Trusts Aren’t Just for Billionaires: Reasons for a Trust

Occasionally clients are hesitant to utilize trusts in their estate plan because they “just have a simple estate” or believe they need substantial assets to warrant a trust.   In fact, trusts are for everyone and solve a variety of purposes in estate planning.  According to an article entitled “3 Reasons a trust may make sense for your family even though your name isn’t Trump, Gates or Rockefeller” from Market Watch, trusts give great flexibility in how assets are divided after your death, no matter how modest or massive the size of your estate. Using trusts in your estate plan is a smart move, for many reasons.

There are two basic types of trust. A Revocable Trust is flexible and can be changed at any time by the person who creates the trust.  This person is known by many different names based upon the convention of where the trust is established, but is often known as the “grantor” or “trustor” or something similar.   These are commonly used because they allow a high degree of control while you are living, especially if your goal is to avoid probate while being able to revise your plan in the future.  The idea is that if your trust is the owner of an asset or properly receives the assets at your death, there will be no need for a Will to be probated through the court system.

Once the trust is created, homes, bank and investment accounts and any other asset you want to be owned by the trust are retitled in the name of the trust or directed to it upon death, depending on the type of asset and what your goals are. This is a step that sometimes gets forgotten, with terrible consequences. Once that’s done, then any documents that need to be signed regarding the trust are signed by you as the trustee, not as yourself. You can continue to sell or manage the assets as you did before they were moved into the trust.

See here for a more robust discussion of how a trust works versus a will.  https://www.galliganmanning.com/will-vs-living-trust-a-quick-and-simple-reference-guide/

There are many kinds of trusts for particular situations. A Special Needs Trust, or “SNT,” is used to help a disabled person, without making them ineligible for government benefits. A Charitable Trust is used to leave money to a favorite charity, while providing income to a family member during their lifetime.

Assets that are placed in trusts do not go through the probate process and can control how your assets are distributed to heirs, both in timing and conditions.

An Irrevocable Trust is permanent and once created, cannot be changed subject to a few caveats. This type of trust is often used to save on estate taxes, by taking the asset out of your taxable estate. Funds you want to take out of your estate and bequeath to grandchildren are often placed in an irrevocable trust.  These types of trust are becoming more and more useful as the estate tax exemption is expected to go down leaving more and more clients exposed to potential estate taxes.

If you have relationships, properties or goals that are not straightforward, talk with your estate planning attorney about how trusts might benefit you and your family. Here’s a few reasons for a trust and why this makes sense:

Reducing estate taxes. While the federal exemption is $11.58 million in 2020 and $11.7 million in 2021, state estate tax exemptions are far lower. New York excludes $6 million, Massachusetts exempts $1 million, Texas has none at all.  Some states are even more complicated in having inheritance tax (taxes are applied against the exact amount transferred).  Further, it is widely accepted that the federal estate tax exemption will be lowered as well.  An estate planning attorney in your state will know what your state’s estate taxes are, and how trusts can be used to protect your assets.  You can also see here for a recent article I wrote on life insurance trusts as a good example of a common trust used to reduce estate tax exposure.  https://www.galliganmanning.com/the-irrevocable-life-insurance-trust-why-should-you-have-one/ 

If you own property in a second or third state, your heirs will face a second or third round of probate and estate taxes. If the properties are placed in a trust, there’s less management, paperwork and costs to settling your estate.

Avoiding family battles. Families are a bit more complicated now than in the past. There are second and third marriages, children born to parents who don’t feel the need to marry and long-term relationships that serve couples without being married. Trusts can be established for estate planning goals in a way that traditional wills do not. For instance, stepchildren do not enjoy any legal protection when it comes to estate law. If you die when your children are young, a trust can be set up so your children will receive income and/or principal at whatever age you determine. Otherwise, with a will, the child will receive their full inheritance when they reach the legal age set by the state. An 18- or 21-year-old is rarely mature enough to manage a sudden influx of money. You can control how the money is distributed.

Protect your assets while you are living. Having a trust in place prepares you and your family for the changes that often accompany aging, like Alzheimer’s disease. A trust also protects aging adults from predators who seek to take advantage of them. Elder financial abuse is an enormous problem, when trusting adults give money to unscrupulous people—even family members.

Talk with an estate planning attorney about your wishes and your worries. They will be able to create an estate plan and trusts that will protect you, your family and your legacy.

Reference: Market Watch (Dec. 4, 2020) “3 Reasons a trust may make sense for your family even though your name isn’t Trump, Gates or Rockefeller”

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Long Distance Caregiving During These Difficult Times

A well thought out plan is the key to effective long distance caregiving.
A well thought out plan is the key to effective long distance caregiving.

Trying to coordinate long distance caregiving is a challenge for many. Add COVID-19 into the mix, and the situation becomes even more difficult, reports the article “When your parent is far away and you are trying to care for them” from the Pittsburgh Post-Gazette.

If you are in the position of having to care for a loved one long distance, the starting point is to have the person you are caring for give you legal authorization to act on their behalf to make financial and medical decisions for them. A financial power of attorney (known as a Statutory Durable Power of Attorney in Texas) naming you as agent will allow you to help manage your loved one’s financial affairs.  It is also important that the person give you a HIPAA Release. HIPAA (Health Insurance Portability and Accountability Act) is the law that governs the use, disclosure and protection of sensitive patient information. With a HIPAA Release you will be able to receive medical information relating to the person you are caring for and to discuss matters with the person’s health care providers.

Next, find out where all of their important documents are, including insurance policies (long-term care, health, life, auto, home), Social Security and Medicare cards. You’ll also want to be able to access tax documents which will provide you with information on retirement accounts, bank accounts and investments. Don’t forget to ask your loved one for family documents, including birth, death, and marriage certificates, which may be necessary to claim benefits. Make copies of these documents so that you can make appropriate decisions for your loved one, even from a long distance.

