Patinelli & Chang, LLP

What You Need to Know about Trusts for Estate Planning

“Trusts fall into one of two main categories. The first category is composed of those that are established while the grantor (one who establishes the trust) is alive and are termed inter vivos (while living) trusts.”

There are many different kinds of trusts used to accomplish a wide variety of purposes in creating an estate plan. Some are created by the operation of a will, and they are known as testamentary trusts—meaning that they came to be via the last will and testament. That’s just the start of a thorough look at trusts offered in the article “ON THE MONEY: A look at different types of trusts” from the Aiken Standard.

Another way to view trusts is in two categories: revocable or irrevocable. As the names imply, the revocable trust can be changed, and the irrevocable trust usually cannot be changed.

A testamentary trust is a revocable trust, since it may be changed during the life of the grantor. However, upon the death of the grantor, it becomes irrevocable.

In most instances, a revocable trust is managed for the benefit of the grantor, although the grantor also retains important rights over the trust during her or his lifetime. The rights of the grantor include the ability to instruct the trustee to distribute any of the assets in the trust to someone, the right to make changes to the trust and the right to terminate the trust at any time.

If the grantor becomes incapacitated, however, and cannot manage her or his finances, then the provisions in the trust document usually give the trustee the power to make discretionary distributions of income and principal to the grantor and, depending upon how the trust is created, to the grantor’s family.

Note that distributions from a living trust to a beneficiary other than the grantor, may be subject to gift taxes. Those are paid by the grantor. In 2019, the annual gift tax exclusion is $15,000. Therefore, if the distribution is under that level, no gift taxes need to be filed or paid.

When the grantor dies, the trust property is distributed to beneficiaries, as directed by the trust agreement.

Irrevocable trusts are established by a grantor and cannot be amended without the approval of the trustee and the beneficiaries of the trust. The major reason for creating such a trust in the past was to create estate and income tax advantages. However, the increase in the federal estate tax exemption means that a single individual’s estate won’t have to pay taxes, if the value of their assets is less than $11.4 million ($22.8 million for a married couple).

Once an irrevocable trust is established and assets are placed in it, those assets are not part of the grantor’s taxable estate, and trust earnings are not reported as income to the grantor.

The downside of an irrevocable trust is that the transfer of assets into the trust may be subject to gift taxes, if the amount that is transferred is greater than $15,000 multiplied by the number of trust beneficiaries. However, depending upon the size of the grantor’s estate, larger amounts may be transferred into an irrevocable trust without any gift tax liability to the grantor, if the synchronization between gift taxes and estate taxes is properly done. This is a complex strategy that requires an experienced trust and estate attorney.

Trusts are also used to address charitable giving and generating current income. These trusts are known as Charitable Remainder Trusts and are irrevocable in nature. There is a current beneficiary who is either the donor or another named individual and a remainder beneficiary, which is a qualified charitable organization. The trust document provides that the named beneficiary receives an income stream from the income produced by the trust assets, and when the grantor dies, the remaining assets of the trust pass to the charity.

Speak with your estate planning attorney about how trusts might be a valuable part of your estate plan. If your estate plan has not been reviewed since the new tax law was passed, there may be certain opportunities that you are missing.

Reference: Aiken Standard (May 17, 2019) “ON THE MONEY: A look at different types of trusts”

There’s A Reason Why There are Laws about Wills and Estates

“A man executes a will leaving his property to three people. Later, he executes a new will removing one of the heirs. Finally, he executes a third will, leaving his property to the original three people but doesn't get the will witnessed. Which will is in control?”

If this question sounds like something from a lawyer’s bar exam, that would be about right. It sounds like the first will should be in control, since his intentions were made clear in the first will, even if it was not executed correctly. This was explained by nwi.com in the article “Estate Planning: Will formalities are important.” However, there are many different factors that go into determining which of these three wills should be the one that the court accepts. This is a good illustration of why a will should be prepared with the help of an estate planning attorney.

First, is the third will valid? If there were no witnesses, it seems very clear that it is not. Except for very unusual circumstances, a will is only valid if it is in writing, signed by the person who is its “creator,” which is the “testator,” and witnessed by not one but two witnesses.

