Why Should I Name a Beneficiary?

For five years, Lewis, who was also trustee of the trust, distributed funds to Vivian, his daughter in law. However, shortly after Lewis passed away, Clark and Vivian divorced. Clark married Sophia, and the problems began, according to the article “Which spouse gets the benefit?” from Glen Rose Reporter.

As a successor trustee, Clark started making the annual distributions from the trust to his new spouse, Sophia. Vivian filed suit, claiming these funds were intended for her. However, the trust directions only said, “his son’s spouse.” Did the phrase mean a particular person or the person who was Clark’s spouse? What did Lewis want to happen to the funds? For obvious reasons, his wishes could not be determined.

This fact pattern is from a real case, Ochse v. Ochse, filed in San Antonio, Texas. The trial court determined that Lewis’ wish was to benefit his son’s ex-spouse, who was his daughter-in-law when the trust was confirmed. An appellate court affirmed the decision.

Was the length of the first marriage part of the court’s decision? Clark had been married to Vivian for thirty years, which is likely to have been a part of the father’s decision. Clark had only been married to his second wife for seven years.

What if the father was alive and able to declare his intentions? It might not have made a difference. The court in this case found the term “son’s spouse” to unambiguously mean the spouse at the time the trust was created.

When a term is found to be unambiguous, there’s no evidence to question its meaning. So even if Lewis were alive and well, the court would not have let his intention be heard.

This kind of situation is seen often when a life insurance policy is left to a first spouse, the couple divorces and the beneficiary on the policy was never updated. Most of the time, the ex-spouse receives the proceeds from the life insurance.

In the case of Ochse v. Ochse, the matter would have been simplified if Lewis had named his daughter-in-law by name as the beneficiary of the trust. Clark might still have tried to change the terms, but it would have been clear who the intended beneficiary was.

No one likes to imagine their children divorcing, especially when the parents have a good relationship with the daughter or son-in-law. However, this needs to be taken into consideration when naming beneficiaries. If you adore your daughter-in-law and want her to receive an inheritance from you, then make sure to name her as a beneficiary. If you are concerned the marriage may not last, talk with an estate planning attorney about creating a trust to protect inheritances from being lost in a divorce.

Reference: Glen Rose Reporter (Dec. 17, 2021) “Which spouse gets the benefit?”

Where Do You Score on Estate Planning Checklist?

Make sure that you review your estate plan at least once every few years to be certain that all the information is accurate and updated. It’s even more necessary if you experienced a significant change, such as marriage, divorce, children, a move, or a new child or grandchild. If laws have changed, or if your wishes have changed and you need to make substantial changes to the documents, you should visit an experienced estate planning attorney.

Kiplinger’s recent article “2021 Estate Planning Checkup: Is Your Estate Plan Up to Date?” gives us a few things to keep in mind when updating your estate plan:

Moving to Another State. Note that if you’ve recently moved to a new state, the estate laws vary in different states. Therefore, it’s wise to review your estate plan to make sure it complies with local laws and regulations.

Changes in Probate or Tax Laws. Review your estate plan with an experienced estate planning attorney to see if it’s been impacted by changes to any state or federal laws.

Powers of Attorney. A power of attorney is a document in which you authorize an agent to act on your behalf to make business, personal, legal, or financial decisions, if you become incapacitated.  It must be accurate and up to date. You should also review and update your health care power of attorney. Make your wishes clear about do-not-resuscitate (DNR) provisions and tell your health care providers about your decisions. It is also important to affirm any clearly expressed wishes as to your end-of-life treatment options.

A Will. Review the details of your will, including your executor, the allocation of your estate and the potential estate tax burden. If you have minor children, you should also designate guardians for them.

Trusts. If you have a revocable living trust, look at the trustee and successor appointments. You should also check your estate and inheritance tax burden with an estate planning attorney. If you have an irrevocable trust, confirm that the trustee properly carries out the trustee duties like administration, management and annual tax returns.

Gifting Opportunities. The laws concerning gifts can change over time, so you should review any gifts and update them accordingly. You may also want to change specific gifts or recipients.

Regularly updating your estate plan can help you to avoid simple estate planning mistakes. You can also ensure that your estate plan is entirely up to date and in compliance with any state and federal laws. Contact an experienced estate planning attorney.

