Wills & Trusts
Monday, March 13, 2017
Common Estate Planning Mistakes Regarding Individual Retirement Accounts (IRAs)
For many people, retirement savings accounts are among the largest assets they have to bequeath to their children and grandchildren in their estate plans. Sadly, without professional and personally tailored advice about how best to include IRAs in one’s estate plan, there may be a failure to take advantage of techniques that will maximize the amount of assets that will be available for future generations.
Failure to Update Contingent Beneficiaries
Assets in an IRA account usually transfer automatically to the named beneficiaries upon the death of the account holder, outside of the probate process. If the account holder’s desired beneficiaries change, due to marriage, divorce, or other major life events, it is critically important to update the named beneficiaries as quickly as possible to prevent the asset from passing to an outdated beneficiary. When updating beneficiaries, account holders should not neglect contingent beneficiaries – those individuals named to receive the asset if the primary named beneficiary is already deceased when the account holder dies.
Example: Sarah’s IRA documents name her husband, Harold, as the primary beneficiary of her IRA. The contingent beneficiary is Harold’s son, George, from Harold’s first marriage. Sarah and Harold divorce. Harold dies. If Sarah dies before changing her IRA beneficiaries, George will receive the IRA. This may no longer be the result Sarah would have wanted.
Failure to Consider a Trust as the Contingent Beneficiary of an IRA
There are three main advantages of naming a trust as the contingent beneficiary of your IRA:
- It avoids the problem described above of having incorrect contingent beneficiaries named at death.
- It protects the IRA if the desired beneficiary is a minor, has debt or marital troubles, or is irresponsible with money.
- It protects the IRA from intentional or unintentional withdrawal.
Since 2005, the IRS has allowed a type of trust created specifically to be the beneficiary of an IRA. The IRA Beneficiary Trust is also known as an IRA trust, an IRA stretch trust, an IRA protection trust, or a standalone IRA trust.
The main advantage of using an IRA Beneficiary Trust instead of a standard revocable living trust is that the IRA trust can restrict distributions to ensure compliance with tax rules and minimum distribution requirements – thus maximizing the amount of tax-free growth of the investments.
Another advantage is that the IRA stretch trust has a framework that allows it to be structured in a way that guarantees protection of the distributions from the IRA as well as protection of the principal of the IRA. When you first establish the IRA protection trust, you structure the trust as either a conduit trust or an accumulation trust. A conduit trust will pass the required minimum distributions directly to your named beneficiaries, maximizing the tax deferral benefits. An accumulation trust passes the required minimum distributions into another trust over which a named trustee has discretion to accumulate the funds, resulting in greater asset protection for the benefit of the beneficiary.
During your lifetime, the IRS allows you to switch between the conduit trust and accumulation trust for each of your beneficiaries, as circumstances change. Furthermore, you may name a “trust protector” who may change the type of trust one last time after your death. This change may be made on a beneficiary-by-beneficiary basis, so that some of your intended heirs have accumulation trusts for their portion of the IRA and others have conduit trusts.
IRA Beneficiary Trusts are complicated legal documents with intricate IRS rules and tremendous implications for your family’s wealth accumulation for future generations. It is wise to seek advice specific to your family’s unique circumstances when considering the establishment of this powerful type of trust.
Monday, February 20, 2017
Self-Settled vs. Third-Party Special Needs Trusts
Special needs trusts allow individuals with disabilities to qualify for need-based government assistance while maintaining access to additional assets which can be used to pay for expenses not covered by such government benefits. If the trust is set up correctly, the beneficiary will not risk losing eligibility for government benefits such as Medicaid or Supplemental Security Income (SSI) because of income or asset levels which exceed their eligibility limits.
Special needs trusts generally fall within one of two categories: self-settled or third-party trusts. The difference is based on whose assets were used to fund the trust. A self-settled trust is one that is funded with the disabled person’s own assets, such as an inheritance, a personal injury settlement or accumulated wealth. If the disabled beneficiary ever had the legal right to use the money without restriction, the trust is most likely self-settled.
On the other hand, a third-party trust is established by and funded with assets belonging to someone other than the beneficiary.
