Update Will at These 12 Times in Your Life – Annapolis and Towson Estate Planning

Estate planning lawyers hear it all the time—people meaning to update their will, but somehow never getting around to actually getting it done. The only group larger than the ones who mean to “someday,” are the ones who do not think they ever need to update their documents, says the article “12 Different Times When You Should Update Your Will” from Kiplinger. The problems become abundantly clear when people die, and survivors learn that their will is so out-of-date that it creates a world of problems for a grieving family.

There are some wills that do stand the test of time, but they are far and few between. Families undergo all kinds of changes, and those changes should be reflected in the will. Here are one dozen times in life when wills need to be reviewed:

Welcoming a child to the family. The focus is on naming a guardian and a trustee to oversee their finances. The will should be flexible to accommodate additional children in the future.

Divorce is a possibility. Do not wait until the divorce is underway to make changes. Do it beforehand. If you die before the divorce is finalized, your spouse will have marital rights to your property. Once you file for divorce, in many states you are not permitted to change your will, until the divorce is finalized. Make no moves here, however, without the advice of your attorney.

Your divorce has been finalized. If you did not do it before, update your will now. Do not neglect updating beneficiaries on life insurance and any other accounts that may have named your ex as a beneficiary.

When your child(ren) marry. You may be able to mitigate the lack of a prenuptial agreement, by creating trusts in your will, so anything you leave your child will not be considered a marital asset, if his or her marriage goes south.

Your beneficiary has problems with drugs or money. Money left directly to a beneficiary is at risk of being attached by creditors or dissolving into a drug habit. Updating your will to includes trusts that allow a trustee to only distribute funds under optimal circumstances protects your beneficiary and their inheritance.

Named executor or beneficiary dies. Your old will may have a contingency plan for what should happen if a beneficiary or executor dies, but you should probably revisit the plan. If a named executor dies and you do not update the will, then what happens if the second executor dies?

A young family member grows up. Most people name a parent as their executor, then a spouse or trusted sibling. Two or three decades go by. An adult child may now be ready to take on the task of handling your estate.

New laws go into effect. In recent months, there have been many big changes to the law that impact estate planning, from the SECURE Act to the CARES act. Ask your estate planning attorney every few years, if there have been new laws that are relevant to your estate plan.

An inheritance or a windfall. If you come into a significant amount of money, your tax liability changes. You will want to update your will, so you can do efficient tax planning as part of your estate plan.

Can’t find your will? If you cannot find the original will, then you need a new will. Your estate planning attorney will make sure that your new will has language that states revokes all prior wills.

Buying property in another country or moving to another country. Some countries have reciprocity with America. However, transferring property to an heir in one country may be delayed, if the will needs to be probated in another country. Ask your estate planning attorney, if you need wills for each country in which you own property.

Family and friends are enemies. Friends have no rights when it comes to your estate plan. Therefore, if families and friends are fighting, the family member will win. If you suspect that your family may push back to any bequests to friends, consider adding a “No Contest” clause to disinherit family members who try to elbow your friends out of the estate.

Reference: Kiplinger (May 26, 2020) “12 Different Times When You Should Update Your Will”

 

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What You Need to Know about Trusts – Annapolis and Towson Estate Planning

Some people still think that trusts and estate planning are just for wealthy people. However, that is simply not true. Many people are good candidates for trusts, used to protect their assets and their families. Trusts can also be used to avoid probate, says the article “Common misconceptions about trusts” from the Rome Sentinel.

Who controls my property? The grantor, or the person setting up the trust, has the option of being a trustee, if they are setting up a revocable trust or an irrevocable trust. There are tax differences, so you will want to do this with an estate planning attorney. The grantor names co-trustees, if you wish. They are usually a spouse, adult child, or trusted adult. Successor trustees, that is, people who will take over the trust if the primary trustee becomes incapacitated or dies.

