Consider Funding a Trust with Life Insurance

October 14, 2020

You have set up a trust and now you need to fund it. There are many different options available. You might want to consider funding a trust with life insurance. How would funding a trust with life insurance work, and could it be a good option for you? A recent article in Forbes “How to Fund a Trust With Life Insurance” explains how this works. Let’s start with the basics: a trust is a legal entity where one party, the trustee, holds legal title to the assets owned by the trust, which is managed for the good of the beneficiary. There can be more than one person who benefits from the trust (beneficiaries) and there can be a co-trustee, but we’ll keep this simple.

Trusts are often funded with a life insurance policy. The proceeds of the policy provide the beneficiary with assets that are used after the death of the insured. This is especially important when the beneficiaries are minor children and the life insurance has been purchased by their parents. Placing the insurance policy within a trust offers more control over how funds are used.

What kind of a trust should you consider? All trusts are either revocable or irrevocable. There are pros and cons to both. Irrevocable trusts are better for tax purposes, as they are not included as part of your estate. However, with an $11.58 million federal exemption in 2020, most people don’t have to worry about federal estate taxes. With a revocable trust, you can make changes to the trust throughout your life, while with an irrevocable trust, only a trustee can make changes.

Note that, in addition to federal taxes, most states have estate taxes of their own, and a few have inheritance taxes. When working with an estate planning attorney, they’ll help you navigate the tax aspect as well as the distribution of assets.

Revocable trusts are the most commonly used trust in estate planning. Here’s why:

Revocable trusts avoid probate, which can be a costly and lengthy process. Assets left in the revocable trust pass directly to the heirs, far quicker than those left through the will.
Because they are revocable, the creator of the will can make changes to the trust as circumstances change. This flexibility and control make the revocable trust more attractive in estate planning.

If you want to consider funding a trust with life insurance, be sure the policy permits you to name beneficiaries, and be certain to name beneficiaries. Missing this step is a common and critical mistake. The beneficiary designations must be crystal clear. If there are two cousins who have the same name, there will need to be a clear distinction made as to who is the beneficiary. If someone changes their name, that change must be reflected by the beneficiary designation.

There are many other types of trusts, including testamentary trusts and special needs trusts. Your estate planning attorney will know which trust is best for your situation. Make sure to fund the trust and update beneficiary designations, so the trust will achieve your goals.

If you would like to learn more about funding a trust – and what happens if you don’t – please visit our previous posts.

Reference: Forbes (Sep. 17, 2020) “How to Fund a Trust With Life Insurance”

How Does Guardianship Work?

October 13, 2020

For the most part, we are free to make our own decisions regarding how we live, where we live, how we spend our money and even with whom we socialize. However, when we are no longer capable of caring for ourselves, most commonly due to advancing age or dementia, or if an accident or illness occurs and we can’t manage our affairs, it may be necessary to seek a guardianship, as explained in the recent article “Legal Corner: A guardian can be a helpful tool in cases of incapacity” from The Westerly Sun. A guardianship is also necessary for the care of a child or adult with special needs. So how does guardianship work?

If no proper estate planning has been done and no one has been given power of attorney or health care power of attorney, a guardianship may be necessary. This is a legal relationship where one person, ideally a responsible, capable and caring person known as a guardian, is given the legal power to manage the needs of a ward, the person who cannot manage their own affairs. This is usually supported through a court process, requires a medical assessment and comes before the probate court for a hearing.

Once the guardian is qualified and appointed by the court, they have the authority to oversee everything about the ward’s life. They have power over the ward’s money and how it is spent, health care decisions, residential issues and even with whom the ward spends time. At its essence, a guardianship is akin to a parent-child relationship.

Guardianships can be tailored by the court to meet the specific needs of the ward in each case, with the guardian’s powers either limited or expanded, as needed and as appropriate.

The guardian must report to the court on a yearly basis about the ward’s health and health care and file an annual accounting of what has been done with the ward’s money and how much money remains. The court supervision is intended to protect the ward from mismanagement of their finances and ensure that the guardianship is still needed and maintained on an annual basis.

