Life Insurance is vital to Estate Planning

February 7, 2024

Life insurance is vital to comprehensive estate planning. Integrating life insurance policies into estate planning can provide financial security for your heirs and ensure that your estate is distributed according to your wishes. When used effectively, life insurance can solve a range of estate planning challenges, from providing immediate cash flow to beneficiaries to helping cover estate tax liabilities.

Incorporating life insurance into your estate plan requires careful consideration of the type of policy that best suits your needs, whether term life insurance for temporary coverage or whole life insurance for permanent protection. It’s essential to understand the insurance company’s role in managing these policies and ensuring that they align with your overall estate objectives.

Life insurance can play a crucial role in estate planning. It can provide a death benefit to cover immediate expenses after your passing, such as funeral costs and debts, thereby alleviating financial burdens on your heirs. Furthermore, life insurance proceeds can be used to pay estate taxes, ensuring that your beneficiaries receive their inheritance without liquidating other estate assets.

When selecting life insurance for estate planning purposes, it’s important to consider the different types of policies available, such as term insurance for short-term needs and permanent insurance for long-term planning. An insurance agent can be a valuable resource in this process, helping to determine the right policy type for your estate planning goals.

Term life insurance offers coverage for a specified period and is often used for short-term estate planning needs, such as providing financial support to minor children. On the other hand, permanent life insurance policies, like whole life or universal life insurance, offer lifelong coverage and can build cash value over time, which can be an asset in your overall estate.

Life insurance trusts, particularly irrevocable life insurance trusts (ILITs), play a significant role in estate planning. By placing a life insurance policy within a trust, you can exert greater control over how the death benefit is distributed among your beneficiaries. The trust owns the policy, removing it from your taxable estate and potentially reducing estate tax liabilities.

Since the trust is irrevocable, it provides a layer of protection against creditors and legal judgments, ensuring that the life insurance payout is used solely for the benefit of your designated beneficiaries.

When considering life insurance in estate planning, it’s important to evaluate how the death benefit of a life insurance policy will impact your estate’s overall financial picture and the inheritance your heirs will receive. The proceeds from a life insurance policy are typically not subject to federal income tax. However, they can still be included in your gross estate for estate tax purposes, depending on the ownership of the policy.

One of the primary uses of life insurance in estate planning is to provide funds to pay estate taxes. This is especially relevant for larger estates that may face significant federal and state estate taxes. The death benefit from a life insurance policy can be used to cover these taxes, ensuring that your heirs do not have to liquidate other estate assets to meet tax obligations. In planning for estate taxes, working with professionals, such as estate attorneys and tax advisors, is essential to ensure that your life insurance coverage aligns with your anticipated tax liabilities.

Life insurance can offer substantial financial support to your heirs and beneficiaries upon your passing. Whether providing for a spouse, children, or other dependents, life insurance can ensure that your loved ones are cared for financially. This is particularly important in cases where other estate assets are not readily liquid or if you wish to leave a specific inheritance to certain beneficiaries.

When selecting life insurance for this purpose, consider the needs of your heirs, their ability to manage a large sum of money and how the death benefit will complement other aspects of your estate plan.

In conclusion, life insurance plays a vital role in comprehensive estate planning. By carefully selecting the right type of policy, designating appropriate beneficiaries and considering the use of trusts, you can ensure that your estate plan effectively addresses your financial goals and provides for your loved ones after your passing. If you would like to learn more about life insurance and estate planning, please visit our previous posts.

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A QPRT is a unique financial tool

January 31, 2024

A Qualified Personal Residence Trust (QPRT) is a unique financial tool used in estate planning to reduce the potential estate tax liability by transferring a principal residence or vacation home into a trust. As an irrevocable type of trust, a QPRT allows the grantor to remain in the home for a predetermined term of years, making it a strategic choice for those looking to manage their estate tax effectively. Learn more about QPRTs.

In the realm of estate planning, QPRTs serve a dual purpose. They provide a mechanism to transfer a residence at a reduced tax cost, while ensuring that the property remains part of the family legacy. This is particularly advantageous in the context of rising real estate values and the corresponding increase in estate tax liabilities.

