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”

What Taxes Have to Be Paid When Someone Dies?

The last thing families want to think about after a loved one has passed are taxes, but they must be dealt with, deadlines must be met and challenges along the way need to be addressed. The article “Elder Care: Death and taxes, Part 1: Tax guidance for administering a loved one’s estate” from The Sentinel offers a useful overview, and recommends speaking with an estate planning attorney to be sure all tasks are completed in a timely manner.

Final income tax returns must be filed after a person passes. This is the tax return on income received during their last year of life, up to the date of death. When a final return is filed, this alerts federal and state taxing authorities to close out the decedent’s tax accounts. If a final return is not filed, these agencies will expect to receive annual tax payments and may audit the deceased. Even if the person didn’t have enough income to need to pay taxes, a final return still needs to be filed so tax accounts are closed out. The surviving spouse or executor typically files the final tax return. If there is a surviving spouse, the final income tax return is the last joint return.

Any tax liabilities should be paid by the estate, not by the executor. If a refund is due, the IRS will only release it to the personal representative of the estate. An estate planning attorney will know the required IRS form, which is to be sent with an original of the order appointing the person to represent the estate.

Depending on the decedent’s state of residence, heirs may have to pay an Inheritance Tax Return. This is usually based on the relationship of the heirs. The estate planning attorney will know who needs to pay this tax, how much needs to be paid and how it is done.

Income received by the estate after the decedent’s death may be taxable. This may be minimal, depending upon how much income the estate has earned after the date of death. In complex cases, there may be significant income and complex tax filings may be required.

If a Fiduciary Return needs to be filed, there will be strict filing deadline, often based on the date when the executor applied for the EIN, or the tax identification number for the estate.

The estate’s executor needs to know of any trusts that exist, even though they pass outside of probate. Currently existing trusts need to be administered. If there is a trust provision in the will, a new trust may need to be started after the date of death. Depending on how they are structured, trust income and distributions need to be reported to the IRS. The estate planning attorney will be able to help with making sure this is managed correctly, as long as they have access to the information.

The decedent’s tax returns may have a lot of information, but probably don’t include trust information. If the person had a Grantor Trust, you’ll need an experienced estate planning attorney to help. During the Grantor’s lifetime, the trust income is reported on the Grantor’s 1040 personal income tax return, as if there was no trust. However, when the Grantor dies, the tax treatment of the trust changes. The Trustee is now required to file Fiduciary Returns for the trust each year it exists and generates income.

An experienced estate planning attorney can analyze the trust and understand reporting and taxes that need to be paid, avoiding any unnecessary additional stress on the family.

Reference: The Sentinel (Dec. 3, 2021) “Elder Care: Death and taxes, Part 1: Tax guidance for administering a loved one’s estate”

When Should a Trust Be Reviewed?

Life changes, and laws change too. The great trust created two decades ago may not be a good idea today and may no longer be suitable for you or your beneficiaries. As a general rule, you should review your estate plan and trust every other year, according to the article “Revisit trust on a regular basis” from the Santa Cruz Sentinel.

Start with the Table of Contents, if there is one. There should be language concerning “Successor Trustees.” Are the trustees you named still alive? Are they still part of your life, and do you still trust them? How are their money skills? If they don’t get along with the rest of the family, or if they have been embroiled in a series of petty disputes, they may not be appropriate to manage your trust. Don’t be afraid to make changes. Your estate planning attorney will know how to do this smoothly and properly.

Next, find the paragraph that discusses “Disposition on Death” or “Disposition on Death of Surviving Spouse.” Does it still make sense for your loved ones? Have any children or family members who are listed as receiving benefits died? Are any heirs disabled and receiving government benefits? Have any of your children developed addictions, problems handling money, married people you don’t trust, or are preparing to divorce their spouses? Changes can be made to protect your children from themselves and from others in their lives.

Look for a “Schedule of Trust Assets.” When was the last time this was updated? If you’ve moved and the trust still lists your last residence, you need to change it. Is your new home in the trust? Are retirement accounts correctly listed? Do you have new assets you’ve never placed in the trust? This is a common, and costly, oversight.

