Important to consider Long-Term Care Insurance

September 8, 2022

It becomes especially important to plan for the future when the world around us seems so volatile and unpredictable. We can’t control future health care costs, but we can plan for them, says a recent article titled “Economic instability and the need to plan for long-term care” from The Indiana Lawyer. Failing to plan could mean lost assets and a lost legacy. It is important to consider long-term care insurance as you get older.

According to Genworth’s Cost of Care survey, from 2004 to 2021, the cost of long-term care has outpaced inflation by a large margin. Many of the increases were driven by supply and demand issues. There aren’t enough people to care for the growing population of people needing services, which will continue to be the case for at least the next decade. A total of 10,000 boomers turn 65 every day and 70% will require care and support services in their lifetimes.

How can assets be protected from long-term costs?

One of the most frequently used tools is an asset protection trust or an irrevocable trust. The irrevocable trust cannot be modified, amended, or terminated without permission of the grantor’s beneficiary or beneficiaries. Once the grantor transfers assets into the trust, the grantor no longer has the rights of ownership. The trust can be designed to minimize taxation, maximize access to long-term benefits and protect assets.

The trust must be drafted properly, so trust income and principal, if needed, can be accessed.

The timing is critical. Asset protection trusts must be created when there is no immediate health care crisis, and the grantor has no need for long-term care. The best trust is created when the person is in good health and of sound mind.

Those who are nearing retirement, passed retirement age or who may have health issues in the distant future and expect to need Medicaid in the future are best candidates for an asset protection trust.

Medicaid’s Five Year Look Back Period

Planning needs to be done at least five years in advance, as Medicaid looks at the applicant’s past five year’s finances to see if any assets were sold or gifted for under market value. Transferring assets to an irrevocable trust is treated as a gift and violates the five-year look back, making the person ineligible for Medicaid coverage. Nursing home care will have to be paid out-of-pocket until the person becomes eligible.

Asset protection strategies are available for those who need immediate protection of assets. However, they have to done quickly and correctly with an estate planning elder law attorney. People who have suffered a fall and have significant injuries or who have received a diagnosis of a difficult disease should speak with an elder law attorney in a timely manner. They’ll need to discuss preparing for a Medicaid application, what assets can be protected and steps they need to take. It is important to consider long-term care insurance before you reach a point when it is needed. The earlier the plan is put into place, the better. If you would like to learn more about long-term care insurance, please visit our previous posts.

Reference: The Indiana Lawyer (Aug. 3, 2022) “Economic instability and the need to plan for long-term care”

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Spendthrift Trust has Restrictions to protect Heirs

July 27, 2022

There are situations when you want to care for your children in your will. However, you know they’d just blow their inheritance in just a few years. That’s when a spendthrift trust is useful. A spendthrift trust is a type of trust that has restrictions to protect immature heirs from both themselves and potential creditors.

US News’ recent article entitled “What Is a Spendthrift Trust?” explains that a spendthrift trust lets you leave funds to a beneficiary, without giving them full control over those funds. Instead, a trustee is given the authority to distribute funds for the benefit of a beneficiary.

This type of trust is created to protect a beneficiary from squandering the wealth bequeathed to them or was left to them

Speak with an estate attorney and talk in detail about your concerns. Ask the attorney to draft this document for you.

The attorney can write into the trust certain rules, such as that an heir may be required to reach a certain age before they start receiving payments, or that the heir receives installments at certain life stages.

If you have an heir or someone you want to leave an inheritance who is immature, irresponsible, or underage, a spendthrift trust can give you some control and power over how and when the money is spent.

A spendthrift trust can also try to limit access to the funds by creditors. The objective is to keep other people from accessing the funds set aside for the beneficiary.

It’s the goal of the original trust creator to protect their beneficiary’s assets from other people. This might be a creditor or even an ex-spouse.

Note that the laws regarding spendthrift trusts vary from state to state, so work with a local estate planning attorney.

The ability of a creditor to access assets in the trust will to depend on state law. Every state has different rules regarding their respect for the spendthrift trust.

A spendthrift trust that has restrictions to protect heirs can be a critical component in your heirs future success. One of the critical tasks in setting up a successful spendthrift trust is the person who is named as the trustee of the funds. That person can have some discretion when distributing the funds, so it needs to be an individual you can trust over the long term. That’s why partnering with an experienced estate planning attorney who’s truly an expert in that field is so important. If you would like to read more about these types of trusts, please visit our previous posts.

