When done properly, estate planning requires that a highly trained individual lead you through one or more in-depth meetings to uncover your hopes, fears, and expectations for yourself and for those who are most important to you. This process almost always requires the preparation of several sophisticated legal documents, but those documents themselves are not ‘estate planning.’ Planning is a process, represented by a complete strategy that is properly documented and maintained by a professional who has taken the time to get to know you, and who is committed to continuing to serve you.
Many people believe that estate planning is only for people who are particularly wealthy, have elaborate schemes in mind for passing their money to their heirs, or for people who are acutely ill and contemplating their death. This could not be farther from the truth! Estate planning is for every husband, wife, mother, father, grandparent, business owner, professional, or anyone else who has someone they care about, are concerned about providing responsibly for their own well being and for the well being of those they love, and for anyone who seeks to make a difference in the lives of others after they’re gone. Estate planning is not “death planning”; it’s “life planning”, and an essential and rewarding process for individuals and families who engage in it.
Perhaps the most common type of trust is the revocable living trust. As the name implies, revocable trusts are fully revocable at the request of the trust maker. Thus, assets transferred (or “funded”) to a revocable trust remain within the control of the trust maker; the trust maker (or trust makers if it is a joint revocable trust) can simply revoke the trust and have the assets returned. Revocable trusts can be excellent vehicles for disability planning, privacy, and probate avoidance.
A Revocable Living Trust based estate plan provides instructions that will allow you to:
- Control your property while you are alive
- Take care of you and your loved ones in the event of disability
- Pass your property to your heirs when and how you want while maintaining privacy
- Ensure that you and your spouse have sufficient assets to maintain your standard of living now and in retirement.
- Maintain maximum control and flexibility during your lifetime.
- Provide for you in the event you become disabled.
- Simplify administration as much as possible upon your death or disability (avoiding probate & guardianship).
- Avoid having your private matters being made public unnecessarily.
- Ensure that the efforts you desire are used to save your life.
- Have your property continue to benefit the survivor after one of you dies.
- If married, protect your assets so that they cannot be lost as a result of remarriage after the death of one of you. Ensure that the persons you select in fact become the guardians of your minor children.
- Protect your children’s or grandchildren’s inheritance from mismanagement.
- Structure your children’s or grandchildren’s inheritance in such a way that it installs values and virtues.
- Educate your children and grandchildren.
- Reduce the risk of litigation from heirs who receive less than they think they are entitled to.
- Minimize income taxes to the extent possible.
- Avoid or minimize capital gain tax on the sale of assets.
- Eliminate as much estate tax as possible.
Many young families put off estate planning because they are young and healthy, or because they don’t think they can afford it. But even a healthy, young adult can be taken suddenly by an accident or illness. And while none of us expects to die while our family is young, planning for the possibility is prudent and responsible. Also, estate planning does not have to be expensive; a young family can start with a Last Will and Testament and term life insurance, then update and upgrade as their financial situation improves. A well drafted Last Will and Testament will include the following:
Naming an Administrator
This person will be responsible for handling final financial affairs–locating and valuing assets, locating and paying bills, distributing assets, and hiring an attorney and other advisors. It should be someone who is trustworthy, willing and able to take on the responsibility.
Naming a Guardian for Minor Children
Deciding who will raise the children if something happens to both parents is often a difficult decision. But it is very important, because if the parents do not name a guardian, the court will have to appoint someone without knowing their wishes, the children or other family members.
Providing Instructions for Distribution of Assets
Most married couples want their assets to go to the surviving spouse if one of them dies. If both parents die and the children are young, they want their assets to be used to care for their children. Some assets will transfer automatically to the surviving spouse by beneficiary designations and how title is held. However, an estate plan is still needed in the event this spouse becomes disabled or dies, so that the assets can be used to provide for the children.