If married, how does the trust address what occurs between the death of the first spouse and the surviving spouse? Do you have an A/B trust to divide everything between a Survivor’s Trust and a Bypass Trust or Exemption Trust? Maybe you don’t need or want an A/B trust anymore. Talk with your estate planning attorney to be sure this is structured properly for your life right now.

How is your health? If you or a spouse are in a nursing home or if one of you is ill and likely to needs nursing home care, it may be time to start planning for a Medicaid Asset Protection Trust.

While you’re reviewing your trusts, trustees and beneficiaries, don’t forget to review the people named as beneficiaries for your retirement accounts and life insurance policies. These should be reviewed regularly as well.

Reviewing your trust and estate plan on a regular basis is just as necessary as an annual physical. Leaving your accumulated assets unprotected is easily fixed, while you are alive and well.

Reference: Santa Cruz Sentinel (Nov. 20, 2021) “Revisit trust on a regular basis”

How Does Cryptocurrency Work in an Estate Plan?

Crypto-assets, including cryptocurrencies and non-currency blockchain tokens, hold significant family wealth today and present challenges to securing, transferring, protecting and gifting, as explained in the article “What Holding Crypto Means for Your Estate Plan” from U.S. News & World Report.

Traditional estate planning is evolving to include this new asset class, as digital asset investors embrace a market worth more than $1 trillion. Experienced investors who use digital assets to expand their asset diversification are more likely to understand the importance of protecting their investment through estate planning. However, first time investors who own a small amount of cryptocurrency or the early adapters who bought Bitcoins at the very start and now are worth millions, may not be as aware of the importance of digital asset estate planning.

Unlike traditional bank accounts, controlled through a centralized banking system and a legacy system of reporting, digital assets are by their very nature decentralized. An owner has access through a private key, usually a series of numbers and letters known only to the asset’s owner and stored in a digital wallet. Unless an executor knows about digital wallets and what a private key is and how to use them, the assets can and often do evaporate.

It can be challenging for executors to obtain access to traditional accounts, like 401(k)s or brokerage accounts. Mistakes are made and documents go astray, even in straightforward estates. In a new asset class, with new words like private keys, seed phrases, hardware wallets and more, the likelihood of a catastrophic loss increases.

A last will and testament is necessary for every estate. It’s needed to name an executor, a guardian for minor children and to set forth wishes for wealth distribution. However, a will becomes part of the public record during court proceedings after death, so it should never include detailed information, like bank account numbers. The same goes for information about cryptocurrency. Specific information in a will can be used to steal digital assets.

Loved ones need to know the crypto-assets exist, where to find them and what to do with them. Depending on the amount of the assets and what kind of assets are held, such information needs to be included and addressed in the estate plan.

If the assets are relatively small and owned through an exchange (Coinbase, Biance, or Kraken are a few examples), it is possible to list the crypto asset on a schedule of trust assets and ensure that the trustee has all the login information and knows how to access them.

For complex cases with significant wealth in digital assets, establishing a custodian and trustee may be necessary. A plan must be created that establishes both a custodian and trustee of digital assets. Steps include sharing private keys with a family member or trusted friend or splintering the private keys among multiple trusted individuals, so no one person has complete control.

This new asset class is here for the foreseeable future, and as more investors get involved with cryptocurrency, their estate plan needs to address and protect it.

Reference: U.S. News & World Report (Oct. 5, 2021) “What Holding Crypto Means for Your Estate Plan”

Talk to Parents about Estate Planning without Making It Awkward

If you don’t have this conversation with parents when they are able to share information and provide you with instructions, helping with their care if they become incapacitated or dealing with their estate after they pass will be far more difficult. None of this is easy, but there are some practical strategies shared in the article “How to Talk to Your Parents About Estate Planning” from The Balance.

Parents worry about children fighting over estates after they pass, but not having a “family meeting” to speak about estate planning increases the chance of this happening. In many cases, family conflicts lead to litigation, and everyone loses.

Start by including siblings. Including everyone creates an awareness of fairness because no one is being left out. A frank, open conversation including all of the heirs with parents can prevent or at least lessen the chances for arguments over what parents would have wanted. Distrust grows with secrets, so get everything out in the open.

