Why Should I Think About a Dynasty Trust? – Annapolis and Towson Estate Planning

A dynasty trust is a trust that lasts longer than one generation below that of the grantor. This trust can be a worthwhile estate planning tool for multi-generational families. Forbes’ recent article, “2 Reasons To Consider A Dynasty Trust” explains that dynasty trusts have two unique benefits that make them attractive.

Generation-Skipping Transfer Tax (GST) Exemption. According to the American Bar Association, the GST tax is imposed on asset transfers to grandchildren and more remote descendants that exceed the exemption limits. As a result, the transferor can’t avoid transfer taxes by “skipping” a generation. The GST is imposed, in addition to gift and estate taxes.

A person can give up to $11.4 million in assets (the GST tax-exempt amount) to a trust in 2019. Trust assets are protected from transfer taxation for as long as the trust document and state law permit it. A dynasty trust uses the federal GST tax exemption by taking family wealth out of the transfer tax system for as long as the trust is in existence; income and principal is used to benefit each succeeding generation.

An additional benefit is that the GST tax exemption can often be extended, by transferring assets subject to valuation discounts.

Grantor Trusts Provide More Tax Benefits. In most cases, grantor trusts treat the trust creator as the owner of the trust assets for income tax purposes. This allows the trust principal to grow free of income tax. Creating the trust as a grantor trust adds another level of tax benefit to a dynasty trust.

The estate planning benefits of the asset transfer are increased by the grantor making the income tax payments instead of the trust. In other words, the assets in the trust aren’t reduced by income taxes. Any income taxes paid by the grantor reduce the size of the grantor’s overall taxable estate when calculating estate taxes.

There are a number of strategies a person can implement using dynasty trusts. You can discuss all your choices with an experienced estate planning attorney.

Reference: Forbes (July 23, 2019) “2 Reasons To Consider A Dynasty Trust”

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Planning for the Unexpected – Annapolis and Towson Estate Planning

A woman was not notified when her elderly mother had fallen and hurt herself.  Sadly, this is not an unusual situation.

The daughter spoke with her mother once or twice a week, and the fall happened just after their last conversation. She dropped what she was doing and drove to the hospital, according to the article “Parents” in BusinessWest.com. At the hospital, she was worried that her mother was suffering from more than fractures, as her mother was disoriented because of the pain medications.

The conversation with her brother and mother about why she wasn’t notified immediately was frustrating. They “didn’t want to worry her.” She was worried, and not just about her mother’s well-being, but about her finances, and whether any plans were in place for this situation.

Her brother was a retired comptroller, and she thought that as a former financial professional, he would have taken care of everything. That was not the case.

Despite his professional career, the brother had never had “the talk” with his mother about money. No one knew if she had an estate plan, and if she did, where the documents were located.

All too often, families discover that no planning has taken place during an emergency.

The conversation took place in the hospital, when the siblings learned that documents had never been updated after their father had passed—more than 20 years earlier! The attorney who prepared the documents had retired long ago. The originals? Mom had no idea. The names of her banks and financial institutions had changed so many times over the years, that she wasn’t even sure where her money was.

For this family, the story had a happy ending. Once the mother got out of the hospital, the family made an appointment to meet with an estate planning attorney to get all of her estate planning and elder law planning completed. In addition, the family updated beneficiaries on life insurance and retirement accounts, which are now set to avoid probate.

Both siblings have a list of their mother’s assets, account numbers, credit card information and what’s more, they are tracking the accounts to ensure that any sort of questionable transactions are reviewed quickly. They finally have a clear picture of their mother’s expenses, assets and income.

If your family’s situation is closer to the start of the story than the end, it’s time to contact a qualified estate planning attorney who is licensed to practice in your state and have all the necessary preparation done. Don’t wait until you’re uncovering family mysteries in the hospital.

Reference: BusinessWest.com (Aug. 1, 2019) “Parents”

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What are the Details of the New SECURE Act? – Annapolis and Towson Estate Planning

The SECURE Act proposes a number of changes to retirement savings. These include changes to parts of IRAs and 401(k)s. The Act is expected to be passed in some form. Some of the changes look to be common sense, like broadening access to IRAs and 401(k)s, as well as including updating the rules to reflect that retirement is now a longer period of life. However, with these changes come potential limitations with stretch IRAs.