Ask your family member whether he or she has completed their estate planning, and whether they want to make any changes. You may wish to review with your loved one changes that indicate when an estate plan should be updated. See https://www.galliganmanning.com/when-to-update-your-estate-plan/.

Put all of this information into a binder, so you have access to it easily.

Consider setting up a care plan for your family member to take care of things that come up when you can’t be there. Think about what kind of care do they have in place right now, and what do you anticipate they may need in the near future? There should also be a contingency plan for emergencies, which seem to occur when they are least expected and which make long distance caregiving especially difficult.

A geriatric care manager or a social worker who can do a needs assessment can help coordinate services, including shopping for groceries, administering medication and help with food preparation, bathing and dressing. If possible, develop a list of neighbors, friends or fellow worshippers who might create a local support system that compliments your long distance caregiving.

Keeping in touch is very important. These days, many are doing regular video calls with their family members. Conference calls with caregivers and your loved one is another way keep everyone in touch.

Long distance caregiving is difficult, but a well-thought out plan and preparing for all situations will make your loved one safer.

Reference: Pittsburgh Post-Gazette (Sep. 28, 2020) “When your parent is far away and you are trying to care for them”

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Art and Other Collections in an Estate Plan

Are you a collector? Is your collection included in your estate plan?
Are you a collector? Is your collection included in your estate plan?

Many people have collections about which they are quite passionate: The collections may be very valuable, for example, art collections, coins, stamps, or designer handbags, or they may have more sentimental than monetary value, such as political bumper stickers, postcards, or rocks. Regardless of its dollar value, if you have a collection, it should be included in your estate plan. You should make arrangements in advance to ensure that it is handled in the way you want, and if it is worth a lot of money, that its value is maximized. The following are a few steps you should take to ensure your wishes for your collection are followed:

Collect relevant documentation. If you have a valuable collection, it is important to create a catalog describing each piece, including photographs, bills of sale, and appraisals. If you have an insurance policy covering some or all of the items, it should be kept with your important documents as well.

Discuss your collection with your family members and loved ones. Although you may have invested a lot of time and money in your collection, and may have a strong emotional attachment to it, it is not unusual for family members not to share your passion about your collection. Try to understand their perspective if this is the case in your family. It is important to discuss this with them to ensure that your estate plan is designed to minimize the burden your family could face in dealing with the collection when you pass away. However, it is also important to find out from your family members if anyone would like to inherit certain pieces or the collection as a whole. If more than one person would like to receive certain items, it is prudent to figure out a reasonable solution in advance. This will help to avoid conflict between family members after you pass away.

Pass it on to loved ones. If you do pass your collection to family members, consider giving them your permission to sell or donate it. If one or more family members is interested in keeping it, consider whether to also provide a cash gift to help those beneficiaries with the costs of maintaining it. If the collection is one of your more valuable assets, take steps to ensure that other beneficiaries receive an equivalent inheritance, for example, by making them the beneficiaries of a life insurance policy. Alternatively, you could consider transferring your entire collection to a trust or a limited liability company that could manage the collection for the benefit of multiple generations.

Donate your collection to a museum or charitable organization. It is important to check with the organization to which you plan to donate the collection to make sure that it is able to handle housing or selling it, both of which could involve more expense than you might expect. Such organizations may request that a donation of cash accompany the bequest to offset the cost of maintaining the collection. Keep in mind that only a donation to a public charity will be tax deductible by your estate (or you, if you make a lifetime gift), and there are certain circumstances when even donations to a public charity will not be deductible.

Sell the collection. If you would like your family to sell your collection or anticipate that they will sell it, it will be helpful to them and likely minimize delays if you provide the names of dealers or auction companies that specialize in the type of collection you have, as this type of information may not be as easy to find for those who are not collectors. To prevent the collection from being sold for much less than its actual value, consider appointing an executor who is knowledgeable about it and its value.

Consider the tax implications. The Taxpayer Relief Act of 1997 lowered the maximum capital gains rate on gains from the sale of most assets to 20 percent but left the maximum rate on gains from the sale of collectibles at 28 percent. If you pass your collection on to a child or other beneficiary when you pass away, that person will have a tax basis in the property based on the value on the date of your death (i.e., a stepped-up basis). This will be the basis used to determine the amount of taxable gain and income tax the beneficiary must pay if the beneficiary eventually sells some or all of the items in the collection. As a result, if your collection has increased in value over time, your beneficiary’s tax bill will be lower if you wait until your death to gift the collection to them rather than making a lifetime gift—in that case, their basis would be the amount you originally paid, resulting in a larger taxable gain. On the other hand, if the collection has not increased in value, you could consider taking advantage of the annual or lifetime gift tax exclusions to make outright gifts of your collection while you are still living.

Make sure it is properly valued. Appraisals are particularly important, as they will help your executor, trustee, and family members determine the value of the collection. Be sure to use an appraiser knowledgeable about the particular type of items in your collection. This will ensure that these items are not sold for a price far below their actual worth or donated because of a lack of knowledge of their true value. Also, it will help you to make decisions about how to provide equitable gifts to your beneficiaries and whether to make gifts from your collection during your life or at death.

Finding Help to Design an Estate Plan for Your Special Collection

Your collection likely means a lot to you. It also adds another level of complexity to your estate plan. An experienced estate planning attorney can help you think through your goals and develop an estate plan that will allow you to rest assured that your collection will be handled according to your wishes after you pass away.

You may also be interested in https://www.galliganmanning.com/when-to-update-your-estate-plan/.

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