The Difference between Revocable and Irrevocable Trust – Annapolis and Towson Estate Planning

A living trust can be revocable or irrevocable, says Yahoo Finance’s recent article entitled “Revocable vs. Irrevocable Trusts: Which Is Better?” And not everyone needs a trust. For some, a will may be enough. However, if you have substantial assets you plan to pass on to family members or to charity, a trust can make this much easier.

There are many different types of trusts you can establish, and a revocable trust is a trust that can be changed or terminated at any time during the lifetime of the grantor (i.e., the person making the trust). This means you could:

  • Add or remove beneficiaries at any time;
  • Transfer new assets into the trust or remove ones that are in it;
  • Change the terms of the trust concerning how assets should be managed or distributed to beneficiaries; and
  • Terminate or end the trust completely.

When you die, a revocable trust automatically becomes irrevocable, and no further changes can be made to its terms. An irrevocable trust is permanent. If you create an irrevocable trust during your lifetime, any assets you transfer to the trust must stay in the trust. You can’t add or remove beneficiaries or change the terms of the trust.

The big advantage of choosing a revocable trust is flexibility. A revocable trust allows you to make changes, and an irrevocable trust doesn’t. Revocable trusts can also allow your heirs to avoid probate when you die. However, a revocable trust doesn’t offer the same type of protection against creditors as an irrevocable trust. If you’re sued, creditors could still try to attach trust assets to satisfy a judgment. The assets in a revocable trust are part of your taxable estate and subject to federal estate taxes when you die.

In addition to protecting assets from creditors, irrevocable trusts can also help in managing estate tax obligations. The assets are owned by the trust (not you), so estate taxes are avoided. Holding assets in an irrevocable trust can also be useful if you’re trying to qualify for Medicaid to help pay for long-term care and want to avoid having to spend down assets.

But again, you can’t change this type of trust and you can’t act as your own trustee. Once the trust is set up and the assets are transferred, you no longer have control over them.

Contact us to speak with one of our experienced estate planning attorneys to see if a revocable or an irrevocable trust is best or whether you even need a trust at all.

Reference: Yahoo Finance (Sep. 10, 2022) “Revocable vs. Irrevocable Trusts: Which Is Better?”

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

What Penalties Hurt Retirement Accounts? – Annapolis and Towson Estate Planning

Money Talks News’ recent article entitled “3 Tax Penalties That Can Ding Your Retirement Accounts” says make one wrong move, and Uncle Sam may ask for some explanations. Let’s review the three biggest mistakes people make.

Excess IRA contribution penalty. Contributing too much to an individual retirement account (IRA) can mean a penalty from the IRS. You can do this if you contribute more than the applicable annual contribution limit for your IRA or improperly rolling over money into an IRA. The IRS states, “Excess contributions are taxed at 6% per year as long as the excess amounts remain in the IRA. The tax can’t be more than 6% of the combined value of all your IRAs as of the end of the tax year.”

The IRS lets you remedy your mistake before any penalties will be applied. You must withdraw the excess contributions — and any income earned on those contributions — by the due date of your federal income tax return for that year.

Taking money out too soon from a retirement account. If you withdraw funds from your IRA before the age of 59½, you might be subject to paying income taxes on the money, plus an additional 10% penalty. However, there are several exceptions when you’re permitted to take early IRA withdrawals without penalties: if you lose your employment, you’re allowed to tap your IRA early to pay for health insurance premiums.

The same penalties apply to early withdrawals from retirement plans like 401(k)s, but again, there are exceptions to the rule that allow you to make early withdrawals without penalty. The exceptions that let you make early retirement plan withdrawals without penalty may differ from the exceptions that allow you to make early IRA withdrawals without penalty.

Missed RMD penalty. Taxpayers were previously obligated to take required minimum distributions — also known as RMDs — from most types of retirement accounts beginning the year they turn 70½. However, the Secure Act of 2019 bumped up that age to 72.

The consequences of not making these mandatory withdrawals still apply. If you fail to take your RMDs starting the year you turn 72, you face harsh penalties. The IRS says that if you don’t take any distributions, or if the distributions aren’t large enough, you may have to pay a 50% excise tax on the amount not distributed as required.

