There is Value in a Life Insurance Trust

February 27, 2023

Irrevocable Life Insurance Trusts have three components: a grantor, the person who creates a trust, a trustee, the manager of the trust and a beneficiary or beneficiaries, explains a recent article titled “What is an Irrevocable Life Insurance Trust?” from The Edwardsville Intelligencer. There is value in a life insurance trust.

In an ILIT, the trustee purchases the policy, and the irrevocable trust becomes the owner. When insurance benefits are paid on the death of the grantor, the trustee collects the funds, pays any estate taxes due and any outstanding debts, like legal fees and probate costs, then distributes the rest to beneficiaries.

The biggest reason for people to consider an ILIT is to help lessen estate taxes. In the last few years, the federal estate and gift tax exemption has been set at historically high levels, and most people don’t need to worry about that on a federal level. However, state estate taxes still need to be addressed, and the federal estate tax level is set to drop dramatically in 2026.

There are other reasons for an ILIT:

If a life insurance beneficiary is incapacitated, the ILIT can prevent the court system from controlling proceeds.

Proceeds from the ILIT can provide cash to pay expenses, including estate taxes and any other debts.

The ILIT can provide income for the spouse without the funds being included in the spouse’s estate.

The ILIT can provide protection for heirs. Depending upon the state where you live, proceeds from life insurance payouts may or may not have protection from creditors. Speak with your estate planning attorney to learn if this applies to you.

Ability to include a “Spendthrift Provision.” If an heir or heirs has trouble managing money or is prone to making bad decisions, financial and otherwise, the ILIT trust can contain a spendthrift provision to pay beneficiaries monthly, instead of providing them with a lump-sum payout.

However, the ILIT isn’t for everyone. There are some downsides to consider.

The ILIT is irrevocable, and is difficult, if not impossible, to make changes to it, with the exception of changing the trustee. Once a policy is placed in an ILIT, you give up any rights to the policy. You can’t reassign it to a different trust or any other legal entity.

ILITs are complex and nuanced legal vehicles requiring the help of an estate planning attorney who knows their way around trusts. There is value in a life insurance trust; but understand this has been a very general overview of a topic with many moving parts to it. Discuss whether an ILIT will be useful for your estate plan with an experienced estate planning attorney. If you would like to learn more about ILITs, please visit our previous posts.

Reference: The Edwardsville Intelligencer (Jan. 31, 2023) “What is an Irrevocable Life Insurance Trust?”

Steps to Take for End-of-Life Planning

February 23, 2023

Most people don’t consider anything about planning for incapacity or death to be joyful. However, if you consider estate planning documents as a way to share your wishes and make your departure easier for those you love, as well as a means to express your thoughts and feelings, it could make these tasks a little cheerier. A recent article from The Washington Post, “6 joyful steps for end-of-life planning,” could help reframe how you think of estate planning. There are some concrete steps to take for end-of-life planning.

From a practical standpoint, death and incapacity are complicated for loved ones. They will appreciate your preparing an advance health directive, which should be created when a person is healthy, and not when they are in a hospital bed. The same goes for funeral arrangements, which are costly. There are so many choices and decisions to make—do your loved ones even know what you want? Leaving instructions and paying in advance will remove the burden for adult children trying to know what you wanted and dealing with the expense of paying for a funeral.

Digging through a loved one’s credit card bills, cellphone accounts, bank accounts and internet passwords is a big challenge in today’s digital world. It was far easier when there were stacks of paper for every account. Today’s executors need to have all of this information to avoid lost assets, avoid identity theft and prevent roadblocks to wrapping up your estate.

Here’s a checklist to help get your estate plan moving forward.

1 Create a crisis notebook. One binder with all estate planning documents will make it easier for loved ones. You should make additional copies but keep originals in one place—and tell your executor where the binder can be found. Create a worksheet of your many documents, so loved ones will know what they are looking for.

2 Have an advance directive created while you are having your estate plan made. This tells your loved ones what you want in case of incapacity and end-of-life decisions.

3 Have a will created with an experienced estate planning attorney. Without a will, the laws of your state determine how your property is distributed and who raises your minor children. Wills are state-specific, so a local estate planning attorney is your best resource. Be wary of online documents—if they are deemed invalid, it will be as if you didn’t have a will.

