Do You Need a Revocable or an Irrevocable Trust? – Annapolis and Towson Estate Planning

Many seniors planning for the future may want to place their home in a trust for their children.

This is especially true if the house is paid off, and free and clear of a mortgage.

However, what would happen if the home were placed in a trust and the senior then decides to sell it?

Nj.com’s recent article entitled “Can I sell my house after I put it in a trust?” explains that there are two primary types of trusts: revocable and irrevocable. In this situation, placing the home in a revocable trust may be a wise option.

The assets in a revocable trust avoid probate but stay in the grantor’s control. That is because you can always change the terms of the trust or terminate the trust. With a revocable trust, the terms can be altered or canceled dependent on the grantor (also known as the trustmaker, settlor, or trustor) of the trust.

During the life of the trust, income earned is given to the grantor, and only after death does property transfer to the beneficiaries.

A grantor can be the trustee. In that way, the grantor is still able to live in the home and sell it and dispose of it as they want upon death.

Assets in a revocable trust are available to creditors and are subject to estate taxes upon death.

In contrast, an irrevocable trust cannot be changed or altered once it is established. In fact, the trust itself becomes a legal entity that owns the assets placed in it.

Because the grantor no longer controls those assets, there are certain tax advantages and creditor protections.

An irrevocable trust is best used for transferring high-value assets that could cause gift or estate tax issues in the future.

Trusts are very complicated, so in any situation consult with an experienced estate planning attorney about whether to use a trust and to make certain that you create the best trust for your specific situation.

Reference: nj.com (Feb. 25, 2022) “Can I sell my house after I put it in a trust?”

 

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What Can a Trust Do for Me and My Family? – Annapolis and Towson Estate Planning

A trust is defined as a legal contract that lets an individual or entity (the trustee) hold assets on behalf of another person (the beneficiary). The assets in the trust can be cash, investments, physical assets like real estate, business interests and digital assets. There is no minimum amount of money needed to establish a trust.

US News’ recent article entitled “Trusts Explained” explains that trusts can be structured in a number of ways to instruct the way in which the assets are handled both during and after your lifetime. Trusts can reduce estate taxes and provide many other benefits.

Placing assets in a trust lets you know that they will be managed through your instructions, even if you are unable to manage them yourself. Trusts also bypass the probate process. This lets your heirs get the trust assets faster than if they were transferred through a will.

The two main types of trusts are revocable (known as “living trusts”) and irrevocable trusts. A revocable trust allows the grantor to change the terms of the trust or dissolve the trust at any time. Revocable trusts avoid probate, but the assets in them are generally still considered part of your estate. That is because you retain control over them during your lifetime.

To totally remove the assets from your estate, you need an irrevocable trust. An irrevocable trust cannot be altered by the grantor after it has been created. Therefore, if you are the grantor, you cannot change the terms of the trust, such as the beneficiaries, or dissolve the trust after it has been established.

You also lose control over the assets you put into an irrevocable trust.

Trusts give you more say about your assets than a will does. With a trust, you can set more particular terms as to when your beneficiaries receive those assets. Another type of trust is created under a last will and testament and is known as a testamentary trust. Although the last will must be probated to create the testamentary trust, this trust can protect an inheritance from and for your heirs as you design.

Trusts are not a do-it-yourself proposition: ask for the expertise of an experienced estate planning attorney.

Reference: US News (Feb. 7, 2022) “Trusts Explained”

 

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How Do You Pass Down a Vacation Home? – Annapolis and Towson Estate Planning

If your family enjoys a treasured vacation home, have you planned for what will happen to the property when you die? There are many different ways to keep a vacation home in the family. However, they all require planning to avoid stressful and expensive issues, says a recent article “Your Vacation Home Needs and Estate Plan!” from Kiplinger.

First, establish how your spouse and family members feel about the property. Do they all want to keep it in the family, or have they been attending family gatherings only to please you? Be realistic about whether the next generation can afford the upkeep, since vacation homes need the same care and maintenance as primary residences. If all agree to keep the home and are committed to doing so, consider these three ways to make it happen.

Leave the vacation home to children outright, pre or post-mortem. The simplest way to transfer any property is transferring via a deed. This can lead to some complications down the road. If all children own the property equally, they all have equal weight in making decisions about the use and management of the property. Do your children usually agree on things, and do they have the ability to work well together? Do their spouses get along? Sometimes the simplest solution at the start becomes complicated as time goes on.

