Can I Fund a Trust with Life Insurance? – Annapolis and Towson Estate Planning

A trust is a legal vehicle in which assets are legally titled and held for the benefit of another party, the beneficiary, explains Forbes’ recent article entitled “How To Fund A Trust With Life Insurance.” The article says that trusts are often funded with a life insurance policy. This will provide assets to be used after the death of the insured for the benefit of their family. If you are a parent of minor children, the combination of life insurance and a trust may be the best way to make certain that your children have their financial needs satisfied and also make sure the assets are used in ways you want.

Trusts are either revocable or irrevocable. A revocable living trust is the most frequently used type of trust. It has some major benefits, like the ability to avoid probate, which can be an expensive and lengthy process. Assets in a revocable trust are accessible much more quickly than those left through a will.  Because they are revocable, the person who creates the trust (the grantor) can also make adjustments to the trust, as their situation changes.

A grantor will fund the trust with assets for the trust beneficiaries. For parents of minor children, funding a trust using term life insurance is an inexpensive tactic to make certain that your children are cared for after your death. Typically, each parent buys a life insurance policy, and in a two-parent household, usually each spouse names the other as the primary beneficiary with a revocable living trust as the contingent beneficiary.

If the second parent was to die, the life insurance policies would pay to the trust. The trustee would manage the trust assets for the minor children. Funding a trust with life insurance also benefits heirs, because it provides liquidity right after your death. Other assets like investment accounts and real estate can be very illiquid or have tax consequences. As a result, it can take a while to get to that equity.

On the other hand, term life insurance is a fast and tax-free funding way to build a trust. Purchase a term life policy that will last until your children are adults and out of college. In making the life insurance paid to a trust with your children as beneficiaries, you also have some control over the assets. If you name minor children as beneficiaries on a life insurance policy, they will not be able to use the money until they are an adult. Some children may also not be financially responsible enough to manage money as young adults in their 20s.

If you already own a life insurance policy and want to create a trust, you can transfer ownership of the policy to the trust. Work with an experienced estate planning attorney.

Reference: Forbes (Sep. 17, 2020) “How To Fund A Trust With Life Insurance”

 

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

What Estate Planning Documents Do I Need for a Happy Retirement? – Annapolis and Towson Estate Planning

Estate planning documents are made to help you and your family, in the event of your untimely demise or incapacitation.

These documents will give your family specific instructions on how to proceed.

The Winston-Salem Journal’s recent article entitled “4 Must-Have Documents for a Peaceful Retirement” looks at these critical documents in constructing an effective estate plan.

  1. Power of Attorney (POA). If you become incapacitated or become unable to make your own financial decisions, a POA will permit a trusted agent to manage your affairs. Have an estate planning attorney review your POA before it is executed. You can give someone a limited POA that restricts their authority to specific transactions. You can also create a springing POA, which takes effect only at the time of your incapacitation.
  2. Will. About 40% of Americans actually have a will. Creating a valid will prevents you from leaving a mess for your heirs to address after you die. A will appoints an executor who will manage your affairs in a fiduciary manner. The will also details your plan for the distribution of your property. Make certain that your will is also in agreement with other documents you have set up, so it does not create any questions.
  3. TOD/POD Designation Forms. A Transfer-on-Death (TOD) or Payable-on-Death (POD) designation lets you to assign your investment accounts to a named beneficiary. The big benefit here is that accounts with a named TOD/POD beneficiary pass directly to that person when you die. Any accounts without a TOD/POD beneficiary will be subject to the terms of your will and will be required to go through the probate process.
  4. Healthcare POA/Advance Directives. These are significant health-related documents. A healthcare POA allows your named agent to communicate your wishes to medical professionals, if you are unable. They also include instructions as to whether you want to have life-saving measures performed, if you have a cardiac or respiratory arrest. These healthcare documents also remove the need for your family to make difficult decisions for you.

Reference: Winston-Salem Journal (Sep. 20, 2020) “4 Must-Have Documents for a Peaceful Retirement”

 

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

What Does It Mean to Be an Executor? – Annapolis and Towson Estate Planning

Being named an executor can be a big deal, undertaking confidence and trust that someone is appointing you to manage their estate after they have died. An executor has a long to-do list, according to The Cleveland Jewish News’ recent article entitled “Role of executor comes with many responsibilities.”

