All posts in Estate Planning Strategies

08 Apr

How Healthy Is Your Wealth and Estate Plan? To Meet Your Objectives, Review and Update It Today

In Estate Planning Strategies by admin / April 8, 2013 / 0 Comments

Estate Planner Mar-Apr 2001

If you have completed a comprehensive wealth and estate strategy or plan, congratulations! You may enjoy the peace of mind that comes from a well-developed and well-drafted plan. But strategic wealth and estate planning is not a static process. You must review and update your plan periodically to ensure it is still meeting your objectives.

Regardless of your age, taking an active role in wealth transaction management and asset protection is critical. For young, wealthy individuals with children in the future, strategic wealth planning is a complex necessity because your goals and strategies are even more likely to change over time. A death, birth, marriage, divorce, acquisition or sale of a family business, or a drastic increase or decrease in net worth warrants a review — and typically a modification — of your overall wealth and estate plan.

Getting Started

To review your current estate plan, make a copy of your will or trust agreement and take a red pen and mark an “X” beside any personal data or information that has changed. Also mark an “X” by any specific bequest you wish to alter. Put a question mark by any provision addressing estate taxes or trust continuation provisions you may need to review.

If only minor changes are necessary, a brief amendment to your revocable trust or will may be sufficient. If more substantive asset transfer provisions or tax saving techniques are required, executing a new will or amendment and restatement of trust may be advisable. This way all of your trust terms and instructions will be in a single instrument. A new will or amendment and restatement of trust is also useful if several previous amendments make it difficult to follow which provisions control and which have been superseded.

Are You Maximizing Tax Savings?

Currently each person may pass up to $675,000 of assets during lifetime or at death free of federal gift and estate taxes. This applicable exclusion amount is scheduled to increase gradually until it reaches $1 million in 2006. If your documents were executed before 1997 and you and your spouse’s combined estate exceeds $675,000, you should review your plan to determine the effect tax law changes may have on your situation.

If your individual retirement accounts (IRAs) or qualified retirement benefit plans — such as a 401(k) — constitute a significant portion of your estate, you must review and update your plan to ensure it addresses all related income and estate tax issues. Who you name as beneficiary of your plan and the distribution method you choose can have a significant impact on how much of your retirement savings goes to your loved ones and how much goes to Uncle Sam. Such issues must be resolved before your required distributions must begin — usually April 1 of the calendar year after you reach age 701/2.

Are You Minimizing Probate Costs?

If your plan includes a living trust, you must ensure that all your eligible assets are titled in the trust’s name. If such trust funding is not completed before your death, your estate may be subject to a court-supervised probate proceeding. Typically, probate fees and trust settlement fees will be greater than probate fees alone.

Don’t Wait Until It’s Too Late

Still not convinced that you need to review your wealth and estate plan? Consider these two key questions:

1. Has your relationship with your designated agents (such as your personal representative, guardian of a minor child, successor trustee or attorney-in-fact) changed?

2. Is it possible your plan may not provide as you wish for your loved ones in the event of your disability or death?

If you answer “yes” to either question, don’t wait to review your plan. Should you have any questions or require help in reviewing, updating or implementing your strategic wealth and estate plan, please give us a call.

08 Apr

Plan Your Estate Around an LLC

In Estate Planning Strategies,LLC by admin / April 8, 2013 / 0 Comments

Estate Planner May-Jun 2001

Estate planning should influence what type of business entity — corporation, subchapter S corporation, general or limited partnership, or limited liability company (LLC) — you choose. An LLC offers the dual advantages of limited liability for its owners (like a corporation) and pass-through income tax treatment (like a partnership). Because an LLC is a hybrid, it offers several unique estate planning benefits.

Facilitate Family Investments

You can facilitate family investments with an LLC because, as with general and limited partnerships, you can include family members. In addition, you can gift and bequeath LLC membership interests to family members.

If you properly structure and form an LLC in a state with restrictive laws regarding withdrawing members, interests in the LLC can enjoy the same discounts for minority interests and lack of marketability and control as partnership interests in closely held corporations do.

Effectively Use Trusts

Trust-centered estate planning has grown in popularity during the past few years because of its probate-avoidance advantages. If you are a closely held business owner considering a trust-centered estate plan, you need to evaluate whether a gift trust or a testamentary trust established for family members can own your business entity. You can use trusts as an ownership vehicle for an LLC just as for a partnership or C corporation. But with an S corporation, you should generally include special provisions in the trust agreement to designate it as a qualified subchapter S trust (QSST) or an electing small business trust.

