What Is the Purpose of a Guardian?

When you’re nearing retirement or enjoying your golden years, you need a will to distribute your worldly possessions and wealth accumulated during your lifetime. However, you also need a will when you’re in the parenting phase of life, according to a recent article “Why parents need a will to establish legal guardianship” from Wausau Pilot & Review. The future of your children depends upon your having a will and other legal documents in place.

As parents, you have the opportunity to name the person who will be your children’s guardian, in the event both parents die. Your will can also include information regarding who they should live with, who will be in charge of any funds they will inherit, and who will raise them. It’s not a pleasant thought, but without a will to name a guardian, children are at risk.

Naming the guardian can avoid your children being placed in temporary foster care until a judge decides who should raise them. Being with a trusted family member or friend during a catastrophic time in their lives would be far better than being cared for by people they don’t know, no matter how well-meaning they may be.

If one of the parents survives the other, the custody and care of the children generally remains with the surviving parent. However, if the children are under age 18 and both parents die, they need a legal guardian.

In most cases, the court will honor a deceased parent’s request for the person named in the will, unless it is determined this person may not be the best person to serve as guardian.

Parents can and do die at the same time, making proper estate planning and identifying a guardian very important to have in place.

The guardianship becomes legal with a court appointment after a court hearing, although laws and procedures do vary from state to state.

Be careful when choosing a guardian. Make sure that the person is ready and able to serve. There is no obligation for someone to accept the appointment, so evaluate your choice carefully. Like your estate plan, this is not a one-and-done appointment. It should be reviewed every few years, as your children grow and their needs change.

Consider these questions when figuring out who would be the best guardian:

  • Does the person share your belief system in education or religion?
  • Can the person raise your child until they reach legal age? Parents are often the first person we think of, but is a 68-year old grandparent with health issues capable of serving in this role, especially if the child is a toddler?
  • Does the person live nearby, or will your children need to change schools, lose friends and leave the family home?

Guardianship needs to be integrated into the rest of your estate plan. For instance, if you have a life insurance policy, is the designated beneficiary your child? A minor cannot inherit assets, but a trust can. Your estate plan may include a trust to own funds and a trustee to manage them. Will that person be the same as the guardian? There are as many good reasons to divide the roles as there are to keep them separate.

Your estate planning attorney can help you and your spouse work through the issues based on your unique situation. The peace of mind you’ll feel in knowing your children will be cared for if the worst happens is well worth the time and effort.

Reference: Wausau Pilot & Review (Oct. 23, 2022) “Why parents need a will to establish legal guardianship”

How Does Probate Court Work?

Probate court is where wills are examined to be sure they have been prepared according to the laws of the state and according to the wishes of the person who has died. It is also the jurisdiction where the executor is approved, their activities are approved and all debts are paid and assets are distributed properly. According to a recent article from Investopedia “What is Probate Court?,” this is also where the court determines how to distribute the decedent’s assets if there is no will.

Probate courts handle matters like estates, guardianships and wills. Estate planning lawyers often manage these matters and navigate the courts to avoid unnecessary complications. The court process begins when the estate planning attorney files a petition for probate, the will and a copy of the death certificate.

The court process is completed when the executor completes all required tasks, provides a full accounting statement to the court and the court approves the statement.

Probate is the term used to describe the legal process of handling the estate of a recently deceased person. The role of the court is to make sure that all debts are paid and assets distributed to the correct beneficiaries as detailed in their last will and testament.

Probate has many different aspects. In addition to dealing with the decedent’s assets and debts, it includes the court managing the process and the actual distribution of assets.

Probate and probate court rules and terms vary from state to state. Some states don’t even use the term probate, but instead refer to a surrogate’s court, orphan’s court, or chancery court. Your estate planning attorney will know the laws regarding probate in the state where the will is to be probated before death if you’re having an estate plan created, or after death if you are the beneficiary or the executor.

Probate is usually necessary when property is only titled in the name of the decedent. It could include real property or cars. There are some assets which do not go through probate and pass directly to beneficiaries. A partial list includes:

  • Life insurance policies with designated beneficiaries
  • Pension plan distribution
  • IRA or 401(k) retirement accounts with designated beneficiaries
  • Assets owned by a trust
  • Securities owned as Transfer on Death (TOD)
  • Wages, salary, or commissions owed to the decedent (up to the set limits)
  • Vehicles intended for the immediate family (this depends on state law)
  • Household goods and other items intended for the immediate family (also depending upon state law).

Many people seek to avoid or at least minimize the probate process. This needs to be done in advance by an experienced estate planning attorney. They can create trusts, assign assets to the trust and designate beneficiaries for those assets. Another means of minimizing probate is to gift assets during your lifetime.

Reference: Investopedia (Sep. 21, 2022) “What is Probate Court?”

