Inheritance

What is an Inheritor’s Trust?

When it comes to estate planning there are several types of tools you can use, depending on your circumstances. One such estate planning tool is the trust. There are numerous types of trusts aimed at fulfilling different estate planning purposes. If you are anticipating an inheritance, there is a special type of trust designed to help protect it: an inheritor’s trust.

Purpose of an Inheritor’s Trust

An inheritor’s trust is a trust that has been established for the purpose of receiving a beneficiary’s inheritance in a way that is protected legally and financially. In order to fulfill its intended purpose, an inheritor’s trust must be set up in a way that follows numerous tax and legal rules. Virtually every state in the country forbids what is referred to as a “self-settled trust.” A self-settled trust is an irrevocable trust established by an individual, for his or her own benefit, with the intent to protect the trust assets from creditors. Therefore, once you receive an inheritance, it is very challenging to protect the inheritance assets yourself. Luckily, the inheritor’s trust provides an option for people expecting an inheritance.

Inheritor’s Trust Explained

If you are expecting an inheritance from a loved one, and he or she is unwilling or unable to leave your inheritance in a trust, you can protect these new assets with an inheritor’s trust. However, because you cannot set up the trust yourself because of the “self-settled trust” rule discussed earlier, you will need to work with your loved one to establish the trust. Instead of receiving the inheritance outright, the trust will be the recipient of the inheritance. The trust will typically include a spendthrift clause to protect against creditors, a more drawn out distribution schedule, or provisions granting only discretionary distributions to you. Once the trust has been drafted, your loved one will need to sign the instrument as the creator (grantor) but you will be the beneficiary.

There are several benefits to an inheritor’s trust:

The inheritance can be excluded from your taxable estate potentially saving your family estate taxes;
The trust can be a more cost effective way to protect the assets instead of your loved one revising their existing plans;
Upon your death, the inheritance will be distributed outside of your probate estate which can help ensure privacy and lower attorneys fees and administration costs;
The inheritance will be protected from creditors, lawsuits, and divorcing spouses;
In some circumstances, the inheritance can even be controlled and managed by you, as a trustee; and
You can decide how remaining trust assets will be distributed after you pass away if the trust gives you that power.

An inheritor’s trust is a sophisticated, but powerful estate planning tool. It is ideal for anyone who is to receive a substantial, outright inheritance that may need additional asset and tax protection.

Consult with an Estate Planning Professional

Estate planning can be complicated, but it is essential in protecting yourself and your loved one’s financial future. If you expect to receive an outright inheritance and desire to maintain control, gain superb asset protection, and use all possible avenues to avoid estate and transfer taxes, an inheritor’s trust may be right for you. Call or contact us today to learn about whether this estate planning tool is an option for you.

Protecting Your Children’s Inheritance When You are Divorced

Consider this story. Beth’s divorce from her husband was recently finalized. Her most valuable assets are her retirement plan at work and her life insurance policy. She updated the beneficiary designations on both to be her two minor children. She did not want her ex-husband to receive the money.

Beth passes away one year after her divorce. Her children are still minors, so the retirement plan and insurance company require an adult to be appointed to receive the inheritance Beth left behind. Who does the court presumptively look to serve as the caretaker of this money? Beth’s ex-husband who is now the only living parent of the children. (In some states, this caretaker of the money is called a guardian, whereas in others it is the conservator. The title does not matter as much as the role, which is to manage the funds on behalf of a minor, since the minor is not legally able to handle significant assets or money.)

Sadly, stories like Beth’s are all too familiar for the loved ones of divorced people who do not make effective use of the estate planning tools. Naming a beneficiary for retirement benefits or life insurance, or having a will can be a good start. However, the complexities of relationships, post-divorce, often render these basic tools inadequate. Luckily, there is a way to protect and control your children’s inheritance fully.

Enter the Trust

A trust allows you to coordinate and control your estate in a way that no other tool can. For those who are not yet familiar, a trust is a legal arrangement for managing your property while you are alive and quickly passing it at your death. There are a few key players in the trust. First, there is the person who created the trust, often called the Trustmaker, Grantor, or Settlor (this is you). Second, there’s the Trustee who manages the assets owned by the trust (usually you during your life and then anyone you select when you are no longer able to manage the assets). Finally, the Beneficiaries are the people who receive the benefit of the trust (usually you during your life, and then typically children or anyone else you choose).

