What is the Difference between a Trust and a Will? – Annapolis and Towson Estate Planning

Trusts and wills are two different ways to distribute and control your assets after your death. They have some key differences. Family trusts and wills are both worthwhile estate planning tools that can make sure your assets are protected and will pass to heirs the way you intended, says MSN’s recent article entitled “Family Trusts vs. Wills: What Are the Differences Between These Estate-Planning Options?”

This article tells you what you need to know about the differences between family trusts and wills to help you avoid estate planning mistakes.

Remember that without a will, the state probate laws will determine what happens to your assets. It may or may not be what you want. In contrast, a will lets you state to whom you want to distribute your assets.

Note that a trust permits the grantor (the person making the trust) to do what he or she wants with the assets. A trust also avoids probate.

A family trust is a wise choice for those who want to provide for the management of their assets if they become incapacitated, people interested in keeping information about their assets and who inherits those assets private and those who have a significant number of assets or a large estate. Here are some other situations in which a family trust would be appropriate to use:

  • Asset protection from creditors and divorce
  • For disabled beneficiaries who need to qualify for government benefits
  • For tax-planning; and
  • For cost and time efficiency over a lengthy probate process.

Everyone should have a will. It is a way to leave bequests, nominate guardians for a minor child and an executor.

If you have a family trust, you still need a will. There may be some assets not owned by the trust, such as vehicles and other personal property. There may also be payments due you at your death. Those assets must go through probate, if not arranged to avoid probate.

Once that process is complete, the assets are distributed to the family trust and are governed by its provisions. This is what is known as a “pour-over will” because the assets “pour over” to the family trust.

Contact an experienced estate planning attorney to discuss the estate planning options available for you and your situation.

Reference: MSN (Aug. 27, 2021) “Family Trusts vs. Wills: What Are the Differences Between These Estate-Planning Options?”

 

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

Why Do Families Fail when Transferring Wealth? – Annapolis and Towson Estate Planning

A legacy plan is a vital part of the financial planning process, ensuring the assets you have spent your entire life accumulating will transfer to the people and organizations you want, and that family members are prepared to inherit and execute your wishes.

Kiplinger’s recent article entitled “4 Reasons Families Fail When Transferring Wealth” gives us four common errors that can cause individuals and families to veer off track.

Failure to create a plan. It is hard for people to think about their own death. This can make us delay our estate planning. If you die before a comprehensive estate plan is in place, your goals and wishes cannot be carried out. You should establish a legacy plan as soon as possible. A legacy plan can evolve over time, but a plan should be grounded in what your or your family envisions today, but with the flexibility to be amended for changes in the future.

Poor communication and a lack of trust. Failing to communicate a plan early can create issues between generations, especially if it is different than adult children might expect or incorporates other people and organizations that come as a surprise to heirs. Bring adult children into the conversation to establish the communication early on. You can focus on the overall, high-level strategy. This includes reviewing timing, familial values and planning objectives. Open communication can mitigate negative feelings, such as distrust or confusion among family members, and make for a more successful transfer.

Poor preparation. The ability to get individual family members on board with defined roles can be difficult, but it can alleviate a lot of potential headaches and obstacles in the future.

Overlooked essentials. Consider hiring a team of specialists, such as a financial adviser, tax professional and estate planning attorney, who can work in together to ensure the plan will meet its intended objectives.

Whether creating a legacy plan today, or as part of the millions of households in the Great Wealth Transfer that will establish plans soon if they have not already, preparation and flexibility are uber important to wealth transfer success.

Create an accommodative plan early on, have open communication with your family and review philosophies and values to make certain that everyone is on the same page. As a result, your loved ones will have the ability to understand, respect and meaningfully execute the legacy plan’s objectives.

Reference: Kiplinger (Aug. 29, 2021) “4 Reasons Families Fail When Transferring Wealth”

 

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Do I Need a 529 Education Savings Plan? – Annapolis and Towson Estate Planning

Statecollege.com’s recent article entitled “Did You Know 529s Are Powerful Estate Planning Tools?” explains that specialized savings accounts, informally referred to as 529s, could be at the top of your list. These accounts have a number of advantages for beneficiaries. There are also benefits for the donors in the high maximum contribution limits and tax advantages.