Naming Someone to Manage the Children’s Inheritance
Unless this in included in the estate plan, the court will appoint someone to oversee the children’s inheritance. This will likely be a friend of the judge and a stranger to the family. It will cost money (paid from the inheritance) and the children will receive their inheritances in equal shares when they reach legal age, usually age 18. Most parents prefer that their children inherit when they are older, and to keep the money in one “pot” so it can be used to provide for the children’s different needs. Establishing a trust for the children’s inheritance lets the parents accomplish these goals and select someone they know and trust to manage it.
A Special Needs Trust is a trust that can supplement the needs of a special needs beneficiary while allowing the beneficiary to maintain his or her governmental benefits, including Supplemental Security Income (SSI), Social Security and Medicaid. With medical advancements, persons with disabilities are living longer and public benefits are often necessary, yet there is no guarantee that public benefits will provide adequate resources over the disabled person’s lifetime, or that existing public agencies will continue to provide acceptable services and advocacy over a disabled person’s lifetime.
If the special needs trust is established by you or someone other than the disabled person and the disabled person does not have the legal right to demand trust assets, the trust is not considered a “countable resource” for purposes of government benefits. Therefore, the special needs trust beneficiary can continue to receive benefits even though he or she is a trust beneficiary. The trust will give the trustee the discretion to make distributions to the beneficiary to the extent possible without reducing benefits, and trust assets are available if the beneficiary no longer qualifies for governmental assistance or that assistance is no longer available.
If the trust is established on the beneficiary’s behalf pursuant to court order, for example as part of a personal injury settlement, the trust will not impact the beneficiary’s eligibility, but it may need to include a ‘payback’ provision that reimburses the state for its assistance before trust assets pass to the trust’s other beneficiaries.
Common savings vehicles for children, like Uniform Transfer to Minor Acts (UTMA) accounts, typical trusts, or designating a retirement plan, insurance policy or annuity directly to an SSI or Medicaid recipient will cause a reduction or elimination of public benefits. Recognizing this, some parents make the difficult decision to disinherit their special needs children, but this severe action is unnecessary.
IRAs and qualified plans create a unique planning challenge in that these assets are subject to income tax when received by the beneficiary. One way to help reduce the tax impact is to structure these accounts to provide the longest term payout possible; deferring income tax as long as possible minimizes the overall tax impact and allows the account to grow tax free. To achieve this maximum “stretch-out”, you should name individuals who are young (e.g., children or grandchildren) as the designated beneficiaries of your tax-qualified plans and, significantly, the beneficiaries should take only those minimum distributions that are required by law. The younger the beneficiary, the smaller these required minimum distributions. By naming a trust as the beneficiary of your tax-qualified plans, you can ensure that the beneficiary defers the income and that these assets remain protected from creditors or a former son or daughter-in-law. I recommend that this trust be a stand-alone Retirement Trust (separate from your revocable living trust and other trusts) to ensure that it accomplishes your objectives while also ensuring the maximum tax deferral permitted under the law. This trust can either pay out the required minimum distribution to the beneficiary or it can accumulate these distributions and pay out trust assets pursuant to the standard you set in advance (e.g., for higher education, etc.)
Life insurance is a unique asset in that it serves numerous diverse functions in a tax-favored environment. Life insurance proceeds are received income tax free and, if properly owned by an Irrevocable Life Insurance Trust, life insurance proceeds can also be received free of estate tax.
An Irrevocable Life Insurance Trust (ILIT) is one of the most popular wealth planning devices. It is a trust designed to own a life insurance policy, usually on the lives of you and your spouse. You gift funds to the trust periodically and the trustee uses the funds to pay premiums on the life insurance policy. The trust is designed to produce benefits for your family.
- Make current gifts to family members.
- Accumulate assets outside the client’s taxable estate.
- Protect assets from claims of creditors.
- Avoid income tax on the accumulation of funds.
- Avoid estate tax upon the distribution of funds to the family.
- Create a source of liquidity to cover estate taxes or expenses.
- Replace assets that may have been given to charity.