Ideally, an inheritance for the benefit of a disabled individual should be left through a third-party special needs trust. Otherwise, if the inheritance is left outright to the disabled beneficiary, a trust can often be set up by a court at the request of a conservator or other family member to hold the assets and provide for the beneficiary without affecting his or her eligibility for government benefits.
The treatment and effect of a particular trust will differ according to which category the trust falls under.
A self-settled trust:
- Must include a provision that, upon the beneficiary’s death, the state Medicaid agency will be reimbursed for the cost of benefits received by the beneficiary.
- May significantly limit the kinds of payments the trustee can make, which can vary according to state law.
- May require an annual accounting of trust expenditures to the state Medicaid agency.
- May cause the beneficiary to be deemed to have access to trust income or assets, if rules are not followed exactly, thereby jeopardizing the beneficiary’s eligibility for SSI or Medicaid benefits.
- Will be taxed as if its assets still belonged to the beneficiary.
- May not be available as an option for disabled individuals over the age of 65.
A third-party settled special needs trust:
- Can pay for shelter and food for the beneficiary, although these expenditures may reduce the beneficiary’s eligibility for SSI payments.
- Can be distributed to charities or other family members upon the disabled beneficiary’s death.
- Can be terminated if the beneficiary’s condition improves and he or she no longer requires the assistance of SSI or Medicaid, and the remaining balance will be distributed to the beneficiary.
Monday, February 6, 2017
Avoid Family Feuds through Proper Estate Planning
A family feud over an inheritance is not a game and there is no prize package at the end of the show. Rather, disputes over who gets your property after your death can drag on for years and deplete your entire estate. When most people are preparing their estate plans, they execute wills and living trusts that focus on minimizing taxes or avoiding probate. However, this process should also involve laying the groundwork for your estate to be settled amicably and according to your wishes. Communication with your loved ones is key to accomplishing this goal.
Feuds can erupt when parents fail to plan, or make assumptions that prove to be untrue. Such disputes may evolve out of a long-standing sibling rivalry; however, even the most agreeable family members can turn into green-eyed monsters when it comes time to divide up the family china or decide who gets the vacation home at the lake.
Avoid assumptions. Do not presume that any of your children will look out for the interests of your other children. To ensure your property is distributed to the heirs you select, and to protect the integrity of the family unit, you must establish a clear estate plan and communicate that plan – and the rationale behind certain decisions – to your loved ones.
In formulating your estate plan, you should have a conversation with your children to discuss who will be the executor of your estate, or who wants to inherit a specific personal item. Ask them who wants to be the executor, or consider the abilities of each child in selecting who will settle your estate, rather than just defaulting to the eldest child. This discussion should also include provisions for your potential incapacity, and address who has the power of attorney.
Do not assume any of your children want to inherit specific items. Many heirs fight as much over sentimental value as they do monetary items. Cash and investments are easily divided, but how do you split up Mom’s engagement ring or the table Dad built in his woodshop? By establishing a will or trust that clearly states who is to receive such special items, you avoid the risk that your estate will be depleted through costly legal proceedings as your children fight over who is entitled to such items.
Take the following steps to ensure your wishes are carried out:
Discuss your estate planning with your family. Ask for their input and explain anything “unusual,” such as special gifts of property or if the heirs are not inheriting an equal amount.
Name guardians for your minor children.
Write a letter, outside of your will or trust, that shares your thoughts, values, stories, love, dreams and hopes for your loved ones.
Select a special, tangible gift for each heir that is meaningful to the recipient.
Explain to your children why you have appointed a particular person to serve as your trustee, executor, agent or guardian of your children.
If you are in a second marriage, make sure your children from a prior marriage and your current spouse know that you have established an estate plan that protects their interests.
Monday, January 30, 2017
Advance Planning Can Help Relieve the Worries of Alzheimer’s Disease
The “ostrich syndrome” is part of human nature; it’s unpleasant to observe that which frightens us. However, pulling our heads from the sand and making preparations for frightening possibilities can provide significant emotional and psychological relief from fear.
When it comes to Alzheimer’s disease and other forms of dementia, more Americans fear being unable to care for themselves and burdening others with their care than they fear the actual loss of memory. This data comes from an October 2012 study by Home Instead Senior Care, in which 68 percent of 1,200 survey respondents ranked fear of incapacity higher than the fear of lost memories (32 percent).
Advance planning for incapacity is a legal process that can lessen the fear that you may become a burden to your loved ones later in life.