When you die, a two-year or 60-day transfer rule on termination of the trust interest applies to your revocable- or living-trust-owned shares of stock in an S corporation. Thus, a successor trust must qualify to own the S stock or the company will lose its S status. These restrictions don’t exist for LLC membership interests. Accordingly, an LLC enhances your ability to control a business interest in trust, to regulate income distributions and to pass business interests to other family members. (See “Postdeath Planning” above.)

Plan for Income Allocations

An LLC’s inherent flexibility allows you to structure your estate plan to provide for a preferred cash flow or a shifting of income or appreciation. Unlike S corporations, LLCs can include multiple classes of ownership interests. An LLC interest may be subordinated, preferred, deferred or a shifting interest. But don’t forget to consider the income-tax consequences.

Protect Your Assets With a Single-Member LLC

Most jurisdictions now allow single-member LLCs. At first, many states required two or more people to take part — reasoning that a partnership can consist only of two or more people. While a partnership is not qualified to own S corporation stock, a single-member LLC can own S corporation shares if the LLC is disregarded as an entity under the check-the-box rules for federal income tax.

In this case, the single-member LLC is taxed like a proprietorship and the IRS treats the owner as the S corporation shareholder. Therefore, as long as the owner personally qualifies as an S shareholder, the LLC should be an eligible S shareholder. And though the IRS treats a single-member LLC like a sole proprietorship for income tax purposes, the LLC member still is entitled to limited liability. Thus, a single-member LLC can create an additional layer of liability protection — much like a holding company.

Does an LLC Fit Into Your Estate Plan?

If an LLC makes sense from business, investment and income-tax standpoints, it may also dovetail nicely with your estate plan. After all, a single-member LLC can limit liability, protect personal assets and accomplish your estate planning objectives. If you have questions on using an LLC, please give us a call. We can explain how an LLC may fit into your estate plan. And for information on protecting your personal assets and limiting liability using a single-member LLC, please fax back page 6 for a complimentary copy of our Estate MiniPlanner, “Protecting Assets Through a Single-Member LLC.”

Postdeath Planning

Often, an estate or revocable trust will receive assets on the owner’s death, which may create a liability problem. These assets may include the direct ownership of a building or business, or a general partnership interest. To restrict any liability to the asset itself, and to protect other estate or trust assets, the personal representative, executor or trustee should consider forming a single-member LLC with that asset.

For example, assume a restaurateur dies while he’s the restaurant’s sole owner — and the establishment passes to his estate. If the estate tries to form an S corporation, restrictions may limit shareholder eligibility and prevent the estate from implementing the restaurateur’s estate plan. In this instance, a single-member LLC may afford liability protection and flexibility.

08 Apr

Use Powers of Appointment To Create Flexibility

In Estate Planning Strategies by admin / April 8, 2013 / 0 Comments

Estate Planner May-Jun 2001

A power of appointment can be an effective estate planning technique, facilitating how your property may ultimately pass to your heirs. There are two types: a general power of appointment and a limited or special power of appointment. You — the testator or grantor — may convey each power to a donee or holder — usually your spouse, child or an unrelated party — through your will or living trust.

General Powers of Appointment

A general power of appointment is any power over the disposition of property exercisable in favor of your holder’s estate or creditors, or the creditors of his or her estate. This includes all powers regardless of the nomenclature used in creating the powers and regardless of local property law connotation. For example, a power of appointment exercisable to meet the estate tax or other taxes, debts, or charges enforceable against your estate is included within the meaning of a general power of appointment.

A power of appointment exercisable for discharging your holder’s legal obligation or for his or her pecuniary benefit also is a general power of appointment exercisable in favor of your holder or his or her creditors. The existence of a general power of appointment will cause assets subject to such powers to be included in your holder’s estate for estate tax purposes. The exercise or release — other than by disclaimer — of a general power of appointment is a transfer subject to gift tax.

Typically, you want your beneficiary to receive your property with outright ownership and without exposure to creditors. For instance, you may create a trust granting your spouse a general power of appointment over your trust assets. If the power is exercisable in favor of your spouse and your minor children, it’s a general power of appointment. Your spouse can then appoint the property equally or unequally among your minor children. In addition, he or she can continually adapt the trust to fit your family’s needs or may appoint some assets to him- or herself. You can broadly structure a general power of appointment to favor your child’s descendants, his or her spouse, other beneficiaries, or charities.

