Category: Estate Planning

Planning for the future of your home can be complicated, especially when you want to ensure that a loved one can continue living there after you are gone. Two common tools for accomplishing this are life estates and right of occupancy trusts. A life estate grants someone the legal right to live in a home for the rest of their life; however, while they can reside there, they do not own it outright. A right of occupancy trust allows someone to stay in the home under specific conditions set in a trust, giving more flexibility and control over how long they can remain. There are a few common scenarios in which people may use one of these tools.

As part of the greatest wealth transfer in modern history that is now underway, many younger Americans will inherit a home from their parents. This generational transfer is happening at a time when older Americans are living longer than ever. Many want to remain in their homes for as long as possible and transfer their home to a chosen loved one after their death, driving the need for estate planning tools such as life estates and right of occupancy trusts.

Both tools can help seniors age in place while facilitating the eventual transfer of their home to their children and other loved ones. However, there are key differences that can significantly impact an individual’s estate plan, loved ones, and remaining years. These tools are also common among blended families. With people marrying later in life or for a second or third time, it is possible that the home where the couple resides was originally the home of one of the spouses. Determining what happens if the home-owning spouse passes away first can bring about issues that need to be addressed through tools such as life estates and right of occupancy trusts.

What Is a Life Estate?

A life estate grants someone the right to possess and use a property for their lifetime. This person is known as the life tenant.

The life tenant has full use of the property and can even profit from it (e.g., by renting it out). However, their ownership is limited to their lifespan. When the life tenant dies, the property automatically passes to the designated remainderman (another word for beneficiary), who has a future interest in the property when the life tenant is alive that converts to a full ownership interest when the life tenant passes away.

A life estate is most often used when an owner wants to transfer property to a designated beneficiary (such as a child) while retaining the right to live in the property for the rest of their life. This allows the owner to stay in their home until they die and then have the property automatically pass to their chosen beneficiary without going through probate court.

For example, a life estate can be used in an estate plan to ensure that a caregiver, such as an adult child (the remainderman), has the right to inherit the property after providing care to an elderly parent (the life tenant). In this scenario, the caregiver lives in the home while the parent is still alive, with full ownership transferring to the caregiver child upon the parent’s death. A life estate can thus be a way to incentivize and compensate the caregiver for their services. 

For married couples in which one spouse owns the home, a life estate ensures that the surviving spouse (the life tenant) can live in and use the home for the rest of their life. After the life tenant passes away, ownership of the home automatically transfers to the person or people chosen by the first spouse to pass away (which may be other family members or children from a prior relationship).

As both the life tenant and the remainderman have an ownership interest in the property, major decisions about the property, such as a decision to sell or mortgage, typically require both parties to agree.

What Is a Right of Occupancy Trust?

A right of occupancy trust is a legal tool that allows a designated individual to live in a property for a specified period of time, usually until they die or move away, giving them the right to occupy the property without full ownership. It is similar to a life estate; however, the beneficiary is not allowed to sell or transfer their interest in the property the way a life estate beneficiary can. They have a right to occupy, but they do not have an ownership interest.

The trust can outline the terms of occupancy, including defining responsibilities for expenses such as property taxes, insurance, and maintenance. It can also provide money to pay for property-related expenses. Upon the right of occupancy trust’s termination, the property is distributed according to the trust’s terms.

A right of occupancy trust is generally used when the current owner wants to provide for someone’s housing needs while retaining control over the property, wants to ensure that the property is passed down according to their wishes after a specified event or period, or needs the flexibility to address specific beneficiary needs.

A right of occupancy trust can ensure that a caregiver, such as an adult child or a hired aide, can continue living in the home for a set period after the aging parent passes away. This provides stability for the caregiver while preserving the home’s ultimate inheritance for the parent’s chosen beneficiaries.

In the context of marriage, if the spouse who owns the home passes away first, a right of occupancy trust can allow the surviving spouse to live in the home for a set period or under specific conditions, such as until they remarry or move out. This ensures that the surviving spouse has housing security while also protecting the home for eventual inheritance by the original owner’s chosen beneficiaries, such as children from a previous marriage.

Key Considerations: Life Estate versus Right of Occupancy Trust

Both life estates and right of occupancy trusts have a great deal to offer in terms of estate planning. They appear quite similar on the surface and offer some of the same benefits, but they have important differences. Here are some key things to consider as you weigh your options:

1. Probate Avoidance

• Life estate. When the life tenant dies, the property automatically passes to the remainderman (i.e., the beneficiary), so it does not need to go through the probate court process.
• Right of occupancy trust. Because the property is owned by the trust, it is not subject to probate when the original owner dies. When the owner dies, the beneficiary gets the right to occupy the property, and when the beneficiary dies or ceases to use the property, the trust determines what happens to the property.

2. Control over Property Distribution

• Life estate. The life tenant can live in and use the property as they see fit during their lifetime, but they cannot sell or mortgage the property without the remainderman’s consent.
• Right of occupancy trust. The beneficiary of a right of occupancy trust has a right to occupy the property during the stated time period but is limited in what they can do with it. The trustmaker can set specific conditions, such as requiring the occupant to maintain the property or pay certain expenses. The beneficiary of a right of occupancy trust generally cannot sell or mortgage the property unless the terms of the trust provide otherwise.

3. Ownership and Control

• Life estate. The life tenant can sell their life estate interest (not the entire property), and the buyer would be subject to the life tenant’s rights. Therefore, when the original life tenant dies, the buyer’s rights end. However, if both the remainderman and the life tenant agree, the entire property could potentially be sold: The life tenant would be entitled to a percentage of ownership interest based on their life expectancy, and the remainderman would receive the remaining interest.
• Right of occupancy trust. The trust owns the property, and the beneficiary has only the right to occupy it according to the trust terms. This arrangement provides greater control and prevents the beneficiary from selling their interest.

4. Financial Responsibilities

• Life estate. The life tenant is typically responsible for most property-related expenses, including property taxes, insurance, maintenance, and minor repairs. The remainderman is usually responsible for major and structural repairs and long-term improvements. This allocation of financial responsibilities may be negotiated.
• Right of occupancy trust. The trust document can specify who is responsible for various expenses.

5. Property Tax Implications

• Life estate. In some states, life estates may not be eligible for certain property tax benefits, such as homestead exemptions or limitations on annual property tax increases.
• Right of occupancy trust. Similarly, states may limit property tax benefits when the property is held in a trust.

Which Option Is Right for You?

The choice between a life estate and a right of occupancy trust should be based on individual circumstances and estate planning goals.

A life estate might be right in the following circumstances:

• You want to stay in your home for the rest of your life and then have it pass to somebody else.
• You want to give some level of ownership to the person you name as the life tenant.

Alternatively, a right of occupancy trust might be right in these circumstances:

• You want greater control over the property and the beneficiary’s occupancy rights.
• You want to specify who is responsible for property-related expenses.
• You need flexibility in defining the terms of occupancy and distribution.

When deciding which tool is right for you or whether other options are a better fit for your estate plan, consult with an attorney for personalized advice.

Approximately three-fourths of Americans do not have a basic will.^[1] Many of the same people also have children under the age of 18, which underscores a major misunderstanding about estate plans: They can accomplish much more than just handling financial assets (money, accounts, and property).