Only rich people need trusts. Anyone who owns a home, has life insurance and other assets worth more than $150,000 can benefit from the protection that a trust provides. The type of trust depends the grantor’s age, health status, and the amount, variety, and location of assets. A healthy person who owns a lot of life insurance or other assets would probably want either a Revocable Living Trust or a Will that includes a Testamentary Trust. However, a person who is over 55 and is planning for nursing home care, is more likely to have an Irrevocable Medicaid Trust to protect assets, avoid probate and minimize tax liability.

Can I access assets in a trust? A properly prepared trust takes your lifestyle and spending into account. Certain types of trusts are more flexible than others, and an estate planning attorney will be able to make an appropriate recommendation.

For instance, if you have an Irrevocable Medicaid Trust, you will be restricted from taking the principal asset back directly. The assets in this type of trust can be used to fund costs and expenses of real property, including mortgage payments, taxes, furnace and roof repairs. An IMT needs to be set up with enough assets outside of it, so you can have an active retirement and enjoy your life. Assets outside of the trust are your spendable money.

Can my children or any others take assets from the trust? No, and that is also the point of trusts. Unless you name someone as a Trustee with the power to take assets out of the trust, they cannot access the funds. The grantor retains control over what assets may be gifted during their lifetime. They can also impose restrictions on how assets are restricted after death. Some trusts are created to set specific ages or milestones, when beneficiaries receive all or some of the assets in the trust.

Trusts are not one size-fits all. Trusts need to be created to serve each family’s unique situation. An experienced estate planning attorney will work with the family to determine their overall goals, and then determine how trusts can be used as part of their estate plan to achieve goals.

Reference: Rome Sentinel (May 31, 2020) “Common misconceptions about trusts”

 

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Can You Place a Life Insurance Policy in a Trust? – Annapolis and Towson Estate Planning

Trusts are frequently used in the estate planning process. They help with in the distribution of assets, making certain that everything is distributed to the right people and entities. A trust can also reduce estate taxes, because it lets you remove assets from your estate, so more wealth can be passed to beneficiaries.

Many people do not know that you can even place a life insurance policy within a trust. Investopedia’s recent article entitled “Can You Trust Your Trustee?” explains that life insurance in a trust is called trust-owned life insurance (TOLI). A TOLI is like bank-owned and company-owned life insurance. Trustees often do a good job of completing basic tasks, but conflicts and problems can pop up when trustees do not understand where their loyalties should be and how to deal with complex financial issues.

A trustee has a fiduciary responsibility to the beneficiaries of a trust. The trustee is required to manage the trust assets pursuant to the instructions of the trust for the beneficiaries.

TOLI beneficiaries usually have a desire to maximize the amount of wealth they will receive, when the trust assets are distributed. The trustee must, therefore, actively manage the insurance policy, or policies, that are owned by the trust. This includes determining if the policy is performing up to the projections reflected in the original life insurance illustration. It also requires the trustee to try to identify alternative policies that may be more in line with the desires of the beneficiaries. New life insurance products have made some policies sold in the past obsolete. An old under-performing policy can often be replaced. However, some trustees do not possess the skills necessary to oversee trust-owned life insurance. A trustee should understand and be aware of:

  • The policy’s performance relative to expectations
  • The last time the life insurance policy was reviewed
  • If there are other policies that may do a better job of meeting wishes and stipulations expressed in the trust document
  • Whether the credit rating of the insurance company that issued the policy has decreased and
  • If the allocation of the sub-accounts is still aligned with the investment policy statement.

Trust-owned life insurance can have an important role in the estate plans of many people, but not all trustees have the bandwidth when it comes to insurance and estate planning to fulfill their fiduciary responsibilities. Ask an experienced estate planning attorney for assistance.

Reference: Investopedia (June 25, 2019) “Can You Trust Your Trustee?”

