Many people believe that estate planning is only for the elderly or those at retirement age. However, there are some documents and tools within estate planning that should be considered at a much earlier age. If you have a child that is about to leave for college or go on a gap-year trip there is one last thing that you should do as you prepare for the separation: ask your child to sign a durable power of attorney and health care proxy forms.
Why These Forms are Important
Estate planning forms like a durable power of attorney and health care proxy forms are important for a number of reasons. Without them, most states will not allow a parent of an adult child to make health care decisions or manage money for their kids. This applies even if the parent is paying for college, claiming the child as a dependent on tax returns, and still covers their kid for health insurance. Without these estate planning forms if your child is in an accident and becomes disabled, even temporarily, you would need a court order to make decisions on their behalf.
The risk for these possibilities is very real. Accidents are the leading cause of death for young adults, and over 250,000 people in the United States between the ages of 18 and 25 are hospitalized with nonlethal injuries every year. Without these documents, even finding out about your child's medical condition can be a challenge, let alone gaining the authority to make medical choices on their behalf.
Why Some Children Do Not Want to Sign
A few different reasons have routinely been cited for why a child is hesitant to sign a durable power of attorney or health care proxy form. One big reason is because at this age, adult children are finally attempting to become independent for the first time. Most kids think that they know better, do not want their parent's help, or want to try to do everything for themselves. Another major reason why children do not want to sign these documents is because as a power of attorney a parent can gain access to their child's grades.
Different Ways to Approach the Situation
Even though at this age most children believe that their parents are clueless, there are ways to approach the subject of estate planning forms and becoming your adult child's proxy. Gentle persuasion is usually the most effective technique. Explain that these documents can help in case of an emergency, wiring money to a bank account, and signing forms like an apartment lease when the child is gone.
Another tactic is to make the forms a condition of your child's education or trip. In exchange for signing the estate planning documents, the parent agrees to help pay for college or time abroad. A final way of approaching the situation is to have an experienced estate planning attorney draft the forms as a back-to-school package. You all sit down as a group and have the attorney explain the significance and importance of the documents to your child.
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Many people believe that estate planning is only for the elderly or those at retirement age. However, there are some documents and tools within estate planning that should be considered at a much earlier age. If you have a child that is about to leave for college or go on a gap-year trip there is one last thing that you should do as you prepare for the separation: ask your child to sign a durable power of attorney and health care proxy forms.
A new show premiered on the Reelz Channel this week called Celebrity Legacies, a documentary series highlighting the estates of famous deceased celebrities. The show explores a different celebrity's estate plan every week, discussing their legacy, estate, and problems that arose after the celebrity's death. It also explains how a celebrity's estate can continue to increase after their death and why some deceased celebrities still make the "highest paid" lists years after they are gone.
Premiere Episode: James Gandolfini
The premiere episode of the series focused on the estate of James Gandolfini, and subsequent episodes include famous names like Anna Nicole Smith and Jim Morrison. Gandolfini died unexpectedly of a heart attack at age fifty-one in 2013 while on vacation in Italy with his son. The actor, known primarily for his work on the television show The Soproanos, left behind two children from two different marriages and a messy, largely unfinished estate plan.
Celebrity Legacies provided legal and financial commentary on the outcome of Gandolfini's estate. Done as a "Band-Aid" measure after the birth of his daughter, Gandolfini relied primarily on his will for his estate plan instead of placing his assets in something more secure like a revocable living trust. As a result, his estate and the affairs of his family came under public scrutiny when his assets became public record in New York's probate court.
Gandolfini's estate was estimated between $70 million and $80 million at the time of his death, and it was divided amongst his family members as well as some close friends. However, he did not contemplate what he was going to do with his Italian properties or consider whether his children would be mature enough to handle their massive inheritances when they come of age at twenty-one.
Celebrity Legacies as a Teaching Tool
One of the great things about this new show on the Reelz Channel is that it can serve as a teaching tool for its viewers. Celebrity estate stories can be used to educate people, including families and professionals, about how celebrity errors in estate planning can help them avoid issues in their own plans. Most people think that celebrity estates could never be relatable to their own situations, but in reality many people make the exact same mistakes in their own estate plans. Regular families routinely face sibling squabbles, public court battles, and other issues that also arise in celebrity estates.
