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”

 

Your Estate Plan Needs to Be Customized

The only thing worse than having no estate plan, is an estate plan created from a ‘fill-in-the-blank’ form, according to the recent article “Don’t settle for a generic estate plan” from The News-Enterprise. Compare having an estate plan created to buying a home. Before you start packing, you think about the kind of house you want and how much you can spend. You also talk with real estate agents and mortgage brokers to get ready.

Even when you find a house you love, you don’t write a check right away. You hire an engineer to inspect the property. You might even bring in contractors for repair estimates. At some point, you contact an insurance agent to learn how much it will cost to protect the house. You rely on professionals, because buying a home is an expensive proposition and you want to be sure it will suit your needs and be a sound investment.

The same process goes for your estate plan. You need the advice of a skilled professional–the estate planning lawyer. Sometimes you want input from trusted family members or friends. There other times when you need the estate planning lawyer to help you get past the emotions that can tangle up an estate plan and anticipate any family dynamics that could become a problem in the future.

An estate planning attorney will also help you to avoid problems you may not anticipate. If the family includes a special needs individual, leaving money to that person could result in their losing government benefits. Giving property to an adult child to try to avoid nursing home costs could backfire, making you ineligible for Medicaid coverage and cause your offspring to have an unexpected tax bill.

Your estate planning lawyer should work with your team of professional advisors, including your financial advisor, accountant and, if you own a business, your business advisor. Think of it this way—you wouldn’t ask your real estate agent to do a termite inspection or repair a faulty chimney. Your estate plan needs to be created and updated by a skilled professional: the estate planning lawyer.

Once your estate plan is completed, it’s not done yet. Make sure that the people who need to have original documents—like a power of attorney—have original documents or tell them where they can be found when needed. Keep in mind that many financial institutions will only accept their own power of attorney forms, so you may need to include those in your estate plan.

Medical documents, like advance directives and healthcare powers of attorney, should be given to the people you selected to make decisions on your behalf. Make a list of the documents in your estate plan and where they can be found.

Preparing an estate plan is not just signing a series of fill-in-the-blank forms. It is a means of protecting and passing down the estate that you have devoted a lifetime to creating, no matter its size.

Reference: The News-Enterprise (June 23, 2020) “Don’t settle for a generic estate plan”

 

Do It Yourself Estate Planning Leads to Bad Outcomes

While the attraction of simplicity and low cost is appealing, the results are all too often disastrous, affirms Insurance News in the article “Mind Your Mouse Clicks: DIY Estate Planning War Stories.” The increasing number of glitches that estate planning attorneys are seeing after the fact has increased, as much as the number of people using online estate planning forms. For estate planning attorneys who are concerned about their clients and their families, the disasters are troubling.

A few clumsy mouse clicks can derail an estate plan and adversely affect the family. Here are five real life examples.

Details matter. One of the biggest and most routinely made mistakes in DIY estate planning goes hand-in-hand with simple wills, where both spouses want to leave everything to each other. Except this typical couple neglected something. See if you can figure out what they did wrong:

John’s will: I leave everything to my wife Phyllis.

Phyllis’ will: I leave everything to my wife Phyllis.

Unless John dies and Phyllis marries someone named Phyllis, this will is not going to work. It seems like a simple enough error, but the courts are not forgiving of errors.

Life insurance mistakes. Jeff owns a life insurance policy and has been using its cash value as a “rainy day” fund. He had intended to swap the life insurance into his irrevocable grantor trust in exchange for low-basis stock held in the trust. The swap would remove the life insurance from Jeff’s estate without exposure to the estate tax three-year rule, and the stock would receive a stepped-up basis at death, leading to tax savings on both sides of the swap.

However, Jeff had a stroke recently, and he’s incapacitated. He planned ahead though, or so he thought. He downloaded a free durable power of attorney form from a nonprofit that helps the elderly. The POA specifically included the power to change ownership of his life insurance.

Jeff put his name in the space designated for the POA. As a result, the insurance company won’t accept the form, and the swap isn’t going to happen.

Incomplete documents. Ellen created an online will leaving her entire probate estate to her husband. It was fast, cheap and she was delighted. However, she forgot to click on the space where the executor is named. The website address for the website company is the default information in the form, which is what was created when she completed the will. The court is not likely to appoint the website as her executor. Her heirs are stuck, unless she corrects this, hoping the court will understand. Hope is a terrible estate plan.

Letting the form define the estate plan. Single parent Joan has a 6-year-old son. Her will includes a standard trust for minors, providing income and principal for her son until he turns 21, at which point he inherits everything. Joan met with a life insurance advisor and applied for a $1 million convertible 20–year term life insurance policy. It will be payable to the trust. However, her son has autism, and receives government benefits. There are no special needs provisions in her will, so her son is at risk of losing any benefits, if and when he inherits the policy proceeds.

Don’t set it and forget it. One couple created online wills, when the estate tax exclusion was $2 million. They created a credit shelter, or bypass, trust to reduce their estate taxes, by allowing each of them to use their estate tax exclusion amount. However, the federal estate tax exclusion today is $11.4 million per person. With $4 million in separate assets and a $2 million life insurance policy payable to children from a previous marriage, the husband’s separate assets will go into the bypass trust. None of it will go to his wife.

An experienced estate planning attorney who is licensed to practice in your state is the best source for creating and updating estate plans, preparing for incapacity and ensuring that tax planning is done efficiently.

Reference: Insurance News Net (Sep. 9, 2019) “Mind Your Mouse Clicks: DIY Estate Planning War Stories”