There are Less Restrictive Alternatives than Guardianship – Annapolis and Towson Estate Planning

The benefit of restrictive alternatives to guardianships is that they don’t require court approval or judicial oversight. They are also much easier to set up and end.

The standard for establishing incapacity is also less rigorous than the standard required for a guardianship, says Kiplinger’s recent article entitled “Guardianships Should Be a Last Resort – Consider These Less Draconian Options First.”

Limited guardianships. A guardianship takes away an individual’s right to make decisions, just as full guardianships do, but they are specific to only some aspects of the person’s life. A limited guardianship can be established to manage an individual’s finances and estate or to control medical and health care decisions. These types of guardianships still require court approval and must be supported by a showing of incapacity.

Powers of attorney. Powers of attorney can be established for medical or for financial decisions. A second set of eyes ensures that financial decisions are well-considered and not harmful to the individual or his or her estate. A medical power of attorney can allow an agent to get an injunction to protect the health and well-being of the subject, including by seeking a determination of mental incapacity. A durable power of attorney for health care matters gives the agent the right to make medical decisions on behalf of the subject if or when they are unable to do so for themselves. Unlike a guardianship, powers of attorney can be canceled when they are no longer needed.

Assisted decision-making. This agreement establishes a surrogate decision-maker who has visibility to financial transactions. The bank is informed of the arrangement and alerts the surrogate when it identifies an unusual or suspicious transaction. While this arrangement doesn’t completely replace the primary account holder’s authority, it creates a safety mechanism to prevent exploitation or fraud. The bank is on notice that a second approval is required before an uncommon transaction can be completed.

Wills and trusts. These estate planning documents let people map out what will happen in the event they become incapacitated or otherwise incapable of managing their affairs. Trusts can avoid guardianship by appointing a friend or relative to manage money and other assets. A contingent trust will let the executor manage assets if necessary. For seniors, it may be wise to name a co-trustee who can oversee matters and step in should the trustor lose the capacity to make good decisions.

Reference: Kiplinger (July 7, 2022) “Guardianships Should Be a Last Resort – Consider These Less Draconian Options First”

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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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Who Is the Best Person for Executor? – Annapolis and Towson Estate Planning

Several critical estate planning documents give another person—known as an agent or personal representative—the legal right to act on another person’s behalf. They include wills, trusts, powers of attorney and advance health care directives, as described in a recent article titled “The nomination of trustees, executors and agents” from Lake County Record-Bee.

Your will is only activated after you die. The will and executor then have to be approved by the court. Many people think being named as an executor confers instant authority, but this is not true. Only when the will has been deemed valid by the court, does the executor have the power to act on behalf of the decedent.

After death, the court is petitioned for a court order appointing the executor and then letters testamentary are signed by the appointed executor. An executor then becomes active as an officer of the court with a fiduciary duty to act as personal representative of the decedent’s estate.

If the named person declines to serve, the will should have a secondary person named as executor, who can then request the appointment be validated by the court. Others can petition the court to be appointed. However, it is best to name two people of your choice in your will.

A trust is a separate legal entity with a trustee who is in charge of the trust and its assets. If a revocable will is created, the trustee is usually the same person who has the trust created, also known as the grantor. For an irrevocable trust, the trustee is someone other than the grantor. The appointment does not become official until the appointment is accepted, usually through signing a document or by the successor trustee taking action on behalf of the trust.

Just as an executor might not accept their role, a trustee can decide not to accept the nomination. However, once they do, they have a fiduciary duty to put the well-being of the trust first and manage it properly. You can’t accept the role and then walk away without serious consequences.

Powers of attorney are used while a person is living. The power of attorney’s effective date depends upon what kind of POA it is. A durable power of attorney is effective the moment it is signed. A springing POA sets forth terms upon which the POA becomes active, usually incapacity. The challenge with a Springing POA is that approval by the court may be required, usually with proof from a treating physician concerning the person’s condition.

Similarly, the health care power of attorney appoints a person who acts on behalf of another as their agent for health issues. They can decline the position. However, once they agree to take on the position, they are responsible for their actions.

If the POAs decline to serve and there is no secondary person named, or if all named POAs decline to serve, the family will need to apply for a conservatorship (also known as guardianship). This is a lengthy and expensive process requiring a thorough investigation of the situation and the person who needs representation. It can be contested if the person does not want to give up their independence, or by family members who feel it is not needed.

These are commonly used terms in estate planning. However, they are not always understood clearly. Your estate planning attorney will be able to address specific responsibilities and requirements, since every state has laws and appointments vary by state.

Contact our office to schedule a consultation with one of our experienced attorneys to discuss who the right people would be to serve as your Executor, Trustee, Power of Attorney, and/or Health Care Agent.

