Blog Articles

Serving Southwest Florida

Helping clients plan for their family's future, by creating an efficient, thoughtful and comprehensive estate plan that preserves their legacy and gives them peace of mind.

Irrevocable Trusts

Irrevocable trusts are mainly used for tax planning, says a recent article from Think Advisor titled “10 Facts to Know About Irrevocable Trusts.”  Their key purpose is to take assets out of an estate, reducing the chances of having to pay estate taxes. For estate planning purposes, placing assets inside the irrevocable trust is the same as giving it to an heir. If the estate exceeds the current limit of $11.7 million, then an irrevocable trust would be a smart move. Remember the $11.7 million includes life insurance policy proceeds. Many states with estate taxes also have far lower exemptions than the federal estate tax, so high income families still have to be concerned with paying estate taxes.

However, let’s not forget that beneficiaries must pay taxes on the income they receive from an irrevocable trust, usually at ordinary income tax rates. On the plus side, trusts are not subject to gift tax, so the trust can pay out more than the current gift tax limit of $15,000 every year.

If the trust itself generates income that remains inside the trust, then the trust will have to pay income taxes on the income.

Asset protection is another benefit from an irrevocable trust. If you are sued, any assets in the irrevocable trust are beyond the reach of a legal judgment, a worthwhile strategy for people who have a greater likelihood of being sued because of their profession. However, the irrevocable trust must be created long before lawsuits are filed.

A physician who transfers a million-dollar home into the trust on the eve of a malpractice lawsuit, for instance, may be challenged with having made a fraudulent transfer to the trust.

There is a cost to an irrevocable trust’s protection. You have to give up control of the assets and have no control over the trust. Legally you could be a trustee, but that means you have control over the trust, which means you will lose all tax benefits and asset protections.

Most people name a trusted family member or business associate to serve as the trustee. Consider naming a successor trustee, in case the original trustee is unable to fulfill their duties.

If you don’t want to give someone else control of your assets, you may wish to use a revocable trust and give up some of the protections of an irrevocable trust.

Despite the name, changes can be made to an irrevocable trust by the trustee. Trust documents can designate a “trust protector,” who is empowered to make certain changes to the trust. Many states have regulations concerning changes to the administrative aspects of a trust, and a court has the power to make changes to a trust.

An irrevocable trust can buy and sell property. If a house is placed into the irrevocable trust, the house can be sold, as long as the proceeds go into the trust. The trust is responsible for paying taxes on any profits from the sale. However, you can request that the trustee use the proceeds from selling a house to buy a different house. Be sure the new house is titled correctly: owned by the trust, and not you.

Asset swaps may be used to change irrevocable trusts. Let’s say you want to buy back an asset from the trust, but don’t want that asset to go back into your estate when you die. There are tax advantages for doing this. If the trust holds an asset that has become highly appreciated, swap cash for the asset and the basis on which the asset’s capital gains is calculated gets reset to its fair value, eliminating any capital gains on a later sale of the asset.

Loss of control is part of the irrevocable trust downside. Make sure that you have enough assets to live on before putting everything into the trust. You can’t sell assets in the trust to produce personal income.

Transferring assets to an irrevocable trust helps maintain eligibility for means-tested government programs, like Medicaid and Supplemental Security Income. Assets and income sheltered within an irrevocable trust are not counted as personal assets for these kinds of program limits. However, Medicaid has a look-back period of five years, so the transfer of a substantial asset to such a trust must have taken place five years before applying for Medicaid.

Talk with your estate planning attorney first. Not every irrevocable trust satisfies each of these goals. It is also possible that an irrevocable trust may not fit your needs. An experienced estate planning attorney will be able to create a plan that suits your needs best for tax planning, asset protection and legacy building.

Reference: Think Advisor (Dec. 16, 2020) “10 Facts to Know About Irrevocable Trusts”

 

Estate Planning Documents You Should Have

This post describes estate planning documents you should have. You might think that the coronavirus pandemic has caused everyone to get their estate planning documents in order, but the 20th annual Transamerica Retirement Survey of Retirees found that 30% of all retirees have nothing prepared—not even a will. That’s not good, for them or their families, says this timely article “6 Legal Documents Retirees Need—but Don’t Have” from MSN Money.

The survey revealed some troubling facts:

Only 32% have a Health Care Power Of Attorney or Designation of Health Care Surrogate, which allows named persons to make medical decisions on the retiree’s behalf.

Only 30% have an Advance Directive or Living Will, sharing their end-of-life wishes for medical care.