The structure of a Qualified Personal Residence Trust is centered around its ability to freeze the value of the residence at the time of the transfer to the trust. When a residence is transferred into a QPRT, its value for gift tax purposes is determined at that time. This is beneficial if the property appreciates in value over the trust term, since the appreciation occurs outside the grantor’s taxable estate.

Furthermore, the trust term is a critical component of a QPRT. It is during this period that the grantor retains the right to live in the home. The length of the trust term can significantly impact the tax benefits of the QPRT, making it essential to choose a term that aligns with the grantor’s estate planning objectives. American Bar Association’s insights on estate planning.

One of the primary benefits of using a QPRT in estate planning is the potential for significant estate tax savings. Transferring a residence into a QPRT removes the property from the grantor’s taxable estate, potentially leading to lower estate taxes upon the grantor’s death.

In addition to estate tax advantages, a QPRT also offers protection for the principal residence. This ensures that the residence can be passed down to beneficiaries, typically the grantor’s children, at a reduced tax cost. It’s a strategic way to preserve a valuable family asset for future generations, while minimizing the estate tax burden.

Creating a Qualified Personal Residence Trust involves a few key steps. The first step is to determine the value of the residence, which will be based on its fair market value at the time of the transfer. This valuation is crucial for calculating the gift tax implications of the transfer.

Choosing the right trust term for your QPRT is equally important. The term should be long enough to offer substantial tax benefits but not so long that the grantor is unlikely to outlive it. If the grantor does not outlive the trust term, the residence reverts back to the estate, negating the tax benefits. Guidance from the National Association of Estate Planners & Councils.

When using a QPRT for your primary residence, it’s important to understand the rules surrounding occupancy. During the trust term, the grantor has the right to live in the home. This right is crucial, as it allows the grantor to continue enjoying their home while reaping the trust’s benefits.

Transferring your primary residence to a QPRT can be a smart estate planning move. It allows you to reduce your taxable estate, while maintaining your lifestyle. However, it’s essential to comply with all the trust requirements to ensure that the tax benefits are realized.

A QPRT can also be used effectively for a secondary or vacation home. The same principles apply: the home is transferred into the trust, potentially reducing estate taxes while allowing continued use of the property during the trust term.

However, there are some specific considerations when using a QPRT for a vacation home. Since these properties are often not the primary residence, it’s essential to understand how the trust will affect your use of the property and any potential rental income.

Understanding the tax implications of a QPRT is crucial. For estate tax purposes, the transfer of the residence to the QPRT is treated as a gift, but the grantor’s retained interest reduces the value of the gift in the property. This can lead to significant gift tax savings.

Income tax considerations are also important. The grantor of a QPRT typically continues to pay the property taxes and can deduct these payments on their personal income tax return. This arrangement can be beneficial from an income tax perspective.

What happens at the end of the QPRT term is a critical aspect of the trust. If the grantor outlives the term, the property is transferred to the beneficiaries, typically without additional estate or gift taxes. This is the ideal scenario, since it maximizes the tax benefits of the QPRT.

If the grantor wishes to continue living in the home after the trust term expires, they can lease it from the trust beneficiaries. This arrangement allows the grantor to remain in the home, while ensuring the property remains outside their taxable estate.

At the end of the QPRT term, there may be opportunities to further estate planning objectives by transitioning the property to another trust. This could involve creating a new trust that continues to hold the property for the benefit of family members, providing ongoing estate planning advantages.

This transition is a strategic move that can ensure the continued protection of the property and further estate tax savings. However, it requires careful planning and adherence to tax laws and regulations.

In conclusion, a QPRT is a unique financial tool to minimize estate taxes while protecting your primary or secondary residence. A QPRT can be a powerful tool in your estate planning arsenal by carefully selecting the trust term and understanding the tax implications.

If you’re considering a QPRT as part of your estate plan or have questions about how this type of trust could benefit you, contact our law firm today. Our experienced estate planning attorneys are here to guide you through every step of the process, ensuring that your estate plan is tailored to your unique needs and goals. If you would like to learn more about different types of trusts, please visit our previous posts.

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A Subtrust is a Multi-Tool that serves various Purposes

January 29, 2024

A subtrust is a separate entity created under the umbrella of a primary trust or a will. A subtrust becomes active based on the terms of the trust or will when certain events happen, such as the death of the primary grantor, or creator. Subtrusts are used by estate planning attorneys to help families pass on inheritances and protect their heirs from creditors or issues such as lawsuits or divorce. A Subtrust is a multi-tool that serves various purposes, depending on the beneficiaries’ specific needs and the grantor’s goals.