4 Make a digital estate plan. No doubt you have more than one email account, shopping accounts with more than a few retailers, credit cards, car leases or loans, home mortgage payments, social media, cloud storage, gaming accounts and more. Without a complete and comprehensive list of all accounts, your executor won’t know what needs to be closed, where your personal documents or photos live or how to retrieve them.

5 Plan your funeral. Yes, it is a little morbid, but do you want your loved ones to have to incur the cost and the emotional burden of planning, when you can do it for them? You’ll feel better knowing your wishes will be followed, whether it’s for a “green” funeral or a cremation, with a long period of mourning following your faith’s tradition or a short memorial service.

6 Write a letter of intent and any final farewells. This is an opportunity to share your thoughts with those you love, with healthcare providers and anyone else who matters to you, about healthcare decisions at end of life, or to convey your values, hopes and dreams for those you love.

When you take these steps for end-of-life planning, you’ll be surprised at the sense of relief you feel. If you would like to learn more about end-of-life planning, please visit our previous posts.

Reference: The Washington Post (Jan. 5, 2023) “6 joyful steps for end-of-life planning”

What are the Responsibilities of a Legal Guardian?

February 22, 2023

When a person is impaired by physical or mental illness or another kind of disability and they haven’t had a legal power of attorney or health care power of attorney created, they may need a court appointed guardian to act on their behalf. So what are the responsibilities of a legal guardian?

As explained in a recent article titled “Legal Guardians” from My Prime Time News, for the court to find the “protected person” in need of a guardian, it must find the protected person unable to receive or evaluate information or both, unable to make or communicate decisions to satisfy essential requirements for physical health, safety or self-care.

The guardian may receive the protected person’s income, such as Social Security, and pay bills. In some states, a conservator is appointed when someone has considerable assets requiring active management.

If a protected person needs help with the tasks of daily living and asset management, the court may appoint both a guardian and a conservator. One person may serve in both roles, unless the person is a “professional caretaker.”

In almost all cases, it is far better to have a plan for incapacity in place, with a trusted and known person named to serve as an agent to handle financial and legal matters, and the same or another person named to act as a health care proxy.

To be appointed a guardian, a petition must be filed with the court and any interested persons must be notified of the petition. This includes spouse, parents, adult children, other caretakers and the treating physician. The petition must include a letter from a doctor indicating the need for a guardianship.

The process varies in different jurisdictions. However, the court usually requires a background check and a credit report for the person petitioning for guardianship. The court appoints a visitor to investigate and report whether an appointment for the guardian is necessary and if the person petitioning for the role of guardian is suitable.

After all this has been completed, a hearing takes place, with the protected person present. The court will make its decision. If the decision is to award the guardianship, the court issues Letters of Appointment and an Order, unless the protected person protests. The order requires the guardian and/or conservator to file annual reports with the court.

The guardian’s responsibility varies with the circumstances. The guardian’s powers should generally be no greater than needed to see to the needs of the protected person. The protected person should be encouraged to maintain the greatest degree of independence under their circumstances. While the guardian is not required to take physical care of the protected person, they are responsible for ensuring the protected person has an appropriate level of care, whether in a nursing home, assisted living or other institutional care.

The guardian’s appointment ends when the protected person dies, or if the guardian dies or if the court issues an order terminating their guardianship. Your estate planning or elder law attorney can help explain what the responsibilities of a legal guardian are and how to begin the process. If you would like to learn more about guardianships, please visit our previous posts.

Reference: My Prime Time News (Jan. 1, 2023) “Legal Guardians”

You Need a Digital Estate Plan

February 21, 2023

You are interested in creating an estate plan to manage your tangible assets. That is great, but you also need a digital estate plan. Laws about intangible assets used to be a legal niche practice area. However, today’s estate planning attorney addresses digital assets as much as tangible assets, according to the article “How to Start Digital Estate Planning in 2023” from yahoo! Social media, emails, websites, photos and even the contents of a hard drive contain a vast amount of digital assets. Managing these assets is known as digital estate planning.

