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Three Things You Need to Know about Cryptocurrency and Your Estate Plan

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Cryptocurrency’s popularity has rapidly increased in recent years, with more people buying and selling it. Here are three things you need to know about cryptocurrency in relation to your estate plan.

Beware of the Tax Consequences

Transferring your cryptocurrency to other people, either during life or at your death, could have income, estate, and gift tax consequences that are important to be aware of.

  • Potential income tax consequences. Essentially, the position of the Internal Revenue Service (IRS) is that the sale or exchange of a “convertible virtual currency” (a virtual currency that has a corresponding value to a real currency such as the US dollar or the euro) may result in taxable gain or loss just as the sale or exchange of other property would. Whether the gain or loss is characterized as a capital gain or loss depends on whether the convertible virtual currency was a capital asset in the hands of the taxpayer, like stocks, bonds, or other investment property. If the virtual currency was not a capital asset in the hands of the taxpayer, such as inventory or other property held for sale in a business, the taxpayer would realize ordinary gain or loss. 
  • Potential estate and gift tax consequences. The IRS considers virtual currency to be property, so federal gift and estate tax laws apply. Because (until quite recently) cryptocurrency has been quickly increasing in value, many people, whose estate would otherwise have a value less than the estate and gift tax exemption amounts ($12.06 million for individuals and $24.12 million for married couples in 2022), must now include in their estate plans provisions for minimizing gift and estate tax consequences. 

If you own cryptocurrency that has substantially increased in value, or that you anticipate will substantially increase in value, it is important to discuss with your estate planning attorney ways you can minimize potential income, estate, and gift tax consequences.

Laws Governing Cryptocurrency Are Slowly Inching Along

It is hardly a secret that technological advances are moving faster than the law.

At the same time, as cryptocurrency increases in popularity, more people have cryptocurrency holdings that must be considered part of their estate. Because cryptocurrencies are generally stored in such a way that no personally identifying information is tied to them, owners of cryptocurrency must inform their beneficiaries that these assets exist, or they could be lost forever at the owner’s death. Further, owners (and their estate planning attorneys) must provide specific instructions for accessing the cryptocurrency, or the information could also die with the owner. Finally, because managing cryptocurrency requires some level of technological expertise, it is important to appoint trusted decision makers that have some basic cryptocurrency knowledge. 

All of these factors create unique challenges when it comes to dealing with cryptocurrency in your estate plan. A comprehensive estate plan ensures that you and your beneficiaries know about and control what happens to your cryptocurrency upon your death.

How You Hold Cryptocurrency Affects Your Plan

The way you store cryptocurrency adds an additional layer of complexity to the issue. How you store your cryptocurrency is one of the most important considerations because, if you have no plan for how to pass on your cryptocurrency, it could be lost after your death.

  • Custodial wallet. A third party, such as a crypto exchange, holds your cryptocurrency, similar to how a bank keeps your money in a checking account. While this is the most convenient option and there is no worry about “losing your keys,” the downside of leaving your crypto in another party’s possession is that they could freeze your funds or be attacked. With this type of wallet, your beneficiary can work with customer support to have the crypto transferred after your death.
  • Cold wallet. A cold wallet is a physical storage device, such as a USB drive, that stores your crypto offline. The downsides of this option are the cost of the hardware and that the device may be a small object that is easy to misplace, but it is also the most secure option for storing crypto because it cannot be stolen by hackers when it is offline. You will want to ensure that your trusted decision maker or beneficiary knows where to find the cold wallet and has detailed instructions for accessing the stored crypto.
  • Hot wallet. A hot wallet is a desktop, web-based, or mobile app that stores your crypto online. While a hot wallet is convenient, the big drawback is that crypto stored online is at the greatest risk of being hacked and stolen. Your estate plan will need to include instructions on how to access the hot wallet.
  • Paper wallet. A paper wallet is a printout of keys, usually in the form of characters and scannable QR codes. It provides a great amount of security because it stores your crypto offline, but it is the least convenient, and there is also the risk of losing the paper wallet. 

No matter how you store your cryptocurrency, it is critical that your trusted decision-maker knows how it is stored, where it is stored, and how to access it, including how to access all security keys, seed phrases, usernames, and password information. 

Because cryptocurrency and the estate planning laws surrounding it are rapidly evolving, it is essential that you work with an estate planning attorney who understands the unique challenges involved in planning for crypto. Get in touch with our team today.

Questions You Should Ask Your Estate Planning Attorney

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Creating an estate plan is a personal and often emotional undertaking, making the selection of your estate planning attorney of the utmost importance. Here are some questions you should ask your estate planning attorney to determine if they are the right person for the job.

Why did they pick estate planning as their practice area?

At its core, estate planning is a personal endeavor. Many estate planning attorneys have personal experiences that influenced their decision to specialize in this area. Asking this question can help you get to know your attorney and their reasons for practicing the way they do. These attorneys are passionate about their work and happy to share their background and the experiences that brought them to choose estate planning as their practice area. If the attorney you are considering has no particular reason for choosing estate planning, then perhaps you should keep looking.

What is their process?

If you have never done any estate planning before, the unknown of the process can be somewhat intimidating. Getting an answer to this question may help alleviate some of your fears because you will know exactly what is going to happen. The estate planning process can vary quite a bit depending on the attorney and their level of planning. For example, some attorneys may meet with a client only once prior to signing documents and then do not have any additional contact with their clients after signing the documents unless the client initiates it. Other attorneys have multiple meetings prior to signing the documents and additional follow-up meetings afterwards. Knowing what the attorney’s process looks like will help you determine whether the level of service they will provide is consistent with your expectations, know how long the process will take, and understand what to expect along the way.

