What You Need to Know about Trusts for Estate Planning

There are many different kinds of trusts used to accomplish a wide variety of purposes in creating an estate plan. Some are created by the operation of a will, and they are known as testamentary trusts—meaning that they came to be via the last will and testament. That’s just the start of a thorough look at trusts offered in the article “ON THE MONEY: A look at different types of trusts” from the Aiken Standard.

Another way to view trusts is in two categories: revocable or irrevocable. As the names imply, the revocable trust can be changed, and the irrevocable trust usually cannot be changed.

A testamentary trust is a revocable trust, since it may be changed during the life of the grantor. However, upon the death of the grantor, it becomes irrevocable.

In most instances, a revocable trust is managed for the benefit of the grantor, although the grantor also retains important rights over the trust during her or his lifetime. The rights of the grantor include the ability to instruct the trustee to distribute any of the assets in the trust to someone, the right to make changes to the trust and the right to terminate the trust at any time.

If the grantor becomes incapacitated, however, and cannot manage her or his finances, then the provisions in the trust document usually give the trustee the power to make discretionary distributions of income and principal to the grantor and, depending upon how the trust is created, to the grantor’s family.

Note that distributions from a living trust to a beneficiary other than the grantor, may be subject to gift taxes. Those are paid by the grantor. In 2019, the annual gift tax exclusion is $15,000. Therefore, if the distribution is under that level, no gift taxes need to be filed or paid.

When the grantor dies, the trust property is distributed to beneficiaries, as directed by the trust agreement.

Irrevocable trusts are established by a grantor and cannot be amended without the approval of the trustee and the beneficiaries of the trust. The major reason for creating such a trust in the past was to create estate and income tax advantages. However, the increase in the federal estate tax exemption means that a single individual’s estate won’t have to pay taxes, if the value of their assets is less than $11.4 million ($22.8 million for a married couple).

Once an irrevocable trust is established and assets are placed in it, those assets are not part of the grantor’s taxable estate, and trust earnings are not reported as income to the grantor.

The downside of an irrevocable trust is that the transfer of assets into the trust may be subject to gift taxes, if the amount that is transferred is greater than $15,000 multiplied by the number of trust beneficiaries. However, depending upon the size of the grantor’s estate, larger amounts may be transferred into an irrevocable trust without any gift tax liability to the grantor, if the synchronization between gift taxes and estate taxes is properly done. This is a complex strategy that requires an experienced trust and estate attorney.

Trusts are also used to address charitable giving and generating current income. These trusts are known as Charitable Remainder Trusts and are irrevocable in nature. There is a current beneficiary who is either the donor or another named individual and a remainder beneficiary, which is a qualified charitable organization. The trust document provides that the named beneficiary receives an income stream from the income produced by the trust assets, and when the grantor dies, the remaining assets of the trust pass to the charity.

Speak with your estate planning attorney about how trusts might be a valuable part of your estate plan. If your estate plan has not been reviewed since the new tax law was passed, there may be certain opportunities that you are missing.

Reference: Aiken Standard (May 17, 2019) “ON THE MONEY: A look at different types of trusts”

 

Do I Need to Update My Estate Plan if I Relocate for Retirement?

Anyone who moves to another state, for retirement, a new job or to be closer to family, needs to have a look at their estate plan to make sure it is valid in their new state, advises the Boca Newspaper in the recent article “I’ve Relocated To Florida…Should I Update My Estate Plan?”

If an estate plan hasn’t been created, a relocation is the perfect opportunity to get this important task done. Think of it as preparation for your new life in your new home.

Because so many retirees do relocate to Florida, there are some general rules that make this easier. For one thing, most wills that are valid in another state are recognized in Florida. There’s a specific law in the Florida statutes that confirms that “other than a holographic or nuncupative will, executed by a nonresident of Florida… is valid as a will in this state if valid under the laws of the state or country where the will was executed.”

In other words, if the estate plan was prepared by an estate planning attorney and is legally valid in the prior state, it will be valid in Florida. Exceptions are a holographic will, which is a handwritten will that is signed by the person with no witnesses, or a nuncupative will, which is a verbal statement made in front of witnesses.