The relationship between the ward and the guardian is often a close one and can continue for many years. The guardianship ends upon the death of the ward, the resignation or removal of the guardian, or in cases of temporary illness or incapacity, when the ward recovers and is once again able to handle their own affairs and make health care decisions on their own.

If and when an elderly family member can no longer manage their own lives, guardianship is a way to step in and care for them, if no prior estate planning has been done. It is preferable for an estate plan to be created and for powers of attorney be created, but in its absence, this is an option.

If you would like to learn more about guardianships, please visit our previous posts.

Reference: The Westerly Sun (Sep. 19, 2020) “Legal Corner: A guardian can be a helpful tool in cases of incapacity”

Understanding How Trustee Fees Work

October 9, 2020

A frequent example is when you create a revocable living trust to pass on assets to your children. You must name a trustee to manage those assets. You might name yourself as trustee, although some situations may require that it be another individual or organization. It is important that you have a good understanding how trustee fees work. Trustees assume responsibilities when managing assets, and the fees can compensate them for their time and efforts.

Yahoo Finance’s recent article entitled “Trustee Fees: What Are They and Who Pays?” explains that trustee fees are a payment for services rendered. A trustee can be an individual or an organization, like a bank, wealth management company or other financial institution. Trustees will do various duties, depending on the instructions in the trust document. However, their primary job is to make certain that the assets held in a trust are managed according to the trust grantor’s (creator’s) wishes for the trust’s beneficiaries.

The trust creator will usually set out the terms of payment for a trustee in the trust document. Let’s look at some different ways to structure trustee fees. One fee structure is to pay the trustee a set percentage of the assets in the trust each year. This is typically used with larger trusts with significant assets that continually appreciate or generate ongoing income. With a smaller trust, a different fee structure might be used. Instead of a percentage, you might pay the trustee a flat dollar amount, each year. If they don’t have as many duties, they could be paid an hourly rate.

When drafting a trust document with the help of an experienced estate planning attorney, the grantor can set the terms of payment, including capping how much can be paid in trustee fees.

If a trust doesn’t mention trustee fees in the trust document, state law can determine the fee. Typically, fees can either be charged as a percentage of assets or as a percentage of transactions associated with money moving in or out of the trust.

There are no set rules for calculating the amount trustees can charge for their time. However, there are some common guidelines for how trustee fees work. In many instances, a trustee will charge a minimum of 1% when dealing with larger trusts with significant assets. Smaller trusts frequently use a flat fee model. Trustee fees are paid out of the trust’s assets. Fees are typically paid quarterly.

Trustees are also entitled to reimbursement for any expenses, such as travel expenses, storage fees, taxes, insurance, or other expenses they incur related to the management of the trust. These expenses are reimbursable, regardless of whether the trust document specifies any guidelines for reimbursement.

The trustee fees are tax deductible to the trust, and the fees are considered taxable income for the trustee. If you feel like you have a good understanding how trustee fees work, but you’re uncertain what to pay (or what to charge if you’re acting as a trustee), speak with an estate planning attorney.

If you would like to learn more about trustees and how to select the person or entity that is right for you, please visit our previous posts.

Reference: Yahoo Finance (Aug. 14, 2020) “Trustee Fees: What Are They and Who Pays?”

A Letter of Instruction is a Good Addition

October 8, 2020

A letter of instruction, or LOI, is a good addition to your estate plan. It’s commonly used to express advice, wishes and practical information to help the people who will be taking care of your affairs, if you become incapacitated or die. According to this recent article “Letter of instruction in elder law estate plan can help with managing important information” from the Times Herald-Record, there are many different ways an LOI can help.

In our digital world, you might want to use your LOI to record website names, usernames and passwords for social media accounts, online accounts and other digital assets. This helps loved ones who you want to have access to your online life.

