Category: The Wealth Advisor

Not only is January the first month of a new year, but it is also a time when many celebrate Hunt for Happiness Week (January 16-22, 2022). Happiness is something that humanity, in large part, has spent a tremendous amount of effort pursuing throughout history. Continue reading →

Imagine the following scenario: For years, you have worked with a valued professional advisor who has become a close friend, maybe even closer than some of your family members. You know her family, attend church with her and know her to be a model citizen who contributes significant value to your community. Continue reading →

In the words of George R. R. Martin’s fictional characters from the noble house Stark, “Winter is coming.” 

Along with this change of seasons comes a change in driving conditions in much of North America—slippery roads, rain, snow, less sunlight during the morning and evening commutes, and a variety of other hazards. Unfortunately, with an increase in such hazards comes an increase in the likelihood of being involved in a motor vehicle accident. But few of us have ever really considered what should be done if we are actually involved in a fender bender.

While certainly no two car accidents are the same, there are some general guidelines that you should follow as soon as possible after an accident.

First, check yourself and your passengers for any injuries. Ask everyone if they are okay before anything else. If it becomes apparent that someone, including yourself, is injured, call 911 and report the accident and the fact that there may be injuries so emergency dispatchers can send appropriate first responder help. When safety and health are at risk, your first priority should be ensuring that everyone involved can get the medical help they need as quickly as possible. If you are injured and cannot make the 911 call yourself, ask anyone you can communicate with to get medical help.

Next, if you and all involved appear to be safe and uninjured and you are not at risk of further danger from nearby traffic, find a safe location to move your vehicles to. If the accident involves someone else, exchange contact and insurance information with the other driver. This will ensure that you can get in touch with the other party to the accident if your insurance company or the police need to get involved to resolve any issues that arise or process insurance claims. 

Also, even when accidents result in what appears to be only minor damage, it is still advisable in most cases to have the local police respond before the other driver leaves the scene. When it is time to file a claim with your insurance company (or respond to claims from the other driver about damages you may have caused), it is important to have a police report detailing the damages and who law enforcement determines was at fault. This will help you avoid being unfairly stuck with the liability for repairs or medical injuries that arise later (such as back and neck injuries).

Additionally, it is important to contact your car insurance company as soon as possible. You may want to contact them even before getting out of the car. The insurance company can provide you with crucial advice and guidance at a very stressful time to make sure that you do not make mistakes in dealing with the other driver that could have significant consequences when it comes to liability. Many people mistakenly believe that it is better not to report minor accidents to your insurer in an effort to prevent their premiums from increasing. However, this can be a dangerous approach. Failing to report an accident and allowing the insurance company to immediately get involved to mitigate possible claims for damages could lead to much larger claims against you personally and could result in your insurance company refusing to cover such claims due to your failure to report in a timely manner.

How Car Accidents Can Impact Your Estate Planning

Healthcare decision-making. In the event of an accident where you become unable to speak or make decisions for yourself as the result of an injury, you will need to have someone who can speak to doctors and medical providers on your behalf. If you have planned in advance, a medical power of attorney will allow someone you have chosen previously (your healthcare agent) to speak with doctors and arrange for treatment until you regain consciousness. If you do not have a medical power of attorney in place, decision-making authority could be unclear and might result in delays in receiving certain types of medical treatment. Thus, it is important that you not only have a medical power of attorney in place and signed, but also that you inform those closest to you about where to obtain a copy of it should you need to be rushed to a hospital in the event of an accident. 

Adequate insurance coverage. Many people do not realize that carrying adequate insurance coverage is one of the most effective ways to protect themselves from lawsuits that would place their savings and property at risk. Ensuring that you carry adequate car insurance is one of the simplest ways to ward off a lawsuit. Beyond increasing your insurance limits on your car insurance, you may also want to discuss with your insurance broker whether it would make sense for you to purchase an umbrella insurance policy. Umbrella policies act as a form of backup insurance to your car insurance policy. Essentially, if you are involved in a car accident where the damages you caused exceed the limits of your car insurance policy, an umbrella insurance policy can step in and cover such excess liability. With both policies in place, you are providing a large enough pool of insurance money that your insurance companies will have a much greater ability to settle any lawsuit against you as a result of the car accident before it ends up in court where the plaintiff could seek payment from you directly.

As part of your estate planning, you should meet with your insurance advisor to discuss the limits of your car insurance and any umbrella policy that you may already have (or intend to purchase) and the types of protections that they provide. Adequate insurance can go a long way toward protecting your accounts and property from loss to a lawsuit as a result of a car accident.

Be Careful of Fraudulent Transfers

After a car accident where there are significant property damages and medical injuries, it can be tempting to take steps to protect what you own if you fear that a lawsuit may result from the accident. But it is important to resist the temptation to begin transferring your property and accounts to friends or family in an effort to hide what you own. In many states, taking such steps after an accident has occurred in which you are liable is considered to be a fraudulent transfer that can be ignored by the courts. In other words, even though you may have made an otherwise legal gift or transfer of your accounts and property to someone else, the courts are likely to allow the party in a successful lawsuit against you to go after and seize the property that you have transferred to someone else in an effort to avoid having it used to pay the judgement against you. Furthermore, you could be liable for additional damages for causing the prevailing party in the lawsuit to expend extra effort and expense to pursue the fraudulently transferred property.

No, Revocable Trusts Do Not Protect Your Property from Lawsuits

Another very common misconception is that if you create a revocable living trust for estate planning purposes, you have also protected your assets from lawsuits and creditors. Unfortunately, this is simply not the case. While it is possible to design a revocable living trust that will protect your assets after you have died from the creditors and lawsuits of your named beneficiaries of your trust (usually your loved ones), revocable trusts in general offer no protection against your own creditors or lawsuits filed against you. This is because you have complete control over the property placed in your revocable trust. And because you retain the power to revoke the trust, a judge can order you to revoke the trust and use the trust property to pay your creditors and lawsuit judgements. 

That being said, there are certain types of irrevocable trusts and other asset protection strategies that, if designed properly, can greatly enhance the level of protection you can obtain for your property. However, you should explore these with the assistance of an experienced asset protection and estate planning attorney to ensure proper creation and implementation.