The next question is, how about that second will? Is it valid? Was the second will revoked, when the third was created, even though it was not properly executed?

There are two basic ways to revoke a will: physical destruction or written instrument. If the will was not destroyed, then the revocation of the second is considered to have occurred by the creation of the third will. Most wills contain a recital revoking all previous wills and codicils, which serves as a written revocation.

However, there’s a problem. Because the third will is most likely void, then it could not have revoked the second will. Will revocations also need to be witnessed, and since the third will was not witnessed, the recital contained in the third will revoking the prior wills is also void.

It, therefore, seems that the second will is valid in this situation. We say it seems, because there may be other factors that might also make the second will invalid: we don’t have all the facts.

The lesson from this article is that when it comes to wills, trusts and estate plans, the formalities really do matter. Procedures and formalities are considered more important than intent.

Another story that illustrates that point comes from an attorney who was involved in an estate matter where the person who made the will tried to take out several beneficiaries, by taking a razor blade to the document and physically removing their names from the will. The estate battle began after he died. The intention was clear—to remove the beneficiaries from the will. However, because the proper formalities were not followed, the beneficiaries were not properly removed from the will and they received their bequests after all.

If you have a will and estate plan and you wish to make changes to it, sit down with an estate planning attorney to discuss the changes you want to make, and have the documents properly revised, following all the required steps. Don’t try to do this yourself: your wishes may not be followed otherwise.

Reference: nwi.com (March 10, 2019) “Estate Planning: Will formalities are important”

When Should You Have Your Estate Plan Done?

“If you have at least gone to the trouble of making a will, consider yourself ahead of the curve and pat yourself on the back.”

But don’t pat yourself too much — you’re not done yet. A will is not a static instrument, says The Item in its recent article “Don’t wait until high noon.” If laws change, which happens regularly, or your life changes, you need to review your will and be aware of any significant changes that may have an impact on your will and its goals.

Marriage, divorce, birth, adoption and death are some of the key trigger events in life that call for a review of your will. Some of these events seem very obvious, but others aren’t. That is when problems can arise. For instance, if a widow or widower remarries, the will needs to be updated to clarify how the new spouse and the children from prior marriages are to be provided for.

Welcoming a new child into the family is an event to celebrate, whether by birth or adoption. The will needs to add the new child. However, there’s another step that may be even more important. A will is used to name a guardian for the child, so the parents may name a person to rear their child in their absence. If a guardian is not named, then the court will select someone who might have not been the parent’s first (or even second) choice.

The death of an executor, beneficiary, guardian or trustee named in the will also means that the will needs to be updated. If the person who has died is a beneficiary, their name needs to be removed. You may want to reconsider how assets are distributed. For executors, guardians or trustees, remember to add a secondary person for each role.

What if you inherit an unexpected fortune? You’ll definitely need to review your will, since your estate tax liability may have changed. Even if you don’t owe federal estate taxes, there may be state estate taxes to plan for. If you suffer a large financial loss, you’ll need to review your will, since the generous gift you had planned on leaving to a nonprofit. may no longer be available.

Some changes to wills occur because people change their minds about how they want to distribute their assets, or who they want to handle their post-mortem responsibilities. If you have a falling out with an executor, for instance, that change needs to be made in a timely manner.

If you have not reviewed the beneficiaries who are named on your life insurance policies and retirement accounts, and any other accounts where beneficiaries are named, you’ll want to do that too. If your will says cousin Andrew gets your life insurance policy proceeds, but his sister Stella is the one named as the beneficiary, then only Stella receives the proceeds. The named beneficiary is a contract that cannot be challenged or changed, regardless of what your will says.

If you don’t yet have a will, now is the time to make an appointment to meet with an estate planning attorney in your community. Remember that estate laws are set by the state of your residence, so an experienced estate planning attorney in your area is your best source.

Reference: The Item (Feb. 15, 2019) “Don’t wait until high noon”

New Year’s Resolutions Can Still Include Your Estate Plan

“We often think of exercising more, eating healthier or getting better sleep, but what about a resolution that continues in the spirit of giving? A resolution that ensures your wealth administration and estate planning are properly structured will greatly benefit you and your family.”

