Estate Planning for Beginners Part 2: Trusts
June 28, 2011
We’ve said it before on our blog and we’ll say it again: It doesn’t matter whether you’re a billionaire business executive or a teacher with a modest salary, it doesn’t matter whether you’re the patriarch of a large family or a stay-at-home mom of a newborn, a revocable living trust may be exactly what your family needs to protect family assets and their best interests. This is because a trust is probably the most comprehensive and versatile tool in your estate plan, and is a key part of helping you accomplish your goals.
There are two basic kinds of trusts—revocable and irrevocable. Revocable means that it can be revoked or changed so long as the grantor (the person who created the trust) is still living and is competent to do so. Logically enough, an irrevocable trust generally cannot be changed once it has been signed. The reason this question of revocability is so important is because a trust is not merely a set of instructions for how your wealth should be distributed, a trust actually owns the property placed within it, with the person or people serving as trustee (usually for a revocable trust this is the grantors themselves, while they are living) controlling the trust property within. It is for this very reason that trusts can be such a powerful and flexible tool for tax planning and estate planning.
The specifics of your trust will vary greatly depending on what you hope to accomplish. Parents of young children may wish to include a general trust for the benefit of all the children, with distributions made to their guardians as necessary. This general trust can be split into separate individual trusts when all of the children have reached a certain age or graduated from college. Parents (and often grandparents) may want to include education trusts under the umbrella of their revocable living trust. Many families feel it is important to include instructions for charitable giving in their estate plan, and may choose to set up a charitable trust with their children or grandchildren as trustees. Pet owners often create pet trusts to ensure that their animals will be well cared after the owner has died.
A trust, much more than a simple will, allows the grantor far greater control over his or her assets—and for a longer period of time—which is why trusts are particularly useful for anybody entering into a second or third marriage, or for any parent who worries about the choices a beneficiary might make once they come into their inheritance. Unlike a simple will, trusts are designed to withstand the test of time, allowing you to leave a legacy that can last for decades.
Simple Steps Now Can Help Your Executor Later On
May 8, 2011
Being named as the executor of the estate of a deceased loved one comes with many challenges, including dealing with the probate system. But one of the most difficult (and least discussed) challenges is sorting through the plethora of paper and information that people collect over the course of a lifetime.
You can save your executor (and your family) time and money later by organizing your important documents and finances right now. If you’re not sure where to begin, or what information an executor would need to know, we’ve assembled a list of information and documents an executor might need quick and easy access to if anything were to happen to you:
- Instructions and letter to trustee: Contact information for your attorney and trustee(s), instructions on how to begin the process.
- Minor children: Information about your minor children, nearby guardians or relatives, medical and health insurance information.
- Personal Information: Birth and marriage certificates, passports, family, friends and contact people.
- Estate Planning Documents: Trust, wills, any amendments, personal property distribution memorandum.
- Employment/Business Information: Contact information for supervisors; client information if you are a small business owner.
- Real Estate and Tangible Property: Deed to your home, mortgage information, homeowners and fire insurance, vehicle records, artwork and antiques.
- Bank Accounts and Investments: Account numbers and locations, contact information.
- Monthly Expenses and Bills: A copy of one monthly statement for each.
- Information about recent Taxes
- Retirement Accounts/Government Benefits: Account numbers, beneficiary information.
- Life Insurance: Account numbers, beneficiary information, and copy of each policy
- Memorial and Burial/Cremation: Preferences, pre-paid arrangements, phone numbers.
- Memberships/Secured Accounts/Passwords
Once you are organized, keep your information in an accessible place and make your executor aware of the location. This simple act of organization will not only benefit you right now, it will save your family and your executor much time, money and frustration later on.
What Happens Now to Elizabeth Taylor’s Fortune?
April 6, 2011
The recent passing of Elizabeth Taylor has many wondering what will now happen with her sizeable fortune? According to this article in Forbes Ms. Taylor’s fortune includes not only the millions she made in the Hollywood movie industry, but the even greater amount made she made with her fragrance line.
“In her most savvy business move, Taylor licensed her name to Elizabeth Arden and came out with several perfumes, including Passion, White Diamonds, and Black Pearls. Her fragrances have reaped a reported $200 million in sales over the years. Perfumes are one of the highest margin products out there, which is why celebrities love them. Taylor was doing it before anyone.”
