What Should Be Included in Estate Planning?

How should you plan for the future, given all that we’ve been through since March 2020? One important step is to get your estate plan in order. While many people became more aware of their mortality since the pandemic began, just as many have kept putting off having an estate plan done. The time to do it, according to the recent article “A Simple Guide to Estate Planning Best Practices” from Accounting Web, is now. Here’s how.

Start with a will. The size of your estate doesn’t matter. Having a will means that you are able to grant whatever you own to someone else on your death. If you don’t have a will, your state’s law will distribute your worldly goods. This method makes certain assumptions that might not be true. You might not want your children to inherit everything you own at age 25. You may also have a distant cousin who thinks they are entitled to an inheritance and is willing to litigate just to get some of your assets. Having a will is the start of having an estate plan. It’s also how you name the executor, the person who will be in charge of administering your assets after death. Your will is used to name a guardian to care for minor children.

Consider your estate planning goals. If you have an estate plan that’s older than four years, it’s time for a review. If you don’t remember when your estate was last done, you definitely should have it reviewed. Your assets may have increased or decreased. The person you named to be your executor may have moved away or died. The past five years have seen a large number of new tax laws, which may have a major impact on your estate plan. You may need to establish trusts and make gifts to keep your wealth in the family.

Could low-cost wealth transfers be right for you? Making gifts to your next of kin may allow them to have access to capital, while decreasing your taxable estate. One common method to do this is through an intra-family loan. By providing a younger member of the family with a loan at a minimal federal interest rate, the younger generation can invest in assets that are likely to appreciate outside the older generation’s taxable estate. Talk with your estate planning attorney about how to do this properly. It’s not a do-it-yourself transaction.

Grantor Retained Annuity Trusts (GRATs) A GRAT allows you to retain an annuity interest in a separate trust, while leaving the remainder beneficiaries. The value of the annuity is removed from the value of the GRAT-constrained property, so beneficiaries only need to pay taxes on the remainder of the value. Low interest rates made a GRAT very attractive, and low entry requirements provide an opportunity to appreciate assets within the GRAT, which might have otherwise been levied on the investments if they were passed through a will. GRATs may need management—one strategy is to combine assets with a series of long and short-term trusts to prepare for market volatility.

Grantor Trust Acquisition of Assets. Here’s a slightly complicated but effective way to reduce taxes on assets: selling them to a grantor trust. The sale may still be taxable, but for a reduced rate. An individual may create and fund a trust using a portion of their gift tax shelter allowance. This ensures that the assets in the trust will be sheltered from transfer tax in the future. The trust structure works as a “grantor” trust for income tax purposes with the individual as the taxpayer, who is liable to report all income generated from the trust. Here’s the neat twist: the individual may sell these appreciated assets to the grantor trust without expressing capital gains. The assets in the trust may grow over time, so the trust estate develops with less fear of tax liability. This is a complex transaction that an estate planning attorney can discuss with you.

One thing is certain: the financial demands of the pandemic have created a need for government agencies to find revenue. The time to prepare for increased taxes on wealth is now.

Reference: Accounting Web (June 23, 2021) “A Simple Guide to Estate Planning Best Practices”

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How Do Special Needs Trusts Work?

A trust of any kind is a document that expresses your wishes while you are alive and after you have passed. The need for a dedicated trust for loved ones differs with the situations or issues of the family. Getting this wrong can lead to financial devastation, explains the article “Take special care with Special Needs trusts” from the Herald Bulletin.

A Special Needs Trust or supplemental trust provides protection and management for assets for specific beneficiaries. The trustee is in charge of the assets in the trust during the grantor’s life or at his death and distributes to the beneficiary as directed by the trust.

The purpose of a Special Needs or supplemental trust is to help people who receive government benefits because they are physically or mentally challenged or are chronically ill. Most of these benefits are means-tested. The rules about outside income are very strict. An inheritance would disqualify a Special Needs person from receiving these benefits, possibly putting them in dire circumstances.

The value of assets placed in a Special Needs trust does not count against the benefits. However, this area of the law is complex, and requires the help of an experienced elder law estate planning attorney. Mistakes could have lifelong consequences.

The trustee manages assets and disperses funds when needed, or at the direction of the trust. Selecting a trustee is extremely important, since the duties of a Special Needs trust could span decades. The person in charge must be familiar with the government programs and benefits and stay up to date with any changes that might impact the decisions of when to release funds.

These are just a few of the considerations for a trustee:

  • How should disbursements be made, balancing current needs and future longevity?
  • Does the request align with the rules of the trust and the assistance program requirements?
  • Will anyone else benefit from the expenditure, family members or the trustee? The trustee has a fiduciary responsibility to protect the beneficiary, first and foremost.

Parents who leave life insurance, stocks, bonds, or cash to all children equally may be putting their Special Needs child in jeopardy. Well-meaning family members who wish to take care of their relative must be made aware of the risk of leaving assets to a Special Needs individual. These conversations should take place, no matter how awkward.

An experienced elder law estate planning attorney will be able to create a Special Needs trust that will work for the individual and for the family.

Reference: Herald Bulletin (March 13, 2021) “Take special care with Special Needs trusts”

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?”

Trusts: The Swiss Army Knife of Estate Planning

Trusts serve many different purposes in estate planning. They all have the intent to protect the assets placed within the trust. The type of trust determines what the protection is, and from whom it is protected, says the article “Trusts are powerful tools which can come in many forms,” from The News Enterprise. To understand how trusts protect, start with the roles involved in a trust.

The person who creates the trust is called a “grantor” or “settlor.” The individuals or organizations receiving the benefit of the property or assets in the trust are the “beneficiaries.” There are two basic types of beneficiaries: present interest beneficiaries and “future interest” beneficiaries. The beneficiary, by the way, can be the same person as the grantor, for their lifetime, or it can be other people or entities.

The person who is responsible for the property within the trust is the “trustee.” This person is responsible for caring for the assets in the trust and following the instructions of the trust. The trustee can be the same person as the grantor, as long as a successor is in place when the grantor/initial trustee dies or becomes incapacitated. However, a grantor cannot gain asset protection through a trust, where the grantor controls the trust and is the principal recipient of the trust.

One way to establish asset protection during the lifetime of the grantor is with an irrevocable trust. Someone other than the grantor must be the trustee, and the grantor should not have any control over the trust. The less power a grantor retains, the greater the asset protection.

One additional example is if a grantor seeks lifetime asset protection but also wishes to retain the right to income from the trust property and provide a protected home for an adult child upon the grantor’s death. Very specific provisions within the trust document can be drafted to accomplish this particular task.

There are many other options that can be created to accomplish the specific goals of the grantor.

Some trusts are used to protect assets from taxes, while others ensure that an individual with special needs will be able to continue to receive needs-tested government benefits and still have access to funds for costs not covered by government benefits.

An estate planning attorney will have a thorough understanding of the many different types of trusts and which one would best suit each individual situation and goal.

Reference: The News Enterprise (July 25, 2020) “Trusts are powerful tools which can come in many forms”