A subtrust is created as part of a primary trust, often a revocable trust. The primary trust acts as a container for your assets, answering critical questions about who gets them, what they receive, when and how. The subtrust, on the other hand, is like a specialized compartment within this container, designed for specific purposes or beneficiaries. Subtrusts remain dormant within the primary trust until a triggering event, typically the death of the grantor. Upon this event, the subtrust becomes active and, in most cases, irrevocable. This means that the terms of the subtrust cannot be changed.

The activation of a subtrust initiates a process known as trust administration. This process involves naming the subtrust, obtaining a tax ID and setting up a bank account. In addition, an appointed trustee will need to manage the trust assets, including making distributions to beneficiaries, filing tax returns and ensuring that the trust operates according to the trust provisions and the grantor’s intentions.

How Do Subtrusts Work If Created Under a Will?

Subtrusts can also be effectively created under a will, offering a flexible approach to estate planning. The will itself can directly establish these trusts or designate a revocable trust as the beneficiary in what is known as a “pour-over” will. This method ensures that the assets are transferred into the trust upon the grantor’s death.

How are Subtrusts Different from Revocable Trusts?

Subtrusts offer enhanced protection for your assets and beneficiaries. Unlike a revocable trust, which can be altered during the grantor’s lifetime, a subtrust becomes irrevocable upon activation, providing a firmer legal structure. This irrevocability protects the assets from the beneficiary’s creditors and in cases of legal challenges, such as divorce or lawsuits.

What are Subtrusts Commonly Used for?

Subtrusts serve various purposes, depending on the beneficiaries’ specific needs and the trustor’s goals. They can be used to protect beneficiaries who are minors, financially irresponsible, or have special needs. Subtrusts can also safeguard assets from beneficiaries’ creditors, ensuring that the inheritance is used as intended by the grantor.

Subtrusts have many different names and types, each serving a unique purpose in estate planning, as outlined in an article by the American Academy of Estate Planning Attorneys titled Basics of Estate Planning: Trusts and Subtrusts.

How Do Subtrusts Avoid Probate?

A Subtrust is a multi-tool that serves various purposes, but one of the primary reasons is to avoid the lengthy and often costly process of probate. Having assets in a subtrust bypasses the court-supervised distribution process, making things smooth, quick and easy for your family and heirs after your death.

Subtrusts provide a layer of protection for beneficiaries against their creditors or their own irresponsibility. This is particularly important in cases where a beneficiary may face financial difficulties, divorce, legal disputes, or even car accidents. The subtrust provides a shield for the assets to protect them from external claims. If you would like to learn more about trusts, please visit our previous posts.

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Strategies to avoid Inheritance Disputes

January 22, 2024

One of the many aspects of a professionally created estate plan involves employing strategies to avoid inheritance disputes. Your estate planning attorney has various tools, from creating a revocable living trust to drafting a detailed and legally sound will, as outlined in the article “6 Estate Management Strategies to Avoid Inheritance Disputes and How to Implement Them” from Legal Reader.

Creating a revocable living trust and placing assets in the trust allows those assets to be passed to heirs directly and according to the instructions you provide in the language of the trust. Assets not in the will need to pass through the probate process, where those involved in the estate plan might need to attend lengthy and stressful court proceedings. In some jurisdictions, the court may require the presence of all heirs and even estranged family members who were not properly disinherited.

In the probate process, beneficiaries can air grievances if they are unhappy with the inheritance agreement and could potentially challenge the will. By passing assets via a trust, you can completely reduce or avoid the opportunity for these disputes to occur.

The foundation of a successful estate plan is a will created with an experienced estate planning attorney. A will is a legally binding document outlining how the decedent wanted their assets and property distributed upon death. The estate planning attorney will work with you to ensure the language in the will is extremely specific and leaves no room for interpretation.

Some assets pass through beneficiary designations, including life insurance policies, retirement, investment, and bank accounts. To avoid problems with these financial assets, regularly review and update beneficiary designations to avoid giving someone no longer in your life a generous gift. These should be reviewed anytime a significant life event occurs, like marriage, divorce, birth or death, changes in financial circumstances, or when you acquire new assets.

