The estate tax is gone for all but the wealthy as the estate tax exemption has increased to beyond $11.4 Million dollars for each of us.
You may not be wealthy. You may not have businesses or multi-million-dollar assets to dispose of.
Therefore, do you really need to consider a trust?
First, it will avoid probate court proceedings and make the assets immediately available to the beneficiaries.
Next, it can assure that bills are paid, and financial matters are handled appropriately during an individual’s lifetime if he/she becomes disabled. More and more individuals are suffering from dementia or Alzheimer’s.
If you are in a second marriage situation, it may be critical. A Will cannot allow for the care of your spouse until his/her death and then the balance to your own children. This can only be done within the provisions of a trust.
If you have children under the age of 30, or if they are older but are not financially savvy, it may be very important. This will permit the distribution of assets over time and possibly for specific purposes, eliminating the risk of the money being wasted.
If you have a child with special needs who is on government benefits, it is absolutely necessary. If such child receives a distribution of assets, it will disqualify him/her from the government benefits until the inheritance is exhausted.
While Trusts are more expensive to establish, it is better not to be penny wise and pound foolish.
The rules for IRA distributions can be confusing. Many errors are made by beneficiaries after the death of the IRA owner. Here are a few to watch out for.
Owner’s Last RMD. If the decedent owner was over the age of 70 ½ and had not taken the RMD prior to death, the designated beneficiaries must take the distribution. The income tax will be reportable to each of the beneficiaries on a pro-rata basis.
RMD Failed Distribution: There is a 50% penalty for failing to take an RMD.
Roth IRAs: The owner and spouse are not required to take RMDs. Beneficiaries must take RMDs. If they fail, there will be a 50% penalty.
Rollovers: These are only available to the surviving spouse. There are no roll overs for beneficiaries.
Inherited IRAs: The beneficiaries cannot contribute to an inherited IRA. Inherited IRAs from different parents cannot be combined. An inherited IRA cannot be mixed with other retirement assets in an account.
Inherited IRAs are not Creditor Protected: While there is protection for IRAs for the owner from creditors, there is not protection for inherited IRAs. Therefore, inherited IRAs are available to the beneficiary’s creditors.
Probate Court cannot fix IRA problems: The IRS will not recognize state court orders that alter or fix IRA problems.
The rules are complex. If you are inheriting an IRA, get advice. This is not a good subject to do-it-yourself.
When choosing a Trustee, individuals often look to family members or friends. There are many reasons for this. They are the ones who know what the grantor wants. Also, they will probably not charge for their services.
Do they have the right skills? It is not a bargain to appoint a family member or friend because they will not charge, if they create a mess when handling the trust.
Even if they are skilled, are they the right person? Will it cause resentments with other family members? Do they have a conflict of interest? If the trust’s primary intent is to care for the current beneficiaries (children?), and then distribute the remaining residue to beneficiaries of whom the Trustee is one, will he/she knowingly or unconsciously refuse to make reasonable distributions to preserve money?
Or, alternatively, will the family member be too nice? Will they be able to stand up to the pressure of the primary beneficiaries’ requests for funds?
It can work best when there is only one child. If he/she is the Trustee, it makes the most sense.
If there are multiple siblings, naming them as co-trustees can work, if they can work together. If not, it can be a mess. It can become unworkable.
For these reasons, Grantors will often name a Corporate Trustee (bank or Trust Company) to administer the trust.
The downsides are the fiduciary fees that they charge and their tendency to be conservative when it comes to investments.
The upsides are many. The Corporate Trustee will easily handle unreasonable beneficiaries. They will also go on forever so there is no concern with the Trustee dying.
There is no “right” answer for choosing a Trustee. Family dynamics and finances may direct the choice. It is important for the Grantor to consider all of these issues without automatically defaulting to the oldest son or daughter.
There may not be a more sensitive topic than this.
Some parents are open about finances and decision making; others however are from the school of privacy. They do not discuss their finances with anyone and that includes their children.
None the less, children feel a duty to assist their parents as they are aging. Grilling them about their bank balances will not achieve the desired success. Another approach may be to offer guidance.
Explain first that in the event of a medical emergency, how important it would be for you to know where to access their information. Could they perhaps list the names and addresses of their bank accounts and financial institutions? Additionally, could they list their bill that are regularly paid such as utilities, mortgages, medical insurance, etc? Explain that this would assist you in helping them in the event of a hospitalization.
