TRUSTEE STANDARD OF CARE
Trustee standard of care also is a constantly evolving area of law. Generally, Courts construe the trustee’s standard to be very high. Initially, the beneficiary does have the right, in most, but not necessarily all circumstances, to demand that the trustee disclose trust-related information. At that point, if the beneficiary believes that an impropriety has occurred, the beneficiary must, to the extent possible, expressly state the nature of the dispute or impropriety. The Courts are not uniform in determining the extent to which the beneficiary must initially present, if at all, evidence of the trustee’s alleged wrongdoing. Assuming that the beneficiary has stated a potentially valid claim, it is then the burden of the trustee to refute that claim with sufficient evidence. Assuming that the trustee can present sufficient evidence tending to refute the claimed impropriety, the beneficiary will want to present evidence establishing trustee wrongdoing.
The general standard of trustee care is stated in Cal. Probate Code §16040. The trustee should administer the trust with the reasonable care, skill, and caution that a prudent person would under the current circumstances to accomplish the purposes of the trust as determined from the trust wording. A trustee who has special skills is required to use those skills.
Generally, the trustee should not delegate responsibilities that the trustee can reasonably be expected to perform. However, in practice it is not uncommon for trustees to delegate certain responsibilities, and, by statute, in appropriate circumstances a trustee can delegate specific duties. Some of the responsibilities that might be delegated are investment, tax, legal and accounting in nature. The trustee must prudently select which agents to use, and must oversee those agents.
Confidentiality, self-interest, and impartiality: A trustee has a duty of confidentiality. The trustee has a general duty, but not in all circumstances, not to disclose to a third person information about the trust and the beneficiaries. However, the trustee might need to disclose certain information to properly administer the trust. More important, a trustee must not put his or her interests above those of the trust or the beneficiaries, and should avoid conflicts of interest with the trust and the beneficiaries. This can be a difficult area because it is absolutely permissible and common for a trustee also to be one of several beneficiaries. Although not a legal requirement, it has been my experience that a trustee should try to avoid even the appearance of self-dealing, or that he or she has placed his or her interests above those of the trust or beneficiaries. If potential conflicts exist, often disputes can be avoided by obtaining prior beneficiary or Court approval of the action to be taken. The trustee should act impartially between the competing interests of the various beneficiaries. Unless the trust specifies otherwise, the trustee should not favor a particular beneficiary or class of beneficiaries.
Discretionary powers
A trust will typically contain provisions that give the trustee discretionary powers, that is, the power to use his or her own judgment in specific circumstances. The amount of discretion is strictly construed from the language in the trust document and the intent of the trustor. Be cautious, however—even if the trust provides sole, absolute or uncontrolled discretion, Courts still require the trustee to act within the fiduciary standards and not in bad faith or in disregard of the purposes of the trust. In other words, if the issue of a trustee’s discretion is presented to the Court, the Judge will make a determination based on his or her own evaluation. Unless limited by the terms of the trust, the trustee also has other statutory powers. You should review the powers and limitations specified in the trust document, and also the powers listed at Probate Code §§16200-16249.
Co-trustees
Some trusts have co-trustees, that is, a trust that has two or more people acting as trustees at the same time. Unless the trust provides otherwise, co-trustees must act unanimously. However, the trust can allocate powers unequally between co-trustees. And, in limited circumstances if a co-trustee is unavailable, the remaining co-trustees may act. If the co-trustees are stalemated on a decision, one or more of the co-trustees can file a Court petition for instructions. A co-trustee can be liable for a breach of duty by a co-trustee.
Investments and management
The trustee has the duty to invest trust property for the benefit of the beneficiaries, subject to restrictions or limitations stated in the trust. The trustee’s investment powers are provided by the terms of the trust. If not derived from the trust, the investment powers are also derived by statute, case law and the factual circumstances. Generally, the trustee has the duty to make trust assets economically productive.
The trustee is subject to the Uniform Prudent Investor Act, unless the trust provides for a greater or lesser standard of care. A trustee must invest and manage the trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. The trustee must exercise reasonable care, skill, and caution. A trustee’s investment and management decisions relating to individual assets and courses of action are evaluated in the context of the trust’s portfolio as a whole and as a part of an overall investment strategy reasonably suited to the trust’s risk and return objectives. Unless the trust states otherwise, the trustee has a duty to invest trust property, preserve it, and make it productive.
The trustee must consider the interests and needs of all beneficiaries, income and remainder, when making investment decisions. The beneficiaries may have conflicting interests. When two or more income beneficiaries have different personal income tax brackets, generally the trustee should strike a balance between them when determining how much to invest in certain assets. However, the trustee might be allowed to prefer one class of beneficiaries over another if the trust terms direct—this can be a difficult area and cause litigation concerns.
Accountings and information
The general rule is that the trustee is required to keep the beneficiaries reasonably informed about the trust and its administration. However, there are important exceptions. Upon reasonable request by a beneficiary, the trustee must provide the beneficiary with a report of the information relating to the assets, liabilities, receipts, and disbursements of the trust, the acts of the trustee, and the particular terms of the trust that are relevant to the beneficiary’s interest.
Probate Code §16062 requires the trustee to provide an accounting at least annually, at termination of the trust, and upon a change of trustee to each beneficiary to whom current distribution of income or principal is authorized. However, the accounting or information might not be required if waived by the terms of the trust or the beneficiary, or the trust in question is revocable. The trustee must maintain proper accounts. Accounting requirements are beyond the scope of this discussion—for example, generally, the records might be required to differentiate between potentially confusing accounting aspects such as income and principal allocations.
HOW MARITAL TRUSTS WORK—ARE YOU IN NEED OF ONE?
By N. Brian Caverly, Esq. and Jordan S. Simon
Most marriage-oriented trusts postpone payment of estate taxes until both spouses in a marriage have died. A marital deduction trust allows you to put property in trust with your spouse as the beneficiary. Upon your death, your spouse has the right to use the property in the trust.
No matter how valuable the property in the trust is even if it exceeds that year’s federal estate tax exemption amount, your spouse won’t owe any federal estate taxes. When your spouse dies, any leftover amount transfers to the beneficiaries that your spouse determined.
One of the more popular uses for all trusts is to buy time on paying any applicable estate taxes until both spouses have died, or to skip over your spouse for purposes of transferring property but still your spouse the right to income from a trust. QTIP trusts and bypass trusts enable you to tailor your trust arrangements with your personal needs.
How do QTIP trusts compare to marital deduction trusts?
If you die first but want to determine who receives the trust property after your spouse dies, consider using a Qualified Terminable Interest Property trust, commonly known by its acronym as the QTIP trust. A QTIP trust operates much the same as a marital deduction trust, with one important exception: You, not your spouse, specify who receives the remaining property in the trust after your spouse dies.
When should you consider using a marital deduction trust instead of a QTIP, or vice versa? Consider the following: Suppose that you and your spouse were only married once (to each other); you have a happy, contented marriage; and both your children act like they stepped out of a 1950s or early 1960s TV show, such as Ozzie and Harriett or Leave It to Beaver. You both want the other provided for no matter who dies first and want to set up some type of trust to delay or diminish federal estate taxes, but then after the second spouse dies, you both want the remainder to go to your children.
In this case, either a QTIP trust or a marital deduction trust probably works equally as well, because you both agree (at least for now) about how you eventually want to distribute the remaining property in your estates.
If you set up a marital deduction trust and you die first, your spouse can later designate your two children as equal beneficiaries of the property left in the trust. Or, perhaps one of your two children makes millions of dollars in business or in the stock market; your spouse can decide to leave the entire leftover estate to the other child who wasn’t quite so fortunate or skilled. Whatever the rationale, a marital deduction trust allows the beneficiary-designation to be delayed as long as possible.
Now consider the following, however. You and your current spouse are each on your second marriage, and you each have children from your first marriage. You and your spouse’s first-marriage children (to put it delicately) don’t quite see eye to eye. The word “freeloaders” comes to mind every time you hear their names, but your spouse thinks of those first-marriage offspring as “my angels.”
Regardless of your cool relationship with your spouse’s children, you and your spouse have a happy marriage, and you want to provide for your spouse if you die first. And, because you both are fairly well off financially, a marriage-oriented trust makes sense to delay estate tax impacts.
But do you want your spouse to decide what happens with any leftovers from your estate upon his or her death, as would be the case in a marital deduction trust? Probably not.
A QTIP trust enables you to designate what happens to leftovers. After all, this estate is yours, and for all intents and purposes you are just “loaning” it to your second spouse for the duration of his or her life if you die first. Afterwards, you want the leftovers to go to your children, or your favorite charity — anyone but your spouse’s children from that first marriage, which is what may happen if you leave the decision up to your spouse by using a marital deduction trust.
How do bypass trusts work?
Married couples can also shelter property from estate taxes by using a bypass trust, which in effect bypasses the surviving spouse. Suppose that you die before your spouse does but instead of either a QTIP trust or marital deduction trust, you’ve set up a bypass trust.
Instead of the property being held in trust for your spouse (as in a QTIP or marital deduction trust), the property in a bypass trust “bypasses” your spouse (thus the reason for the often-used term) to someone else, such as your child, for whom the property is held in trust.
However, unlike the relatively simple process of giving property to your child as a gift or leaving your child property in your will, your spouse can still benefit from the property under a bypass trust. Although the property is held in trust for the ultimate benefit of your child, your spouse (while living) can have the benefit of the trust assets.
Because your spouse never takes possession of the property in a bypass trust, he or she never is considered to be the property owner and therefore never has to include the property in his or her estate — and possibly be subject to estate taxes on the property.
An incredible number of rules apply to bypass trusts and, specifically, the estate tax consequences. The IRS has all kinds of restrictions. To determine the exact amounts you want to use to fund a bypass trust, consider the exemption amounts, your estate’s value, the value of your spouse’s estate, and other factors.
FINANCIAL ELDER ABUSE ON THE RISE–YOU NEED AN INCAPACITY PLAN
ESTATE ELDER ABUSE IS ON THE RISE
California is one of the few states with strong estate elder abuse laws. Offenders can be fined or sent to prison for defrauding older adults.
