What Not to Do when Creating an Estate Plan

Having a good estate plan is critical to ensure that your family is well taken care of after you are gone. Working with an experienced estate planning attorney remains the best way to be sure that your assets are distributed as you want and in the most tax-efficient way possible. A recent article titled “Estate Planning mistakes to avoid” from Urology Times looks at the fine points.

An out-of-date estate plan. Life is all about change. Your estate plan needs to reflect those changes. Just as you prepare taxes every year, your estate plan should be reviewed every year. Here are trigger events that should also spur a review:

  • Parents die and can no longer be beneficiaries or guardians of minor children.
  • Children marry or divorce or have children of their own.
  • Your own remarriage or divorce.
  • A significant change in your asset levels, good or bad.
  • Buying or selling real estate or other large transactions.

Neglecting to update an estate plan correctly. Scratching out a provision in a will and initialing it does not make the change valid. This never works, no matter what your know-it-all brother-in-law says. If you want to make a change, visit an estate planning attorney.

Relying on joint tenancy to avoid probate. When you bought your home, someone probably advised you to title the home using joint tenancy to avoid probate. That only works when the first spouse dies. When the surviving spouse dies, they own the home entirely. The home goes through probate.

Failing to coordinate your will and trusts. All your wills and trusts and any other estate planning documents need to be reviewed to be sure they work together. If you create a trust and transfer assets to it, but your will states that the asset now held in the trust should be gifted to a nephew, then you’ve opened the door to delays, family dissent and possibly litigation.

Not titling assets correctly. How assets are titled reflects their ownership. If your home, bank accounts, investment accounts, retirement accounts, vehicles and other properties are titled properly, you’ve done your homework. Next, check on beneficiary designations for any asset. Beneficiary designations allow assets to pass directly to the beneficiary. Review these designations annually. If your will says one thing and the beneficiary designation says another, the beneficiary designation wins.

Not naming successor or contingent beneficiaries. If you’ve named a beneficiary on an account—such as your life insurance—and the beneficiary dies, the proceeds could go to your estate and become taxable. Naming an alternate and successor for all the key roles in your estate plan, including beneficiaries, trustees and guardians, offers another layer of certainty to your estate plan.

Neglecting to address health care directives. It may be easier to decide who gets the family vacation home than who will decide to keep you on or take you off life-support systems. However, this is necessary to protect your wishes and prevent family disasters. Health care proxy, advance care directive and end-of-life planning documents tell your loved ones what your wishes are. Without them, the family may be left guessing what to do.

Forgetting to update Power of Attorney. Review this critical document to be sure of two things: the person you named to manage your affairs is still the person you want, and the documents are relatively recent. Some financial institutions balk at older POA forms, and others will outright refuse to accept them. Some states, like New York, have changed POA rules to make it harder for POAs to be denied, but in other states there still can be problems, if the POA is old.

Reference: Urology Times (July 29, 2021) “Estate Planning mistakes to avoid”

Checklist for Estate Plan’s Success

We know why estate planning for your assets, family and legacy falls through the cracks. It’s not the thing a new parent wants to think about while cuddling a newborn, or a grandparent wants to think about as they prepare for a family get-together. However, this is an important thing to take care of, advises a recent article from Kiplinger titled “2021 Estate Planning Checkup: Is Your Estate Plan Up to Date?

Every four years, or every time a trigger event occurs—birth, death, marriage, divorce, relocation—the estate plan needs to be reviewed. Reviewing an estate plan is a relatively straightforward matter and neglecting it could lead to undoing strategic tax plans and unnecessary costs.

Moving to a new state? Estate laws are different from state to state, so what works in one state may not be considered valid in another. You’ll also want to update your address, and make sure that family and advisors know where your last will can be found in your new home.

Changes in the law. The last five years have seen an inordinate number of changes to laws that impact retirement accounts and taxes. One big example is the SECURE Act, which eliminated the Stretch IRA, requiring heirs to empty inherited IRA accounts in ten years, instead of over their lifetimes. A strategy that worked great a few years ago no longer works. However, there are other means of protecting your heirs and retirement accounts. It is recommended that you speak with a qualified estate planning attorney to periodically review your estate plan to coincide with changes in the law.