Reference: Kiplinger (July 28, 2021) “2021 Estate Planning Checkup: Is Your Estate Plan Up to Date?”

 

What Kind of Trust Is Right for You?

Everyone wins when estate planning attorneys, financial advisors and accounting professionals work together on a comprehensive estate plan. Each of these professionals can provide their insights when helping you make decisions in their area. Guiding you to the best possible options tends to happen when everyone is on the same page, says a recent article “Choosing Between Revocable and Irrevocable Trusts” from U.S. News & World Report.

What is a trust and what do trusts accomplish? Trusts are not just for the wealthy. Many families use trusts to serve different goals, from controlling distributions of assets over generations to protecting family wealth from estate and inheritance taxes.

There are two basic kinds of trust. There are also many specialized trusts in each of the two categories: the revocable trust and the irrevocable trust. The first can be revoked or changed by the trust’s creator, known as the “grantor.” The second is difficult and in some instances and impossible to change, without the complete consent of the trust’s beneficiaries.

There are pros and cons for each type of trust.

Let’s start with the revocable trust, which is also referred to as a living trust. The grantor can make changes to the trust at any time, from removing assets or beneficiaries to shutting down the trust entirely. When the grantor dies, the trust becomes irrevocable. Revocable trusts are often used to pass assets to adult children, with a trustee named to manage the trust’s assets until the trust documents direct the trustee to distribute assets. Some people use a revocable trust to prevent their children from accessing wealth too early in their lives, or to protect assets from spendthrift children with creditor problems.

Irrevocable trusts are just as they sound: they can’t be amended once established. The terms of the trust cannot be changed, and the grantor gives up any control or legal right to the assets, which are owned by the trust.

Giving up control comes with the benefit that assets placed in the trust are no longer part of the grantor’s estate and are not subject to estate taxes. Creditors, including nursing homes and Medicaid, are also prevented from accessing assets in an irrevocable trust.

Irrevocable trusts were once used by people in high-risk professions to protect their assets from lawsuits. Irrevocable trusts are used to divest assets from estates, so people can become eligible for Medicaid or veteran benefits.

The revocable trust protects the grantor’s wishes, if the grantor becomes incapacitated. It also avoids probate, since the trust becomes irrevocable upon death and assets are outside of the probated estate. The revocable trust may include qualified assets, like IRAs, 401(k)s and 403(b)s.

However, there are drawbacks. The revocable trust does not provide tax benefits or creditor protection while the grantor is living.

Your estate planning attorney will know which type of trust is best for your situation, and working with your financial advisor and accountant, will be able to create the plan that minimizes taxes and maximizes wealth transfers for your heirs.

Reference: U.S. News & World Report (Aug. 26, 2021) “Choosing Between Revocable and Irrevocable Trusts”

 

How Do I Sell a Home in an Irrevocable Trust?

A trustee who sells a home in irrevocable trust for a parent who died should know that generally, assets transferred to an irrevocable trust will be deemed a completed gift and will not be included in an estate for estate tax purposes.

Lehigh Valley Live’s recent article entitled “What happens to tax on a home sold from a trust?” explains that this means there wouldn’t be a step-up in basis to the fair market value upon the decedent’s death.

Remember that an irrevocable trust is a type of trust in which its terms can’t be modified, amended, or terminated without the permission of the grantor’s named beneficiary or beneficiaries.

Irrevocable trusts have tax-shelter benefits that revocable trusts to don’t.

However, an irrevocable trust can be created so that the settlor (the creator) of the trust keeps certain rights and powers, so that gifts to the trust are incomplete.

In that instance, the assets are included in the settlor’s estate upon death and obtain a step-up in basis upon the decedent’s death.

If the trust sells the asset in the trust, the trust may need to file Form 1041, U.S. Income Tax Return for Estates and Trusts, and the trust may be required to pay a tax.

If the trust distributes any income to the beneficiaries in the same tax year it receives that income, the income is passed through to the beneficiaries, and the beneficiaries must report it on the beneficiaries’ individual tax returns (Form 1040) and pay any tax due.

It’s generally a good idea to report and pay tax at the individual rate instead of at the trust or estate level.

That’s because the trust or estate will begin to pay tax at the highest rate at only $13,150. In comparison, an individual doesn’t pay tax at the highest rate until his or her income exceeds over $440,000.

