Category: Alerts

Just what is probate? Living probate is a legal process that determines your fate when you cannot, generally because you’ve been disabled by injury, illness, or mental incapacity. Death probate is the process that disposes of your estate after you die. Having a will virtually guarantees that your estate will go through probate. While probate attorneys might be happy with these definitions, trust attorneys would draw your attention to all the problems that come with probate: red tape, expense, publicity, delay, loss of control, and in the case of living probate, potential for personal humiliation.

THE IMPACT ON SENIORS

Way back in 1989, the American Association of Retired Persons (AARP) decided to look carefully at probate and its impact on seniors. As the organization reported in its study, Probate: Consumer Perspectives and Concerns, probate is a special concern for older Americans.
The study found that 90% of all probate cases involved the disposition of property owned by people 60 years of age or older. Because the chances of becoming incapacitated increase dramatically as we age, living probate is also much more likely to involve seniors.

AARP went on to reveal that consumers nationally spend as much as $2 billion or more each year on all probate-related expenses, with attorneys’ fees alone representing more than $1.5 billion of that amount. The study noted that attorneys’ and executors’ fees could consume as much as 20% of small estates, and as much as 10% of even uncomplicated estates . And that’s only the beginning. Add to these fees such expenses as court costs and appraisers’ fees, and your heirs could end up with a legacy that’s considerably less than you intended.

HOW PROBATE AFFECTS SENIORS’ FAMILIES

AARP found that probate usually comes into play after the surviving spouse of marriage dies. Most couples own property jointly. So, at the first death, much if not all of their property immediately becomes the sole possession of the survivor. When the survivor dies, however, their property will have to go through probate before it can pass on to their heirs. Since few couples take into consideration probate costs, many would be saddened to learn how big a dent it will make in their intended gifts.

Seniors aren’t the only ones who may be blind-sided by probate. Their children and grandchildren may feel the bite as well. A study by American Demographics Magazine revealed that many Baby Boomers are so financially strapped today that they are deferring an important financial goal: saving for retirement. Instead, they are counting on their inheritance from Mom and Dad to help pad their meager retirement funds.

So, the higher the probate fees, the less of a legacy they will receive, and the harder it will be for them to retire.

WHAT THE AARP HAS TO SAY ABOUT PROBATE

Unreasonable expenses aren’t probate’s only drawbacks. There’s also the time involved.
AARP’s study found that probate frequently lasts longer than a year. Having a will seemed to make no difference in the time required. In fact, it could drag the process out even longer.

Now, add to the expenses and delays of probate these problems: a loss of control over one’s affairs and the publicity it requires. You can see why AARP declared that:

Probate as it is generally practiced in the United States is anachronism… and, to the extent that the probate system is unreasonable, attorney’s fees in connection with the probate work are unreasonable.

WHY ATTORNEYS DISAGREE ABOUT PROBATE

AARP’s edict sums up the reason for so much rancor between pro-probate and pro-trust attorneys. It’s a matter of money, and lots of it. The AARP study noted that attorneys often build lucrative practices focused solely on probate. Many use cheap wills as a “loss leader.” According to AARP:
This marketing practice may set a costly trap for consumers. Attorneys lay the groundwork for their probate practice by writing wills. Some write wills cheaply as a way to generate other business, prompting the companion to loss leader discounts in retail trade. When the client dies, the same attorney, or other member of the firm, probates the will at a high fee enough to recover any money lost on the earlier discount.

But not all attorneys have been happy with the status quo and escalating consumer dissatisfaction with probate. A growing number, such as the members of the American Academy of Estate Planning Attorneys, would rather spare their clients the expense, delay, publicity, inconvenience and potential for public humiliation that can be such an integral part of the probate process.

IS PROBATE EVEN NECESSARY?

“Death Probate” has these primary functions:

• It verifies the validity of your will.
• It inventories and establishes the value of your significant assets.
• It provides your creditors with the opportunity to make claims against your estate.
• It gives disgruntled family members a forum for challenging your will.
• Lastly, when all these steps have been completed, it transfers the title to your property to your heirs, as you’ve instructed in your will.

Do you really need probate to accomplish these tasks? AARP says no. Instead, it recommends alternatives such as the Revocable Living Trust.

HOW TO AVOID PROBATE WITH A LIVING TRUST

Whether you die with a will or without one, probate will be required if you owned any property in your own name. A Living Trust makes probate unnecessary by changing the way you own your property. Although you still have absolute control over all your assets, just as if you owned them directly, you do not own property in your own name. Instead, your Living Trust owns your property. And you own your Living Trust.

At first blush, that can sound like a scary proposition. But it isn’t, because you are the trust maker, the trust owner and trust beneficiary. So you and you alone control your trust and the assets it owns. You can buy, sell, trade, derive income from, mortgage and give away your trust assets, just as before. You can change your trust, add to it, or even revoke it any time you want. Bottom line: the fact that your trust owns your property has little, if any, impact on the way you live and conduct business each day.

But what a difference the trust makes when you die. Then, the person you’ve chosen to take charge of your trust, your successor trustee, steps in and follows your direction for the disposition of your estate. Because you owned no property in your own name, there’s no need for probate. So there’s no publicity and, compared to probate, very little expense, delay or inconvenience for your family.

Living Trusts are also indispensable for avoiding the indignity of living probate, the court proceedings that determine who will oversee your affairs in the event of your disability. A Living Trust helps you ensure that your physical and financial needs are handled as you would want them to be.

