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”

What You Should Never, Ever, Include in Your Will

A last will and testament is a straightforward estate planning tool, used to determine the beneficiaries of your assets when you die, and, if you have minor children, nominating a guardian who will raise your children. Wills can be very specific but can’t enforce all of your wishes. For example, if you want to leave your niece your car, but only if she uses it to attend college classes, there won’t be a way to enforce those terms in a will, says the article “Things you should never put in your will” from MSN Money.

If you have certain terms you want met by beneficiaries, your best bet is to use a trust, where you can state the terms under which your beneficiaries will receive distributions or assets.

Leaving things out of your will can actually benefit your heirs, because in most cases, they will get their inheritance faster. Here’s why: when you die, your will must be validated in a court of law before any property is distributed. The process, called probate, takes a certain amount of time, and if there are issues, it might be delayed. If someone challenges the will, it can take even longer.

However, property that is in a trust or in payable-on-death (POD) titled accounts pass directly to your beneficiaries outside of a will.

Don’t put any property or assets in a will that you don’t own outright. If you own any property jointly, upon your death the other owner will become the sole owner. This is usually done by married couples in community property states.

A trust may be the solution for more control. When you put assets in a trust, title is held by the trust. Property that is titled as owned by the trust becomes subject to the rules of the trust and is completely separate from the will. Since the trust operates independently, it is very important to make sure the property you want to be held by the trust is titled properly and to not include anything in your will that is owned by the trust.

Certain assets are paid out to beneficiaries because they feature a beneficiary designation. They also should not be mentioned in the will. You should check to ensure that your beneficiary designations are up to date every few years, so the right people will own these assets upon your death.

Here are a few accounts that are typically passed through beneficiary designations:

  • Bank accounts
  • Investments and brokerage accounts
  • Life insurance polices
  • Retirement accounts and pension plans.

Another way to pass property outside of the will, is to own it jointly. If you and a sibling co-own stocks in a jointly owned brokerage account and you die, your sibling will continue to own the account and its investments. This is known as joint tenancy with rights of survivorship.

Business interests can pass through a will, but that is not your best option. An estate planning attorney can help you create a succession plan that will take the business out of your personal estate and create a far more efficient way to pass the business along to family members, if that is your intent. If a partner or other owners will be taking on your share of the business after death, an estate planning attorney can be instrumental in creating that plan.

Funeral instructions don’t belong in a will. Family members may not get to see that information until long after the funeral. You may want to create a letter of instruction, a less formal document that can be used to relay these details.

Your account numbers, including passwords and usernames for online accounts, do not belong in a will. Remember a will becomes a public document, so anything you don’t want the general public to know after you have passed should not be in your will.

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

Estate Planning Is Best When Personalized

Just as a custom-tailored suit fits better than one off the rack, a custom-tailored estate plan works better for families. Making sure assets pass to the right person is more likely to occur when documents are created just for you, advises the article “Tailoring estate to specific needs leads to better plans” from the Cleveland Jewish News.

The most obvious example is a family with a special needs member. Generic estate planning documents typically will not suit that family’s estate planning.

Every state has its own laws about distributing property and money owned by a person at their death, in cases where people don’t have a will. Relying on state law instead of a will is a risky move that can lead to people you may not even know inheriting your entire estate.

In the absence of an estate plan, the probate court makes decisions about who will administer the estate and the distribution of property. Without a named executor, the court will appoint a local attorney to take on this responsibility. An appointed attorney who has never met the decedent and doesn’t know the family won’t have the insights to follow the decedent’s wishes.

The same risks can occur with online will templates. Their use often results in families needing to retain an estate planning attorney to fix the mistakes caused by their use. Online wills may not be valid in your state or may lead to unintended consequences. Saving a few dollars now could end up costing your family thousands to clean up the mess.

Estate plans are different for each person because every person and every family are different. Estate plan templates may not account for any of your wishes.

Generic plans are very limited. An estate plan custom created for you takes into consideration your family dynamics, how your individual beneficiaries will be treated and expresses your wishes for your family after you have passed.

Generic estate plans also don’t reflect the complicated families of today. Some people have family members they do not want to inherit anything. Disinheriting someone successfully is not as easy as leaving them out of the will or leaving them a small token amount.

Ensuring that your wishes are followed and that your will is not easily challenged takes the special skills of an experienced estate planning attorney.

