Your Estate Plan is a “Dynamic Document”

One of the most common mistakes people make about their estate planning is neglecting to coordinate all of the moving parts, reports the Dayton Business Journal’s article “Baird expert gives estate planning advice.” The second most common mistake is not thinking of your estate plan as a dynamic document. Many people believe that once their estate plan is done, it’s done forever. That creates a lot of problems for the families and their heirs.

In the last few years, we have seen three major federal tax law changes, including an increase in the federal estate tax exemption amount from $3,500,000 to an enormous $11,580,000. The estate tax exemption is also now portable. Most recently, the SECURE Act has changed how IRAs are distributed to heirs. All of these changes require a fresh look at estate plans. The same holds true for changes within families: births, deaths, marriages and divorces all call for a review of estate plans.

For younger adults in their 20s, an estate plan includes a last will and testament, financial power of attorney, healthcare power of attorney and a HIPAA authorization form. People in their 40s need a deeper dive into an estate plan, with discussions on planning for minor children, preparing to leave assets for children in trusts, ensuring that the family has the correct amount of life insurance in place, and planning for unexpected incapacitation. This is also the time when people have to start planning for their parents, with discussions about challenging topics, like their wishes for end-of-life care and long-term care insurance.

In their 60s, the estate plan needs to reflect the goals of the couple, and expectations of what you both want to happen on your passing. Do you want to create a legacy of giving, and what tools will be best to accomplish this: a charitable remainder trust, or other estate planning tools? Ensuring that your assets are properly titled, that beneficiaries are properly named on assets like life insurance, investment accounts, etc., becomes more important as we age.

This is also the time to plan for how your assets will be passed to your children. Are your children prepared to manage an inheritance, or would they be better off having their inheritance be given to them over the course of several years via a trust? If that is the case, who should be the trustee?

Some additional pointers:

  • Revise your estate plan every three or five years with your estate planning attorney.
  • Evaluate solutions to provide tax advantages to your estate.
  • Review asset titling and beneficiary designations.
  • Make sure your charitable giving is done in a tax efficient way.
  • Plan for the potential tax challenges that may impact your estate

Regardless of your age and state, your estate planning attorney will be able to guide you through the process of creating and then reviewing your estate plan.

Reference: Dayton Business Journal (February 4, 2020) “Baird expert gives estate planning advice”

 

The Latest on Kirk Douglas’ Estate

Wealth Advisor’s recent article entitled “Kirk Douglas Lived Well, Died Rich And May Trigger $200M Los Angeles Range War” explains that Douglas worked steadily in a four-decade period but slowed down after the early 1980s. Since that’s almost 40 years ago, one might think that what would be considered a modest legacy by modern standards would be whittled down considerably. However, Kirk Douglas died extremely rich, despite a long life and decades of semi-retirement.

Douglas was one of the first to ask to participate in the profit of his movies and was one of the first stars to form his own production company. For example, Spartacus was big enough to gross $30 million on its $12 million budget. When he started his company, he refused to pay himself for that film. Instead he took 60% of the profit and wound up about $3 million ahead. His company owned the films and sold off distribution rights.

His widow Anne is now the only shareholder of record. She’s rolled the money into a family trust that over the decades created numerous tiers of holding companies and joint ventures. One of those joint ventures ended up owning half the land under Marina Del Rey’s high-rise Shores apartment complex, a property that cost a reported $165 million to build. The land is nearly priceless.

Now that it’s only Anne, the successor trustees will one day need to decide what to do with the land. She called the shots on the accounting side. Kirk remarked that he didn’t even know where the money was. However, when he found out, he got eager to give it all away. Tens of millions have already been committed to hospitals, schools and theaters.

Estate tax won’t be an issue because Kirk and Anne conducted thorough estate planning so that any wealth that goes to the family will transfer via a trust. That way, they’ll get a portion of the income without triggering estate tax concerns.