One of the most important estate plan functions for parents of minor children is the ability to provide specific guidance about how their children will be cared for and who will care for them in case something happens to the parents.

To account for all emergency contingencies concerning you and your children, your estate plan should form a comprehensive safety net that addresses your children’s care needs and protects them from the unthinkable.

Three Tools You Need If You Have Minor Children

As parents, we instinctively strive to shield our children from harm and set them up for success, now and in the future.

While we cannot predict the future, we can prepare for it. Estate planning is a crucial step in this preparation, especially when minor children are involved. It is not only about distributing your money and property after your death; it is also about establishing ways to care for your children if you no longer can.

Your death or incapacity (inability to manage your affairs) from a sudden illness or accident is a situation that you would likely rather not think about but must consider in preparing for worst-case scenarios that could lead to a court deciding who cares for your child.

Data on parental mortality is sobering: More than 4 percent of minor children have lost at least one parent.^[2] If you wait too long to create your estate plan, it could be too late. More than any other reason, Americans cite procrastination as the reason they do not have an estate plan.^[3] Procrastinating on creating your estate plan could mean it will not be there when you—and your children—need it.

To safeguard your children’s future, three estate planning tools are particularly important: a will, a power of attorney for minors, and a standalone nomination of guardian.

Last Will and Testament

A last will and testament (also known as a will) is a cornerstone of any estate plan, but it takes on added importance when you have minor children. Your will outlines your wishes regarding the distribution of your money and property after your death. It also allows you to do the following:

• Name a guardian. A guardian is the person you want to raise your children if you and the other legal parent are deceased. The most common choice of guardian is a close family member, such as grandparents or siblings, or a close family friend.
• Establish an inheritance for your children. Because minors cannot directly inherit money and property over a certain limit set by state law, there needs to be a way to handle their inheritance for them until they reach legal adulthood. A testamentary trust (one that is created in a will) is a safe way to set aside money and property for your minor children. The terms of the testamentary trust allow you to name a trustee to oversee the inheritance. Another benefit of a trust is that you can determine when the children receive their inheritance and how they will receive it.
• Name an executor. An executor (or personal representative) is the person you designate to carry out the instructions in your will, including managing your estate and distributing your money and property. They might work closely with the guardian and the trustee to ensure that your instructions are executed smoothly and according to plan. The same person may serve in more than one role in your estate plan (e.g., guardian and trustee, guardian and executor).

Power of Attorney for Minors

A power of attorney for minors, sometimes called a designation of standby guardian or something similar depending on the state, is a legal document that empowers a chosen individual (your agent or attorney-in-fact) to act for your minor child on your behalf. This person steps in to make decisions regarding your child’s care if you become incapacitated or unavailable.

The power of attorney can grant the agent broad authority to handle various aspects of your child’s life, including the following:

• Healthcare: making medical decisions, consenting to treatments, and accessing medical records
• Education: enrolling your child in school, making educational choices, and attending school meetings
• Finances: managing your child’s finances, including accessing bank accounts, applying for benefits, and handling their inheritance
• Legal matters: representing your child’s legal interests in matters such as a custody dispute, personal injury claim, or inheritance matter
• Daily care: meeting your child’s food, shelter, clothing, and other basic needs

Although the power of attorney grants the agent significant authority, there are limits to what it permits. The agent cannot consent to the child’s marriage or adoption. In addition, many state laws impose expiration dates on these documents (e.g., six months, one year), so it is important to review and update them regularly to ensure that they remain valid.

Standalone Nomination of Guardian

While a power of attorney addresses temporary situations, such as short-term incapacity or extended travel, a standalone nomination of guardian document focuses on the long-term care of your children in the event of your death or incapacity.

Without a designated guardian, a court will decide who cares for your children. The guardianship process can be lengthy and uncertain and could potentially result in the appointment of a caretaker you would not want gaining custody of your kids.

You should name a guardian in your will. However, a standalone document that also names a guardian (if allowed in your state) offers the added benefit of being easier to update than a will, which often requires more formalities and can take longer to change.

Revocable Living Trust

In addition to a power of attorney, nomination of guardian, and will, the parents of minor children might consider a revocable living trust that holds their accounts and property during their lifetime and distributes them after their death.

You (the parent) maintain control of the accounts and property in the trust while you are alive as the current trustee. You can change the trust’s terms as needed because you are the trustmaker, and this type of trust is revocable. A revocable living trust can help avoid probate and give your children faster access to the resources they need. You can also specify how and when your children receive their inheritance, name a successor trustee to continue management of the trust if you suffer incapacity, and provide financial support for the guardian, further synergizing your estate plan.

How These Tools Work Together—and What Can Happen If You Do Not Plan

These three estate planning tools are not interchangeable; they are complementary and designed to work together to address immediate and long-term needs in a range of potential scenarios.

Imagine a scenario where both parents are in a car accident. One parent dies, and the other is severely injured and temporarily incapacitated. The agent named in the temporary power of attorney or delegation of standby guardian immediately steps in to temporarily care for the children.

If the injured parent passes away, the designated guardian (who may be the same person as the agent under the temporary power of attorney) named in the will or standalone document can provide the children with a stable permanent home. The will can be structured so that the children’s inheritance is managed through a trust that specifies how and when their inheritances should be spent and distributed.

Failure to have any one of these estate planning tools can lead to complications and unintended consequences for your minor children. For example:

• A missing temporary power of attorney could lead to delays in, or the inability to, make emergency decisions about medical treatment.
• A missing guardian nomination document could lead to a court choosing a guardian you would not have chosen. Ostensibly, the choice a judge makes will be in the child’s best interest, but do they really know your child and family dynamics well enough to make this choice?
• A missing will can also lead to a court appointing a guardian who is someone other than your first choice. In addition, your children may not receive the inheritance you intended in the way that you intended, and you lose the ability to specify how your money and property are used for their benefit. Further, they will end up getting what is left of their inheritance outright when they reach the age of majority (18 or 21, depending on the state).

Other Planning Tools and Tips for Parents

Parents should understand that they can only nominate a guardian for their child, not legally appoint one; the court has the final authority to decide, though it gives significant weight to the parents’ nomination.

If there is evidence that your chosen guardian is unfit or unable to provide proper care, the court may appoint a different guardian in the child’s best interest, even if it goes against your wishes. There is also the chance that a family member could contest your guardianship choice or your first choice of guardian is unavailable.

These outcomes are unlikely, but since they could undermine your wishes, there are additional steps you can take to minimize the risk and strengthen your case.

• In a separate letter, sometimes referred to as a letter of intent, clearly state your choice of guardian and provide a detailed explanation of why you believe this person is the best fit. Speak to their qualifications, relationship with your children, and ability to provide a stable and loving home.
• Name alternative guardians in case your first choice is unable or unwilling to serve.
• To prevent misunderstandings and reduce the likelihood of a challenge, have open and honest conversations with family members about your guardianship decision. Explain your reasoning and address any questions or concerns they may have.
• Have your will or separate guardian nomination form properly executed according to your state’s laws. To be legally binding, they may need to be witnessed and notarized and meet other requirements.

Fitting Together the Pieces of Your Estate Plan

Each part of an estate plan has a role to play, but they work best when considered as parts of a larger plan that addresses big issues such as the well-being of your minor children.

