Trust Based Estate Plans vs. Will Based Plans

Many people now choose a revocable living trust instead of relying on a will or joint ownership in their estate planning. A living trust that has been properly prepared and funded with your assets can provide many benefits for you and your loved ones.

How many of these benefits of a revocable living trust are you familiar with?

• Avoids the time and expense of probate when you die.
• Avoids multiple probates if you own assets in more than one state.
• Provides easier, more efficient administration of your estate.
• Prevents court interference at incapacity.
• Gives you and your family maximum privacy by avoiding public court processes.
• Minimizes emotional stress on your family.
• Brings all of your assets into one plan controlled by one set of instructions.
• Prevents unintentional disinheriting.
• Makes it easier to make equitable (fair) distributions to your beneficiaries.
• Lets you keep assets in the trust until your beneficiaries reach the age(s) you want them to inherit.
• Can continue longer to provide for a loved one with special needs.
• Assets can remain in the trust and be protected from beneficiaries’ creditors, spouses, divorce proceedings, irresponsible spending and future death taxes.
• Prevents the court from controlling inheritance of minor children.
• More difficult than a will to contest.
• Provides effective pre-nuptial protection.
• Can be changed or cancelled at any time.
• Allows for professional asset management with a professional trustee.
• Can include tax planning to reduce or eliminate state and/or federal estate taxes.
• Lets you keep maximum control while you are living (even if incapacitated) and after you die.
• Peace of mind.

It will probably cost more initially to set up a well-drafted living trust than to have a will prepared. One reason is that a living trust usually has more provisions because it deals with issues while you are living as well as after you die, and a will only deals with issues after you die. When comparing costs, remember that the true cost of a will must include the costs of probate when you die, of a possible conservatorship if you become incapacitated and the costs of a guardianship if you leave assets to minor children.

After weighing the costs and benefits, it is easy to see why so many people and professionals prefer a living trust.

Should I Name My Trust beneficiary of my IRA?

I often say that your estate plan is only as good as your beneficiary designations. So why then for some what is their biggest asset, and IRA or a qualified plan, would they not list their Trust as beneficiary? ANSWER- Either their trust has not been drafted to accommodate this or they were unaware of its benefit or misinformed about the consequences.

Trust are often my favorite tool in the tool box and are no more appropriate that in the world of qualified money. A properly drafted trust can get the best of both worlds; conduit treatment for RMD purposes, and asset protection for the beneficiary, if desired.

Now there are some reasons why a Trust might better be suited as an accumulationt Trust rather than a conduit trust, most notably when you have a special needs beneficiary and the governmental benefit outweigh that tax advantage of RMD distributions. But for most others, a comprehensively drafted trust as beneficiary of an IRA will serve the beneficiary well.

What about RMDs? If "The Smith Trust" is listed as the beneficiary, you need to dig further into the trust. Life expectancy distributions would, in this case, be based on the oldest beneficiary. Not the worst case result. If there is a charity listed as a current or contingent beneficiary, there is a good chance that the IRA must follow the 5 year payout rule. If you have beneficiaries of differing ages, I suggest naming as beneficiary "the sub trust created for Bill Smith Jr in the Smith Family trust" along with Bill Jr's share %. This way each child or beneficiary will get life expectancy distributions based on their particular RMD table.

For maximum benefit and protection, I will often draft a standalone Retirement Trust and name it as the sole beneficiary of an IRA. This is an irrevocable trust whereby the Trust takes an RMD distribution based on the oldest beneficiary and the Trustee has authority to "sprinkle or spray" the after tax distribution among the beneficiaries as the trustee sees fit. This would be an excellent solution for troubled, at-risk, or divorce prone beneficiaries.

Under Treas. Reg. § 1.401(a)(9)-4 Q&A 5(b) the requirements for a Trust to qualify as a designated beneficiary are:

(1) The trust is a valid trust under state law, or would be but for the fact that there is no corpus.
(2) The trust is irrevocable or will, by its terms, become irrevocable upon the death of the employee.
(3) The beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in the employee’s benefit are identifiable from the trust instrument within the meaning of A-1 of this section.
(4) The documentation described in A-6 of this section has been provided to the plan administrator.

Too often do IRA's go outright by way of beneficiary designation, for the informed advisor and savvy client, they don't have to.

Justin Peltier is an estate planning attorney with offices located in Merrimac, MA with the sole focus of estate planning, elder law, asset protection, trust and probate 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. Thank You.

