It is important to understand that estate planning documents do not exist in a vacuum. Estate planning is one of the most technical and dynamic areas of the law. Properly planning an estate requires consideration of federal and state tax issues, state property law, state probate law and state trust law. Estate planning documents must be carefully customized to meet each individual’s unique circumstances and objectives. If they are not, unintended, and often costly, consequences may result.
Suppose you use a generic template that you find online to create a last will and testament or revocable living trust. Are you sure that the documents that you wind up with will stand up to any challenges that may present themselves after your death? Are you sure the tax sensitive provisions of your documents have been properly considered for your particular circumstances? Could there be conflicting clauses that require your family to go to court to interpret the document after you have passed? Has the document been thoughtfully drafted under state law so that your beneficiaries’ inheritances are protected from a divorcing spouse or other potential creditors?
Another thing to consider is best explained by way of example. Let's say that you never played golf before. You look into the bag and you see a lot of clubs, but you really don't know what club you should use. You may not use the right clubs as you try to negotiate the course without any information. The same is true of estate planning. There are numerous different legal instruments that can be utilized. Just arbitrarily deciding which ones you are going to use in a DIY last will and testament or revocable living trust is simply reckless.
These are a few things to think about, but if you would like to learn more of the facts we urge you to download our free report on DIY estate planning. This special report goes into a good bit of detail about the dangers of do-it-yourself wills and living trusts.
We urge you to download your copy of the report. Access will be granted if you follow the simple instructions that you see after clicking this link: The Dangers of DIY Wills & Living Trusts.
People that have assets that exceed the exclusion amount ($5.25 million in 2013) most certainly need to discuss tax efficiency strategies with a licensed estate planning attorney who places an emphasis on wealth preservation.
However, there are those who the only reason someone would meet with an estate planning lawyer is to avoid taxes. They may reason that because their estate is less than the exclusion amount, there is no need for estate planning. In fact, there are myriad concerns that can be addressed with a properly constructed estate plan that have nothing to do with tax exposure.
One of these concerns could be long-term access to financial resources. You may be concerned about leaving lump sum inheritances to certain people on your inheritance list. After all, you won't be around to help if someone in the family was to burn through his or her inheritance too quickly.
A way to respond to this would be to convey assets into a spendthrift trust. You appoint a trustee, and this could be a family member, the trust department of a bank, or a trust company. This trustee will administer the funds according to your stated wishes and distribute assets to the beneficiary in a measured fashion. The beneficiary will not be able to control the principal, which also means their creditors would not have access, either.
This is only one possible scenario. There are many others, including planning for blended families and providing for a family member with special needs without jeopardizing disability benefits.
Arranging for the transfer of your financial assets to your loved ones is a profound act. It is something that is best undertaken with the benefit of professional guidance.
On the Internet there are marketers that sell generic estate planning documents like wills and trusts.
Statistics tell us that most people don't have a comprehensive estate plan in place. Some of these people finally decide to put the procrastination behind them and they start searching for solutions. They come upon one of the sites, and they see an easy answer because the marketing materials can be convincing.
It is important to recognize the things that you can do on your own with a little bit of guidance and the things that are better left to licensed professionals. Consumer Reports, the highly respected magazine that has been informing people about the quality of various products and services for many years, advised against DIY wills last year.
Legal professors who examined documents constructed with online worksheets and downloads saw a number of different problems with them.
We endeavor to provide legal information that is truly accurate, covering every aspect of estate planning. To this end we have joined with the American Academy of Estate Planning Attorneys and compiled a series of special reports that are available for download on our website.
These reports examine wills, trusts, powers of attorney, legacy planning, asset protection, special needs planning, estate administration, and a number of other topics.
You can download these reports absolutely free of charge. To reach the page that contains a list of the reports and a brief description of each of them simply click this link: Free Nevada Estate Planning Reports.
If you have further questions after reviewing the information contained in the reports simply contact our firm to request a free consultation.
The estate planning process involves a number of different facets, including matters that the typical layperson may not consider. When you know the facts you understand why certain courses of action are recommended by estate planning and elder law attorneys.
On the other hand, when you harbor misplaced notions you may fail to act or take incorrect courses of action. With this in mind we would like to highlight two misplaced notions that can lead to negative consequences.