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What’s the Difference between Revocable and Irrevocable Trusts? – Annapolis and Towson Estate Planning

A trust is an estate planning tool that you might discuss with an experienced estate planning attorney, beyond drafting a last will and testament.

KAKE.com’s recent article entitled “Revocable vs. Irrevocable Trusts” explains that a living trust can be revocable or irrevocable.

You can act as your own trustee or designate another person. The trustee has the fiduciary responsibility to act in the best interests of the trust beneficiaries. These are the people you name to benefit from the trust.

There are three main benefits to including a trust as part of an estate plan.

  1. Avoiding probate. Assets held in a trust can avoid probate. This can save your heirs both time and money.
  2. Creditor protection. Creditors can try to attach assets held outside an irrevocable trust to satisfy a debt. However, those assets titled in the name of the irrevocable trust may avoid being accessed to pay outstanding debts.
  3. Minimize estate taxes. Estate taxes can take a large portion from the wealth you may be planning to leave to others. Placing assets in a trust may help to lessen the effect of estate and inheritance taxes, preserving more of your wealth for future generations.

What’s the Difference Between Revocable and Irrevocable Trusts?

A revocable trust is a trust that can be changed or terminated at any time during the lifetime of the person making the trust. When the grantor dies, a revocable trust automatically becomes irrevocable, so no other changes can be made to its terms.

An irrevocable trust is essentially permanent. Therefore, if you create an irrevocable trust during your lifetime, any assets you place in the trust must stay in the trust. That is a big difference from a revocable trust: flexibility.

Whether a trust is right for your estate plan, depends on your situation. Discuss this with a qualified estate planning attorney. This has been a very simple introduction to a very complex subject.

Reference: KAKE.com (March 31, 2020) “Revocable vs. Irrevocable Trusts”

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Which Takes Priority in a Conflict: a Will or a Trust? – Annapolis and Towson Estate Planning

A will and a trust are separate legal documents that usually have a common goal of coordinating a comprehensive estate plan. The two documents ideally work in tandem, but because they are separate and distinct documents, they sometimes can conflict with one another. This conflict can be accidental or on purpose.

A revocable trust is a living trust established during the life of the grantor. It can be changed at any time, while the grantor is still alive. Since revocable trusts become operative before the will takes effect at death, the trust takes precedence over the will, in the event that there are issues between the two.

An Investopedia article from 2019, “What Happens When a Will and a Revocable Trust Conflict?” reminds us that a will has no power to decide who receives a living trust’s assets, such as cash, equities, bonds, real estate and jewelry because a trust is a separate entity. It is a separate entity from an individual. When the grantor dies, the assets in the trust do not go into the probate process with a decedent’s personal assets. They remain trust property.

When a person dies, their will must be probated, and the deceased individual’s property is distributed according to the terms in the will. However, probate does not apply to property held in a living trust, because those assets are not legally owned by the deceased. As such, the will has no authority over a trust’s assets, which may include cash, real estate, cars, jewelry, collectibles and other tangible items.

Let us say that the family patriarch named Christopher Robin has two children named Pooh and Roo. Let us also assume that Chris places his home into a living trust, which states that Pooh and Roo are to inherit the home. Several years later, Chris remarries and just before he dies, he executes a new will that purports to leave his house to his new wife, Kanga. In such an illustration, Chris would have needed to amend the trust to make the transfer to Kanga effective, because the house is trust property, and Chris no longer owns it to give away. That home becomes the property of the children, Pooh and Roo.

This can be a complex and confusing area, so work with an experienced estate planning attorney to be sure you do not end up like Kanga with nowhere to live.

Remember a revocable trust is a separate entity and does not follow the provisions of a person’s will upon his or her death.  It is wise to seek the advice of a trust and estate planning attorney to make sure proceedings go as you intend.

While a revocable trust supersedes a will, the trust only controls those assets that have been placed into it. Therefore, if a revocable trust is formed, but assets are not moved into it, the trust provisions have no effect on those assets, at the time of the grantor’s death. If Christopher Robin created the trust but he failed to retitle the home as a trust asset, Kanga would have been able to take possession under the will. Oh bother!