How a Trust Protects Your Children’s Inheritance after a Divorce

A trust protects your children’s inheritance in a few distinct ways:

Since you select the Trustee, you can choose someone other than your ex-spouse to manage the assets. In fact, you can even state that the ex-spouse can never be a Trustee, if you wish. If Beth had a trust, she could have named her brother to be Trustee after her death. Her brother (rather than her ex-husband) would then be in charge of the children’s inheritance.
Since you select the Beneficiaries, you can determine how the trust assets can be used for them. You may have long-term goals for your beneficiaries, such as college, purchasing of a first home, or starting a business. When you share your intent, your Trustee can invest the assets appropriately and ensure your legacy is used the way you want, rather than the assets being potentially wasted or used in a thoughtless way. If Beth had a trust, she could have instructed how she wanted the inheritance used, rather than leaving it to the whims of a court and her ex-husband.
A fully funded trust avoids probate, so your children do not have to deal with the cost, publicity, and delay that is all-too-common in probate cases. Although “plain” beneficiary designations, like the one that Beth used, also avoid probate, they may still open the door for a guardianship or conservatorship court case, especially when your children are minors. A fully funded trust avoids these guardianship and conservatorship cases. This means more money for your intended beneficiaries and less for the lawyers and courts.

If you are divorced, it is essential to make sure your plan works precisely the way you want. Every situation is unique, but we are here to help design a plan that achieves your goals and works for your family. Give us a call today.

The Biggest Threats to Successful Estate Planning

Poor estate planning is a recipe for disaster. Look no further than Dickens’ Bleak House — or a telenovela — to witness the tragedy and melodrama inadequate estate planning can cause. While having your estate planning documents prepared is the first hurdle to overcoming these types of disasters, there are several threats that lurk around the corner that might derail your wishes.

Family Conflict

According to a TF Wealth survey of over 100 estate planning professionals, family conflict is the number one risk to a peaceful inheritance. If children are treated differently under the estate plan, there is often an assumption that a mistake was made in drafting the documents or that someone has exerted undue influence on the parent. While this may not be the case, without any guidance from you, family members can begin to think the worst of each other.

Sloppy or No Estate Planning

If you have not done any estate planning or if what you have done is ineffective, your estate will be subject to your state’s intestate laws. These laws predetermine who will inherit your assets and in what proportion. While these statutory schemes might work for some people, they will have adverse consequences for those who have been married multiple times, have children from prior relationships, or children who need additional asset protection. If you haven’t done any estate planning, you’re simply leaving your inheritance and your legacy in the hands of the government.

In order to ensure that your wishes are being carried out and safe from the ever present dangers, it is important that you know what a successful estate plan looks like.

No (or Little) Family Conflict

The goal here is for there to be no surprises. If you are choosing to treat children or other family members differently, be open and honest about it. It may be helpful to have a conversation about your wishes prior to your death so that those individuals understand why you have made those decisions. Even if you choose to not have such a conversation, it’s important to discuss your plan and reasons with your attorney, so that the plan can be drafted to carry out your wishes.

Eliminate (or Minimize) Costs and Taxes

Watching inheritance get whittled away by taxes and fees will only lead to frustration and hard feelings. When preparing your estate plan, your intent is to benefit your loved ones, not the government. Working with a qualified estate planning attorney can help ensure that your assets are being handled in such a way that the administrative costs of your passing and any income or estate tax are minimized or avoided.

A Chosen Representative

It is possible that, later in life, you may not be able to handle all of your affairs yourself and may require some assistance from a loved one, whether it be with your finances or healthcare. Look for someone you trust who understands you and your desires. Don’t necessarily rely on someone just because they are the most convenient. And, don’t rely on hope that everyone will know who you want to be in charge. You must ensure that you’ve granted proper authority using a power of attorney, a trust, and a will.

Ensure that Everyone Gets What You Want

Your assets may be, or may in some way, represent your legacy. Do some real soul-searching about how and what you want to share this with your family and friends. To ensure that your legacy is passed on in a meaningful way, consider including an explanation as to why someone is receiving a particular inheritance. If you have wishes as to how they use a gift of money, he or she may appreciate hearing the hopes and dreams you have for them and their future even though you are no longer with them.

Documents Are Up-to-Date

Life can change quickly. It is important that you review your estate planning documents with each life change (i.e. birth or death of a family member, purchase or sale of a major asset, change in health, etc.). It is also important that we stay in touch. Contact us when these major life changes occur and we will contact you when there are changes in the law. This will help ensure that your documents stay effective and your wishes are carried out.

So do the groundwork that a little planning requires. And leave the melodrama for entertainment. Call or contact us today. We’re here to help.

Why a Spendthrift Trust Can Be a Great Solution for Your Heirs

There are many tools that can be used when putting together your estate plan. One such tool is a trust.