If the property is transferred by deed, the children could have a Use and Maintenance Agreement created to set terms and rules for the home’s use. If everyone agrees, this could work. When the children have their own individual interest in the property, they also have the right to leave their share to their own children—they could even give away or sell their shares while they are living. If one child is enmeshed in an ugly divorce, the ex-spouse could end up owning a share of the house.

Create a Limited Liability Company, or LLC. This is a more formalized agreement used to exert more control over the property. An LLC operating agreement contains detailed rules on the use and management of the vacation home. The owner of the property puts the home in the LLC, then can give away interests in the LLC all at once or over a period of years. Your estate planning attorney may advise using the annual exclusion amount, currently at $16,000 per recipient, to make this an estate tax benefit as well.

Consider who you want to have shares in the home. Depending on the laws of your state, the LLC can be used to restrict ownership by bloodline, that is, letting only descendants be eligible for ownership. This could help keep ex-spouses or non-family members from ownership shares.

An LLC is a good option, if the home may be used as a rental property. Correctly created, the LLC can limit liability. Profits can be used to offset expenses, which would likely help maintain the property over many more years than if the children solely funded it.

What about a trust? The house can be placed into an Irrevocable Trust, with the children as beneficiaries. The terms of the trust would govern the management and use of the home. An irrevocable trust would be helpful in shielding the family from any creditor liens.

A Revocable Trust can be used to give the property to family members at the time of your death. A sub-trust, a section of the trust, is used for specific terms of how the property is to be managed, rules about when to sell the property and who is permitted to make the decision to sell it.

A Qualified Personal Residence Trust allows parents to gift the vacation home at a reduced value, while allowing them to use the property for a set term of years. When the term ends, the vacation home is either left outright to the children or it is held in trust for the next generation.

Reference: Kiplinger (Feb. 1, 2022) “Your Vacation Home Needs and Estate Plan!”

 

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How Do You Gift Your House to Your Children during Your Lifetime? – Annapolis and Towson Estate Planning

Whether you have a split level or a log cabin, your estate plan should be considered when passing property along to the next generation. How you structure the transaction has legal and tax implications, explains the article “How estate planning can help you pass down a house to your kids and give them a financial leg up” from USA Today.

For one family, which had been rental property landlords for more than two decades, parents set up a revocable trust and directed the trustee to be responsible for liquidating houses only when they became vacant, otherwise maintaining them as rental properties as long as tenants were in good standing. They did this when the wife was pregnant with their first child, with the goal to maximize the value to their children as beneficiaries. This was a long-term strategy.

Taxes must always be considered. When a home or any capital asset is given to children while the parents are alive, there may be a capital gains tax issue. It is possible for the carryover cost basis to lead to a big cost. However, using a revocable trust avoids probate and gives them a step-up in basis to avoid capital gains taxes.

Many families use a traditional method: gifting the house to the children. The parents retain the ownership and benefit of the property during their lifetimes. When the last parent dies, the children get the home and the benefit of the stepped-up basis. However, many estate planning attorneys prefer to have a house pass to the next generation through a revocable trust. It not only avoids probate but having a trust allows the parents to dictate exactly what is to be done with the house. For example, the trust can be used to direct what happens if only one child wants the house. The one who wants the house can have it, but not without buying out the other children’s’ shares.

If the children are added onto the deed of the house, keep in mind whoever is added to the deed has all the rights and liabilities of an owner. If one child wants to live in the home and the others do not, the others will not be able to sell the house. The revocable trust mentioned above provides more control.

Selling the family home to an adult child may work, especially if the parents cannot afford to maintain the home and the child can. However, there are pitfalls here, since the parents lose control of the home. An alternative might be to deed the property to the children, have the children refinance the property and cash the parents out.

If parents sell the home below fair market value, they are giving up proceeds to finance their retirement. If they do not need the money, great, but if not, this is a bad financial move. There are also taxable gains consequences, if the home is sold for more than they paid. A home’s sale might result in a dramatic increase in property taxes to the buyer.

However you decide to pass the family home or other real estate property to children, the transfer needs to be aligned with the rest of your estate plan to avoid any unexpected costs or complications. Your estate planning attorney will be able to help determine the best way to do this, for now and for the future.

Reference: USA Today (Dec. 3, 2021) “How estate planning can help you pass down a house to your kids and give them a financial leg up”

 

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Is Estate Tax Exemption Going to Change? – Annapolis and Towson Estate Planning

In 2022, the estate and gift tax exemption increases from $11.7 million in 2021 to $12.06 million per individual, according to new inflation-adjusted numbers from the IRS. The gift tax annual exclusion also increases, from $15,000 to $16,000. The IRS announced these numbers, as well as tax brackets, standard deductions and more, as reported in the article “New Higher Estate And Gift Tax Limits for 2022: Couples Can Pass On $720,000 More Tax Free” from Forbes.

