Category: Estate Planning

Elvis Presley, the King of Rock and Roll, died in 1977. Like most celebrities of his stature, he left behind a complicated legacy—and a considerable estate. Elvis’s estate, including Graceland, ended up in the hands of his only child, Lisa Marie Presley, who passed away in January at fifty-four years old. It is now set to pass to Lisa Marie’s three daughters. 

Several complications could make administering Lisa Marie’s estate a messy affair, however. Personal financial issues, a wide age gap between her children, and a challenge to her will by mother Priscilla Presley cast doubt over what will happen not only to her estate, but the future of Elvis’s legacy. 

Lisa Marie: Her Inheritance and Finances

Lisa Marie was born in 1968 to Elvis and Priscilla Presley. Less than a decade later, her father passed away from a heart attack at the age of forty-two. Lisa Marie would die of her own heart problems nearly forty-six years later, in January 2023.

Elvis never lost popularity in the decades following his death—his estate raked in an estimated $400 million last year, as the 2022 Elvis biopic movie helped to boost the value of the estate from around $500 million to more than $1 billion.¹

The Elvis Presley Trust

When Elvis died, his estate was placed in a trust, with Lisa Marie, Elvis’s grandmother, and his father as the beneficiaries. Elvis stipulated that Lisa Marie’s inheritance was to be held in trust for her until her twenty-fifth birthday on February 1, 1993. On that date, the trust automatically dissolved, and Lisa Marie inherited $100 million.²

Part of her inheritance was her childhood home, Graceland, which has become a museum and international tourist attraction that generates over $10 million per year.³ Lisa Marie started a new trust, the Elvis Presley Trust, to continue managing Graceland and the rest of the Elvis estate, which also includes the business entity Elvis Presley Enterprises, Inc (EPE).⁴ Lisa Marie was owner and chairperson of the board of EPE until 2005, when she sold 85 percent of its assets. 

Graceland and the Living Trust

Lisa Marie retained 15 percent ownership in EPE but 100 percent sole personal ownership of the Graceland mansion. She owned the entire thirteen-acre Graceland grounds, as well as her father’s personal effects, such as his awards, cars, costumes, and wardrobe. In 2013, Lisa Marie said, “Graceland was given to me and will always be mine. And then passed to my children. It will never be sold.”⁵

Her children—thirty-three-year-old Riley Keough and fourteen-year-old twins Harper and Finley Lockwood—stand to inherit their mother’s money and property through a living trust. Her son, Benjamin Keough, died in 2020. 

Since it appears that Lisa Marie did not file a separate will, the living trust—an estate planning document that allows an individual to transfer ownership of accounts and property to a separate entity (the trust), controls the accounts and property as the trustee while they are alive, and names a successor trustee to manage the accounts and property when they die—looms large. 

Priscilla Presley’s Trust Challenge

Priscilla Presley has disputed the validity of a 2016 amendment to Lisa Marie’s trust that removed Priscilla and a former business manager as trustees and replaced them with Riley Keough and Benjamin Keough.⁶ 

Court filings indicate that Priscilla says she was not notified of the change as required by law. She also claims there is no witness or notarization for the amendment, her name was misspelled in the document, and her daughter’s signature looked unusual. Priscilla has asked a judge to invalidate the amendment that removed her as trustee. 

Lisa Marie’s Financial Troubles

Despite inheriting $100 million when she turned twenty-five-years old, legal documents indicate that, upon her death, Lisa Marie was in financial trouble. The documents show that she had around $95,000 in cash and $715,000 in bonds, stocks, and other assets. She also reportedly had more than $100,000 in monthly earnings from EPE.⁷ 

However, the same documents show a $1 million tax debt and $92,000 in monthly expenses. And, in 2021, her ex-husband Michael Lockwood reopened a lawsuit against Lisa Marie seeking $4,600 per month in child support. 

By 2016, her $100 million trust had been reduced to just $14,000 cash. This revelation came from a lawsuit against her manager, Barry Siegel, for allegedly mismanaging her wealth. Lisa Marie claimed in 2016 divorce documents that she was $16.67 million in debt.⁸ In 2019, Siegel, who counter-sued Lisa Marie, said the deal to sell off her 85 percent stake in EPE cleared up over $20 million in debts she had incurred. 

Potential Legal Issues for the Lisa Marie Presley Estate

The uncertainty of Lisa Marie’s estate raises several legal questions that will most likely be left to the courts to resolve. 

The Living Trust Challenge

If Priscilla’s challenge to the living will amendment is successful, the amendment will presumably be treated as invalid. This would mean Priscilla, not Lisa Marie’s daughter Riley, would be named the successor trustee and have control over the trust’s money and property. 

Creditor Claims

While her financial status is still unclear, if Lisa Marie was in debt, her creditors would have the chance to make claims against her estate. The estate has the option to honor or reject any creditor claims. Rejection could lead to litigation. 

Because creditors receive priority over those entitled to inherit Lisa Marie’s money and property, her accounts and property, including Graceland, might have to be liquidated or sold to satisfy Lisa Marie’s debts. In her case, estate taxes could also be due even after debt is calculated, and an estate tax valuation could take time if creditors bring lawsuits against Lisa Marie’s estate. 

Her Daughters’ Inheritances

Assuming that there is enough liquidity in the estate to satisfy creditors without selling Graceland, the mansion and any remaining money and property would pass to daughters Riley, Harper, and Finley. But the mansion comes with maintenance and tax expenses of over $500,000 per year. It is not clear whether the daughters would agree to support these costs and keep control of the Elvis legacy in the family. 

The daughters could decide to sell Graceland. But if even one of the daughters wants to cash out, it could lead to internal conflict among them. The ages of the daughters are another wildcard. Did Lisa leave her twin daughters’ inheritances in trust until they come of age, as her father did for her? Or does the trustee have discretion? And will the trustee end up being daughter Riley or mother Priscilla following the trust challenge? 

There is no guarantee, either, that Lisa Marie left an equal inheritance to all three daughters. Although this is common practice, there is no law mandating that children be treated equally in estate plans. Parents are free to divvy up their money and property however they see fit. An unequal bequest could be another source of inner-family conflict. 

Control What You Can with an Estate Plan

Lisa Marie Presley’s tragic and untimely passing is a reminder that none of us know the time, place, and manner of our death. But we can assert control over our legacy through estate planning. 

A well-considered estate plan eliminates some of the uncertainty we all face, helping to bring peace of mind to you and your loved ones. To start planning today, contact our office to schedule an appointment.

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Footnotes

1. Steve Knopper, The Elvis Business Is Booming Into the Billions, Billboard Pro (June 25, 2022), https://www.billboard.com/pro/elvis-business-what-its-worth-graceland-publishing-film/.
2. Harriet Alexander, Who’s going to get Graceland? Lisa Marie Presley’s 14-year-old twins and Hollywood starlet daughter are expected to split the King’s Memphis mansion – but they won’t see a cent of $100million Elvis left his daughter because she lost it all, Daily Mail (Jan. 13, 2023), https://www.dailymail.co.uk/news/article-11630587/Whos-going-Graceland-Lisa-Maries-14-year-old-twins-Hollywood-star-daughter-inherit.html.
3. Brian Contreras and Anousha Sakoui, Lisa Marie Presley leaves behind a lucrative Graceland — and a complicated financial legacy, Los Angeles Times (Jan. 14, 2023), https://www.latimes.com/entertainment-arts/business/story/2023-01-14/lisa-marie-presley-graceland-financial-legacy-elvis.
4. The Estate of Elvis Presley/The Elvis Presley Trust, Graceland, https://www.graceland.com/about-graceland.
5. Leah Bitsky, What Lisa Marie Presley’s children may inherit after her tragic death, Page Six (Jan. 13, 2023), https://pagesix.com/2023/01/13/what-lisa-marie-presleys-children-may-inherit-after-her-tragic-death/.
6. MoneyWatch, Priscilla Presley is challenging her daughter Lisa Marie’s will, CBS News (Jan. 31, 2023), https://www.cbsnews.com/news/priscilla-presley-challenges-lisa-marie-presley-trust-amendment/.
7. Andrew Court, Lisa Marie Presley’s finances revealed: $92K in monthly spending, $1M in IRS debt, New York Post (Jan. 13, 2023), https://nypost.com/2023/01/13/lisa-marie-presleys-finances-revealed-in-court-docs-92k-in-monthly-spending-1m-in-irs-debt/.
8. Maria Pasquini, Lisa Marie Presley Says She’s Over $16 Million in Debt, Divorce Documents Claim, People (Feb. 16, 2018), https://people.com/music/lisa-marie-presley-16-million-debt/.