Forbes asks in its recent article “Are Concerns Over Stretch IRAs And The SECURE Act Justified?” You should know that an IRA is a tax-wrapper for your investment that is sheltered from tax. Your distributions can also be tax-free, if you use a Roth IRA. That’s a good thing if you have an option between paying taxes on your investment income and not paying taxes on it. The IRA, which is essentially a tax-shield, then leaves with more money for the same investment performance, because no tax is usually paid. The SECURE act isn’t changing this fundamental process, but the issue is when you still have an IRA balance at death.

A Stretch IRA can be a great estate planning tool. Here’s how it works: you give the IRA to a young beneficiary in your family. The tax shield of the IRA is then “stretched,” for what can be decades, based on the principle that an IRA is used over your life expectancy. This is important because the longer the IRA lasts, the more investment gains and income can be protected from taxes.

Today, the longer the lifetime of the beneficiary, the bigger the stretch and the bigger the tax shelter. However, the SECURE Act could change that: instead of IRA funds being spread over the lifetime of the beneficiary, they’d be spread over a much shorter period, maybe 10 years. That’s a big change for estate planning.

For a person who uses their own IRA in retirement and uses it up or passes it to their spouse as an inheritance—the SECURE Act changes almost nothing. For those looking to use their own IRA in retirement, IRAs are slightly improved due to the new ability to continue to contribute after age 70½ and other small improvements. Therefore, most typical IRA holders will be unaffected or benefit to some degree.

For many people, the bulk of IRA funds will be used in retirement and the Stretch IRA is less relevant.

Reference: Forbes (July 16, 2019) “Are Concerns Over Stretch IRAs And The SECURE Act Justified?”

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Should You Contest a Will? – Annapolis and Towson Estate Planning

The cases that generate headlines are just the high-profile ones, and they don’t include the hundreds, if not thousands, of inheritance claims being brought every year that never make it to the courtroom, says FT Advisor in the article “When and how clients can contest a will?” What we don’t read about are the family fights, the settlements and the eventual distribution of a loved one’s estate.

What’s behind this uptick in inheritance disputes?

One answer has to do with the increased complexity of families. Having a second, or even a third, family is no longer as unusual as it once was. The division of assets when there are children and stepchildren create more chances for someone to feel wronged. A second reason is that the value of individual property overall has increased. Relatively modest estates with a home that’s now worth half a million dollars, means there’s more to fight over.

Add to that a generally more litigious society, and you have an increase in estate battles.

There are two general areas of estate battles: one concerns wanting a greater portion of an estate, and the second centers on whether the will is valid. The second can bring allegations of undue influence, lack of capacity to create a will and even forgery.

Challenging the validity of a will is difficult, since the person who made the will has passed and they can’t speak for themselves. However, there are certain presumptions in favor of upholding a will that helps the courts. For one thing, the will must be in writing and there must be two people witnessing the signing.

Taking the position that the person was incapacitated and not legally able to create a will is another way that wills are challenged. The older the person is when the will was created, the more likely this is. One way to address this in advance, is to have a medical opinion documenting the person’s mental capacity.

While it is impossible to make any will completely immune to any challenges, there are a few things that can be done to make it less likely that the will is contested.

Write a letter or have a video made that speaks to the family, explaining what your wishes are for your property and for the family. This is not legally binding but could be used to show that you were thinking clearly when you had your estate plan done.

Communicate openly and with great transparency to all members of the family, so there are no surprises. If everyone knows what you have in mind and an opportunity to voice their opinions, there may be less potential for fighting.

Finally, be sure to work with an estate planning attorney who will know the laws of your state, so there are no legal errors that would lead to the will being deemed invalid by the courts.

Reference: FT Adviser (July 3, 2019) “When and how clients can contest a will?”

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Estate Planning a Necessity for Small Business Owners – Annapolis and Towson Estate Planning

Just as the small business owner must plan for their own personal estate to be passed onto the next generation, they must also plan for the future of their business. This is why you need a comprehensive estate plan that addresses both you personal life and the business, says grbj.com’s recent article “Estate planning for small businesses.” Here are the basic strategies you’ll need as a small business owner:

A will. A last will and testament allows you to name someone who will receive your assets, including your business, when you die. If you don’t have a will, you leave your heirs a series of problems, expenses and stress. In the absence of a will, everything you’ve worked to attain will be distributed depending on the laws of the state. That includes your assets and your business. It’s far better to have a will, so you make these decisions.

