A dynasty trust used to be a very popular estate planning tool that has declined in use over the last few years. A dynasty trust ensures that upon the client's death their assets would still qualify for an estate tax exemption. In the past, if a deceased spouse did not have a trust, their part of the estate would not qualify for the exemption.
However, today's rules for trusts and estate tax exemptions are different. A deceased spouse's portion of the estate tax exemption passes automatically to their surviving spouse. Additionally, the tax exemption level has risen from $1 million to $5.3 million per person. As a result, a lot less people need to worry about a part of their estate being taxed upon their death, and dynasty trusts have mostly fallen out of use.
Benefits of Dynasty Trusts
The estate tax exemption is not the only benefit to dynasty trusts, and estate planning attorneys can utilize them in a variety of ways to ensure that a client's family is taken care of for years. The most basic reason for a dynasty trust is asset protection. When a client dies if their children lose a lawsuit the trust cannot be forced to pay. A dynasty trust also prevents a surviving spouse from remarrying and disinheriting the beneficiaries of the trust.
A dynasty trust also provides the option to set up the trust in perpetuity. Most trusts designate that distributions should be made to beneficiaries when they are 18, 25, or 30. However, by having a dynasty trust the young beneficiary does not have the opportunity to squander all of their money at a young age. By using a dynasty trust a young beneficiary can have ownership of the money, but not necessarily access to it. A trust can be put in place for over one hundred years, and the trustee decides when and how distributions should be made.
Finally, dynasty trusts protect against legal loopholes and changing laws. For example, usually when a surviving spouse remarries she will forfeit the tax exemption on the deceased spouse's estate. A dynasty trust prevents that from occurring. This type of trust also locks in the exemption level at the time of the creation of the trust. So if the level of exemption falls back to $1 million, the dynasty trust created now will keep its exemption of $5.3 million.
Detriments of Dynasty Trusts
However, there are some drawbacks to creating a dynasty trust. Setting up a dynasty trust is a complex legal process that requires a significant amount of time and money to accomplish. If a client wants to set up a dynasty trust in perpetuity, advisers need time to discuss who the trustees will be, what money and assets will be used, and under what circumstances the terms of the trust can be altered. Dynasty trusts can be written in a way that seems like a hand is controlling from the grave or can be done with a great deal of flexibility in the terms.
If you or a loved one is considering creating or revising an estate plan, discuss the possibility of a dynasty trust with your attorney and see if it may be a valuable option for you.
A dynasty trust used to be a very popular estate planning tool that has declined in use over the last few years. A dynasty trust ensures that upon the client's death their assets would still qualify for an estate tax exemption. In the past, if a deceased spouse did not have a trust, their part of the estate would not qualify for the exemption.
America currently has 72 million people from the Baby Boomer generation, the oldest of which are turning sixty-eight this year. That is also the average age when people decide to create charitable remainder trusts. Estate planning attorneys are expecting a big increase in the number of charitable trusts set up over the next twenty years as the rest of the Baby Boomer generation begins the estate planning process.
Charitable Remainder Trusts
A charitable remainder trust is a trust that provides a distribution, usually annually, to one or more beneficiaries where at least one is not a charity. The distributions can be made over a period of years or for the life of the beneficiaries, but an irrevocable remainder interest is held for the benefit of one or more charitable institutions.
Charitable remainder trusts can be set up in a number of ways. Usually, the trust creator will establish the trust during his lifetime and enjoy the tax benefits that come with it. He names himself and his family members as beneficiaries to the trust, and they all take distributions during their lives. When the creator dies, the rest of the family can continue to take distributions or the remainder can immediately go to the charity, whichever the trust creator prefers.
Benefits of Charitable Remainder Trusts
One of the main reasons for the boon in charitable remainder trusts is the demographics. These types of trusts grew fourfold during the 1980s and 1990s, but they quickly tapered off in popularity due to a mixture of demographic, economic, and tax conditions. The Baby Boomer generation as a whole is more charitable than other generations, and tax laws once again prefer these types of estate planning tools. Another reason for the increase is for tax purposes. Recent tax laws have changed that have increased the amount of capital gains taxes owed after selling a business or asset so placing them in a trust can help avoid those tax implications.
The biggest benefit for the charities in the creation of charitable remainder trusts is the permanency of the arrangement. Unlike other bequests or instruments, the remainder interest for charities in these types of trusts is irrevocable. Many multimillion dollar bequests to charities and other nonprofit organizations never come through because the family challenges it after the decedent has passed away or because someone simply changed their mind about the arrangement. However, under a charitable remainder trust the money cannot be moved or changed thereby ensuring that the charity will in fact receive the remainder of the estate.