A will, temporary power of attorney, and standalone guardian document are not interchangeable; they are complementary. Incorporating all three into your plan, alongside other strategies such as a revocable living trust and a letter of intent, addresses the immediate and long-term needs of your minor children in any eventuality.

If you have minor children, estate planning is a necessity. Do not leave your children’s future to chance. Consult with an estate planning attorney to create a multipoint plan that protects you and your family.

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^[1] Victoria Lurie, 2025 Wills and Estate Planning Study, Caring (Feb. 18, 2025), https://www.caring.com/caregivers/estate-planning/wills-survey.

^[2] George M. Hayward, New 2021 Data Visualization Shows Parent Mortality: 44.2% Had Lost at Least One Parent, U.S. Census Bureau (Mar. 21, 2023), https://www.census.gov/library/stories/2023/03/losing-our-parents.html.

^[3] Lurie, supra note 1.

Now is the perfect time to start working on an estate plan. As newlyweds, you are likely in the process of deciding which of your accounts and property (your assets) to combine and how to turn two households into one. You may also be setting up new bank accounts and creating a plan for paying shared bills and other expenses.

You can use that time, energy, and work to leapfrog into planning for your future so that you will be prepared for the next stages of your new life together.

Why Think About Estate Planning at This Point?

Even if you do not have a great deal of money or own many valuables, you may have more than you think. Regardless of what you currently own, putting together a will or a trust can be straightforward at this point since you are likely very aware of what you own and how you own it.

You may have heard of state laws that give your property to your spouse if you do not have a will. Unfortunately, this may not always be true—or at least may not be the full story. State laws that direct where your assets go when you die without a will—known as intestacy laws—vary by state and sometimes have unexpected results. Also, distributing your assets through intestacy laws requires your estate to go through probate, a court proceeding that can take months or even years to resolve. A comprehensive estate plan can give you the peace of mind that comes from knowing that your loved ones are taken care of if anything happens to you. If avoiding probate and having control over who receives your assets is important to you, the right estate planning tools can make this wish come true.

Although you have just embarked on a new chapter in your life and more changes may be coming, creating an estate plan now is still important. Once you have an initial plan in place, you can easily update it as your circumstances and needs change.

Who Can Make Decisions for Me If I Cannot?

A financial power of attorney is a legal tool that allows you to designate an agent (often a spouse) to make financial decisions on your behalf. Your agent can pay your bills, sign contracts on your behalf, manage insurance policies, file lawsuits on your behalf, and more. Depending on the document’s exact language, you can grant your agent broad powers to be able to do almost anything you could do or more limited powers for a specific issue, situation, or time period. Subject to state law (as some states do not allow for delayed authority), you may also be able to designate when your agent is allowed to act on your behalf; they may be allowed to act immediately when you sign the document, even if you are well and able to manage your affairs, or they may have to wait until it is determined that you can no longer manage your own affairs.

A medical power of attorney (sometimes referred to as a designation of health care surrogate or health care advocate designation) is similar to a financial power of attorney in that it gives an agent the legal authority to make medical decisions on your behalf when you cannot make them yourself. Unlike a financial power of attorney, a medical power of attorney typically takes effect only if you are unable to make decisions on your own or communicate your wishes, such as in an emergency or because of illness. Some states allow you to grant the agent immediate authority to access health records and make medical decisions on your behalf. You may choose to name your new spouse as an agent under either or both powers of attorney. If you fail to create or update a comprehensive estate plan, your new spouse will have no legal authority to act for you on financial or medical matters without court intervention—a lengthy and costly process that most people want to avoid.

What Kind of Care Would I Want?

An advance directive (sometimes also known as a living will) is a tool that defines your wishes regarding end-of-life care if you are unable to make those decisions for yourself. Think of this document as an emotional insurance policy: You make decisions now so the people you love will not have to in the future when they are already under a great deal of emotional stress. However, note that not all states recognize advance directives as legally binding. 

Who Will Look After the Kids?

If you do not yet have kids but want them someday, realize that an estate plan is essential for families with children. The number one concern for most new parents is who will raise their children if they are unable to. If parents want a say in whom the court will appoint as legal guardians of their children if neither legal parent is alive or available, they need a will or a standalone nomination (if your state allows it) to designate their guardian choices. In the absence of a will, the court will appoint a guardian based on the priority set in state law and based on what the judge feels is in the children’s best interests. The court’s ultimate choice may not be the person you would have chosen yourself.

As you start your new life together, one of the best ways to begin is by planning for the future, whatever it may bring. We help families of all ages and kinds and would be delighted to help you, so please contact our office today. 

Having an estate plan is a great way to ensure you and your loved ones are protected today and in the future. When creating an estate plan, we look at what is going on in your life at that time. But because life is full of changes, it is important to make sure your plan can change to accommodate whatever life throws your way. Sometimes, we can make your first estate plan flexible to account for potential life changes. Other times, we must change or add to the tools we use to ensure that your ever-evolving wishes will be carried out the way you want.

Life Changes that Could Impact the Tools in Your Estate Plan

Life is constantly changing. The following are some important events that may require you to reevaluate your estate plan:

• The value of your accounts and property have increased
• Your pay has increased
• The balance of your retirement account has grown significantly
• You acquired real estate in another state
• You received an inheritance
• You have a new spouse, significant other, or minor child that you want to provide for

Ways We Can Enhance Your Estate Plan

It is important to know when you create your first estate plan that you are not locked into this plan for the rest of your life. The following are common changes we can make to your estate plan to ensure that we adequately address your evolving concerns and wishes.

Transitioning from a Last Will and Testament to a Revocable Living Trust

A will (sometimes referred to as a last will and testament) is a tool that allows you to leave your money and property to anyone you choose. It names a trusted decision maker (a personal representative or executor) to wind up your affairs at your death, lists how your money and property will be distributed, and appoints a guardian to care for your minor children. If you rely on a will as your primary estate planning tool, the probate court will oversee the entire administration process at your death. A will may adequately meet some clients’ needs.

On the other hand, a revocable living trust is a tool in which a trustee is appointed to hold title to and manage the accounts and property that you transfer to your trust for one or more beneficiaries. Typically, you will serve as the initial trustee and be the primary beneficiary. If you are incapacitated (unable to manage your affairs), the backup trustee will step in and manage the trust for your benefit with little interruption and with less potential for costly court involvement. Upon your death, the backup trustee manages and distributes the money and property according to your instructions in the trust document, again without court involvement.

If your wealth has grown or you have new loved ones to provide for, you may find the privacy, expediency, and potential cost-savings associated with a revocable living trust more appropriate for your situation.

Adding an Irrevocable Life Insurance Trust

At some point, you may decide that you need life insurance—or more of it—to provide for your loved ones sufficiently. If the value of your life insurance is especially high, you may want to consider adding protections for the funds in your estate plan, as well as engaging in estate tax planning. Both goals can be accomplished by using an irrevocable life insurance trust (ILIT). Once you create the ILIT, you fund it either by transferring ownership of an existing life insurance policy into the trust or by having the trust purchase a new life insurance policy. Once the trust owns a policy, you then make cash gifts to the trust to pay for the insurance premiums. These gifts can count against your annual gift tax exclusion, so you likely will not owe taxes at the point of these transfers. Upon your death, the trust receives the death benefit of the policy, and the trustee holds and distributes the money according to your instructions in the trust document. This tool allows you to remove the value of the life insurance policy and the death benefit from your taxable estate while allowing you to control what will happen to the death benefit. An ILIT can also be helpful if you want to name beneficiaries for the trust who differ from the beneficiaries you name in other estate planning tools.