The Living Trust isn’t exactly a new idea. Its origins date back hundreds of years. More importantly for Americans, the concept has been used in the U.S. since 1765 when Patrick Henry drafted a trust for Robert Morris, governor of the Colony of Virginia. During this century its many proponents have included John F. Kennedy, William Waldorf Astor, John D. Rockefeller, H. L. Hunt, Bing Crosby and Frank Sinatra. As consumers become better educated about the pitfalls of probate, all signs point to Living Trusts becoming even more popular in the years ahead.

JUST FOR THE WEALTHY?

Now that you know all the problems that probate entails, it’s probably the last thing you’d want to bequeath your loved ones. But is it a strategy worth pursuing only if you’re a Rockefeller or Vanderbilt?
Absolutely not. Even if your estate is valued at no more than $100,000, you should probably have a Living Trust to avoid death probate. And regardless of how much your estate is worth, you should definitely have a Living Trust if you want to avoid living probate.

Who should you turn to for help with your Living Trust? The American Academy of Estate Planning Attorneys recommends that you start with an attorney who concentrates on this area of the law. That’s the best way to ensure that your legal professional has invested the time and energy to providing you with the most current estate planning techniques.

But be wary. Remember that wills and probate are also estate planning tools. So make sure your attorney focuses on the Living Trust, rather than wills.

GETTING THE MOST FROM YOUR LIVING TRUST

Once you’ve worked with your estate planning attorney to draw up your Living Trust, don’t stop there. Taking advantage of everything this powerful estate planning tool has to offer requires these final steps:

• Make sure you fund your Living Trust. Remember that it only works if the title to your property has been transferred to the trust. If you keep your property in your own name, you’ve defeated its purpose. These days, most financial advisors are experienced in funding Living Trusts, so be sure to turn to your advisor for help if you need it.
• Keep your Living Trust current. As you acquire new property, be sure that you transfer title to these assets to your Living Trust.

Ideally, a Living Trust is a living, breathing document, and a plan that will serve you for many years to come. That means, however, that you’ve got to take the time to have it updated as your family’s situation, your goals, and your needs change. A good estate planning attorney will stay in touch with you over the years to ensure your Living Trust continues to serve you well.

Yes, it is true that a Living Trust will cost you more up front than a “discount” will. But in estate plans, as in all other areas, you get what you pay for. The bargain you buy today might just cost you or your heirs a fortune – your fortune – down the road.

© American Academy of Estate Planning Attorneys, Inc.

Although Joint Tenancy offers some short-term conveniences, in the long run it poses a host of problems that can cost you and your loved ones many times the expense and headaches you thought you were avoiding.

It happens almost automatically.  When you and your spouse open a checking account, buy a car, purchase a home, or acquire just about any other asset you can think of, the first — and usually only — impulse is to put the title in both your names as Joint Tenants.

Married couples aren’t the only ones relying on Joint Tenancy.  This ownership strategy is widely used by friends, life partners, parents and their children, among others.  It’s an ownership method so pervasive, many consumers often say they know of no others.

Why is Joint Tenancy so frequently employed?  Ironically, otherwise well-informed consumers choose Joint Tenancy because they’ve heard it is a cost-free replacement for a will and that it avoids probate.  These consumers focus on the fact that at the death of one of the owners, Joint Tenancy — or more precisely, Joint Tenancy with Right of Survivorship — immediately passes full ownership of an asset onto the surviving Joint Tenant by operation of law.  So, yes, it does circumvent probate and avoid the need for a will.  At least for the moment.

What all too many Americans unfortunately overlook is the fact that Joint Tenancy only temporarily avoids probate.  It also brings with it a slew of problems that more than make up for any short-term convenience it provides.  In fact, Joint Tenancy can end up costing you — and your loved ones — many times the expense and headaches you thought you were avoiding.

Consequences include:

• Joint Tenancy may avoid probate at the first death.  But upon the death of the surviving Joint Tenant, the entire estate will have to pass through probate.
• Joint Tenancy means that the first person to die loses all control over to whom or how his or her assets will ultimately be distributed.
• With Joint Tenancy, spouses effectively lose their right to a double federal estate tax exclusion.
• Depending on the state in which you reside and the state in which the joint tenancy property is located, Joint Tenancy may expose assets to capital gains taxes that otherwise could have been avoided.
• When the Joint Tenants aren’t husband and wife, gift taxes may be due.
• Joint Tenancy exposes one Joint Tenant to the financial risks, liabilities, and other potential problems created by the other Joint Tenant.

Let’s take a closer look at each of these areas and how they may affect you.

PROBATE, AFTER ALL

Frequently called the “Poor Man’s Will,” Joint Tenancy is often used as a replacement for wills and as a tactic for avoiding probate.  But this is only half the story.  Joint Tenancy does alleviate the need for probate when the first owner dies.  But when the second/last owner dies, the entire estate goes through the often costly, time-consuming and nightmarish probate process.

After 30 years of marriage, Gene and Marjorie Cummings had accumulated the usual trappings of married life. The home they bought 25 years ago for $100,000 was now worth $500,000. When they added in the value of their autos, furnishings, and cash accounts — all held in Joint Tenancy — they were slightly amazed to discover their estate was worth $1.5 million. When Gene died suddenly, Marjorie immediately became the sole owner of their $1.5 million estate by operation of law, circumventing the probate courts. But upon her death 15 years later, the entire estate — now worth over $2 million — was subjected to probate.