Special tax rules governing these accounts let you decrease your taxable estate. That might minimize future federal gift and estate taxes. In 2021, the lifetime exclusion is now $11.7 million per person, so most of us do not have to concern ourselves with our estates exceeding that limit. However, remember that the threshold will revert back to just over $5 million per person in 2026.

Under the rules that govern 529s, you can make a lump-sum contribution to a 529 plan up to five times the annual limit of $15,000. As a result, you can give $75,000 per recipient ($150,000 for married couples), provided you document your five-year gift on your federal gift tax return and do not make any more gifts to the same recipient during that five-year period. You can, however, go ahead and give another lump sum after those five years are through. The $150,000 gift per beneficiary will not have a gift tax, as long as you and your spouse follow the rules.

Many people think that gifting a big chunk of money in a 529 means they will irrevocably give up control of those assets. However, 529 plans let you have considerable control—especially if you title the account in your name. At any time, you can get your money back, but it will be part of your taxable estate again subject to your nominal federal tax rate. There is also a 10% penalty on the earnings portion of the withdrawal, if you do not use the money for your designated beneficiary’s qualified education expenses.

If your chosen beneficiary does not need some or all of the money you have put in a 529, you can earmark the money for other types of education, like graduate school. You can also change the beneficiary to another member of the family as many times as you like. This is nice if your original beneficiary chooses not to go to college at all.

In addition, you can take the money and pay the taxes on any gains. Normally, you would also expect to pay a penalty on the earnings but not for scholarships. The penalty is waived on amounts equal to the scholarship, provided they are withdrawn the same year the scholarship is received, effectively turning your tax-free 529 into a tax-deferred investment. You can always use the money to pay for other qualified education expenses, like room and board, books and supplies.

Reference: statecollege.com (Aug. 29, 2021) “Did You Know 529s Are Powerful Estate Planning Tools?”

 

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How Does Medicaid Count Assets? – Annapolis and Towson Estate Planning

For seniors and their families, figuring out how Medicaid works usually happens when an emergency occurs, and things have to be done in a hurry. This is when expensive mistakes happen. Understanding how Medicaid counts assets, which determines eligibility, is better done in advance, says the article “It’s important to understand how Medicaid counts your resources” from The News-Enterprise.

Medicaid is available to people with limited income and assets and is used most commonly to pay for long-term care in nursing homes. This is different from Medicare, which pays for some rehabilitation services, but not for long-term care.

Eligibility is based on income and assets. If you are unable to pay for care in full, you will need to pay nearly all of your income towards care and only then will Medicaid cover the rest. Assets are counted to determine whether you have non-income sources to pay for care.

Married people are treated differently than individuals. A married couple’s assets are counted in total, regardless of whether the couple owns assets jointly or individually. The assets are then split, with each spouse considered to own half of the assets for counting purposes only. Married couples have some additional asset exemptions as well.

Not all resources are considered countable. Prepaid funeral expenses, a car used to transport the person in the care family and qualified retirement accounts may be exempt from Medicaid’s countable asset limits.

For married couples, their residence for a “Community Spouse”—the spouse still living at home, and a large sum of liquid assets, are also excluded. Many non-countable assets are very specific to the individual situation or current events. For example, stimulus checks were exempt assets, but only for a limited time.

Medicaid sets a “snapshot” date to determine asset balances because some assets change daily. For unmarried individuals, all asset protections and spend-downs must happen prior to submitting the application to Medicaid. A detailed explanation must be included, especially if any assets were transferred within five years of the application.

For married couples, a Resource Assessment Request should be submitted to Medicaid before any action is taken. This document details all resources Medicaid will count and specifies exactly how much of these resources must be “spent down” by the institutionalized spouse for eligibility.

In many cases, assets are preserved by turning the countable asset into a non-countable income stream to the spouse remaining at home.

Medicaid application is a complicated process and should be started as soon as it becomes clear that a person will need to enter a facility. Understanding options early in the process makes it more likely that property and assets can be preserved, especially for the spouse who remains at home.

