Can I Create a Stress-free Asset Transfer?

We can all agree that end-of-life planning is a sensitive topic. Nonetheless, taking the time to consider a loved one’s estate and distribution of wealth can set the family at ease and also make certain that there is a smooth transition of assets, without unnecessary legal hurdles or headaches.

MarketWatch’s article entitled “3 tips for navigating estate planning with loved ones” explains that, if you’re thinking about starting the process of estate planning with a close family member, like an elderly parent or a new spouse, read these recommendations:

  1. Stress the ultimate benefit of peace of mind. Estate planning helps the transfer of assets in an efficient and less stressful manner. It also minimizes estate tax liability of your assets when you die. Most of all, your loved ones will benefit with the peace of mind.
  2. Be as open as you can. Be honest and communicate openly about your loved one’s wishes on how they would like to distribute their estate and wealth either during life or death. Many assumptions can be made about end-of-life financial planning, like parents who assume their children will not fight when dividing their assets. This can put a lot of stress on surviving siblings, so communicate clear expectations during the planning process. It is also important to take some time to consider trustees and executors, and to encourage your parent or spouse to name an executor who is organized and thorough. Once this individual is named, be sure he or she understands the location of all of your loved one’s assets.
  3. Use care with beneficiary selections. Naming beneficiaries can have important tax implications. It is common to name a trust as the beneficiary of an IRA account, when your children are young. However, as they grow up, this can be an issue. When an IRA is distributed to a trust, it triggers taxes. The assets will be taxed immediately before being distributed to beneficiaries. Name children as direct beneficiaries of their IRA, so that they have other options available to them. Many of these may provide significant tax savings.

One more thought: using “transfer on death” designations for individual accounts is similar to a beneficiary designation for a retirement account. However, it permits your parent or spouse to name beneficiaries when they pass and prevents their money from going through a lengthy and expensive probate.

The best time to discuss estate planning with your parents is now. Work with an experienced estate planning attorney to guide you through this process.

Reference: MarketWatch (June 5, 2021) “3 tips for navigating estate planning with loved ones”

 

What Is Probate and How Does It Work?

Probate is a legal process created long ago to protect the interests of a person after their death. It establishes a documented, validated, formal court procedure to establish title (ownership) and transfer ownership of a deceased person’s assets, as described in a recent article “Probate still gets lots of questions” from the Pauls Valley Democrat.

Probate accomplishes several goals. One is to fulfill the intentions of the decedent and follow the directions expressed in a written valid will. Another is to prevent the improper acquisition of assets by self-serving heirs or claimants. It provides a formal process to capture and control assets and document them. It also provides for the distribution of all assets in the estate, as directed by the decedent.

A petition is typically filed with the local district court in the county where the person resided at death. It confirms the jurisdiction of the court and defines the scope of the estate. This includes:

  • Fact of death and name of the decedent, included in the original copy of the death certificate
  • Residency of the decedent
  • Whether there was a will (original will is filed with the court)
  • Name of the executor or personal representative
  • Names of all potential heirs
  • The approximate size and scope of the estate

After documents are filed, a hearing takes place and formal notice is provided to all known heirs and to the public. This is where probate becomes problematic. Any known heirs who are notified may not always be named in the will and could bring claims against the estate. Any person who wishes to find out the size and scope of the estate may do so. This often brings creditors and predators into the process. Many scammers rely on probate notices to find fresh victims.

While the traditional goals of providing an open and fair opportunity to gain notice of the person’s death may have worked well in the past, today they often provide an opportunity for disgruntled relatives and thieves.

For this reason, many families prefer to take some or all assets from the estate and place them within the protection of a revocable living trust. Assets placed in a trust do not go through probate and will not be mentioned in a will. The trustee is charged with administering and distributing assets in a trust. There is no court involvement. Trusts may also be used during a person’s lifetime, as well as after they have died.

Other assets not governed by probate are those with beneficiary designations. Insurance policies, retirement accounts and investment accounts are among the types of assets distributed directly to the beneficiary without court involvement.

An estate planning attorney takes the best of these old English laws and blends them with our modern realities and current tax laws.

Reference: Pauls Valley Democrat (June 3, 2021) “Probate still gets lots of questions”

 

Should a Trust Be a Component of My Estate Planning?