What is advance planning for incapacity?
Under the American legal system, competent adults can make their own legally binding arrangements for future health care and financial decisions. Adults can also take steps to organize their finances to increase their likelihood of eligibility for federal aid programs in the event they become incapacitated due to Alzheimer’s disease or other forms of dementia.
The individual components of advance incapacity planning interconnect with one another, and most experts recommend seeking advice from a qualified estate planning or elder law attorney.
What are the steps of advance planning for incapacity?
Depending on your unique circumstances, planning for incapacity may include additional steps beyond those listed below. This is one of the reasons experts recommend consulting a knowledgeable elder law lawyer with experience in your state.
- Write a health care directive, or living will. Your living will describes your preferences regarding end of life care, resuscitation, and hospice care. After you have written and signed the directive, make sure to file copies with your health care providers.
- Write a health care power of attorney. A health care power of attorney form designates another person to make health care decisions on your behalf should you become incapacitated and unable to make decisions for yourself. You may be able to designate your health care power of attorney in your health care directive document, or you may need to complete a separate form. File copies of this form with your doctors and hospitals, and give a copy to the person or persons whom you have designated.
- Write a financial power of attorney. Like a health care power of attorney, a financial power of attorney assigns another person the right to make financial decisions on your behalf in the event of incapacity. The power of attorney can be temporary or permanent, depending on your wishes. File copies of this form with all your financial institutions and give copies to the people you designate to act on your behalf.
- Plan in advance for Medicaid eligibility. Long-term care payment assistance is among the most important Medicaid benefits. To qualify for Medicaid, you must have limited assets. To reduce the likelihood of ineligibility, you can use certain legal procedures, like trusts, to distribute your assets in a way that they will not interfere with your eligibility. The elder law attorney you consult with regarding Medicaid eligibility planning can also advise you on Medicaid copayment planning and Medicaid estate recovery planning.
Sunday, January 15, 2017
Many people give to charity during their lives, but unfortunately too few Americans take advantage of the benefits of incorporating charitable giving into their estate plans. By planning ahead, you can save on income and estate taxes, provide a meaningful contribution to the charity of your choice, and even guarantee a steady stream of income throughout your lifetime.
Those who do plan to leave a gift to charity upon their death typically do so by making a simple bequest in a will. However, there are a variety of estate planning tools designed to maximize the benefits of a gift to both the charity and the donor. Donors and their heirs may be better served by incorporating deferred gifts or split-interest gifts, which afford both estate tax and income tax deductions, although for less than the full value of the asset donated.
One of the most common tools is the Charitable Remainder Trust (CRT), which provides the donor or other designated beneficiary the ability to receive income for his or her lifetime, or for a set period of years. At death, or the conclusion of the set period, the “remainder interest” held in the trust is transferred to the charity. The CRT affords the donor a tax deduction based on the calculated remainder interest that will be left to charity. This remainder interest is calculated according to the terms of the trust and the Applicable Federal Rate published monthly by the IRS.
The Charitable Lead Trust (CLT) follows the same basic principle, in reverse. With a CLT, the charity receives the income during the donor’s lifetime, with the remainder interest transferring to the donor’s heirs upon his or her death.
To qualify for tax benefits, both CRTs and CLTs must be established as:
A Charitable Remainder Annuity Trust (CRAT) or a Charitable Lead Annuity Trust (CLAT), wherein the income is established at the beginning, as a fixed amount, with no option to make further additions to the trust; or
A unitrust which recalculates income as a pre-set percentage of trust assets on an annual basis; which would be either a Charitable Remainder Unitrust (CRUT) or a Charitable Remainder Annuity Trust (CRAT).
Another variation is the Net Income Charitable Remainder Unitrust, which provides more flexible payment options for the donor. One advantage to this type of trust is that a shortfall in income one year can be made up the following year.
The Charitable Gift Annuity (CGA) enables the donor to buy an annuity, directly from the charity, which provides guaranteed fixed payments over the donor’s lifetime. As with all annuities, the amount of income provided depends on the donor’s age when the annuity is purchased. The CGA gives donors an immediate income tax deduction, the value of which can be carried forward for up to five years to maximize tax savings.
