EHDH Estate Planning

What Does Estate Plan Include?

The will, formally known as a last will and testament, is just one part of a complete estate plan, explains the article “Essential components of an estate plan” from Vail Daily. Consider it a starting point. A will can be very straight-forward and simple. However, it needs to address your unique situation and meet the legal requirements of your state.

If your family includes grown children and your goal is to leave everything to your spouse, but then make sure your spouse then leaves everything to the children, you need to make sure your will accomplishes this. However, what will happen if one of your children dies before you? Do you want their share to go to their children, your grandchildren? If the grandchildren are minors, someone will need to manage the money for them. Perhaps you want the balance of the inheritance to be distributed among the adult children. What if your surviving spouse remarries and then dies before the new spouse? How will your children’s inheritance be protected?

Many of these questions are resolved through the use of trusts, another important part of a complete estate plan. There are as many different types of trusts as there are situations addressed by trusts. They can be used to minimize tax liability, control how assets are passed from one generation to the next and protect the family from creditor claims.

How a trust should be structured, whether it is revocable, meaning it can be easily changed, or irrevocable, meaning it is harder to change, is best evaluated by an experienced estate planning attorney. No matter how complicated your situation is, they will have seen the situation before and are prepared to help.

A memorandum of disposition of personal property gives heirs insight into your wishes, by outlining what you want to happen to your personal effects. Let’s say your will leaves all of your assets to be divided equally between your children. However, you own a classic car and have a beloved nephew who loves the car as much as you do. By creating a memorandum of disposition, you can make sure your nephew gets the car, taking it out of the general provisions of the will. Be mindful of state law, however.

Note that some states do not allow the use of a memorandum of disposition, let alone permit such “titled” assets to be transferred by such an informal memorandum. Consequently, you must clarify how this situation will be handled in your state of residence with your estate planning attorney.

You will also need a Power of Attorney, giving another person the right to act on your behalf if you should become incapacitated. This is often a spouse, but it can also be another trusted individual with sound judgment who is good with handling responsibilities. Make sure to name a back-up person, just in case your primary POA cannot or will not serve.

A Medical Power of Attorney gives a named individual the ability to act on your behalf regarding medical decisions if you are incapacitated. Make sure to have a back-up, just to be sure. Failing to name a back- up for either POA will leave your family in a position where they cannot act on your behalf and may have to go to court to obtain a court-appointed guardianship in order to care for you. This is an expensive, time-consuming and stressful process, making a bad situation worse.

A Living Will is a declaration of your preference for end-of-life care. What steps do you want to be taken, or not taken, if you are medically determined to have an injury or illness from which you will not recover? This is the document used to state your wishes about a ventilator, the use of a feeding tube, etc. This is a hard thing to contemplate, but stating your wishes will be better than family members arguing about what you “would have wanted.”

Reference: Vail Daily (Feb. 15, 2022) “Essential components of an estate plan”

Can You Set Up a Trust After Death?

If you want the power of a trust without the work of maintaining it, a testamentary trust may be the right solution for your estate plan. Estate planning attorneys rely on many trusts, but two categories are most common: inter vivos trusts, trusts set up during your lifetime to offer the most flexibility, and testamentary trusts, as described in the article “Trusts can be created after death” from The News-Enterprise.

For an inter vivos trust, the grantor (the person making the trust) places property into the trust. These assets are thereby removed from the probate estate and pass directly to beneficiaries. Placing property into the trust requires having assets retitled and some trusts pay taxes. Not everyone wants to do the work. However, it is not onerous unless the estate is large, in which case an estate planning attorney can manage the details.

The testamentary trust is quite simple. The terms and directions for the trust are the same as in inter vivos trust but are inside the last will and testament. There is no separate trust document. The trust is located within the will.

The costs of creating a testamentary trust are lower, since the trust does not exist until the person dies. Your executor is responsible for transferring assets into the trust. Many wills contain “trigger” trusts, which only become effective if pre-determined circumstances of the beneficiary occur to trigger the trust. If a beneficiary becomes disabled, for instance, the provisions become active.

There are some disadvantages to be aware of, which your estate planning attorney can explain if they pertain to your situation.

Testamentary trusts must by their nature go through probate before they are created. People use trusts to protect their privacy. However, a testamentary trust becomes part of the public record as part of the probate estate. With a testamentary trust, trust documents are private during your life and after you have died.

If dependents require funds from the trust because they are disabled or dependent, they must wait until the grantor dies and probate is completed, since the trust does not exist until after probate. As most people know, probate does not always occur in a timely manner.

Other issues: some life insurance companies may not permit a testamentary trust to be a beneficiary. The trust may only be funded with assets left after creditors have been paid. If there is a home to be sold, assets may not be available for a year or more.

Testamentary trusts do not shield assets during your lifetime, another key benefit for using a trust.

Testamentary trusts offer certain means of controlling distribution of assets after death, but should be considered with all factors in mind, benefits and drawbacks. In estate planning, as in life, it is always best to prepare for the unexpected.

Reference: The News-Enterprise (Feb. 8, 2022) “Trusts can be created after death”

How Do You Pass Down a Vacation Home?