Furthermore, a recent article in ABC News reports that Elizabeth Arden has no plans to discontinue the Taylor brand anytime soon. “White Diamonds remains a best seller almost 20 years after its 1991 introduction, a testimony to her transcendent and enduring appeal… Our best tribute to Elizabeth Taylor will be to continue the legacy of the brands she created and loved so much.”
The question now is, what will happen to this sizeable (and growing) fortune now that Ms. Taylor has passed away? ABC News has some guesses: “On the question of what could happen to her estate now that she has passed away, many speculate it will be distributed to her four children and 10 grandchildren [with whom she is reported to have been on good terms]… And Taylor most likely bequeathed a substantial amount of money to her charitable work. Taylor was a devoted AIDS activist, helping form the American Foundation for AIDS Research in 1985 and the Elizabeth Taylor AIDS Foundation in 1991.”
Thus far no last will and testament has been released, which suggests that Ms. Taylor may have had a trust, an document which typically ensures privacy. While it is only our speculation at the moment, given what we do know about Ms. Taylor, it is not unreasonable to believe that her estate will be split between her family and her charitable endeavors, especially the AIDS Foundations to which she gave so much in life.
It’s Never Too Early to Make Your First Will
February 3, 2011
We’d like to share with our readers a recent article in Forbes entitled How To Write Your First Estate Plan. This article supports something we’ve been saying in our blog all along: That everyone needs a will—whether you’re a young couple just starting out, an established family with valuable assets to protect, or an entrepreneurial business owner with succession on your mind. The article reminds us that a will “is the cornerstone of an [estate] plan,” and at whatever stage of life you may be is not too early to make your first will.
“There’s a lot more to an estate plan than just a will, even for folks who don’t need a more complicated estate-tax oriented version. You might have pieces of it already–a living will signed when you had elective surgery or a beneficiary form filled out for a 401(k) when you got your first job. You need to make sure the pieces fit together.”
Many couples or individuals are first motivated to create a will when they have young children, and the primary purpose of their will is to ensure that their minor children will be cared for and provided for should anything happen to the parents. This is certainly one of the best reasons to create your will or estate plan, but it is not the only reason, not by a long shot. If you drafted your will when your children were young and haven’t looked at it since—or if you never created a will because you don’t have kids and therefore didn’t think you needed one—it’s time to revisit the subject.
An estate plan not only ensures that minor children will be provided for, but also that:
- Older children have the means to continue their education if something happens to you
- Your spouse or children are the recipients of your life insurance or retirement proceeds, and not the tax man or (even worse) an ex-spouse or ex-boyfriend or girlfriend.
- You have someone trustworthy distributing your assets as you wish after you pass away.
- Your business will transfer smoothly if you aren’t able to run it anymore.
- And much more.
“Whatever motivates you, fine. The point is–whether you’re in estate tax territory or not, if you don’t have an estate plan, you need one. (And if you have a really old one, you probably need a whole new one.)” Any opportunity is the perfect opportunity to start planning to protect your loved ones. Call our office (or your own trusted attorney) to learn what steps you can take toward protecting your loved ones right now.
What Is Probate?
October 20, 2010
With all the recent news about what will happen with estate taxes, the process of probate has come up quite a bit. Sometimes probate is mentioned in a low-key, matter-of-fact kind of way; at other times it is presented as something scary, and to be avoided at all costs. We know our readers have seen the term often enough here in our blog, but under the circumstances we thought it a good idea to go back to basics, and have a discussion of exactly what is probate, and what’s all the fuss?
Probate is the process by which the court identifies the assets of a person who has died, and facilitates the distribution of those assets and transfer of title to the persons entitled to them. It sounds like it should be simple, but even in the best of circumstances there are procedures that must be followed to the letter, and the actual process (depending on the size of the estate and the laws of the state in which the property is being probated) can take anywhere from 6 months to a few years.