Reference: US News (June 28, 2022) “What Is a Spendthrift Trust?”

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Marital Trusts have multiple Benefits

July 25, 2022

Marital trusts have multiple benefits for beneficiaries, including asset allocation and tax benefits. They are worth looking at in your estate plan.

Forbes’ recent article entitled “Guide To Marital Trusts” says that a marital trust is an irrevocable trust that allows you to transfer a deceased spouse’s assets to the surviving spouse without paying any taxes. The trust also protects assets from creditors and future spouses that the surviving spouse may encounter.

When the surviving spouse dies, the assets in the trust aren’t included as part of their estate. That will keep the taxes on their estate lower.

There are three parties involved in setting up, maintaining and ultimately passing along the trust, including a grantor, who is the person who establishes the trust; the trustee, who’s the person or organization that manages the trust and its assets; and the beneficiary. That’s the person who will eventually receive the assets in the trust, once the grantor dies.

A marital trust also involves the principal, which are assets initially put into the trust.

A marital trust doubles the couple’s estate tax exemption limit, especially when almost all assets are owned by one spouse. Estate tax refers to the federal tax that must be paid on someone’s estate after they die. The estate tax limit is how much of an estate will be tax-free. In 2022, the estate tax limit is $12.06 million, which means utilizing a marital trust would essentially double that amount to $24.12 million. Therefore, about $24 million of a couple’s net worth would be shielded from estate taxes by taking advantage of a marital trust.

A marital trust is also beneficial because it can provide income to the surviving spouse, tax-free.

Only a surviving spouse can be a beneficiary of a marital trust. When the surviving spouse dies, the trust will then be passed on to whomever the first spouse’s will or trust governs.

If keeping wealth within your family after you die is important, then a marital trust is an estate planning tool that will make certain that individuals outside of your family don’t have access to the wealth. You can put a variety of assets into a marital trust, including property, retirement accounts and investment accounts.

Marital trusts have multiple benefits for your heirs and is a legal tool to consider using when planning for a blended family. If you would like to learn more about marital trusts, please visit our previous posts.

Reference: Forbes (June 30, 2022) “Guide To Marital Trusts”

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Your Estate Plan should incorporate Asset Protection

July 20, 2022

Your estate plan should incorporate asset protection and tax planning. Most people don’t realize they live with a certain level of risk and it can be addressed in their estate plan, says an article from Forbes titled “You Need An Asset Protection Plan Not Just A Will.”

Being aware of these issues and knowing that they need to be addressed is step one. Here’s an illustration: a married couple in their 50s have two teenage children. They are diligent people and made sure to have an estate plan created early in their marriage. It’s been updated over the years, adding guardians when their children were born and making changes as needed. They have worked hard and also have been fortunate. They own a vacation home they rent most of the year and a small retail business and both of their teenage children drive cars. They don’t see a reason to tie asset protection and risk management into their estate plan. No one they know has ever been sued.

With assets in excess of $4 million and annual income of $350,000, they are a risk target. If one of their children were in an auto accident, they might be liable for any damages, especially if they own the cars the children drive.

The vacation home, if not held in a Limited Liability Company (LLC) or another type of entity, could lead to exposure risks too. If the property is not insured as an income-producing business property and something occurs on the property, the insurance company could easily refuse the claim if the house is insured as a residence.

If their retail business is owned by an LLC or another properly prepared entity, they have personal protection. However, if they have not followed the laws of their state for a business, they might lose the protection of the business structure.

Retirement assets also need to be protected. If they have employees and a retirement plan and are not adhering strictly to all of the requirements, their retirement plan qualification could easily be placed in jeopardy. Their estate planning attorney should be asked to review the pension plan and how it is being administered to ensure that their retirement is not at risk.

There are several reasons why tax oriented trusts would make a lot of sense for this couple. While current gift estate and GST (Generation Skipping Tax) exemptions are historically high right now, they won’t be forever.

This couple would be well-advised to speak with their estate planning attorney about the use of trusts, to serve several distinct functions. Trusts can shelter assets from litigation, decrease or minimize estate taxes when the estate tax changes in 2026 and possibly protect life insurance policies.

Estate planning and risk management are not only for people with mansions and global businesses. Regular people, business owners, and wage earners in all tax brackets, should incorporate asset protection in their estate plan to address their legacy, protect their assets and defend their estate against risks. If you would like to learn more about asset protection, please visit our previous posts.

