Avoiding Probate with a Trust

Privacy is just one of the benefits of having a trust created as part of an estate plan. That’s because assets that are placed in a trust are no longer in the person’s name, and as a result do not need to go through probate when the person dies. An article from The Daily Sentinel asks, “When is a trust worth the cost and effort?” The article explains why a trust can be so advantageous even when the assets are not necessarily large.

Let’s say a person owns a piece of property. They can put the property in a trust by signing a deed that will transfer the title to the trust. That property is now owned by the trust and can only be transferred when the trustee signs a deed. Because the trust is the owner of the property, there’s no need to involve probate or the court when the original owner dies.

Establishing a trust is even more useful for those who own property in more than one state. If you own property in a state, the property must go through probate to be distributed from your estate to another person’s ownership. Therefore, if you own property in three states, your executor will need to manage three probate processes.

Privacy is often a problem when estates pass from one generation to the next. In most states, heirs and family members must be notified that you have died and that your estate is being probated. The probate process often requires the executor, or personal representative, to create a list of assets that are shared with certain family members. When the will is probated, that information is available to the public through the courts.  Family members who were not included in the will but were close enough kin to be notified of your death and your assets, may not respond well to being left out. This can create problems for the executor and heirs.

Having greater control over how and when assets are distributed is another benefit of using a trust rather than a will. Not all young adults are prepared or capable of managing large inheritances. With a trust, the inheritance can be distributed in portions: a third at age 28, a third at age 38, and a fourth at age 45, for instance. This kind of control is not always necessary, but when it is, a trust can provide the comfort of knowing that your children are less likely to be irresponsible about an inheritance.

There are other circumstances when a trust is necessary. If the family includes a member who has special needs and is receiving government benefits, an inheritance could make them ineligible for those benefits. In this circumstance, a special needs trust is created to serve their needs.

Another type of trust growing in popularity is the pet trust. Check with a local estate planning lawyer to learn if your state allows this type of trust. A pet trust allows you to set aside a certain amount of money that is only to be used for your pet’s care by a person you name to be their caretaker. In many instances, any money left in the trust after the pet passes can be donated to a charitable organization, usually one that cares for animals.

Finally, trusts can be drafted that are permanent, or “irrevocable,” or that can be changed by the person who wants to create it, a “revocable” trust. Once an irrevocable trust is created, it cannot be changed. Trusts should be created with the help of an experienced trusts and estate planning attorney, who will know how to create the trust and what type of trust will best suit your needs.

Reference: The Daily Sentinel (Jan. 23, 2020) “When is a trust worth the cost and effort?”

 

How is a Guardianship Determined?

Because the courts call guardianship “a massive curtailment of liberty,” it’s important that guardianship be used only when necessary.

The Pauls Valley Democrat’s recent article asks, “Guardianship – What is sufficient incapacity?” As the article explains, courts must be certain that an individual is truly “incapacitated.” For example, Oklahoma law defines an incapacitated person as a person 18 years or older, who is impaired by reason of:

  1. Mental illness;
  2. Intellectual or developmental disability;
  3. Physical illness or disability; or
  4. Drug or alcohol dependency.

In addition, an incapacitated person’s ability to receive and evaluate information or to communicate decisions is impaired to such a level that the person (i) lacks capacity to maintain health and safety; or (ii) is unable to manage financial resources.

A person who is requesting to be appointed guardian by the court must show evidence to prove the person’s incapacity. This evidence is typically presented with the professional opinion of medical, psychological, or administrative bodies.

In some instances, a court may initiate its own investigation with known medical experts. In these cases, the type of professional chosen to provide an opinion should match the needs of the person (the “ward”), who will be subject to guardianship.  The court will receive this evidence and if it’s acceptable, in many cases, require that the experts provide a plan for the care and administration of the ward and his assets. This plan will become a control measure, as well as guidance for the guardian who’s appointed.  These controls will include regular monitoring and reports of performance back to the court.

Contact an experienced estate planning or elder law attorney to discuss guardianship rules.

Reference: Pauls Valley Democrat (Jan. 23, 2020) “Guardianship – What is sufficient incapacity?”

 

Why Would I Need a Power of Attorney?

Recently Heard’s article entitled “6 Reasons to Choose a Power of Attorney” provides us with several reasons why you want to have one drafted.

