Friday Estate Planning Links

Interesting links dealing with estate planning, wills & trusts, and the like appear all the time on the internet. Here are a few for your reading pleasure:

Estate planning: A must for all physicians from Helio.com

International Estate Planning from Forbes.com

The Tax Elasticity of Capital Gains and Revenue-Maximizing Rates could be a harbinger of things to come: increases in the capital gains tax rates. Per the abstract of the article:

This paper uses an event study approach to estimate the effect of capital gains taxation on realizations at the state level, and then develops a framework for determining revenue-maximizing rates at the federal
level. We find that the elasticity of revenues with respect to the tax rate over a ten-year period is -0.5 to -0.3, indicating that capital gains tax cuts do not pay for themselves, and that a 5 percentage point rate increase would yield $18 to $30 billion in annual federal tax revenue. Our long-run estimates yield revenue-maximizing capital gains tax rates of 38 to 47 percent (emphasis supplied).

In other words, the maximum rate imposed on capital gains on property held longer than 1 year could jump from 20% to as high as 47%–if Congress needs the money. What are the chances?

Core Documents to Review During a Pandemic from Trusts & Estates magazine.

Enjoy and have a great weekend.

Is Probate Necessary?

Good question. The answer? It depends:

  • Did the decedent own probate property, that is, property that does not pass to heirs by deed, contract, title, beneficiary designation, account designation, POD or TOD account, trust, etc?
  • Did the decedent have creditors and outstanding debts?
  • Are any of decedent’s heirs or beneficiaries, even just one of them, a bit contentious, a bit entitled, or wondering why it’s taking so long to distribute the decedent’s property?
  • Did the decedent leave a will?
  • Is there any question in any one of the decedent’s heir’s or beneficiary’s mind about the will’s validity?
  • Did the decedent leave minor children and no spouse?
  • Did the decedent wish to disinherit his or her spouse or any other heirs?
  • Are there questions about who is and who is not an heir or beneficiary?
  • Do any of the heirs or beneficiaries distrust or have reason to distrust the decedent’s designated personal representative?
  • Is there real estate in the estate that the decedent didn’t own jointly with someone else?
  • Is the decedent’s probate estate worth less than $100,000.00 (Utah) or $200,000.00 (Wyoming)?

If you can answer No! to all of these questions, you may not need to probate the decedent’s will. If you answer Yes! to any of them, then you may need to probate the will. My plan is to review these and other questions in a series of post, so stay tuned.

Probate vs. Non-Probate Property: Which Property Can Pass Outside of Probate?

Probate is the legal process where a court proves, or validates, the decedent’s will; appoints his or her personal representative; and often oversees the collection, distribution, or sale of the decedent’s property. The probate property, that is. Thus, it is important for the practitioner to know the difference between probate and non-probate property. The easy, but unsatisfactory answer is that probate property is anything other than non-probate property. So what is non-probate property; that is, what property passes at death without a permission slip from the court?

Here’s another easy, but more instructive answer: non-probate property is property that does not pass under the decedent’s will.  As the list below illustrates, that could include a lot of property:

Non-Probate Property

Property that passes by beneficiary designation, which generally includes:

  • Life insurance policies (but see below),
  • Annuities,
  • Individual retirement accounts or IRAs,
  • Roth IRAs,
  • Employee Stock Ownership Plans or ESOPs,
  • Pension Plans, including
  • Defined Benefit Plans,
  • Money Purchase Plans,
  • 401(k) Plans,
  • 403(b) Plans,
  • Simple IRA Plans (Savings Incentive Match Plans for Employees),
  • SEP Plans (Simplified Employee Pension),
  • SARSEP Plans (Salary Reduction Simplified Employee Pension),
  • Payroll Deduction IRAs,
  • Profit Sharing Plans,
  • Governmental Plans under 401(a),
  • 457 Plans,
  • 409A Nonqualified Deferred Compensation Plans,
  • Payable-on-Death or POD Accounts,
  • Transfer-on-Death of TOD Accounts, including investment accounts,
  • Property that passes by deed, which includes:
  • Real estate owned in 1. joint tenancy with rights to survivorship (JTWS), 2. life estate where property passes to another upon death of life tenant, and 3. any property the decedent held in a life estate,
  • Property that passes by account designation, which includes: 1. Bank accounts owned jointly, and 2. brokerage accounts owned jointly,
  • Vehicles owned jointly,
  • Safety deposit boxes,
  • Other property that falls within the definition of a “non-probate transfer,” including ; 1. Insurance policies, contracts of employment, bonds, mortgages, promissory notes, deposit agreements, pension plans, trust agreements, conveyances, or virtually any other written instrument effective as a contract, gift, conveyance, or trust.
  • Property owned by a trustee of a trust. (Of course, if the decedent is the settlor of a trust, that trust will be subject to an administration somewhat similar to the administration that takes place in probate, but away from the prying eyes of both a judge and the public.)