Reference: Forbes (June 7, 2022) “You Need An Asset Protection Plan Not Just A Will”

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Consider a Prenup in your Estate Planning

June 23, 2022

There are some important financial decisions that need to be made before you get hitched. One of them is whether you should get a prenuptial agreement (“prenup”). This isn’t the most romantic issue to discuss, especially because these agreements usually focus on what will happen in the event of the marriage ending. However, in many cases, having tough conversations about the practical side of marriage can actually bring you and your spouse closer together. It might be wise to consider a prenup in your estate planning as well.

JP Morgan’s recent article entitled “What to know about prenups before getting married” explains that being prepared with a prenup that makes both people in a marriage feel comfortable can be a great foundation for building a financially healthy and emotionally healthy marriage.

A prenup is a contract that two people enter before getting married. The terms outlined in a prenup supersede default marital laws, which would otherwise determine what happens if a couple gets divorced or one person dies. Prenups can cover:

How property, retirement benefits and savings will be divided if a marriage ends;
If and how one person in the couple is allowed to seek alimony (financial support from a spouse); and
If one person in a couple goes bankrupt.

Prenups can be useful for people in many different income brackets. If you or your future spouse has a significant amount of debt or assets, it’s probably wise to have a prenup. They can also be useful if you (or your spouse) have a stake in a business, have children from another marriage, or have financial agreements with an ex-spouse.

First, have an open and honest conversation with your spouse-to-be. Next, talk to an attorney, and make sure he or she understands you and your fiancé’s unique goals for your prenup. You and your partner will then compile your financial information, your attorney will negotiate and draft your prenup, you’ll review it and sign it.

Consider that a prenup can be a useful resource for couples in many different circumstances, including your estate planning.

It might feel overwhelming to discuss a prenup with your fiancé, but doing this in a non-emotional, organized way can save a lot of strife in the future and could help bring you closer together ahead of your big day. If you would like to learn more about prenups, please visit our previous posts.

Reference: JP Morgan (April 4, 2022) “What to know about prenups before getting married”

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Dying without a Will is costly

June 7, 2022

Dying without a will in place is a costly mistake. Without a valid and legal will, it can open the door to family fighting or significant court costs to settle an estate.

The Seattle Times’s recent article entitled “Do you have a will? Without an estate plan, families can struggle to sort it out” advises you to put your wishes in writing, so your estate is handled responsibly at the end of your life.

It’s the best thing that you can do to help your family and help eliminate fighting in the future.

A will can help with the most routine aspects of settling someone’s affairs or provide additional protection for more rare events.

If a person dies without a will, they are said to have died intestate. When this occurs, the deceased’s estate is handed over to the local probate court to identify creditors, beneficiaries and allocate assets.

Property typically goes to a surviving spouse first, then to any children, then to extended family and descendants, following the state’s probate laws. If no family can be found, property typically reverts to the state.

You can also ask an experienced estate planning attorney about a living trust.

A trust is a legal document that can set out plans for someone while they’re still alive and after death, including instructions for how to divide up all assets, including property, businesses and investments.

While most of the instructions should be covered in the living trust, writing a will can also serve as a back-up document to lay out how property and other assets should be transferred. In addition, wills used in conjunction with a living trust commonly designate that trust as the beneficiary of the will. Hence, such wills are referred to as pour-over wills.

A will that’s entirely in someone’s own handwriting — not anyone else’s — that’s signed and dated may be valid, depending on your state of residence. However, it can be disputed in court if there are questions about its authenticity. People who handwrite their wills risk leaving out or forgetting heirs or assets they want to identify, if it’s not checked over by a professional. Dying without a will in place is a costly mistake that could have significant implications for your love ones. If you would like to learn more about drafting a will or trust, please visit our previous posts.

Reference: Seattle Times (May 16, 2022) “Do you have a will? Without an estate plan, families can struggle to sort it out”

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Leaving Property in Trust is Common

May 25, 2022

A typical estate at death will include a personal residence. It’s common for a large estate to also include a vacation home, or family retreat. Leaving real property in trust is common.

Estate plans that include a revocable trust will fund the trust by a pour-over, says Kiplinger’s recent article entitled “Should You Own Your Home in Your Trust?”

A settlor (the person establishing a trust) often will title their home to the revocable trust, which becomes irrevocable at death.