Adding a Standalone Retirement Trust

If you have been contributing to your retirement account over the years, the balance has ideally increased. If you want to provide for minor children or loved ones who are not good at managing money, you may want to name a trust as the beneficiary of your retirement account as opposed to naming your loved ones directly. Naming an individual directly as a beneficiary will allow them to inherit the account without restrictions or protections.

A standalone retirement trust (SRT) is a special type of trust that is separate and distinct from your revocable living trust. It is designed to be the beneficiary of your retirement accounts so that the trust becomes the owner of the account after your death. The SRT is only meant to hold retirement accounts. When the SRT is created as an accumulation trust, the trust can protect the inherited retirement account from the beneficiary’s creditors as well as guardianship or probate proceedings. An accumulation trust requires that any withdrawals taken from the retirement account be held in the trust (not given directly to the trust beneficiaries) and distributed to the beneficiaries according to the instructions you lay out in the trust agreement. There are, of course, drawbacks to an accumulation trust. One such drawback is that because income is held in the trust and not automatically distributed to beneficiaries, the income is taxed at the trust income tax rate, which is often higher than the individual beneficiary’s tax rate. Most people, however, find that the benefits outweigh this potential burden. An SRT ensures that the inherited retirement account remains in the family and out of the hands of a child-in-law, former child-in-law, or creditor. It can also enable proper planning for disabled or special needs beneficiaries.

This type of trust can also be easier for your backup trustee to administer because they only have to worry about one type of asset: retirement accounts. An SRT can also be helpful if you want to name beneficiaries different from those you have named in other estate planning tools.

Adding a Charitable Trust

As you accumulate more wealth or become more philanthropically inclined, you may wish to include separate tools to benefit a cause that is near and dear to your heart. Depending on your unique tax situation, using tools such as a charitable remainder or charitable lead trust can allow you to use your accounts or property that are increasing in value to benefit the charity while offering you some potential tax deductions.

A charitable remainder trust (CRT) is a tool designed to potentially reduce both your taxable income during life and estate tax exposure when you die by transferring cash or property out of your name (in other words, you will no longer be the owner). As part of this strategy, you will fund the trust with the money or property of your choosing. The property will then be sold, and the sales proceeds will be invested in a way that will produce a stream of income. The CRT is designed so that when it sells the property, the CRT will not have to pay capital gains tax on the sale of the stocks or real estate. Once the stream of income from the CRT is initiated, you will receive either a set amount of money per year or a fixed percentage of the value of the trust (depending on how the trust is worded) for a term of years. When the term is over, the remaining amount in the trust will be distributed to the charity you have chosen. 

A charitable lead trust (CLT) operates in much the same way as the CRT. The major difference is that the charity, rather than you as the trustmaker, receives the income stream for a term of years. Once the term has passed, the individuals you have named in the trust agreement will receive the remainder. This can be an excellent way to benefit a charity while still providing for your loved ones. Also, you may receive a deduction for the value of the charitable gifts that are made periodically over the term. These deductions may offset the gift or estate tax that may be owed when the remaining amount is given to your beneficiaries.

Adding Documents to Care for Your Minor Child

If you have not reviewed your estate plan since having or adopting children, you should consider incorporating some additional tools into your estate plan. Some states recognize a separate document that nominates a guardian for your minor child should you be unable to care for them, even if you are still alive. You can also reference this document in your last will and testament. Some people prefer using this separate document because it is easier to change the document than it is to change your will if you want to choose a different guardian or backup guardian for your minor child. 

Another tool recognized in some states is a document that grants temporary guardianship (referred to as temporary power of attorney in some states) over your minor child. This can be used if you are traveling without your child or are in a situation where you are unable to quickly respond to your child’s emergency. This document gives a designated individual the authority to make decisions on behalf of the minor child (with the exception of agreeing to the marriage or adoption of the child). This document is usually only effective for six months to a year but can last for a longer or shorter period, depending on your state’s law. You still maintain the ability to make decisions for your child, but you empower another person to have this authority in the event you cannot address the situation immediately.

Let Us Elevate Your Planning

We are committed to making sure that your wishes are carried out in the way that you want. For us to do our job, we must ensure that your wishes are properly documented and that any relevant changes in your circumstances are accounted for in your estate plan. If you need an estate plan review or update, give us a call.

By now, you have likely heard about the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) and the SECURE 2.0 Act of 2022 (part of the Consolidated Appropriations Act, 2023). These pieces of legislation were created to encourage Americans to save for retirement and provide additional rules about how retirement accounts should be treated. Among the many provisions in these pieces of legislation, one presents a unique opportunity for young adults to save for retirement.

SECURE 2.0 Act’s 529-to-Roth Rollover

Passed in 2023, the SECURE 2.0 Act provided additional provisions and opportunities to strengthen the retirement system in the United States. One of these provisions includes the ability to roll over unused funds from a 529 plan into the beneficiary’s Roth individual retirement account (IRA), up to a certain amount tax-free and without any penalties.

What Is a 529 Plan?

A 529 plan is a tax-advantaged investment account designed to hold funds to be used for a beneficiary’s (such as a child’s or grandchild’s) qualified educational expenses. After-tax money is placed into the account and grows tax-free through investing. Once the money is needed, it can be withdrawn tax-free for the qualified education expenses of the beneficiary, such as tuition and fees, most room and board expenses, books and supplies, and computers and other technology. The beneficiary can also use these funds to pay up to $10,000 toward their existing student loans. If money is withdrawn for nonqualified expenses, it is subject to income tax and a 10 percent penalty (with some exceptions).

What Happens If There Are Unused Funds?

Getting an education can be expensive, which is why many people are motivated to set up or contribute to 529 plans for their children and grandchildren. Like a standard investment account, money is put into the 529 plan with the hope that it will grow over time and result in enough money to cover some or all of the beneficiary’s educational expenses. If the cost of the beneficiary’s education is less than the amount that has been saved in the 529 account—perhaps the beneficiary has received more in scholarships than they anticipated, for example—there may be funds left over. Now, instead of withdrawing the unused money from the account and paying income tax and a penalty or trying to find a new beneficiary to which you can transfer the remaining funds, the leftover funds can be rolled over into a Roth IRA for the beneficiary.

What Is a Roth IRA?

A Roth IRA is a tax-advantaged IRA to which you contribute after-tax money to be used for your retirement. While in the account, the money grows tax-free through investing and can be withdrawn tax-free after you reach age 59 ½, as long as the account has been open for at least five years. You may be able to withdraw the funds before you have reached age 59 ½ without being subject to taxes or penalties under some exceptions.

Are There Limitations to the Rollover?

Like most things, there are some limits to rolling over unused funds from a 529 educational savings plan into a Roth IRA. Some important limitations include the following:

• There is a lifetime maximum of $35,000 that a 529 beneficiary can transfer to the Roth IRA.
• The 529 plan must have been in existence for at least 15 years.
• The Roth IRA must be in the name of the beneficiary of the 529 plan.
• You cannot transfer contributions or earnings on contributions to the 529 plan that were made within five years.
• Transfers to the Roth IRA are subject to the annual Roth IRA contribution limits.
• The rollover must be plan-to-plan or trustee-to-trustee.
• The beneficiary must have earned income to roll over funds from the 529 plan to the Roth IRA.