Reference: Money Talks News (March 1, 2022) “3 Tax Penalties That Can Ding Your Retirement Accounts”

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What’s a ‘Pot Trust’? – Annapolis and Towson Estate Planning

A pot trust is a type of trust that names the children as beneficiaries and the trustee is given discretion to decide how the trust assets should be spent. This trust lets the grantor create a single pool of assets to be used for the benefit of multiple children. A pot trust can offer more flexibility as to how trust assets are used if you plan to leave your entire estate to your children, says Yahoo Finance’s recent article entitled “How Does a Pot Trust Work?”

If you create a family pot trust for your three children and one of them experiences a medical emergency, the trustee would be able to authorize the use of trust funds or assets to cover those costs.

Flexibility is a key element of family pot trusts. Assets are distributed based on the children’s needs, rather than setting specific distribution rules as to who gets what. You might consider this type of trust over other types of trusts if:

  • You have two or more children;
  • At least one of those children is a minor; and
  • You plan to leave your entire estate to your children when you pass away.

Pot trusts can be created for children when you plan to leave all of your assets to them. Generally, a pot trust ends when the youngest included as a beneficiary reaches a certain age. As long as the trust is in place, the trustee can use his or her discretion to determine the way in which trust assets may be used to provide for the beneficiaries’ well-being. The aim is to satisfy the financial needs of individual children as they arise.

However, pot trusts don’t ensure an equal distribution of assets among multiple children. And a family pot trust can also put an increased burden on the trustee. In effect, the trustee has to take on a parental role for financial decision-making. That’s instead of adhering to predetermined directions from the trust grantor. And children may also not like at having to wait until the youngest child comes of age for the trust to terminate and assets to be distributed.

Setting up a pot trust isn’t that different from setting up any other type of trust. Contact us as our experienced estate planning attorneys are here to help you.

Reference: Yahoo Finance (Aug. 30, 2021) “How Does a Pot Trust Work?”

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Can I Get My Co-Executor Sister to Abide by Father’s Will? – Annapolis and Towson Estate Planning

When both children are beneficiaries and both are executors, it should be a simple result. Sell the house and split the proceeds as the father instructed. However, if one child feels this to be unfair, it can cause issues, especially when no one lives in the house, no one wants to and it just costs the heirs money each month.

Nj.com’s recent article entitled “I’m fighting with my sibling about an inheritance. What can I do?” says that this is an example of the estate planning issue of treating heirs equally rather than equitably.

An executor cannot act in his or her own personal interest. Instead, the executor must act in the best interest of the estate. They have what’s called a “fiduciary duty.” Thus, as joint executors, the two children in this example owe a fiduciary duty to implement the terms laid out in their father’s will, unless the will is successfully contested.

When real estate is left to named heirs, the executor can either sell the property and divide the proceeds as specified in the will, or distribute the house “in kind,” which means that the beneficiaries would become co-owners. If the beneficiaries don’t want to be co-owners, the best solution is to sell the property.

While neither child wants to keep the home, it’s also possible for one of them to buy out the other’s share based on a fair market value of the house. If they can’t resolve the dispute amicably, the courts will need to be involved.

The dissatisfied child could file a lawsuit contesting the will. If the deadline to do this has passed, the will should stand. Even if the child does contest the will within the required time period, it will be hard for her to succeed. The two most common grounds to contest a will are to show that the testator wasn’t competent to sign it, or to show that somebody exerted undue influence over the testator.

If the dissatisfied child doesn’t contest the will — or if she does contest it but fails — she’s legally obligated to put aside her personal desires and comply with her fiduciary duty to implement the will.

If she refuses to do so, the other child can ask the court for help resolving the matter. This would involve filing a complaint seeking to remove the dissatisfied child as co-executor and name the other as the sole executor.

He would ask the court to enter an order, called an “order to show cause.” This order states deadlines for the dissatisfied child to defend her conduct and oppose the relief requested.

While you’re not required to have an attorney for this process, it will be difficult to navigate the process without one. Contact us to work with one of our experienced estate planning attorneys.