A trust is a fiduciary arrangement, established by a grantor or trustmaker, which gives a third party (known as a trustee) the authority to manage assets on behalf of one or more persons (known as a beneficiaries). Since every situation is different, there are different types of trusts to ensure the best outcome for each beneficiary. One type of trust, known as a spendthrift trust, is commonly used to protect a beneficiary’s interest from creditors, a soon-to-be ex-spouse, or his or her own poor management of money. Generally, these trusts are created for the benefit of individuals who are not good with money, might easily fall into debt, may be easily defrauded or deceived, or have an addiction that may result in squandering of funds.

Spendthrift Trust Basics

Put simply, a spendthrift trust is for the benefit of someone who needs additional assistance managing or protecting his or her money.

The spendthrift trust gives an independent trustee complete control and authority to make decisions on how the funds in the trust may be spent and what payments to or for the benefit of the beneficiary are necessary according to the trust document. Under a spendthrift trust, the beneficiary is prohibited from spending the money before he or she actually receives distributions. These restrictions prevent the beneficiary from squandering their entire interest or having it garnished by the beneficiary’s creditors. The trustee controls the assets in the trust, including managing and investing the funds, once the trust is made irrevocable. Most trusts become irrevocable after the grantor has passed, but some are irrevocable from the start.

Creating a Spendthrift Trust

A spendthrift trust is created essentially in the exact same manner as any other trust. However, the vital difference of a spendthrift trust is that the trust instrument must contain the right language to invoke the law’s protection. A knowledgeable estate planning attorney can provide guidance on how to best structure this provision, so it meets your family’s needs.

Like any trust, the benefits of a spendthrift trust can help avoid the delay and expense of probate as well as provide tax benefits and peace of mind. Of note, there are several states that limit a grantor from naming his or herself as a beneficiary under a spendthrift trust for the purposes of avoiding creditors.

Estate Planning Help

Creating a spendthrift trust is invaluable because it can give you peace of mind that your loved ones will be taken care of after your passing. If you are considering creating a spendthrift trust, or have any other estate planning questions, call or contact us today to explore your options.

What to Expect from Estate Planning in 2018

2017 is now fading into the rearview mirror. As we all look ahead to 2018, let’s consider a few things to watch regarding estate planning, so you and your family can be completely protected.

The death tax. The death tax has been in a state of flux ever since the early 2000s when the Bush administration’s first tax cuts changed the exemption and tax rates. The recently-passed Tax Cuts and Jobs Act is the latest significant change. Starting January 1, 2018, the estate tax exemption amount will double to $11.2 million per person (married couples have $22.4 million of combined exemption). Like the current exemption, this amount will adjust annually for inflation. However, this enhanced exemption expires on December 31, 2025, at which time it will return to an amount similar to the $5.49 million per person exemption we’ve had in 2017. Similar to what happened when the Bush tax cuts phased in (and were scheduled to expire) during the 2000s, we’ll face the same situation over the coming years – the law provides a deadline and timetable, but political activity may result in something entirely different. Regardless of your stance on this new tax law, if you have a plan based around the now-old rules, it’s time to visit with us, so we can make sure the plan still meets your needs and goals while maximizing the benefit to your family, charities, or other beneficiaries.
Incapacity planning. What happens if you don’t die? Historically, much of estate planning focused on what happened to your assets after your death. With cognitive impairment at near epidemic proportions, you must plan for the contingency that you don’t die and instead require assistance managing your affairs. Depending on your circumstances, this could range from a relatively simple matter of ensuring you have a trusted person authorized to make decisions to extensive planning to become eligible for help paying for nursing home care. Either way, now is the time to work with us to ensure that your plan protects you, even if you don’t die.
Giving your family lifelong financial security. Although you may not have a “large” amount of wealth now, you probably have an IRA or a life insurance policy. A modest IRA or life insurance policy could be the foundation for lifelong financial security for your family. To make this a reality, you need to set up your affairs with the proper structures to ensure money avoids costs, taxes, and the risk of financial immaturity or ignorance. We are here to help you ensure that the savings you’ve spent a lifetime building will be there for your family.
Fixing broken or old trusts. Many people have inherited assets from parents, aunts, uncles, and others through a trust. Some of these trusts may use old strategies or be expensive or difficult to administer. The law recognizes that old trusts may need some refreshing. There are many options available to modernize an old trust, and the best way to get started is to meet with us so we can explore which option is best for you and the trust you inherited.

2018 will likely be an exciting, dynamic year. No matter where you are on the estate planning journey, carve out some time to talk with us to make sure that you and your family are fully protected. Contact us or give us a call today.