When it comes to protecting your accounts and property, the time for taking the necessary steps is well before an accident occurs. Doing so will help you maximize the amount of asset protection that is available to you through purchasing insurance or designing estate planning features that have a much better chance of warding off successful lawsuits in the event of an accident. 

We hope that we have given you some things to consider and encouraged you to revisit some aspects of your estate planning. Protecting your hard-earned accounts and property is a worthwhile investment of time and effort. But remember, the time to do so is before an accident occurs. If you are not sure where to start, give us a call. We would be happy to help you take the next step in preparing for the perils that winter can bring.

Estate Planning Awareness Week is October 18–24, 2021. To that end, this month’s newsletter is geared toward helping you become aware of and better understand common estate planning myths. Left unaddressed, these myths can create serious trouble for your loved ones, often leading to intrafamily conflict, permanently damaged relationships, and lengthy and expensive court battles.

Myth #1: I did my estate plan a couple of years ago. I’m good!

If you have worked on your estate plan with an experienced estate planning attorney within the last few years, then you are way ahead of most people, and you should give yourself a pat on the back. Way to go!

However, life moves quickly, and even a couple of years can make a significant impact on the effectiveness of your estate plan to help you achieve your goals:

• Children can get married and have children of their own. 
• People who you have named in your estate planning documents can move out of state, making them unable to handle those responsibilities when called upon.
• Your relationships with your chosen fiduciaries or beneficiaries can change or become complicated.
• Your beneficiaries can develop harmful addictions, marry financially exploitative spouses, or run into financial difficulties of their own.
• Your spouse could die or you could get divorced.
• The amount and types of property that you own can change.
• Changes in the law can cause your estate plan to have unintended tax or other consequences. 

Any one of the above circumstances may be a good reason to meet with your estate planning lawyer again to determine whether changes should be made to your estate plan. In many cases, even a quick phone call to discuss any changes with your lawyer is advisable.

It is also essential to understand that some estate planning documents like your power of attorney or healthcare directive can, over time, become less effective from the perspective of certain financial institutions, business entities, or healthcare providers. If your circumstances change, it can be beneficial to review, update, and reexecute your estate planning documents. This will keep these documents relevant and effective when they need to be used.

Beyond the considerations above, a well-rounded estate plan requires a number of steps to ensure that the estate plan will work effectively when needed.

First, if you have a trust, have you funded it? Funding your trust means you have coordinated the ownership and beneficiary designations of your accounts and property to work with the trust. For real estate, a deed must have been recorded with the proper government recorder’s office. Most bank and brokerage accounts should be titled in the name of the trust if you want your trustee to control those accounts should something happen to you.

Second, have you checked the beneficiary designations on your retirement accounts and insurance policies to make sure they name the correct people or your trust? Life insurance policies should usually name the trust as beneficiary. Retirement plans may name a trust as a beneficiary, but be careful! Naming a trust as the beneficiary of an individual retirement account or 401(k) has significant tax consequences and may not be advisable in many situations. Speak with your tax advisor before changing the beneficiary designations on your retirement accounts.

Third, have you shared copies of your medical power of attorney and healthcare directive with your doctor and local hospital? Doing so can alleviate family members’ worries about digging through your documents should you have a healthcare issue in the future.

Fourth, in many states, a financial power of attorney document that names an agent to act on your behalf must be accompanied by a signed acceptance document from the agent before it can be used. Has this step been taken? If not, your estate plan may not be complete.

Fifth, writing things down does not guarantee that misunderstandings will not arise among your loved ones or beneficiaries. In addition to the important work of documenting your wishes, you should talk with your loved ones to help them understand the kind of plan you have put in place as well as the roles you want them to fulfill. Having open, honest communication with those individuals involved in your estate plan will minimize the chances for miscommunication and hurt feelings.

Myth #2: Avoiding taxes is the only reason to create an estate plan.

It can be easy to dismiss the need for an estate plan considering today’s historically high estate tax exemption ($11.7 million per person in 2021). Most Americans do not need to worry about estate taxes. However, tax avoidance is only one of many goals of estate planning, and in many cases it is not the most important goal. For example, planning for the orderly passing of your treasured heirlooms to avoid family discord may be far more important than tax planning in the long run. Alternatively, you may have children who are struggling financially or with substance abuse challenges, are in a rocky marriage, or work in high-liability professions. As a result, it may be crucial for you to ensure that whatever inheritance is left to those children is protected from loss to lawsuits, creditors, or divorcing spouses.

Myth #3: My spouse will get everything when I die.

This is another myth that is partially true but can lead to unfortunate conflicts and misunderstandings among family members. Under most state laws, if you are married and pass away, your spouse will inherit your property. Default laws that exist to divide up a deceased person’s property if they have never made a will or a trust (called intestacy laws) typically allow the surviving spouse to inherit 100 percent of the deceased spouse’s property. But in many states, if the surviving spouse is not the biological parent of one or more of the deceased spouse’s children, then those children will typically have a right to some percentage of their deceased parent’s property. In many states, that can be as much as 50 percent. As a result, your spouse could get a very unpleasant surprise shortly after the funeral from your children from another relationship when they demand their share of the estate.

Myth #4: A will avoids probate.

An all-too-common misconception is that having a will helps you avoid probate. This is simply not true—in fact, the opposite is true. For a will to be effective after your death, it must be submitted to the court to prove its validity. Only after the probate court has verified that the will is valid can the individual named in the will (the executor or personal representative) distribute the decedent’s money and property during the probate process. People often confuse the benefits of a will with those of a trust. Trusts can avoid probate, but only if the trustmaker names the trust as owner of the accounts and property during the trustmaker’s life or as the beneficiary of the accounts and property upon the trustmaker’s death.

What You Can Do to Be Prepared

Understanding these myths can help you identify those areas of your estate plan that may need attention. Taking these essential steps to ensure that your estate plan is complete is crucial to its success. As your estate planning professionals, we are here to help you think through these challenges, avoid mistakes, and complete the necessary paperwork. Give us a call today so we can help you take these important steps in your estate planning.