Special or Limited Powers Of Appointment

A power of appointment that is not a general power of appointment is a special, limited or nongeneral power. A special power of appointment doesn’t cause your property to be included in your holder’s estate for federal estate tax purposes. To qualify as a special or limited power of appointment, the power to appropriate property for the benefit of your holder must be limited by an ascertainable standard relating to his or her health, education, support or maintenance. The safe-harbor phrases specifically denoted as qualifying as an ascertainable standard include:

  • Support,
  • Support in reasonable comfort,
  • Maintenance in health and reasonable comfort,
  • Support in the accustomed manner of living,
  • College and professional education,
  • Medical, dental and hospital expenses, and
  • Invalidism expenses.

The applicable Treasury regulations specifically exclude any provision or appropriations for the “comfort, welfare or happiness of the holder.” Thus, carefully word your special or limited power of appointment. Otherwise, any misused word or phrase may create disastrous estate or gift tax consequences to you or your holder.

Reasons To Choose a General Power of Appointment

To qualify for the federal estate tax marital deduction, a marital trust requires a general power of appointment. This trust may be preferable if you want your spouse to have a lifetime power of appointment over the trust property. Alternatively, you may grant your spouse a right of withdrawal over trust assets. You may also wish to grant your children the right of withdrawal over their trusts at specified ages or at staggered intervals.

You can sometimes use a general power of appointment to lower overall transfer taxes if the federal generation-skipping transfer tax applies. This typically occurs when your child’s estate tax marginal bracket is less than the maximum rate. Accordingly, giving your child a general power of appointment would cause trust assets to be in the child’s estate for estate tax purposes and not subject to generation-skipping transfer taxes.

Reason To Choose a Special or Limited Power of Appointment

If you decide to leave everything to your children after you and your spouse die, they should receive the assets in trust. When should your children receive distributions? Distribution of principal can be more restrictive than distribution of income. Thus a limited power of appointment may be useful. If your children can use principal only for support, you may guard against them spending the inheritance unwisely.

Create Flexibility In Your Estate Plan

Depending on your situation, the right power of appointment may provide you with flexibility, reduce your tax liability or create other benefits. But choosing the correct power of appointment — general or special or limited — can be complicated. Please call us if you wish to know how a power of appointment can benefit your estate plan.

When To Avoid Powers of Appointment

You should avoid some types of powers of appointment in certain circumstances. For example, a power of appointment in a trust that your holder can exercise during his or her lifetime will disqualify that trust for qualified terminal interest property (QTIP) trust or qualified subchapter S corporation trust (QSST) status. To achieve the desired tax objectives of these trusts, limit the power to a testamentary power exercisable only at death.

And an inadvertent power of appointment may be problematic. For example, if the trustee has the power to distribute property to him- or herself as a beneficiary, that power will be regarded as a general power of appointment unless it’s limited to an ascertainable standard. Thus, if you want your child to serve as trustee of his or her separate trust, limit the child’s power to convey income or principal to an ascertainable standard.

08 Apr

Avoid Income Tax Consequences of Funding FLPs

Estate Planner Nov-Dec 2000

Many people use family limited partnerships (FLPs) to transfer wealth from one generation to the next. Why? FLPs enable the older generation to maintain control, and the family benefits from lower estate taxes. Although many people focus on the estate planning benefits of FLPs, they often overlook the income tax consequences, which can be significant.

The “Investment Company” Issue

A family usually forms an FLP by contributing cash, securities and other assets to the partnership in exchange for interests in the partnership. The FLP then owns the contributed assets. In general, the partners recognize no gain or loss on property contributions to the FLP.

The Internal Revenue Code defines an investment company as a partnership in which more than 80% of the value of the assets (excluding cash and nonconvertible debt obligation) are investments such as marketable stocks or securities. If a transfer to an investment company results in the diversification of the transferor’s interest, then the transferor may recognize a current capital gain.

When Does Diversification Occur?

Diversification generally takes place when two or more people transfer nonidentical assets to the FLP. For example, if Paul and Linda create an FLP, and Paul contributes 100 shares of A Corporation and Linda contributes 100 shares of B Corporation – both publicly traded companies – Paul and Linda will recognize gain. What is the diversification? Paul and Linda each individually now hold 50 shares of A Corporation and 50 shares of B Corporation. In this case, the FLP is an investment company because it holds 100% of the partnership assets for investment and the assets consist of marketable stocks.

In reality, however, a family often creates a partnership with the transfer of already diversified portfolios. Realizing that the tax rules regarding recognition of gain generally were not aimed at those situations where partners did not realize any advantage by further diversification, Congress changed the law to broaden the nonrecognition rules.

What Makes a Portfolio Diversified?

A portfolio is considered diversified if not more than 25% of the total value is invested in the stock and securities of any one issuer, and not more than 50% of the total value is invested in stock and securities of five or fewer issuers. While for the 25% and 50% tests government securities (such as Treasury bills) are included in total assets for purposes of the denominator, they are not treated as securities of an issuer for purposes of the numerator.

