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Category: Revocable Living Trust

how do I keep money in the family? 

Consider Funding a Trust with Life Insurance

You have set up a trust and now you need to fund it. There are many different options available. You might want to consider funding a trust with life insurance. How would funding a trust with life insurance work, and could it be a good option for you? A recent article in Forbes “How to Fund a Trust With Life Insurance” explains how this works. Let’s start with the basics: a trust is a legal entity where one party, the trustee, holds legal title to the assets owned by the trust, which is managed for the good of the beneficiary. There can be more than one person who benefits from the trust (beneficiaries) and there can be a co-trustee, but we’ll keep this simple.

Trusts are often funded with a life insurance policy. The proceeds of the policy provide the beneficiary with assets that are used after the death of the insured. This is especially important when the beneficiaries are minor children and the life insurance has been purchased by their parents. Placing the insurance policy within a trust offers more control over how funds are used.

What kind of a trust should you consider? All trusts are either revocable or irrevocable. There are pros and cons to both. Irrevocable trusts are better for tax purposes, as they are not included as part of your estate. However, with an $11.58 million federal exemption in 2020, most people don’t have to worry about federal estate taxes. With a revocable trust, you can make changes to the trust throughout your life, while with an irrevocable trust, only a trustee can make changes.

Note that, in addition to federal taxes, most states have estate taxes of their own, and a few have inheritance taxes. When working with an estate planning attorney, they’ll help you navigate the tax aspect as well as the distribution of assets.

Revocable trusts are the most commonly used trust in estate planning. Here’s why:

  • Revocable trusts avoid probate, which can be a costly and lengthy process. Assets left in the revocable trust pass directly to the heirs, far quicker than those left through the will.
  • Because they are revocable, the creator of the will can make changes to the trust as circumstances change. This flexibility and control make the revocable trust more attractive in estate planning.

If you want to consider funding a trust with life insurance, be sure the policy permits you to name beneficiaries, and be certain to name beneficiaries. Missing this step is a common and critical mistake. The beneficiary designations must be crystal clear. If there are two cousins who have the same name, there will need to be a clear distinction made as to who is the beneficiary. If someone changes their name, that change must be reflected by the beneficiary designation.

There are many other types of trusts, including testamentary trusts and special needs trusts. Your estate planning attorney will know which trust is best for your situation. Make sure to fund the trust and update beneficiary designations, so the trust will achieve your goals.

If you would like to learn more about funding a trust – and what happens if you don’t – please visit our previous posts. 

Reference: Forbes (Sep. 17, 2020) “How to Fund a Trust With Life Insurance”

 

how do I keep money in the family? 

Understanding How Trustee Fees Work

A frequent example is when you create a revocable living trust to pass on assets to your children. You must name a trustee to manage those assets. You might name yourself as trustee, although some situations may require that it be another individual or organization. It is important that you have a good understanding how trustee fees work. Trustees assume responsibilities when managing assets, and the fees can compensate them for their time and efforts.

Yahoo Finance’s recent article entitled “Trustee Fees: What Are They and Who Pays?” explains that trustee fees are a payment for services rendered. A trustee can be an individual or an organization, like a bank, wealth management company or other financial institution. Trustees will do various duties, depending on the instructions in the trust document. However, their primary job is to make certain that the assets held in a trust are managed according to the trust grantor’s (creator’s) wishes for the trust’s beneficiaries.

The trust creator will usually set out the terms of payment for a trustee in the trust document. Let’s look at some different ways to structure trustee fees. One fee structure is to pay the trustee a set percentage of the assets in the trust each year. This is typically used with larger trusts with significant assets that continually appreciate or generate ongoing income. With a smaller trust, a different fee structure might be used. Instead of a percentage, you might pay the trustee a flat dollar amount, each year. If they don’t have as many duties, they could be paid an hourly rate.

