What Estate Planning Do I Need with a New Baby?

Congratulations parent! You have a new baby. There’s a lot to think about, but there is a vital task that should be a priority. That is making an estate plan. People usually don’t worry about estate planning when they’re young, healthy and starting a new family. However, your new baby is depending on you to make decisions that will set them up for a secure future.

Motley Fool’s recent article, “If You’re a New Parent, Take These 4 Estate Planning Steps” says there are a few key estate planning steps that every parent should take to make certain they’ve protected their child, no matter what the future holds.

  1. Purchase Life Insurance. If a parent dies, life insurance will make sure there are funds available for the other spouse to keep providing for the children. If both parents die, life insurance can be used for a guardian to raise the child or to fund the cost of college. For most parents, term life insurance is used because the premiums are affordable, and the coverage will be in effect long enough for your child to grow to an adult.
  2. Draft a Will and Name a Guardian for your Children. For parents, the most important reason to make a will is to name a guardian for your children. If you designate a guardian, you can select the person that you think shares your values and who will do a good job raising your children. This way, it’s not left to a judge to make that selection. Do this as soon as your children are born.
  3. Update Beneficiaries. Your will should say what happens to most of your assets, but you probably have some accounts with a designated beneficiary, like a 401(k), IRA, or life insurance. When you have children, you’ll need to update the beneficiaries on these accounts for your children to inherit these assets as secondary beneficiaries, so they will inherit them in the event of your and your spouse’s death. Be careful, however, to designate a custodian to take care of those funds while your children are still minors.
  4. Look at a Trust. If you die prior to your children turning 18, they can’t directly take control of any inheritance you leave for them. This means that a judge may need to appoint someone to manage assets that you leave to your child. Your child could also wind up inheriting a lot of money and property free and clear at age 18. To have more control, like who will manage assets, how your money and property should be used for your children and when your children should directly receive a transfer of wealth, ask your estate planning attorney about creating a trust. With a trust, you can designate an individual who will manage money on behalf of your children and provide instructions for how the trustee can use the money to help care for your children, as they age. You can also create conditions on your children receiving a direct transfer of assets, such as requiring your children to reach age 21 or requiring them to use the money to cover college costs. Trusts are for anyone who wants more control over how their property will help their children after they’ve passed away.

When you have a new baby, working on your estate planning probably isn’t a big priority. However, it’s worth taking the time to talk to an attorney for the security of knowing your bundle of joy can still be provided for, in the event that the worst happens to you.

Reference: Motley Fool (September 28, 2019) “If You’re a New Parent, Take These 4 Estate Planning Steps”

You Can Protect Pets after You’re Gone

Many of us consider our pets members of the family, but the law does not. In most states, if not all, pets are considered property, reports the East Valley Tribune in the article “Trusts can help provide for a pet’s future.” That means you can’t leave them your house or open a bank account in their name. However, you can take measures to protect your pets from what could happen to them after you pass away.

The simple thing to do is to make arrangements with a trusted family member or friend to take care of your pet and leave some money for their care. The problem is, there’s no way to enforce this, and it’s all based on trust. What happens if something unexpected happens to your trusted family member or friend, and they can’t care for your pet? You’ve also given them funds that they are not legally required to spend on your pet.

Another choice is to leave your pet to a no-kill animal shelter. However, shelters, even no-kill shelters, can be stressful for animals who are used to a family home. There’s also no way to know when your pet will be adopted since most people come to shelters to adopt puppies and kittens. There is also the issue of the shelter itself. Will it continue to operate after you are gone and protect your pet?

The best way that many people care for their pets, is by having a pet trust created. An estate planning attorney in your state will know if your state is among the many that allow a pet trust to be created to benefit and protect your pet.

Start by naming a guardian or caretaker for your pets, including instructions on whether your pets should be kept together. If you are not sure about a guardian, name additional guardians, in case one does not wish to serve. Then, determine how much money you need to leave for the pet’s care for its life. This will depend upon the animal’s age, health, and life expectancy. There will need to be adequate funding for any medical issues. The trust can specify whether you want your pet to undergo expensive surgeries or whether they should be kept comfortable at any cost.

You’ll want to make sure to name a guardian who you are confident will care for your pet or pets in the same manner as you would.

