Category: Beneficiaries

Ways to Minimize Your Probate Estate

Ways to Minimize Your Probate Estate

Having a properly prepared estate plan is especially important if you have minor children who would need a guardian, are part of a blended family, are unmarried in a committed relationship or have complicated family dynamics—especially those with drama. There are ways you can protect your loved ones, and minimize your probate estate, as described in the article “Try these steps to minimize your probate estate” from the Indianapolis Business Journal.

Probate is the process through which debts are paid and assets are divided after a person passes away. There will be probate of an estate whether or not a will and estate plan was done, but with no careful planning, there will be added emotional strain, costs and challenges left to your family.

Dying with no will, known as “intestacy,” means the state’s laws will determine who inherits your possessions subject to probate. Depending on where you live, your spouse could inherit everything, or half of everything, with the rest equally divided among your children. If you have no children and no spouse, your parents may inherit everything. If you have no children, spouse or living parents, the next of kin might be your heir. An estate planning attorney can make sure your will directs the distribution of your property.

Probate is the process giving someone you designate in your will—the executor—the authority to inventory your assets, pay debts and taxes and eventually transfer assets to heirs. In an estate, there are two types of assets—probate and non-probate. Only assets subject to the probate process need go through probate. All other assets pass directly to new owners, without involvement of the court or becoming part of the public record.

Many people embark on estate planning to avoid having their assets pass through probate. This may be because they don’t want anyone to know what they own, they don’t want creditors or estranged family members to know what they own, or they simply want to enhance their privacy. An estate plan is used to take assets out of the estate and place them under ownership to retain privacy.

Some of the ways to remove assets from the probate process are:

Living trusts. Assets are moved into the trust, which means the title of ownership must change. There are pros and cons to using a living trust, which your estate planning attorney can review with you.

Beneficiary designations. Retirement accounts, investment accounts and insurance policies are among the assets with a named beneficiary. These assets can go directly to beneficiaries upon your death. Make sure your named beneficiaries are current.

Payable on Death (POD) or Transferable on Death (TOD) accounts. It sounds like a simple solution to own many accounts and assets jointly. However, it has its own challenges. If you wished any of the assets in a POD or TOD account to go to anyone else but the co-owner, there’s no way to enforce your wishes.

An experienced, local estate planning attorney will be the best resource to minimize your probate estate. If there is no estate plan, an administrator may be appointed by the court and the entire distribution of your assets will be done under court supervision. This takes longer and will include higher court costs. If you are interested in learning more about the probate process, please visit our previous posts. 

Reference: Indianapolis Business Journal (Aug. 26,2022) “Try these steps to minimize your probate estate”

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Way you Title Assets has an Impact on your Estate

Way you Title Assets has an Impact on your Estate

The way you title your assets has an impact on your estate plan. FedWeek’s recent article entitled “How Assets Are Titled Can Make a Big Difference discusses the different ways property may be titled, and the significance of each one.

The way in which you take title to assets can affect your estate, taxes and perhaps the disposition of the asset if a couple divorces. Many couples want assets to be titled simply in the event something happens to one, so the other spouse can take possession immediately without taxes or complications. Joint ownership may be the simplest way to meet most of these objectives. However, this can get complicated if any number of things happen, such as divorce, second marriage, children from multiple marriages, adoption and blended families of all types.

It’s critical to be educated on the different types of ownership, so you know when a change may be needed. Here are the main options:

Holding Assets in Your Own Name is simple and inexpensive. However, if you become incompetent, those assets might be mismanaged. At your death, individually owned assets may have to go through probate.

Joint Tenants with Right of Survivorship is when one co-owner dies, all assets held this way automatically pass to the survivor. One joint owner can take over if the other is incapacitated, and jointly held assets don’t go through probate.

Tenants in Common means there’s a divided interest, although none of the owners may claim to own a specific part of the property. At the death of one of the joint owners, the share owned by the deceased must pass through their will to determine ownership. The surviving joint owner doesn’t automatically own the entirety of assets.