Non-probate property bypasses Go, bypasses the court, and goes directly to the beneficiary, the joint account holder, the joint owner. Often the movement of the property from the decedent owner to the surviving owner is virtually seamless—well, painless anyway: beneficiaries file a death claim with the insurance company, attach a death certificate, and voila! the death proceeds appear. But often the movement requires a trip to the DMV. Even that need not be a chore. If the word “or” separated the two names on the title, the survivor doesn’t have to do anything; however, if he or she wishes to remove the decedent’s name off the title, then mailing or hand-delivering a “Vehicle Application for Title” to the DMV along with a check to cover the cost of removing the name, will do the job. If the word “and” separates the name, the survivor will also need to provide a death certificate.

Likewise, the surviving owner(s) of real property owned in a JTWS must take a few steps to terminate the decedent’s interest in the property under most states’ probate code, including filing an affidavit substantially similar to the statutory form in the county where the property is located and attaching a copy of the death certificate. (By the way, if the decedent owned real estate as a trustee of a trust, the successor trustee should file a similar affidavit along with a death certificate, indicating that the successor trustee has assumed the position of the deceased trustee with regard to the property.)

It should go without saying, but I’ll say it anyway: non-probate property will pass to the intended beneficiary, account holder, surviving owner notwithstanding what the decedent said in his or her will. In other words, the beneficiary designation, the deed, the POD/TOD, etc. controls the disposition of non-probate property, not the will.

Probate Property

If non-probate property includes everything on the list above, probate property includes everything else, including the following:

  • Life insurance/annuities payable to the insured’s estate,
  • Personal property—art, furniture, antiques, and the like—not jointly owned,
  • Real estate the decedent owns either as an individual or as a tenant in common,
  • Accounts owned individually by the decedent, including
    • Bank accounts,
    • Brokerage accounts,
    • Etc.
  • Any other property the decedent owned individually at death.

And if it’s probate property, the court will have some say about who gets what, governed by the decedent’s will of course.

The Attorney’s Job

The probate attorney’s or personal representative’s or PR’s job is to separate the non-probate wheat from the probate chaff. To do that, the attorney or PR should consult the relevant documents. That requires gathering account statements, life insurance policies, retirement plan beneficiary designations, titles, deeds, and the like to determine how the property is owned and who the beneficiaries are in the relevant cases. That may turn out to be more difficult than it seems, largely because you can’t be sure the decedent’s heirs know fact from fiction. Thus, don’t rely on the life insurance policy in the decedent’s file drawer to tell you who or what is the beneficiary. Ask the life insurance agent or call the company to get a copy of the most recent beneficiary designation. Call the title company to pull the most recent vesting deed. (You might even go further, some attorneys argue that there’s no need to record a deed to a revocable trust; thus, the most recent recorded vesting deed may not be the most recent deed.) In other words, check primary sources.

Trusts and the People Behind Them

First, let’s discuss the parties or positions in a trust. To form a trust, you need at fill at least three positions. Nowadays, you can have as many as two more:

One or more Settlors/Grantors/Trustors/Trust Makers. The person (or persons) who creates the trust, whether during his or her lifetime or at death. In Wyoming and Utah, Settlor or Grantor is the preferred term, though the other terms are used as well. The terms mean the same thing. Utah’s definition reads, “’Settlor’ means a person, including a testator, who creates . . . a trust.” In contrast, Wyoming’s definition reads, “’Settlor’ means a person, including a testator, grantor or trust maker, who creates . . . a trust.”

