4 Reasons Why a Living Trust is Preferred over a Will

 

Posted on: June 26th, 2014

Many consumers and professionals now prefer an estate plan that uses a revocable living trust over a will as the primary estate planning document. Here are four reasons why:

1. A properly prepared and funded revocable living trust plan avoids probate at death, including multiple probates if you own property in other states. A will must go through probate to be verified and enforced, and if you own property in more than one state, your family could face multiple probates, each one according to the laws in that state. Avoiding the cost of probate is often a factor when choosing a living trust, but many people are just as interested in avoiding the court process altogether, along with its delays, lack of privacy, loss of control and emotional stress.
2. A properly prepared and funded living trust avoids court interference at incapacity. Most people prefer to have their care and assets managed privately by people they know and trust, instead of being placed in a court guardianship, which is costly, time consuming, public and stressful. It’s important to note that a will is of no help at incapacity because a will can only go into effect when you die.
3. A living trust brings all of your assets together under one plan with one set of instructions. (Possible exceptions are IRAs and other tax-deferred plans.) This makes it much easier to provide fair inheritances to your beneficiaries, as opposed to trying to balance inheritances with beneficiary designations and joint ownership because of fluctuating values of investment accounts, life insurance policies and other assets. By contrast, a will only controls assets that are titled solely in your name; it does not control most jointly owned assets or those for which you have named a valid beneficiary.
4. A properly prepared and funded living trust is more private than a will and is not as easily contested. Because probate is a public process, disgruntled heirs and other interested parties are invited to submit claims and contest your will, and unwanted solicitors can have access to your family’s personal and financial information. While a living trust cannot guarantee complete privacy, it is much more private than a will, which is guaranteed to be made public through probate.

What, then, is a properly prepared and funded living trust? “Properly prepared” means the documents are written correctly according to the law and your desires. This is best accomplished by having an experienced estate planning attorney prepare your trust. “Properly funded” means you all assets are properly titled in the name of your revocable living trust and proper beneficiary designation forms are completed naming your revocable living trust as beneficiary. Your revocable living trust only controls the assets that have been transferred to it. If you forget to put an asset into your trust, it will be added to your trust after you die through probate before it can be distributed along with your other assets according to your desires as set forth in your revocable living trust.

 

For all your Massachusetts estate planning needs, contact Massachusetts estate planning attorney Justin Peltier here: justin@jpestateplanning.com.

 

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/