Attorney & Mediator
Attorney & Mediator
Do you really need a trust?

Do you really need a trust?

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.

IRA Mistakes

IRA Mistakes

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.

Choosing a Trustee

Choosing a Trustee

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.

When your primary wealth is in IRA’s

IRA piggybank

Estate planning addresses the varying wealth of the client together with his or her desires in passing on this wealth.  For those with cash assets and land as their primary financial holding, a revocable trust may be the right answer to control those assets for the benefit of future generations.  But, what if the primary assets are held in IRA’s?

First, IRA’s cannot be a part of your revocable trust.  To transfer them during your lifetime into your trust (as you would your home and bank accounts) would be a distribution of the assets, subjecting them to income tax.  Most individuals, therefore, simply name beneficiaries on their IRA’s to receive the balance of the funds when the individual dies.

The so-call “stretch” provisions allow for a calculation or re-calculation of a Required Minimum Distribution (RMD) for each of the beneficiaries based upon each of their life expectancies.  They each must take this RMD annually, or be subject to a 50% penalty.  The distribution of the small RMD’s is usually in line with the wishes of the individual who has died.

Many clients desire a plan where the child withdraws only the RMD, gradually over his or her lifetime.  What if the child decides to withdraw 100% of the principal and pay the tax in one year?  He or she can do this as there is no prohibition on doing so.

How can the distribution of an IRA be controlled in the same way as the assets in a revocable trust so that the wishes of the client are honored?  By establishing a separate Conduit Trust.  These IRA trusts are specially drawn to comply with the requirements set forth by the IRS so that the money is able to pass through the conduit trust in the specific manner desired without being subject to the large tax penalties that would result if the entire amount were distributed in one year.

This type of trust is ideal for the client that has a revocable trust and desires to set up a mechanism to control the distribution of his or her IRA so that it stretches over the lifetime of the child.  It is a free-standing trust and requires a trustee.  It can protect the large IRA from being wasted by children who are not mature enough to handle the large principal amount that would otherwise be available.  It also provides an income stream to that child, gradually, over his or her lifetime.

While a Conduit IRA Trust is not for every client, it is the right estate planning tool for individuals with considerable wealth in IRAs who is concerned about limiting the distribution of the principal upon death.