Estate Planning Blog Articles

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

How to Plan in a Time of Uncertainty

There’s a saying in estate planning circles that the only people who pay estate taxes are those who don’t plan not to pay estate taxes. While this doesn’t cover every situation, there is a lot of truth to it. A recent article from Financial Advisor entitled “Estate Planning In This Particular Time of Uncertainty” offers strategies and estate planning techniques to be considered during these volatile times.

Gifting Assets into Irrevocable Trusts to Benefit Family Members. If done correctly, this serves to remove the current value and all future appreciation of these assets from your estate. With the federal estate tax exemption ending at the end of 2025, the exemption will drop from $12.06 million per person to nearly half that amount.

Combine this with a time of volatile asset prices and it becomes fairly obvious: this would be a good time to take investments with a lowered value out of the individual owner’s hands and gift them into an irrevocable trust. The lower the value of the asset at the time of the gift, the less the amount of the lifetime exemption that needs to be used. If assets are expected to recover and appreciate, this strategy makes even more sense.

Spousal Limited Access Trust (SLAT). This may be a good time for a related technique, the SLAT, an irrevocable trust created by one spouse to benefit the other and often, the couple’s children. Access to income and principal is created during the spouse’s lifetime. It can even be drafted as a dynasty trust. Assets can be gifted out of the estate to the trust and while the grantor (the person creating the trust) cannot be a beneficiary, their family can. Couples may also create reciprocating SLATs, where each is the beneficiary of the other’s trust, as long as they are careful not to create duplicate trusts, which have been found invalid by courts. Talk with an experienced estate planning attorney about how a SLAT may work for you and your spouse.

What about interest rates? A Grantor Retained Annuity Trust (GRAT), where the grantor contributes assets and enjoys a fixed annuity stream for the life of the trust, may be advantageous now. At the end of the trust term, remaining assets are distributed to family members or a trust for their benefit. To avoid a gift tax on the calculated remainder, due when the trust is created, most GRATs are “zeroed out,” that is, the present value of the annuity stream to the grantor is equal to the amount of the initial funding of the trust. Since you get back what’s been put in, no taxable gift occurs. The lower the interest rate, the higher the value of the income stream. The grantor can take a lower annuity amount and with decent appreciation of assets in the trust, there will be a larger amount as a remainder for heirs. Interest rates need to be considered when looking into GRATs.

Qualified Personal Residence Trust (QPRT) is a trust used to transfer a primary residence to beneficiaries with minimal gift tax consequences. The grantor retains the right to live in the house at no charge for a certain period of time. After the time period ends, the property and any appreciation in value passes to beneficiaries. The valuation for the value of the initial transfer into the trust for gift tax purposes is determined by a calculation relying heavily on interest rates. In this case, a higher interest rate results in a lower present value of the remainder and a lower gift value when the trust is created.

Reference: Financial Advisor (July 8, 2022) “Estate Planning In This Particular Time of Uncertainty”

How Do You Pass Down a Vacation Home?

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!”

How Does a Charitable Trust Help with Estate Planning?

Simply put, a charitable trust holds assets and distributes assets to charitable organizations. The person who creates the trust, the grantor, decides how the trust will manage and invest assets, as well as how and when donations are made, as described in the article “How a Charitable Trust Works” from yahoo! finance. An experienced estate planning attorney can help you create a charitable trust to achieve your estate planning goals and create tax-savings opportunities.

Any trust is a legal entity, legally separate from you, even if you are the grantor and a trustee. The trust owns its assets, pays taxes and requires management. The charitable trust is created with the specific goal of charitable giving, during and after your lifetime. Many people use charitable trusts to create ongoing gifts, since this type of trust grows and continues to make donations over extended periods of time.

Sometimes charitable trusts are used to manage real estate or other types of property. Let’s say you have a home you’d like to see used as a community resource after you die. A charitable trust would be set up and the home placed in it. Upon your death, the home would transfer to the charitable organization you’ve named in the trust. The terms of the trust will direct how the home is to be used. Bear in mind while this is possible, most charities prefer to receive cash or stock assets, rather than real estate.

The IRS defines a charitable trust as a non-exempt trust, where all of the unexpired interests are dedicated to one or more charitable purposes, and for which a charitable contribution deduction is allowed under a specific section of the Internal Revenue Code. The charitable trust is treated like a private foundation, unless it meets the requirements for one of the exclusions making it a public charity.

There are two main kinds of charitable trusts. One is a Charitable Remainder Trust, used mostly to make distributions to the grantor or other beneficiaries. After distributions are made, any remaining funds are donated to charity. The CRT may distribute its principal, income, or both. You could also set up a CRT to invest and manage money and distribute only earnings from the investments. A CRT can also be set up to distribute all holdings over time, eventually emptying all accounts. The CRT is typically used to distribute proceeds of investments to named beneficiaries, then distribute its principal to charity after a certain number of years.