If you have minor children who are beneficiaries, the LOI is a good way to share your priorities to the trustee on your wishes for the funds left for their care. It is common to leave money in trust for HEMS—for “Health, Education, Maintenance and Support.” However, you may want to be more specific, both about how money is to be spent and to share your thoughts about the path you’d like their lives to take in your absence.

Art collectors or anyone who owns valuable items, like musical instruments, antiques or collectibles may use the LOI as an inventory that will be greatly appreciated by your executor. By providing a carefully created list of the items and any details, you’ll increase the likelihood that the collections will be considered by a potential purchaser. This would also be a good place to include any resources about the collections that you know of, but your heirs may not, like appraisers.

Animal lovers can use an LOI to share personalities, likes, dislikes and behavioral quirks of beloved pets, so their new caregivers will be better prepared. In most states, a pet trust can be created to name a caregiver and a trustee for funds that are designated for the pet’s care. The caregiver and the trustee may be the same person, or they may be two different individuals.

For families who have a special needs member, an LOI is a useful means of sharing important information about the person and is often referred to as a “Letter of Intent.” It works in tandem with a Special Needs Trust, which is created to leave assets to a person who receives government benefits without putting means-tested benefits in jeopardy. If there is no Special Needs Trust and the person receives an inheritance, they could lose access to their benefits.

Some of the information in a Letter of Intent includes information on the nature of the disability, daily routines, medications, fears, preferred activities and anything that would help a caregiver provide better care, if the primary caregiver dies.

The LOI can also be used to provide basic information, like where important documents are kept, who should be notified in case of death or incapacity, which bills should be paid, what home maintenance tasks need to be taken care of and who provides the services, etc. A letter of instruction is a useful document and a good addition to your estate plan. It will help those you leave behind to adjust to their new responsibilities and care for loved ones.

If you would like to learn more about what should be included in your estate planning, please visit our previous posts.

Reference: Times Herald-Record (Sep. 8, 2020) “Letter of instruction in elder law estate plan can help with managing important information”

A Legal Battle Between Siblings

October 7, 2020

When your parents pass away, their assets are often divided between their children. However, if there’s no will to answer any legal questions that may arise, siblings can fight over the assets. Some even take the matter to court. It would be great to avoid these battles because, in many cases, a legal battle between siblings over an estate can end their good relationship and enrich attorneys, instead of family members.

The Legal Reader’s recent article entitled “Tips to Help Siblings Avoid or Resolve an Estate Battle” says that the following tips can help people in this situation or assist them in preventing the fight entirely, when there are no instructions for the distribution of certain assets.

Use a Family Auction. With a family auction, siblings use agreed upon “tokens” to bid for the estate items they want.

Get an Appraisal. The division of an estate between the siblings can get complicated and end in a legal battle, if the siblings want different pieces of the estate and have to work out the value difference. If, for example, the siblings decide to split the estate unevenly, and one gets a car and another a house, it’s worthwhile to engage the services of an appraiser to calculate the value of these assets. That way, those pieces of smaller value can be deducted from ones of higher value for fairer distribution.

Mediation. If siblings historically don’t get along, they may cause a legal battle over every trinket left as an inheritance, no matter how immaterial. In that case, you should use a mediator to help divide the estate fairly without a court battle.

Take Turns! Sometimes, if there are several siblings involved in the division of assets, they can take turns in claiming the items within the estate. All siblings naturally have to agree to the idea with no hard feelings involved. Just like Mom would have wanted!

Asset Liquidation. If everything else fails, the easiest way to divide the assets and the estate between the siblings is to go through asset liquidation and split the proceeds.

As you can see, there are a number of ways to deal with the division of the estate and assets and prevent the legal battle between the siblings. To avoid hard feelings, stay calm, be reasonable and ask your siblings to act the same way.

If you would like to learn more about inheritance and the role of heirs in estate planning, please visit our previous posts.

Reference: The Legal Reader (Aug. 24, 2020) “Tips to Help Siblings Avoid or Resolve an Estate Battle”

Can I Revoke a Power of Attorney?