Reference: nj.com (Aug. 9, 2022) “I’m fighting with my sibling about an inheritance. What can I do?”

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

Does the Way I Title My Assets Have an Impact on My Estate? – Annapolis and Towson Estate Planning

FedWeek’s recent article entitled “How Assets Are Titled Can Make a Big Difference” discusses the different ways property may be titled, and the significance of each one.

The way in which you take title to assets can affect your estate, taxes and perhaps the disposition of the asset if a couple divorces. Many couples want assets to be titled simply in the event something happens to one, so the other spouse can take possession immediately without taxes or complications. Joint ownership may be the simplest way to meet most of these objectives. However, this can get complicated if any number of things happen, such as divorce, second marriage, children from multiple marriages, adoption and blended families of all types.

It is critical to be educated on the different types of ownership, so you know when a change may be needed. Here are the main options:

Holding Assets in Your Own Name is simple and inexpensive. However, if you become incompetent, those assets might be mismanaged. At your death, individually owned assets may have to go through probate.

Joint Tenants with Right of Survivorship is when one co-owner dies, all assets held this way automatically pass to the survivor. One joint owner can take over if the other is incapacitated, and jointly held assets do not go through probate.

Tenants in Common means there is a divided interest, although none of the owners may claim to own a specific part of the property. At the death of one of the joint owners, the share owned by the deceased must pass through their will to determine ownership. The surviving joint owner does not automatically own the entirety of assets.

Tenancy by the Entirety is a type of joint ownership similar to rights of survivorship for married couples. It lets spouses own property together as a single legal entity. Ownership cannot be separated, which means creditors of an individual spouse may not attach and sell the property. Only creditors of the couple may make claims against the property.

With Entity Ownership, you might create a trust, a partnership (such as a family limited partnership), or a limited liability company (LLC) to hold assets. These entities may provide protection from creditors and tax benefits.

Community Property may only be used by married couples in community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin). Each person owns an undivided interest in the entire property. When a spouse dies, the survivor automatically receives the entire interest, so there is no need for probate. Community property cannot be controlled by a person’s will or trust.

Ask an experienced estate planning attorney to review your estate plan and how assets are titled.

Reference: FedWeek (July 27, 2022) “How Assets Are Titled Can Make a Big Difference”

 

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How Do I Contest a Will? – Annapolis and Towson Estate Planning

As a beneficiary of a will, if you do not agree with how the assets are being distributed, you may have grounds for contesting the will. MSN’s recent article entitled “Contesting a Will? You Might Not Need a Lawyer” says to do this you must have a legitimate legal reason to challenge the will, such as one of the most common arguments:

  • Lack of mental capacity. If the person making the will (the “testator”) was not “of sound mind,” he or she may not understand their decisions. The testator must be able to understand what they own, who their natural heirs are and what they are giving and to whom.
  • Fraud, undue influence, or forgery. Some people are tricked into signing a will, are forced to create a will under duress, or have their signature forged.
  • Multiple wills. In this situation, the one that was made most recently is often the one that the courts will decide is valid. However, wills created immediately before death may be contested due to undue influence, lack of mental capacity, or other reasons.
  • The state requirements are not met. Every state has specific requirements as to what must be in a will, the way in which it is signed, and the number of witnesses required. If these elements are not met, then the will may not be valid.
  • Location. Some states may not recognize wills created in another state.

To contest the will, you must have legal standing, which means you must meet one of these requirements:

  • A prior will designates you as a beneficiary;
  • The current will designates you as a beneficiary;
  • You are the beneficiary of a more recent will made after the one in question; or
  • You would be an heir if there was no will, and the state’s laws of intestacy were applied.

Your attorney will next file a petition in the state probate court where the estate is under probate. This tells the probate court and the estate that you are contesting the will. If your case is not settled, it goes to court where you will make your argument as to why the will should be changed. The court will decide the outcome of your case.

A way to keep family members from fighting over an estate is add a no-contest clause into the will. This disinherits anyone who challenges a will, if their challenge fails. In order words, if you do not win your challenge, you get nothing from the estate.