For example, assume Dad contributes his portfolio of publicly traded stocks to an FLP, and no single stock accounts for more than 20% of his portfolio’s value. His children contribute Treasury bills. Before the change in the law, Dad would’ve recognized gain on the contribution. With the new provision, however, Dad will be considered diversified before the exchange. The transfer avoids investment company rules because no more than 25% of the noncash assets are invested in any one issuer, and no more than 50% of the assets are invested in five or fewer issuers.

Avoiding Recognition Rules

Although the rules regarding the income tax consequence of FLP creation can be confusing, they cannot be overlooked. Fortunately, you can avoid the recognition rules before forming an FLP.

For example, if Paul and Linda were married, they could have avoided recognition in the original example by each giving the other 50 shares of their respective stocks. Because of the marital deduction, this transfer would have had no gift tax consequences. Paul and Linda then could have each transferred their 50 shares of A Corporation and 50 shares of B Corporation to the FLP and avoided the recognition. In nonspousal situations, however, you must carefully review the assets before contributing them to the FLP.

We would be pleased to assist you in creating an FLP that meets your objectives and avoiding tax when funding it.

08 Apr

10 Steps to Creating a Proper FLP

Estate Planner Nov-Dec 2000

Family limited partnerships (FLPs) are an increasingly popular vehicle for managing and controlling family assets and for transferring wealth to younger generations. Unfortunately, the IRS is attempting to curtail this estate planning technique by challenging the technical structure of such partnerships as well as the valuation issues that arise when an FLP interest is gifted to children or grandchildren.

A typical FLP consists of at least one general partner and one limited partner. You transfer assets to the FLP, and generally, you (or an entity controlled by you) act as the general partner and, through your partnership interest, retain indirect ownership of a small portion of the assets. Placing your assets into an FLP transfers ownership — but not control — of the assets to the partnership. As general partner, you manage the partnership and have control over its operation, assets and cash flow distributions.

FLP Checklist

Creating an FLP can be complex. If improperly set up, it can stumble into many tax pitfalls. Here are 10 important steps to take when setting up an FLP:

1. Name the partnership. After you choose your partners, select a partnership name. To avoid calling attention to the fact that you are creating an FLP, consider naming it an “investment” or “management” partnership rather than a “family” partnership. Also, check the availability of the name with your local secretary of state or other governmental body that supervises the formation of business entities. Most states require that the designation “Limited” or “L.P.” be part of the entity’s name.

2. Consider the state of formation. Determining the jurisdiction where you create your partnership is critical. Why? Because the jurisdiction must have a limited partnership act that supports valuation discounts for FLP interests you may gift to family members. If state law relating to the transfer of partnership interests and the rights of a withdrawing partner are not restrictive, the tax code allows the IRS to disregard the relevant provisions of your partnership agreement for purposes of valuing partnership interests. This would reduce the marketability and lack of transferability discounts that would be otherwise available.

3. File a certificate of limited partnership. Once you choose a name, you must file a certificate of limited partnership. This is a critical step in the formation of your FLP. The requirements for a certificate vary from state to state but, generally, the certificate must list the partnership’s name, registered agent’s name and address, purpose of the partnership, and each general partner’s name and address. Until the state has accepted the partnership entity, the partnership is a general one — not a limited one — and different statutory rules apply relating to transfers of interests and partners’ rights.

4. Obtain a taxpayer identification number. An FLP is a legal entity even though it may not pay income tax. You need to obtain a taxpayer identification number from the IRS because the partnership is required to file income tax returns.

5. Sign a partnership agreement. Have your attorney draft a partnership agreement and have each partner sign it. The agreement should specify how the partnership:

  • Shares profits and losses,
  • Computes capital accounts,
  • Defines its policy on admitting new partners and — if new partners are permitted — conducts its admission process, and
  • Intends to manage and dissolve the partnership. The agreement should restrict transfers of partnership interests to support gifting discounts. Until you execute the agreement, the limited partnership statutes of the state will govern the partnership.

6. Funding the partnership. After you form the FLP and execute the agreement, transfer selected assets to the partnership. Generally, you recognize no gain or loss when you transfer property to an FLP in exchange for partnership interests. One exception to this rule is when the IRS views the partnership as an investment company. In this case, the IRS says you have a form of asset diversification and a deemed sale.

The IRS will classify your FLP as an investment company if more than 80% of the contributed assets’ fair market value consists of cash, securities and other types of investment property, and if the transfer results in diversification of the transferor’s interest. Diversification occurs when two or more persons transfer different assets — including cash — to the partnership in the exchange. You should be aware of these rules when you are considering creating an FLP.