IRA contributions are also an option through 2011 for donors who are at least 70½ years of age. Donors who meet the age requirement can donate funds in an Individual Retirement Account (IRA) to charity via a charitable IRA rollover or qualified charitable distribution. The amount of the donation can include the donors’ required minimum distribution (RMD), but may not exceed $100,000. The contribution must be made directly by the trustee of the IRA.
With several ways to incorporate charitable giving into your estate plan, it’s important that you carefully consider the benefits and consequences, taking into account your assets, income and desired tax benefits. A qualified estate planning attorney and financial advisor can help you determine the best arrangement which will most benefit you and your charity of choice.
Monday, December 5, 2016
What are the powers and responsibilities of an executor?
An executor is responsible for the administration of an estate. The executor’s signature carries the same weight of the person whose estate is being administered. He or she must pay the deceased’s debts and then distribute the remaining assets of the estate. If any of the assets of the estate earn money, an executor must manage those assets responsibly. The process of doing so can be intimidating for an individual who has never done so before.
After a person passes away, the executor must locate the will and file it with the local probate office. Copies of the death certificate should be obtained and sent to banks, creditors, and relevant government agencies like social security. He or she should set up a new bank account in the name of the estate. All income received for the deceased, such as remaining paychecks, rents from investment properties, and the collection of outstanding loans receivable, should go into this separate bank account. Bills that need to be paid, like mortgage payments or tax bills, can be paid from this account. Assets should be maintained for the benefit of the estate’s heirs. An executor is under no obligation to contribute to an estate’s assets to pay the estate’s expenses.
An inventory of assets should be compiled and maintained by the executor at all times. An accounting of the estate’s assets, debts, income, and expenses should also be available upon request. If probate is not necessary to distribute the assets of an estate, the executor can elect not to enter probate. Assets may need to be sold in order to be distributed to the heirs. Only the executor can transfer title on behalf of an estate. If an estate becomes insolvent, the executor must declare bankruptcy on behalf of the estate. After debts are paid and assets are distributed, an executor must dispose of any property remaining. He or she may be required to hire an attorney and appear in court on behalf of the estate if the will is challenged. For all of this trouble, an executor is permitted to take a fee from the estate’s assets. However, because the executor of an estate is usually a close family member, it is not uncommon for the executor to waive this fee. If any of these responsibilities are overwhelming for an executor, he or she may elect not to accept the position, or, if he or she has already accepted, may resign at any time.
Friday, November 18, 2016
Do Heirs Have to Pay Off Their Loved One’s Debts?
The recent economic recession, and staggering increases in health care costs have left millions of Americans facing incredible losses and mounting debt in their final years. Are you concerned that, rather than inheriting wealth from your parents, you will instead inherit bills? The good news is, you probably won’t have to pay them.
As you are dealing with the emotional loss, while also wrapping up your loved one’s affairs and closing the estate, the last thing you need to worry about is whether you will be on the hook for the debts your parents leave behind. Generally, heirs are not responsible for their parents’ outstanding bills. Creditors can go after the assets within the estate in an effort to satisfy the debt, but they cannot come after you personally. Nevertheless, assets within the estate may have to be sold to cover the decedent’s debts, or to provide for the living expenses of a surviving spouse or other dependents.
Heirs are not responsible for a decedent’s unsecured debts, such as credit cards, medical bills or personal loans, and many of these go unpaid or are settled for pennies on the dollar. However, there are some circumstances in which you may share liability for an unsecured debt, and therefore are fully responsible for future payments. For example, if you were a co-signer on a loan with the decedent, or if you were a joint account holder, you will bear ultimate financial responsibility for the debt.
Unsecured debts which were solely held by the deceased parent do not require you to satisfy the outstanding obligation. Regardless, many aggressive collection agencies continue to pursue collection even after death, often implying that you are ultimately responsible to repay your loved one’s debts, or that you are morally obligated to do so. Both of these assertions are entirely untrue.
Secured debts, on the other hand, must be repaid or the lender can repossess the underlying asset. Common secured debts include home mortgages and vehicle loans. If your parents had any equity in their house or car, you should consider doing whatever is necessary to keep the payments current, so the equity is preserved until the property can be sold or transferred. But this must be weighed within the context of the overall estate.