  1. Choose Who Can Make the Decisions on Your Behalf. If you have a signed a power of attorney and later you become incapacitated and are unable to make decisions, the agent you named in your POA can step in on your behalf. Without a power of attorney, loved ones will need to go to court to request a conservatorship or guardianship and that can be expensive.
  2. Guardianship Not Needed. If you fail to sign a comprehensive power of attorney before you become incapacitated, you and your family have few options.

Someone will have to petition the court to appoint a guardian or a conservator. The judge will decide who will manage your financial health affairs. The court will also monitor the situation. This can be expensive, and you’ll have no say regarding who will be chosen to serve.

  1. Lets You Discuss Your Wishes. An important decision is who your agent will be. When a parent or loved one decides to sign a power of attorney, it offers the chance to discuss the wishes and the expectation with the family and the person who’s named as an agent in a power of attorney.
  2. Comprehensive Power of Attorney is Preferred. When you age your needs change. Your POA should reflect it.
  3. Your Intent is Clear. If you become incapacitated, relatives may need to go to court to determine your intent. However, a well-drafted power of attorney provides a healthcare directive, which can eliminate the need for the family members to have arguments or disagree over your wishes.
  4. Avoid Delays. With a comprehensive power of attorney, all the powers required to do effective asset protection planning are included. Note: if a power of attorney doesn’t include the specific power, it can reduce the ability of the agent and may lead to significant setbacks.

Want to write a power of attorney? Contact a qualified estate planning attorney.

Reference: Recently Heard (Jan. 30, 2020) “6 Reasons to Choose a Power of Attorney”

 

Be Aware of Probate

Probate is the legal process that happens after a person dies. Most people are not aware of the concept of “probate”. The court accepts the deceased’s last will and then the executor can carry out the instructions for the deceased’s estate. However, first he or she must pay any debts and sell assets before distributing any remaining property to the heirs.

If the deceased doesn’t have a will the probate court will appoint an administrator to manage the probate process, and the court will supervise the process. The Million Acres article entitled asks, “Probate Explained: What Is Probate, and How Does It Work?”

When the will is proven to be legal, the probate judge will grant the executor legal rights to carry out the instructions in the will.

When there’s no will, the probate process can be complicated because there’s no paper trail that shows what assets belong to what heirs. Tracking down heirs can also be challenging especially if there’s no surviving spouse and the next of kin is located in a different state or outside the U.S.

Many executors will partner with a probate attorney to help them through the probate process, as well as to assist in filing the required paperwork, notifying creditors, filing taxes and distributing assets. The deceased’s assets must first be located and then formally appraised to determine their value.  Creditors must also be notified after death within a specified period of time. After the creditors taxes and fees have been paid on behalf of the estate any leftover money or assets are distributed to the heirs. The probate process can be lengthy. Things that can lengthen the process include the state when the deceased was a resident, whether there is a will and whether it is contested by the heirs. The more detailed the will, the simpler the probate process.

The probate process can be expensive, because of court filing fees, creditor notice fees, appraisal fees, tax preparation and filing fees and attorney fees. All of these fees are subtracted from the proceeds of the estate.

Estate planning with a qualified estate planning or elder law attorney involves taking the proper actions to avoid probate. This can reduce the burden for the surviving heir(s) and reduce costs, fees and taxes. Ask your estate planning attorney about some of the steps you can take before death to avoid probate.

Reference: Million Acres (Jan. 17, 2020) “Probate Explained: What Is Probate, and How Does It Work?”

 

Estate Planning for Unmarried Couples

For some couples, getting married just doesn’t feel necessary. However, they don’t enjoy the automatic legal rights and protections that legally wed spouses do especially when it comes to death. There are many spousal rights that come with a marriage certificate, reports CNBC in the article “Here’s what happens to your partner if you’re not married and you die.” Without the benefit of marriage extra planning is necessary to protect each other.

Taxes are a non-starter. There’s no federal or state income tax form that will permit a non-married couple to file jointly. If one of the couple’s employers is the source of health insurance for both, the amount that the company contributes is taxable to the employee. A spouse doesn’t have to pay taxes on health insurance.