7. Open a bank account. Open the account in the FLP’s name and maintain proper accounting records. Partnership assets, including bank accounts, must be owned in the FLP’s name — not in the name of individual partners. Only the partnership’s cash should be kept in these accounts.

8. File income tax returns. The FLP must file an income tax return. The return is primarily for informational purposes. The partnership is not subject to tax. Instead, the partners are taxed on their proportionate share of the partnership’s income.

9. Make distributions. The general partner controls the timing and amount of distributions of the FLP’s cash. Make distributions to partners in proportion to their ownership interests.

10. Respect the entity. The FLP is a distinct, separate entity — just as a corporation is an entity. You must respect the entity if it’s going to achieve your planning objectives. Steps you can take to help ensure success include conducting a formal, annual partner meeting and documenting actions taken or authorized. Don’t ignore the partnership and treat it as the general partners’ alter ego.

Seek Assistance When Setting Up an FLP

An FLP provides many estate planning advantages, but variables exist in setting one up. And because everyone’s situation is different, it’s best to work with a qualified advisor to develop a plan that’s right for you.

08 Apr

What To Expect When Named Executor of an Estate

Estate Planner Nov-Dec 2000

Few of us are prepared to oversee the financial affairs of a recently deceased relative or close friend’s estate. Nevertheless, it would not be unusual for such a person to name you as executor (or personal representative) of his or her will.

Of course you could decline the offer. Circumstances may have changed since your relative or friend asked you to be executor — or he or she may never have consulted you. And, perhaps, a successor such as a bank or trust company could better serve the family. But if you decide to accept the responsibility of executor, you could have a long and complicated task ahead. Let’s review some of the duties you’ll perform as executor and then examine the steps necessary to administer the estate.

Duties of the Executor

Running an estate is similar to running a business. You’ll have to make decisions regarding each asset and claim. The first month or so of the estate’s administration will be busy. Your duties as executor may include:

  • Collecting and managing estate assets,
    Investing estate assets to preserve value,
  • Directing the payment of taxes, debts and administration expenses from estate assets, and
  • Distributing the remaining estate assets to the named beneficiaries or heirs in accordance with the terms of the will.

You’ll need professional advice and assistance throughout the administration of the estate. Assemble a team consisting of an accountant (particularly one who is familiar with the decedent’s financial and tax records), an attorney qualified in estate and trust administration, a life insurance broker with expertise in filing insurance claims, and, in large estates, a financial manager or advisor. You may be able to combine various functions in one firm or individual or choose to spread the duties among several. You may also need to establish banking and brokerage relationships for the estate.

Administering the Estate

Once you assemble your team of professional estate advisors, begin preparing to administer the estate or trust. Your team members may assume many of the specific tasks, but you need to understand the steps involved in the administration. Here’s a brief explanation of those steps:

1. Confirm that appropriate funeral arrangements have been made.

2. Safeguard the decedent’s household and assets until you’ve taken control of them. This may involve changing locks or notifying asset holders and power of attorney users of the decedent’s death.

3. Locate the original will and file it with the appropriate supervisory court — usually a probate court.

4. Determine whether a formal reading of the will is required and whether to send a copy, summary or outline to interested parties.

5. Have the will formally accepted in a probate court and have yourself appointed as the personal representative of the estate.

6. Direct the post office to forward the decedent’s mail to you.

7. File Form 56 with the IRS, advising that you are the estate’s personal representative and entitled to receive all IRS notices.

8. Determine the nature and extent of the decedent’s assets and family benefit plans. These may include the contents of safe deposit boxes; Veteran’s Administration and fraternal organization benefits; existing qualified benefit plans; and individual retirement accounts, securities, and brokerage and banking accounts.

9. Determine whether the estate should pay the surviving spouse and minor children awards or allowances and whether Social Security benefits are available.

10. File medical insurance claims for payment or reimbursement of expenses for the decedent’s last medical care.

11. Identify life insurance policies, file claims for proceeds and obtain Form 712 from the insurance companies for use with the federal estate tax return.

12. Determine what formal notices you need to give to interested parties and the type of notice court rules require be published in a local newspaper.

13. Ascertain the estate’s liabilities, such as the decedent’s debts, bank loans, mortgages and auto loans, and arrange for payments or settlement.

14. Formally object to all questionable claims against the estate.

15. Arrange for valuation of all assets except cash items and marketable securities. This includes real estate (residence, investment and business), closely held business interests, investment interests in partnerships and limited liability companies, and tangible personal property — including personal effects, jewelry, antiques and art collections.