If your parents own a safety deposit box, it is vitally important that an additional person be on the signature card. Without that, the family would be unable to access important documents.
A good way to approach this might be to let them know that you have recently done this and wonder if they have also done the same.
It might be a good time to suggest that streamlining might make life easier for them and for their family. If they have multiple accounts scattered all over town, it might be time to consolidate those accounts at one financial institution.
This might be the time to ask if they have updated Wills, Durable Power of Attorneys and Patient Advocate Designations. Try to explain the importance of these documents, stressing that you are not attempting to influence their decision making, take away their power or nose into their business.
While you are at their home, try to notice if things are all running smoothly. Are there piles of unanswered mail and bills?
Discuss with your parents the scams and frauds that are common today. Millions of older Americans are victims of these scams. Explain that the IRS does not call people on the phone. People asking for social security numbers or bank account information cannot be trusted. Be careful not to lecture. Explain that everyone is vulnerable to these scams, not just seniors.
If your parents do name you on their Durable Power of Attorney or place your name as a signer on their checking account, remember that it is not your money. You must keep accurate records as if you were a disinterested third party (think bank). Never co-mingle money. Never borrow money from their accounts.
This is an area loaded with land mines. Tread carefully and be patient.
When doing estate planning, one issue often overlooked is the care of our beloved pets. It’s not something that is on the typical information questionnaire that clients fill out at their estate planning attorney’s office. If your consultation with counsel doesn’t touch on the issue of your pet, it make end up overlooked.
Many of us feel that our beloved pets are a member of our family. They depend on us.
So, what would happen to our furry friends waiting at our homes if something happens to us. While we would like to think that our family members would step in and take care of our friend for his or her lifetime, it may be best not to leave it to chance.
Family members may not want to take in a pet, or additional pets. Annually many animals end up at animal shelters when the owner passes away. If you love your friend, this is not the future you want for him or her.
Reaching out from the grave to protect pets used to be for eccentric rich people like Leona Helmsley who famously left $12 million to her pampered pooch Trouble.
Now ordinary animal lovers are taking action to care for their furry loved ones. Funds for Muffin’s lifetime care may be as small as $5,000, or be much more.
The idea of leaving a substantial sum for a pet may not appeal to the other members of the family, especially if they think that it is money they should rightfully be inheriting. Legal battles may be fought when parents leave substantial money to their pets instead of the money going to their children. Accordingly, it may be better not to tell your kids in advance because you will endure an endless stream of complaining and lobbying.
To avoid court challenges, or to avoid a judge from altering the terms of your estate plan, it is best to keep the amount left for your pets modest.
In setting the amount, estimate how much your furry friend will require by adding up the annual expenses for food, vet visits, grooming and toys. Multiply that by your pet’s life expectancy. Then adjust. Be realistic and consider what a prudent person would spend on their pets.
This amount can be left by Will or by Trust to the individual that will care for the pet. If it is by your Will, you will need to update your Will frequently to take into account the changing amount that will be required. Alternatively, Pet Trusts are legal arrangements that set money aside for a pet’s care and designate a trustee to fulfill an owner’s wishes. In this way, you may leave an annual amount to be distributed during the lifetime of the pet.
You may want to invest in a life insurance policy to fund this expense. Such a policy will assure your children that the amount of their inheritance is not being diminished in order to take care of your cat or dog.
You will also name a guardian or custodian for your pets when you are no longer present to care for them. It goes without saying that you must have a realistic conversation with the proposed pet guardian to assure that he or she is genuinely interested in caring for your pets.
When it comes to revocable trusts, the grantor (mom or dad) often nominates a family member to succeed him or her as trustee (son or daughter). Ordinarily, a family member (child) will say “yes” to this request and think nothing about it until the time comes to act.
If you are the successor trustee while mom and/or dad is still alive and incapacitated, there are some very important issues to consider and remember.
There is a tendency to treat the matter casually. After all, this is just mom or dad, and you are just writing checks for them, right? Wrong. When you take on the duties of being a trustee, you are a fiduciary in the same sense that a bank is for you. This means detailed record keeping, to the penny.
Never transfer money from the trust into your own personal account. Write checks directly from the trust account to the creditors or vendors. Keep track on a leger as to what the expenditures are for, and save the receipts. While this seems unnecessarily complicated, it won’t down the line if someone challenges your expenditures of mom or dad’s money.