Reference: Lake Country Record-Bee (July 30, 2022) “The nomination of trustees, executors and agents”

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

What’s Involved with Being a Trustee? – Annapolis and Towson Estate Planning

There is an old saying that the two best days in a boat owner’s life are the day they buy their boat and the day they sell it.

Forbes’ recent article entitled “How To Be An Effective Trustee” says that a similar notion applies to being a trustee – it is an honor to be named and then a huge relief when it is over. That is because being a trustee is difficult.

Remember that a trust is a fiduciary relationship in which one party (the trustor) gives another party (the trustee) the right to hold title to property or assets for the benefit of a third party (the beneficiary). Trusts are created to provide legal protection for the trustor’s assets, to make certain those assets are distributed according to the wishes of the trustor, and to save time, reduce paperwork and, in some cases, avoid or reduce inheritance or estate taxes.

Being a trustee requires knowledge about a wide range of topics, including:

  • The trustee’s fiduciary duties, which include loyalty, impartiality, duty of care, protection of trust property, enforcement of claims and the duty to inform and account to beneficiaries, among others (violation of these duties exposes the trustee to liability).
  • Understanding the details of the trust, like the specifics of the distribution instructions.
  • Investments and the ability to engage and monitor investment managers.
  • Administrative matters, such as record keeping and principal and income accounting.
  • Estate planning, trusts and the basics of the estate, gift and generation skipping taxes.
  • Income tax, including how trusts are taxed both by the federal government and the state.

A trustee must also be able to productively communicate and work with the beneficiaries on their financial wellness and distribution needs, which is an area that can be full of conflict.

It is a daunting list. Talk with an experienced estate planning attorney to discuss your situation in detail.

Reference: Forbes (May 31, 2022) “How To Be An Effective Trustee”

 

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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”

 

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What Is the Proposed IRS Anti-Clawback Provision? – Annapolis and Towson Estate Planning

The proposed amendment is designed to fix some loopholes in a 2019 regulation passed in response to the 2017 Tax Cuts and Jobs Act. The 2017 law doubled the value of the estate and gift tax exemption until December 31, 2025, when it goes from $12.06 million to $5.49 million. According to this recent article from Financial Advisor titled “Amending The IRS’s Anti-Clawback Provision on Gifting,” the law generated concern among those who wanted to make large gifts to take advantage of the historically high federal estate and gift tax exemption.

The concern was whether the IRS would attempt to clawback the taxes, if the taxpayer died after 2025. This is when the estate tax reverts back to a much lower number. A regulation was issued in 2019 to reassure taxpayers and explain how they could take advantage of the high exemption as long as they made gifts before 2026, regardless of the exemption at the time of their death.

The IRS recognized this as a good step. However, it had a loophole and hence the new proposed amendment. The amendment provides clarity on what constitutes an actual gift. If the donor garners a benefit from the gift or maintains control over the gift, is it really a gift?

Giving the gift of a promissory note worth $12.06 million to lock in the high exemption and leaving it unpaid until death, for instance, is not a gift. The person is not actually giving anything away until after death. Therefore, the note is part of the taxable estate and bound by the estate tax exemption amount in place at the day of death.

The same goes for a person who gives ownership interests in a limited liability company, while continuing to serve as the company’s manager. Taxpayers must be very careful not to mischaracterize their gifts to stay on the right side of this regulation.

Another example: let’s say a person puts a $12 million vacation home into an LLC, with clear directions for home to be kept in the family, and then makes gifts of the LLC ownership interests to the children. If the donor wants those gifts to max out the current $12.06 million exemption, rather than be subject to the lower exemption in place at the date of death, the owner should not be the manager of the LLC. The same goes for the owner living rent-free in any property he’s gifted to anyone, if the wish is to take advantage of the gifting exemption.

In the same way, a mother who places money into a trust fund for a child may not serve as a trustee and control the assets and distributions, if she wishes to take advantage of the tax benefit.

If your estate plan uses grantor annuity trusts (GRATs), Grantor Retained Income Trusts (GRITs) and qualified personal residence trusts (QPRTs), speak with your estate planning attorney. If you die during the annuity period or term of the trust, your estate may lose the benefit of the anti-clawback regulation.

If the amendment is approved, which is expected in late summer, make sure your estate plan follows the new guidelines. If you are truly giving gifts before 2026, you will likely be able to take advantage of this substantial tax benefit and pass more of your estate to your heirs.

Reference: Financial Advisor (May 27, 2022) “Amending The IRS’s Anti-Clawback Provision on Gifting”

 

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

What are Benefits of Putting Money into a Trust? – Annapolis and Towson Estate Planning

For the average person, knowing how a revocable trust, irrevocable trust and testamentary trust work will help you start thinking of how a trust might help achieve your estate planning goals. A recent article from The Street, “3 Powerful Types of Trusts that Can Work for You,” provides a good foundation.