The perfect trustee?

One or more Trustees. A fiduciary (either an individual or an entity) named in the trust document who holds legal title to trust property for the benefit of the . . .

One or more Beneficiaries. Person or persons, entity or entities, charities or otherwise, for whose benefit the settlor created the trust in the first place. The beneficiary may have a present, future, vested, or contingent interest in trust property. Beneficiaries may be income or remainder beneficiaries. Settlors can be beneficiaries of their trust.

Trust Protector. Someone named in the trust other than trustee with powers granted by the trust document, often including a limited power to remove the trustee, appoint a replacement, add beneficiaries, and maybe modify the trust. In other words, a trust protector is someone a trustee should pay attention to. Modern trusts often have trust protectors (and advisors, see below) to add flexibility to the trust.

Trust Advisor. Though the term is sometimes used interchangeably with trust protector, a trust advisor is more of an advisor than an enforcer, guiding the trustee in the exercise of her powers. That said, the place to define these two terms is in the trust agreement.

First, here are three important definitions and four basic types of trusts, especially as to the taxation of trusts:

Complex trust. A trust that either retains all current income or distributes corpus or makes distributions to charitable organizations.

Simple trust. As described in tax law, a trust that must distribute all income at least annually and which doesn’t provide for charitable distributions.

Grantor trust. A trust over which the settlor (aka the grantor) retains power to revoke or to control trust property. Consequently, the settlor/grantor is taxed on trust income. Most living trusts are grantor trusts.

Living trust. Also known as an inter vivos trust, a living trust is one established and funded during the settlor’s lifetime as opposed to a testamentary trust (see below), which comes into being upon the settlor’s death. A living trust can be either revocable or irrevocable. The settlor of a revocable living trust is typically also the initial trustee of the trust.

Revocable trust. A living trust over which the settlor retains the power to revoke the trust.  

Irrevocable trust. A trust over which the settlor retains no right to revoke. Irrevocable trusts are generally used to remove assets out of the taxable estate of the settlor. Once a settlor dies, his or her revocable becomes irrevocable. Likewise, once the creator of a testamentary trust dies, his or her trust is irrevocable.

Testamentary trust. A trust created by will and which comes into being upon the death of the testator or maker of the will.

Now, in no particular order, here’s a brief summary of many of the trusts in use today:

Charitable trusts. A trust for the benefit of a charity (government, educational, religious, and similar institutions). There are a variety of charitable trusts, including a charitable lead trust (CLT)—defined as a trust for a fixed period, during which the charity receives the trust income and after which, the remainder goes to a non-charitable beneficiary—or a charitable remainder trust (CRT), which essentially reverses those roles.

Irrevocable life insurance trust (ILIT). An irrevocable trust designed to own life insurance, so the insurance remains outside the insured’s estate and free of estate tax.

Pet Trust. A trust established to take care of the settlor’s pets in the event of the settlor’s death or disability.

Firearms or NFA Trust. A trust to hold firearms generally and National Firearms Act firearms specifically. Such trusts allow for the sharing of NFA firearms without violating transfer rules governing NFA firearms.

Special Needs Trust (SNT).  A trust designed to hold assets for the benefit of a beneficiary whose disabilities may allow the beneficiary to receive public assistance for medical and other care expenses.

Standalone Retirement Trust (SRT).  A trust designed to receive “qualified retirement accounts” like IRAs, 401(k)s, etc. It can be either revocable or irrevocable, and it’s designed to allow trust beneficiaries to defer income tax on the account for as long as possible—i.e., stretch the IRA. SRTs can be either conduit trusts (distributions flow through them and out to the beneficiaries) or accumulation trusts (any trust that is not a conduit trust).

Grantor Retained Annuity Trust (GRAT). A special type of irrevocable trust. The settlor/grantor establishes the trust, puts property in, and takes back an annuity (calculated as a dollar amount) for a specific amount of time based on the value of the property in the trust.