Many other states require the elderly to cooperate in prosecuting fraud, including making a statement. The elderly person has to leave home and go to court, and if there’s a conviction, the person usually doesn’t even get a harsh sentence, even though the elder’s entire life savings can be wiped out. Having a well-organized estate plan does not necessarily prevent intra-family scheming. See more at link below.
HAVING AN INCAPACITY PLAN IN PLACE IS CRUCIAL TO YOUR OVERALL ESTATE PLAN
A California court awarded Kerri Kasem temporary durable power of attorney and health care directive and has ordered Jean Kasem to surrender Casey Kasem’s passport to the daughter. The California judge also ordered that Casey Kasem can’t travel anywhere without a court order until a doctor clears him.
DISCLAMER: The information provided by WFB Legal Consulting, Inc. in this newsletter is disseminated for educational purposes only, and is not to be construed as legal advice. Do not take any action, postpone any action, or decline to take any proposed action based on this information without first engaging the representation of a licensed attorney at law in your State of residence.
ESTATE PLANNING: POWER OF APPOINTMENT APPLICATION
Denis Behan created a Trust in 1994, and into he placed his personal residence. Denis made his four children the beneficiaries of the Behan Trust, and three of the children (but not the fourth, Philip) were also made Trustees.
Each of Denis’ children were given a 1/4th interest in the Trust, subject to the Spendthrift Provision which protected those interests from a child’s creditors.
Critically, each child was given a withdrawal right, embodied in the following paragraph:
In addition, the Trustees shall pay to or for the benefit of such child all or so much of the principal and accrued income of such share as such child may specifically demand in writing from the Trustees so long as such child is not incapacitated at time of demand.
Each child could, through their Will and upon their death, also appoint their share of the Behan Trust assets to whomever they designated.
Four years later, in 1998, Denis passed. Apparently, the Behan Trust percolated along without difficulty for the next 14 years.
Then, Philip J. Behan filed for Chapter 7 bankruptcy on June 6, 2012.
The only significant asset listed by Philip in his bankruptcy schedules was a Power of Appointment that he had in the Behan Trust created by his father. Philip asserted that he had no control over the Trust or its assets, and that the Trust had a Spendthrift Provision that protected his interest from creditors.
Philip claimed that the Power of Appointment held little or no value, and at any rate the value was within the amounts of his creditor exemptions allowed by local law.
Asset protection planners have long looked for the Holy Grail of Trusts, meaning a trust that would lawfully allow a beneficiary to control and use the trust assets, while keeping those assets from the reach of the beneficiary’s creditors.
The first attempt was the Foreign Asset Protection Trust (“FAPT”), which seemed to reach this result simply because the Trust’s assets were outside the U.S. and beyond the reach of creditors. But then, courts started throwing the settlor-beneficiaries in jail until the assets were returned back to with the U.S. so they would be available for creditors. This doesn’t always happen, but it happens enough as to make FAPTs suspect as an asset protection planning tool, and not just a few asset protection planners have abandoned their use in all but very limited circumstances.
The second attempt was the Domestic Asset Protection Trust (“DAPT”), which attempted to rely on favorable state law to reach the same result that FAPTs were supposed to reach. However, this has so far proven to fail if the settlor-beneficiary is not resident in a state that has adopted DAPT laws. But worse, in 2005, Congress amended Bankruptcy Code 548(e) to create a 10-year Statute of Limitations for challenges to “self-settled trusts and similar devices” and which law was aimed specifically at DAPTs. It is frankly a wonder that anybody with more than a minimal knowledge of creditor-debtor law now uses DAPTs at all — though of course the trust companies market them quite shamelessly to the unwary without revealing these trusts’ very serious flaws.
Which brings us to present day, and the third attempt to create the Holy Grail of Trusts, being the so-called “Special Power of Appointment Trusts”, or “SPA Trusts” for short. The idea here is that the settlor of the trust is not, repeat not, given anything like a beneficial interest in the trust, i.e., is not made a beneficiary of the trust.
However, and here is the catch, the creator of the trust (know as the “settlor”, or somebody so close to the settlor that they are effectively the settlor’s nominee, is given a Special Power of Attorney that at some later date they can exercise the Power of Attorney and give the themselves a share (or all) of the trust’s assets.
In estate planning parlance, the SPA Trust essentially creates a “springing beneficiary”, i.e., somebody who was not a beneficiary when the trust was created, but then later becomes a beneficiary at some future date, presumably when the settlor has no creditors hovering about who might try to snatch up trust assets.
Which brings us back to the Bankruptcy Court’s opinion in Behan, because the Court essentially held that such Powers of Appointment can be used by a Chapter 7 Court-Appointed Trustee (“C7T”), to access the beneficiary’s share of the trust assets, even if a Spendthrift Clause says otherwise.
Another way to look at this is that Courts are looking past the language in trust documents, and seeing what might actually occur. If at some point, a debtor-beneficiary might get access to trust assets, then the Courts are basically treating that possibility as if it has already occurred — by letting the C7T exercise whatever powers the debtor has to bring that result about.
The C7T took the position that the Spendthrift clause was unenforceable, because Philip had the right to demand his share of the Behan Trust assets at any time — and the Trustee had no discretion to refuse Philip’s request. Moreover, because Philip had a Power of Appointment over his share of the Behan Trust assets, the C7T argued that this amounted to control over Philip’s share such that the assets became part of his bankruptcy estate, and thus available to his creditors.
Philip, of course, disagreed. Philip argued that the Power of Appointment did not override the Spendthrift Clause, and at any rate the value of the Power of Appointment was nothing like the value of his share of the assets, but some much, much lower number — so low, Philip argued, that it was within his personal property exemption under Massachusetts law.
The Bankruptcy Court agreed with the C7T. The fly in Philip’s ointment was the Power of Appointment. Because Philip had a Power of Appointment by which he could direct where his share of the Behan Trust asset would go, that Power of Appointment became an asset of Philip’s bankruptcy estate and thus ended up being held by the C7T, who could exercise the Power of Appointment for the benefit of Philip’ s creditors.
After a long and very technical discussion of how the Power of Appointment caused Philip’s share of the Behan Trust to end up in his estate, the Court concluded:
In the present case, the Trust document unequivocally confers on the beneficiaries the right to demand their share of the principal and accrued income provided that “such child … specifically demand in writing from the Trustees … [their share] … [and] … so long as such child is not incapacitated at the time of demand.” The power of appointment, although not exercised, defeats the spendthrift provision set forth in the Trust. As a property interest, the [C7T] is authorized to exercise the power of appointment for the benefit of the Debtor’s bankruptcy estate, subject to this Court’s determination of the [C7T]‘s Objection to the Debtor’s amended claim of exemption in the power of appointment.
We’ll have to see in future cases involving more modern trusts how this plays out, but the Behan opinion certainly sounds a warning horn that all may not be well in Power of Appointment land.
For more on SPA Trusts, see “Are Special Power of Appointment Trusts And Hybrid Trusts ‘Similar Devices’ To Self-Settled Trusts?” at http://onforb.es/11djfUQ and http://goo.gl/RMWGn
ESTATE PLANNING—NOT A ONE-TIME DEAL
A very logical and important article follows below:
Many believe that setting up an estate plan is all there is to estate planning. This is incorrect, and potentially disastrous. Estate plans need to be updated if certain life changes occur, and if there are no life changes, every three to four years. By leaving an estate plan stagnant, trustors put themselves and their beneficiaries at a major disadvantage.
Here are 7 main reasons to review and update your Estate Plan regularly
1. Moving to a New State Or Purchasing Property in a New State
State laws are different and updating an estate plan to reflect the purchase of property in that state could offer tax advantages.
2. Purchase or Sale of a Business
When a business is purchased, a trustor needs to make accommodations for succession, death or disability. When a business is sold, the plan needs to be updated to reflect that.
3. Change in Beneficiary Circumstances
Sometimes, a beneficiary or fiduciary may need to be removed due to mitigating circumstances such as death, change in health or mental capacity, finances or other personal reasons.
4. Birth or Adoption
Most estate plans automatically update to accommodate new additions to the family and provide for all children equally. Any variations to equal shares must be made through a revision.
5. Death
If any of the designated beneficiaries or fiduciaries has died, it is in the best interest of the trustor to change the estate plan accordingly. Not updating the estate plan on the death of a beneficiary could result in a prolonged and costly execution of the trustor’s wishes.
6. Marital Status
A new marriage creates a whole new set of tax planning opportunities which would be lost if the estate is left as is. Conversely, it is very important to update estate plans after a divorce to remove a former spouse as a beneficiary and to change designees to life insurance and retirement plans.
7. Taxes
Another important reason to regularly review estate plans is to take advantage of the changes in tax laws. For example, the US estate tax is currently 40%. However, there is an estate tax exemption of $5.34million (double for married couples). Ten years ago, the exemption was $675,000 (double for married couples). If an estate plan was set up ten years ago and ignored, the trustor could be at risk of missing out on the changes to the tax laws.
http://lataxlawyers.com/blog/view/estate-planning-not-a-one-time-deal#%2EU8lvofldU_s
TRUSTEE OR NOT TO TRUSTEE–TAKE CAREFUL AIM WHEN CREATING AN ESTATE PLAN
Typically, a trustee will have control over assets for many years when chosen to serve either as part of your initial estate plan, or as a successor trustee. Therefore, important decisions need to be made after considering important factors that go into the equation. Accordingly, make sure you and your attorney give sufficient attention to this important fiduciary role. See some pivotal points to consider outlined in the full article contained in this month’s BBS Newsletter, or at the following link: http://www.financial-planning.com/blogs/selecting-a-trustee-how-financial-advisors-can-help-clients-2689352-1.html
Visit: https://protectyourestate365.com/
ESTATE AND FINANCIAL PLANNING “PLANNING”–it’s more than just “PASSING THE BUCK”
So much of proper estate planning involves more than just “who gets your estate when you pass.” After you’ve worked a lifetime, accumulating assets along the way, planning now can help you avoid losing your house and emptying your bank account in the event of a disabling illness or sudden death. And yes, planning now also will help in the smooth transfer of your estate to the special people in your life.