LOSING CONTROL

Today more Americans are involved in second marriages than in first. And often, remarriage means that either one or both of the partners has children from a previous marriage. Whenever a parent holds property in Joint Tenancy with a spouse, children are effectively disinherited. That’s one reason why parents with children from a prior marriage should rarely, if ever, own property in Joint Tenancy with a new spouse. Instead, remarried parents should choose ownership strategies that will help them ensure their children are well provided for in the event of their death.

Even when children from a prior marriage aren’t a factor, you may want to think twice about whether you want to give up total control over how the fruits of your life’s work are distributed at your death. Since many widows and widowers will eventually remarry, there’s a strong likelihood that someone your spouse may marry in the future will be the ultimate beneficiary of your estate. For some people, that’s of little concern. But most of us would rather see our assets benefit a relative, friend or favorite charity, rather than some stranger we’ve never met.

A TAXING ISSUE

As an estate taxation planning device, Joint Tenancy is not optimal. As the death of the first tenant, there may be little concern. Through the Unlimited Marital Deduction, the government lets spouses pass assets to one another at death estate tax-free. However, when the survivor dies, estate taxes can reduce the legacy the couple thought they were leaving behind. Why? At the death of the survivor, the value of the entire property is included in the survivor’s estate. If the sum of all of the survivor’s property is less than the amount that can be passed free of estate tax, this may not be a problem. This amount is $5 million for federal tax purposes, indexed for inflation. However, many states have a separate state estate or inheritance tax which kicks in at a much lower level.

CAPITAL GAINS EXPOSURE

Couples who live in one of the nine community property states — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin — pay a high price when they put assets in Joint Tenancy rather than owning them as community property. In these states, using Joint Tenancy can actually expose your estate to costly capital gains taxes. Here’s how.

The capital gains tax, that often-debated revenue generator for the federal government, is a tax levied against your profit when you sell an asset. To determine the amount of capital gains against which the tax will be applied, you deduct your cost basis in the asset — meaning your investment in it — from the price it fetches when you sell it. The difference is your capital gains, and that’s the sum which will be used to compute your capital gains tax. For instance, if you bought rental property for $125,000 and sell it later for $200,000, you would owe capital gains taxes on $75,000.

The federal government provides a capital gains tax break on assets in a person’s estate. Called a step-up in basis, it simply means that when you die, the government will consider your heir’s cost basis in an asset to be its current market value, not your original purchase price. So, if the rental property you originally bought for $125,000 is worth $200,000 when you die, your heir’s cost basis would be $200,000. If your heir sells it for that price, no capital gains tax will be due.

A very taxing situation occurs, however, when you live in a community property state but hold title to an asset in Joint Tenancy with your spouse. Instead of getting that step-up in basis on the entire sum — as your survivor would if the asset were community property or owned outright by you — the government allows him or her only half the step-up in basis.  That means when the asset is sold, more of the profit will be subject to costly capital gains tax.

California residents, Nick and Sandy Worthington, had an admirable art collection, with pride of place going to an acclaimed Matisse.  It was one of the first pieces they bought, paying $50,000 for it several years ago.  When Nick died last year, the painting was appraised at a whopping $500,000!  Unfortunately, Nick and Sandy had placed ownership of the painting in both their names, as Joint Tenants, rather than owning it as community property.  That meant the painting received the favorable step-up in basis treatment on only half its value.  So, much to Sandy’s dismay, instead of a cost basis of $500,000, she now has a cost basis of only $275,000.  If she were to sell the painting today, $225,000 of her profit would be subject to capital gains tax, an expense she could have avoided completely if she and Nick had titled ownership of the painting differently.

JOINT TENANCY AND GIFT TAXES

So far, we’ve focused primarily on the impact of Joint Tenancy and married couples.  But frequently, Joint Tenancy is used as a method of ownership between non-spouses.
For instance, friends often buy property together.  An aging relative will often make a younger relative a Joint Tenant on property or cash accounts.  Parents make their children Joint Tenants with them on everything from cash accounts to cars to the family home.

Unfortunately, the government takes a dim view of these transactions, sometimes considering them to be gifts, not estate planning strategies.  That’s why many Americans are shocked to discover that the step they’ve taken to avoid wills and probate will in the long run cost them many, many times more money than it saves.  Let’s look at some examples.

When a non-spouse is added to the title of property as a Joint Tenant, the government deems it to be a gift.  Gift taxes will become due, and the donor — the person presumably making the gift — will usually be liable for the taxes.  (Under extreme circumstances, however, the done — the person receiving the gift — may become liable.)  How much gift tax is due and when it is due depends on the asset.

For example, elderly relatives commonly add a younger relative or an adult child to their checking accounts, savings accounts and other cash accounts as a convenience.  As long as the new Joint Tenant withdraws money strictly for the use of the original Joint Tenant, no gift taxes are due.  But if he or she withdraws money for personal use, the original Joint Tenant will have to pay gift taxes on that amount.

The gift tax situation is even more dire when real estate is involved.  At the time a new Joint Tenant — who is not the spouse of the original Joint Tenant — is added to the title of real property, the government considers a gift to have been made.  Gift taxes will then be due on the portion of the property the new Joint Tenant receives.  For example, if a father decides to add his son as his Joint Tenant on his personal residence, the government will consider that the son has been given a gift equal to half the home’s value, and demand the father pay gift taxes accordingly.