A prenuptial agreement can mitigate the risk of inheritance disputes by establishing specific terms and conditions in the event of a divorce. They are particularly important in states where the courts can divide property acquired during the marriage regardless of where the assets came from. By drafting documents explicitly declaring intentions about the treatment of inherited assets, you provide an additional layer of protection to assets in case of divorce. The process also fosters communication between parties to assist in clarifying expectations for the future.

A well-drafted no-contest clause can diminish the likelihood of legal battles among heirs and challengers. It helps dissuade disgruntled beneficiaries from pursuing costly litigation by putting any inheritance at risk if they should decide to pursue what they feel are unfair distributions. It is imperative to engage an experienced estate planning attorney licensed to practice law in your state to have an effective no-contest clause in a will or a trust.

In some situations, liquidating non-cash assets like real estate makes the most sense. It’s far easier to divide cash than proportions of real estate. However, a buyout arrangement can be implemented if one sibling wants to purchase the property. Beneficiaries could buy out each other’s shares if there’s more than one heir, eliminating the need to sell the asset.

By employing strategies to avoid inheritance disputes, you can ensure your will clearly articulates your wishes. If you would like to learn more about inheritance issues, please visit our previous posts.

Reference: Legal Reader (Dec. 4, 2023) “6 Estate Management Strategies to Avoid Inheritance Disputes and How to Implement Them”

Appointing a Trust Protector is a Critical Decision

January 16, 2024

Serving as the trustee of a special needs trust (SNT) can be particularly challenging because it often requires long-term financial management of the trust, while maintaining a good relationship with the beneficiary. Furthermore, because trustees wield great financial power over the trust assets, oversight of their investment and distribution decisions is helpful. Trust protectors can add an additional layer of protection to oversee the management of a trust, supervise the trustee’s actions and remove and replace the trustee when needed. This article delves into why appointing a trust protector is a critical decision that can significantly impact the management of a SNT and guard the beneficiary’s rights.

The Case of Senator Feinstein: A Cautionary Tale

U.S. Sen. Dianne Feinstein’s lawsuit against the trustees of her late husband Richard Blum’s trust, as related in The Hill’s article, “Feinstein accuses trustees of husband’s estate of financial abuse”, highlights one reason why a trust protector may be helpful. Before her death in September 2023, Feinstein accused the trustees of withholding funds and breaching their fiduciary duties.

Through three separate lawsuits, Feinstein claimed that the trustees breached their fiduciary duties to honor the terms of the trust by not making the anticipated distributions of $5 million that were supposed to be placed into her trust in quarterly installments. She argued that the trustees’ inaction in their administration of the trust was intended to benefit Blum’s daughters at her expense, who were slated to receive $22 million each from the trust without Feinstein’s distribution.

For the late Sen. Feinstein, a trust protector may have provided the needed control over the trust assets to leverage the distribution intended by her late husband, who was the settlor. In the context of a special needs trust, where disabled beneficiaries may not be able to supervise their trustees, the role of a trust protector becomes even more critical in managing the trust.

What is a Trust Protector?

Special Needs Alliance explains in the article “Trust Protectors for Special Needs Trusts” that a trust protector is a person appointed to oversee the actions of the trustee and ensure that a trust is administered in line with the settlor’s intentions. Suppose a trustee performs in a manner that is unsatisfactory or even mismanages the trust assets. In that case, the trust protector can be empowered by the trust document to replace that person with a successor trustee. This role is particularly important in special needs trusts, where beneficiaries might not fully understand or be able to manage their financial affairs due to the nature of their disabilities.

How Does a Trust Protector Oversee the Trustee?

A trust protector works alongside the trustee, providing an extra layer of oversight in managing the trust assets according to the instructions in the trust document. They can resolve disputes, guide trustees and ensure that the trust’s administration aligns with the settlor’s intent. Trust protectors are granted various powers, including the ability to review trustee actions, including distribution decisions, replace the trustee and amend trust terms to adapt to changing laws and beneficiary needs. Their primary responsibility is to act in the best interests of the beneficiaries.

How Do Grantors Choose the Right Trust Protector?