A mere 28% have a designated Durable Power of Attorney, so an agent can act on their behalf to pay bills and manage finances, if they are incapable of doing so themselves.

Worse, only 19% have written funeral and burial arrangements. Their families will be left to make all the decisions.

18% have a Health Insurance Portability and Accountability Act (HIPAA) waiver, which is needed so someone else may speak with health care and insurance providers on their behalf.

11% have a Trust of any kind.

The study shines a bright light on a big problem that will be faced by families, if their elders have not created the proper estate planning documents to prepare for incapacity or death. Ignoring the problem does not make it go away. It becomes more complicated, expensive and stressful for the loved ones left behind.

These estate planning documents and a last will and testament are needed, so families have the legal right to take care of their loved ones while they are living, as well as handle their estates after they pass.

Without these estate planning documents, the family may find themselves having to go to court to have a guardian appointed in the event their senior loved ones are too ill to manage their financial affairs.

If the loved one should die and there is no will in place, the court will rely on the state’s estate laws to determine who inherits assets. An estranged family member could end up owning the family home and all of its contents, regardless of their absence from the family.

An experienced estate planning attorney can work with the family in a safe, socially distanced manner to have the necessary estate planning documents created, before they are needed.

Reference: MSN MONEY (Dec. 15, 2020) “6 Legal Documents Retirees Need—but Don’t Have”

 

All About Charitable Trusts

A charitable trust can provide an alternative to meeting your wishes for charities and your loved ones, while serving to minimize tax liabilities. There are pros and cons to consider, according to a recent article titled “Here’s how to create a charitable trust as part of an estate plan” from CNBC. Many families are considering their tax planning for the next few years, aware that the individual income tax provisions of the 2017 Tax Cuts and Jobs Act will expire after 2025.

Creating a charitable trust may work to achieve wishes for charities, as well as loved ones.

A charitable trust is a set of assets, usually liquid, that a donor signs over to or uses to create a charitable foundation. The assets are then managed by the charity for a specific period of time, with some or all of the interest the assets produce benefitting the charity.

When the period of time ends, the assets, now called the remainder, can go to heirs, or can be donated to the charity (although they are usually returned to heirs).

There are pros and cons to Charitable Remainder Trusts and Charitable Lead Trusts. Your estate planning attorney will determine which one, if any, is appropriate for you and your family.

A charitable trust allows you to give generously to an organization that has meaning to you, while providing an equally generous tax break for you and your heirs. However, to achieve this, the charitable trust must be irrevocable, so you can’t change your mind once it’s set in place.

Charitable trusts provide a way to ensure current or future distributions to you or to your loved ones, depending on your unique circumstances and goals.

A Charitable Remainder Trust, or CRT, provides an income stream either to you or to individuals you select for a set period of time, which is typically your lifetime, your spouse’s lifetime, or the lifetimes of your beneficiaries. The remaining assets are ultimately distributed to one or more charities.

By contrast, the Charitable Lead Trust (CLT) pays income to one or more charities for a set term, and the remaining assets pass to individuals, such as heirs.

For CRTs and CLTs, the annual distribution during the initial term can happen in two ways; a Unitrust (CRUT or CLUT) or an Annuity Trust (CRAT or CLAT).

In a Unitrust, the income distribution for the coming year is calculated at the end of each calendar year and it changes, as the value of the trust increases or decreases.

In an Annuity Trust, the distribution is a fixed annual distribution determined as a percentage of the initial funding value and does not change in future years.

Interest rates are a key element in determining whether to use a CLT or a CRT. Right now, with interest rates at historically low levels, a CRT yields minimal income.

The key benefits to a CRT include income tax deductions, avoidance of capital gains taxation, annual income and a wish to support nonprofit organizations.

Your estate planning attorney and a member of the development team from the charity can work together to ensure that your charitable trust strategy achieves your goals of supporting the charity and building your legacy.  Contact us to find out more about charitable trusts.

Reference: CNBC (Dec. 22, 2020) “Here’s how to create a charitable trust as part of an estate plan”

 

Life Settlement Planning

This post addresses Life Settlement Planning.  Even in this volatile environment, many seniors may have an option for more retirement income available in the sale of their life insurance policy. A “life settlement” could provide them with an average of four or more times the cash surrender value of their policy.

The Street’s recent article entitled “Is Your Life Insurance Policy Worth More Than Its Cash Surrender Value?” explains that anytime a senior isn’t going to keep a life insurance policy, they should look into a life settlement to bring them the most money when they terminate the policy.