What information do they need from you?

Estate planning relies heavily on you providing complete and accurate information. In fact, the failure to disclose certain information, such as all of the accounts and property that you own, debts or other obligations, or the existence of family members, can completely derail an entire estate plan. Some attorneys will rely on the information they glean from conversations with you while other attorneys will want to see supporting documentation, such as copies of deeds, account statements, insurance policies, etc. It is important that the attorney communicate what information will be needed and provide you with adequate time to collect the information.

Do other people have to be involved?

Because estate planning is such a personal process that requires the disclosure of highly sensitive information, it is good to know whom your attorney plans to involve in the process. Some people are very uncomfortable discussing their private affairs with others and want to limit the disclosure of this information to as few people as possible.  If you are married, then your spouse will need to be involved in the process. There is really no way of getting around this, as many laws require the disclosure of certain information to one’s spouse. 

Beyond your spouse, there are few other people who have to be involved. You may have trusted advisors, such as a financial planner, a certified public accountant (CPA), or an insurance agent, who have information that can help in the estate planning process and whom you may want to involve in the process to ensure that it goes smoothly. For example, a successful estate plan requires the proper coordination of the legal documents prepared by your estate planning attorney and the beneficiary designations on your accounts (such as retirement accounts) and insurance policies. Your attorney can work together with your financial and insurance advisors to ensure that your beneficiary designations are correct and make any necessary updates to them. Your CPA can also be invaluable in helping you understand the interplay of income, estate, and gift taxes and working with your attorney to ensure that your tax savings are maximized to the fullest extent possible. Although these advisors can play an important role, your attorney may be able to limit the amount of information that they share if there are specific details about your estate plan that you do not want divulged to your advisors.

Children do not need to be involved, and in some instances, should not be involved. Although it can be helpful to give adult children an overview of what your estate plan looks like and how it will work after your estate plan is completed, it is not necessary that you involve your children in the decision-making process. And if your adult children have strong opinions or if siblings do not all get along, then your children should not be involved in the estate planning process, as this will only be an invitation to challenge your estate plan on the grounds of undue influence later on.

Asking these questions of your potential estate planning attorney will help you get to know the attorney and better understand their process, the level of service they will provide, and their professional experience. Ultimately, the answers to these questions can help you determine whether the attorney is a good fit for you and your needs. If you are interested in moving forward with your estate plan, please give us a call and let us answer these questions for you.

Pour-Over Will: Not Your Average Will

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Wills and trusts are the two basic legal instruments that people use to pass accounts and property on to their loved ones at death. Although a revocable living trust is often used in place of a will, the two are not mutually exclusive. You can have both a will and a trust, and in fact, a special kind of will—known as a pour-over will—is commonly used alongside a living trust. 

A pour-over will adds peace of mind to your trust-based estate plan. If you neglect to transfer any accounts and property into a living trust during your lifetime, or fail to designate the trust or anyone else as a beneficiary at your death, the pour-over will ensures that those assets end up in the trust after you die. If you do not set up a pour-over will to go along with a living trust, any money or property that does not pass to the trust or other beneficiaries at your death and therefore remains outside the trust at the time of your death could be treated as though you had died without a will and will pass to your heirs under the default laws of your state.

What Is a Pour-Over Will? 

If your estate plan is based around a living trust, you are probably familiar with the benefits that the trust provides over a standard will. Avoiding probate, reducing attorney’s fees, and providing privacy for you and your loved ones are the primary benefits of using a living trust. 

Ideally, you transfer all of your accounts and property into the living trust while you are still alive by changing ownership from you as an individual to you as the trustee of the living trust or naming the living trust as the beneficiary of items such as life insurance or a retirement account. The trust, in effect, is a legal entity that is separate from your estate (the money and property you own). Since you create the trust while you are alive and you will most likely name yourself as the beneficiary, you will continue to use and enjoy the accounts and property. But if you do not transfer those accounts and property into the trust, they remain owned by you as an individual and are part of your estate. Without a will, when you pass away, your accounts and property will be distributed according to state law—which could end up being very different from how you want them to be distributed. 

A pour-over will prevents this scenario from happening. The pour-over will names your living trust as the beneficiary, which allows any money or property still owned by you individually at death to be transferred, or poured over, into your living trust upon your death. When used in tandem with a living trust, a pour-over will acts like a safety net to capture any accounts and property that you forgot—or did not have time—to place in the trust. 

How Does a Pour-Over Will Work? 

There are four parties involved in a pour-over will and the related trust: 

  • The testator (the person who creates the will)
  • The beneficiary (the person or entity who receives the accounts and property that are owned solely by the testator when they die)
  • The executor or personal representative (the person who carries out the testator’s wishes as stated in their will)
  • The trustee (the person who controls trust accounts and property)

When you create a pour-over will, you (the testator) name a beneficiary. The beneficiary receives any accounts and property that you own in your name alone at the time of your death. This person is usually the trustee of your living trust. They may also serve in the triple roles of beneficiary under your will, trustee of your trust, and executor. 

However, if the beneficiary and the trustee are the same person, your pour-over will must be drafted very carefully. Referring to the trustee by name, and not as your trust’s formal trustee, could result in your accounts and property passing to them as an individual instead of to the trust. 

You will also name an executor of your pour-over will. The executor is legally responsible for ensuring that your accounts and property end up being owned by the trust per the instructions in the will. 

