Protecting Your Family’s Inheritance

Protecting Your Family’s Inheritance
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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.”

Your Spouse Just Died … Now What?

There are several steps to take while both spouses are alive and well, to help reduce the chance of the surviving spouse finding themselves in a “financial deadlock” situation, or worse. The preparations require the non-financially dominant partner to be involved as much as possible, says Barron’s in the article “How to Avoid Financial Deadlock—or Worse—After One Spouse Dies”

Step one is to prepare the financial equivalent of a “go-bag,” like the ones people are supposed to have when they must leave their home in a crisis. That means a list of all financial contacts, advisors, estate planning attorney, accountants, insurance professionals and copies of all beneficiary designations. There should also be a list or a spreadsheet of all the couple’s assets and liabilities, including digital assets and passwords to these accounts. The spouse should also note the location of financial records and critical legal documents, including insurance policies, wills, and trusts.

Each partner must have access to checking and cash independently of the other, and the spouses need to review together how assets and accounts are titled.

It is especially important for both spouses to be on the deed to their home with right of survivorship, so that the surviving spouse can easily prove that they are the sole owner of the home after the spouse dies. Otherwise, they may not be able to communicate with the mortgage company. If a surviving spouse must go to court and file probate in order to deal with the home, it can become costly and more stressful.

It’s not emotionally easy to go through all this information but it is critical for the surviving spouse’s financial security.

Any information that will be needed by the surviving spouse should be documented in a way that is easily accessible and understandable for the spouse. Even if someone is very organized and has a well-developed description of their assets and estate plan, it may not be as easily understood for someone whose mind works differently. This is especially true if the couple has had years where the non-financial spouse was not involved with the family’s assets and is suddenly digesting a lot of new information.

It is wise for the non-financial spouse to be in meetings with key advisors and take on some of the tasks like bill paying, reviewing insurance policies and reconciling accounts well before either spouse experiences any kind of cognitive decline. Ideally, the financially dominant partner takes the time to train the other spouse and then also have them handle the finances independently to the extent possible until they are both comfortable managing all the details.

Each spouse needs to understand how the death of the other will impact the household income. If one spouse has a pension without survivor benefits and that spouse is the first to die, the surviving spouse may find themselves struggling to replace that income. They also need to consider daily aspects of their lives, like if one spouse is highly dependent upon the other for caregiving.

Spouses are advised not to make any big financial or life decisions within a year or so of a spouse’s death. The surviving spouse is often not in a good emotional state to make smart decisions, and that is the time they are most at risk for senior financial abuse.

Both spouses should sit down with their estate planning attorney and discuss what will happen if either of them is widowed. It is a difficult topic but planning ahead will make the transition less traumatic from a financial and legal perspective.

Reference: Barron’s (Sep. 15, 2019) “How to Avoid Financial Deadlock—or Worse—After One Spouse Dies”

Elder Law Estate Planning for the Future

Seniors who are parents of adult children can make their children’s lives easier by making the effort to button-down major goals in elder law estate planning, advises Times Herald-Record in the article “Three ways for seniors to make things easier for their kids.” Those tasks are: 1) planning for disability; 2) protecting assets from long-term care or nursing home costs, and 3) minimizing costs and stress in passing assets to the next generation.

Here’s what you need to do, and how to do it.

Disability Planning

Disability planning includes signing advance directives. These are legal documents that are created while you still have all of your mental faculties. Naming people who will make decisions on your behalf if, and when, you become incapacitated gives those you love the ability to take care of you without having to apply for guardianship, conservatorship, or other legal proceedings. There are many names for these advance directives, which include financial powers of attorney, health care powers, health care proxies, and living wills.

Your agent named in the financial power of attorney will make all and any legal and financial decisions on your behalf. In addition, if you use a power of attorney that is specifically drafted for long term care and benefits planning, the agent will have unlimited gifting powers that may save about half of a single person’s assets from the cost of nursing home care.

The agent named in the health care directive can make medical decisions, and you can also have language that advises your agent about how you want your body to be taken care of in the event you are incapacitated. If you want to list these separately, you can also use a health care proxy to name the person who can make medical decisions, and use a living will, to convey your wishes for end-of-life care, including resuscitation and artificial feeding.

When advance directives are in place, you spare your family the need to have a judge appoint a legal guardian to manage your affairs. That saves time, money and keeps the judiciary out of your life. Your children can act on your behalf when they need to, during what will already be a very difficult time.

Protect Assets

Goal number two is protecting assets from the cost of long-term care. Losing the family home and retirement savings to unexpected nursing costs is devasting and could be minimized or avoided with the right planning. The first and best option is to purchase long-term care insurance. If you don’t have or can’t obtain a policy, the next best is the Medicaid Asset Protection Trust (MAPT) that can be used to protect assets in the trust from nursing home costs, after the assets have been in the trust for five years.