A Living Trust. A living trust is similar to a will, in that it allows you to name who will receive your assets when you die. However, there are certain advantages to having a trust. For one thing, a trust is a private document, and assets controlled by the trust can bypass probate. Assets controlled by a will must first go through probate, which is a public proceeding. If you’ve ever had a family member die and wonder why all those companies seemed to know that your loved one had passed, it’s because they get the information that is available to the public.

If your business is owned by a trust, the transition of ownership to your intended beneficiaries can be a much smoother process.

A financial durable power of attorney. This document lets you appoint an agent to act on your behalf, if you are incapacitated by illness or injury. This is a powerful legal document, so take the time to consider who you want to give this power to. Your agent can manage your finances, pay your bills and manage the day-to-day operations of your business.

A succession plan. Here is where many small business owners fall short in their planning. It takes a long time to create a succession plan for a business. Sometimes a buy-out agreement is part of a succession plan, or a partner in the business or key employee wishes to become the new owner. If a family member wishes to take over the business, will they inherit your entire ownership interest, or will there be a payment required? Will more than one family member take over the business? If a non-family member is going to take over the business, you’ll need an agreement documenting the obligation to purchase the business and the terms of the purchase.

If you would prefer to have the business sold upon your death, you’ll need to plan for that in advance so that family members will be able to receive the best possible price.

A buy-sell agreement. If you are not the sole owner, it’s important that you have a buy-sell agreement with your partners. This agreement requires your ownership interest to be purchased by the business or other owners, if and when a triggering event occurs, like death or disability. This document must set forth how the value of ownership interest is to be determined and how it is to be paid to your family. Without this kind of document, your ownership interest in the business will pass to your spouse or other family members. If that is not your intention, you’ll need to do prior planning.

The right type of life insurance. This is an important part of planning for the future for the small business owner. The death benefit may be needed to provide income to the family, until a business is sold, if that is the ultimate goal. If a family member takes over the business, proceeds from the life insurance policy may be needed to cover payroll or other expenses, until the business gets going under new leadership. Life insurance proceeds may also be used to buy out the other partners in the business.

Failing to plan through the use of basic estate planning and succession planning can create significant costs and stress. An experienced estate planning attorney can review the strategies and documents that are appropriate for your situation. You’ll want to ensure a smooth transition for your business and your family, as that too will be part of your legacy.

Reference: grbj.com (Grand Rapids Business Journal) (July 19, 2019) “Estate planning for small businesses”

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Elder Law Estate Planning for the Future – Annapolis and Towson Estate Planning

Seniors who are parents of adult children can make their children’s lives easier, by making the effort to button down major goals in elder law estate planning, advises Times Herald-Record in the article “Three ways for seniors to make things easier for their kids.” Those tasks are planning for disability, protecting assets from long-term care or nursing home costs and minimizing costs and stress in passing assets to the next generation. Here’s what you need to do, and how to do it.

Disability planning includes signing advance directives. These are legal documents that are created while you still have all of your mental faculties. Naming people who will make decisions on your behalf, if and when you become incapacitated, gives those you love the ability to take care of you without having to apply for guardianship or other legal proceedings. Advance directives include powers of attorney, health care powers or attorney or proxies and living wills.

Your power of attorney will make all and any legal and financial decisions on your behalf. In addition, if you use the elder law power of attorney, they are able to make unlimited gifting powers that may save about half of a single person’s assets from the cost of nursing home care. With a health care proxy, a person is named who can make medical decisions. In a living will, you have the ability to convey your wishes for end-of-life care, including resuscitation and artificial feeding.

When advance directives are in place, you spare your family the need to have a judge appoint a legal guardian to manage your affairs. That saves time, money and keeps the judiciary out of your life. Your children can act on your behalf when they need to, during what will already be a very difficult time.

Goal number two is protecting assets from the cost of long-term care. Losing the family home and retirement savings to unexpected nursing costs is devasting and may be avoided with the right planning. The first and best option is to purchase long-term care insurance. If you don’t have or can’t obtain a policy, the next best is the Medicaid Asset Protection Trust (MAPT) that is used to protect assets in the trust from nursing home costs, after the assets have been in the trust for five years.

The third thing that will make your adult children’s lives easier, is to have a will. This lets you leave assets to the family as you want, with the least amount of court costs, legal fees, taxes and family battles over inheritances. Work with an experienced estate planning attorney to have a will created.  If your attorney advises it, you can also consider having trusts created, so your assets can be placed into the trusts and avoid probate, which is a public process. A trust can be easier for children, because estates settle more quickly.