If these distinctions are confusing, think of a chain of command: you are telling your will’s executor to move your accounts and property into the trust at your death. From there, the trustee is in charge and controls the distribution of the accounts and property because they are now owned by the trust. Again, the executor and the trustee could be the same person, but they do not have to be. You can split these roles among different people to create checks and balances in the chain of command so that one individual does not control the entire asset transfer process. 

Does Using a Pour-Over Will Avoid Probate? 

Probate is the court-supervised proceeding in which the court oversees the transfer of your accounts and property to beneficiaries. Only accounts and property owned solely in your name at your death are subject to probate; trust accounts and property are not. Thus, even though a pour-over will directs that accounts and property become trust accounts and property, the “leftover” accounts and property that you did not get around to transferring to the trust are subject to probate. In other words, they do not pour over to the trust until after probate wraps up. This can result in beneficiaries having to wait longer to receive their trust distributions. 

On the plus side, since the accounts and property that pass through probate on the way to becoming trust accounts and property are likely to be of relatively low value, the estate may qualify for small estate probate, which is generally faster, simpler, and less expensive than standard probate. The threshold value that qualifies an estate as small varies by state. Some states also allow small estates to skip the probate process altogether. 

Trusts should be updated regularly to reflect changing circumstances, but personal accounts and property might remain outside the trust for a variety of reasons. A pour-over will is a valuable addition to a living trust that acts as a safety device to protect your beneficiaries. Our estate planning attorneys can help you create a living trust and a pour-over will to accompany it. We can also discuss other trust and will options that might be better for you. To explore the different ways we can help secure your legacy, please schedule an appointment.

Three Steps You Can Take Now to Protect Your Artistic Legacy

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Although your death is probably a long way off, it is important that you have a plan to ensure that your affairs are settled in the way that you want. An estate plan crafted by an experienced estate planning attorney is a legally enforceable set of documents that allows you to name who will have the authority to make decisions for you in the event you cannot (agent under a financial or medical power of attorney); who will take care of your minor children (guardian); who will wind up your affairs upon your death (personal representative, executor, or successor trustee); and who will receive your accounts, property, and artwork (beneficiaries).

You have various options regarding who will receive your artwork. You could

  • instruct your personal representative, executor, or successor trustee to sell any of your artwork in your possession at your death;
  • designate specific individuals to receive it;
  • have it held by a trust or foundation to be lent or licensed after your death; or
  • provide instructions to donate your work outright to a museum, university, or other organization that might benefit from it.

Steps You Can Take to Begin the Process

The first step is to catalog your artwork, including pieces that you have sold. Make sure to specify to whom they were sold and for how much. This information can be helpful in valuing artwork that has not sold and providing a list of potential buyers for when you pass away. You should also include any pieces of artwork that you have lent. This knowledge will be helpful for your loved ones to determine who has the artwork and under what circumstances it will need to be returned. Your list should also include any pieces that have been licensed to someone else. It will be important for your loved ones to know about this stream of income, which could continue after your death. Also consider including a list of pieces that you have gifted to individuals or donated to charities. Be sure to include any pieces that you have kept for yourself. 

After you have compiled a list of your artwork, it will then be important to determine the value of any piece that has not already been appraised and that is still considered yours (having been neither donated nor sold). This process can help you understand the value of everything you own (an important step in the estate planning process) and determine if you have adequate insurance to cover your artwork’s value. Just like other pieces of tangible personal property, your artwork can be susceptible to theft and destruction and needs to be protected.

The last step is for you to meet with us to start or review your estate planning. During this meeting, we can discuss whom to put in charge of your affairs at your death as well as during any period in which you cannot make or communicate your own decisions. We will also discuss your wishes regarding your artistic legacy. We can discuss your fears, concerns, and objectives to craft a unique plan.

Remember Your Copyright

A copyright protects “original works of authorship” such as books, movies, songs, computer software, photographs, and architectural works. These works do not have to be published to be protected, but they generally have more commercial value after publication. If you own the copyright to your artwork, both the work and its copyright should be included in your estate plan. If the copyright is not specifically mentioned in your will or trust, it will transfer to your heirs by a residuary clause, which distributes all property not already addressed. As a result, one person could end up with the work and another with the copyright.

However, it is important to note that a copyright includes your right to terminate most transfers or licenses of the copyright at a future date. You cannot waive or transfer this right to someone else during your lifetime, and it passes to your surviving spouse and children when you die. It includes the ability to terminate a transfer of a copyright to a trust. An exception to this rule is transfer of the copyright by a will, which cannot be terminated by your spouse and children. 

We Are Here to Help You and Your Legacy

We understand how overwhelming it can be to think about what to do with your prized artwork at your death and to make other important decisions about your care and the care of your loved ones. We are passionate about working with you to create your next masterpiece: a comprehensive estate plan. Call us to schedule an appointment.

Powerful Provisions in Your Financial Power of Attorney

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In a financial power of attorney, you designate a trusted decision maker (agent or attorney-in-fact) to act on your behalf if you become disabled or unable to manage your financial affairs. Depending on the provisions you choose to include, your agent may have the power to buy and sell property, the power to invest, and powers regarding your retirement benefits. When you are selecting powers to give your agent, you should carefully consider the following three powers in particular: (1) the power to gift, (2) the power to make or change your estate plan, and (3) the power to prosecute and defend legal actions. 

The Power to Gift

Depending on how it is written, the power to gift authorizes your agent to make gifts of your money and property to any person or organization on your behalf. On the one hand, this power could be quite beneficial because it can enable your family to accomplish necessary Medicaid and other public benefits eligibility planning after you become incapacitated. It also gives your agent the ability to continue your charitable giving practices such as tithing to your church or donating to your favorite charities or scholarship funds. In addition, if a need arises after you can no longer manage your affairs, it allows your agent flexibility to financially help family members the way you would have.