Let’s say that there’s a young father with a wife and young son, who owns a home and a Roth IRA account, with a few stock investments. On the stock investments, he’s filled out the beneficiary designation forms passing all his assets to his wife and son, should anything happen to him.  This father owns his home is joint tenancy with right of survivorship with his wife.  Does he need to set up a separate trust, if most of his assets pass through beneficiary designations?

Nj.com’s recent article entitled “Do I need a trust in case something happens to me?” says that leaving assets outright to a minor is typically a bad move. The son’s guardian and/or the court would take custody of the assets, both of which require significant court oversight and involvement.

The minor would also receive the assets upon attaining the age of majority, which in most states is age 18.

No one can tell what a young child will be like at the age of 18, especially after suffering the loss of their parents. Even if there are no significant issues, such as drug addiction or special needs, parents should think about what they’d have done with that much money at that age.

The best option is to leave assets in trust for the benefit of the minor son.

The trustee can manage and use the assets for the benefit of the young boy with limited court involvement.

The terms of the trust can also delay the point at which the assets can be distributed and ultimately paid over to the beneficiary, if at all.

For example, it’s not uncommon for a trust to stipulate that the beneficiary gets a third of the assets at 25, half of the remaining assets at 30 and the rest at age 35. However, other trusts don’t provide for such mandatory distributions and can hold the assets for the beneficiary’s lifetime, which has its advantages.

In some instances, the terms of the trust are included in a will. This creates a trust account after death, which is also called a testamentary trust.

Talk to an experienced estate planning attorney, who can assess your specific situation and provide guidance in creating an estate plan. The attorney can also make certain that trust assets are correctly titled and that beneficiary designations of retirement accounts and life insurance are correctly prepared, so the trust under the will receives those assets and not the minor individually.

Reference: nj.com (June 14, 2021) “Do I need a trust in case something happens to me?”

 

What Is a Fiduciary and Why Is It Important?

If you do not choose a fiduciary, a guardian appointed by a court may end up making financial and medical decisions for you and the intestate statutes of your state will determine who will administer your estate when you have passed. If you’d rather have some control over your life, doing some estate planning now will prevent these scenarios later, according to the article “Fiduciary Agents have power to make decisions you’d prefer to make yourself” from the Pocono Record.

A financial fiduciary is the person you designate under your general durable power of attorney, last will and testament, or trust.

The fiduciary under a power of attorney has the power to make decisions, while you are living, for your financial and legal affairs. The person is named in a legal document called an agent or attorney in fact. This document can be broad, allowing the person to determine how to spend or invest your money, to buy and/or sell your home, etc., or it can permit someone to act on your behalf solely for a specific transaction. You and your estate planning attorney determine what is best.

An agent under a healthcare proxy can make healthcare decisions on your behalf, when you are unable to communicate for yourself because of a severe illness or an injury, or a cognitive condition. It is very important to understand that if you are already incapacitated, you cannot sign documents giving anyone else these powers. They must be prepared before they are needed!

Some people prefer to have one person serve as both their agent for finances and for healthcare. This allows one person who understands your physical and mental needs to make decisions about home care, assisted living or a skilled nursing facility and have access to the resources to pay for these services. This also means that one person is applying for any government benefits to help pay for this care.

There are times when designating two different agents creates conflict, if the two people don’t agree on the appropriate type of care. One may be more concerned with spending down resources, while another may wish you to receive 24/7 care.

If you appointed someone to serve as your fiduciary many years ago, it is so important that your documents be reviewed and updated. Do you still want that same person to make critical decisions on your behalf? Are they still able or willing to serve? If the person you have chosen lives in another state and wants you to be moved to where they live, will that work for you and your family?

If you have not reviewed your estate plan and your power of attorney documents in recent years, it is strongly recommended you do so now. Many families are now grappling with the results of outdated planning, or no planning at all. Having an updated estate plan and all of the related documents provides peace of mind for you and your loved ones. Contact an experienced estate planning attorney to update or even begin your estate planning documents.

Reference: Pocono Record (June 1, 2021) “Fiduciary Agents have power to make decisions you’d prefer to make yourself”

 

How Do Special Needs Trusts Work?