Save all of the paperwork, either in paper form or as PDFs. Do not rely upon electronic bank statements as those are removed after a period of time from the account. Financial institutions only have those transactions on-line for 6 months to a year. After that, you will have to pay to have the items reproduced.
When purchasing items for mom or dad, do not mix their items in with your own at the store. Have their items rung up separately so there is a separate receipt. Using a check or credit card is best. Don’t use cash. You want to make a paper trail that shows all expenditures.
Do not “loan” yourself money out of the trust account. This is true even if in prior years when they were not incapacitated, mom or dad advanced/loaned you money regularly. You are now acting as the bank, not the son or daughter.
If you do not understand what it is that you are supposed to do, get help. Call an attorney and make a 30 minute appointment. The advice you receive will be invaluable in moving forward.
During mom or dad’s incapacity, you will still have to file income tax returns for them on an annual basis. After their death, you will have to file income tax returns for the trust. Do not rely upon your own best guess as to how this is done. Hire an accountant to complete this task for you so that it is done correctly.
Why be so careful? First, it is your legal duty to do so. Next, it is not uncommon for other family members (your siblings) to ignore the financial implications of mom or dad’s incapacity. They will be overjoyed that you are doing this and that they do not have to. No news, will be good news.
Things will change, however, after mom or dad pass away. Then they will want to know where all of the money went. How could there be so little left? They remember when there were several hundred thousand dollars in mom or dad’s trust. How could it be gone? They will ask, “what did you do with it?”
This is when all of the documentation so carefully maintained will come in the handiest. You will be in a position to stop all of the complaining by giving each sibling a copy of the accountings for each of the years you have handled the trust.
Without this information, you will be open to charges of breach of fiduciary duty that can be filed in Probate court. Without documentation, you may end up on the hook for repayment of some of the money into the trust for division among the siblings as their “inheritance”.
A little extra advise, time and effort now, will save you many headaches and heartaches in the future.
Some families talk and others don’t. Sometimes, it is the kids who don’t want mom or dad to talk about estate planning issues – they cannot face the fact that some day mom and dad won’t be here. Other times, it is the parents who cannot discuss the future.
Either way, there are certain issues that need to be addressed. One of them is long term care.
We are living longer. That is both the good news and the bad. We all would like to live to a ripe old age and be healthy until we draw our last breath. Unfortunately, that is not the case for many of us.
What is your plan for getting older? Where will you live when you can no longer live alone? What is the plan for a long-term illness?
In many families, the unspoken plan is for one of the family members to care for mom and/or dad until their dying days. For some families, this is a realistic plan as there are children who are able and willing to care for mom and/or dad in this way.
There are other families in which mom and dad state that they are never going into a nursing home, yet, there is no plan for care. This must be addressed by the family.
If you do not want to go to an assisted living facility or later to a nursing home, are there family members who will actually care for you? Have you discussed this with your children? Or are you assuming that because you cared for your parents, your children will care for you?
Do your children work full-time? That could impact their ability to care for you. Caring for aging parents often comes at the same time that families are putting children through college. Quitting work to care for a parent may not be realistic or possible.
If you do not expect family to care for you, are you acquainted with the costs of assisted care? Of nursing home care? Assisted living can cost $3,000 to $4,000 per month. This is a cost that is not covered by Medicare or Medicaid. It is direct pay. Could you afford $36,000 to $48,000 per year for assisted living?
If your health deteriorates, you may need nursing home care. Medicare pays only for a limited number of days after discharge from a hospital. Thereafter, it is the patient’s responsibility to cover the costs. If you have long term care insurance, the cost may be covered. If not, you will quickly spend your accumulated savings.
If you are a couple, there is some ability to save a portion of the marital estate for the benefit of the non-institutionalized spouse. Currently, in Michigan, that community spouse may keep the marital home, an automobile and approximately $123,000. The balance must be spent down prior to qualifying for Medicaid.
These financial issues are why it is necessary to have a plan. Have a conversation with your family to see where everyone stands on this issue. Then develop a strategy.
While the last thing that an individual who has gone through a divorce wants to do is contact another lawyer, a divorce should trigger a need for new estate planning documents.
First, you do not want your former spouse named as your Personal Representative or Trustee. Also, you will not want to name him/her as the primary beneficiary of your estate.
Next, your assets are now different from what they were prior to the divorce. You will need to re-think your gifts to your family and friends. This means a new Will or Trust.