On the other hand, you must exercise caution when including the power to gift, because it may invite financial exploitation by the agent. An agent could be tempted to make substantial gifts to themselves or their loved ones to the detriment of your chosen beneficiaries. Abusing the power to gift can disrupt an entire estate plan. Therefore, you may consider limiting the power to gift by specifying that your agent may not make gifts that disrupt your estate plan’s essential provisions or that your agent make gifts only to a trust that preserves your estate plan’s main provisions, such as a Medicaid Asset Protection Trust. To create a check on the agent, consider naming an independent third party to approve any gifts the agent makes.

The Power to Make or Change Your Estate Plan

This power is sensitive because it also invites potential exploitation by an agent who could create or alter your estate plan so that they receive all of your property or more than the share you want them to receive. On the other hand, such a power can allow a trusted agent to be able to alter an estate plan in a way and under circumstances that you would have wanted but are now unable to do yourself. For example, if a child develops an addiction after Mom and Dad become incapacitated, this power would allow the agent to alter the estate plan to include provisions that would let the child receive their inheritance with restrictions that would be helpful in treating their addiction and not detrimental in their current situation. Thus, the power to make or change an estate plan could allow a beneficial change for the loved one who is going through a messy divorce, facing bankruptcy, or dealing with an addiction.

Again, when including such a power, you may want to consider including limiting language so that, if any agent makes a change to your estate plan in a way that improperly benefits themselves, they must seek approval from a disinterested third party.

The Power to Prosecute and Defend Legal Actions

This power gives your agent the ability to start, settle, defend, intervene in, and appeal a legal action. The following example illustrates this power’s benefit:

Example: Helen goes to her estate planning lawyer’s office and signs a power of attorney that includes the power to prosecute and defend legal actions. A short time later, Helen goes into a nursing home where she has a fall that causes a stroke. The nursing home staff fails to check on her for more than eighteen hours, which results in brain damage and leaves Helen significantly paralyzed. Helen’s son, who is her agent under her power of attorney, seeks out a medical malpractice lawyer who advises him that Helen has a claim against the nursing home. Because Helen’s power of attorney specifically allows her agent to initiate legal action, the medical malpractice attorney can immediately file a lawsuit against the nursing home. Without that provision, Helen’s agent would have had to first go to court and seek a guardianship. Granting the power to prosecute avoided that delay and additional expense.

The downside to including the power to prosecute and defend legal actions is that an agent could conceivably abuse the power to harass or seek revenge on another person, such as a sibling against whom they have a personal grudge. It may be possible to guard against such abuses by including limiting language that excludes legal actions against family members.

Overall, because the powers to gift, to make or change an estate plan, and to prosecute and defend legal actions are such powerful provisions, you should carefully discuss their potential pros and cons with your attorney before deciding to include them in or exclude them from your financial power of attorney. If you have questions or would like to discuss other ways we can safeguard you, your loved ones, and your life savings when you can no longer manage your affairs, call us to schedule an appointment.

Business owners

Can a Trust Own My Business after I Die?

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In general, the answer to the title question is yes, your trust can own your business after you die. However, there are a number of considerations that may impact the answer to this and the following questions. One consideration is the type of business interest you own. Is your business a limited liability company (LLC), a partnership, a corporation, or a sole proprietorship? Another consideration is how your business is managed. Is your business managed as an LLC, a partnership, or a corporation?

How Does the Trust Get Ownership of the Business?

  • LLC: If your business is an LLC, a trust can receive ownership of your business interest when you execute an assignment of interest. If you are the LLC’s sole member, then after you have executed the transfer document assigning your interest to the trust, the trust will own 100 percent of your business. If your LLC has other members, your trust will own only the percentage of the business that you own. For example, if you have a 25 percent ownership interest in an LLC, your trust will own 25 percent. It is important to review the LLC’s operating agreement to see what restrictions, if any, there are on transferring your interest. Also, some operating agreements will require the other members’ consent prior to any transfer. If your LLC issues membership certificates, you should submit your assignment document to the LLC and have new membership certificates issued in the trust’s name.
  • Partnership: As with an LLC, a partnership interest is transferred to a trust by an assignment of interest. Again, it is important to review any partnership agreement to determine if there are restrictions or other conditions, such as consent requirements, to a transfer.
  • Corporation: If your business is a corporation, you should contact the corporation to determine what documentation will be needed to transfer your stock to your trust. For closely held corporations without specific documentation requirements, you can transfer your stock to your trust by executing an assignment of stock. You should submit this document to the corporation so that new stock certificates can be issued showing that the trust owns the stock. As with other types of business interests, you should check the corporate governing document, if any, to determine if there are restrictions or other conditions on making a transfer to your trust.
  • Sole Proprietor: If you own your business as a sole proprietor, you have not created any separate legal business entity that needs to be transferred. To transfer ownership of your business’s assets to your trust, you will simply transfer ownership in the same way as you would any other assets that are in your personal name. 

How Is the Business Managed?

How the business is managed after it has been transferred to the trust is very fact specific and will depend on several factors, such as what kind of business has been transferred and how that business was managed prior to the transfer. 