Special-needs trusts have been used for many years. However, there are two factors that are changing and parents need to be aware of them, says the article “Special-Needs Trusts: How They Work and What Has Changed” from The Wall Street Journal. For one thing, many people with disabilities and chronic illnesses are leading much longer lives because of medical advances. As a result, they are often outliving their parents and primary caregivers. This makes planning for the long term more critical.

Second, there have been significant changes in tax laws, specifically laws concerning inherited retirement accounts.

Special needs planning has never been easy because of the many unknowns. How much care will be needed? How much will it cost? How long will the special needs individual live? Tax rules are complex and coordinating special needs planning with estate planning can be a challenge. A 2018 study from the University of Illinois found that less than 50% of parents of children with disabilities had planned for their children’s future. Parents who had not done any planning told researchers they were just overwhelmed.

Here are some of the basics:

A Special-Needs Trust, or SNT, is created to protect the assets of a person with a disability, including mental or physical conditions. The trust may be used to pay for various goods and services, including medical equipment, education, home furnishings, etc.

A trustee is appointed to manage all and any spending. The beneficiary has no control over assets inside the trust. The assets are not owned by the beneficiary, so the beneficiary should continue to be eligible for government programs that limit assets, including Supplemental Security Income or Medicaid.

There are different types of Special Needs Trusts: pooled, first party and third party. They are not simple entities to create, so it’s important to work with an experienced estate elder law attorney who is familiar with these trusts.

To fund the trust after parents have passed, they could name the Special Needs Trust as the beneficiary of their IRA, so withdrawals from the account would be paid to the trust to benefit their child. There will be required minimum distributions (RMDs), because the IRA would become an Inherited IRA and the trust would need to take distributions.

The SECURE Act from 2019 ended the ability to stretch out RMDs for inherited traditional IRAs from lifetime to ten years. However, the SECURE Act created exceptions: individuals who are disabled or chronically ill are still permitted to take distributions over their lifetimes. This has to be done correctly, or it won’t work. However, done correctly, it could provide income over the special needs individual’s lifetime.

The strategy assumes that the SNT beneficiary is disabled or chronically ill, according to the terms of the tax code. The terms are defined very strictly and may not be the same as the requirements for SSI or Medicaid.

The traditional IRA may or may not be the best way to fund an SNT. It may create larger distributions than are permitted by the SNT or create large tax bills. Roth IRAs or life insurance may be the better options.

The goal is to exchange assets, like traditional IRAs, for more tax-efficient assets to reach post-death planning solutions for the special needs individual, long after their parents and caregivers have passed.

Reference: The Wall Street Journal (June 3, 2021) “Special-Needs Trusts: How They Work and What Has Changed”

 

Can Family Members Contest a Will?

Estate planning documents, like wills and trusts, are enforceable legal documents, but when the grantor who created them passes, they can’t speak for themselves. When a loved one dies is often when the family first learns what the estate plans contain. That is a terrible time for everyone. It can lead to people contesting a will. However, not everyone can contest a will, explains the article “Challenges to wills and trusts” from The Record Courier.

A person must have what is called “standing,” or the legal right to challenge an estate planning document. A person who receives property from the decedent, and was designated in their will as a beneficiary, may file a written opposition to the probate of the will at any time before the hearing of the petition for probate. An “interested person” may also challenge the will, including an heir, child, spouse, creditor, settlor, beneficiary, or any person who has a legal property right in or a claim against the estate of the decedent.

Wills and trusts can be challenged by making a claim that the person lacked mental capacity to make the document. If they were sick or so impaired that they did not know what they were signing, or they did not fully understand the contents of the documents, they may be considered incapacitated, and the will or trust may be successfully challenged.

Fraud is also used as a reason to challenge a will or trust. Fraud occurs when the person signs a document that didn’t express their wishes, or if they were fooled into signing a document and were deceived as to what the document was. Fraud is also when the document is destroyed by someone other than the decedent once it has been created, or if someone other than the creator adds pages to the document or forges the person’s signature.

Alleging undue influence is another reason to challenge a will. This is considered to have occurred if one person overpowers the free will of the document creator, so the document creator does what the other person wants, instead of what the document creator wants. Putting a gun to the head of a person to demand that they sign a will is a dramatic example. Coercion, threats to other family members and threats of physical harm to the person are more common occurrences.