First, the executor must find the signed will and file it at the probate court to officially be appointed.

Next, the executor must collect all of the estate’s assets, as well as track down any debts like mortgages, credit card bills, car payments and the like.

Once the bills are paid, the executor will distribute the assets to the beneficiaries.

Finally, the executor is tasked with going to the probate court and state that the bills were paid, so all of the assets can be distributed. At that point, the executor is discharged.

Any adult can be named an executor as an executor of an estate. However, in some circumstances, a bond is required. The bonding company will decide if the executor is financially sound. If a person dies without a will, an individual can apply to be an administrator of the estate.

When naming an executor, before death, the estate owners should discuss the role and responsibilities of their named executor to have a smooth transition with no surprises for those left behind.

In addition, an alternate executor should be named in the event the first person is unwilling or unable to serve.

Executors should consult an estate planning attorney throughout the process. This legal assistance is important to guide the executor through all the required steps, so he or she can fulfill the fiduciary responsibilities.

An experienced estate planning attorney can help review the will with the executor, so he or she understands what it means. The attorney can also review the steps of being appointed and what their role of the executor is as far as collecting the assets and debts, along with the details about which the average non-attorney might not consider.

Reference: Cleveland Jewish News (Sep. 23, 2020) “Role of executor comes with many responsibilities”

 

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

What Is Involved with Serving as an Executor? – Annapolis and Towson Estate Planning

Serving as the executor of a relative’s estate may seem like an honor, but it can also be a lot of work, says The (Fostoria, OH) Review Times’ recent article entitled “An executor’s guide to settling a loved one’s estate.”

As an executor of a will, you are tasked with settling her affairs after she dies. This may sound rather easy, but you should be aware that the job can be time consuming and difficult, depending on the complexity of the decedent’s financial and family situation. Here are some of the required duties:

  • Filing court papers to initiate the probate process
  • Taking inventory of the decedent’s estate
  • Using the decedent’s estate funds to pay bills, taxes, and funeral costs
  • Taking care of canceling her credit cards and informing banks and government offices like Social Security and the post office of her death
  • Readying and filing her final income tax returns; and
  • Distributing assets to the beneficiaries named in the decedent’s will.

Every state has specific laws and deadlines for an executor’s responsibilities. To help you, work with an experienced estate planning attorney and take note of these reminders:

Get organized. Make certain that the decedent has an updated will and locate all her important documents and financial information. Quickly having access to her deeds, brokerage statements and insurance policies after she dies, will save you a lot of time and effort. With a complex estate, you may want to hire an experienced estate planning attorney to help you through the process. The estate will pay that expense.

Avoid conflicts. Investigate to see if there are any conflicts between the beneficiaries of the decedent’s estate. If there are some potential issues, you can make your job as executor much easier, if everyone knows in advance who is getting what, and the decedent’s rationale for making those decisions. Ask your aunt to tell her beneficiaries what they can expect, even with her personal items because last wills often leave it up to the executor to distribute heirlooms. If there is no distribution plan for personal property, she should write one.

Executor fees. You are entitled to an executor’s fees paid by the estate. In most states, executors are allowed to take a percentage of the estate’s value, which can be from 1-5%, depending on the size of the estate. However, if you are a beneficiary, it may make sense for you to forgo the fee because fees are taxable, and it could cause rancor among the other beneficiaries.

Reference: The (Fostoria, OH) Review Times (Aug. 19, 2020) “An executor’s guide to settling a loved one’s estate”

 

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

State Laws Have an Impact on Your Estate – Annapolis and Towson Estate Planning

Nj.com’s recent article entitled “Will N.J. or Florida’s tax laws affect this inheritance?” notes that first, the fact that the individual from Florida is not legally married is important.

However, if she is a Florida resident, Florida rules will matter in this scenario about the vacation condo.

Florida does not have an inheritance tax, and it does not matter where the beneficiary lives. For example, the state of New Jersey will not tax a Florida inheritance.

Although New Jersey does have an inheritance tax, the state cannot tax inheritances for New Jersey residents, if the assets come from an out-of-state estate.

If she did live in New Jersey, there is no inheritance tax on “Class A” beneficiaries, which include spouses, children, grandchildren and stepchildren.

However, the issue in this case is the fact that her “daughter” is not legally her daughter. Her friend’s daughter would be treated by the tax rules as a friend.