  • LLC: After a business interest has been transferred to a trust, the trustee will own the interest. If the interest is a single-member LLC where the member runs the business and is also the trustee, the trustee would continue to run the business’s day-to-day affairs, just like prior to the transfer. After the member’s death, the successor trustee would manage the business unless the trust and operating agreements have specified otherwise or the trustee has delegated their business management duties to another person. If, however, the business interest is a manager-managed multimember LLC where the member has not participated in day-to-day management decisions and such decisions have been delegated to a manager, the LLC would continue to be managed by the manager both prior to and after the member’s death.
  • Partnership: In a partnership where the partner participated in day-to-day management and has now transferred their ownership portion to a trust of which they are the trustee, the trustee will continue to manage the business as before the transfer. As with an LLC, after the partner’s death, the successor trustee will step in to manage the business unless the trust and partnership agreements specify otherwise or the trustee has delegated their management duties to another person. If the partnership has delegated these duties to its officers or employees, then depending on what the trust and partnership agreements direct, the trustee will most likely continue to allow the other officers/employees to manage the business, both prior to and after the partner’s death.
  • Corporation: After transferring the corporate stock to the trust, the trustee, as the owner, will be entitled to vote that stock according to the terms and conditions of the corporation’s governing documents. Normally, a transfer of stock to a trust will not change the corporation’s management.

What Do the Beneficiaries Receive?

The trust’s terms will determine what the beneficiaries are entitled to receive. The trust is entitled to receive income or profit distributions to owners or stockholders. Whether that income is distributed to the beneficiaries, and on what terms, will depend on the trust agreement’s terms.

Special Note About S Corporations

If your business is taxed as an S corporation (and you do not have to actually be a corporation to be taxed as an S corporation), there are special rules about who can own an S corporation. It is important to seek the advice of a qualified legal or tax professional prior to transferring ownership of your S corporation business interest to a trust and after the death of the grantor/trustmaker.

Although your trust can own your business after you die, you must consider many factors when transferring your business ownership interest to your trust. Therefore, it is important to consult a qualified professional who can ensure that you have considered all the factors and help you properly complete the transfer.

Vacation Property

Important Questions to Ask When Investing in a Vacation Property

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According to the National Association of Home Builders, in 2018 there were approximately 7.5 million second homes, making up 5.5 percent of the total number of homes.1 These homes are not only real estate that must be planned for, managed, and maintained, they are also the birthplace of happy memories for you and your loved ones. Following are some important estate planning questions to consider to ensure that your place of happy memories is protected.

What Will Happen to the Property at Your Death?

The fate of your vacation property at your death largely depends on how it is currently owned. If you are the property’s sole owner or if you own it as a tenant in common with one or more other people, you need to decide what will happen to your interest in the property. If you own the property with another person as joint tenants with rights of survivorship or with a spouse as tenants by the entirety, your interest will automatically transfer to the remaining owner without court involvement. If a trust or limited liability company owns your vacation property, the entity will continue to own the property after your death. The trust instrument or operating agreement may lay out additional instructions about what will happen at your death. 

What Do You Want to Happen to the Property at Your Death?

The wonderful thing about proactively creating an estate plan is that you get to choose, in a legally binding way, what happens to your money and property. It is important to note that, if you do not create a plan for your property (and if it is not owned in joint tenancy with right of survivorship or tenancy by the entirety), your state will decide for you according to its laws and by putting your loved ones through the probate process. Probate is the court-supervised process that winds up your affairs and distributes your money and property to the appropriate people. It is also important to note that owning property in a different state from where you reside could lead to your loved ones having to open two probates (one in the state where you resided at death and one where the vacation property is located). There are several different options for handling your vacation property.

  • Give the property outright to a loved one. This person may be your oldest child, someone who has expressed interest in continuing to use the property, or an individual with the financial means to maintain the property.
  • Leave the property outright to a group of people. Because your whole family enjoys gathering together now, you may wish for them to continue gathering at the vacation property after you pass away.
  • Give the property to a group of people as tenants in common and create an ownership agreement. Because there are multiple parties involved, each with their own property interest and personal financial situations, an ownership agreement can lay out each one’s rights and responsibilities.
  • Prior to your death, transfer the property to your revocable living trust to be held for a long period of time or indefinitely. Because the trust is the property’s owner when you die, the beneficiaries will merely look to the trust to see what happens. There is no need for probate, and you can specify any rules you may have for the property and how it is to be held or distributed to one or more chosen beneficiaries. Note: State law may limit how long the trust can remain in effect (the rule against perpetuities). If you want the trust to hold the property indefinitely, speak with an experienced estate planning attorney about how to accomplish this goal.
  • Prior to your death, transfer the property to a special trust that owns only the property to be held for a long period of time or indefinitely. This option may be advisable if you want to separate one property from the rest of your money and property to be managed on its own or if you have asset protection concerns. This trust agreement would also lay out each beneficiary’s specific rights and responsibilities with respect to their use and enjoyment of the property.
  • Prior to your death, transfer the property to a limited liability company to be held for a long period of time or indefinitely. Depending on your objectives for the property, transferring it to a limited liability company may provide the beneficiaries with some additional asset and liability protection. The company operating agreement may also specify each company owner’s rights and responsibilities with respect to any company property. 
  • Instruct your trusted decision maker who will wind up your affairs to sell the property. If you believe that the money from the property’s sale would be of greater use to your beneficiaries or that none of them would want to buy the property, selling it can be an effective way to provide some money to benefit your loved ones differently.

Can Your Beneficiary Afford the Vacation Property?

While there may be a lot of happy memories associated with your vacation property, you know that there are also a lot of responsibilities. When you decide to leave your property outright to a person or group of people, they will become responsible for financial obligations such as mortgage payments (if any), utility bills, and property insurance and taxes. If you wish your beneficiary to keep the property, you need to consider whether they can meet the financial obligations; if not, they may end up prematurely selling it.

If More than One Person Will Have an Interest in the Property, Do They All Get Along?

All your children may get along now, but will they still be able to come together and see eye to eye when you are no longer living? Owning property together means that they need to be able to communicate, agree, and equally contribute to the property’s maintenance. A proper estate plan can address these potential issues by outlining

  • everyone’s responsibilities with respect to the property,
  • everyone’s rights to the property,
  • who makes the decisions,
  • what to do if a dispute arises, and
  • how someone can walk away from the property.

What Should You Do to Make Your Wish a Reality?

First, you need to legally document your wishes to ensure that your loved ones know what your wishes are, that they will be followed, and that all possible scenarios have been planned for. Second, if you have concerns about your beneficiaries being able to financially maintain the property, you need to meet with a financial advisor to design a plan that allows you to set aside money for its maintenance. Also, you need to meet with an insurance agent to make sure that the property is properly insured based on its intended use and to acquire additional life insurance in case you need another source of financial liquidity for its maintenance. Finally, you should meet with your tax adviser to make sure that you know of any potential tax consequences of transferring the vacation property, whether during your lifetime or at your death.

If you are interested in learning more about your options for protecting your vacation property and having your wishes for it carried out, please contact us.

Footnotes

  1. Na Zhao, Nation’s Stock of Second Homes, National Assoc. of Home Builders Discusses Economics and Housing Policy, Eye on Housing (Oct. 16, 2020), https://eyeonhousing.org/2020/10/nations-stock-of-second-homes-2/).
Family Office

Seven Reasons for Considering a Family Office

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A family office provides management services to a family whose businesses and wealth have become too complex and significant to manage by themselves. A family office often combines investment, legal, and tax services along with lifestyle and administrative services, such as making travel arrangements or coordinating the use of the family’s private aircraft. In addition to supporting and simplifying a high-net-worth family’s lives, here are seven more reasons for considering a family office.

Reason 1: Passing Lessons and Values On to the Next Generation

With the structure and support processes of a family office in place, families are more likely to create an overall mission and cohesive vision for the legacy they would like to build. A family’s long-term vision will likely include more than just accumulating additional wealth; it will also include such things as charitable giving or making a social impact on the world in other ways. A family office can coordinate projects and plans that can help the next generation understand their potential role in executing the family’s long-term vision, as well as provide education and training to ensure that younger family members are ready to step into management or ownership roles that contribute to the family’s overall mission.

Reason 2: Comprehensive Investment Solution with Higher Returns

Families often think of their wealth in terms of separate silos: the family’s primary operating business is separate from its investment portfolio, which is separate from its real estate, which is separate from its charitable efforts. However, this disconnected mindset often inhibits a coordinated planning strategy that includes all of the family’s assets and liabilities.

Because a family office provides a centralized and comprehensive investment solution tailored to the family’s unique values, goals, and competencies (such as industry expertise or networks), family offices can often lead to higher returns without creating additional risk.1 Further, because families who use a family office are more likely to have conversations about investment decisions and performance, there is a greater likelihood that they will reach their financial goals. Finally, a family office, with its built-in reporting and feedback, allows a family to respond quickly when a change in investment strategy is needed.

Reason 3: Comprehensive Legal and Tax Planning Solutions

As a family grows and develops, so does its need for comprehensive legal and tax planning. Life events such as marriage, retirement, divorce, and death require planning ahead to establish the right tax, insurance, and legal strategies. A family office, with legal and tax experts who understand the family and its internal dynamics, ensures that the proper plans will be in place to minimize disruptions to achieving the family’s goals when unexpected life events occur.

Reason 4: Efficiency

A family office can avoid duplication of effort and thus be more efficient and economical. By delegating the management of certain activities to a family office, family members are free to use their time and energies as they choose. Family members can also benefit from economies of scale because investing a single large pot of funds is more cost effective than having many small accounts. In addition, for many activities, adding more family members only marginally increases the activity’s cost. 

Reason 5: Increased Information Flow

A family office can serve as the center for gathering and summarizing information related to the family’s businesses, investments, property, and charitable endeavors and then circulating it to the family at large. Families with family offices report that they are more informed about family matters, which promotes a feeling of transparency among all family members and in turn increases trust within the family.2

Reason 6: Maintain Privacy and Relationships

Working with a private family office instead of several different service providers minimizes both the number of people who have confidential and sensitive information about the family as well as the disruption that comes with change at the service provider level. By limiting the sharing of private information to a need-to-know-basis in the family office, the family can better minimize the risk of, and protect itself from, external threats such as extortion or fraud.

Reason 7: Create Career Opportunities

Not every family member who wants to work in the family business will have the opportunity to do so. A family office, with its array of investment, development, managerial, and charitable activities, provides additional career opportunities for family members to participate in and enables them to contribute to the family’s greater mission, even when opportunities within the primary family business may not be available or the right fit.

While creating a family office may seem overwhelming, there are many good reasons to begin exploring the idea if your family’s wealth is becoming increasingly too complex to continue managing alone. Start with implementing the services for which your family has the greatest need and build over time. Given the many reasons to consider a family office, not having one could be more costly to your family in the long run. To learn more about a family office and how it could help your family, please call us.

Footnotes

  1. Marius A. Holzer & Courtney Collette, The Value of a Family Office: A Deep Dive into the Benefits and Services a Family Office Can Provide to a Family, Cambridge Family Enterprise Group, https://cfeg.com/insights_research/the-value-of-a-family-office (last visited May 27, 2022).
  2. Id.
Debt

What Happens to My Spouse’s Debts at Their Death?