Intentionally Defective Grantor Trust (IDGT). An irrevocable trust that removes the value of the trust assets out of the settlor’s estate but allows the grantor/settlor to continue to be treated as the owner for income tax purposes. A big advantage of IDGTs is that grantor/settlor can add value to the trust by paying the income tax due on trust income without those tax payments being treated as additional taxable gifts to the trust.

By-pass or Credit Shelter Trust. Also known as the B Trust that holds that part of the deceased spouse’s estate that is applied against the deceased’s applicable exclusion amount, thus protecting it from estate taxes.

Marital Trust. Also known as the A Trust, this trust holds the portion of the deceased spouse’s estate that qualifies for the unlimited marital deduction. That portion will later be included in the surviving spouse’s taxable estate. The Marital and Credit Shelter Trusts are generally created by the trustee of the settlor’s Revocable Living Trust or Testamentary Trust upon the settlor’s death.

Qualified Personal Residence Trust (QPRT). This trust works like a GRAT except that the property transferred into the trust is the Settlor’s personal residence. The Settlor retains the right to live in the home for a specified number of years. At the end of the term, the Settlor must move out or begin paying rent to the trust, which goes to beneficiaries entitled to the trust property after the initial term.

Qualified Domestic Trust (QDOT). A form of trust that allows a taxpayer whose surviving spouse is a non-citizen to claim the marital deduction. To qualify, 1. at least one U.S. citizen must be a trustee, 2. the trust can’t allow distributions of principal unless the U.S. trustee has the right to withhold estate tax on the distribution, and 3. sufficient trust assets must be held in the U.S., among other things.

QTIP Trust. A trust that can hold qualified terminable interest property, property the settlor sets aside for the surviving spouse and which qualifies for the marital deduction.

Domestic Asset Protection Trust (DAPT). An irrevocable trust that allows a settlor to set aside assets in trust and protect those assets from creditor claims. The DAPT is established under the laws of states with favorable asset protection laws—Nevada, Alaska, South Dakota, Wyoming, and Utah, for example.

Seminar this Wednesday: Estate Planning for Blended Families

I’ll be presenting a seminar at the Orem Public Library on Estate Planning for Blended Families.
When                 Wed, April 5, 7pm – 8pm
Where                Orem Public Library, Media Auditorium (map)
Description       Couples with blended families face special challenges when it comes to making sure that stocks, bonds, real estate, and other property and family heirlooms go to the right persons at the right time when a spouse dies. This seminar will address such issues and discuss ways to solve them, using wills, trusts, and other estate planning documents.
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Hope to see you there.

So You’re the Trustee of Your Parents’ Trust . . .

If you’re already or soon to be a trustee of a family trust you might want to read my new piece on Medium: Trustee Much? 5 Ways to Avoid Sibling on Sibling Mayhem.

Celebrity Estate Planning Mistakes that Keep on Giving–to the Wrong Person

My dad was a life insurance salesman. I remember rummaging around in his sales materials and finding a service he subscribed to that reported on the estate tax problems of the rich and famous and even the not-so-famous. He used the  reports to make the point that his prospective clients needed to do some estate and insurance planning, so their families wouldn’t face similar fates.

I was reminded of this when I stumbled upon this 2013 article from Forbes, “Monumental Estate Planning Blunders of 5 Celebrities.” The piece details the woes of rocker Jim Morrison, Rat Pack icon Sammy Davis Junior, hotelier Leona Helmsley,  QB Steve McNair, and, my favorite sad story, actress Marilyn Monroe:

Some celebrities have erred by not going far enough with their estate planning. For instance, famous actress and model Marilyn Monroe left most of her estate to her acting coach, Lee Strasberg.

“She left him three-fourths of her estate, and when he died, his interest in Marilyn’s estate went to his third wife, who did not even know Marilyn. Marilyn’s mistake was not putting her assets in trusts,” says Nass.

Strasberg’s third wife, Anna, eventually hired a company to license Monroe’s products, which involved hundreds of companies including Mercedes-Benz and Coca-Cola. In 1999, many of Monroe’s belongings were auctioned off, including the gown she wore to President John F. Kennedy’s birthday party, for more than $1 million. Strasberg ended up selling the remainder of the Monroe estate to another branding company for an estimated $20 million to $30 million, according to a remembrance of the star by NPR in 2012.