You can call it what you want. However, legally, if she is not married to her friend, she does not have a legal relationship with her daughter.

As a result, the courts and taxing authorities will treat both persons as non-family.

The smart thing to do with this type of issue is to talk with an experienced estate planning attorney who is well-versed in both states’ laws to determine whether there are any protections available.

Reference: nj.com (July 23, 2020) “Will N.J. or Florida’s tax laws affect this inheritance?”

 

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

How Do I Handle Inheritance? – Annapolis and Towson Estate Planning

The loss of a close loved one can make it very hard to think clearly and function effectively. Add to that the fact that you may have to make important decisions about an inheritance, and it can be an overwhelming time.

Motley Fool’s recent article entitled “5 Considerations for Managing an Inheritance” discusses some ways to be a responsible steward of the money you have received and how to best integrate new funds into your larger financial plan.

  1. Stop and organize your thoughts. After the funeral or memorial service, take time to grieve and reflect on the loss of your loved one. You should also not make any sudden, large changes to your life, if you have inherited a considerable amount of money or a valuable asset. After some time has passed, you should speak with the estate’s executor or court-appointed administrator about next steps.
  2. Create a plan and act on it. While the executor is tasked with winding up the deceased’s affairs, you might ask if you can help with an inventory of his or her assets in the estate. This should include both probate (assets without a named beneficiary) and non-probate (assets with a named beneficiary). It is helpful to make sure that you verify and then cancel your loved one’s subscription services and recurring household expenses (i.e., cable and electric). The executor will make that decision, but you may be able to help with some phone calls or emails to these companies. After the estate’s final expenses are paid, you should create an action plan and assign responsibilities. You’ll then be ready when the executor distributes the estate assets to heirs.
  3. Integrate to avoid mental accounting. After time has passed and you have received your inheritance, any new funds should be integrated into your own financial plan, as if it were earned income. If you do not yet have a written financial plan, talk to a fee-only financial planner who charges by the hour or on a fixed-rate.
  4. Make certain that your financial priorities are met. Your inheritance creates a critical chance to possibly change the trajectory of your net worth. You might use it to pay off or reduce long-standing debts, like student loans. Build your emergency fund — at least six months’ worth of living expenses — that will cushion you from unforeseen circumstances (like this pandemic!). You should also make sure that Roth contributions are made for the year.
  5. Get creative! If you have inherited non-financial assets, like a car, artwork or antiques, you should make sure you know their value and decide whether you will keep or sell them. You might also swap an item with another heir, or if you are not ready to absolutely part with an inherited item, you might offer them to other family or friends. It can be nice to know that an unused item is being put to good use by people you know. Another option is to repurpose the item or donate it.

Losing a close loved one is difficult enough, but the need to wisely manage your inheritance will be a big task. Follow these steps to help with that process.

Reference: Motley Fool (Aug. 8, 20020) “5 Considerations for Managing an Inheritance”

 

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

What Does Pandemic Estate Planning Look Like? – Annapolis and Towson Estate Planning

In the pandemic, it is a good idea to know your affairs are in order. If you already have an estate plan, it may be time to review it with an experienced estate planning attorney, especially if your family has had a marriage, divorce, remarriage, new children or grandchildren, or other changes in personal or financial circumstances. The Pointe Vedra Recorder’s article entitled “Estate planning during a pandemic: steps to take” explains some of the most commonly used documents in an estate plan:

Will: This basic estate planning document is what you use to state how you want your assets to be distributed after your death. You name an executor to coordinate the distribution and name a guardian to take care of minor children.

Financial power of attorney: This legal document allows you to name an agent with the authority to conduct your financial affairs, if you are unable. You let them pay your bills, write checks, make deposits and sell or purchase assets.

Living trust: This lets you leave assets to your heirs, without going through the probate process. A living trust also gives you considerable flexibility in dispersing your estate. You can instruct your trustee to pass your assets to your beneficiaries immediately upon your death or set up more elaborate directions to distribute the assets over time and in amounts you specify.

Health care proxy: This is also called a health care power of attorney. It is a legal document that designates an individual to act for you, if you become incapacitated. Similar to the financial power of attorney, your agent has the power to speak with your doctors, manage your medical care and make medical decisions for you, if you cannot.