Of course, there are some exemptions available for gifts.  Each year you may give away up to “pre-determined dollar amount”, indexed for inflation, per individual — and to as many individuals as you want — with no gift taxes due. Gifts in excess of that amount reduce the gift and estate tax exclusion. The gift and estate tax exclusion is $5 million, adjusted annually for inflation.

So, in many cases, the mere fact that you’ve added someone’s name as Joint Tenant to your checking account or real property may not actually require you to part with cold hard cash. Even if your gift falls within the exclusions described above, however, you must still report it on your federal gift tax returns.

EXPOSURE TO RISK

When you own property with a Joint Tenant, each of you owns half of the asset. That means you effectively lose control of half the property. Whether your Joint Tenant is your spouse or someone else, the implications of this exposure to loss are frightening. For example, half of your asset held in Joint Tenancy could be lost as a result of:

• Your Joint Tenant’s bad debts, back taxes or bankruptcy
• Your Joint Tenant’s divorce
• Lawsuits or damage awards filed against your Joint Tenant

More than exposure to risk, Joint Tenancy also deprives you of the day-to-day autonomy and control in managing your own asset. Consider, for example, that property is held in Joint Tenancy with someone else:

• You may have to obtain your Joint Tenant’s consent before you sell, pledge as collateral or engage in any other transaction involving your property.
• You may have to obtain the approval of your Joint Tenant’s spouse before you can dispose of your property.
• Your asset may fall under the jurisdiction of your Joint Tenant’s living probate, if your Joint Tenant becomes incapacitated through illness or injury.
• If your Joint Tenant is a child, your shared property may be the subject of guardianship hearings.
• If your Joint Tenant is a child, you run the risk that his or her financial inexperience, emotional immaturity, or the inevitable mistakes that are part of the growing experience, may have a disastrous financial impact on your shared asset.\
• Liquid assets — such as cash accounts — can be depleted by your Joint Tenant without any safeguards to protect you.

ALTERNATIVES TO JOINT TENANCY

Early on we said that Joint Tenancy is so pervasive, many people are hard-pressed to think of an alternative. Fortunately, there are several. For instance, you can own property solely in your own name. Or you and another person can own property as tenants in common. If you live in a community property state, you can elect that ownership option. Or, in some states, you can seek the special creditor protection spouses receive under tenants by the entirety. Each of these options avoids some of the pitfalls of Joint Tenancy.

However, none of them — and that certainly includes Joint Tenancy — is a replacement for the thoughtful estate planning that a qualified estate planning attorney can provide you.  In fact, all the objectives you might try in vain to achieve through Joint Tenancy can be achieved much more effectively through an option such as the Revocable Living Trust.  With a Revocable Living Trust, for example, you can:

Control exactly how your estate is distributed — including who your beneficiaries will be, when they will receive your legacy and how they will receive it. Ensure that children from another marriage — or children who have special needs — will receive fair treatment from your estate.

• Reduce your estate taxes or eliminate them completely.
• Take advantage of all other tax breaks to which you might be entitled.
• Retain complete control over your assets while you live.
• Put your legacy out of the reach of your heirs’ predators, creditors and others seeking a piece of your estate.
• Choose when, where and how you will make gifts to friends, family and worthwhile organizations.
• Enjoy peace of mind in the knowledge that you can make provisions for your care should injury, illness or some other incapacity make you unable to do so for yourself.

© American Academy of Estate Planning Attorneys, Inc.

Many Americans think that passing on their worldly goods is a simple proposition: they write out their final wishes, then, someone ensures that their wishes are carried out. Unfortunately, wills require probate, and in many states, there’s nothing simple about probate. It’s usually a highly technical, complicated and bureaucratic process that can drown your heirs in a sea of red tape. There are exceptions, however. In some states, small estates may be eligible for short-form probate. See your estate planning attorney to learn how your state’s probate rules will affect your estate.

HOW PROBATE WORKS

Roughly speaking, the process begins with the filing of your will and a petition to the courts to begin probate. The probate court will either approve your choice of executor (the person who will oversee the disposition of your estate) that you may have named in your will, or will appoint someone else to act as executor. Unless your estate is fairly simple, your executor may also hire an attorney to help with the process. (You may stipulate that your attorney also serves as your executor, for a modest savings in administration fees.)

At some point, your executor will have to present your will to the court and obtain its ruling on the validity of this document. Your executor must publish notification of your death and contact all your creditors so that they can submit their claims against your estate.

And we’re just getting started. Someone will have to inventory the valuables you’ve left behind, and appraisers may be called in to establish their value.

Depending on the state in which you lived, your heirs may be denied access to your assets until the final disposition of your estate. And in most states, a contest over the validity of your will virtually guarantees that your assets will be placed off limits until the will contest is decided.

Here is another aspect of probate that can cost your heirs dearly. Your executor must adhere to stringent rules governing your investments during the probate process. These rules limit your executor’s ability to buy, sell or take other action to preserve the value of fluctuating investments—such as stocks, bonds, and real estate in your portfolio. So, if in the midst of your probate, a bull market turns bearish, the bond market goes south, or the real estate market plunges, your heirs could be left with assets that have depreciated substantially.

At best, your heirs may be inconvenienced by their lack of access to and control over your assets during probate; at worst, they may endure financial hardship. So, if they breathe a sigh of relief as your probate begins to wind down, they may be in for a disappointment.