It is important to let your estate planning attorney know if you own real estate that is subject to a mortgage. Most mortgages include due-on-sale clauses stating that, upon the transfer of the mortgaged property, the entire amount of the debt owed on the mortgage is immediately due and payable. Under the Garn–St Germain Depository Institutions Act of 1982¹ (Garn–St Germain Act), lenders are prohibited from enforcing due-on-sale clauses in some circumstances but not in others. If your estate plan involves the transfer of property subject to a mortgage, it is important to keep this in mind.

What Is the Garn-St Germain Act?

The Garn–St Germain Act is a federal law that allows lenders to enter into or enforce contracts, including mortgage agreements, that contain due-on-sale clauses even if a state’s constitution or laws, including their judicial decisions, prohibit them. However, the Garn–St Germain Act lists nine situations in which due-on-sale clauses are not enforceable, including some transfers that may be relevant to your estate plan. In the nine situations specified, lenders may not enforce due-on-sale provisions in real property loans “secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home.”²

This generally means that the statutory exceptions apply to due-on-sale clauses in mortgages on residential—not commercial—real estate with less than five apartments. Although we will not cover every situation involving mortgages on residential real estate in which lenders are not permitted to enforce due-on-sale clauses, the following exceptions are especially relevant when you are creating or updating your estate plan:

A transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety. Many spouses and other individuals co-own their homes or other real estate. In a joint tenancy, two or more co-owners (not necessarily spouses) of real property have equal rights and responsibilities and a right of survivorship, meaning that if one of the co-owners dies, their interest disappears and the other co-owners’ interests automatically and immediately increase proportionally. A tenancy by the entirety is only permitted in some states and is generally available only to married couples. Neither of the married co-owners may sell the property or obtain a mortgage without the consent of the other. Similar to joint tenants, tenants by the entirety have a right of survivorship, so if one spouse dies, the surviving spouse automatically becomes the sole owner of the property. When one of these two types of co-ownership exists, a lender may not enforce a due-on-sale provision upon the death of one of the co-owners.

A transfer to a relative resulting from the death of a borrower. This situation involves the transfer of real property when one or more relatives inherit it after the borrower’s death. As long as the beneficiaries are relatives, the due-on-sale clause will not be enforced.

Transfer to a spouse or child during the owner’s lifetime. If someone who owns property subject to a mortgage transfers it during their lifetime to their spouse or child, the due-on-sale clause may not be enforced. This could be a transfer of the owner’s entire interest in the property or a partial interest to establish joint ownership, such as a joint tenancy mentioned.

A transfer to an inter vivos trust in which the borrower is and remains a beneficiary that does not relate to a transfer of rights of occupancy in the property. An inter vivos trust is a trust that is created during the lifetime of the grantor (the creator of the trust) as opposed to at the grantor’s death. There are a couple of somewhat complicated but important elements to consider regarding this exception:

1. The borrower is and must remain a beneficiary of the inter vivos trust. In the case of a revocable living trust (RLT), a grantor is often also the beneficiary of the trust: the trustee simply holds the property in trust for the benefit of the grantor. In many cases, the grantor is also the trustee. An RLT may be revoked or modified by the grantor at any time during the grantor’s lifetime, and is useful for many people because it enables them to enjoy their property as if they still owned it. The trustee is authorized to manage the property for the grantor if they become incapacitated during their lifetime, and holding the property in the trust avoids probate proceedings by enabling the property to pass according to the terms of the trust, maintaining privacy and avoiding delays and costs. Because the grantor often remains the beneficiary of an RLT, this requirement of the Garn–St Germain Act is frequently (although not always) satisfied in situations involving transfers to RLTs.

Irrevocable trusts, that is, trusts that generally cannot be revoked or changed once they are created, are often created to minimize estate taxes or protect the property held by the trust from creditors’ claims. To achieve these benefits, the grantor is often not a beneficiary of an irrevocable trust—and if the grantor is not a beneficiary, the lender may not be precluded by the Garn–St Germain Act from enforcing a due-on-sale clause when the property is transferred to the irrevocable trust.³ 

2. The borrower may need to occupy the property. Unfortunately, it is not completely clear whether the individuals who transfer real property to a trust during their lifetime need to occupy the property. The Garn–St Germain Act does not require occupancy of the property being transferred to an inter vivos trust, but simply mandates that the transfer does not relate to a transfer of the rights of occupancy in the property. However, the regulations issued by the Office of the Comptroller of the Currency to implement the Garn–St Germain Act state that the borrower must remain an “occupant of the property.”⁴ Because of the lack of clarity, it may be prudent to comply whenever possible with both requirements to ensure that the lender is prohibited from enforcing the due-on-sale clause.

We Can Help

Estate planning often involves transfers of real estate, either during your lifetime to a trust or family member, or at your death. Fortunately, if the property is subject to a mortgage, the Garn–St Germain Act will prevent the lender from enforcing a due-on-sale clause in many situations, especially transfers to family members. However, it is important to be cautious to avoid missteps that could result in a mortgage unexpectedly being called due. Obtaining lender approval in writing before transferring real estate with a mortgage is advised. Call us to set up an appointment so we can help ensure that your estate plan achieves your goals for your real property and does not include any unpleasant surprises.

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Footnotes

1. 12 U.S.C. §1701j-3.
2. 12 U.S.C. §1701j-3(d). The regulations implementing the Garn–St Germain Act, Preemption of State Due-on-Sale Laws, 12 C.F.R. §§ 191.1-191.6 (2018), https://www.govinfo.gov/content/pkg/CFR-2018-title12-vol1/xml/CFR-2018-title12-vol1-part191.xml, use the word “home” instead of a “residential real property containing less than five dwelling units” as stated in the text of the Garn–St Germain Act. 12 C.F.R. § 191.5(b). Those regulations also state in 12 C.F.R.§ 191.2(e) that the word “home” has the same meaning as provided in 12 C.F.R § 141.14, which states: “The term home means real estate comprising a single-family dwelling(s) or a dwelling unit(s) for four or fewer families in the aggregate.”
3. There is some authority indicating that a right of occupancy will be deemed to be a beneficial interest sufficient to satisfy the statute. Daley v. Sec’y of the Exec. Off. of Health and Hum. Servs., 477 Mass. 188 (Mass. 2017).
4. Preemption of State Due-on-Sale Laws 12 C.F.R. § 191.5(b)(1)(vi)) (Jan. 1, 2018), https://www.govinfo.gov/content/pkg/CFR-2018-title12-vol1/xml/CFR-2018-title12-vol1-part191.xml. Although one case found that the OCC had exceeded its authority in requiring the borrower to be an occupant of the property to maintain the Garn St Germain protections, the case may not be considered by some courts because it was unpublished. Baldin v. Wells Fargo Bank, N.A., 2013 WL 794086 (D. Or. Feb. 12, 2013).

Spring is associated with renewal, and as the weather gets warmer, many homeowners turn their attention to renovation projects. 

Each May, the home remodeling industry and the National Association of Home Builders (NAHB) celebrate National Home Remodeling Month. In 2023, over 17 million home remodeling projects are expected to be undertaken in the United States. 

Between planning, permitting, and construction, the home remodeling process can take months to complete. But even after the finishing touches have been applied, there may still be work to do. If the home is part of an estate plan, a remodel can affect that plan and require changes to it. To keep your estate plan up to date, make sure to discuss a home remodeling project with an attorney. 

Remodeling Market Remains Strong 

The home remodeling market has shown tremendous growth. From 2007 to 2022, US remodeling activity increased 65.9 percent.¹ The remodeling market slowed at the start of the pandemic in early 2020 but has come back strong, despite rising material costs and labor shortages. 