When drafting a trust document with the help of an experienced estate planning attorney, the grantor can set the terms of payment, including capping how much can be paid in trustee fees.

If a trust doesn’t mention trustee fees in the trust document, state law can determine the fee. Typically, fees can either be charged as a percentage of assets or as a percentage of transactions associated with money moving in or out of the trust.

There are no set rules for calculating the amount trustees can charge for their time. However, there are some common guidelines for how trustee fees work. In many instances, a trustee will charge a minimum of 1% when dealing with larger trusts with significant assets. Smaller trusts frequently use a flat fee model. Trustee fees are paid out of the trust’s assets. Fees are typically paid quarterly.

Trustees are also entitled to reimbursement for any expenses, such as travel expenses, storage fees, taxes, insurance, or other expenses they incur related to the management of the trust. These expenses are reimbursable, regardless of whether the trust document specifies any guidelines for reimbursement.

The trustee fees are tax deductible to the trust, and the fees are considered taxable income for the trustee. If you feel like you have a good understanding how trustee fees work, but you’re uncertain what to pay (or what to charge if you’re acting as a trustee), speak with an estate planning attorney.

If you would like to learn more about trustees and how to select the person or entity that is right for you, please visit our previous posts.

Reference: Yahoo Finance (Aug. 14, 2020) “Trustee Fees: What Are They and Who Pays?”

 

how do I keep money in the family? 

Estate Planning Needs for Every Stage

Many people decide they need an estate plan when they reach a certain age, but when an estate plan is needed is less about age than it is about stages in life, explains a recent article “Life stages dictate estate planning needs” from The News-Enterprise. There are estate planning needs for every stage of life. These stages can be broken into four groups, young with limited assets, young parents, getting close to retirement and post-retirement life.

Every adult should have an estate plan. Without one, we can’t determine who will take care of our financial and legal matters, if we are incapacitated or die unexpectedly. We also don’t have a voice in how any property we own will be distributed after death.

The first stage—a young individual with limited assets—includes college students, people in the early years of their careers and young couples, married or not. They may not own real estate or substantial assets, but they need a fiduciary and beneficiary. Distribution of assets is less of a priority than provisions for life emergencies.

Once a person becomes a parent, he or she needs to protect minor children or special needs dependents. Lifetime planning is still a concern, but protecting dependents is the priority. Estate planning is used in this stage to name guardians, set up trusts for children and name a trustee to oversee the child’s inheritance, regardless of size.

Many people use revocable living trusts as a means of protecting assets for minor dependents. The revocable trust directs property to pass to the minor beneficiary in whatever way the parents deem appropriate. This is typically done so the child can receive ongoing care, until the age when parents decide the child should receive his or her inheritance. The revocable trust also maintains privacy for the family, since the trust and its contents are not part of the probated estate.

The third estate planning stage of life includes people whose children are adults, who have no children or who are near retirement age and addresses different concerns, such as passing along assets to beneficiaries as smoothly as possible while minimizing taxes. The best planning strategy for this stage is often dictated by the primary type of asset.

For people with special situations, such as a beneficiary with substance abuse problems, or a person who owns multiple properties in multiple states or someone who is concerned about the public nature of probate, trusts are a critical part of protecting assets and privacy.

For people who own a primary residence and retirement assets, an estate plan that includes a will, a power of attorney and medical power of attorney may suffice. An estate planning attorney guides each family to make recommendations that will best suit their needs.

If you would like to learn more about what type of estate planning stage you are in and what is right for you, please view our previous posts. 

Reference: The News-Enterprise (Aug. 25, 2020) “Life stages dictate estate planning needs”

 

how do I keep money in the family? 

Keeping The Family Farm In The Family

Most American farms or ranches are family businesses, started by one generation with the hope that the business will be transferred to the next generation. Keeping the family farm in the family matters. However, surveys show that only 20% of farm and ranch owners are confident they have a good plan in place for the transition, reports High Plains Journal in the article “Don’t wait to secure the future of your farm or ranch.” A common reason is that owners just aren’t ready, or they don’t have the time, or the right advice. They could also be put off by the complexity of the process.