Estate planning involves much, much more than writing a Last Will and Testament. Many consider transferring ownership of assets to a “Living Trust,” which they or a designated trustee control during the person’s lifetime. A “Living Trust” is different from a “Living Will,” which only expresses your wishes about being kept alive if you’ become terminally ill or seriously injured. This is, in part, why I have always stressed a trust “package” comprising a comprehensive portfolio covering all contingencies in combination with your overall estate goals.
Since the approach taken will depend on your personal situation, consult with your lawyer and other appropriate expert in the financial planning area. Above all, be wary of “free” estate planning seminars whose business is to merely sell legal and financial services even if your personal situation does not necessarily justify it.
Some things to consider in your financial/estate planning:
- Select the best type of estate/financial plan such as a “living trust” and “last will and testament”
- Determine your cash flow and the value of your assets. It is very difficult to develop a financial plan if you do not know how much income you will receive now and in the future.
- Calculate your net worth. In addition to your regular income and expenses, identify your assets and liabilities in your overall calculation.
- Always anticipate changes, such as illness, inflation, retirement, etc. These changes could affect your financial status.
- Medical services and long-term care costs are important considerations in end-of-life care planning. Although there is often no easy or simple way to determine how to meet these future needs, it is important to learn what kind of financial assistance you may be able to receive under your health insurance plan, disability insurance plan and Medicare/Medicaid Benefits (Social Security Administration).
- Make sure you have selected an objective trustee who is capable of moving forward with your estate and financial plan requests, and who will stand tall against any challenges brought by beneficiaries.
- Avoid surprise costs and let your family know your wishes by planning funeral arrangements specifically within your trust package.
- Make sure your trust contains a “no-contest” clause to avert any challenges by beneficiaries wherever possible.
Remember, in the end, planning an estate is no different than planning any other type of activity or project. 1) Plot out the goals you want to meet; 2) Secure the pieces you will need to accomplish those goals i.e., pick a trustee and successor trustees and secure health plans/funeral arrangements, etc. AND, 3) Hire and meet with a Lawyer for Business—not the internet.
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TRUST DECANTING
The term revocable trust means just that– the trust cannot be revoked or, in other words, terminated in a way that would change its terms and conditions concerning both the assets in the trust as well is the beneficiaries’ position. My clients are always advised of two critical things when the notion of an irrevocable trust is being considered: what is it you want to accomplish in creating a revocable trust; and are you prepared to give up the ownership of your assets in exchange for whatever benefits you might otherwise not receive? Clearly, a lot of people focus on giving their assets away in order to protect them. Sounds like a great plan however this must be done in a legitimate fashion in order to avoid claims of fraudulent transfer. However, there are other reasons that crop up subsequent to the completion of the trust which invites second thoughts.
An individual’s or family’s need to modify an irrevocable trust arises fairly often as hindsight may reveal that an irrevocable trust is defective in some key aspect. This defect may have been caused by a change in circumstances, legislative changes such as ATRA, or an error in drafting.
There are several ways in which an irrevocable trust can be fixed. Decanting is only one option among many that may be used to fix a broken or obsolete trust. Estate planning counsel must be proficient at recognizing which techniques may apply to a particular set of facts and then implementing those techniques.
A trustee may want to “decant” a trust by transferring funds from one trust to another with preferable terms. The trustee may be unsure, however, as to when the trustee is authorized to decant the trust. “A trustee’s powers include those specified in the trust instrument, those conferred by statute, and those needed to satisfy the reasonable person and prudent investor standards of care in managing the trust.”
Below is a fine article on this subject, the full presentation of which can be found here: http://www.lexisnexis.com/legalnewsroom/estate-elder/b/estate-elder-blog/archive/2012/09/06/morrison-amp-foerster-llp-decanting-a-california-trust.aspx
WHY DO PEOPLE NOT SEEK LEGAL ADVICE WHEN CONSIDERING AN ESTATE PLAN?
Most people cannot accept and plan for the fact of their own deaths. Insurers, for example call death insurance “life insurance” and agents are careful to emit the word “death” from their discussions with clients. As Freud once wrote, “Our own death is indeed unimaginable, and whenever we make the attempt to imagine it we can perceive that we really survive as spectators. Hence, at bottom no one believes in his or her own death, or to put the same thing in another way, in the unconscious every one of us is convinced of his own immortality.”
Modernly, another reason is the cost involved. It seems like a big deal to go to a lawyer and of course many people arrange to transfer their property at death by way of joint tendency, payable on death designations, life insurance policies, pension plans, etc. The notion of creating a revocable trust and avoiding probate is less important than buying a big screen television. The distribution of probate property of the person who dies without a trust, or even with a will, that the that does not make a complete disposition of his or her state, is governed by statute in each state. If a will is so poorly crafted, for example, that it disposes of only part of the probate estate, then the result is partial intestacy.
Generally speaking, the law of the state where the decedent was domiciled at death covers the disposition of personal property, and the law of the state where the decedent’s real property is located governs the disposition of real property. In some way, the psychological notion that the state and the law will manifest in the end what is best for an individual, provides a false sense of confidence that everything will take care of itself at time of death. Of course, nothing could be further from the truth. A lack of privacy, cost, and the time lag involved in distributing an estate through probate, rears its ugly head immediately upon death.
Dare I say, yet another reason is pure selfishness. Many people simply don’t care what happens to their estate or what their descendants might have to put up with after they are gone. This notion is more prevalent than you would think. Not only does this type of a belief system affect a person’s descendants as ability to access the estate proceeds as described above, it prohibits seeing the big picture in terms of combining an effective estate plan with the protection of one’s assets. While generally speaking, an irrevocable trust will provide asset protection, a revocable trust generally will not, although it can house a business that affords asset protection, while allowing the passage of that business to descendants without unnecessary cost in a timely manner, free from an invasion of privacy.
It would be prudent, therefore, at this point to clear up any misconceived notions about what a trust actually is. Generally speaking, it is a device whereby a trustee manages property who is a fiduciary for one or more beneficiaries. The trustee holds legal title to the property and, in the usual trust, can hold or sell the trust property and replace it with property sought to be more desirable. The beneficiaries hold equitable title and are entitled to payments from the trust income and sometimes from the trust corpus as well. Many times, the trust is to end on the death of the settlor– the creator of the trust. Property is then distributed at the settlor’s death without probate and without a court order, directly to the beneficiaries. The terms of the revocable trust may call for distribution of the trust assets as stated, at the time of the settlor’s death, or in some instances, after his death.
It is rather ironic that a generation after the will began to lose its dominance because of the public’s seeming desire to avoid probate, the revocable trust has replaced it as a document with almost all the same attributes as a will but without the necessity of probate. Nevertheless, people still in many cases, avoid lawyers and the expense which a trust entails. The real irony, however, is convincing an individual that he can be his own worst enemy. We tend to invest in the things that we want rather than the things that we need. Everyone needs a trust if they want to avoid having their estate shared by the state. However, if you choose to go the inexpensive route and avoid seeing a lawyer for business who can create your estate plan, and rather wish to take probate head-on, or simply tackle the process by using a do-it-yourself website– then go for the big screen TV. At least the TV will provide you with entertainment prior to passing without a trust.
THE BLOODLINE TRUST: ESTATE PLANNING ADVANTAGES
A Bloodline Trust makes available very interesting tax benefits and also protects assets if children get divorced. Some highlights are as follows:
1. Asset exemption from the Federal Estate Tax: assets will pass down through generations using a Bloodline Trust. In this way, double or triple taxation issues are eliminated. For example, when you pass, your assets are included in your “taxable estate” and therefore subject to federal estate taxes. Federal estate tax applies if the value of your estate exceeds $5.25M. In other estate plans, not only are those assets subject to estate tax at your death, but when your children pass, any remaining assets will be subject to the estate tax a second time when your children leave the assets to their children (your grandchildren). Subsequently, those same assets, or a portion thereof, will be taxed a third time if passed down to your great-grandchildren. A Bloodline Trust, eradicates double or triple taxation issues.
2. If children get divorced after you have passed, their inheritances can be protected from spouses. In a traditional estate plan, if you leave a child an inheritance and that child later divorces, the ex-spouse will usually receive a portion of the inheritance. The assets will be “marital” in nature and therefore part of the “community” in effect, leaving them open to attack for distribution in a divorce. Furthermore, any income earned on assets kept by a child could be ordered to be paid to an ex-spouse either in the nature of child support or even alimony. Not with a Bloodline Trust.
3. If financial difficulties ensue, inheritances are securely protected from potential creditors. In other forms of estate planning, an inheritance may be seized by creditors. Not with a Bloodline Trust, however.
Essentially the trust operates in this manner: after you and your spouse die, instead of each child receiving a share of your estate the child’s share is put into a separate trust for his or her benefit. The child to be trustee of his or her own trust or you may choose a third party to be the trustee, such as a financial or investment institution. The trustee may then invest trust assets and may purchase assets on behalf of the trust for child’s benefit. Should your child be the trustee, withdrawal of assets from the trust can be made for “health, education, maintenance, and support”. Should a financial or personal dilemma arise in the manner discussed above, your child may simply resign as trustee or even appoint a co-Trustee to serve the trust. At that juncture, the Bloodline Trust insulation provisions take hold.
NOT LEGAL OR TAX ADVICE. Everything posted here is for educational purposes only, and is not to be construed as legal advice or tax advice. Do not take any action, postpone any action, or decline to take any proposed action based on this information without first engaging the representation of a qualified attorney and/or tax accountant or CPA. Nothing posted on social media or on any website shall be construed in any way as legal advice. Furthermore, I am not your attorney. Therefore no communications here are covered by the attorney-client or attorney-work product privileges.