Executors and estate administrators have a duty to locate and inventory all of the decedent’s assets and debts, and must notify creditors and financial institutions of the death. Avoid making the mistake of automatically paying off all of your loved one’s bills right away. If you rush to pay off debts, without a clear picture of your parents’ overall financial situation, you run the risk of coming up short on cash, within the estate, to cover higher priority bills, such as medical expenses, funeral costs or legal fees required to settle the estate.
Monday, October 24, 2016
Things to Consider When Picking an Executor
The role of an executor is to effectuate a deceased person’s wishes as declared in a will after he or she has passed on. The executor’s responsibilities include the distribution of assets according to the will, the maintenance of assets until the will is settled, and the paying of estate bills and debts. An old joke says that you should choose an enemy to perform the task because it is such a thankless job, even though the executor may take a percentage of the estate’s assets as a fee. The following issues should be considered when choosing an executor for one's estate.
Competency: The executor of an estate will be going through financial and legal documents and transferring documents from the testator to the beneficiaries. If there are legal proceedings, the executor must make all necessary court appearances. There is no requirement that a testator have any financial or legal training, but familiarity with these areas does avoid the intimidation felt by lay people, and potentially saves money on professional fees.
Trustworthiness: The signature of an executor is equivalent to that of the testator of an estate. The executor has full control over all of an estate’s assets. He or she will be required to go through all of the papers of the deceased to confirm what assets are available to be distributed. The temptation to transfer assets into the executor's own name always exists, particularly when there is a large estate. It is important to choose a person with integrity who will resist this temptation. It makes sense to utilize an individual who is an heir to fill the role to alleviate this concern.
Availability: The work of collecting rents, maintaining property, and paying debts can take more than a few hours a week. Selecting an executor with significant obligations to work or family may cause problems if he or she does not have the time available to devote to the task. If an executor must travel great distances to address issues that arise, there will be more of a time commitment necessary, not to mention greater expenses for the estate.
Family dynamics: Selection of the wrong person to act as executor can create resentment and hostility among an estate’s heirs. A testator should be aware of how family members interact with one another and avoid picking someone who may provoke conflict. Even the perception of impropriety can lead to a lawsuit, which will serve to take money out of the estate’s coffers and delay the legitimate distribution of the estate.
Monday, September 26, 2016
Coordinating Property Ownership and Your Estate Plan
When planning your estate, you must consider how you hold title to your real and personal property. The title and your designated beneficiaries will control how your real estate, bank accounts, retirement accounts, vehicles and investments are distributed upon your death, regardless of whether there is a will or trust in place and potentially with a result that you never intended.
One of the most important steps in establishing your estate plan is transferring title to your assets. If you have created a living trust, it is absolutely useless if you fail to transfer the title on your accounts, real estate or other property into the trust. Unless the assets are formally transferred into your living trust, they will not be subject to the terms of the trust and will be subject to probate.
Even if you don’t have a living trust, how you hold title to your property can still help your heirs avoid probate altogether. This ensures that your assets can be quickly transferred to the beneficiaries, and saves them the time and expense of a probate proceeding. Listed below are three of the most common ways to hold title to property; each has its advantages and drawbacks, depending on your personal situation.
Tenants in Common: When two or more individuals each own an undivided share of the property, it is known as a tenancy in common. Each co-tenant can transfer or sell his or her interest in the property without the consent of the co-tenants. In a tenancy in common, a deceased owner’s interest in the property continues after death and is distributed to the decedent’s heirs. Property titled in this manner is subject to probate, unless it is held in a living trust, but it enables you to leave your interest in the property to your own heirs rather than the property’s co-owners.
Joint Tenants: In joint tenancy, two or more owners share a whole, undivided interest with right of survivorship. Upon the death of a joint tenant, the surviving joint tenants immediately become the owners of the entire property. The decedent’s interest in the property does not pass to his or her beneficiaries, regardless of any provisions in a living trust or will. A major advantage of joint tenancy is that a deceased joint tenant’s interest in the property passes to the surviving joint tenants without the asset going through probate. Joint tenancy has its disadvantages, too. Property owned in this manner can be attached by the creditors of any joint tenant, which could result in significant losses to the other joint tenants. Additionally, a joint tenant’s interest in the property cannot be sold or transferred without the consent of the other joint tenants.