When selecting a successor trustee for a trust, it is common for the individual who creates the trust (the trustmaker) to choose one person to serve as a successor trustee at a time. Some attorneys routinely recommend that only a single successor trustee be appointed to avoid the potential for conflicts between co-trustees during trust administration. This can be a prudent approach and works well in many situations. This is particularly true when the appointed trustee diligently keeps the beneficiaries of the trust informed about the trust administration and carefully fulfils the trustee’s responsibilities under both the law and the provisions of the trust document.

However, many trustmakers are reluctant to place the entire responsibility for trust administration on only one person. As a result, it is increasingly common for a trustmaker to nominate two or more family members or friends to serve as successor co-trustees. In some cases, it may even be beneficial to divide the trustee responsibilities between a professional trustee and a family member trustee. For example, a professional trustee might be given the responsibility for trust investments or accounting and tax matters, and the family member trustee may be asked to handle certain distribution responsibilities, such as the timing and amount of distributions to a minor beneficiary. While this co-trustee approach can have some drawbacks, it also has benefits that may be worth considering.

Advantages and Disadvantages of a Co-trustee Approach

Choosing multiple individuals to serve as co-trustees offers the following advantages:

• Co-trustees can provide checks and balances to guard against potential abuses of authority.
• Sharing or separating the responsibilities of trust administration among co-trustees can expedite the efficient administration of a trust.
• Depending on the terms of the trust, a particular co-trustee may be able to respond quickly to an emergency situation if no other co-trustees are available.
• Trust beneficiaries may be more likely to accept the actions and decisions of unified co-trustees as opposed to the decisions of a single trustee.
• Administrative responsibilities can be allocated among the co-trustees based on each co-trustee’s unique strengths and skills or in a fair and equitable manner.

However, there are also disadvantages to consider:

• Disagreements between co-trustees can lead to conflicts or stalemates.
• Delays can result if the trust requires that all co-trustees be present and act together to conduct trust business.
• Financial institutions, individuals, and businesses may be reluctant to take direction from fewer than all co-trustees, even if the trust document authorizes a single co-trustee to act.
• Compensating multiple co-trustees for their time spent handling trust business can result in potentially higher costs.

What Is the Right Approach for You?

Before you decide whom to name as a successor trustee, you should discuss these advantages and disadvantages with your attorney and other professional advisors well before there is a health event that could lead to your incapacity (the inability to make your own decisions) or death. Doing so will help you identify some of the potential pitfalls and complications that can arise with regard to your successor trustee choice. These discussions may also help you realize that you need to make changes to your estate planning documents, either to add another family member or a professional fiduciary as successor co-trustee or to remove certain individuals listed as a co-trustee because of the potential for conflicts. Of course, we welcome the opportunity to meet with you to discuss ideas and make any necessary updates to your estate documents so that they better match your intent.

As you prepare for these discussions with your attorney and other professional advisors, it may be helpful for you to consider some of the following questions before ultimately deciding whom to name as your successor trustee:

How well does the individual I want to name as trustee work with others? 

Does your potential successor trustee have the temperament to delicately handle requests, questions, and perhaps even emotional outbursts from the trust beneficiaries while administering the trust? Do they handle conflict well, or do they have a tendency to escalate conflict when they encounter it? How might serving with a co-trustee mitigate or exacerbate this temperament?

Does the person you plan to name as trustee have sufficient time and flexibility for their duties?

Being a trustee requires a certain level of flexibility and availability. If your chosen trustee is a busy professional or a busy parent with little extra time to spend handling the trustee’s many tasks, would it make sense to nominate multiple co-trustees to share those responsibilities? On the other hand, would naming multiple trustees create frustration if the co-trustees are all required to be present to handle certain financial or administrative tasks? Sometimes, the need for flexibility calls for fewer, not additional, trustees.

If co-trustees are named, should they have authority to act independently? 

While having multiple co-trustees can provide important checks and balances, should they nevertheless be given independent authority to act on behalf of the trust? Granting such authority may decrease the hassle of needing to have all co-trustees present but still provide the ability to spread responsibilities among the various co-trustees, thereby decreasing the workload of each co-trustee.

If multiple co-trustees are chosen, what method might be used to resolve a stalemate in trustee decisions?  

Even co-trustees who normally get along can sometimes disagree so strongly that a stalemate occurs. In such a case, what might be an appropriate way to resolve the impasse? Should another family member be named to break the tie? What about a trusted professional advisor, a mediator, or a trust protector? Or should differences like these only be resolved by a court? Often, leaving such decisions to a court can encourage disagreeing co-trustees to resolve the dispute on their own in an effort to avoid the expense and delay of going to court. 

You might also request that your attorney include language in your trust that permits a dissenting co-trustee to abstain from participating in a decision, thereby limiting the dissenting co-trustee’s liability for any harm that might result from the other co-trustees’ decision. This approach allows the business of the trust to move forward, even over the objection of a co-trustee. However, the dissenting co-trustee would have the comfort of knowing that the overruling co-trustees would ultimately be the only ones responsible for those particular actions.

Conclusion

Whether you nominate a single successor trustee or multiple co-trustees, carefully considering the pros and cons of each approach can help ensure that your wishes for the handling of your estate and trust will be honored. Contact us today so we can review your current successor trustee selections or create an estate plan with the right people in charge to assist you when needed.

If you have not had a chance to nominate your favorite Bloomington business for the Herald Times Best of BTown there is still time.

Best of BTown is broken up into a “nominations” round that runs now through June 15, 2021. The top 5 nominated business then move onto the final voting round. Final voting begins July 7^th.

If you believe we have earned your vote please “nominate” us in the law firm category. A link to the nominations page is here (click on the words below and it will link you to the nominations page):

Nominate Like Law Group

We are in the “Services” category. You will then need to scroll down to “Law Firm” and type in Like Law Group LLC.  I hope that we have earned your trust and you are willing to take a few minutes to nominate us.  While you are at it nominate your other favorite businesses in town as well.

Now, on to this month’s article.

How to Responsibly Leave an Inheritance to Your Grandchildren

Estate planning attorneys frequently hear from their clients, “I’d like to leave something to my grandchildren. What’s the best way to do that?” 