Reference: The News-Enterprise (Oct. 5, 2021) “It’s important to understand how Medicaid counts your resources”

 

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What Should Small Business Owners Know about Estate Planning? – Annapolis and Towson Estate Planning

Not having an estate plan can place business owners and entrepreneurs in jeopardy because they may face difficulties in keeping the business running, if they have to withdraw from the business at any point in time.

Legal Reader’s recent article entitled “What Small Business Owners Should Know about Doing Estate Planning” explains that estate planning is necessary to ensure business continuity. Think about who can take control when you are no longer around to have the business continue according to your wishes contained in your estate plan. An experienced estate planning attorney can help business owners create a comprehensive estate plan, so things do not become chaotic for their family in the event of premature death or any permanent disability. Consider these steps when it comes to good estate planning for business owners.

Create an estate plan if you have not got one. A will is designed to detail your wishes about how you want the business to run and the manner of sharing your property at your death. A power of attorney allows an entrusted individual to undertake your business transactions and manage your finances, if you are incapacitated by injury or illness. A healthcare directive permits a trusted agent to make medical decisions on your behalf when you cannot do so yourself.

Plan for taxes. Tax planning is a major component of estate planning. Our tax laws keep changing frequently, so you have to stay in constant touch with your attorney to develop strategies for decreasing your tax liability, as well as creating a strategy for minimizing inheritance/estate taxes.

Buy life and disability insurance. Small business owners should think about purchasing life insurance, so their families can have a source of income after their death.

Create a succession plan. In addition to estate planning, a business owner should have a succession plan that specifies exactly how your company, and your family will prepare for a transition of ownership. The purpose of a well thought out succession plan is to keep the business operating or to take steps to sell it. This plan also includes the organizational structure of the business in case of maintaining business continuity.

Finally, you should keep everyone impacted by your decisions apprised of your estate plan and your business succession plan.

Reference: Legal Reader (Aug. 26, 2021) “What Small Business Owners Should Know about Doing Estate Planning”

 

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When Should You Update Your Estate Plan? – Annapolis and Towson Estate Planning

Updating an estate plan is not usually the first thing on one’s mind when large life events occur. However, if you fail to update your estate plan, over time the plan may not work—for you or your loved ones. Reviewing estate plans at least once every three or four years will help to reach your goals and protect your family, explains the article “Do I Need to Update My Estate Plan?” from Arkansas Business.

Two key documents are used to distribute your assets: your last will and testament and trusts. As your children and other family members mature, those documents should change as may be needed.

If you have a revocable trust, you need to review the dispositive provisions and the trust funding. One of the biggest mistakes in estate planning, after failing to have an estate plan, is failing to fund or manage the funds in a trust.

Trusts are created to avoid probate and establish a process for distributing assets in case of disability or death. However, if assets are not retitled to be owned by the trust, or if the assets do not have an appropriate beneficiary designation to transfer assets to the trust at the time of your death, they will not perform as intended. As new assets are purchased, they also need to be incorporated into your estate plan.

Relationships you have with people who have responsibilities for your estate plan may change over time. Those need to be updated, including the following:

Trustee—The person or institution administering and managing a revocable trust, when you can no longer do so.

Guardian—The individual who will have legal authority and responsibility to raise your minor child(ren).

Executor—The person who is in charge of administering and managing your estate.

Health Care Agent—The person you authorize to make medical decisions in the event of incapacity.

Another common point of failure for estate plans: neglecting to update beneficiary designations for assets like life insurance, retirement plans and any asset that customarily passes to an heir through a beneficiary designation.

A regular review of your estate plan with your estate planning attorney also allows your plan to incorporate changes in tax laws. The last few years have seen many significant changes in tax laws, and more changes are likely in the future. Strategies that may have been extremely effective five or ten years ago are probably outdated and might create costs for your heirs. A review with an experienced estate planning attorney can prevent unnecessary tax liabilities, unexpected inheritances and family feuds.

Reference: Arkansas Business (Sep. 2021) “Do I Need to Update My Estate Plan?”