BEST ASSET PROTECTION IN ESTATE PLANNING–FAMILY SAVINGS TRUST
Estate Planning
The Family Savings Trust differs from a Living Trust that is often used to avoid probate and pass property upon the death of a spouse. Unlike the Living Trust which provides no asset protection benefits, the FST can be designed to accomplish both asset protection and traditional estate planning goals – some of which can be quite sophisticated. Although Congress is likely to make substantial changes in the current estate tax law, those that might be subject to an estate tax can use the FST for a variety of advanced tax planning techniques.
Planning for High Risk Specialties
Physicians at the higher end of the liability scale – practicing in high risk specialties or in businesses with higher than usual lawsuit potential – may choose to add language to the Family Savings Trust which allows the FST to obtain certain “offshore advantages” at some later point. For example, under normal circumstances, the trust exists and is governed by whatever domestic law we choose. But, if circumstances warrant, and strategy dictates, we can convert all or a portion of the trust or its’ assets into a foreign entity – usually an LLC or a trust – for enhanced asset protection and estate planning. The feature is not necessary for everyone but for those who are attractive lawsuit targets, the “offshore” capability can be a valuable additional feature.
The Family Savings Trust is a popular and effective vehicle for accomplishing a variety of asset protection and estate planning goals within a single structure with limited filing and maintenance requirements. Since every legal strategy should be analyzed fully in light of a client’s unique circumstances, you should make sure to discuss your asset protection planning with your attorney and tax advisors so that your particular planning needs are considered in adequate detail.
IMPORTANT FACTS AND FALLACIES OF PRENUPTIAL AGREEMENTS
Prenups can to be, broken and/or circumvented. Consider other options to avoid a circumvented prenup. I recommend an irrevocable trust as one of the most efficient way to separate assets from marital assets. Here are some things you need to know:
1. Avoid planting the seed of distrust Before the Wedding Day:
The biggest problem with a prenuptial agreement is that the parties must specify all of the assets they own as well as the property they want to keep as separate during the marriage and thus retain ownership of in the event of a divorce. It must be agreed upon and signed by both parties. The formalities that make a prenuptial agreement legally binding in the event of a divorce are one of its most glaring disadvantages. Many people find it difficult to discuss the subject of maintaining ownership of separate property with the person they are about to marry. Talking about divorce at all while planning a marriage is a sticky situation at best. The alternative is an irrevocable trust. An irrevocable trust is a legal document just like a prenup, but the advantage over a prenuptial agreement is that the trust does not require the involvement of your new husband or wife. Placing your assets in an irrevocable trust takes the assets out of your name and places them into the trust. However, the assets placed in an irrevocable trust never become part of the marital estate, so they are never at risk in the event of the marriage ending in a divorce. The “trust” as a separate entity must do something “wrong” in order to be sued.
2. Asset Protection from Legal Challenges
Challenging a prenuptial agreement successfully in a divorce proceeding is much easier than people realize. Challenging the validity of a properly drafted, implemented, and funded irrevocable trust, however, in a divorce situation is just the opposite; there is nothing stronger. Court calendars are filled with court cases of divorces in all 50 states in which individuals who readily agreed to the terms of a prenuptial agreement, challenged the prenup’s validity many years after signing it and have often times been successful.
3. Protect Assets from Prying Eyes
The creation and funding of an irrevocable trust is completed in private without having to disclose what you own to your spouse. This is in striking contrast to prenuptial agreements that have been invalidated because of a failure to disclose every asset – even if it was an honest mistake. The Court of Appeals of California has already ruled that a prenuptial agreement was unconscionable because a husband did not adequately disclose the full extent of his assets.
4. Estate Planning Tool
Irrevocable trust’s offer you a vehicle for controlling and protecting assets while you are living as well as during the post-death distribution of the assets that you worked hard all of your life to acquire. A prenuptial agreement does not survive death and does not allow for the distribution of your assets. This means that your spouse will probably get all of your assets and then may distribute them as he or she pleases, including distributing none to your children from a prior marriage. An irrevocable trust insures that one’s assets will be distributed to the pre-chosen people in life or in death.
5. Creditor, Medicaid, Probate, and Estate Tax Issue Planning
A properly drafted, implemented, and funded irrevocable trust helps you to increase your privacy, avoid lawsuits, avoid the costs of the nursing home, and avoids the delays as well as expenses associated with probate. Transferring your assets to an irrevocable trust reduces the size of your estate used to calculate your Medicaid eligibility as well as to reduce potential estate taxes. The prenup achieves none of these goals because it is only designed for the purpose of splitting assets in the event of a divorce, not death.
In conclusion, most clients with assets to protect, who weigh all of the options after finding out the facts, risks, and uncomfortable conversations, tend to choose an irrevocable trust over a prenuptial agreement for the BEST ASSET PROTECTION available.
Contribution to this article from LinkedIn source asset protection group.
THE BENEFITS OF “BLOODLINE TRUSTS”
One of the most interesting topics in my estate planning toolbox is the Bloodline Trust. A Bloodline Trust is a vehicle for leaving your children their inheritances with many benefits over a traditional estate plan:
- Assets are protected from divorce. In a traditional estate plan, if you leave a child an inheritance and that child later divorces, the ex-spouse will likely receive a portion of the inherited assets. This is because in real life, inheritances are almost always mixed with “marital assets”, which leaves them open to equitable distribution in a divorce. In addition, any income earned on the assets that your child does retain may end up being paid to the ex-spouse in the form of alimony or child support. Use of a Bloodline Trust can eliminate all of these negative consequences.
- Assets are protected from financial calamity. In a traditional estate plan, if you leave a child an inheritance and the child later gets into financial trouble, those assets may be seized by creditors. With a Bloodline Trust, however, those assets can be protected.
- Assets are protected from double (or triple) taxation. When you pass away, your assets are included in your “taxable estate” and as such are subject to federal estate taxes. Federal estate tax applies if the value exceeds $5.25M (adjusted each year for inflation).] With a traditional estate plan, not only are those assets subject to estate tax at your death, but when your children die, any remaining assets will be subject to estate tax a second time when they pass down to your grandchildren, and potentially a third time if any assets pass down to great-grandchildren. With a Bloodline Trust, this double or triple taxation can be eliminated completely.
The mechanics of these trusts are as follows:
Upon your death (or the death of both you and your spouse, if married), your assets are split among your children in a manner that you decide in your Will. But instead of each child receiving his or her share outright, each child’s share is put into a separate trust for his or her benefit.
You can allow your child to be trustee of his or her own trust if you so desire, or you may choose a third party trustee like a bank or trust company.
Regardless of who is trustee, the trustee may invest trust assets. The trustee may also purchase assets in the name of the trust for use of your child. If your child is trustee, he or she may also withdraw assets from the trust for his or her “health, education, maintenance, and support”.
If a divorce or other financial trouble is on the horizon, at that point your child resigns as trustee or appoints a co-Trustee to serve. That’s when the protection “kicks in”.
These trusts have become increasingly common as parents seek to protect their children from both divorce and double taxation.
TAX ADVICE DISCLAIMER: Any tax advice contained in this communication (including attachments) was not intended or written to be used, and it cannot be used, by you for the purpose of (1) avoiding any penalty that may be imposed by the Internal Revenue Service or (2) promoting, marketing, or recommending to another party any transaction or matter addressed herein.
LEGAL DISCLAMER: Everything posted here is for educational purposes only, and is not to be construed as legal advice. Do not take any action, postpone any action, or decline to take any proposed action based on this information without first engaging the representation of me or another qualified attorney.
See more interesting commentary regarding Bloodline Trusts at the link below.
https://www.avvo.com/legal-guides/ugc/what-is-a-bloodline-trust
http://www.protectyourestate365.com
THE PRACTICAL AND PURPOSEFUL USE OF DYNASTY TRUSTS
Many times I hear clients say that all they want is a simple will. On numerous occasions an estate planning attorney has to either take the position of defending why a simple will not work explaining to their clients why much more is required. In fact, sometimes clients complain that trusts are too complicated for them to understand as part of an overall estate plan. Because of the fact that the current estate exemption is now $5,250,000 for a single person and $10,500,000 for a married couple, this attitude has become even more popular. Because clients tend to feel they are not exposed to estate taxes, many no longer are inclined to believe there is a need for a living trust.
Nevertheless, it must always be cognizant in the mind of the estate planner that while saving taxes is a sound objective, it is only one of several things that can be accomplished through the proper use of a living trust. The overall resistance to a trust can certainly be explained by the fact that clients feel that a will is simple and inexpensive. However a will fails to ensure that the intended beneficiaries of the estate will actually be able to enjoy and use the property as may have been intended by the decedent. Creditors, a former spouse, less than reputable investment advisors, as well as the United States government, can all reach the estate. Frankly, it is naïve to believe that a living trust is not a viable alternative.
Other critiques of a living trust encompass the accusation that control is surrendered to outsiders; that they are more expensive; and that they sometimes require continuous administration, while only relevant to preserve the estates of outlandishly wealthy people. Nevertheless, without question, the trust is almost always the better way to achieve whatever goals a client desires.
For example, Dynasty Trusts permit inter-and multi-generational wealth management and are more effective than the standard living trust. Clients who have a net worth well below the current tax exemption even benefit from these types of trusts. Dynasty trusts can, in theory, last forever. Assets in dynasty trusts can grow and be protected from your descendants’ creditors, former spouses, and their own wasteful habits. Dynasty Trusts can also avoid estate taxes saving large sums of money over the years.
An old legal principle, called the “rule against perpetuities,” used to prohibit trusts that could potentially last forever. Still, even with this rule, trusts could last a long time. To oversimplify, the rule stated that a trust couldn’t last more than 21 years after the death of a potential beneficiary who was alive when the trust was created. Some states (California, for example) have adopted a different, simpler version of the rule, which allows a trust to last about 90 years. (This is called the Uniform Statutory Rule Against Perpetuities.)
About half the states have done away with the rule against perpetuities altogether, clearing the way for Dynasty Trusts. Some—Delaware and Florida, for example—go further, luring trust-makers with tax breaks and flexibility, including strong protection if beneficiaries divorce or get into debt. Financial institutions in these states benefit handsomely from the sizeable fees they charge to manage Dynasty Trust assets.
