Can You Trust Your Trust? Why an Online Will or Trust Could Be the Dumbest Mistake You Ever Make

This article was posted on Estateplanning.com.

In this article, WealthCounsel member David Hiersekorn discusses the hidden dangers of consumers using online legal forms, often referred to as “do it yourself (DIY) wills and trusts.” Hiersekorn notes at the end of his article that “You only get to use an estate plan once. If you screw it up, you’ll never know, but your family will.”

Online legal document services offer an enticing bargain. Most people realize that they need an estate plan to manage their affairs if something happens to them. And, let’s face it, estate planning attorneys are expensive.

That’s why many consumers are now questioning whether it’s possible to skip the attorney fees and use a low-cost website to prepare estate planning documents. The short answer is that, yes, it is possible. But, it’s not recommended. You could save a few bucks now, but end up creating an expensive and frustrating mess for your family.

Unfortunately, most people don’t realize what they are getting themselves into with an online document service. That’s because the online services have spent millions trying to create the impression that their services are similar to those of an attorney. They put lawyers in their commercials, hire celebrities to promote them, and even tout stories of people who have successfully used their documents.

But, all the marketing in the world can’t erase the simple truth. The online services aren’t law firms. They aren’t lawyers. They can’t give legal advice. Instead, they are “document assistants” – a term that states use to define service providers who type your information into generic form documents.

In other words, a document assistant is like a mindless typing zombie who enters your information into a form, whether or not it makes sense and whether or not it is a good idea. If you are stuck, they can’t help you. If you make a huge mistake, they can’t warn you.

It would be a crime for them to warn you. It doesn’t matter if the guy working on your documents is an estate planning genius. He’s simply not allowed to give legal advice. Think of it this way. A person needs a law license in order to give legal advice, just the same way that a doctor needs a license to write a prescription. Giving legal advice without a license is very much like selling drugs without a prescription. It’s a crime.

So, these companies design their generic forms so that, even without legal advice, it’s hard to make mistakes. That may seem like a good thing. But, it turns out that the best way to make sure that your documents don’t do anything wrong is to make sure they don’t do anything at all. They’re just do-nothing, one-size-fits-all generic documents.

That leads to the next problem with the online services. They can’t even promise you that the documents will work. Again, they can’t. They aren’t attorneys, which means they can’t promise a particular legal result.

Many clients are excited to learn that they can leave assets to a special needs child without jeopardizing government benefits; or, that they can protect a child’s inheritance from frivolous lawsuits, divorce or bankruptcy. A well-designed estate plan makes sure that your resources get where you want them and that they are used in the way you instruct. It’s about creating legally-enforceable provisions that do what you want done.

And, the online document services can’t promise any of that. They can’t promise you’ll achieve your goals. They can’t point out opportunities, and they can’t warn you about hidden hazards. Really, all they can do is save you a few bucks.

Justin Peltier is a  Massachusetts estate planning attorney with offices located in Merrimac, MA with the sole focus of estate planning, elder law, probate and trust administration, and business planning. Please view our website for more information at www.jpestateplanning.com or join our social media community below. You can also reach me directly at justin@jpestateplanning.com or (978)319-6006.

Take Advantage of the $5.12 Million Dollar Gift Tax Exemption in 2012

Take Advantage of the $5.12 Million Dollar Gift Tax Exemption in 2012

There has been a lot of media coverage about the Bush tax cuts that are set to expire on December 31, 2012 and whether they will be extended for all taxpayers or if they will be discontinued for top earners. But not nearly as much has been said about the current estate and gift tax rates that are also due to expire on December 31.

What we have for the next few months is an historic opportunity in estate planning. At the end of 2010, Congress put in place a two-year estate tax provision that included a huge gift no one had been expecting: a $5 million gift and estate tax exemption, the highest it has ever been. It was indexed for inflation for 2012, making it even higher—$5.12 million—but for this year only.

Not nearly enough people have taken advantage of this. Some think it doesn’t apply to them because their net estate is less than $5.12 million, and others think they can’t use it because they don’t plan to die in 2012. But they are mistaken, and are likely missing the chance of a lifetime when it comes to estate planning. Here’s why 2012 is such an incredible year for estate planning.

* This is a combined gift and estate tax exemption, so you don’t have to die in 2012 to use it. It can be used to make gifts in 2012 and still exclude up to $5.12 million from estate taxes when you die, regardless of the amount of the estate tax exemption at that time. The exemption is per person, so a married couple can give twice this amount, or up to $10.24 million.