When a policy is lapsed, the policy owner gets nothing. When a policy is surrendered back to the insurance company, the policyowner receives little, if any, cash surrender value. So, in instances where a policy is being lapsed or surrendered, a life settlement makes financial sense.

According to 2019 life insurance industry data, over 90% of life insurance policies (by face amount) that terminated in 2018 were lapsed or surrendered. In 80% of those cases, the policyowners received nothing in return for years of premium payments to the insurance company, because they lapsed their policies.

Over the next decade, more than $2 trillion in life insurance policy death benefits that could qualify for a life settlement is anticipated to be lapsed or surrendered—about $850 billon is projected to be policies between $100,000 and $1 million.

To qualify for a life settlement, an individual must usually be at least 70 years old and own a whole life, universal life, or convertible term insurance life insurance policy, with a death benefit of $100,000 or more.

Traditionally, life settlements have been available only where the insured has developed a significant health impairment since the policy was started, but now even those insureds without a change in health can qualify for a life settlement, depending on their age and the type and size of the policy.

Some life settlement companies take several months to make an offer to purchase a policy, asking for full medical records and independent underwriting. However, recently, these companies have shortened the time in evaluating a policy and making an offer.

Reference: The Street (Dec. 22, 2020) “Is Your Life Insurance Policy Worth More Than Its Cash Surrender Value?”

Let us help plan your estate.

Personalized Estate Planning

Just as a custom-tailored suit fits better than one off the rack, a custom-tailored, personalized estate plan works better for families. Making sure assets pass to the right person is more likely to occur when documents are created just for you, advises the article “Tailoring estate to specific needs leads to better plans” from the Cleveland Jewish News.

The most obvious example of personalized estate planning is a family with a special needs member. Generic estate planning documents typically will not suit that family’s estate planning.

Every state has its own laws about distributing property and money owned by a person at their death, in cases where people don’t have a will. Relying on state law instead of a will is a risky move that can lead to people you may not even know inheriting your entire estate.

In the absence of a personalized estate plan, the probate court makes decisions about who will administer the estate and the distribution of property. Without a named personal representative, the court may appoint a local attorney to take on this responsibility. An appointed attorney who has never met the decedent and doesn’t know the family won’t have the insights to follow the decedent’s wishes.

The same risks can occur with online will templates. Their use often results in families needing to retain an estate planning attorney to fix the mistakes caused by their use. Online wills may not be valid in your state or may lead to unintended consequences. Saving a few dollars now could end up costing your family thousands to clean up the mess.

Estate plans are different for each person because every person and every family are different. Estate plan templates may not account for any of your wishes.

Generic plans are very limited. A personalized estate plan custom created for you takes into consideration your family dynamics, how your individual beneficiaries will be treated and expresses your wishes for your family after you have passed.

Generic estate plans also don’t reflect the complicated families of today. Some people have family members they do not want to inherit anything. Disinheriting someone successfully is not as easy as leaving them out of the will or leaving them a small token amount.

Ensuring that your wishes are followed and that your will is not easily challenged takes the special skills of an experienced estate planning attorney.  Let us help you create a personalized estate plan.

Reference: Cleveland Jewish News (Dec. 9, 2020) “Tailoring estate to specific needs leads to better plans”

Suggested Key Terms: Inheritance, Estate Planning Attorney, Will, Probate Court, Executor, Beneficiaries, Special Needs Families, Disinheriting

Wills Don’t Avoid Probate

Wills don’t avoid probate.  A last will and testament is a straightforward estate planning tool, used to determine the beneficiaries of your assets when you die, and, if you have minor children, nominating a guardian who will raise your children. Wills can be very specific but can’t enforce all of your wishes. For example, if you want to leave your niece your car, but only if she uses it to attend college classes, there won’t be a way to enforce those terms in a will, says the article “Things you should never put in your will” from MSN Money.

If you have certain terms you want met by beneficiaries, your best bet is to use a trust, where you can state the terms under which your beneficiaries will receive distributions or assets.

Leaving things out of your will can actually benefit your heirs, because in most cases, they will get their inheritance faster. Here’s why: when you die, your will must be probated in a court of law before any property is distributed.  Wills don’t avoid probate.  Probate takes a certain amount of time, and if there are issues, it might be delayed. If someone challenges the will, it can take even longer.

However, property that is in a trust or in payable-on-death (POD) titled accounts pass directly to your beneficiaries outside of a will.