Some states do not use the same definition of qualified expenses for state income tax calculations. Therefore, it is important that you work with a professional to understand if there will be any state income tax consequences if you choose to roll over the funds from the 529 plan to a Roth IRA for the beneficiary.

Could This Be the Right Move for Me or My Child?

This new rollover technique allowed under the provisions of the SECURE 2.0 Act presents an additional option to consider if there are funds left over in a 529 plan after you or your child have completed their education. Instead of trying to fund a new beneficiary’s 529 plan or losing part of the money to income taxes and a 10 percent penalty, you may be able to assist your loved one in planning for their retirement. If you have questions about a 529 educational savings plan and how it may fit into your estate plan, please give us a call.

Today more young adults are living at home with their parents than at any time since the 1940s. While there are many different opinions about this trend and the cause of its recent prevalence, the primary motivation for young adults staying at home with their parents is usually related to finances.

Most adult children who still live at home have future plans to move out at some point. However, if one or both of their parents pass away prior to that time without addressing the adult child’s living situation in their estate plan, it can present legal issues.

An estate plan should be updated every 3 to 5 years. If you have an adult child who still lives at home or recently had an adult child move back in with you, it may be time to review your plan and make any necessary changes to ensure that your wishes are adequately addressed.

Almost Half of Young Adults Still Live at Home

A sign of tough economic times can be evidenced by the large number of young adults living at home with their parents.

According to a recent survey by the Harris Poll for Bloomberg, about 23 million—or 45 percent—of 18-to-29-year-olds are living with their parents.¹ That is the highest level since the post-Depression era.

Bloomberg cites economic headwinds like high inflation, the lingering effects of pandemic lockdowns, student loan debt, unaffordable home prices, and an uncertain job market as reasons why young people are staying home en masse.

The majority of those surveyed said the decision to live with Mom and Dad was motivated by the following financial reasons:

• Saving money (41 percent)
• Inability to afford to live on their own (30 percent)
• Paying down debt (19 percent)
• Recovering from emergency costs (16 percent)
• Losing their job (10 percent)

Opinions are split on the importance of parents charging rent to adult children who live with them. Around 57 percent of US adults told Newsweek that an adult child living at home should be charged rent; just 28 percent said an adult child should be allowed to live with them rent-free. A Lending Tree survey found that 73 percent of parents would charge rent to an adult child living at home.²

Boomerang Children and Estate Planning

The phenomenon of the not-so-empty-nest raises questions that should be addressed in an estate plan.

Adding an Adult Child to the Home Title

Moving back home is not always the result of a child’s money problems or financial circumstances. The second-most common reason cited in the Bloomberg poll was taking care of older family members (30 percent). Helping with family expenses (28 percent) ranked fourth.

Maybe one parent passed away and the surviving parent either does not want to live alone, requires living assistance, or is on a fixed income and needs help making ends meet. In such situations, an adult child could be added to the house’s deed as a partial owner.

• If the house is jointly owned by the surviving parent and the adult child and the joint ownership structure includes survivorship rights, then when the surviving parent dies, the house passes automatically to the adult child outside of probate.
• With a tenants-in-common ownership structure, the surviving parent’s share of the house becomes part of their estate and may need to be transferred to whomever they designate in their will through probate court.
• A life estateis another form of joint ownership in which the life tenant (the surviving parent) has the right to live in the home during their lifetime, and upon their death, the house passes to a named remainderman (here, the adult child). This option, like joint ownership, avoids probate and can be thought of as a type of beneficiary designation on real property.

Avoiding probate might be a desirable goal, but it should be weighed alongside other potential outcomes of co-ownership, such as capital gains tax if the property is later sold, gift tax that may be due because the surviving parent is gifting a partial ownership in the home, and potential creditor claims of the child’s creditors. If parents are trying to avoid probate, they may consider creating a trust to own their interest in the home, in addition to their other accounts and property, or utilizing an enhanced life estate deed or transfer-on-death (TOD) deed for their home, if their state law allows. All of these techniques can be applied to the parent’s partial interest in the home if the co-ownership is structured as a tenancy in common, or to the parent’s full ownership in the home if they choose not to add their child to the title.

Choosing to add a child as a joint owner of a home when there are multiple children who stand to benefit from an estate can raise additional estate planning challenges. For example, a parent could add a live-in child as a co-owner of the home under a tenants-in-common ownership structure and direct their child or other heirs in an estate plan to sell the house and divide the profit among their siblings (and other heirs) upon that parent’s death.³ But in this case, there is nothing requiring the live-in child to share the portion of the sales proceeds attributable to the interest of the property they owned directly.

Alternatively, if the child was added as a joint owner with right of survivorship (rather than a tenancy-in-common co-owner), the home will become 100 percent the child’s by operation of law, and they will be under no legal obligation to sell the home or share the proceeds, despite whatever instructions are left in a will or given verbally to the child.

When an Adult Child is a Tenant

The likelihood of an adult child living at home and paying rent to their parents is not trivial, as it can determine the child’s status as a tenant or guest.

Tenants have legal rights under landlord-tenant laws. If there is a written or even a verbal rent agreement between parent and adult child, the child may be considered a tenant, granting them certain legal rights and protections, and therefore it might not be possible to just kick them out. An adult child who is a legal tenant would have the right to an eviction process that involves a court hearing.

Eviction might not come up when the parents are alive, but it could become a problem when they pass away and the estate plan orders the sale of the house and the division of its proceeds to beneficiaries. Additionally, the adult child might not have anywhere else to go or the financial means to make alternate arrangements. Also, to further complicate matters, the estate executor is likely to be a sibling, raising the possibility of family strife.

Gifting a Family Home to a Live-in Adult Child

Mom or Dad could opt to leave their house to an adult child living at home in their estate plan instead of making them a joint owner and transferring the home to them via a contractual right of survivorship. But this course of action raises a different set of questions:

• Do they have other children?
• If they do, would the live-at-home child/heir be required to buy out their siblings’ interest?
• In the event of a sibling buyout provision, would the live-at-home adult child be able to afford the house or obtain financing?

Even if the adult child could obtain financing to buy out their siblings, somebody who has never owned a home before might not be financially prepared for hidden and unexpected expenses beyond the monthly mortgage payments. Property taxes, HOA or condo association fees, insurance, utilities, and repair and upkeep costs can easily add up to thousands of additional dollars per year.

Parents wishing to leave the family home to an adult child currently living there might have their hearts in the right place, but without addressing the financial considerations of owning a home, they could be overburdening their adult child, which could ultimately result in an unfortunate or unintended outcome.

Alternatively, parents could leave their home to their live-at-home child in an estate plan and gift other assets to their other children in an amount needed to offset the share of the value of the home they would otherwise receive. While this would give the home to the child without the need to pay off their siblings, the child would still have to contend with the financial obligations of owning a home discussed above.

Every Family Is Different. Create an Estate Plan That Fits Yours.

For better or worse, multigenerational family living arrangements have made a comeback. And while the stigma of having an adult child at home is mostly gone, that does not mean it does not present potential difficulties—both in the present and the future.

