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LTN Economist Advises on Estate Planning and Retirement Income

by Paul Ebeling

#estate #planning #retirement

From the Desk of LTN Tax Expert on Estate Planning, Retirement Income, and Asset Protection

“This article is intended to familiarize our readers with the 3 primary types of Estate Trusts: Revocable, Irrevocable or Asset Protection” — Bruce WD Barren PhD

When you begin to determine who gets what, start with a written lists of their Assets and their respective liabilities are.

To start the Process, the initial focus should be  a Last Will & Testament, which should be written, witnessed ideally by 2 independent witnesses, and with ideally the identification of whom the beneficiaries are to be. 

Remember, many people think that estate and will planning is only for the elite. Nothing could be further from the truth. If you have an asset, it can be anything from a bike to a private airplane, you need to create a will.

Though more people now than ever realize the importance of creating a will, many people still downplay the significance of writing a will.

Ever wondered what happens to an estate of a person who passes away without making a will?

A person who dies without a will is said to have died intestate, meaning that the local intestacy laws (of the state) will decide how their property such as bank accounts, real estate, securities, and other assets will be divided.

Real Estate acquired in a different state than where the deceased person resided will be handled according to the intestacy laws of the state where it is located.

The laws of intestate succession will vary depending on whether the person was single or married and had children.

In most cases, the estate of a person who died without making a will is divided between their heirs, which can be their surviving spouse, uncle, aunt, parents, nieces, nephews, and distant relatives. If, however, no relatives come forward to claim their share in the property, the entire estate goes to the State where the descendent died. 

Their primary responsibility is to  protect and perpetuate Estate Assets for their heirs in order to protects one’s assets and to save tax dollars. 

Whatever Trust instrument one selects, it is a complicated process and any estate planning should be done only in consultation with a qualified Estate Attorney.

For those who are unaware there are  15 types of Estate Trusts available and each should be treated with sophistication.

These include: Revocable Trust, Irrevocable Trust, Asset Protection Trust,  Testamentary Trusts, Special Needs Trust, QTIP Trust (this allows an individual, called the Grantor, to leave assets for a surviving spouse and also determine how the trust’s assets are split up after the surviving spouse dies.), Blind Trust, Spendthrift Trusts, Charitable Trusts, the little known and less often used Totten Trust (see special comments below), Constructive Trusts, By-pass Trusts, Generation Skipping Trusts, Life Insurance Trusts, and Creditor Shelter Trusts.

Once the above is determined then the question moves to the question of heirs.

This is also complicated for too often disproportionate Trusts are sent up during a parent’s life, particularly referring to a father  or an Estate is left totally to a wife.

This is where the problem begins to emerge but only after the primary asset spouse has long since passed away.

Just remember the average time to distribute trust assets ranges from 12  to 18 months.

Why does it take so long to settle an estate with a Trust to the beneficiaries and heirs?

Initially, when the Grantor passes, the Trustee has to come in and begin doing the initial steps of the trust administration process. 

This so important because when an Estate has liabilities (in particular – real estate mortgages), a provision in a Will should address this in that it is the responsibility of the Estate to pay any liabilities in a timely fashion so as to avoid excess interest and penalty(s) expenses. 

This is specifically handled by a Totten Trust which is a bank account that has a beneficiary, who the person who opens the account selects. It is also called a payable on death account.

Very Important: Remember, that on one’s death, the money in the account will automatically go to the chosen beneficiary. It will not have to go through the sometimes lengthy probate process. However, most estates do not unfortunately have such a provision, they should.

The Estate Planning Process: often people get their estate planning notebook and simply put their trust documents on the shelf, never to be reviewed. Don’t let that be you! Using a suggested checklist like that presented herein, you can review your trust to understand your trust and how it works. Always consult with your estate planning attorney to make sure of any changes that might be needed, or to answer questions that you have. Here are a number of questions you should ask yourself.