However, just because your will is recognized in Florida, does not mean that it doesn’t need a review.

There are distinctions in Florida law that may make certain provisions invalid or change their meaning. In one well-known case, a will was missing one sentence—known as a “residual clause,” a catch-all that distributes assets that are otherwise not specified. The maker of the will wanted everything to go to her brother. However, without that one clause, property acquired after the will was created was not included. The court determined that the property that was acquired after the will was created, would go to other relatives, despite the wishes of the decedent.

Little details mean a lot when it comes to estate plans.

It’s important to ensure that the last will and testament properly expresses intentions under the laws of your new home state. As you review or begin the process, this might be the time to speak with your estate planning attorney about whether any trusts are applicable to your estate. A revocable living trust, for example, would avoid the assets placed in the trust having to go through probate.

This is also the time to review your Durable Power of Attorney, designation of a Health Care Surrogate, Living Will and nomination of a pre-need Guardian.

Estate planning gives peace of mind, knowing that the legal side of your life is all taken care of. It avoids stress and unnecessary costs and delays to your family. It should be reviewed and updated, if needed, at big events in your life, including a relocation, the sale or purchase of a home or when you retire. You should contact an experienced estate planning attorney in your area.

Reference: Boca Newspaper (May 1, 2019) “I’ve Relocated To Florida…Should I Update My Estate Plan?”

 

Singles Need Two Key Documents, No Matter How Young

 

A woman is shopping, when suddenly she is struck by abdominal pains that are so severe she passes out in the store. When she comes to, an EMT is asking her questions. One of those questions is “Do you have a living will or a medical power of attorney?” That was a wake-up call for her and should be for other singles also, says Morningstar in the article “2 Estate-Planning Tools That Singles Should Consider.”

People who don’t have children or a married spouse, often think they don’t need any kind of estate plan. However, the truth is, they do. For singles, power of attorney, medical power of attorney and a living will are especially important.

What is a Living Will? A living will is sometimes called an advance medical directive. It details your wishes, if you are in a situation where life-sustaining treatment is the only way to keep you alive. Would you want to remain on a respirator, have a feeding tube or have other extreme measures used? It’s not pleasant to think about. However, this is an opportunity for you to make this decision on your own behalf, for a possible future date when you won’t be able to convey your wishes. Some people want to stay alive, no matter what. Others would prefer to turn off any artificial means of life support.

This spares your loved ones from having to guess about what you might like to have happen.

What is a Durable Power of Attorney for Healthcare? This is a legal document that gives a person you name the ability to make decisions about healthcare for you, if you can’t. To some people, this matters more than a living will, because the durable power of attorney for healthcare can convey your wishes in situations, where you are not terminally ill, but incapacitated.

Find someone you trust, whose judgment you respect and have a long, serious talk with them. Talk about your preferences for blood transfusions, organ transplants, disclosure about your medical records and more. Doctors have a hard time when a group of relatives and friends are all trying to help, if there is no one person who has been named as your power of attorney for healthcare.

What else does a single person need? The documents listed above are just part of an estate plan, not the whole thing. A single person should have a will, so that they can determine who they want to receive their assets upon death. They should also check on their beneficiary designations from time to time, so any insurance policies, investment accounts, retirement accounts, and any other assets that allow beneficiary designations are going to the correct person. Some accounts also do not permit non-spouses as beneficiaries. As unfair as this is, it does exist.

The takeaway here is that to protect yourself in a health care emergency situation, you should have these documents in place. Speak with an experienced estate planning attorney. This is not a complicated matter, but it is an important one.

Reference: Morningstar (April 23, 2019) “2 Estate-Planning Tools That Singles Should Consider”

 

Property Transfers and Gift Taxes: Estate Planning Basics

As we age, our needs change. That includes our needs for the property that we own. For one person, the family home was rented to the daughter and her spouse as a “rent-to-own” property. This is generous, since it gives the daughter an opportunity to build equity in a home. The parent had questions about what kind of a deed would be needed for this transaction, and if any gift taxes need to be paid on the gift of the house and a separate parcel of land. The answers are presented in the article “Dealing with property transfers and gift taxes” from Chicago Tribune.