A pet trust will also require you to name a trustee, who will be in charge of disbursing the funds as they are needed. The trustee can also check on the pet to be sure your pet is being well-cared for and your instructions are being followed. The money in the trust must only be used by the person for the care of the pets.

A pet trust will give you the peace of mind of knowing that your beloved companion animals are being cared for, even when you are not here to care for them. Speak with an estate planning attorney to learn how to make a pet trust part of your overall estate plan.

Reference: East Valley Tribune (Oct. 14, 2019) “Trusts can help provide for a pet’s future”

Protecting Your Family’s Inheritance

Protecting Your Family’s Inheritance
Bank vault closeup sideview. 3D Render

The label of “irrevocable trust” sounds like you might be trying to keep children and grandchildren from being irresponsible with the assets you’ve amassed through a lifetime’s work, but irrevocable trusts can also offer a flexible solution. They are especially helpful in cases of divorce, substance abuse and other situations, reports The Chattanoogan in an article titled “Keeping Your Family from Losing Its Inheritance.”

If we are lucky, we are able to leave a generous inheritance for our children. However, that doesn’t necessarily mean we should give them easy access to all or some of the assets. Some people, particularly younger adults who haven’t yet developed money management skills, or others with problems like a troubled marriage or a special needs family member, aren’t ready or able to handle an inheritance.

In some cases, like when there is a substance abuse problem, handing over a large sum of money at once could have disastrous results.

Many people are not educated or experienced enough to handle a large sum of money. Consider the stories about lottery winners who end up filing for bankruptcy. Without experience, knowledge, or good advisors, a large inheritance can disappear quickly.

An irrevocable trust provides protection. A trustee is given the authority to control how funds are used, when they are given to beneficiaries, and when they are retained for continued investment. Depending on how the trust is created, the trustee can have as much control over distributions as is necessary.

An irrevocable trust also protects assets from creditors. This is because the assets are owned by the trust and not by the beneficiary. An irrevocable trust can also protect the funds for a beneficiary from divorces, lawsuits and bankruptcies, and manipulative family members and friends.

Once the money leaves the trust and is disbursed to the beneficiary, that money becomes available to creditors, just as any other asset owned by the person. However, there is a remedy for that, if things go bad.  Instead of distributing funds directly to the beneficiary, the trustee can pay bills directly. That can include payments to a school, a mortgage company, medical bills, or any other costs.

The trustee, not the beneficiary, is in control of the assets and their distributions.

The person establishing the trust (the “grantor”) determines how much power to give to the trustee. The grantor determines whether the trustee is to distribute funds on a regular basis, or whether the trustee is to use their discretion, as to when and how much to give to the beneficiary.

Here’s an example. If you’ve given full control of the trust to the trustee, and the trustee decides that some of the money should go to pay a child’s college tuition, the trustee can send a check every semester directly to the college. Some trusts are written so that the trustee can also put conditions on the college tuition payments, mandating that a certain grade level be maintained or that the student must graduate by a certain date.

Appointing the trustee is a critical piece of the success of any trust. If no family members are suitable, then a corporate trustee can be hired to manage the trust. Speak with a qualified estate planning attorney to learn if an irrevocable trust is a good idea for your situation. A professional can also determine whether or not a family member should be named the trustee.

Reference: The Chattanoogan (July 5, 23019) “Keeping Your Family from Losing Its Inheritance.”

Protecting Kids from Too Much, Too Fast, Too Soon

When parents think about their kids inheriting a large sum, they often have some concerns. Protecting your kids from frittering away an inheritance is often done through a spendthrift trust but that trust can also be used to protect them from divorce and other problems that can come their way, according to Kiplinger in “How to Keep Your Heirs from Blowing Their Inheritance.”

We all want the best for our kids, and if we’ve been fortunate, we are happy to leave them with a nice inheritance that makes for a better life. However, regardless of how old they are, we know our children best and what they are capable of. Some children, even once they are adults, are simply not prepared to handle a significant inheritance. They may have never learned how to manage money or may be involved with a significant other who you fear may not have their best interests in mind. If there’s a problem with drug or alcohol use, or if they are not ready for the responsibility that comes with a big inheritance, there are steps you can take to help them.