Naming a trust protector involves considering their expertise, impartiality and understanding of the beneficiary’s needs. A third party, such as an attorney, accountant, or other professional, can often serve in this role. Family members who may be too challenged by the role of trustee also make a good choice for the trust protector. Selecting a family member who has a good relationship with the beneficiary, understands the nature of their disability and can serve as a good mediator between the trustee and beneficiary is a wise choice.

What Role Do Trust Protectors Play in Special Needs Trusts?

In special needs trusts, trust protectors play a vital role in ensuring that the trust caters to the unique needs of the beneficiary, considering their disability and inability to manage financial affairs. Their role can vary based on the trust agreement terms and state laws. The trust protector can review financial decisions or investments and sometimes force large distributions for purchases, like a house or car, based on the impact on the beneficiary. They can also help the beneficiary understand financial statements and tax documents provided by the trustee.

Is a Trust Protector Also Important to Consider for General Estate Planning?

Appointing a trust protector into any trust is a critical decision. It adds an extra layer of protection and adaptability, ensuring that the trust remains effective and relevant over time. Only a few states have specific laws authorizing and regulating trust protectors. Therefore, it’s essential to work with an experienced estate planning attorney to carefully draft the trust to define the role and anticipate potential issues in exercising the power of the trustee or trust protector.

The Future of Trust Protectors in Estate Planning

As laws and family dynamics evolve, the role of trust protectors is becoming increasingly important in estate planning, offering flexibility and protection for beneficiaries.

Conclusion

Trust protectors offer an essential safeguard in trust administration, especially for special needs trusts. Their oversight ensures that the trust remains effective, adaptable and true to the settlor’s intentions, providing peace of mind for both settlors and beneficiaries.

Trust protectors provide essential oversight and adaptability.
They ensure that the trust’s administration aligns with the settlor’s intent.
Their role is crucial in special needs trusts for beneficiaries who cannot manage their affairs.
Trust protectors are becoming increasingly important in modern estate planning.

If you would like to learn more about trust protectors, and trusts generally, please visit our previous posts.

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How Does an Inheritance Trust Work?

October 30, 2023

How does an inheritance trust work? Don’t let the term “inheritance trust” intimidate you. It’s basically a way to safeguard assets, while managing their distribution efficiently. Trusts are also used to provide potential tax benefits, which can add significantly to a family’s financial security, according to a recent article from yahoo! finance, “How to Keep Money in the Family With an Inheritance Trust.” An estate planning attorney can guide you in establishing an inheritance trust, securing assets and protecting your family’s financial health. An inheritance or a family or testamentary trust is a legal arrangement to manage and protect assets for the benefit of heirs or beneficiaries after the grantor’s passing. Its key function is to ensure an efficient and controlled distribution of assets. These can be financial, real estate, or personal property of value.

Many types of trusts offer different levels of control, tax benefits and asset protection. For instance, a revocable trust lets the person who set up the trust or the trustee maintain control over the assets while living and make changes as they want to the terms of the trust.

In an irrevocable trust, the terms can’t be changed easily, which offers greater protection against creditors or legal disputes.

There’s also something called a “Generation Skipping Trust,” designed to transfer wealth directly to outright beneficiaries, typically grandchildren, to avoid repeated estate taxes on a family’s assets.

The inheritance trust provides a strong shield of protection for assets. By placing assets in a trust, they are safeguarded from creditors, lawsuits and even certain tax liabilities. This layer of protection ensures that assets go directly to beneficiaries without the risk of erosion by unexpected challenges.

Another reason for a trust—control of the distribution of assets. You establish the specific conditions and timelines for when and how assets are to be passed on to heirs. You may want to wait until they have reached a certain age, protect against reckless spending, or have the trust used solely for the long-term care of a loved one.

Inheritance trusts are also used to minimize estate taxes. Working with an experienced estate planning attorney, you can plan for assets within the trust to potentially reduce the tax burden on your estate, allowing heirs to inherit more of the family’s earned wealth.

Trusts provide privacy. Unlike wills, trusts don’t become public documents. Trusts bypass the probate process, which can become a protracted and expensive public court proceeding. By placing assets in trust, the transfer of wealth is prompt and confidential.

For blended families or those with complex dynamics, inheritance trusts can help prevent disputes and ensure that assets are distributed according to your specific directions. For instance, if you want to leave assets to your children but protect them from their spouses in case of divorce, a trust can be created to address this issue. You might also wish your wealth to be distributed directly to grandchildren, not a son or daughter-in-law.