The estate tax is 40% on the biggest estates, but wealthy individuals use legal strategies, like transferring wealth to heirs while they are living, making big gifts and also making multiple $16,000 annual exclusion gifts that do not count against the $12 million lifetime limit.

In 2022, a wealthy person may leave $12.06 to heirs with no federal estate or gift tax. A married couple may leave $24.12 million. If by some chance a couple has maxed out their lifetime gifts, this latest increase means they have the option to give away another $720,000 in 2022.

A series of annual exclusion gifts of $16,000 can add up, especially when they are done in a planned method over an extended period of time. Since these gifts do not count toward the $12 million amount, they are especially valuable for managing estate tax liability.

Estate sizes may also be reduced by making direct payments for medical and tuition expenses, for as many people as desired, with no gift or tax consequences. There is no limit on the amount to be paid, as long as these payments are made directly to the institution.

There are any number of ways to take money out of an estate. These include outright gifts, loans to family members and special trusts. A variety of trusts are created to preserve family wealth, from simple to complex trusts used to extend wealth across many generations.

In addition to planning for the increased numbers for 2022, this is also the time to check on basic estate planning documents and be certain they are up to date. These include a will, any kind of revocable living trust, a durable power of attorney, a healthcare directive and a living will. If the family includes a special needs member or a disabled individual, there are other planning methods to be discussed with an experienced estate planning attorney.

Despite the good news of these increases, the $12 million estate tax exemption will be halved at the start of 2026. The historical high exemption was created under President Donald J. Trump by the 2017 Tax Cuts and Jobs Act, which temporarily doubled the estate tax exemption from 2018 to 2025. While there was a lot of discussion about the Infrastructure Bill and funding through estate taxes, any provisions impacting estate planning were dropped before the bill was passed.

One more reason to gift now: state estate taxes and inheritance taxes are still alive and well in many states. If you live in a state with these taxes, the state tax bite could be just as bad, if not worse, than the federal tax.

Reference: Forbes (Nov. 11, 2021) “New Higher Estate And Gift Tax Limits for 2022: Couples Can Pass On $720,000 More Tax Free”

 

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Do I Need a Living Trust? – Annapolis and Towson Estate Planning

Yahoo Finance’s recent article entitled “What Is a Living Trust in Real Estate?” says that a living trust is a legal document that makes it easier for you to pass assets to your loved ones after you die. It allows property to be transferred directly to your designated beneficiaries without needing to go through probate. A living trust will be managed by a trustee, while you are still living (that can be you).  You will name a successor trustee who will manage the trust, if you become incapacitated and distribute its assets after you pass away.

While the trust holds these assets, you are still considered in possession of them while you are alive (assuming you named yourself the trustee). Therefore, you can move assets in and out of the trust as you see fit. If you have a revocable trust, you can even cancel or change it at any time.

Creating a living trust can simplify the inheritance process for your family when you die. That is because any property you own is subject to the probate process when you die. Probate can be a very lengthy process.

While waiting, your family may be unable to manage, use, or sell the property you left behind. Until probate is complete, your executor will be responsible for maintaining the property, including paying taxes, making repairs and paying the bills (like insurance).

A living trust is a beneficial financial product for many reasons. First, it bypasses the probate courts. There are some types of assets that will pass on to your beneficiaries directly, and others will need to clear the probate courts before they can be disbursed to your beneficiaries. This probate process can take months or even years and can be both costly and complicated.

Another benefit of a trust is that you keep control of your estate, even after you pass away. A living trust lets you set rules, timelines and stipulations for your estate. This may be something like keeping your children from getting a substantial sum of money in their early 20s. With a living trust, you can state instructions for your trustee as to when your kids receive that inheritance. For example, you may provide that they receive their inheritance in stages, like a third at 30, 35 and 40.

Finally, a trust is private. Unlike a will, your trust can be kept as private as you want. Once you pass away, and your will is filed with the probate court, it becomes public record. However, if you would rather have your estate and your wishes kept out of the public eye, a trust can help you do so.  Because a trust skips the probate process, it is also much harder for someone to challenge your directives.

Reference: Yahoo Finance (Oct. 7, 2021) “What Is a Living Trust in Real Estate?”

