Is an Irrevocable Trust a Good Idea?
Writing note shows the text irrevocable life insurance trust ILIT

Is an Irrevocable Trust a Good Idea?

An irrevocable trust is mainly used for tax planning, says a recent article from Think Advisor titled “10 Facts to Know About Irrevocable Trusts.” Its key purpose is to take assets out of an estate, reducing the chances of having to pay estate taxes. For estate planning purposes, placing assets inside the irrevocable trust is the same as giving it to an heir. If the estate exceeds the current limit of $11.7 million, then an irrevocable trust would be a smart move. Remember the $11.7 million includes life insurance policy proceeds. Many states with estate taxes also have far lower exemptions than the federal estate tax, so high income families still have to be concerned with paying estate taxes.

However, let’s not forget that beneficiaries must pay taxes on the income they receive from an irrevocable trust, usually at ordinary income tax rates. On the plus side, trusts are not subject to gift tax, so the trust can pay out more than the current gift tax limit of $15,000 every year.

If the trust itself generates income that remains inside the trust, then the trust will have to pay income taxes on the income.

Asset protection is another benefit from an irrevocable trust. If you are sued, any assets in the irrevocable trust are beyond the reach of a legal judgment, a worthwhile strategy for people who have a greater likelihood of being sued because of their profession. However, the irrevocable trust must be created long before lawsuits are filed.

A physician who transfers a million-dollar home into the trust on the eve of a malpractice lawsuit, for instance, may be challenged with having made a fraudulent transfer to the trust.

There is a cost to an irrevocable trust’s protection. You have to give up control of the assets and have no control over the trust. Legally you could be a trustee, but that means you have control over the trust, which means you will lose all tax benefits and asset protections.

Most people name a trusted family member or business associate to serve as the trustee. Consider naming a successor trustee, in case the original trustee is unable to fulfill their duties.

If you don’t want to give someone else control of your assets, you may wish to use a revocable trust and give up some of the protections of an irrevocable trust.

Despite the name, changes can be made to an irrevocable trust by the trustee. Trust documents can designate a “trust protector,” who is empowered to make certain changes to the trust. Many states have regulations concerning changes to the administrative aspects of a trust, and a court has the power to make changes to a trust.

An irrevocable trust can buy and sell property. If a house is placed into the irrevocable trust, the house can be sold, as long as the proceeds go into the trust. The trust is responsible for paying taxes on any profits from the sale. However, you can request that the trustee use the proceeds from selling a house to buy a different house. Be sure the new house is titled correctly: owned by the trust, and not you.

Asset swaps may be used to change irrevocable trusts. Let’s say you want to buy back an asset from the trust, but don’t want that asset to go back into your estate when you die. There are tax advantages for doing this. If the trust holds an asset that has become highly appreciated, swap cash for the asset and the basis on which the asset’s capital gains is calculated gets reset to its fair value, eliminating any capital gains on a later sale of the asset.

Loss of control is part of the irrevocable trust downside. Make sure that you have enough assets to live on before putting everything into the trust. You can’t sell assets in the trust to produce personal income.

Transferring assets to an irrevocable trust helps maintain eligibility for means-tested government programs, like Medicaid and Supplemental Security Income. Assets and income sheltered within an irrevocable trust are not counted as personal assets for these kinds of program limits. However, Medicaid has a look-back period of five years, so the transfer of a substantial asset to an irrevocable trust must have taken place five years before applying for Medicaid.

Talk with your estate planning attorney first. Not every irrevocable trust satisfies each of these goals. It is also possible that an irrevocable trust may not fit your needs. An experienced estate planning attorney will be able to create a plan that suits your needs best for tax planning, asset protection and legacy building.

Reference: Think Advisor (Dec. 16, 2020) “10 Facts to Know About Irrevocable Trusts”

Should I Add that to My Will?

In general, a last will and testament is an easy and straightforward way to state who gets what when you die and designate a guardian for your minor children, if you (and your spouse) die unexpectedly.

MSN’s recent article entitled “Things you should never put in your will” explains that you can be specific about who receives what. However, attaching strings or conditions may not work because there’s no one to legally enforce the terms. If you have specific details about how a person should use their inheritance, whether they are a spendthrift or someone with special needs, a trust may be a better option because you’ll have more control, even from beyond the grave.