Incapacity Is Unlikely
You may feel as though it is unlikely that you will ever become unable to make your own decisions. If you feel this way you should ask yourself if you expect to live until you are at least 65.
If you say yes to the above, and you are correct and you do reach the age of 65, it is likely that you will live to the age of 80 at minimum.
Alzheimer's disease is very common among the elderly. 13% of those who are 65 years of age and older have Alzheimer's, and if you confine the sample to those 85 and up you are looking at a figure of 45%.
Given the likelihood of Alzheimer's disease or other forms of dementia, having durable powers of attorney naming agents to act on your behalf the event of your incapacity is important. Having a living trust is an even better plan.
I Don't Need a Trust
There are those who don't even consider the possibility of creating a living trust because they feel as though trusts are for very wealthy people. Of course, wealthy individuals and families should have a living trust at a minimum, but even those with modest means can benefit.
Living trusts are used to facilitate asset transfers outside of probate. Probate is the process of estate administration, and because it is done through the courts, it is time-consuming and often costly. If you create a living trust your heirs will receive their inheritances in a timely manner because these transfers are not subject to the probate process.
When you hear about the pros and cons of Last Wills versus revocable living trusts you may decide that, for you and/or your family, the latter choice is a better one. One of the best things about revocable living trusts is the fact that the resources that you utilized to fund the trust can be distributed to your heirs outside of the process of probate.
Probate is a legal proceeding that can be quite time-consuming. Even in simple uncontested cases involving pretty straightforward property transfers and little or no debt it can take a number of months, up to about a year. In more complex cases it can take years.
There is something to remember, however, when you are executing a revocable living trust. You are likely to still be in possession of some resources that you have not placed into the trust at the time of your passing.
If you do nothing to account for these assets their transfer would indeed be delayed as the probate process ran its course.
Making sure that you have a pour-over will to account for your remaining personal assets is something that is routine for experienced probate lawyers. With this instrument you express your desire to have these remaining resources "poured over" into your revocable living trust.
Some people and even inexperienced advisors assume that a pour-over will avoids probate on those assets that were not funded into the trust. Just the opposite is true. Experienced attorneys will provide a document that assigns non-titled assets to the trust, such as art work and furniture. They will also give detailed instructions as to how to place specific assets into your trust. Properly drafted powers of attorney allow others to place forgotten assets into the trust if you are incapacitated.
People who use do-it-yourself estate planning downloads, or place their trust in inappropriate advisors, may never include such details. These are good examples of why it is always advisable to engage professional expertise when you are executing important legal documents.
Have you considered who would manage your financial afffairs if you became incapacitated? Married couples are sometimes under the impression that their spouse will automatically be given access to all the assets. This may not be the case. Assets that are titled jointly may be easily accessed but that is not always the case. Take for instance real property that is jointly titled. If the well spouse desired to refinance, obtain a secured loan or sell real property that is jointly owned a legal representative would have to be appointed to sign in behalf of the incapacitated spouse. A power of attorney may not adequately authorize an agent to handle these transactions. Then there is the issue of a retirement account or pension benefits solely in the name of an incapacitated spouse. In these cases, the well spouse, child or parent woul likely need to seek a court’s permission to access your assets taking a significant amount of time and money.
Often, when someone becomes incapacitated, assets that are needed by loved ones to maintain the household or pay bills are inaccessible when most needed. Even worse, a dispute can arise as to who should manage the assets which can prolong the process of obtaining a court order.
There are, however, a variety of estate planning tools that can be used to avoid the need for court intervention. Executing a comprehensive durable power of attorney or creating a revocable trust may also be viable options. With just a small amount of pre-planning on your part you can avoid a lengthy and costly court process in the event of your incapacity.
When you are serious about making informed plans for the future you have to be aware of all of the options that are available to you and how to use them effectively. Depending on the resources that you have and what your legacy intentions are some of the instruments that would be useful are rather complex. So, unless you are in the field of financial planning or elder law you probably are not going to have a comprehensive understanding of the challenges that exist and the appropriate responses that are typically utilized by estate planning professionals.
This is why it is important to develop a good working relationship with a legacy planning attorney you can trust. He or she will gain an understanding of your wishes, evaluate your assets, and make the proper recommendations so that your legacy goals will eventually come to fruition.