 

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Do You Need a Revocable or Irrevocable Trust? – Annapolis and Towson Estate Planning

However, below the surface of estate planning and the world of trusts, things get complicated. Revocable trusts become irrevocable trusts, when the grantor becomes incapacitated or dies. It is just one of the many twists and turns in trusts, as reported in the article “What’s the difference between a revocable and irrevocable trust” from Market Watch.

For starters, the person who creates the trust is known as the “grantor.” The grantor can change the trust while living, or while the grantor has legal capacity. If the grantor becomes incapacitated, the grantor cannot change the trust. An agent or Power of Attorney for the grantor can make changes, if specifically authorized in the trust, as could a court-appointed conservator.

Despite the name, irrevocable trusts can be changed—more so now than ever before. Irrevocable trusts created for asset protection, tax planning or Medicaid planning purposes are treated differently than those becoming irrevocable upon the death of the grantor.

When an irrevocable trust is created, the grantor may still retain certain powers, including the right to change trustees and the right to re-direct who will receive the trust property, when the grantor dies or when the trust terminates (these do not always occur at the same time). A “testamentary power of appointment” refers to the retained power to appoint or distribute assets to anyone, or within limitations.

When the trust becomes irrevocable, the grantor can give the right to change trustees or to change ultimate beneficiaries to other people, including the beneficiaries. A trust could say that a majority of the grantor’s children may hire and fire trustees, and each child has the right to say where his or her share will go, in the event he or she dies before receiving their share.

Asset protection and special needs trusts also appoint people in the role of trust protectors. They are empowered to change trustees and, in some cases, to amend the trust completely. The trust is irrevocable for the grantor, but not the trust protector. Another trust might have language to limit this power, typically if it is a special needs trust. This allows a trust protector to make necessary changes, if rules regarding government benefits change regarding trusts.

Irrevocable trusts have become less irrevocable over the years, as more states have passed laws concerning “decanting” trusts, reformation and non-judicial settlement of trusts. Decanting a trust refers to “pouring” assets from one trust into another trust—allowing assets to be transferred to other trusts. Depending on the state’s laws, there needs to be a reason for the trust to be decanted and all beneficiaries must agree to the change.

Trust reformation requires court approval and must show that the reformation is needed if the trust is to achieve its original purpose. Notice must be given to all current and future beneficiaries, but they do not need to agree on the change.

The Uniform Trust Code permits trust reformation without court involvement, known as non-judicial settlement agreements, where all parties are in agreement. The law has been adopted in 34 states and in the District of Columbia. Any change that does not violate a material purpose of the trust is permitted, as long as all parties are in agreement.

Reference: Market Watch (Oct. 8, 2021) “What’s the difference between a revocable and irrevocable trust”

 

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Where Do You Score on Estate Planning Checklist? – Annapolis and Towson Estate Planning

Make sure that you review your estate plan at least once every few years to be certain that all the information is accurate and updated. It is even more necessary if you experienced a significant change, such as marriage, divorce, children, a move, or a new child or grandchild. If laws have changed, or if your wishes have changed and you need to make substantial changes to the documents, you should visit an experienced estate planning attorney.

Kiplinger’s recent article “2021 Estate Planning Checkup: Is Your Estate Plan Up to Date?” gives us a few things to keep in mind when updating your estate plan:

Moving to Another State. Note that if you have recently moved to a new state, the estate laws vary in different states. Therefore, it is wise to review your estate plan to make sure it complies with local laws and regulations.

Changes in Probate or Tax Laws. Review your estate plan with an experienced estate planning attorney to see if it has been impacted by changes to any state or federal laws.

Powers of Attorney. A power of attorney is a document in which you authorize an agent to act on your behalf to make business, personal, legal, or financial decisions, if you become incapacitated.  It must be accurate and up to date. You should also review and update your health care power of attorney. Make your wishes clear about do-not-resuscitate (DNR) provisions and tell your health care providers about your decisions. It is also important to affirm any clearly expressed wishes as to your end-of-life treatment options.

A Will. Review the details of your will, including your executor, the allocation of your estate and the potential estate tax burden. If you have minor children, you should also designate guardians for them.

Trusts. If you have a revocable living trust, look at the trustee and successor appointments. You should also check your estate and inheritance tax burden with an estate planning attorney. If you have an irrevocable trust, confirm that the trustee properly carries out the trustee duties like administration, management and annual tax returns.

Gifting Opportunities. The laws concerning gifts can change over time, so you should review any gifts and update them accordingly. You may also want to change specific gifts or recipients.

Regularly updating your estate plan can help you to avoid simple estate planning mistakes. You can also ensure that your estate plan is entirely up to date and in compliance with any state and federal laws.