October 5, 2020

Can I revoke a power of attorney? The simple answer is yes. Here is a cautionary tale. The story takes an unpleasant twist, after Cindy’s stepsister Charlotte suggests that she be given power of attorney to help Cindy with her business matters. When Cindy agrees, Charlotte’s attorney creates a Statutory Durable Power of Attorney that names Charlotte as her agent. What happened next, according to the Glen Rose Reporter in the article “Guarding against the evil stepsister,” was a nightmare.

A few weeks later, Cindy’s brother Prince found that Charlotte had moved money from Cindy’s personal bank accounts into a completely different bank, setting up joint accounts in Cindy and Charlotte’s names and granting Charlotte right of survivorship (ROS). This made Charlotte the legal owner of the account at the time of Cindy’s passing. Charlotte had also contacted Cindy’s former employer and was attempting to wrest control of Cindy’s pension. It wasn’t clear whether she was attempting to obtain the entire amount in a lump sum, but she was attempting to gain control.

Cindy realized that Charlotte was not to be trusted. However, Charlotte had the power of attorney, and all of these actions were legal. Could the power of attorney that she had signed be revoked? The answer is yes, which is important to know.

There were two paths available to Cindy: she could immediately revoke the Statutory Durable Power of Attorney that had been used to give Charlotte authority, or have her attorney create a new power of attorney granting power of agency to another person. Either way, Charlotte would be stripped of the legal authority to act on Cindy’s behalf.

Cindy had a new POA created, naming her brother Prince as her agent. The new POA had to immediately be presented to all of the financial institutions she deals with. She contacted her former employer and gave them proper notice that Charlotte no longer had authority to represent her. The new joint accounts that Charlotte had opened were then closed and individual accounts in her name only were open, which also ended the ROS. She could have returned her accounts back to the old bank or stayed with the new bank where Charlotte had opened new accounts. Cindy decided to stay with the new bank.

Cindy had to anticipate another challenge—that Charlotte might attempt to have Cindy declared incompetent and have herself named as Cindy’s legal guardian. To protect herself, Cindy’s estate planning attorney drew up documents stating that in the event Cindy ever needed someone to be her guardian, she did not want Charlotte to be named. In addition, she named the person she would want to be her guardian, if that is necessary in the future. While a judge ultimately has final discretion, the courts generally prefer naming a guardian as requested by an individual.

Your estate planning attorney can revoke a power of attorney, if it becomes clear that the person you’ve named is not acting in your best interests. Having an estate plan in place in advance of any medical or mental challenges is always better, so that you are less vulnerable to anyone trying to take advantage of you during a difficult time.

If you would like to learn more about powers of attorney, and other estate planning documents, please visit our previous posts.

Reference: Glen Rose Reporter (Sep. 10, 2020) “Guarding against the evil stepsister”

What Does an Executor Do?

October 2, 2020

Being asked to serve as the executor of a loved one’s estate is flattering, but it is also a big responsibility and a lot of work. So what does an executor do? As the executor, you are responsible for taking care of all of the financial and legal matters of the estate, explains the article “An executor’s guide to settling a loved one’s estate” from Review Times. The job will require a lot of time and, depending upon the complexity of the estate and the family situation, could be challenging.

Some of the tasks of an executor include:

Filing court papers to start the probate process to determine whether the will is valid.
Making a complete inventory of everything in the estate.
Obtaining an estate tax ID number, opening an estate bank account and using the estate funds to pay bills, including funeral costs and medical bills.
If the estate includes a home, maintaining the home and paying the mortgage, taxes, etc.
Terminating credit cards, notifying banks and government agencies—including Social Security—and the post office.
Preparing and filing income tax returns for the last year of the person’s life, unless they filed them already, and for the estate.
Distributing assets, as directed by the will.

Your first task as an executor is to locate the will and any important documents and financial information. You will need the will, deeds, titles, brokerage statements, insurance policies, etc.

If the estate is complicated, you will want to work with an estate planning attorney, who can guide you through the process. The estate pays for the attorney, and the executor works closely with them. Every state has its own laws and timetables for the executor’s responsibilities, which the attorney will be familiar with.