Don’t put any property or assets in a will that you don’t own outright. If you own any property jointly, upon your death the other owner will become the sole owner. This is usually done by married couples in community property states.

A trust may be the solution for more control. When you put assets in a trust, title is held by the trust. Property that is titled as owned by the trust becomes subject to the rules of the trust and is completely separate from the will. Since the trust operates independently, it is very important to make sure the property you want to be held by the trust is titled properly and to not include anything in your will that is owned by the trust.  Any property titled in a trust will avoid probate.  Wills don’t avoid probate.

Certain assets are paid out to beneficiaries because they feature a beneficiary designation. They also should not be mentioned in the will. You should check to ensure that your beneficiary designations are up to date every few years, so the right people will own these assets upon your death.

Here are a few accounts that are typically passed through beneficiary designations:

  • Bank accounts
  • Investments and brokerage accounts
  • Life insurance polices
  • Retirement accounts and pension plans.

Another way to pass property outside of the will, is to own it jointly. If you and a sibling co-own stocks in a jointly owned brokerage account and you die, your sibling will continue to own the account and its investments. This is known as joint tenancy with rights of survivorship.

Business interests can pass through a will, but that is not your best option. An estate planning attorney can help you create a succession plan that will take the business out of your personal estate and create a far more efficient way to pass the business along to family members, if that is your intent. If a partner or other owners will be taking on your share of the business after death, an estate planning attorney can be instrumental in creating that plan.

Funeral instructions don’t belong in a will. Family members may not get to see that information until long after the funeral. You may want to create a letter of instruction, a less formal document that can be used to relay these details.

Your account numbers, including passwords and usernames for online accounts, do not belong in a will. Remember a will becomes a public document, so anything you don’t want the general public to know after you have passed should not be in your will.

Reference: MSN Money (Dec. 8, 2020) “Things you should never put in your will”

Let is help you plan your estate.

The SECURE Act

The SECURE Act eliminated the life expectancy payout for inherited IRAs for most people, but it also preserved the life expectancy option for five classes of eligible beneficiaries, referred to as “EDBs” in a recent article from Morningstar.com titled “Providing for Disabled Beneficiaries After the SECURE Act.” Two categories that are considered EDBs are disabled individuals and chronically ill individuals. Estate planning needs to be structured to take advantage of this option.

The first step is to determine if the individual would be considered disabled or chronically ill within the specific definition of the SECURE Act, which uses almost the same definition as that used by the Social Security Administration to determine eligibility for SS disability benefits.

A person is deemed to be “chronically ill” if they are unable to perform at least two activities of daily living or if they require substantial supervision because of cognitive impairment. A licensed healthcare practitioner certifies this status, typically used when a person enters a nursing home and files a long-term health insurance claim.

However, if the disabled or ill person receives any kind of medical care, subsidized housing or benefits under Medicaid or any government programs that are means-tested, an inheritance will disqualify them from receiving these benefits. They will typically need to spend down the inheritance (or have a court authorized trust created to hold the inheritance), which is likely not what the IRA owner had in mind.

Typically, a family member wishing to leave an inheritance to a disabled person leaves the inheritance to a Supplemental Needs Trust or SNT. This allows the individual to continue to receive benefits but can pay for things not covered by the programs, like eyeglasses, dental care, or vacations. However, does the SNT receive the same life expectancy payout treatment as an IRA?

Thanks to a special provision in the SECURE Act that applies only to the disabled and the chronically ill, a SNT that pays nothing to anyone other than the EDB can use the life expectancy payout. The SECURE Act calls this trust an “Applicable Multi-Beneficiary Trust,” or AMBT.

For other types of EDB, like a surviving spouse, the individual must be named either as the sole beneficiary or, if a trust is used, must be the sole beneficiary of a conduit trust to qualify for the life expectancy payout. Under a conduit trust, all distributions from the inherited IRA or other retirement plan must be paid out to the individual more or less as received during their lifetime. However, the SECURE Act removes that requirement for trusts created for the disabled or chronically ill.

However, not all of the SECURE Act’s impact on special needs planning is smooth sailing. The AMBT must provide that nothing may be paid from the trust to anyone but the disabled individual while they are living. What if the required minimum distribution from the inheritance is higher than what the beneficiary needs for any given year? Let’s say the trustee must withdraw an RMD of $60,000, but the disabled person’s needs are only $20,000? The trust is left with $40,000 of gross income, and there is nowhere for the balance of the gross income to go.

In the past, SNTs included a provision that allowed the trustee to pass excess income to other family members and deduct the amount as distributable net income, shifting the tax liability to family members who might be in a lower tax bracket than the trust.

