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”

Consider Funding a Trust with Life Insurance

How would funding a trust with life insurance work, and could it be a good option for you? A recent article in Forbes “How to Fund a Trust With Life Insurance” explains how this works. Let’s start with the basics: a trust is a legal entity where one party, the trustee, holds legal title to the assets owned by the trust, which is managed for the good of the beneficiary. There can be more than one person who benefits from the trust (beneficiaries) and there can be a co-trustee, but we’ll keep this simple.

Trusts are often funded with a life insurance policy. The proceeds of the policy provide the beneficiary with assets that are used after the death of the insured. This is especially important when the beneficiaries are minor children and the life insurance has been purchased by their parents. Placing the insurance policy within a trust offers more control over how funds are used.

What kind of a trust should you consider? All trusts are either revocable or irrevocable. There are pros and cons to both. Irrevocable trusts are better for tax purposes, as they are not included as part of your estate. However, with an $11.58 million federal exemption in 2020, most people don’t have to worry about federal estate taxes. With a revocable trust, you can make changes to the trust throughout your life, while with an irrevocable trust, only a trustee can make changes.

Note that, in addition to federal taxes, most states have estate taxes of their own, and a few have inheritance taxes. When working with an estate planning attorney, they’ll help you navigate the tax aspect as well as the distribution of assets.

Revocable trusts are the most commonly used trust in estate planning. Here’s why:

  • Revocable trusts avoid probate, which can be a costly and lengthy process. Assets left in the revocable trust pass directly to the heirs, far quicker than those left through the will.
  • Because they are revocable, the creator of the will can make changes to the trust as circumstances change. This flexibility and control make the revocable trust more attractive in estate planning.

If you are using life insurance to fund the trust, be sure the policy permits you to name beneficiaries, and be certain to name beneficiaries. Missing this step is a common and critical mistake. The beneficiary designations must be crystal clear. If there are two cousins who have the same name, there will need to be a clear distinction made as to who is the beneficiary. If someone changes their name, that change must be reflected by the beneficiary designation.

There are many other types of trusts, including testamentary trusts and special needs trusts. Your estate planning attorney will know which trust is best for your situation. Make sure to fund the trust and update beneficiary designations, so the trust will achieve your goals.

Reference: Forbes (Sep. 17, 2020) “How to Fund a Trust With Life Insurance”

Different Trusts for Different Estate Planning Purposes

There are a few things all trusts have in common, explains the article “All trusts are not alike,” from the Times Herald-Record. They all have a “grantor,” the person who creates the trust, a “trustee,” the person who is in charge of the trust, and “beneficiaries,” the people who receive trust income or assets. After that, they are all different. Here’s an overview of the different types of trusts and how they are used in estate planning.

“Revocable Living Trust” is a trust created while the grantor is still alive, when assets are transferred into the trust. The trustee transfers assets to beneficiaries, when the grantor dies. The trustee does not have to be appointed by the court, so there’s no need for the assets in the trust to go through probate. Living trusts are used to save time and money, when settling estates and to avoid will contests.

A “Medicaid Asset Protection Trust” (MAPT) is an irrevocable trust created during the lifetime of the grantor. It is used to shield assets from the grantor’s nursing home costs but is only effective five years after assets have been placed in the trust. The assets are also shielded from home care costs after assets are in the trust for two and a half years. Assets in the MAPT trust do not go through probate.

The Supplemental or Special Needs Trust (SNT) is used to hold assets for a disabled person who receives means-tested government benefits, like Supplemental Security Income and Medicaid. The trustee is permitted to use the trust assets to benefit the individual but may not give trust assets directly to the individual. The SNT lets the beneficiary have access to assets, without jeopardizing their government benefits.

An “Inheritance Trust” is created by the grantor for a beneficiary and leaves the inheritance in trust for the beneficiary on the death of the trust’s creator. Assets do not go directly to the beneficiary. If the beneficiary dies, the remaining assets in the trust go to the beneficiary’s children, and not to the spouse. This is a means of keeping assets in the bloodline and protected from the beneficiary’s divorces, creditors and lawsuits.

An “Irrevocable Life Insurance Trust” (ILIT) owns life insurance to pay for the grantor’s estate taxes and keeps the value of the life insurance policy out of the grantor’s estate, minimizing estate taxes. As of this writing, the federal estate tax exemption is $11.58 million per person.

A “Pet Trust” holds assets to be used to care for the grantor’s surviving pets. There is a trustee who is charge of the assets, and usually a caretaker is tasked to care for the pets. There are instances where the same person serves as the trustee and the caretaker. When the pets die, remaining trust assets go to named contingent beneficiaries.