Parents should know that “fair treatment” may look different for some of their children and ultimately that completely “equal treatment” of their kids may not be possible. An adult child who has yet to fly the nest due to financial struggles may call for special attention in an estate plan. It could also be the case that parents would like to compensate an adult child who moved back home to help them out.

Whatever your family situation, careful planning can ensure that your intentions are made clear, your loved ones are properly taken care of, the potential for conflict is minimized, and your estate is taxed as little as possible. To create or update an estate plan, please contact our office and schedule an appointment.

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Footnotes

1. Paulina Cachero & Claire Ballentine, Nearly Half of All Young Adults Live with Mom and Dad—and They Like It, Bloomberg (Sept. 20, 2023), https://www.bloomberg.com/news/articles/2023-09-20/nearly-half-of-young-adults-are-living-back-home-with-parents.
2. Sophie Lloyd, Why More Parents Are Charging Their Adult Children Rent, Newsweek (Apr. 6, 2023), https://www.newsweek.com/charging-adult-children-rent-homeowner-parenting-1793021.
3. It is important to note that in a tenancy-in-common ownership structure, each owner holds an individual interest in the property, but no single owner possesses unilateral authority to sell the property. Any sale requires the consent and participation of all co-owners. In this example, therefore, the parent, as a tenancy-in-common co-owner in the property, does not have the authority to require the sale of the entire property after their death in their estate plan. They may include language regarding the sale of the property and hope that the live-in child willfully participates. If the live-in child is not compliant, the trustee, executor, or heirs/beneficiaries may need to bring a partition action with the court to get a court order requiring the sale, if such remedy is available under the relevant state law.

Married couples love each other and want the best for each other. Establishing a comprehensive estate plan is one way to provide the best for each other. Not only does an estate plan protect you when you are unable to care for yourself during your lifetime, but it also protects your hard-earned money and property after your death for those you love. When your spouse is not a US citizen, it becomes even more crucial to have the proper estate planning tools, especially if you have a high net worth.

The Marital Deduction

One of the benefits associated with marriage in the United States is the unlimited marital deduction. With this tool, a person can transfer unlimited money and property to their spouse during their lifetime and upon their death without estate and gift taxes being owed. One rationale for this deduction is that married couples are assumed to rely on their joint accounts and property to fund their needs and wants during their marriage and to support the survivor. The Internal Revenue Service (IRS) is not concerned about assessing estate tax to what is left to the surviving spouse, because whatever is left over will usually be subject to estate tax at the surviving spouse’s death.

However, the unlimited marital deduction’s favorable tax treatment is usually only available if the surviving spouse is a US citizen (except in certain limited situations). For noncitizen surviving spouses, additional planning must be done to take advantage of the marital deduction’s estate tax benefits.

Why a Noncitizen Spouse Cannot Use the Marital Deduction

When a surviving spouse is not a citizen, the IRS is concerned that collecting the estate tax owed on the first spouse’s money and property may be more difficult when the surviving spouse dies. Because the surviving spouse is not a citizen, it is possible that they will return to their country of citizenship, which may make it impossible for the IRS to collect the estate tax.

A Qualified Domestic Trust Could Be the Answer

The qualified domestic trust (QDOT) balances the IRS’s interest in collecting estate tax and the public policy argument against requiring a surviving spouse to pay substantial estate taxes and be left with less than they need to survive.

What Is a Qualified Domestic Trust?

A QDOT is a trust created by the US citizen spouse during their lifetime to hold accounts and property on behalf of the noncitizen spouse. Alternatively, a QDOT can be made by the noncitizen spouse by irrevocably assigning the accounts and property they received from their deceased US citizen spouse to the QDOT before the deceased spouse’s estate tax return is due (including extensions). The accounts and property passing to a QDOT can qualify for the marital deduction with either option. However, the estate tax is deferred, not eliminated.

How Does a QDOT Work?

While the noncitizen surviving spouse lives, they will receive income from the trust. This income will not be subject to estate tax but will be subject to income tax. If any principal distributions are made from the QDOT to the surviving spouse, then the Internal Revenue Code § 2056A estate tax will be owed on that distribution. However, an exception may be made if the distribution is being made because of a hardship.

When the noncitizen spouse passes away, the money and property remaining in the QDOT will be subject to the estate tax. That is why we say that a QDOT does not eliminate the estate tax; it just defers it until the noncitizen surviving spouse passes away. Once the taxes are paid and other administrative tasks are completed, the remainder of the trust is distributed to the named beneficiaries.

What Are the Requirements for a QDOT?

For the QDOT to be legally effective, the following requirements must be met:

• Accounts and property given to the noncitizen spouse at the citizen spouse’s death must be transferred to the QDOT before the deadline to file the decedent’s estate tax return¹
• The trustee must elect the trust as a QDOT on a timely filed estate tax return²
• US state laws or the laws of the District of Columbia must govern the trust’s administration³
• The trust must qualify as an ordinary trust under Treasury Regulation §301.7701-4(a)
• The trust must include terms that qualify the trust as a power of appointment trust, a qualified terminable interest property trust, a qualified charitable remainder trust, or an estate trust if created by the US citizen spouse⁴
• At least one trustee must be a US citizen or a US corporation⁵
• The trustee must have the right to withhold estate tax in making distributions of principal to the surviving spouse and when the balance of the QDOT is distributed at the noncitizen surviving spouse’s death⁶

Additional requirements must be met depending on the overall value of the accounts and property that are in the trust.⁷

What Happens If the Noncitizen Surviving Spouse Becomes a US Citizen?

The surviving spouse may choose to become a US citizen. This could be because of the administrative burdens of a QDOT or a firmly held desire to change their citizenship status. If a change of citizenship occurs, the surviving spouse may become eligible to use the marital deduction without using the QDOT.

If the surviving spouse becomes a US citizen before their deceased spouse’s estate tax return is filed and stays a US resident after their deceased spouse’s death, then the deceased spouse’s estate will be eligible to use the marital deduction for any assets transferred to the now-citizen spouse.

If the surviving spouse becomes a US citizen after the QDOT was created and stays a US resident after their deceased spouse’s death, and either does not receive any principal distributions from the trust or treats the distributions as taxable gifts, then the QDOT can be terminated, and the remaining balance of assets in the trust can be eligible for the marital deduction.

Conclusion

We know that no one likes to think about death and dying, and most people do not want to pay more taxes than required. You need to plan proactively to minimize tax consequences upon your death. We are here to assist you and your spouse in creating a plan to protect your futures and each other. Please call us to learn more about qualified domestic trusts or discuss other important estate planning considerations when dealing with noncitizens.

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Footnotes

1. Treas. Reg. § 20.2056A-2(b)(2).
2. Id. § 20.2056A-3.
3. Id. § 20.2056A-2(a).
4. Id. § 20.2056A-2(b)(1).
5. Id. §§ 20.2056A-2(a)(c), 20.2056A(a)(1)(A)-(B).
6. Id. § 20.2056A-5(b)(1)-(2).
7. Id. §§ 20.2056A-2(d)(1)(i)(A), 20.2056A-2(d)(1)(i)(B)-(C), 20.2056A-2(d)(2)(ii).