The Future of Charitable Remainder Trusts
Many experts agree that charitable remainder trusts will continue to grow in popularity over the next decade or two. One reason is that these types of trusts work for people at almost any age that is considering estate planning. The retiree who needs income for a decade before taking mandatory withdrawals can easily work with a charitable remainder trust. Similarly, a father in his forties can also set up this type of trust and can make a gift to a charity as well as bypass capital gains taxes while providing the funds for his children's educations.
Other estate planning attorneys agree that the number of charitable remainder trusts will grow but that most of the trust creators will opt for trusts that provide income to life for their families instead of a period of years. If you or someone that you know is beginning the estate planning process, speak with an estate planning attorney and see if a charitable remainder trust is a good option for you.
In an interesting twist of events this week, court documents show that the late Phillip Seymour Hoffman left his entire estate to his girlfriend, Mimi O'Donnell. Hoffman died earlier this year at the age of forty-six of a heroin overdose at his home in New York City. He left behind his long-term girlfriend, O'Donnell, and three children. Cooper (ten), Tallulah (seven), and Willa (five) were all children of Hoffman and O'Donnell.
Hoffman's accountant stated in court documents that he saw Hoffman treating O'Donnell like a spouse and not a girlfriend. Although they had been together for well over a decade, Hoffman never married her because he simply did not believe in marriage. However, he did fully believe that his girlfriend would fully support and take care of their children. O'Donnell was named as one of the executors of his estate which was estimated at around thirty-five million dollars earlier this year. She already held multiple joint financial accounts with Hoffman that held substantial assets when he died.
Reason for Exclusion
Court documents reveal that Hoffman left his entire thirty-five million dollar estate in a trust to his girlfriend, and he completely excluded his children from the estate. According to his accountant, his reasoning was that he did not want his children seen as "trust fund kids." His accountant recalled conversations with Hoffman a year before his death "where the topic of a trust was raised for the kids and summarily rejected by him." Hoffman decided to go against his accountant's repeated suggestions that he provide for his children in his estate plan.
Planning for the Children
Hoffman was more interested in how his children were going to be raised instead of establishing a trust for each of them. In the only will he ever signed back in 2004, his single wish for his son - the only existing child at the time - was that "it is my strong desire [that] my son, Cooper Hoffman, be raised and reside in or near the borough of Manhattan [or] Chicago, Illinois, or San Francisco, California." The purpose being that he wanted his children to be exposed to the art, culture, and architecture that those cities have to offer.
Potential Pitfalls of the Estate Plan
Hoffman's estate plan is not typical for someone planning for their children, and there are reasons why this route is not the usual case. By placing the entirety of the estate in a trust for his girlfriend, she has complete control over the assets in the trust. There was no language that mandated that the money be used for the children, so O'Donnell could spend every penny and not get in trouble for it. Additionally, her children have no say over when and how much of the money is spent on their needs. Everything is conditioned on the will and opinion of their mother.
Usually, when a person wants to create an estate plan that takes care of their children they will make a trust that names the kids as beneficiaries. The trust can have age limits, distribution limits, and any other guidelines the parent wants on how the money is given to the children. However, because Hoffman did not want his children to have that kind of access to his estate, every time they need money they will have to get the okay from mom first.
Most people feel a sense of accomplishment after drafting and executing an estate plan. Afterwards, it is commonplace to file away the paperwork and promptly forget about the documents. The issue in this is that most people's lives change between the creation of an estate plan, and it will need to be updated accordingly. In fact, recent studies have shown that people at all levels of wealth, including the very rich, have estate plans that are routinely more than five years old.
As some estate planning attorneys have noted, an estate plan is not like a time capsule that should only be opened at a future time. An estate plan needs to be routinely updated as life events occur. You should plan on regularly updating your estate plan every three to five years; however, it should occur more often if major events happen. In some cases, estate plans that have not been updated have led to large, public disputes between family members. These fights have destroyed families as well as the inheritances that they were supposed to have. These situations are even more unfortunate because the vast majority of these disputes could have been avoided if the estate plan was up to date.
Common Excuses Why an Estate Plan is Not Updated
There are a few common reasons why people do not update their estate plan after it has been created. Some of the most common excuses include:
· Avoiding uncomfortable conversations with family
Some people do not like having conversations with their family about financial matters or estate planning. They are afraid that it will cause disputes, or they simply do not like to think about end of life planning.