The biggest advantage of a Dynasty Trust is that it can save your descendants a significant amount of money in estate taxes. The assets you put in the trust (plus any increase in their value over the years) are subject to the federal gift/estate tax just once, when you transfer them to the trust. They are not taxed again, even though multiple generations benefit from them.
By contrast, if you simply left a very large amount of money to your children (without a trust), it would be subject to the estate tax. And whatever they left to their children would be taxed again. If you tried to avoid one of those “tax events” by leaving assets directly to your grandchildren, the federal generation-skipping transfer tax could apply. (Though keep in mind that only very large estates, worth more than several million dollars, are subject to the federal estate or the generation-skipping transfer tax.)
For example, say you and your spouse leave $10 million to your daughter. If her inheritance grew, over 30 years, to $30 million, it would be subject to the estate tax at her death—and if federal estate tax rates and exemptions in effect then were about what they are in 2014 ($5.34 million exemption, 40% top rate), almost $9 million would go to pay estate tax. That amount wouldn’t be owed if the money were in a carefully drafted Dynasty Trust—it would stay in the trust, where it could be invested and keep growing.
Simply stated, the typical goals of any client are as follows:
1. Management control: the handing over of the control of assets to descendants’ subject to their abilities, maturity level and value similarity to that of the client. Such control encompasses both investment and business opportunities.
2. Enjoyment of trust assets: typically clients enjoy the assets of their estate until death with the idea that primary beneficiaries will eventually use those assets prior to younger generation beneficiaries. In the case of real property for example, this means the use of a specific premises. In the case of intangibles, this typically requires some distribution of the income or principal while retaining the rest of the asset until it is needed.
3. Flexibility: this entails the ability to change the structure of the trust in conjunction with changing circumstances. The special needs of certain beneficiaries as well as the change in tax laws potentially, are factors to be considered.
4. Protection: protection of the beneficiaries from creditors as a result of inherited wealth, as well as the protection from divorcing or divorced spouses, label the Dynasty Trust as an excellent choice.
5. Taxes: obviously reducing any burden in both estate and income taxes, at the federal, state and local levels, is critical so that the inherited wealth is not unduly diminished.
6. Simplicity: in order to make sure that the wishes of the decedent is attained without the need for ongoing expensive consultations with either an estate planning attorney or a trustee, is optimal. Otherwise the client and beneficiaries become overwhelmed and frustrated with the process.
Therefore, consider a Dynasty Trust in order to best attain the above-referenced goals by speaking to WFB Legal Consulting or visiting www.protectyourestate365.com.
WAYS TO AVOID PROBATE: POD ACCOUNTS
If you plan carefully, your estate may not have to go through the process of probate. Probate can drag on for years, and can easily cost your family thousands of dollars — money that would otherwise have gone to them.
These various ways to avoid probate offer simple and effective methods for skipping the probate process so that property goes directly to the intended beneficiaries. Some examples follow.
- Setting up payable-on-death accounts
- Naming beneficiaries for retirement accounts, vehicles, real estate, and stocks and bonds
- Holding property in joint ownership, and alternatives to joint ownership
- Using a living trust to avoid probate
- Making gifts of property and money
The first of the enumerated methods listed above, payable-upon-death accounts (POD’s), is very straightforward yet often ignored, and is summarized in greater detail here:
Payable-on-death bank accounts offer one of the easiest ways to keep money—even large sums of it—out of probate. All you need to do is properly notify your bank of whom you want to inherit the money in the account or certificate of deposit. The bank and the beneficiary you name will do the rest, bypassing probate court entirely. It’s that simple.
This kind of account has been called the “poor man’s trust.” The description is apt (if sexist) because a payable-on-death account does accomplish for a bank account—for free—exactly the same result as would an expensive, lawyer-drawn trust.
As long as you are alive, the person you named to inherit the money in a payable-on-death (P.O.D.) account has no rights to it. If you need the money, or just change your mind about leaving it to the beneficiary you named, you can spend the money, name a different beneficiary, or close the account.
Pros
• They’re easy to create.
• There’s no limit on how much money you can leave this way.
• Designating a beneficiary for a bank account costs nothing.
• It’s easy for the beneficiary to claim the money after the original owner dies.
Cons
• You can’t name an alternate beneficiary.
Payable-on-Death Account or “Totten Trust”?
Payable-on-death accounts go by different names in different states—and sometimes in the same state. Your bank, for example, may respond to your request for a payable-on-death account by handing you a form that authorizes the creation of something called a “Totten trust.” Payable-on-death bank accounts are also sometimes called tentative trusts, informal trusts, or revocable bank account trusts.
“Totten trusts” are really just payable-on-death accounts. The name comes from an old New York case (Re Totten), which was the first case to rule (in 1904) that someone could open a bank account as “trustee” for another person who had no rights to the money until the depositor died. Other courts had balked at this, objecting that such an account was tantamount to a will, which had to fulfill detailed legal requirements to be valid. The Totten court called the account a “tentative” (revocable) trust.
After this decision, courts in many other states adopted the idea of Totten trusts. Later, state legislatures enacted statutes authorizing payable-on-death accounts, specifically addressing many of the questions that had sprung up about Totten trusts. For example, some statutes state exactly how you can change a payable-on-death designation.
Banks, savings and loans, and credit unions all offer payable-on-death accounts. They don’t charge any extra fees for keeping your money this way. You can add a payable-on-death designation to any kind of new or existing account: checking, savings, or certificate of deposit.
Setting up a payable-on-death bank account is simple. When you open the account and fill out the bank’s forms, just list the beneficiary on the signature card. The bank may also ask you for some other information, such as the beneficiary’s address and birth date. (For example, the current address of each beneficiary is required by law in a few states.) The beneficiary of a payable-on-death account, who is commonly referred to as a “P.O.D. payee,” doesn’t have to sign anything.
Example: Joyce wants to leave her two nieces some money. She opens a savings account at a local bank, deposits $10,000 in it, and names her two nieces as payable-on-death beneficiaries. After Joyce’s death ten years later, they claim the money in the account—including the interest paid by the bank—without going through probate.
If you choose an account that has restrictions on withdrawals—for example, a 24-month certificate of deposit—the early withdrawal penalty will probably be waived if you die before the period is up.
If you’ve considered changing a solely owned bank account to a joint account with the person you want to inherit the money after your death, you may be better off by simply naming the person as the P.O.D. beneficiary instead. There are several advantages.
If you added another person’s name to yours on the account, he or she would immediately have the right to withdraw money from the account. And if she got behind on her debts, a creditor could come after her share of the account.
Example: Matthew, an elderly widower, goes down to his bank and makes his daughter, Doris, the payable-on-death beneficiary of his checking account. Doris (and her creditors) will have no access to the money during Matthew’s life, but after his death she’ll be able to get the funds in the account quickly and easily.
Caution
Don’t create a joint account just to avoid probate. If you want to leave money to someone at your death—but not give it away now—stick to a P.O.D. account. It will accomplish your goal simply and easily. Don’t set up a joint account with the understanding that the other person will withdraw money only after you die. This is a common mistake, and it often creates confusion and family fights.
Adding a P.O.D. Designation to a Joint Account: P.O.D. accounts can be very useful for couples who have joint bank accounts.
Accounts with a Right of Survivorship
Most joint accounts come with what’s called the “right of survivorship,” meaning that when one co-owner dies, the other will automatically be the sole owner of the account. So when the first owner dies, the funds in the account belong to the survivor—without probate. If you add a P.O.D. designation, it takes effect only when the second owner dies. Then, whatever is in the account goes to the P.O.D. beneficiary you named.
Example: Virginia and Percy keep a joint checking account with several thousand dollars in it. They hold this account as joint tenants with right of survivorship. They decide to name their sons, who are both adults, as P.O.D. beneficiaries. After both Virginia and Percy have died, the bank will release whatever is left in the account to the sons, in equal shares.
It’s important for both spouses (and other co-owners) to realize that designating a P.O.D. beneficiary for a joint account doesn’t lock in the surviving spouse after one spouse dies. The survivor is free to change the beneficiary or close the account, shutting out the beneficiary who was named back when both spouses were still alive.
Example: Howard and Marge name Elaine, Howard’s daughter from a previous marriage, as the P.O.D. payee of their joint savings account. Howard dies first, and in the years that follow relations between Marge and Elaine deteriorate. Marge decides to remove Elaine as P.O.D. beneficiary and instead name her nephew, Max. When Marge dies, Elaine doesn’t inherit any of the money in the account—even though she’s firmly convinced that her father intended her to.
Adding a P.O.D. beneficiary to a joint account not only avoids probate, but allows you to plan for the unlikely event that both persons die simultaneously.
Example: June and Horace have a joint savings account. They name their daughter, Virginia, as the payable-on-death beneficiary. When June and Horace are killed in an accident, Virginia inherits the money in the account without probate.
Accounts with No Right of Survivorship
Some kinds of joint accounts cannot be turned into payable-on-death accounts. Unless your joint account provides that when one owner dies, the other automatically becomes the sole owner, don’t try to name a P.O.D. payee for the account.
Two common situations where this advice applies are:
• Your state law requires you to request the right of survivorship in writing when you open the account, and you didn’t make the proper request. In that case, the account is not a joint tenancy account; it’s what is known as a “tenancy in common” account, which means that you can leave your share to anyone you choose.
• You and your spouse live in a community property state and own a community property account together. Such accounts don’t carry the right of survivorship; each spouse has the right to leave his or her half-interest to someone else.
Caution
Don’t use a P.O.D. designation for a joint account that doesn’t have the right of survivorship. In other words, don’t try to arrange things so that a P.O.D. payee inherits just your share of a co-owned bank account at your death. It’s far more reliable and less confusing to establish a separate account and name a P.O.D. payee for it.
Choosing Beneficiaries
There are few restrictions on whom you can name as a P.O.D. beneficiary. But there are some issues you should think about as you make your choices.