What is the Purpose of an ILIT?

Life insurance falls into two categories: life insurance and death insurance. Life insurance is used to take advantage of the tax-free returns that qualifying insurance products enjoy under federal income tax laws. There is a death component. However, the main purpose is to serve as a tax-deferred investment vehicle. Death insurance is used to provide financial security for loved ones after the owner passes, with little or no regard for tax and investment benefits.

Using both types of life insurance in estate planning can be a complicated process, but the resulting financial security is well worth the effort, as reported in a recent article “Keeping an Eye on ILITs” from Financial Advisor.

The Irrevocable Life Insurance Trust is a somewhat complex trust structured under state trust law and tax strategies under federal income tax laws. ILITs have been tested in court cases, audits and private letter rulings, so an estate planning attorney can create an ILIT knowing it will serve its intended purpose.

Life insurance in an ILIT is owned outside of the estate and enhances the after-estate tax wealth for the surviving spouse and heirs. Because the trust is irrevocable, the transfer of ownership is permanent.

The annual insurance premium is typically paid by the insured to the ILIT, subject to “Crummey” withdrawal powers, named after a famous case, which gives named people the power to withdraw all or a portion of the contributed premium amounts within specified periods. The time frame depends on the trust—usually it’s 30 or 60 days, but sometimes it’s annually.

There are many nuances and details.  The ILIT lets an insured buy life insurance “outside of their estate” for estate tax purposes, lets the person treat insurance premiums as non-taxable gifts under the annual exclusion provisions and provides safety and security to the beneficiaries.

The ILIT is often used as part of a buy-sell agreement for privately held family businesses to make it possible for the business itself or business partners to buy out the equity of a deceased partner. The payment obligations may be funded by the proceeds from life insurance. In some cases, each partner buys a traditional insurance policy in an ILIT. The estate planning attorney working on a succession plan can provide advice on the most effective way to use the ILIT.

Another use for the ILIT is for wealthy families with illiquid assets, like an art collection or a large real estate portfolio. An ILIT holding a life insurance policy with a death benefit lets the beneficiaries use the proceeds to pay estate tax liabilities, without dipping into their own or the estate’s assets. The investment returns of the ILIT increase the policy owner’s wealth substantially, without increasing their taxable estate.

Reference: Financial Advisor (December 1, 2021) “Keeping an Eye on ILITs”

Stretch Out IRA Distributions, Even Without ‘Stretch’ IRA

It’s sad but true: the SECURE Act took away the long lifetime stretch that so many IRA heirs enjoyed. It was a great efficiency tool for family wealth transfer, but there are ways to fill the gap. A recent article “3 Strategies That Dry Your Stretch IRA Tears” from InsuranceNewsNet.com explains what to do now that IRAs need to be cashed out within ten years of the original owner’s death.

There are a number of tax-efficient planning opportunities, falling into three basic categories: wealth replacement with life insurance, Roth planning and charitable opportunities.

The life insurance policy is straightforward: parents buy life insurance to close the gap between what the IRA could have been, if it had been stretched out over the heir’s lifetime. For parents who are in a lower tax bracket than their children, it might make sense for parents to take distributions out of their IRA and buy insurance with after-tax dollars. This method may also present an opportunity for parents to purchase life insurance with long-term care protection, if they have not already done so.

The “Slow Roth” strategy is for families who might not think they can benefit from a Roth, but they can—just not all at once. By converting an IRA to a Roth IRA over time, only in amounts that keep parents in the same tax bracket, and paying taxes on the conversion slowly and over time, the Roth IRA can be built up so when it is inherited, even though it has to be taken out within ten years after your death, it is income tax free.

The third strategy is for families already planning on making charitable gifts. A Qualified Charitable Distribution, or QDC, lets the owner make distributions directly from their IRA to qualified charities, up to $100,000 annually. Remember that the distribution must go directly to the charity and it cannot be used for a donation to a donor-advised fund or private foundation. Your estate planning attorney will be able to help determine if your charity of choice qualifies.

Finally, you can name a Charitable Remainder Trust as an IRA Beneficiary. This is not a do-it-yourself project and mistakes can be costly. By naming a CRT as a beneficiary of your IRA, you avoid taxes on the entire lump sum when the trust liquidates the IRA. At the same time, the income beneficiary of the trust can receive income from the CRT over their lifetime or a term that you determine. It can’t be more than twenty years from the date of death, but twenty years is a long time. The payments from the trust will be treated as taxable income, so be sure that this will work for the recipient. If you accidentally push them into a higher tax bracket, they may not be quite as grateful as you wanted.

Reference: InsuranceNewsNet.com (Oct. 28, 2020) “3 Strategies That Dry Your Stretch IRA Tears”