Digital estate planning is the process of including online and digital assets, a simple concept but one which is quite complicated. Assets in your digital estate include (but are by no means limited to):

Social media accounts
Websites and domain names
Online stores and businesses
Software and code
Pictures, video, and other media
Financial records or financial assets owned digitally
Contents of hard drives, phones, tablets and other devices
Contents of cloud storage

Today, your digital assets can be some of the most important assets left behind. Photos are the photo books of today, and websites are often the family’s business. Neglecting to plan for digital assets is the equivalent of putting family heirlooms, photos, stock certificates and cash into a storage unit and neglecting to tell anyone of the existence of the storage unit, or how to access it.

Passwords and logins. The sheer volume of passwords, combined with the increase in two-factor authentication, makes it difficult to keep track of information for users. Imagine what your executor will face when trying to locate digital assets. You need to have a secure record of accounts, including the platform, your user name, login and password information. Keeping an old-school logbook of important user names and passwords is an option, since online password storage sites themselves are occasionally hacked.

Legal authority for access. There are a surprising number of laws about who is allowed to access your digital access. Your last will needs to be clear in directing your executor as to what you want to happen to specific digital assets. Make it clear who is to inherit the account and what you want them to do with it.

Distribution and rights. One of the growing problems with digital assets is that often companies are selling indefinite licenses disguised as purchases. You may think you own something, only to find you simply rented it. On Amazon Prime, the button may say “Buy,” but you are actually downloading a licensed product and the company retains the right to end your access at its discretion. Such licenses typically expire upon the death of the buyer, with no ability to transfer the data or product to anyone else.

Your estate planning attorney will be able to explain why you need a digital estate plan and how to prepare it, so it is as protected as your traditional assets. While making a complete inventory of digital assets may be overwhelming, consider the value of such assets as family photos and videos. Chances are, they’re worth passing down to your descendants. If you would like to read more about managing digital assets, please visit our previous posts.

Reference: yahoo! (Jan. 28, 2023) “How to Start Digital Estate Planning in 2023”

Better to have a Revocable or an Irrevocable Trust?

February 20, 2023

Is it better to have a revocable or irrevocable trust? It’s not always obvious which type of trust is the best for an individual, says a recent article titled “Which is Best for Me: Trusts” from Westchester & Fairfield County Business Journals.

In a revocable living trust (RLT), the creator of the trust, known as the “grantor,” benefits from the trust and can be the sole Trustee. While living, the grantor/trustee has full control of the real estate property, bank accounts or investments placed in the trust. The grantor can also amend, modify and revoke the trust.

The goal of a revocable trust is mainly to avoid probate at death. Probate is the process of admitting your last will and testament in the court in the county where you lived to have your last will deemed legally valid. This is also when the court appoints the executor named in your last will. The executor then has access to the estate’s assets to pay bills and distribute funds to beneficiaries as named in the last will.

Probate can take six months to several years to complete, depending upon the complexity of the estate and the jurisdiction. Once the estate is probated, your estate is part of the public record.

A revocable living trust and the transfer of assets into the trust can accomplish everything a last will can. However, distribution of assets at the time of death remains private and the court is not involved. Distribution of assets takes place according to the instructions in the trust.

By comparison, irrevocable trusts are not easily revoked or changed. Most irrevocable trusts are used as a planning tool to transfer assets for the benefit of another person without making an outright gift, or for purposes of Medicaid or estate tax planning. An Irrevocable Medicaid Asset Protection Trust is used to allow an individual to protect their life savings and home from the cost of long-term care, while allowing the trust’s creator to continue to live in their home and benefit from income generated by assets transferred into the irrevocable trust.

The grantor may not be a trustee of an irrevocable trust and the transfer of assets to a Medicaid Asset Protection trust starts a five-year penalty period for Nursing Home Medicaid and a two-and-a-half-year penalty period for Home Care Medicaid for applications filed after March 1, 2024. After the penalty (or “look back”) periods expire, the funds held by the trust are protected and are not considered countable assets for Medicaid.

An irrevocable trust can also be used to transfer assets for the benefit of a loved one, friend, child, or grandchild. Assets are not controlled by the beneficiaries but can be used by the trustee for the beneficiary’s health, education, maintenance and support.

Trusts are used to reduce the size of the taxable estate, to plan for the well-being of loved ones, and to protect the individual and couple if long-term care is needed. Whether it is better to have a revocable or an irrevocable trust depends a lot on your own circumstances. Speak with an estate planning attorney about which trust is best for your unique situation. If you would like to learn more about trusts, please visit our previous posts.