Keeping some assets out of your will can actually benefit your future heirs because they’ll get their inheritance faster. When you pass on, your will must be “proven” and validated in a probate court prior to distribution of your property. This process takes some time and effort, if there are issues—including something in your will that doesn’t need to be there. For example, property in a trust and payable-on-death accounts are two types of assets that can be distributed to your beneficiaries without a will.

Don’t put anything in a will that you don’t own outright. If you jointly own assets with someone, they will likely become the new owner. For example, this applies to a property acquired by married couples in community property states.

Property in a revocable living trust. This is a separate entity that you can use to distribute your assets which avoids probate. When you title property into the trust, it is subject to the trust’s rules.  Because a trust operates independently, you must avoid inconsistencies and not include anything in your will that the trust addresses.

Assets with named beneficiaries. Some financial accounts are payable-on-death or transferable-on-death. They are distributed or paid out directly to the named beneficiaries. That makes putting them in a will unnecessary (and potentially troublesome, if you’re inconsistent). However, you can add information about these assets in your letter of instruction (see below). As far as bank accounts, brokerage or investment accounts, retirement accounts and pension plans and life insurance policies, assign a beneficiary rather than putting these assets in your will.

Jointly owned property. Property you jointly own with someone else will almost always directly pass to the co-owner when you die, so do not put it in your will. A common arrangement is joint tenancy with rights of survivorship.

Other things you may not want to put in a will. Businesses can be given away in a will, but it’s not the best plan. Wills must be probated in court and that can create a rough transition after you die. Instead, work with an experienced estate planning attorney on a succession plan for your business and discuss any estate tax issues you may have as a business owner.

Adding your funeral instructions in your will isn’t optimal. This is because the family may not be able to read the will before making arrangements. Instead, leave a letter of instruction with any personal wishes and desires.

Reference: MSN (Dec. 8, 2020) “Things you should never put in your will”

Will I Get A Bill as My Inheritance?
Inheritance paper note on hundred dollar bills

Will I Get A Bill as My Inheritance?

When someone dies and leaves debts, you may ask if you have any personal liability to pay them. The answer is typically no, even though those debts don’t automatically disappear. However, there are situations in which you may have to address issues with a loved one’s creditors after they are gone, says KAKE’s recent article entitled “Can I Inherit Debt?”

The responsibility for ensuring the estate’s debts are paid, is typically that of the executor. An executor performs several tasks to wrap up a person’s estate after death. They include:

  • Obtaining a copy of the deceased’s will, if they had one, and filing it with the probate court
  • Notifying creditors and other entities of the person’s death (like the Social Security Administration to stop benefits)
  • Creating an inventory of the deceased’s assets and their value
  • Liquidating assets to pay off any debts owed by the estate; and
  • Distributing the remaining property to the individuals or organizations named in the deceased’s will (if they had one) or according to inheritance laws, if they didn’t.

In terms of debt repayment, executors must notify creditors who may have a claim against the estate. Creditors are given a set period of time to make a financial claim against the estate’s assets for repayment of debts. It’s not that uncommon for a disreputable creditor to attempt to get paid by the deceased’s relatives.

Any assets in the estate that have a named beneficiary, such as a life insurance policy, a 401(k), individual retirement account, payable on death accounts or annuity, would be transferred to that beneficiary automatically and cannot be touched by creditors.

You typically don’t inherit debts of another like you might inherit property or other assets from them. Thus, if a debt collector tries get money from you, you’re under no legal obligation to pay.

However, if you cosigned a loan with the deceased or opened a joint credit card account or line of credit, those debts are legally yours, just as much as they are the person who died. If they pass away, you’d be solely responsible for repaying them.

You should also know that you may be liable for long-term care costs incurred by your parents, while they were alive. Many states require children to cover nursing home bills, although they aren’t always enforced.

As for spouses, the same rules of debt responsibility apply. However, for debts that are in one spouse’s name only, it’s important to understand how living in a community property state can impact your liability for marital debts. If you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin), debts incurred after the marriage by one spouse can be treated as a shared financial obligation.

Reference: KAKE (December 2, 2020) “Can I Inherit Debt?”

 

What Do I Need to Know about Creating a Will?

