Read more about the article How Do Trusts Work in Your Estate Plan?
Trusts offer many benefits, so speak with your attorney on how to fit them in your estate plan.

How Do Trusts Work in Your Estate Plan?

Trusts offer many benefits including probate avoidance, tax and disability planning and protecting beneficiaries.
Trusts offer many benefits including probate avoidance, tax and disability planning and protecting beneficiaries.

Trusts can be useful tools for passing on assets, allowing them to be held by a responsible trustee for the benefit of the beneficiaries. However, determining which type of trust is best for each family’s situation and setting them up so they work with an estate plan can be complex. You’ll do better with the help of an estate planning attorney, says The Street in the article “How to Set Up a Trust Fund: What You Need to Know.”

There are lots of reasons to use trusts.  Many are used to avoid the time and difficulty involved with the probate process.  Others are used for estate tax planning and Medicaid planning.  Still others are used to pass financial assets to beneficiaries who might not be able to use them well or by themselves, such as with a disabled beneficiary, a beneficiary who wastes money or has creditors, or perhaps is struggling with addiction.  Many parents leave assets to their children in trusts so that the assets are excluded from their child’s potential divorce.  Trusts can even be used for your pets!  We have many blog posts on different reasons to use a trust, and here are a few:  https://galligan-law.com/special-estate-planning-considerations-for-a-blended-family/ (blended families)  https://galligan-law.com/do-you-need-a-pet-trust-in-your-estate-plan/ (pets) https://galligan-law.com/some-common-estate-planning-mistakes-best-avoided/.    

If you are considering using a trust as part of your estate planning, you have to consider whether it will be revocable or irrevocable.  I’ll briefly describe both varieties.

Revocable Trusts are trusts that can be changed. They are often called Living Trusts.  This form of trust is typically used to avoid probate because assets properly owned or directed to the trust will not be probate assets.  Because of its flexibility, you can change beneficiaries, terminate it, or leave it as is. You have options, and it can change with you as your needs, wishes and plan change over time.  Once you die, the revocable trust becomes irrevocable and distributions and assets shift to the beneficiaries in the manner you chose. 

A revocable trust avoids probate for the assets it directs, but will be counted as part of your “estate” for estate tax purposes. They are includable in your estate, because you maintain control over them during your lifetime.  Under current law, very few people have an estate large enough to pay federal estate taxes, so having assets as part of your “estate” for estate tax purposes is actually a good thing.

Revocable Trusts are also used to help manage assets as you age, help you maintain control of assets if you don’t believe the trustees are ready to manage the funds, or to appoint other trustees in case you can no longer manage the assets yourself.

Irrevocable Trusts are called irrevocable because in theory you cannot change or revoke them.  However, most states have laws which permit revocation or change of irrevocable trusts in certain circumstances.  But, you should be careful about irrevocable trusts if you expect a need to change it in the future.

If estate taxes are a concern, it’s likely you’ll consider this type of trust. The assets are given to the trust, thus removing them from your taxable estate.  Irrevocable trusts of this type are less common than revocable trusts, but still can be a powerful weapon in your estate planning arsenal. 

These are just two of many different types of trusts. There are trusts set up for distributions to pay college expenses, providing for disabled individuals to preserve government benefits, charitable funds for philanthropic purposes, planning for pets after you are gone, leaving assets to a second spouse or children in a blended family and more.

Your estate planning attorney will be able to identify which types are most appropriate for your situation.  Here’s how to prepare for your meeting with an estate planning attorney when considering a trust:

Why do you want the Trust? Consider your goal.  Is it to avoid probate?  Is it for tax planning?  Is it because you know a beneficiary shouldn’t receive the assets but you still want to provide for them?

List beneficiaries. Include primary beneficiaries and have a plan for what happens when the primary beneficiary is deceased.

Map out the specifics. Who do you want to receive the assets? How much do you want to leave them? Why shouldn’t receive the assets immediately?  You should be as detailed as possible.

Choose a trustee. You’ll need to name someone who will respect your wishes, who understands your financial situation and who will be able to stand up to any beneficiaries who might not like how you’ve structured your plan. It can be a professional trustee as well.

Don’t forget to fund the it! This last step is very important. The trust does no good if it is not properly funded. You should speak with your estate planning attorney about how to fund the trust based upon the plan you selected.

Creating a trust can be a complex task. However, with the help of an experienced estate planning attorney, this strategy can yield a lifetime of benefits for you and your loved ones.

Reference: The Street (July 22, 2019) “How to Set Up a Trust Fund: What You Need to Know”

Continue ReadingHow Do Trusts Work in Your Estate Plan?

How to Begin the Estate Planning Process

The estate planning process can be intimidating, but doesn’t have to be.  Start by listing your assets, who they go to and who to put in charge.

The hardest part of the estate planning process is  starting it.  About 17% of adults don’t think they  need  a will, believing that estate planning is only for  the very wealthy. In fact, clients frequently ask  whether they have enough money for an “estate.”    Sometimes they think state law will already directs their assets and they don’t need a plan.

However, the estate planning process is not about how much money someone has.  It is about planning for the assets you have, however much or little that may be, your wishes for those assets, yourself and your family.  It is about empowering you to make the choices you want for you and your family, not leaving it up to the state.  Even completing a few simple documents can make a huge difference in the future.

valuewalk.com’s recent article, “Couples: Here’s How To Start The Estate Planning Process” notes that although the estate planning  process can seem overwhelming, taking inventory of assets is a terrific place to start.