 

Business Owners: Have You Planned Your Exit?

You've worked hard building your business, but have you thought about what will happen when you are no longer there running the show?
According to one study (Small Business Review, Summer 2001), only 30% of all family-owned businesses survive to the next generation; only 12% make it to the third generation; and a meager 3% are functioning into the 4th generation and beyond.
Why? Most business owners simply do not plan an exit. They do not do proper estate planning, which often results in unnecessary estate taxes that drain the life out of their businesses. And they do not plan for a successful transition to the next generation.
Who could take over your business? You may have more choices than you think.
Family members are often a logical choice. Most business owners feel a certain pride in being able to pass down a family business. In fact, you may already have a child or two working in the business with you.
Depending on your financial needs, you can gift and/or or sell your business to family members. Some techniques will provide you with retirement income and let you transfer the business at a discount, saving estate and gift taxes. Most let you keep some control.
Be sure to consider family members who will not be involved with the business. Life insurance is often used to "equalize" inheritances. You also need to be objective when considering the abilities of family members whom you consider potential successors.
Business partners are also logical options. You can have reciprocal buy/sell arrangements with each other, so that when one of you is ready to retire or dies, the other automatically buys his/her share of the business. Life insurance is often used to fund these arrangements.
Your employees could also be a source. An Employee Stock Ownership Plan lets your employees enjoy the benefits of ownership, yet you can keep control until your retirement or death.

How about a charity? Charitable trusts can provide terrific income, capital gain and estate tax savings. With a charitable remainder trust, you can receive a lifetime income. And you have the added benefit of helping a charity that has special meaning to you.
Of course, you can also consider an outright sale to another company. But the tax benefits are usually not as good as other planning options.
A good business succession (exit) plan should also provide for the possibility of a long-term illness or disability. Make sure you work with an experienced professional who can help you evaluate your goals and objectives, and can provide you with the best options for your situation.

When Is It Time to Service Your Estate Plan

If you own a car, then you know it requires regular servicing in order to perform well and be reliable. More than likely, your car came with a recommended schedule for service, based on how many miles it has been driven; after a certain number of miles, you need to change the oil, replace the brake pads, rotate the tires, and so on.
If you have a newer car, you probably have an irritating dash light that comes on when it's time for service and stays on until the mechanic resets it. Either way, whether you pay attention to the odometer or rely on that dash light, it's pretty easy to know when it's time to service your car. And if you keep driving it without servicing it, it's a sure bet your car will let you down.
Like your car, your estate plan needs "servicing" if it is going to perform the way you want when you need it. Your estate plan is a snapshot of you, your family, your assets and the tax laws in effect at the time it was created. All of these change over time, and so should your plan. It is unreasonable to expect the simple will written when you were a newlywed to be effective now that you have a growing family, or now that you are divorced from your spouse, or now that you are retired and have an ever-increasing swarm of grandchildren! Over the course of your lifetime, your estate plan will need check-ups, maintenance, tweaking, maybe even replacing.
So, how do you know when it's time to give your estate plan a check-up? Well, instead of having mileage checkpoints, your estate plan has event checkpoints. Generally, any change in your personal, family, financial or health situation, or a change in the tax laws, could prompt a change in your estate plan. Use the following list to guide you.
It's a good idea to review your estate plan every year. Set aside a specific time every year (your birthday, anniversary, family gathering) to review it.

Event Checkpoints for Your Estate Plan
You and Your Spouse, If Married

• You marry, divorce or separate
• Your or your spouse's health declines
• Your spouse dies
• Value of assets changes dramatically
• Change in business interests
• You buy real estate in another state

Your Family

• Birth or adoption
• Marriage or divorce
• Finances change
• Parent or relative becomes dependent on you
• Minor becomes adult
• Attitude toward you changes
• Health declines
• Family member dies

Other

• Federal or state tax laws change
• You plan to move to a different state
• Your successor trustee, guardian or administrator moves, becomes ill, changes mind
• You change your mind

Should You Disinherit a Child?

Most parents choose to leave their estates equally to their children. But sometimes, parents intentionally choose to not leave anything to one or more of their children. There may be what the parents consider to be legitimate reasons, such as if one child has been more financially successful than the others, or not wanting a special needs child to lose government benefits, or not wanting to leave an inheritance to an irresponsible or drug-dependent child. And sometimes a parent wants to disinherit a child who is estranged from the family, or to use disinheritance as a way to get even and have the last word.