Do you have a Power of Attorney? A POA gives a person you authorize the ability to manage your financial, business, personal and legal affairs, if you become incapacitated. If the POA is old, a bank or investment company may balk at allowing your representative to act on your behalf. If you have one, make sure it’s up to date and the person you named is still the person you want. If you need to make a change, it’s very important that you put it in writing and notify the proper parties.

Health Care Power of Attorney needs to be updated as well. Marriage does not automatically authorize your spouse to speak with doctors, obtain medical records or make medical decisions on your behalf. If you have strong opinions about what procedures you do and do not want, the Health Care POA can document your wishes.

Last Will and Testament is Essential. Your last will needs regular review throughout your lifetime. Has the person you named as an executor four years ago remained in your life, or moved to another state? A last will also names an executor for your property and a guardian for minor children. It also needs to have trust provisions to pay for your children’s upbringing and to protect their inheritance.

Speaking of Trusts. If your estate plan includes trusts, review trustee and successor appointments to be sure they are still appropriate. You should also check on estate and inheritance taxes to ensure that the estate will be able to cover these costs. If you have an irrevocable trust, confirm that the trustee is still ready and able to carry out the duties, including administration, management and tax returns.

Gifting in the Estate Plan. Laws concerning charitable giving also change, so be sure your gifting strategies are still appropriate for your estate. An estate plan review is also a good time to review the organizations you wish to support.

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

Do You Need a Revocable Trust or Irrevocable Trust?

There are important differences between revocable and irrevocable trusts. One of the biggest differences is the amount of control you have over assets, as explained in the article “What to Consider When Deciding Between a Revocable and Irrevocable Trust” from Kiplinger. A revocable trust is often referred to as the Swiss Army knife of estate planning because it has so many different uses. The irrevocable trust is also a multi-use tool, only different.

Trusts are legal entities that own assets like real estate, investment accounts, cars, life insurance and high value personal belongings, like jewelry or art. Ownership of the asset is transferred to the trust, typically by changing the title of ownership. The trust documents also contain directions regarding what should happen to the asset when you die.

There are three key parties to any trust: the grantor, the person creating and depositing assets into the trust; the beneficiary, who will receive the trust assets and income; and the trustee, who is in charge of the trust, files tax returns as needed and distributes assets according to the terms of the trust. One person can hold different roles. The grantor could set up a trust and also be a trustee and even the beneficiary while living. The executor of a will can also be a trustee or a successor trustee.

If the trust is revocable, the grantor has the option of amending or revoking the trust at any time. A different trustee or beneficiary can be named, and the terms of the trust may be changed. Assets can also be taken back from a revocable trust. Pre-tax retirement funds, like a 401(k) cannot be placed inside a trust, since the transfer would require the trust to become the owner of these accounts. The IRS would consider that to be a taxable withdrawal.

There isn’t much difference between owning the assets yourself and a revocable trust. Assets still count as part of your estate and are not sheltered from estate taxes or creditors. However, you have complete control of the assets and the trust. So why have one? The transition of ownership if something happens to you is easier. If you become incapacitated, a successor trustee can take over management of trust assets. This may be easier than relying on a Power of Attorney form and some believe it offers more legal authority, allowing family members to manage assets and pay bills.

In addition, assets in a trust don’t go through probate, so the transfer of property after you die to heirs is easier. If you own homes in multiple states, heirs will receive their inheritance faster than if the homes must go through probate in multiple states. Any property in your revocable trust is not in your will, so ownership and transfer status remain private.

An irrevocable trust is harder to change, as befits its name. To change an irrevocable trust while you are living takes a little more effort but is not impossible. Consent of all parties involved, including the beneficiary and trustee, must be obtained. The benefits from the irrevocable trust make the effort worthwhile. By giving up control, assets in the irrevocable trust may not be part of your taxable estate. While today’s federal estate exemption is historically high right now, it’s expected to go much lower in the future.

Contact and experienced estate planning attorney to discuss you estate planning needs.