If possible, find out if there are any family conflicts, before the loved one passes. If there are potential problems, it may be better for the loved one to tell who will be inheriting what before they die. If there is no plan for asset distribution, the person who is asking you to be the executor needs to meet with an estate planning attorney as soon as possible and have a plan created, with all of the documents necessary for your state.

The executor is entitled to be paid a fee, which is paid by the estate. In most states, that fee is set at a percentage of the estate’s value, depending on the size and complexity of the estate. If you are both an executor and a beneficiary, you may want to forgo the fee, because fees are taxable, but in most states, inheritances are not.

If you would like to learn more about the role of the executor, please visit our previous posts.

Reference: Review Times (Sep. 6, 2020) “An executor’s guide to settling a loved one’s estate”

Do I Have to Accept an Inheritance?

October 1, 2020

Do I have to accept an inheritance? That is a phrase many estate planning attorneys hear. Most people don’t use a disclaimer because they’re not entitled to other assets to offset the value of the asset disclaimed. They don’t get to decide who gets their disclaimed asset.

MarketWatch’s recent article entitled “Can I reject an inheritance?” explains that the details can be found in Internal Revenue Code §2518. However, here are some of the basics about disclaimers.

In most states, a qualified disclaimer can be filed within nine months of an asset owner’s death. This disclaimer is irrevocable. Therefore, once it’s done, it’s done. This can create problems with IRAs because they have beneficiary designations, and the death claim can be processed with a few forms. As soon as the funds are transferred to an inherited IRA, disclaiming is no longer an option.

When a person declines to accept an inheritance, the assets are distributed as though that beneficiary had died prior to the date of the benefactor’s death. Therefore, with an IRA, it is pretty simple. If you disclaim all or a part of the IRA, the funds pass on, based on the beneficiary designation.

The IRA usually has a secondary beneficiary named. If the beneficiaries in line to inherit the account are who you would want to inherit the account, disclaiming should transfer the account to them. However, if they’re not who you want to get the funds, you have little leverage to do anything about it.

If there are no other beneficiaries and you disclaimed an inheritance, the money goes back into the decedent’s estate.

The funds would go through probate and be directed based upon his will. If there was no will (intestacy), the probate laws of the decedent’s state will dictate how the assets are distributed.

Having an IRA go through an estate is inefficient, time consuming and adds additional costs beyond the taxes.

All these drawbacks can be avoided, by properly designating beneficiaries.

Being wise with your beneficiary designations, also provides flexibility in your estate plan.

For example, you can set up beneficiary designations to purposely give an inheritor the option to disclaim to other family members if they choose not to accept an inheritance, which is done when the primary beneficiary can disclaim to a family member that is in greater need of funds or is in a lower tax bracket.

If you would like to learn more about beneficiary designations, please visit our previous posts.

Reference: MarketWatch (Aug. 25, 2020) “Can I reject an inheritance?”

What Should You Look For In A Trustee?

September 30, 2020

You have begun the task of creating an estate plan. You have selected beneficiaries for your assets, but now comes the naming of a trustee. What should you look for in a trustee? The trustee is tasked with caring for the assets in the trust for one or more beneficiaries. It is the trustee who handles all the necessary paperwork and sees that tax returns are filed.

FedWeek’s recent article entitled “Your Options for Selecting a Trustee” explains that probate and trust law creates a fiduciary responsibility, so the trustee is accountable to the trust beneficiaries and must serve the beneficiaries’ best interests. Here are the types of trustee one can select:

Individual trustee: this can be a friend or relative who’s probably familiar with everyone involved and may well make the decisions desired by you, the trust creator. If you decide to go with an individual, make sure you choose someone who is trustworthy. It’s the most important qualification of a trustee. Ask yourself if this a is person who I can trust unconditionally to carry out my wishes when I’m gone. You also need to be certain that your trustee is financially responsible. The reason is that a trustee’s duties will include handling your financial accounts and being responsible for your investments. Therefore, finding a person who’s proven themselves to be financially responsible is critical. A trustee needs to deal with financial accounts, as well as the responsibility of accounting to the trust beneficiaries regarding all assets, income and expenses of a trust. Therefore, basic record keeping skills are required. Finally, you need someone who’s available. Choose a trustee who’s likely to be available when the need for his or her services arises. Age, health, job demands and location are all things to take into account, when selecting a trustee.