The Revocable Trust is one of the more flexible trusts. The person who creates the trust can change anything about the trust at any time. You may add or remove assets, beneficiaries or sell property owned by the trust. Most people who create these trusts, grantors, name themselves as the trustee, allowing themselves to use their property, even though it is owned in the trust.

A Revocable Trust needs to have a successor trustee to manage the assets in the trust for when the grantor dies or becomes incapacitated. The transfer of ownership of the trust and its assets from the grantor to the successor trustee is a way to protect assets in case of disability.

At death, a revocable trust becomes an Irrevocable Trust, which cannot be easily revoked or changed. The successor trustee follows the instructions in the trust document to manage assets and distribute assets.

The revocable trust provides flexibility. However, assets in a revocable trust are considered part of the taxable estate, which means they are subject to estate taxes (both federal and state) when the owner dies. A revocable trust does not offer any protection against creditors, nor will it shield assets from lawsuits.

If the revocable trust’s owner has any debts or legal settlements when they die, the court could award funds from the value of the trust and beneficiaries will only receive what is left.

A Testamentary Trust is a trust created in connection with instructions contained in a last will and testament. A good example is a trust for a child outlining when assets will be distributed to them by the trustee and for what purposes the trustee is permitted to make the distribution. Funds in this kind of trust are usually used for health, education, maintenance and supports, often referred to as “HEMS.”

For families with relatively modest estates, a trust can be a valuable tool to protect children’s futures. Assets held in trust for the lifetime of a child are protected in the event of the child’s going through a divorce because the child’s inheritance is not subject to equitable distribution when not comingled.

Many people buy life insurance for their families, but they do not always know that proceeds from the life insurance policy may be subject to estate taxes. An insurance trust, known as an ILIT (Irrevocable Life Insurance Trust) is a smart way to remove life insurance from your taxable estate.

Whether you can have an ILIT depends on policy ownership at the time of the insured’s death. In most cases, the insurance trust must be the owner and the insurance trust must be named as the beneficiary. If the trust is not drafted before the application for and purchase of the life insurance policy, it may be possible to transfer an existing policy to the trust. However, if this is done after the purchase, there may be some challenges and requirements. The owner must live more than three years after the transfer for the policy proceeds to be removed from the taxable estate.

Trusts may seem complex and overwhelming. However, an estate planning attorney will draft them properly and make sure that they are used appropriately to protect your assets and your family.

Reference: The Street (May 13, 2022) “3 Powerful Types of Trusts that Can Work for You”

 

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

What Is the Best Way to Leave Money to Children? – Annapolis and Towson Estate Planning

Parents and grandparents want what is best for children and grandchildren. We love generously sharing with them during our lifetimes—family vacations, values and history. If we can, we also want to pass on a financial legacy with little or no complications, explains a recent article titled “4 Tax-Smart Ways to Share the Wealth with Kids” from Kiplinger.

There are many ways to transfer wealth from one person to another. However, there are only a handful of tools to effectively transfer financial gifts for future generations during our lifetimes. UTMA/UGMA accounts, 529 accounts, IRAs, and Irrevocable Gift Trusts are the most widely used.

Which option will be best for you and your family? It depends on how much control you want to have, the goal of your gift and its size.

UTMA/UGMA Accounts, the short version for Uniform Transfers to Minor or Uniform Gift to Minor accounts, allows gifts to be set aside for minors who would otherwise not be allowed to own significant property. These custodial accounts let you designate someone—it could be you—to manage gifted funds, until the child becomes of legal age, depending on where you live, 18 or 21.

It takes very little to set up the account. You can do it with your local bank branch. However, the funds are taxable to the child and if an investment triggers a “kiddie tax,” putting the child into a high tax bracket and in line with income tax brackets for non-grantor trusts, it could become expensive. Your estate planning attorney will help you determine if this makes sense.

What may concern you more: when the minor turns 18 or 21, they own the account and can do whatever they want with the funds.

529 College Savings Accounts are increasingly popular for passing on wealth to the next generation. The main goal of a 529 is for educational purposes. However, there are many qualified expenses that it may be used for. Any income from transfers into the account is free of federal income tax, as long as distributions are used for qualified expenses. Any gains may be nontaxable under local and state laws, depending on which account you open and where you live. Contributions to 529 accounts qualify for the annual gift tax exclusion but can also be used for other gift and estate tax planning methods, including letting you make front-loaded gifts for up to five years without tapping your lifetime estate tax exemption.

You may also change the beneficiary of the account at any time, so if one child does not use all their funds, they can be used by another child.

From the IRS’ perspective, a child’s IRA is the same as an adult IRA. The traditional IRA allows an immediate deduction for income taxes when contributions are made. Neither income nor principal are taxed until funds are withdrawn. By contrast, a Roth IRA has no up-front tax deduction. However, any earned income is tax free, as are withdrawals. There are other considerations and limits.  However, generally speaking the Roth IRA is the preferred approach for children and adults when the income earner expects to be in a higher tax bracket when they retire. It is safe to say that most younger children with earned income will earn more income in their adult years.