Naturally, grandparents love their grandchildren and want them to succeed in life. And when grandparents are in the twilight of their lives, their hearts often turn to the younger generation with a desire to give them whatever advantages they can, especially if they were unable to give their own children those same advantages when their children were younger.

For most grandparents, the best way to provide for their grandchildren is to leave their accounts and property to the grandchildren’s parents to ensure the financial stability of that family unit, thereby indirectly benefiting the grandchildren. In fact, default inheritance laws in nearly every state reflect this common desire to provide first for children and then for the grandchildren in the event that an adult child predeceases the grandparent. From a practical perspective, the grandchildren’s parents are often in the best position to know how to use the money for the benefit of their children and can spend or invest it appropriately on their behalf.

In some cases, however, it makes better sense for grandparents to leave property to their grandchildren—for example, if the grandparents have reason to believe that their own children would not responsibly use the money intended for the benefit of the grandchildren, or if the grandchildren’s parents are independently wealthy and distributing the property to them would unnecessarily expose the property to estate tax in their estates. In some cases, although the intent of grandparents may have been to leave everything to their adult children, an inheritance may flow to grandchildren unintentionally because of an accident or illness that prematurely takes the life of an adult child. In any of these situations, it is important to consider the possibilities and the options for leaving an inheritance to grandchildren. Failing to do so can have long-lasting consequences and, in many cases, do more harm than good.

The Trouble with Outright Gifts

Perhaps the simplest way to leave an inheritance to your grandchildren is to name them as beneficiaries in your will or trust to receive a specific amount of money or a percentage of your total accounts and property. If all of the grandchildren who will receive such gifts are physically and emotionally stable, financially prudent, and have reached adulthood, this strategy may work just fine and reduce the administrative burden of managing and distributing your accounts and property to the beneficiaries or heirs.

However, depending on when you pass away, if any of the named grandchildren are minors, you could create additional hassles by leaving a gift directly to them. The executor of your estate or the trustee of your trust may have to establish certain types of custodial accounts to hold that gift for the minor child until they have reached the age of majority (either age eighteen or twenty-one depending on the state). In some states, and depending upon how much money is involved, establishing a court-controlled conservatorship over the property may be required. In other cases, setting up an account using the Uniform Transfers to Minors Act laws of the state may be all that is necessary. In either of these cases, however, once the child reaches the age of majority, you may not be able to control how that money is used by the grandchild. It could be spent on fast cars and fancy clothes rather than on an education, starting a business, or a down payment on a home as you might have imagined. In a worst-case scenario, a grandchild might even unwisely invest it with a spouse who later divorces them, or with an unscrupulous business partner who preys upon inexperienced individuals who have come into a sum of money.

By being aware of these risks, you can take steps today to make sure that any of your property that ends up in the hands of your grandchildren is protected from not only your grandchildren’s own poor spending choices but also the claims of a divorcing spouse, an unethical business partner, or an opportunistic lawsuit filed by a stranger against your grandchild.

Using Trusts for Gifting to Grandchildren

A trust offers one of the most flexible methods for leaving an inheritance to grandchildren. When you leave an inheritance to grandchildren via a trust, you can ensure that the money and property are used appropriately and at appropriate times. There are a variety of ways to use trusts in your estate planning. You can add provisions to your will or revocable living trust that instruct the executor or trustee to hold any property that is payable to a grandchild in a separate trust share rather than making a direct distribution of the accounts or property to them. You can specify in those trust terms how the money is to be used or distributed and when. These can be very important provisions to include in your trust even if you are planning to leave your accounts and property only to your children. As mentioned, it is possible for your child to pass away before you do in an accident or from illness. And if your child has children of their own and you want your child’s share to go to their children, it can be crucial to have a trustee protect and manage it until it can be distributed to the grandchildren at a more appropriate time.

Another way to use trusts is to create the trust during your lifetime, name yourself as the trustee, and transfer some of your property into the trust for the benefit of your grandchildren. From a tax perspective, you can make gifts to this trust using the annual gift tax exemption (currently, $15,000 per beneficiary of the trust per year) to shelter the gifts from transfer taxes. Gifting in this way during life allows you to have confidence that the trust is set up appropriately and enables you to enjoy watching your grandchildren actually benefit from the trust. You can also feel confident that once you pass away, your grandchildren and even your great-grandchildren will continue to benefit from the property in the trust, if that is your goal.

Health and Education Exclusion Trusts

Beyond the traditional use of trusts in your estate planning, you can also design special trusts to provide additional tax benefits if your estate is large enough to potentially be subject to the generation-skipping transfer (GST) tax. A health and education exclusion trust (HEET) is one of these special types of trusts. A HEET is designed to make use of certain tax code provisions that exclude from lifetime gifts any amounts paid directly to healthcare and education institutions on behalf of someone. A HEET can be designed to name, as beneficiaries, any number of your grandchildren or succeeding generations, if desired. The funds in the trust can then be used to pay for health and education expenses directly on behalf of the beneficiaries without being subjected to gift taxes in the future. Furthermore, the distributions to the beneficiaries will be exempt from the GST tax. This benefit is obtained by naming a charitable institution as an additional beneficiary of the trust. As long as the trustee makes regular and reasonably substantial distributions to the charitable beneficiary from the trust, the distributions to the other beneficiaries will be GST tax-exempt.

A HEET is worth considering if (1) you would like to help your grandchildren and succeeding generations with their education and medical expenses, (2) you have used up your GST tax exemption amount through gifting or other estate planning strategies, and (3) you want to benefit a charitable organization as part of your estate planning.

Generation-Skipping Transfer Taxes

Although we have mentioned GST taxes in passing, it is important to remember that whenever you are including grandchildren in your estate planning, you should seek advice from your attorney or accountant with regard to this unique form of taxation. For most people with modest accounts and property, the GST tax is not a significant issue. However, if what you own is valued at more than the current estate tax exemption amount, the GST tax is something that you should be aware of and plan around, particularly if you anticipate that any amount of your property will eventually be distributed to your grandchildren. You should also be aware of the GST tax if you are creating trusts specifically for your grandchildren and their descendants. You may need to take certain steps upon creation of such trusts to ensure that the trust is GST tax-exempt. Your tax professional can provide you with important guidance on this point.