16. Prepare an estate asset inventory and determine whether you need to file a copy with the court and whether beneficiaries should receive copies now or later.

17. File the decedent’s income tax return for the prior year (if unfiled) and for the year of death.

18. File income tax returns for the estate.

19. File federal estate tax returns and state estate or inheritance tax returns for the estate and related trusts.

20. Determine whether you need to file gift tax and generation-skipping tax returns for the year of death and for prior years.

Look Out for Trouble

If you assemble a competent team and delegate many of the executor duties to professionals, you may ultimately have a rewarding experience. But if there is a disgruntled heir, a confusing or ambiguous will, or a conflict among family members, your experience may be frustrating and difficult. If you decide to serve as executor, make certain you understand what may lie ahead.



08 Apr

Save Taxes Even After You’re Gone Roth IRAs Permit Tax-Free Growth for Beneficiaries Too

Estate Planner Sept-Oct 2000 Fulfillment

By creating the Roth individual retirement account (IRA), the Taxpayer Relief Act of 1997 allows your money to grow tax free – not only while you’re alive but also long after you’re gone. While you can’t deduct contributions to Roth IRAs, your qualified distributions are not included in gross income. This means the growth of the assets in a Roth IRA is not subject to income tax.

As with traditional IRAs, if you don’t need Roth funds, defer distributions as long as possible. For traditional IRAs, deferral postpones payment of income tax. For Roth IRAs, deferral lets the assets continue to grow tax free even after your death.

Post-Death Distributions

Post-death distributions from Roth IRAs are subject to the rules governing distributions from traditional IRAs and to the terms of the agreement. Two options generally are available for a nonspouse beneficiary: Distributions must be taken either over your beneficiary’s lifetime or by the end of the year after the fifth anniversary of your death. Lifetime payments must begin by the end of the year after you die. Unless the assets are needed sooner, choose the lifetime payment option to continue the tax-free growth of the assets as long as possible.

If your Roth beneficiary is your spouse, special rules apply. He or she may treat the Roth IRA as his or her own, or may roll it over into his or her own Roth IRA. Regardless, the tax-free growth will continue during his or her lifetime without any required distributions – even after age 70 1/2. Your spouse can also name his or her own beneficiary, thus further continuing the tax-free growth
of the assets.

Check the Roth IRA agreement carefully. Are its distribution provisions more restrictive than those required by law? The agreement may not contain all available options. For example, your Roth agreement may require that post-death distributions be made within five years of your death, not over the beneficiary’s lifetime. This would limit the income tax-free growth of the assets.

If your beneficiaries need additional funds, the Roth can provide a source of tax-free income. Distributions to beneficiaries made after you die are not included in
gross income if the account has been open for five years.

Estate Planning Implications

With traditional IRAs, you may take into account the effect of income tax on your beneficiaries in determining how to divide assets among them. For example, you may provide your beneficiary with additional assets of a traditional IRA to offset the income tax they’ll owe. Under a Roth IRA, your beneficiaries have the advantage that any growth of the asset is income tax free.

Because Roth IRAs grow tax free, you should ensure they won’t need to be liquidated to pay estate tax. One way to make liquidity available to your estate is to buy
life insurance through an irrevocable trust.

Creating a trust to hold the Roth IRA proceeds after you die may also be advantageous. The trustee can defer distributions for as long as practical to increase assets for beneficiaries who would otherwise withdraw the proceeds too quickly. Use multiple trusts if significant age disparity exists among beneficiaries. Otherwise, payments will
be based on the oldest beneficiary’s life expectancy.

Benefits Can Continue Long After Death

With careful planning, the tremendous income tax-saving benefits of Roth IRAs
can continue long after your death.

08 Apr

Long-Term Tough Love: Incentive Trusts Provide Assets to Successive Generations

Estate Planner Sept-Oct 2000

Striking the right balance between encouraging your children to accomplish their goals and providing for their needs can be difficult to achieve during your lifetime. Reaching the desired results when you are no longer around is even harder. With the resurgence of long-term dynasty trusts — through which assets are retained in trust generation after generation — comes a renewed interest in providing distribution incentives designed to encourage the trust’s beneficiaries to lead productive lives. This approach is referred to as an incentive trust. These incentives are often coupled with disincentives to discourage inappropriate behavior.

If you are considering leaving assets to successive generations in trust, you’ll want to consider the variety of incentives and disincentives available. Let’s take a closer look at how incentive trusts work.