Wills and living trusts are two of the most fundamental estate planning documents. While both accomplish the same primary objective in an estate plan of directing the distributions of your money and property to your desired beneficiaries after you pass away, a revocable living trust, often referred to simply as a living trust or an inter vivos trust, provides added flexibility and functionality, including incapacity planning.

Like other types of trusts, there are three roles under a revocable living trust:

• The person who creates the trust, called the trustmaker, grantor, settlor, or trustor (Indiana statutes typically uses the term “settlor” but sometimes clients more easily understand the term “trustmaker” and we will use this term in this article)
• The person who manages the trust and the accounts and property it owns, known as the trustee
• The person who receives money and property from the trust, called the beneficiary

Before setting up a revocable living trust, you should understand what you can—and cannot—do in your dual role as trustmaker and trustee. Living trusts are complex legal documents that need to be drafted carefully with help from an estate planning attorney.

Two Phases of a Living Trust: Today and Tomorrow

The living trust is a powerful tool that affects your life today and throughout certain events into the future, such as incapacity or death.

The Living Trust While You Are Alive

After creating a trust, as the trustmaker, you must retitle accounts and property that you want to be transferred to the trust—such as real estate, financial accounts, stocks, and bonds—from your name to the trust’s name. Even after this transfer, as trustee, you retain control over them and will manage them for your benefit throughout your lifetime while you have capacity.

Any time before your death, while you are mentally capable of managing your affairs, you have the legal authority to alter, amend, or even revoke the living trust as the trustmaker. For example, you can place additional money or property in the trust or take money and property out of the trust, make investment decisions about the trust’s accounts, add or remove beneficiaries and successor trustees, and change the rules regarding when and how your beneficiaries receive their inheritance.

However, because it is your trust and you retain control over the trust’s accounts and property, there are some things you cannot do.

• You cannot use the trust to shield or protect accounts and property from your creditors.
• You cannot avoid paying taxes on income earned by the trust. Because no separate tax identification number is required for trust income, income on the trust’s accounts and property must be reported on your personal tax return.
• You cannot perform trust-related business, like making investments, taking disbursements, and paying taxes, individually. You will need to sign as the trustee instead of as an individual. This limitation is manageable, however. It usually means you will sign as “John Doe, Trustee of the John Doe Trust” instead of “John Doe.”

The Living Trust After You Die (or Become Incapacitated)

This brings us to the next phase of a revocable trust: the time after your death or incapacitation.

When you pass away or suffer from incapacity (i.e., you cannot administer the trust yourself), a successor trustee of your choosing takes over trust administration per the instructions you provide in the trust document.

Depending on the trust’s terms, the successor trustee may be responsible for managing the trust’s accounts and property for an extended period on behalf of the beneficiaries and terminating the trust and distributing its money and property to the beneficiaries. If you become incapacitated, the successor trustee can serve in this role for as long as you are unable to manage your affairs. While you are alive and unable to manage your affairs, you are not allowed to be a trustee, but you will still be a trust beneficiary, so you will not be left penniless.

Many revocable trusts will close within a few years of the trustmaker’s death. Still, some may remain open for years, such as those holding accounts and property for a minor beneficiary until they hit a certain age or milestone, as specified by you in the trust agreement. In either case, it is a good idea to name a backup successor trustee if something happens to the original successor trustee and they can no longer serve.

Get an Estate Plan That Fits Your Needs and Goals

Creating a living trust makes you a wearer of many hats. You are the creator of the trust, the initial trustee, and the beneficiary. Each role comes with unique powers and duties that apply both now and upon the occurrence of certain future events, such as your incapacity or death.

Please contact us today to schedule an appointment with one of our attorneys so you can learn more about these roles and duties. Only when you understand these roles can you go on to craft your estate plan in a way that will best meet your goals.

The Internal Revenue Code assesses a tax (gift or estate) on the transfer of money or property from one person to another during life or at death, with some exceptions. If you own accounts or property that are worth a lot of money and you expect them to continue to increase in value, you may want to transfer them out of your estate so you will no longer own them and they will not be subject to estate tax at your death. If you believe this type of planning may benefit you, then you need more than just a simple estate plan. Do not worry, though—there are strategies and tools that we can use to fulfill your goal of getting rid of an account or property while minimizing the tax consequences of this transaction.

Self-Canceling Installment Notes

A self-canceling installment note (SCIN) is a promissory note that can be used to transfer valuable accounts and property from one person to another with minimal gift and estate tax consequences due to a clause in the promissory note that states the buyer’s obligation to repay the loan ends upon the death of the seller.

How SCINs Work

A seller sells an asset (an account or piece of property) to a buyer (often a family member) in exchange for a promissory note, which includes a self-cancellation clause. The self-cancellation clause states that, should the seller die before the balance of the note is paid, the note terminates and the outstanding balance of the note is canceled. If the seller survives the term of the note, the seller will receive the total value of the note in exchange for the asset that was sold. If the seller does not survive the note term, the asset remains with the buyer, and the asset’s value is removed from the seller’s estate (with estate being defined as everything the seller owns at the time of death). Further, the note is canceled, and the remaining balance due is not included in the seller’s estate. Overall, because the asset and the unpaid portion of the SCIN are not part of the seller’s estate, it is not subject to estate tax and is not considered a gift that would be subject to the gift tax.

The Term of the SCIN

To be effective for estate planning purposes, the note’s term should not exceed the seller’s life expectancy. Determining the seller’s life expectancy and the term used for the SCIN should involve consulting with an experienced professional, as many variables must be considered.

Selecting the Right Interest Rate for the SCIN

Every promissory note needs an interest rate; a SCIN is no exception. Although the transaction may occur between family members, the correct rate must be used. Generally, the interest rate for the SCIN must be equal to or greater than the applicable federal rate (AFR) with semiannual compounding. The specific AFR that should be applied will be determined by the repayment term of the SCIN (short-term rate for repayment term of up to three years, mid-term rate for repayment term between three and nine years, and long-term rate for repayment term greater than nine years).

Your SCIN Must Account for the Risk

Because the seller may die before the note is paid in full, and the seller’s death will cause the note to terminate and cancel the outstanding balance, a premium must be included in the transaction to address this possibility. There are two ways that the risk premium can be addressed within the promissory note: an increase in the sales price to above fair market value or an increase in the interest rate above the standard AFR. Deciding on how to include the risk premium depends on the buyer and seller and their tax circumstances. A professional can help craft terms that will consider the specifics of your proposed transaction.

When Might You Use a SCIN

Although a SCIN is not for everyone, there are some circumstances in which it can be a valuable tool. For instance, if you own assets that are likely to have a large amount of future appreciation (meaning they are likely to become more valuable in the future), and you want to make sure that this future appreciation is not included in your estate for estate tax purposes at your death, you may be looking for ways to give the assets to someone else, such as a child, grandchild, or other family member. If you die before the note’s term expires, the remaining balance owed is canceled, and the asset and the unpaid balance will not be included in your estate for estate or gift tax purposes. It is important to note that the ideal time for transactions like this is when we are in a low-interest rate environment.

Additional Considerations

Many different factors go into developing the right estate plan. While taxes may be at the forefront of your mind, we must also ensure that your plan adequately addresses your other areas of concern. If you want to learn more about SCINs and their use in your estate plan, call us. We are also available to assist you in creating or updating your existing estate plan.