Have a Trust

The third thing that will make your adult children’s lives easier, is to have a trust that dictates where you want your assets to go after you die. A trust lets you leave assets to the family as you want, with the least amount of court costs, legal fees, taxes and family battles over inheritances. It also allows for the estate to be settled quicker, which will in turn also be easier for your children. Work with an experienced estate planning attorney to have a trust created.

Think of estate planning as part of your legacy of taking care of your family, ensuring that your hard-earned assets are passed to the next generation. You can’t avoid your own death or that of your spouse, but you can prepare so those you love are helped by thoughtful and proper planning.

Reference: Times Herald-Record (July 13, 2019) “Three ways for seniors to make things easier for their kids”

Forgot to Update Your Beneficiary Designations? Your Ex Will be Delighted

Your will does not control who inherits all your assets when you die. This is something that many people do not know. Instead, many of your assets will pass by beneficiary designations, says Kiplinger in the article “Beneficiary Designations: 5 Critical Mistakes to Avoid.” Therefore it is important to update your beneficiary designations.

The beneficiary designation is the form that you fill out, when opening many different types of financial accounts. You select a primary beneficiary and, in most cases, a contingent beneficiary, who will inherit the asset when you die.

Typical accounts with beneficiary designations are retirement accounts, including 401(k)s, 403(b)s, IRAs, SEPs, life insurance, annuities and investment accounts. Many financial institutions allow beneficiaries to be named on non-retirement accounts, which are most commonly set up as Transfer on Death (TOD) or Pay on Death (POD) accounts.

It’s easy to name a beneficiary and be confident that your loved one will receive the asset, without having to wait for probate or estate administration to be completed. However, there are some problems that occur and mistakes get expensive.

Here are mistakes you don’t want to make:

Failing to name a beneficiary. It’s hard to say whether people just forget to fill out the forms or they don’t know that they have the option to name a beneficiary. However, either way, not naming a beneficiary becomes a problem for your survivors. Each company will have its own rules about what happens to the assets when you die. Life insurance proceeds are typically paid to your probate estate, if there is no named beneficiary. Your family will need to go to court and probate your estate.

When it comes to retirement benefits, your spouse will most likely receive the assets. However, if you are not married, the retirement account will be paid to your probate estate. Not only does that mean your family will need to go to court to probate your estate, but taxes will be levied on the asset. When an estate is the beneficiary of a retirement account, all the assets must be paid out of the account within five years from the date of death. This acceleration of what would otherwise be a deferred income tax, must be paid much sooner.

Neglecting special family considerations. There may be members of your family who are not well-equipped to receive or manage an inheritance. A family member with special needs who receives an inheritance, is likely to lose government benefits. Therefore, your planning needs to include a SNT — Special Needs Trust. Minors may not legally claim an inheritance, so a court-appointed person will claim and manage their money until they turn 18. This is known as a guardianship of the estate. Guardianships are costly to set up. They must also make an annual accounting to the court. Guardians may need to file a bond with the court, which is usually bought from an insurance company. This is another expensive cost.

If you follow this course of action, at age 18 your heir may have access to a large sum of money. That may not be a good idea, regardless of how responsible they might be. A better way to prepare for this situation is to have a trust created.  The trustee would be in charge of the money for a period of time that is determined by the personality and situation of your heirs.

Using an incorrect beneficiary name. This happens quite frequently. There may be several people in a family with the same name. However, one is Senior and another is Junior. The person might also change their name through marriage, divorce, etc. Not only can using the wrong name cause delays, but it could lead to litigation, especially if both people believe they were the intended recipient.

Failing to update beneficiaries. Just as your will must change when life changes occur, so must your beneficiaries. It’s that simple, unless you really wanted to give your ex a windfall.

Failing to review beneficiaries with your estate planning attorney. Beneficiary designations are part of your overall estate plan and financial plan. For instance, if you are leaving a large insurance policy to one family member, it may impact how the rest of your assets are distributed.

Take the time to review your beneficiary designations, just as you review your estate plan. You have the power to determine how your assets are distributed, so don’t leave that to someone else.

Reference: Kiplinger (April 5, 2019) “Beneficiary Designations: 5 Critical Mistakes to Avoid”

What is the Best Way to Leave an Inheritance to a Grandchild?

Leaving an inheritance (money or real estate) to a grandchild under the age of 18 requires careful handling, usually under the guidance of an estate planning attorney. The same is true for money awarded by a court, when a child has received property for other reasons, like a settlement for a personal injury matter.