You may wonder why probate can take so long, especially if the deceased person has left a will making their wishes clear. A good will can certainly make the process easier, but even with a will, there are certain steps that must be followed to complete the probate process, some of which can be very time consuming. Some of these steps include:
- The appointment of an executor or personal representative
- Verification of the will
- Taking an inventory of assets belonging to the deceased
- Giving notice to creditors
- Paying valid claims against the estate
- Preparing and paying taxes
- Notifying beneficiaries
- Distributing the assets to the beneficiaries or heirs
If you think that just reading the above paragraph takes your breath away, imagine the confusion of having to actually go through all of those steps—and possibly more!
Whether or not your estate will eventually be subject to a lengthy or expensive probate often depends on a number of factors: the size of your estate, how your assets are held, and how cooperative your next of kin may be. But one way to increase your chances of avoiding probate is to have clear (and clearly valid) estate planning documents which are designed to do just that. This would usually mean a revocable living trust. If however, your assets are valued at less than $100,000 at your death, then in California there is a simplified procedure to avoid probate even if you do not have a revocable living trust and provided that your designated beneficiaries or heirs cooperate with one another. There are other ways to avoid probate by titling assets in a certain way, but these alternatives are usually only effective in limited circumstances and often create other problems. These include: joint tenancy, Pay On Death (“POD”) and Transfer of Death (“TOD”).
If you are concerned about probate, or would like to know more about how you can protect your assets and help your loved ones avoid a lengthy probate, contact our office—or a qualified estate planning attorney in your home state—to discuss your options.
What to Do With Your Estate Plan After a Divorce
October 17, 2010
When it comes to estate planning, the steps you take after a divorce are not so different from the steps you’ll take after a death—many of the phone calls will be the same, many of the changes you make and details you change will be similar. This all makes sense, because a divorce is basically the death of your marriage, and in the financial and legal world your marriage was an entity all its own.
The first question most people ask is “Who gets the estate plan?” The answer is that both of you and neither of you get the estate plan. Ideally, you both put a lot of thought into your estate plan and it reflects both of your wishes. All of this work was not for nothing. The details of your plan will have to change, this is true, but the basic ideals will most likely be the same.
Caution: In California, some of the following things “to do” might need to wait until your divorce is final. For example, changing beneficiary designations may be prevented by the “automatic restraining order” that takes effect immediately when your divorce starts. Ask you divorce attorney whether it is O.K. to proceed and then talk to your estate planning attorney:
Subject to the above caution, your first order of business should be to change your beneficiary designations. Most married couples name their spouses as the primary beneficiary on insurance policies, retirement accounts, wills and trusts, with their children or immediate family members named second. Unless you think your ex-spouse deserves to benefit from all your hard work you’ll want to remove him or her as a beneficiary immediately. (Documents to change: will, trust, ALL life insurance policies, IRA or 401(k) accounts, savings accounts, investment accounts, POD or TOD accounts, credit card insurance policies.)
Your second order of business will be to amend your agent/executor/trustee. It is likely that while you were married you named your spouse as the primary person in all of these roles; you’ll now want to move your secondary nominee to the primary position, or find someone new. (Documents to change: will, trust, All powers of attorney, health care directives, nomination of conservator, emergency contact forms.)
Not necessarily your third order of business, but somewhere in there you may want to change your nomination of guardian. You and your ex-spouse probably chose people you both knew and trusted to be guardians of your minor children if anything happened to both of you. Divorce can bring up many powerful emotions and hard feelings, so although these people are probably still good and trustworthy people, you may want to nominate someone else. Keep in mind that your ex-spouse will still be namd your children’s primary guardian if anything happens to you. This doesn’t mean you shouldn’t execute a new nomination of guardians, but keep in mind that your nomination of guardians will only come into play if your spouse dies first. (Documents to change: nomination of guardians, nomination of conservator, emergency contact forms, authorization for custodian consent to medical treatment of minors.)
The most important thing to remember is that the more you put it off, the more likely it is that your wishes will go unacknowledged. As a rule, it’s a good idea to visit your estate planning attorney after any life change, especially one as significant as divorce.
Executors and Agents: Choosing Your Own Replacement
October 9, 2010
When people think about estate planning they generally think about inheritance, or taxes, or even guardianship—but rarely are the words “executor” or “agent” the first ones that come to mind. And yet, choosing your executor or your agent is one of the most important decisions you’ll ever make.