It is also possible for the personal representative or trustee’s administration of a will or trust to be challenged. If the personal representative or trustee fails to follow the instructions in the will or the trust, or does not report their actions as required, the court may invalidate some of the actions. In extreme cases, a personal representative or a trustee can be removed from their position by the court.

An estate plan created by an experienced estate planning lawyer should be prepared with an eye to the family situation. If there are individuals who are likely to challenge the will, a “no-contest” clause may be necessary. Open and candid conversations with family members about the estate plan may head off any surprises that could lead to the estate plan being challenged.

One last note: just because a family member is dissatisfied with their inheritance does not give them the right to bring a frivolous claim, and the court may not look kindly on such a case.

Reference: The Record-Courier (May 16, 2021) “Challenges to wills and trusts”

 

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”

 

What Is the Purpose of an Estate Plan?

No one wants to think about becoming seriously ill or dying, but scrambling to get an estate plan and healthcare documents done while in the hospital or nursing home is a bad alternative, says a recent article titled “The Essentials You Need for an Estate Plan” from Kiplinger. Not having an estate plan in place can create enormous costs for the estate, including taxes, and delay the transfer of assets to heirs.

If you would like to avoid the cost, stress and possibility of your spouse or children having to go to court to get all of this done while you are incapacitated, it is time to have an estate plan created. Here are the basics:

A Will, a Living Will, Power of Attorney and a Beneficiary Check-Up. People think of a will when they think of an estate plan, but that’s only part of the plan. The will gives instructions for what you want to happen to assets, who will be in charge of your estate—the executor—and who will be in charge of any minor children—the guardian. No will? This is known as dying intestate, and probate courts will make all of these decisions for you, based on state law.

However, a will is not enough. Beneficiary designations determine who receives assets from certain types of property. This includes life insurance policies, qualified retirement accounts, annuities, and any account that provides the opportunity to name a beneficiary. These instructions supersede the will, so make sure that they are up to date. If you fail to name a beneficiary, then the asset is considered part of your estate. If you fail to update your beneficiaries, then the person you may have wanted to receive the assets forty years ago will receive it.

Some banks and brokerage accounts may have an option of a Transfer on Death (TOD) agreement. This allows you to plan out asset distribution outside of the will, speeding the distribution of assets.

A Living Will or Advance Directive is used to communicate in advance what you would want to happen if you are alive but unable to make decisions for yourself. It names an agent to make serious medical decisions on your behalf, like being kept on life support or having surgery. Not having the right to make medical decisions for a loved one requires petitioning the court.

Financial Power of Attorney names an attorney in fact to manage finances, paying bills and overseeing investments. Without a POA, your family can’t take action on your financial matters, like paying bills, overseeing the maintenance of your home, etc. If the court appoints a non-family member to manage this task, the family may see the estate evaporate.

Creating a trust is part of most people’s estate plan. A trust is a means of leaving assets for a minor child, or someone who cannot be trusted to manage money. The trust is a legal entity that inherits money when you pass, and a trustee, who you name in the trust documents, manages everything, according to the terms of the trust.

Today’s estate plan needs to include digital assets. You need to give someone legal authority to manage social media accounts, websites, email and any other digital property you own.  The time to create an estate plan, or review and update an existing estate plan, is now. COVID has awakened many people to the inevitability of severe illness and death. Planning for the future today protects the ones you love tomorrow.

Speak with an experienced estate planning attorney to assist you in preparing your documents.

Reference: Kiplinger (April 21, 2021) “The Essentials You Need for an Estate Plan”

 

A Trust can Protect Inheritance from Relatives

It’s always exciting to watch adult children build their lives and select spouses. However, even if we adore the person they love, it’s wise to prepare to protect our children, says a recent article titled “Worried about Your Child’s Inheritance If They Divorce? A Trust Can Be Your Answer” from Kiplinger.

After all, why would you want the assets and money that you accumulated over a lifetime to pass to any ex-spouse, if a divorce happens? With the current federal estate tax exemptions still historically high (although that may change in the near future), setting up a trust to protect wealth from federal estate taxes isn’t the driving force in many estate plans. The bigger concern is how well your children will do, if and when they receive their inheritance.