Don’t feel bad if your kids aren’t ready for an inheritance. How many stories do we read about lottery winners who go through all their winnings and end up filing for bankruptcy? An inheritance of any size needs to be managed with care.

A spendthrift trust protects heirs by providing a trustee with the authority to control how the beneficiary can use the funds. A spendthrift trust works like a regular trust but includes special language indicating that the trust qualifies as a spendthrift trust and including limitations to the beneficiary’s control of the funds.

Even if you do not need to protect your child from themselves, a spendthrift trust also protects assets from others. For instance, it shields it from your child’s creditors because the assets are not considered legally your child’s. The trust owns the assets. This also protects the assets from divorces, lawsuits, and bankruptcies. It’s a good way to keep the money out of the hands of manipulative partners, family members, and friends.

Keep in mind, however, that once the money is paid from the trust, the protections are gone. However, while the money is in the trust, it enjoys protection.

The trustee in a spendthrift trust has a level of control that is granted by you, the grantor of the trust. You can stipulate that the trustee is to make a set payment to the beneficiary every month, or that the trustee decides how much money the beneficiary receives.

You can also direct that the trustee pay for things directly. For instance, if the money is to be used to pay college tuition, the trustee can write a check for tuition payments every semester, or they can put conditions on the heir’s academic performance and only pay the tuition if those conditions are met.

For a spendthrift trust, carefully consider who might be able to take on this task. Be realistic about family dynamics. A professional firm, bank, or investment company may be a better, less emotionally involved trustee than an aunt or uncle.

An estate planning attorney can advise you on creating an estate plan that fits your unique circumstances.

Reference: Kiplinger (June 5, 2019) “How to Keep Your Heirs from Blowing Their Inheritance.”

What You Need to Know If Asked to Be a Trustee

“Would you be willing to be my trustee?” Being asked to be a trustee is a question that deserves serious consideration. First, because there are so many different types of trustees, the answer to the question posed above will vary greatly, says The Mercury in a recent article that asks “Should you be a trustee?”

At the very simplest level, a trustee is appointed when a trust is established. The most common type is for a person and their spouse. The person’s assets are retitled to be owned by the trust. The couple continues to file the same tax returns, using the same Social Security number and the income from the trust assets is treated as the couples’ income. This is often called a revocable trust or a living trust. In this case, the trustees are the same as the people making the trust. When you are trustee of your own trust, you retitle the assets into the name of the trust, but you continue to file income tax returns as if you owned that property directly.

When one of the couples dies, the other person usually becomes the defaulting trustee. If the property is being given to another person, it is generally treated as if the deceased person passed it directly to the person receiving the property. So, for instance, if the couple lives in a state with an inheritance tax, the spouse receiving property from the deceased spouse will be taxed based on your relationship as a spouse.

In most cases, the trust document names one successor trustee. That person is typically one of the couple’s adult children, although it could also be a bank or a financial institution. The successor trustee is responsible for managing the trust assets, dealing with banks, financial institutions and others on behalf of the person if they became disabled or incapacitated.

After the person dies, the successor trustee would continue in their role, and details of their responsibilities should be outlined clearly in the trust document.

Another type of trust is a simple trust that is part of a will, called a testamentary trust. It is often created to provide support for a minor beneficiary who might inherit assets. Usually, parents or the surviving parent of a minor beneficiary or an executor is named as a trustee for the child’s funds, until the child reaches a certain age.

Regardless of what kind of trustee a person is, they have a fiduciary responsibility, meaning that they are held to a high standard of accountability and must always put the needs of the trust before their own. The trustee is required to maintain accurate documents and cannot take funds for their own use. A trustee can be paid a reasonable fee unless the trust documents have other directions.

In most cases, the trust document gives the trustee the right to retain others, such as attorneys, accountants, or financial advisors to help fulfill their responsibilities. Sometimes that’s as simple as setting up a bank account, but other times it is more complicated.

When do you stop being a trustee? It is usually when the trust says the trust is to end, which is sometimes at a certain date, when the beneficiaries reach a certain age, or when the trust fund is empty. A court order can be made to the Court to either terminate or modify the trust.

