Category: The Wealth Advisor

Personal Guidance from beyond the Grave 

Life can get hectic for parents when the school year starts. Parents often juggle many different responsibilities, which increase with the number of children they have and activities the children participate in. Most parents feel like they need to be in five places at once! 

As a parent, you have likely pictured what your child’s future will look like, but how many times have you considered what would happen if you were unable to be a part of their future? This is a sad thought to consider for everyone, however, taking steps now to put a plan in place can offer you peace of mind so that if the unexpected happens, your child will receive the benefit of your hard work and planning. 

What goals do you have for your child’s future?

To develop a comprehensive plan for your child’s future, it is helpful to consider what goals you hope they will achieve, what experiences you feel are important for them to have, and what values you would like to instill in them. There are planning methods that can support your child in achieving a higher education, learning a valuable trade through trade school, or even becoming an entrepreneur and starting their own business. You can also opt to leave funds or incentives to encourage them to spend some time volunteering for important causes. You should also think about whether you want to provide your child with the ability to travel, whether it is to see the world or maintain relationships with extended family members. 

Put goals into action with an estate plan.

There is no substitute for the guidance and support you can provide for your child. However, you may be surprised to learn that there are ways to guide them, even in your absence. This can involve planning methods that incentivize your child to accomplish certain tasks during their lives. You can emphasize the importance of values such as working hard by encouraging them to maintain a job and potentially matching a portion of their salary. You can provide them with funds to allow them to pursue philanthropic efforts. Education is often a goal many have for their children, which could include learning a trade or obtaining a college degree. Fortunately, there are many ways to set aside funds for your child to use for education. 

In addition, just as you are prioritizing your family by creating an estate plan, you can also assist your child in prioritizing their future families and relieving some of their financial pressures. This can be done by setting aside funds for your child to use for family vacations, to pay for their children’s education, or to purchase their first home.

We know this type of planning may seem daunting, but you can accomplish developing a comprehensive plan for your child’s future by contacting a qualified estate planning professional to start the planning process. Once you finish, you will have answered many important questions about the future and will feel prepared. You may wonder why you did not start the process earlier. If you need to create or review your estate plan to provide for your child, give us a call.

Not all children are responsible enough to handle a large lump sum inheritance at age eighteen without some guidance. Most children would be tempted to spend it all on fast cars, designer clothes, lavish vacations, or maybe even to quit their job. It is important to educate yourself on the options available in the event you die prior to your children reaching the age of majority. 

1. How a Continuing Trust Works

A continuing trust is a great option to ensure that the money you worked so hard for lasts to provide your children with the future you envision. A continuing trust holds money for a specific period of time and does not distribute it outright. This type of trust can allow for small distributions when a child reaches certain ages, and then distribute the remainder at a specified age, or continue indefinitely. You decide the appropriate ages and amounts for disbursements to your children. The specifics will largely depend on what you hope your children will utilize the funds for and whether you need to plan for special circumstances that affect your children. 

1. Protecting Minor Children

Continuing trusts can be particularly beneficial for situations in which a child may inherit funds or property while they are a minor. Minor children are unable to own property or inherit an amount over $15,000 in many jurisdictions. If children are set to receive more than $15,000, most states require that a conservatorship or guardianship be put in place until the child reaches the age of majority (eighteen or twenty-one depending on the state). This court process requires additional fees and court filings for the duration of the guardianship or conservatorship. And ultimately, the child would still receive a large lump sum when they turn eighteen or twenty-one (when they may still be immature). Establishing a continuing trust prevents the need for a conservatorship or court-monitored guardianship. 

1. Other Ways a Continuing Trust Can Help

Continuing trusts can also be beneficial in other circumstances. They can help preserve money for children who are financially irresponsible and tend to exercise poor judgment when it comes to spending. They can also protect children who suffer from addiction from having a lump sum given to them that could be used to fuel their addiction. In addition, this type of trust may protect money and property from lawsuits if a child works in a high-risk occupation. 

1. Potential Issues with a Continuing Trust

Continuing trusts provide a lot of benefits, but they can be problematic if not properly drafted. There may be a circumstance in which a child may need a large sum of money and the trust does not give the trustee the ability to distribute money for that need. Additionally, if a child requires government aid, this type of trust may disqualify the child if it does not contain specific language to preserve the benefits. 

While we have already discussed several of the benefits of establishing a continuing trust, there are other important considerations when deciding if a continuing trust is the right fit. In most cases, managing a trust costs money. The amount that it will cost can be quite substantial depending on how long the trust exists (and continuing trusts typically last a long time). The most common expenses associated with continuing trusts are trustee fees and income taxes. Both should be considered when determining how long you would like the trust to exist. There can be provisions that can give the trustee authority to dissolve the trust if it becomes financially impractical to maintain or if the original purpose is the trust is no longer applicable. 

Another important consideration of continuing trusts is that managing a trust takes time. These types of trusts are created to last for a long time and require a trustee who has the time to dedicate to the proper management of the trust. One of the more difficult decisions you will need to make is choosing who should serve as trustee. There are many considerations that go into trustee selection, and the following questions should be asked: How old is the successor trustee? Do they have the time and capacity to manage a trust? Will selecting this person put them in a position where it could strain their relationship with the beneficiary? You may feel it would be better to select an entity rather than a family member; if so, you should ask the following questions: How accessible is this institution? Will they be in business long enough? Is there a minimum trust value requirement? What fees do they charge for management?

There are a lot of considerations in determining whether a continuing trust is the right fit for your family. Contact a qualified estate planning professional who can ask you the right questions to make a proper determination of whether this form of trust is appropriate or if there may be a better option for your circumstances. 

There are certain reasons that establishing an estate plan can be of the utmost importance. Having minor children or grandchildren is one of those reasons. Most parents do not have time to keep up with their own tasks, let alone consider what would happen if they died while their children were still minors, but having a comprehensive plan in place for their children is very important. It can be motivating to know that a well thought-out and carefully drafted plan can last over eighteen years. Most parents have carefully considered what values they want to instill upon their children, but you may not realize that establishing a trust can allow you to essentially parent from beyond the grave. In addition, grandparents may want to provide a lasting gift to their grandchildren but may be unsure of how to make a gift that truly has a lasting impact. Trusts are not a “one size fits all” planning method—in fact, there are different forms of trusts that can help your clients accomplish a variety of goals. 

1. Health and Education Exclusion Trust

Every parent wants to provide their child with opportunities, and grandparents also find great value in contributing to the success of their grandchildren. Education is often a major stepping stone to bigger opportunities. Many times, grandparents will want to leave funds for their grandchildren’s education. You and your parents may be unaware of a health and education exclusion trust (HEET). These trusts allow grandparents to set aside funds to be used for their grandchildren’s and other distant descendant’s health and/or education expenses, providing you with the ultimate peace of mind in having the trust cover your children’s educational and healthcare costs. 