Homeowners flush with cash from increased home values have been a major driver of the billions spent on improvement projects.² While high home equity levels should sustain remodeling activity for the next few years, decreases could occur due to falling home prices, inflation, and the probability of a recession. 

The number of remodeling projects is expected to decrease from 17.7 million in 2022 to 17.3 million in 2023. Nevertheless, the United States spends hundreds of billions per year on home improvement. From 2019 to 2021, Americans spent $624 billion on nearly 135 million home improvement projects—an increase of $300 billion and 94 million projects compared to 2013.³ 

As the housing market slows, more homeowners plan to invest in improvement projects to make their homes more comfortable and enjoyable, as opposed to making them more attractive to prospective buyers. Home improvement spending averages around $7,750 to $8,500.⁴ The most common remodeling projects involve the bathroom, kitchen, living room, and primary bedroom. 

When it comes to home improvement project funding, cash from savings pays for most projects under $5,000. Pricier projects are more likely to be funded by a home equity loan, cash from home refinancing, an insurance settlement, or contractor financing. 

Home Improvement Estate Planning Considerations

Different generations spend differently on home renovations. Millennials, for example, tend to focus on projects around family formation and favor a do-it-yourself approach. Baby Boomers and the Silent Generation, on the other hand, prioritize projects that make the home more livable as they age and are more likely to hire a professional contractor. 

There are also generational differences in estate planning. Although 60 percent of US adults have no estate plan, 81 percent of people aged seventy-two or older and 58 percent of those ages fifty-three through seventy-one have estate planning documents.⁵ 

A home is the largest purchase that most people ever make. For the average American, home equity accounts for around 65 to 70 percent of their net worth. The home should therefore feature prominently in any estate plan. Home remodeling can necessitate estate plan changes, however. Here are a few estate planning considerations to keep in mind when remodeling a home. 

Remodeling a Home in a Trust with a Home Equity Loan

Homeowners may place their property in a revocable living trust (i.e., a living trust) to avoid probate. Placing property in a trust makes the trust the legal owner of the property, which requires drafting a new deed in the trust’s name. 

A home equity loan (also known as a second mortgage) allows homeowners to borrow money using the equity in their home as collateral. A home equity loan is dispersed in a lump sum and paid back in monthly installments. This type of loan is often used to pay for big expenses, such as a home improvement project. 

Some lenders prefer to only extend a home equity line of credit to a person—not a trust. Depending on the bank, this could mean taking a property held in trust out of the trust and deeding it back to the homeowner. The property can be transferred back into the trust when the loan is secured; the homeowner does not have to wait until the loan is repaid. If you deed your home out of the trust and back to you, make sure that the home gets transferred back to the trust if you want to avoid probate.

Increasing a Home’s Value and Beneficiaries

Remodels are not a great way to make money. The return on investment for remodeling projects ranges from 54 percent to 87 percent.⁶ But depending on the neighborhood, region, market, and project expense, home improvement can significantly increase a property’s value, especially over time, since home prices increase about 5 percent a year. 

Median home prices have risen dramatically over the years, from just under $18,000 in 1963 to more than $467,000 in 2022.⁷ Record growth in home prices during the pandemic accelerated this trend, and while median prices are declining in some markets, they mostly remain above pre-pandemic levels. 

With or without major renovations, a home purchased years ago is likely to have appreciated over time. In certain areas, homes purchased in 2000 appreciated over 200 percent. Average prices in San Francisco, for example, have increased from $364,000 to $1.12 million since 2000.⁸ 

Home value changes may affect a homeowner’s estate plan. If leaving the property to a specific person and wanting to treat beneficiaries equally, an estate plan may need to be refigured to equalize each beneficiary’s inheritance. One option to do this is to leave the home to more than one person; however, care must be taken to avoid conflict among multiple beneficiaries. The estate plan should stipulate how the home will be co-owned and provide a plan for the recipients to sell their interests in it. 

Balancing Homeowner Needs and Legacy

Older adults have a strong preference for growing old in their current homes. Ninety-percent of respondents told AARP that they want to “age in place.”⁹ At the same time, nearly 50 percent said they have not considered the changes their home may need to accommodate them as they age. 

Remodeling projects specific to aging in place average less than $10,000, but they can cost up to $40,000 or more.¹⁰ Because older adults tend to have more equity in their homes and more savings, an aging-in-place project may be affordable, but unless paying cash for a project, it also may entail taking out a loan.

Any debt that outlives a person needs to be paid during estate or trust administration. Creditors have preference over most heirs, and every dollar that goes to paying back a loan is one less dollar that goes to a beneficiary. While aging in place usually costs less than a nursing home, having less cash on hand or added debt can impact estate planning goals. 

Revising Your Estate Plan After Home Improvement

Americans renovate their homes around every three to five years. This is the same time interval that attorneys recommend reviewing an estate plan. 

Once you have finished remodeling your home, you should consider remodeling your estate plan. In addition to home improvements, there may have been other life events in recent years that warrant an estate plan update. Making changes to your plan does not cost much, and you will buy peace of mind knowing your plan reflects your current wishes. 

To discuss revisions to your estate plan, contact our office and schedule an appointment.

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Footnotes

1. Vincent Salandro, Remodeling Activity Likely to Drop in 2023, Remodeling by JLC (Dec. 18, 2022), https://www.remodeling.hw.net/benchmarks/economic-outlook-rri/remodeling-activity-likely-to-drop-in-2023.
2. Market Measure, The Industry’s Annual Report, Hardware Retailing p. 26, 27 (Jan. 2022), https://lsc-pagepro.mydigitalpublication.com/publication/?m=59500&i=732068&p=30&ver=html5.
3. Elizabeth Renter, 2022 Home Improvement Report, NerdWallet (Nov. 16, 2022), https://www.nerdwallet.com/article/mortgages/2022-home-improvement.
4. State of Home Spending, Angi, https://www.angi.com/research/reports/spending/ (last visited Apr. 10, 2023).
5. Haven’t Done A Will Yet? You’ve got company. Neither have 6 in 10 U.S. adults, AARP (Feb. 24, 2017), https://www.aarp.org/money/investing/info-2017/half-of-adults-do-not-have-wills.html.
6. Carl Vogel, Home Renovations with the Best Return on Investment, This Old House, https://www.thisoldhouse.com/home-finances/21015466/renovations-that-give-you-a-return-on-your-investment (last visited Apr. 10, 2023).
7. Median Sales Price of Houses Sold for the United States (MSPUS), FRED Economic Data, Federal Reserve Bank of St. Louis, https://fred.stlouisfed.org/series/MSPUS (last visited Apr. 10, 2023).
8. Nick Routley, Charting 20 Years of Home Price Changes in Every U.S. City, Visual Capitalist (Oct. 22, 2020), https://www.visualcapitalist.com/20-years-of-home-price-changes-in-every-u-s-city/.
9. Kristen Dalli, Most older adults want to grow old in their current homes, study finds, Consumer Affairs https://www.consumeraffairs.com/news/most-older-adults-want-to-grow-old-in-their-current-homes-study-finds-041822.html (last visited Apr. 10, 2023).
10. Jonathan Trout, The Cost of Aging in Place Remodeling, RetirementLiving (Mar. 15, 2023), https://www.retirementliving.com/the-cost-of-aging-in-place-remodeling.

When it comes to protecting your hard-earned money and property, it is important that you have the right plan, which can include a number of tools for your unique situation. One tool that might benefit you is a limited liability company (LLC) that owns some of your accounts and property.

What is a limited liability company?

An LLC is a business structure that can own many types of accounts and property. The LLC is owned by members who contribute money or property to the LLC. You can have a single-member-owned LLC or a multimember-owned LLC. If there is more than one member, management of the LLC can either be carried out by each member or the members can elect a manager.

What can an LLC own?