A simple or basic will allows you to specifically say the way in which you want your assets to be distributed among your beneficiaries after your death. This can be a good starting point for creating a comprehensive estate plan because you may need more than just a basic will.

KAKE’s recent article entitled “What Is a Simple Will and How Do You Make One?” explains that a last will and testament is a legal document that states what you want to happen to your property and “worldly goods” when you die. A simple will can be used to designate an executor for the will and a legal guardian for minor children and specify who (or which organizations) should inherit your assets when you die.

A will must be approved in the probate process when you pass away. After the probate court reviews the will to make sure it’s valid, your executor will take care of the collection and distribution of assets listed in the will. Your executor would also be responsible for paying any debts owed by your estate.

Whether you need a basic will or something more complex, usually depends on a few factors, including your age, the size of your estate and if you have children (and their ages).

Having a will in place can be a good starting point for estate planning. However, deciding if it should be simple or complex can depend on a number of factors, such as:

  • The size of your estate
  • The amount of estate tax you expect to owe
  • The type of assets and property you own
  • Whether you own a business
  • The number of beneficiaries you want to name
  • Whether the beneficiaries are individuals or organizations (like charities)
  • Any significant life changes you anticipate, like marriages, divorces, or having more children; and
  • Whether any of your children or beneficiaries have special needs.

With these situations, you may need a more detailed will to plan how you want your assets to be distributed. In any event, work with an experienced estate planning attorney. With life or financial changes, you may need to create a more complex will or consider a trust. It is smart to speak with an estate planning attorney, who can help you determine which components to include in your plan and help you keep it updated.

Reference: KAKE (Nov. 23, 2020) “What Is a Simple Will and How Do You Make One?”

Is the Pandemic Motivating People to Do Estate Planning?

A survey from Policygenius, an online insurance marketplace, found that most people (60.4%) didn’t have a will, but that may be about to change. Nearly 40% of survey respondents (39.7%) said they feel it’s more important to get a will because of the pandemic.

PR Newswire’s recent article entitled “Policygenius survey finds Americans with misconceptions about estate planning” reports that many respondents also held misconceptions about the estate planning process, which may a reason they avoid it.

The survey found that more than one in five respondents (22.8%) who think getting a will is too expensive overestimated the cost by hundreds or even thousands of dollars.

A total of 48.2% incorrectly thought that their possessions would automatically pass to their spouse, if they died without a will. That may suggest that people may not be creating wills because they think they don’t need them.

There were 24.1% respondents who said that they don’t have a will because they haven’t had time to put one together, and more than half of those respondents (62%) were parents.

The survey also found that respondents prioritized family, with more than a third of them (35.9%) saying that having a child is the most important life event for someone, if they want to create a will. About two-thirds (65.5%) said that making the process of inheritance as easy as possible is one of their top three important issues, when getting a will.

Just 39.3% knew that if someone passes away without a will, a court will determine who gets their assets.

The Policygenius survey is based on responses from a nationally representative sample of 2,689 Americans ages 25 and over. It was conducted by SurveyMonkey from July 16 through July 17, 2020.

Ask an experienced estate planning attorney about a will and a comprehensive estate plan.

Reference: PR Newswire (Dec. 2, 2020) “Policygenius survey finds Americans with misconceptions about estate planning”

What Kind of Estate Planning Do I Need During the Pandemic?

Having a valid will and a complete estate plan is important for everyone, but it’s crucial as you approach retirement.

Richmond Times-Dispatch’s recent article entitled “Estate planning during the pandemic” says that it’s because you’ll probably have more assets at this stage of your life, and it’s important to consider whom you’d like to inherit.

It is critical that you plan to be sure your spouse and family will be cared for financially, in the event that something happens to you. This can be accomplished with proper estate planning with the help of an experienced estate planning attorney.

If you die without a will or estate plan, state probate laws of succession may direct the way in which your assets are distributed. This can be an expensive process, but it can also be a significant burden on your family during a time of grieving and sadness.

Even with a will, going through the court-supervised probate process of passing assets through a will can be time consuming and expensive.

One way to avoid probate is to ask an experienced estate planning attorney to help you set up a trust. A frequently used trust is a revocable living trust, which lets you modify the terms if you like.