Your executor is the person who carries out the instructions in your will. You may spend hours (sometimes months or even years) agonizing over inheritance plans and making decisions; but in the end, when the time comes for all of those decisions to be implemented, you’re not going to be around. If there are any questions to be answered or clarifications to be made they’re going to fall to your executor.
Your agent is the person who—depending on whether the document is a health care directive or a financial power of attorney—will make your important financial or health care decisions when you are unable. This person is your proxy during your life, signing checks on your behalf or talking to doctors about your treatment.
Considering all of this, it is understandable why so many people have trouble naming an agent or executor. It’s not easy to choose your own replacement, so to speak. But the most difficult decisions are often the most important. If you are a parent of more than one child then you know about the sibling fights that can erupt seemingly out of nowhere, even in loving and agreeable families. This is especially true when there is any uncertainty about what mom or dad’s true wishes were. The right agent or executor can relieve much of that uncertainty.
So how do you choose the right agent or executor?
First of all, think it through carefully. Choose someone reliable, whose decisions you trust. You’ll want someone who’s careful; and you’ll want to choose someone who isn’t already overloaded, because they’ll need to have time to do a thorough job. Choose someone who knows you and who knows your family; a familiar face will be comforting in hard times. On the other hand, nominating a financial institution rather than a personal friend can work out well under the right circumstances, but research your choices carefully.
If there isn’t one clear choice you may decide to nominate two people to make decisions together. This can be a good alternative if the two work well together and share your values, but it can also be a recipe for disaster, so be sure to build in some protections: instead, consider naming an uneven number of agents or executors to prevent tie-decisions, or nominate a mediator or tie-breaker who can step in to prevent serious disagreements from having to be decided in court. If you wish to include the power to make family gifts, special legal considerations come into play: talk to your attorney about gifting powers if you wish to include them in your documents. They can often be very helpful, especially if you wish to delegate the authority to qualify you for a long term care subsidy under the Medi-Cal program.
How to Prepare for Dismaying Changes to Estate Tax Law
September 19, 2010
This may seem like we’re listening to a broken record, but once again Congress’ inability to act is creating uncertainty in the estate-tax-planning world. We’re little over 3 months away from a major upheaval in the estate tax, and according to the New York Times the upcoming law is likely to cause a lot of grumbling unless Congress takes action. And it’s no wonder when the new law will mean that more families are taxed at a higher percentage:
“The amount of each estate that is exempt from estate tax is scheduled to become $1 million in 2011 (down from $3.5 million in 2009, when the tax was last in effect). The tax on the balance is to rise to 55 percent in most cases (up from the 2009 rate of 45 percent). So now is the time to consider the various tax strategies available.”
What this lower exemption rate really means, however, is that more families will be caught off-guard when a loved one passes away and the survivors are suddenly hit with a massive tax bill.
That is unless families start planning now.
The Times article mentioned above suggests that “the easiest way to reduce the tax bill is to give as much as $13,000 a year each to as many people as you like — which you can do without paying gift tax;” but when you consider how little $1 million really is (especially when the value of your home, retirement savings, etc. are all included when adding up your total assets) we’re guessing that there are a lot of people out there who are over the exemption amount, but don’t feel they can afford to go handing out $13,000 every year. Much more appealing are some of the other planning strategies suggested in the article, including:
- “Buy a one- or two-year [life insurance] term policy to cover the tax bill if the exemption amount is only $1 million.” If you want to cover the risk that you might die during the next year or so during a time where the estate tax exemption could be low relative to the value of your estate, the policy will help your heirs cover what could be a hefty tax bill. If Congress later increases the exemption so that you no longer need this protection for the excess, the policy could then be canceled;
- “Create a trust.” The article suggests a GRAT (Grantor Retained Annuity Trust), which is a great tool for assets with depressed values that are expected to appreciate during your lifetime; but for married couples simply looking for a way to protect their children from a hefty federal estate tax down the road a Credit Shelter Trust may be a better option.
There are a number of other ways you might be able to prepare for the coming estate tax upheaval—the best way to protect your own family is to contact an estate planning attorney and ask about your options.