Reference: Cleveland Jewish News (Dec. 9, 2020) “Tailoring estate to specific needs leads to better plans”

SECURE Act has Changed Special Needs Planning

The SECURE Act eliminated the life expectancy payout for inherited IRAs for most people, but it also preserved the life expectancy option for five classes of eligible beneficiaries, referred to as “EDBs” in a recent article from Morningstar.com titled “Providing for Disabled Beneficiaries After the SECURE Act.” Two categories that are considered EDBs are disabled individuals and chronically ill individuals. Estate planning needs to be structured to take advantage of this option.

The first step is to determine if the individual would be considered disabled or chronically ill within the specific definition of the SECURE Act, which uses almost the same definition as that used by the Social Security Administration to determine eligibility for SS disability benefits.

A person is deemed to be “chronically ill” if they are unable to perform at least two activities of daily living or if they require substantial supervision because of cognitive impairment. A licensed healthcare practitioner certifies this status, typically used when a person enters a nursing home and files a long-term health insurance claim.

However, if the disabled or ill person receives any kind of medical care, subsidized housing or benefits under Medicaid or any government programs that are means-tested, an inheritance will disqualify them from receiving these benefits. They will typically need to spend down the inheritance (or have a court authorized trust created to hold the inheritance), which is likely not what the IRA owner had in mind.

Typically, a family member wishing to leave an inheritance to a disabled person leaves the inheritance to a Supplemental Needs Trust or SNT. This allows the individual to continue to receive benefits but can pay for things not covered by the programs, like eyeglasses, dental care, or vacations. However, does the SNT receive the same life expectancy payout treatment as an IRA?

Thanks to a special provision in the SECURE Act that applies only to the disabled and the chronically ill, a SNT that pays nothing to anyone other than the EDB can use the life expectancy payout. The SECURE Act calls this trust an “Applicable Multi-Beneficiary Trust,” or AMBT.

For other types of EDB, like a surviving spouse, the individual must be named either as the sole beneficiary or, if a trust is used, must be the sole beneficiary of a conduit trust to qualify for the life expectancy payout. Under a conduit trust, all distributions from the inherited IRA or other retirement plan must be paid out to the individual more or less as received during their lifetime. However, the SECURE Act removes that requirement for trusts created for the disabled or chronically ill.

However, not all of the SECURE Act’s impact on special needs planning is smooth sailing. The AMBT must provide that nothing may be paid from the trust to anyone but the disabled individual while they are living. What if the required minimum distribution from the inheritance is higher than what the beneficiary needs for any given year? Let’s say the trustee must withdraw an RMD of $60,000, but the disabled person’s needs are only $20,000? The trust is left with $40,000 of gross income, and there is nowhere for the balance of the gross income to go.

In the past, SNTs included a provision that allowed the trustee to pass excess income to other family members and deduct the amount as distributable net income, shifting the tax liability to family members who might be in a lower tax bracket than the trust.

Special Needs Planning under the SECURE Act has raised this and other issues, which can be addressed by an experienced estate planning attorney.

Reference: Morningstar.com (Dec. 9, 2020) “Providing for Disabled Beneficiaries After the SECURE Act”

What are the Basic Estate Planning Documents?

Having a well-prepared estate plan means that you have a plan in place to distribute your home, assets and possessions. However, the estate plan does more, says the article “Trustee Tips: Estate Planning Basics” from Wilmington Biz Insights: it also gives your family the insight and legally enforceable directions to follow, so they may honor your wishes.

Estate planning eliminates uncertainty and maximizes the value of the estate, by streamlining the transfer of assets to beneficiaries and minimizing estate tax liability. In addition, estate planning protects your estate and your family from mismanagement, creditor claims or claims from people or companies outside of the family.

Many people equate estate planning with owning a large home and significant wealth, but that’s not true. An estate includes everything people own: their personal residence, retirement accounts, insurance policies, investments and possessions.

A case can be made that estate planning is more important for people with a modest estate to preserve and protect what assets they have, versus a large estate where the family enjoys a large cushion against poverty.

The basic estate planning documents are a last will and testament, trusts, financial power of attorney, health care power of attorney and a living will.

A Last Will and Testament provides instructions to the probate court of the decedent’s final wishes, including naming an executor to carry out the instructions. It also contains instructions on who will raise minor children by naming a guardian. This document, and any other documents filed with the probate court, become part of the public record, and can be accessed by anyone who wishes to see them.

A Revocable Trust also provides instructions but avoids probate. The trust creates a legal entity that owns assets (once they are retitled and placed in the trust). The individual who creates a revocable trust remains in control of the assets, as long as they are alive. The revocable trust can be changed at any time.