Individuals with children or real estate can particularly benefit from setting up a trust. A trust allows you to avoid probate and makes certain that your assets are transferred to the intended people. It also lets you control exactly how the money can be used. You can also name someone to take control when you’re not available, known as a secondary trustee.

The executor of a will is really an administrator who transfers assets from one person to another. In contrast, a trustee is more of a decision-maker who will take your place and make decisions you would want to make, if you were still around to make them.

After you set up your estate plan, you should review it every few years.

Reference: Richmond Times-Dispatch (Nov. 19, 2020) “Estate planning during the pandemic”

What Do I Need to Know about Gift-Giving with the Biden Administration?

After the election, many people are wondering what will happen to the federal gift and estate tax exemption. Kiplinger’s recent article entitled “Making a Gift This Year? Some Key Questions to Consider,” explains that the Tax Cuts and Jobs Act dramatically upped the lifetime gift, estate and generation-skipping tax exemption to $11.58 million per individual ($23.16 million per couple). This exemption, however, is set to expire at the end of 2025. Some observers say that Democrats could significantly shorten the time frame, ending it as early as 2021.

Some families may face the possibility of losing an opportunity to transfer wealth out of their estate and save on future estate taxes sooner than anticipated. No matter when the gift is made, here are some important issues to consider.

Can I afford to give? For couples who have a significant taxable estate, gifting assets and removing future appreciation could result in some substantial tax savings for their heirs. However, just because someone has the means to make a large gift, doesn’t necessarily mean it’s the right move. Some are so eager to take advantage of the tax benefits that they underestimate their own cost of living down the road. Look at whether the grantor has enough assets to maintain their desired lifestyle. Then, think about what can be transferred without negatively impacting goals and lifestyle choices.

How Do I Structure a Gift? There are many ways of distributing assets. Remember that any transfer is gift tax-free up to the annual exclusion amount ($15,000 per person per donor for 2020). Any gift over this will count against the donor’s lifetime exemption amount. Once that’s exhausted, the gift will be subject to gift tax.

Outright Cash Gifts. This may be the most uncomplicated way of gifting, but for families with significant wealth, this could have some drawbacks. Some recipients may not be prepared to manage money, and it may demotivate them to live off their inheritance rather than becoming productive on their own.

Trusts. These are frequently used for bigger gifts to provide for beneficiaries, while using some restrictions by the grantor to protect the assets from being squandered. One plan is to distribute the trust assets in stages, when the beneficiary reaches a certain age or achieves a specific goal. Another option is to leave assets in a discretionary lifetime trust, which would maintain the assets in a trust for the beneficiary’s entire lifetime. Drafted properly by an experienced estate planning attorney, this offers a high level of protection from divorcing spouses, lawsuits, bad decisions and outside influences. It also lets grantors create a lasting family legacy for many generations.

Gifts for Education Expenses. You can also make direct payments for education or for medical expenses with no gift tax consequences.

Uniform Trust to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA). These custodial accounts are usually less restrictive than trusts and allow minor beneficiaries access to funds at age a specific age, depending on state law.

Reference: Kiplinger (Oct. 30, 2020) “Making a Gift This Year? Some Key Questions to Consider”

What Should I Know about a Living Trust?
Living trust and estate planning form on a desk.

What Should I Know about a Living Trust?

A will and a living trust both can be very important in your estate plan. However, a living trust doesn’t require probate to transfer your assets.

KYT24’s recent article entitled “Fundamentals Of A Living Trust” explains that everyone who owns a home and/or other assets should have a will or a living trust. Proper estate planning can protect your family from unnecessary court costs and delay, if you become incapacitated, disabled, or die.

With a living trust, you can avoid all probate delays and related costs and make life much simpler for your family in a crisis. If you pass away, your spouse will be able to automatically and immediately continue without any delay or unnecessary expense.

When you and your spouse both die, your assets will also transfer directly to your beneficiaries.

Living trusts can save time, expense and stress for your loved ones. Speak with an experienced estate planning attorney about creating a living trust.

A trust agreement, being a legal document, must be written by an experienced estate planning attorney who has the knowledge and experience to prepare such a legal document to cover all of your needs and desires. If not properly and completely drafted, you run the risk of issues after you’re gone for your family.

