That Last Step: Trust Funding

A trust only controls the assets it owns, so don’t forget the critical last step in a trust estate plan: properly funding the trust.

Neglecting to fund trusts is a surprisingly common mistake, and one that can undo the best estate plans. Many people put it on the back burner, then forget about it, says the article “Don’t Overlook Your Trust Funding” from Forbes.

If you read our blogs routinely, you’ll know we are fans of trust planning.  Done properly with appropriate trust funding, a trust helps avoid probate, provides for you and your family in the event of incapacity and streamlines the estate process.

Creating a revocable trust gives you control. With a revocable trust, you can make changes to the trust while you are living, including funding. Think of a trust like an empty box—you can put assets in it now, or after you pass. If you transfer assets to the trust now, however, your executor won’t have to do it when you die.

Note that if you don’t put assets in the trust while you are living, those assets may go through the probate process. While the executor will have the authority to transfer assets, they’ll have to get court to appoint them as executor first. That takes time and costs money. It is much better if you do it yourself while you are living.

A trust helps if you become incapacitated. You may be managing the trust while you are living, but what happens if you die or become too sick to manage your own affairs? If the trust is funded and a successor trustee has been named, the successor trustee will be able to manage your assets and take care of you and your family. If the successor trustee has control of an empty, unfunded trust, it may not do very much good.  Instead, an agent under a power of attorney, or if none, a court-appointed guardian may have to be appointed.

Move the right assets to the right trust. It’s very important that any assets you transfer to the trust are aligned with your estate plan. I cannot stress this enough, but you should speak with an attorney regarding how to fund your specific trust.  Not all plans and assets are the same, and different plans call for different trust funding.   That said, taxable brokerage accounts, bank accounts and real estate are usually transferred into a trust either immediately during lifetime or upon death via a beneficiary designation. Some tangible assets may be transferred into the trust, as well as business interests.  Some assets, such as life insurance and retirement funds may designate the trust in some manner by beneficiary designation, but in light of the Secure Act changes you’ll definitely want to discuss that with your attorney.   See here for more:  https://galligan-law.com/how-the-secure-act-impacts-your-estate-plan/

Your estate planning attorney, financial advisor and insurance broker should be consulted to avoid making expensive mistakes. You should also consider trust funding when you review your estate plan to ensure it is updated with new assets.

You’ve worked hard to accumulate assets and protecting them with a trust is a good idea. Just don’t forget the final step of funding the trust.

Reference: Forbes (July 13, 2020) “Don’t Overlook Your Trust Funding”

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Can Mom Leave a Home to a Child but Not Grandchildren?

You have many options on how to leave a home to your child, but not a grandchild, including a will, trust and an enhanced life estate deed.

There are numerous ways to pass your property at death. A woman with three grown daughters faced a problem about passing down the family home. She wanted to leave a home to a child who has taken care of and is closest to her. However, she also wanted to be sure that, if something happened to this youngest daughter, the house would go to her two other daughters and not the close daughter’s adult children.

With proper planning, this can be done, as described in the article “Mom needs contingency plan to pass house title” from mySanAntonio.

One way is to rely on a last will and testament. The will would state that she leaves the house to the youngest daughter, under terms of a testamentary trust inside the will. The executor would probate the will and the trust would be established at death.  The trust terms would permit the daughter to use, enjoy, and live in the house during her lifetime, as the beneficiary of the testamentary trust.

The two older daughters would be named as the secondary beneficiaries of the trust. When the younger daughter dies, the trust distributes the house to the older daughters.  The trust would also provide what would happen to the property if the older daughters are deceased.

The plan will need to be prepared by a qualified estate planning attorney. This is not a terrible process, if the will is professionally written and properly executed, includes an executor and a trustee and clear instructions about her wishes.

However, there are other options, which can also be used in conjunction.  One is an enhanced life estate deed and another is a living trust. The enhanced life estate deed specifies that the woman is retaining a life estate, that is, the right to use, enjoy and occupy her home, for the rest of her life. The document specifies that when she dies, the home goes to her youngest daughter. The owner would also want to specify that she has the right to change her mind at any time.