One of the tools used that can provide tax savings as well as asset protection is the charitable remainder unitrust, which in estate planning circles is often shortened to the acronym CRUT. You create and fund the trust and name both a charitable and non-charitable beneficiary. The non-charitable beneficiary must receive annuity payments equal to between 5% and 50% of the fair market value of the trust annually, so most people are going to act as their own beneficiary. You could serve as the trustee as well.
At the end of the trust term, which can be upon your death if you choose to set up the trust in this manner, the charitable beneficiary assumes the remainder that is left in the trust. This remainder must equal at least 10% of the original fair market value of the CRUT.
Assets that are placed in the trust are no longer the personal property of the grantor so they are protected from creditors and claimants. From a tax perspective, the act of funding the trust reduces the value of your estate for estate tax purposes. And there are also capital gains tax advantages if you fund the trust with appreciated securities. In addition, you are entitled to a charitable deduction, the amount of which is determined by the application of IRS rules regarding charitable remainder unitrusts.
If you have an estate that will likely be subject to an estate tax at your death, make an appointment to meet with a legacy planning attorney to discuss a CRUT or other methods of reducing your taxable estate.
When you are planning your estate it is likely that you have multiple objectives in mind, and if you're like most people making sure that your loved ones are provided for is at the top of that list. To make sure that your family members get everything that you would like to leave them without allowing a significant portion of their inheritances to go to the IRS you sometimes have to take steps to gain estate tax efficiency. At the present time the estate tax exclusion is $5 million, but if no changes are made in the meantime it is going down to just $1 million at the end of 2012, and this is something to keep abreast of during the upcoming election season.
In addition to protecting your assets from erosion as you pass them along to your loved ones you may also feel the desire to make charitable giving a part of your legacy. There are a number of charitable giving vehicles that people utilize when they are planning their estates, and one of them that provides multiple benefits is the charitable remainder unitrust or CRUT.
These vehicles provide an ongoing source of income to the non-charitable beneficiary during the term of the trust, and then when the term expires or the grantor passes away the charitable beneficiary assumes ownership of the remainder. Most the time the grantor will act as the beneficiary and receive the annuity payments from the trust, which must be at least 5% and no more than 50% of the value of the trust per year. Once the term has concluded or upon the death of the grantor the charitable beneficiary must receive no less than 10% of the original value of the trust.
The creation of the trust removes these assets from your estate for estate tax purposes, and you are also entitled to a charitable deduction that is calculated via valuation of the remainder interest. Additionally, if you were to fund the trust with appreciated securities you could have the trust sell them and your capital gains liability would be spread out rather than being due all at once.
When people debate the fairness of the estate tax the primary argument against it is the fact that it is in and of itself an instance of double taxation. You pay income and payroll taxes, and then you have the remainder which may be as little as 70% of what you actually earned. With this remainder you go forth, and as you do you must pay sales tax, property tax, capital gains tax, and any number of additional taxes. Then when you pass away your estate is taxed yet again, and at an exorbitant rate exceeding one third of the taxable portion.
The above is a pretty convincing argument, isn't it? But it really doesn't stop there. Let's say you leave a bequest to your children that is subject to the estate tax. They are successful in their own right and never touch that money. When they pass away and leave it to your grandchildren the taxable portion is once again going to be shaved down by the death levy, and in fact this can go on and on into future generations until nothing is left but the exempt amount.
This can be avoided, at least in part, through the creation of a generation-skipping trust. With these vehicles you name your children and grandchildren as the beneficiaries. They can receive cash distributions, live in property that has been placed into the trust rent-free, and even direct trust administration in large part through a special power of appointment. Plus, since these assets are not owned by the beneficiaries they are protected from the beneficiaries' potential future divorces and creditors (e.g., lawsuits). Perhaps the greatest benefit, upon the death of your children, and even your grandchildren in states like Nevada, because the assets are owned by the trust and not the beneficiary, they are not once again subject to estate taxes.
The children and grandchildren can receive liberal benefits from the trust, but the assets can be passed down to future generations estate tax free. The generation-skipping transfer tax is applicable, but there is a $5 million exclusion so many people will limit their contribution into the trust to this amount.