When is the right time to have the conversation? There is no time like the present. Don’t wait for an emergency to occur—what most people do—but by then, it’s too late.

Estate planning includes preparing for issues of aging as well as property distribution after death. Health care power of attorney and financial power of attorney need to be prepared, so family members can be involved when a parent is incapacitated. An estate planning attorney will draft these documents as part of creating an estate plan.

The unpredictable events of 2020 and 2021 have made life’s fragile nature clear. Now is the time to sit down with family members and talk about the plans for the future. Do your parents have an estate plan? Are there plans for incapacity, including Long-Term Care insurance? If they needed to be moved to a long-term facility, how would the cost be covered?

Another reason to have this conversation with family now is your own retirement planning. The cost of caring for an ailing parent can derail even the best retirement plan in a matter of months.

Define roles among siblings. Who will serve as power of attorney and manage mom’s finances? Who will be the executor after death? Where are all of the necessary documents? If the last will and testament is locked in a safe deposit box and no one can gain access to it, how will the family manage to follow their parent’s wishes?

Find any old wills and see If trusts were established when children were young. If an estate plan was created years ago and the children are now adults, it’s likely all of the documents need to be revised. Review any trusts with an estate planning attorney. Those children who were protected by trusts so many years ago may now be ready to serve as executor, trustees, power of attorney or health care surrogate.

Usually, a complete understanding of the parent’s wishes and reasons behind their estate plan takes more than a single conversation. Some of the issues may require detailed discussion, or family members may need time to process the information. However, as long as the parents are living, the conversation should continue. Scheduling an annual family meeting, often with the family’s estate planning attorney present, can help everyone set long-term goals and foster healthy family relationships for multiple generations.

Reference: The Balance (Oct. 15, 2021) “How to Talk to Your Parents About Estate Planning”

When Should You Update Your Estate Plan?

Updating an estate plan is not usually the first thing on one’s mind when large life events occur. However, if you fail to update your estate plan, over time the plan may not work—for you or your loved ones. Reviewing estate plans at least once every three or four years will help to reach your goals and protect your family, explains the article “Do I Need to Update My Estate Plan?” from Arkansas Business.

Two key documents are used to distribute your assets: your last will and testament and trusts. As your children and other family members mature, those documents should change as may be needed.

If you have a revocable trust, you need to review the dispositive provisions and the trust funding. One of the biggest mistakes in estate planning, after failing to have an estate plan, is failing to fund or manage the funds in a trust.

Trusts are created to avoid probate and establish a process for distributing assets in case of disability or death. However, if assets are not retitled to be owned by the trust, or if the assets don’t have an appropriate beneficiary designation to transfer assets to the trust at the time of your death, they won’t perform as intended. As new assets are purchased, they also need to be incorporated into your estate plan.

Relationships you have with people who have responsibilities for your estate plan may change over time. Those need to be updated, including the following:

Trustee—The person or institution administering and managing a revocable trust, when you can no longer do so.

Guardian—The individual who will have legal authority and responsibility to raise your minor child(ren).

Executor—The person who is in charge of administering and managing your estate.

Health Care Agent—The person you authorize to make medical decisions in the event of incapacity.

Another common point of failure for estate plans: neglecting to update beneficiary designations for assets like life insurance, retirement plans and any asset that customarily passes to an heir through a beneficiary designation.

A regular review of your estate plan with your estate planning attorney also allows your plan to incorporate changes in tax laws. The last few years have seen many significant changes in tax laws, and more changes are likely in the future. Strategies that may have been extremely effective five or ten years ago are probably outdated and might create costs for your heirs. A review with an experienced estate planning attorney can prevent unnecessary tax liabilities, unexpected inheritances and family feuds.

Reference: Arkansas Business (Sep. 2021) “Do I Need to Update My Estate Plan?”

Where Do You Score on Estate Planning Checklist?

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

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

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

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

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

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

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

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

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

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

What’s a Pot Trust?

A pot trust can give you added flexibility as to the way in which the trust assets are used, if you plan to leave your entire estate to your children, says Wealth Advisor’s recent article entitled “How Does a Pot Trust Work?” It’s also called a discretionary, sprinkling or common pot trust and is a type of trust that can be used by families to pass on assets. Minor children serve as beneficiaries with a trustee overseeing the management of trust assets. The trustee has discretionary power to decide how the trust funds are used to pay for the care and needs of beneficiaries.