HEETs can pay for tuition costs at any education level. These trusts can be particularly beneficial for high net worth grandparents, as they can serve the dual purpose of adding a charity as a beneficiary. Additionally, grandparents can avoid generation-skipping transfer (GST) tax liability on funds transferred to the trust. Further GST tax (and gift tax) liability can be avoided on funds disbursed as qualified transfers. Qualified transfers are defined as funds that are transferred directly from the trust to the educational institution or medical provider. 

1. Incentive Trusts

How likely are children to do the dishes, walk the dog, clean their room, or offer to cook dinner? How much does the likelihood increase when they are offered money to complete these tasks? Most parents would agree that incentivizing young children works like magic. How surprised would you be to learn that even if you are not around, you can continue to guide and motivate your children by incentivizing them from beyond the grave? 

Incentive trusts are becoming a popular choice for parents of young children that want their children to achieve certain goals in life. Incentive trusts provide parents with the flexibility to set goals and appropriate rewards through distributions once a child reaches the goal. Parents can set multiple and separate goals for each child. 

There are a variety of goals that can be addressed with incentive trusts. Some of the more common goals are achieving a higher education, receiving good grades, starting a business, and maintaining a paying job. As you can imagine, these goals are best defined by you, who knows your children’s abilities and limitations. 

Imagining not being a part of your young children’s lives can be difficult. However, incentive trusts can offer your children guidance and support if you are unable. 

1. Beneficiary-Controlled Trust 

You may feel that your children are financially responsible and exercise good judgment, and you may want to avoid giving another individual control of the money you leave them. Even with strong financial management skills, the money left to children is still vulnerable to creditors’ claims, divorce, lawsuits, or estate taxes. By using a beneficiary-controlled trust, the risks can be reduced while allowing your children some control over their own trusts. A beneficiary-controlled trust is much like it sounds, in that a trust can be established for a beneficiary, who can also serve as the sole trustee or a co-trustee. 

These trusts grant the beneficiary a considerable amount of control over their inheritance while still allowing you to place certain restrictions on its use. When a beneficiary acts as sole trustee, they can be allowed to make distributions based on an ascertainable standard—for example, distributions for the beneficiary’s health, education, maintenance, and support (HEMS). In circumstances in which the beneficiary acts as sole trustee, under many states’ laws, most creditors cannot reach the beneficiary’s interest or compel a distribution when the trust contains the HEMS standard. However, once a distribution has been made to the beneficiary, it may be susceptible to the beneficiary’s creditors. 

You can save money on the cost of trust administration when your beneficiary serves as the sole trustee. However, there may be benefits to appointing a co-trustee to serve and giving your beneficiary the ability to remove and replace the co-trustee, if necessary. 

As you can see, trusts are not “one size fits all.” The type of trust you choose can address your specific concerns. It is best to work with a qualified estate planning professional who can analyze your situation and fully discuss your goals in establishing a trust, and ultimately provide you with a comprehensive plan that protects the future of both you and your family.  

Just as spending a day under the summer sun without proper protection can leave you with a painful sunburn, an unfinished or out-of-date estate plan can inflict harm on you and your loved ones. In this newsletter, we explore the importance of creating a comprehensive estate plan to protect your legacy and ensure a smooth transition to future generations. 

What Is Your Relationship with Your Parents?

Your relationship with your parents and with your own children is important for several reasons, including developing an effective estate plan. Simply maintaining a loving relationship with a parent does not necessarily guarantee inheritance rights. A legal right to inherit depends largely on the legal relationship between a child and that child’s parent, the existence of a valid estate plan, or if no estate plan exists, the applicable laws of intestacy in a given jurisdiction. Generally, children can inherit from their parents whether their parents are biological or adoptive, but in most jurisdictions, there is no legal right for a child to inherit unless they are a minor or it can be shown that they were accidentally left out of a parent’s estate plan. In some jurisdictions, if there is no estate plan, a child may be entitled to a percentage of the parent’s estate. 

Any discussion about estate planning concerns should include a review of the legal relationship between parents and children. In what manner are you a “child” of your parents? Are your children your biological children? Or are they legally adopted? Are they stepchildren? Or is your relationship something else altogether?

When it comes to a child’s legal ability to inherit from parents, there is no difference between adopted children and biological children—they are considered equal in the eyes of the law. However, situations involving stepchildren or presumed parents can be more complicated. 

Stepparents. A stepparent is typically someone who is married to or in a civil partnership with one of the biological parents of a child. With few exceptions, stepparents have no legal obligation to provide any legacy to a stepchild or stepchildren. And unless they were legally adopted, stepchildren have no legal right to expect an inheritance from their stepparent. The ability of stepchildren to inherit from stepparents can depend on the laws of the jurisdiction where the parents are located and that jurisdiction’s laws of intestacy. Stepparents can choose to provide for stepchildren in their estate plan, and in that case, the stepchildren would benefit in the same manner as any other beneficiary. If a stepchild is included in a stepparent’s estate plan under their will or trust, that stepchild can inherit money or property in the same manner as biological or adopted children under the same instrument. However, if there is no provision made for stepchildren under an estate plan, they would likely not be entitled to any share of the estate.

Presumed parents. In some cases, a person may be considered a presumed parent, which means that they are legally recognized as the parent of a child, even if they are not the biological or adoptive parent. Legal recognition for presumed parents is based on public policy that certain individuals should be treated as parents because of their relationship with a child and the role they assume in that child’s life. 

The criteria for being a presumed parent can vary by jurisdiction, but they often include the following:

1. Biological connection. In some jurisdictions, a person who is the biological parent of a child is automatically considered a presumed parent, regardless of their marital or relationship status.
2. Birth or adoptive parent. A person who has legally adopted the child or given birth to the child (with their consent) is considered a presumed parent.
3. Marriage or domestic partnership. If a person is married to or in a legally recognized domestic partnership with the child’s biological or adoptive parent at the time of the child’s birth or conception, they may be presumed to be a parent.
4. Intent to parent. If an individual openly and actively takes on the role of a parent and demonstrates their intent to parent the child, they may be considered a presumed parent. This can include factors such as receiving the child into their home, providing financial support, making important decisions regarding the child’s upbringing, and establishing a parent-child relationship.
5. Length of time and stability. The length of time the person has been involved in the child’s life and the stability of their relationship with the child may be considered when determining presumed parenthood. 