Before your heirs receive their full legacy from your estate, your creditors will be paid off, estate taxes will be paid, your executor and administrator will receive their fees for handling your probate, and all court fees will have to be settled. After these expenses have been paid, your heirs will divvy up what’s left—and it’s often considerably less after probate than before.

That’s a quick overview of the probate process. At best, it’s a bureaucratic nightmare. At worst, it exposes your heirs to the following problems:

IN THE PUBLIC EYE

Your probate proceedings will usually be published in a general circulation newspaper in your community. This unwelcomed publicity goes well beyond turning your life into an open book: it can also expose your loved ones to the abuse of opportunists. Con artists, creditors, overly aggressive sales people, and those eager to exploit any financial weaknesses in an estate, routinely avail themselves of probate records. They may simply be looking to buy your personal effects at a heavy discount, or they may wish to prey on your loved ones for more sinister reasons. Regardless of their motives, they pose a threat you’ll want to shelter your loved ones from. And you can’t do that if your estate goes through probate.

THE WAITING GAME

The good news is that probate usually ensures that your wishes for your loved ones probably will be carried out as you’ve directed. The bad news is that it will take time, and in the intervening months—or even years—your family may have precious little access to your assets.

The average length of time for probate varies from state to state. But in general, you can expect your probate can take 1 to 3 years , and that’s if your affairs are relatively straightforward. It isn’t uncommon for probate to take several years.

PAYING THE PIPER—AND THE REST OF THE BAND

It goes without saying that a process this bureaucratic and time-consuming, with such a large cast of characters, exacts a considerable price. Everyone gets paid: the attorney, your executor, the appraisers, the courts, the taxing authorities, and your creditors. Only after they’ve gotten their cut will your heirs be able to take their share out of what’s left. How much of your estate remains will vary considerably. If yours is a complex estate, or if there is litigation, such as a will contest, the expense of probate can seriously erode what’s left for your loved ones. But having a simple estate and a well-drafted will doesn’t protect you from probate’s expenses.

Whether they get paid a flat fee or fees based on a percentage of the value of your estate, the services of an attorney, executor and appraisers will reduce the assets your loved ones inherit. Probate fees vary from state to state, but here are the national averages: attorney’s fees alone will range from 2% to 4%   of the value of your estate, with a median of 3% ; your executor’s fees will range anywhere from 1% to 5%   (if your attorney also serves as your executor, the total fees likely will be reduced somewhat); add to their fees such expenses as the appraisers’ fees and court costs, and your estate’s value could be reduced by as much as 15%, or more .

If you are married and you and your spouse have based your estate planning on a Simple Will, in some states you can expect your estate to go through probate twice—once after the death of each spouse. So, you may have to double the impact of all probate’s expenses on the value of your estate.

TAXES AND OTHER PROBLEMS

The estate tax has been the subject of a great deal of fluctuation in the last 10-15 years. The amount that could be passed free of estate tax changed nearly every year. However, in search for ways to reduce the federal deficit, Congress will likely continue to make changes in the future. A married person can transfer an unlimited amount to their spouse through the use of the Unlimited Marital Deduction. However, the surviving spouse would have to pay tax on all the assets at their death. Unless “portability” was elected at the death of the first spouse, the surviving spouse would only have his or her own exclusion to use.

While “portability” simplifies things and can be useful in some circumstances, it does not necessitate an estate tax return to be filed at the first death, even if it would not be otherwise required. A Living Trust can be a great way to minimize estate taxes and other problems. There are many reasons that a couple might plan their Living Trust to have the first spouse leave their assets in a separate “Family” or “B” Trust for the benefit of the survivor and children, rather than relying on portability. A Family Trust not only locks in the deceased spouse’s exclusion amount, even growth of the trust would be excluded from the survivor’s estate. Further, the trust could be exempt from tax even in the estate of the children. Portability does not allow for this.

A separate Family Trust allows for many protections that portability does not provide. The trust can provide creditor protection, both in the event of the survivor’s remarriage and subsequent divorce, and even from other creditors. Also, a Family Trust can lock in the ultimate beneficiaries of the assets. This can be important, especially in blended families.

INVITING SPOILERS TO THE PARTY

Simply making out a will doesn’t mean things will go as you planned. Disgruntled family members, creditors, “predators,” and other would-be spoilers can throw a monkey wrench into the works.
Probate is a vulnerable time for your loved ones. Just about any disgruntled relative can contest a will, with potentially devastating consequences. Defending against a will contest is a costly process that can delay the disposition of your estate considerably. That’s why spoilers employ it. They know the threat of these additional expenses and delays is often enough to intimidate heirs into a settlement they may not be entitled to. Even if your heirs decide to fight a will contest and ultimately prevail in court, they may find they’ve won the battle and lost the war.

AVOIDING PROBATE

Is it any wonder the only fans of probate are probate lawyers? In contrast, most Americans who know what probate entails try to avoid it at all costs.
In case you’re thinking you can spare your heirs the hassles of probate by dying intestate, without a will, forget it. The creaky wheels of probate are set in motion whether you have a will or not. And if anything, probate becomes more complicated, not less so, when you die intestate.

So, if you’ve decided that probate is the last thing you want to bequeath your loved ones, how do you avoid it?