Start by working with an experienced estate planning attorney to create a comprehensive estate plan. He or she will help you understand how a inheritance trust works. This includes drafting a will, establishing trusts and assigning beneficiaries. Communicate with heirs, so they understand your intentions and expectations. Regularly review and update your plan every three to five years to be sure that it remains current and aligned with your goals. If you would like to learn more about various types of trusts, please visit our previous posts.

Reference: yahoo! finance (Oct. 3, 2023) “How to Keep Money in the Family With an Inheritance Trust”

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Strategies to minimize Taxes on Trusts

October 25, 2023

Dealing with trusts and the tax implications for those who create them, and their beneficiaries can seem confusing. Nevertheless, with the help of an experienced estate planning attorney, those issues can be managed, according to a recent article, “5 Taxes You Might Owe If You Have a Trust,” from Yahoo! Finance. There are strategies to minimize taxes on trusts.

Trusts are legal entities used for various estate planning and financial purposes. There are three key roles: the grantor, or the person establishing the trust; the trustee, who manages the trust assets; and the beneficiary, the person or persons who receive assets from the trust.

Trusts work by transferring ownership of assets from the grantor to the trust. By separating the legal ownership, specific instructions in the trust documents can be created regarding using and distributing the assets. The trustee’s job is to manage and administer the trust according to the grantor’s wishes, as written in the trust document.

Trusts offer control, privacy, and tax benefits, so they are widely used in estate planning.

There are two primary types of trusts: revocable and irrevocable. Revocable trusts are adjustable trusts that allow the grantor to make changes or even cancel during their lifetime. They avoid the probate process, which can be time-consuming and expensive, especially if assets are owned in different states. However, the revocable trust doesn’t offer as many tax benefits as the irrevocable trust.

Think of irrevocable trusts as a “locked box.” Once assets are placed in the trust, the trust can’t be changed or ended without the beneficiary’s consent. In some states, irrevocable trusts can be “decanted” or moved into another irrevocable trust, requiring the help of an experienced estate planning attorney. However, irrevocable trusts are not treated as part of the grantor’s taxable estate, making them an ideal strategy for reducing tax liabilities and shielding assets from creditors.

Trust distributions are the assets or income passed from the trust to beneficiaries. They can be in the form of cash, stocks, real estate, or other assets. For instance, if a trust owns a rental property, the monthly rental property generated by the property could be distributed to the trust’s beneficiaries.

Do beneficiaries pay taxes on distributions from the principal of the trust? Not generally. If you receive a distribution from the trust principal, it is not usually considered taxable. However, the trust itself may owe taxes on any income it generates, including interest, dividends, or rental income. The trust typically pays these before distributions are made to beneficiaries.

It gets a little complicated when beneficiaries receive distributions of trust income. In many cases, the income is taxable to the beneficiaries at their own individual tax rates. This can create a sizable tax wallop if you are in your peak earnings years.

There are strategies to minimize taxes on your trust. One approach is to structure trust distribution with a Charitable Remainder Trust, where income goes to a charity for a set number of years, and the remaining assets are then distributed to beneficiaries. An estate planning attorney will be a valuable resource, so grantors can achieve their goals and beneficiaries aren’t subject to overly burdensome taxes. If you would like to learn more about tax planning, please visit our previous posts.

Reference: Yahoo! Finance (Sep. 27, 2023) “5 Taxes You Might Owe If You Have a Trust”

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Estate Planning can be a Powerful Part of a Financial Strategy

October 10, 2023

Estate planning can be a powerful part of a financial strategy to ensure the smooth transfer of assets to the next generation while yielding significant tax savings, as explained in a recent article, “Maximizing wealth: The power of strategic estate planning in tax savings” from Thomasville Times-Enterprise.

Estate planning generally involves arranging assets and personal affairs to facilitate an efficient transfer to beneficiaries. However, there’s a tax angle to consider. Estates are subject to various taxes, including estate, inheritance and capital gains taxes. Without a good estate plan, taxes can take a big bite out of any inheritance.