A “Testamentary Trust” is created by a will, and assets held in a Testamentary Trust do not avoid probate and do not help to minimize estate taxes.

An estate planning attorney in your area will know which of these trusts will best benefit your situation.

Reference: Times Herald-Record (August 1,2020) “All trusts are not alike”

What You Need to Know about Trusts

Some people still think that trusts and estate planning are just for wealthy people. However, that’s simply not true. Many people are good candidates for trusts, used to protect their assets and their families. Trusts can also be used to avoid probate, says the article “Common misconceptions about trusts” from the Rome Sentinel.

Who controls my property? The grantor, or the person setting up the trust, has the option of being a trustee, if they are setting up a revocable trust or an irrevocable trust. There are tax differences, so you’ll want to do this with an estate planning attorney. The grantor names co-trustees, if you wish. They are usually a spouse, adult child, or trusted adult. Successor trustees, that is, people who will take over the trust if the primary trustee becomes incapacitated or dies.

Only rich people need trusts. Anyone who owns a home, has life insurance and other assets worth more than $150,000 can benefit from the protection that a trust provides. The type of trust depends the grantor’s age, health status, and the amount, variety, and location of assets. A healthy person who owns a lot of life insurance or other assets would probably want either a Revocable Living Trust or a Will that includes a Testamentary Trust. However, a person who is over 55 and is planning for nursing home care, is more likely to have an Irrevocable Medicaid Trust to protect assets, avoid probate and minimize tax liability.

Can I access assets in a trust? A properly prepared trust takes your lifestyle and spending into account. Certain types of trusts are more flexible than others, and an estate planning attorney will be able to make an appropriate recommendation.

For instance, if you have an Irrevocable Medicaid Trust, you will be restricted from taking the principal asset back directly. The assets in this type of trust can be used to fund costs and expenses of real property, including mortgage payments, taxes, furnace and roof repairs. An IMT needs to be set up with enough assets outside of it, so you can have an active retirement and enjoy your life. Assets outside of the trust are your spendable money.

Can my children or any others take assets from the trust? No, and that’s also the point of trusts. Unless you name someone as a Trustee with the power to take assets out of the trust, they cannot access the funds. The grantor retains control over what assets may be gifted during their lifetime. They can also impose restrictions on how assets are restricted after death. Some trusts are created to set specific ages or milestones, when beneficiaries receive all or some of the assets in the trust.

Trusts are not one size-fits all. Trusts need to be created to serve each family’s unique situation. An experienced estate planning attorney will work with the family to determine their overall goals, and then determine how trusts can be used as part of their estate plan to achieve goals.

Reference: Rome Sentinel (May 31, 2020) “Common misconceptions about trusts”

How Does a Spendthrift Trust Protect Heirs from Themselves?

This is not an unusual question for most estate planning lawyers—and in most cases, the children aren’t bad. They just lack self-control or have a history of making poor decisions. Fortunately, there are solutions, as described in a recent article titled “Estate Planning: What to do to protect trusts from a spendthrift” from NWI.com.

What needs to happen? Plan to provide for the child’s well-being but keep the actual assets out of their control. The best answer is the use of a trust. By leaving money to an heir in a trust, a responsible party can be in charge of the money. That person is known as the “trustee.”

People sometimes get nervous when they hear the word trust, because they think that a trust is only for wealthy people or that creating a trust must be very expensive. Not necessarily. In many states, a trust can be created to benefit an heir in the last will and testament. The will may be a little longer, but a trust can be created without the expense of an additional document. Your estate planning attorney will know how to create a trust, in accordance with the laws of your state.

In this scenario, the trust is created in the will, known as a testamentary trust. Instead of leaving money to Joe Smith directly, the money (or other asset) is left to the John Smith Testamentary Trust for the benefit of Joe Smith.

The terms of the trust are defined in the appropriate article in the will and can be created to suit your wishes. For instance, you can decide to distribute the money over a three or a thirty-year period. Funds could be distributed monthly, to create an income stream. They could also be distributed only when certain benchmarks are reached, such after a full year of employment has occurred. This is known as an incentive trust.

The opposite can be true: distributions can be withheld, if the heir is engaged in behavior you want to discourage, like gambling or using drugs.

If the funding for the trust will come from proceeds from a life insurance policy, it may be necessary to have your estate planning attorney contact the insurance company to be sure that the insurance company will permit a testamentary trust to be the beneficiary of the life insurance and avoid probate altogether.

Not all insurance companies will permit this. There may be some other changes that need to occur for this to work and be in compliance with your state’s laws. However, your estate planning attorney will be able to resolve the issue for you.

Reference: NWI.com (May 17, 2020) “Estate Planning: What to do to protect trusts from a spendthrift”