A Pour-Over Will is used with a revocable trust. It ensures that any assets not included in the Revocable Trust are “poured-over” into the trust upon death, protecting them from the probate process and keeping your wishes private.

A financial Power of Attorney and Health Care Power of Attorney are documents used to give control of legal and financial affairs and health care decisions, in the event of incapacity.

The Living Will provides directions to designated persons, usually family members, about what kind of medical care is desired in the event of an inability to communicate. This is a gift to loved ones, who would otherwise be left guessing what the person would wish. A HIPAA release should also be prepared to allow doctors to discuss medical matters with the Health Care Power of Attorney.

An estate plan is a way to protect the family’s well-being, not just distributing property and minimizing taxes. A well-crafted estate plan, created for the family’s unique situation, helps avoid family fights, litigation within and outside of the family and provides direction for the next generation.

Reference: Wilmington Biz Insights (Nov. 17, 2020) “Trustee Tips: Estate Planning Basics”

Should a GRAT Be Part of My Estate Plan?

A Grantor-Retained Annuity Trust, or GRAT, is funded by the grantor, the person who creates the trust, in exchange for a stream of annuity payments at a predetermined interest rate—the IRS Section 7520 rate. The interest rate in December 2020 is 0.6%, as reported in the article “Transferring Wealth With This Trust Can Yield Big Tax Advantages” from Financial Advisor.

GRAT assets need only appreciate greater than the Section 7520 rate over the term of the trust, and any excess earnings will pass to beneficiaries, or to an ongoing trust for beneficiaries with no gift or estate tax.

Because the grantor takes back the amount equal to that which was transferred to the trust (often two or three years), which is set by the IRS when the trust is funded, future appreciation over and above the interest rate passes gift-tax free.

There’s little upkeep. Once the trust agreement is in place, a gift tax return needs to be filed once a year. If the trust is set up without a tax ID number, there’s no need to file an income tax return.

The grantor is responsible for the income generated by the asset in the GRAT, but that’s it. If the value of the property is increased following an audit, the gift won’t be increased but the annuity will. If the GRAT property decreases in value, the only out of pocket is the set-up costs.

Assets in a GRAT may be anything from an investment portfolio to shares in a closely held business.

Most GRATs are designed to have the value of the retained annuity be equal to the value of the property that is transferred to the GRAT. If the values are equal, then the amount of the gift for tax purposes is zero, since the value of the transfer less the annuity value is zero.

GRATs are not for everyone. The success of the GRAT depends upon the success of the underlying assets. If they don’t appreciate as expected, then there might not be a significant amount transferred out of the estate after paying for the legal, accounting and appraisal fees. If the grantor dies during the term of the GRAT before payments back to the grantor have ended, the GRAT will be unsuccessful.

Generation skipping transfers cannot utilize GRATS, since the generation skipping tax exemption may not be applied to a GRAT, until the grantor’s death.

Ask your estate planning attorney about whether a GRAT could benefit your family. If a GRAT is not a good fit, they will know about many other tools available.

Reference: Financial Advisor (Nov. 30, 2020) “Transferring Wealth With This Trust Can Yield Big Tax Advantages”

The Biggest Mistake in Trusts: Funding

Failing to put assets into trusts creates headaches for heirs and probate hassles, says the article “Once You Create a Living Trust, Don’t Forget to Fund It” from Kiplinger. It’s the last step of creating an estate plan that often gets forgotten, much to the dismay of heirs and estate planning attorneys.

Are people so relieved when their estate plan is finished, that they forget to cross the last “t” and dot the last “i”? Could be! Retitling accounts is not something we do on a regular basis, and it does take time to get done. However, without this last step, the entire estate plan can be doomed.

Here are the steps that need to be competed:

Check the deeds on all real estate property. If the intention of your estate plan is to place your primary residence, vacation home, timeshare or rental properties into the trust, all deeds need to be updated. The property is being moved from your ownership to the ownership of the trust, and the title must reflect that. If at some point you refinanced a home, the lender may have asked you to remove the name of the trust for purposes of financing the loan. In that case, you need to change the deed back into the name of the trust. If your estate planning attorney wasn’t part of that transaction, they won’t know about this extra step. Check all deeds to be certain.

Review financial statements. Gather bank statements, brokerage statements and any financial accounts. Confirm that any of the accounts you want to be owned by the trust are titled correctly. You may need to contact the institutions to make sure that the titles on the statements are correct. If there is no reference to the trust at all, then the account has not been recorded correctly and changes need to be made.