Using tax-free thresholds and deductions effectively is one way to save on taxes. Depending upon your jurisdiction, there may be a state estate tax exemption in addition to the federal estate tax exemption. By strategically distributing assets to beneficiaries or using trusts, individuals can keep the value of their estate below these thresholds, leading to reduced or eliminated estate taxes.

Equally important is planning to take advantage of allowable deductions, further decreasing the tax burden facing heirs.

Trusts are valuable tools for estate and tax planning. They offer a legal framework to hold and manage assets to benefit individuals or organizations and provide asset protection and tax advantages. A revocable living trust transfers assets seamlessly to beneficiaries without passing through probate. Irrevocable trusts shield assets from estate taxes while allowing the person who created the trust—the grantor—to direct their distribution when the trust is established.

Strategic gifting during one’s lifetime is another way wealth is transferred. Using the annual gift tax exclusion, you may gift a certain amount per person yearly without triggering gift taxes. This allows for the gradual transfer of assets, reducing the taxable estate while helping loved ones. Gifting appreciated assets can result in significant capital gains tax savings for both the person making the gift and the recipient.

Estate planning is necessary for business owners to protect a family business from being stripped of capital because of hefty estate taxes. Different ownership structures, including a Family Limited Partnership (FLP) or a Limited Liability Company (LLC) can facilitate the smooth transition of the business to the next generation, while using valuation discounts to reduce estate tax liabilities further.

Estate planning can be a powerful part of a financial strategy. Given the complexity of estate and tax laws, working with an experienced estate planning attorney, accountant, and financial advisor is essential to ensure that all aspects of an estate plan meet legal requirements. Every situation and every family is different, so the estate plan needs to be designed to meet the unique needs of the individual and their family. If you would like to learn more about tax planning, please visit our previous posts.

Reference: Thomasville Times-Enterprise (Sep. 3, 2023) “Maximizing wealth: The power of strategic estate planning in tax savings”

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‘Pour-Over’ Will is vital to a Revocable Trust

October 9, 2023

A revocable living trust gives a married couple or individual the power to direct what should happen after they die to assets and possessions placed within a Revocable Trust. The trust also indicates who should be in charge of carrying out these instructions without the involvement of a probate court judge, explains a recent article, “How does a Pour-Over Will work?” from Coeur d’Alene/Post Falls Press. A ‘Pour-Over’ Will is vital to a Revocable Trust.

A Last Will and Testament, referred to as a “will,” is the traditional document that leaves instructions about what you want to happen to your assets when you die and includes the name of your executor, the person you want to carry out your wishes. If you have a will, do you still need a trust? Probably.

A Revocable Living Trust will only concern the specific assets and possessions you’ve placed into the trust. This is known as “funding the trust.” When the trust is first established, your estate planning attorney will help you with the steps needed to ensure that assets are retitled so they are owned not by you but by the trust.

As time passes, if you acquire new assets or possessions, you might forget to have them placed in the trust. This is a common oversight and can have major implications for the success of your overall estate plan.

If you die and there are assets outside of the trust, they will likely need to go through the court-controlled probate process. You were trying to avoid this in the first place by establishing a trust.

If you don’t have a will, these assets will be distributed according to state law instead of your wishes.

There is a solution—the Pour-Over Will.

A Pour-Over Will is a little different than a traditional will. It includes specific instructions to place any assets not placed inside your trust into the trust as soon as possible. This type of will still has to go through probate, but probate will only apply to assets left out of the trust and can typically be probated less formally.

A ‘Pour-Over’ Will is vital to a Revocable Trust. While the goal in using a Revocable Trust is to avoid probate completely, the Pour-Over Will is an important “just in case” document to have if you have Trusts.

Parents of minor children have yet another reason to have a Pour-Over Will, even when there is a Revocable Living Trust. A will is used to name the person or people you want to serve as guardians for your minor children, if both parents are deceased. Leaving this decision to be made by the court rather than by you is something to be avoided at all costs. If you would like to learn more about revocable living trusts, please visit our previous posts.

Reference: Coeur d’Alene/Post Falls Press (Sep. 10, 2023) “How does a Pour-Over Will work?”

What Type of Trust is best for You?

September 19, 2023

You are beginning the estate planning process. Great! When discussing your situation with your estate planning attorney, you will hear about trusts. But what type of trust is best for you? Fortune’s recent article, “Understanding trusts: An important estate planning tool for everyday Americans,” gives a concise run-down of all of the various types of trusts.