* Under current law, this $5.12 million exemption will decrease to just $1 million on January 1, 2013 and the top tax rate will increase from 35% in 2012 to 55% in 2013. Those with estates over $1 million who do not plan now and who die in 2013 (and quite possibly in later years) will pay considerably more in estate taxes—and leave that much less to loved ones.

* The generation skipping transfer (GST) tax exemption is another reason to plan this year. This tax applies when assets are transferred (by gift or inheritance) to a grandchild, great-grandchild or other person more than 37.5 years younger than the person making the transfer. The GST tax is equal to the highest federal estate tax rate in effect at the time and is in addition to the federal estate tax. In 2012 the exemption for the GST tax is also $5.12 million ($10.24 million for married couples) and the tax rate is 35%. Next year, the exemption will be about $1.4 million and the top tax rate will be 55%. Planning now allows considerably more to be given to grandchildren and future generations without incurring this onerous tax.

* In 2012, estate planners have options that are considered “standards.” For example, gifts can be made using life insurance, various trusts, family limited partnerships and others, often using discounted values that leverage exemptions, without losing control. But these may soon be history as lawmakers search for more ways to generate revenue and close perceived loopholes.

* Lastly, interest rates (bound to increase in 2013) are at historic lows and thus there has never been a better time to do intra-family loans and other interest-rate-sensitive planning.

Of course, Congress could change the laws before January 1 but, based on recent history, that seem unlikely. Even if Congress does change the laws, we have no idea what the new ones will be. It’s best to plan based on what we know—not on what we think might happen. This once in a lifetime opportunity is about to expire. You don’t want to miss it.

Justin Peltier is an estate planning attorney with offices located in Merrimac, MA with the sole focus of estate planning, elder law, probate and trust administration, and business planning. Please view our website for more information at www.jpestateplanning.com or join our social media community below. You can also reach me directly at justin@jpestateplanning.com or (978)319-6006.

Blended Families Underscore the Need for Estate Planning

Blended Families Underscore the Need for Estate Planning

Posted on: June 27th, 2012

Anyone with children or modest assets should seriously consider some minimal estate planning, but the increasing number of blended families underscores the need for proper estate planning.
Blended families can involve children from a prior marriage as well as joint children, sometimes joking referred to as “his, hers and theirs.”  And blended families involve both younger and older couples, and nearly everyone in between.
When the new spouse is significantly younger, this sometimes means that the older spouse’s children are close in age to the younger.  These relationships can cause more than friction between the step-parent and step-children.
Most parents want to ensure that their assets will pass to their children, not their stepchildren.  However, absent good estate planning, there is no guarantee that their children will inherit their assets.  In fact, if the couple creates common “I love you” wills such that their assets pass to the survivor of them, there is a significant likelihood their children will be totally disinherited.
This is because all of their assets will pass to the surviving spouse to do with as he or she pleases. More often than not this means excluding the stepchildren, who then receive nothing.
The fact that Americans are living longer, and sometimes remarrying much later in life, means that blended family issues come into play there too. A recent USA Today article, titled With more blended families, estate planning gets ugly, highlights some of these issues. (The full article is available online at http://www.usatoday.com/news/parenting-family/story/2012-03-13/With-more-blended-families-estate-planning-gets-ugly/53516094/1?csp=34news.)
As this article states, “[a]dd the gaping generational divide between Depression-era parents, who valued frugality above all else, and their Baby Boomer children, who relish self-reward, and the dynamics can be explosive.”
Thus, baby boomer children expecting an inheritance may have to wait much longer than expected. But perhaps more difficult, who should pay for the cost of the surviving spouse’s care? Should the stepchildren be forced to use their inheritance to pay for an aging step-parent’s care, particularly after only a short-term marriage?  Or should this burden fall on the children?
There is no one right answer here, but these questions epitomize the many questions that arise with blended families. These questions should be answered with the help of counsel and proper planning.

If estate planning for a blended family is a concern for you, please contact Justin Peltier, a Massachusetts Estate Planning Attorney.

Beneficiary Designation Mistakes

Potential Problems with Beneficiary Designations

Many clients use beneficiary designations, and for good reason. Some significant assets, including life insurance policies, IRAs, retirement plans and even bank accounts, allow a beneficiary to be named. It’s free, it’s easy, and, when the owner dies, these assets are designed to be paid directly to the individual(s) named as beneficiary, outside of probate.

But that is not always what happens. For example:

*    If your beneficiary is incapacitated when you die, the court will probably have to take control of the funds. That’s because most life insurance companies and other financial institutions will not knowingly pay to an incompetent person; they may insist on court supervision.