Transition planning is possible. There are solutions for every farm, ranch or business, whether the goal is to ensure that your legacy continues, minimize taxes or provide for heirs who are and who are not involved with the business.

Understand that the process can take at least a year. A good estate planning attorney who is familiar with family businesses like yours will be an important help. The process will include both estate and succession planning. Here are some basic steps to help:

Reaching consensus. You’ll need to have discussions to clarify what the senior generation wants, and what their heirs want. Discuss how management and task-focused work is currently divided and who is going to step to up take what tasks.

Keeping the family farm in the family requires developing a plan. How will the operation go forward, and how will assets be distributed? What kind of coaching will be needed to ensure that the next generation has the tools and knowledge to succeed?

Estate planning is the paper and financial part of the process that will provide ways for the operation to mitigate estate taxes and prepare for wealth and asset management.

The succession plan involves the “people” side of the business, including developing vital business management and leadership skills, passing down the values of the founding owners and providing clarity for the family throughout this process.

Implementing the plan. This will be different for every scenario, but might include:

  • Splitting the operation into two entities: one that will operate ranch operations, another that will own the land.
  • Stipulating the owners with two types of ownership: voting and non-voting.
  • Voting ownership—deciding if it is to be retained individually or controlled by a trust.
  • Should non-voting ownership be transferred to trusts to reduce estate taxes?
  • Transfer strategies must be evaluated: gift, sale or stock options.

Here’s the most important concept: start now. Waiting to talk with an estate planning attorney could leave heirs in a situation where they can’t continue the family legacy. A failure to plan could mean they are forced to sell the land that’s been in the family for generations. If you would like to learn more about succession planning, please visit our previous posts.

Reference: High Plains Journal (Aug. 14, 2020) “Don’t wait to secure the future of your farm or ranch”

 

how do I keep money in the family? 

What Happens If You Don’t Fund Your Trust?

What happens if you don’t fund your trust? Trust funding is a crucial step in estate planning that many people forget to do. However, if it’s done properly, funding will avoid probate, provide for you in the event of your incapacity and save on estate taxes.

Forbes’s recent article entitled “Don’t Overlook Your Trust Funding” looks at some of the benefits of trusts.

Avoiding probate and problems with your estate. If you’ve created a revocable trust, you have control over the trust and can modify it during your lifetime. You are also able to fund it, while you are alive. You can fund the trust now or on your death. If you don’t transfer assets to the trust during your lifetime, then your last will must be probated, and an executor of your estate should be appointed. The executor will then have the authority to transfer the assets to your trust. This may take time and will involve court. You can avoid this by transferring assets to your trust now, saving your family time and aggravation after your death.

Protecting you and your family in the event that you become incapacitated. Funding the trust now will let the successor trustee manage the assets for you and your family, if your become incapacitated. If a successor trustee doesn’t have access to the assets to manage on your behalf, a conservator may need to be appointed by the court to oversee your assets, which can be expensive and time consuming.

Taking advantage of estate tax savings. If you’re married, you may have created a trust that contains terms for estate tax savings. This will often delay estate taxes until the death of the second spouse, by providing income to the surviving spouse and access to principal during his or her lifetime while the ultimate beneficiaries are your children. Depending where you live, the trust can also reduce state estate taxes. You must fund your trust to make certain that these estate tax provisions work properly.

Remember that any asset transfer will need to be consistent with your estate plan. Your beneficiary designations on life insurance policies should be examined to determine if the beneficiary can be updated to the trust.

You may also want to move tangible items to the trust, as well as any closely held business interests, such as stock in a family business or an interest in a limited liability company (LLC). Ask an experienced estate planning attorney about the assets to transfer to your trust.