‘Tis the season—to make decisions about year-end giving to friends and family and charitable organizations. And then, just as quickly, it’s time for New Year’s resolutions. Instead of making resolutions about getting more fit, or sleeping better, asks the Grand Rapids Business Journal, in the article “Incorporate estate planning into New Year’s resolutions,” why not make a resolution about your estate plan this year?

Resolving to address your estate plan and wealth administration in the coming year, will be a big help to you and your family. It’s easy to become overwhelmed—how many accounts do I have? Who is the named beneficiary? Who will administer my estate? To make it easier, use this checklist:

Revisit your estate plan. Have you looked at your estate plan in light of the 2018 tax law changes? Have you updated your beneficiary names on any accounts? Do you have contingent beneficiaries named?

Develop or update your will and don’t forget to sign it. If you pass without a will, the laws of your state will determine how your property is distributed, and the court will assign a guardian to your minor children. Better—have your will created or update it. Not having a will may increase your family’s tax liabilities, not to mention the legal disputes or challenges that result when there is no will. Don’t forget to finalize the document with your signature. Yes, that really does happen, and it leads to unnecessary problems.

Revise your charitable giving. Instead of annual charitable giving that may no longer be deductible under the new tax laws, consider donating a larger sum to a donor-advised fund. This lets you receive an immediate charitable deduction and distribute funds to carefully vetted charities over time. This also lets your money grow tax-free before it is donated.

Check on your insurance coverage: Just as your life changes and your estate plan changes, your insurance needs change also. Make sure there are no gaps in your coverage and that there’s enough liquidity to pay estate taxes, satisfy any buy/sell agreements and provide enough money to support any survivors. If you have young children, have you included their college educations in your insurance portfolio?

Business succession plan review. Business owners who pour their heart and soul into their businesses hate to think about succession planning, and as a result many do nothing, leaving partners, family members, and clients in a bad position. What would happen to the business, if something unexpected occurred to you? Does your retirement plan center on the sale of your business? It usually takes a long time to create a business plan, and then it needs to be reviewed on a regular basis to ensure that it still works for all involved.

Make an appointment with your estate planning attorney. Make an appointment now, and you’ll be sure to go over these steps before too much of the new year passes by.

Reference: Grand Rapids Business Journal (Dec. 7, 2018) “Incorporate estate planning into New Year’s resolutions”

Why Do I Need an Estate Plan? I’m a Millennial!

“For most millennials, getting a will is likely at the bottom of their to-do list—if it even makes the list.”

We know that people don’t want to talk about death. Even baby boomers, who are coming to terms with their own mortality, don’t like to talk about death. However, if you die without a will or an estate plan, the Chicago Tribune says the consequences for those you love can be financially and emotionally disastrous. The article is titled “Family Finances: Even millennials need an estate plan.”

A will details how you want assets distributed after death. It names an executor to handle those assets. Without a will, you are dying “intestate” and the state will decide how to distribute your property and funds. If you aren’t married and don’t have any children, most states will start with your parents. However, if you have a will, the entire process becomes much easier.

There are two documents that are even more important than a will for a single healthy millennial. The first is a Power of Attorney. Through this legal document, you appoint the person who is empowered to make decisions about financial matters on your behalf, if you cannot. It’s for when you are incapacitated, by illness or injury, and also if you are unavailable for other reasons, like if you are travelling.

The second document is called an advance medical directive. This defines your end-of-life wishes about medical treatment. The person you name, will be able to carry out decisions like this on your behalf. This is unpleasant, but necessary to address. If you don’t designate a health care agent or fall into a persistent vegetative state, you will probably be kept alive artificially by default. This may not be what you wanted, but if no one has the legal document telling them what you wanted, then this is what happens.

What happens to your digital assets when you die? Facebook now has a default, where it memorializes your account, and you can appoint a legacy contact or direct Facebook to delete the account, if that is your preference. Google now lets you choose up to ten trusted contacts, who can download data from your Gmail, photos and more, if you become inactive for a certain period of time. Most states have now enacted laws that govern how an executor can access your digital assets, but you still have to tell the platforms, one at a time, what your wishes are.

Cryptocurrencies, like Bitcoin, are another aspect of millennial life that have to be addressed in advance, if they are not going to disappear completely when you die.