Gandolfini's estate taught many important lessons for viewers in the premiere episode of Celebrity Legacies. He was only fifty-one years old when he died, and Gandolfini started planning his estate before he left for vacation - intending to finish when he returned. Like Gandolfini far too many people put off estate planning, and it can have tragic consequences for the rest of the family. His incomplete estate plan could have been avoided and all of the complications, publicity, and estate taxes could have also been sidestepped if he would have stopped procrastinating.
As obvious as it may seem, for most people it is not. In fact, as many as two-thirds of the U.S. population has neglected to fill out even a simple will. Hopefully, shows like Celebrity Legacies will highlight the dangers of putting off estate planning and help viewers avoid the same fate.
In the first part of this article the importance of planning for pets in the estate planning process, common reasons why pet planning often fails, and the documents needed for proper pet planning were discussed. However, there are other issues that must also be reviewed when including a pet in the estate planning process.
Issues to Consider When Planning for a Pet
Regardless of the document(s) you choose to develop your estate plan for your pet, the following issues also need to be considered for their wellbeing and needs. By clearly detailing every one of the following aspects you can be sure that your pet will be properly cared for in your estate plan.
Pet Owner: It is important to establish who the true owner of the pet is because a pet is considered personal property. The issues that arose with pet ownership after Hurricane Sandy are another good example of why it is important to establish ownership of a pet.
Pet Guardian: The pet guardian can be a person or organization. The guardian typically keeps the pet and cares for it under the instruction of the will or pet trust. If an organization is the guardian then instructions about adoption should be included in the estate plan.
Funding: Providing funding for a pet trust or pet provision in a will is highly recommended for a pet in the estate planning process. The funds can be a percentage or fixed amount from the estate and can come from bank accounts, retirement funds, insurance policies, or from the selling of personal items in the estate. You should include in your consideration for funding the possible future expenses of the pet as it ages, level of comfort you wish the pet to have, and whether you want to include compensation for the pet guardian.
Remainder Beneficiaries: It is vitally important to consider who or what will receive the remainder of the funds set aside for your pet after it dies. If a remainder beneficiary is not set up the court will decide who gets the rest of the funds in the pet account. Most people designate the remainder of the pet trust to go to families, charitable organizations, or the pet guardian. Another important consideration if you are leaving the remainder to multiple beneficiaries is to designate the amount in percentages rather than whole numbers because it is incredibly difficult to figure out ahead of time how much will be left in the pet account.
Pet Description: This is done for the protection of the pet to ensure that the pet guardian does not destroy the animal or replace it with another after it dies to illegally extend trust distributions or benefits.
Instructions for Care: Detailed instructions help ease the transition for the pet from its owner to its new guardian. However, the instructions should also allow the pet guardian some discretion in care.
Keeping Pets Together: If more than one pet is being planned for consider adding a provision in the will or pet trust that keeps the pets together. Keeping pets together is not automatic, and it can have a significant impact on who will agree to be pet guardian.
Including Present and Future Pets: All pets should be included in the estate planning process, including those not yet owned. The care for all present and future pets can be included in the estate planning process. Using the term "all of my pets" in the documents is the best way to make sure this is accomplished.
Legally, pets are considered personal property of their owners, but for many people their pets mean so much more than any piece of furniture or inanimate object. They can be a person's best friend, companion, and family. When a person begins the estate planning process the pets need to be addressed, as well.
For many people, the wellbeing of their pets is not a concern in the estate planning process, and unfortunately it can lead to the abandonment or euthanizing of the animal once the owner is gone. The only way to protect pets after the death of the owner is through legally binding estate planning documents. Allergies, conflicts with other pets, and exclusion of pets in rental agreements are the most common reasons why informal promises made by friends and family members to take care of a pet often fail.
The idea of legally enforceable documents that ensure a pet's wellbeing in estate planning is a relatively new concept. Mockery in the press is also another reason why people do not seriously consider providing for pets in an estate plan, even if the remainder of the funds is set to go to an animal charity or other worthy endeavor. The most well-known example of this was Leona Helmsley, who left millions for her dog, Trouble, in a pet trust. Sadly, she was ill-advised when creating the trust, and her wishes were never fulfilled.