Communicate Your Objectives 

The first step in establishing an incentive trust is to communicate your objectives for the trust. A statement concerning your intentions can set the tone for trust distributions for years to come. These intentions may include:

  • Allowing beneficiaries to live off the trust assets, and
  • Allowing the trust to provide security but not necessarily a sole means of support.

In addition to a general statement regarding the proper uses of trust assets, you can set forth more specific directions for the trustee to follow. But be careful to provide for contingencies that might arise. For instance, you could include provisions that prevent trust assets from impairing a beneficiary’s motivation to be a productive citizen.

Encourage Education

If you value education and wish your beneficiaries to attain a certain level, then you may want to provide extra incentives to encourage scholastic achievement. Begin by providing the trustee with broad authority to distribute funds to beneficiaries pursuing their educations. Make certain to permit the trustee to pay not only for tuition and room and board, but also for a broad range of educational activities including travel, lessons in the arts or religious education. Identify the types of schooling you wish to encourage, whether private school, vocational school, graduate programs or schooling abroad.

You also may wish to consider additional monetary incentives to encourage beneficiaries to pursue these objectives. One way is to direct the trustee to provide beneficiaries with a stipend while they are pursuing their educations. In addition, consider providing a reward to beneficiaries who obtain desired levels of academic achievement, such as grades or degrees. These rewards and stipends can help offset forgone opportunities to earn outside income while pursuing educational objectives.

Discourage Negative Behavior

In addition to rewarding positive behavior, an important part of incentive trusts is to discourage negative behavior. Unfortunately, some beneficiaries may need encouragement to be productive members of society. Ensure that trust assets will not be used to subsidize nonproductive behavior. If a beneficiary is unable to handle money because of self-destructive behavior such as drug abuse, indolence or being under the control of others that would take advantage of the beneficiary’s generosity, the trustee should be empowered to address such concerns.

You may want to authorize the trustee to retain in trust any distributions that would otherwise have gone to the troubled beneficiary. You may even want to authorize the trustee to take more drastic measures. For example, you could empower the trustee to distribute funds as if the troubled beneficiary were deceased. It may be possible in such cases to provide support to the family of such a beneficiary.

Provide for Future Generations 

Incentive trusts can encourage a beneficiary’s development and protect the trust by preventing misuse of funds so that succeeding generations can also benefit from your legacy. Consult a professional advisor to learn how to include incentive trusts in your estate plan.



08 Apr

The Responsibilities Of Being a Trustee with Discretion

Estate Planner Sept-Oct 2001

As a result of a family, personal or professional relationship, you may be asked to serve as trustee for an estate planning trust established for the benefit of someone’s spouse or descendants, or a combination of the two. Before deciding to accept this responsibility, you should understand the distribution authorities and requirements contained in the trust agreement.

As trustee, you may be granted broad or limited authority to make discretionary trust asset distributions. Such distributions generally consist of either income or principal to meet trust objectives (and the trustor’s intent). To properly function as a trustee, you must be aware of the primary distribution requirements you may be called upon to make.

Decisions and Provisions

Usually, no one will interfere with your decisions in the exercise of your discretionary distribution power as long as you don’t act in bad faith or abuse your discretion. But you must understand the trustor’s intent to determine whether the trust agreement clearly satisfies the intent.

The following provisions are often found in estate planning trusts and dictate your ability to exercise discretion in making distributions:

Medical care. What’s involved in a distribution to provide for the healthcare of a beneficiary? Based on the document, what would you do as trustee with respect to: psychiatric care, dental needs, substance abuse clinics, elective medical procedures, medical insurance premiums and nursing home care? Every situation doesn’t need to be spelled out, but the document should generally tell what is expected of you.

Education. Discretion to distribute trust assets for a beneficiary’s education, unless specifically restricted, generally includes college, post-graduate, professional, vocational, language and artistic studies. But a question you may need to consider is: Does the trust cover religious education, private schools, boarding schools or tutorial expenses?

Support. Discretionary distributions normally consider support as day-to-day living expenses including housing, food and healthcare based on the beneficiary’s reasonable standard of living. Support generally includes more than the bare necessities and contemplates distributions for at least basic educational purposes and maintenance in reasonable comfort. But how does the trust account for the support of a person dependent on the beneficiary, such as a spouse, minor child or adult-dependent child?

Best interests. Trusts that authorize discretionary distributions for the beneficiary’s best interest or that provide no standard at all and gives the trustee unrestricted discretion give the trustee comfort because such discretion is so broad and indefinite that it cannot be abused. Accordingly, discretionary distributions may be made for travel (perhaps via first class) or the purchase of a $50,000 automobile (rather than a $20,000 vehicle). If the beneficiary desires to make gifts to friends or family, would distributions for this purpose be in his or her best interests? What would the trustor have wanted you to do?