Special Needs Planning under the SECURE Act has raised this and other issues, which can be addressed by an experienced estate planning attorney.

Reference: Morningstar.com (Dec. 9, 2020) “Providing for Disabled Beneficiaries After the SECURE Act”

 

Avoiding Probate with Homestead

This homestead estate planning issue concerns a single retired parent of an only adult daughter and how to transfer the home to the daughter. Should the daughter simply sell the house when her mother dies, or should the daughter be added to the deed now while her mother is alive?

Also, is there a court hearing?

In many states, there is no reason or requirement to go before a judge to probate your estate, says nj.com in its recent article “Should I add my daughter’s name to my home’s deed?”

In Florida estate planning, there are three primary questions to answer about the transfer of the home. First, adding the daughter to the title of the homestead property could jeopardize the property’s homestead status.  This can lead to a substantial increase in property taxes.

Second, there would possibly be some significant capital gains if the mom adds her daughter to the deed prior to death.

Also, if the mother winds up requiring Medicaid, Medicaid might put a lien against the home after she dies for the value of the services it provided.

Generally, when a home has been owned for a long time, the mother should try to preserve the step-up in basis for tax purposes that happens, if the real estate is still in the mom’s name at her passing.

Whether that step up is preserved and whether the homestead status is affected, depends on how the daughter is added to the deed.

Adding the daughter as a joint tenant or tenant in common won’t preserve the step-up basis for taxes and will negatively affect the homestead status. Ask an elder law attorney what this means in your specific situation.

A better option may be the Enhanced Life Estate Deed, where the mother transfers the property to her daughter but retains an enhanced life estate in the property.  The mother retains her authority to sell and put a mortgage on the property without the consent of the daughter.  Since there is no current transfer of the property the homestead status is not affected.  And since, the daughter receives the homestead at the mother’s death, that will preserve the step-up in basis at death.

This can also get complicated when there’s an outstanding mortgage, so speak to an experienced estate planning attorney.

Reference: nj.com (Dec. 15, 2020) “Should I add my daughter’s name to my home’s deed?”

 

Estate Planning for Blended Families

If two adult children in a blended family receive a lot more financial help from their parent and stepparents than other children, there may be expectations that the parent’s estate plan will be structured to address any unequal distributions. This unique circumstance requires a unique solution, as explained in the article “Estate Planning: A Trust Can Be Used to Protect Blended Families” from The Daily Sentinel. Families in which adult children and stepchildren have grandchildren also require unique estate planning for blended families.

Blended families face the question of what happens if one parent dies and the surviving step parent remarries. If the deceased spouse’s estate was given to the surviving step parent, will those assets be used to benefit the deceased spouse’s children, or will the new spouse and their children be the sole beneficiaries?

In a perfect world, all children would be treated equally, and assets would flow to the right heirs.  However, that does not always happen. There are many cases where the best of intentions is clear to all, but the death of the first spouse in a blended marriage change everything.

Other events occur that change how the deceased’s estate in a blended family is distributed. If the surviving step-spouse suffers from Alzheimer’s or experiences another serious disease, their judgement may become impaired.

All of these are risks that can be avoided, if proper estate planning is done by both parents while they are still well and living. Chief among these is a trust,  a simple will does not provide the level of control of assets needed in this situation. Don’t leave this to chance—there’s no way to know how things will work out.

A trust can be created, so the spouse will have access to assets while they are living. When they pass, the remainder of the trust can be distributed to the children.

If a family that has helped out two children more than others, as mentioned above, the relationships between the siblings that took time to establish need to be addressed, while the parents are still living. This can be done with a gifting strategy, where children who felt their needs were being overlooked may receive gifts of any size that might be appropriate, to stem any feelings of resentment.

That is not to say that parents need to use their estate to satisfy their children’s expectations. However, in the case of the blended family above, it is a reasonable solution for that particular family and their dynamics.

A good estate plan for blended families addresses the parent’s needs and takes the children’s needs into consideration. Every parent needs to address their children’s unique needs and be able to distinguish their needs from wants. A gifting strategy, trusts and other estate planning tools can be explored in a consultation with an experienced estate planning attorney, who creates estate plans specific to the unique needs of each family.  We can help you address these issues in your estate plan.

Reference: The Daily Sentinel (Dec. 16, 2020) “Estate Planning: A Trust Can Be Used to Protect Blended Families”

 

Merry Christmas

Our office wishes you and your loved ones a very Merry Christmas.