According to the article “Gifts from Grandma, and other problems with children owning property” from the Cherokee-Tribune & Ledger News, if a child under age 18 receives money as an inheritance through a trust, or if the trust states that the asset will be “held in trust” until the child reaches age 18, then the trustee named in the will or trust is responsible for managing the money.

Until the child reaches age 18, the trustee is to use the money only for the child’s benefit. The terms of the trust will detail what the trustee can or cannot do with the money. In any situation, the trustee may not benefit from the money in any way.

The child does not have free access to the money. Children may not legally hold assets in their own names. However, what happens if there is no will, and no trust?

A child could be entitled to receive property under the laws of intestacy, which defines what happens to a person’s assets, if there is no will. Another way a child might receive assets, would be from the proceeds of a life insurance policy, or another asset where the child has been named a beneficiary and the asset is not part of the probate estate. However, children may not legally own assets. What happens next?

The answer depends upon the value of the asset. State laws vary but generally speaking, if the assets are below a certain threshold, the child’s parents may receive and hold the funds in a custodial account. The custodian has a duty to manage the child’s money, but there isn’t any court oversight.

In Georgia, the threshold is $15,000. Check with a local estate planning attorney to determine your state’s limitations.

If the asset is valued at more than $15,000, or whatever the threshold is for the state, the probate court will exercise its oversight. If no trust has been set up, then an adult will need to become a guardian of the estate, a person responsible for managing a child’s property. This person needs to apply to the court to be named guardian, and while it is frequently the child’s parent, this is not always the case.

The guardian is required to report to the probate court on the child’s assets and how they are being used. If monies are used improperly, then the guardian will be liable for repayment. The same situation occurs, if the child receives money through a court settlement.

Making parents go through a guardianship appointment and report to the probate court is a bit of a burden for most people. A properly created estate plan can avoid this issue and prepare a trust, if necessary, and name a trustee to be in charge of the asset.

Another point to consider: turning 18 and receiving a large amount of money is rarely a good thing for any young adult, no matter how mature they are. An estate planning attorney can discuss how the inheritance can be structured, so the assets are used for college expenses or other important expenses for a young person. The goal is to not distribute the funds all at once to a young person, who may not be prepared to manage a large inheritance.

Reference: Cherokee-Tribune & Ledger News (March 1, 2019) “Gifts from Grandma, and other problems with children owning property”

Does Anyone Really Need a Trust?

The simplest definition of a trust is a three-party fiduciary relationship between the person who created the trust and the fiduciary for the benefit of a third party. The person who created the trust is known as the “Settlor” or “Trustor.” The fiduciary, known as the “Trustee,” is the person or organization with the authority to handle the asset(s). The trustee owes the duty of good faith and trust to the third party, known as the “Beneficiary.”

That is accurately described by the Pittsburgh Post-Gazette in the article titled “Do I need a trust?”

Trusts are created by the preparation of a trust document by an estate planning attorney. The trust can be made to take effect while the Trustor is alive — referred to as inter vivos or after the person’s death — testamentary.

The document can be irrevocable, meaning it can never be changed, or revocable, which means it can change from one type of trust to another, under certain circumstances.

Whether you even need a trust, has nothing to do with your level of assets. People work with estate planning attorneys to create trusts for many different reasons. Here are a few:

  • Consolidating assets during lifetime and for ease of management upon disability or death.
  • Avoiding probate so assets can be transferred with privacy.
  • Protecting a beneficiary with cognitive or physical disabilities.
  • Setting forth the rules of use for a jointly shared asset, like a family vacation home.
  • Tax planning reasons, especially when IRAs are being transferred to the next generation.
  • Planning for death, disability, divorce or bankruptcy.

There is considerable misinformation about trusts and how they are used. Let’s debunk a few myths:

An irrevocable trust means I can’t ever change anything. Ever. Even with an irrevocable trust, the settlor typically reserves options to control trust assets. It depends upon how the trust is prepared. That may include, depending upon the state, the right to receive distributions of principal and income, the right to distribute money from the trust to third parties at any time and the right to buy and sell real estate owned by the trust, among others. Depending upon where you live, you may be able to “decant” a trust into another trust. Ask your estate planning attorney, if this is an option.

I don’t have enough assets to need a trust. This is not necessarily so. Many of today’s retirees have six-figure retirement accounts, while their parents and grandparents didn’t usually have that much saved. They had pensions, which were controlled by their employers. Today’s worker owns more assets with complex tax issues.

You don’t have to be a descendant of an ancient Roman family to need a trust. The probate limit is $150,000 in California. You must just have enough factors that make it worthwhile doing. Talk with your estate planning attorney to find out if you need a trust. While you’re at it, make sure your estate plan is up to date. If you don’t have an estate plan, there’s no time like the present to tackle this necessary personal responsibility.