AB Trust. Also called a credit shelter or bypass trust, this trust is used by married couples to get the most benefit from estate tax exemptions. An AB trust is two trusts. The easiest way to remember them is that the A trust is for the person “above ground,” and the B trust belongs to the person “below ground.” Assets up to the annual estate tax exemption are put in the B trust to avoid estate taxes and usually pass to the couple’s children (“bypassing” the spouse). The remaining assets are placed in the surviving spouse’s A trust. When the surviving spouse dies, assets in both trusts pass to the designated beneficiaries.

An AB trust may be best for highly affluent married couples with large estates wanting to max out their estate tax exemptions.

Charitable Trust. This trust can benefit three parties: you, the grantor, your beneficiaries, and a charitable cause. They come in two types—charitable remainder trusts and charitable lead trusts. They still have one thing in common: the benefiting charity must be a qualifying organization per Internal Revenue Service guidelines. A charitable remainder trust is a type of irrevocable trust that provides income for you or your beneficiaries during your lifetime. You typically will move highly-appreciated assets into the trust, which the trust then sells—avoiding capital gains taxes—to create the income stream. After your death, the remaining assets in the trust are distributed to one or more charitable causes. A charitable lead trust is an irrevocable trust that’s the opposite of a charitable remainder trust. It first benefits the charitable beneficiaries of your choice during your lifetime. When you die, the remaining assets are distributed to your beneficiaries. A charitable lead trust can be funded during your lifetime or when you die through instructions in your will. A charitable trust may be best for individuals with highly appreciated assets, like stocks, that can be used to help meet philanthropic goals during or after their lifetimes.

Grantor Retained Annuity Trust (GRAT). A GRAT is an irrevocable trust generally used by the wealthy to reduce tax implications for their beneficiaries. You transfer assets into the trust that are expected to appreciate over time and specify the term for which you’ll receive an annuity payment based on those assets. Once the GRAT’s term expires, the assets and any appreciation of those assets in the trust will pass to your beneficiaries with little to no estate tax burden. A GRAT may be best for wealthy individuals who want to help family members avoid paying estate taxes on their inheritance.

Irrevocable Life Insurance Trust (ILIT). Putting life insurance into a trust is a strategy the wealthy use to cover several fronts. You fund an irrevocable trust using one or several life insurance policies. When you die, the payouts from those policies typically avoid estate taxes but can be used to pay for things like state estate taxes and funeral expenses. The funds in the trust can help avoid the need to liquidate assets to meet these financial needs. An ILIT may be best for people who expect to pay state estate taxes and want to protect life insurance policies from creditors or divorce.

Special Needs Trust. This trust can help provide long-term care for a loved one with physical or mental disabilities who’s under age 65. The big benefit of special needs trusts is that assets held in them don’t affect their eligibility for Social Security and Medicaid benefits. There are three types of special needs trusts. Therefore, it is important to create one with an attorney specializing in special needs trusts. This trust may be best for those with mentally or physically disabled family members.

Figuring out what type of trust is best for you really comes down to the type of assets you have, and how you want to manage and pass down those assets when you pass. If you would like to read more about the different types of trusts, please visit our previous posts.

Reference: Fortune (June 9, 2023) “Understanding trusts: An important estate planning tool for everyday Americans”

Image by Aymane Ididi

Category: Trustee

Life Insurance is vital to Estate Planning

A QPRT is a unique financial tool

A Subtrust is a Multi-Tool that serves various Purposes

Strategies to avoid Inheritance Disputes

Appointing a Trust Protector is a Critical Decision

The Case of Senator Feinstein: A Cautionary Tale

What is a Trust Protector?

How Does a Trust Protector Oversee the Trustee?

How Do Grantors Choose the Right Trust Protector?

What Role Do Trust Protectors Play in Special Needs Trusts?

Is a Trust Protector Also Important to Consider for General Estate Planning?

The Future of Trust Protectors in Estate Planning

Conclusion

How Does an Inheritance Trust Work?

Strategies to minimize Taxes on Trusts

Estate Planning can be a Powerful Part of a Financial Strategy

‘Pour-Over’ Will is vital to a Revocable Trust

What Type of Trust is best for You?

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