· Revising an estate plan costs money
Some people think that once an estate plan is done there is no reason to spend more money to revise it. Unfortunately, by not revising the estate plan many more problems can arise.
· People believe that they have more time
Many people simply procrastinate on revisiting an estate plan. Either they believe that they will have more time to do it after a major life event or they just do not feel like putting in the time at the moment.
· People do not realize that an update is needed
A lot of people do not realize when it is that they need to update a plan. By knowing when an estate plan needs to be revised, many people would be apt to look at their plans again.
Reasons Why You Should Update Your Estate Plan
The simple way to think about when you should be revisiting your estate plan is to think about updating your plan when there is either a meaningful change in your life or every three to five years as a rule. A meaningful change in your life can refer to many different things, including:
· Birth or adoption of a child
· Launch of a new business
· Death in the family
· Buying or selling of any major assets
...and anything else that occurs that would be considered a major change.
If no major event occurs, by revisiting your estate plan with an attorney every three to five years you can take advantage of any new tax or estate laws that have been enacted. By applying the new laws to your plan your attorney can ensure that even more of your estate is going to your family and loved ones.
Many people, business owners and everyone else, are concerned about the federal estate tax when creating their estate plans. Although the federal estate tax is 40%, it does not apply unless the decedent has an estate worth over $5.34 million, and the estate amount is doubled if the person is married. However, there are other concerns besides the federal estate tax that a business owner should take into account when creating an estate plan.
Other State and Federal Taxes
The estate tax should be the least of a business owner's worries when creating an estate plan. Before an estate tax is even considered other state and federal taxes are first deducted from a business and the estate. The federal income tax rate on an equity owner of a business can top out at 44.6%. State income taxes compound the issue by charging even more on an equity owner's share. A business owner should first try and minimize the damage done by income taxes on his estate before dealing with the possibility of an estate tax.
Before creating an estate plan that involves a business it is important to consider how issues that arise during life could affect the business after a death. For example, after the announcement of his cancer and subsequent death of Apple founder Steve Jobs the stock in the company plummeted. Another issue that may arise is the founder of the company spending all of the equity for senior and long-term care. These and other risk management issues must be addressed first before any kind of effective estate plan can be enacted.
A business needs to have a solid plan in place for asset and stock distributions after the death of an equity owner. Loss in share value can occur from issues in probate, problems in the boardroom, and the simple passage of time. If the distribution of wealth is anticipated and prearranged in the estate plan less of the wealth will be lost in the actual distribution.
A business owner needs to provide liquidity in his estate plan for the continuation of the business. After the death of an owner the business will still have bills to pay, creditors to appease, benefit plans to fund, and need money to supplement any lost revenue. When liquidity is not arranged in the estate plan assets are usually sold at a discount in order to quickly pay the bills. However, if it is planned for in the estate there will be plenty of liquid assets to pay off all debts and still have distributions available for the heirs.
One of the largest hidden problems for a business owner when drafting an estate plan comes from the family. Sometimes the biggest predator to the business is a family member who got the least in the rest of the estate. A business owner can avoid this issue if the estate plan establishes a solid post-death business transfer to the correct heirs.
In late 2012, the government threatened to make steep cuts in the levels of exemption for gift and estate taxes. At the time, the gift tax exemption was set to drop from $5.1 million to $1 million, and the top tax rate was to rise from 35% to 55%. As a result, many families hurried to create trusts that would protect their assets from the cuts and did so very hastily. This is because assets placed in certain types of trusts are not affected by gift and estate taxes. However, Congress prevented these cuts, but by that time many trusts had been created with cook cutter documents in order to be executed quickly. Now, many creators of these trusts are going back and trying to provide more detail to the trustees about how they want the trusts to benefit their heirs.
Letter of Wishes
The trust creators are using "letters of wishes" which have long been around in the world of trusts and estates. These letters are not binding, but they typically reflect the intention of the trust creators in more detail than what was written when the trust was first formed. These intentions are usually in regard to priorities for doling out distributions, for example like getting for education or a new home.
The Growing Importance of Letters
Since the scramble at the end of 2012, these letters of wishes are growing in importance for the world of trusts and estates. Trusts created at the end of that year look very similar to one another. Because of the cookie cutter format, most trusts are broadly worded and give the trustees incredibly wide latitude in their roles. Normally when trusts are set up there is time to finely tune and tailor documents that specifically detail the trust creator's wishes. Additionally, broad parameters can be instituted for the trustees in order to guide them about the trust's intent. Paying for specific expenses or distributing funds to a certain level are common details that were left out of the rushed trusts at the end of 2012.