The relationship between a parent and child can take many forms. It is therefore important that you discuss with your estate planning and financial advisors the need to have an estate plan that clearly identifies your intended beneficiaries and the legal relationship of those beneficiaries to you. Your discussion should also examine relationships with any individuals who may not be immediate or obvious family members. With a well thought-out, comprehensive estate plan, you can rest assured that your wishes regarding inheritance will be clear and properly documented so they can be legally enforced.

As summer approaches and open waters beckon, it is important to consider a unique aspect of estate planning that can often be overlooked—your boats and watercraft. These vessels bring you joy and unforgettable memories, but they also warrant special attention when it comes to safeguarding your legacy as part of your comprehensive estate plan. 

There are several estate planning strategies that can be tailored specifically to handling boats and other vessels or personal watercraft. By implementing these strategies, you can ensure a seamless transition of ownership, mitigate potential tax burdens, avoid family squabbles, and pave the way for future generations to enjoy the pleasures of being out on the open water.

One planning strategy is to use a trust structure for boat ownership. Setting up a trust can be an effective strategy to maintain control over your boat while simplifying the transfer process. A revocable living trust allows you to retain enjoyment during your lifetime while designating beneficiaries who will inherit the boat upon your passing. This approach helps bypass probate, ensuring a smoother transition plan for managing and distributing the boat after your passing and potentially minimizing costs. It is important to note, however, that holding a boat in a trust may not be ideal from a liability perspective. In case of accidents or damages that result in injury or death, trial lawyers may try to pursue damages beyond liability insurance coverage limits based solely on the fact that the boat is owned by a trust. Additionally, transferring the boat to a trust could potentially incur state or local taxes at the transfer and may increase insurance premiums.

Another planning strategy involves using gifting and lifetime transfers. If you wish to pass on your boat during your lifetime, gifting or lifetime transfers can be viable options. By transferring ownership of a boat to family members or loved ones, you can experience firsthand the joy of gifting it while also potentially reducing estate taxes by removing the boat from your taxable estate. The downsides to this approach are that you may need to file a gift tax return, the boat may become subject to the gift recipient’s creditors, and you will not have any further control over the boat once the gift is completed.

A third planning strategy that is becoming more popular with boat owners is the use of a limited liability company (LLC). Establishing an LLC can offer significant benefits when it comes to managing and transferring boat ownership. By placing a boat into an LLC, you could use a trust to own a membership interest in the LLC. This approach may provide personal liability protection by separating the boat’s ownership from your personal accounts and property. However, it is essential to understand not only how changing ownership will impact insurance premiums but also any other legal and financial considerations specific to your jurisdiction. For example, securing adequate insurance coverage is essential to protect your boat and ensure a smooth transition in the event of an unexpected loss. 

Whichever planning strategy you employ, it is crucial that you work closely with a qualified estate planning professional who can tailor these strategies to your specific needs and goals. By proactively addressing the complexities of boat ownership in your estate plan, you can sail through life’s adventures with peace of mind.

Friction between family members can escalate during a scorching summer heatwave. Likewise, a flawed estate plan has the potential to breed conflict, mistrust, and financial turmoil among your beneficiaries in several ways.

Lack of a plan. If you fail to create an estate plan altogether, it can lead to significant disputes and confusion among your family members. Without clear instructions, loved ones could argue over what your intentions were, and state laws will dictate the distribution of your accounts and property in a manner that could be inconsistent with your wishes. This can result in some individuals feeling left out or receiving less than they anticipated.

Vague or generic plan. If your estate plan lacks specificity or fails to address important questions, it can open the door for interpretation and disagreement among your beneficiaries. Detailed instructions and provisions in the plan can help prevent disputes and provide clarity as to how you prefer different situations to be handled. Without clear instructions, disputes may arise regarding how money and property is to be divided, guardianship of minor children, or your intentions. This uncertainty can lead to protracted legal battles, strained relationships, and irreparable family rifts.

Outdated plan. Circumstances change over time, and your estate plan may no longer align with your current wishes or family situation. For example, if a beneficiary named in the plan predeceases you, it is crucial to have contingencies in place. Financial institutions may also be hesitant to accept outdated estate planning documents such as a financial power of attorney. Regularly reviewing and updating your estate plan helps ensure its relevance and effectiveness.

Unequal treatment of beneficiaries. While you have the right to distribute your money and property as you see fit and in the manner you think best, treating beneficiaries unequally can create tension and hurt feelings among family members. Open communication and discussing the reasoning behind your decisions ahead of time can alleviate stress, help manage expectations, and minimize conflicts.

Unclear wishes regarding care and decision-making. Apart from your money and property, your estate plan should also address your wishes for medical and financial decision-making if you become unable to make your own decisions. If you fail to provide clear instructions, it can lead to disagreements among family members who may have different opinions about your care. To prevent conflicts, it is important that you appoint reliable decision-makers and clearly communicate your wishes.

Conflicting decision-makers. Conflicts may arise when multiple individuals, such as children, are given priority to serve as decision-makers. Each person may have different philosophies or opinions about your care, leading to disagreements and potential disputes. It is crucial to consider these dynamics and select decision-makers who can work together harmoniously.

Unexpected tax consequences. Inadequate estate planning can lead to significant tax liabilities that may deplete the wealth you intended to pass on to your loved ones or favorite organizations. By leveraging effective tax planning strategies such as trusts or gifting, you can potentially minimize estate taxes and maximize the financial legacy you leave behind.

Business succession issues. If you own a family business, a lack of succession planning can be particularly detrimental. Without a well-defined plan, conflicts may arise regarding leadership, ownership, and the future direction of the business. This can jeopardize the continuity of the enterprise and strain relationships among family members involved in the business.

Emotional toll on loved ones. A poorly crafted or outdated estate plan can place an immense emotional burden on your loved ones during an already challenging time. Without clear guidance, your family members may be left guessing your wishes, resulting in anxiety, resentment, and fractured familial bonds. By proactively addressing potential conflicts in your estate plan, you can alleviate the emotional strain on your beneficiaries and foster a sense of unity.

To mitigate these potential conflicts, it is advisable to consult with an experienced estate planning attorney to create a comprehensive and up-to-date plan. Regularly reviewing and updating the plan as circumstances change can help ensure that your intentions are clearly communicated, reducing the likelihood of conflicts among your loved ones and protecting your legacy.

Introduction

On March 9, 2023, the Biden administration released a proposed budget for fiscal year 2024, calling for an increase in federal spending along with a series of counterbalancing revenue raisers. The budget was outlined in a document called the “General Explanations of the Administration’s FY2024 Revenue Proposals,” otherwise known as the “Greenbook.” 

The Greenbook is a document created by the US Department of the Treasury to explain the revenue proposals in the President’s budget. The Greenbook also serves as a guide to Congress for tax legislation by describing current laws, proposed changes to those laws, the rationale behind the proposed changes from a policy perspective, and US Department of the Treasury’s revenue projections based upon the proposed changes.