Thanks to all of Kirk’s films—many of which he owned like Spartacus—he compiled tens of millions of dollars in cash and stock during his lifetime. In almost 70 years of marital bliss, his planning added up to a lot of marital property. It was good life with good things yet to come.

It’s a testament to the power of long-term thinking. Kirk Douglas’ fortune has remained intact for generations and will undoubtedly keep helping the world for many years to come.

Reference:  Wealth Advisor (Feb. 4, 2020) “Kirk Douglas Lived Well, Died Rich And May Trigger $200M Los Angeles Range War”

Fixing an Estate Plan Mistake

When an issue arises, you need to seek the assistance of a qualified and experienced estate planning attorney, who knows to fix the problems or find the strategy moving forward.

For example, an irrevocable trust can’t be revoked. However, in some circumstances it can be modified. The trust may have been drafted to allow its trustees and beneficiaries the authority to make certain changes in specific circumstances, like a change in the tax law.

Those kinds of changes usually require the signatures from all trustees and beneficiaries, explains The Wilmington Business Journal’s recent article entitled “Repairing Estate Planning Mistakes: There Are Ways To Clean Up A Mess.”

Another change to an irrevocable trust may be contemplated, if the trust’s purpose may have become outdated or its administration is too expensive. An estate planning attorney can petition a judge to modify the trust in these circumstances when the trust’s purposes can’t be achieved without the requested change. Remember that trusts are complex, and you really need the advice of an experienced trust attorney.

Another option is to create the trust to allow for a “trust protector.” This is a third party who’s appointed by the trustees, the beneficiaries, or a judge. The trust protector can decide if the proposed change to the trust is warranted. However, this is only available if the original trust was written to specify the trust protector.

A term can also be added to the trust to provide “power of appointment” to trustees or beneficiaries. This makes it easier to change the trust for the benefit of current or future beneficiaries.

There’s also decanting, in which the assets of an existing trust are “poured” into a new trust with different terms. This can include extending the trust’s life, changing trustees, fixing errors or ambiguities in the original language, and changing the legal jurisdiction. State trust laws vary, and some allow much more flexibility in how trusts are structured and administered.

The most drastic option is to end the trust. The assets would be distributed to the beneficiaries, and the trust would be dissolved. Approval must be obtained from all trustees and all beneficiaries. A frequent reason for “premature termination” is that a trust’s assets have diminished in value to the extent that administering it isn’t feasible or economical.

Again, be sure your estate plan is in solid shape from the start. Anticipating problems with the help of your lawyer, instead of trying to solve issues later is the best plan.

Reference: Wilmington Business Journal (Jan. 3, 2020) “Repairing Estate Planning Mistakes: There Are Ways To Clean Up A Mess”

Not a Billionaire? Trusts Can Still Be Beneficial

You don’t have to be wealthy to benefit from the use of a trust. A trust is a legal arrangement by which one person transfers his or her assets to a trustee who will hold those assets in trust for third parties, explains the Stamford Advocate’s article “Trusts are not for the wealthy only.” As the person who created the trust, referred to as “the settlor,” you determine who the trustee is, as well as naming the beneficiaries.

There are many different types of trusts which serve different purposes. However, the two basic categories of trusts are revocable (also known as “living” trusts) and irrevocable trusts. Their names reflect two chief characteristics: the revocable trust can be changed and controlled by the settlor. The irrevocable trust cannot be changed, and the settlor gives up the control of the trust. However, it should be noted that the irrevocable trust has certain tax and other benefits not offered by the revocable trust.

A will is definitely necessary to pass assets on according to your wishes, but a trust can serve other purposes. Here’s a look at some common reasons why people use trusts:

  • Protect assets from creditors
  • Allow heirs to avoid probate of assets in the trusts
  • Avoid, minimize or delay estate taxes, transfer taxes or income taxes
  • Control how assets are disbursed or invested
  • Facilitate business succession planning and manage business assets
  • Shelter assets for descendants, if a spouse remarries
  • Establish a family tradition of philanthropy

Trusts allow assets to be passed on quickly and privately, while eliminating some expenses for heirs. They also permit closer management of who will benefit from your assets.