Reference: MSN (May 30, 2022) “Contesting a Will? You Might Not Need a Lawyer”

 

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

When Should I Hire an Estate Planning Attorney? – Annapolis and Towson Estate Planning

Kiplinger’s recent article entitled “Should I Hire an Estate Planning Attorney Now That I Am a Widow?” describes some situations where an experienced estate planning attorney is really required:

Estates with many types of complicated assets. Hiring an experienced estate planning attorney is a must for more complicated estates. These are estates with multiple investments, numerous assets, cryptocurrency, hedge funds, private equity, or a business. Some estates also include significant real estate, including vacation homes, commercial properties and timeshares. Managing, appraising and selling a business, real estate and complex investments are all jobs that require some expertise and experience. In addition, valuing private equity investments and certain hedge funds is also not straightforward and can require the services of an expert.

The estate might owe federal or state estate tax. In some estates, there are time-sensitive decisions that require somewhat immediate attention. Even if all assets were held jointly and court involvement is unnecessary, hiring a knowledgeable trust and estate lawyer may have real tax benefits. There are many planning strategies from which testators and their heirs can benefit. For example, the will or an estate tax return may need to be filed to transfer the deceased spouse’s unused Federal Estate Unified Tax Credit to the surviving spouse. The decision whether to transfer to an unused unified tax credit to the surviving spouse is not obvious and requires guidance from an experienced estate planning attorney.

Many states also impose their own estate taxes, and many of these states impose taxes on an estate valued at $1 million or more. Therefore, when you add the value of a home, investments and life insurance proceeds, many Americans will find themselves on the wrong side of the state exemption and owe estate taxes.

The family is fighting. Family disputes often emerge after the death of a parent. It is stressful, and emotions run high. No one is really operating at their best. If unhappy family members want to contest the will or are threatening a lawsuit, you will also need guidance from an experienced estate planning attorney. These fights can result in time-intensive and costly lawsuits. The sooner you get legal advice from a probate attorney, the better chance you have of avoiding this.

Complicated beneficiary plans. Some wills have tricky beneficiary designations that leave assets to one child but nothing to another. Others could include charitable bequests or leave assets to many beneficiaries.

Talk to an experienced attorney, whose primary focus is estate and trust law.

Reference: Kiplinger (July 5, 2022) “Should I Hire an Estate Planning Attorney Now That I Am a Widow?”

 

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

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

Marital trusts have multiple benefits for beneficiaries, including asset allocation and tax benefits.  They are worth looking at in your estate plan.

Forbes’ recent article entitled “Guide To Marital Trusts” says that a marital trust is an irrevocable trust that allows you to transfer a deceased spouse’s assets to the surviving spouse without paying any taxes. The trust also protects assets from creditors and future spouses that the surviving spouse may encounter.

When the surviving spouse dies, the assets in the trust are not included as part of their estate. That will keep the taxes on their estate lower.

There are three parties involved in setting up, maintaining and ultimately passing along the trust, including a grantor, who is the person who establishes the trust; the trustee, who is the person or organization that manages the trust and its assets; and the beneficiary. That is the person who will eventually receive the assets in the trust, once the grantor dies.

A marital trust also involves the principal, which are assets initially put into the trust.

A marital trust doubles the couple’s estate tax exemption limit, especially when almost all assets are owned by one spouse. Estate tax refers to the federal tax that must be paid on someone’s estate after they die. The estate tax limit is how much of an estate will be tax-free. In 2022, the estate tax limit is $12.06 million, which means utilizing a marital trust would essentially double that amount to $24.12 million. Therefore, about $24 million of a couple’s net worth would be shielded from estate taxes by taking advantage of a marital trust.

A marital trust is also beneficial because it can provide income to the surviving spouse, tax-free.

Only a surviving spouse can be a beneficiary of a marital trust. When the surviving spouse dies, the trust will then be passed on to whomever the first spouse’s will or trust governs.

If keeping wealth within your family after you die is important, then a marital trust is an estate planning tool that will make certain that individuals outside of your family do not have access to the wealth. You can put a variety of assets into a marital trust, including property, retirement accounts and investment accounts.

A marital trust is one legal tool to consider using when planning for a blended family.