*    If you name a minor as a beneficiary, you are probably setting up a court guardianship for the child. Life insurance companies and other financial institutions will not knowingly pay these funds directly to a minor, nor will they pay to another person for the child, not even to a parent. They do not want the potential liability and will usually require proof of a court-supervised guardianship.

*    If you name “my estate” as beneficiary, the court will have to determine who that is. The funds will have to go through probate so they can be distributed along with your other assets.

*    If your beneficiary dies before you (or you both die at the same time) and you have not named a secondary beneficiary, the proceeds will have to go through probate so they can be distributed with the rest of your assets.

Even if the funds are paid to the named beneficiary, things may not work out as the owner intended. For example:

*    Some people just cannot handle large sums of money. They may spend irresponsibly, be influenced by a spouse or friend, make bad investment choices, or lose the money to an ex-spouse or creditor. If the beneficiary receives a tax-deferred account, he/she may decide to “cash out” and negate your careful planning for continued long-term tax-deferred growth.

*    If you name someone as a beneficiary with the “understanding” that the funds will be used to care for another or will be “held” until a later time, you have no guarantee that will happen. The money may just be too tempting.

*    If the person you name as beneficiary is receiving government benefits (for example, a child or parent who requires special care), you could be jeopardizing their ability to continue to receive these benefits.

*    If your estate is larger, your choice of beneficiary could limit your tax planning options, causing serious tax consequences for your family.

Beneficiary designations can be quite useful, but they need to be considered as part of an overall estate plan. Naming a trust as beneficiary will generally prevent the problems described above, and by bringing all of the client’s assets together under one plan, you can be sure that each beneficiary will receive the amount the client wants them to have—something that can be difficult to accomplish with multiple designations.

When meeting with a potential client, or reviewing a client’s existing plan, it is important for the estate planning professional to see all beneficiary designations. Correcting any designations now, and making sure the client understands them, will help to prevent significant future problems.

These are very important financial and legal decisions.  Be sure to consult with an Massachusetts Estate Planning Attorney knowledgeable in this area.

A Way to Avoid Gift Taxes

As an estate planning attorney in Massachusetts, gifting to the next generation (or multiple generations) is often a concern for those that have accumulated wealth.  A great tool in today's low interest rate environment is a GRAT.  Below is an article in Forbes that is a prefect example of having your cake and eating it too (minimizing or not paying a gift tax AND transferring wealth to the next generation). 

Facebook Billionaires Shifted More Than $200 Million Gift-Tax Free

 

 

 

Not too young for estate planning: In 2008 Mark Zuckerberg, then 24, put $3,023,128 worth of Facebook stock into a grantor retained annuity trust.

Mark Zuckerberg and Dustin Moskovitz, the co-founders of Facebook and two of the world’s youngest billionaires, may seem too young to be thinking about estate planning. But in 2008, when they were both 24, they used an estate planning tool that is more familiar to people two or three times their age. It involved putting pre-IPO stock into a special kind of trust that will explode in value when the company goes public. In the process Zuckerberg and Moskovitz, by FORBES conservative estimate, will together shift $185 million to trust beneficiaries without having to pay gift tax. Sheryl Sandberg, Facebook’s CEO, who was then 39, used the same strategy to transfer at least $19 million tax-free.
There’s nothing illegal about what these executives did. In fact, their experience is a case study in how the ultra-rich and even the moderately wealthy can work within the parameters of the tax law to transfer vast sums of money without having to pay gift tax. Incidentally, according to the 2012 FORBES Billionaires list, Zuckerberg (#35 on the list) has a net worth of $17.5 billion and Moskovitz (#314) is worth $3.5 billion.

Move up Move down

 