Now, families that created the simple, broad trusts have had the time to consider in detail how they want the trusts to be run. For example, one family placed a vacation home in a trust without further comment. Using a letter of wishes, the creators can now explain that they want the trustee to maintain the home for future generations to enjoy, and not to sell the house in order to make distributions to heirs.
These letters of wishes are now being given more consideration since the rush of trusts in 2012. When a trust is created with generically worded documents, a letter of wishes is given greater weight and can potentially affect how the trustee distributes funds. Trustees are supplementing the original trust documents with the letters for guidance in order to have a better idea about the wishes of the trust creators and to ensure that their wishes are being followed. If you or someone that you know created a trust at the end of 2012, consider reviewing the trust documents and writing up a letter of wishes. That way your intentions can also be followed the way that you had wanted.
Parents who are now at retirement age think that they have done a great job discussing finances and estate plans with their children. However, their children think the exact opposite about the situation. According to a new study done by the Fidelity Investments Intra-Family Generational Finance Study, this is the new generation gap.
The key point in the study is that many parents are failing to have critical conversations about their finances and estate plans with their grown, adult children. For the baby boomer generation, money and estate planning are taboo subjects. However, the same study showed that having this important conversation with their children gave parents an increased peace of mind and reduced anxiety.
Key Findings in Study
Six key highlights can be pulled from the study about the new generation gap in families. These points include:
· Neither generation feels comfortable talking to the other about money
Only around half of parents and children feel comfortable discussing finances with one another
· Nearly 64% of parents and adult children disagree on the best time to discuss estate planning
This includes retirement plans, wills, other estate plans, nursing home care, and final wishes. Most parents want to wait until after retirement, and most children want to discuss it before.
· In many families, serious estate planning discussions are not happening at all
Around 40% of parents have not discussed any finances or estate planning with their children. Parents mainly do not want their children to rely on their inheritance, and children mainly do not want to upset both parties by bringing it up.
· Parents think that they are doing a better job at explaining their finances and estate plans than they are
A full 60% of parents who have had conversations with their children think that they had full, detailed conversations about their plans. However, only 42% of their children believed the same thing.
· Many parents do not think that they will need help from their adult children, but lots of the children think that they will
The baby boomer generation is a very independent group. A full 96% of parents do not believe that they will need financial assistance from their children, but almost 30% of children think that they will need to help their parents at some point. Additionally, only 6% of parents think that their children will need to provide elder care for them as they age, but 43% of children think that they or their siblings will be providing care.
· Children may be more nervous about their parents' finances and estate plans than is necessary
Over 56% of children believe that their parents are worrying constantly about their finances, but only 23% of parents worry about their financial future more than a few times per month.
How to Fix the Generation Gap
The main takeaway for parents from this study is that if you are nearing retirement age and have adult children you need to have the estate planning talk. Discussions need to be had that involve serious, detailed conversations about finances, estate plans, and any possible concerns. It should also not be a one and done discussion. Have these talks periodically about different aspects of your estate plan. Make sure that all of your children know your wishes and that all the documents are in place. Although the first conversation may be difficult, once you break through the initial barrier of having the talk you will have greater peace of mind and better estate plans in the long run.
The late lead singer and guitarist of The Velvet Underground, who later had a decades-long successful solo career, was the man who famously sang "Hey babe, let's take a walk on the wild side." He seemed to take that lyric to heart when it came to his estate planning, and his estate is worth more than $30 million.
Lou Reed passed away from liver disease on Oct. 27, 2013 at the age of 71. Recent filings in probate court in Manhattan show that since his death less than a year ago his estate has already earned another $20.3 million. This income has come from his copyright, publishing, and performance royalties as well as other deals that were put together by his longtime manager, Robert Gotterer. Mr. Gotterer is also one of the co-executors of Lou Reed's estate.
Details of Lou Reed's Estate
Mr. Gotterer recently filed motions in probate court, reporting on the income earned in the estate. All in all, $10 million in assets are set aside for Reed's wife and sister as well as another $500,000 set aside for his mother's care. Reed's wife and sister will split the residual of the estate 75% and 25%, respectively, with real estate totaling over $9 million going to his wife alone.
And despite the enormous wealth of his estate, Reed's executors are only asking for $220,000 in fees. Compared to Michael Jackson's executors, who are taking 10% of most business deals (including the $250 million deal with Sony), Reed's executors are being paid practically nothing. But why do we know all of the details of his estate, and why is this plan taking a walk on the wild side?