Fund your trust now to maximize your updated estate planning documents. To learn more about trusts, how they work, and if they are right for you, please read our previous posts. 

Reference: Forbes (July 13, 2020) “Don’t Overlook Your Trust Funding”

 

how do I keep money in the family? 

What Is a Testamentary Trust?

What is a testamentary trust? It is a legal document that’s part of your will. It goes into effect after your death. This trust holds property for your heirs’ benefit and comes into effect when three criteria are met:

  • the testator has died
  • the will goes through probate; and
  • and the terms of the trust are still relevant.

US News and World Report’s recent article entitled How Do I Create A Testamentary Trust? explains that a frequent reason to create a testamentary trust, is to provide for your children after your death.

Testamentary trusts are not the same as living trusts. Those trusts become effective while you’re still alive. The main purpose of a living trust is to allow assets within the trust to avoid the legal proceedings associated with administering the will in the probate process.

With a testamentary trust, assets are transferred to the trust at your death through your will. As a result, they’re subject to probate proceedings.

A living trust can be revocable. That means it can be modified at any time. There’s also an irrevocable trust, which means that it can’t be changed once it’s finalized. A testamentary trust can be changed up, until the creator’s death.

A testamentary trust is often used when the creator has minor children and wants to provide some financial control over the assets, if both parents die while the children are minors. It can arrange management of those assets by a trustee.

You can also employ a testamentary trust for Medicaid planning. State law has a lot to do with how this works, so it is best to speak with an experienced estate planning attorney or elder law attorney.

Generally speaking, if you have a beneficiary who needs Medicaid government benefits, a supplemental needs trust or Medicaid trust can help the beneficiary afford needed expenses, without disqualifying them from the program’s benefits.

Note that Medicaid benefits are available to people who own few assets and eligibility is income-based.

If you would like to learn more about the different types of trusts, please visit our previous posts.

Reference: US News and World Report (Aug. 6, 20201) “How Do I Create A Testamentary Trust?”

 

how do I keep money in the family? 

Different Trusts for Different Estate Planning Needs

There are a few things all trusts have in common, explains the article “All trusts are not alike,” from the Times Herald-Record. They all have a “grantor,” the person who creates the trust, a “trustee,” the person who is in charge of the trust, and “beneficiaries,” the people who receive trust income or assets. There are different trusts for different estate planning needs. Here’s an overview of the different types of trusts and how they are used in estate planning.

“Revocable Living Trust” is a trust created while the grantor is still alive, when assets are transferred into the trust. The trustee transfers assets to beneficiaries, when the grantor dies. The trustee does not have to be appointed by the court, so there’s no need for the assets in the trust to go through probate. Living trusts are used to save time and money, when settling estates and to avoid will contests.

A “Medicaid Asset Protection Trust” (MAPT) is an irrevocable trust created during the lifetime of the grantor. It is used to shield assets from the grantor’s nursing home costs but is only effective five years after assets have been placed in the trust. The assets are also shielded from home care costs after assets are in the trust for two and a half years. Assets in the MAPT trust do not go through probate.

The Supplemental or Special Needs Trust (SNT) is used to hold assets for a disabled person who receives means-tested government benefits, like Supplemental Security Income and Medicaid. The trustee is permitted to use the trust assets to benefit the individual but may not give trust assets directly to the individual. The SNT lets the beneficiary have access to assets, without jeopardizing their government benefits.

An “Inheritance Trust” is created by the grantor for a beneficiary and leaves the inheritance in trust for the beneficiary on the death of the trust’s creator. Assets do not go directly to the beneficiary. If the beneficiary dies, the remaining assets in the trust go to the beneficiary’s children, and not to the spouse. This is a means of keeping assets in the bloodline and protected from the beneficiary’s divorces, creditors and lawsuits.