The Charitable Lead Trust (CLT) distributes assets to charity for a defined amount of time, and at the end of the term, any remaining assets are distributed to beneficiaries. The grantor may be included as one of the trust’s beneficiaries, known as a “Reversionary Trust.”

All Charitable Trusts are irrevocable, so assets may not be taken back by the grantor. To qualify, the trust may only donate to charities recognized by the IRS.

An estate planning attorney will know how to structure the charitable trust to maximize its tax-savings potential. Depending upon how it is structured, a CT can also impact capital gains taxes.

Reference: yahoo! finance (Dec. 16, 2021) “How a Charitable Trust Works”

Can You Refuse an Inheritance?

No one can be forced to accept an inheritance they don’t want. However, what happens to the inheritance after they reject, or “disclaim” the inheritance depends on a number of things, says the recent article “Estate Planning: Disclaimers” from NWI Times.

A disclaimer is a legal document used to disclaim the property. To be valid, the disclaimer must be irrevocable, in writing and executed within nine months of the death of the decedent. You can’t have accepted any of the assets or received any of the benefits of the assets and then change your mind later on.

Once you accept an inheritance, it’s yours. If you know you intend to disclaim the inheritance, have an estate planning attorney create the disclaimer to protect yourself.

If the disclaimer is valid and properly prepared, you simply won’t receive the inheritance. It may or may not go to the decedent’s children.

After a valid qualified disclaimer has been executed and submitted, you as the “disclaimor” are treated as if you died before the decedent. Whoever receives the inheritance instead depends upon what the last will or trust provides, or the intestate laws of the state where the decedent lived.

In most cases, the last will or trust has instructions in the case of an heir disclaiming. It may have been written to give the disclaimed property to the children of the disclaimor, or go to someone else or be given to a charity. It all depends on how the will or trust was prepared.

Once you disclaim an inheritance, it’s permanent and you can’t ask for it to be given to you. If you fail to execute the disclaimer after the nine-month period, the disclaimer is considered invalid. The disclaimed property might then be treated as a gift, not an inheritance, which could have an impact on your tax liability.

If you execute a non-qualified disclaimer relating to a $100,000 inheritance and it ends up going to your offspring, you may have inadvertently given them a gift according to the IRS. You’ll then need to know who needs to report the gift and what, if any, taxes are due on the gift.

Persons with Special Needs who receive means-tested government benefits should never accept an inheritance, since they can lose eligibility for benefits.

A Special Needs Trust might be able to receive an inheritance, but there are limitations regarding how much can be accepted. An estate planning attorney will need to be consulted to ensure that the person with Special Needs will not have their benefits jeopardized by an inheritance.

The high level of federal exemption for estates has led to fewer disclaimers than in the past, but in a few short years—January 1, 2026—the exemption will drop down to a much lower level, and it’s likely inheritance disclaimers will return.

Reference: NWI Times (Nov. 14, 2021) “Estate Planning: Disclaimers”

Do You Need a Revocable Trust or Irrevocable Trust?

There are important differences between revocable and irrevocable trusts. One of the biggest differences is the amount of control you have over assets, as explained in the article “What to Consider When Deciding Between a Revocable and Irrevocable Trust” from Kiplinger. A revocable trust is often referred to as the Swiss Army knife of estate planning because it has so many different uses. The irrevocable trust is also a multi-use tool, only different.

Trusts are legal entities that own assets like real estate, investment accounts, cars, life insurance and high value personal belongings, like jewelry or art. Ownership of the asset is transferred to the trust, typically by changing the title of ownership. The trust documents also contain directions regarding what should happen to the asset when you die.

There are three key parties to any trust: the grantor, the person creating and depositing assets into the trust; the beneficiary, who will receive the trust assets and income; and the trustee, who is in charge of the trust, files tax returns as needed and distributes assets according to the terms of the trust. One person can hold different roles. The grantor could set up a trust and also be a trustee and even the beneficiary while living. The executor of a will can also be a trustee or a successor trustee.

If the trust is revocable, the grantor has the option of amending or revoking the trust at any time. A different trustee or beneficiary can be named, and the terms of the trust may be changed. Assets can also be taken back from a revocable trust. Pre-tax retirement funds, like a 401(k) cannot be placed inside a trust, since the transfer would require the trust to become the owner of these accounts. The IRS would consider that to be a taxable withdrawal.

There isn’t much difference between owning the assets yourself and a revocable trust. Assets still count as part of your estate and are not sheltered from estate taxes or creditors. However, you have complete control of the assets and the trust. So why have one? The transition of ownership if something happens to you is easier. If you become incapacitated, a successor trustee can take over management of trust assets. This may be easier than relying on a Power of Attorney form and some believe it offers more legal authority, allowing family members to manage assets and pay bills.