Proposed Changes to How Your Retirement Plan is Managed

Prevent Excessive Accumulation

The Greenbook outlines proposals on several different topics. One proposal that could directly impact your future financial security is the proposal to prevent excessive accumulations of wealth by high-income taxpayers using tax-favored retirement accounts.

Tax-favored (sometimes referred to as tax-deferred) retirement accounts, such as individual retirement accounts (IRAs) and 401(k)s, were approved by the federal government as a method of encouraging American citizens to save money for retirement. These accounts allow individuals to contribute a portion of their earnings to an investment account without taxes being withheld at the time of contribution. The money invested can grow with tax liability being delayed until the monies are withdrawn from the retirement account. 

In 2021, 87 percent of US citizens who were sixty-years-old or older had some type of retirement savings.¹ According to the latest findings, the average balance in American retirement accounts was $141,542 in 2021.² However, the Joint Committee on Taxation estimates that as of 2022, there are roughly 500 taxpayers with retirement accounts worth $25 million or more, and over 28,000 additional retirement accounts worth $5 million or more.³ 

Because of the special tax treatment afforded retirement accounts, some high-income people have started using these accounts as wealth transfer tools. An individual is in the high-income category if their modified adjusted gross income is over $450,000 if married filing jointly, over $425,000 if head-of-household, or over $400,000 in other cases.⁴ Some high-income taxpayers have been able to accumulate amounts in “tax-favored retirement arrangements that are far in excess of the amount needed for retirement security.”⁵ According to the Greenbook, “the exemption from required minimum distribution rules for Roth IRAs means that a taxpayer who has other sources of retirement income could choose to continue accumulating investment returns on a tax-favored basis until the taxpayer dies, which means that the tax-favored retirement arrangement could be passed on in its entirety to the taxpayer’s heirs.”⁶

Special Distribution Rules for Large Account Balances

To prevent such “excessive accumulations” by individuals, the Greenbook contains proposals that would modify rules related to retirement accounts. One such proposal would impose special distribution rules on high-income taxpayers with large account balances. Under the proposal, a high-income taxpayer with an aggregate vested account balance in a tax-favored retirement account exceeding $10 million would be required to distribute a minimum of 50 percent of the excess.⁷ “[I]f the high-income taxpayer’s aggregate vested account balance under these tax-favored retirement arrangements exceeded $20 million, then the required distribution would be subject to a floor.”⁸ “The floor is the lesser of (a) that excess and (b) the portion of the taxpayer’s aggregate vested account balance that is held in a Roth IRA or designated Roth account.”⁹ Commentators have suggested that this proposal is simply a rehashing of the mega-IRA proposals in the Build Back Better Act.¹⁰ Based on a $10 million threshold, the proposal would not likely affect the majority of retirement plan participants.¹¹ However, for those individuals who have accumulated more than $10 million in their retirement account, the proposed changes would greatly limit their ability to retain balances in excess of $10 million and use these accounts as wealth transfer tools.¹² 

Limit on Rollovers and Conversions

Another Greenbook proposal that could impact your financial plan is the proposed limit on rollovers and conversions to designated Roth retirement accounts or to Roth IRAs. The proposal “would prohibit a rollover of a distribution from a tax-favored retirement arrangement into a Roth IRA unless the distribution was from a designated Roth account within an employer-sponsored retirement plan or was from another Roth IRA if any part of the distribution includes a distribution of after-tax contributions.”¹³ The proposal would further “prohibit a rollover of a distribution from a tax-favored retirement arrangement into a designated Roth account if any part of the distribution includes a distribution of after-tax contributions, unless the distribution was from a designated Roth account.”¹⁴ “This proposal would eliminate the commonly used ‘backdoor’ Roth conversion for all high-income earners.”¹⁵ A backdoor Roth conversion is a strategy used by high-income earners who are prohibited from contributing to a Roth IRA because their income is above certain limits. Instead of contributing directly to a Roth, these high-income taxpayers contribute to a traditional IRA (which has no income limits), and then convert it to a Roth IRA. “Backdoor conversions would still be allowed for taxpayers with income above the Roth IRA contribution limit, but below the high-income earner limit.”¹⁶ However, according to some commentators, “this proposal does not appear to limit Roth contributions in employer retirement plans.”¹⁷

Although these are just proposals, we are committed to keeping you up-to-date on matters that may impact you, your loved ones, and your futures.

Three Improvements the Administration Wants to Make Regarding Administration for Trusts and Decedents’ Estates

When a person dies, there are often several tasks that need to be completed to properly wind down their affairs (their estate)—funerals and other preparations need to be planned, bank and investment accounts closed, property transferred, arrangements made for pets, tax returns filed, and final bills paid. There are several proposals in the Greenbook that are meant to help alleviate some of the complications that have arisen in estate and trust tax matters and simplify the process. 

Required Reporting on Trust Value

One Greenbook proposal would require reporting the estimated total value of a trust’s money and property (otherwise known as assets) and other information about trusts to the Internal Revenue Service (IRS) on an annual basis. Currently, most domestic trusts must file an annual income tax return. However, trusts do not have to report the nature or value of the trust’s accounts and property.¹⁸ Because of this, “the IRS has no statistical data on the nature or magnitude of wealth held in domestic trusts.”¹⁹ This lack of statistical data has made it difficult for the administration “to develop administrative and legal structures capable of effectively implementing appropriate tax policies and evaluating compliance with applicable statutes and regulations.”²⁰ This in turn further hampers the administration’s “efforts to design tax policies intended to increase the equity and progressivity of the tax system.”²¹ The proposal outlined in the Greenbook would require certain trusts to report certain information to the IRS on an annual basis to facilitate the analysis of tax data, the development of tax policies, and the administration of the tax system.²² 

The Greenbook continues its proposals by providing that the information could be reported on an annual income tax return or other form, as determined by the Secretary, and would include the name, address, and taxpayer identification number of each trustee and trustmaker, and general information about the nature and estimated total value of the trust’s accounts and property.²³ Also, each trust (regardless of value or income) would be required to report the inclusion ratio of the trust at the time of any trust distribution to a non-skip person, as well as information about trust modifications or transactions with other trusts that occurred that year.²⁴ “The proposal would apply for taxable years ending after the date of enactment.”²⁵ It is anticipated that increased reporting would require increased participation by attorneys in the preparation of fiduciary income tax returns.²⁶

Require Defined Value Formula Clause Be Based on Variable Without IRS Involvement