An “Irrevocable Life Insurance Trust” (ILIT) owns life insurance to pay for the grantor’s estate taxes and keeps the value of the life insurance policy out of the grantor’s estate, minimizing estate taxes. As of this writing, the federal estate tax exemption is $11.58 million per person.

A “Pet Trust” holds assets to be used to care for the grantor’s surviving pets. There is a trustee who is charge of the assets, and usually a caretaker is tasked to care for the pets. There are instances where the same person serves as the trustee and the caretaker. When the pets die, remaining trust assets go to named contingent beneficiaries.

A “Testamentary Trust” is created by a will, and assets held in a Testamentary Trust do not avoid probate and do not help to minimize estate taxes.

An estate planning attorney in your area will know which of these trusts will best benefit your situation.

Reference: Times Herald-Record (August 1,2020) “All trusts are not alike”

 

how do I keep money in the family? 

Take Advantage of Tax Laws Now

The pundits are saying that the if Democrats win the White House and possibly Congress, expect changes to income, gift generation skipping transfer and estate taxes. This recent article from Forbes says that you should take advantage of tax laws now.

Since 2000, the estate and gift tax exemption has taken a leap from $675,000 and a top marginal rate of 55% to an exemption of $11.58 million and a top marginal rate of 40%. However, it’s not permanent. If Congress does nothing, the tax laws go back in 2026 to a $5.6 million exemption and a top marginal rate of 55%. The expectation is that if Biden wins in November, and if Congress enacts the changes published in his tax plan, the exemption will fall to $3.5 million, and the top marginal rate will jump to 70%.

The current exemption and tax rate may be as good as it gets.

If you make a taxable gift today, you can effectively make the current tax laws permanent for you and your family. The gift will be reported in the year it is made, and the tax laws that are in effect when the gift is made will permanently applicable. Even if the tax laws change in the future, which is always a possibility, there have been proposed regulations published by the IRS that say the new tax laws will not be imposed on taxable gifts made in prior years.

Let’s say you make an outright taxable gift today of $11.58 million, or $23.16 million for a married couple. That gift amount, and any income and appreciation from the date of the gift to the date of death will not be taxed later in your estate. The higher $11.58 million exemption from the Generation Skipping Transfer Tax (GSTT) can also be applied to these gifts.

Of course, you’ll need to have enough assets to make a gift and still be financially secure. Don’t give a gift, if it means you won’t be able to support your spouse and family. To take advantage of the current tax laws now, you’ll need to make a gift that exceeds the reversionary exemption of $3.5 million. One way to do this is to have each spouse make a gift of the exemption amount to a Spousal Lifetime Access Trust (SLAT), a trust for the benefit of the other spouse for that spouse’s lifetime.

Be mindful that such a trust may draw attention from the IRS, because when two people make gifts to trusts for each other, which leaves each of them in the same economic position, the gifts are ignored and the assets in the trusts are included in their estate. The courts have ruled, however, that if the trusts are different from each other, based on the provisions in the trusts, state laws and even the timing of the creation and funding of the trusts may be acceptable.

These types of trusts need to be properly administered and aligned with the overall estate plan. Who will inherit the assets, and under what terms?

A word of caution: these are complex trusts and take time to create. Time may be running out. Take advantage of the tax laws now and speak with a skilled estate planning attorney. To learn more about the effects of tax law on estate planning, please view our previous posts here.

Reference: Forbes (July 17, 2020) “Use It Or Lose It: Locking In the $11.58 Million Unified Credit”

 

how do I keep money in the family? 

Planning An Estate After A Divorce

Planning an estate after a divorce involves adopting a different type of arithmetic. Without a spouse to anchor an estate plan, the executors, trustees, guardians or agents under a power of attorney and health care proxies will have to be chosen from a more diverse pool of those that are connected to you.

Wealth Advisor’s recent article entitled “How to Revise Your Estate Plan After Divorce” explains that beneficiary forms tied to an IRA, 401(k), 403(b) and life insurance will need to be updated to show the dissolution of the marriage.