When people think of an LLC, they assume that it is a structure to operate a business. However, many types of accounts and property can benefit from being owned by an LLC:

• Real estate. An LLC can own property such as a second home, a rental property, or a property that has been in the family for generations.
• Investments. In some cases, an LLC can be formed to allow multiple people to pool their money and invest it with a larger volume.
• Expensive and risky property. An LLC can own items such as airplanes and boats. 

Why should I consider using an LLC in my estate plan?

Asset Protection

Because the LLC is a separate entity, typically the LLC’s creditors can only go after the LLC’s money and property, not the member’s personal accounts or property. Also, if the proper formalities are in place, the member’s personal creditors may not be able to reach the LLC’s accounts and property to satisfy the member’s personal debts. Note: In some states, a single-member LLC does not enjoy the same protection from the member’s personal creditors. The rationale of these laws is that your creditors should be able to seek relief through your LLC interests to satisfy their claims because there are no other members that will be negatively impacted by seizure of money and property owned by the LLC.

Probate Avoidance

Anything that is owned by the LLC, either retitled into the name of the LLC during your lifetime, bought by the LLC, or transferred by operation of law at your death, will not go through the public, costly, and time-consuming probate process. The probate process only transfers accounts and property that you owned at your death. By using an LLC, the LLC—not you—owns the accounts and property. However, if you own a membership interest in your own name, the transfer of the membership interest at your death may need to go through the probate process.

How can an LLC be used in an estate plan?

How It Works

During your lifetime, you create an LLC and then transfer accounts and property to the LLC or name the LLC to be the beneficiary of your accounts and property at your death. Once it has been created, you may also purchase property or create accounts in the name of the LLC. As the creator of the LLC, you will be a member. A member is someone who owns an interest in the LLC, and depending on the number of members and the type of management, may also manage the LLC. If you are married, your spouse may also be a member. You can also add other people as LLC members either when the LLC is created or later. Be aware that there may be gift tax consequences associated with adding members who do not contribute their own money or property to the LLC. The LLC becomes the owner of the accounts and property and it is operated as an entity separate from its individual members. It is this separation that allows an LLC to have some level of asset protection. At your death, the only item that may need to be transferred is your ownership interest in the LLC; the accounts and property owned by the LLC will remain owned by the LLC.

Operating Agreement

Most LLCs have an operating agreement that outlines the rules for managing and transferring a member’s interest in the LLC. If you currently have an LLC but do not have an operating agreement, or have an operating agreement but need to update it, please reach out to an experienced business law attorney as soon as possible. Some provisions that should be included in the operating agreement are  

• who the members of the LLC are,
• the percentage of ownership that each member has,
• how conflicts among members are settled,
• any restrictions on a member’s ability to transfer their membership interest (including transfers to a trust), and
• what happens to each member’s interest if the member dies (in most cases, whatever is stated in the operating agreement controls).

Trust Agreement

As an additional layer of protection, you may choose to transfer your membership interest in an LLC to a revocable living trust. As the creator, trustee, and beneficiary of the trust, you would still be able to participate in the management of the LLC and benefit from the LLC, you would just do so as the trustee of the trust and not as an individual. Because the trust owns the membership interest, transfer of the membership interest will not require probate, because the trust does not die. In fact, the trust can continue to own the membership interest after your death, which you can include in the trust’s instructions, along with a provision allowing a successor trustee to step in for you and handle LLC matters on behalf of the trust’s beneficiaries. Alternatively, you could state in the trust instructions that the membership interest be distributed to a named beneficiary at your death or at a specific time in the future. At that point, the beneficiary would have control of the membership interest.

Best Practices for Using an LLC

To ensure that you can take full advantage of the benefits associated with an LLC, it is critical that you follow all of the rules. An LLC is supposed to be a separate entity and you need to treat it as such. This means that there are some formalities you need to abide by, some of which include filing your annual report with the appropriate state government office and keeping separate records to showcase all transactions and meetings that the LLC is involved with. Additionally, you need to keep your personal money and property separate from the LLC’s money and property. You should not treat the LLC bank account as your own personal wallet.

Effective January 1, 2024, LLCs that meet the definition of a reporting company will need to file a Beneficial Ownership Information Report with the Department of the Treasury’s Financial Crimes Enforcement Network. The report must include the name, birthdate, address, and unique identifying number, issuing jurisdiction, and image of an acceptable identification document for all of the beneficial owners of the LLC. A beneficial owner is an individual who owns or controls 25 percent or more of the ownership interest of the company or who exercises “substantial control” over the company. For reporting companies created after January 1, 2024, company applicants must provide their name, birthdate, address, and the unique identifying number, issuing jurisdiction, and image of an acceptable identification document. A company applicant is either the individual who files the document that creates the entity or registers the entity to do business in the United States in the case of a foreign reporting company, or the individual who is primarily responsible for directing or controlling another person’s filing of the document.

What are my next steps?

We understand how important it is to protect yourself, your loved ones, and all that you have worked so hard to earn. A comprehensive estate plan can help accomplish your goals by implementing the right strategies for your situation. If you would like to explore how an LLC can help you plan for your future and the future of your loved ones, please reach out to our firm. 

On February 14, 2023, California state lottery officials named the winner of the largest lottery prize in United States history: Edwin Castro won an eye-popping $2.04 billion in a November 2022 lottery drawing, choosing a lump sum payment of $997.6 million instead of annual payments over three decades.¹ A lottery player in Maine recently won the $1.35 billion Mega Millions jackpot—another of the largest prizes ever recorded.² If you are fortunate enough to have purchased a winning lottery ticket, it is important to carefully consider how you want to handle your unexpected windfall to avoid repeating the unfortunate pattern of many lottery winners who quickly squander their new wealth,³ even if your prize is much smaller than those mentioned.

Take your time. Lottery winners typically have a specific length of time to claim their winnings, although the deadlines vary by state. For example, under title 8, section 382 of the Maine Revised Statutes, the Maine Mega Millions winner has one year after the drawing to claim the money. If it is never claimed, it will be transferred to the state’s general fund. In North Carolina, however, the prize must be collected within 90 or 180 days of the end of the game or drawing, depending upon the type of lottery prize you have won.⁴ Although it is not wise to delay too long, you should take time to think carefully about what you would like to do with the cash you have won, preferably even before you claim your prize. 

Manage expectations. If your lottery winnings have substantially increased your wealth, you may discover that your popularity has also grown. Some family members, acquaintances, and scammers are likely to want a piece of your winnings. Do not feel pressured to do anything that you do not genuinely feel good about, and be firm about your choices, regardless of attempts to make you feel obligated or guilty. Nevertheless, you may choose to be generous with your winnings, making gifts to family members, loved ones, or charities. However, keep in mind that large gifts may have tax consequences. In 2023, the annual gift tax exemption amount is $17,000 per recipient. This means that, with a few exceptions, if you give more than $17,000 to someone other than your spouse or a dependent, you may be subject to gift tax. However, many people avoid owing taxes by filing a Form 709 and subtracting any amount exceeding $17,000 from their lifetime exemption amount ($12.92 million for 2023).

Keep an eye on income tax consequences. Although the winner of California’s lottery opted to receive a lump sum of $997.6 million, he will not actually receive that amount, which is the amount of his winnings before taxes. Mr. Castro should hold off on buying any private islands until all of the taxes on his winnings are paid. Before the state of California gives him any of his winnings, 24 percent—$239.4 million—will be withheld and sent directly to the Internal Revenue Service (IRS).⁵ In addition, because the highest federal income tax rate is 37 percent, an additional 13 percent—$129.7 million—will be due in April 2023.⁶ After these federal tax payments are made, Mr. Castro will be left with a relatively paltry $628.5 million. Depending upon the state and city in which lottery winners live, their prize may also be subject to a state tax. 

It is important to file tax returns reporting your winnings and pay taxes owed to avoid interest and penalties. There is a 5 percent per month penalty for each month after the due date up to a maximum of 25 percent for failure to file your tax return on time. If you file your tax return on time, but do not pay all of the tax you owe on time, there is a failure-to-pay penalty of one-half of one percent per month up to a maximum of 25 percent of the amount of unpaid taxes. The amount of the penalty will increase if the IRS issues a notice of intent to levy property as a means of collecting the amount due. If your prize winnings are substantial, these penalties could also be sizable.