Tenancy by the Entirety is a type of joint ownership similar to rights of survivorship for married couples. It lets spouses own property together as a single legal entity. Ownership can’t be separated, which means creditors of an individual spouse may not attach and sell the property. Only creditors of the couple may make claims against the property.

With Entity Ownership, you might create a trust, a partnership (such as a family limited partnership), or a limited liability company (LLC) to hold assets. These entities may provide protection from creditors and tax benefits.

Community Property may only be used by married couples in community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin). Each person owns an undivided interest in the entire property. When a spouse dies, the survivor automatically receives the entire interest, so there’s no need for probate. Community property can’t be controlled by a person’s will or trust.

Remember, the way you title your assets has an impact on your overall estate plan. Ask an experienced estate planning attorney to review your estate plan and how assets are titled. If you would like to learn more about titling your assets, please visit our previous posts. 

Reference: FedWeek (July 27, 2022) “How Assets Are Titled Can Make a Big Difference”

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Grounds for Contesting a Will

Grounds for Contesting a Will

As a beneficiary of a will, if you don’t agree with how the assets are being distributed, you may have grounds for contesting the will. MSN’s recent article entitled “Contesting a Will? You Might Not Need a Lawyer” says to do this you must have a legitimate legal reason to challenge the will, such as one of the most common arguments:

  • Lack of mental capacity. If the person making the will (the “testator”) wasn’t “of sound mind,” he or she may not understand their decisions. The testator must be able to understand what they own, who their natural heirs are and what they are giving and to whom.
  • Fraud, undue influence, or forgery. Some people are tricked into signing a will, are forced to create a will under duress, or have their signature forged.
  • Multiple wills. In this situation, the one that was made most recently is often the one that the courts will decide is valid. However, wills created immediately before death may be contested due to undue influence, lack of mental capacity, or other reasons.
  • The state requirements aren’t met. Every state has specific requirements as to what must be in a will, the way in which it’s signed and the number of witnesses required. If these elements aren’t met, then the will may not be valid.
  • Location. Some states may not recognize wills created in another state.

To contest the will, you must have grounds, or legal standing, which means you must meet one of these requirements:

  • A prior will designates you as a beneficiary;
  • The current will designates you as a beneficiary;
  • You’re the beneficiary of a more recent will made after the one in question; or
  • You would be an heir if there was no will, and the state’s laws of intestacy were applied.

Your attorney will next file a petition in the state probate court where the estate is under probate. This tells the probate court that you are a beneficiary and the estate that you are contesting the will. If your case is not settled, it goes to court where you’ll make your argument as to why the will should be changed. The court will decide the outcome of your case.

A way to keep family members  from fighting over an estate is add a no-contest clause into the will. This disinherits any beneficiary who challenges a will, if their challenge fails. In order words, if you don’t win your challenge, you get nothing from the estate. If you would like to read more about wills and probate, please visit our previous posts.

Reference: MSN (May 30, 2022) “Contesting a Will? You Might Not Need a Lawyer”

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Dynasty Trusts offer more Control over Assets

Dynasty Trusts offer more Control over Assets

Trusts are the Swiss Army Knife of estate planning, perfect tools for specific directions on how your assets should be managed while you are living and after you have passed. A recent article titled “This Trust Can Help You Create a Financial Dynasty from Yahoo! finance explains how qualified perpetual trusts, also known as dynasty trusts, can offer more control over assets than other types of trusts.

What is a Dynasty Trust?

Called a Qualified Perpetual Trust or a Dynasty Trust, this trust is designed to let the grantor pass assets along to beneficiaries in perpetuity. Technically speaking, a dynasty trust could last for a century. They don’t end until several years after the death of the last surviving beneficiary.

Why Would You Want a Trust to Last 100 Years?

Perpetual trusts are often used to keep family wealth out of probate for a long time. During probate, the court reviews the will, approves the executor and reviews an inventory of assets. Probate can be time consuming and costly. the will and all the information it contains becomes part of the public record, meaning that anyone can find out all about your wealth.

A trust is created by an experienced estate planning attorney. Assets are then transferred into the trust and beneficiaries are named. There should be at least one beneficiary and a secondary beneficiary, in case the first beneficiary predeceases the second. A trustee is named to oversee the assets. The language of the trust is where you set the terms for when and how assets are to be distributed to beneficiaries.