Community Property with Right of Survivorship: Some states allow married couples to take title in this manner. When property is held this way, a surviving spouse automatically inherits the decedent’s interest in the property, without probate.
Make sure your estate planning attorney has a list of all of your property and exactly how you hold title to each asset, as this will directly affect how your property is distributed after you pass on. Automatic rules governing survivorship will control how property is distributed, regardless of what is stated in your will or living trust.
Monday, August 1, 2016
What Does the Term "Funding the Trust" Mean in Estate Planning?
If you are about to begin the estate planning process, you have likely heard the term "funding the trust" thrown around a great deal. What does this mean? And what will happen if you fail to fund the trust?
The phrase, or term, "funding the trust" refers to the process of titling your assets into your revocable living trust. A revocable living trust is a common estate planning document and one which you may choose to incorporate into your own estate planning. Sometimes such a trust may be referred to as a "will substitute" because the dispositive terms of your estate plan will be contained within the trust instead of the will. A revocable living trust will allow you to have your affairs bypass the probate court upon your death, using a revocable living trust will help accomplish that goal.
Upon your death, only assets titled in your name alone will have to pass through the court probate process. Therefore, if you create a trust, and if you take the steps to title all of your assets in the name of the trust, there would be no need for a court probate because no assets would remain in your name. This step is generally referred to as "funding the trust" and is often overlooked. Many people create the trust but yet they fail to take the step of re-titling assets in the trust name. If you do not title your trust assets into the name of the trust, then your estate will still require a court probate.
A proper trust-based estate plan would still include a will that is sometimes referred to as a "pour-over" will. The will acts as a backstop to the trust so that any asset that is in your name upon your death (instead of the trust) will still get into the trust. The will names the trust as the beneficiary. It is not as efficient to do this because your estate will still require a probate, but all assets will then flow into the trust.
Another option: You can also name your trust as beneficiary of life insurance and retirement assets. However, retirement assets are special in that there is an "income" tax issue. Be sure to seek competent tax and legal advice before deciding who to name as beneficiary on those retirement assets.
Monday, July 25, 2016
Estate Planning: The Medicaid Asset Protection Trust
The irrevocable Medicaid Asset Protection Trust has proven to be a highly effective estate planning tool for many older Americans. There are many factors to consider when deciding whether a Medicaid Asset Protection Trust is right for you and your family. This brief overview is designed to give you a starting point for discussions with your loved ones and legal counsel.
A Medicaid Asset Protection Trust enables an individual or a married couple to transfer some of their assets into a trust, to hold and manage the assets throughout their lifetime. Upon their deaths, the remainder of the assets will be transferred to the heirs in accordance with the provisions of the trust.
This process is best explained by an example. Let’s say Mr. and Mrs. Smith, both retired, own stocks and savings accounts valued at $300,000. Their current living expenses are covered by income from these investments, plus Social Security and their retirement benefits. Should either one of them ever be admitted to a skilled nursing facility, the Smiths likely will not have enough money left over to cover living and medical expenses for the rest of their lives.
Continuing the above example, the Smiths can opt to transfer all or a portion of their investments into a Medicaid Asset Protection Trust. Under the terms of the trust, all investment income will continue to be paid to the Smiths during their lifetimes. Should one of them ever need Medicaid coverage for nursing home care, the income would then be paid to the other spouse. Upon the deaths of both spouses, the trust is terminated and the remaining assets are distributed to the Smiths’ children or other heirs as designated in the trust. As long as the Smiths are alive, their assets are protected and they enjoy a continued income stream throughout their lives.
However, the Medicaid Asset Protection Trust is not without its pitfalls. Creation of such a trust can result in a period of ineligibility for benefits under the Medicaid program. The length of time varies, according to the value of the assets transferred and the date of the transfer. Following expiration of the ineligibility period, the assets held within the trust are generally protected and will not be factored in when calculating assets for purposes of qualification for Medicaid benefits. Furthermore, transferring assets into an irrevocable Medicaid Asset Protection Trust keeps them out of both spouses’ reach for the duration of their lives.
Deciding whether a Medicaid Asset Protection Trust is right for you is a complex process that must take into consideration many factors regarding your assets, income, family structure, overall health, life expectancy, and your wishes regarding how property should be handled after your death. An experienced elder law or Medicaid attorney can help guide you through the decision making process.