Reference: Westchester & Fairfield County Business Journals (Jan. 26, 2023) “Which is Best for Me: Trusts”

Photo by Mikhail Nilov

ABLE Accounts are a lifesaver for Special Needs Children

February 16, 2023

For many families, a plan for the future includes an Achieving a Better Life Experience, or ABLE, account to allow those with disabilities to set aside extra money without interfering with their federal aid. ABLE accounts are a lifesaver for special needs children. All but four states—Idaho, North Dakota, South Dakota, and Wisconsin—provide ABLE accounts, according to a recent article titled “ABLE Accounts Give Help For People with Disabilities” from AARP.

Other states, including California and Pennsylvania, allow people from other states to invest in their ABLE program.

Account owners are permitted to invest their money and shield earnings from taxes. Withdrawals are tax-free, as long as the money is used for approved expenses related to the account owner’s condition. Much or all of the money in an ABLE account does not count against asset limits which impact eligibility for safety-net programs, like Medicaid and Supplemental Security Income (SSI).

To be eligible for an ABLE account, the person must have a disability which began by the time they reached age 26 and in most cases, be receiving SSI or Social Security Disability Insurance (SSDI). If a person has reached the age requirement but isn’t receiving SSI or SSDI benefits, they may still be able to open an ABLE account if they meet Social Security’s disability definitions and can get a letter of disability from a doctor certifying their condition.

A person with disabilities may only have one account. However, anyone can contribute to it. The maximum contribution is 2023 is $17,000. However, those who work may deposit an additional amount up to their annual gross salary or the individual Federal Poverty Level (FPL). For an individual, the FPL in 2023 is $13,590. In some states, contributions are deductible from state income taxes.

Account owners may keep $235,000 to $550,000 in an ABLE account, depending upon state limits. If there is more than $100,000 in an ABLE account, the excess could cause SSI to be suspended, assuming they had $2,000 in other accounts. SSI can be reinstated if assets fall below the cap. The $100,000 ABLE limit does not apply to benefits from Medicaid or the Supplemental Nutrition Assistance Program, formerly known as food stamps.

Without an ABLE account, many people with disabilities face a choice between building savings and keeping benefits. If ABLE money is spent on a qualified disability expense, such as food, housing, transportation, and other things that improve health, independence or quality of life, withdrawals are free from federal and state taxes.

When the ABLE account owner dies, their estate may use funds from the account to pay for any qualified disability expenses, funeral and burial costs. The state may file a claim on the account equal to the amount the state spent on the individual’s Medicaid program. Any remaining amount passes to the owner’s estate.

Each state’s plan is different, so it makes sense to look at ABLE accounts offered by other states. Several states offer state income tax deductions for in-state residents who make contributions to an ABLE account. ABLE accounts are a lifesaver for special needs children. Discuss with your estate planning attorney how you can incorporate an ABLE account into your overall planning. If you would like to learn more about special needs planning, please visit our previous posts.

Reference: AARP (Jan. 4, 2023) “ABLE Accounts Give Help For People with Disabilities”

The Estate of The Union Season 3|Episode 9

The Estate of The Union Season 2|Episode 6 is out now!

February 15, 2023

The Estate of The Union Season 2|Episode 6 is out now!

In the latest episode of Estate of the Union, Brad Wiewel is joined by guest, and his youngest son, Zach Wiewel to talk about the fascinating, and often chaotic estate planning mistakes of celebrities. Join them as they take a dive into the wills of the famous, such as Chief Justice Warren Burger, Princess Diana, Michael Jackson, Leona Helmsley and more. Brad and Zach break down how well these celebrity Wills were written and what kind of mistakes they made that YOU can avoid. It is a lively and entertaining episode.

In each episode of The Estate of The Union podcast, host and lawyer Brad Wiewel will give valuable insights into the confusing world of estate planning, making an often daunting subject easier to understand. It is Estate Planning Made Simple! The Estate of The Union Season 2|Episode 6 is out now! The episode can be found on Spotify, Apple podcasts, or anywhere you get your podcasts. If you would prefer to watch the video version, please visit our YouTube page. Please click on the links below to listen to or watch the new installment of The Estate of The Union podcast. We hope you enjoy it.