Some people recognize that their children are simply not up to the task. They worry about potential divorces, or a spendthrift spouse. The answer is estate planning in general, and more specifically, a well-designed trust. By establishing a trust as part of an estate plan, these assets can be protected.  If an adult child receives an inheritance and commingles it with assets owned jointly with their spouse—like a joint bank account—depending upon the state where they live, the inheritance may become a marital asset and subject to marital property division, if the couple divorces.

If the inheritance remains in a trust account, or if the trust funds are used to pay for assets that are only owned in the child’s name, the inherited wealth can be protected. This permits the child to have assets as a financial cushion, if a divorce should happen.  Placing an inheritance in a trust is often done after a first divorce, when the family learns the hard way how combined assets are treated. Wiser still is to have a trust created when the child marries. In that way, there’s less of a learning curve (not to mention more assets to preserve).

Here are three typical situations:

Minor children. Children who are 18 or younger cannot inherit assets. However, when they reach the age of majority, they can. A sudden and large inheritance is best placed in the hands of a trustee, who can guide them to make smart decisions and has the ability to deny requests that may seem entirely reasonable to an 18-year-old, but ridiculous to a more mature adult.

Newlyweds. Most couples are divinely happy in the early years of a marriage. However, when life becomes more complicated, as it inevitably does, the marriage may be tested and might not work out. Setting up a trust after the couple has been together for five or ten years is an option.

Marriage moves into the middle years. After five or ten years, it’s likely you’ll have a clearer understanding of your child’s spouse and how their marriage is faring. If you have any doubts, talk with an estate planning attorney, and set up a trust for your child.

Estate plans should be reviewed every four or five years, as circumstances, relationships and tax laws change. A periodic review with your estate planning attorney allows you to ensure that your estate plan reflects your wishes.

Reference: Kiplinger (April 16, 2021) “Worried about Your Child’s Inheritance If They Divorce? A Trust Can Be Your Answer”

 

What is not Covered by a Will?

A last will and testament is one part of a holistic estate plan used to direct the distribution of property after a person has died. A recent article titled “What you can’t do with a will” from Ponte Vedra Recorder explains how wills work, and the types of property not distributed through a will.

Wills are used to inform the probate court regarding your choice of guardians for any minor children and the executor of your estate. Without a will, both of those decisions will be made by the court. It’s better to make those decisions yourself and to make them legally binding with a will.

Lacking a will, an estate will be distributed according to the laws of the state, which creates extra expenses and sometimes, leads to life-long fights between family members.  Property distributed through a will necessarily must be processed through a probate, a formal process involving a court. However, some assets do not pass through probate. Here’s how non-probate assets are distributed:

Jointly Held Property. When one of the “joint tenants” dies, their interest in the property ends and the other joint tenant owns the entire property.

Property in Trust. Assets owned by a trust pass to the beneficiaries under the terms of the trust, with the guidance of the trustee.

Life Insurance. Proceeds from life insurance policies are distributed directly to the named beneficiaries. Whatever a will says about life insurance proceeds does not matter—the beneficiary designation is what controls this distribution, unless there is no beneficiary designated.

Retirement Accounts. IRAs, 401(k) and similar assets pass to named beneficiaries. In most cases, under federal law, the surviving spouse is the automatic beneficiary of a 401(k), although there are always exceptions. The owner of an IRA may name a preferred beneficiary.

Transfer on Death (TOD) Accounts. Some investment accounts have the ability to name a designated beneficiary who receives the assets upon the death of the original owner. They transfer outside of probate.

Here are some things that should NOT be included in your will:

Funeral instructions might not be read until days or even weeks after death. Create a separate letter of instructions and make sure family members know where it is.

Provisions for a special needs family member need to be made separately from a will. A special needs trust is used to ensure that the family member can inherit assets but does not become ineligible for government benefits. Talk to an elder law estate planning attorney about how this is best handled.

Conditions on gifts should not be addressed in a will. Certain conditions are not permitted by law. If you want to control how and when assets are distributed, you want to create a trust. The trust can set conditions, like reaching a certain age or being fully employed, etc., for a trustee to release funds.

Reference: Ponte Vedra Recorder (April 15, 2021) “What you can’t do with a will”