Under current federal law most Americans do not have a federal estate tax problem. Under the 2010 Tax Relief Act (formally abbreviated as TRUIRJCA 2010), every individual has a $5 million federal estate tax exemption. If you do not need that entire amount, the balance of your exemption is ‘portable’ to your surviving spouse when they later die. So for married couples, it’s fairly easy to shelter $10 million from federal estate taxation with little or no planning done in advance.
Many states, however, impose a separate estate tax that is often more widely applicable than the federal estate tax. Because the state and federal estate tax systems are often out of sync, it is important to coordinate your estate plan in a way that maximizes your estate tax planning opportunities to ensure that you pay as little in estate tax as possible.
Moreover, proper tax planning in the estate planning context must contemplate income tax planning opportunities for you and for your heirs as well as capital gains, generation skipping transfer, and other tax systems.
Second marriages and blended families present their own issues when it comes to estate planning. If you have been through a divorce, you understand how difficult the situation can be. Every family’s situation is different, and estate planning that takes into account your unique family situation can alleviate most of your concerns. With proper planning, should be able to enjoy your second chance in marriage.
Here are some important estate planing items to consider chaining and/or updating when entering into a second marriage:
If one of you brings significant assets to the marriage, it may be beneficial to prepare a separate property trust, before you get married to ensure that those assets ultimately end up with your chosen beneficiaries. You may make your current spouse the beneficiary of the trust until their death and then your children. Or you may have your separate property distributed directly to your children. Whether or not you have a separate property trust, you should also establish a joint trust with your spouse that has protections for the children.
Power of Attorney for Financial Affairs
Who will make decisions for you if you are unable to make them for yourself? Who will have the power to sign documents on your behalf, or make sure your bills get paid? A carefully written durable power of attorney will allow you to name someone you trust to make decisions for you if you become disabled to the point of no longer being able to make those decisions yourself. Make sure that any previous powers of attorney (perhaps naming your previous spouse) are revoked. Execute an updated power of attorney naming your spouse, your children or another trusted individual as your agent.
Advance Health Care Directive
Similar to a power of attorney, a health care directive allows you to name someone you trust to make decisions about your health care when you are not capable yourself. An updated health care directive is always helpful for medical professionals in the event of an emergency. This also gives you a chance to discuss your wishes for your end-of-life care, organ donation and burial arrangements with your new spouse.
Every blended family is different and each presents its own set of challenges, both legal and personal. An experienced attorney can help guide you through the process and achieve your goals. Contact me today to start planning for your blended family.
A revocable trust provides no asset protection for the trust maker during his or her lifetime. Upon the death of the trust maker, however, or upon the death of the first spouse to die if it is a joint trust, the trust becomes irrevocable as to the deceased trust maker’s property and can provide asset protection for the beneficiaries, with two important caveats. First, the assets must remain in the trust to provide ongoing asset protection. In other words, once the trustee distributes the assets to a beneficiary, those assets are no longer protected and can be attached by that beneficiary’s creditors. If the beneficiary is married, the distributed assets may also be subject to the spouse’s creditor(s), or they may be available to the former spouse upon divorce.
Trusts for the lifetimes of the beneficiaries provide prolonged asset protection for the trust assets. Lifetime trusts also permit your financial advisor to continue to invest the trust assets as you instruct, which can help ensure that trust returns are sufficient to meet your planning objectives. The second caveat follows logically from the first: the more rights the beneficiary has with respect to compelling trust distributions, the less asset protection the trust provides. Generally, a creditor “steps into the shoes” of the debtor and can exercise any rights of the debtor. Thus, if a beneficiary has the right to compel a distribution from a trust, so too can a creditor compel a distribution from that trust.