Legal Documents for Pet Protection
There are two main documents to consider when planning for the future of your pet - a will and a pet trust. Each document has its advantages and disadvantages, so the best option is to discuss with an estate planning attorney what the best choice for your estate should be.
Will: A will is valid after death and serves to distribute property. However, there are many pitfalls to relying solely on a will for a pet's wellbeing. Instructions in a will are not enforceable, and disbursements cannot be made over time. In addition, the lag time between when a will is read and disbursement of property can also create issues. Changes to a will are also in a court's discretion, so if a judge does not think that the pet deserves a disbursement the document can be changed. Finally, in states without pet trusts any disbursement to a pet in a will is considered "honorary."
Pet Trust: A pet trust enlists a pet trustee who distributes funds for the pet's wellbeing and ensures that it is being properly cared for per the previous owner's instructions. This document has many advantages over a will. Pet trusts are valid during and after the owner's life and a trust can preempt problems in the estate. Control over the disbursement of funds is also better under a pet trust. Pet trusts also allow for an investment trustee or trust protector for the proper investment and disbursement of funds. Finally, a pet trust allows for provisions about incapacity, and it can instruct that the pet goes with the owner to a nursing home or other care facility.
Part two of this article will discuss the various issues that need to be contemplated concerning the wellbeing of your pet during the estate planning process.
When many business owners talk about business strategy they often refer to financing, expansion, partnerships, marketing, and the like. However, many business owners fail to take into consideration the question of continuity and business succession. According to the U.S. Small Business Administration, over 70% of all small business owners do not have a business succession plan integrated into their other estate planning documents.
Why You Should Create A Plan Now
Many small businesses are family owned, and as a result they do not feel the need to be so formal with a succession plan. However, this can be a huge mistake and many businesses have crumbled after an owner dies or leaves because of the lack of a plan.
Another reason why business owners do not create a business succession plan is because, like writing other estate planning documents, the process makes them feel uncomfortable. Keep in mind that creating a plan is necessary to ensure that the business will continue in line with your goals. A succession plan can also protect your employees, their retirement plans, and your future, as well.
Creating the Plan
At a minimum, the business succession plan should include details about the transfer of management and ownership of the business. Management and ownership planning can include:
· Development, training, and support for successors
· Delegation of responsibilities and authority to successors
· Identification of outside advisors
· Retention of key employees through compensation, benefits, etc.
· Coordination between who will own and who will manage the business
· Consideration of transfer during the lifetime of the owner
· Consideration of the best interests of the business and owner's family
The last point is particularly important for the owners of small businesses. Many small business owners and successors have difficulty separating personal preferences and what is best for the business when creating a succession plan. You must treat the family business as what it is, a business, and if you need to speak with professional advisors about the succession plan then you should do so.
Benefits of Creating a Succession Plan
One benefit to creating a business succession plan is to avoid probate. All assets, including business assets, must go through probate and the courts unless arrangements are made beforehand. Another benefit to creating a business succession plan is to maximize potential tax considerations for your estate and your business.
Your business may continue to grow in between the time that you create a business succession plan and when you pass away. The taxable estate will include the increased value unless it is planned for accordingly. Options for avoiding probate and increasing tax benefits include an ILIT, GRAT, GRUT, family limited partnership, or family limited liability company.
An ILIT is an irrevocable life insurance trust that can provide liquidity for a business during probate. The funds from the life insurance trust do not pass through probate and are available immediately to help with the costs of business. The GRAT and GRUT are types of trusts that you can transfer the assets of the business into for successors while still maintaining a source of income for yourself. Any appreciation in business value is not subject to probate and is shielded from estate taxes. The final option is a family limited partnership or a family limited liability company. Using these in a succession plan can allow the owner to transfer business assets to the successor without probate and can even discount some assets for gift tax purposes.