A second proposal aimed at simplifying issues involving estate and trust matters requires that a defined value formula clause be based on a variable not requiring IRS involvement. Many taxpayers like to use gifts, bequests, or disclaimers as part of a particular tax strategy. To achieve this result, sometimes a defined value formula clause is necessary to determine how much money or property should be transferred. A defined value clause is the amount transferred based on a value as determined for tax purposes and using a formula based on IRS enforcement activities.²⁷ After losing a number of court decisions upholding taxpayer use of formula clauses for hard-to-value assets, the Biden administration has found the defined value formula poses a number of challenges as it currently exists because it potentially (a) allows a gift giver to escape the gift tax consequences of undervaluing transferred property, (b) makes examination of the gift tax return and litigation by the IRS cost-ineffective, and (c) requires the reallocation of transferred property among gift recipients (donees) long after the date of the gift.²⁸ Additionally, the administration feels that “defined value formula clauses that depend on the value of an asset as finally determined for Federal transfer tax purposes create a situation where the respective property rights of the various donees are being determined in a tax valuation process in which those donees have no ability to participate or intervene.”²⁹ To address these concerns, the Greenbook proposal provides “that if a gift or bequest uses a defined value formula clause to determine value based on the result of involvement of the IRS, then the value of such gift or bequest will be deemed to be the value as reported on the corresponding gift or estate tax return.”³⁰ Transfers made by gift or occurring upon a death after December 31, 2023, would be subject to this proposal. 

Eliminating Present Interest Requirement for Annual Gifts

A third Greenbook proposal to simplify estate and trust matters is to eliminate the requirement that gifts must be of a present interest to qualify for the gift tax annual exclusion. Currently, annual per-donee gift tax exclusion is available only for gifts of a present interest. According to the Greenbook, “[a] present interest is an unrestricted right to the immediate use, possession, or enjoyment of property or the income from property.”³¹ If a taxpayer wants to make a gift in trust for the beneficiary, using the annual exclusion amount, the trust beneficiary must usually be given timely notice of a limited right to withdraw the trust contribution (referred to as a Crummey notice) to qualify the gift as a present interest.³² Complying with the notice requirement and record maintenance can pose a significant cost for taxpayers and the administration, and enforcement of these rules also imposes a large cost to the IRS.³³ Under the new proposal, gifts would no longer have to be of a present interest to qualify for the gift tax annual exclusion. “Instead, the proposal would define a new category of transfers (without regard to the existence of any withdrawal rights) and would impose an annual limit of $50,000 per donor, indexed for inflation after 2024, on the gift giver’s transfers of property within this new category that would qualify for the gift tax annual exclusion.’³⁴ 

Even though we do not know for certain which, or if any, of these proposals will come to fruition, we are carefully monitoring the latest legislation to ensure that you are properly prepared if and when Congress does act.

Ways the Administration Wants to Modify the Tax Rules for Certain Trusts

Taxes are not just for individuals—they can impact certain types of trusts as well. Whether a trust pays its own taxes or whether the taxes are paid by the trust’s beneficiaries or the trustmaker depends on several factors. 

Grantor Retained Annuity Trusts

If the trust is a grantor trust (a type of trust where the trustmaker, or grantor, typically retains power or control over the money or property in the trust), then trust income is taxed to the trustmaker. Grantor trusts may be revocable or irrevocable. Irrevocable grantor trusts such as a grantor retained annuity trust (GRAT) are popular among high-income taxpayers. These are trusts where the trustmaker retains an annuity interest (a right to receive payments of income) in a trust for a term of years. 

The Greenbook proposes to modify the tax rules for grantor trusts. Currently, estate planning tools such as GRATs and other grantor trusts allow taxpayers to substantially reduce their federal tax liabilities.³⁵ A GRAT is a type of trust where a trustmaker receives an amount annually for a term of years or for the trustmaker’s lifetime, then the trust terminates and any remaining money or property in the trust is distributed to the trust beneficiaries. It is the position of the Biden administration that legislative changes need to be made “to close the existing loopholes and ensure the effective operation of Federal income, gift, and estate taxes.”³⁶ This Greenbook proposal “would require that the remainder interest in a GRAT at the time the interest is created would need to be a minimum value for gift tax purposes equal to the greater of 25 percent of the value of the assets transferred to the GRAT or $500,000.”³⁷ Also, “the proposal would prohibit any decrease in the annuity during the GRAT term and would prohibit the grantor from acquiring in exchange an asset held in the trust without recognizing gain or loss for income tax purposes.”³⁸ In addition, the proposal would require a GRAT to have a minimum term of ten years and a maximum term set at the life expectancy of the annuitant plus ten years. It would also “provide that the payment of the income tax on the income of a grantor trust (other than a trust that is fully revocable by the grantor) is a gift.”³⁹ The unreimbursed amount of the income tax paid would be considered a gift.⁴⁰ This proposal is the same proposal that was included in the 2023 Greenbook⁴¹ and was previously included in Greenbooks from the Obama administration.⁴²

Charitable Lead Annuity Trusts

Charitable trusts are also being targeted by the Greenbook proposals—particularly charitable lead annuity trusts (CLATs). A CLAT is a special type of charitable trust where the trustmaker selects a charity or charities to receive annual payments from the trust. The payments can be made either for the trustmaker’s lifetime or for a predetermined number of years. Once the trust terminates, any remaining trust money or property is distributed to noncharitable beneficiaries. The Biden administration feels that “taxpayers often design the CLAT to have an annuity that increases over the trust term, thereby largely deferring the charitable benefit until the end of the trust term.”⁴³ By using this and other tax planning techniques, it is possible to greatly increase the value of the trust remainder without incurring increased gift tax consequences. The Greenbook “would require that the annuity payments made to charitable beneficiaries of a CLAT must be a level, fixed amount over the term of the CLAT, and that the value of the remainder interest at the creation of the CLAT must be at least 10 percent of the value of the property used to fund the CLAT, thereby ensuring a taxable gift on creation of the CLAT.”⁴⁴ This proposal has not appeared in prior Greenbooks, and it is unclear at this point in time how it will be received.