Another option is a Qualified Personal Residence Trust, which is irrevocable, to gift a valuable home to a trust for the settlor’s children. With a QPRT, the house is passed over a term of years while the original owner continues to live there, so the gift passes with little or no gift or estate tax.

Some trusts arising from a decedent estate will hold the home belonging to the settlor without any instructions for its disposal or retention. Outside of very large trusts, a requirement to actually purchase homes for beneficiaries in the trust is far less common.

It is more common in a large trust to have terms that let the trustee buy a home for a beneficiary outside the trust or keep the settlor’s home in the trust for a beneficiary’s use, including purchasing a replacement home when requested.

The trustee will hopefully propose a plan that will satisfy the beneficiary without undue risk to the trust estate or exceeding the trustee’s powers. The most relevant considerations for homeownership in a trust are:

The competing needs of other trust beneficiaries
The purchase price and costs of maintaining the home
The size of the trust as compared to those costs
Other sources of income and resources available to the beneficiary; and
The interests of the remaindermen (beneficiaries who will take from the trust when the current beneficiaries’ interests terminate).

The terms of the trust may require the trustee to ignore some of these considerations.

Each situation requires a number of decisions that could expose the trustee to a charge that it has acted imprudently.

Leaving real property in trust is common and those who want to create a trust should work with an experienced estate planning attorney to avoid any issues. If you would like to learn more about managing real property in your estate planning, please visit our previous posts.

Reference: Kiplinger (Feb. 8, 2022) “Should You Own Your Home in Your Trust?”

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LLCs can Reduce Estate Taxes

May 16, 2022

Family LLCs can be used to protect assets, reduce estate taxes and more efficiently shift income to family members, reports the article “Handling Estates Like An LLC Can Reduce Taxes” from Financial Advisor. The qualified business income and pass-through entity tax deductions may add significant benefits to the family.

What is a Family LLC? They are holding companies owned by two or more individuals, with two classes of owners: general partners (typically the parents) and limited partners (heirs). Contributed assets of the general partners are no longer considered part of their estate, and future appreciation on the assets are not counted as part of their taxable estate.

Consider the LLC as three separate pieces: control, equity and cash flow. Because of the separation, you can maintain control of the personal/business assets, while at the same time transferring non-controlling equity of the assets to someone else via a gift, a sale, or a combination of the two.

An added benefit—transfers of non-controlling equity can qualify for a discount on the value for tax reporting, minimizing any gift or estate tax consequences of the transfer. Discounting business entities with very liquid assets is generally not advisable. However, illiquid assets could warrant a discount as high as 40%.

These types of structures are complicated. Therefore, you’ll need an estate planning attorney with experience in how Family LLCs interact with estate planning. The LLC must be properly structured and have a legitimate business purpose.

It’s important to note that if a real estate or operating business is put into an LLC and taxed as a pass-through entity instead of a sole proprietorship, they may be eligible for the 20% discount under Section 199A, or for the pass—through entity tax workaround for the limitation of the deductibility of state taxes for individuals and trusts.

Every state has its own rules about income qualifying for a state income tax deduction on the federal level. If you have an entity in place, you’ll want to speak with your attorney to determine if a pass-through entity on the state level will be advantageous. If so, this election may allow for a state income tax deduction on the federal level.

Your estate planning attorney will help you get a qualified appraisal of the assets, since the IRS will require an accurate value of the transfer for reporting purposes, especially if a discount is being contemplated. LLCs can reduce estate taxes and protect your assets, but this is a complex matter. The estate planning and tax advantages to be gained make it worthwhile for families with a certain level of assets to protect. If you would like to learn more about LLCs and how they can benefit your estate planning, please visit our previous posts.

Reference: Financial Advisor (April 4, 2022) “Handling Estates Like An LLC Can Reduce Taxes”

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Safeguard your Inheritance from Divorce

May 9, 2022

Even if divorce is the last thing on your mind, when an inheritance is received, its wise to treat it differently from your joint assets, advises a recent article “Revocable Inheritance Trust: Inexpensive Divorce Protection” from Forbes. After all, most people don’t expect to be divorced. However, the numbers have to be considered—many do divorce, even those who least expect it. There are a few ways to safeguard your inheritance from divorce.

Maintaining separate property is the most important step to take. If you deposit a spouse’s paycheck into the account with your inheritance, even if it was by accident, you’ve now commingled the funds.

You might get lucky and have a forensic accountant who can dissect that amount and make the argument it was a mistake, as long as it only happened once, but the Court might not agree.