For starters, there are tax advantages while the person is living, since the home is an investment for the owner, as described above. On the day that the home is deeded over to the daughter, she will own the home at the cost basis of the parent. Here is why. The IRS defines the “cost basis” of a real estate property as the price that the owner paid for it, plus the cost of purchase and any fees associated with the sale plus the cost of any new materials or structural improvements.

When you give someone a home, they receive it at the price that was paid for it plus these costs.

Let’s say this person paid $50,000 for the family home, and it’s now worth $100,000. If you give the home to a family member, it’s as if she paid $50,000 for it, not $100,000. There may be tax consequences when she goes to sell it, but that’s in the distant future.

It’s different if the home is inherited. In that case, if the house was valued at $100,000 on the date that the owner died, the heir’s cost basis would be $100,000. However, if the heir sold the property on the exact same day (this is an unlikely scenario), there would be no tax owed on the sale for the heir.

This is a very simplified explanation of how a home can be passed from one generation to the next. It would be best to speak with a good estate planning attorney, who can evaluate all the factors, since every situation is different. One suggestion might be to put the property into a living trust, in which case the daughter will still pay rent to the parent, but then would inherit the property when the parent died.

The estate planning attorney could use the same living trust for the separate parcel of land. Once the home and the land are deeded into the living trust, the owner can state her wishes for how the properties are to be used.

As for the question of gift taxes, anyone can give anyone else $15,000 per year, with no need to file any forms with the IRS or pay any taxes. If you give someone more than $15,000 in one year, the IRS requires a gift tax form with the federal income tax return.

A meeting with an estate planning attorney is the best way to ensure that the transfer of a family home to a family member is handled correctly and that there are no surprises.

Reference: Chicago Tribune (April 23, 2019) “Dealing with property transfers and gift taxes”

 

Kids Going to the Mom and Dad ATM One Time Too Many?

Parenting is supposed to be a process of teaching children how to be self-sufficient. However, it’s not always easy to go from being dependent on parents to being independent. If you think you’re still doing too much, says Newsday, you need to ask “Good to Know: Are your grown-up children taking advantage of you?”

Plenty of parents don’t know what to do when they are asked too many times for too many financial favors. They may feel pressured to agree, worried that they may see their grandchildren or their children less, if they say no. That’s a bad reason for generosity. If the parent is asked to co-sign for a large purchase, like a home or a car, they need to put the brakes on and discuss this thoroughly with their child. It may also be a good idea to speak with an estate planning attorney, for an objective viewpoint.

There needs to be recognition of the child’s creditworthiness. Have they borrowed money from their parents or other family members and failed to pay it back completely, or made only partial payments, and only after being reminded repeatedly? Don’t expect behavior to change. Parents facing this example also need to discuss this between themselves. They should only “lend” money that they can afford to lose.

If the child has been turned down for credit through regular financial channels and the bank of Mom and Dad is the only option, find out why. Ask them for a credit report and be transparent about your concerns. Can you afford to pick up the mortgage payments, if the child fails to make them? What about car loan payments?

Taking advantage of parents can extend past money. Some families welcome their grandchildren with open arms for unlimited times. However, if you find yourself babysitting on weekends and several week nights during the week, it’s time for a discussion. For one family, whose son was interested in spending time with a new fiancé more than with his two toddlers, the situation went on for nearly a year, until the parents gathered the courage to speak up.

They added up all the time they were spending each week taking care of the children. It turned out that they were watching the children for fifteen hours or more each week. This was discussed calmly. They then made it clear that they were happy to continue caring for the children, but for a far more reasonable period of time.

If you feel that your children are taking advantage of you, you’ll need to have a discussion in a calm and reasonable manner. If there are financial matters that are spinning out of control, speak with your estate planning attorney about how to create a plan to stop the flow of money. Elder financial abuse sometimes begins as a “favor.” However, it can escalate, if it is allowed to grow unchecked.

Reference: Newsday (April 14, 2019) “Good to Know: Are your grown-up children taking advantage of you?”