But regardless of the reason, disinheriting a child is hurtful, permanent, and will undoubtedly affect that child’s relationship with his or her siblings. Courts are full of siblings who sue each other over inheritances but even if they don’t sue, it is highly unlikely they will be having family dinners together. Finances aside, there is symbolic meaning to receiving something from a parent’s estate.

Disinheriting a child may be short-sighted and even completely unnecessary. For example:

• A child who appears to be more successful financially may have trouble behind the scenes. This child may actually need the inheritance now or in the future; fortunes can change quickly, marriages can collapse, and people can become ill. Consider that if you disinherit this child, you also disinherit your grandchildren by this child, unless you make specific provision for them in your estate plan.
• You may have a spouse, child, sibling, parent or other loved one who is physically, mentally or developmentally disabled—from birth, illness, injury or even substance abuse—who may be entitled to government benefits now or in the future. Most of these benefits are available only to those with very minimal assets and income. But you do not have to disinherit this person. You can establish a special needs trust that is carefully designed to supplement and not jeopardize the benefits provided by local, state, federal or private agencies.
• You may have a child who is irresponsible with money or is under the influence of drugs or alcohol. Consider that this child may actually need financial help now or in the future, and may eventually become a responsible and/or sober adult. Instead of disinheriting this child, you can set up a trust and give the trustee discretion in providing or withholding financial assistance; you can stipulate any requirements you want the child to meet.

How you choose to include your children in your estate plan says a good deal about your values and faith. Not disinheriting a child who has caused you grief and heartache can convey a message of love and forgiveness, while disinheriting a child, even for what seems to be good cause, can convey a lack of love, anger and resentment.

If you have previously disinherited a child in your will or trust and you have since reconciled, you need to update your plan immediately. If your decision to disinherit a child is final, be sure to discuss it with your attorney; he or she will know the best way to handle it in your estate plan. Finally, tell your child that you are disinheriting him or her so it doesn’t come as a complete surprise. Explaining your reasons will allow for honest discussion, may help deter the child from blaming siblings later, and may prevent a costly court battle.

The Best Estate Plan is No Match for Unprepared Heirs

 

Over the course of my career, I have encountered many families who were unprepared for the inevitable aging and loss of parents. These families experienced unexpected rivalries that threatened to cripple or destroy the very family unity and wealth that the parents and their estate planning attorney hoped to protect.

Well-drafted estate plan documents are designed to reflect clients’ instructions for passing their legacies to the right beneficiaries and providing for care of clients and their families. However, the best estate plan is no substitute for preparing heirs to deal with: changing care needs of aging parents and other family members, the complexities of estate and trust administration, and how to avoid elder financial abuse and prevent or resolve conflict among siblings.

Rivalries and conflicts may arise out of innumerable scenarios. For example, consider what can happen when one sibling steps into a fiduciary role while the parents are living and no longer able to manage their affairs unassisted or when a parent passes on. The new fiduciary and other siblings have no idea what Mom or Dad promised to other siblings. Misunderstanding and conflict can arise when monthly cash “gifts” from Dad to one sibling are suddenly cut off without notice or discussion because the trustee had no idea Dad was making these gifts; or a daughter claims Mom had always promised her all of the family jewelry plus an equal share in the balance of the estate. Without a process for communication and resolution, the next step is too often costly litigation and permanent breakdown of family unity.

Conflict is Inevitable. Anticipate it.
Decide on a Process for Resolving it.

There will be disagreements among family members. Whether disagreements are over relatively small or very significant issues, they are inevitable. What is not inevitable is that the family will know how to deal with disagreements and manage conflict. It’s how families prepare for and manage conflict that makes the difference.

Few parents want to think about conflicts among their children, but successful families engage in foundational processes that prepare heirs for parents’ inevitable aging and loss. Working with a neutral mediator in a confidential setting, these families engage in education and planning, anticipate and discuss possible conflicts, and institutionalize conflict resolution. These processes help families and their estate planning attorneys avoid or at least significantly reduce family discord, which in turn helps protect and preserve family unity and wealth. Estate planners have a unique opportunity to integrate estate planning mediation into the estate planning process and educate clients and their families about its benefits.

