When Should You Fund a Trust?

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 doesn’t 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’ll 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 jointlyowned 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?”

Do I Need to Update My Estate Plan?

Given a choice, most people will opt to do almost anything rather than talk about death and life for others after they are gone. However, estate planning is essential to ensure that your life and life’s work will be cared for correctly after you’ve passed, advises the article “Is Your Estate Plan Up to Date?” from NASDAQ.com. If you own any assets, have a family, loved ones, pets or belongings you’d like to give to certain people or organizations, you need an estate plan.

Estate planning is not a set-it-and-forget it process. Every few years, your estate plan needs to be reviewed to be sure the information is accurate. Big life changes, from birth and death to marriage and divorce—and everything in between—usually also indicate it’s time for an update. Changes in tax laws also require adjustments to an estate plan, and this is something your estate planning attorney will keep you apprised of.

Reviewing and updating an estate plan is a straightforward process, once your estate planning attorney has created an initial plan. Keeping it updated protects your wishes and your loved ones’ futures. Here are some things to keep in mind when reviewing your estate plan:

Have you moved? Changes in residence require an update, since estate laws vary by state. You also should keep your advisors, including estate planning attorney, financial advisor and tax professional, informed about any changes of residence. You’d be surprised how many people move and neglect to inform their professional advisors.

Changes in tax law. The last five years have seen big changes in tax laws. Estate plans created years ago may no longer work as originally intended.

Power of Attorney documents. A Power of Attorney authorizes a person to act on your behalf to make business, personal, legal and financial decisions. If this document is old, or no longer complies with your state’s laws, it may not be accepted by banks, investment companies, etc. If the person you designed as your POA decades ago can’t or won’t serve, you need to choose another person. If you need to revoke a power of attorney, speak with your estate planning attorney to do this effectively.

Health Care Power of Attorney and HIPAA Releases. Laws concerning who may speak with treating physicians and health care providers have become increasingly restrictive. Even spouses do not have automatic rights when it comes to health care. You’ll also want to put your wishes about being resuscitated or placed on artificial life support in writing.

Do you have an updated last will and testament? Review all the details, from executor to guardian named for minor children, the allocation of assets and your estate tax costs.

What about a trust? If you have minor children, you need to ensure their financial future with a trust. Your estate planning attorney will know which type of trust is best for your situation.

A regular check-up for your estate plan helps avoid unnecessary expenses, delays and costs for your loved ones. Don’t delay taking care of this very important matter. You can then return to selecting a color for the nursery or planning your next exciting adventure. However, do this first.

Reference: NASDAQ.com (July 28, 2021) “Is Your Estate Plan Up to Date?”

Suggested Key Terms: Estate Planning Attorney, Minor Children, Guardian, Last Will and Testament, Executor, Power of Attorney, Health Care, POA, Assets, Trust, HIPAA Release

How Does Probate Work?

Having a good understanding of how wills are used, how probate works and what other documents are needed to protect yourself and loved ones is key to creating an effective estate plan, explains the article “Understanding probate helps when drafting will” from The News Enterprise.

A last will and testament expresses wishes for property distribution after death. It’s different from a living will, which formalizes choices for end-of-life decisions. The last will and testament also includes provisions for care of minor children, disabled dependents and sometimes, for animal companions.

The will does not become effective until after death. However, before death, it is a useful tool in helping family members understand your goals and wishes, if you are ever incapacitated by illness or injury.

The will has roles for specific people. The “testator” is the person creating the will. “Beneficiaries” are heirs receiving assets after the testator has died. The “executor” is the person who oversees the estate, ensuring that directions in the will are followed.

If there is no will, the court will appoint someone to manage the estate, usually referred to as the “administrator.” There is no guarantee the court will appoint a family member or relative, even if there are willing and qualified candidates in the family. Having a will precludes a court appointing a stranger to make serious decisions about a treasured possession and the future of your loved ones.

A will is usually not filed with the court until after the testator dies and the executor takes the will to the court in the county where the testator lived to open a probate case. If the person owned real estate in other counties or states, probate must take place in all other such locations. The will is recorded by the county clerk’s office and becomes part of the public record for anyone to see.

Assets with named beneficiaries, like life insurance proceeds, retirement funds and property owned jointly are distributed to beneficiaries outside of probate. However, any property owned solely by the decedent is part of the probate action and is vulnerable to creditors and anyone who wishes to make a claim against the estate.

The best way to protect your family and your assets is to have a complete estate plan that includes a will and a thorough review of how assets are titled so they can, if possible, go directly to beneficiaries and not be subject to probate.