The wealth-transfer strategy that the Facebook billionaires used gets a passing reference in footnotes of the company’s public stock offering. It indicates that each of these company executives is the trustee for a separate annuity trust named after them and funded with shares of Facebook stock. (Moskovitz left Facebook in 2008 to co-found Asana.)  This is almost certainly a reference to the popular estate planning technique known as the grantor retained annuity trust or GRAT.
Here’s how these trusts work: the person setting up the trust, known as the grantor, puts company shares into a short-term irrevocable trust and retains the right to receive an annual income stream, known as an annuity, for a preset time (for this type of asset, it is typically 5 to 15 years). If the grantor survives that period – a condition for this tool to work – any property left in the trust when the annual payments end passes to family members or to a trust for their benefit (they are the remainder beneficiaries).
The annuity should be approximately equal to the value of the assets transferred, plus an assumed interest rate that the government imposes, known as the Section 7520 rate. If the assets in the GRAT appreciate by more than that rate, all the excess passes to the beneficiaries with little or no gift tax. If the appreciation never occurs, the trust can satisfy its payout obligations by returning more of the assets to the grantor—the person who created the trust.
For more than a decade, it has been possible to form what’s called a zeroed-out GRAT, in which the remainder is theoretically worth nothing so that there is no taxable gift. In 2008, when the Facebook GRATs were set up, there was federal gift tax (at a 45% rate) if you gave away more than $1 million in cash or other assets during life. A zeroed-out GRAT enables wealthy folks to use their lifetime gift tax exemption for other transfers. Plus, there’s no exemption wasted if the asset does not perform as hoped.
How much will the Facebook billionaires wind up shifting this way? Let’s assume that the shares were bought under the company’s 2005 Stock Plan and were purchased at 83 cents per share. Under that scenario, using share quantities from Facebook’s securities registration statement filed on Feb. 1, Zuckerberg transferred $3,023,128 worth of stock (3,642,323 shares) to his GRAT; Moskovitz put $11,955,748 worth (14,404,516 shares) into his; and the starting value of Sandberg’s trust was $1,576,988 (1,899,986 shares). The SEC filing does not indicate how long each GRAT will last, who are the beneficiaries or what the shares were worth at the time.
More revealing is how much will be left at the end of the GRAT term because that’s what will go to beneficiaries free of gift tax.
FORBES asked Lawrence P. Katzenstein, a lawyer with Thompson Coburn in St. Louis to run the numbers, using the Tiger Tables Actuarial Software, which he created. We assumed that the GRAT lasts five years, with the stock growing modestly at a rate of 3.6% for the first four years (a conservative estimate); during this time, the annuity to the grantor will be paid with shares of stock. Then we assumed that in year five of the GRAT, before making the final annuity payment, Facebook goes public at $40 per share and the GRAT ends without any further change in the stock price.
Based on these assumptions, the total tally for tax-free transfers through the three GRATS is $204,353,993, divided as follows:
Moskovitz: $147,573,190
Zuckerberg:  $37,315,513