The subprime crisis and financial meltdown certainly has taken its toll on the real estate market, and most areas of the country have made slow strides to recover. But the fact remains that home ownership has traditionally been the foundational instrument of wealth building in the United States and most Americans would likely still tell you that their homes are their most valuable asset.
When the market is healthy and appreciation is robust it can certainly make sense to invest a large percentage of your income into your residence. So when you're inventorying your assets as you prepare your estate plan you may find that it is the value of your home that pushes your overall worth above the estate tax exclusion of $5 million.
If the value of your home is making your estate vulnerable to the 35% federal death levy one option that is available to you is the creation of a qualified personal residence trust or QPRT. With these trusts you name your beneficiary, appoint a trustee, and fund the trust with the residence. By doing so you remove the value of your home from your estate for estate tax purposes, but it is considered to be a gift into the trust and it is taxable as such.
However, the trust states a term during which you will continue to reside in the house. By so doing you retain an interest in the home, so the taxable value of the gift is reduced by the amount of your retained interest. When the retained income period ends ownership of the residence will be transferred to the beneficiaries designated in the trust and this asset will no longer be subject to an estate tax in your estate.
Nobody is especially anxious to part with any of their hard earned money and hand it over to the tax man. But in spite of the complaining, most people recognize the fact that some taxation is necessary and are perfectly willing to pay their fair share. What people don't want to do is pay taxes multiple times on the same earnings, and this is one of many reasons there is so much support in some quarters for a permanent repeal of the estate tax.
Consider this overly simplified example that demonstrates the logically indefensible nature of the estate tax. Let's say that Elizabeth was an avid saver throughout her life. She socked away a sizable portion of every paycheck that she ever earned in a savings account.
Since she was so frugal it always bothered her to see that she was left holding only about $60 out of every $100 she earned after paying payroll and income taxes, but she was heartened by the fact that she was doing her part as a good citizen.
After saving so diligently for so long she was able to accumulate quite a large sum of money. Every year she paid income taxes on the interest she had earned and then when she died, the estate tax kicked in and her children received just 65% of the savings that she worked so hard to accumulate after paying taxes. And then when her children died and left that money to their children, it was once again taxed at 35% and less than half of the taxable portion of Elizabeth's original bequest was left.
A viable response to this potential scenario is the creation of a legacy trust. With these vehicles you name your grandchildren as the beneficiaries, skipping a generation as it were. Your children can still receive benefits from the trust, but they don't own the assets so they can't be targeted by claimants or former spouses. When your children die, your grandchildren inherit the contents of the trust, and the estate tax is levied only once though two generation enjoyed benefits from the trust. And now, in Nevada, as well as a handful of other states, the tax can be avoided for multiple generations with a properly established trust.
The estate tax is repealed for 2010, but when it was last in effect back in 2009, the exclusion was $3.5 million. The exclusion stood at $2 million from 2006 through 2008. In 2011 the estate tax exclusion is going to be just $1 million, so a lot of estates that had been under the exclusion for years are now going to be exposed to the estate tax.
Home ownership has long been the foundational wealth building vehicle in the United Estates, and many of the people who are now going to be exposed to the estate tax would say that the worth of their homes is what is causing the overall value of their estates to exceed the $1 million estate tax exclusion. For these individuals, an instrument known as a qualified personal residence trust, or QPRT, may provide the solution.
To implement this estate planning strategy you place your home into a special trust trust and you name your children, or whoever it is that you want to leave the property to, as the beneficiaries. When you are drawing up the trust agreement you state a term during which you will continue to live in the house rent free. Upon transfer to the trust, the value of the home is removed from your estate and your children will assume ownership of the property after the term expires, at which time you would begin paying rent to live in the home.
The funding of the trust with the house is subject to the gift tax, but the IRS does not use the fair market value of the home at that time to calculate its taxable value. They reduce the value of the home by the interest that you are retaining while you are still living in it rent free after you placed it in the trust. Assuming the value of your home appreciates at a reasonable rate moving forward (say, 3%), this techniques can provide a fair amount of gift and estate tax planning leverage.
Feel free to contact our office if you would like a consultation on how a QPRT may benefit you.
To learn more about living trust lawyers, get in touch with the trust attorneys at Anderson, Dorn & Rader. Call (775) 823-9455 or fill out the form below to get started.