  1. Should you have your successor trustee start serving sooner? If you’re having problems with memory or mobility, you may want to change your trust so that your successor trustee can start to serve with you now. That lets you see how your co-trustee acts and you still have the ability to change trustees if you decide it isn’t working out. Also, if you’re married and your spouse is a co-trustee on your trust but he or she has dementia, you might want to change the order of trustees so that a child serves as successor trustee even if your spouse survives you.
  2. Who can remove trustees besides you? You always can change the trustees of your revocable trust. But should your heirs also have this right after you pass away? This can help with family harmony or allow a change in bank trustees when there are communication problems or disagreements with the trustee. But sometimes it’s better to limit the power to replace trustees if you want to make sure the beneficiaries aren’t just looking for a trustee to do whatever they say. For example, you could give beneficiaries the power to change trustees, but only to a lawyer, CPA or trust company.
  3. How much flexibility should your spouse have to change ultimate distribution of trust assets after you have passed away? Often trusts give surviving spouses a “power of appointment” to redirect trust assets at their death. This helps provide flexibility to change the ultimate distribution if there are changes in family circumstances or the law. For example, if a child becomes disabled or estranged, it might make sense to change how the distribution to that child is made, or even disinherit that child altogether or skip that child and give his or her share to the grandchildren. This should be used with caution for second marriages. Depending on the language of the a power of appointment, the second wife could use this power to give everything to her children instead of to her deceased husband’s children (the original beneficiaries). Often powers of appointment are included, but limited as to the potential class of who can be named a recipient of the trust, even for first marriages.
  4. Does your trust protect your children and grandchildren from lawsuits and divorce? Rather than distributing your trust outright to your children, your trust could continue for your children’s lives to provide creditor and divorce protection. Maybe their circumstances have changed and this makes more sense than when you were first creating this trust.
  5. Have you properly funded your trust? Only assets that you’ve retitled into the revocable trust will avoid probate. Assets that are still titled in your personal name will pass through probate before being added to your revocable trust. It is good to review your asset listing and how accounts are titled with your attorney every few years, or if you transfer assets between banks or investment companies.
  6. Who is your beneficiary of retirement plans, life insurance and annuities? It’s a good idea to keep a list of your current beneficiary designations for IRA’s, 401(k)’s, annuities and life insurance. Depending on your situation, you  may name individuals or the trust (or a subtrust) as beneficiary. You need to make sure that your beneficiary designations and your trust planning are coordinated. Also, be cautious of accounts set up as “payable on death” or “transfer on death.” That can thwart your good planning, by causing assets to pass to an underage beneficiary, or change your intended distribution scheme.
  7. When should your children and grandchildren receive their inheritance? Your trust probably states that assets will remain in trust for beneficiaries who are under a certain age, often 21 or 25. If you had an older age, that could be lowered if you now see that the beneficiary has proven very responsible. Alternatively, if you have concerns about the age being too young, or that you don’t want the beneficiary to get the entire inheritance at once, you could increase the age. You could also have a multi-stage distribution, to permit a beneficiary to withdraw a portion of the trust at set ages, such as half at 25 and half at 30, or a third each at 25, 30 and 35. Remember that the trustee could be able to make distributions before then, but the beneficiaries (your children or grandchildren) couldn’t get direct control themselves unless the trustee believes they have sufficient financial experience.
  8. Would you like to maximize tax deferral for your IRA’s?  If your goal is to encourage your children or grandchildren to maximize your IRA’s tax deferral and protect them from creditor or divorce problems after your death, you may want to supplement your living trust with an IRA Beneficiary Trust that can stretch out the annual required distributions.
  9. Have you moved since your trust was drafted or last reviewed?  Usually you do not need to make changes to your revocable trust if you move to North Carolina. However, it is a good idea to have your trust reviewed by a North Carolina elder law estate planning lawyer to confirm that. Even if your revocable trust is ok as-is, your other documents such as your will or powers of attorney may need changes.
  10. Can you simplify your trust now that estate tax laws have changed? Estate tax rules have changed so that they don’t affect nearly as many people. As of December 31, 2020 and which expires in 2025, the lifetime gift tax exemption is $11.58 million. The annual gift tax exclusion is $15,000. Any gift over that amount given to a single person in one year decreases both your lifetime gift tax exemption and the federal estate.

