Just What Does an Executor Do?

Spending the least amount of time possible contemplating your death is what most people try to do. However, one part of the estate planning process needs time and reflection: deciding who should serve in important roles, including executor. Whatever the size of your estate, the people you name have jobs that will impact your life and your family’s future, says a recent article “How to get it right when naming an executor and filling other key roles in your estate plan” from CNBC. A quick decision now might have a bad outcome later.

First, let’s look at the executor. They are responsible for everything from filing your last will with the court to paying off debts, closing accounts and making sure that assets in your probate estate are distributed according to the directions in your last will. They need to be trustworthy, organized and able to manage financial decisions. They also need to be available to handle your estate, in addition to their other responsibilities.

Note that some of your assets, including retirement tax deferred accounts, life insurance proceeds and any other assets with a named beneficiary, will pass outside of your probate estate. These assets need to be identified and the custodian needs to be notified so the heir can receive the asset.

Settling an estate takes an average of 16 months, with smaller estates being settled more quickly. Larger estates, worth more than $5 million and up, can take as long as four years to settle.

Some people prefer to name co-executors as a means of spreading out the responsibilities. That ix fine, unless the two people have a history of not getting along, as is the case with many siblings. Sharing the duties sounds like a good idea, but it can lead to delays if the two don’t agree or can’t coordinate their estate tasks. Many estate planning attorneys recommend naming one person as the executor and a second as the contingency executor, in case the first cannot serve or decides he or she does not want to take on the responsibilities. The same applies to any trustees, if your estate plan includes a trust.

Make sure the people you are considering as executor, contingent executor, trustee or success or trustee are willing to take on these roles. If there is no one in your life who can take on these tasks, an option is to name an estate planning attorney, accountant, or trust company.

Another important role in your estate plan is the Power of Attorney. You’ll want one for financial decisions and another for healthcare decisions. They can be the same person or different people. Understand that the financial Power of Attorney will have complete control over your assets, including accounts, real estate, and personal property, if you are too incapacitated to make decisions or to communicate your wishes.

The healthcare Power of Attorney will be making medical decisions on your behalf. You will want to name a person you trust to carry out your wishes—even if they are not the same ones they would want, or if your family opposes your wishes. It’s not an easy task, so be sure to create a Living Will to express your wishes, if you are placed on life support or suffer from a terminal condition. This will help your healthcare Power of Attorney follow your wishes.

Finally, revisit your estate plan every three to five years. Life changes, laws change and your estate plan should continue to reflect your wishes. The lives of the people in key roles change, so the same person who was ready to serve as your executor today may not be five years from now. Confirm their willingness to serve every time you review your last will, just to be sure.

Reference: CNBC (March 5, 2021) “How to get it right when naming an executor and filling other key roles in your 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”

Preparing for an Estate Planning Meeting

Preparing to meet with an estate planning attorney for the first time is an opportunity to get organized and think about your wishes for the future. If you meet with your accountant every year to prepare tax returns, this may be a familiar process. It’s a chance to step away from day-to-day activities and focus on your life, as described in a recent article “Preparing for an Estate Planning Consultation: 10 Items to Consider Before Meeting Your Attorney” from The National Law Journal.

Minor Children Need Guardians and Conservators. In most states, families with minor children need a last will to designate one or more guardians to raise the children in the event both parents die. A successor should be named in case the first named guardian is unable or unwilling to serve. Discuss your decision with the people you are naming; don’t leave this as a surprise. Choosing these people is a hard decision. However, don’t let it be a reason to delay creating your estate plan. It’s better that you name a guardian, rather than let the court make that decision.

Agents, Trustees, and Power of Attorney. With a Durable Power of Attorney, your assets can be managed by a named agent, if you become incapacitated. The person who manages your estate after death is the executor. They are named in your last will. If you have trusts, the documents that create the trust also name the trustees. It is possible for one person to act as a fiduciary for all of these roles, although the tasks can be divided.

Living Will and Patient Advocate Designation. If you are incapacitated, a Patient Advocate can make medical decisions on your behalf, including following the instructions of your Living Will.

Personal Property. Any items of personal property, whether their value is sentimental or monetary, should be specified in the will. A list of items and who you want to receive what, may spare your heirs from squabbles over your personal effects, large or small. If you own a business or real estate, they also need to be addressed in your will.

Charitable Donations. If you are charitably minded, your will is one way to make bequests and build a lasting legacy. Charitable donations can also be made to gain tax benefits for heirs.

Beneficiary Distributions. The beneficiary designation is the unsung hero of the estate plan. By managing beneficiary designations while you are living—updating beneficiary designations, assigning beneficiary designations to all accounts possible—you take assets out of your probate estate and smooth the asset distribution process. However, there are some wrinkles to consider.

Minor children may not receive assets until they become of age—18 in most cases. Do you want your children (or nieces or grandchildren) to receive an inheritance, while they are still in their teens? Proper estate planning includes trusts created, so a responsible adult can manage the trust on their behalf. Your trust can also be structured so the money may only be used for college expenses, or when the children reach certain ages.

Surviving Pets. You can plan for your pet’s care, if you pass away or become incapacitated before they die. Most states permit the creation of a pet trust, an enforceable means of providing assets to be used for the care and well-being of your pet.

Your estate planning attorney will be able to provide you with a list of the documents she will need to get started on your estate plan, but these are the major issues that you will be discussing at your first meeting.

Reference: The National Law Journal (Feb. 23, 2021) “Preparing for an Estate Planning Consultation: 10 Items to Consider Before Meeting Your Attorney”

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”