Prepare Heirs Using Confidential
Estate Planning Mediation

Estate planning family mediation is an appropriate estate planning foundation. This involves bringing all family members together with a mediator in a confidential setting. Mediation conducted by a neutral mediator serves a different purpose than family meetings conducted by the estate planning attorney. At least in California, mediation confidentiality is provided by statute, and mediation with a neutral mediator allows for confidential open discussion. Family meetings with the estate planning attorney are focused on reporting and are limited to topics that avoid breach of the attorney-client privilege. In mediation, the mediator is not competing with the estate planning attorney, attorney-client privilege is not at risk, and the result is a memorandum of understanding for the family and the estate planning attorney.

In this confidential setting, family members hear each other’s concerns and ideas, learn and discuss, e.g., what is required of a family fiduciary who will administer the trust/estate both during the lifetimes and after the deaths of the parents; who wants the position and who might best serve as fiduciary; how to avoid elder abuse and elder financial abuse; express thoughts about inheritance; allow all family members to participate in brainstorming ideas to meet their family needs. The approach is meant to provide a safe setting for family members to express concerns and ideas and work out their own solutions in light of the parents’ wishes. Involved family members are less likely to dispute what they had a hand in creating. Of course, the parents are free to plan their estates as they desire with the advice of their own estate planning attorney.

A signed memorandum of understanding is produced, reflecting the ideas and issues discussed, solutions proposed, agreements reached, and a statement whether or not, and to whom, the memorandum may be released. Confidentiality of this memorandum may be waived to be shared with the parents’ estate planning attorney, investment advisor, and other appropriate advisors, as a roadmap for estate and financial planning.

Participants may return to mediation to resolve new conflicts or matters that have changed since the initial mediation. Should a family member later raise issues with the attorney about the parents’ estate plan, the attorney will be able to refer the family member back to the memorandum of understanding in which they participated.

Both estate planners and their clients benefit from estate planning family mediation. Prepared heirs are less likely to create or sustain conflict within a family or against the estate planning attorney. Estate planners who reinforce estate planning family mediation with their clients reduce the chances for unresolved misunderstandings and disputes, and increase opportunities to protect family unity and wealth.

 

This article was originally published in estateplanning.com and can be seen here
http://www.estateplanning.com/How-to-Leave-Assets-to-Adult-Children/

 

 

Six Biggest IRA Beneficiary Form Mistakes

 

Americans hold nearly $15 Trillion in IRA’s and other qualified plans. If you have a retirement plan you have made a series of very wise deci­sions. Now you must take steps to protect and preserve what you have worked so hard for.

Do you want your heirs to have to chase after the IRA money? Better make sure you have an up to date beneficia­ry form. On January 26, 2009, the United States Supreme Court unanimously ruled in the case of Kennedy vs DuPont that the plan administrator was not required to honor the divorce decree. William and Liz Kennedy were married in 1971 while William was an employee of DuPont and a participant in its Savings and Investment Plan. William designated Liz as the sole beneficiary of his plan benefits. When William and Liz divorced in 1994, the divorce decree terminated any of her rights to William’s pension or retirement benefits. William never changed his beneficiary form. When William died in 2001, his estate demanded the plan funds based on the domestic relations order. The Du­Pont plan administrator refused and disbursed the funds to Liz, in reliance on William’s beneficiary designation form. The ex-wife, who was still listed on the beneficiary form, gets the money, even though the divorce court ordered her rights terminated and she signed a waiver.

It is important to understand that your will does not control who gets your IRA.

The Beneficiary Designation Form trumps your will. Filling out the Beneficiary designation form correctly is critical. In my practice I see clients who come in with sophisticated wills or trusts. When I ask about the IRA it is often the largest asset. When I ask what the Beneficiary Designation form says they look surprised. They have no idea what the form says. Many cannot even find the form or remember when they last reviewed it.

So what are the Biggest mistakes?

Mistake #1. You cannot find the form. The Supreme Court made it clear, the beneficiary form rules. Without the form you are stuck with the default provisions of the plan. You may not like the result. Frequently it goes to your es­tate. This is the last place you want it to go. Make sure you and your family can find the form. Do not assume that the plan administrator will be able to find it either. In this time of companies merging, going out of business, getting sold, or moving, files get lost or misplaced. Do you think that when all those files are getting moved that someone takes the time to say wait a minute these Beneficiary forms are very important! Not likely. Solution Get an acknowledged copy of your beneficiary form from the IRA administrator. Make sure that you keep the forms in a place that you and family can easily find. All of your planning goes out the window if the form cannot be found.