Think of estate planning as part of your legacy of taking care of your family, ensuring that your hard-earned assets are passed to the next generation. You can’t avoid your own death, or that of your spouse, but you can prepare so those you love are helped by thoughtful and proper planning.

Reference: Times Herald-Record (July 13, 2019) “Three ways for seniors to make things easier for their kids”

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When Is the Best Time to Disinherit a Child? – Annapolis and Towson Estate Planning

This may sound like something out of a Dickens novel, but sadly, it is someone’s real life. A woman is mourning the loss of her mother. She is the trustee and only beneficiary of her mother’s trust, as explained in the article “It’s never too early to disinherit children” appearing in the Santa Cruz Sentinel. After disappearing for decades, her sister visited with the mother a few times a year toward the end of the mother’s life. Now the sister has retained an attorney to challenge the trust, accusing the woman of elder abuse and stating that the mother was insane.

What can this sister expect?

The goal of the formerly absent sister is to get the trust thrown out so that the estate will pass equally between the two sisters. She can accomplish this if she is able to invalidate the trust and invalidate any prior wills the mother may have signed disinheriting one sister and leaving everything to the other sister.

She may not have a case with a lot of merit, but it is going to cost a lot to defend the estate plan. She may be hoping for a quick payoff.

Whether the case is successful may depend upon the circumstances surrounding the creation of the trust. In the best case, the mother would have gone to see the attorney by herself and created the trust with zero involvement of the sister who is the trustee. Even better would be if the trustee sister didn’t know a thing about the trust or the estate plan, until after it was completed.

Here’s the concern: if the mother created the trust only after she became dependent on the more involved sister and if that sister selected the attorney, made the appointment and had a conversation with the attorney about how awful the other sister was, then it will be hard to prove that the trust was set up purely on the mother’s wishes.

It’s an odd lesson, but in truth, it’s never too early to take steps to disinherit children. If someone knows that they are going to create an estate plan that is going to make one or more people very unhappy, the sooner they document these wishes, the better. It should be done while the person is still living independently and does not require a lot of help from any family member.

Keeping the people who will benefit from the disinheritance out of the creation of the estate plan is best, since it further removes them from involvement and is better when they are accused of being manipulative.

The best tactic is to create an estate plan with the help of an experienced estate planning attorney who can serve as a neutral and unbiased witness and can testify to the fact that the person knew what they were doing when the estate plan was created.

Reference: Santa Cruz Sentinel (June 2, 2019) “It’s never too early to disinherit children”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Protecting Your Family’s Inheritance – Annapolis and Towson Estate Planning

The name sounds like you might be trying to keep children and grandchildren from being irresponsible with the assets you’ve amassed through a lifetime’s work, but irrevocable trusts offer a flexible solution. They are also helpful in cases of divorce, substance abuse and other situations, reports The Chattanoogan in an article titled “Keeping Your Family from Losing Its Inheritance.”

If we are lucky, we are able to leave a generous inheritance for our children. However, that doesn’t necessarily mean we should give them easy access to all or some of the assets. Some people, particularly younger adults who haven’t yet developed money management skills, or others with problems like a troubled marriage or a special needs family member, aren’t ready or able to handle an inheritance.

In some cases, like when there is a substance abuse problem, handing over a large sum of money at once could have disastrous results.

Many people are not educated or experienced enough to handle a large sum of money. Consider the stories about lottery winners who end up filing for bankruptcy. Without experience, knowledge or good advisors, a large inheritance can disappear quickly.

An irrevocable trust provides protection. A trustee is given the authority to control how funds are used, when they are given to beneficiaries and when they are not. Depending on how the trust is created, the trustee can have as much control over distributions as is necessary.

An irrevocable trust also protects assets from creditors. This is because the assets are owned by the trust and not by the beneficiary. An irrevocable trust can also protect the funds from divorces, lawsuits and bankruptcies, as well as manipulative family members and friends.

Once the money leaves the trust and is disbursed to the beneficiary, that money becomes available to creditors, just as any other asset owned by the person. However, there is a remedy for that, if things go bad.  Instead of distributing funds directly to the beneficiary, the trustee can pay bills directly. That can include payments to a school, a mortgage company, medical bills or any other costs.

The trustee and not the beneficiary, is in control of the assets and their distributions.