Make a list of all your assets, including confirming how they are titled and whether there are beneficiaries named on the accounts, as well as the general value of the assets. Then, decide who you want to leave these assets to and who should be in charge of the process.  Our firm uses questionnaires as part of the estate planning process to help gather this information so we can focus on the issues most important to you.

Drafting a will or a trust may be the most critical step in the estate planning process. These documents serve as the directions for how assets are to be distributed and who is responsible to do it.  A well-crafted will or trust can simplify the distribution of assets at your death, provide instructions to your family, and avoid disputes, unnecessary taxes and protect your beneficiaries from predators.

Without an estate plan in place, your assets will be distributed according to state law, rather than according to your wishes. Don’t assume state law leaves everything to your spouse!  Many people assume if they are married everything they own goes to their surviving spouse, but in many situations, that isn’t true.  For example, blended families, children outside of the marriage and some non-marital property.  Speak with your estate planning attorney about how these issues impact you.

Once you have an idea of your assets, beneficiaries and who to put in charge, the next step in the estate planning process is to meet with your estate planning attorney to review the information so they can make recommendations on the best way to accomplish your goals and highlight other issues to address.  Our firm offers free estate planning consultations, so please contact us today to start the estate planning process.

Reference: valuewalk.com (July 22, 2019) “Couples: Here’s How To Start The Estate Planning Process”

Continue ReadingHow to Begin the Estate Planning Process

Proposed IRA Rules and Their Effect on Stretch IRAs.

New IRA rules make retirement funds better for retirees, but not necessarily for their beneficiaries.

The SECURE (Setting Every Community Up for Retirement Enhancement) Act proposes a number of changes to IRA rules and other retirement rules.  The Act passed in the House of Representatives by a 417-3 vote and is expected to be passed in some form by the Senate. Some of the changes appear to be common sense, like broadening access to IRAs and 401(k)s, changing the required minimum distribution (RMD) age from 70½ to 72 and providing different investment options for these programs. However, with these changes come potential limitations with Stretch IRAs.

Forbes asks in its recent article “Are Concerns Over Stretch IRAs And The SECURE Act Justified?” An IRA shelters investments from tax which leaves investors with more money for the same investment performance because usually no tax is usually paid as it grows. Your distributions can also be tax-free if you use a Roth IRA. That’s a good thing if you have an option between paying taxes on your investment income and not paying taxes on it. The SECURE act isn’t changing this fundamental process, but the issue is when you still have an IRA balance at death.

A Stretch IRA can be a great estate planning tool. Here’s how it works: you give the IRA to a young beneficiary in your family. The tax shield of the IRA is then “stretched,” for what can be decades, based on the principle that an IRA is used over the life expectancy of the beneficiary. This is important because the longer the IRA lasts, the more investment gains and income can be protected from taxes which allows the investment to grow tremendously.

Even better, current estate planning techniques allow an investor to leave an IRA to a trust and still get “stretch” treatment.  For more information, see our website.  https://galligan-law.com/estate-planning-life-stages/planning-for-retirement/   Current Treasury Rules permit trusts to receive “stretch” treatment if the beneficiary of the trust is readily identifiable. This enables investors to leave their retirement assets to trusts for their individual beneficiaries and receive the investment advantage of the “stretch” as well as the benefit of the trust, such as tax planning and divorce or creditor protection for the beneficiaries.  One such trust is called a “conduit trust” where only RMD’s are paid out to the identifiable beneficiary based upon his or her life expectancy.

However, the SECURE Act could change that.  The proposed IRA rules and other retirement rules instead require funds to be distributed over a 10 year period instead of the beneficiary’s lifetime. That’s a big change for estate planning and the value of assets passed to the next generation.

There are some exceptions to the 10 year time period, including retirement left to a surviving spouse, minor children and some persons with disabilities or chronic illnesses.  However, aside from the spouse, these beneficiary groups are limited and will be most harmed by this change.  For example, a disabled beneficiary would likely not receive the retirement funds directly because receiving the retirement funds would affect their government benefits.  Instead, the retirement will pay to a special kind of trust, called a Supplemental Needs Trust, that will receive the retirement funds and accumulate them for the beneficiary’s use.  However, that form of a trust will presumably not qualify for the 10 year exception because remainder beneficiaries (those who survive the disabled beneficiary) will be brought into the analysis and likely won’t be minors or disabled beneficiaries to make the trust eligible for a 10 year exception.  For someone in that case, a 10 year payout will accelerate tax and greatly reduce the legacy left to the beneficiary with a disability, and he or she is the one who needs it most.

For a person who uses their own IRA in retirement and uses it up or passes it to their spouse as an inheritance—the  proposed IRA rules and retirement rules under the SECURE Act change almost nothing. For those looking to use their own IRA in retirement, IRAs are slightly improved due to the new ability to continue to contribute after age 70½ and other small improvements. Therefore, most typical IRA holders will be unaffected or benefit to some degree during their lifetimes.  However, for investors with large investment funds to pass to beneficiaries, the proposed IRA rules may greatly reduce the legacy left to their loved ones.

Reference: Forbes (July 16, 2019) “Are Concerns Over Stretch IRAs And The SECURE Act Justified?”

Continue ReadingProposed IRA Rules and Their Effect on Stretch IRAs.