Extra FDIC Coverage for Beneficiaries
Payable-on-death accounts get extra coverage from the Federal Deposit Insurance Corporation.
The general rule is that the FDIC insures each person’s accounts at a financial institution up to $250,000. But to calculate the amount of FDIC insurance coverage on an account with P.O.D. beneficiaries, you multiply the number of beneficiaries by $250,000.
For example, if you have an account and name your son as the P.O.D. beneficiary, your insurance coverage is $250,000, just as it would be if you had no P.O.D. beneficiary. But if you name your son and your daughter as P.O.D. beneficiaries, the account is immediately insured up to 2 × $250,000, or $500,000.
Children
It’s perfectly fine to name a minor—that is, a child younger than 18 years old—as a P.O.D. payee. If the account is worth more than a few thousand dollars, however, you should think about what might happen if that beneficiary were still a child at your death. You will probably want to arrange for an adult to manage the money for the child.
If you don’t, and a minor child inherits money from a payable-on-death account, one of three things will happen:
• If state law allows it, the money, no matter how much, can simply be given to the beneficiary’s parents (or to the beneficiary, if he or she is married). The parents hold the money for the benefit of the child.
• If the amount is relatively small—generally, a few thousand dollars, depending on state law and bank custom—the bank will probably turn it over to the child or the child’s parents.
• If the amount is larger, the parents will probably have to go to court and ask to be appointed guardians of the money. (If the parents aren’t alive, a guardian will probably already have been appointed and supervised by the court.)
Fortunately, court involvement, which can be expensive, intrusive, and time-consuming, can be easily avoided. You can choose someone now, and give that person authority to manage the money, without court supervision, in case the child is still younger than 18 at your death. The logical choice, usually, is one of the child’s parents.
The easiest way to do this, in most states, is to name an adult to serve as “custodian” of the money. Custodians are authorized under a law called the Uniform Transfers to Minors Act (UTMA), which has been adopted by every state except South Carolina and Vermont.
All you need to do is name the custodian as the P.O.D. payee of the account and make it clear that the custodian is to act on the child’s behalf. That gives the custodian the legal responsibility to manage and use the money for the benefit of the child. Then, when the child reaches adulthood, the custodian turns over what’s left to the beneficiary. Most, but not all, UTMA states set 21 as the age when the custodianship ends. (The ages are listed below.)
Example: Alice wants to make her grandson, Tyler, the P.O.D. payee of a bank account. But Tyler is just nine years old. So Alice decides to name Tyler’s mother, Susan, as custodian of the money in the account. On the bank’s form, Alice puts, in the space for the P.O.D. payee, “Susan Irving, as custodian for Tyler Irving under the Florida Uniform Transfers to Minors Act.” If Tyler is not yet 21 when his grandmother dies, Susan will be legally in charge of the money until Tyler’s 21st birthday.
| Age at Which an UTMA Custodianship Ends | |
| Alabama 21 | Missouri 21 |
| Alaska 18 to 25* | Montana 21 |
| Arizona 21 | Nebraska 21 |
| Arkansas 18 to 21* | Nevada 18 to 25* |
| California 18 to 25* | New Hampshire 21 |
| Colorado 21 |
New Jersey 18 to 21* |
| Connecticut 21 | New Mexico 21 |
| Delaware 21 | New York 21 |
| District of Columbia 18 to 21* | North Carolina 18 to 21* |
| Florida 21 | North Dakota 21 |
| Georgia 21 | Ohio 21 |
| Hawaii 21 | Oklahoma 18 to 21* |
| Idaho 21 | Oregon 21 to 25* |
| Illinois 21 | Pennsylvania 21 to 25* |
| Indiana 21 | Rhode Island 21 |
| Iowa 21 | South Dakota 18 |
| Kansas 21 | Tennessee 21 to 25* |
| Kentucky 18 | Texas 21 |
| Louisiana 18 | Utah 21 |
| Maine 18 to 21* | Virginia 18 to 21* |
| Maryland 21 | Washington 21 or 25* |
| Massachusetts 21 | West Virginia 21 |
| Michigan 18 to 21* | Wisconsin 21 |
| Minnesota 21 | Wyoming 21 |
| Mississippi 21 | |
| *The person who sets up the custodianship can designate the age, within these limits, at which the custodianship ends and the beneficiary inherits the money outright. | |
If You Don’t Live in an UTMA State
Even if you live in South Carolina or Vermont—the only states that haven’t adopted the UTMA—you may still be able to enjoy the law’s benefits. The law is written so that you can appoint a custodian if any of the following is true:
• The custodian lives in a state that has adopted the law.
• The minor lives in a state that has adopted the law.
• The bank account (the “custodial property,” in the terms of the statute) is located in a state that has adopted the law.
Example 1: Christopher is a resident of South Carolina. His grandson, however, lives in California, which has adopted the UTMA. Christopher can appoint a custodian for his grandson under the California Uniform Transfers to Minors Act. As long as the boy is a resident of California when the transfer takes place, the transfer is valid under the UTMA.
Example 2: Eunice, a Vermonter, keeps an account in a New Hampshire bank. She can use the New Hampshire UTMA to appoint a custodian for her granddaughter. On the bank forms, she can name “Esther Stanhope, as custodian for Michelle Stanhope under the New Hampshire Uniform Transfers to Minors Act.”
Multiple Beneficiaries
You may well want to name more than one person to inherit the money in a bank account—for example, your three children or two good friends. That’s no problem; you just name all the beneficiaries on the bank’s form. Each will inherit an equal share of the money in the account unless you specify otherwise.
Be careful when setting up unequal shares. In a few states—Florida, for example—you cannot change the equal-shares rule. If you’re concerned about this issue, check your state’s law or open a separate account for each beneficiary.
It’s important to realize that you can’t name an alternate payee—that is, someone to inherit the money if your first choice doesn’t outlive you. In other words, if you list three payees on a bank’s form, the bank won’t consider your list to be a ranking in order of preference. For example, some bank forms provide three spaces for beneficiaries’ names. It’s not uncommon for people to assume that beneficiary #1 will get all the money, and that if he isn’t alive at your death, then #2 will inherit it, and so on. But that’s not the way it works. All the beneficiaries you name will share the money in the account.
If one of the beneficiaries dies before you do, all the money will go to the surviving beneficiaries. So if you leave an account to your three children, and one of them dies before you do, the other two will inherit the funds. Depending on your family situation, this result may be fine with you—or it may not. If it’s not what you want, you should name new P.O.D. payees after a beneficiary dies.
Example: Miranda names her sons, Brad and Eric, as P.O.D. beneficiaries of her bank account. Eric dies before Miranda does, leaving two children of his own. Unless Miranda changes her bank account papers to include the grandchildren as P.O.D. beneficiaries, they will not inherit their father’s share. Instead, all the money in the account will belong to Brad when Miranda dies.
Also give some thought to the kind of asset you’re leaving. Naming more than one P.O.D. beneficiary to inherit a bank account isn’t generally a problem, because the money can easily be divided. If you are adding a P.O.D. designation to a brokerage account, things can be more complicated. If the account owns one large asset—for example, a bond—then it will have to be sold, and the proceeds divided among all the beneficiaries. That can be done, but the sale proceeds may need to be reported to just one Social Security number, which the beneficiaries may not want. These problems can be time-consuming and costly, negating any probate-avoidance benefit.
Institutions
It’s unlikely, but your state’s law may restrict your ability to name an institution, such as a school, church, or other charity, as the beneficiary of a P.O.D. account. Delaware law, for example, requires the beneficiary to be “a natural person.” Oklahoma doesn’t allow for-profit entities such as corporations or limited liability companies to be P.O.D. beneficiaries; beneficiaries must be individuals, trusts, or tax-exempt nonprofits.
Such a requirement can frustrate attempts to leave money as you wish. For example, under previous Georgia state law, a charitable corporation could not be the P.O.D. beneficiary of a bank account or certificates of deposit. State statute, the court ruled, required P.O.D. beneficiaries to be “persons,” and the definition of a person did not include corporations. Georgia amended its law in 2011 to allow charities to be beneficiaries.
Your Spouse’s Rights
You may not have complete freedom to dispose of the funds in a bank account—even if it’s in your name—as you wish. Your spouse or partner (if you’ve entered into a registered domestic partnership or civil union) may have rights, too. It depends on your state’s law.
| Community Property States | Non-Community Property States |
| Alaska* Nevada Arizona New Mexico California TexasIdaho Washington |
Louisiana Wisconsin
All other states
*Only if spouses sign a community property agreement.
Caution
You can’t shortchange creditors or family. If you don’t leave enough other assets to pay your debts and taxes or to support your spouse and minor children temporarily, a P.O.D. bank account may be subject to the claims of creditors or your family after your death. If there is any probate proceeding, your executor can demand that a P.O.D. beneficiary turn over some or all of the funds so that creditors can be paid.
If you specifically pledged the account as collateral for a debt, the creditor is entitled to (and doubtless will) claim repayment directly from the funds in the account. The P.O.D. payee gets whatever, if anything is left.
Spouses’ Rights in Community Property States
If you live in a community property state, your spouse (or your registered domestic partner) probably already owns half of whatever you have in a bank account, even if the account is in your name only. If you contributed money you earned while married, that money and the interest earned on it is “community property,” and your spouse is legally entitled to half.
There are a few exceptions to this rule: Your money is yours to do with as you please if you and your spouse have signed a valid agreement to keep all your property separate. And your spouse does not have any right to your separate property—money you deposited before you were married, or money that you alone inherited or received as a gift—unless that money has been mixed with community property in a bank account and is impossible to separate.
If the money in your account is community property, and you want to name someone other than your spouse as the P.O.D. beneficiary for the whole account, it’s a good idea to get your spouse’s written consent. Otherwise, your spouse could assert a claim to half of the money in the account at your death, leaving the beneficiary you named with only half.
Spouses’ Rights in Non-Community Property States
If you leave money in a P.O.D. bank account to someone other than your spouse, make sure your spouse doesn’t object to your overall estate plan.