The person establishing the trust (the “grantor”) determines how much power to give to the trustee. The grantor determines whether the trustee is to distribute funds on a regular basis, or whether the trustee is to use their discretion, as to when and how much to give to the beneficiary.

Here’s an example. If you’ve given full control of the trust to the trustee, and the trustee decides that some of the money should go to pay a child’s college tuition, the trustee can send a check every semester directly to the college. The trustee, if the trust is written this way, can also put conditions on the college tuition payments, mandating that a certain grade level be maintained or that the student must graduate by a certain date.

Appointing the trustee is a critical piece of the success of any trust. If no family members are suitable, then a corporate trustee can be hired to manage the trust. Speak with a qualified estate planning attorney, to learn if an irrevocable trust is a good idea for your situation and also to determine whether or not a family member should be named the trustee.

Reference: The Chattanoogan (July 5, 23019) “Keeping Your Family from Losing Its Inheritance.”

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What Do I Need to Know About My Own Funeral Arrangements? – Annapolis and Towson Estate Planning

You’ve heard about death and taxes. While having a plan for your death may not be a big priority, creating a plan for your family when you pass is something everyone should do.

WHNT’s recent article, “How to plan for life after death,” says the first step is having that conversation with someone you trust. It may be a close friend, a family member or an attorney.

Next, think about some important considerations like what you want in terms of a funeral service, burial or cremation, if you want life insurance to pay your last expenses and how your estate should be handled.

The National Institute on Aging has created a comprehensive list of considerations for those who are facing end of life decisions. It’s also a great resource for caretakers.

This planning will may make the process easier for those you leave behind, especially if you work with an experienced estate planning attorney.

There are also some fundamental decisions that can also ease the financial burden on your loved ones.

The average North American traditional funeral costs between $7,000 and $10,000. This price range includes the services at the funeral home, burial in a cemetery and the installation of a headstone at the cemetery.

The National Funeral Directors Association reports that the median cost to move the remains of a loved one to a funeral home in the U.S. is $325. Embalming can run about $725, and the average cost of a vault in the United States is $1,395, as of 2017.

According to the 2018 NFDA Cremation & Burial Report, the 2018 cremation rate is estimated to be 53.5%, and the burial rate is projected to be 40.5%.

Forbes says that roughly 42% of people opt to be cremated because of the costs involved with a standard funeral in the United States.

Reference: WHNT (June 30, 2019) “How to plan for life after death”

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Who Should Be the Agent of My Power of Attorney? – Annapolis and Towson Estate Planning

It’s important to understand what a power of attorney is, how it factors into estate planning, and how sibling roles can differ and be shared at the same time.

Considerable’s recent article, “How to assign power of attorney without sparking a family feud,” gives us some idea how the power of attorney can work within a family and among siblings.

A power of attorney or POA is a legal document that allows one person to act on behalf of another, usually when that person is unable to make decisions for themselves for reasons of ill health.

Many people confuse a power of attorney role with the executor of the estate. Power of attorney authority is only in effect while the person who has granted the authority is alive. Once that person dies, the executor of the estate then assumes responsibility of seeing the estate through the probate process. They’re two very different roles, but they can be held by the same person.

There are different types of power of attorney, too. The most frequently used are the general power of attorney and the medical power of attorney. The general power of attorney is for management of financial, business, or private affairs. If a parent grants power of attorney to one of their kids, he or she has the sole authority to act on behalf of the parent.

The other siblings have to abide by the inherent authority of the sibling with the power of attorney to make decisions for the parent related to their business affairs.

It’s also important to understand that the power of attorney is a fiduciary obligation. This means the person who holds it must act in the best interests of the parent rather than their own. He or she must also comply with rules. Nonetheless, things can get sticky if there isn’t proper confidence among siblings or transparency when major decisions are being made.

There’s also the option of signing a joint power of attorney so that two siblings share the responsibility. This may decrease the potential for jealousy and mistrust within the family. However, it can also lengthen and complicate decision-making. There’s the possibility that the siblings simply can’t agree on an issue. As a result, an important decision remains stuck in neutral indefinitely.

Whether one or more are entrusted with power of attorney, communication and transparency are the key factors in avoiding painful situations in the family.

You can also name an independent agent. This may provide more flexibility to help the parent manage his or her affairs.

Reference: Considerable (July 10, 2019) “How to assign power of attorney without sparking a family feud”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys