What’s the Difference between Revocable and Irrevocable Trusts?

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A trust is an estate planning tool that you might discuss with an experienced estate planning attorney, beyond drafting a last will and testament.

KAKE.com’s recent article entitled “Revocable vs. Irrevocable Trusts” explains that a living trust can be revocable or irrevocable.

You can act as your own trustee or designate another person. The trustee has the fiduciary responsibility to act in the best interests of the trust beneficiaries. These are the people you name to benefit from the trust.

There are three main benefits to including a trust as part of an estate plan.

  1. Avoiding probate. Assets held in a trust can avoid probate. This can save your heirs both time and money.
  2. Creditor protection. Creditors can try to attach assets held outside an irrevocable trust to satisfy a debt. However, those assets titled in the name of the irrevocable trust may avoid being accessed to pay outstanding debts.
  3. Minimize estate taxes. Estate taxes can take a large portion from the wealth you may be planning to leave to others. Placing assets in a trust may help to lessen the effect of estate and inheritance taxes, preserving more of your wealth for future generations.

What’s the Difference Between Revocable and Irrevocable Trusts?

A revocable trust is a trust that can be changed or terminated at any time during the lifetime of the person making the trust. When the grantor dies, a revocable trust automatically becomes irrevocable, so no other changes can be made to its terms.

An irrevocable trust is essentially permanent. Therefore, if you create an irrevocable trust during your lifetime, any assets you place in the trust must stay in the trust. That’s a big difference from a revocable trust: flexibility.

Whether a trust is right for your estate plan, depends on your situation. Discuss this with a qualified estate planning attorney. This has been a very simple introduction to a very complex subject.

Reference: KAKE.com (March 31, 2020) “Revocable vs. Irrevocable Trusts”

What Are the Five “Must Have” Estate Planning Documents?

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WTHR 13’s recent article, “The 5 legal documents every adult should have” lists the five “must have” estate planning documents involved in estate planning.

  1. General Durable Power of Attorney. This document states who you want to make decisions if you’re unable to do so for yourself. Without it, your family may have to petition the courts to become your legal guardian/conservator, which can be time consuming and expensive. A power of attorney allows the person whom you select, to pay your mortgage or rent and your bills.
  2. Health Care Power of Attorney. (Also known as an Advance Healthcare Directive) This document plans for the situation, if you are unable to make your own health care decisions. You name someone you trust, like family members or friends, to do this on your behalf.
  3. Will. This says that when you pass away, here’s what I want to happen. A will states who will get your assets after your death. If you don’t have a valid will in place, the state laws of intestacy will govern what will happen to your estate—which may not be what you want.
  4. Living Will. This is the document in which you state your instructions for end-of-life care, such as life support. This document is used to make certain that your family and physicians know what you want your end-of-life care to be. A living will is much different than a will and many times may be incorporated into the Advance Healthcare Directive.
  5. Revocable Living Trust. This document can be important, if you’re a parent with young children and would like your assets passed down properly to your children if you die. Typically, if children are under 18, they’re legally minors and can’t receive assets. A trust can help coordinate the receiving your property and avoid probate on your death.

An experienced estate planning attorney can help you with the creation of these documents, while creating an overall plan so that your wishes are followed, your legacy is protected and your family is secure.

Reference: WTHR 13 (April 17, 2019) “The 5 legal documents every adult should have”

How Do I Get My Mom’s Affairs in Order?

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What can you do to make sure your mother’s financial affairs are in proper order?

The Monterey Herald’s recent article, “Financial planning: Making sure Mom is taken care of,” says to first make sure that she has her basic estate planning documents in place. She should have a will and an Advance Health Care Directive. Talk to an experienced estate planning attorney to make sure these documents fully reflect your mother’s desires. An Advance Health Care Directive lets her name a person to make health care decisions on her behalf, if she becomes incapacitated. This decision-making authority is called a Power of Attorney for Health Care, and the person receiving the authority is known as the agent.

Based on the way in which the form is written, the agent can have broad authority, including the ability to consent to or refuse medical treatment, surgical procedures and artificial nutrition or hydration. The form also allows a person to leave instructions for health care, such as whether or not to be resuscitated, have life prolonged artificially, or to receive treatment to alleviate pain, even if it hastens death. To limit these instructions in any specific way, talk to an attorney.

Another option is to create a living trust, if the value of her estate is significant. In some states, (including California) estates worth more than a certain amount are subject to probate—a costly, lengthy and public process. Smaller value estates usually can avoid probate. When calculating the value of an estate, you can exclude several types of assets, including joint tenancy property, property that passes outright to a surviving spouse, assets that pass outside of probate to named beneficiaries (such as pensions, IRAs, and life insurance), multiple party accounts or pay on death (POD) accounts and assets owned in trust, including a revocable trust.  You should also conduct a full inventory of your parent’s accounts, including where they’re held and how they’re titled. Your parents should update the named beneficiaries on IRAs, retirement plans and life insurance policies.

Some adult children will have their parent name them as a joint owner on their checking account. This allows you greater flexibility to settle outstanding obligations, when she passes away. But, it is important not to put a large account in joint tenancy for tax reasons. Also, a joint owner automatically becomes the owner, on the other joint tenant’s death. Remember that a financial power of attorney won’t work here, because it will lapse upon your mother’s death. However, note that any asset held by joint owners are subject to the creditors of each joint owner. Do not add your daughter as a joint owner, if she has current or potential marital, financial, or legal problems!

You also shouldn’t put your name as a joint owner of a brokerage account—especially one with low-cost basis investments. One of the benefits of transferring wealth, is the step-up in cost basis assets receive at time of death. Being named as the joint owner of an account will give you control over the assets in the account—but you won’t get the step up in basis, when your mother passes.

Reference: Monterey Herald (March 20, 2019) “Financial planning: Making sure Mom is taken care of”

What You Need to Know, If the Next Generation Is Inheriting the Family Farm

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Understanding the tax liabilities for inheriting, buying or being gifted the family farm, is critical to avoid a costly financial misstep, says Capital Press in the article “The family farm is coming to you: What’s next?” You’ll need to work closely with your estate planning attorney and CPA to make sure you understand the basis in the real estate, especially if the property is sold and taxes will need to be paid. How you inherit the property, makes a big difference in the tax bill.

If you receive the property as a gift from parents while they are alive, then you retain their income tax basis in the property. If they inherited it also, they likely have a low tax basis. Farms with a basis of $50,000 that are now worth $2 million are not unusual. If the farm is sold, there will be a capital gains tax on the difference between the basis and the present value, which could be more than $600,000.

If you inherit the farm from a parent and then sell it for $2 million, its value at the time of their death, you would not have to pay a capital gains tax. That saves $600,000.

The estate tax may not be so bad, depending upon your state’s estate tax, which is probably lower than the highest capital gains rate. If you live in California, there are no estate taxes in this state. Your estate planning attorney will be able to help you plan for and manage these taxes.

If you bought the farm from a parent’s trust or estate for $2 million, then you have a $2 million basis in the property and will probably not owe any property gains tax, if you eventually sell it for $2 million.

If you own the farm without other family members, you should start planning your next steps. To whom do you want to pass the farm? If you want to keep the farm in the family, work with an attorney who is familiar with farm families, so that you can keep working the land and reduce any disputes.

Farmers often separate business operations from the land, with the operations held by one business and the land held by another entity. This allows the estate planning attorney to plan for succession in how operations and land are transferred to the next generation. It also provides asset protection, while you are alive.

Make sure that your farm succession plan and your estate plan are aligned. A common issue is finding that buy-sell documents don’t align with the will or trust. Some farmers use a revocable living trust as a will, so they can incorporate estate tax planning and transition the farm privately upon death.

Reference: Capital Press (March 24, 2019) “The family farm is coming to you: What’s next?”

What Should My Fiancé and I Discuss About Finances Before We Say “I Do”?

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If you’re older and remarry, you may have more assets and you probably have children. That’s different than a first marriage, where people often enter as financial equals. In subsequent unions, situations are more complicated—and the stakes are higher. You should protect your money in the event of divorce and protect your children in the event of your death.

Barron’s recent article, “How to Manage Your Money When You’re Remarrying,” says the subject of money should be easier this time around. Money talk might have been taboo going into your first marriage, but experience—and the battle wounds of divorce—tend to make this dialog much easier.

The best strategy for navigating the financial side of remarriage is to be direct and give yourself plenty of time before the wedding to work out the details. All good financial plans start with a broader discussion that has more to do with identifying and setting goals, than it does about dollar signs.

Consider what you hope to achieve individually and as a couple over the next year, five years, decade, and so on. Discuss your priorities and intentions, be specific, and write it all down. Your conversation will be the groundwork for the specific financial planning decisions the two of you will need to make, when it’s time to formalize your plans for merging finances or—as the case may be—keeping them separate.

Prenuptial agreements, or “prenups,” are becoming more frequently used by millennials because they are marrying later and bringing more assets and debt to the marriage. In the case of remarriage, a prenup should be strongly considered by most couples. This legally-binding agreement details how assets and liabilities will be divided, in the event of divorce.

Many experts suggest keeping separate checking, savings, and investment accounts—but setting up joint accounts for shared lifestyle expenses. Having a joint account removes the need for constant discussion about how you’ll divide expenses. Create a monthly joint budget and agree on the fairest way to split it. Some couples divide it down the middle, while others base it on a percentage of their respective incomes.

You don’t need to have all of your estate plans settled before the wedding but be certain to update key documents where appropriate—such as your wills, medical advance directives, retirement plan, and insurance beneficiaries.

A big trouble spot for couples remarrying—especially if there are children and grandchildren from other marriages—is how assets will be divided in the future. Without a clear estate plan, if you die first, then the assets will pass to your spouse and then to that spouse’s children, depending on the type of asset. That can be a big source of family strife—even for families who aren’t wealthy. A good solution is to set up revocable livings trusts that say exactly how you want your respective and joint assets to be distributed when you die.

Reference: Barron’s (March 2, 2019) “How to Manage Your Money When You’re Remarrying”