In almost all non-community property states (all states except the ones listed above), surviving spouses who are unhappy with what the deceased spouse left them can claim a certain percentage of the deceased spouse’s property. This is called the spouse’s “elective share” or “statutory share,” and in most states it amounts to about a third of what the spouse owned. It’s a fairly rare occurrence, however, for a spouse to go to court over this, because most spouses inherit more than their statutory share.
The funds in a P.O.D. account may be subject to a spouse’s claim—
or they may not, depending on state law. Some states consider such accounts outside the surviving spouse’s reach.
Contractual Wills
It’s an infrequent practice these days, but some couples make legally binding agreements to leave property to each other. They sign a contract that requires them in turn to sign wills leaving all their assets (or part of them) to each other. These contracts have been ruled to take precedence over a payable-on-death designation on a bank account. In other words, the P.O.D. designation gets wiped out by the contract.
Example: Scott and Terry sign a contract in which each promises to make a will leaving all their assets to the other. Later, Scott adds a payable-on-death designation to his savings account, naming his brother as the beneficiary. If Scott dies first, Terry has a legal right to the funds in the account.
If a Beneficiary Dies Before You Do
People usually choose people younger than themselves to inherit their money and property, fully expecting them to outlive their elders. But sometimes this natural course of events is disrupted. If someone you have named as a P.O.D. beneficiary dies before you do, you should change the necessary paperwork at the bank to put a new beneficiary in place.
If you named more than one payee, and one or more of them dies before you do, the funds in the account will go to the survivor(s) at your death. If, however, none of the P.O.D. payees you named is alive at your death, the bank will release the funds in the account to your executor, who will be responsible for seeing that the money is distributed under the terms of your will or state law. The money will probably have to go through probate, unless your estate is small enough to qualify for special, simpler procedures.
If you want to name alternate beneficiaries, don’t rely on a P.O.D. account. Banks generally don’t allow you to name an alternate P.O.D. payee—that is, someone who would inherit the money if none of your primary beneficiaries outlived you. Your will, if you make one (and you should, for reasons like this) functions as a backup in this case, as explained below. But that doesn’t avoid probate. If you want to name a back-up beneficiary and be sure of avoiding probate, you’ll probably want to use a living trust.
Depending on state law, however, the bank may be able to release the money directly to your legal heirs—the close relatives who are entitled to inherit from you if you don’t leave a will. In that case, the money won’t have to go through probate.
If the money goes to your executor, it will be distributed under the terms of your will, even though you most likely didn’t even mention this account in your will. That’s because most wills contain what is called a “residuary clause,” which names a beneficiary to inherit everything that’s not specifically mentioned in the will. The person you named to inherit this “residuary” property would receive this money.
Example: Mark names his brother as the P.O.D. beneficiary of his savings account. But his brother dies, and Mark, confined to a nursing home, isn’t able to change the paperwork at the bank to name a new payee. Mark does, however, have a will that contains a residuary clause, naming his daughter Madeline as residuary beneficiary. When Mark dies, and the will is probated, the money in the account goes to her, along with everything else that Mark didn’t specifically leave to another beneficiary.
If You Change Your Mind
Families change; relationships change. At some point you may decide that you don’t want to leave money to a P.O.D. payee you’ve named, or a beneficiary may die before you do. You’re free to change the P.O.D. arrangement, but you must meticulously follow the procedures for making changes. The law books, sadly, are full of cases brought by relatives fighting over the bank accounts of their deceased loved ones who didn’t pay enough attention to these simple rules.
How to Change a P.O.D. Designation
There are two easy and foolproof ways to make a change to a P.O.D. account:
• Withdraw the money in the account, or
• Go to the bank and change the paperwork. Fill out, sign, and deliver to the bank a new account registration card that names a different beneficiary or removes the P.O.D. designation altogether.
To ensure that your wishes are followed after your death, dot the i’s and cross the t’s when it comes to following the bank’s procedures. A change in beneficiary isn’t effective unless you fulfill the bank’s requirements, whatever they are. Almost all banks require something in writing—a phone call isn’t good enough. And to be effective, in most places your written instructions must be received by the bank before your death.
That doesn’t sound difficult, but it’s not all that unusual to find problems. In one case, after a woman’s death a new signature card, in a stamped envelope, was found on her desk. Relatives sued over the money. The court ruled that the change was not effective because the new signature card was ambiguous and because the bank had not received it before her death.
Contradictory Will Provisions
Trying to change a P.O.D. designation in your will by leaving the account to someone else is almost certain to cause problems after your death. At best, it will spawn confusion; at worst, disagreements or even a lawsuit.
About half the states say, flat out, that a P.O.D. designation cannot be overridden or changed in a will. In these states, a will provision that purports to name a new beneficiary for a P.O.D. account will simply have no effect.
Example: Kimberly names her niece, Patricia, as the P.O.D. beneficiary of her bank account. After they have a falling-out, Kimberly writes her will, and in it leaves the funds in the account to her friend Charles. At Kimberly’s death, Patricia is still legally entitled to collect the money.
Some other states do allow you to revoke a payable-on-death designation in your will if you specifically identify the account and the beneficiary. An attempt to wipe out several accounts with a general statement won’t work. In one case, a South Dakota woman wrote in her will that “I hereby intentionally revoke any joint tenancies or trust arrangements commonly called ‘Totten trusts’ [another name for P.O.D. accounts] by this will.” After her death, a court ruled that even this language wasn’t specific enough; state law requires every P.O.D. account to be individually changed or revoked.
Never rely on your will to change a payable-on-death account. Instead, deal directly with the bank, which, after all, will be in charge of the money after your death.
Property Settlement Agreements at Divorce
A property settlement agreement, even though it’s approved by a court when a couple divorces, may not revoke a payable-on-death designation.
For example, when a New York couple divorced, the property settlement agreement gave the husband “any and all bank accounts, held jointly or otherwise.” Some of those accounts named the wife as payable-on-death beneficiary; when the husband died, she inherited the money. The court ruled that because the settlement agreement had not named the accounts specifically, it had not met New York’s statutory requirements for the revocation of a Totten trust account.
Similarly, when an Arizona couple divorced, their property settlement agreement gave the husband some bank CDs for which he had named the wife as the payable-on-death payee. But the husband never went to the bank and removed the wife as the P.O.D. payee. When he died, a court ruled that the ex-wife was entitled to the money, because the settlement agreement had no effect on the contract between the husband and the bank.
Claiming the Money
After your death, all a P.O.D. beneficiary needs to do to claim the money is show the bank a certified copy of the death certificate and proof of his or her identity. If the account was a joint account to begin with, the bank will need to see the death certificates of all the original owners. The bank records will show that the beneficiary is entitled to whatever money is in the account.
State laws authorize banks to release the money in payable-on-death accounts when they’re shown this proof of the account holder’s death; they don’t need probate court approval. Legally, the money automatically belongs to the beneficiaries when the original account owner dies. It’s not part of the probate estate and isn’t under the executor’s control.
Beneficiaries may, however, encounter some delays when they go to claim the money:
• Tax clearances. Like other bank accounts, a payable-on-death account may be temporarily frozen at your death, if your state levies estate taxes. The bank will release the money to your beneficiaries when the state is satisfied that your estate has ample funds to pay the taxes.
• Waiting periods. There may be a short waiting period before the money can be claimed. Vermont, for example, doesn’t allow a bank to release funds to P.O.D. beneficiaries until 90 days after the death of the account owner.
When you set up a P.O.D. account, ask the bank what the P.O.D. payee will need to do to claim the money after your death. Then make sure the payee knows what to expect.
THE SCOOP AND SCOPE OF POWERS OF ATTORNEY:
A power of attorney is a legal document appointing another to act in the maker’s place when the maker is unable to take action personally. The maker is called the principal and the person authorized to act on the principal’s behalf is called the agent or attorney-in-fact. All powers of attorney terminate on the death of the principal. A principal may also revoke the power of attorney at any time as long as he or she is competent. A successor agent may be named in the power of attorney to prevent it from lapsing if the first named agent dies or is unable to serve.
There are various types of powers of attorney; they can be either general, durable or limited. Some states have also adopted a statutory power of attorney. A general power of attorney grants the agent broad powers to act in regard to the principal’s assets and property while the principal is alive and not incapacitated. A durable power of attorney will remain effective even if the principal becomes incapacitated. A special or limited power of attorney restricts the agent’s action to a particular purpose in order to handle specific matters when the principal is unavailable or unable to do so. A statutory power of attorney copies the language in a state statute which includes an example of a form that may be used. State laws vary, but the states that have adopted a statutory form of power of attorney typically allow for other language to be used as long as it complies with the state law. A power of attorney may be created for a limited time period and/or specific purpose, such as a Health Care Power of Attorney, Power of Attorney for Care and Custody of Children, Power of Attorney for Real Estate matters and Power of Attorney for the Sale of a Motor Vehicle.
By creating a power of attorney, the agent may sign documents, make decisions, and take necessary actions when the principal is unable to do so. While a power of attorney may be created in anticipation of a future need, such as military deployment, it also allows another to manage the principal’s affairs when unexpected events occur, such as an accident, illness or unplanned absence. Without a power of attorney, a spouse, parent or other interested party must petition the appropriate court to be appointed as guardian or conservator of the incapacitated person, which can be a time-consuming and expensive process.
Power of attorney requirements vary by state, but typically are signed by the principal and need to be witnessed and/or acknowledged before a notary public. Usually, powers of attorney do not need to be recorded. However, powers of attorney dealing with the sale and purchase of real estate must be recorded. In order to revoke, cancel, or end a power of attorney before it expires, the principal must sign a revocation of power of attorney and give a copy of the revocation to any person who might have or will possibly deal with the agent. Giving a copy of the revocation to people the former attorney-in-fact dealt with is to avoid an apparent authority situation.
A person has apparent authority as an agent when the principal, by his words or conduct (e.g., having granted power of attorney to former attorney-in-fact), leads a third person to reasonably believe that the person/agent has the authority that the agent appears to have, and the third person relies on this appearance of authority. The question of apparent authority is probably the most litigated question in agency law.