For more complicated trusts, the help of an estate planning attorney will be needed to protect the trust and the beneficiaries. There are Special Needs Trusts (SNTs), created for an individual with special needs, who often receive help from government programs like Social Security Disability Insurance (SSDI) or Medicaid. There are different kinds of SNTs, depending on the needs of the individual and their family.

While the trusts listed above provide a brief overview of the most common type of trust, there are many others: irrevocable income-only trusts, intentionally defective grantor trusts, non-grantor trusts, qualified personal residence trusts and even more beyond that. Your estate planning attorney will be able to explain what kind of trust would be optimal for your family, while you are living and after you have passed. An attorney can also help you make sure you are protected while serving as a trustee.

Reference: The Mercury (July 17, 2019) “Should you be a trustee?”

 

Why Are the Daughters of the Late Broncos Owner Contesting His Trust?

Beth Wallace and Amie Klemmer, the two oldest daughters of the late owner of the Denver Broncos, Pat Bowlen, filed a lawsuit in a Denver area court challenging the validity of their father’s trust. Specifically, they are arguing that their father didn’t have the mental capacity to properly execute documents and was under undue influence when he signed his estate planning documents in 2009, according to Colorado Public Radio’s recent article “Pat Bowlen’s Kids Are Still Fighting Over Inheritance As 2 Daughters File Lawsuit.”

Dan Reilly, a lawyer for the Patrick Bowlen Trust, said in a statement that it is “sad and unfortunate that Beth Bowlen Wallace and Amie Bowlen Klemmer have elected to contest their father’s plan and attack his personal health,” adding the lawsuit was the “latest effort in their public campaign to circumvent Pat Bowlen’s wishes.”

Bowlen died in June at age 75 after a long battle with Alzheimer’s. He put the trust in place hoping that one of his seven children would succeed him in running the Broncos, a team he purchased in 1984. In addition to the two daughters, he had with his first wife, Sally Parker, Pat Bowlen had five children (Patrick, Johnny, Brittany, Annabel, and Christianna) with his widow, Annabel.

Wallace said in 2018 that she wanted to succeed her father, but the trustees said she was “not capable or qualified.” Likewise, Brittany Bowlen said last fall that she wanted to become the next controlling owner of the Broncos team. She will become part of the team in November in a management position to begin that process.

Reilly said that Wallace and Klemmer never raised the issue of mental capacity until after 2014 “when Ms. Wallace was privately told by the trustees that she was not capable or qualified to serve as controlling owner.”

Last month, Arapahoe County Court Judge John E. Scipione dismissed a lawsuit filed by Bowlen’s brother, Bill. That suit that sought to oust team president and CEO Joe Ellis, team counsel Rich Slivka, and Denver lawyer Mary Kelley as trustees. Bill argued that they weren’t acting in good faith or in Pat’s best interests.

The judge ruled in a separate case over the trust that the court and not the NFL would decide the question of Pat’s mental capacity at the time he updated his estate planning documents 10 years ago.

The trust also has a no-contest clause. In electing to challenge the validity of the trust in court, Wallace and Klemmer are putting themselves at risk of being disinherited, if they’re found in violation of the no-contest clause, and the 2009 trust is upheld in court. Their rights as beneficiaries would bypass them and go to their children.

Reference: Colorado Public Radio (September 14, 2019) “Pat Bowlen’s Kids Are Still Fighting Over Inheritance As 2 Daughters File Lawsuit”

How to Choose an Estate Planning Attorney

Estate planning is a critical part of financial planning, but it is something that many Americans prefer to procrastinate about. However, drafting a will, health care proxy, and power of attorney are too important to leave to chance, says Next Avenue in the article “How to Find a Good Estate Planner.” An experienced estate planning attorney can help prevent critical mistakes and help you adjust your plan as circumstances change.

Here are a few tips:

Look for an estate planning attorney. This is not the same as a real estate attorney. An attorney who practices real estate law is not going to be up to date on all of the latest changes to estate and tax laws. You should also determine if the attorney deals with families who are in similar situations as yours. An attorney who works with family-owned businesses, for instance, will be more helpful in creating an estate plan that includes tax and succession planning for small business owners, whereas an attorney who works with special needs trusts will be more informed on drafting those.