IRAs, Annuities, and Guardianship – Providing for Your Minor Children After You Die

IRAs, Annuities and Guardianship:

Providing for Your Minor Children after You Die

Deciding on a guardian for your minor children may very well be the most vexing decision you’ll make regarding your estate planning. Not only must you trust the appointed guardian to raise your children as you’d want them raised, but you also need that person to be financially responsible with your children’s inheritance. For example, if you have an IRA or an annuity that you wish to pass to your minor children, how can you ensure those funds will be used properly—especially if the person you trust most to raise your kids isn’t necessarily the best with finances?

This question is multifaceted, so let’s unravel one aspect at a time.

The Question of Guardianship

Here’s the good news: The person who raises your minor children and the person who handles their inheritance don’t have to be the same person. If necessary, you can appoint one guardian to serve each function, naming one as the guardian of the person and another as the guardian of the estate. In this arrangement, you entrust one person with your children’s assets and another with their care, while enabling each to interact with the other. This dual guardianship model gives many parents peace of mind—knowing they don’t necessarily have to risk their children’s inheritance while ensuring that they are raised according to the family’s values.

Although guardianship of the estate is an option, for many families the best strategy for financially providing for the children is to use a trust. In that case, a trustee fulfills the responsibility that would otherwise belong to the guardian of the estate. The trust assets can be released to the children or the caregiver incrementally according to age and needs. For example, the trustee could distribute money for the children’s needs until age 18 and then manage for the money until the child is a financially mature adult. Your trustee may also exercise discretion in investing and distributing the funds for the children’s support, education, etc., coordinating with their physical guardian to ensure the children’s needs are met until they come of age. This can ensure that the assets are there when they’re needed for your family.

Passing an Annuity to the Children

Annuities pay out regular income—which can make them convenient vehicles to cover ongoing expenses for minor children. If you have set up an annuity for yourself or a spouse, you can name the children as beneficiaries, or you can also name a trust for the benefit of your children. If you are still paying into the annuity at the time of death, your children may receive the balance, or you may give a trustee the option of rolling the balance into another annuity to be paid out to the children at a later maturity date. If you are already receiving annuity payments yourself, the children may simply continue receiving these payments for the remainder of the term. Depending on your annuity contract, payouts may also be made lump sum. Annuities are a very flexible financial product with many different options. If you have annuity now, or if you are considering purchasing one, bring it up with us as we work on your estate plan so we can make sure it meshes with your will or trust seamlessly.

Transferring an IRA to the Children

Individual Retirement Accounts (IRAs) are also excellent vehicles to pass along wealth for minor children’s welfare—because, unlike most annuities, they have the ability to grow over time and can provide a lifetime of financial benefit to your children.

When you name the next generation as beneficiaries on an IRA, you effectively extend the IRA’s life expectancy. While the required minimum distribution payments to the children will be smaller than they would have been for you (since, according to the IRS’s rules, they have a longer life expectancy), the account balance can remain invested for growth over time. Your financial and tax advisor can evaluate your situation to help you decide which type of IRA (Roth or traditional) is the best option for your goals. And we can work with you to make sure that the IRA is fully protected against creditors, predators, and bad financial decision making with an IRA trust.

Planning for the welfare of minor children after your death is neither simple nor pleasant to consider, but it’s absolutely necessary for peace of mind. Determining the right person(s) to be the guardian of your children requires careful thought, but you don’t have to sacrifice your children’s inheritance for their proper care. With the right financial plan, you can manage both facets successfully. As always, we’re here to provide assistance and explain your options. Call or contact our offices for an appointment today.

An Estate Planning Checklist to Facilitate Wealth Transfer

Studies have shown that 70% of family wealth is lost by the end of the second generation and 90% by the end of the third.

Help your loved ones avoid becoming one of these statistics. You need to educate and update your heirs about your wealth transfer goals and the plan you have put in place to achieve these goals.

What Must You Communicate to Future Generations to Facilitate Transfer of Your Wealth?

You must communicate the following information to your family to ensure that they will have the information they need during a difficult time:

Net worth statement, or at the very minimum a broad overview of your wealth

Final wishes – burial or cremation, memorial services

Estate planning documents that have been created and what purpose they serve:

Durable Power of Attorney, Health Care Directive, Living Will – property management; avoiding guardianship; clarifying wishes regarding life-sustaining procedures

Revocable Living Trust – avoiding guardianship; keeping final wishes private; avoiding probate; minimizing delays, costs and bureaucracy

Last Will and Testament – a catch-all for assets not transferred into your Revocable Living Trust prior to death, or the primary means to transfer your wealth if you are not using a Revocable Living Trust

Irrevocable Life Insurance Trust – removing life insurance from your taxable estate; providing immediate access to cash

Advanced Estate Planning – protecting assets from creditors, predators, outside influences, and ex-spouses; charitable giving; minimizing taxes; creating dynasty trusts

Who will be in charge if you become incapacitated or die – agent named in your Durable Power of Attorney and Health Care Directive; successor trustee of your Revocable Living Trust and other trusts you’ve created; personal representative named in your will

Benefits of lifetime discretionary trusts created for your heirs:

Fosters educational opportunities
Provides asset, divorce, and remarriage protection
Protects special needs beneficiaries (if properly drafted)
Allows for professional asset management
Minimizes estate taxes at each generation
Creates a lasting legacy for future generations

Overall goals and intentions for inheritance – what the money is, and is not, to be used for (in other words, education vs. charitable work vs. vacations vs. Ferraris vs. business opportunities vs. retirement), and who will be trustee of lifetime discretionary trusts created for your heirs and why you’ve selected them

Where important documents are located – this should include how to access your “digital” assets

Who your key advisors are and how to contact them

How Can Your Professional Advisors Help You Communicate Your Wealth Transfer Goals?

Your professional advisors are well-positioned to help you discover your wealth priorities, goals, and objectives and then communicate this information to your heirs. This, in turn, will prepare your heirs to receive your wealth instead of being left to figure it out on their own and, as statistics have shown, lose it all.

We are available to assist you with figuring out your wealth transfer goals, putting a plan in place to achieve these goals, and effectively communicating this information to your loved ones.

Call or contact our office now to set up an estate planning consultation appointment. We make tough topics manageable to discuss and talk about.

How to Protect Your Child’s Inheritance from His or Her Untrustworthy Spouse

Parents who develop an estate plan often do so to provide for their heirs financially. Many want to make sure hard-earned assets, family heirlooms, or closely held businesses stay within the family. Indeed, a common question is what cost effective options are available to protect one’s children’s inheritance from a spouse in the event of untrustworthiness or divorce. Thankfully, there are many ways to structure your child’s inheritance to help ensure it will remain in the family for future generations. Let’s look at a few of the options now.

Create a Trust

A trust involves three parties: (1) the person creating the trust (you might see this written as the “settlor,” “trustmaker,” or “grantor.”), (2) the person or entity holding the trust property for the benefit of the beneficiary, known as the “trustee”, and (3) the person(s) that benefit from the creation of the trust, known as the “beneficiaries.” Choosing a trustee who is independent can be a great way to eliminate any arguments that one beneficiary has more control to receive assets than what is actually provided in the trust documents than other beneficiaries, a helpful situation when you have an untrustworthy son- or daughter-in-law.

A lifetime trust is a type of trust that – as is evident from its name – lasts for the lifetime of the beneficiary and passes to the next generation of beneficiaries upon his or her death. It is commonly referred to as a “generation-skipping trust” and can also dramatically reduce or eliminate estate taxes. Assets in a lifetime trust are protected against commingling in the marriage and, therefore, cannot be pursued by a spouse. When assets are held by a trust your children – and, by extension, their spouses – cannot access these assets. Therefore, even in the event of a divorce, an ex-spouse cannot pursue them.

Use Prenuptial Agreements

In addition to creating a trust to protect your children’s inheritance from an untrustworthy spouse, your children can use a prenuptial agreement as a tool for asset protection. A prenuptial agreement is a document that details an agreement between your child and his or her spouse about the characterization of assets owned at the time of marriage and those earned after marriage. This legal document also provides the couple to agree upon the division of assets in the event there is a divorce. Because enforceability of prenuptial agreements varies by state, it is important to seek the advice of a legal professional before drafting and signing the contract. It may be an uncomfortable suggestion to bring up with your children, but it can be an incredible benefit in the event of a later divorce.

Other Planning Ideas

Beyond the actual legal tools, it is important for you to let your wishes be known to the family. One way to do this is to have a family discussion about your estate plan, explaining your intentions and reasons as to why it is set up in this manner. Additionally, using clear language in your estate planning documents that specify the intent or purpose in leaving the inheritance to benefit descendants – and not their spouses – can further solidify your wishes are followed. Finally, choosing a trustee that is independent will keep control over the funds in the trustee’s hands and not your child’s untrustworthy spouse. This will also allow you to manage or overcome any conflict that you may not have been expecting.

Bottom Line: Seek Out Estate Planning Help

If you wish to make sure your descendants receive a portion of your estate, discuss these intentions with your children and devise an estate plan that will guarantee this desire is fulfilled after your passing. Whether you have no estate plan, or have one that more than a few years old, sit down with an estate planning professional to create or update this plan to suit your goals.

Call today and find out how to better protect your family.