Reed's Estate Plan
The reason that Lou Reed's estate is public knowledge is because Reed relied on a will that he signed in 2012. The will was thirty-four pages long, but it was still only a will. Because Lou Reed did not use a revocable living trust for his plans the estate must go through full probate in the court system, and that means that everything within his estate is made public. The New York Post is breaking news about every piece of his estate that becomes public knowledge, and media outlets across the world are commenting in their own stories about the details of Reed's estate.
Unfortunately, if Reed had used a revocable living trust and transferred his assets into the trust during his lifetime all of this information would have been kept secret from the public. No one would have the details of his estate's worth, know who gets what, or even know how much his executors were getting paid for their time. In other words, trusts keep your estate private, while wills must go through probate court - a fully public process.
While the common person may not need to worry about the press leaking the details of their estate, there are plenty of other reasons why you should strive to avoid probate court. Besides being public, probate court is also expensive, time consuming, stressful, and often causes family fights. These fights break out because it is much easier to file challenges or objections in probate court than to a private trust. Additionally, it is much simpler to leave instructions, conditions, limitations, or suggestions in a trust document. So while Lou may have taken a walk on the wild side with his estate planning, we can take away the importance of avoiding probate court and using private estate planning documents in our own estates.
People entering retirement age are now facing an unexpected hurdle - dealing with the pitfalls from their parents' reverse mortgage. The same loans that were supposed to be helping their elderly parents stay in their homes are now pushing the children out of them. In fact, the same situation is playing out all across the United States, where the retirement age children of elderly borrowers are discovering that their parents' reverse mortgages are now threatening their own inheritances.
Reverse Mortgage Schemes
A reverse mortgage is a financial tool that allows people age 62 and older to borrow money against the value of their homes. This money does not need to be paid back until they move out of the home or die. Unfortunately, many children of parents who invested in reverse mortgages are discovering the issues that arise with them.
Under federal law, survivors of a reverse mortgage are supposed to be given the option to settle the loan for a percentage of the full amount. Instead, reverse mortgage companies are now threatening the heirs with foreclosure on the homes unless they pay in full. In fact, some reverse mortgage lenders are foreclosing in a matter of weeks after the borrower dies, and it has led to a rash of lawsuits in state and federal courts against reverse mortgage lenders.
In other cases, the reverse mortgage lenders do not move to foreclose but instead plunge the heirs into a bureaucratic quagmire if they want details about how to save their family home. The lenders make it nearly impossible to figure out what the rules are in order to pay back the loan, and they wait for the heirs to either give up or run out of time. Another tactic is where lenders do offer the heirs a chance to pay a percentage of the value of the house, but since the time that the reverse mortgage was taken out the overall value of the house has increased.
An Increasing Problem
According to various elder care and estate planning leaders, reverse mortgage lending issues are on the rise in the United States. Tens of thousands of survivors of reverse mortgages are now attempting to beat the ploys of these lenders. Unfortunately, this problem will only increase over time as more Americans are reaching their elder years and are turning to their homes for money. The combined debt of those ages 64-73 is now higher than any other age group, and right now 13% of all reverse mortgages are underwater.
For heirs, the main issue is that few know about the set of reverse mortgage rules set forth in the Department of Housing and Urban Development. While the department vets reverse mortgage lenders, it does not provide a list of firms in violation of the rules or that have been penalized.
What Heirs Need to Know
According to the rules set forth by the Department of Housing and Urban Development the lenders of reverse mortgages must offer heirs up to thirty days to decide what they want to do with the property. Additionally, they must give up to six months to arrange financing. Most importantly, the rule states that heirs are allowed to pay only 95% of the current fair market value of the property. Hopefully, by making the rules and pitfalls of reverse mortgage lending public more parents and heirs can avoid the problems that come with them.
Planning for retirement can be difficult; however, if you also plan on leaving money to heirs in your estate plan the process can be even more complex. Deciding which financial accounts should be tapped first for retirement funds and which should be left for inheritance purposes is a tricky question. The answer is often determined by your own financial needs for retirement as well as the needs of your heirs, but you can expect the following to occur with your heirs with each of these retirement accounts.
As a general rule, a Roth IRA account is a great asset to leave for inheritance. When inherited, Roth distributions are tax-free for your heirs. If planned properly, your heirs can take distributions from the account over the course of their lifetimes and simultaneously leave the bulk of the principal from the account to continue to grow in interest. Additionally, the federal estate tax exemption is now at $10.6 million for a married couple. That means that most Roth IRA accounts that are inherited will be both income and estate tax free.