Reference: The News Enterprise (Aug. 17, 2021) “Understanding probate helps when drafting will”

What Happens If You Inherit a House with a Mortgage?

Nothing in life is certain, except death and taxes, says the old adage. The same could be said about mortgages. Did you know that the word “mortgage” is taken from a French term meaning “death pledge?” A recent article titled “What happens to your mortgage when you die?” from bankrate.com explains the options for homeowners who wonder what might happen to their home, mortgage and loved ones, after they die.

When a homeowner dies, their mortgage lives on. The mortgage lender still needs to be repaid, or the lender could foreclose on the home when payments stop, regardless of the reason. The same is true if there are outstanding home equity loans or lines of credit attached to the property.

If there is a co-borrower or co-signer, the other person must continue making payments on the mortgage. If there is no co-signer, the executor of the estate is responsible for making mortgage payments from estate assets.

If the home is left to an heir through a will, it’s up to the heir to decide what to do with the home and the mortgage. If the lender and the terms of the mortgage allow it, the heir can assume the mortgage and make payments. The heir might also arrange for the property to be sold.

A sole heir should reach out to the mortgage company and discuss their options, after conferring with the family’s estate planning attorney. To assume the loan, the mortgage must be transferred to the heir. If the property is sold, proceeds from the sale are used to pay off the loan.

Heirs do not need to requalify for the mortgage on a loan they inherited. This can be a good opportunity for someone with bad credit to repair that credit, if they can stay current on the mortgage. If the heir wants to change the terms of the mortgage, they will need to qualify for a new loan and meet all of the lending institution’s eligibility requirements.

Proof that a person is the rightful inheritor of the property or executor of the estate may be required. The mortgage lender will typically have a process to specify what documents are needed. If the lender is not cooperative or balks at any requests, the estate planning attorney will be able to help.

If you own a home, it is very important to plan for the future and that includes making decisions about what you want to happen to your home, if you are too ill to manage your affairs or for when you die. You’ll need to document your wishes,

Reference: Bankrate.com (July 9, 2021) “What happens to your mortgage when you die?”

Do QTIP Trusts Help avoid Estate Taxes?

Using a QTIP trust allows one spouse to create a trust to benefit the surviving spouse, while providing the surviving spouse with up to nine months to decide how to treat the gift for tax purposes, explains a recent article “How Certain Trusts Soften The Blow Of Estate Tax Increases” from Financial Advisor. This flexibility is just one reason for this trust’s popularity. However, while the QTIP election can be made on the 2021 gift tax return, which is filed in 2022, the choice as to how much of the transfer will be subject to tax can be made in 2022.

The current estate and gift tax exemption of $11.7 per individual is slated to sunset in 2025, but the current legislative mood may curtail that legislation sooner. Right now, flexibility is paramount.

The surviving spouse is named as the primary beneficiary of the trust and must be the only beneficiary of the trust during the lifetime of the surviving spouse, in terms of both receiving income or principal from the trust.

If the decision is made to treat the trust as a QTIP trust, a gift to the trust is eligible for the marital deduction and is not taxable. It does not use up any of the donor’s gift tax exclusion. That flexibility to make a transfer today and decide later whether it uses any lifetime exemption is something most people don’t know about. A QTIP can also protect the recipient spouse and the principal from any creditors.

There are conditions and limitations to this strategy. If the QTIP election is not made, all net trust income must be distributed to the beneficiary spouse. There’s also no flexibility for the trust income to be accumulated or distributed directly to descendants.

The property over which the QTIP election is made is included in the estate of the surviving spouse.

The election can be made over the entire asset or only a portion of the asset transferred to the trust. The option to apply only a portion of the transfer makes it more tax efficient. For generation skipping-trust purposes, an election can be made to use the transferor spouse’s GST exemption when the decision about the QTIP election is made.

QTIPs are not the solution for everyone, but they may be the best option for many people while the people in Washington, D.C. determine the immediate future of the estate tax.

There are many Americans who are moving forward with making gifts using the current gift tax exclusion, using spousal lifetime access trusts (SLATs). However, the QTIP elections remain a way to hedge against the risk of being on the hook for a substantial gift tax, if there is a reduction in the federal estate tax exemptions.

Speak with an estate planning attorney to learn if a QTIP or another type of trust is appropriate for you. Note that these are complex planning strategies, and they must work in tandem with the rest of your estate plan.

Reference: Financial Advisor (May 24, 2021) “How Certain Trusts Soften The Blow Of Estate Tax Increases”

Can a Person with Alzheimer’s Sign Legal Documents?