A trust, in particular an incentive trust, can be a very useful tool for someone who wants to provide for his heirs but is not sure that the heirs can use the inheritance constructively. A trust can encourage personal responsibility and accomplishment for the beneficiaries; however, it can also cause resentment on the part of the beneficiary towards the trustee. This usually occurs because the beneficiary is limited in the amount of funds that he can access, and the third-party trustee is making determinations about whether a distribution should be made.
The best way to minimize friction between the trustee and beneficiary is to make the terms of the trust as explicit as possible, but there will always be some level of interpretation on the part of the trustee. Another way to lessen issues between a beneficiary and a trustee when there is a dispute is to use a trust protector.
A trust protector is a usually a person who is close to the beneficiary. Most trust protectors are other members of the family, a close family friend, or other advisor who has an intimate knowledge of the family's circumstances. Using their knowledge of the family, the trust protector can help the trustee make difficult decisions regarding distributions and if allowed can even overrule the trustee.
Role of the Trust Protector
Ideally, if a trust protector is used the roles, responsibilities, and limits on power will be established in the trust document. For example, the trust creator could specify that the trust protector has the ability to overrule the decisions of the trustee on matters of distributions, or the trust protector could be authorized to intercede if he believes that the trust funds are not being invested properly. The more specific that the trust creator can be in describing the duties of the trust protector, the easier the working relationship between the trustee and trust protector will be.
The trust protector's main role is to serve as an arbiter between the trustee and beneficiary when a dispute arises about distributions of trust funds. The trust protector can interpret the conditions of the trust based on his knowledge of the family and wishes of the trust creator. Although the trust protector may have a closer relationship with the beneficiary, it does not mean that the protector will side with him on every decision.
Another role of the trust protector is to adjust the expectations of the trust with any changes in tax or estate planning law. A trust protector can work with the trustee to decide how the trust should be updated to maximize the tax benefits and then make distributions in addition to investment choices accordingly.
The one role that a trust protector does not play is as the beneficiary's advocate. A trust protector is not there to work for the beneficiary or against the trustee. The two roles are supposed to work in concert with one another to ensure that the trust's conditions are being followed according to the creator's wishes given the economic and familial circumstances while also giving the beneficiary what he is due.
In an oral ruling last week a probate court judge ruled in favor of Shelly Sterling selling the Los Angeles Clippers against Donald Sterling's objections. Judge Michael Levanas ruled in a probate Los Angeles Superior Court case that Shelley has the authority to sell the professional basketball team to businessman Steve Ballmer, who has agreed to purchase the team for $2 billion.
Appellate Proof Ruling
The judge's ruling took the extraordinary step of granting Shelley's request for an order under section 1310(b) of the California Probate Code. It states that the trial court can direct the powers of a fiduciary to exercise powers as though no appeal was pending. Under this provision, the sale of the Clippers could be completed regardless of an appellate court intervention on the part of Donald Sterling.
Donald Sterling's Removal as Co-Trustee
One of the most significant parts of the ruling was that the judge stated that Shelley had her husband properly removed as a co-trustee of the family trust, which held the ownership of the Clippers, before she made the sale. According to sources, the Sterling family trust included a provision that if either Shelley or Donald was found by two qualified doctors to have "an inability to conduct affairs in a reasonable and normal manner" he or she could be removed as co-trustee. Shelley had Donald see two neurologists back in May for a competency test, and those doctors found that Donald was incompetent to manage the trust as co-trustee due to Alzheimer's disease.
Removing a Trustee
Removing a trustee from a trust is usually a painful and lengthy process. Under the law, trustees are presumed to be competent in order to be able to perform their duties. Therefore, when beneficiaries or co-trustees want a trustee removed for incompetence they must prove to the court that the trustee is incapacitated to the point that he is unfit to serve in the position.
Most actions to remove trustees involve family members. Oftentimes, the trustee in question is a parent that is serving as trustee for their children's trust or like in the case of the Sterlings one spouse is petitioning to remove the other. Litigation to remove a parent or spouse as trustee is costly, time consuming, and often comes at the expense of emotionally devastating a family.