Long before the Court gets to consider this point, if your ex-spouse’s attorney is aggressively pursuing this one act of commingling as enough to make the property jointly owned, you could lose half of your inheritance in a divorce.

You might also try to mount a defense of the particular account or asset being separate property, by identifying the means of transfer. Was there a deed for real estate gifted to you from a parent or a wire transfer for securities? This information will need to be carefully identified and safeguarded as soon as the inheritance comes to you, in case of any future upheavals.

To spare yourself any of this grief, there are steps to be taken now to avoid commingling. Document the source of wealth involved as a gift or inheritance, maintain the property in a wholly separate account and consider keeping it in a different financial institution than any other accounts to avoid commingling.

Another way to safeguard your inheritance, such as gifts and inherited property, against a 50% divorce rate is to use a revocable trust. Creating a revocable trust to own this separate property allows you to make changes to it any time but maintains its separate nature, by serving as a wholly separate accounting entity. The trust will own the property, while you as grantor (creator of the trust) and trustee (responsible for managing the trust) maintain control.

For a turbo-charged version of this concept, you could go with a self-settled domestic asset protection trust. This is a more complex trust and may not be necessary. Your estate planning attorney will be able to explain the difference between this trust and a revocable trust.

One clear warning: if you have already created a revocable trust to protect your estate and it is not funded, you may feel like it would be most convenient to use this already-existing trust for your inheritance. That would not be wise. You should have a completely different trust created for the inherited property, and this would also be a wise time to remember to fund the existing trust.

Using a revocable trust this way will also require customized language in your Last Will, as you’ll want standard language in the Last Will to reflect the trust being separate from your other marital property. If you would like to read more about divorce protection, please visit our previous posts.

Reference: Forbes (April 13, 2022) “Revocable Inheritance Trust: Inexpensive Divorce Protection”

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Several Ways to Avoid Probate

April 19, 2022

Probate can tie up the estate for months and be an added expense. It can be a financial and emotional nightmare if you have not planned ahead. Some states have a streamlined process for less valuable estates, but probate still has delays, extra expense and work for the estate administrator. A probated estate is also a public record anyone can review. There are, however, several ways to avoid probate.

Forbes’ recent article entitled “7 Ways To Avoid Probate Without A Living Trust” says that avoiding probate often is a big estate planning goal. You can structure the estate so that all or most of it passes to your loved ones without this process.

A living trust is the most well-known way to avoid probate. However, retirement accounts, such as IRAs and 401(k)s, avoid probate. The beneficiary designation on file with the account administrator or trustee determines who inherits them. Likewise, life insurance benefits and annuities are distributed to the beneficiaries named in the contract.

Joint accounts and joint title are ways to avoid probate. Married couples can own real estate or financial accounts through joint tenancy with right of survivorship. The surviving spouse automatically takes full title after the other spouse passes away. Non-spouses also can establish joint title, like when a senior creates a joint account with an adult child at a financial institution. The child will automatically inherit the account when the parent passes away without probate. If the parent cannot manage his or her affairs at some point, the child can manage the finances without the need for a power of attorney.

Note that all joint owners have equal rights to the property. A joint owner can take withdrawals without the consent of the other. Once joint title is established you cannot sell, give or dispose of the property without the consent of the other joint owner.

A transfer on death provision (TOD) is another vehicle to avoid probate. You might come across the traditional term Totten trust, which is another name for a TOD or POD account (but there is no trust involved). After the original owner passes away, the TOD account is transferred to the beneficiary or changed to his or her name, once the financial institution gets the death certificate.

You can name multiple beneficiaries and specify the percentage of the account each will inherit. However, beneficiaries under a TOD have no rights in or access to the account while the owner is alive. An estate planning attorney will be able to identify several ways for you to avoid a costly probate. If you would like to read more about probate, please visit our previous posts.

Reference: Forbes (March 28, 2022) “7 Ways To Avoid Probate Without A Living Trust”

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Category: Asset Protection

Important to consider Long-Term Care Insurance

Spendthrift Trust has Restrictions to protect Heirs

Marital Trusts have multiple Benefits

Your Estate Plan should incorporate Asset Protection

Consider a Prenup in your Estate Planning

Dying without a Will is costly

Leaving Property in Trust is Common

LLCs can Reduce Estate Taxes

Safeguard your Inheritance from Divorce

Several Ways to Avoid Probate

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