Note that an irrevocable trust is a more complex legal arrangement than a revocable trust. As a result, there might be current income tax and future estate tax implications when using this type of trust. It’s wise to seek the assistance of an experienced estate planning attorney.

Reference: Lehigh Valley Live (Aug. 16, 2021) “What happens to tax on a home sold from a trust?”

 

What Exactly Is a Trust?

MSN Money’s recent article entitled “What is a trust?” explains that many people create trusts to minimize issues and costs for their families or to create a legacy of charitable giving. Trusts can be used in conjunction with a last will to instruct where your assets should go after you die. However, trusts offer several great estate planning benefits that you don’t get in a last will, like letting your heirs to see a relatively speedy conclusion to settling your estate.

Working with an experienced estate planning attorney, you can create a trust to minimize taxes, protect assets and spare your family from going through the lengthy probate process to divide up your assets after you pass away. A trust can also let you control to whom your assets will be disbursed, as well as how the money will be paid out. That’s a major point if the beneficiary is a child or a family member who doesn’t have the ability to handle money wisely. You can name a trustee to execute your wishes stated in the trust document. When you draft a trust, you can:

  • Say where your assets go and when your beneficiaries have access to them
  • Save your beneficiaries from paying estate taxes and court fees
  • Shield your assets from your beneficiaries’ creditors or from loss through divorce settlements
  • Instruct where your remaining assets should go if a beneficiary dies, which can be helpful in a family that includes second marriages and stepchildren; and
  • Avoid a long probate court process.

One of the most common trusts is called a living or revocable trust, which lets you put assets in a trust while you’re alive. The control of the trust is transferred after you die to beneficiaries that you named. You might want to ask an experienced estate planning attorney about creating a living trust for several reasons, such as:

  • If you’d like someone else to take on the management responsibilities for some or all of your property
  • If you have a business and want to be certain that it operates smoothly with no interruption of income flow, if you die or become disabled
  • If you want to shield assets from the incompetency or incapacity of yourself or your beneficiaries; or
  • If you want to decrease the chances that your will may be contested.

A living trust can be a smart move for those with even relatively modest estates. The downside is that while a revocable trust will usually keep your assets out of probate if you were to die, there still will be estate taxes if you hit the threshold.

By contrast, an irrevocable trust can’t be changed once it’s been created. You also relinquish control of the assets you put into the trust. However, an irrevocable trust has a key advantage in that it can protect beneficiaries from probate and estate taxes.

In addition, there are many types of specialty trusts you can create. Each is structured to accomplish different goals. Ask an experienced estate planning attorney about these.

Reference: MSN Money (July 9, 2021) “What is a trust?

What are My Best Estate Planning Moves?

Tickertape’s recent article “5 Estate Planning Tips That Aren’t Just for the Wealthy” explains that a common misconception is that estate planning isn’t necessary if your estate assets amount to less than the 2021 federal estate tax exemption of $11.7 million per individual.

But most of us can benefit from estate planning. This can help protect your assets for your heirs. Estate planning includes creating a last will or revocable living trust, making certain that you have the right beneficiaries, and creating a health care directive. Creating a solid estate plan can decrease the odds that your family will have to deal with a problematic probate and reduce the amount of money because of unneeded taxes.

Create a Will. A last will is one way to let people know how you want your assets taken care of after you die. Plus, a last will should include information about who should act as guardians for minor children and care for any pets. Talk to an estate planning attorney about the specific laws for probate to make sure you do it correctly.

Name Your Beneficiaries. Review your beneficiary designations and make sure they’re up to date. When there’s a major life change, you should look at your beneficiary designations (e.g., life insurance and retirement funds), update your last will, and make sure everything matches. This includes charities as well as individuals. There are estate planning strategies designed to help you pass your assets on, but none of these will help if you don’t have your beneficiaries properly designated and assets aligned with your estate plan.

Ask Your Attorney About a Trust. A fully funded revocable living trust can be great tool to pass your assets on while potentially helping your heirs avoid probate. There are many different types of trusts that can be used to provide a variety of benefits. Much depends on your situation, so work with an experienced estate planning attorney.

Power of Attorney. Estate planning also includes documents in the event you become incapacitated. Signing a power of attorney allows an agent to make decisions on your behalf if you’re incapacitated. Find a person you trust to handle these decisions and have an estate planning attorney prepare the legal documents to ensure that everything is correct.