Keeping Parents in the Loop

Grandparents often overlook bringing parents into the conversation when planning for their grandchildren. Consequently, some grandparents have been unpleasantly surprised at the negative reactions from their own children or in-laws when they make generous gifts to their grandchildren. Depending on a family’s parenting philosophy, the grandchildren’s parents may resent an unexpected, large sum of money or payment for certain expenses. Instead of seeing it as a boon, a parent could see it as a grandparent interfering in the character development of their children, robbing them of important opportunities to become financially independent, learn important life lessons about sacrifice and hard work, such as qualifying for merit-based scholarships, and the value of money in general. Speaking beforehand with your grandchildren’s parents about how you can best support the development of your grandchildren into responsible adults can go a long way toward ensuring that your gifts will be appreciated and truly beneficial.

Conclusion

Whether you want to specifically and intentionally include your grandchildren in your estate planning or just want to make sure that they are carefully accounted for in the event that they unexpectedly inherit your property, it is critical to examine your estate planning with your attorney to make sure that your plan reflects your wishes and your family’s values. Beyond making sure your property gets to the right people at the right time, careful planning with the help of your tax professionals can also ensure that significant tax savings are preserved, thereby keeping more money in the hands of your family and out of the hands of the government.

Most people are shocked to learn that their retirement accounts can be seized once they pass to their loved ones. During your lifetime, your retirement funds have fairly comprehensive asset protection, meaning they cannot be taken in a lawsuit. Unfortunately, as soon as retirement accounts are inherited, the protection evaporates in most states. This means your hard-earned money can legally be snatched by your beneficiaries’ creditors and the courts.

As estate planning attorneys, we constantly look for ways to protect our clients and their loved ones, as well as their money and property. That is why we suggest having a conversation about your retirement accounts so that together we can determine whether a retirement trust would make sense for you.

What Is a Standalone Retirement Trust and Why Might It Be Good for You?

A standalone retirement trust(SRT) is a special type of trust designed to be the beneficiary of your qualified retirement accounts such as IRAs, 401(k)s, etc. During your lifetime, your ownership of and access to the accounts do not change. Upon your death, as long as you have properly named the SRT as the beneficiary on the appropriate beneficiary designation form, the trust will become the beneficiary, and the trustee of the trust will be in charge of withdrawing and managing the money received from the inherited retirement account according to the terms laid out in the trust document.  

The SRT is a popular planning tool because it 

• protects inherited retirement accounts from beneficiaries’ creditors as well as predators and lawsuits;
• ensures retirement accounts go to whom you designate—and nobody else; 
• allows for experienced management and oversight of funds by a professional trustee;
• protects beneficiaries from reckless spending;
• enables proper planning for a special needs beneficiary;
• permits you to name minor beneficiaries as immediate beneficiaries without court-supervised guardianship; and
• facilitates generation-skipping transfer tax planning.

Divorce Creditor—A Common Example

Many parents are concerned that their in-laws may someday become the outlaws—that is, that their children may someday get divorced, and their children’s inherited money and property will be seized by a divorcing spouse.

Here is the story of Mary and Tom. Which outcome would you prefer for your children?

Option 1: Mary and Tom love their son-in-law, Mike, and think his marriage to their daughter Liz will last. They gave Liz her share of their retirement plans outright at their deaths. Five years later, Liz and Mike divorced and Mike was able to take 50 percent of Liz’s inherited retirement funds.  

Option 2: Mary and Tom love their son-in-law, Mike, but recognize that 50 percent of all marriages end in divorce. It is an unfortunate reality, so when they did their estate planning, they provided for their children but made sure the inheritances could not be taken from them. Instead of outright distributions, they passed their retirement plans in trust. Five years later, Liz and Mike divorced, and Mike was not able to take any of Liz’s inheritance. Liz was able to use the funds in the trust to create a new beginning.

Must You Have an SRT?

Not everyone needs an SRT. Depending upon your situation perhaps having asset and divorce protection provisions in your revocable living trust (RLT) will be sufficient.  However, some clients may want their retirement assets handled and managed differently for their children than they do non-retirement plan assets. As discussed below, the recent SECURE Act may mean it’s time to review your RLT to determine if changes should be made or if perhaps now would be a good time to add an SRT to your plan.

Already Have an SRT? Or an RLT? Now Is the Time to Review It

Depending on the size of your retirement account or your specific family dynamics, you may have already addressed these concerns and had an SRT prepared to handle your retirement accounts at your death. Even if you did not, your RLT may have been designed to also handle retirement account assets. However, in light of the SECURE Act, which was passed in December 2019 and became effective January 1, 2020, it would be wise to review the distribution instructions that were included in the SRT and/or any RLT.  Most trusts, whether an SRT or RLT, are typically designed using either “conduit” or “accumulation” provisions. Under the old law, if the trust had conduit provisions, the trustee would typically withdraw the required minimum distribution (RMD) from the inherited retirement account on behalf of the trust beneficiary and would then be required to immediately give that money to the trust beneficiary. The benefit of this type of provision was that it guaranteed that the ultimate beneficiary was only receiving the bare minimum amount and would stretch the withdrawals from the inherited retirement account over the beneficiary’s lifetime. 

However, because the SECURE Act did away with the lifetime stretch for most beneficiaries (with some exceptions), the conduit provisions may cause some unintended consequences. Now, most beneficiaries are required to withdraw the entire balance of the inherited retirement account by the end of the tenth year following the plan participant’s death. Therefore, a trust with conduit provisions requires the trustee to give the entire account balance to the trust beneficiary within ten years of the account owner’s death, unless the beneficiary is an eligible designated beneficiary. While this means that your ultimate beneficiary cannot cash out the inherited retirement account immediately, the entire balance will be given to your beneficiary in about ten years after your death.  And remember, once the funds pass out of the trust to the beneficiary, there is no longer any asset or divorce protection. If ten years is too soon for your beneficiary, it may be wise to consider changing your trust to include accumulation provisions instead. With accumulation provisions, the trustee can take any required distributions from the inherited retirement account and continue to hold them in a protected trust account for your beneficiary, making distributions according to the instructions you provide in the trust.

In order to make an educated decision about what is right for you there are other issues that you will want to know, including the income tax rules that may apply to a “conduit” structure vs. an “accumulation” structure. 