An estate planning attorney will do more than create documents for you; they’ll create a plan that addresses issues that arise during life, as well as after death. Estate planning documents, including the three mentioned above, are governed by state law, so you’ll want to work with an attorney who is familiar with the laws of your state.

Resource: Chicago Tribune (Oct. 9, 2018 “Family Finances: Even millennials need an estate plan”

Wills, Trusts, Estates: What’s What?

“First, why is a trust better than a will? Can I serve as the trustee? Where do my kids get a copy of the trust after I die?”

It is important to understand that every person’s situation is different.  Therefore, trusts aren’t necessarily “better” than wills. They are different types of estate planning tools with different features and are used to accomplish different things, says nwitimes.com in “Estate Planning: Distinct differences between wills and trusts.”

A will is a document that provides instructions regarding your final affairs: what to do with your property after death.  It also enables you to nominate the person you would choose to carry out your wishes—your executor—and if you have minor children, who you want to rear them—a guardian.

The will is not used for anything during your lifetime and becomes effective when you die. In most cases, it needs to be presented to a court. The presenting of the will to a court and the appointment of a personal representative is known as probate.

Trusts are different. A trust is a legal entity that can own property and provide certain benefits to the beneficiary. Think of a trust as a box in which you place certain assets. You don’t own the assets—but you do own the box.

In most cases, the creator of a revocable living trust is also the beneficiary and the trustee. There’s no difference in how you address property transactions, other than how you transact business. To sell a home, the deed is signed by the trustee, rather than the individual, because the trust owns the home. 

The biggest difference? Certain trusts are effective during the lifetime of the person. Some trusts only become active when the person passes: a testamentary trust. Most trusts have powers, once they are set up. The will only becomes active, when a person passes away.

People like trusts because they think that trusts will help them avoid the probate process.  However, trusts can also offer confidentiality and some protection, albeit limited, from creditors.

Trusts are not filed anywhere or recorded, so your children will probably only get a copy of the trust from you, while you are alive or from your estate planning attorney, who should maintain a copy.

An estate planning attorney will be able to discuss the different types of trusts, what functions they serve and whether your situation requires the use of a trust. With or without a trust, everyone should have a will, power of attorney and a healthcare directive. An estate planning attorney can make sure that you and your family have everything appropriate for your unique needs.

Reference: nwitimes.com (Jan 21, 2018) “Estate Planning: Distinct differences between wills and trusts”

Have These Documents Prepared for a Child Headed to College

“There are documents pertaining to health, money, and college records, that your child can sign to give you some peace of mind. Not all of these are required, but you may want to consider if you need them or not.”

There’s no end to what parents and grandparents can worry about, when their child or grandchild heads off to college. Will they make the right decisions, choose good friends and perform well in their studies? One thing you can do to help prepare your college-bound student, is to have certain legal documents prepared before they go, advises getintocollege.com in the article “Legal Documents Your Child Needs to Sign Before Heading to College.”

Once your child turns 18, your access to their medical records ends, unless they complete a form called a HIPAA Authorization. Your child must sign the form to give you access to their records, appointments, test results, etc. If your child is going to a school out of state, you may need a state-specific form. Keep these documents in a safe place, where you can access them quickly, in case of an emergency. 

Chances are your student is heading off to college with a debit card and a credit card.  However, do you have access to those accounts? Talk with your estate planning attorney about creating a Financial Power of Attorney form, so you don’t run into any roadblocks, if your child needs help handling their finances. Opening a bank account or having a credit card attached to your account makes it easier for you to transfer money to your student. It also makes it easier for you to keep a watchful eye on their spending. Make a copy of the front and back of all cards so you can easily report them if lost or stolen. 

Colleges have a form known as FERPA (Family Educational Rights and Privacy Act), which you usually can obtain at some point during orientation. This is a document that gives you the legal right to your child’s academic and financial information through the college. Think of this as the college’s HIPAA law. It’s not the same, but it can create the same level of obstruction, if you do not address it in advance. With it in place, you’ll be able to discuss their finances with the bursar’s office, their grades with their academic advisor and many other offices in the college that will otherwise refuse to speak with you.