If a loved one has been diagnosed with Alzheimer’s disease or any other form of dementia, it is necessary to address legal and financial issues as soon as possible. The person’s ability to sign documents and take other actions to protect themselves and their assets will be limited as the disease progresses, so there’s no time to wait. This recent article “Financial steps to take when dealing with Alzheimer’s” from Statesville Record & Landmark explains the steps to take.

Watch for Unusual Financial Activity

Someone who has been sensible about money for most of his life may start to behave differently with his finances. This is often an early sign of cognitive decline. If bills are piling up, or unusual purchases are being made, you may need to prepare to take over his finances. It should be noted that unusual financial activity can also be a sign of elder financial abuse.

Designate a Power of Attorney

The best time to designate a person to take care of finances is before she shows signs of dementia. It’s not an easy conversation, but it is very important. Someone needs to be identified who can be trusted to manage day-to-day money matters, who can sign checks, pay bills and supervise finances. If possible, it may be easier if the POA gradually eases into the role, only taking full control when the person with dementia can no longer manage on her own.

An individual needs to be legally competent to complete or update legal documents including wills, trusts, an advanced health care directive and other estate planning documents. Once such individual is not legally competent, the court must be petitioned to name a family member as a guardian, or a guardian will be appointed by the court. It is far easier for the family and the individual to have this handled by an estate planning attorney in advance of incompetency.

An often-overlooked detail in cases of Alzheimer’s is the beneficiary designations on retirement, financial and life insurance policies. Check with an estate planning attorney for help, if there is any question that changes may be challenged by the financial institution or by heirs.

Cost of Care and How It Will Be Paid

At a certain point, people with dementia cannot live on their own. Even those who love them cannot care for them safely. Determining how care will be provided, which nursing facility has the correct resources for a person with cognitive illness and how to pay for this care, must be addressed. An elder law estate planning attorney can help the family navigate through the process, including helping to protect family assets through the use of trusts and other planning strategies.

If the family has a strong history of Alzheimer’s disease or other cognitive diseases, it makes sense to do this sort of preparation far in advance. The sooner it can be addressed, even long before dementia symptoms appear, the better the outcome will be.

Reference: Statesville Record & Landmark (April 11, 2021) “Financial steps to take when dealing with Alzheimer’s”

What Happens when Homeowner Dies without Will?

When parents die suddenly, in this case due to COVID-19, and there is no will and no discussions have taken place, siblings are placed in an awkward, expensive and emotionally fraught situation. The article titled “My parents died of COVID-19 and left no will. My brother lives rent-free in their home and borrowed $35,000. What now?” from MarketWatch sums up the situation, but the answer is complicated.

When there is no will, or “intestacy,” there aren’t a lot of choices.

These parents had a few bank accounts, owned their home outright and left no debts. They had six adult children, including one that died and is survived by two living sons. None of the siblings agrees upon anything, so nothing has been done.

One of the siblings lives in the house rent free. Another brother was loaned $35,000 for a down payment on a mobile home. He now claims that the loan was a gift and does not have to pay it back. There are receipts, but the money was paid directly to the escrow company from the mother’s bank account.

How do you determine if this brother received a loan or a gift? What do you do about the brother who lives rent-free in the family home? How does the family now move the estate into probate without losing the house and the bank accounts, while maintaining a sense of family?

For starters, an administrator needs to be appointed to begin the probate process and act as a mediator among the siblings. In some states, the administrator also requires a family tree, so they can know who the descendants are. Barring some huge change of heart among the siblings, this is the only option.

If the parents failed to name a personal representative and the siblings cannot agree on who should serve, an estate administration lawyer is the sensible choice. The court may name someone, if there is concern about possible conflicts of interests or the rights of creditors or other beneficiaries.

A warning to all concerned about how the appointment of an administrator works, or sometimes, does not work. Working with an estate planning attorney that the siblings can agree upon is better, as the attorney has a fiduciary and ethical obligation to the estate. While state laws usually hold the administrator responsible to the standard of care of a “reasonable, prudent” individual, not all will agree what is reasonable and prudent.

One note about the loan/gift: if the mother helped a brother to qualify for a mortgage, it is possible that a “Gift Letter” was created to satisfy the bank or the resident’s association. Assuming this was not a notarized loan agreement, the administrator may rule that the $35,000 was a gift. Personal loans should always be recorded in a notarized agreement.

