You may consider yourself a planner, but do you have a Will? A Trust? A Durable Power of Attorney? You may get your annual checkup and take your annual vacation. But your estate plan? Thinking about illness, death and dying? Not so much.
The sad state of Estate Planning is that only 34% of Americans have a will. Yet, almost 70% think they should have one.
But not talking about death and dying isn’t the only reason. The vast majority of people find the process daunting and do not feel they have access to good information. So they procrastinate.
While traditional estate planning deals with death and dying, the contemporary senior or baby boomer is not well served by this narrow approach. These are some of the current issues facing the boomers and contemporary seniors:
Many people believe that, once they’ve completed a will, they’ve done their estate planning. And most of those people – or, unfortunately, their heirs – eventually find out they’ve only scraped the surface.
Here’s just a partial checklist of things you may be missing:
* Do you have minor children? If so, do you even remember who you’ve designated as their guardian if anything happens to you? And, even if you do remember, is your designee the same person you’d name now?
* If you have minor children, do you also have a trust to preserve their inheritance until they’re old enough to manage it themselves?
* Do you need a Testamentary Trust, which protects your assets from your beneficiaries’ creditors, failed marriages, etc.?
* Are the beneficiaries listed for your life insurance, annuities, IRAs, 401Ks, pensions, etc. the same ones you’d name now? If not, you’d better do something about it (before anything happens to you)!
* Do you have a list of your online accounts, with usernames, passwords, and the answers to security questions? If not…what are you waiting for?
* Do you have a Durable General Financial Power of Attorney, to avoid having a court appoint a guardian for your children?
* If any of your family members have special needs, have you prepared a trust to ensure those needs are met?
* If you own a business, does your estate plan include provisions for the succession or sale of the business?
* What about charitable provisions? If you want to give to certain charities, you’ve got to list them, and how much you’d like each one to get. If it’s not in writing, it won’t happen!
* Do you “get” all the ramifications of the laws regarding gifting, estate and other taxes?
* Have you prepared Advance Health Care Directives and a Living Will to make your end-of-life wishes crystal-clear…and to avoid any disputes that could shatter your family forever?
A will is a legal document that controls how and when certain assets (not all assets) are distributed at our death.
However, a will won’t…
If I own all my assets jointly, why do I need a will? A will is needed in some cases even to distribute personal property or a car. It can name a person to make funeral decisions. A will is a basic estate planning document that everyone should have. It keeps things tidy!
A trust, simply put, is a legal entity that can hold assets for you or your beneficiaries.
There’s a widely-held misconception that trusts are only for wealthy people. Not true! In actuality, they can address a wide range of needs. And they can offer possible advantages for a wide range of people and situations.
It’s managed by a trustee designated by you (generally you in your lifetime), who acts in accordance with your wishes. And it says clearly how your assets should be managed and distributed during incapacity and on death.
For example, say you’re a business owner who wants to keep his financial affairs private. Unlike wills, trusts keep assets and their disposition confidential.
Trusts also offer regular income to dependents…and possible tax savings for you. And you can specify the how’s and when’s of payouts to dependents, according to their circumstances.
One of the biggest advantages of trusts, however, is that they can transfer your property without the expense and delay of probate.
If you’re a retiree, widow or widower, a trust can provide a monthly check. They can provide management of your finances if you’re ill. A trust can protect children of a previous marriage. And it can spare friends and family from conflicts, both legal and otherwise.
If you’re the parent of a special-needs child, you can ensure the financial needs of the child will be addressed. And if you become too ill to manage your own finances, they’ll be handled by a guardian you’ve appointed.
You can even provide a “significant other” with lifetime-income, while still keeping the assets in your family.
Jointly owned property will avoid probate but can create a different set of problems:
Except between spouses (called tenancy by the entirety), joint ownership is usually a bad idea.
Joint tenancy of a bank or financial account facilitates embezzlement.
Each joint tenant to a bank account has full right to make withdrawals from the account.
Once a person’s name is added to the title of property, it can be undone only with his or her consent.
Moreover a joint tenant can sever the joint tenancy, with the consequence that his or her proportionate share of the property passes to his or her heirs, even if he or she predeceases the other joint tenant(s).
Property held in joint tenancy is immediately subject to claims of each joint tenant’s creditors. This includes future creditors, ex-spouses etc.
Joint tenancy can produce unintended results. People often forget how they have titled accounts. At the end of the day, it is the title that rules and nothing in a will matters. This can result in uneven distributions between children or even someone long forgotten inheriting money.
Similarly, Payable on Death Accounts can produce unintended consequences.
Note: You need to review periodically the beneficiary designation forms for these assets. Numerous court cases and IRS rulings have concluded that the owner’s intent and statements in the will rarely matter. The only thing that matters is what was written in the latest beneficiary designation form.
Some assets avoid probate because they generally have beneficiary designations. These include most retirement accounts, life insurance, and annuities. It is critical that beneficiary designations be coordinated with the balance of your estate.