More important, however, is what happens when one of the partners dies or becomes incapacitated. A number of documents need to be created so should one become incapacitated the other is able to act on their behalf. Preparations also need to be made so the surviving partner is protected and can manage the deceased’s estate.

In order to be prepared, an estate plan is necessary. Creating a plan for what happens to you and your estate is critical for unmarried couples who want their commitment to each other to be protected at death. The general default for a married couple is that everything goes to the surviving spouse. However, for unmarried couples the default may be a sibling, children, parents or other relatives. It won’t be the unmarried partner.

This is especially true if a person dies with no will. The courts in the state of residence will decide who gets what depending upon the law of that state. If there are multiple heirs who have conflicting interests, it could become nasty—and expensive.

However, a will isn’t all that is needed. Most tax-advantaged accounts—Roth IRAs, traditional IRAs, 401(k) plans, etc.—have beneficiaries named. That person receives the assets upon death of the owner. The same is true for investment accounts, annuities, life insurance and any financial product that has a beneficiary named. The beneficiary receives the asset regardless of what is in the will. Therefore, checking beneficiaries need to be part of the estate plan. Checking, savings and investment accounts that are in both partner’s names will become the property of the surviving person, but accounts with only one person’s name on them will not.

Unmarried couples who own a home together need to check how the deed is titled, regardless who is on the mortgage. The legal owner is the person whose name is on the deed. If the house is only in one person’s name, it won’t become part of the estate. Change the deed so both names are on the deed with rights of survivorship, so both are entitled to assume full ownership upon the death of the other.

To prepare for incapacity, an estate planning attorney can help create a durable power of attorney for health care, so partners will be able to make medical decisions on each other’s behalf. A living will should also be created for both people which states wishes for end of life decisions. For financial matters, a durable power of attorney will allow each partner to have control over each other’s financial affairs. It takes a little extra planning for unmarried couples, but the peace of mind that comes from knowing that you have prepared to care for each other, until death do you part, is priceless.

Reference: CNBC (Dec. 16, 2019) “Here’s what happens to your partner if you’re not married and you die”

 

Should Retirees Buy Vacation Homes?

It sounds like a great idea. After all it’s an investment in real estate and it could be passed along to the next generation. It might be a rental property too, generating income when the owners aren’t able to enjoy it. However, there are some things to be careful of, warns Barron’s in the article “ Vacation Home, Primary Residence, Estate Planning Lawyer, Limited Liability Corporation, Rental Property, Downsizing,.”

Taxes, maintenance, insurance and possibly the cost of hiring a rental-management company are just a few things to consider. Above all, don’t think of it as an investment because with real estate, there are no guarantees. For one thing, it’s not liquid. You can’t count on selling it for a good price when you need some ready cash.

The first and most important question: can you afford it? Retirees are usually living on a fixed income. The cost of a vacation home can be loaded with surprises just like any other property. If there’s enough of a nest egg to live on and there won’t ever be a need to sell fast then it may be a good move.  If there’s enough money to purchase the home, then investing in someone to manage the property is a good idea. Empty homes are targets for thieves and if there’s a maintenance issue, an uninhabited home is vulnerable to damages.

Where taxes are concerned, the sale of a second home does not give the seller the same capital gains tax exemption as the sale of a primary residence. That exemption is only available for people who have lived in the home as a primary residence for at least two of the previous five years. The exemption is up to $500,000 for married couples.

There is one way around it, if it makes sense for owners. Let’s say that they plan on downsizing from their primary residence. They sell it and use the tax exemption. They then move to the vacation home for at least two years using that as their primary residence. At that point, they can sell the home that has now become a primary residence enjoy the generous tax exemption and then move to a new primary residence.

As a rental property, owners are permitted to rent for up to 14 days without owing any taxes on the rental income. After the 14-day period, taxes must be paid, but some of the rental expenses are tax deductible.  If the intent is to keep the house for as long as the owners are living, it becomes part of the estate and must be included in an estate plan. Leaving it to the next generation may be feasible if all of the children want to keep the house and can afford its upkeep. Have the conversation with the children first. Giving the house to children can be accomplished by putting it into a limited liability corporation with an operating agreement that defines it. Each child will have a stake in the entity that owns the home, rather than the house itself.