Directions for the trust can be as specific as you wish. Terms may be set requiring certain goals, stages of life, or ages for beneficiaries to receive assets. This amount of control is part of the appeal of trusts. You can also set terms for when beneficiaries are not to receive anything from the trust.

Let’s say you have two adult children in their 30s. You could set a condition for them to receive monthly payments from trust earnings and nothing from the principal during their lifetimes. The next generation, your grandchildren, can be directed to receive only earnings as well, further preserving the trust principal and ensuring its future for generations to come.

Dynasty trusts are irrevocable, meaning that once assets are transferred, the transfer is permanent. Be certain that any assets going into the trust won’t be needed in the short or long run.

Be mindful if you chose to leave assets directly to grandchildren, skipping one generation, you risk the Generation Skipping Tax. There is no GST with a dynasty trust.

Assets in a trust are still subject to income tax, if they generate income. If you transfer assets creating little or no income, you can minimize this tax.

Not all states allow qualified perpetual trusts, while other states have used perpetual trusts to create a cottage industry for trusts. Dynasty trusts can offer more control over assets than other types of trusts, but they may not be the best choice. Your estate planning attorney will be able to advise the best perpetual trust for your situation. If you would like to read more about trusts, please visit our previous posts. 

Reference: yahoo! finance (July 12, 2022) “This Trust Can Help You Create a Financial Dynasty

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Mistakes to Avoid with Beneficiary Designations

Many people don’t know that their will doesn’t control who inherits all of their assets when they die. Some assets pass by beneficiary designation. Assets like life insurance, annuities and retirement accounts all pass by beneficiary designation. There are mistakes to avoid with beneficiary designations.

Kiplinger’s recent article entitled “Beneficiary Designations: 5 Critical Mistakes to Avoid” lists five critical mistakes to avoid when dealing with your beneficiary designations:

  1. Failing to designate any beneficiary at all. Many people forget to name a beneficiary for retirement accounts or life insurance. They may forget, didn’t know they had to, or just never got around to filling out the forms. If you don’t name a beneficiary for life insurance or retirement accounts, the company will apply its rules about where the assets will go after you die. For life insurance, the proceeds will typically be paid to your probate estate. For retirement benefits, if you’re married, your spouse will most likely receive the assets. However, if you’re unmarried, the retirement account will likely be paid to your probate estate, which has negative income tax ramifications.
  2. Failing to consider special circumstances. Not every family member should get an asset directly. This includes minor children, those with specials needs and people who can’t manage assets or with creditor issues.
  3. Misspelling a beneficiary’s name. Beneficiary designation forms can be filled out incorrectly and the beneficiary designation form may not be specific. People also change their names through marriage or divorce, or assumptions can be made about a person’s legal name that later prove incorrect. Failing to have names match exactly can cause delays in payouts, and in a worst-case scenario of two people with similar names, it can result in a court case.
  4. Forgetting to update your beneficiaries. Your choice of beneficiary may likely change over time as circumstances change. Naming a beneficiary is part of an overall estate plan, and just as life changes, so should your estate plan. Beneficiary designations are an important part of that plan—make certain that they’re updated regularly.
  5. Failing to review beneficiary choices with legal and financial advisers. How beneficiary designations should be completed is a component of an overall financial and estate plan. Involve your legal and financial advisers to determine what’s best for your circumstances. Note that beneficiary designations are designed to guarantee that you have the ultimate say over who will get your assets when you pass away. Taking the time to carefully (and correctly) choose your beneficiaries and then periodically reviewing those choices and making any necessary updates will allow you to remain in control of your money.

Your estate planning attorney will help you avoid any mistakes with your beneficiary designations, and make sure your choices are in line with your overall estate plan. If you would like to learn more about beneficiary designations, please visit our previous posts.

Reference: Kiplinger (June 6, 2022) “Beneficiary Designations: 5 Critical Mistakes to Avoid”

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Are Testamentary Trusts a Good Idea?

Are Testamentary Trusts a Good Idea?