It’s unlikely Monroe would have wanted someone she didn’t know to profit so handsomely from her belongings. A trust would have provided for Strasberg while he was alive and then after his death could have directed the remainder of her estate to someone of her choosing.

Yes, I imagine was very unlikely that she wantedStrasberg’s 3rd wife to laugh all the way to and from the bank. But poor planning allowed that to happen.

Dear Annie, Estate Planning is Hard, Especially for Blended Families, Which is Why People Shouldn’t Do It on the Fly

Annie Lane apparently writes an advice column for The Daily Courier in Prescott, Arizona. Today she gave some advice to a woman who was having trouble coaxing her second husband into doing some estate planning. After explaining that she has a college-age daughter and telling how happy she is in her 2nd marriage and what an otherwise perfect husband the new guy is, the woman writes,

He is so generous and dedicated, but this is one subject he will not deal with. We have no will or trust, but I get the feeling he would be fine with anything I would want to arrange financially. As far as what to do with our bodies upon death goes, though, that’s something we would need to decide on together. Even though I am older than he is, my family has a history of living long, and his family does not. And there is always a possibility we will go at the same time in some kind of accident.

So we have a second marriage, at least one child–a stepdaughter of the husband–a husband who is at least a few years younger than the wife and who is still passionately engaged in a career he loves. The family of one of the spouses has a long lifeline, the other a short one. Apparently plenty of money. And the wife seems pretty certain that even though he won’t talk about estate planning, the husband will be fine with anything she suggests.

Yeah, right. Especially when money’s involved.

And Annie says?

Fortunately, you seem equipped to tackle this challenge on behalf of you both.

Tell your husband that you’ll prepare a draft of the will and that he can simply sign off on it or make revisions before it’s finalized. My guess is that he’ll be relieved. Once the will is behind you, you’ll have the peace of mind to enjoy the rest of your lives together even more.

Where to start? Well, first there’s the idea that just anyone can draft a will. Of course, they can–and LegalZoom and its competitors are there to help. But really? The weeds can get pretty thick and high very quickly when you have some money, are in your 50s and 60s, and have grown children and stepchildren. I’ve been there and done that, and if you want hard, there it is–in spades.

Next, there’s the idea that where there’s a will, there’s a way out. But not so fast. Yes, it’s better than nothing, but there’s the little matter of stepchildren–his and probably hers. Who gets what–especially when it sounds like it’s really all his–is a question that needs to be addressed big time, preferably sitting in the office with an attorney with oodles of experience in dealing with blended families.

And then there’s the fact that a will is only the first in a long line of estate planning documents that virtually everybody should have in order, including trust, an advance health care directive, a financial power of attorney, and so one. Add to that the fact that though the couple probably have their minds around a number of issues in their financial and family life, there’s certainly a lot that they don’t know they don’t know. A good attorney can help them see those problems and issues.

I do agree with Annie on one thing: The woman having a will drafted and presenting the draft to her husband may bet him moving on the subject. But don’t do this alone.

My take anyway.

 

Estate Planning Seminar at Orem Public Library

I’m presenting a seminar at the public library in Orem, Utah tomorrow, Wednesday, March 1st at 7 PM. The topic will be “Wills, Trusts, and Other Documents Necessary to a Good Estate Plan.” I’d love to see you there.

Unfortunately, I just learned that the library’s calendar was hacked yesterday, so you’ll have to trust me on this one.

The Donald’s Impact on Estate Planning: Good or Bad?

Jonathan G. Blattmachr & Martin M. Shenkman, two major gurus in the estate planning field, seem to think a Trump administration will lead to the need for most of us to engage in some planning:

The election of Donald J. Trump as President, along with a Republican-controlled House and Senate, may lead to the most radical changes to the estate tax since it was first enacted.

I’ve only read a brief abstract from the article at this link. I’ll report back after I’ve read the actual piece. (I’m not a fan of the online viewing option for this story. Hard to read.)

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