Reference: Pittsburgh Post-Gazette (Jan. 28, 2019) “Do I need a trust?”

Is Your Junk Drawer Better Organized than Your Digital Assets?

If your digital estate is not properly cared for, it can lead to problems for your heirs, including an opportunity for hackers to try to get at whatever assets they can, reports the White Mountain Independent in the article titled “Is your ‘digital estate’ in order?”

Think about how many of your personal accounts are online:

  • Financial accounts: banking, brokerage, bill-paying utilities;
  • Virtual property: credit card points, frequent flyer miles, cryptocurrency;
  • Business accounts: eBay, Amazon, Etsy; stock photo accounts;
  • Email accounts: Gmail, Outlook, Yahoo;
  • Social network: Facebook, Twitter, LinkedIn, Instagram; and
  • Online digital storage: Dropbox, Google Drive, iCloud.

Those are many assets to protect. Where do you start?

First, create an inventory. Use the categories above or create your own. However, you should make it organized.

Document your wishes for how you want your digital assets to be managed. If you don’t specify this, you may be leaving a wide-open arena for long legal battles. Your heirs and beneficiaries may never gain access to them. Hackers might go after them and use your identity. Your heirs may also have to engage in an expensive and protracted battle with a social media giant with costs eating into their inheritance.

Name a digital executor in your will. This is a relatively new area, but you can name a person to be your digital executor. Not all states recognize this position, so you’ll want to speak with a local estate planning attorney to find out what the laws are in your state.

Ensure your estate planning documents include the authorization to access your accounts. Depending on the state you are in, the access to your digital assets on your death will be determined by the terms of the account, as well as your estate planning documents. It is important that your documents allow for the access and management of your digital assets on your death.

Review your plans, especially as you add new digital assets.

Managing digital assets can be as difficult as managing tangible assets. The laws are still evolving, so speak with your estate planning attorney to make sure that your estate is prepared, and your heirs will not face a digital nightmare after you have passed away.

Reference: White Mountain Independent (Oct. 26, 2018) “Is your ‘digital estate’ in order?”

 

Are You Ready to Retire? These Professionals Can Help

Are you thinking about retiring in 2019 or 2020? Do you know if you are ready to retire? It seems like a simple concept: Just pick a month, run some numbers and turn off your weekly early morning wake-up alarm. However, it’s not that simple. According to an article titled “Professionals can ease a person into retirement” from the Cleveland Jewish News, most people need some help for both financial and non-financial planning.

A good place to start is with the financial side. Take inventory of all your assets to identify where you have assets and where you have liabilities. You’ll need to be brutally honest with yourself and your spouse. Are there gaps? Is your credit card debt bigger than you thought? Use this exercise to get a real sense of whether you can retire this year.

Next, take care of the legal aspects of retirement. You’ll need a will (and possibly a trust), durable power of attorney, and an advance healthcare directive. The financial and medical POAs will give someone the legal authority to make financial and medical decisions for you, if you become incapacitated. If you already have a will but have not reviewed it in three or four years, it’s time for a review. Laws change, lives change, and what may have worked well for you and your family when the will was first created, may not work now. You’ll want to work with an estate planning attorney to create a plan, making sure assets are properly aligned with your estate plan and minimizing any tax liability for your heirs.

This is also the time to consider how you’ll pay for long-term care. Do you have a long-term care insurance policy in place? Speak with a reputable insurance agent, or if you don’t know one, ask your trusted advisors to make a recommendation. People don’t like to think about going into a nursing home for an extended period of time, but it happens often enough that it makes sense to have this type of insurance. It’s not cheap—but neither is paying out-of-pocket for care at a nursing facility.

When you’ll retire, and what you’ll do with your retirement years, which could last two or even three decades, is a big question. The answer may be based on your finances—can you realistically stop working full time, or do you need to continue to work for a few more years? Would part-time work fill any savings gaps? These are questions that can’t be answered, without a thorough financial analysis of your retirement income.

If you stop working, what will you do? Some experts advise asking a bigger question: Who are you, now that your work identity is gone? If you’ve planned well, or if you’re lucky, your retirement can be a time of great fulfillment, spending time with family, volunteering in the community and devoting time to taking better care of yourself. For some people, retirement from one career is an opportunity to spring into a new career, one that they’ve always put to the side, in order to earn a paycheck.

How much you can achieve of your dreams, depends on putting down a solid foundation of legal and financial resources. An estate planning attorney and a financial advisor are important members of your retirement success team.

Reference: Cleveland Jewish News (Jan. 9, 2019) “Professionals can ease a person into retirement”