Experience matters in this area of the law. The laws of your state are just one of the many parts that the attorney needs to know by heart. The estate planning attorney who has been practicing for many years will have a better sense of how families work, what problems crop up when it comes time to execute these plans, and tips on how to avoid them.

Ask about costs. Don’t be shy. You want to be clear from the start what you should expect to be spending on an estate plan. The attorney should be comfortable having this discussion with you and your spouse or family member. Remember that the attorney will be able to understand the scope of work only after they speak with you about your situation. What may seem simple to you, may be more complicated than you think.

If a trust is added, the fees are likely to increase. A trust can be used to avoid or minimize estate taxes, avoid probate, save on time and court fees and create conditions for the distribution of assets after you die.

A full plan includes incapacity documents. Don’t neglect to have the attorney create a Power of Attorney form and any other advance directives you need. These vary by state, and you don’t want them to get too old, or they may become out of date.

Recognize that this is an ongoing relationship. Make sure that you are comfortable with the attorney, how the practice is run and the people who work there—receptionist, paralegals and other associates at the firm are all people you may be working with at one point or another during the process. You will be sharing very personal information with the entire team, so be sure it’s a good fit.

This is not a one-and-done event. Having an estate plan is a lot like having a home—it requires maintenance. Every four years or so, or when large events occur in your life, you’ll need to have your estate plan reviewed.

Your estate planning attorney should become a trusted advisor who works hand in hand with your accountant and financial advisor. Together, they should all be looking out for you and your family.

Reference: Next Avenue (September 10, 2019) “How to Find a Good Estate Planner”

Where Should I Keep My Estate Plan?

Many people ask their attorney to hold the original documents of their estate plan. This prevents the plan from being misplaced at home and keeps it away from prying family members.

Forbes’ recent article, “Keeping Your Estate Planning Documents Safe,” explains that because of the expense of storage and the move to paperless offices, some estate planning attorneys are now having their clients hold the original documents.

This saves money for the attorney, but it leaves the client with the problem of where to put the originals.

If you need a safe and secure place for them, here are some options.

No safe deposit boxes. Avoid placing the original documents in a safe deposit box, because the authority to get into the box is inside the box! If you pass away or are incapacitated—and nobody has access to the safe deposit box—they’ll need a court order to get access. For them to get the court order, they need the documents inside the box. It’s like the chicken and the egg.

Get a fireproof safe. A fireproof safe is a great place to keep these important documents.

Make copies. Get a set of hard copies in another location that is easily accessible. You can now use the safe deposit box to hold a set of copies of your documents. Your attorney should also have a set of hard copies.

E-records. Your estate planning attorney should also have an electronic copy of your estate plan and should send you an electronic version of the documents to keep with your e-records.

Treat your copies like the originals, and don’t lose it, in case the originals are misplaced or destroyed. If the original documents somehow vanish, your family may still be able to use a set of copies. For instance, a photocopy of a will can be probated, once the executor has attested that she has made a diligent search to find the original which hasn’t turned up.

Remember that this isn’t a “one and done” task. You should review your documents every few years to make certain the people you’ve named in them are still alive and your intentions haven’t changed.

Reference: Forbes (August 16, 2019) “Keeping Your Estate Planning Documents Safe”

Filing Taxes for a Deceased Family Member

If you are the executor of a loved one’s estate, and if they were well-off, there are several tax issues that you’ll need to deal with. The article “How to file a loved one’s taxes after they’ve passed away” from Market Watch gives a general overview of estate tax liabilities.

Winding down the financial aspects of the estate is one of the tasks done by the trustee or executor. That person will most likely be identified in the decedent’s trust or will. If the family trust holds the assets on behalf of the deceased, the trust document will name a trustee. If the person died without a will or trust, also known as “intestate,” the probate court will appoint an administrator.

The executor is responsible for filing the federal income tax for the decedent’s estate in cases where a return needs to be filed. Income generated by the estate, even after the death of your loved one, is subject to income tax. The estate’s first federal income tax year starts immediately after the date of death. The tax year-end date can be December 31 or the end of any other month that results in a tax year of 12 months or less. The IRS form 1041 is used for estates and trusts and the due date is the 15th day of the fourth month, after the fiscal tax year-end.