Institutional trustee: a local bank or trust company might have the resources to manage your assets. They also will have the staying power to handle long-term trusts.

You can also set up a combination of the two. You could designate an institution and an individual as co-trustees. That way, you may get financial expertise and personal attention. If discretionary decisions are permitted, you can leave instructions that both co-trustees must agree.

You can also add “trustee removal” powers into the terms of the trust to reduce the risk that a trustee will prove to be unsatisfactory. A majority vote of adult income beneficiaries may be enough to get a new trustee. That person must be an unrelated person or institution.

When you name an individual as trustee or co-trustee, again make certain that he or she is qualified to do the job, then get his or her consent.

When you have found what you were looking for in a trustee, you should also designate a successor trustee. Just in case your first choice is unable or unwilling to serve.

If you would like to learn more about trusts and how they work, please visit our previous posts.

Reference: FedWeek (Aug. 13, 2020) “Your Options for Selecting a Trustee”

Disinheriting A Child As An Heir

September 29, 2020

Disinheriting a child as an heir happens for a variety of reasons. There may have been a long-running dispute, estrangement over a lifestyle choice, or not wanting to give assets to a child who squanders money. What happens when a will or trust has left a child without an inheritance is examined in an article from Lake County News, “How to Protect Your Estate from Unintended Heirs.”

Circumstances matter. Was the child born or adopted after the decedent’s estate planning documents were already created and executed? In certain states, like California, a child who was born or adopted after documents were executed, is by law entitled to a share in the estate. There are exceptions. Was it the decedent’s intent to omit the child, and is there language in the will making that clear? Did the decedent give most or all of the estate to the other parent? Did the decedent otherwise provide for the omitted child and was there language to that effect in the will? For example, if a child was the named beneficiary of a $1 million life insurance policy, it is likely this was the desired outcome.

Another question is whether the decedent knew of the existence of the child, or if they thought the child was deceased. In certain states, the law is more likely to grant the child a share of the estate.

Actor Hugh O’Brien did not provide for his children, who were living when his trust was executed. His children argued that he did not know of their existence, and had he known, he would have provided for them. His will included a general disinheritance provision that read “I am intentionally not providing for … any other person who claims to be a descendant or heir of mine under any circumstances and without regard to the nature of any evidence which may indicate status as a descendant or heir.”

The Appellate Court ruled against the children’s appeal for two reasons. One, the decedent must have been unaware of the child’s birth or mistaken about the child’s death, and two, must have failed to have provided for the unknown child solely because of a lack of awareness. The court found that his reason to omit them from his will was not “solely” because he did not know of their existence, but because he had no intention of giving them a share of his estate.

In this case, the general disinheritance provision defeated the claim by the children, since their claim did not meet the two standards that would have supported their claim.

This is another example of how an experienced estate planning attorney creates documents to withstand challenges from unintended outcomes. A last will and testament is created to defend the estate and the decedent’s wishes. If you would like to learn more about inheritance and how to distribute assets to your heirs, please visit our previous posts.

Reference: Lake County News (Aug. 22, 2020) “How to Protect Your Estate from Unintended Heirs.”

Blog Articles

Consider Funding a Trust with Life Insurance

How Does Guardianship Work?

Understanding How Trustee Fees Work

A Letter of Instruction is a Good Addition

A Legal Battle Between Siblings

Can I Revoke a Power of Attorney?

What Does an Executor Do?

Do I Have to Accept an Inheritance?

What Should You Look For In A Trustee?

Disinheriting A Child As An Heir

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