However, there is one issue that was recently decided by the courts regarding retirement accounts and inheritance. If your heir inherits your Roth IRA and then goes bankrupt your bequeathed Roth IRA is subject to their creditors. You should take the time to explain to your heirs that your retirement accounts are not shielded from their bankruptcy.
Stocks, Bonds, and Mutual Funds
Other types of retirement assets such as stocks, bonds, and mutual funds are good accounts to leave for inheritance if they have greatly increased in value over time. The reason for this is called the "step up" in cost basis. Cost basis is the price of an asset (like a stock or bond) when it was first purchased. This is the price that all increases or decreases in value are measured by. When you sell an asset, the capital gains taxes are determined by the amount of value that your stock or bond has increased. However, if you pass along those assets to your heirs, they get to "step up" the cost basis to the value of the asset on the day of your death. Therefore, when your heirs decide to sell the stock or bond, the tax break on capital gains will be significant.
One common idea for funding retirement, while still leaving assets for heirs, is to focus on selling stocks, bonds, and mutual fund assets that have seen the smallest gain or loss. That way the assets that will have the largest tax breaks are reserved for your heirs. Also, keep in mind when determining which assets will go to heirs that annuities inherited by non-spouses and U.S. savings bonds do not get the "step up" in cost basis.
IRA or 401(k?)
In terms of value, the costliest assets to leave to heirs are tax-deferred retirement accounts such as an IRA or a 401(k). These accounts get no step up in cost basis like stocks, bonds, and mutual funds. Additionally, they are distributed at ordinary tax rates for your heirs, unlike the Roth IRAs.
If you are planning on leaving money to your heirs as well as to charitable causes, consider leaving the tax-deferred assets to charity. Charitable organizations are not taxed on those types of assets, and the tax-free or stepped up assets can then be left for your heirs.
If you have accrued some wealth in your lifetime, have a significant life insurance policy, or simply want to look out for the best interests of your children the idea of incorporating a trust into your estate plan may have been suggested. A trust fund places assets into trust, run by an appointed trustee who makes decisions about the investment and distribution of trust assets to its beneficiaries. However, smaller mistakes can be made in the creation of a trust for your children that can cause major problems after you are gone.
Carefully Consider the Trustee
Naming a trustee for a trust fund for your children is different than naming a custodian for their physical care. Consider appointing someone who has financial knowledge and can make wise decisions regarding the trust assets. Also consider naming co-trustees to the fund, thereby creating a set of checks and balances that can preemptively avoid any type of trust abuse.
Be Clear about the Goals of the Trust
When thinking about the smaller details of a trust it is important to be very clear in your wishes. How often do you want trust assets distributed? Yearly, every five years, or at the trustee's discretion? Do you want your children to reach a certain age first or reach some other type of goal? Do you want the distributions to be tied to future earnings so that the children that need more of the funds get more? By covering each issue clearly in your estate plan you can avoid issues arising later down the road.
Check Your Beneficiaries
This means more than checking to see that all of your children are named as beneficiaries to the trust. Most parents assume that their life insurance and retirement accounts are automatically going to their children, but very few parents double check to make sure that their children are listed as the beneficiaries on those accounts. Also, consider listing every single beneficiary of the trust as beneficiaries for the other accounts to ensure that everyone is legally entitled to the proceeds. This can eliminate any issues or ambiguity if only one child is listed as a beneficiary of those accounts but was just expected to make distributions to remaining children. You can also consider naming the trust as the beneficiary to your other accounts, thereby ensuring that the money will be distributed properly through the trust channels.
Keep Up to Date on All Other Estate Planning Documents
In order to ensure that everyone is accounted for in the trust fund and other estate plans, occasionally check all of your estate planning documents. This is especially important after any major life events such as a marriage, divorce, or the inclusion of other children. By keeping all documents up to date you can take care of any problems in the estate plan before they happen. Make plans to regularly update the will, check beneficiaries, and ensure that everyone listed in your estate plan is still alive and able to take part in the trust that you have created.
Many people are uncomfortable with the process of estate planning. As a result, people are not always completely forthcoming with their estate planning attorney or do not think through all aspects of their plan. If you are just starting to draft your estate plan or are thinking of revising your current documents, here are some questions to consider that can make the process easier.
· What are your personal goals? Professional goals?