The most versatile way to make gifts to minors is through a trust. There is no one-size-fits-all trust, and tax rules can be complex. Therefore, trusts should only be created with the help of an experienced estate planning attorney. A trust is a private agreement naming a trustee who will manage the assets in the trust for a beneficiary. The terms can be whatever the grantor (the person creating the trust) wants. Trusts can be designed to be fully asset-protected for a beneficiary’s lifetime, as long as they align with state law. The trust should have a provision for what will occur if the beneficiary or the primary trustee dies before the end of the trust.

Reference: Kiplinger (May 15, 2022) “4 Tax-Smart Ways to Share the Wealth with Kids”

 

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Can I Plan My Estate to Avoid Leaving Residual Assets? – Annapolis and Towson Estate Planning

When looking into your estate plan, you see the term “residuary estate.” This is any part of your estate that has not been distributed to your heirs through a will. It is also called estate residue or residual estate. However, it simply means assets that are left over once your will has been read, the assets have been distributed to your heirs and any final expenses have been paid.

Proper estate planning can help you avoid leaving residual assets behind, says Yahoo Finance’s recent article entitled “Residuary Estate Definition and Example.” An experienced estate planning attorney can help you select a structure for your estate that accomplishes your objectives.

A will lets you state how you want your assets to be divided among your heirs when you pass away. However, it is possible that not all of your assets will make it into your will for some reason. Any assets that are not included in your will or distributed through a trust automatically becomes part of your residuary estate when you pass away.

Residual estates can be created without advance planning. For example, your heirs may be left to deal with a residuary estate if:

  • You neglected to include certain assets in your will;
  • You acquired new assets after drafting your will and failed to amend the document for the distribution of these assets; or
  • Someone you named in your will dies before you or is unable to receive their inheritance for some other reason.

Assets that are designed to have a named beneficiary but do not have one, can also be included in the residuary estate.

When a residuary estate exists, it can complicate the probate process for your family. Any unclaimed or otherwise overlooked assets would be distributed according to the state’s inheritance laws, after any estate taxes, outstanding debts or final expenses have been paid.

You should also know that it is possible to have a residuary beneficiary of a living trust. This person would receive any property or assets transferred to the trust that were not designated for specific beneficiaries. If you create a trust properly, there should be a provision for each beneficiary you want to be included and which assets they should receive. However, you could still run into issues if a named beneficiary dies, and you haven’t named anyone as a residuary beneficiary.

A residuary estate is something you may need to plan for when creating a will or trust. Fortunately, it is pretty easy to do so by including the proper wording in your will and trust documents. Ask an estate planning attorney to eliminate confusion and to plan your estate properly.

Reference: Yahoo Finance (Dec. 30, 2021) “Residuary Estate Definition and Example”

 

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

Is Estate Planning Affected by Property in Two States? – Annapolis and Towson Estate Planning

Cleveland Jewish News’ recent article titled “Use attorney when considering multi-state estate plan” says that if a person owns real estate or other tangible property (like a boat) in another state, they should think about creating a trust that can hold all their real estate. You do not need one for each state. You can assign or deed their property to the trust, no matter where the property is located.

Some inherited assets require taxes be paid by the inheritors. Those taxes are determined by the laws of the state in which the asset is located.

A big mistake that people frequently make is not creating a trust. When a person fails to do this, their assets will go to probate. Some other common errors include improperly titling the property in their trust or failing to fund the trust. When those things occur, ancillary probate is required.  This means a probate estate needs to be opened in the other state. As a result, there may be two probate estates going on in two different states, which can mean twice the work and expense, as well as twice the stress.

Having two estates going through probate simultaneously in two different states can delay the time it takes to close the probate estate.

There are some other options besides using a trust to avoid filing an ancillary estate. Most states let an estate holder file a “transfer on death affidavit,” also known as a “transfer on death deed” or “beneficiary deed” when the asset is real estate. This permits property to go directly to a beneficiary without needing to go through probate.

A real estate owner may also avoid probate by appointing a co-owner with survivorship rights on the deed. Do not attempt this without consulting an attorney.

If you have real estate, like a second home, in another state (and) you die owning that individually, you are going to have to probate that in the state where it is located. It is usually best to avoid probate in multiple jurisdictions, and also to avoid probate altogether.

A co-owner with survivorship is an option for avoiding probate. If there is no surviving spouse, or after the first one dies, you could transfer the estate to their revocable trust.

Each state has different requirements. If you are going to move to another state or have property in another state, you should consult with a local estate planning attorney.

Reference: Cleveland Jewish News (March 21, 2022) “Use attorney when considering multi-state estate plan”

 

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