 

Estate Planning with Loved Survivors In Mind

There is a strong need for clarity regarding the rules about what happens when a spouse from a second marriage, who is not an owner of the home, wants to remain in the home after the death of the owner. A kind-hearted practice is to allow the surviving spouse to remain in the home and enjoy the memories the couple shared, says The Union in the article “Estate planning from the heart.”

Giving the surviving spouse the ability to remain in the home, honors the relationship of the spouse with the decedent. It is an act of kindness. However, it does need to be made legally enforceable, in case there are any challenges. Several considerations need to be evaluated in the estate plan:

Can the surviving spouse manage the cost of the home? This may include a monthly mortgage payment, property taxes, homeowner’s dues, insurance, yard upkeep, interior and exterior maintenance and any repairs that are needed to keep the home working.

Another concern is whether the surviving spouse will continue to be able to maintain the home in the immediate and distant future.

The surviving spouse’s health, including physical and mental abilities, needs to be considered. Will the survivor be able to manage if dementia strikes, or if they are afflicted by a serious illness and left in poor health? All of these challenges need to be considered, when drafting language regarding the rights of a person to remain in the decedent’s home. For instance, if a person is not mentally competent to live on their own, health problems or the declining condition of the property may arise.

A standard of care needs to be made regarding home maintenance and update. It may get very specific, including details like pet care and clean-up, internal cleanliness, the presence of roommates or boarders and an annual or semi-annual inspection to be sure that the home remains in good condition.

The most common problem for a surviving spouse is the financial ability to remain in the home and pay the bills. One solution may be to permit the survivor to stay in the house for two years, creating a trust that can support the cost of maintaining the home during the hardest period of mourning. This gives the surviving spouse time to recover and adjust to the loss.

If the surviving spouse does not have the mental capacity to remain in the house, the choices are difficult. Ideally, both spouses are involved in planning for this possibility, long before the owner of the property dies. There is nothing pleasant or easy about this. However, it must be done. Ignoring it, makes a bad situation worse. Will the person need care, how will that care be paid for, etc.? Don’t leave it for the family to manage.

In the case of a second marriage, leaving the house to an individual who does not have the ability to manage it, creates a difficult situation, unless the decedent is able to leave enough assets in trust for the surviving spouse to maintain the home. There should be no assumption of the ability of the surviving spouse to care for the home, as an unexpected illness or accident could make a person who is healthy at the time of the signing of the agreement, change to one who needs a great deal of help.

The key to a surviving non-owner spouse is to address the “what-if’s” early on, in the context of the estate plan. A plan should be put in place, which may involve trusts or other estate planning tools, to allow the surviving spouse to remain in the home, if that is the couple’s wish, and a plan “A,” “B,” and “C” for the unexpected events that occur in the course of aging.

An estate planning attorney will be able to create a plan that makes sense for the spouse, the surviving spouse and the heirs. A family meeting will be helpful to ensure that everyone involved knows what the plan is, so there are no misunderstandings, and all can act from a place of kindness.

Reference: The Union (April 7, 2019) “Estate planning from the heart”

 

The Big Problem with Do-It-Yourself Wills

An estate planning attorney would much rather not see a family undergoing unnecessary stress and expenses. Do-it-yourself wills and on-line wills very often create problems for families, as reported in Next Avenue’s aptly-named article “The Problems With Do-It-Yourself Online Wills.”

The article reports that one DIY estate planning service had three different “packages” that consisted of the same document, just with different names. Those packages were also missing a key estate planning document that the average person would not know to ask about. Even attorneys who do not practice estate planning law, know to work with an estate planning attorney for their wills.

For those with complex financial and personal lives, a DIY service may not be able to address the estate planning issues. If you have over a certain level of assets, do you want to risk making a costly blunder that would easily be prevented by working with a skilled professional?

Think of it this way: there are some people who can have their taxes done online, because they receive simple tax forms from their employer. If there’s a mistake, the IRS sends a letter and they may have to pay a penalty or pay the taxes that were not paid properly. Simple, right?

If your estate plan doesn’t work, you’ll never know. However, your loved ones will, and they’ll be the ones to have to make things right.

Good estate planning is all about expressing our wishes. The documents that are prepared and the process of decisions about our wishes accomplish a number of tasks:

  • Avoids court intervention in your family’s life,
  • Reduces administrative confusion, and
  • Reduces or eliminates unnecessary fees and delays.