Establishing personal and professional goals can give an idea of how much you will need to live comfortably in your lifetime and how much will be left for your heirs. If you plan on retiring early or need more money for personal, financial, or health reasons an attorney can help you structure your estate plan accordingly. Establishing goals is also a good way to indicate to your heirs what they should expect to receive from your estate.
· What would you like to achieve with your wealth?
Knowing what you want to do with your money can also help with estate planning. Are you planning on investing in a post-retirement business, do you want to spend most of your wealth before you die, or do you want to set aside a significant amount for your heirs?
· What keeps you up at night about your money?
Knowing your concerns about your current estate can also help your attorney plan accordingly. If you are unsure about how to use money in retirement and have some left for your heirs they can help you structure a plan, and if you don't know the best way to leave money for your heirs an attorney can tell you what your options are.
· What do you want for your children? Parents? Other family members?
Everyone wants their loved ones to be happy, healthy, and taken care of. However, you need to think carefully about how exactly you want your estate to help. Do you want your loved ones receiving lump sums of money after you are gone, or would setting up a trust be more prudent? In the case of you passing before your parents do you want part of your estate to be put towards their senior care?
· Who have you considered for the role of executor of your estate? Why?
What you should be asking yourself when appointing an executor is who knows best about my estate wishes and has the ability to see them through? It could be a spouse, child, or family friend. You can also appoint someone outside of your close circle like an attorney in order to avoid any personal or familial conflicts that could arise.
· Who have you considered for the role of trustee of your various trusts? Why?
The trustee(s) to any accounts set up for your estate should be knowledgeable about your financial matters as well as your wishes for those assets. You can appoint someone who is close to your family and knows the intimate needs of the beneficiaries, or if you can appoint a neutral third party who will make decisions based on what is best for the trust.
· Who have you considered for the role of custodian for your children?
This person will be in charge of raising your children, and it should be someone who can effectively communicate with the executor and any trustees for your estate to ensure that your children are properly cared for in the estate plan.
· Do your family members get along? If not, why?
If your family does not get along, you need to discuss with your attorney how this may affect your estate plan. Beneficiary, executor, trustee, and other designations can be greatly affected if there is discord in your family. This may mean that you include a letter in your estate plan explaining your decisions, or it may mean restructuring your plan entirely to avoid any further strife.
In the last post we discussed the first five of ten essential documents that should be considered when estate planning. Those included a basic will, beneficiary forms, a financial power of attorney, medical power of attorney, and a living will. Here are the last five documents that should be included in your estate planning process.
6. Inventory of assets
Every financial planner has a different way of structuring and explaining your assets. Some planners give you a small book detailing every complex facet of your current financial status. Others will hand you a page with a simple chart or graph that sums up your entire account, and a lot of other financial planners fall somewhere in between. You should talk with your financial planner about getting documents that explain your assets in a way that your executor and heirs will be able to understand, and include it with your other estate planning documents.
7. List of contacts
Providing a list of contacts can greatly help your executor, attorney, and heirs. The list should include the contact information for any personal advisors such as bankers, lawyers, doctors, and tax advisors. You should also list all of your utility providers and any other service that is done for you or your home. This can include dog walking, lawn care, pest control, and others. Finally, provide the contact information for anyone that will be involved in the estate plan so that they can all be notified.
8. Guide to digital assets
As discussed in previous posts, estate planning now includes digital assets. Online bank accounts, social media pages, and the like are all digital assets. Provide a list of accounts, user names, and passwords so that your executor will have access to your digital assets. The list can be a hard copy, or you can opt for an online password storage service and give your executor access to that account.
9. Funeral arrangements
Making all of your funeral arrangements beforehand can greatly relieve the stress on your family from your passing. Decisions about cremation, burial, funeral home, memorial services, pallbearers, and the like can all be predetermined by you in your funeral arrangements. If you expect any donations to be made in your honor you can also decide which charities should get them, as well as how much they should each receive.
A trust is an estate planning tool that allows assets from your estate to bypass probate proceedings and provide for your loved ones. Trusts are a great tool to provide financial stability for minor children, spouses, and anyone in your family with special needs. You must also name a person as trustee who will make decisions regarding the trust money such as investment and distributions.
Not everyone will need every document in this list for their estate planning needs. However, you should go over all of them with your estate planning attorney. These ten essential documents should cover almost every aspect of your estate plan and ensure that your wishes will be fulfilled as you want them in addition to making sure that your loved ones will be taken care of after you are gone.