Reference: Investopedia (August 5, 2019) “What Happens When a Will and a Revocable Trust Conflict?”

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Should I Create a Trust? – Annapolis and Towson Estate Planning

Just 40% of adults in the United States have any kind of estate planning documents in place. That leaves 60% of adults who don’t have their property and other assets protected in the event of death.

Without planning, their family and loved ones will have trouble trying to determine what to do next.

Frequently, when thinking of estate planning, we think of a will. However, there are other options. Creating a living trust may be a better option for you and your family, advises kake.com’s recent article entitled “What Are the Advantages of Creating a Living Trust for My Family?”

The article provides some of the major benefits of a living trust.

It can save your family money. When a person with a living trust passes, the trustee takes possession and control over the trust property, according to the instructions provided by the trustor. It can be less expensive, because there are no fees that may be incurred in probate. Everything also moves faster.

Protection of your privacy. A living trust is much more private, because it does not have to go through the probate court and will not become public record. In contrast, a will becomes public record, that anyone can request to view as a court record.

A trust is for more than death. A living trust can be invoked at other times before death. The creator can add specific stipulations and conditions to the living trust to designate when the trustee can take over the management of property and finances.

More difficult to challenge. A will can be contested in court, if a family member thinks that he or she is entitled to more of your assets than was outlined in the will. A judge can rule that your will is not valid, and the contesting family member can possibly get more than you intended. With a living trust, there is much less chance that this will happen.

Creating a living trust takes legal expertise, so work with an experienced estate planning attorney. You can then discuss an entire estate planning strategy.

Reference: kake.com (April 20, 2020) “What Are the Advantages of Creating a Living Trust for My Family?”

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

Am I Making One of the Five Common Estate Planning Mistakes? – Annapolis and Towson Estate Planning

You do not have to be super-wealthy to see the benefits from a well-prepared estate plan. However, you must make sure the plan is updated regularly, so these kinds of mistakes do not occur and hurt the people you love most, reports Kiplinger in its article entitled “Is Anything Wrong with Your Estate Plan? Here are 5 Common Mistakes.”

An estate plan contains legal documents that will provide clarity about how you would like your wishes executed, both during your life and after you die. There are three key documents:

  • A will
  • A durable power of attorney for financial matters
  • A health care power of attorney or similar document

In the last two of these documents, you appoint someone you trust to help make decisions involving your finances or health, in case you cannot while you are still living. Let us look at five common mistakes in estate planning:

# 1: No Estate Plan Whatsoever. A will has specific information about who will receive your money, property and other property. It is important for people, even with minimal assets. If you do not have a will, state law will determine who will receive your assets. Dying without a will (or “intestate”) entails your family going through a time-consuming and expensive process that can be avoided by simply having a will.

A will can also include several other important pieces of information that can have a significant impact on your heirs, such as naming a guardian for your minor children and an executor to carry out the business of closing your estate and distributing your assets. Without a will, these decisions will be made by a probate court.

# 2: Forgetting to Name or Naming the Wrong Beneficiaries. Some of your assets, like retirement accounts and life insurance policies, are not normally controlled by your will. They pass directly without probate to the beneficiaries you designate. To ensure that the intended person inherits these assets, a specific person or trust must be designated as the beneficiary for each account.

# 3: Wrong Joint Title. Married couples can own assets jointly, but they may not know that there are different types of joint ownership, such as the following:

  • Joint Tenants with Rights of Survivorship (JTWROS) means that, if one joint owner passes away, then the surviving joint owners (their spouse or partner) automatically inherits the deceased owner’s part of the asset. This transfer of ownership bypasses a will entirely.
  • Tenancy in Common (TIC) means that each joint owner has a separately transferrable share of the asset. Each owner’s will says who gets the share at their death.