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A spouse’s death creates a difficult and demanding time for the surviving partner. As much as you might want space and time alone to process your grief, you may have certain responsibilities related to settling your deceased spouse’s affairs, including paying off their debt. 

Most Americans have some type of debt. The obligation to pay debts does not necessarily go away when a person dies. While most debts are paid by the deceased’s estate (money and property owned by the decedent at their death) and do not transfer to a surviving spouse or other beneficiaries, in some cases you may be responsible for paying off your deceased spouse’s creditor claims.

If the legal duty to pay off a spouse’s debt does fall to you, it has implications for your own finances, so you will want to be clear on what the laws are where you live. If debt collectors contact you, know that you have rights as well. You should discuss questions about your debt payment obligations and rights with an attorney who specializes in estate planning and administration. 

Debtor Nation

About 80 percent of Americans have some type of debt, from credit-card debt and student loans to mortgage debt and personal loans.1 An estimated 13 percent of Americans with debt expect that they will never pay it off during their lifetime. 

The average American has more than $90,000 in debt.2 Collectively, Americans owe $14 trillion. More than half of this amount is mortgage debt, which is not surprising, since a house is the largest purchase most Americans ever make. What may be surprising, however, is that people forty-five to fifty-four years old hold the greatest average debt. While Gen Xers have the largest average debt balance ($135,000), Baby Boomers, many of whom are at or near retirement age, hold the next-largest debt load (nearly $100,000). Members of the Silent Generation (age seventy-five and over) owe about half as much as the average Millennial, but people in the highest age category still have significant debt, owing an average of more than $40,000. 

In short, debt does not discriminate by age. Even as people near the end of life, they can struggle financially. And when a debtor passes away, questions arise for their surviving loved ones. 

Probate and Debt Payment

Before we delve into a surviving spouse’s possible debt obligations, a brief primer on how debt is handled after a death is useful. 

The legal process for distributing a person’s property after they die is called probate. During probate, estate assets (everything a person owned at the time of their death) are distributed according to the person’s will, if they had one, or to their legal heirs. But first, debts are paid. The remaining assets are then passed on to heirs or beneficiaries. 

Assets such as life insurance policies and other accounts with a named beneficiary, assets in trust, and jointly owned property are not subject to probate. In addition, each state has different rules for prioritizing the order in which debts must be paid. Usually, the estate pays funeral expenses and estate administration costs (e.g., court fees and attorney fees) first, followed by taxes and then other forms of debt, such as loans and credit card balances. 

This explanation of how probate works is, of course, extremely simplified. An attorney specializing in estate planning and administration can fill you in on the complete process and what is expected of you if you are named the estate administrator (the person in charge of overseeing the probate process and working with the probate court). 

When You May Be Liable for a Spouse’s Debts

An estate that lacks the money to pay off its liabilities is known as an insolvent estate. There may be nothing a creditor can legally do to collect a debt from an insolvent estate, and the debt could just go unpaid. But, in the following situations, you may be on the hook for your deceased spouse’s debts: 

  • You cosigned for a loan.
  • You are a joint account holder on a credit card (not merely a spouse who is an authorized user).
  • You live in a community property state that considers a couple’s assets and debts to be jointly owned by both spouses.

There are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In Alaska, couples who sign a special agreement are considered to be living in a community property state. If you live in one of these states, the debts your spouse incurred during marriage are legally also your debts.  

As a result, if the estate is insolvent and cannot cover its debts, you may be personally liable for paying them, even if they were exclusively in your spouse’s name. Creditors can come after you for debts such as medical expenses and outstanding credit-card balances. They could even have the right to garnish your wages, put a lien on or seize your property, or take money from your bank account. 

Exceptions apply to the shared-debt rules of community property states. Generally, you are responsible only for debts that you took on as a member of a married couple. That is, any debt your spouse incurred before you were married is generally not yours unless you explicitly agreed to take it on. Also, you may not be responsible for a spouse’s debt if you were legally separated when they passed away. In addition, property that you received as a gift or inheritance is typically considered your separate property and may be protected from your spouse’s creditors. Check with an attorney specializing in estate planning and administration for guidance on specific community property rules in your state. 

Spousal Debts and Dealing with Debt Collectors

Unless you live in a community property state or are otherwise legally obligated to pay your deceased spouse’s debts, you should not have to worry about spousal debt. But debt collectors may contact you anyway. 

Creditors could attempt to collect the money they are owed from assets that pass to you outside probate. They might even try to sue you personally to collect the debt. Neither of these tactics will work, but simply ignoring a legal filing is a bad idea. You may need to hire an attorney to prove that you are not liable for your spouse’s debt. 

Debt collectors do have the right to contact a deceased person’s spouse to find out who is authorized to pay the estate’s debts, according to the Consumer Financial Protection Bureau.3 However, the bureau adds, they cannot represent that you are personally responsible for paying the debt unless you are legally obligated to do so. 

There are rules to debt collection under federal law. As a debtor’s surviving spouse, you have the right to tell a debt collector to stop contacting you. After you have made such a request in writing, they must end communications with you. However, they can still try to collect the debt from either you or the estate with an official filing. 

Any debt that you do not personally owe should not affect your credit score, but a debt collector could improperly report your spouse’s debts to a credit reporting agency under your name. Should that happen, contact the credit reporting company and file a dispute to get the erroneous information removed from your credit report. 

Talk to an Estate Administration Attorney about Dealing with Spousal Debt

After the loss of a spouse, the grieving process can be complicated by the probate process and lingering questions about debt and finances. Though you may not have to pay your spouse’s debt, you may have to serve as their personal representative, executor, or administrator and deal with creditors. To best honor your spouse’s legacy and protect your own rights, it helps to understand the laws around estate administration, unpaid bills, and creditors. 

