Articles Posted in Estate Planning

A dynasty trust used to be a very popular estate planning tool that has declined in use over the last few years. A dynasty trust ensures that upon the client’s death their assets would still qualify for an estate tax exemption. In the past, if a deceased spouse did not have a trust, their part of the estate would not qualify for the exemption.

However, today’s rules for trusts and estate tax exemptions are different. A deceased spouse’s portion of the estate tax exemption passes automatically to their surviving spouse. Additionally, the tax exemption level has risen from $1 million to $5.3 million per person. As a result, a lot less people need to worry about a part of their estate being taxed upon their death, and dynasty trusts have mostly fallen out of use.

Benefits of Dynasty Trusts

America currently has 72 million people from the Baby Boomer generation, the oldest of which are turning sixty-eight this year. That is also the average age when people decide to create charitable remainder trusts. Estate planning attorneys are expecting a big increase in the number of charitable trusts set up over the next twenty years as the rest of the Baby Boomer generation begins the estate planning process.

Charitable Remainder Trusts

A charitable remainder trust is a trust that provides a distribution, usually annually, to one or more beneficiaries where at least one is not a charity. The distributions can be made over a period of years or for the life of the beneficiaries, but an irrevocable remainder interest is held for the benefit of one or more charitable institutions.

Most people feel a sense of accomplishment after drafting and executing an estate plan. Afterwards, it is commonplace to file away the paperwork and promptly forget about the documents. The issue in this is that most people’s lives change between the creation of an estate plan, and it will need to be updated accordingly. In fact, recent studies have shown that people at all levels of wealth, including the very rich, have estate plans that are routinely more than five years old.

As some estate planning attorneys have noted, an estate plan is not like a time capsule that should only be opened at a future time. An estate plan needs to be routinely updated as life events occur. You should plan on regularly updating your estate plan every three to five years; however, it should occur more often if major events happen. In some cases, estate plans that have not been updated have led to large, public disputes between family members. These fights have destroyed families as well as the inheritances that they were supposed to have. These situations are even more unfortunate because the vast majority of these disputes could have been avoided if the estate plan was up to date.

Common Excuses Why an Estate Plan is Not Updated

The late lead singer and guitarist of The Velvet Underground, who later had a decades-long successful solo career, was the man who famously sang “Hey babe, let’s take a walk on the wild side.” He seemed to take that lyric to heart when it came to his estate planning, and his estate is worth more than $30 million.

Lou Reed passed away from liver disease on Oct. 27, 2013 at the age of 71. Recent filings in probate court in Manhattan show that since his death less than a year ago his estate has already earned another $20.3 million. This income has come from his copyright, publishing, and performance royalties as well as other deals that were put together by his longtime manager, Robert Gotterer. Mr. Gotterer is also one of the co-executors of Lou Reed’s estate.

Details of Lou Reed’s Estate

If you have accrued some wealth in your lifetime, have a significant life insurance policy, or simply want to look out for the best interests of your children the idea of incorporating a trust into your estate plan may have been suggested. A trust fund places assets into trust, run by an appointed trustee who makes decisions about the investment and distribution of trust assets to its beneficiaries. However, smaller mistakes can be made in the creation of a trust for your children that can cause major problems after you are gone.

Carefully Consider the Trustee

Naming a trustee for a trust fund for your children is different than naming a custodian for their physical care. Consider appointing someone who has financial knowledge and can make wise decisions regarding the trust assets. Also consider naming co-trustees to the fund, thereby creating a set of checks and balances that can preemptively avoid any type of trust abuse.

Many people are uncomfortable with the process of estate planning. As a result, people are not always completely forthcoming with their estate planning attorney or do not think through all aspects of their plan. If you are just starting to draft your estate plan or are thinking of revising your current documents, here are some questions to consider that can make the process easier.

· What are your personal goals? Professional goals?

Establishing personal and professional goals can give an idea of how much you will need to live comfortably in your lifetime and how much will be left for your heirs. If you plan on retiring early or need more money for personal, financial, or health reasons an attorney can help you structure your estate plan accordingly. Establishing goals is also a good way to indicate to your heirs what they should expect to receive from your estate.

In the last post we discussed the first five of ten essential documents that should be considered when estate planning. Those included a basic will, beneficiary forms, a financial power of attorney, medical power of attorney, and a living will. Here are the last five documents that should be included in your estate planning process.

6. Inventory of assets

Every financial planner has a different way of structuring and explaining your assets. Some planners give you a small book detailing every complex facet of your current financial status. Others will hand you a page with a simple chart or graph that sums up your entire account, and a lot of other financial planners fall somewhere in between. You should talk with your financial planner about getting documents that explain your assets in a way that your executor and heirs will be able to understand, and include it with your other estate planning documents.

Most people do not like to talk about estate planning. Some do not want to think about the idea of death, others do not want to discuss financial or personal matters, and more simply procrastinate. However, once you do make the decision to set up your estate plan the options and paperwork can seem daunting. Here are ten basic, essential documents that you should discuss with your attorney about including in your estate planning process.

1. Basic will

The will is the document that most people think of when they consider estate planning. A will, in its most basic form, states who gets what when you pass. Family, friends, trusts, charities, and just about anyone else can be named as an heir or beneficiary in a will. You can also name a guardian for minor children in a will, and you should appoint an executor for the will, as well. If you do not have a will the court decides who gets what in your estate and a judge decides where your children will live.

The loss of a parent is a heartbreaking experience, and discovering that your parent had a large amount of debt can add even more stress to the situation. Usually, creditors have a certain period of time in which to make claims against your parent’s estate. In most cases, you are not responsible for the debts of your deceased parent and if there are not enough assets the debt dies with them; however, in certain circumstances you can be on the hook to pay for what your parent left behind. Responsibility for debts is typically determined by the type of debt, the assets available, and where your parent resided.

Assets can be protected from creditors even if your parent passed on with debt. If you are listed as the beneficiary of a retirement account or life insurance policy that money cannot be touched by creditors. However, other assets in the estate may have to be sold in order to pay off the debts of creditors. This can greatly reduce or eliminate your inheritance from your parent’s estate.

Credit Card Debt

In a unanimous decision the Supreme Court has ruled that an IRA is not protected from creditors in bankruptcy proceedings when it is inherited in an estate. In the case of Clark v. Rameker, Heidi Heffron-Clark inherited an IRA from her mother in 2001. The account contained roughly $450,000 and she began to make distributions. In 2010, Mrs. Heffron-Clark and her husband filed for bankruptcy, but they claimed that the remaining $300,000 in the account was shielded from creditors as retirement funds. The creditors and bankruptcy court disagreed, and the case went all of the way up to the Supreme Court.

Key Distinctions of Inherited IRAs

The Court made its decision that inherited IRA accounts are subject to bankruptcy and creditors based on a couple of specific differences between inherited IRAs and owner IRA accounts. Owners of an inherited IRA cannot put additional funds into the account. Additionally, they can take distributions from the account at any time without penalty. In fact, the law states that an heir to an IRA account must either withdraw the entire amount from the account within five years of the original owner’s death or at the very least take out a minimum amount starting the December 31st after the original owner died. This applies to regular and Roth IRA accounts.