It is also crucial to make a good faith effort to ensure that your tax return accurately reports your winnings and not take any steps to willfully evade paying taxes owed. In 2021, an Ohio man who won $1 million in the lottery was charged with filing a false tax return to avoid taxes.⁷ According to court documents, the man, who pleaded guilty, had falsely claimed large gambling losses and transferred significant sums of money to foreign bank accounts that were not disclosed to the IRS in an effort to avoid paying taxes on his winnings. The maximum penalty for filing a false tax return is three years in prison and a fine of up to $100,000.

Contact professional advisors. The financial, tax, and legal issues that arise when you win a large prize can be overwhelming if you do not seek help. Before you make any major purchases or gifts, it is important to immediately contact a team of professionals to help you think through how to handle your winnings. If you would like to preserve your new wealth and enable it to grow, it is important to contact a financial advisor who can help you make wise financial decisions that are most appropriate for your unique situation. A tax advisor will also help you make important decisions such as determining whether there are more tax savings from receiving the lottery winnings as a lump-sum or installment payments, as well as make sure you file an accurate and timely tax return and pay taxes owed by the IRS’s due date.

As your estate planning attorneys, we can coordinate with your other advisors to help you make decisions and create or update your estate plan to incorporate strategies that will ensure that your winnings are protected during your lifetime, income and transfer taxes are minimized, and that your wealth is distributed to the people you choose in the way you desire when you pass away. Let us help you avoid hasty decisions that you may later regret. Call us today to set up an appointment so we can help you create a plan that will maximize the benefits from your lottery prize during your lifetime and create a lasting legacy for your loved ones.

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Footnotes

1. Jordan Mendoza, Winner of Record $2.04 Billion Powerball Finally Revealed, Says They Were ‘Shocked and Ecstatic,‘ USA Today (Feb. 15, 2023), https://www.usatoday.com/story/news/nation/2023/02/14/who-won-two-billion-powerball-jackpot/11258329002/.
2. Jesus Jimenez, Someone in Maine Won the $1.35 Billion Mega Millions Jackpot, N.Y. Times (Jan. 18, 2023), https://www.nytimes.com/2023/01/14/us/mega-millions-jackpot-winner.html.
3. Mark Abadi et al., 20 Lottery Winners Who Lost It All — As Millions Vie for Powerball’s $700 Million Jackpot, Bus. Insider (Jan. 11, 2023), https://www.businessinsider.com/lottery-winners-lost-everything-2017-8.
4. Frequently Asked Questions, NC Education Lottery, https://nclottery.com/faq#:~:text=For%20instant%20scratch%2Doff%20games,which%20the%20ticket%20was%20purchased (last visited Mar. 29, 2023).
5. Robert W. Wood, $2.04 Billion Powerball Winner Takes Home $628 Million after Taxes, Forbes (Nov. 9, 2022), https://www.forbes.com/sites/robertwood/2022/11/09/204-billion-powerball-winner-takes-home-628-million-after-taxes/?sh=38a5cba87bbe.
6. Id.
7. Hilliard Man Lies to Avoid Taxes on $1 Million in Lottery Winnings; Pleads Guilty to Tax Fraud, U.S. Dep’t Just. (Nov. 9, 2021), https://www.justice.gov/usao-sdoh/pr/hilliard-man-lies-avoid-taxes-1-million-lottery-winnings-pleads-guilty-tax-fraud.

Roughly one in five US adults experiences a mental illness each year. Anxiety disorders are among the most common mental health conditions, affecting nearly one-third of adults at some point in their lives. While anxiety can be generalized and chronic, it can also be a normal reaction to everyday stresses, such as worrying about finances, health, and family. 

During Mental Health Awareness Month, people are encouraged to make positive changes that can help them feel better. Anxiety may be rooted in concerns about the future, like what will happen when you pass away or have health problems. Many questions cannot be answered. But that does not mean we have no control over the future. 

Procrastination, Anxiety, and Estate Planning

Procrastination and mental health can be closely linked and lead to an increasingly self-defeating cycle. Putting off necessary actions may lead to anxiety, depression, and low self-esteem, which causes further procrastination and more negative emotions.¹ 

People may procrastinate because they fear an unpleasant outcome, struggle with perfectionism, or feel overwhelmed. Occasional procrastination, like occasional anxiety, is normal. But when procrastination starts to negatively impact your life, causing you to put off important tasks, it may be time to take corrective action. 

Experts recommend beating procrastination by taking on the dreaded task, even if it is just in a few small chunks at a time. They also advise getting more organized and, when necessary, seeking professional help. 

About two-thirds of Americans have no estate plan.² That means they have no plan in place for dealing with unexpected tragedies, including death or incapacity. 

Many procrastinations have no immediate or tragic consequences. But if you put off your estate plan—and tragedy strikes—it will be too late to get started. 

Ways to Act Now and Address Anxiety about the Future

Contemplating death and disability does not have to be a morbid, anxiety-producing exercise. It can be a productive exercise in which unpleasant thoughts are channeled into meaningful actions. 

For many unanswered questions you have about the future, there is a related estate planning action you can take to achieve a greater degree of certainty. Below are some of the most common questions we all deal with and ways to take action. 

What happens when I die? 

Spiritually, this is a question best left to religion or philosophy. But materially, you can specify what happens to your money and property after you pass away using a will or revocable living trust. 

• A will is the most basic estate planning document that everybody should have, even if it is very simple. At a minimum, a will should name who will receive your accounts and property (your beneficiaries) and describe the distribution of your accounts and property to them. A will can do much more, though. It can also appoint guardians for minor children, provide funeral and burial instructions, describe how to handle your debts, taxes, and other legal affairs, and appoint an executor to carry out the instructions in your will. 
• A living trust is a trust that can hold your money and property for your benefit while you are alive and distribute them to beneficiaries upon your death or incapacity. It is often called a revocable living trust because you can revoke the trust or change its terms during your lifetime. For example, you can move accounts and property in and out of the trust, name a new trustee or co-trustee, and change the beneficiaries. At the designated time (i.e., your death or incapacity), a trustee takes over the trust and manages the accounts and property you placed in it. A living trust, which can only deal with the ownership and management of your accounts and property, is more limited in scope than a will and is best used as a will supplement—not a replacement. 

What happens if I am alive but cannot communicate?

Contemplating incapacity can be as anxiety-inducing as thinking about death. The following estate planning tools can ensure that you do not end up in legal limbo due to a mental or physical disorder that renders you unable to manage your affairs or make decisions. 

• A revocable living trust (described above) can be written so that it takes effect when you are incapacitated. You can define “incapacity” to specify exactly what triggers a successor trustee to take over management of the trust’s accounts and property. The trust can even lay out the procedures to follow for determining incapacity. 
• A financial power of attorney is the legal authority, granted by you to someone else, that allows that other person to manage your financial affairs and property without the need for court involvement. The individual granted a power of attorney can handle bank accounts, pay bills, sell property, run a business, apply for public benefits, pay taxes, make investments, and oversee insurance and retirement accounts on your behalf. They are legally required to act in your best interest. 
• A medical power of attorney is the healthcare equivalent of a financial power of attorney. It designates a person who is authorized to make medical and personal care decisions for you if and when you are unable to make those decisions. A medical power of attorney also gives a trusted decision maker the authority to manage your protected health information. 
• A HIPPA release lets designated persons access your protected health information. Your medical decision maker may already have this authority through a medical power of attorney, but others may want to be included on a HIPPA release so they can stay informed about your condition. 
• A living will describes the types of medical treatment you do—and do not—want to receive to keep you alive, as well as your preferences for pain management, organ donation, and other medical decisions. The use of a ventilator, tube feeding, palliative care interventions, and resuscitation techniques are typically addressed in a living will. 

What happens to my children? 

An estate plan is not just about your own peace of mind. It can also have a considerable impact on those closest to you. If you have minor children, you need to account for their needs. Several documents can help ensure that your children are taken care of. 