 

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

Is a Rollover IRA a Good Idea? – Annapolis and Towson Estate Planning

In addition to an increase in rollovers, there has been an increase in the mistakes people make when transferring retirement funds as well, reports The Wall Street Journal in a recent article, “The Biggest Mistake People Make With IRA Rollovers.” These are expensive mistakes, potentially adding up to tens of thousands of dollars in taxes and penalties.

Done properly, rolling the funds from a 401(k) to a traditional IRA offers flexibility and control, minus paying taxes immediately. Depending on the IRA custodian, the owner may choose from different investment options, from stocks and bonds to mutual funds, exchange-traded funds, certificates of deposits or annuities. A company plan may limit you to a half-dozen or so choices. However, before you make a move, be aware of these key mistakes:

Taking a lump-sum distribution of the 401(k) funds instead of moving them directly to the IRA custodian. The clock starts ticking when you do what is called an “indirect rollover.” Miss the 60-day deadline and the amount is considered a distribution, included as gross income and taxable. If you are younger than 59½, you might also get hit with a 10% early withdrawal penalty.

There is an exception: if you are an employee with highly appreciated stock of the company that you are leaving in your 401(k), it is considered a “Net Unrealized Appreciation,” or NUA. In this case, you may take the lump-sum distribution and pay taxes at the ordinary income-tax rate, but only on the cost basis, or the adjusted original value, of the stock. The difference between the cost basis and the current market value is the NUA, and you can defer the tax on the difference until you sell the stock.

Not realizing when you do an indirect rollover, your workplace plan administrator will usually withhold 20% of your account and send it to the IRS as pre-payment of federal-income tax on the distribution. This will happen even if your plan is to immediately put the money into an IRA. If you want to contribute the same amount that was in your 401(k) to your IRA, you will need to provide funds from other sources. Note that if too much tax was withheld, you will get a refund from the IRS in April.

Rolling over funds from a 401(k) to an IRA before taking a Required Minimum Distribution or RMD. If you are required to take an RMD for the year that you are receiving the distribution (age 72 and over), neglecting this point will result in an excess contribution, which could be subject to a 6% penalty.

Rolling funds from a 401(k) to a Roth IRA and neglecting to pay taxes immediately. If you move money from a 401(k) to a Roth IRA, it is a conversion and taxes are due when you make the transfer. However, if you have some after-tax dollars left in the 401(k), you can make a tax-free distribution of those funds to a Roth IRA. Remember funds must remain in a Roth IRA for at least five years, before withdrawing any earnings or they will be subject to taxes and possibly penalties.

Not knowing the limits when moving funds from one IRA to another, if you do a 60-day rollover. The general rule is this: you are allowed to do only one distribution from an IRA to another IRA within a 12-month period. Make more than one distribution and it is considered taxable income. Tack on a 10% penalty, if you are under 59½.

Reference: The Wall Street Journal (Oct. 1, 2021) “The Biggest Mistake People Make With IRA Rollovers”

 

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What Is a Dynasty Trust? – Annapolis and Towson Estate Planning

Do not be put off by the term “dynasty.” Just as every person has an estate, even if they do not live in a million-dollar home, every person who owns assets could potentially have a dynasty trust, even if they do not rule a continent. If you have assets that you wish to pass to others, you need an estate plan and you may also benefit from a dynasty trust, says this recent article from Kiplinger, “A Smart Option for Transferring Wealth Through Generations: The Dynasty Trust.”

When parents die, assets are typically transferred to their descendants. In most cases, the assets are transferred directly to the heirs, unless a trust has been created. Estate taxes must be paid, usually from the assets in the estate. Inheritances are divided according to the will, after the taxes have been paid, and go directly to the beneficiary, who does what they want with the assets.

If you leave assets outright to heirs, when the beneficiary dies, the assets are subject to estate taxes again. If assets are left to grandchildren, they are likely to incur another type of taxes, called Generation Skipping Transfer Taxes (GSTT). If you want your children to have an inheritance, you will need to do estate planning to minimize estate tax liability.