Talk with your estate planning lawyer about how the purchase and inheritance of a vacation home may impact your overall estate plan before making a purchase.

Reference: Barron’s (Jan. 18, 2020) “What Retirees Should Know Before Buying a Vacation Home”

 

If I’m 35, Do I Need a Will?

Estate planning is a crucial process for everyone, no matter what assets you have now. If you want your family to be able to deal with your affairs, debts included, drafting an estate plan is critical, says Wealth Advisor’s recent article entitled “Estate planning for those 40 and under.”

If you have young children, or other dependents, planning is vitally important. The less you have, the more important your plan is, so it can provide as long as possible and in the best way for those most important to you. You can’t afford to make a mistake.

Talk to your family about various “what if” situations. It is important that you’ve discussed your wishes with your family and that you’ve considered the many contingencies that can happen, like a serious illness or injury, incapacity, or death. This also gives you the chance to explain your rationale for making a larger gift to someone, rather than another or an equal division. This can be especially significant, if there’s a second marriage with children from different relationships and a wide range of ages. An open conversation can help avoid hard feelings later.

You should have the basic estate plan components, which include a will, a living will, advance directive, powers of attorney, and a designation of agent to control disposition of remains. These are all important components of an estate plan that should be created at the beginning of the planning process. A guardian should also be named for any minor children.

In addition, a life insurance policy can give your family the needed funds in the event of an untimely death and loss of income—especially for young parents. The loss of one or both spouses’ income can have a drastic impact.

Remember that your estate plan shouldn’t be a “one and done thing.” You need to review your estate plan every few years. This gives you the opportunity to make changes based on significant life events, tax law changes, the addition of more children, or their changing needs. You should also monitor your insurance policies and investments, because they dovetail into your estate plan and can fluctuate based on the economic environment.

When you draft these documents, you should work with a qualified estate planning attorney.

Reference: Wealth Advisor (Jan. 21, 2020) “Estate planning for those 40 and under”

 

Not a Billionaire? Trusts Can Still Be Beneficial

You don’t have to be wealthy to benefit from the use of a trust. A trust is a legal arrangement by which one person transfers his or her assets to a trustee who will hold those assets in trust for third parties, explains the Stamford Advocate’s article “Trusts are not for the wealthy only.” As the person who created the trust, referred to as “the settlor,” you determine who the trustee is, as well as naming the beneficiaries.

There are many different types of trusts which serve different purposes. However, the two basic categories of trusts are revocable (also known as “living” trusts) and irrevocable trusts. Their names reflect two chief characteristics: the revocable trust can be changed and controlled by the settlor. The irrevocable trust cannot be changed, and the settlor gives up the control of the trust. However, it should be noted that the irrevocable trust has certain tax and other benefits not offered by the revocable trust.

A will is definitely necessary to pass assets on according to your wishes, but a trust can serve other purposes. Here’s a look at some common reasons why people use trusts:

  • Protect assets from creditors
  • Allow heirs to avoid probate of assets in the trusts
  • Avoid, minimize or delay estate taxes, transfer taxes or income taxes
  • Control how assets are disbursed or invested
  • Facilitate business succession planning and manage business assets
  • Shelter assets for descendants, if a spouse remarries
  • Establish a family tradition of philanthropy

Trusts allow assets to be passed on quickly and privately, while eliminating some expenses for heirs. They also permit closer management of who will benefit from your assets.

The cost of setting up a trust depends on the complexity of the trust and the estate, as well as other factors, like the number of beneficiaries and how many generations are being planned for. Bear in mind that the cost of setting up a trust should be measured against the future cost of not just taxes, but any litigation that might occur if the estate is probated and becomes public knowledge, or if family members are dissatisfied with the distribution of assets.

Speak with an estate planning attorney to first determine what kind of trusts are needed for your estate plan to achieve your wishes. Discuss the role of a Special Needs trust, if any family members have mental or physical needs that make them eligible for public assistance. An experienced estate planning attorney will know which planning strategies are best in your unique circumstances.

Reference: Stamford Advocate (Jan. 19, 2020) “Trusts are not for the wealthy only”

 

Do You Want to Decide or Do You Want the State to Decide?

A will allows you to direct your assets to the people you want to receive them, rather than the alternative, which is relying on the laws of your state to direct who receives your assets, says the article “Will you plan now or pay later?” from the Chron.com.