If your family enjoys a treasured vacation home, have you planned for what will happen to the property when you die? There are many different ways to keep a vacation home in the family. However, they all require planning to avoid stressful and expensive issues, says a recent article “Your Vacation Home Needs and Estate Plan!” from Kiplinger.

First, establish how your spouse and family members feel about the property. Do they all want to keep it in the family, or have they been attending family gatherings only to please you? Be realistic about whether the next generation can afford the upkeep, since vacation homes need the same care and maintenance as primary residences. If all agree to keep the home and are committed to doing so, consider these three ways to make it happen.

Leave the vacation home to children outright, pre or post-mortem. The simplest way to transfer any property is transferring via a deed. This can lead to some complications down the road. If all children own the property equally, they all have equal weight in making decisions about the use and management of the property. Do your children usually agree on things, and do they have the ability to work well together? Do their spouses get along? Sometimes the simplest solution at the start becomes complicated as time goes on.

If the property is transferred by deed, the children could have a Use and Maintenance Agreement created to set terms and rules for the home’s use. If everyone agrees, this could work. When the children have their own individual interest in the property, they also have the right to leave their share to their own children—they could even give away or sell their shares while they are living. If one child is enmeshed in an ugly divorce, the ex-spouse could end up owning a share of the house.

Create a Limited Liability Company, or LLC. This is a more formalized agreement used to exert more control over the property. An LLC operating agreement contains detailed rules on the use and management of the vacation home. The owner of the property puts the home in the LLC, then can give away interests in the LLC all at once or over a period of years. Your estate planning attorney may advise using the annual exclusion amount, currently at $16,000 per recipient, to make this an estate tax benefit as well.

Consider who you want to have shares in the home. Depending on the laws of your state, the LLC can be used to restrict ownership by bloodline, that is, letting only descendants be eligible for ownership. This could help keep ex-spouses or non-family members from ownership shares.

An LLC is a good option, if the home may be used as a rental property. Correctly created, the LLC can limit liability. Profits can be used to offset expenses, which would likely help maintain the property over many more years than if the children solely funded it.

What about a trust? The house can be placed into an Irrevocable Trust, with the children as beneficiaries. The terms of the trust would govern the management and use of the home. An irrevocable trust would be helpful in shielding the family from any creditor liens.

A Revocable Trust can be used to give the property to family members at the time of your death. A sub-trust, a section of the trust, is used for specific terms of how the property is to be managed, rules about when to sell the property and who is permitted to make the decision to sell it.

A Qualified Personal Residence Trust allows parents to gift the vacation home at a reduced value, while allowing them to use the property for a set term of years. When the term ends, the vacation home is either left outright to the children or it is held in trust for the next generation.

Reference: Kiplinger (Feb. 1, 2022) “Your Vacation Home Needs and Estate Plan!”

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”

Estate Planning for Couples with Big Age Differences

Seniors who are married to younger spouses have a special situation for estate planning, a situation that’s become more common, according to Barron’s recent article “Couples with Big Age Gaps Require Special Attention.”

This kind of family requires planning for the older spouse’s retirement needs and healthcare costs, while determining how much of the older spouse’s wealth should go to the children from any previous marriages while balancing the needs of a future child with a younger spouse. Beneficiaries for all financial accounts, last wills and all estate documents need to be updated to include the new spouse and child. The same goes for medical directives and power of attorney forms.

Social Security and retirement account considerations differ as well. The younger spouse may begin receiving their own Social Security at age 62, or a portion of the older spouse’s Social Security, whichever is greater. If the older spouse can wait to file for Social Security benefits at age 70, the younger spouse will receive more spousal benefits than if the older spouse claims earlier. Social Security pays the survivor’s benefit, typically based upon the older spouse’s earnings.

Pension plans need to be reviewed for a younger spouse. If the pension plan allows a survivor benefit, the surviving spouse will receive benefits in the future. IRAs have different beneficiary distribution rules for couples with significant age differences. Instead of relying on the standard Uniform Lifetime Tables, the IRS lets individuals use the Joint Life and Last Survivor Expectancy Table, if the sole beneficiary is a spouse who is more than ten years younger. This allows for smaller than normally Required Minimum Distributions from the IRA, allowing the account a longer lifetime.

Families that include children with special needs also benefit from trusts, as assets in the trust are not included in eligibility for government benefits. Many families with such family members are advised to use an ABLE Savings Account, which lets the assets grow tax free, also without impacting benefit eligibility. There are limits on the accounts, so funds exceeding the ABLE account limits may be added to special needs trusts, or SNTs.

A trustee, who may be a family member or a professional, uses the SNT assets to pay for the care of the individual with special needs after the donor parents have passed. The child is able to maintain their eligibility.

For same sex couples, revocable or irrevocable trusts may be used, if the couple is not married. Nontraditional families of any kind with children require individual estate plans to protect them,  which usually involves trusts.

Trusts are also useful when there are children from different marriages. They can protect the children from the first marriage and subsequent marriages. A wisely constructed estate plan can do more than prevent legal battles among children—they can preserve family harmony in the non-traditional family after parents have passed.