Living will: This is also known as an advance health care directive. It provides information about the types of end-of-life treatment you do or do not want, if you become terminally ill or permanently unconscious.

These are the basics. However, there may be other things to look at, based on your specific circumstances. Consult with an experienced estate planning attorney about tax issues, titling property correctly and a host of other things that may need to be addressed to take care of your family. Pandemic estate planning may sound morbid in these tough times, but it is a good time to get this accomplished.

Reference: Pointe Vedra (Beach, FL) Recorder (July 16, 2020) “Estate planning during a pandemic: steps to take”

 

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

How to Make Beneficiary Designations Better – Annapolis and Towson Estate Planning

Beneficiary designations supersede all other estate planning documents, so getting them right makes an important difference in achieving your estate plan goals. Mistakes with beneficiary designations can undo even the best plan, says a recent article “5 Retirement Plan Beneficiary Mistakes to Avoid” from The Street. Periodically reviewing beneficiary forms, including confirming the names in writing with plan providers for workplace plans and IRA custodians, is important.

Post-death changes, if they can be made (which is rare), are expensive and generally involve litigation or private letter rulings from the IRS. Avoiding these five commonly made mistakes is a better way to go.

1—Neglecting to name a beneficiary. If no beneficiary is named for a retirement plan, the estate typically becomes the beneficiary. In the case of IRAs, language in the custodial agreement will determine who gets the assets. The distribution of the retirement plan is accelerated, which means that the assets may need to be completely withdrawn in as little as five years, if death occurs before the decedent’s required beginning date for taking required minimum distributions (RMDs).

With no beneficiary named, retirement plans become probate accounts and transferring assets to heirs becomes subject to delays and probate fees. Assets might also be distributed to people you didn’t want to be recipients.

2—Naming the estate as the beneficiary. The same issues occur here, as when no beneficiary is named. The asset’s distributions will be accelerated, and the plan will become a probate account. As a general rule, estates should never be named as a beneficiary.

3—Not naming a spouse as a primary beneficiary. The ability to stretch out the distribution of retirement plans ended when the SECURE Act was passed. It still allows for lifetime distributions, but this only applies to certain people, categorized as “Eligible Designated Beneficiaries” or “EDBs.” This includes surviving spouses, minor children, disabled or special needs individuals, chronically ill people and individuals who are not more than ten years younger than the retirement plan’s owner. If your heirs do not fall into this category, they are subject to a ten-year rule. They have only ten years to withdraw all assets from the account(s).

If your goal is to maximize the distribution period and you are married, the best beneficiary is your spouse. This is also required by law for company plans subject to ERISA, a federal law that governs employee benefits. If you want to select another beneficiary for a workplace plan, your spouse will need to sign a written spousal consent agreement. IRAs are not subject to ERISA and there is no requirement to name your spouse as a beneficiary.

4—Not naming contingent beneficiaries. Without contingency, or “backup beneficiaries,” you risk having assets being payable to your estate, if the primary beneficiaries predecease you. Those assets will become part of your probate estate and your wishes about who receives the asset may not be fulfilled.

5—Failure to revise beneficiaries when life changes occur. Beneficiary designations should be checked whenever there is a review of the estate plan and as life changes take place. This is especially true in the case of a divorce or separation.

Any account that permits a beneficiary to be named should have paperwork completed, reviewed periodically and revised. This includes life insurance and annuity beneficiary forms, trust documents and pre-or post-nuptial agreements.

Reference: The Street (Aug. 11, 2020) “5 Retirement Plan Beneficiary Mistakes to Avoid”

 

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

How Do I Incorporate Cryptocurrency into My Estate Planning? – Annapolis and Towson Estate Planning

Planning for cryptocurrency has been neglected. It means that, in some cases, the cryptocurrency has been lost. There have been people who tossed their computer hard drives with thousands of bitcoins (now worth millions). They then spend days sifting through tons of garbage. To save your family from this trouble and embarrassment after you die, add your cryptocurrency into your estate plan to preserve the benefits and avoid the risks of cryptocurrency.

Wealth Advisor’s recent article entitled “Estate Planning When You Own Cryptocurrency” says, first, you must preserve the benefits of your cryptocurrency.