Other Key Questions include the following:

* When is a  Descendant’s Estate Valued for tax purposes?
The estate’s tax year begins on the date on which the deceased person died. You, as executor, can file the estate’s first income tax return (which may well be its last) at any time up to 12 months after the death. The tax period must end on the last day of a month. Also, remember valuing an Estate can be a tricky problem, particularly in valuing Partnerships where there can be discounts for Lack of Marketability and Minority Discounts are available.

*How much insurance should one carry to offset potential tax liabilities or estate liquidity?
The answer to this should be left primarily to your estate advisors, typically your estate attorney.  Too often estates are composed mostly of fixed assets, which one should not be forced to sell in order to meet an estate obligations, the most important of which are taxes, outstanding liabilities plus Trustee and other Estate fees, such as legal and accounting, in order to bring an Estate to a successful conclusion.

*Should Heirs Get Equal Shares of the Estate?

Parents have several different reasons for considering leaving unequal shares of their estates to children.  Some parents are tempted to leave a child less money because they believe he or she will waste it. A better approach in that case might be to leave that wealth in a trust with restrictions or with discretion by the trustee. There should also be a contingent beneficiary in case the money is not distributed to the initial heir. Just remember that when children have unequal financial success in life, parents are tempted to factor this into their inheritances.

A financially successful child is likely to consider the inheritance to be a measure of your affection or will believe he or she is being punished for success if less affluent children receive greater inheritances.

Equal inheritances can be a major problem when a family business or other asset is involved. Many advisors believe children who aren’t involved in the business probably shouldn’t have voting ownership in it, at least not equal to that of the child actually running the business. Just remember that regardless of how you structure your estate, there almost always is going to be tension between siblings who jointly inherit a business or similar property. A good solution might be to leave the business only to children who will be active in it and use life insurance to equalize the inheritances.

*Lifetime gifts and assistance when dividing up the estate.

One child might have received substantial assistance over the years that the other children didn’t. If you really want things to be equal, these lifetime gifts should be subtracted from their inheritances.

An alternative to equal inheritances is a reserve trust where one might  have about 80% of the estate distributed equally among the heirs. The other 20% is placed in a trust where it can be tapped for emergencies by any of the heirs at the trustee’s discretion. Just remember this can often create its own set of problems or it can provide valuable assistance to the least financially successful heirs or those who encounter unexpected problems.

*Long-Term Estate Planning?

It is fairly common these days for families to have 2nd spouses, stepchildren and other complications. Additional complications might arise after your death, for example if your spouse re-marries. Without careful planning for these situations, the final destination of your wealth will be in doubt. 

*How the wealth will be bequeathed in his or her will.

Things could change after your death, and the wealth could end up in the hands of a 2nd spouse or beneficiaries other than your children.

There are a number of ways to deal with these situations, but the key is to decide what you want to do, implement a plan that will achieve the goals, and then let everyone involved know before your death. This usually eliminates post death problems for the benefactor can get any concerns out on the table so as to soften (if there is such a capability) post death angers among the intended heirs. 

Very Important: remember as the benefactor of an Estate, the more answers that one pre-thinks out can eliminate post death problems and hopefully a happy remembrance of the descendant,” says LTN’s Bruce WD Barren, LTN’s specialist in estate planning and valuations.   

Coming up: Charitable Giving.

Along the way do not forget to look after yourself, you have worked hard for your money, so make your money work hard for you” — Paul Ebeling

Have a prosperous week, Keep the Faith!

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