Reference: Barron’s (July 27, 2021) “Couples with Big Age Gaps Require Special Attention”

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.

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

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

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.

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

How Does a Trust Work for a Farm Family?

There are four elements to a trust, as described in this recent article “Trust as an Estate Planning Tool,” from Ag Decision Maker: trustee, trust property, trust document and beneficiaries. The trust is created by the trust document, also known as a trust agreement. The person who creates the trust is called the trustmaker, grantor, settlor, or trustor. The document contains instructions for management of the trust assets, including distribution of assets and what should happen to the trust, if the trustmaker dies or becomes incapacitated.

Beneficiaries of the trust are also named in the trust document, and may include the trustmaker, spouse, relatives, friends and charitable organizations.

The individual who creates the trust is responsible for funding the trust. This is done by changing the title of ownership for each asset that is placed in the trust from an individual’s name to that of the trust. Failing to fund the trust is an all too frequent mistake made by trustmakers.

The assets of the trust are managed by the trustee, named in the trust document. The trustee is a fiduciary, meaning they must place the interest of the trust above their own personal interest. Any management of trust assets, including collecting income, conducting accounting or tax reporting, investments, etc., must be done in accordance with the instructions in the trust.

The process of estate planning includes an evaluation of whether a trust is useful, given each family’s unique circumstances. For farm families, gifting an asset like farmland while retaining lifetime use can be done through a retained life estate, but a trust can be used as well. If the family is planning for future generations, wishing to transfer farm income to children and the farmland to grandchildren, for example, a granted life estate or a trust document will work.

Other situations where a trust is needed include families where there is a spendthrift heir, concerns about litigious in-laws or a second marriage with children from prior marriages.

Two main types of trust are living or inter-vivos trusts and testamentary trusts. The living trust is established and funded by a living person, while the testamentary trust is created in a will and is funded upon the death of the willmaker.

There are two main types of living trusts: revocable and irrevocable. The revocable trust transfers assets into a trust, but the grantor maintains control over the assets. Keeping control means giving up any tax benefits, as the assets are included as part of the estate at the time of death. When the trust is irrevocable, it cannot be altered, amended, or terminated by the trustmaker. The assets are not counted for estate tax purposes in most cases.

When farm families include multiple generations and significant assets, it’s important to work with an experienced estate planning attorney to ensure that the farm’s property and assets are protected and successfully passed from generation to generation.

Reference: Ag Decision Maker (Dec. 2020) “Trust as an Estate Planning Tool”

The Importance of a Will

Even during a pandemic, few people want to spend time thinking about death. However, having an estate plan means having some of the most important documents you’ll ever create. Having a will is a gift that alleviates the burden placed on loved ones after we are gone, says this recent article “Why it’s important for every adult to get a will” from Bankrate. In a time of sorrow, the family and friends will be spared the stress that makes grieving more complicated when there is no will, no guidance and no path forward.

What is a will?

In its most simple form, a will is a legal document that serves to transfer property at your death to the people you choose. It is revocable, which means you have the legal ability to make changes to it, as long as you are alive and have the mental capacity to do so. However, wills do more than distribute property. The will is your chance to state your wishes for who will care for your children, what happens to your physical remains and who will take care of your pets.

Are Wills Pretty Much the Same?

There’s a good reason why the best wills are those created with an estate planning attorney: they are created to suit your specific needs. Just as every person is different, everyone’s will must reflect their life. Some people want to name a recipient for every single asset they have, while others prefer simply to give their entire estate to a spouse, their children, a trust, or a charity. However, there are also different kinds of wills.

A Testamentary Will is a will signed in the presence of witnesses. It is the best choice to protect your family.

A Holographic Will is a handwritten will, which is not acceptable in many states and could lead your family into all kinds of expensive and stressful battles, in and out of court.

An Oral Will is a verbal will that is declared in front of witnesses, but don’t count on anything you say being considered a legally valid will.

A Mutual Will is also known as a “I love you Will,” when partners create a joint will leaving everything to each other. There can be some tricky things about these wills, since when one person dies, the other is still legally bound to the terms of this will. If the surviving spouse remarries, it can become complicated.

A Pour Over Will is the ideal choice, when your plan is to pour assets into an established trust at your death.

What does a will do and not do?

Wills are used to determine guardianship for minor children and distribute assets and real property. Wills don’t control jointly owned assets, or contracts, like life insurance policies and retirement accounts. These are controlled by beneficiary designation forms. It won’t matter if your will says that your current spouse should inherit your retirement account and you never changed the beneficiary from your first spouse. This is why estate planning attorneys always tell clients to check on beneficiary designations when large life events, like divorce and remarriage, occur.

What happens if there is no will?

Without a will, the state’s laws will determine what happens and your wishes don’t count. That includes who inherits your property, and even who raises your minor children. The court will make all of these decisions. The stress that this creates cannot be underestimated. When there is no will, the chances of litigation between family members and trouble from distant relatives seeking a claim against your estate rises.

Reference: Bankrate (Nov. 6, 2020) “Why it’s important for every adult to get a will”