Ins and Outs of Trusts

Some of the public does not know what a trust is. Others think it is merely for the rich. Many others have come to me and said something like “I need a trust,” as if it is aspirin or some panacea. What most of the public (and most non-estate planning attorneys) don’t realize is that there are roughly 65 different types of trusts, some more broad than others, some quite specialized, and many share similar features. This brief overview should be a simple reminder for the seasoned practitioner, or a starting point for those new to the wonderful world of trusts.
First, let’s start with the basics – the Trust has three “points” – a Grantor (Settlor, Trustmaker), a Trustee, and one or more beneficiaries. The Grantor creates the trust, the Trustee carries out the instructions of the Trust, and the beneficiary benefits from the trust. In some circumstances, the Grantor may wear all three hats.
Grantor or Non-Grantor? Included in the estate or excluded? Available to the beneficiary? Beneficiary’s ability to control part or all of the trust? These probably rank highest in the architecture of the trust, so let’s attack those first.
Grantor Trust versus Non-Grantor Trust
A Grantor Trust is a trust where the grantor has retained certain control over the trust. Any trust income is taxed on the Grantor’s personal tax return (1040), at the Grantor’s personal income tax rates. Conversely, a Non-Grantor trust’s income is NOT taxed to the Grantor, and the trust is taxed at the compressed (usually higher) trust rates on a trust tax return (1041).
As the tables above illustrate, Non-Grantor trusts are taxed at the maximum marginal rate of 35% once they produce over $11,350/year in income, whereas an individual earning $11,350 would only be subject to a 15% tax, therefore care must be taken in the selection of a Non-Grantor Trust.
Estate Inclusion or Estate Exclusion
If the Grantor has certain rights or too much control, the trust will be included in the Grantor’s estate upon death. Estate inclusion may be desirable, for example, if the Grantor has a modest estate, and the assets have appreciated since the Grantor obtained same, by including the assets in the Estate there will be a “step up in basis” upon the Grantor’s death – in other words, if a share of stock cost the Grantor $10, and is worth $110 upon the Grantor’s death, the beneficiary will receive that stock at the $110 level, and can sell the stock for $110 without a capital gains tax; if the stock was placed in a trust excluded from the Grantor’s estate (a “completed gift”) then the beneficiary will receive the stock at the Grantor’s cost basis (being $10 in this example) and if the stock is sold for $110, there will be a capital gains of $100. The tug-of-war between estate inclusion and estate exclusion can be complicated, and it is strongly suggested that an experienced attorney is consulted on such matters to avoid significant tax errors (and malpractice).
Mixing and Matching Grantor and Non-Grantor and Estate Inclusion and Estate Exclusion
For some estates, and under certain circumstances, the family may be served by a variety of the above – for example, a Revocable Living Trust is a Grantor Trust (income taxed to the Grantor) and included in the Grantor’s estate. Income will be taxed at the Grantor’s personal rates, and the assets will enjoy a step up in basis upon the Grantor’s death. The same Grantor might also benefit from a “Medicaid Trust” which will often be a Grantor Trust (income taxed to the Grantor) yet the Grantor will have no control of the assets, and the assets may or may not be included in the Grantor’s estate upon death. Usually, with a small enough estate, the assets will be included in the Grantor’s estate (for Federal Estate Tax purposes) to enjoy the step up in basis. The same family could ALSO potentially benefit from a Medicaid Trust (or other trust) that might be a Grantor Trust (taxed to the Grantor) but yet excluded from the estate – non-appreciated assets would be more appropriate in that trust.
Beneficiary’s Access and Control
There are times we want the beneficiary to have control of the trust – perhaps they are the successor Trustee, and the trust is dynastic in nature intended to benefit the beneficiary (and perhaps beyond). Or perhaps it is a small family, and the Grantor wants assets controlled by family members who are also beneficiaries.
Then there may be times where we do NOT want the beneficiary to have any access – an example would be a Special Needs Trust (or Supplemental Needs Trust) where the beneficiary would lose means tested governmental benefits (such as Medicaid). In that instance, we want the Trustee to have very tight discretion and guidelines on how to help the beneficiary, without being “too helpful” and costing the beneficiary their benefits.
Interested Beneficiaries
In my practice, a large portion of our trusts involve Trustees who are also beneficiaries (Interested Trustees). The Trustee may be in charge of their own separate share, and/or also in charge of other beneficiary’s shares. For example, in a small family, perhaps the oldest child will be the initial trustee following the death of the Grantor(s), and there may be younger siblings, and in that example, the Trustee would be an Interested Trustee on the Trustee’s separate share, and an Independent Trustee (or Disinterested Trustee) on the shares of his/her siblings. When making distributions for him/herself, the Trustee will be limited to the “ascertainable standards” of their own Health, Education, Maintenance or Support (HEMS) – this “standard” provides “creditor and predator” protection from the trusts; one way to simplify is to say if the Trustee had completely unfettered access, the assets would be more like the Trustee’s own personal bank account than a trust. Regarding the sibling’s shares, the Trustee would be able to distribute assets for any reason that made sense to the Trustee, without breaking the protections of the Trust.
Conclusion
It is my hope this brief piece was able to clarify some nomenclature and where various trusts can make sense – as with any legal article, you should consult a qualified attorney when in doubt or before establishing your Trust.

Attorney Justin Peltier is a Massachusetts Estate Planning Attorney.  Please visit http://www.jpestateplanning.com/ for additional information.

This blog post was written by Gary B. Garland and can be seen here.

Estate and Asset Protection Planning Opportunities 2011-2012

The 2010 tax year certainly proved to be a challenge for estate planners due to the uncertainty of the estate tax and the generation-skipping transfer (GST) tax. However, with the enactment of the 2010 Tax Act there is a least a little more certainty over the next couple of years.
The new $5 million gift tax and generation skipping transfer tax exemptions provide a powerful gifting opportunity for clients in the next two years. Because the $5 million exemption is scheduled to expire in 2013, it is important for advisors to understand the estate planning techniques that should be explored with their clients before the expiration of these high exemption amounts.

In addition to the increased exemption amount, the 2010 Tax Act includes a provision giving the executor of the estate of a first spouse to die the option of shifting any unused estate tax exemption amount to the surviving spouse. Thus, for example, if the first spouse used only $3,000,000 of his $5,000,000 exemption amount, his estate could elect to have the remaining $2,000,000 pass to the surviving spouse, giving her a total of $7,000,000 of estate tax exemption. Although this portability provision seems simple on the surface, it introduces important planning considerations that will be discussed during this session.
With a good fundamental understanding of the current gift and generation skipping transfer tax exemption rules, one will be able to identify significant opportunities to shift wealth to future generations.

To visits me website for Massachusetts Estate Planning from a MA estate planning attorney go to http://www.jpestateplanning.com/


This post was written by Robert Keebler, CPA, MST, AEP and can be viewed here.