Not everyone wants to leave everything to their heirs without restrictions. Some want to protect money inherited from their own parents for their children or want to keep an irresponsible child from squandering an inheritance. For people who want more control over their assets, a testamentary trust might be useful, according to the recent article “What Is a Testamentary Trust and How Do I Create One? from U.S. News & World Report. A testamentary trust can also be used to leave assets to minor children, who may not legally inherit wealth directly. Are testamentary trusts a good idea?

Your estate planning attorney may have some other, better tools for you.

A testamentary trust is a trust created to hold assets created in a last will and testament. It does not become active until after a person dies and the will has been validated by probate court. Once this has happened, the trust is activated and the decedent’s assets are placed into the trust. At this point, the trustee is in charge of the trust’s management and asset distribution.

A testamentary trust is different from a living trust. The living trust, also known as a revocable trust, is created while the grantor (the person making the trust) is still living. When the person dies, the trust doesn’t go through probate and assets are distributed according to the directions in the trust.

Both testamentary and living or revocable trusts are used in estate planning. However, the living trust may have far more flexibility and be easier to manage for a very simple reason: testamentary trusts are part of the probate process, administered through probate for as long as they are in effect.

There are advantages and disadvantages to both kinds of trusts. The testamentary trust is often used to manage assets for minor children. It’s also a good tool if you’re worried about an adult child getting divorced and keeping the family money in the family. The long-term court oversight is more protective, which may be desirable, but it can also be more expensive.

The best reason for a testamentary estate? When someone involved in the person’s estate loves to get tangled up in litigation. Having to deal with probate court in addition to civil court might make a litigious family member a little less likely to bring a lawsuit.

Your will must contain specific directions for what assets go into the testamentary trust. Assets with beneficiary designations, such as life insurance policies and retirement accounts, don’t go into any trusts, unless a trust is designated as the beneficiary of the policy or account. They are instead distributed directly to beneficiaries outside of the probate estate.

Changing or annulling a testamentary trust is relatively easy while you are living—simply update your will to reflect your new wishes.  However, once you have passed, the testamentary trust becomes irrevocable and may not be changed.

Are testamentary trusts a good idea for your situation? Your estate planning attorney will evaluate these and other estate planning tools to find the best solutions to protect you and your family. If you would like to read more about trusts in general, please visit our previous posts. 

Reference: U.S. News & World Report (July 14, 2022) “What Is a Testamentary Trust and How Do I Create One?

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How are Capital Gains in Irrevocable Trust Taxed?

How are Capital Gains in Irrevocable Trust Taxed?

Putting a home in an irrevocable trust may be done to protect the house from estate taxes, explains a recent article from Yahoo! Life titled “Do Irrevocable Trusts Pay the Capital Gains Tax?”  How are capital gains in a irrevocable trust taxed?

An irrevocable trust is used to protect assets. Unlike a revocable trust, once an asset is placed within the trust, it’s difficult to have the asset returned to the original owner. The trust is a separate legal entity and has its own taxpayer identification number.

Assets moved into a trust are permanently owned by the trust, until the trustee distributes assets to named beneficiaries or their heirs. Irrevocable trusts are often used to protect assets from litigation.

Capital gains taxes are the tax liabilities created when assets are sold. Typical assets subject to capital gains taxes include stocks, homes, businesses and collectibles. Capital gains taxes are usually lower than earned income taxes. For example, the top federal income tax rate is 37%, and the top capital gains tax rate is 20%. A single investor might pay no capital gains taxes if their taxable income is $41,675 or less (in 2022). Married copies filing joining also pay 0% capital gains if their taxable income is $83,350 or less.

Irrevocable trusts are the owners of assets in the trust until those assets are distributed, including any earned income. While it would seem that the irrevocable trust should pay taxes on earned income, this is not necessarily the case. If irrevocable trusts are required to distribute income to beneficiaries every year, then that makes the trust a pass-through entity. Beneficiaries pay taxes on the income they receive from the trust.

Capital gains are not considered income to such an irrevocable trust. Instead, any capital gains are treated as contributions to principal. Therefore, when a trust sells an asset and realizes a gain, and the gain is not distributed to beneficiaries, the trust pays capital gains taxes.