Loans from a Trust

Another Greenbook proposal modifying the tax rules of trusts “would treat loans made by a trust to a trust beneficiary as a distribution for income tax purposes, carrying out each loan’s appropriate portion of distributable net income to the borrowing beneficiary.”⁴⁵ Currently, with few exceptions, loans from a trust to a borrower do not result in tax consequences to the borrower.⁴⁶ Additionally, loans to a trust beneficiary would be treated as a distribution for generation-skipping transfer (GST) tax purposes under the proposal, “thus constituting either a direct skip or taxable distribution, depending upon the generation assignment of the borrowing beneficiary.”⁴⁷ 

In addition, “[t]o discourage borrowing from a trust by a person who is not a trust beneficiary but who is a deemed owner of the trust under the grantor trust rules, the proposal would treat a trust maker’s repayment of a loan from a grantor trust as an additional contribution to the trust for GST tax purposes.”⁴⁸ In some instances, “this new contribution (like any other contribution) would utilize GST exemption of the borrower(s), generate a GST tax liability in the case of a direct skip on such borrower(s) or their respective estates, or increase the trust’s inclusion ratio.”⁴⁹ The trust could be liable for the GST tax payable on such a deemed direct skip if it could not be collected from a deemed owner or a deceased deemed owner’s estate.⁵⁰ This proposal would allow certain types of loans to be excepted from the application of the proposal, such as short-term loans or the use of real or tangible property for a minimal number of days.⁵¹

When a president submits a proposed budget, it is viewed as an invitation to begin policy debates with Congress. Many people feel the proposed budget for 2024 is “dead on arrival” due to discord between congressional Democrats and Republicans and that the chance of most proposals becoming law is remote. However, the Greenbook still serves as an indicator of the current administration’s goals and agenda. It is important to stay abreast of the latest proposals and discuss with your financial and legal advisors to understand how the proposals may impact you and your financial and estate planning.

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Footnotes

1. Share of adults with any retirement savings in the United States in 2021, by age group, Statista.com (Feb. 8, 2023), https://www.statista.com/statistics/1273812/adults-with-no-retirement-savings-by-age-us/.
2. How America Saves 2022, Vanguard, https://institutional.vanguard.com/content/dam/inst/vanguard-has/insights-pdfs/22_TL_HAS_FullReport_2022.pdf (last visited May 26, 2023).
3. Retirement Tax Incentives Supercharge the Fortunes of Wealthy Americans, Washington Center for Equitable Growth (Mar. 17, 2022), https://equitablegrowth.org/retirement-tax-incentives-supercharge-the-fortunes-of-wealthy-americans/.
4. Dep’t of the Treasury, General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposal [hereinafter General Explanations] at 90, https://home.treasury.gov/system/files/131/General-Explanations-FY2024.pdf.
5. Id. at 89.
6. Id.
7. Id. at 90.
8. Id.
9. Id.
10. The House approved the Build Back Better legislation in November 2021, but it was never passed by the Senate.
11. General Explanations, supra n. 4, at 90.
12. Amy E. Heller et. al, The 2024 Green Book and Tax Implications: A Primer, Skadden, Arps, Slate, Meagher & Flom LLP (Mar. 20, 2023), https://www.skadden.com/insights/publications/2023/03/the-2024-green-book-and-tax-implications-a-primer.
13. General Explanations, supra n. 4, at 92.
14. Id.
15. Analysis and Observations of Tax Proposals in Biden Administration’s FY 2024 Budget at 38, KPMG (Mar 14. 2023), https://assets.kpmg.com/content/dam/kpmg/us/pdf/2023/03/tnf-fy-2024-green-book-mar14-2023.pdf.
16. Id.
17. Id. at 39.
18. Dep’t of the Treasury, General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposal [hereinafter General Explanations] at 115, https://home.treasury.gov/system/files/131/General-Explanations-FY2024.pdf.
19. Id.
20. Id. at 117.
21. Id.
22. Id. at 118.
23. Id.
24. General Explanations, supra n. 18, at 118.
25. Id. at 119.
26. James Dougherty and Marissa Dungey, The 2024 Green Book Limits Use of Defined Value Clauses, WealthManagement.com (Mar. 17, 2023), https://www.wealthmanagement.com/estate-planning/2024-green-book-limits-use-defined-value-clauses.
27. General Explanations, supra n. 18, at 116.
28. Id. at 117.
29. Id.
30. Id. at 119.
31. Id. at 116.
32. Id. at 117.
33. General Explanations, supra n. 18, at 117, 118.
34. Id. at 119.
35. Dep’t of the Treasury, General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposal [hereinafter General Explanations] at 124, https://home.treasury.gov/system/files/131/General-Explanations-FY2024.pdf.
36. Id.
37. Id. at 127.
38. Id.
39. Id.
40. Id.
41. Dep’t of the Treasury, General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals at 40, https://home.treasury.gov/system/files/131/General-Explanations-FY2023.pdf.
42. Dep’t of the Treasury, General Explanations of the Administration’s Fiscal Year 2016 Revenue Proposals, https://home.treasury.gov/system/files/131/General-Explanations-FY2016.pdf; and Dep’t of the Treasury, General Explanations of the Administration’s Fiscal Year 2017 Revenue Proposals, https://home.treasury.gov/system/files/131/General-Explanations-FY2017.pdf.
43. General Explanations, supra n. 35, at 127.
44. Id. at 128.
45. Id. at 129.
46. Id. at 124.
47. Id. at 129.
48. Id.
49. General Explanations, supra n. 35, at 129.
50. Id.
51. Id.

Important Probate Rules You Should Know:

When a person dies, what happens next depends on whether the deceased person had any foundational estate planning documents such as a last will and testament (otherwise known as a will) or trust, who the living relatives are, and their relationship to the person who died. If the deceased person did not have a trust or will, the state where the deceased person resided has rules for overseeing how the deceased person’s money and property are to be distributed. If the deceased person died owning accounts and property in their sole name and had a will, it will contain instructions for what is to happen to the decedent’s money and property and must be filed with the probate court. Probate is a formal legal process of proving that a will is valid (if the person had a will), appointing someone to carry out the deceased person’s wishes (known as a personal representative or executor), and supervising the distribution of the deceased person’s money and property.  

While probate rules can vary by state, there are some important ones that you should be aware of should you need to wind up a loved one’s affairs. 

Deadlines

Deadlines are important rules that must be followed during the probate process. Failing to meet these deadlines could get you in trouble with the court.

When and if to file the last will and testament. If and when a will must be filed with the probate court can vary by state, but it is important that you understand when this task needs to be completed. Some states require that your loved one’s will be filed with the probate court within a certain number of days after your loved one’s death, while others only require that a will be filed if a probate is necessary. This usually occurs when the decedent died owning accounts and property in their sole name that need to be transferred. Once the will is filed, the court will generally begin by reviewing the will to ensure that it was properly made and signed. If the court is satisfied, it will appoint the personal representative.  

Collecting and securing items. The personal representative must locate and secure the deceased person’s money and property and create an inventory of all items. Deadlines for filing an inventory with the court are calculated from the date you were appointed as personal representative, and they vary greatly among states, from sixty days in Florida to six months in New York. The inventory will include a valuation of the items as of the date of death. During this period, the personal representative may also need to establish a tax identification number for the estate and open an estate checking account for depositing estate funds.