Mistake #2. The form is out of date. Have there been any changes in your life, such as marriage, birth of a child or grandchild, divorce, job change, retirement, a death? Remember that your will cannot change the beneficiary of your plan! It is imperative that you review the beneficiary form regularly. This is basic, but unfortunately many get it wrong. In 2001 The New York Post ran a headline declar­ing a “Pension Pickle!” after Anne Friedman’s $900,000 pension went not to her loving husband of nearly 20 years but to her sister, who refused to share her new found wealth. The beneficiary form Anne filled out in 1974 and never updated after she married was binding.

Another problem I have seen far too often is accidentally disinheriting a child’s family. You name your three chil­dren as beneficiaries, intending each child to receive 1/3rd. Your oldest child predeceases you. At the time of your death your two surviving children receive 50% each instead of the 1/3rd you intended. Your oldest child’s family gets nothing.

Solution. Review the form annually. Tax time is an ideal time since you are reviewing all of your financial records anyway.
Mistake #3. You have not named a backup benefi­ciary. If you do not name a backup beneficiary then who knows who gets the money. The Probate Court will most likely be in charge. Example: you name your spouse as the only beneficiary. If your spouse dies before you, there is no beneficiary so your IRA will be liquidated, taxed and what is left will be distributed to your estate. It is a good idea to name someone, say your children, as contingent beneficia­ries. If you name backup beneficiaries then the IRA has a chance of getting it where you want it to go.

A single person may name his parents first and then St Nor­bert College as the backup beneficiary. Naming a charity is a great planning idea but that is a topic for another day.

Mistake #4. Naming a minor as a beneficiary. A minor cannot control funds. Court appointed Guardians are in control. This will result in a trip to the Probate Court, and later, when the child turns 21 (18 in some states), to the Sports Car Dealership. The only question will be what color! Solution Set up a Trust so the funds are managed under your instructions, by people of your choice.

Mistake #5. Missing out on the Stretch IRA Op­portunity. The Stretch IRA can turn a modest IRA into millions for your beneficiary. The Stretch IRA is not some­thing that you can buy. Rather it is how you set up your beneficiary designation. Stretching the IRA payments over the lifetime of the beneficiary allows the IRA to grow tax deferred. Let’s do some calculations. We have a $100,000 IRA go to a 30 year old child. If the funds earn an aver­age of 7% over the life of the child which according to IRS tables is 53 years, the value would be $1,026,533. A $100,000 IRA has become a very significant asset. Naming an even younger grandchild can supercharge the result to over $2,000,000.

This is great but will it really happen? Probably not! Why? IRS statistics show us that 90% of IRA’s are cashed out within 6 months of death. This is called the “Found Mon­ey” syndrome. This new wealth is unexpected gain to be spent.

Solution Something needs to be put in place to make sure that the funds will be used over a lifetime. This is a trust. It has lots of different names. IRA Stretch Trust, Retire­ment Benefits Trust, Stand Alone IRA Trust just to name a few. Regardless of the name the purpose is to preserve the Stretch Opportunity.

Mistake #6. Not providing Creditor Protection for the Beneficiary. Would you like to protect your child’s inheritance from divorce, lawsuits, creditors, business failure, even bankruptcy grabbing the IRA? Some children suffer from poor money management skills and others have special needs. The divorce rate in this country is quite high. If your IRA is left to your child who later gets di­vorced who will end up with the funds? Would you like to protect assets and keep them in the family? Are you aware that you can do this? Solution In my office we build Castle Trusts. Historically why were Castle’s built? Protec­tion. We like to make sure that your loved ones have the Castle Trust protection. These are trusts that have special asset protection features built in to them that help preserve your wealth and safeguard your assets.

The Bottom Line

The difference between effective planning and getting it wrong can cost your family millions of dollars. Done cor­rectly your retirement plan can preserve some significant funds for future generations to enjoy. Wouldn’t it be great if everything always worked out the way you planned? In a perfect world it does. But I am sure you are aware ours is a world full of surprises where Murphy’s Rule often jumps up to bite you. The rules surrounding retirement plans are complicated enough, don’t compound the difficulty by messing up the beneficiary forms. When a good portion of your assets consist of a retirement plan you need expert help.

Important: The information in this article is for general in­formation purposes only and is not, nor is it intended to be, legal advice, including legal advice for Internal Revenue Code purposes as described in IRS Circular 230. Tax law changes frequently, so please consult your financial advisor.

 

This article was orignally posted in estateplanning.com you can view it here

http://www.estateplanning.com/Six-Biggest-IRA-Beneficiary-Form-Mistakes/