Want to know more about protecting your retirement accounts? Contact us today to schedule a conversation. While every situation is different, we can help you determine what plan is right for you. We are available for in-person and virtual appointments, whichever works best for you. 

If you have already done your estate planning, you have taken a significant step toward ensuring that your loved ones will know how to manage your affairs if you become incapacitated or die. However, simply having a will or a trust and related estate planning documents is often not enough. A detailed inventory of all of your accounts and property is crucial for helping your loved ones manage your legal and financial affairs effectively.

Most estate planning attorneys have received calls from distressed children who knew that a deceased parent had a will or a trust, but had no idea what accounts, insurance policies, or items of real and personal property the parent owned. If an inventory was never prepared and shared with the parent’s attorney, the child likely had to spend countless hours meticulously combing through the parent’s file cabinets, drawers, tax returns, mail, and online accounts to identify what the parent owned. 

Needless to say, this is not something that anyone wants to happen. Even if you do not have a will or a trust in place, you do not need to wait to prepare an inventory of your property until you have created these legal documents. In fact, assembling an inventory can be an excellent first step when it comes to your estate planning. This preliminary effort will allow your attorney to immediately begin focusing on the creation of a will or a trust that takes into account each of your accounts and pieces of property and how they should be coordinated with your estate planning goals. If you take this step, your attorney is guaranteed to be impressed and grateful for your preparation.

How to Create an Inventory

Creating an inventory of your accounts and property does not need to be very complicated. It can be a simple word processing document or even a handwritten list. Many individuals create spreadsheets in software programs like Microsoft Excel, Numbers, or Google Sheets. There are also numerous online services that can help you create a thorough inventory of your property. Many of these services enable you to automatically share your inventory with chosen individuals at a time that you designate before death or disability strikes. The bottom line is that any of these methods can work well—the important thing is that you create an inventory. Below is an example of an inventory formatted as a spreadsheet with columns and rows:

Of course, this is just an example of what an inventory could look like. You should include any information that you think will be helpful to someone who is put in charge of collecting your property after you have passed away. You might include additional details, such as where the property is located. For example, if you keep certain items of jewelry in a safe, or a boat you own is stored in dry storage, this would be crucial information to include.

In addition, though you will not share this with your attorney, consider using a software program or other service to store passwords for online accounts and even store digital copies of your important documents. 

Probate and Your Property

As you create your inventory, you will review how each item is titled or who is named as the beneficiary on certain accounts, which will enable you to identify those items of property that will have to go through probate. Probate is the court process that appoints an executor or personal representative to inventory your probate property and distribute the property according to state law or the terms of your will, if you have one. Generally speaking, any account or property that meets the following conditions will have to go through the probate process: (a) is owned only in your name, (b) is not owned jointly with another person, (c) is not titled in the name of a trust or business entity (like an LLC or partnership), and (d) does not have a named pay-on-death (POD) or transfer-on-death (TOD) beneficiary associated with the property. 

Probate can be an expensive, time-consuming, and public process that most people would rather avoid. If avoiding probate is a goal of yours, preparing an inventory well before you pass away can alert you to those items of property that will require a probate so that you can take steps prior to your incapacity or death to transfer ownership or retitle them.

Additional Benefits of a Complete Inventory

By creating an inventory with the type of information demonstrated in the example above, you can help your loved ones understand their next steps with regard to taking control of your property for management and distribution. Certain items and accounts, such as the following, may be distributed according to the unique legal aspects of that type of property:

• Property owned in joint tenancy with rights of survivorship (such as real estate or bank accounts) will pass automatically to the surviving joint owner and outside of a trust or probate.
• Some bank or investment accounts may have POD or TOD designations that allow those accounts to skip the probate process and be paid directly to a named beneficiary such as a child, spouse, trust, or charity.
• Life insurance proceeds typically will not have to go through probate if you have properly completed the beneficiary designation form by naming your loved ones, a trust, or a charitable organization as beneficiaries on the policy. 
• Accounts and property titled in the name of a trust (i.e., owned by the trust) can be distributed outside of probate according to the terms of the trust agreement.
• Retirement accounts usually require the listed beneficiaries to file a claim with the account custodian before the account will be paid out. Probate courts and trusts usually have no control over retirement accounts.
• Vehicles will typically need to be transferred through the local department of motor vehicles, which requires an affidavit along with a death certificate and the physical car title.
• Certain items of personal property (e.g., furniture, jewelry, art, collections, etc.), if above the value determined by state law, may be subject to probate, unless they are transferred into a trust before death.

What to Do with Your Inventory Once Created

After creating your inventory, make sure to store a copy where your loved ones will be able to easily find it should something happen to you. Consider the following locations:

• an estate planning portfolio or binder 
• a file folder that is clearly marked and easily accessible to your loved ones
• your client file with your estate planning attorney
• an electronic document format that can be shared with your trusted loved ones online
• a clearly labeled USB drive in your safety deposit box or safe (as long as you let your loved ones know what to look for, where to find it, and how to access it)
• your client file with your other professional advisors (so that they can help your loved ones easily identify all of your property if your loved ones call them first after your death)

Once you have created and shared your inventory, you should create a plan for updating it. Over time, accounts get closed or consolidated with other accounts, property is sold or acquired, stocks get converted to cash, and retirement accounts get depleted. If you do not regularly update your inventory, there is a chance that you could create confusion and send your loved ones down rabbit holes as they try to handle your affairs. 

Some people find it helpful to choose a specific date each year when they will review and update their inventory and also review their estate planning documents. Whatever will work best for you, make a plan, implement it, and then stick with it. Your loved ones will praise your name for years to come if you do. If you need assistance or have questions reviewing your important documents, feel free to give us a call.

For most people, it is perfectly natural to think about estate planning only in terms of planning for death. While planning for your death is very important, if that is all you plan for, your planning can quickly become woefully inadequate. As medical knowledge and technology have improved over the decades, so too has modern medicine’s ability to keep people alive for much longer. It is no accident that in many areas of the country, long-term care facilities such as assisted living centers and nursing homes are being built at record pace.  

At first blush, staying alive longer would seem to be a good thing. However, longevity coupled with physical or mental incapacity can be extremely challenging if you fail to make arrangements for someone to assist you during that period of time. On the other hand, with proper incapacity planning, you can rest assured knowing that your affairs are in good hands, out of the public eye, and being handled without the expense of lawyers, courts, and unnecessary complications. 

What Is Incapacity?

Before we discuss how to plan for incapacity, it is important to clarify what it means to be incapacitated. Each state has its own method for determining legal incapacity, and most have enacted laws that define what incapacity is. For example, in states that have adopted the Uniform Probate Code, an incapacitated person is typically defined as follows:

“Incapacitated person” means an individual who, for reasons other than being a minor, is unable to receive and evaluate information or make or communicate decisions to such an extent that the individual lacks the ability to meet essential requirements for physical health, safety, or self-care, even with appropriate technological assistance.

Although some states have defined incapacity more broadly or more narrowly, in most states, this is a common definition of legal incapacity. From a purely practical perspective, however, incapacity can be described as an ongoing condition where you simply do not have the mental ability to take care of routine tasks for yourself without assistance from someone else. Such tasks might include paying your bills, cooking your meals, bathing, grooming or dressing yourself, taking your own medications, or being unable to protect yourself from financial or physical exploitation.

Why a Will Alone Will Not Cut It

Almost all estate plans created in this country include a will. A will is a legal document that allows you to memorialize your wishes for what you would like to happen after you have died.  For example, a will allows you to 

• authorize someone to handle your final affairs after your death (an executor or personal representative);
• name who will receive your accounts and property and in what shares, including successor or backup beneficiaries; and
• designate guardians of your minor children.

Did you notice a theme in the list above? They are all things that must be handled only after you have died. That is an important point. A will only becomes effective once you are dead. 

So does a will help you if you become incapacitated? The short answer is no. A will is not any help if you become incapacitated. To provide some level of incapacity planning in your will-based estate plan, you must obtain additional legal documents, including at least a financial power of attorney and an advance directive. 

Financial Power of Attorney

A financial power of attorney (POA) is a legal document that you sign before you become incapacitated that allows you to appoint a trusted individual to act as your agent (meaning the appointed individual can act on your behalf). In this document, you spell out what an agent may do: a general POA allows an agent to handle most of your financial affairs whereas a limited POA restricts an agent’s actions to certain things or for a limited amount of time. Legally, your agent must act in your best interests when handling your property and legal affairs. A POA can, and in many cases should, grant the power to take the following actions: 

• handle your deposit and banking accounts
• withdraw funds from your retirement accounts
• enter into contracts
• collect your mail
• deal with your various insurance companies
• make investment decisions on your behalf
• sell, mortgage, lease, and manage real property

You can also determine when your agent is allowed to act on your behalf. It can be restricted to only after you have become incapacitated (a springing POA) or take effect as soon as you sign the document (an immediate POA). When planning for your incapacity, it is important that your POA be durable, which means that your incapacity will not affect the validity or effectiveness of the document.

If you have a will-based estate plan and no financial POA (or an invalid one), your loved ones will have to go to court to have someone appointed to take care of these matters for you through a process known as guardianship or conservatorship. This can be a very costly, public, and time-consuming process for your loved ones during a stressful and emotional time.

Advance Directives

An advance directive is a document or set of documents in which you can appoint an individual to act on your behalf regarding medical decisions and, if authorized under your state law, also memorialize some of your medical and end-of-life wishes. Similar to a financial POA, a medical durable POA is one kind of advance directive that allows you to appoint an agent, often referred to as a medical or healthcare agent or proxy, who has the ability to make medical decisions on your behalf when you are unable to communicate your wishes yourself (i.e., if you are unconscious, even temporarily).

Another kind of advance directive is a living will, which is a legal document in which you can specify the kinds of end-of-life decisions that you want your doctors or healthcare agent to make on your behalf. In some states, an advance healthcare directive will contain both a power of attorney and end-of-life instructions; other states require separate legal documents. Regardless of the format, these documents are a critical component of making your estate plan incapacity proof. By naming someone you trust to make healthcare decisions for you, similar to the decisions you would have made if you could still communicate your wishes, you can ensure that you receive the care and medical treatment that is most appropriate for you.

If you do not have an advance healthcare directive, your loved ones will be forced to go to the court and have a judge decide who can make medical decisions for you if you are not able to make or communicate your wishes. 

Trust-Based Estate Planning and Incapacity

For those who want to make their estate plans truly incapacity proof, a revocable living trust can be a powerful legal tool. This type of trust has become the foundation of many well-constructed estate plans in this country. A living trust is a legal agreement between a trustmaker (a person with the money and property, sometimes called a trustor, settlor, or grantor) and a trustee (the person charged with managing, investing, and handing out the money and property). For most revocable living trusts, the trustmaker changes the ownership of the trustmaker’s accounts and property from the trustmaker as an individual to the trustee of the revocable living trust, who is often initially the trustmaker himself or herself. The trustee agrees to manage and protect the money and property for the benefit of beneficiaries. In a revocable living trust, the trustmaker is also the beneficiary during the trustmaker’s lifetime. Holding the property in this type of legal structure creates a great deal of flexibility to deal with incapacity issues as they arise.

For example, if you created a revocable living trust, named yourself as trustee, and transferred most of your property into the trust, you could use and enjoy your property just as you do today. But if you suddenly became incapacitated, a successor trustee (named by you beforehand in your trust document) could quickly and seamlessly step into your shoes as trustee to continue managing the trust property for your benefit throughout any period you were incapacitated. All of this could be accomplished outside of the courtroom, maintaining privacy and eliminating burdensome court and attorney fees in the process. Then, when you die, your successor trustee would have the authority to continue to manage the trust property or give it to remaining living beneficiaries (typically, your loved ones that you leave behind). Again, this can be done completely outside of the court system, thereby eliminating significant cost, delay, and invasion of your and your loved ones’ privacy.

Do not forget that this incapacity planning is only as good as the individuals you choose to serve in these roles. If the person or people you named can no longer fulfill their responsibilities, you will need to change your legal documents as soon as possible to ensure that the best possible people are serving in these crucial roles.