Instead, you could turn to a handful of strategies for circumventing the probate process. There’s no probate, for example, on assets such as IRAs, life insurance policies, and pension plans for which you name a beneficiary. Also, any assets you hold in “joint tenancy with rights of survivorship” pass immediately to your joint tenant. And, of course, you can simply give away your assets while living. While these methods avoid the pitfalls of probate, they have plenty of shortcomings of their own, and should be used carefully and only in certain circumstances. (For more information on joint tenancy, see our Academy Report titled, The Trouble with Joint Tenancy.)

THE SOLUTION: THE REVOCABLE LIVING TRUST

For many reasons—avoiding probate being just one of them—the Revocable Living Trust is widely considered the most effective and versatile estate planning tool. The first discovery you’ll make about the Living Trust is that it avoids probate. So, you’re immediately avoiding problems that come with it:

• Publicity
• Delays
• Expenses
• Opportunities for Spoilers

In contrast, with a Living Trust, you safeguard your privacy, dramatically expedite the disposition of your estate, significantly reduce costs, and greatly diminish opportunities for spoilers to upset your plans. Those advantages alone are enough to make Living Trusts the estate planning tool of choice for many Americans. But consider these additional benefits that Living Trusts provide as well:

• You can use a Living Trust to take care of your healthcare and financial needs should you become disabled. Considering that for most of our lives we face a much greater likelihood of becoming disabled than dying, a Living Trust can provide considerable peace of mind.
• A Living Trust can help you maximize estate tax planning.
• A Living Trust gives you maximum control over the disposition of your assets. For instance, if you have children from a previous marriage, you can ensure that your spouse and your children receive fair treatment.
• A Living Trust dramatically reduces the threat of “spoilers.” In most states, your trust can also include a ‘no-contest’ clause which deters greedy claimants from attacking your estate plan.
• As long as your Living Trust owns your assets, it protects them from your heirs’ creditors and “predators.” So, a daughter won’t see the legacy you’ve left her become the spoils of a divorce settlement. Or a son won’t find the assets you bequeathed him depleted by his creditors.
• A Living Trust will allow you to control your assets long after you’re gone. That’s especially important if you’ve left behind minor children or young adults who may need time to grow into their financial responsibilities.

HOW A LIVING TRUST WORKS

With a Living Trust, you own nothing, and your trust owns everything. But not to worry. Since you are your trust’s trustee and beneficiary, you retain complete control of your assets. You can derive income from your trust, sell assets, acquire new assets, and do anything you need to with the property in your trust. And rest assured, as its name implies, you can amend or revoke your trust at any time. In every practical sense, having a Living Trust is almost identical to owning all your property directly.

The difference occurs when you die. Since you technically owned nothing, there’s no property that needs to go through probate. Instead, your property is quickly distributed according to the precise instructions written into your trust. Carrying out your instructions is your handpicked agent—your successor trustee—who will follow your directions to the letter. There’s no need to obtain the approval of a court, no additional expenses, and no details of your Living Trust are made public.

These advantages are so important they bear repeating: with a Living Trust, your estate completely avoids the publicity, expense, delay, and other disadvantages of probate.

YOUR FIRST STEP IN DESIGNING YOUR LIVING TRUST

Creating a Living Trust tailored to your unique needs, reflecting the laws in your state, and delivering the greatest benefit to you and your family requires expert help—and that means an attorney, preferably one who concentrates his or her practice on estate planning.

But not just any estate planning attorney. If you go to one who has built a practice around probate, don’t be surprised if what you get is a will. In fact, many attorneys offer substantial discounts on will preparation, counting on the substantial fees they will earn when your estate goes through probate. Instead, look for an attorney who emphasizes Living Trusts.

Once a prospective attorney demonstrates sufficient expertise in Living Trusts, make sure he or she passes the next most important test: Does the attorney listen well? If not, move on to the next candidate. Why? Because no two clients have the same circumstances, financial profiles, and family situations. So listening carefully to you will be the only way your attorney can ensure he or she is providing you with a Living Trust that meets your needs.

Next, consider how well the attorney will be able to work with your family. It will be a great comfort to them to have on hand a professional who was not only familiar with your wishes, but who also has the expertise and people skills to help them through what may be an emotionally difficult time.

Finally, choose an attorney with whom you can feel comfortable sharing your hopes, dreams and fears. Creating a Living Trust is an intensely personal experience, during which we consider our own mortality, take a hard look at our life’s work, deal with family dynamics, and decide how we’ll provide for our loved ones. Your attorney should have the professionalism, tact, and humanity to help you explore all these issues, and resolve them in a way that leaves you feeling satisfied, with lasting peace of mind.

© American Academy of Estate Planning Attorneys, Inc.

If you own life insurance, congratulations. Many of us put off this critical element in our family’s financial planning, which may have devastating consequences on loved ones. You probably know why life insurance is so important. Young families need it to replace part of a breadwinner’s income. Mature Americans find it provides their heirs with a source of funds to pay estate taxes. Investors have discovered that innovative insurance products help them build cash value, tax deferred, for long-term goals like retirement. But remember, buying life insurance may be only part of the solution. Without proper planning, it can actually add to your estate tax bill.

The Mistake Thousands of Americans Make

Countless well-meaning parents, spouses and others make a simple but costly mistake when buying life insurance policies. They don’t think about who should own the policy. Unfortunately, that simple act could cost your heirs plenty. Here’s why.

Every American is entitled to an estate tax exclusion on the first part of his or her estate. You may need to take every precaution possible to reduce the value of your estate for estate tax purposes, and that includes life insurance planning.