It’s also a good idea to review any accounts with named beneficiaries. Talk with your estate planning attorney about whether these accounts should be retitled. The rules regarding beneficiaries for annuities changed a few years ago, so naming the trust as a beneficiary might not work for your estate plan or your tax planning goals as it did in the past.

IRAs and other retirement accounts. These accounts need to be treated on an individual basis when deciding if they should have a trust listed as a primary or contingent beneficiary. Listing a trust as a beneficiary can, in some cases, accelerate income tax due on the account. If the trust is listed as the beneficiary, the ability to distribute assets to trust beneficiaries may be impacted.

The main reason to list a trust as a beneficiary to an IRA or retirement plan is to protect the asset from creditors, financially reckless heirs, or a beneficiary with special needs. An estate planning attorney will know the correct way to handle this.

Making sure that your assets are in the trust takes a little time, but it is up to the owner of the trust to take care of this final detail. The estate planning attorney may provide you with written directions, but unless you make specific arrangements with the office, they will expect you to take care of this. The assets don’t move themselves – you’ll need to make it happen.

Reference: Kiplinger (Oct. 26, 2020) “Once You Create a Living Trust, Don’t Forget to Fund It”

Avoid Estate Planning Mistakes

Estate planning should be a business-like process, where people evaluate the assets they have accumulated over time and make clear decisions about how to leave their assets and legacy to those they love. The reality, as described in the article “5 Unfortunate Estate Planning Myths You Probably Believe,” from Kiplinger, is not so straightforward. Emotions take over, as does a feeling that time is running short, which is sometimes the case.

Reactive decisions rarely work as well in the short and long term as decisions made based on strategies that are set in place over time. Here are some of the most common mistakes that people make, when creating an estate plan or revising one in response to life’s inevitable changes.

Estate plans are all about tax planning. Strategies to minimize taxes are part of estate planning, but they should not be the primary focus. Since the federal exemption is $11.58 million for 2020, and fewer than 3% of all taxpayers need to worry about paying a federal estate tax, there are other considerations to prioritize. If there is a family business, for example, what will happen to the business, especially if the children have no interest in keeping it? In this case, succession or exit planning needs to be a bigger part of the estate plan.

The children should get everything. This is a frequent response, but not always right. You may want to leave your descendants most of your estate, but ask yourself, could your lifetime’s work be put to use in another way? You don’t need to rush to an automatic answer. Give consideration to what you’d like your legacy to be. It may not only be enriching your children and grandchildren’s lives.

My children are very different, but it’s only fair that I leave equal amounts to all of them. Treating your children equally in your estate plan is a lot like treating them exactly the same way throughout their lives. One child may be self-motivated and need no academic help, while another needs tutoring just to maintain average grades. Another may be ready to step into your shoes at the family business, with great management and finance skills, but her sister wants nothing to do with the business. The same family includes offspring with different dreams, hopes, skills and abilities. Leaving everyone an equal share doesn’t always work.

Having a trust takes care of everything. Well, not exactly. In fact, if you neglect to fund a trust, your family may have a mess to deal with. A sizable estate may need revocable or irrevocable trusts, but an estate plan is more complicated than trust or no trust. First, when an asset is placed into an irrevocable trust, the grantor loses control of the asset and the trustee is in control. The trustee has a fiduciary duty to the beneficiaries, not the grantor of the trust. The beneficiaries include the current and future beneficiaries, so the trustee may have to answer to more than one generation of beneficiaries. Problems can arise when one family member has been named a trustee and their siblings are beneficiaries. Creating that dynamic among family members can create a legacy of distrust and jealousy.

My estate advisors are all working well with each other and looking out for me. In a perfect world, this would be true, but it doesn’t always happen. You have to take a proactive stance, contacting everyone and making sure they understand that you want them to cooperate and act as a team. With clear direction from you, your professional advisors will be able to achieve your goals.

Reference: Kiplinger (Sep. 17, 2020) “5 Unfortunate Estate Planning Myths You Probably Believe”

How 401(K) Beneficiaries Work with Your Estate Plan

For anyone who thinks that their will or trust can be used to distribute assets in a 401(k) after they pass, think again. The beneficiaries listed in a 401(k), insurance policy or any account with the option to name a beneficiary supersede whatever directions are placed in a will or a trust. If you’re not careful, warns the article “What You Should Know About 401(k) Beneficiaries” from The Motley Fool, your assets could end up in the wrong hands.