A will is also the document used to name an independent executor with successors, in the unlikely chance that the first executor fails, refuses or becomes unable to serve. Your estate planning attorney will discuss the use of special trusts to provide for family members who are disabled, trusts for minors or special needs family members or even adult children.

There are three big considerations you may not have even considered that would require you to have an estate plan created in recent years to be reviewed or revised. Years ago, the federal tax exemption, which allows a person to leave a certain amount of money to beneficiaries, was much smaller than it is now.

This was a “use it or lose it” exemption. Here’s an example of how things have changed. In 1987, when the exemption was $600,000 per taxpayer, a couple would use a by-pass trust to shelter the first $600,000 upon the first to die to take advantage of the exemption. In 2020, the exemption is $11.58 million. The “use it or lose it” law is different. Therefore, if your will still has a by-pass trust for this reason, it may be best to discuss it with your estate planning attorney. It is likely that you don’t need it anymore.

You also want a will to have some control over what happens to your assets when you die. Let’s say Betty and Bob have three children. Bob dies, leaving his assets to Betty, then Betty dies and leaves all of her assets to her three children. One of the children, Bea, dies shortly after Betty dies. Bea’s will leaves all of her assets to her husband Bruce.

Bruce remarries. When Bruce dies, the share of the family’s assets that Bruce inherited from his wife Bea may be left to Bruce’s second wife or the couple may spend them all during their marriage. If Bruce divorces his second wife, she may win those assets in a divorce settlement. Would Betty and Bob have wanted their assets to go to their grandchildren, instead of their son-in-law’s second wife and children?  An estate plan can be created to protect those assets, so they remain within the family, going to grandchildren or to the children of Betty and Bob.

While most people think of an estate plan as a plan for death, it’s also a plan for illness and incapacity. A perfectly healthy person is injured in a car accident or suffers a stroke. Without having documents like a power of attorney, power of attorney for health care, living will and medical privacy documents, the family will spend a great deal of time and money trying to establish legal control over the estate.

Speak with an experienced estate planning attorney today to update your current will or create a will and the necessary documents to protect yourself and your family.

Reference: Chron.com (January 16, 2020) “Will you plan now or pay later?”

 

Dad’s Will and Trust at Odds?

A revocable trust, commonly called a living trust, is created during the lifetime of the grantor. This type of trust can be changed at any time, while the grantor is still alive. Because revocable trusts become operative before the will takes effect at death, the trust takes priority over the will, if there is any discrepancy between the two when it comes to assets titled in the name of the trust or that designate the trust as the beneficiary (e.g., life insurance).

A recent Investopedia article asks “What Happens When a Will and a Revocable Trust Conflict?” The article explains that a trust is a separate entity from an individual. When the grantor or creator of a revocable trust dies, the assets in the trust are not part of the decedent grantor’s probate process.

Probate is designed to distribute the deceased individual’s property pursuant to the instructions in his will. However, probate doesn’t apply to property held in a living trust, because those assets are not legally owned by the deceased person. They’re owned by the trust. As a result, the will has no authority over a trust’s assets.

Let’s say that Bernie (who is the grandfather) has two children named Pat and Junior.  Bernie places the old family home into a living trust that says Pat and Junior are to inherit that house. Twelve years later, Bernie remarries. Right before his death, he executes a new will that says is the house is to go to his new wife, Andrea.

In this case, for the home to go to his new wife, Bernie would’ve had to amend the trust to make the house transfer to his wife effective. Thus, the home goes to the two children, Pat and Junior.

Sound confusing? It can be. Work with an experienced estate planning attorney, so that your intentions can be carried out without any issues. As mentioned, a revocable trust is a separate entity and doesn’t follow the terms of a person’s will when they die.

Make sure everything is legally binding and the way you intend it with the advice of a trust and estate planning attorney.

It’s important to note that while a revocable trust supersedes a will, the trust only controls those assets that have been placed into it. Therefore, if a revocable trust is formed, but assets aren’t moved into it, the trust provisions have no effect on those assets at the time of the grantor’s death.

Reference: Investopedia (Aug. 5, 2019) “What Happens When a Will and a Revocable Trust Conflict?”