If you have minor children, it is more important than ever to name a Guardian (who would step in only if your spouse were deceased) and a Conservator to handle the money for your children. While you cannot eliminate your former spouse from having custody of your children if you die, you do not have to leave him/her in charge of the money for the children.
You will want to name different agents for your Durable Power of Attorney (for financial and legal affairs). You do not want your former spouse as the individual paying your bills and having access to your checking and savings accounts. You will need to name someone you trust and you should name a back-up individual, just in case.
Also, you will want to execute a new Patient Advocate Designation (Health Care Directive). Again, you do not want your former spouse as the individual with the power to direct your medical care or to “pull the plug”. You will need to name individuals you trust to handle your medical decision making if you are unable to do so.
The last thing a recently divorced individual wants is more legal bills or contact with the legal system. It is, however, very important as your last step in the divorce process.
For those who have revocable trusts, they often feel that they are all set. They got them done years ago but haven’t looked at them since. Should they be reviewed and revised? Yes. When? Now.
Years ago, the estate tax was the reason for couples executing revocable trusts. Each person received credit for $600,000 to pass along during his/her lifetime or at death without any estate tax being due. The problem was that if your spouse received all the assets upon the death of the first spouse, that $600,000 credit was lost [“use it or lose it”]. The surviving spouse ended up with only his or her $600,000 credit and often larger estates would be taxed when they passed on to the children at the death of the second spouse.
At that time, the revocable trust was used to avoid such a scenario. With the trust, the first $600,000, or credit amount, was put into a Family Trust. Since it wasn’t a transfer to a spouse, it could use the $600,000 credit. The Family Trust or Credit Shelter Trust was available to the surviving spouse in the event that he or she needed it; however, it was usually the amount that ended up being passed along to the children. The remainder of the estate was passed to the surviving spouse in the Marital Trust. The Marital Trust was not taxed at the death of the first spouse, but was added to the surviving spouse’ net worth. Then when the surviving spouse passed away, there was the opportunity to take another $600,000 credit. Thereby gaining the advantage of both credit amounts, worth $1.2 Million.
Many trusts were written this way over the years and they have remained this way. The problem today is that with the last tax reform passed in late 2017, we each now receive a $5 Million credit. Therefore, unless a couple has assets of $10 Million, there is no need for the above complicated tax planning.
Additionally, as written, these Trusts would now require that the first $5 Million be kept in the Family or Credit Shelter Trust. There would essentially be nothing to fund the Marital Trust and nothing to absolutely pass along to the surviving spouse without restrictions.
For the average individual, these trusts today are unnecessarily complicated and unneeded. If this is the language of your Trust, it is time to see an estate planning attorney to have your Trust amended. The complex portions will be deleted and more simplified language inserted. Additionally, there have been many changes in the laws over the years, including a new Probate Code and a Trust Code in Michigan.
If your trust documents are this old, it is probable that there are additional changes that need to be made. If you have trust provisions for your minor children and they are now in their 30’s, it is time to have the documents reflect the reality of your circumstances and theirs. Many of the individuals that you may have named as Successor Trustees may no longer be appropriate (if even alive).
The best practice is to get these Trusts updated at once. Take advantage of the opportunity to simplify the documents and have them reflect your real-life circumstances and preferences.
Initially, this may strike you as a strange suggestion. After all, in the usual course of events, our parents die before we do. We inherit from them, not the other way around.
Also complicating this is the fact that many of us have spouses and children that we would leave our estates for. So, why consider leaving money to our parents?
Many older people are financially set. They have a good income from Social Security, pensions and investments. They have planned carefully and will be able as they move forward to rely upon themselves for their financial well-being.
Other elderly people are not so fortunate. Times have changed, and they didn’t plan for the changes that would come. They may have thought that if they owned their home (mortgage paid off) and they had no debt, they could manage on Social Security alone. They may have only a few thousand in the bank for the rainy-day emergency.
As your parents age, will they be looking to you for assistance? If they cannot live alone, can they afford assisted care? Or would they anticipate moving in with you? What would they do if you were to pass away?
In large families, there may be other siblings to shoulder the responsibility. If there are fewer, or if you are an only child, there may be no one to assist them. This may be a reason to include them in your estate planning. If you can afford to do so, you may wish to leave them money if they are still alive at the time of your death. This could provide the cushion they would need to make it through.
This is not a planning idea that is for everyone or for every family. It is a consideration when you are doing your planning. Who would help Mom and Dad if you were not here?