Notifying creditors. The personal representative must notify known creditors and attempt to find unknown creditors. Generally, at the direction of the probate court and with the assistance of an experienced estate administration attorney, the personal representative is required to publish notice of the deceased person’s death in appropriate newspapers to run for a specified length of time. This notice is typically published in the local newspaper where the person died. The purpose of this notice is to allow creditors, both known and unknown, time to make a claim to the estate for any debt owed. The personal representative must then determine the validity and priority of all creditor claims received and pay those claims as appropriate.

If the personal representative follows the correct steps regarding notice to creditors, any debts not brought to the personal representative’s attention during the applicable time period may be barred, and the estate may not be responsible for paying them. The creditor deadline gives creditors an opportunity to come forward with their claims, but it also provides a cutoff point for the personal representative so they can wind up the deceased’s affairs in as efficient a manner as possible.

Maintaining and providing estate accounting records. The personal representatives must maintain accounting records as proof of monies coming into and going out of the estate. Depending on the circumstances, the accounting records may need to be filed with the court, and interested parties may need to sign releases at certain intervals.

Filing and paying taxes. A personal representative must ensure that the deceased’s final tax return is filed by the personal income tax filing deadline of the year following the deceased’s death. If the estate earns income after the deceased’s death, the personal representative must file estate income tax returns (sometimes referred to as fiduciary income tax returns). Finally, a personal representative may have to file an estate tax return if required by law or for further tax planning. Each of these returns will have a specific deadline.

Who Has to Know

During the probate process, there are a lot of steps that are involved, and there may be multiple individuals who need to be kept informed about what is happening. If the deceased had a will, this would include those named in the will (beneficiaries). In some states, the deceased’s relatives and the deceased’s creditors can also be interested persons. When dealing with individuals other than those the deceased named in a will, it may be tempting to leave them in the dark, especially if there has been bad blood. However, personal conflicts do not absolve the personal representative of the duty to keep an interested person informed and to provide them with the information they are legally entitled to.

Who Can Be in Charge

Another important probate rule is who can be appointed as a personal representative. The personal representative can be almost anyone. Many states require that the personal representative be an adult or emancipated minor. However, some states may not appoint a personal representative who is a non-US resident, nonstate resident, or a felon. Most often, a personal representative is a surviving spouse, a family member, a close family friend, or an attorney. There is no requirement that the personal representative have any experience or expertise in handling estate matters nor is the person required to have any financial or legal experience or background. 

We Are Here to Help

Probate is a process with many rules. We understand that this can be very overwhelming for many people. We are committed to working with named and appointed personal representatives to ensure a smooth estate administration. If you would like to learn more about the probate process and what is involved, please give us a call.

Infusing the Principles of Etiquette into Your Estate Plan

May is National Etiquette Month, and the goal is to encourage all people to act with consideration, respect, and honesty in their interactions with others and in their everyday lives.

Etiquette can also play a role in estate planning. A well-crafted estate plan ensures that your wishes are respected and that your loved ones are taken care of. Estate planning can also address what happens when you become ill and are unable to make decisions for yourself prior to death. Good manners and decorum can help minimize potential conflicts and disputes that may arise among family members during the planning process. As such, it is important to observe proper etiquette when planning and executing your estate plan to ensure a smooth and peaceful transition of your money and property to your loved ones. This involves communicating openly and honestly with family members about your plan and considering their feelings and opinions. Showing respect and sensitivity to family members can prevent future potential legal challenges that could arise from disagreements.  

The following are some ways that you can bolster your estate plan by incorporating the key elements of etiquette.  

Consideration. An estate plan can create a sense of stability and calm in times of loss or uncertainty. No matter what level of wealth you currently enjoy, if you do not leave detailed instructions for the type of medical care you want, you will be putting those you love most in the position of being mind readers. They will have to do their best to figure out what you would have wanted and then deal with the consequences, such as unhappy family members who disagree with them. A well-crafted estate plan shows consideration for your loved ones by preventing confusion about what to do and helping them avoid the pressure to make rushed choices.

Additionally, a carefully prepared estate plan can allow you to customize a plan that provides for your loved ones in a unique way that takes into consideration your loved one’s personal circumstances. They can find solace in the love and consideration you showed them by ensuring that your estate plan was not just a one-size-fits-all document.

Another way you can demonstrate consideration in an estate plan is by carefully considering who you are choosing as your trusted decision makers. Each role in an estate plan is important and is best handled by individuals with the right skills. When you are choosing a decision maker, it is important that you pick the right person for the job and that the person you are choosing can handle the responsibilities. In some instances, the person may not be able—not for a lack of skill, but because their plate is already full. Choosing an already overcommitted loved one could leave them feeling burdened and resentful during a time when they need to be grieving.

Respect. Estate planning makes it easier for your loved ones to respect your wishes because they know exactly what you want. Trust-based estate plans can respect your and your loved ones’ right to privacy by keeping private matters out of the public eye. Without a comprehensive trust-based estate plan, your estate may need to go through court in a proceeding called probate. This means that your choices become visible to the public, as does any information that needs to be filed with the court (like a list of everything you owned). 

Honesty. An estate plan can bring a family together. News stories are rife with examples of beneficiaries arguing over a deceased loved one’s money and property or instances of a person’s care and end-of-life wishes being ignored. But an estate plan can avoid those types of emotionally draining situations. You should communicate your wishes for end-of-life care to your loved ones. While creating an advance directive document like a healthcare power of attorney is important, it is equally essential to have open and honest conversations with your loved ones about your wishes. These conversations can be difficult, but they can provide clarity and peace of mind for everyone involved. And these discussions can provide a wonderful opportunity for you to show those same people how much you care for them and appreciate them while strengthening the bonds of family love. Many people also take the opportunity to write something personal to their family members – passing along hopes, dreams, stories, and wisdom.

By crafting an estate plan that is considerate of one’s loved ones, respectful of privacy, and honest about wishes for care and end-of-life decisions, you can ensure that your wishes are carried out in the most respectful and dignified manner possible. If you are interested in learning more about our estate planning process, or to update your existing plan, please schedule a meeting with us.

What? You didn’t know that March 14 (3/14) is National Pi Day? We didn’t either until recently, but now we know this celebratory day was established (you guessed it!) by a physicist (Larry Shaw) to recognize the mathematical constant (𝛑) whose first three digits are 3.14—probably as an excuse to devour lots of pie. National Pi Day is a great occasion to come to our office and discuss how you would like to slice your financial pie when you pass your wealth on to your children and loved ones. No complicated mathematical formulas are necessary to determine whom you would like to leave your money and property to, but it is an important subject that requires some serious thought.

How Should You Slice Your Pie?