What, exactly, are trusts? How can they help you? And, most importantly…do you need one?
As an Elder Law attorney, I get asked these questions every day. So here’s a quick guide to help you decide if we should talk about trusts. First, a bit of a primer…
The person who creates the trust (you) is called the grantor. You write the rules…the how’s, why’s, who’s, when’s, etc. If the trust is revocable, you can change it if you decide to.
When creating the living trust, you need to appoint a trustee. He/she will be the person responsible for ensuring that your wishes are followed. (Some people appoint themselves as trustee…which tends to work better if you’re still alive!)
There can, of course, be many beneficiaries. And the assets can be distributed in many ways. For example, you can decide to give the income to certain beneficiaries, the capital gains to others, and the original money invested (the corpus) to others.
Trusts are not necessarily a one-time thing, either. Many people have more than one. In fact, some people have five or six…for the simple reason that different trusts have different goals. In some cases, believe it or not, trusts are even created by other trusts, or by a will!
Drafting, execution, and funding of a revocable trust requires estate planning counsel. But doing otherwise is penny wise and pound foolish. This is particularly true when dealing with special assets such as retirement accounts, annuities or life insurance. If not done property there can be serious income tax consequences.
Trusts can be an effective, versatile tool in your estate planning. And you owe it to yourself – and to your family – to at least consider them.
For example…
Are You Concerned About A Family Member’s Spending Habits?
A Loved One With Special Needs?
Protecting Your Assets From Nursing Homes?
Want To Avoid Probate?
Trusts can preserve what you’ve worked so hard to earn.
Is a trust right for you? Here are some questions you should ask yourself…
* Do you have a disabled family member? If your answer is yes, you might think about a Special Needs Trust.
* Is there a possibility your heirs might blow the money you’ve left them? If yes, maybe a Spendthrift Trust.
* Do you have a lot of life insurance? If yes, consider a Life Insurance Trust.
* Are you donating a lot of money to charity after you pass on? If your answer is yes, think about the Charitable Remainder Trust.
* Do you have children and expect your spouse to remarry after you die? Then, perhaps you should investigate a Qualified Terminal Interest Property (QTIP) Trust.
* Do you want to ensure that your assets are used for you, even if you’re not able to manage them anymore? Do you to ensure that they go directly to your heirs, avoiding the costs, delay, and publicity of probate? If so…a Living Trust.
* Would you prefer that most of your assets go to your grandchildren? If yes, you should consult an Elder Law attorney about a Generation-Skipping Trust.
And, while this type of damage may not endanger your life, it can sure endanger your savings, and the assets you plan to leave your heirs. And it can sure endanger your legacy.
If you have a loved one with special needs (an emotional or physical challenge), you are concerned about the balance between what they might inherit and the possible loss of their government benefits. This is frequently overlooked in the estate planning process.
Families need to be aware of their options in providing for a special-needs loved one.
The special-needs person (SNP) may be disinherited. This is an option if the assets available for the SNP are small.
Give the SNP the assets outright. Caution should be exhibited with this option as it could result in government interference or the SNP spending it unwisely.
Another option is to give the funds to a third party for the care and well-being of the SNP. Be careful! The third party you chose has no legal obligation to spend it on the SNP. It is subject to the owner’s creditors and can have a negative effect on their his or her income or estate plan. Also, when the owner dies, his or her heirs may not be trusted to care for the SNP heir.
This leaves us with the last and usually best option, the Special Needs Trust (SNT). Special Needs Trusts are used to allow one person to set aside funds for the care and benefit of an SNP. This is a common family practice for special-needs children, grandchildren, siblings, or other relatives. The key to an SNT is that they are drafted to be totally discretionary so that the SNP cannot demand distributions. Since the assets are not legally available to the beneficiary on demand, they are not considered assets when the SNP applies for government benefits.
Special Needs Trusts are also used to manage and shelter funds of the SNP gained through inheritance, life insurance, or personal injury award. As long as the SNP is not the trustee, there is no interference with the SNP’s ability to qualify for SSI or other government benefits.
SNT’s must conform to government requirements to assure that the SNP continues to be eligible for SSI or Medicaid.
Living with a disability is often associated with significant amounts of extra costs. That’s why individuals and families can now contribute to ABLE accounts — tax-advantaged savings accounts that can fund disability expenses.
Achieving a Better Life Experience (ABLE) accounts allow the families of disabled young people to set aside money for their care in a way that earns special tax benefits. ABLE accounts work much like the so-called 529 accounts that families can use to save money for education; in fact, an ABLE account is really a special kind of 529
Congress authorized ABLE accounts in the Achieving a Better Life Experience Act of 2014. Supporters of the law pointed out that the U.S. tax code provided significant tax benefits to parents who save money for their children’s college education in 529 plans, which are named for the section of the tax code that describes them.