Most people do not like to talk about estate planning. Some do not want to think about the idea of death, others do not want to discuss financial or personal matters, and more simply procrastinate. However, once you do make the decision to set up your estate plan the options and paperwork can seem daunting. Here are ten basic, essential documents that you should discuss with your attorney about including in your estate planning process.
1. Basic will
The will is the document that most people think of when they consider estate planning. A will, in its most basic form, states who gets what when you pass. Family, friends, trusts, charities, and just about anyone else can be named as an heir or beneficiary in a will. You can also name a guardian for minor children in a will, and you should appoint an executor for the will, as well. If you do not have a will the court decides who gets what in your estate and a judge decides where your children will live.
2. Beneficiary forms
Almost every retirement account and insurance policy names a beneficiary in the case that you die while in the possession of the policy or account. Most beneficiary forms are mandatory, but you need to check each account and update the beneficiary if any major life changes like marriage, divorce, or children have occurred. You should also make copies of all beneficiary forms, and make sure that they are included in your estate planning documents.
3. Financial power of attorney
A power of attorney form names a person to make specific types of decisions about your well-being in the case that you are no longer able to do so yourself. A financial power of attorney form designates a person to make all financial and legal decisions on your behalf. A financial power of attorney form can be customized to the level of decision making power and types of decisions that the holder can have.
4. Medical power of attorney (Healthcare proxy)
The medical power of attorney form is similar to the financial power of attorney. The difference is that the person named to the medical power of attorney, otherwise known as a healthcare proxy, makes all of your medical decisions for you if you are unable to do so yourself. An important detail within the medical power of attorney is to include a HIPAA form that gives the person appointed as your healthcare proxy access to your medical records and information so that better decisions can be made about your care.
5. Living will
Also known as an advanced medical directive, a living will details all of your decisions regarding end of life wishes and long-term medical care. You can customize a living will to a particular illness or types of procedures that you do or do not wish to have. If you foresee issues arising within your family about your living will for personal or religious reasons consider explaining within the living will why you chose those directives. Whoever is appointed in your medical power of attorney should follow the decisions set out by you in your living will.
The next post will continue with the last five documents essential to the estate planning process.
The loss of a parent is a heartbreaking experience, and discovering that your parent had a large amount of debt can add even more stress to the situation. Usually, creditors have a certain period of time in which to make claims against your parent's estate. In most cases, you are not responsible for the debts of your deceased parent and if there are not enough assets the debt dies with them; however, in certain circumstances you can be on the hook to pay for what your parent left behind. Responsibility for debts is typically determined by the type of debt, the assets available, and where your parent resided.
Assets can be protected from creditors even if your parent passed on with debt. If you are listed as the beneficiary of a retirement account or life insurance policy that money cannot be touched by creditors. However, other assets in the estate may have to be sold in order to pay off the debts of creditors. This can greatly reduce or eliminate your inheritance from your parent's estate.
Credit Card Debt
In most cases, you are not responsible for the credit card debt of your parent. However, if you are a co-signor for your parent's credit cards then you can be held liable for the debt. Credit card companies are considered low priority creditors. That means that they fall behind other lenders, funeral care costs, and tax agencies. If you are responsible for paying off your parent's credit card debt, typically the credit card companies will agree to negotiate a lower payment because of their low priority.
Medical Care Debt
Deciding who is responsible for unpaid medical bills is separated into two categories: those who were on Medicaid and those who were not. If your parent was on Medicaid then you are not responsible for the debt. Under Medicaid rules, the only major asset that a person can possess and qualify for Medicaid is a home. The state can place a lien on the home to recover payments, but that money will come from the estate.
If your parent was not on Medicaid and had unpaid medical bills, state law determines whether or not you are responsible for the debt. The estate must first try to pay off all outstanding medical bills from estate assets. If the debt remains, "filial responsibility" may mandate that you pay off the remainder. Almost thirty states have filial responsibility statutes that require adult children to pay off the remaining debt if the estate cannot.
If you inherit your parent's home and it comes with a mortgage you may be responsible for the underlying debt. If the mortgage exceeds the value of the home you can consider foreclosing in order to pay off the mortgage on the property. After the foreclosure sale if mortgage debt still remains the bank can go after the estate for the difference. If you wish to keep the inherited home then you are responsible for making all mortgage payments on the home going forward.
You are not responsible for paying off the taxes of your parent. Government agencies are usually top priority creditors and they can take from the estate to pay off outstanding taxes, but they cannot go after you for any remaining balance if the estate is unable to pay it off in its entirety.