Charitable Remainder Trusts
The Charitable Remainder Trust (“CRT”) is a type of trust specifically authorized by the Internal Revenue Code. These irrevocable trusts permit you to transfer ownership of assets to the trust in exchange for an income stream to the person or persons of your choice (typically you, your spouse or you and your spouse) for life or for a specified term of up to 20 years. With the most common type of Charitable Remainder Trust, at the end of the term, the balance of the trust property (the “remainder interest”) is transferred to a specified charity or charities. Charitable Remainder Trusts reduce estate taxes because you are transferring ownership to the trust of assets that otherwise would be counted for estate tax purposes.
A Charitable Remainder Trust can be set up as part of your revocable living trust planning, coming into existence at the time of your death, or as a stand-alone trust during your lifetime. At the time of creation of the CRT you or your estate will be entitled to a charitable deduction in the amount of the current value of the gift that will eventually go to charity. If the income recipient is someone other than you or your spouse there will be gift tax consequences to the transfer to the CRT.
Charitable Remainder Trusts are tax-exempt entities. In other words, when a Charitable Remainder Trust sells an asset it pays no income tax on the gain in that asset. Therefore, after a sale the trust has more available to invest than if the asset were sold outside of the Charitable Remainder Trust and subject to tax. Accordingly, Charitable Remainder trusts are particularly suited for highly appreciated assets, such as real estate and stock in a closely held business, or assets subject to income tax such as qualified plans and IRAs. While the Charitable Remainder Trust does not pay tax on the sale of its assets, the tax is not avoided altogether. The payments to the income recipient will be subject to tax.
There are several types of Charitable Remainder Trusts. For example, the Charitable Remainder Annuity Trust pays a fixed dollar amount (for example, $80,000 per year) to the income recipient at least annually. Another type of CRT, the Charitable Remainder Unitrust, pays a fixed percentage of the value of the trust assets each year to the income recipient (for example, 8% of the value as of the preceding January 1). A third type, perhaps the most common, allows you to transfer non-income producing property to the CRT and have the trust convert to a Charitable Remainder Unitrust upon the sale or happening of a specified event, for example upon reaching a specified retirement age.
At the end of the term of a Charitable Remainder Trust, the remainder interest passes to qualified charities as defined under the Internal Revenue Code. Generally, any charity that has received tax-exempt status through an IRS determination qualifies, but this is not always the case. It is possible for you to name a private foundation established by you as the charitable beneficiary.
Charitable Lead Trusts
The Charitable Lead Trust is a type of charitable trust that can reduce or virtually eliminate all estate tax on wealth passing to heirs. In order to accomplish this goal, you create a trust that grants to a charity or charities, for a set number of years, the first or “lead” right to receive a payment from the trust. At the end of the term of years, your children or grandchildren receive the balance of the trust property which often is greater than the amount contributed free of estate tax in most instances. Although the Charitable Lead Trust is a complex estate planning strategy, the steps to implement it are few and simple from your perspective. Here is how one of the most frequently used Charitable Lead Trusts, the Charitable Lead Annuity Trust, operates:
You, as grantors, create a Charitable Lead Trust as part of your revocable living trust planning. Upon the death of the survivor of the two of you, a substantial amount of property will pass to the Charitable Lead Trust. The income beneficiary of the Charitable Lead Trust will be a qualified charitable organization, chosen by the two of you or by the survivor of you, named in your revocable living trust. The charitable income beneficiary receives a fixed, guaranteed amount from the trust for a certain number of years (determined by you with the assistance of your legal and financial advisors). Generally, any charity that has received tax-exempt status through an IRS determination qualifies, but this is not always the case. It is possible for you to name a private foundation established by you as the charitable beneficiary. If so, you must have very limited authority over which charity is to receive money from the foundation. Too much control while you are alive will result in adverse tax consequences.
At the end of the Charitable Lead Trust’s term, the remaining assets in the trust pass to non-charitable trust beneficiaries such as children and grandchildren, free of estate and gift tax. These assets can pass outright to the beneficiaries, or can continue to be held in trust, either in new trusts or in trusts previously established for the benefit and protection of beneficiaries.