The cost of setting up a trust depends on the complexity of the trust and the estate, as well as other factors, like the number of beneficiaries and how many generations are being planned for. Bear in mind that the cost of setting up a trust should be measured against the future cost of not just taxes, but any litigation that might occur if the estate is probated and becomes public knowledge, or if family members are dissatisfied with the distribution of assets.

Speak with an estate planning attorney to first determine what kind of trusts are needed for your estate plan to achieve your wishes. Discuss the role of a Special Needs trust, if any family members have mental or physical needs that make them eligible for public assistance. An experienced estate planning attorney will know which planning strategies are best in your unique circumstances.

Reference: Stamford Advocate (Jan. 19, 2020) “Trusts are not for the wealthy only”

What’s the Best Thing to Do with an Inherited Investment?

Wealth Advisor’s recent article entitled “How to Handle Inherited Investments” provides us with some of the top inheritance considerations:

Consider Cash. Besides cash, the most common inheritances are securities, real estate and art. These assets usually go up in value, but another big benefit is their favorable tax treatment. The heirs won’t pay capital gains on unsold investments that went up in value during the lifetime of the deceased (estate taxes would apply). Those taxes would only apply to the gains that happened after they took possession.  There’s a good reason to hang onto these investments. These types of property carry some risks, so you may consider putting some of your inherited investments into cash, cash equivalents, or life insurance with a guaranteed payout to avoid exposure to undue risk.

Beware of Concentration Risk. It’s not unusual for an inheritance to be heavily concentrated within a specific asset. While the deceased’s instincts may have been accurate at the time of their initial investment, there’s no guarantee that their strategy will continue to pay dividends long term.  Diversifying into other areas—even with high-volatility vehicles that are unrelated to the original inherited investment—can lessen that concentration risk. An even safer strategy would be to build a portfolio of diverse holdings that includes multiple asset classes across different sectors.

Learn about Trusts. Sometimes when people inherit assets through a trust, they don’t think it’s critical to require anything but a superficial understanding of how these work. This is because the trustee assumes nearly all the fiduciary duties. However, this could change when a beneficiary attains a certain age, which often triggers a dissolution of the trust or stipulates a transfer of trustee responsibilities to them. You should understand what will happen at that point. You may want to create your own trust to distribute part or all of your unmanaged inherited assets to heirs in a framework that suits you best, and without having to go through the probate process. In any event, you should learn how trusts work and the difference between revocable and irrevocable trusts. Ask your estate planning attorney about your specific situation and whether there is a trust that may be best for your circumstances.

Reference: Wealth Advisor (Jan. 7, 2020) “How to Handle Inherited Investments”

How Do I Incorporate My Business into My Estate Planning?

When people think about estate planning, many just think about their personal property and their children’s future. If you have a successful business, you may want to think about having it continue after you retire or pass away.

Forbes’ recent article entitled “Why Business Owners Should Think About Estate Planning Sooner Than Later” says that many business owners believe that estate planning and getting their affairs in order happens when they’re older. While that’s true for the most part, it’s only because that’s the stage of life when many people begin pondering their mortality and worrying about what will happen next or what will happen when they’re gone. The day-to-day concerns and running of a business is also more than enough to worry about, let alone adding one’s mortality to the worry list at the earlier stages in your life.

Business continuity is the biggest concern for entrepreneurs. This can be a touchy subject, both personally and professionally, so it’s better to have this addressed while you’re in charge rather than leaving the company’s future in the hands of others who are emotionally invested in you or in your work. One option is to create a living trust and will to put in place parameters that a trustee can carry out. With these names and decisions in place, you’ll avoid a lot of stress and conflict for those you leave behind.

Let them be upset with you, rather than with each other. This will give them a higher probability of working things out amicably at your death. The smart move is to create a business succession plan that names successor trustees to be in charge of operating the business, if you become incapacitated or die.

A power of attorney document will nominate a fiduciary agent to act on your behalf, if you become incapacitated, but you should also ask your estate planning attorney about creating a trust to provide for the seamless transition of your business at your death to your successor trustees. The transfer of the company to your trust will avoid the hassle of probate and will ensure that your business assets are passed on to your chosen beneficiaries. Timely planning will also preserve your business assets, as advanced tax planning strategies might be implemented to establish specific trusts to minimize the estate tax.

Estate planning may not be on tomorrow’s to do list for young entrepreneurs and business owners. Nonetheless, it’s vital to plan for all that life may bring.

Reference: Forbes (Dec. 30, 2019) “Why Business Owners Should Think About Estate Planning Sooner Than Later”

How Should I Prepare for My Child’s Future?

It’s been a common path for millennials and their predecessors to go to a four-year college and get a job. If they were short on funds, they’d take out some loans. However, there have been some signals that this norm is changing.

With worries about a student debt crisis and with the experience of recent graduates, new college-age students are increasingly turning to alternatives to the established route to create their own debt-free future.

Kiplinger’s recent article entitled “How to Stay Flexible in Saving for Your Child’s Future” says that student debt is leading to obstacles, when it comes to achieving major milestones of financial freedom. Of the young millennials surveyed, nearly half (47%) said they delayed purchasing a home because of  their debt, 40% delayed saving for retirement and 31% waited to move out of their parents’ home. A total of 28% of parents said they delayed saving for their own retirement, to pay for their children’s education.

Saving for a child’s future now looks different than when these 18-year-olds were born.  It certainly will be the case, when they leave the nest. As a result, it’s critical for parents to try to give them help, by learning how to adapt to the changing times.

With the gig economy and digitally enabled side jobs, parents have more flexibility to maintain their financial goals, while preserving their personal lives.

When considering flexibility, especially when saving for a child’s education, it’s actually one of the big benefits of a 529 plan. Although you’re responsible if you make a withdrawal that isn’t for a qualified education expense, the penalties aren’t too steep. Federal income tax is imposed on the plan’s growth, plus a 10% penalty on the growth. Therefore, depending on the amount withdrawn, the penalty may be very little.

Nonetheless, the tax penalties may worry parents enough that even when their goal is to save for their child’s education, they want to spread their savings into multiple accounts. This has some clear advantages, when the child decides not to go to college after high school. The good news is that there are plenty of options to account for both possibilities.

  • Other investment accounts: You could also create a brokerage account with money earmarked for a child. This gives parents complete flexibility in how the money is used. The money can be used for expenses other than education, but the downside is not having the tax benefits of the 529 plan (tax deferral and potential tax-free growth).
  • Trusts: a trust allows parents to keep complete control over the funds and lets parents provide instructions to the trustee, on how the trust can be used.
  • Custodial accounts: These accounts are managed by a guardian (or custodian), until the child is an adult. These accounts are pretty easy to set up but don’t have the restrictions that can be placed on trust funds.

The digital world has changed everything, including how we plan for our children and their future. Be flexible and make your plans accordingly.

Reference: Kiplinger (Dec. 27, 2019) “How to Stay Flexible in Saving for Your Child’s Future”

Disinheriting Loved Ones is A Common Mistake

It happens way more often than you’d ever expect. The account owner dies, the assets go directly to the beneficiaries on the account, and the heirs learn for the first time that whatever is in the will doesn’t override the beneficiary designation. They can argue and even go to court, but it won’t do them much good, says the recent article “Don’t accidentally leave your estate to the wrong person” from The News-Enterprise.

One of many examples, is the widower who remarries after his first wife passes away. He neglects to change his IRA beneficiary form, so when he dies, his second wife does not receive any funds. The case of what happens to the funds has to go to court, because the assets obviously cannot go to his deceased first wife.