# 4: Not Funding a Revocable Living Trust. A living trust lets you put assets in a trust with the ability to freely move assets in and out of it, while you are alive. At death, assets continue to be held in trust or are distributed to beneficiaries, which is set by the terms of the trust. The most common error made with a revocable living trust is failure to retitle or transfer ownership of assets to the trust. This critical task is often overlooked after the effort of drafting the trust document is done. A trust is of no use if it does not own any assets.

# 5: The Right Time to Name a Trust as a Beneficiary of an IRA. The new SECURE Act, which went into effect on January 1, 2020 gets rid of what is known as the stretch IRA. This allowed non-spouses who inherited retirement accounts to stretch out disbursements over their lifetimes. It let assets in retirement accounts continue their tax-deferred growth over many years. However, the new Act requires a full payout from the inherited IRA within 10 years of the death of the original account holder, in most cases, when a non-spouse individual is the beneficiary.

Therefore, it may not be a good idea to name a trust as the beneficiary of a retirement account. It is possible that either distributions from the IRA may not be allowed when a beneficiary would like to take one, or distributions will be forced to take place at a bad time and the beneficiary will be hit with unnecessary taxes. Talk to an experienced estate planning attorney and review your estate plans to make certain that the new SECURE Act provisions don’t create unintended consequences.

Reference: Kiplinger (Feb. 20, 2020) “Is Anything Wrong with Your Estate Plan? Here are 5 Common Mistakes”

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

Does Artwork Belong in a Charitable Remainder Trust? – Annapolis and Towson Estate Planning

A charitable remainder trust is a tax-exempt irrevocable trust that is created to decrease taxable income of people, by initially giving income to the beneficiaries of the trust for a set period of time and then donating the rest of the trust funds to a designated charity.

Financial Advisor’s recent article entitled “Putting Art Into Charitable Remainder Trusts” says that people who have valuable artwork or other collectibles that are hard to divide or that their kids do not want, can investigate a charitable remainder trust with an estate planning attorney as an option.

A Charitable Remainder Trust is designed to save asset owners taxes that they would have to pay, if they sold their artworks on the open market. CRTs are also designed so that when they expire, they allow philanthropically inclined individuals help their favorite charitable organizations.

Many people with higher net worth hold about a tenth of their wealth in art and collectibles.  Due to the nature of the assets, the value may be hard to split up among their heirs, or no one heir may want that specific piece of art. A charitable remainder trust gives the art or collectible owner a solution to that issue. The trust will reduce her taxable income, by first dispersing income to the trust beneficiaries for a certain period of time and then the remainder is donated to a charity.

It is important to note that art markets are quirky, and a CRT protects an owner from forcing her into a fire sale, when she or a trustee is trying to divide the estate.

For example, say the parents purchased a number of pieces of artwork on a European vacation and shipped them back to the United States. They have three children, but there is one piece of art that is more valuable than the others. As a result, there was no way to equitably divide the pieces. If they sold the pieces outright, there would be a 28% tax imposed.

However, the parents could instead place the artwork in a charitable remainder trust, get a tax deduction for part of the value, get income from the trust and then give a sum to a selected charity.

The asset can be held in the trust until one owner dies, until both parents pass, or for up to a certain number of years, based on how the trust is set up. Contact an estate planning attorney experienced in charitable planning strategies.

Reference: Financial Advisor (Feb. 21, 2020) “Putting Art Into Charitable Remainder Trusts”

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

What’s the Difference Between an Inter Vivos Trust and a Testamentary Trust? – Annapolis and Towson Estate Planning

Trusts can be part of your estate planning to transfer assets to your heirs. A trust created while an individual is still alive is an inter vivos trust, while one established upon the death of the individual is a testamentary trust.