After your attorney drafts your living trust, you must fund the trust, by titling or adding assets to it. If assets aren’t titled to or otherwise connected to your trust agreement, they won’t be legally part of the trust.

This totally defeats the purpose of drafting your living trust agreement in the first place.

It’s a common mistake to fail to fund a trust, which can happen as a result of poor follow through after signing the trust.

Work with an experienced estate planning attorney to complete a living trust and your entire estate plan. This includes a thorough review of your goals and objectives, as well as reviewing all estate assets to complete the funding of your trust, by transferring assets into the name of the living trust.

Reference: KYT24 (Nov. 14, 2020) “Fundamentals Of A Living Trust”

What Happens If You Fail to Submit a Change of Beneficiary Form?

Wealth Advisor’s recent article entitled “I’m being denied an inheritance. Can they do that?” explains the situation where an individual, Peter, was given a CD/IRA by a friend named Paul.

Paul told Peter that he wanted him to have it, in case anything happened to him. Paul was married and didn’t tell his wife about this. Paul’s wife was the beneficiary of several other accounts.

Paul told Peter to sign a document before he died, and they got it notarized.

Paul died somewhat unexpectedly, and Peter took the signed and notarized beneficiary designation form to the bank to see about collecting the money.

However, the bank told Peter that there was no beneficiary designation given to them prior to Pauls’ death.

Is there anything that Peter can do?

The article explains that it’s a matter of timing, and it’s probably too late. That’s because it looks like Paul failed to submit a written beneficiary change form to the financial institution prior to his death.

As a result, the financial institution must distribute the CD to the person or entities that otherwise would be entitled to receive it.

In most states, you can choose any IRA beneficiary you want. However, in nine community property states, you are required to name your spouse as your heir. If you want to name anyone else, your spouse must give written permission. The same laws apply, if you want to change your beneficiary designation.

The nine community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

The only way for Peter to see the money, is if he can show that Paul intended for him to receive the asset. That bank doesn’t want to be sued by another person, who claims they’re entitled to the CD.

In this situation, it’s best to speak with an experienced estate planning attorney who can examine the specifics of this type of issue.

Reference: Wealth Advisor (Nov. 24, 2020) “I’m being denied an inheritance. Can they do that?”

What Do You Do with a Big Inheritance?

Wealth Advisor’s recent article entitled “Death by inheritance: Windfall can cause complications” cautions that in a community property state, if you’re married, your inheritance is separate property. It will stay separate property, provided it’s not commingled with community funds or given to your spouse. That article says that it is much harder to do than it looks.

One option is for you and your spouse to sign a written marital agreement that states that your inheritance (as well as any income from it) remains your separate property. However, you have to then be careful that you keep it apart from your community property.

If your spouse doesn’t want to sign such an agreement, then speak to an attorney about what assets in your inheritance can safely be put into a trust. If you do this, take precautions to monitor the income and keep it separate.

Another route is to put your inheritance into assets held in only your name and segregate the income from them. This is important because income from separate property is considered community property.

Another tip as far as the overall management of the inheritance, is to analyze it by type of asset. IRAs and other qualified funds take very special handling to avoid unnecessary taxes or penalties. If you immediately cash out your inherited traditional IRA, you’ll forfeit a good chunk of it in taxes. If you don’t take the mandatory distribution of a Roth IRA, you’re going see a major penalty.

Inherited real estate has its own set of issues. If you inherited only part of a piece of real property, then you’ll have to work with the other owners as to its use, maintenance, and/or sale. For example, your parents’ summer home is passed to you and your three siblings. If things get nasty, you may have to file a partition suit to force a sale, if your siblings aren’t cooperative. Real estate can also be encumbered by an environmental issue, a mortgage, delinquent taxes, or some other type of lien.

Some types of assets are just a plain headache: timeshares, partnership, or entity interests that don’t have a buy-sell agreement, along with Title II weapons (which may be banned in your state).

You can also refuse an inheritance by use of a disclaimer. It’s a procedure where you decline to take part or all of an inheritance.

Finally, speak with an experienced estate planning attorney, so you can incorporate your inheritance into your own estate plan.

Reference: Wealth Advisor (Nov. 10, 2020) “Death by inheritance: Windfall can cause complications”