While your beneficiaries will receive the death benefit income tax-free, the proceeds are not estate tax-free. Say, for example, that your home, retirement benefits, and other assets total $3.1 million. Your estate will pass to your heirs estate tax-free. But add in a life insurance policy with a death benefit increases the value of your estate over the estate tax exclusion. and subject to estate taxes. Estate taxes are levied at a higher rate after your exclusion, so your estate would owe a hefty estate tax.

The net result: your heirs will see part of your legacy lost needlessly to the government.

Preserving Your Legacy for Those You Love

There’s a simple solution that not only avoids the estate tax problem but also provides a host of other benefits. It’s called an Irrevocable Life Insurance Trust— or ILIT for short— and it allows you to protect your loved ones without adding to your estate taxes. Because your ILIT actually owns your policy, its death benefit won’t be taxable in your estate. Here’s how it works.

You set up your ILIT, and name a trustee other than yourself. Trustees are most often the beneficiaries of the trust or a financial advisor. (Obviously, if your beneficiaries are your minor children, you’ll want to name as trustee the person you’ve chosen to be their guardian or some other responsible adult.) The fact that you are not actively involved as a trustee should give you no cause for concern. Your trustee—or trustees—will have to precisely follow the instructions you provide in your trust documents.

After you create your trust, your trustee purchases a life insurance contract on your life with funds you provide. If you have an existing policy, you can assign ownership of it to the ILIT, but there are conditions imposed on these transactions that should be carefully considered before you do so. For instance, if you die within three years of the transfer, the life insurance contract will be included in your estate.

Annually, a taxpayer may give a pre-determined dollar amount (indexed for inflation) to another person gift tax-free. Married couples, therefore, can give a combined total of double that amount, gift tax-free to any one person. Other than this per-person rule, there’s no limit on the total amount you can give away.

By carefully following the IRS rules, you can employ this gift-tax exemption to make the policy’s premium payments. When you provide your trustee with the funds to pay your annual premium, your trustee must notify your beneficiaries in writing that a gift has been made in their names. Your beneficiaries will have the option of withdrawing these funds from your ILIT during a specified period, usually a minimum of 30 days. When they don’t exercise their option, your trustee will use the money to pay your insurance premium. This written notification of your gift to your beneficiaries is called the Crummey Letter, bearing the name of the taxpayer who won a court case against the IRS resulting in approval of this process. An annual Crummey Letter to your beneficiaries is an essential element of a successful ILIT.

Staying in Control—Today, Tomorrow and for Years to Come

Reducing your estate tax liability is a powerful incentive for considering the ILIT. But that’s just the beginning of the long list of benefits it provides.

The ILIT provides you control over how proceeds from your life insurance policy are spent. It is a mistake if you fail to control how the beneficiaries receive the policy’s proceeds. Even an adult with experience may find the large sum of money overwhelming. But when the beneficiaries are young adults who lack the maturity to handle such a windfall, the results can be devastating.

With the ILIT, you control who receives the proceeds, and how they receive it. Whatever distribution strategy makes most sense for you and your loved ones; the ILIT gives you the opportunity to put it into effect.

In many states, ILITs offer you the best—if not the only—way to protect the cash value of your policy from creditors. Over the years, your premiums and interest earnings can accumulate to considerable sums, making cash value policies a tantalizing target for creditors. They may be successful in such an action if you own the policy. When the policy is owned by the ILIT, however, it is generally out of your creditor’s reach.

A Short-Cut that Doesn’t Work

If you don’t want to implement an ILIT, you may be considering short cuts. One often-employed strategy is to make someone else the owner of your policy. It solves the estate-tax problem, but it also spawns a host of others, all involving your loss of control over the disposition of the policy. For example:

The policy’s owner can reassign it, pledge it as collateral, or expose it to threats from creditors. There’s nothing to keep the owner from spending your annual premiums on his or her own priorities, instead of keeping the policy in force. If the owner gets divorced, an ex-spouse can end up with a piece of your policy. You’ll have no option for controlling how your beneficiaries spend the policy’s proceeds.

© American Academy of Estate Planning Attorneys, Inc.

Americans are some of the most generous givers on the face of the planet. They reach into their pockets and take out their checkbooks on behalf of others more often than any other industrialized nation. Nationally, charitable contributions make a thunderous plunk in the collection plate. In 2015, American corporations gave a total of $18.46 billion. Individuals followed suit, contributing to charity a total of $373.25 billion. Charitable Remainder Trust is one of the most popular ways Americans can donate to their favorite cause while doing well for themselves and their families.

HOW THE CHARITABLE REMAINDER TRUST WORKS

Whether you are a budding philanthropist looking for the best way to contribute to society, or an investor looking for strategies to maximize income and tax breaks, the Charitable Remainder trust offers a powerful solution to your needs. It combines current charitable income tax deductions and future estate tax deductions with the opportunity to avoid capital gains tax on a highly appreciated asset. It then goes one step further to provide you with a new source of income.

A Charitable Remainder Trust delivers best results when benefactors have a highly appreciated asset—such as real estate or stocks—that provides little or no income.

Owning such an asset is a double-edged sword. You can’t sell the asset without experiencing the costly bite of state and federal capital gains taxes. On the other hand, if the asset is still in your estate when you die, it will increase your estate taxes.