 

Reference: Kiplinger (July 14, 2021) “What to Consider When Deciding Between a Revocable and Irrevocable Trust”

 

Just What Does an Executor Do?

Spending the least amount of time possible contemplating your death is what most people try to do. However, one part of the estate planning process needs time and reflection: deciding who should serve in important roles, including executor. Whatever the size of your estate, the people you name have jobs that will impact your life and your family’s future, says a recent article “How to get it right when naming an executor and filling other key roles in your estate plan” from CNBC. A quick decision now might have a bad outcome later.

First, let’s look at the executor. They are responsible for everything from filing your last will with the court to paying off debts, closing accounts and making sure that assets in your probate estate are distributed according to the directions in your last will. They need to be trustworthy, organized and able to manage financial decisions. They also need to be available to handle your estate, in addition to their other responsibilities.  Note that some of your assets, including retirement tax deferred accounts, life insurance proceeds and any other assets with a named beneficiary, will pass outside of your probate estate. These assets need to be identified and the custodian needs to be notified so the heir can receive the asset.

Settling an estate takes an average of 16 months, with smaller estates being settled more quickly. Larger estates, worth more than $5 million and up, can take as long as four years to settle.

Some people prefer to name co-executors as a means of spreading out the responsibilities. That ix fine, unless the two people have a history of not getting along, as is the case with many siblings. Sharing the duties sounds like a good idea, but it can lead to delays if the two don’t agree or can’t coordinate their estate tasks. Many estate planning attorneys recommend naming one person as the executor and a second as the contingency executor, in case the first cannot serve or decides he or she does not want to take on the responsibilities. The same applies to any trustees, if your estate plan includes a trust.

Make sure the people you are considering as executor, contingent executor, trustee or success or trustee are willing to take on these roles. If there is no one in your life who can take on these tasks, an option is to name an estate planning attorney, accountant, or trust company.

Another important role in your estate plan is the Power of Attorney. You’ll want one for financial decisions and another for healthcare decisions. They can be the same person or different people. Understand that the financial Power of Attorney will have complete control over your assets, including accounts, real estate, and personal property, if you are too incapacitated to make decisions or to communicate your wishes.

The healthcare Power of Attorney will be making medical decisions on your behalf. You will want to name a person you trust to carry out your wishes—even if they are not the same ones they would want, or if your family opposes your wishes. It’s not an easy task, so be sure to create a Living Will to express your wishes, if you are placed on life support or suffer from a terminal condition. This will help your healthcare Power of Attorney follow your wishes.

Finally, revisit your estate plan every three to five years. Life changes, laws change and your estate plan should continue to reflect your wishes. The lives of the people in key roles change, so the same person who was ready to serve as your executor today may not be five years from now. Confirm their willingness to serve every time you review your last will, just to be sure.

Reference: CNBC (March 5, 2021) “How to get it right when naming an executor and filling other key roles in your estate plan”

 

Preparing for an Estate Planning Meeting

Preparing to meet with an estate planning attorney for the first time is an opportunity to get organized and think about your wishes for the future. If you meet with your accountant every year to prepare tax returns, this may be a familiar process. It’s a chance to step away from day-to-day activities and focus on your life, as described in a recent article “Preparing for an Estate Planning Consultation: 10 Items to Consider Before Meeting Your Attorney” from The National Law Journal.

Minor Children Need Guardians and Conservators. In most states, families with minor children need a last will to designate one or more guardians to raise the children in the event both parents die. A successor should be named in case the first named guardian is unable or unwilling to serve. Discuss your decision with the people you are naming; don’t leave this as a surprise. Choosing these people is a hard decision. However, don’t let it be a reason to delay creating your estate plan. It’s better that you name a guardian, rather than let the court make that decision.

Agents, Trustees, and Power of Attorney. With a Durable Power of Attorney, your assets can be managed by a named agent, if you become incapacitated. The person who manages your estate after death is the executor. They are named in your last will. If you have trusts, the documents that create the trust also name the trustees. It is possible for one person to act as a fiduciary for all of these roles, although the tasks can be divided.

Living Will and Patient Advocate Designation. If you are incapacitated, a Patient Advocate can make medical decisions on your behalf, including following the instructions of your Living Will.