Cryptocurrency is highly secure. However, that security is in danger, if the private key is carelessly recorded or discarded. With the private key, anyone can access the cryptocurrency. As a result, your planning and procedures must address how to secure this information. Just like cash, cryptocurrency is not traceable. In fact, there is no electronic or paper trail connecting the parties in a transaction involving cryptocurrency. Therefore, in order to preserve that privacy, you will need to plan so the other documentation in the transaction does not reveal these identities, or at least keep that information privileged. Remember that transferring cryptocurrency takes only seconds.

Because cryptocurrency, like precious metals and other commodities, can fluctuate wildly in value even during the course of a day, it must be treated like stock in a private company and other assets that are volatile in nature. Cryptocurrency also is not subject to government regulation, so no government is responsible for losses from fraud, theft or other malfeasance.

Trusts and other planning devices have a tough time with cryptocurrency, especially if the Prudent Investor Rule applies. Without specific language, the trust will not be capable of holding cryptocurrency. If that language is written too broadly, the trustee may be exempt from damages due to willful neglect.

Cryptocurrency is also taxed as property not as currency by the IRS, which means that the fair market value is set by conversion into U.S. dollars at “a reasonable exchange rate” and transactions involving cryptocurrency are subject to the capital gains tax regulations. As a result, you must have specific tax provisions in trusts, partnerships, LLCs, and other entities. Therefore, if you, or your business, own bitcoin or any other cryptocurrency, your estate, business succession, and financial plans need to address it specifically. Ask an experienced estate planning attorney for help.

Reference:  Wealth Advisor (August 4, 2020) “Estate Planning When You Own Cryptocurrency”

 

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

How Can I Protect Assets from Creditors? – Annapolis and Towson Estate Planning

Forbes’ recent article entitled “Three Estate Planning Techniques That Protect Your Assets From Creditors” explains that the key to knowing if your assets might be susceptible to attachment in litigation is the fraudulent conveyance laws. These laws make a transfer void, if there is explicit or constructive fraud during the transfer. Explicit fraud is when you know that it is likely an existing creditor will try to attach your assets. Constructive fraud is when you transfer an asset, without receiving reasonably equivalent consideration. Since these laws void the transfer, a future creditor can attach your assets.

Getting reasonably equivalent consideration for a transfer of assets will eliminate the transfer being treated as constructive fraud. Reasonably equivalent consideration includes:

  • Funding a protective trust at death to provide for your spouse or children
  • Asset transfer in return for interest in an LLC or LLP; or
  • A transfer that exchanges for an annuity (or other interest) that protects the principal from claims of creditors.

Limited Liability Companies (LLCs) can be an asset protection entity, because when assets are transferred into the LLC, your creditors have limited rights to get their hands on them. Like a corporation, your interest in the LLC can be attached. However, you can place restrictions on the sale or transfer of interests that can decrease its value and define the term by which sale proceeds must be paid out. An LLC must be treated as a business for the courts to treat them as a business. Thus, if you use the LLC as if it were your personal property, courts will disregard the LLC and treat it as personal property.

Annuities are created when you exchange assets for the right to get payment over time. Unlike annuities sold by insurance companies, these annuities are private. These annuities are similar to insurance company annuities, in that they have some income tax consequences, but protect the principal against attachment.

You can also ask an experienced estate planning attorney about trusts that use annuities, which are called split interest trusts. There is a trust where you (the Grantor) give assets but keep the right to receive payments, which can be a fixed amount annually with a Grantor Retained Annuity Trust (or GRAT.)

Another trust allows you to get a variable amount, based on the value of the assets in the trust each year. This is a Grantor Retained Uni-Trust or GRUT. If the assets are vacant land or other tangible property, or being gifted to someone who is not your sibling, parent, child, or other descendant, you can keep the income from the assets by using a Grantor Retained Income Trust (or GRIT).

Along with a trust where you make a gift to an individual, you can protect the trust assets and get a charitable deduction, if you make a gift to charity through trusts. There are two types of trust for this purpose: a Charitable Remainder Trust (CRT) lets you keep an annuity or a variable payment annually, with the remainder of the trust assets going to charity at the end of the term; and a Charitable Lead Trust (CLT) where you give a fixed of variable annuity to charity for a term and the remainder either back to you or to others.

To get the most from your asset protection, work with an experienced estate planning attorney

Reference: Forbes (June 25, 2020) “Three Estate Planning Techniques That Protect Your Assets From Creditors”

 

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