If you own a Family Limited Partnership (FLP) or a Limited Liability Company (LLC), own real estate or have a large equity portfolio, you may have the ability to use gifting and wealth transfer plans to provide for your family in the future. You may be able to do this without losing control of the assets.

The “dynasty trust,” named because it was once used by families like the DuPont’s and Fords, is created to transfer wealth from generation to generation without being subject to various gift, estate and/or GSTT taxes for as long as the assets remain in the trust, depending upon applicable state laws. A dynasty trust can also be used to protect assets from creditors, divorcing spouses and others seeking to make a claim against the assets.

Many people use an Irrevocable Life Insurance Trust (ILIT) and transfer the assets free of the trust upon death. Most living trusts are transferred without benefit of being held within trusts.

A dynasty trust is usually created by the parents and can include any kind of asset—life insurance, securities, limited partnership interests, etc.—other than qualified retirement plans. The assets are held within the trust and when the grantor dies, the trust automatically subdivides into as many new trusts as the number of beneficiaries named in the trust. It is also known as a “bloodline” trust.

Let us say you have three children. The trust divides into three new trusts, dividing assets among the three. When those children die, the trust subdivides again for their children (grandchildren) in their own respective trusts and again, assets are divided into equal shares.

The trust offers broad powers for health, welfare, maintenance and support. The children can use the money as they wish, investing or taking it out. When created properly, the assets and growth are both protected from estate taxes. You will need a trustee, a co-trustee and an experienced estate planning attorney to draft and execute this plan.

Reference: Kiplinger (Oct. 2, 2021) “A Smart Option for Transferring Wealth Through Generations: The Dynasty Trust”

 

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

Estate Planning and Cryptocurrency – Annapolis and Towson Estate Planning

The increase of people investing in digital assets has not been matched by an increase in the number of people preparing to pass on these assets, which can be of considerable value. This new class of assets requires a new kind of estate planning, according to the article “Cryptocurrency and Estate Planning: What Digital Investors Should Know” from Forbes.

Cryptocurrency is digital currency used to buy online goods and services and traded in several markets. Cryptocurrency is not issued by any government. Instead, it is created and managed through blockchain, a technology comprised of decentralized computers used to record and manage transactions. Users claim cryptocurrency is extremely secure. Sometimes, cryptocurrency is so secure that a lost password can cause the owner to lose millions.

The most popular cryptocurrencies are Bitcoin, Ethereum, Dogecoin and Binance Coin, although there are many others, and it seems like a new cryptocurrency is always being introduced. The total value is estimated at $1.35 trillion.

Another digital asset class gaining in popularity is the NFT, or non-fungible token, used to buy and sell digital art. Each NFT, which is also supported by blockchain technology, can be anything digital, like music or artwork files. The buyer of an NFT owns the exclusive original and the artist, in some cases, retains proprietary rights to feature the artwork or make copies of it. Numerous NFTs have already sold for millions.

Owning digital assets without a plan for passing them along to the next generation, could leave heirs empty handed.

Even if your family knows you own cryptocurrency, and even if they know your passwords or have access to the digital wallet where you keep your passwords, they still may not be able to access your accounts. Probate for digital assets is still very new to the courts, and if you can avoid probate for this asset class, you should.

Blockchain technology, the system behind cryptocurrency and NFTs, requires a private key to access each account, typically in the form of a long passcode. Just as you would not put account numbers into a will, you should never put passcodes or usernames in a last will and testament to prevent them from becoming part of the public record. However, only by understanding how each currency works after the original owner dies and preparing to provide the information to your executor, can your heirs receive these assets.

The nature of cryptocurrency is decentralization. There is no governing body that oversees or regulates cryptocurrency. Laws around cryptocurrency are still evolving, so your estate plan may benefit from a trust to protect digital assets.

Do not neglect to have the necessary discussion with your heirs, including a knowledge transfer of the step-by-step process they will need to know to access your digital assets. An estate planning attorney with experience with digital assets and your state’s laws about digital assets will help protect these assets and ensure they are passed to the next generation without evaporating into cyberspace.

Reference: Forbes (July 21, 2021) “Cryptocurrency and Estate Planning: What Digital Investors Should Know”

 

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