For example, if a person died in 2019 and the trustee chooses December 31, 2019 date as the tax year-end, the estate tax return deadline is April 15, 2020. An extension is available, but it’s only for five and a half months. In this example, an extension could be granted for September 30.

There is no need to file a Form 1041 if all of the decedent’s income producing assets are directly distributed to the spouse or other heirs and bypass probate or trust administration. This is the case when property is owned as joint tenants with right of survivorship, as well as with IRAs and retirement plan accounts and life insurance proceeds with designated beneficiaries.

The trustee also needs to keep in mind transfer tax issues, such as the estate tax and the gift tax. For recent years, this is not as much of a concern because no federal estate tax will be due unless the estate is valued at more than $11.2 million for a person who passed in 2018 or $11.4 million in 2019.

However, the trustee also needs to find out if there were large gifts given. That means gifts larger than $15,000 in 2018-2019 to a single person, $14,000 for gifts in 2013-2017; $13,000 in 2009-2012, $12,000 for 2006-2008; $11,000 for 2002-2005 and $10,000 for 2001 and earlier. If these gifts were made, the excess over the applicable threshold for the year of the gift must be added back to the estate, to see if the federal estate tax exemption has been surpassed. Check with the estate attorney to ensure that this is handled correctly.

Whether or not a person died leaving property to a spouse also impacts whether or not tax will be due. The unlimited marital deduction privilege permits any amount of assets to be passed to the spouse, as long as the decedent was married, and the surviving spouse is a U.S. citizen. However, the surviving spouse will need good estate planning to pass the family’s wealth to the next generation without a large tax liability.

While the tax consequences and tax planning strategies are more complex where significant assets are involved, an estate planning attorney can strategically plan to protect family assets, when the assets are not so grand. In fact, estate planning is more important for those with modest assets, as there is a greater need to protect the family and less room for error.

Reference: Market Watch (June 17, 2019) “How to file a loved one’s taxes after they’ve passed away”

What Should I Look for in a Trustee?

Selecting a trustee to manage your estate after you pass away is an important decision. Depending on the type of trust you’re creating, the trustee will be in charge of overseeing your assets and the assets of your family. In general, people choose either a friend or family member or alternatively decide to go with a professional trustee or a trust company or corporate trustee for this critical role.

Forbes’s recent article, “How To Choose A Trustee,” helps you identify what you should look for in a trustee.

If you go with a family member or friend, they should be financially savvy and good with money. You want someone who knows something about investing, and preferably someone who has assets of their own that they are investing with an investment advisor.

A good thing about selecting a friend or family member as trustee is that they’re going to be most familiar with you and your family. They will also understand your family’s dynamics.  Family members also usually don’t charge a trustee fee (although they are entitled to do so).

Depending on your family dynamics and personalities, however, your family may be better off with a professional trustee such as a private fiduciary or trust company that has expertise with trust administration. This may eliminate some potentially hard feelings in the family. Because your family member may be too close to the family and may get caught up in the drama, a neutral third party can also act as a barrier to potential fights and arguments. Certain family members may also end up having a power trip and enjoy having total control of your beneficiary’s finances a bit too much.

Trust companies, especially larger ones, will have more structure and oversight to the trust administration, including a trust department that oversees the administration. This will be more expensive, but it may be money well spent. A trust company can make the tough decisions and tell beneficiaries “no” when needed. It’s common to use a trust company when the beneficiaries don’t get along, when there is a problem beneficiary, or when the trustee is responsible for managing a large sum of money. A drawback is that a trust company may be difficult to remove or become inflexible. They also may be stingy about distributions if it will reduce the assets under management that they’re investing. You can solve this by giving a neutral third party, like a trusted family member, the ability to remove and replace the trustee in your trust documents.

Some people may also choose to have an attorney serve as their trustee. The advantage of a trusted attorney serving as a trustee is that they have familiarity with your family if you’ve worked together for some time. There will, however, be a charge for their time spent serving as trustee.

Talk to your estate planning attorney and go through your concerns to find a trustee solution that works for you and your family.

Reference: Forbes (May 31, 2019) “How To Choose A Trustee”