This family’s disaster serves as a good lesson for anyone who does not have an estate plan. Siblings rarely agree, and a properly prepared estate plan protects more than your assets. It also protects your children from losing each other in a fight over your property.

Reference: MarketWatch (April 4, 2021) “My parents died of COVID-19 and left no will. My brother lives rent-free in their home and borrowed $35,000. What now?”

Trusts can Work for ‘Regular’ People

A trust fund is an estate planning tool that can be used by anyone who wishes to pass their property to individuals, family members or nonprofits. They are used by wealthy people because they solve a number of wealth transfer problems and are equally applicable to people who aren’t mega-rich, explains this recent article from Forbes titled “Trust Funds: They’re Not Just For The Wealthy.”

A trust is a legal entity in the same way that a corporation is a legal entity. A trust is used in estate planning to own assets, as instructed by the terms of the trust. Terms commonly used in discussing trusts include:

Grantor—the person who creates the trust and places assets into the trust.
Beneficiary—the person or organization who will receive the assets, as directed by the trust documents.
Trustee—the person who ensures that the assets in the trust are properly managed and distributed to beneficiaries.

Trusts may contain a variety of property, from real estate to personal property, stocks, bonds and even entire businesses.

Certain assets should not be placed in a trust, and an estate planning attorney will know how and why to make these decisions. Retirement accounts and other accounts with named beneficiaries don’t need to be placed inside a trust, since the asset will go to the named beneficiaries upon death. They do not pass through probate, which is the process of the court validating the will and how assets are passed as directed by the will. However, there may be reasons to designate such accounts to pass to the trust and your attorney will advise you accordingly.

Assets are transferred into trusts in two main ways: the grantor transfers assets into the trust while living, often by retitling the asset, or by using their estate plan to stipulate that a trust will be created and retain certain assets upon their death.

Trusts are used extensively because they work. Some benefits of using a trust as part of an estate plan include:

Avoiding probate. Assets placed in a trust pass to beneficiaries outside of the probate process.

Protecting beneficiaries from themselves. Young adults may be legally able to inherit but that doesn’t mean they are capable of handling large amounts of money or property. Trusts can be structured to pass along assets at certain ages or when they reach particular milestones in life.

Protecting assets. Trusts can be created to protect inheritances for beneficiaries from creditors and divorces. A trust can be created to ensure a former spouse has no legal claim to the assets in the trust.

Tax liabilities. Transferring assets into an irrevocable trust means they are owned and controlled by the trust. For example, with a non-grantor irrevocable trust, the former owner of the assets does not pay taxes on assets in the trust during his or her life, and they are not part of the taxable estate upon death.

Caring for a Special Needs beneficiary. Disabled individuals who receive government benefits may lose those benefits, if they inherit directly. If you want to provide income to someone with special needs when you have passed, a Special Needs Trust (sometimes known as a Supplemental Needs trust) can be created. An experienced estate planning attorney will know how to do this properly.

Reference: Forbes (March 15, 2021) “Trust Funds: They’re Not Just For The Wealthy”

What States Make You Pay an Inheritance Tax?

Let’s start with defining “inheritance tax.” The answer depends on the laws of each state, so you’ll need to speak with an estate planning attorney to learn exactly how your inheritance will be taxed, says the article “States with Inheritance Tax” from yahoo! finance. There are six states that still have inheritance taxes: Iowa, Kentucky, Nebraska, New Jersey, Maryland and Pennsylvania.

In Iowa, you’ll need to pay an inheritance tax within nine months after the person dies, and the amount will depend upon how you are related to the decedent.

In Kentucky, spouse, parents, children, siblings and half-siblings do not have to pay inheritance taxes. Others need to act within 18 months after death but may be eligible for a 5% discount, if they make the payment within 9 months.

Timeframes are different county-by-county in Maryland, and the Registrar of Wills of the county where the decedent lived, or owned property determines when the taxes are due.

Only a spouse is exempt from inheritance taxes in Nebraska, and it has to be paid with a year of the decedent’s passing.

New Jersey gets very complicated, with a large number of people being exempted, as well as qualified religious institutions and charitable organizations.

In Pennsylvania, rates range from 4.5% to 15%, depending upon the relationship to the decedent. There’s a 5% discount if the tax is paid within three months of the death, otherwise the tax must be paid within nine months of the death.

As you can tell, there are many variations, from who is exempt to how much is paid. Pennsylvania exempts transfers to spouses and charities, but also to children under 21 years old. If one sibling is 20 and the other is 22, the older sibling would have to pay inheritance tax, but the younger sibling does not.