The four basic planning documents are: a will, power of attorney for financial matters, an advance health care directive and if needed, a trust. If you expect to use any of these through a DIY website, expect to use a “fill in the blank” approach. Remember that every state has its own laws governing probate. Are you sure that the forms you are filling out are acceptable in your state?

Other DIY sites have some documents, but only if you purchase a high-end package. Others offer attorney consultations, but some consider an attorney consultation to be a series of questions and answers through an online app with pre-written responses, and not a real attorney.

The problem with DIY wills, is that we don’t know what we don’t know. We may know who we would like to receive our assets, but not what our state law requires to make that happen. Case law about estate distribution and probate is not something an average person knows. That’s why it makes more sense to speak with an experienced estate planning attorney. They will be able to create an estate plan based on knowledge and skills, that come about only after practicing in this area of law.

Reference: Next Avenue (March 29, 2019) “The Problems With Do-It-Yourself Online Wills.”

 

There’s A Reason Why There are Laws about Wills and Estates

There are laws about Wills and Estates and if this sounds like a question from a lawyer’s bar exam, that would be about right. It sounds like the first will should be in control, since his intentions were made clear in the first will, even if it was not executed correctly. This was explained by nwi.com in the article “Estate Planning: Will formalities are important.” However, there are many different factors that go into determining which of these three wills should be the one that the court accepts. This is a good illustration of why a will should be prepared with the help of an estate planning attorney.

First, is the third will valid? If there were no witnesses, it seems very clear that it is not. Except for very unusual circumstances, a will is only valid if it is in writing, signed by the person who is its “creator,” which is the “testator,” and witnessed by not one but two witnesses.

The next question is, how about that second will? Is it valid? Was the second will revoked, when the third was created, even though it was not properly executed?

There are two basic ways to revoke a will: physical destruction or written instrument. If the will was not destroyed, then the revocation of the second is considered to have occurred by the creation of the third will. Most wills contain a recital revoking all previous wills and codicils, which serves as a written revocation.

However, there’s a problem. Because the third will is most likely void, then it could not have revoked the second will. Will revocations also need to be witnessed, and since the third will was not witnessed, the recital contained in the third will revoking the prior wills is also void.

It, therefore, seems that the second will is valid in this situation. We say it seems, because there may be other factors that might also make the second will invalid: we don’t have all the facts.

The lesson from this article is that when it comes to wills, trusts and estate plans, the formalities really do matter. Procedures and formalities are considered more important than intent.

Another story that illustrates that point comes from an attorney who was involved in an estate matter where the person who made the will tried to take out several beneficiaries, by taking a razor blade to the document and physically removing their names from the will. The estate battle began after he died. The intention was clear—to remove the beneficiaries from the will. However, because the proper formalities were not followed, the beneficiaries were not properly removed from the will and they received their bequests after all.

If you have a will and estate plan and you wish to make changes to it, sit down with an estate planning attorney to discuss the changes you want to make, and have the documents properly revised, following all the required steps. Don’t try to do this yourself: your wishes may not be followed otherwise.

Reference: nwi.com (March 10, 2019) “Estate Planning: Will formalities are important”

 

Smart Women Protect Themselves with Estate Planning

The reason to have an estate plan is two-fold: to protect yourself, while you are living and to protect those you love, after you have passed. If you have an estate plan, says the Boca Newspaper in the article titled “Smart Tips for Women: Estate Planning,” your wishes for the distribution of your assets are more likely to be carried out, tax liabilities can be minimized and your loved ones will not be faced with an extended and expensive process of settling your estate.

Here are some action items to consider, when putting your estate plan in place:

If you have an estate plan but aren’t really sure what’s in it, it’s time to get those questions answered. Make sure that you understand everything. Don’t be intimidated by the legal language: ask questions and keep asking until you fully understand the documents.

If you have not reviewed your estate plan in three or four years, it’s time for a review. There have been new tax laws that may have changed the outcomes from your estate plan. Anytime there is a big change in the law or in your life, it’s time for a review. Triggering events include births, deaths, marriages, and divorces, purchases of a home or a business or a major change in financial status, good or bad.