Here are some basics about beneficiaries that you need to know.

After you die, your estate goes through probate, which can be a costly and lengthy process. However, assets like 401(k) plans that have named beneficiaries are typically passed to heirs outside of probate. The asset goes directly to the beneficiary.

When you opened a 401(k), you were almost certainly directed to name a beneficiary in the paperwork used to establish the account. That person is usually a spouse, child or a domestic partner.  The beneficiary is sometimes a trust (a legal entity that manages assets for the benefit of beneficiaries).

If no beneficiary was named and you were married when you established the account, most 401(k) plans designate your spouse as the default beneficiary. The surviving spouse is allowed to treat the account as if it is their own when they inherit it—they can delay withdrawing money until they are 72, when the IRS requires withdrawals to begin. The surviving spouse uses their own life expectancy, when calculating future withdrawals.

If someone other than a spouse was listed as the beneficiary, the assets are to be transferred into an inherited 401(k) and the amounts received are based on the percentage listed on the beneficiary designation form. Most plans give the beneficiaries the option to roll over an inherited 401(k) into an inherited IRA. This gives the account owners greater control over what they can do with their inheritance.

Once you have named a beneficiary on these accounts, it’s wise to list contingent beneficiaries, who will inherit the accounts, if the primary beneficiary is deceased. For most families, the children are the contingent beneficiaries and the spouse is the primary beneficiary.

The list of mistakes made when naming beneficiaries is a long one, but here are a few:

  • Setting up a trust to keep IRA or 401(k) assets from going to a minor or to protect services for a special needs child, then failing to list the trust as a beneficiary.
  • Not naming anyone as a beneficiary on an IRA or 401(k) plan.
  • Neglecting to check beneficiary names every few years or after big life changes.

If you set up a trust for your beneficiaries, you must list the trust as the beneficiary. If you don’t specifically list the trust, the account will pass to any person listed as a beneficiary, or the accounts will go through probate.

If you have had more than a few jobs and have more than a few 401(k) accounts, it can be challenging to track the accounts and the beneficiaries. Consolidating the accounts into one 401(k) account makes it easier for you and for your heirs.

If you do list a trust as a beneficiary, talk with your estate planning attorney about how to do this correctly. The trust’s language must take into consideration how taxes will be handled. This could have big costs for your heirs.

Reference: The Motley Fool (Aug. 24, 2020) “What You Should Know About 401(k) Beneficiaries”

Estate Planning Needs for Every Stage

Many people decide they need an estate plan when they reach a certain age, but when an estate plan is needed is less about age than it is about stages in life, explains a recent article “Life stages dictate estate planning needs” from The News-Enterprise. Life’s stages can be broken into four groups, young with limited assets, young parents, getting close to retirement and post-retirement life.

Every adult should have an estate plan. Without one, we can’t determine who will take care of our financial and legal matters, if we are incapacitated or die unexpectedly. We also don’t have a voice in how any property we own will be distributed after death.

The first stage—a young individual with limited assets—includes college students, people in the early years of their careers and young couples, married or not. They may not own real estate or substantial assets, but they need a fiduciary and beneficiary. Distribution of assets is less of a priority than provisions for life emergencies.

Once a person becomes a parent, he or she needs to protect minor children or special needs dependents. Lifetime planning is still a concern, but protecting dependents is the priority. Estate planning is used in this stage to name guardians, set up trusts for children and name a trustee to oversee the child’s inheritance, regardless of size.

Many people use revocable living trusts as a means of protecting assets for minor dependents. The revocable trust directs property to pass to the minor beneficiary in whatever way the parents deem appropriate. This is typically done so the child can receive ongoing care, until the age when parents decide the child should receive his or her inheritance. The revocable trust also maintains privacy for the family, since the trust and its contents are not part of the probated estate.

The third stage of life includes people whose children are adults, who have no children or who are near retirement age and addresses different concerns, such as passing along assets to beneficiaries as smoothly as possible while minimizing taxes. The best planning strategy for this stage is often dictated by the primary type of asset.

For people with special situations, such as a beneficiary with substance abuse problems, or a person who owns multiple properties in multiple states or someone who is concerned about the public nature of probate, trusts are a critical part of protecting assets and privacy.

For people who own a primary residence and retirement assets, an estate plan that includes a will, a power of attorney and medical power of attorney may suffice. An estate planning attorney guides each family to make recommendations that will best suit their needs.

Reference: The News-Enterprise (Aug. 25, 2020) “Life stages dictate estate planning needs”