Are you unsure of your rights and obligations regarding a spouse’s debts? An estate administration attorney can answer your questions and advise you on which steps to take next. Contact us to set up an appointment.

Footnotes

  1. American Debt Statistics, Shift Credit Card Processing (Mar. 2021), https://shiftprocessing.com/american-debt/.
  2. Megan DeMatteo, The average American has $90,460 in debt—here’s how much debt Americans have at every age, CNBC (Nov. 18, 2021), https://www.cnbc.com/select/average-american-debt-by-age/.
  3. Am I responsible for my spouse’s debts after they die? Consumer Fin. Prot. Bureau (May 16, 2022), https://www.consumerfinance.gov/ask-cfpb/am-i-responsible-for-my-spouses-debts-after-they-die-en-1467/.
child and father

An Estate Plan Should Not Be a Set-It-and-Forget-It Endeavor

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As we all know, life happens. There is really nothing we can do about it. However, some of the most common life events can have a dramatic effect on your estate plan. If you think your estate plan is like a slow cooker and you can set it and forget it, you and your loved ones may be in for a stomach-turning surprise when it is time to put your plan into action. Let us take a look at some common life changes and the impact they may have on your already established estate plan.

Birth of a Child

It is common for parents to have their estate plan prepared after the birth of their first child. However, depending on what provisions are in the first iteration, a second child might have difficulty getting their share without court involvement if the clients do not revise their plan after the birth of a subsequent child.

Example: Ten years ago, Tim and Leslie had a daughter named Tabitha, which prompted them to have a revocable living trust prepared, outlining how the trust’s money and property were to be managed for Tabitha’s benefit. Five years later, Tim and Leslie had a second daughter, Tina. Months after Tina’s birth, Tim and Leslie both passed away in a plane crash. However, Tim and Leslie had not revisited their estate plan after Tina’s birth, so she is not mentioned anywhere in their trust. For Tina to receive any benefit from her parent’s money and property, someone will need to petition the probate court to sort out the situation. This process can be time-consuming, costly, and public, and the exact opposite of the outcome Tim and Leslie wanted when they created a revocable living trust to begin with.

Birth of a Grandchild

Many grandparents love spending time with and supporting their grandchildren in any way they can. However, depending on the family structure, a grandchild who has been left out of an estate plan may have no recourse and may miss out on the opportunities the grandparents may otherwise have intended their grandchildren to have.

Example: Ted and Gladys had two children, John and Adam. In 2020, Ted and Gladys met with their estate planning attorney to create an estate plan. Because they strongly believed in the value of higher education, they created subtrusts for their two grandchildren, John’s daughters, Mary and Ellen, to help offset the cost of their future tuition. In 2021, Adam welcomed a son, George. Unfortunately, Ted and Gladys passed away shortly thereafter. Although updating their trust was on their to-do list, they never got around to it. Therefore, when Ted and Gladys passed, Mary and Ellen were the only grandchildren to receive money for their education, leaving George to find alternate avenues for funding his education.

Death of a Family Member

A number of people are involved in creating a will or trust. There are those who are creating the estate planning documents (will maker or trust maker, respectively), those who receive a benefit from the estate planning document (beneficiaries), and those who are in charge of carrying out the document’s instructions (personal representative, executor, or successor trustee). Aside from the will or trust maker, the death of any of these individuals can greatly impact the estate plan. A beneficiary’s death may mean that others receive a larger share or that the deceased beneficiary’s descendants receive that share. Reviewing your estate plan to make sure that your wishes will still be carried out is important, even if your first-named beneficiary is no longer living.

Example: Stacy, a single woman, created a will, leaving her modest amount of money and property to her mother, her only living parent. Ten years later, both Stacy and her mother passed away while bungee jumping in Costa Rica. Because Stacy named no contingent beneficiary in her estate plan, the probate judge must look to the state inheritance law, which gives everything to her only living sibling, her estranged brother, Robert, whom she has not seen for fifteen years.

In addition, it is crucial that you select backups for your personal representative, executor, or successor trustee in case the first person you named passes away (even if it is before you). If you named no alternate, or not enough alternates, then depending on your estate plan’s terms, your loved ones may be able to pick the successor person or a judge may have to look to state law to determine whom to appoint as the new person in charge. For families who are prone to conflict, this type of situation could spell disaster.

Example: Roger named his wife, Janice, as the successor trustee of his revocable living trust. Under the wise guidance of his estate planning attorney, Roger named his sister, Joan; his son, Jason; and his best friend, Charles, as additional successor trustees. Six years later, Roger, Janice, and Joan passed away while visiting Roger’s mother. Because Roger had named backup successor trustees, his trust’s administration continued smoothly under Jason’s direction, preserving Roger and Janice’s nest egg and keeping nosy relatives and neighbors from learning their financial details.

Purchasing a New Home

Purchasing a new home can dramatically impact a trust-based estate plan. Typically, for this type of plan to work as intended, either all accounts and property need to be owned by the trust or the trust needs to be named as the beneficiary. Usually, when you create the trust, you prepare a deed transferring your home to it, making it easy to ensure that the trust owns your home (if your estate planning attorney recommends that strategy). However, if you decide years later to buy a new or second home, you need to remember to fund your new real estate into your trust to avoid probate. When you purchase real estate, most title companies will assume that you are doing so as an individual or, if you are married, as a married couple. If you want the home to be purchased in the trust’s name, you will need to notify the title company or follow up with your estate planning attorney after the transaction has closed to transfer the new property into the trust.