• Your will can designate a guardian for your minor children in the event that tragedy befalls both you and the child’s other legal parent. It can also set up a trust and appoint a trustee to manage accounts and property for your children’s support. Careful use of a trust and trustee for this purpose may eliminate the need for a trustee bond (paid to secure performance of the trustee’s duties) and avoid court supervision of a minor child’s inherited assets.³ 
• A minor power of attorney lets a parent delegate somebody to take care of their child for a certain period (usually up to one year, depending on state law). The named caregiver is legally permitted to make necessary decisions for the minor, such as decisions about their schooling and healthcare. The parent can give the caretaker complete or limited authority to make these decisions. A minor power of attorney—which does not create a permanent guardianship—can be used as a stopgap if a parent is incapacitated, incarcerated, out of the country, or otherwise temporarily unable to fulfill their parental duties. 
• A permanent guardian nomination names a permanent caregiver for a minor child. The nomination can be in a will or a separate signed document. Nominating a guardian for your minor child does not guarantee that that person will end up as their guardian. The court has the authority to appoint a guardian. Usually, they appoint the nominee unless there is a good reason not to. Having a backup guardian is recommended in case the court rejects the primary nominee, or if for some reason they are unable to serve as guardian. 

Treat Yourself to Estate Planning This Mental Health Awareness Month

Rewarding yourself is a way to break out of procrastination that may be hindering your estate plan goals. And what better reward is there than taking control of your future? 

An estate plan that includes wills, trusts, powers of attorney, medical directives, and guardianship documents can help eliminate some of the uncertainty—and anxiety—that comes with contemplating end-of-life scenarios. You cannot cheat fate. However, you can buy yourself peace of mind with comprehensive estate planning. To start planning now, schedule a meeting with our attorneys. 

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Footnotes

1. Why You Put Things Off Until the Last Minute, Mass Gen. Brigham McLean, https://www.mcleanhospital.org/essential/procrastination (last visited Apr. 7, 2023).
2. Lorie Konish, 67% of Americans Have No Estate Plan, Survey Finds. Here’s How to Get Started on One, CNBC (Apr. 11, 2022), https://www.cnbc.com/2022/04/11/67percent-of-americans-have-no-estate-plan-heres-how-to-get-started-on-one.html.
3. Introduction to Wills, Am. Bar Ass’n, https://www.americanbar.org/groups/real_property_trust_estate/resources/estate_planning/an_introduction_to_wills/ (last visited Apr. 7, 2023).

A will (which should be accompanied by other important documents such as healthcare and financial powers of attorney, as well as an advance healthcare directive) is a foundational estate planning document. However, according to Gallup, only 46 percent of US adults have a will. This number has remained consistent in Gallup polls dating back to 1990. If you are among the minority of Americans with this crucial estate planning document, then you probably recognize the risks of not having a will. 

But simply creating a will does not mean that your estate plan is complete or final: your will may need to be updated from time to time. It may even need to be revoked and redrafted entirely. 

Usually, revoking a will is a purposeful act on the part of the will maker. But many states have laws that automatically revoke a will, or portions of it, in specific situations. Certain actions by a beneficiary can also revoke that person’s interest in the will. 

What Is in a Will?

A will—more formally known as a last will and testament—provides instructions about who should receive a person’s money and property after the person’s death and who they would like to care for their dependents. A basic will should specify the following: 

• who receives personal assets (e.g. property, bank account balances, investments, business interests, and personal possessions) and in what amount 
• an executor or person responsible for making sure that instructions in the will are carried out
• guardian arrangements for minor children

When a person passes away, their will goes through a legal process called probate, usually in a probate court located in the county where they lived, although a different location may sometimes be required if, for example, the deceased person owned real estate in another county or state. But if a person dies intestate, meaning without a will, the court must follow state laws that control the distribution of a person’s assets and the appointment of executors and guardians. 

Most people want to make their own decisions about such important matters rather than leaving them to the state. Yet state law will determine what will happen if a person does not have a will. 

Creating a basic will does not have to be expensive or time-consuming. A will should be updated as life circumstances dictate. Many people change their will when they get married or divorced, have a child, accumulate more wealth, buy new property, retire, or move to another state or country. The will maker might also have a change of heart about beneficiaries or a guardianship arrangement due to a personal falling out or changes in the circumstances of a beneficiary or potential guardian. 

Estate planning attorneys generally recommend revisiting—and possibly updating—a will every few years. Even if the person who created the will has not experienced a major life event, periodic reviews are essential to ensure that the will still accurately represents their intentions and relevant law. 

Updating an Existing Will

Amendments to a will are made using a legal document called a codicil. Like the execution of a will, executing a codicil usually requires that the person who is creating or changing their will sign the will or codicil in the presence of at least two witnesses. 

Codicils are something of an anachronism dating to the time before computers, when drafting a new will by hand was more onerous. Nowadays, it is easier than it used to be to create a new will that contains the amended portions. The American Bar Association also cautions that codicils can lead to confusion or legal challenges if they create ambiguities when read together with the provisions in the original will. 

Using a codicil to make minor changes to a will—such as changing the executor—does not necessarily revoke it. However, in some states, a codicil can be used to republish or revoke a will. 

Executing a New Will

Your estate planning lawyer may advise you that a codicil is not worth the potential problems it can cause and instead recommend that you make a new will. The new will must be properly executed in accordance with state law. In addition, the will should contain language that clearly states the will maker’s desire to revoke all prior wills. However, there may be instances in which the will maker does not want all prior wills revoked (e.g., they may need to have a separate will for property owned in a foreign country). 

Destroying an Old Will

The fastest way to revoke a will is to physically destroy it. States have different definitions of what qualifies as the destruction of a will. Usually, the state statute includes some variation of the phrasing that a person can revoke their will by “cutting, tearing, burning, obliterating, canceling, destroying, or mutilating” it. Note that this definition does not include making notes in the margin or placing an “X” through part of a will. 

Most state laws provide that the destruction must be done with the intent and for the purpose of revocation, so accidentally destroying a will may not revoke it. 

Electronic wills may have different definitions for revocation by destruction. Florida, for example, says that an electronic will or codicil is revoked when it is deleted, canceled, rendered unreadable, or obliterated. 

The law may allow the will maker to direct another person to physically destroy a will on their behalf, provided that the will maker is there to witness it. State law may also require the presence of two additional witnesses. Depending on the state, there could be a presumption that the will was destroyed if it cannot be located. However, most states have processes by which lost wills may be proven by using copies and one or more disinterested witnesses. If the intent is to revoke a will, it is best to consult an experienced estate planning attorney.

If the destruction of a will does not comply with the requirements of state law, the court may rule that it was improperly destroyed and treat it as though it is still in effect. Typically, when somebody destroys an old will, they make a new will. But if the old will is not legally revoked, and a new one is created, the existence of multiple wills could lead to litigation. 

Revoking a Will by Operation of Law

State law may provide that a will is revoked, in part or in full, if certain events take place, such as the following: 

• If a person gets divorced or has their marriage annulled, any part of the will that refers to their spouse, or the spouse’s family, is automatically revoked in many states. 
• There is a new will or codicil that includes provisions that contradict provisions in old will or codicil. 
• A beneficiary’s interest is revoked under a “slayer statute” if the beneficiary kills the will maker. 

Thinking of Changing Your Will? Talk to an Estate Planning Lawyer

Whether you are making minor changes to your will or destroying the old one and starting from scratch, any revocation of your will must comply with state law. Otherwise, a court might not recognize your final wishes, which can produce consequences akin to not having a will at all and cause your loved ones additional stress and potential conflict. 

An estate plan should be updated every few years to take into account new milestones and directions as well as changes in the applicable law. To discuss changes to your estate plan, please contact us to schedule an appointment.

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Footnotes

1. Jeffrey M. Jones, How Many Americans Have a Will?, Gallup (Jun. 23, 2021), https://news.gallup.com/poll/351500/how-many-americans-have-will.aspx.
2. Introduction to Wills, Am. Bar Ass’n, https://www.americanbar.org/groups/real_property_trust_estate/resources/estate_planning/an_introduction_to_wills/ (last visited Feb. 24, 2023).
3. Fla. Stat. § 732.506 (West, Westlaw through 2022 Reg. Sess. and Spec. A, C, and D Sess. of 27th Legis.), http://www.leg.state.fl.us/statutes/index.cfm?App_mode=Display_Statute&Search_String=&URL=0700-0799/0732/Sections/0732.506.html.