Think About Giving Now. You don’t need to wait until you’re gone to provide resources to your family. In 2021, you can give up to $15,000 to each recipient without paying the gift tax. If you’re married, each spouse can give $15,000. When you give to charity now, instead of waiting until you pass, you may claim a tax deduction, whether you donate directly, give stock, or set up a donor-advised fund. This allows you to benefit now—along with your beneficiaries.

Reference: Tickertape (June 25, 2021) “5 Estate Planning Tips That Aren’t Just for the Wealthy”

 

What Is a Testamentary Trust?

Trusts are created to hold assets, and money in a trust is managed according to the instructions of the person who created it. A testamentary trust is a trust that’s created by a will after death, explains WTOP’s article entitled “What Is a Testamentary Trust and How Do I Create One?” Once the trust has been created, assets are placed into it and then distributed, as designated by its legal documentation.

There is also something called a revocable trust, which is a living trust created prior to a person’s death. A revocable trust is created outside of probate, which means that the heirs do not have to go through probate to receive assets from a living trust. Instead, a trustee can distribute funds directly to beneficiaries. Both testamentary trusts and living trusts are used for estate planning. However, a living trust allows for more flexibility and can have lower long-term costs. Living trusts are not only created outside probate but managed outside the court system as well. In contrast, testamentary trusts are administered through probate for as long as they are in effect.

A testamentary trust is frequently used to manage money for minor children, but it can protect assets in other situations too. The good thing is that there is a lot more court oversight. The bad part is court oversight is not cheap.

For example, a testamentary trust could be used to manage money for an 8-year-old beneficiary until age 25. But that means 17 years of probate. So, while testamentary trusts may be less expensive than living trusts to set up, they could cost more in the long run. These trusts are rare, and the one time a testamentary trust may have an advantage over a living trust is if someone involved in the estate is prone to taking legal action, in which case court management may be the better option.

You should ask an attorney to draft the documents. It should be an attorney who specializes in trusts and estates. Having an experienced estate planning attorney draw up will and trust documents will make certain that they meet the state’s requirements and are written so that your assets are distributed according to your instructions.

When the creator of the trust dies, the testamentary trust will be created, and assets moved into it as stipulated in the deceased’s will. Distributions will then occur from the trust, as instructed in the trust documents.

Reference: WTOP (July 19, 2021) “What Is a Testamentary Trust and How Do I Create One?”

 

Estate Planning Matters for Singles

If you’re not married and you have relatives or friends to whom you would like to pass certain assets, then you need an estate plan, says the article “Estate planning important even if you’re not married” from Rocky Mountain Telegram.

If you die without a last will and testament or other estate planning documents in place, a probate court will make the decisions about how to distribute assets according to the laws of your state. That may not be what you wanted, but it will be too bad—and too late.

If you want to leave assets to family members or close friends, you’ll need to plan for this with a last will and testament. The same goes for any donations you may wish to leave to one or more charitable organizations. You could just name organizations in your will, but there are many different ways to give to charity and some have tax benefits for you and your heirs.

One way to leave assets to charity is a Charitable Remainder Trust. Your estate planning attorney will help guide you through the steps. Appreciated assets, like stocks, mutual funds, or other investment securities, are transferred into an irrevocable trust. You get to name the trustee—you could be the trustee, if you prefer—and then you can sell the assets at full market value, avoiding any capital gains taxes that you’d pay if you sold them as an individual.

If you itemize your income taxes, you might be able to claim a charitable deduction on taxes. With the proceeds, the trust can purchase income-producing assets and provide an income stream for the rest of your life. When you die, the assets remaining in the trust will go to the charity or charities that you have named.

Family members and charities aren’t the only ones to consider in an estate plan for a single person. You need to prepare to protect yourself. With the absence of an immediate family, being protective of your financial and health care decisions requires a durable power of attorney and a health care proxy, among other documents.

The durable power of attorney authorizes a person of your choice to manage finances, if you were to become incapacitated. This is especially important when there is no spouse to take on this role. Your health care proxy, also known as a medical power of attorney, authorizes someone you name to make health care decisions on your behalf, if you are unable.

Estate planning can be complex. An experienced estate planning attorney will be an invaluable resource as you go through the process. Who will be the best candidate to select as your power of attorney? What other documents do you need to ensure that your assets go to the people or charities you want? Once this is done, you’ll be prepared for the future—and protected.