The charity will receive the same dollar amount each year, no matter how its investments perform. The remainder interest ultimately passing to the heirs, however, will be affected by the performance of the trust’s investments.
Charitable Lead Annuity Trusts are particularly suited for hard-to-value assets (such as real estate or family limited liability company interests) and assets which are expected to grow rapidly in value.
Durable Power of Attorney
Who will make decisions for you if you are unable to make them for yourself? Who will have the power to sign documents on your behalf, or make sure your bills get paid?
Without a durable power of attorney, someone who is mentally incapacitated must be taken to guardianship or conservatorship court to have a decision maker named for them by a judge. A carefully written durable power of attorney will allow you to name someone you trust to make decisions for you if you become disabled to the point of no longer being able to make those decisions yourself.
Healthcare Power of Attorney
A healthcare power of attorney allows your trusted friend or family member to make medical treatment decisions for you if you are unable to communicate your wishes to doctors. Without one, you must have a guardian or “conservator” of your person appointed by the court before decisions can be made on your behalf.
A healthcare power of attorney not only saves precious decision making time, but it also makes sure that the individual you trust the most has the power to make these most important decisions for you if you are unable to make the decisions on your own.
A living will or directive to physicians directly informs your doctors that you do not want extraordinary medical measures taken, especially those that would cause you pain or discomfort, if those measures would only prolong the dying process. This document backs up your health care power of attorney. Anyone can deliver this document to your doctors if your agent under your health care power of attorney is unavailable to make health care decisions for you.
What is probate?
Probate is the process by which the court validates a will and supervises the settlement of an estate, including the transfer of assets to beneficiaries.
How do I avoid probate?
Only assets in your individual name will go through probate. Many folks use a (fully funded) revocable living trust to avoid probate. In addition, contract assets such life insurance, retirement accounts, and annuities as well as assets owned by joint tenants with right of survivorship avoid probate as well.
Why should I avoid probate?
Most people want to avoid probate because it can include high fees and costs, significant time delays and stress, and everything that goes through probate is public information. Anyone can go on the Internet and see a listing of your assets, debts, beneficiaries, and who got what. If you’re like most people, you want to keep your family affairs and finances private.
What is living probate?
“Living probate” refers to the court process necessary if you don’t have a disability plan in place. It’s also referred to as “guardianship” or “conservatorship,” depending on state law. It can be a painful, arduous, and painful process for your loved ones that is easily avoided with powers of attorney and living trust planning. I have found that most folks also want to keep their family and financial affairs private with a disability plan instead of dredging through a public court proceeding.
If estate planning is the process of designing a playbook, estate administration occurs when the playbook is put into action. The process begins with an event that triggers a provision in your estate plan, such as incapacity or death. The plan becomes “executor”, meaning that the individuals you designated in your plan documents must step into action and execute according to your instructions.
Estate administration can be complex and the people you have designated must have competent and experienced counsel to guide them through the process. They must make important decisions, sometimes quickly, and they need help to make them wisely. They may need to prepare inventories of your property, prepare tax returns, or sign other important documents on your behalf. Ultimately they must divide and distribute your property to those individuals or charities you identified in your will or trust agreement.
The estate administration process carries a lot of responsibilities. I can help guide your loved ones through the process as sensitively and completely as possible, and will try to make it as straightforward and efficient as possible.
Your estate plan is a snapshot of you, your family, your assets and the tax laws in effect at the time it was created. All of these change over time, and so should your plan. It is unreasonable to expect the simple will written when you were a newlywed to be effective now that you have a growing family, or now that you are divorced from your spouse, or now that you are retired and have an ever increasing swarm of grandchildren! Over the course of your lifetime, your estate plan will need check-ups, maintenance, tweaking, maybe even replacing. So, how do you know when it’s time to give your estate plan a check-up? Generally, any change in your personal, family, financial or health situation, or a change in the tax laws, could prompt a change in your estate plan.