How to Establish Incompetence
Because the court presumes competence for trustees there are only a few ways to prove that a trustee is unable to serve and incompetent for the position. Some trusts, like the Sterling family trust, come with instructions about how to prove incompetence or how to remove a person as trustee. If no such language exists, the beneficiaries or co-trustee must turn to case law. Typically, it involves a showing that the trustee is unable to resist fraud, undue influence, or duress. The other option is usually to show that the trustee is no longer able to provide himself with personal needs like food, clothing, and shelter without aid.
A final option in some states to remove a trustee is to deem him unfit to run the trust by a doctor or medical professional. The doctor must test the trustee and testify that medically he is unfit by reason of health problem or mentally incompetent to fulfill the duties as trustee. This, aided by language in the family trust document, was the route that Shelley took to have her husband ruled incompetent as co-trustee so that she could complete the sale of the Clippers.
Recent studies have shown that talking about inheritance is still a taboo subject for many families, and the avoidance of the subject could lead to many issues down the road. An estimated $40 trillion of wealth will be passed down to heirs as the Baby Boomer generation passes away. According to a survey of thousands of clients done by financial managing giant UBS, over forty-six percent of people who plan on passing down their estate through inheritance have not discussed inheritance plans with their children and other family members.
Reasons for Avoiding the Talk
The reasons why people had not discussed these plans varied. Thirty-two percent of survey takers said that they hadn't discussed it because they did not want their children counting on the inheritance. Over a quarter, twenty-seven percent, said that they did not want their children thinking that they were entitled to wealth, and around thirty-one percent of people simply did not see the inheritance talk as a pressing issue.
However, despite the fact that families had not had the talk about inheritance seventy-five percent of people said that it is highly important for their children to use the inheritance wisely and not squander it. In addition, a solid two-thirds of responders stated that they did not want any bad feelings among the heirs about who got what or how much.
The Problem with The Taboo
This is where the conundrum lies: benefactors want fights avoided and prudent financial decisions to be made but keep their children in the dark about what to expect from the inheritance. Wealth experts agree that it is a big mistake to not have a discussion about inheritance with your family. The secrecy can backfire and heirs can be overwhelmed by sudden wealth. When inheritance is treated as a taboo subject, heirs can be surprised and disappointed about what they receive. When there is no explanation for differences in amount or in what people receive the heirs are left to only speculate about the reasons why. This leads to family fights and other issues that arise only after the testator is dead. It is also unsurprising that these types of tensions are higher still in blended families where there is a second or subsequent marriage and stepchildren.
The numbers do not lie, either. Of the heirs who know the details of their parents' estate plans beforehand - which include seeing the will, knowing how much money there is as well as how it will be divided, and where the assets are - a majority of eighty-nine percent of heirs said that they were satisfied with the distribution plan. Compare this to the heirs who did not know the details beforehand and only sixty-five percent responded that they were happy with the distributions. On top of that, twenty-seven percent of heirs who were in the dark about their inheritances stated that they would fight family members about the distribution of wealth, as opposed to a mere twelve percent of heirs who know what to expect from their parents.
Research has shown both quantitatively and qualitatively that the outcome of inheritance is better for the testator and the heirs when the plans are discussed ahead of time. By making inheritance less of a taboo subject there is a better understand of what is to come, what is expected, and less issues will arise as a result.
In the recent Tax Court case of Estate of Marie P. Frappolli v. Director, Division of Taxation, a domestic partnership lost estate tax benefits because they did not register as a couple with the state. As an alternative to marriage equality, New Jersey had introduced the option to register as a domestic partnership. Ms. Frappolli and her partner, Ms. Dorothea Angelou, qualified under the requirements for a domestic partnership in New Jersey, but they never filed with the state to make it official.
Marie Frappolli passed away, leaving her estate to Ms. Angelou. In addition, the couple lived in Ms. Frappolli's home that was transferred to a joint tenancy with the right of survivorship in 1993. The tax division argued that because the couple never registered with the state the entire estate could be taxed. Furthermore, the value of the home could be added to the total value of the estate when determining tax liability. As a result, Ms. Angelou was hit with a transfer tax bill by the state for $178,845.57.