In addition, assets in a trust don’t go through probate, so the transfer of property after you die to heirs is easier. If you own homes in multiple states, heirs will receive their inheritance faster than if the homes must go through probate in multiple states. Any property in your revocable trust is not in your will, so ownership and transfer status remain private.

An irrevocable trust is harder to change, as befits its name. To change an irrevocable trust while you are living takes a little more effort but is not impossible. Consent of all parties involved, including the beneficiary and trustee, must be obtained. The benefits from the irrevocable trust make the effort worthwhile. By giving up control, assets in the irrevocable trust may not be part of your taxable estate. While today’s federal estate exemption is historically high right now, it’s expected to go much lower in the future.

Reference: Kiplinger (July 14, 2021) “What to Consider When Deciding Between a Revocable and Irrevocable Trust”

Will Inheritance and Gift Taxes Change in 2021?

Uncertainty is driving many wealth transfers, with gifting taking the lead for many wealthy families, reports the article “No More Gift Tax Exemption?” from Financial Advisor. For families who have already used up a large amount or even all of their exemptions, there are other strategies to consider.

Making gifts outright or through a trust is still possible, even if an individual or couple used all of their gift and generation skipping transfer tax exemptions. Gifts and generation skipping transfer tax exemption amounts are indexed for inflation, increasing to $11.7 million in 2021 from $11.58 million in 2020. Individuals have $120,000 additional gift and generation-skipping transfer tax exemptions that can be used this year.

Annual exclusion gifts—individuals can make certain gifts up to $15,000 per recipient, and couples can give up to $30,000 per person. This does not count towards gift and estate tax exemptions.

Don’t forget about Grantor Retained Annuity Trust (GRAT) options. The GRAT is an irrevocable trust, where the grantor makes a gift of property to it, while retaining a right to an annual payment from the trust for a specific number of years. GRATS can also be used for concentrated positions and assets expected to appreciate that significantly reap a number of advantages.

A Sale to a Grantor Trust takes advantage of the differences between the income and transfer tax treatment of irrevocable trusts. The goal is to transfer anticipated appreciation of assets at a reduced gift tax cost. This may be timely for those who have funded a trust using their gift tax exemption, as this strategy usually requires funding of a trust before a sale.

Intra-family loans permit individuals to make loans to family members at lower rates than commercial lenders, without the loan being considered a gift. A family member can help another family member financially, without incurring additional gift tax. A bona fide creditor relationship, including interest payments, must be established.

It’s extremely important to work with a qualified estate planning attorney when implementing tax planning strategies, especially this year. Tax reform is on the horizon, but knowing exactly what the final changes will be, and whether they will be retroactive, is impossible to know. There are many additional techniques, from disclaimers, QTIPs and formula gifts, that an experienced estate planning attorney may consider when planning to protect a family legacy.

Reference: Financial Advisor (April 1, 2021) “No More Gift Tax Exemption?”

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”

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Trusts: The Swiss Army Knife of Estate Planning

Trusts serve many different purposes in estate planning. They all have the intent to protect the assets placed within the trust. The type of trust determines what the protection is, and from whom it is protected, says the article “Trusts are powerful tools which can come in many forms,” from The News Enterprise. To understand how trusts protect, start with the roles involved in a trust.

The person who creates the trust is called a “grantor” or “settlor.” The individuals or organizations receiving the benefit of the property or assets in the trust are the “beneficiaries.” There are two basic types of beneficiaries: present interest beneficiaries and “future interest” beneficiaries. The beneficiary, by the way, can be the same person as the grantor, for their lifetime, or it can be other people or entities.

The person who is responsible for the property within the trust is the “trustee.” This person is responsible for caring for the assets in the trust and following the instructions of the trust. The trustee can be the same person as the grantor, as long as a successor is in place when the grantor/initial trustee dies or becomes incapacitated. However, a grantor cannot gain asset protection through a trust, where the grantor controls the trust and is the principal recipient of the trust.

One way to establish asset protection during the lifetime of the grantor is with an irrevocable trust. Someone other than the grantor must be the trustee, and the grantor should not have any control over the trust. The less power a grantor retains, the greater the asset protection.

One additional example is if a grantor seeks lifetime asset protection but also wishes to retain the right to income from the trust property and provide a protected home for an adult child upon the grantor’s death. Very specific provisions within the trust document can be drafted to accomplish this particular task.

There are many other options that can be created to accomplish the specific goals of the grantor.

Some trusts are used to protect assets from taxes, while others ensure that an individual with special needs will be able to continue to receive needs-tested government benefits and still have access to funds for costs not covered by government benefits.

An estate planning attorney will have a thorough understanding of the many different types of trusts and which one would best suit each individual situation and goal.

Reference: The News Enterprise (July 25, 2020) “Trusts are powerful tools which can come in many forms”