There’s also a difference as to which property is subject to inheritance taxes. In Nebraska, the first $40,000 inherited is exempt. Pennsylvania exempts certain transfers of farmland and agricultural property. All six exempt life insurance proceeds when they are paid to a named beneficiary, but if the policies are paid to the estate in Iowa, the proceeds are subject to inheritance tax.

Note that an inheritance tax is different than an estate tax. Both taxes are paid upon death, but the difference is in who pays the tax. For an inheritance tax, the tax is paid by heirs and the tax rate is determined by the beneficiary’s relationship to the deceased.

Estate tax is paid by the estate itself before any assets are distributed to beneficiaries. Estate taxes are the same, regardless of who the heirs are.

There are twelve states and the District of Columbia (Washington D.C.) that have their own estate taxes (in addition to the federal estate tax). Note that Maryland has an inheritance, state and federal estate taxes. The rest of the states with an estate tax are Connecticut, Hawaii, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Washington and Vermont.

The large variations on estate and inheritance taxes are another reason why it is so important to work with an experienced estate planning lawyer who knows the estate laws in your state.

Reference: yahoo! finance (Jan. 6, 2021) “States with Inheritance Tax”

How Does a Trust Work for a Farm Family?

There are four elements to a trust, as described in this recent article “Trust as an Estate Planning Tool,” from Ag Decision Maker: trustee, trust property, trust document and beneficiaries. The trust is created by the trust document, also known as a trust agreement. The person who creates the trust is called the trustmaker, grantor, settlor, or trustor. The document contains instructions for management of the trust assets, including distribution of assets and what should happen to the trust, if the trustmaker dies or becomes incapacitated.

Beneficiaries of the trust are also named in the trust document, and may include the trustmaker, spouse, relatives, friends and charitable organizations.

The individual who creates the trust is responsible for funding the trust. This is done by changing the title of ownership for each asset that is placed in the trust from an individual’s name to that of the trust. Failing to fund the trust is an all too frequent mistake made by trustmakers.

The assets of the trust are managed by the trustee, named in the trust document. The trustee is a fiduciary, meaning they must place the interest of the trust above their own personal interest. Any management of trust assets, including collecting income, conducting accounting or tax reporting, investments, etc., must be done in accordance with the instructions in the trust.

The process of estate planning includes an evaluation of whether a trust is useful, given each family’s unique circumstances. For farm families, gifting an asset like farmland while retaining lifetime use can be done through a retained life estate, but a trust can be used as well. If the family is planning for future generations, wishing to transfer farm income to children and the farmland to grandchildren, for example, a granted life estate or a trust document will work.

Other situations where a trust is needed include families where there is a spendthrift heir, concerns about litigious in-laws or a second marriage with children from prior marriages.

Two main types of trust are living or inter-vivos trusts and testamentary trusts. The living trust is established and funded by a living person, while the testamentary trust is created in a will and is funded upon the death of the willmaker.

There are two main types of living trusts: revocable and irrevocable. The revocable trust transfers assets into a trust, but the grantor maintains control over the assets. Keeping control means giving up any tax benefits, as the assets are included as part of the estate at the time of death. When the trust is irrevocable, it cannot be altered, amended, or terminated by the trustmaker. The assets are not counted for estate tax purposes in most cases.

When farm families include multiple generations and significant assets, it’s important to work with an experienced estate planning attorney to ensure that the farm’s property and assets are protected and successfully passed from generation to generation.

Reference: Ag Decision Maker (Dec. 2020) “Trust as an Estate Planning Tool”

Estate Planning Blog Articles

Estate & Business Planning Law Firm Serving the Providence & Cranston, RI Areas

When Should You Fund a Trust?

Do I Need to Update My Estate Plan?

How Does Probate Work?

What Happens If You Inherit a House with a Mortgage?

Do QTIP Trusts Help avoid Estate Taxes?

Can a Person with Alzheimer’s Sign Legal Documents?

What Happens when Homeowner Dies without Will?

Trusts can Work for ‘Regular’ People

What States Make You Pay an Inheritance Tax?

How Does a Trust Work for a Farm Family?

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When Should You Fund a Trust?

Do I Need to Update My Estate Plan?

How Does Probate Work?

What Happens If You Inherit a House with a Mortgage?

Do QTIP Trusts Help avoid Estate Taxes?

Can a Person with Alzheimer’s Sign Legal Documents?

What Happens when Homeowner Dies without Will?

Trusts can Work for ‘Regular’ People

What States Make You Pay an Inheritance Tax?

How Does a Trust Work for a Farm Family?

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