One of the tax benefits of home ownership is the ability to avoid the first $250,000 in capital gains profits on the sale of the home. For married couples filing jointly, the exemption is $500,000. The home must be a primary residence for two of the last five years.

What happens if you transfer your home to an irrevocable trust as part of your estate planning? Who pays the capital gains tax on the sale of a home in an irrevocable trust? Remember, the trust is a legal entity and not a person. The trust does not receive the $250,000 exemption.

Placing a home into an irrevocable trust can protect it from creditors and litigation, but when the home is sold, someone will have to pay the capital gains taxed on the sale. Although irrevocable trusts are great for distributing assets to beneficiaries, they are also responsible for paying capital gains taxes.

An experienced estate planning attorney will help you to determine which is more important for your unique situation: protecting the home through the use of an irrevocable trust or getting the tax exemption benefit if the home sells. If you would like to learn more about irrevocable trusts, please visit our previous posts. 

Reference: Yahoo! Life (July 7, 2022) “Do Irrevocable Trusts Pay the Capital Gains Tax?”

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There are Alternatives to Guardianship

There are Alternatives to Guardianship

Guardianships are drastic and very invasive. They strip individuals of their legal autonomy and establish the guardian as the sole decision maker. To become a guardian requires strong evidence of legal incapacity, and approval by a judge, explains an article titled “Guardianships Should Be a Last Resort–Consider These Less Draconian Options First” from Kiplinger. They should not be undertaken unless there is a serious need to do so. Once they’re in place, guardianships are difficult to undo. There are alternatives to guardianship.

If an elderly person with dementia failed to make provisions durable powers of attorney for health care and for financial matters before becoming ill, a guardianship may be the only ways to protect the person and their estate. There are also instances where an aging parent is unable to care for themselves properly but refuses any help from family members.

Another scenario is an aging grandparent who plans to leave funds for minor beneficiaries. Their parents will need to seek guardianships, so they can manage the money until their children reach the age of majority.

Laws vary from state to state, so if you might need to address this situation, you’ll need to speak with an estate planning attorney in the elderly parent or family member’s state of residence. For the most part, each state requires less restrictive alternatives to be attempted before guardianship proceedings are begun.

Alternatives to guardianship include limited guardianship, focused on specific aspect of the person’s life. This can be established to manage the person’s finances only, or to manage only their medical and health care decisions. Limited guardianships need to be approved by a court and require evidence of incapacity.

Powers of attorney can be established for medical or financial decisions. This is far less burdensome to achieve and equally less restrictive. A Healthcare Power of Attorney will allow a family member to be involved with medical care, while the Durable General Power of Attorney is used to manage a person’s personal financial affairs.

Some families take the step of making a family member a joint owner on a bank, home, or an investment account. This sounds like a neat and simple solution, but assets are vulnerable if the family member has any creditor issues or risk exposure. A joint owner also doesn’t have the same fiduciary responsibility as a POA.

An assisted decision-making agreement creates a surrogate decision-maker who can see the incapacitated person’s financial transactions. The bank is notified of the arrangement and alerts the surrogate when it sees a potentially suspicious or unusual transaction. This doesn’t completely replace the primary account holder’s authority. However, it does create a limited means of preventing exploitation or fraud. The bank is put on notice and required to alert a second person before completing potentially fraudulent transactions.

Trusts can also be used to protect an incapacitated person. They can be used to manage assets, with a contingent trustee. For an elderly person, a co-trustee can step in if the grantor loses the capacity to make good decisions.

Planning in advance is the best solution for incapacity. Guardianship is a very significant step, so consider the alternatives first. Talk with an experienced estate planning attorney to protect loved ones from having to take draconian actions to protect your best interests. If you would like to read more about guardianships, please visit our previous posts. 

Reference: Kiplinger (July 7, 2022) “Guardianships Should Be a Last Resort–Consider These Less Draconian Options First”

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Information in our blogs is very general in nature and should not be acted upon without first consulting with an attorney. Please feel free to contact Texas Trust Law to schedule a complimentary consultation.
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