Whether you are reviewing your existing trust or creating a new trust, you should understand the important role that a trustee plays not only in handling trust matters but also in providing for and protecting your loved ones.

What is a trust?

A trust is an agreement between an owner of accounts and property (trustmaker) and another person (trustee) who agrees to manage the accounts and property on behalf of a third party (beneficiary). In most situations, there is a written document, called a trust agreement, that lays out the specific instructions or rules that govern the trust relationship. 

What is a trustee?

A trustee is a trusted decision maker who is tasked with handling all matters that relate to your trust. Depending on the type of trust, you could be the trustee in the beginning and need someone else to act as trustee only when you are unable to manage the trust, or you could select a trustee to act immediately.

What types of trustees are there?

When creating an estate plan, there are several types of trustees to consider. An initial trustee is the decision maker that immediately starts managing the trust’s accounts and property. You may choose to be the initial trustee if you create a revocable living trust. However, for some types of irrevocable trusts, you will need to select someone else to be the initial trustee. 

The successor trustee is the next in line to manage the trust. This person may need to act because the initial trustee becomes incapacitated, dies, or steps down from their role. 

You could choose to have one trustee handle the entire trust. You could also choose to name a separate trustee for any subtrusts that you later create. For example, you may name your children as the trustees for the subtrusts that are created for their benefit at your death. In this instance, there may be several trustees acting once the subtrusts are created. However, they will only be responsible for their separate trust and will have no control over other subtrusts that have their own trustees.

What does a trustee do?

Being a trustee involves many different important tasks, including the following:

• Managing accounts and property owned by the trust or subtrust. Although the trust owns your accounts and property, a person needs to carry out most transactions. If the trust owns an investment account, the trustee must watch the investments and request any adjustments that may be needed to ensure the best outcome for the trust and its beneficiaries.
• Keeping the trust beneficiaries informed about the trust. Although the trustee decides how trust accounts and property are used, they do so on behalf and in the best interests of the trust beneficiaries. A trustee is required to periodically inform the trust beneficiaries about the status of the trust—what the trust owns, how much the trust is worth, what income the trust has received, and what expenses the trust has paid.
• Acting as a point person for trust matters. If beneficiaries have questions about the trust, the trustee is usually best suited to answer them. The trustee is also in charge of filing tax returns and participates in any lawsuits involving the trust.

What should you look for when selecting a trustee?

While it may be advantageous for a trustee to be financially savvy or have a background in tax, law, or finance, they are not required qualifications. When considering potential trustees, we recommend looking for someone with following qualities: 

• Ability to ask for help when needed. The trustee does not have to be an expert in every area of trust administration. They can get assistance from financial advisors, tax preparers, and attorneys at the trust’s expense to fully carry out their responsibilities.
• Be detail oriented. Trust administration is a process with specific legal steps that must be taken. The trustee will be asked to compile a list of everything that the trust owns and keep accurate records of income and expenses. Being too general with this information can cause tension between the trustee and beneficiaries and could lead to legal action.
• Be organized. Depending on what the trust owns, how many beneficiaries there are, and the trust distribution plan, there may be a lot of moving parts. In addition to managing the trust, the trustee will need to make sure that they do not mix their personal affairs with those of the trust.
• Have good communication skills. Although the trustee has authority over the trust, they are supposed to act in the best interests of the beneficiaries. It is important that the trustee clearly communicate with the beneficiaries, deliver necessary information, and be available to answer any questions that the beneficiaries may have in a timely manner. A trustee must also be able to get along with the beneficiaries.
• Follow rules. State and federal laws, as well as instructions within the trust, must be followed. While a trust may have provisions that allow a trustee to use their discretion in some matters, there are other instances in which the trustee is required to do certain things a specific way. Failing to comply with the rules can subject the trustee to potential civil and criminal penalties.

Who can you choose to be your trustee?

Although the choice of trustee is a very serious matter, you have several options available to you depending on your circumstances and what matters most to you.

• Family members. It is common for clients to select family members (spouse, child, parent, sibling, etc.) to be their trustees. Family members likely have an intimate knowledge of your wishes and values, making trust administration easier if you want to leave decisions to your trustee’s discretion. If your trustee is also a beneficiary, they could choose not to accept any compensation for acting as trustee because they will already be receiving something as a beneficiary of your trust. However, allowing the beneficiary to be the trustee of your trust could jeopardize or limit protection of their inheritance.
• Close friends. Close friends likely understand your values and wishes, making any discretionary decisions easier; however, depending on your family dynamics, your close friends may not want to get involved in any conflicts that arise. Also, if they are not trust beneficiaries, they may want to be compensated for the work they do, which could leave some beneficiaries feeling disgruntled that your trustee is getting money from the trust (even though the trustee is legally entitled to it).
• Professional third party. If protecting your beneficiaries’ inheritances is important to you, a professional may offer additional protection. Because administering trusts is their profession, they will likely understand every step that must be taken and have the tools to efficiently and accurately do so. However, because trust administration is their job, they will require compensation and will inform you of their fee. This amount will likely be higher than what a family member or close friend would seek for compensation.

We understand that you have an important decision ahead of you. We are here to guide you through the decision-making process and answer any questions you may have along the way. Call us to schedule an appointment so we can help you check this item off your to-do list.

When you create an estate plan, it is an admission of your mortality. But even if you accept that you are not going to live forever, you may be slower to face the possibility that you could become incapacitated before you die. 

Although it can be an uncomfortable topic, incapacity is an essential but often overlooked part of drafting revocable living trusts. Placing your money and property in a living trust can accomplish many estate planning objectives, including planning for incapacity. Should you suffer a disability, your mental competency could come into question. At that point, it will need to be determined if a backup trustee should take over the management of your living trust. 

Who, exactly, makes this key determination is very important. Naming a disability panel in your trust allows you to exert control over your incapacity plan by choosing a group of people you trust to determine if you are incapacitated. 

Disability Is Common among Older Americans

Today, Americans can expect to live longer than previous generations. Living longer does not always mean living better, though. 

Older Americans are much more likely than younger Americans to have a disability, according to the Pew Research Center. About one-quarter of Americans, and roughly half of Americans over age seventy-five, report living with a disability. For eighteen- to thirty-four-year-olds, that number is just 6 percent. Around 13 percent of thirty-five- to sixty-four-year-olds say they have a disability. 

Disability can befall anyone at any age. However, the longer you live, the more likely you are to suffer from a disability, and certain disabling conditions such as Alzheimer’s are age-related. Currently, more than 6 million Americans are living with Alzheimer’s. By 2050, the number of Alzheimer’s patients is projected to more than double to 13 million. Roughly one-third of seniors die with Alzheimer’s or another form of dementia. 

Living Trusts and Disability Panels

A living trust, also known as a revocable trust, is a popular estate planning tool that allows people to avoid probate; eliminate, defer, or lower estate taxes; and distribute money and property to their beneficiaries at death. 

Another major benefit of living trusts is that they help the trustmaker (i.e., the grantor, trustor, or settlor) arrange for the management of the trust’s money and property should they become disabled, ill, or the victim of age-related decline. 

The trustmaker is typically also the trustee of their living trust and handles any administration that may be required, such as recording trust income and expenses and filing tax returns. There may be a co-trustee (e.g., a spouse) who shares these duties. If there is no co-trustee who can continue to manage the property held by the trust, a successor trustee named in accordance with the trust document should take over as trustee when the trustmaker dies or becomes incapacitated. It is possible for the trustmaker to name two different individuals to serve as the successor incapacity trustee (upon the trustmaker’s incapacity) and successor death trustee (upon the trustmaker’s death). 