Texas Trust Law focuses its practice exclusively in the area of wills, probate, estate planning, asset protection, and special needs planning. Brad Wiewel is Board Certified in Estate Planning and Probate Law by the Texas Board of Legal Specialization. We provide estate planning services, asset protection planning, business planning, and retirement exit strategies.

Benefits of Creating a Life Estate

February 14, 2023

Today’s post discusses the significant benefits of creating a life estate. Quicken Loans’ recent article entitled “What Is A Life Estate And What Property Rights Does It Confer?” says by understanding the features of a life estate and creating one at the right time, you can enjoy several benefits, including the following:

Property Avoids Probate. Property in a life estate doesn’t go through probate. Instead, it just transfers ownership to the remainderman. This saves time and stress. It also eliminates the complications that arise when trying to spell out your intentions for your property in a will.

Property is No Longer Part of The Estate. Once your state’s Medicaid look-back period has passed, a property transferred through a life estate won’t count against your eligibility for the program.

Allows Seniors to Stay in Their Homes. Even though a life estate transfers property ownership to the remainderman, the life tenant has guaranteed residency, if desired, for the rest of the owner’s life.

While life estates are helpful, they have some drawbacks:

Property is Vulnerable to Debts Of Heirs. Because the life estate transfers property rights to a designated heir, his or her creditors may have the right to seize inherited assets to cover lingering debts, if there are any.

The Heirs’ Rights to The Property Vest at Creation. Once you create a life estate, the property rights vest in the heirs. You can’t take back those rights without the heir’s consent. As a result, some seniors use a living trust, in which its creator can always change the terms or cancel it entirely.

Property Can’t Be Sold or Mortgaged. If you want to significantly change the property, convert it into a rental, or even decide to sell, you must have the remainderman’s permission.

In sum, life estates help elderly homeowners create a straightforward, legal directive for an heir to inherit property without getting mired in probate.

Life estates also permit the owner to control the property in all respects, except they can’t sell or mortgage the property without the consent of their heirs. If created in a “timely” manner, a life estate can even help its creator qualify for Medicaid assistance.

However, life estates do have a few disadvantages.

As the life tenant, you’ll forfeit the ability to sell or mortgage your home without your heir’s permission. Since you can’t reverse a life estate without the consent of both the life tenant and remainderman, you should know all about the contract before committing to it. Discuss the potential benefits of creating a life estate with your estate planning attorney. He or she will have the experience to advise you if this strategy is best for your circumstances. If you would like to learn more about life estates, please visit our previous posts.

Reference: Quicken Loans (Aug. 9, 2022) “What Is A Life Estate And What Property Rights Does It Confer?”

What Is a Tax Reimbursement Clause?

February 13, 2023

What Is a Tax Reimbursement Clause? To understand a tax reimbursement clause, you must first understand what a grantor trust is, and how it works. A grantor trust means the person creating the trust, also called a trustor or grantor, is responsible to pay the income tax on income earned by the trust.

According to the article “Tax Reimbursement Clauses: What They Are And Why You Need To Know” from Forbes, these clauses were established when marginal income tax rates were much higher than they are today and taxpayers tried to save taxes by shifting income to a trust which paid a much lower income tax. Congress reacted by creating rules to cause the income of some trusts to be taxed to the grantor. However, tax experts reimagined the new laws and found a way to use the clause to benefit estate plans.

In 1986, when non-grantor trusts were taxed in a harsher way, grantor trusts were used for estate tax planning purposes. When assets were shifted into a trust, the goal is to have them grow rapidly and be protected by the trust. An increase in value of assets in the trust means less value in your taxable estate and outside the reach of creditors.

If you pay the income tax on the income earned by the trust, it grows faster because the value of the trust is compounding on a tax-free basis. Tax free compounding growth is considered one of the most powerful ways to build wealth.

As you pay income taxes on trust income, the trust grows faster and the assets in and value of the remaining estate is reduced. This also reduces the assets subject to the estate tax.

The purpose of the clause is to provide funds to the grantor to pay the income tax on the income earned by the grantor trust. What if the grantor trust tax becomes too much of a good thing, or if you don’t want to keep paying the income tax on the trust’s income?

If the trust can reimburse you for the income tax, it may help with cash flow concerns.