Of course, you could donate the asset directly to charity and gain an immediate charitable income tax deduction. In one fell swoop, you’d reduce the value of your estate—and thus future estate taxes—as well as avoid capital gains taxes. But you’d miss out on an opportunity to maximize your income.

The Charitable Remainder Trust neatly overcomes these problems.

When you create your Charitable Remainder Trust, you transfer your highly appreciated asset to your trust. The asset is usually sold, with the proceeds used to buy income-producing investments. Then, each year for the rest of your life, you’ll receive income from your Charitable Remainder Trust. When you die, your designated charity will receive whatever remains in your trust. Hence the name: Charitable Remainder Trust.

The incentives for using the Charitable Remainder Trust include:

• An immediate charitable income tax deduction based upon the fair market value of the asset given away (reduced by your received interest—or future income and subject to normal percentage limitations applied to itemized deductions);
• An opportunity to put the full value of your appreciated asset to work for you and avoid the costly impact of capital gains taxes;
• A new source of income;
• And a charitable estate tax deduction on the full fair market value of the asset you’ve donated to the charity when you die.

It may sound like the Charitable Remainder Trust is a complex legal tool. But just the opposite is the case. Working with your estate planning attorney, you can set one up in fairly short order.

After deciding which charity you want to support, you then decide who will serve as trustee. The trustee can be you, a bank or trust company, or anyone else of your choosing. The trustee will assist in the valuation of the asset you contribute and will follow your precise directions laid down in your trust documents.

Next, you decide who will receive income from your Charitable Remainder Trust and for how long. This isn’t optional; it’s mandatory. According to the IRS, at least one beneficiary other than the charity must receive income each year. So, determine if you will be the only beneficiary, or if your spouse or children will receive income after you die. Lastly, you decide how you want to receive your income, and how much you will receive each year.

GIVE AND YOU WILL RECEIVE

Your answers to these last questions will prove critical in determining exactly what type of Charitable Remainder Trust you choose. Which one will depend on your temperament as an investor?
For instance, conservative investors who want a predictable income year after year may prefer the Charitable Remainder Annuity Trust—or CRAT for short. You may make only one contribution to your CRAT, which will provide you a fixed annual income, regardless of the investment performance of your asset. Because your tax deductions and income are based on the value of the asset as of the day it was transferred to the trust, the CRAT is probably better suited to assets you suspect will lose value in the years ahead.

Regardless of the economic winds, your income is guaranteed. So, if your asset doesn’t earn enough to pay your annual income, the principal will be used to make up the difference. On the other hand, if the markets turn bullish and your asset outperforms your expectations, the surplus will be added to the principal.

With a CRAT, you will be paid an annual income equal to at least 5%, and no more than 50%, of the asset’s fair market value, determined on the day it was transferred to your trust. So, if you donated a stock portfolio valued at $250,000 on the day it was transferred to your Charitable Remainder Trust, your annual income would be a minimum of $12,500. There’s an upper limit to how much you can receive each year, but it isn’t as simply stated. It has to do with your lifespan (as well as the life spans of any other beneficiaries) and other factors. Your estate planning attorney will help you determine exactly how much your annual income from a CRAT may be each year.

The chief drawback of the CRAT is also its strength; it protects the donor against swings in the financial markets. In a stagnant or declining market, the donor comes out ahead. But in a strong market experiencing investment growth, it’s the charity that will ultimately benefit the most. That’s why donors who hold more bullish views on investing will prefer the Charitable Remainder Unitrust.

The Charitable Remainder Unitrust (CRUT) offers a couple of advantages over the CRAT. First, unlike the CRAT, you may make as many contributions as you like to your CRUT. And for the sake of determining annual income, it is the asset’s current fair market value—not its value on the date it was transferred to the trust—which is used in the calculations.

As for its income opportunities, the CRUT allows the benefactor to ride the financial markets and enjoy the investment performance of the trust assets. That means, of course, that in some years you may receive less, other years more. When lean years keep you from receiving your full due, a “make-up provision” can allow for additional income in future years to make up for the shortfall.

The CRUT requires that the donor receive a minimum income of 5% of the asset’s current fair market value, and not more than 50%. You can also opt to receive your chosen percentage or the trust’s net income, whichever is less.

Clearly, donors who want income from their charitable contribution and who don’t mind riding the winds of economic change will find plenty of appeal in the CRUT.

WHAT ABOUT YOUR HEIRS?

So far we’ve focused on the ample benefits that the Charitable Remainder Trust offers you. But what about your heirs? After all, you’ve given away a piece of their legacy in order to gain income and tax advantages for yourself today.
One frequently employed solution is the Irrevocable Life Insurance Trust. When used in concert with the Charitable Remainder Trust, it provides your heirs with an income-tax-free legacy equal to the full value of the asset you donate to charity. Here’s how it works.

After you establish your Irrevocable Life Insurance Trust, your trustee then purchases a life insurance policy on your life with your heirs as beneficiaries. Usually, the death benefit of this policy is equal to the value of the asset you’ve given away. The cost of the policy can be offset by income generated by your Charitable Remainder Trust or the charitable income tax deduction you receive. Upon your death, your heirs will receive an income-tax-free death benefit.

Why do it this way, rather than just owning the policy outright? Because the proceeds of a policy owned in your name at your death will be included in the value of your estate for estate tax purposes. Considering that estate taxes kick in at a 40% rate, life insurance policy could expose your estate to a sizable tax bite. (For more information, see the Academy report, The Irrevocable Life Insurance Trust.)