But parents of people with disabilities had no similar way to save for their children’s future needs, such as occupational therapy or assisted living. Further, families that did try to save money for such things often ended up costing their children access to government assistance. The ABLE Act amended Section 529 in an effort to correct this.
Although the federal tax code allows for ABLE accounts, it’s up to the states to actually set up and administer the programs—just as the states administer 529 programs. When you contribute money to 529 plans, the state invests the money on your behalf. Unlike with a typical IRA or 401K, you can’t dictate how the money is invested outside of making choices as to how aggressive or conservative the money is to be invested, within limits.
As of 2019:
Contributions to an ABLE account are not tax-deductible, but all investment earnings remain untaxed as long as money taken from the account is used for “qualified disability expenses.” Such expenses include, among other things:
As with education 529 plans, taxes apply if money is withdrawn from an ABLE account for something other than qualifying expenses. Usually, the beneficiary will have to:
A key feature of ABLE accounts is that the first $100,000 in an account is not treated as personal assets of the account’s beneficiary. This is important because federal law generally bars individuals from receiving assistance such as Medicaid, housing aid and Supplemental Security Income if they have more than $2,000 worth of financial assets.
Severely disabled individuals often need these government services, especially after their parents die or can no longer care for them. Advocates for the disabled have long argued that the $2,000 cutoff effectively punished those whose families planned ahead.
Many clients, especially baby boomers retire with large retirement accounts, a home. These are often the bulk of the assets. Planning with retirement accounts can be a little tricky because you can’t put them into a trust – they are individual retirement accounts. But we do have options to protect family members and save on income taxes. It’s called an IRA trust.
In the case of a typical custodial IRA, after the death of the (original) IRA owner, the retirement account goes to (and becomes the property of) the named beneficiary, giving him/her full control over the account.
Then we look at the stretch IRA rules under the “stretch IRA” rules, the beneficiary has the option to leave the money in the account and take only the annual post-death Required Minimum Distribution, or can choose to some or all of the money more quickly. It’s the beneficiary’s choice, because the beneficiary controls the account after the death of the original owner; the Financial Institution simply serves as the custodian to hold the account, and follow the directions of the beneficiary.
On the other hand, with an IRA trust, after the death of the original IRA owner, the account will pay out according to the terms of the trust document that controls the IRA, as executed by the trustee. Control does not transfer to the beneficiaries (unless the trust document stipulates that it should).
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The ability to restrict beneficiaries from liquidating the inherited retirement account is helpful not merely to reduce the risk that they merely irresponsibly spend down the account to quickly, but also to “ensure” that the beneficiaries maximize the tax benefits of stretching the IRA out over their life expectancies (by being required to take no more than the minimum amount required under the rules).
The ‘stretch IRA’ is a choice. A trusteed IRA helps ensure beneficiaries do it right.
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Short definitions of each of these trusts.
If you’re thinking about trusts, here’s a Glossary of Terms that will be helpful…
BYPASS TRUSTS – Also sometimes referred to as the credit shelter trust, marital trust, or family trust, this vehicle is designed to help married couples avoid estate taxes. A Bypass Trust can increase the amount of money each spouse is allowed to pass on without these taxes.
SPECIAL NEEDS TRUSTS – Provides financial support for a disabled person who can’t earn enough income to support him/herself. The assets in this trust, however, cannot be used for food, clothing or housing.
IRA TRUSTS (or Trusteed Ira Trusts)
SPENDTHRIFT TRUSTS – Rather than leaving money to someone in whose judgment you don’t feel confident, you can put it into a trust. The heir would get the assets later on, perhaps at a certain age, in an allowance, or as needed for specific expenses.
LIFE INSURANCE TRUSTS – If you’re worth a lot, life insurance may not be appropriate, because it’s subject to estate taxes. Instead, you might put your insurance policy into a trust, which would be your beneficiary, and your heirs would be the beneficiaries of the trust. The trust can distribute to your heirs at a measured pace.
CHARITABLE REMAINDER TRUSTS – If you’re leaving something to charity, you can establish a CRT and get a tax deduction right now. You’re the beneficiary (giving yourself an annual income), and your charity gets what’s left (tax-free) after your death.
QTIP TRUSTS – If your widow remarries and later passes on – and you have children – they could get nothing. With a Qualified Terminal Interest Property Trust, though, your inheritance is left to the trust, rather than your spouse. He/she receives income from it. But when he/she dies, your children get remaining assets.
LIVING TRUSTS – Eliminates the need for probate. And ensures your assets will be used for your benefit if you become disabled.
GENERATION SKIPPING TRUSTS – This can preserve substantial assets for several generations while avoiding income and estate taxes. And assets are also protected from creditors.
Bottom Line? If you’re thinking about trusts, think about consulting an Elder Law attorney. You can’t do this on your own.
Daunting? Not if you let us help. We have worked with hundreds of families and can help you sort out these issues. We are professionals at this. It’s what we do!