Talk with your estate planning attorney about the pros and cons of including a tax reimbursement clause in your trust. Some estate planning attorneys insist that a tax reimbursement clause must be included in every grantor trust, while others never use them. They are concerned that they may increase the risk of all trust assets being included in your estate as a result of the tax reimbursement clause being viewed as a retained right in the trust, or you as a beneficiary of the trust.

The decision depends upon your situation and your state laws. The improper use of a tax reimbursement clause might cause estate inclusion, in which case great care needs to be used before including this provision. However, there have been so many cases of taxpayers misusing tax reimbursement clauses that not including them may also make sense.

Every trust has its own language and the exercise of any tax reimbursement clause must comply with the terms of the trust.

Talk with your estate planning attorney about understanding what a tax reimbursement clause is and if it is appropriate for you. If you would like to learn more about taxes and estate planning, please visit our previous posts.

Reference: Forbes (Jan. 8, 2023) “Tax Reimbursement Clauses: What They Are And Why You Need To Know”

Naming a Secondary Beneficiary is critical

February 10, 2023

Naming a secondary beneficiary is critical to ensuring your assets go where you want them. A secondary beneficiary, sometimes called a contingent beneficiary, is a person or entity entitled to receive assets from an estate or trust after the estate owner’s death, if the primary beneficiary is unable or unwilling to accept the assets. Secondary beneficiaries can be relatives or other people, but they can also be trusts, charities or other organizations, as explained in the recent article titled “What You Need to Know About Secondary or Contingent Beneficiaries” from yahoo! life.

An estate planning lawyer can help you decide whether you need a secondary beneficiary for your estate plan or for any trusts you create. Chances are, you do.

Beneficiaries are commonly named in wills and trust documents. They are also used in life insurance policies and in retirement accounts. After the account owner dies, the assets are distributed to beneficiaries as described in the legal documents.

The primary beneficiary is a person or entity with the first claim to assets. However, there are times when the primary beneficiary does not accept the assets, can’t be located, or has predeceased the estate owner.

A secondary beneficiary will receive the assets in this situation. They are also referred to as the “remainderman.”

In many cases, more than one contingent beneficiary is named. Multiple secondary beneficiaries might be entitled to receive a certain percentage of the value of the entire estate. More than one secondary beneficiary may also be directed to receive a portion of an individual asset, such as a family home.

Estate planning attorneys may even name an additional set of beneficiaries, usually referred to as tertiary beneficiaries. They receive assets if the secondary beneficiaries are not available or unwilling to accept the assets. In some cases, estate planning attorneys name a remote contingent beneficiary who will only become involved if all of the primary, secondary and other beneficiaries can’t or won’t accept assets.

For example, a person may specify their spouse as the primary beneficiary and children as secondary beneficiaries. A more remote relative, like a cousin, might be named as a tertiary beneficiary, while a charity could be named as a remote contingent beneficiary.

Almost any asset can be bequeathed by naming beneficiaries. This includes assets like real estate (in some states), IRAs and other retirement accounts, life insurance proceeds, annuities, securities, cash and other assets. Secondary and other types of beneficiaries can also be designated to receive personal property including vehicles, jewelry and family heirlooms.

Naming a secondary beneficiary is critical to ensuring that your wishes as expressed in your will are going to be carried out even if the primary beneficiary cannot or does not wish to accept the inheritance. Lacking a secondary beneficiary, the estate assets will have to go through the probate process. Depending on the state’s laws, having a secondary beneficiary avoids having the estate distribution governed by intestate succession. Assets could go to someone who you don’t want to inherit them!

Talk with your estate planning attorney about naming secondary, tertiary and remote beneficiaries. If you would like to learn more about beneficiaries, please visit our previous posts.

Reference: yahoo! life (Jan. 4, 2023) “What You Need to Know About Secondary or Contingent Beneficiaries”

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Blog Articles

There is Value in a Life Insurance Trust

Steps to Take for End-of-Life Planning

You Need a Digital Estate Plan

Better to have a Revocable or an Irrevocable Trust?

The Estate of The Union Season 2|Episode 6 is out now!

Benefits of Creating a Life Estate

What Is a Tax Reimbursement Clause?

Naming a Secondary Beneficiary is critical

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