Investopedia’s recent article entitled “Inter Vivos Trust vs. Testamentary Trust: What’s the Difference?” explains that an inter vivos or living trust is drafted as either a revocable or irrevocable living trust and allows the individual for whom the document was established to access assets like money, investments and real estate property named in the title of the trust. Living trusts that are revocable have more flexibility than those that are irrevocable. However, assets titled in or made payable to both types of living trusts bypass the probate process, once the trust owner dies.

With an inter vivos trust, the assets are titled in the name of the trust by the owner and are used or spent down by him or her, while they are alive. When the trust owner passes away, the remainder beneficiaries are granted access to the assets, which are then managed by a successor trustee.

A testamentary trust (or will trust) is created when a person dies, and the trust is set out in their last will and testament. Because the creation of a testamentary trust does not occur until death, it is irrevocable. The trust is a created by provisions in the will that instruct the executor of the estate to create the trust. After death, the will must go through probate to determine its authenticity before the testamentary trust can be created. After the trust is created, the executor follows the directions in the will to transfer property into the trust.

This type of trust does not protect a person’s assets from the probate process. As a result, distribution of cash, investments, real estate, or other property may not conform to the trust owner’s specific desires. A testamentary trust is designed to accomplish specific planning goals like the following:

  • Preserving property for children from a previous marriage
  • Protecting a spouse’s financial future by giving them lifetime income
  • Leaving funds for a special needs beneficiary
  • Keeping minors from inheriting property outright at age 18 or 21
  • Skipping your surviving spouse as a beneficiary and
  • Making gifts to charities.

Through trust planning, married couples may use of their opportunity for estate tax reduction through the Unified Federal Estate and Gift Tax Exemption. That is the maximum amount of assets the IRS allows you to transfer tax-free during life or at death. It can be a substantial part of the estate, making this a very good choice for financial planning.

Reference: Investopedia (Aug. 30, 2019) “Inter Vivos Trust vs. Testamentary Trust: What’s the Difference?”

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

Do I Need to Be Wealthy to Set Up a Trust? – Annapolis and Towson Estate Planning

Trust funds are intended to let a person’s money continue to be useful, after they pass away. However, they are not only useful for ultra-high-net-worth individuals. Many people can benefit from the use of a trust.

Investopedia’s recent article entitled “How to Set Up a Trust Fund if You’re Not Rich” says that you can place cash, stock, real estate, or other valuable assets in your trust. Work with a trust attorney, decide on the beneficiaries, and set any instructions or restrictions. With an irrevocable trust, you do not have the ability to dissolve the trust, if you change your mind later on. Once you place property in the trust, it is no longer yours but is under the care of a trustee. Because the assets are no longer yours, you do not have to pay income tax on any money made from the assets, and with an estate planning attorney’s guidance, the assets can be exempt from estate and gift taxes.

Tax exemptions are a main reason that some people set up an irrevocable trust. If you, the trustor (the person establishing the trust) is in a higher income tax bracket, creating an irrevocable trust lets you remove these assets from your net worth and move into a lower tax bracket.

If you do not want to set up a trust, there are other options. However, they do not give you as much control over your property. As an alternative or in addition to a trust, you can have an attorney draft your will. With a will, your property is subject to more taxes, and its terms can easily be contested in probate. You also will not have much control over how your assets are used.

Similar to a 529 college-savings plan, UGMA/UTMA custodial accounts are designed to let a person use the funds for education-related expenses. You can use an account like this to gift a certain amount up to the maximum gift tax or fund maximum to reduce your tax liability, while setting aside funds that can only be used for education-related expenses. The downside to UGMA/UTMA Custodial Accounts and 529 plans is that money in the minor’s custodial account is considered an asset. This may make them ineligible to receive need-based financial aid.

For those who do not have a high net-worth but want to leave money to children or grandchildren and control how that money is used, a trust may be a good option. Talk it over with a qualified estate planning attorney.

Reference: Investopedia (Dec. 12, 2019) “How to Set Up a Trust Fund if You’re Not Rich”

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