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”

How Important Is Avoiding Probate?

Estate planning attorneys are often asked if one of the goals of an estate plan is to avoid probate, regardless of the cost. The answer to that question is no, but a better question is the more even-tempered “Should I try to avoid probate?” In that case, the answer is “It depends.” A closer look at this question is provided in the recent article from The Daily Sentinel, “Estate Planning: Is Probate Something to Avoid at All Costs?”

Probate is not always a nightmare, depending upon where a decedent lived. Probate is a court process conducted by judges, who usually understand the difficulty executors and families are facing, and their support staff who genuinely care about the families involved. This is not everywhere, but your estate planning attorney will know what your local probate court is like. With that in mind, there are certain pitfalls to probate and there are situations where avoiding probate does make sense for your family.

In the case where it makes sense to avoid probate, whatever planning strategy is being used to avoid probate must be carefully evaluated. Does it make sense, or does it create further issues? Here’s an example of how this can backfire. A person provided their estate planning attorney with a copy of a beneficiary deed, which is a deed that transfers property to a designated person (called a “grantee”) immediately upon the death of the person who signed the deed (called a “grantor”).

The deed had been signed and recorded properly with the recorder’s office, just as a typical deed would be during the sale of a home. Note that a beneficiary deed does not transfer the title of ownership, until the grantor dies.

Here’s where things went bad. No one knew about the beneficiary deed, except for the grantor and the grantee. The remainder of the estate plan did not mention anything about the beneficiary deed. When the grantor died, ownership of the property was transferred to the grantee. However, the will contained conflicting instructions about the property and who was to inherit it.

Instead of avoiding probate, the grantor’s estate was tied up in court for more than a year. The family was torn apart, and the costs to resolve the matter were substantial.

Had the deceased simply relied upon the probate process or coordinated the transfer of ownership with his estate planning attorney, the intended person would have received the property and the family would have been spared the cost and stress. Sticking with the use of a last will and testament and the probate process would have protected everyone involved.

An experienced estate planning attorney can help determine the best approach for the family, with or without probate.

Reference: The Daily Sentinel (Oct. 3, 2020) “Estate Planning: Is Probate Something to Avoid at All Costs?”

Do You Need a Revocable Trust?

A will lets you determine how your property will be distributed when you die, and a revocable living trust also accomplishes that task. However, the owner of the trust can make strict stipulations about how specific assets should be distributed, says Barron’s in the article “Revocable Living Trusts Can Help Your Heirs Avoid Probate. Here’s How They Work.” Another advantage of a revocable trust—avoiding probate, which gives the trust owner far more control over asset distribution.

Remember, probate is a process that takes place under the supervision of a judge in a court. Things don’t always happen the way the decedent may have wanted.

It’s best for individuals or couples with complex estate planning needs to meet with an estate planning lawyer, who will discuss whether a living trust is the right option. One question couples should ask: does it make sense for them to have a living will, and should it be a joint trust, or should it be two separate ones?

When a trust is created, it needs to be funded. Assets such as real estate, bank accounts, taxable non-retirement investment accounts all need to be retitled so they are owned by the trust. The person who creates the trust has no restrictions as to how the assets within the trust are used while they are alive. The trust can also be revoked during the owner’s lifetime, but it’s more common for owners to make tweaks to the trust.

Trusts are very popular in states like California and Massachusetts, which have more restrictive probate laws than other states. Trusts are very good for people who own property in multiple states and would otherwise have to deal with probate in multiple states. Trusts are also excellent for people who wish to maintain privacy about their assets, since the trust’s contents remain private. A will, once it enters the probate process, becomes a public document.

Someone who does not own his or her own home and has limited assets may prefer to use a will, which is less expensive and simpler than a trust. Once they do own a home and have more extensive assets, they can always have a trust created.

A living trust is part of a larger estate plan. Other estate planning documents are still needed, including a durable power of attorney for finances, an advance health care directive, a nomination of guardianship for families with minor children and a living will.

People who have revocable trusts should ask their estate planning attorney about something called a “pour-over” will. This is a will that ensures that any assets accidentally left out of the trust are added to the trust after the death of the owner. If the majority of assets are in the trust, the probate of the pour-over will should be much simpler and there may even be a “fast-track” option for assets under a certain dollar level.

Reference: Barron’s (February 22, 2020) “Revocable Living Trusts Can Help Your Heirs Avoid Probate. Here’s How They Work”

Common Myths about Your Estate When You Die

There are many misconceptions about the law in general and about estate planning in particular. There are also many opportunities to use the law to protect those we love, when it comes to helping families navigate life and the legal processes that happen after the death or disability of a loved one. The best option is to plan ahead, reports the article “I’m dead, now what? Myths about deaths in Georgia” from the Cherokee Tribune & Ledger-News. Here are the top four myths about what happens when someone dies.

A Will. If there’s no will, my spouse gets everything. Well, no. While you are a team, and you may want your spouse to get everything, if there’s no will, the laws of your state will determine who gets what. Your spouse in some states will split your possessions with your children. Your spouse in some states will get no less than a third of your assets. If you want your spouse to inherit everything, you need a will.

You also need a will if you want your spouse to receive everything so they can take care of your children, if something unexpected happens to you. Without it, your spouse will have to create a budget for your children’s needs and present that to the court before they can spend any of the children’s money. That’s how it works in Georgia. Check with a local estate planning attorney to make sure that’s what you’re prepared to leave for your spouse to do, or what your state’s laws say.

Having a will allows you to determine who you want to inherit what.

A will means there’s no need for probate court. Wrong again! Having a will does not mean you avoid probate court and the legal process known as probate. A will is not legally effective, until the nominated executor presents your will to the probate court and the court accepts the will and declares it to be valid. This is a longer process in some jurisdictions. However, there are potential problems. If there’s a disgruntled family member or a need for privacy, the probate process creates a public record and information can and often is obtained by family members. To avoid making your life a public matter, you need an estate plan that includes trusts, which do not go through the probate process and do not become public records.

If I don’t have a will, the state will take it all. It’s very rare that any state will take everything, even if there is no will. The state only does that if absolutely no family members can be found, or if the state’s Medicaid program has an aggressive claw back policy that seeks to recover the cost of nursing home care provided to the decedent. If the person who died did not need Medicaid services, then it’s unlikely that the state will take the assets. More likely? A family member, determined by degree of kinship, will be entitled to inherit. Again, the law varies by state, so check with an experienced estate planning lawyer in your state.

The family gets stuck with the debts. That’s a yes and no answer. The debts of family members do not have to be paid by the family. However, they are paid by the deceased’s estate, which will be decreased by the amount of debt owed. Therefore, the family members will inherit less, but it’s not coming out of their own pockets. The debts of the deceased are to be paid by whatever assets he or she owned at the time of death. If there’s not enough in the estate, the family is not obligated to pay the debt. The exception is if the spouse was a joint borrower or otherwise legally obligated to pay the debt.

What you know and don’t know about estate planning can hurt you and your family. An easy way to address this: meet with an experienced estate planning attorney and make a plan that will distribute your assets according to your wishes.

Reference: Cherokee Tribune & Ledger-News (Feb. 1, 2020) “I’m dead, now what? Myths about deaths in Georgia”

Your Estate Plan Decides or the State Decides

It’s something that everyone needs, but often gets overlooked. Estate planning makes some people downright uncomfortable. There’s no law that says you must have an estate plan—just laws that will impact how your property is distributed and who will raise your children, if you don’t have a will. Planning is important, says WMUR 9 in a recent article “Money Matters: Estate planning,” if you want to be the one making those decisions.

An estate plan can be simple, if you only own a few assets, or complicated if you have significant assets, more than one home and multiple investments. Some strategies are easier to implement, like a last will and testament. Others can be simple or complex, like trusts. Whatever your needs, an estate planning attorney will be able to give you the guidance that your unique situation requires. Your estate planning attorney may work with your financial advisor and accountant to be sure that your financial and legal plans work together to benefit you and your family.

There are circumstances that require special estate planning:

  • If your estate is valued at more than the federal gift and/or estate tax exclusion, which is $11.4 million per person in 2019
  • You have minor children
  • There are family members with special needs who rely on your support
  • You own a business
  • You own property in more than one state
  • You want to leave a charitable legacy
  • Your property includes artwork or other valuable collectables
  • You have opinions about end-of-life healthcare
  • You want privacy for your family

The first step for any estate plan is a thorough review of the family finances, dynamics and assets. Who are your family members? How do you want to help them? What do they need? What is your tax picture like? How old are you, and how good is your health? These are just a few of the things an estate planning attorney will discuss with you. Once you are clear on your situation, you’ll discuss overall goals and objectives. The attorney will be able to outline your options, whether you are concerned with passing wealth to the next generation, avoiding family disputes, preparing for a disability or transferring ownership of a business.

A last will and testament will provide clear, legal direction as to how your assets should be distributed and who will care for any minor children.

A trust is used to address more complex planning concerns. A trust is a legal entity that holds assets to be used for the benefit of one or more individuals. It is overseen by a trustee or trustees, who can be individuals you name or professionals.

If you create trusts, it is important that assets be retitled so the trust owns the assets and not you personally. If the assets are not retitled, the trust will not achieve your goals.

Some property typically has its own beneficiary designations, like IRAs, retirement accounts and life insurance. These assets pass directly to heirs according to the designation, but only if you make the designations on the appropriate forms.

Once you’re done with your estate plan, make a note on your calendar. Estate plans and beneficiary designations need to be reviewed every three or four years. Lives change, laws change and your estate plan needs to keep pace.

Reference: WMUR 9 (Aug. 1, 2019) “Money Matters: Estate planning”

Having a Generous Spirit is a Good Thing for Many Reasons

Many people give generously throughout the year, for birthdays, to help children or grandchildren with college costs or just because they want to help family or friends. However, according to the New Hampshire Union Leader’s article “Lifetime (noncharitable) giving has many advantages—and not just for tax purposes.”

Lifetime giving means that you are more involved with giving, than if your giving occurs after you have died. Perhaps the best part of gifting with warm hands, is that you are able to enjoy seeing the recipient (donee) benefit from your gift. It’s a good feeling to see a person have his life enriched by your generosity.

It should also be noted that sometimes, giving away something can be a way of liberating yourself. With less property, there’s less for you to manage, insure or provide upkeep.

If you die with no will, the intestacy laws of your state will determine who gets what. With a will, you have the opportunity to make your intentions known clearly. However, since you will not be alive, you won’t be able to see the actual transfer of property. A beneficiary might decide that they don’t want an asset. It is also possible that someone who always told you that he loved the painting in the foyer of your home, may decide to sell it, instead of keeping it.

Lifetime giving lets you react to changing circumstances and provides some control over how your assets are distributed.

After your death, your property and your estate may go through probate, which in some states can be a lengthy process. Lifetime giving also reduces the costs associated with probate and estate administration, because they won’t be included in your estate at the time of death. Assets that come out of the probate estate, reduces the likelihood of estate creditors or dissatisfied heirs. Lifetime gifts are private, while probate is public.

However, there are also tax advantages. If your gifting program is structured correctly by an experienced estate planning attorney, income and estate taxes can be decreased. Generally, a gift is not taxable income to the donee. However, any income earned by the gift property or capital gain subsequent to the gift, is usually taxable. The donor holds the responsibility of paying state or federal transfer taxes imposed on the gift. There are four taxes to be aware of: the state gift tax, the state generation-skipping transfer tax, federal gift and estate taxes and the federal generation-skipping transfer tax.

Many people give, because they want to support charitable causes or help friends and family enjoy a higher quality of life. The need to reduce the size of an estate to lower estate taxes is now less prominent, since the federal estate tax exemption is so high. It should be kept in mind that the new tax laws regarding federal estate taxes end in 2025. That may seem far away, but it will be here soon enough.

Another way to give, is to help with college expenses. Any gift must be made directly to a qualified institution. Similarly, if you’d like to help a friend or family member with medical expenses, a gift needs to be made directly to the healthcare provider. Not only are these types of transfers exempt from federal gift and estate taxes, but they are outside of the $15,000 annual gift exclusion gift you can make to an individual in any given calendar year.

This is a simple overview of gifting. An estate planning attorney should be consulted to create a plan for giving, that aligns with your overall estate plan and tax management plan.

Reference: New Hampshire Union Leader (April 7, 2019) “Lifetime (noncharitable) giving has many advantages—and not just for tax purposes”

Estate Taxes, Death and a Other Certainties

As the old saying goes, “Nothing is certain but death and taxes.” Many people don’t have the faintest idea of just how extensive those taxes can be, says Pittsburgh Post-Gazette in the article “Death and taxes—and taxes and taxes.” For all the headlines and noise about federal estate taxes, those are the last ones most of us have to think about.

The federal estate tax is a non-event, unless you belong to the upper one percent of wealthy Americans. The federal tax is paid, based on the value of the assets owned by the decedent at the time of death. It also includes any assets that are controlled by the decedent at the time of death. The first $11.4 million is now excluded from any taxes due for an individual, and $22.8 million for a couple.

Before the Tax Cuts and Jobs Act of 2017, this exemption was roughly $5 million, so many more people had to pay it. The levels are expected to go back to the pre-2018 amount at the end of 2025, unless the law changes before that time.

This is an important point to remember: the tax laws change, and anytime tax laws change, your estate plan should be reviewed to ensure that it is still going to work the way you intend.

In some states, like Pennsylvania, there are still inheritance taxes. Only six states have inheritance taxes, and only 12 states still have an estate tax. Your estate planning attorney will know what your state’s inheritance and estate taxes are and can help you plan, so that your family is not overly burdened when it comes time to pay these taxes.

Inheritance taxes are generally based on the value of the assets owned or controlled by the decedent. It is independent of the obligation to file an income tax return for the estate.

The decedent’s representative, usually the executor, is responsible for filling all state, local and federal income tax returns for the portion of the year, in which the decedent was still living.

When a person passes and their last will and testament is admitted to probate, the executor receives an employer identification number (EIN) from the IRS. If the decedent died owning a trust, the trustee must obtain an EIN. Once the EIN is obtained, the IRS sends a letter notifying you of the due date for the income tax return for the estate or the trust. These are known as “fiduciary income tax returns.” They must be filed every year for the year that the estate or trust exists.

Note that the tax returns involve federal capital gains tax and how assets purchased before death will be treated for tax purposes, when they are sold after death. Usually these are real estate and investments. There are a LOT of taxes to consider, each has a unique due date and there may be ways to pay some taxes that will have an impact on other taxes, depending upon the situation.

The key, and an estate planning attorney can help with this, is to create a plan that takes all the taxes into consideration and plans out a strategy to minimize taxes, ensure that everything is paid on time, and prepare for the taxes to be paid.

Ideally, all this planning takes place before someone dies, as part of their estate plan, so that their loved ones are not left figuring out all of the different tax liabilities and how to pay them.

Reference: Pittsburgh Post-Gazette (March 25, 2019) “Death and taxes—and taxes and taxes”

Smart Women Protect Themselves with Estate Planning

The reason to have an estate plan is two-fold: to protect yourself, while you are living and to protect those you love, after you have passed. If you have an estate plan, says the Boca Newspaper in the article titled “Smart Tips for Women: Estate Planning,” your wishes for the distribution of your assets are more likely to be carried out, tax liabilities can be minimized and your loved ones will not be faced with an extended and expensive process of settling your estate.

Here are some action items to consider, when putting your estate plan in place:

If you have an estate plan but aren’t really sure what’s in it, it’s time to get those questions answered. Make sure that you understand everything. Don’t be intimidated by the legal language: ask questions and keep asking until you fully understand the documents.

If you have not reviewed your estate plan in three or four years, it’s time for a review. There have been new tax laws that may have changed the outcomes from your estate plan. Anytime there is a big change in the law or in your life, it’s time for a review. Triggering events include births, deaths, marriages, and divorces, purchases of a home or a business or a major change in financial status, good or bad.

If you don’t have an estate plan, stop postponing and make an appointment with an estate planning attorney, as soon as possible.

Your estate plan should include advance directives, including a Durable Power of Attorney, Health Care Surrogate, and a Living Will. You may not be capable of executing these documents during a health emergency and having them in place will make it possible for those you name to make decisions on your behalf.

Anyone who is over the age of 18, needs to have these same documents in place. Parents do not have a legal right to make any decisions or obtain medical information about their children, once they celebrate their 18th birthday.

Make a list of your trusted professionals: your estate planning attorney, CPA, financial advisor, your insurance agent and anyone else your executor will need to contact.

Tell your family where this list is located. Don’t ask them to go on a scavenger hunt, while they are grieving your loss.

List all your assets. You should include where they are located, account numbers, contact phone numbers, etc. Tell your family that this list exists and where to find it.

If you have assets with primary beneficiaries, make sure that they also have contingent beneficiaries.

If you have assets from a first marriage and remarry, be smart and have a prenuptial agreement drafted that aligns with a new estate plan.

If you have children and assets from a first marriage and want to make sure that they continue to be your heirs, work with an estate planning attorney to determine the best way to make this happen. You may need a will, or you may simply need to have your children become the primary beneficiaries on certain accounts. A trust may be needed. Your estate planning attorney will know the best strategy for your situation.

If you own a business, make sure you have a plan for what will happen to that business, if you become incapacitated or die unexpectedly. Who will run the business, who will own it and should it be sold? Consider what you’d like to happen for long-standing employees and clients.

Smart women make plans for themselves and their loved ones. An estate planning attorney will be able to help you navigate through an estate plan. Remember that an estate plan needs upkeep on a regular basis.

Reference: Boca Newspaper (March 4, 2019) “Smart Tips for Women: Estate Planning”

Can A Cell Phone Video Become a Will?
Old woman making a statement with her smartphone

Can A Cell Phone Video Become a Will?

What if a grandmother made a statement, while in an intensive care unit, that she wanted everything she owned to go to a grandchild and a brother-in-law? What if that statement was captured on a cellphone as a video? The question was a real one, posed by a reader of My San Antonio in the article “Can a video be used as a Will?”

There are two reasons why a cellphone video is unlikely to be accepted as a will by any court. One is that the cellphone video does not follow the formality of how a will is created and executed. Another is the statute of frauds, which basically says that to be lawfully valid, certain promises must be in writing.

Not only does a will need to be in writing, it must show clear intent to dispose of assets after death. The writing must be dated and signed by the person who is making the promise (the testator). If the will is written by the testator in his or her handwriting, it is known as a “holographic” will. If the will is typed or in someone else’s handwriting other than the testator, which is known as a “formal will,” then it must also be signed by two independent witnesses and must be notarized. The person who is having the will created (again, the testator), must also have legal capacity for the will to be valid.

In some states, including Texas, there was a time when a spoken will, known an a “nuncupative will” could have been recognized. However, that is no longer the case and a verbal will is no longer valid. Even when a nuncupative will was accepted, it was only accepted for inexpensive personal effects, not large assets or real property.

Some states, including Florida and Nevada, now allow a person to make a will online or on their computer and never have it transferred to paper. These are called “digital” or “electronic” wills. In these cases, e-signatures are allowed to be used. Other states have considered bills allowing digital wills, but the bills did not pass. The Florida law allows the digital will to be e-signed, but it must be witnessed by two independent individuals and it must be e-notarized. It should be noted that the will process is not permitted to be used by a person, who is in an end-stage illness or who is legally considered a “vulnerable adult.”

In the state of Texas, the grandmother in the example above is considered to have died without a will, meaning that she died “intestate.” Texas law will determine how her assets are distributed, and that will depend on her relationships and her survivors. If she was married and all children are from that marriage, her assets go to her spouse. If she was married and had children from a prior marriage, her assets are split unevenly between those children and her spouse. If there is no spouse, assets go to her children. There is a tremendous burden placed on the heirs of those who die without a will, since it does take a long time to figure out who their heirs are.

If she had a properly executed legal will, all these issues would be moot. Anyone who owns a home needs to have a will, and this should have been something that was taken care of, long before she became ill.

For more information about Utah’s laws regarding video wills, consult an estate planning attorney.

Reference: My San Antonio (Feb. 18, 2019) “Can a video be used as a Will?”