Learn More About Revocable Living Trusts
A Lifetime Trust is an Irrevocable Trust that will pay out an inheritance to a beneficiary for the duration of his or her life. Creating individual Lifetime Trusts for your family provides a wealth of benefits.
If your children are currently minors, a Trust is a good alternative to having your child’s inheritance endure a court-supervised guardianship. Individual trusts also allows you to give your children an even split of your estate.
Many trusts end when a child reaches adulthood or a specified age such as 25 or 30. If you create a Trust that ends as some point in your child’s life, those funds will loose asset protection and may be taken for a court settlement. A Lifetime Trust offers the benefit of continued asset protect. Asset protection can keep your child’s inheritance safe from his or her creditors or a divorcing spouse.
If your beneficiaries have already reached adulthood, a lifetime Trust is still a good idea. Besides providing continued asset protection from creditors it also provides protection when an heir who is not good with money and may spend his or her inheritance too quickly. Such a Trust will also protect your child from losing all or part of his inheritance in a divorce.
Like other Irrevocable Trusts, a Lifetime Trust can pass to your heir outside of probate and without being included in your taxable estate. For estates worth more than a million dollars, estate tax reduction methods are a must. By creating trusts for each heir you will guarantee your loved ones an inheritance that will not be washed away by estate taxes.
By avoiding probate, you may save your family some of the time and cost associated with this harried process.
There are many advantages to having a Lifetime Trust. If you would like to learn more or would to set up a Lifetime Trust, schedule a visit with the living trust lawyers at Anderson, Dorn & Rader.
If you have retirement accounts, you understand the importance of having enough funds to cover your retirement expenses. So, what if you pass away with funds still in these accounts? When you die, your family or other loved ones may inherit your retirement accounts.
First, make a list of all of your retirement funds. Include your 401k, pension plan and IRAs. If you were self-employed, don’t forget to list your self-employed 401K, Keogh plan or other account. Next, include details for each account: statement locations, account numbers, financial institutions, account managers, and a description of benefits you are currently receiving.
You should also include information about what you have paid into social security. Some of your beneficiaries, such as children under eighteen or a spouse, may be able to collect on your social security record.
Retirement accounts allow you to name a beneficiary to receive those funds after you pass away. If you have a 401K or work pension plan, or you live a community property state, you may be required to designate your spouse unless he or she signs off on a different beneficiary.
By choosing a beneficiary, your account can pass to your heir outside of probate. Make sure to update account beneficiaries when they change.
It is not a good idea to name your Revocable Living Trust as the beneficiary of a retirement account, as it will limit the access your heirs have to those funds. Since your account can already avoid probate if you have designated a beneficiary, you don’t need a Living Trust for this.
If you prefer a trust to provide protection against a beneficiary's divorce or other creditors, or you have beneficiaries who are young or exhibit spendthrift behavior, you may wish to consider a Retirement Plan Trust. This is a trust specifically designed to meet the requirements of the tax laws to allow you to protect the death benefits of these accounts and to "stretch out" their tax benefits over the life expectancies of your beneficiaries. This allows for maximum protection of your retirement accounts after your death and provides for the greatest overall income tax deferral on these accounts.
A pot trust (also referred to as family trust) is a single trust for all of the children in the family that is used in the event that both parents die before the children reach a designated age of maturity. It offers some unique pros and cons for your beneficiaries.
An advantage to having a pot trust is that the trustee may be given the flexibility to spend the funds in any way he or she deems fit. That means that little Jimmy could have tuition paid to attend a trade school while Mary's tuition at an accredited university is paid if that’s what the trustee determines is in their best interests. However, if you gave a trustee broad discretion to make these types of decisions, you should be assured that your trustee is someone in whom you can place your confidence to make the decisions as you would desire.
Another consideration is that the trust is set up to operate until the youngest of the children reaches the designated age. Any funds then remaining in the trust would be disbursed equally to all the children. But if there’s a large gap in ages between your children, the older children may be waiting a significant time to receive their portion of the inheritance.
Of course a pot trust is only one toll of many to provide an inheritance for your children after you’re gone. To learn more about inheritance estate planning, get in touch with Anderson, Dorn & Rader.