This approach avoids probate. However, there is a downside. If the youngest daughter dies before the mother, then the mother will need to take legal action to cancel the deed and issue a new one to the two older daughters. If the daughter outlives her mother, once she inherits the house, there will be no way to have it transferred to the other sisters in the future (unless the daughter choses to do so) and presumably the property will go to the grandchildren after all.  Clients who try to construct their own estate plans often fall into this trap, they try to rely on beneficiary designations for everything and can’t address contingencies.

A living trust provides the detailed control allowed in a will, but the trust, which must be properly created and funded, avoids going to probate. The trust would let the mother live in the home, and when she dies, the title to the house stays in trust with her youngest daughter, who is able to live in the house. However, she never becomes the owner of the house. The trust would continue to own the house. The trust would specify that when the daughter dies, the house goes to the two older daughters. She may also use the enhanced life estate deed, and have it name the trust as beneficiary at her death to ensure it goes to the right beneficiaries.

There are other considerations which affect these decisions, such as taxes, who to put in charge of the process and long term care planning.  See here for more information.  https://galligan-law.com/removing-your-house-from-your-trust/

If you have a similar situation and want to learn more, call our office today.  We will walk you through these issues and help craft a plan that accomplishes your goals.

Reference: mySanAntonio (June 8, 2020) “Mom needs contingency plan to pass house title”

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Business Succession Planning in your Estate Plan

Business succession planning is critical in your estate plan to ensure your business succeeds when you’re gone and to preserve value for your beneficiaries.

When people think about estate planning, many just think about their personal property and their children’s future. If you have a successful business, you may want to think about how it will continue after you retire or pass away.  Business succession planning is critical because the value and success of the business will be greatly effected when you pass away.  Planning now will help prevent interruptions to the business and preserve the value for your beneficiaries, and for your employees.

Forbes’ recent article entitled “Why Business Owners Should Think About Estate Planning Sooner Than Later” says that many business owners believe that business succession planning, estate planning and getting their affairs in order happens when they’re older. While that’s true for the most part, it’s only because that’s the stage of life when many people begin pondering their mortality and worrying about what will happen next or what will happen when they’re gone. The day-to-day concerns and running of a business is also more than enough to worry about, let alone adding one’s mortality to the worry list at the earlier stages in your life.  Having been a business owner myself, I understand that the demands of the day seem so important, it’s hard to think about next week, let alone when you’re gone.

Business continuity is the biggest concern for entrepreneurs and one of the key components to address in business succession planning. This can be a touchy subject, both personally and professionally, so it’s better to have this addressed while you’re in charge.  One option is to create a living trust and will to put in place parameters that a trustee can carry out. With these names and decisions in place, you’ll avoid a lot of stress and conflict for those you leave behind.  You may do this as a trust solely for the business, such as a management trust, or as part of your regular estate planning.

They may be upset with you, but it’s better than the other or future owners and key employees being mad at each other.  This will give them a higher probability of working things out amicably at your death. The smart move is to create a business succession plan that names successor trustees to be in charge of operating the business, if you become incapacitated or die.

Business succession planning may include several other aspects.  For example, many owners complete buy sell agreements or similar documents that require a deceased owners estate to sell their interest to the other owners, or address what happens if an owner divorces, or becomes disabled.  Some even address buy outs for retiring owners.  It is also a good idea to consider employment agreements that entice key employees to stay with the company if you should retire or pass away.  These documents can be complex as they touch many issues, but are worth discussing with your estate planning or business attorney as part of your business succession plan.

A power of attorney document will nominate a fiduciary agent to act on your behalf, if you become incapacitated, but you should also ask your estate planning attorney about creating a trust to provide for the seamless transition of your business at your death to your successor trustees. The transfer of the company to your trust will avoid the hassle of probate and will ensure that your business assets are passed on to your chosen beneficiaries. Timely planning will also preserve your business assets, as advanced tax planning strategies might be implemented to establish specific trusts to minimize the estate tax.  See here for more details.  https://galligan-law.com/how-do-trusts-work-in-your-estate-plan/

Business succession planning and estate planning may not be on tomorrow’s to do list for young entrepreneurs and business owners. Nonetheless, it’s vital to plan for all that life may bring, and is critical to prevent disruptions to the business you created.

Reference: Forbes (Dec. 30, 2019) “Why Business Owners Should Think About Estate Planning Sooner Than Later”

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