Standard of living. Using your discretion to make distributions may be limited to distributions in accordance with the beneficiary’s standard of living. But when is that determined — when the trust was created or when the distribution is being considered? You may need guidance to determine what state law provides. What if the beneficiary is living substantially above or below the standard of living he or she can afford? In case of multiple beneficiaries, do you favor the one with the higher standard of living?

Favoring beneficiaries. Generally, a trust will have more than one beneficiary. Two or more beneficiaries could receive current discretionary distributions, or a beneficiary may not acquire an interest until the current beneficiary dies or some other specified event occurs. As trustee, you may have to make disproportionate distributions or allocate all trust assets to current beneficiaries, excluding remainder beneficiaries. The trust agreement should direct you in this area, perhaps authorizing disproportionate or unequal distributions or authorizing trust termination in favor of one beneficiary.

Other resources. You may be required to consider other resources available to a beneficiary in exercising your discretion to distribute assets. If a beneficiary wants a distribution, he or she should give you financial statements and tax returns.

Carrying Out the Trustor’s Wishes

If you serve as a trustee, you will find that your power of distribution discretion will serve to accomplish the trustor’s objective under unknown and changing circumstances. You will be able to implement what you have determined to be the wishes of the trustor. Yet, your duty to act in good faith and not abuse your discretion may at times conflict with other duties imposed on you as a trustee, such as the duty to treat beneficiaries impartially. If you have questions concerning your existing or proposed trusteeship, contact a professional estate planning advisor.

08 Apr

Paying for Long-Term Care: Are You Eligible To Receive Medicaid?

Estate Planner July-Aug 2000

You’ve worked a lifetime to build up your assets and create a legacy for your family and you probably don’t want to lose everything to pay for long-term care costs. Giving away assets may make sense if you or a loved one is facing the prospect of nursing home placement, but be aware of the availability and consequences of receiving public benefits to cover the cost of care. Long-term nursing home care is expensive and not covered by Medicare, which forces many elderly individuals to apply for Medicaid benefits.

Medicaid eligibility for long-term care depends on your financial position. To prevent you from intentionally impoverishing yourself, an ineligibility period is applied for asset transfers made before applying for Medicaid. The rules are complex because some assets are exempt from the determination of an applicant’s financial status, and the transfer of certain assets to certain individuals also does not affect eligibility. Let’s take a closer look at the implications of transferring assets to qualify for Medicaid.

The Rules of the Game

Each state has different requirements, but generally, transfers you make within a certain period of application for Medicaid are subject to penalties that make the transferred property includable in your financial position for the relevant period. The period varies depending on whether an asset was transferred to a trust (60 months) or outright to an individual (36 months). Whether the trust was revocable and the value of the property transferred may also affect the ineligibility period.

What Is Exempt?

The Medicaid system exempts certain assets from the determination of eligibility. For example, your principal residence is exempt if your spouse or a disabled child lives there. In addition, you may transfer the residence without impact on Medicaid benefits to a child who:

  • Is under age 21,
  • Is disabled, or
  • Has provided care to you and has been residing in your residence with you for two years before the date you enter the nursing home.

An automobile is also exempt up to $4,500 if you are unmarried, or up to an unlimited value if you are married. Burial and cemetery plots of any value are exempt. Household goods of up to $2,000 in value are exempt. Finally, up to an additional $2,000 in any form is exempt from the determination.

To prevent impoverishment of your spouse who remains in the home, he or she is permitted to retain a certain amount of assets and is entitled to a monthly income allowance fixed by statute. These amounts are adjusted annually for changes in the cost of living.

Recovering Medicaid Expenses

Federal law requires all states to have a program that provides for the recovery of nursing home and long-term care Medicaid expenses from the estates of deceased applicants and from their transferees. A state may have a claim against a person’s estate for the amount paid to a nursing home spent on behalf of that person.

The term “estate” is generally defined as all real and personal property included within your estate. It also includes any other real and personal property and other assets in which you had a legal title, or interest, at the time of death. It may include assets conveyed to a survivor or heir through joint tenancy, tenancy in common, life estate or a revocable trust. In most states, the claim may not be enforced until after the surviving spouse’s death and only if there is no surviving child who is under age 21 or is disabled. The claim may be waived in some circumstances where a hardship exists.

Plan Now For Long-term Care Costs

Long-term care insurance that covers both nursing home and stay-at-home care may be the solution to protecting your estate for yourself and your loved ones. The availability and consequences of receiving public benefits such as Medicaid to pay for long-term care can greatly affect your estate planning strategy.