Reference: Rocky Mountain Telegram (June 6, 2021) “Estate planning important even if you’re not married”

 

What Is the Main Purpose of a Trust?

There are advantages and disadvantages of an irrevocable trust, and you’ll want to be fully informed before taking steps that may be costly to undo, explains the article “Understanding your trust” from The Sentinel. Once your home is deeded to an irrevocable trust, you won’t be able to make any changes without getting permission from the beneficiary or beneficiaries named in the trust. Your rights of ownership are transferred to the trust, when you deed it to the trust.

A separate legal agreement with the trustee, the person in charge of the trust, will be needed to give you a legal right to occupy the home also. Any changes could be made but will take time and could be costly. Changes can also only be made, if the beneficiaries agree.

There was a time when lenders inserted clauses into mortgages that any time a sale or transfer of the deed occurred, full payment of the mortgage would be due. This changed, and today the mortgage is not due just because of a change in the deed. However, it may be a challenge to refinance if the home is held in an irrevocable trust.

For most people, the reason to put a home into an irrevocable trust is to prevent the home from being lost to a creditor, including protecting the home’s equity from the cost of nursing home care, during life or after death. In some states, like Pennsylvania, the state will initiate a collection action against the estate to recover the amount paid for the deceased homeowner’s nursing care costs.

The move to put a home into an irrevocable trust can work as long as the trust remains intact and the homeowner does not apply for financial assistance for nursing home care for at least five years from the date that the deed was transferred as recorded in the courthouse.  If long-term care needs arise before that time, putting the home into an irrevocable trust may not serve its intended purpose.

There are some tax benefits from an irrevocable trust. If the homeowner lives at least one year after the home is deeded to the trust, in some states no inheritance taxes will be due on the home. Check with a local estate planning attorney to learn what the rules are in your state.

If the trust is prepared by an experienced elder law attorney, it is likely that the capital gain on the sale of the home by the trust after the homeowner’s death will be taxed based on the home’s value at the time of sale, rather than the value at the time it is placed into the trust or on the day of death.

If the home is the only asset in the trust, the taxpayer ID of the trust will be the homeowner’s Social Security number, and no annual tax return is required. If, however, other assets, particularly income-producing assets, are placed in the trust, then the trust needs to have its own EIN (a federal tax identification number) and annual tax returns will need to be paid. Taxes on a trust are normally at a higher rate than individual income rates.

Your estate planning attorney will explain the numerous strategies that can be used to protect your assets and your home from the high cost of long-term care. There are many Medicaid compliant techniques and tools, depending upon the situation of the individual and the family.

Reference: The Sentinel (April 23, 2021) “Understanding your trust”

 

How can I Revoke an Irrevocable Trust?

Is there a way to get a house deed out of the trust?

Nj.com’s recent article entitled “Can I dissolve an irrevocable trust to get my house out?” says that prior to finalizing legal documents, it is important to know the purpose and consequences of the plan.

An experienced estate planning attorney will tell you there are a variety of trust types that are used to achieve different objectives.

There are revocable trusts that can be created to avoid probate, and others trusts placed in a will to provide for minor children or loved ones with special needs.

Irrevocable trusts are often created to shield assets, including the home, in the event long-term nursing care is required. Conveying assets to an irrevocable trust typically starts the five-year “look back” period for Medicaid purposes, if the trust is restricted from using the assets for, or returning assets to, the individual who created the trust (known as the “grantor”).

When you transfer assets to a trust, control of the assets is given to another person (the ‘trustee”).

This arrangement may protect assets in the event long-term care is required. However it comes with the risk that the trustee may not always act how the grantor intended.

For instance, the grantor can’t independently sell the house owned by the trust or compel the trustee to purchase a replacement residence, which may cause a conflict between the grantor and trustee. Because the trust is irrevocable, it could be difficult and expensive to unwind.

In light of this, it’s important to designate a trustee who will work with and honor the wishes of the grantor.

An experienced estate planning attorney retained for estate and asset planning should provide clear, understandable and thoughtful advice, so the client has the information needed to make an informed decision how to proceed.

Reference: nj.com (April 6, 2021) “Can I dissolve an irrevocable trust to get my house out?”