If you don’t have an estate plan, stop postponing and make an appointment with an estate planning attorney, as soon as possible.

Your estate plan should include advance directives, including a Durable Power of Attorney, Health Care Surrogate, and a Living Will. You may not be capable of executing these documents during a health emergency and having them in place will make it possible for those you name to make decisions on your behalf.

Anyone who is over the age of 18, needs to have these same documents in place. Parents do not have a legal right to make any decisions or obtain medical information about their children, once they celebrate their 18th birthday.

Make a list of your trusted professionals: your estate planning attorney, CPA, financial advisor, your insurance agent and anyone else your executor will need to contact.

Tell your family where this list is located. Don’t ask them to go on a scavenger hunt, while they are grieving your loss.

List all your assets. You should include where they are located, account numbers, contact phone numbers, etc. Tell your family that this list exists and where to find it.

If you have assets with primary beneficiaries, make sure that they also have contingent beneficiaries.

If you have assets from a first marriage and remarry, be smart and have a prenuptial agreement drafted that aligns with a new estate plan.

If you have children and assets from a first marriage and want to make sure that they continue to be your heirs, work with an estate planning attorney to determine the best way to make this happen. You may need a will, or you may simply need to have your children become the primary beneficiaries on certain accounts. A trust may be needed. Your estate planning attorney will know the best strategy for your situation.

If you own a business, make sure you have a plan for what will happen to that business, if you become incapacitated or die unexpectedly. Who will run the business, who will own it and should it be sold? Consider what you’d like to happen for long-standing employees and clients.

Smart women make plans for themselves and their loved ones. An estate planning attorney will be able to help you navigate through an estate plan. Remember that an estate plan needs upkeep on a regular basis.

Reference: Boca Newspaper (March 4, 2019) “Smart Tips for Women: Estate Planning”

 

When Should You Have Your Estate Plan Done?

But don’t pat yourself too much — you’re not done yet. A will is not a static instrument, says The Item in its recent article “Don’t wait until high noon.” If laws change, which happens regularly, or your life changes, you need to review your will and be aware of any significant changes that may have an impact on your will and its goals.

Marriage, divorce, birth, adoption and death are some of the key trigger events in life that call for a review of your will. Some of these events seem very obvious, but others aren’t. That is when problems can arise. For instance, if a widow or widower remarries, the will needs to be updated to clarify how the new spouse and the children from prior marriages are to be provided for.

Welcoming a new child into the family is an event to celebrate, whether by birth or adoption. The will needs to add the new child. However, there’s another step that may be even more important. A will is used to name a guardian for the child, so the parents may name a person to rear their child in their absence. If a guardian is not named, then the court will select someone who might have not been the parent’s first (or even second) choice.

The death of an executor, beneficiary, guardian or trustee named in the will also means that the will needs to be updated. If the person who has died is a beneficiary, their name needs to be removed.  You may want to reconsider how assets are distributed. For executors, guardians or trustees, remember to add a secondary person for each role.

What if you inherit an unexpected fortune? You’ll definitely need to review your will, since your estate tax liability may have changed. Even if you don’t owe federal estate taxes, there may be state estate taxes to plan for. If you suffer a large financial loss, you’ll need to review your will, since the generous gift you had planned on leaving to a nonprofit. may no longer be available.

Some changes to wills occur because people change their minds about how they want to distribute their assets, or who they want to handle their post-mortem responsibilities. If you have a falling out with an executor, for instance, that change needs to be made in a timely manner.

If you have not reviewed the beneficiaries who are named on your life insurance policies and retirement accounts, and any other accounts where beneficiaries are named, you’ll want to do that too. If your will says cousin Andrew gets your life insurance policy proceeds, but his sister Stella is the one named as the beneficiary, then only Stella receives the proceeds. The named beneficiary is a contract that cannot be challenged or changed, regardless of what your will says.

If you don’t yet have a will, now is the time to make an appointment to meet with an estate planning attorney in your community. Remember that estate laws are set by the state of your residence, so an experienced estate planning attorney in your area is your best source.

Reference: The Item (Feb. 15, 2019) “Don’t wait until high noon”