College is a transition time for both students and parents, as well grandparents. Having these documents properly prepared, with the help of an estate planning attorney, will give you some peace of mind, as your child leaves the nest.

Reference: getintocollege.com (March 29, 2018) “Legal Documents Your Child Needs to Sign Before Heading to College.”

Tax Reform and People with Disabilities

            Republican tax plans have some people with disabilities worried. For parents and grandparents of those people with disabilities, it suggests that a special needs trust is more important than ever.

The ramifications of the new Republican tax reform for individual Americans are still being assessed.

Some people will pay lower taxes, but a few will likely see their taxes increase. One group concerned about the new law was people with disabilities.

Not only will those with disabilities enjoy the standard deduction doubling under the Republican plan, but their taxes might decrease even further due to another provision. The plan includes a provision to lower the itemized deduction threshold for health care expenses in tax years 2017 and 2018. The new tax law lowers the deductibility threshold from 10% to 7.5% of adjusted gross income.

Not until 2019 will the threshold increase return back to 10% where it was pegged in 2016.

Accordingly, the fears expressed by The Hill in "Restructured tax code would unduly burden people with disabilities" did not come to pass.

There is something parents and grandparents of the disabled, as well as the disabled themselves, can do and that is create a special needs trust. These trusts do not ease anyone's tax burden but do allow people with special needs to have more income to help cover any increased taxes.

If you would like to learn more about special needs trusts, then talk to an estate planning attorney for the details about setting one up.

The process is complicated and needs to be done in a particular way in order to work but an experienced attorney can help you with that.

Reference: The Hill (Nov. 24, 2017) "Restructured tax code would unduly burden people with disabilities."

 

Do Not Resuscitate Tattoo

A study has highlighted an unusual case, where doctors had to decide what to do about a patient who had a "Do Not Resuscitate" tattoo.

Medical professionals today understand that people with severe health problems would often prefer that nothing extraordinary be done to prolong their lives. Do not resuscitate orders are common in the medical files of the elderly and the terminally ill.

When doctors see the order in their files, they follow the wishes of the patient.

However, a medical ethics study recently brought to light an unusual case that was not so clear.

An unconscious 70-year-old man was brought into the hospital. He had a high blood alcohol level and a tattoo that read "Do Not Resuscitate."

Doctors had to figure out whether to follow the directions of the tattoo, as CNN reported in "A man's tattoo left doctors debating whether to save his life."

The doctors determined at first that they should ignore the tattoo and try to save the man's life.

Then they discussed the matter with an ethics consultant and reached the opposite conclusion.

The man's written do not resuscitate directive was later found and the problem was cleared up. The man passed away.

This is an interesting case for medical ethicists.

It is also interesting in the sense that doctors will follow the advanced directives of their patients.

If you would like to write down your advanced medical directives and make them legally binding without debate, then you shouldn’t get a tattoo directive. Visit an estate planning attorney instead.

Reference: CNN (Dec. 12, 2017) "A man's tattoo left doctors debating whether to save his life."

Planning for Family Businesses

It is more difficult for shareholders to get value out of privately-held family businesses than it is for public companies. It is important to understand that and to make plans around it.

If you leave your heirs shares in publicly traded companies, it is easy for them to turn those shares into cash anytime they wish. Shares in most public companies can be sold quickly and easily.

If you leave your family shares in a private or family business, it is much more difficult to turn those shares into cash. There are often restrictions on who can own the shares. There is not an easily and quickly accessible market to sell the shares.

 It means that money can more easily be lost, when you leave your heirs stock in a private company as the Wills, Trusts & Estates Prof Blog discusses in "The Family-Shareholder Wealth Roadmap."

One of the biggest mistakes that family businesses make, is not adequately considering the time value of money when it comes to making cash distributions to shareholders.

Companies often wait too long to make the distributions and thus the shareholders lose value. Another common mistake is using equity to finance operations, when debt financing would be better under the circumstances.

These problems can be overcome with the right assistance.

Family businesses should have financial advisers and accountants to help them. They should also seek estate planning attorneys to get help with how to pass the business on to heirs in a way that does not destroy the business.

Reference: Wills, Trusts & Estates Prof Blog (Nov. 24, 2017) "The Family-Shareholder Wealth Roadmap."