Finally, it is important to remember that a trust-based plan should still include a will, financial POA, and advance healthcare directive. Each of these documents has important legal functions designed to address circumstances that a trust alone cannot.

By carefully crafting each of these legal documents with our help, you can feel confident that your loved ones and the property that you have worked your whole life to obtain will be in good hands if incapacity strikes. We are here to help you think through and implement each decision that goes into making your estate planning truly incapacity proof. Give us a call today.

This year is quickly coming to a close. For many of us, December 31 cannot come soon enough, as 2020 has been anything but a walk in the park. 

The first quarter of 2020 brought a worldwide pandemic. Not only did this raise concerns about everyone’s health and safety, but it also fundamentally changed the way we all live. Many people found themselves either working from home or out of work. The pandemic also created market volatility that impacted many people’s investment and retirement accounts. Along with the pandemic, many areas of the country experienced severe natural disasters such as hurricanes, earthquakes, and fires, leaving them without homes. Lastly, the 2020 presidential election proved to be just as unprecedented, with many states taking days after the election to count all of the votes and certify the election results. 

While there is reason to be optimistic that 2021 will bring a COVID-19 vaccine and the promise of a return to some level of normalcy, this will not happen immediately on January 1, 2021. In the meantime, life marches on. We are just as busy as ever with supervising kids attending school and other activities (in-person or virtually), pursuing new employment opportunities or adapting to new work environments, and adjusting savings and investment goals. With so much going on in your life, it can be easy to forget the details that can help you prepare for whatever 2021 may bring. That is why we are here: to remind you of those things that can make your life easier when it comes to your estate, financial, and tax planning. Here are a few important things to consider as the year comes to a close.

Maximize Contributions to Retirement Accounts

This year brought plenty of employment disruptions for many of us. These disruptions may have resulted in a job change and the establishment of a new 401k account with your employer. Or they may have caused you to reduce or even suspend making regular paycheck contributions to your retirement account given the uncertainty of the job market as the pandemic escalated. As a result, you may not have maximized your annual contributions to your retirement accounts in 2020. Depending on your current employment status, perhaps you have forgotten to restart your contributions and are at risk of missing out on the opportunity to maximize your annual contribution limits. Although the IRS has routinely allowed for contributions to be made even after the first of the year for the preceding year, it is typically good practice to make such contributions before the end of the year if possible.

Tax Return Preparation

December is the perfect time to begin pulling together your tax records in preparation for filing your 2020 tax returns. The sooner you can begin to get a sense of what your tax bill will be for 2020, the sooner you can prepare to write that check to the IRS or carefully plan how you will use any tax refund if you are entitled to one. In either case, preparing now for tax season can be an easy way to reduce stress over the holidays by knowing that you are ready to begin working on your returns just as soon as January 1 comes around.

You can begin gathering the following information and documentation in preparation for filing your tax returns:

• Social Security numbers and birthdates for everyone to be listed on your return
• W-2 forms, any 1099 forms, bank or financial institution tax statements, miscellaneous income records (e.g., gambling or lottery winnings)
• Property tax payment records
• Charitable donations
• Receipts for medical expenses and health insurance coverage records
• Business expense records
• Mileage records
• Home office expenses

Last-Minute Gifts

A frequently forgotten tax benefit that exists for all US citizens is the ability to gift up to $15,000 per person (in 2020) without incurring any gift tax liability and without the need to file a gift tax return. This annual gift tax exclusion amount is noncumulative, so it is a use-it-or-lose-it tax benefit. Because the pandemic has caused financial hardship for many people, utilizing the annual gift tax exemption may be a great way for you to help family and friends without incurring tax liability. And despite some of the recent presidential election drama, it appears increasingly likely that Joe Biden will be inaugurated as the forty-sixth president in January, which presents a distinct possibility that the lifetime unified gift and estate tax exclusion amount will be decreased in the near future. 

If you have significant wealth, you should seriously consider leveraging this annual gift tax exclusion in 2020 as a part of an ongoing strategy for reducing your estate’s size and thereby avoiding potential future estate taxes. Although writing a check for $15,000 to each child or grandchild annually is one way to use this tax benefit, it may not be the best way. Forming a trust can add significant benefit and protection to this kind of gifting strategy.

For example, forming an irrevocable life insurance trust continues to be a highly effective way to leverage the annual gift tax exclusion by using the annual cash gifts to purchase life insurance on you, your spouse, or both of you. At your death, the life insurance benefits pass income tax-free to the trust and can then be managed and used on behalf of your trust beneficiaries in a much more protective and strategic manner.

If you have questions about how to best leverage this annual gift tax exclusion, we would welcome a phone call to visit with you about it and help you understand the available options.

It Might Be Time to Review Your Estate Planning

This year also brought significant changes to the law surrounding retirement accounts and how to coordinate them with your estate planning. The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was passed in late December 2019, had a major impact on estate planning for those with significant savings in tax-deferred retirement plans. No longer can required minimum distributions from an inherited IRA be stretched out over the lifetime of the person inheriting the IRA. Unless a beneficiary is a spouse or otherwise qualifies as an Eligible Designated Beneficiary, the retirement account must now be paid out within ten years of the plan owner’s death. Although this received some attention in the media early in the year, it paled in comparison to the COVID-19 pandemic coverage, so it is not surprising that many people are still very unaware of these changes and how they could impact their estate planning. 

With all of the changes that 2020 has brought, it is more important than ever to review your estate planning documents. If it has been a few years, you will want to make sure that your plan still reflects your wishes. Give us a call to schedule a review of your plan if you or your loved ones have experienced any of the following life changes:

• Marriage or divorce
• Birth or death in the family
• Moving
• New job
• Retirement or loss of employment
• Acquiring new accounts or property

If you currently have a trust-based estate plan, carefully reviewing your financial accounts before the end of the year to determine how your accounts are titled and how the beneficiary designations have been made can ensure that you catch critical mistakes and identify accounts unintentionally left out of your living trust.

Taking the steps described above can go a long way toward preparing you for the upcoming year. When you are prepared, there is not much room left for uncertainty and fear. Instead, you can feel confident heading into the holiday season that you will be ready for whatever 2021 has in store for you.