The first private pension plan in the United States was established in the late 1800s. Through 1980, nearly 40 percent of Americans were covered by a traditional employer-funded pension. But employer-provided retirement plans have now largely shifted to retirement savings vehicles like 401(k) plans and Individual Retirement Accounts (IRAs) that place most of the savings onus on the employee.

Pension and retirement accounts often form a large portion of an individual’s wealth and should be accounted for in an estate plan. If a retirement account holder completes a proper beneficiary designation, their account assets will bypass probate. Account holders often designate a surviving spouse or children as beneficiary, but they could also name a trust or a charity.

The benefit and beneficiary rules applicable to different types of retirement accounts vary and should be discussed with an estate planning attorney, especially with the recent passage of the SECURE Act.

How Pensions Have Changed: Defined Benefit versus Defined Contribution Plans

The American Express Company provided the original private pension plan to its workers in 1875. Soon after, banks, manufacturing companies, and utilities also began offering pension plans.^[1]

These early pensions were defined benefit (DB) plans. Funded entirely by employers, DB plans pay workers a specific monthly benefit for life once they retire. Typically, DB plans calculate a benefit based on factors like a worker’s salary and service length and make regular payments (annuity payments) over the employee’s life after retirement (or the joint lives of the employee and their spouse). The employer that provides a DB pension controls and owns the plan.

Traditional DB pension plans have mostly given way to defined contribution (DC) plans, such as 401(k)s. DC plans are owned and controlled by employees but are often subsidized by employers. Other types of DC plans are 403(b), 457, and 529 plans. IRAs are not employer-sponsored but can also be considered a DC plan since they involve defined contributions by the IRA owner into tax-advantaged accounts.^[2] DC plans generally pay retirement benefits as a lump sum or installments.

From 1980 to 2008, the proportion of private industry workers participating in DB plans decreased from 38 percent to 20 percent.^[3] In 2020, 85.3 million Americans had a DC plan compared to just 12 million workers with a DB plan.^[4]

In 2020, 18.2 percent of Americans were covered by an IRA-style retirement account, 34.6 percent had a 401(k)-style account, and 13.5 percent had a DB plan, reports the U.S. Census Bureau. The median value of a retirement account in 2020 was about $30,000.^[5]

Congress passed the Employee Retirement Income Security Act (ERISA) in 1974 to guarantee workers’ benefits in private pension plans. Before then, pensions had little or no protection, and there were incidents of workers losing their earned retirement benefits. ERISA covers most employer-sponsored DB plans and DC plans, but not government employee plans or IRAs.

DB Plans, DC Plans, and Beneficiaries

The only estate planning tool applicable to retirement accounts is the beneficiary designation.  Retirement accounts must be owned by an individual, so they cannot be transferred into a revocable living trust during the participant’s lifetime like most other financial accounts or property.  Further, they cannot be jointly owned. Thus, the only way to control how these accounts transfer at the time of the participant’s death is through the use of properly designated beneficiaries.

In general, participants in an ERISA-covered plan can select anyone to be the plan’s beneficiary when they die.^[6]

• Most plans regulated by ERISA name a person’s spouse to automatically receive the benefit if the account holder dies first.
• If the account holder wishes to select a different beneficiary, their spouse must consent by signing a waiver. Otherwise, the spouse is entitled to 50 percent of the plan’s benefits, even if somebody else is named as the plan beneficiary.
• An ERISA plan holder who divorces and remarries should update the beneficiary designation to their current spouse or else the former spouse may be in line to inherit the plan benefits.
• An account holder who does not have a spouse can name an alternate beneficiary. This may be a person such as a child, parent, or sibling, but it can also be a charity or a trust.
• The named beneficiary of an ERISA retirement plan takes precedence over somebody designated in a will as the plan’s beneficiary when there is a conflict between the two.
• When an ERISA retirement plan does not designate a beneficiary, the benefit passes to the participant’s probate estate and is distributed along with other probate assets according to the will (if the participant has created one) or according to state intestacy law (if the participant has not created one).

IRAs are not covered by ERISA. An IRA account holder can name a beneficiary (or multiple beneficiaries) to receive the account assets. They can also name their probate estate to be the beneficiary of the IRA, in which case the account proceeds will be distributed according to their will (if they have created one) or according to state intestacy law (if they have not created one). A trust or charity can be designated to receive IRA funds as well. An IRA with no beneficiary designation is distributed pursuant to the IRA’s governing document.

Employees with a DB plan may be able to name a beneficiary, but this right is not guaranteed because the employer owns the plan and sets the terms. For a DB plan, a current spouse may be entitled to a qualified joint and survivor annuity (QJSA) death benefit paid out over their lifetime. The plan may provide the annuity payout percentage, which could be at least 50 percent but no more than 100 percent of the annuity paid to the participant. It may be possible, with spousal consent, for a participant to waive the QJSA and select a different payment option. QJSA rules may also apply to nondefined benefit plans, but only through an election.^[7]

The SECURE Act and Inherited Retirement Accounts

Passed in 2019 and effective in 2020, the Setting Every Community Up for Retirement Enhancement (SECURE) Act affects DC plans like 401(k)s and IRAs and has implications for estate planning.

Under the SECURE Act, the age at which retirees must make annual withdrawals, called minimum required distributions (RMDs), increased from 70.5 to 72. In 2023, that age was raised to 73.

A retiree who lives a long life might deplete a large portion of their retirement account due to RMDs and have little left in the account to give to heirs. But the SECURE Act also affects those who inherit an IRA or 401(k) in a more direct way.

While beneficiaries of these accounts always had to pay taxes on all withdrawals from them, prior to the SECURE Act, they could stretch out withdrawals over their life expectancy to minimize their tax bill. Beginning in 2020, however, most nonspouse retirement account beneficiaries must completely withdraw the balance of their inherited portion within 10 years of the original account holder’s death. For minors, the 10-year rule starts when they turn 21. These new rules do not apply to a surviving spouse named as an account beneficiary. Spouses that inherit retirement accounts still receive preferential tax treatment in the SECURE Act. A popular option is for the inheriting spouse to roll over the account into their own IRA and name their own beneficiaries for the account. The spouse is then treated as the original IRA owner for income tax purposes.^[8]

Another option for an account holder when designating a beneficiary is to designate the account owner’s trust rather than naming individual beneficiaries. When the accounts transfer into the trust upon the account owner’s death, the language in the trust agreement will direct how and when the retirement proceeds are to be distributed to trust beneficiaries. The retirement account owner might prefer this option if they are concerned that the beneficiary might immediately deplete money or fail to set aside enough funds to cover taxes that might be due on withdrawals. Also, trusts can provide asset protection from creditors and help centralize asset management.

Retirement Accounts and Estate Planning

You saved hard for your retirement. The money you set aside could benefit more than just you. Most retirement accounts can be transferred to your heirs when you die, enabling them to supplement their own savings goals.

Retirement assets can transfer directly to properly designated beneficiaries outside of probate. But these assets will be subject to federal and state income tax, and possibly even estate taxes. The SECURE Act could further impact your estate planning efforts. Your retirement accounts could be the single largest store of economic value that you leave behind. To maximize their value to loved ones after you are gone, be sure that you understand the different inheritance and tax rules that may apply, review beneficiary designations regularly, and speak to an estate planning attorney about how to best provide for your family’s future.

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