There are usually estate planning terms that are included in agreements created during the separation and divorce. These may call for the removal of both spouses from each other’s estate planning documents and retirement accounts. For example, in New York, bequests to an ex-spouse in a will prepared during the marriage are voided after the divorce. Even though the old will is still valid, a new will has the benefit of realigning the estate assets with the intended recipients.

However, any trust created while married is treated differently. Revocable trusts can be revoked, and the assets held by those trusts can be part of the divorce. Irrevocable trusts involving marital property are less likely to be dissolved, and after the death of the grantor, distributions may be made to an ex-spouse as directed by the trust.

A big task in the post-divorce estate planning process is changing beneficiaries. Ask for a change of beneficiary forms for all retirement accounts. Without a stipulation in the divorce decree ending their interest, an ex-spouse still listed as beneficiary of an IRA or life insurance policy may still receive the proceeds at your death.

Divorce makes children assume responsibility at an earlier age. Adult children in their 20s or early 30s typically assume the place of the ex-spouse as fiduciaries and health care proxies, as well as agents under powers of attorney, executors and trustees.

If the divorcing parents have minor children, they must choose a guardian in their wills to care for the children, in the event that both parents pass away.

Ask an experienced estate planning attorney to help you with the issues that are involved in planning an estate after a divorce. There are other important times in your life when you should review your planning.  To learn more, please read our previous posts.

Reference: Wealth Advisor (July 7, 2020) “How to Revise Your Estate Plan After Divorce”

 

how do I keep money in the family? 

Neglecting to Fund a Trust

Neglecting to fund a trust is a surprisingly common mistake, and one that can undo the best estate and tax plans. Many people put it on the back burner, then forget about it, says the article “Don’t Overlook Your Trust Funding” from Forbes.

Done properly, trust funding helps avoid probate, provides for you and your family in the event of incapacity and helps save on estate taxes.

Creating a revocable trust gives you control. With a revocable trust, you can make changes to the trust while you are living, including funding. Think of a trust like an empty box—you can put assets in it now, or after you pass. If you transfer assets to the trust now, however, your executor won’t have to do it when you die.

Note that if you don’t put assets in the trust while you are living, those assets will go through the probate process. While the executor will have the authority to transfer assets, they’ll have to get court approval. That takes time and costs money. It is best to do it while you are living.

A trust helps if you become incapacitated. You may be managing the trust while you are living, but what happens if you die or become too sick to manage your own affairs? If the trust is funded and a successor trustee has been named, the successor trustee will be able to manage your assets and take care of you and your family. If the successor trustee has control of an empty, unfunded trust, a conservatorship may need to be appointed by the court to oversee assets.

There’s a tax benefit to trusts. For married people, trusts are often created that contain provisions for estate tax savings that defer estate taxes until the death of the second spouse. Income is provided to the surviving spouse and access to the principal during their lifetime. The children are usually the ultimate beneficiaries. However, the trust won’t work if it’s empty.

Depending on where you live, a trust may benefit you with regard to state estate taxes. Putting money in the trust takes it out of your taxable estate. You’ll need to work with an estate planning attorney to ensure that the assets are properly structured. For instance, if your assets are owned jointly with your spouse, they will not pass into a trust at your death and won’t be outside of your taxable estate.

Move the right assets to the right trust. It’s very important that any assets you transfer to the trust are aligned with your estate plan. Taxable brokerage accounts, bank accounts and real estate are usually transferred into a trust. Some tangible assets may be transferred into the trust, as well as any stocks from a family business or interests in a limited liability company. Your estate planning attorney, financial advisor and insurance broker should be consulted to avoid making expensive mistakes.

You’ve worked hard to accumulate assets and protecting them with a trust is a good idea. Just don’t neglect the final step of funding the trust.

Reference: Forbes (July 13, 2020) “Don’t Overlook Your Trust Funding”