With only a few possible exceptions, you are free to use your estate plan to slice up your wealth for the benefit of anyone you choose. Some common beneficiaries you may choose are spouses or other significant others—such as your boyfriend, girlfriend, or partner—and children. More and more people are also leaving money in trust to be used for the care of their pets. Others want to provide a gift to one or more close friends when they pass away. You may choose to include institutions as well as people or pets in your estate plan: if you have a strong relationship with a favorite alma mater, charity, or church, you may choose to leave money or property for its benefit.

It is crucial for you to create an estate plan to ensure that each person or institution gets the slice you intend. Without an estate plan, your money and property will be divided up according to state law, which may not provide the result you would have wanted. The state’s intestacy statute typically provides that if you die without a will, your surviving spouse will inherit everything, but if you had children from a prior relationship, the estate will be divided between them and your surviving spouse. If you do not have a surviving spouse or children, the estate may go to your parents or siblings. In the absence of any surviving family members specified in the statute, your money and property go to the state. This means that if you had stepchildren or foster children who were beloved but not adopted, or a significant other who was not a spouse, they will receive nothing. In addition, without an estate plan, you will lose out on the opportunity to leave your wealth to a nonfamilial loved one or charitable organization of your choice; instead, your wealth will go into the state’s coffers.

By creating an estate plan, you can specify not only to whom you want to leave a slice of your pie, but also the size of that slice. For example, you may want each of your children to receive an equal inheritance, or you may choose to divide up your wealth among your children based upon what you think each one needs. Children who are disabled and unable to provide for themselves may need more than other children who are able bodied or independently wealthy. There is no right answer: it is up to you to determine those to whom you want to leave your money and property and the size of each gift.

Depending on state law, there may be a couple of exceptions that have at least some impact on your ability to specify the size of the slices of your pie:

• Spouse’s elective share. Nearly every state has a statute that protects a surviving spouse from complete disinheritance by allowing them to elect to take a certain portion, such as one-third or one-half, of their deceased spouse’s estate. In some states, the size of the elective share may depend on whether the deceased spouse left behind children, grandchildren, or parents in addition to their spouse. The surviving spouse’s elective share may be smaller if there are other surviving relatives who would benefit from the deceased spouse’s estate.

Some states’ elective share statute applies only to the probate estate, that is, accounts and property that are held in the deceased spouse’s individual name. However, other statutes also subject money and property the deceased spouse had transferred to a revocable living trust during their lifetime to the surviving spouse’s elective share. Elective share statutes are generally a default rule, so a surviving spouse may contractually waive or modify their right to an elective share if they sign a premarital or postmarital agreement to that effect.

• Family allowance. Under state law, the surviving spouse, minor children, and adult children with special needs may be entitled to an amount from the deceased person’s estate necessary for their maintenance if they are able to demonstrate their need to the probate court. The money and property considered in determining the amount to which the spouse or children may be entitled vary depending on state law. Often, if the family allowance is determined to be available, it will be paid to the spouse or children before gifts are made to other beneficiaries named in the deceased person’s estate plan or most other claims against the estate, and if there are insufficient funds in the estate to cover the family allowance, the court may order the sale of estate property.

We Can Help You Slice Your Pie How You Want

Celebrate National Pi(e) Day by setting up an appointment to create or update your estate plan. We can help you design a plan to ensure that your pie is divided up in a way that achieves your goals. Give us a call today!

We associate March with St. Patrick’s Day and Irish traditions such as searching for four-leaf clovers, which are thought to bring good luck. One thing that parents should never leave to luck is providing for their minor children. Young parents work hard to create a wonderful life for their children and pass on wealth to them in the future, but they also need to create a plan for their children’s care if something happens to them. If you are a parent, it is difficult for you to think about having your young children grow up without you, but you need to recognize that lack of planning for this possibility could be disastrous for your children. 

Choose someone you trust to provide day-to-day care for your children. If one parent dies or becomes incapable of caring for your children, their other parent will likely continue to have physical custody of the children and responsibility for their care. However, it is crucial for you to name a guardian who will step into your shoes to provide day-to-day care for your children in the event that something happens to both of you. If you do not name a person you trust, a court will step in to appoint someone. Because the person the court chooses to be your children’s guardian may not be the person you would have chosen, it is vitally important to designate this person in advance in your will or in a separate document. Although the court will still have to appoint the guardian, it will typically defer to your wishes.

There are two types of guardians you should consider nominating in your estate plan:

• Permanent guardian. A permanent guardian is appointed by the court to care for children whose parents are both deceased or are otherwise no longer able to care for them. The permanent guardian steps into the parents’ shoes to provide for the children’s educational, religious, legal, medical, and day-to-day care until they reach the age of majority in your state (often age eighteen or twenty-one). As mentioned, to avoid leaving your children’s fate to a court with no input from you, you can name the person you want to care for your children in your will or a separate document specifically addressing guardianship.

• Temporary guardian. You can choose a person you trust to act as a caregiver for your children for a limited time period by choosing a temporary guardian in writing. That person will care for your children if you are temporarily unavailable, for example, if you become very ill and need to be hospitalized or are away for an extended trip. You can authorize the guardian to make decisions and take actions that you, as their parent, would normally handle, such as consenting to medical treatment or enrolling them in school. A temporary guardianship is usually only effective for a period of six months to a year, depending on state statute. If you would like to have it effective longer, you will need to sign a new form when the original one expires.

Make plans for your children’s inheritance. If you fail to plan ahead, the court may have to appoint a conservator (sometimes called a guardian of the estate) to manage your children’s inheritance until they reach the age of majority. This is necessary because minors legally cannot own money or property on their own. 

To avoid the appointment of a conservator, sometimes a custodial account under the Uniform Transfer to Minors Act or the Uniform Gifts to Minors Act is created through the probate process to hold the money and property your minor children inherit from you. The court will choose the custodian of the account who will manage the funds for the benefit of your children. However, when your children are legally recognized as adults at the young age of eighteen or twenty-one, the account will terminate. Your children will gain full access to their inheritance and can use it in any way they choose, even if they lack the maturity to make wise financial decisions or are addicted to drugs or alcohol. In addition, any present or future creditors could try to reach your children’s inheritance to satisfy their claims.

Although a custodial account is less expensive and easier to set up, a trust is often preferred over a custodial account because it is more flexible and can be designed to protect the funds against your children’s future creditors and their own imprudent spending. You can name someone you trust who is skilled at handling money to manage and distribute the funds for the benefit of your children if you die before they reach adulthood. This could be the same person who will act as the children’s guardian, but you can name another individual as the trustee if you choose. You can determine the age at which or the circumstances under which you feel comfortable having the remaining funds distributed to your children and provide those instructions in your trust document.

Give Us a Call

Your children are too important for you to leave their futures to chance. Call us today to set up an appointment to create an estate plan that will safeguard their future and give you the peace of mind that comes with knowing you have done everything in your power to care for them.