Legal Arguments Over the Estate
The estate and Ms. Angelou's attorneys argued that given the length of the couple's relationship the formality of filing a piece of paper with the state could be overlooked. Clearly, the couple had fulfilled the qualifications for being a domestic partnership within the state. However, the tax court rejected that argument and stated that in order to bypass the transfer taxes on an estate the law requires that a couple register as a domestic partnership with the state.
Even if the couple meets all of the requirements the form must be filled out except for in limited circumstances. For example, in dire medical situations a couple can be treated as a domestic partnership even if the paperwork is not filled out with the state registrar. But the court would not apply the same reasoning to a couple making estate planning decisions.
The attorney for the couple also made the argument that an estate planning attorney reviewed the New Jersey state tax website, and nowhere in the website for domestic partnerships did it say anything about filling out a form with the state. However, the tax court also rejected that argument by stating "It is difficult for this court to accept the proposition that an attorney with longtime experience . . . would credibly argue to this court that it was reasonable for him to draw conclusions about New Jersey tax law and provide assistance in completing an inheritance tax return based solely on his review of [the New Jersey tax law] website."
Ramifications on Domestic Partnerships and Estate Planning
The New Jersey tax court affirmed in its decision that domestic partnerships are not equal to heterosexual marriages in the state. As a result, domestic partnerships must have every possible aspect of their estate plans covered in states that do not recognize gay marriage or risk the same outcome as Ms. Angelou and Ms. Frappolli's estate. It is incredibly important to speak with an experienced estate planning attorney who knows the law of the state as well as every potential legal pitfall to avoid. By not filling out a single affidavit for the state Ms. Angelou will be forced to spend the majority of her partner's estate just paying off the taxes for it.
It was recently reported that prior to his death, Philip Seymour Hoffman rejected the advice of both his attorneys and accountant when planning his estate. Instead of leaving his estate to his children, Hoffman left his entire $34 million estate to his long-term girlfriend and mother of his kids. He told his accountant that the reason behind this was that he did not want to have "trust fund kids" or the stigma that goes along with it. Sadly, his poor estate planning decisions leave his estate open to a massive tax bill and other potential problems in later years.
Additionally, Sting also made news in the estate planning world recently when he announced that he did not want his six children to have trust funds, either. He told a reporter that he felt like a trust fund would be "an albatross around their necks." Sting said that if they needed financial help he would give it to them, but he wanted them to have their own work ethic.
While both Hoffman and Sting had good intentions regarding their wealth and children, both superstars perpetrated common myths held about trust funds that simply are not true. There are many different types of trusts, each with their own rules and standards that you can set for them. Here are some of the most common misconceptions that people have about trust funds and estate planning:
Trust funds create spoiled and lazy children.
One of the most common misconceptions about trusts is that the children who inherit them are spoiled and lazy. However, trusts can be used creatively and for whatever purpose the creator wants. In Hoffman's case, he wants his children to be introduced to culture and fine arts. Sting will help his children if they need it, but he wants them to work on their own. Trusts can be set up to accomplish both of these goals. A trust can be set up only for only cultural and artistic purposes, or it can be set up so that it can only be accessed for educational, health, or financial emergencies.
Trusts are only for rich people.
Trusts are for anyone who wants to avoid the hassles of probate court. A trust also allows the creator to control the estate legacy from beyond the grave, and it avoids the probate court from making decisions about the estate that may go against the final wishes of the testator.
If I start a trust then I lose control.
A revocable living trust means exactly that - they can be changed, amended, or canceled altogether at the creator's will as long as he is still competent. Furthermore, the creator can establish how, when, and if the assets in the trust passes and to whom.
I do not need a trust because I already have a will/joint accounts/other estate planning documents.
Wills and other estate planning documents must go through probate court, whereas a trust and all of its assets do not. In addition, trusts have tax benefits that other estate planning options cannot get. Trusts can help your children avoid getting double taxed for assets.
If I start a trust everything must go to my children.
Both Hoffman and Sting seemed to be under the impression that a trust is meant only to pass money to children, but that is not the case. A trust can be set up for anyone or any entity. That means that other family members, friends, charities, trusted employees, and others can all be beneficiaries of a trust.
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.
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.
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.