Within a living trust, a trustmaker can define when they are deemed to be incapacitated so there are no doubts about when trusteeship passes from the trustmaker as trustee to the remaining co-trustee or successor trustee. For example, the trustmaker could include a general definition in their trust stating that incapacity begins when they are no longer able to manage their financial affairs; or they could rely on a more objective measure, such as the General Practitioner Assessment of Cognition screening test, which is often used to evaluate dementia patients. 

In addition to defining incapacity, the trustmaker can choose a group of people to determine if the definition has been met. The trust documents can leave this decision to a doctor or the court, or the trustmaker can instead name a private disability panel. 

A disability panel is a group of pre-selected people who determine if the trustmaker is incapacitated. The trustmaker selects these people ahead of time and names them in the trust. The trust should also state whether the panel’s decision must be made by a unanimous or majority vote. 

Reasons to Name a Disability Panel

A physician or court, while ostensibly qualified to weigh in on disability, may not be best suited to the task. The trustmaker may prefer to name a disability panel because 

• it can include the people who know the trustmaker best and can recognize when something is wrong, 
• they may feel more secure with a mix of people—such as medical professionals and trusted family members—making the determination, 
• it eliminates the need to pay an attorney to go to court to have the trustmaker declared incompetent, and 
• it circumvents red tape and avoids delays that can affect estate planning considerations. 

Creating an estate plan is all about taking control of the future. Naming a disability panel gives the trustmaker control over not only what happens upon their death, but also what happens if they suffer from an incapacitating disability. By providing for a disability panel in their trust, they will not have to rely solely on a court or a doctor to make such a personal decision. 

Getting the Details Right in Your Estate Plan

Advanced healthcare directives and powers of attorney supplement your living trust and can provide direction if you become incapacitated, but if you do not have a disability panel as part of your trust, you are overlooking an important aspect of incapacity planning. 

The people on—and the rules of—your disability panel are completely up to you. Setting these parameters while you are still competent and in control is one more way that you can make your wishes known. 

It is important to discuss the creation of a disability panel with an attorney who can help you with practical considerations, such as having a medical professional on the board to assure stronger cooperation from financial institutions. Remember that you can always change the terms of your revocable living trust, including the disability panel. For help drafting or updating your estate plan, please reach out to schedule a meeting.

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Footnotes

1. Kristen Bialik, 7 facts about Americans with disabilities, Pew Research Ctr. (July 7, 2017), https://www.pewresearch.org/fact-tank/2017/07/27/7-facts-about-americans-with-disabilities/.
2. Alzheimer’s Ass’n, 2022 Alzheimer’s Disease Facts and Figures, https://www.alz.org/media/Documents/alzheimers-facts-and-figures.pdf.

None of us likes to think about our own death or enjoys planning for that occasion. However, if you do not create an estate plan or fail to update it regularly, you are likely setting your loved ones up for even more stress and grief after you pass away. It may add to your own stress and impede your peace of mind during your lifetime because of the uncertainty that your wishes and goals will be fulfilled. If you have not updated your estate plan to include loved ones who are not provided for in your existing plan, you may be tempted to make deathbed gifts. It may bring you pleasure to make significant gifts to loved ones because of the joy it may bring to them. However, in addition to the obvious problem that none of us knows the exact time we will die and may not be able to make the deathbed gifts we intend, there are some other drawbacks to deathbed planning that you may not have thought about.

Lack of Basis Adjustment

Although it may seem special and meaningful to provide a gift to a loved one as your last act, it may come with significant costs to them. Under federal tax law, a capital gain occurs if property is sold or exchanged for more than its original price. The original price is called its basis. If you make a gift during your lifetime, even one minute prior to your death, the recipient of your gift will have the same basis you had: this is called a carryover basis. However, if the same person inherits the property after your death, the basis of the property is generally its fair market value at the time of your death: this is called a basis adjustment. This is important because if the value of the property increased over time, it will likely be worth more at your death than it was when you bought it, perhaps many years ago.

Example: If, on your deathbed, you decide to give your son a valuable painting you purchased in 1975 for $20,000 that is currently worth $150,000, the painting has appreciated in value by $130,000. Your son’s carryover basis in the painting is the same as yours—$20,000. As a result, if your son decides not to keep the painting and sells it for $150,000, the increase in value of $130,000 will be taxable as capital gain to him. In contrast, if your son inherits the painting at your death, his basis will be stepped up to $150,000, its fair market value on the date of your death. If he immediately sells it, he would have no capital gain, and thus, would benefit from significant tax savings.

Possible Inclusion in Your Gross Estate

If you have a very large estate, you may be tempted to make lifetime gifts as a way of decreasing the size of your estate and minimizing your liability for estate taxes. However, if you wait until you are on your deathbed to make those gifts, they will still be included in your estate under some circumstances because they are not considered “completed” gifts under federal tax law.¹ A recent case, Estate of DeMuth v. Commissioner,² dealt with a situation in which a father’s health began to worsen. His son, as his agent under a power of attorney, wrote eleven checks on September 6, 2015, from his father’s investment account totaling $464,000 to different recipients in an effort to take advantage of the annual gift exemption ($14,000 in 2015). The father died on September 11, 2015. Some of the recipients had deposited their checks before the father’s death, but some had not. 

Treasury Regulation § 20.2031-5 provides that the “amount of cash belonging to the decedent at the date of his death, whether in his possession or in the possession of another, or deposited with a bank, is included in the decedent’s gross estate.” The Tax Court found that under Pennsylvania law, which was applicable to determine when the gift of a check was a completed gift, delivery of a check does not complete the gift.³ Instead, only checks deposited by the recipients before the father’s death and credited to the their bank were completed gifts, and those that were not deposited or paid by the investment company should be included in the father’s estate because he (or his son as his agent) could have stopped payment on those undeposited checks until his death.⁴ Estate of DeMuth highlights the importance of planning ahead rather than waiting until the last moments or days of life to make a gift, particularly if the goal is to reduce your estate tax liability.

Although gifts made within three years of your death are generally includible in your estate,⁵ there is an exception if a gift tax return was not required to be filed because the value of the gift was less than the annual exclusion amount. Transfers relating to life insurance policies, however, are an exception to this exception.⁶

Doubts about Your Capacity

To make a valid gift, you must have the mental capacity required by state law, but those standards vary by state. In some states, it is the same standard that must be met to make a valid will: (1) you must have a general understanding of what type and how much property you own, (2) you must understand to whom you plan to give the property, and (3) you must understand that the gift transfers the property. In some states, it may also be necessary for you to have an understanding of the effect of the gift on your future financial security. 

If you make a gift on your deathbed, other heirs who may have inherited the property if the gift had not been made and who disagree with your decision may question your mental competency to make the gift. Although the mere fact that a gift was made on your deathbed is not enough on its own to show that you lacked the capacity to make the gift, there may be other factors that call the validity of the gift into question: Could your medical condition at the end of your life cause your mental capacity to decrease? What if you are taking medications immediately prior to your death that could impede your understanding?

We Can Help You Plan Ahead

The downsides of deathbed planning can outweigh any benefits you may think it will achieve, so it is prudent to consult an experienced estate planning attorney when considering any plan involving lifetime gifts. In addition, creating an estate plan designed to achieve all of your goals or updating an old plan that is no longer in line with your wishes will spare your family members and loved ones discord and can help them avoid tax bills. In addition, you will have the peace of mind that comes with knowing that your intentions will be carried out. Give us a call so we can assist you in planning ahead to avoid additional grief for you and your family.

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Footnotes

1. See I.R.C. § 2035(c)(3); Treas. Reg. § 25.2511-2(b) (“[I]f upon a transfer of property (whether in trust or otherwise) the donor reserves any power over its disposition, the gift may be wholly incomplete, or may be partially complete and partially incomplete, depending upon all the facts in the particular case.”).
2. 124 T.C.M. (CCH) 22 (2022) (appeal filed).
3. In re Mellier’s Estate, 182 A. 388, 389 (Pa. 1936).
4. Several of the checks that the Internal Revenue Service (IRS) had mistakenly conceded were not included in the father’s gross estate were excluded from it. But for the IRS’s mistake, the amounts of those checks also would have been included.
5. I.R.C. § 2035(a).
6. I.R.C. § 2035(c)(3).