If a principal revokes a power of attorney that is recorded in the real estate records of a county, a revocation of that power of attorney should also be recorded in the real estate records.
Please remember that the agent under a Power of Attorney is under a high legal duty to act in the interest of the grantor/principal. This legal duty is called a “fiduciary duty.” It is a duty of loyalty that arises out of a special relationship of trust and confidence that is supposed to exist between the grantor and his agent. It is like the duty between lawyer and client. As a practical matter, when you give someone a Power of Attorney, you’re taking a risk that you may lose your assets to your agent. Powers of Attorney don’t usually contain provisions requiring the agent to give you a periodic accounting of your financial affairs. The agent under a Power of Attorney cannot make decisions after your death, as can the trustee of a living trust.
Powers of Attorney do not have to be recorded with the county in which you reside. However, if your agent has to handle a real estate transaction for you the Power of Attorney will need to be recorded at the time of the transaction. Banking transactions and stock transactions ordinarily do not require recordation. Nevertheless, it may be prudent to forewarn an institution that you have such a power by providing them a copy of the document before its required use.
Also remember you can specify the ending date in your Power of Attorney. If you don’t, it ends when you become disabled if it is not durable. If it is durable, it ends when you die. A Power of Attorney which is durable may survive your disability, but it is not immortal. When you die, it dies. Your agent, upon your death, will lose all power to make decisions for you concerning who is to receive your assets. Do not rely upon a Power of Attorney in place of a living trust.
ESTATE COMPOSITION RELATING TO LIFE INSURANCE PROCEEDS
Right to Receive Insurance Policy Dividends
In Private Letter Ruling 201328030 (released July 12, 2013), the Internal Revenue Service addressed the following question: Does a decedent, at death, possess an incident of ownership in life insurance policies insuring his life, such that the insurance proceeds are includible in his gross estate under Internal Revenue Code Section 2042? The IRS said, “No.” The ruling involved an examination of facts similar to those set forth below:
Terms of Related Divorce Agreement
The decedent and his spouse filed for divorce and executed a property settlement agreement (the Agreement) covering all marital and separate property. Pursuant to the terms of the Agreement, the decedent was to maintain life insurance policies on his life, for the sole benefit of his former spouse. Under the Agreement, the decedent was to pay all premiums and dues, but couldn’t borrow against the policies. The policies’ dividends however belonged exclusively to the decedent.
When the decedent and his former spouse divorced, the court incorporated the Agreement into the divorce judgment, ordering that all property be distributed according to the Agreement’s terms. When the decedent died, his former spouse received the policies’ proceeds. On the decedent’s estate tax return (Form 706), his executor included the policies’ proceeds in the decedent’s gross estate. The IRS said this inclusion was incorrect. Here’s the IRS’ rationale.
Incidents of Ownership and Estate Inclusion
Under IRS Section 2042, the value of a gross estate shall include the value of all property to the extent of the amount received by all beneficiaries under policies on a decedent’s life, with respect to which a decedent possessed any “incidents of ownership” at the time of his death.
“Incidents of ownership” refers to the right of an insured or his estate to economic benefits of an insurance policy (Treasury Regulations Section 20.2042-(1)(c)(2)). It includes a power to change a beneficiary; surrender and cancel the policy; pledge the policy as security and dispose of the policy and its proceeds. Previously, a Tax Court had already held that a right to dividends, which may be applied against a premium due, is nothing more than “a reduction in the amount of premiums paid rather than a right to the income of the policy.”
In this instance therefore, according to the terms of the Agreement, the decedent agreed to maintain life insurance policies for his former spouse’s sole benefit. The IRS found that the policies’ dividends “belonged” to the decedent “in a technical legal sense,” but the “mere right” to those dividends, by itself, wasn’t an incident of ownership rising to the level that would cause the value of the insurance proceeds to be included in the decedent’s gross estate under IRS Section 2042(2).
This is an interesting result to consider when dealing with insurance beneficiaries….as well as when an impending divorce may be on the horizon.
ESTATE ASSET PROTECTION PLANNING: TESTAMENTARY AND LIVING TRUSTS
I thought it important to provide a basic background on revocable living trusts and how they might interact with the business owner’s intention of passing both his/her personal and business assets to beneficiaries of his/her choosing.
Simply put, trusts that are created after an individual dies by a provision in the individual’s will are called testamentary trusts. Trusts, however, that are created during an individual’s lifetime and hold title to property are referred to as” inter vivos trusts.” Inter vivos trusts are also commonly called living trusts and revocable living trusts. Inter vivos is Latin for “living.”
The primary difference between testamentary trusts and living trusts is the time at which these trusts are created. A living trust is drafted and executed during an individual’s lifetime. The individual is referred to as the “grantor,” “creator,” or” trustor.” The testamentary trust, on the other hand, is created at the death of an individual through a provision in that individual’s will. Testamentary trusts do not hold title to property until the creator or grantor dies. Be advised that wills that create testamentary trusts are ineffective for probate avoidance and disability planning. It is not recommended that they be used in a majority of estate planning applications simply because they contain no living benefits. This disadvantages of using a will to create a testamentary trust are as follows:
- Your will does not hold title to property and thus contains no systematic provisions for asset distribution to you in the event of your disability. There is no trustee, conservator or guardian either. There is no one to step in to manage assets for you during your lifetime should you become incapacitated.
- Assets may be titled so that they pass outside the provisions of your will, such as assets held in joint tenancy with the right of survivorship, or assets that passed by a contract.
- Assets that pass by will are subject to the expense and inconvenience of probate proceedings and thus can be costly to the estate, and thus the beneficiaries, who may be in a position to inherit valuable business assets.
- Wills can provide for the creation of trusts at the death of the maker, however, quite often the trusts may not be funded properly because assets may pass outside the provisions of the will. NOTE: Interestingly, however, some business owners may find this advantageous rather than disadvantages, should he/she wish a business asset to specifically go to a named third-party by way of contract.
Alternatively, there are advantages to using a revocable living trust, some of which are as follows:
- Revocable living trusts hold title to assets before death.
- Revocable living trusts provide a center for management when they are funded by holding title to your property. A trustee can be named as can a guardian or conservator to act on your behalf during your lifetime.
- Business assets held or titled to your trust are not subject to the expensive cost and inconvenience of probate.
- Revocable living trusts can be split into additional trusts such as marital and family trusts, and the grantor can make certain that these additional trusts are funded under the terms of the living trust. In this way, major tax advantages can be realized should the estate be valued currently at $5.2 million or more at time of death– a distinct possibility if a profitable business asset is contained within the trust.
While revocable living trusts do not themselves insulate assets from the protection of lawsuits, the creation of a viable business entity which does provide asset protection, can be placed in the trust in order to obtain all of the other advantages cited herein above, while retaining its asset protection capability. In order to obtain ironclad asset protection, it is recommended that the estate planning principles surrounding an irrevocable living trusts be employed– a concept I will discuss in my next issue of Bottled Business Sense.
BEST ASSET PROTECTION SERVICES GROUP: WFB Legal Consulting, Inc.
*Please be advised that this communication is for general public informational use only and does not establish an attorney-client relationship. For more information, please contact WFB Legal Consulting, Inc.—a BEST ASSET PROTECTION Services Group at (949) 413-6535.
Below is a brief recap of relevant estate planning guidelines. Please see an Estate Planning attorney at WFBLC, Inc. for a plan tailored to your particular business and family needs.
Highlights of a bill Congress passed Tuesday aimed at averting wide tax increases and budget cuts scheduled to take effect with the New Year. The measure would raise taxes by about $600 billion over 10 years compared with tax policies that were due to expire at midnight Monday. It would also delay for two months across-the-board cuts to the budgets of the Pentagon and numerous domestic agencies.
Highlights:
—Income tax rates: Extends decade-old tax cuts on incomes up to $400,000 for individuals, $450,000 for couples. Earnings above those amounts would be taxed at a rate of 39.6 percent, up from the current 35 percent. Extends Clinton-era caps on itemized deductions and the phase-out of the personal exemption for individuals making more than $250,000 and couples earning more than $300,000.
—Estate tax: Estates would be taxed at a top rate of 40 percent, with the first $5 million in value exempted for individual estates and $10 million for family estates. In 2012, such estates were subject to a top rate of 35 percent.
—Capital gains, dividends: Taxes on capital gains and dividend income exceeding $400,000 for individuals and $450,000 for families would increase from 15 percent to 20 percent.
—Alternative minimum tax: Permanently addresses the alternative minimum tax and indexes it for inflation to prevent nearly 30 million middle- and upper-middle-income taxpayers from being hit with higher tax bills averaging almost $3,000. The tax was originally designed to ensure that the wealthy did not avoid owing taxes by using loopholes.
—Other tax changes: Extends for five years Obama-sought expansions of the child tax credit, the earned income tax credit, and an up-to-$2,500 tax credit for college tuition. Also extends for one year accelerated “bonus” depreciation of business investments in new property and equipment, a tax credit for research and development costs and a tax credit for renewable energy such as wind-generated electricity.
—Unemployment benefits: Extends jobless benefits for the long-term unemployed for one year.
—Cuts in Medicare reimbursements to doctors: Blocks a 27 percent cut in Medicare payments to doctors for one year. The cut is the product of an obsolete 1997 budget formula.
—Social Security payroll tax cut: Allows a 2-percentage-point cut in the payroll tax first enacted two years ago to lapse, which restores the payroll tax to 6.2 percent.
—Across-the-board cuts: Delays for two months $109 billion worth of across-the-board spending cuts set to start striking the Pentagon and domestic agencies this week. Cost of $24 billion is divided between spending cuts and new revenues from rule changes on converting traditional individual retirement accounts into Roth IRAs.
BEST ASSET PROTECTION SERVICES GROUP: WFB Legal Consulting, Inc.
*Please be advised that this communication is for general public informational use only and does not establish an attorney-client relationship. For more information, please contact WFB Legal Consulting, Inc.—a BEST ASSET PROTECTION Services Group at (949) 413-6535.