Personal Property. Any items of personal property, whether their value is sentimental or monetary, should be specified in the will. A list of items and who you want to receive what, may spare your heirs from squabbles over your personal effects, large or small. If you own a business or real estate, they also need to be addressed in your will.

Charitable Donations. If you are charitably minded, your will is one way to make bequests and build a lasting legacy. Charitable donations can also be made to gain tax benefits for heirs.

Beneficiary Distributions. The beneficiary designation is the unsung hero of the estate plan. By managing beneficiary designations while you are living—updating beneficiary designations, assigning beneficiary designations to all accounts possible—you take assets out of your probate estate and smooth the asset distribution process. However, there are some wrinkles to consider.

Minor children may not receive assets until they become of age—18 in most cases. Do you want your children (or nieces or grandchildren) to receive an inheritance, while they are still in their teens? Proper estate planning includes trusts created, so a responsible adult can manage the trust on their behalf. Your trust can also be structured so the money may only be used for college expenses, or when the children reach certain ages.

Surviving Pets. You can plan for your pet’s care, if you pass away or become incapacitated before they die. Most states permit the creation of a pet trust, an enforceable means of providing assets to be used for the care and well-being of your pet.

Your estate planning attorney will be able to provide you with a list of the documents she will need to get started on your estate plan, but these are the major issues that you will be discussing at your first meeting.

Reference: The National Law Journal (Feb. 23, 2021) “Preparing for an Estate Planning Consultation: 10 Items to Consider Before Meeting Your Attorney”

 

Is it Better to Have a Living Will or a Living Trust?

A living will and a living trust are part of an estate plan that achieves the goals of protecting you while you are living and your loved ones when you have passed. You may need both, but before you make any decision, first know what they are, says the article “Living Will vs. Living Trust” from Yahoo! Finance.

A living will is a legal document used in healthcare decision making. It offers a way for you to provide in exact terms what kind of medical care and treatment you want to receive in end-of-life situations. They are not fun to contemplate, but the alternative is leaving your spouse or children guessing what you would want and living with the consequences. By having a living will prepared properly with your estate planning attorney (to ensure that it is valid), you tell your loved ones what you want. They will not be left guessing or fighting among each other. The treating physicians will also know what you want.

This is different from an advance healthcare directive, which also deals with medical situation but from a different angle. The advance healthcare directive is used to name an agent who will act on your behalf to make medical decisions. It is used in situations other than end-of-life care. Let’s say you are incapacitated by an illness. That person is authorized to make medical care decisions on your behalf.

A trust is a legal entity that lets you transfer assets to the ownership of a trustee and has little to do with your healthcare. The trustee is a person named to be in charge of the trust. He is considered a fiduciary, a legal standard requiring him to put the interest of the trust above his own. A living trust is one of many different kinds of trusts.

Living trusts are also known as “inter vivos” trusts and take effect while you are alive. You (the grantor) are permitted to serve as your own trustee. You should name one or more successor trustees, who can take over just in case something happens to you. You can also name someone else to be the trustee. That is usually a trusted person or a financial institution.

Living trusts may be revocable or irrevocable. When they are revocable, assets transferred to the trust can be moved in and out of the trust as you like, as long as you are alive. You can add assets, remove assets, change the named beneficiaries, or even change the terms of how the assets are managed.

An irrevocable trust is just as it sounds—once it’s created and funded, those assets are permanently inside the trust. There are some states that permit “decanting” of a trust, that is, moving the assets inside a trust to another trust. Your estate planning attorney will know if that is an option for you.

So, do you need a living will or a living trust? You probably need both. The living will deals with your healthcare, while the living trust is all about your assets. Do you need a trust? Most estates will benefit from some kind of a trust. Depending on the type of trust, it may let you protect assets against creditors, give you control postmortem of how and when (or if!) your beneficiaries receive their inheritance, and removes the assets from your taxable estate. Both are important tools in a comprehensive estate plan and should be prepared by an experienced estate planning attorney or an elder law attorney.

Reference: Yahoo! Finance (Feb. 18, 2021) “Living Will vs. Living Trust”

 

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?”