Reference: Kiplinger (July 28, 2021) “2021 Estate Planning Checkup: Is Your Estate Plan Up to Date?”

 

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When Should You Fund a Trust? – Annapolis and Towson Estate Planning

If your estate plan includes a revocable trust, sometimes called a “living trust,” you need to be certain the trust is funded. When created by an experienced estate planning attorney, revocable trusts provide many benefits, from avoiding having assets owned by the trust pass through probate to facilitating asset management in case of incapacity. However, it does not happen automatically, according to a recent article from mondaq.com, “Is Your Revocable Trust Fully Funded?”

For the trust to work, it must be funded. Assets must be transferred to the trust, or beneficiary accounts must have the trust named as the designated beneficiary. The SECURE Act changed many rules concerning distribution of retirement account to trusts and not all beneficiary accounts permit a trust to be the owner, so you will need to verify this.

The revocable trust works well to avoid probate, and as the “grantor,” or creator of the trust, you may instruct trustees how and when to distribute trust assets. You may also revoke the trust at any time. However, to effectively avoid probate, you must transfer title to virtually all your assets. It includes those you own now and in the future. Any assets owned by you and not the trust will be subject to probate. This may include life insurance, annuities and retirement plans, if you have not designated a beneficiary or secondary beneficiary for each account.

What happens when the trust is not funded? The assets are subject to probate, and they will not be subject to any of the controls in the trust, if you become incapacitated. One way to avoid this is to take inventory of your assets and ensure they are properly titled on a regular basis.

Another reason to fund a trust: maximizing protection from the Federal Deposit Insurance Corporation (FDIC) insurance coverage. Most of us enjoy this protection in our bank accounts on deposits up to $250,000. However, a properly structured revocable trust account can increase protection up to $250,000 per beneficiary, up to five beneficiaries, regardless of the dollar amount or percentage.

If your revocable trust names five beneficiaries, a bank account in the name of the trust is eligible for FDIC insurance coverage up to $250,000 per beneficiary, or $1.25 million (or $2.5 million for jointly owned accounts). For informal revocable trust accounts, the bank’s records (although not the account name) must include all beneficiaries who are to be covered. FDIC insurance is on a per-institution basis, so coverage can be multiplied by opening similarly structured accounts at several different banks.

One last note: FDIC rules regarding revocable trust accounts are complex, especially if a revocable trust has multiple beneficiaries. Speak with your estate planning attorney to maximize insurance coverage.

Reference: mondaq.com (Sep. 10, 2021) “Is Your Revocable Trust Fully Funded?”

 

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What Should I Know about Powers of Attorney? – Annapolis and Towson Estate Planning

Forbes’ recent article entitled “5 Power Of Attorney Clauses You Need to Focus On” explains that there are two types of powers of attorney. A durable power of attorney is valid when you sign it and stays valid, if you later become incapacitated. A springing power of attorney “springs” into effect, if you become incapacitated. No matter the type of power of attorney, here are some things to consider before signing.

  1. Designating multiple agents. Selecting the person you want as your attorney-in-fact or agent can be a difficult decision because he or she will have control of your financial assets. You can name more than one person as your agent, but if you name two, specify if they will be required to act together or if either one can act independently.
  2. Defining gifting parameters. Make certain that your agent will be authorized to make gifts, as this may be important if you want to reduce estate taxes or if you will need to apply for government benefits in the future.
  3. Changing beneficiary designations. See if the document lets your agent change beneficiary designations. You should have already named beneficiaries of important assets, like life insurance and retirement accounts, but verify whether you want your agent to be able to change those designations. Most people do not want their agent to be able to change these designations.
  4. Amending a trust. If you have created a revocable trust during your lifetime, you may want to give your agent the ability to change important provisions of the trust, like the beneficiaries or the amounts that they receive. However, this could ruin your estate planning goals and disinherit family that you intended to provide for. Most people do not want to give their agent the ability to change a trust.
  5. Designating a guardian. The power of attorney often names a guardian, in case one is required. The guardian would be appointed by a court and is often the same person as the agent. If you trust someone enough to be your attorney-in-fact, you will probably also trust them as your guardian.

The power of attorney contains powerful authorizations, so make sure you read the document carefully before you sign it. It may be wise to sign a new power of attorney every few years. Otherwise, the power of attorney might become “stale” and your named agent may have trouble using it if it is ever needed.

Reference: Forbes (July 19, 2021) “5 Power of Attorney Clauses You Need to Focus On”

 

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