Flexibility is key in family pot trusts, since the 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: (i) you have two or more children; and (ii) at least one of those children is a minor. As long as the trust is in place, the trustee determines how trust assets may be used to provide for the beneficiaries’ well-being. This trust is designed to address the financial needs of individual children as they arise, and there’s no requirement for trust assets to be divided equally among them.

Pot trusts can offer an advantage to parents who want to make certain the needs of their children will be met in the event something happens to them. If both parents were to die, a pot trust could provide money to cover basic living expenses, as well as other costs that might arise. You can decide when the trust should end, based on the ages of your children, if ever. Children can also still get distributions from the trust once it terminates, if all trust assets haven’t been used.

However, pot trusts don’t ensure an equal distribution of assets among multiple children. A family pot trust can also put an increased burden on the trustee because the trustee must in effect assume a parental role when it comes to financial decision-making. There’s no predetermined set of instructions left behind by the trust grantor.

However, if you’re worried about issues of fairness or older children having to wait to receive trust assets, ask an experienced estate planning attorney about creating individual trusts instead, so that you can designate specific assets to be added to each trust and provide instructions to the trustee on how those assets should be managed. An individual trust gives you more control over what happens with the trust assets. You can also say what portion of your estate each child should receive.

Reference: Wealth Advisor (Aug. 31, 2021) “How Does a Pot Trust Work?”

What Should a Power of Attorney Include?

The pandemic has taught us how swiftly our lives can change, and interest in having a power of attorney (POA) has increased as a result. But you need to know how this powerful document is and what it’s limits are. A recent article from Forbes titled “4 Power of Attorney Clauses You Need To Focus On” explains it all.

The agent acting under the authority of your POA only controls assets in your name. Assets in a trust are not owned by you, so your agent can’t access them. The trustee (you or a successor trustee, if you are incapacitated) appointed in your trust document would have control of the trust and its assets.

There are several different types of POAs. The Durable Power of Attorney goes into effect the moment it is signed and continues to be valid if you become incapacitated. The Springing Power of Attorney becomes valid only when you become incapacitated.

Most estate planning attorneys will advise you to use the Durable Power of Attorney, as the Springing Power of Attorney requires extra steps (perhaps even a court) to determine your capacity.

All authority under a Power of Attorney ceases to be effective when you die.

There are challenges to the POA. Deciding who will be your agent is not always easy. The agent has complete control over your financial life outside of assets held in trust. If you chose to appoint two different people to share the responsibility and they don’t get along, time-sensitive decisions could become tangled and delayed.

Determine gifting parameters. Will your agent be authorized to make gifts? Depending upon your estate, you may want your agent to be able to make gifts, which is useful if you want to reduce estate taxes or if you’ll need to apply for government benefits in the near future. You can also give directions as to who gets gifts and how much. Most people limit the size of gifts to the annual exclusion amount of $15,000.

Can the POA agent change beneficiary designations? Chances are a lot of your assets will pass to loved ones through a beneficiary designation: life insurance, investment, retirement accounts, etc. Do you want your POA agent to have the ability to change these? Most people do not, and the POA must specifically state this. Your estate planning attorney will be able to custom design your POA to protect your beneficiary designations.

Can the POA amend a trust? Depending upon your circumstances, you may or may not want your POA to have the ability to make changes to trusts. This would allow the POA to change beneficiaries and change the terms of the trust. Most folks have planned their trusts to work with their estate plan, and do not wish a POA agent to have the power to make changes.

The POA and the guardian. A POA may be used to name a guardian, who would be appointed by the court. This person is often the same person as the POA, with the idea that the same person you trust enough to be your POA would also be trusted to be your guardian.

The POA is a more powerful document than people think. Downloading a POA and hoping for the best can undo a lifetime of financial and estate planning. It’s best to have a POA created that is uniquely drafted for your family and your situation.

Reference: Forbes (July 19, 2021) “4 Power of Attorney Clauses You Need To Focus On”

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”

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