Many different kinds of accounts now have beneficiary designations. They include:

  • S. Savings Bonds
  • Bank Accounts
  • Certificates of Deposits
  • Investment Accounts
  • Life Insurance
  • Annuities
  • Retirement Accounts

Some of these accounts can be titled “Payable on Death” or “Transferable on Death,” so that they can more easily be distributed to heirs without going through probate.

If you’ve changed jobs, remember that beneficiary designations do not transfer over, when you roll your 401(k) over to a new plan or IRA.

Here’s another thing most people don’t know about beneficiary designations: they don’t have to be individuals. Beneficiaries can be trusts, charities, organizations, your estate, or, no one at all (although that’s not recommended). Be careful, though, if you are thinking about being creative, like saying “All of my living grandchildren.” What if someone who your family has never met, comes forward and claims to be a grandchild? It’s best to discuss this with an estate planning lawyer.

There are situations where you don’t want to name someone as a beneficiary. You don’t want to leave assets outright to minors, since they cannot inherit property. A court-appointed guardian would have to be named to care for the assets, until the child reaches age 18. Then the 18 year old inherits everything at once and goes on a wild spending spree, and the money is gone. A better approach is to set up a trust, so the trust is the beneficiary of the assets and the trust pays money to heirs over an extended period of time.

Caution must be taken, when considering Special Needs Individuals. If they are receiving government benefits, an inheritance could cause them to lose all benefits. Instead, speak with your estate planning attorney about the use of a Special Needs Trust or Supplemental Needs Trust.

Updating the beneficiary form is simple. Contact the financial company that holds the accounts, ask for a copy of your current beneficiary form, and a blank copy so that you can make changes, if needed. Keep a copy of all current beneficiary forms. You should also speak with your estate planning attorney to make sure that your estate plan and your beneficiary designations work together.

Reference: The News-Enterprise (November 30, 2019) “Don’t accidentally leave your estate to the wrong person”

How Do Special Needs Trusts Work?

This is only one of a million questions that parents of children with special needs or caregivers worry about every day, but it is always on their minds. Despite this worry, 72% of parents and caregivers have not yet named a trustee for their child or have not formally planned for their future care or guardianship. This is something that should be at the top of their to-do lists, says kake.com in the article “Special Needs Trusts are Always Available to those Who Need them.”

A Special Needs Trust, also known as an SNT, has many benefits for parents and caregivers, including peace of mind. Here’s what you need to know:

A special needs trust is a way to set aside money for a special needs child or individual. In 2016, President Obama signed the 21st Century Cures Act. This new law made a number of changes to existing laws about SNTs. It gave children with special needs and adults the ability to get funding through a trust. The assets are available to them, in addition to any existing government-funded programs they were receiving. With a SNT, the individual can receive their public help and the extra money also. That includes an inheritance or life insurance payment, after their parents or caregivers pass away.

There are a number of different types of SNTs, so it’s important to talk with an experienced elder lawyer who is familiar with the SNT laws and applicable law in your state. The most commonly used SNTs are called ‘self-settled’ trusts and ‘pooled’ trusts.

For a self-settled trust, the individual is allowed to create the trust by themselves, from their own money. If the individual is a minor, a parent or guardian must establish the trust and determine when the individual may take funds from it. Those who are not minors, may create this type of trust without the approval of the court.

A pooled trust is typically created when the individual is older than 65 and establishes the trust on their own.

A trustee must be named for the trust. This should be someone in whom the parents have great faith and confidence.

The biggest benefit for parents or caregivers is the peace of mind of knowing that the disabled individual will have access to additional funds, if they need them. Speak with an estate planning or elder law attorney who can help create the type of trust appropriate for your situation.

Reference: kake.com (Nov. 16, 2019) “Special Needs Trusts are Always Available to those Who Need them”

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