Reference: Forbes (June 30, 2022) “Guide To Marital Trusts”

 

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

Addressing Vacation Home in Another State in Estate Planning – Annapolis and Towson Estate Planning

Many families have an out-of-state cabin or vacation home that is passed down by putting the property in a will. While that is an option, this strategy might not make it as easy as you think for your family to inherit this home in the future.

Florida Today’s recent article entitled “Avoiding probate: What is the best option for my out-of-state vacation home?” explains the reason to look into a more comprehensive plan. While you could just leave an out-of-state vacation home in your will, you might consider protecting your loved ones from the often expensive, overwhelming and complicated process of dealing both an in-state probate and an out-of-state probate.

There are options to help avoid probate on an out-of-state vacation home that can save your family headaches in the future. Let’s take a look:

  • Revocable trust: This type of trust can be altered while you are still living, especially as your assets or beneficiaries change. You can place all your assets into this trust, but at the very least, put the vacation home in the trust to avoid the property going through probate. Another benefit of a revocable trust is you could set aside money in the trust specifically for the management and upkeep of the property, and you can leave instructions on how the vacation home should be managed upon your death.
  • Irrevocable trust: similar to the revocable trust, assets can be put into an irrevocable trust, including your vacation home. You can leave instructions and money for the management of the vacation home. However, once an irrevocable trust is established, you cannot amend or terminate it.
  • Limited liability company (LLC): You can also create an LLC and list your home as an asset of the company to eliminate probate and save you or your family from the risk of losing any other assets outside of the vacation home, if sued. You can protect yourself if renting out a vacation home and the renter decides to sue. The most you could then lose is that property, rather than possibly losing any other assets. Having beneficiaries rent the home will help keep out-of-pocket expenses low for future beneficiaries. With the creation of an LLC, you are also able to create a plan to help with the future management of the vacation home.
  • Transfer via a deed: When you have multiple children, issues may arise when making decisions surrounding the home. This is usually because your wishes for the management of the house are not explicitly detailed in writing.
  • Joint ownership: You can hold the title to the property with another that’s given the right of survivorship. However, like with the deed, this can lead to miscommunication as to how the house should be cared for and used.

Plan for the future to help make certain that the property continues to be a place where cherished memories can be made for years to come. Talk to a qualified estate planning attorney for expert legal advice for your specific situation.

Reference: Florida Today (July 2, 2022) “Avoiding probate: What is the best option for my out-of-state vacation home?”

 

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Should I Update My Estate Plan? – Annapolis and Towson Estate Planning

An estate plan exists to accomplish three things.

  1. Preserving your accumulated wealth
  2. To specify who will inherit your assets after your death; and
  3. To indicate who will make health care and financial decisions on your behalf if you are unable.

Real Daily’s recent article entitled “4 Good Reasons to Update Your Estate Plan” says that as you age, you should consider updating your estate plan. Why? Well, your feelings may change over time, or you may experience a significant life event that requires you to update things. These are events such as a marriage or divorce, a new child or grandchild, or a significant change in your health, wealth and outlook on life.

In addition to your will and trusts, you need to review your power of attorney, healthcare directive, living will and HIPAA waiver.

It is critical to recognize the life events that may necessitate updating your estate plan.

For example, if you are recently married or divorced, according to some state laws, existing wills are nullified when someone gets married or divorced.

It is also possible that your wealth has increased significantly, which may affect the way you view how your assets should be distributed to your beneficiaries.

Another reason to update your plan, is if you want to give more (or less) to charity or to your heirs.

Your executor or trustees may change their minds about their roles, no longer live nearby, or they themselves have died. If an individual is no longer interested in assuming those responsibilities, no longer alive, or no longer in good health or of repute, then there is a need to revise the document.

Some other reasons to update your plan include if you are in the process of retiring, moving to another state, or buying or selling real estate.

Each of these events calls for a comprehensive estate plan review.

Finally, your goals may evolve over the years as a result of changes to your lifestyle or circumstances, such as an inheritance, career change, marriage, house purchase, or a growing family.

Reference: Real Daily (June 13, 2022) “4 Good Reasons to Update Your Estate Plan”

 

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