But I Don’t Like or Trust My Child’s Spouse! Trusts, part two

In the post immediately prior to this post, I discussed the use of a trust to prevent a spendthrift child from squandering his or her entire share of the parents estate.  This form of trust has another purpose as well.

Consider the situation where mom and dad really dislike or do not trust their child’s spouse (for fun, let’s call him or her the “evil spouse”).  They don’t want the evil spouse to have access to their child’s share, lest the evil spouse divert those assets and use them for purposes that Mom and Dad never intended.  Customarily the parents intend that the child’s share pass on to the next generation at the death of the child, but if the evil spouse can access the assets, he or she may have other ideas.  So what are Mom and Dad to do?

The answer again is to establish a trust for the benefit of their child.  Such a trust will be substantially the same as the one described in the last post.  While the purpose of a trust for a spendthrift child is to protect against inappropriate spending, the purpose of a trust in this case is to keep the evil spouse from getting access to the assets so long as they remain in the trust.  The evil spouse will have access only to those assets which have been distributed outright to the child.  The child has the option to maintain assets in trust to keep the assets beyond the reach of the evil spouse.   This will prevent the evil spouse from commandeering the assets meant for the child.  Mom and Dad will rest much easier knowing that the evil spouse only has access to the trust assets to the extent their child chooses to request outright distribution, and one can only hope that the child has the wherewithal to prevent the evil spouse from spending the assets in ways that were not intended.

The Spendthrift Child: Trusts Part One

I often work with clients who have adult children, and as is typical, wish to leave their estate to their children in equal shares.  Customarily, at the death of both parents, the shares for adult children will be distributed to each outright, free and clear of all trusts.  But sometimes one of the children is financially irresponsible, and the parents are uncomfortable simply handing over that child’s share of the estate outright.  There may be concern that the child will not manage his or her share responsibly or in the way that the parents intended.   So how do parents of such a child protect that child’s share of the estate and prevent such events from occurring?

The answer is  for the parents to create a trust, and maintain the share for the spendthrift child in that trust for the life of the spendthrift child as beneficiary of that trust.  Most often, the trust will be in the form of a testamentary trust contained in each parent’s Will.  Upon the death of  the second parent, the share for the spendthrift child will not pass outright, but instead will pass to the trust established for his or her benefit.  The trustee appointed to oversee the trust will have the authority to make distributions of income and principal to the beneficiary, in the trustee’s discretion for the “best interest and general welfare” of the beneficiary.  The trustee may release trust assets to the spendthrift child for purposes consistent with the language of the trust and has broad discretion to do so. 

The parents must appoint a trustee to manage and distribute trust assets according to the foregoing standards.  If the siblings have a good relationship, the parents may appoint one of their other children as trustee, knowing that the trust assets will be made available to the beneficiary for appropriate purposes without acrimony.  If the parents are concerned about straining the relationship among their children, however, naming one child to act as trustee for another may be a poor choice.  In that case, the parents might identify an independent person or corporate trustee to serve.  Such a trustee is likely to be more conservative about making distributions only according to the specific language of the trust.

Whatever the terms of the trust may be, the establishment of a trust to hold the share of a spendthrift child is an effective way to ensure that the spendthrift child will not fritter away the whole share in ways that are inconsistent with the parents’ intentions.

End of Life Care: Part Three

I have written twice previously about the important topic of discussing the subject of end of life care with aging seniors, a significant concern for those approaching the end of life and and those who care for and love them.  The discussion of this subject has, apparently, "gone viral", and this is a positive thing.  The topic that previously we rarely heard about in the context of estate planning, medicine and other relevant places is now everywhere.  Why the sudden global interest?  Whatever the case, the issue is being discussed in many different contexts.  Things are changing for the better. 

Seniors age 65 and older are entitled to Medicare coverage, which provides health care insurance to the older population during the last years of life.  And as I have discussed, in addition to strictly medical concerns, several other factors contribute to an assessment of whether patients are getting the care they want or need as they approach the end of their lives.  In many cases, the wishes of those patients are unmet.

To the credit of the Centers for Medicare and Medicaid Services, as of 2016, Medicare will begin covering advanced care planning, including discussions between physicians and other health care professionals and their patients regarding end-of-life care and patient preferences.  

I am encouraged that the populations of seniors approaching the end of life are finally being afforded the consideration and respect they have long deserved but not always received.

We all die.  Wouldn't it be nice if we could all express our philosophies and our wishes in a meaningful way, and be heard, so we can die with dignity, just as we have lived?

Testamentary Trusts

A testamentary trust is an estate planning tool whereby a trust is established through a testator’s will, and comes into effect when the testator dies.  In the past, absent a particular circumstance, clients were advised to avoid testamentary trusts for several reasons.  The Will would have to be filed for probate in order for the trust to take effect.  The court would then have continuing oversight of the testamentary trust, and the trustee was required to provide the court with annual accounts.  In order to avoid the ongoing administrative obligations and costs of probating an estate and managing a testamentary trust, most often estate plans would avoid testamentary trusts and instead include a “pourover trust”.  The testator’s will would provide for the estate to “pour over” into a separate trust over which the court would have no authority or supervision.  The pourover trust might contain essentially the same provisions as would the testamentary trust, but would be administered privately without the court’s involvement. 

Under the new Massachusetts Uniform Probate Code, testamentary trusts have come back into favor. The Court no longer has continued supervision over a testamentary trust, and the previous administrative obligations no longer exist.    With the relaxing of the former requirements, testamentary trusts will often be a more simple, direct and appropriate method for leaving estate assets in trust.

It should be noted, however, that although testamentary trusts may be a simpler yet equally effective method of trust planning, it will be necessary to file the will for probate in order for the provisions of the testamentary trust to be implemented.  If probate avoidance is an important component of a client’s wishes, a testamentary trust will not be the proper vehicle.  Rather, to avoid probate, all assets must be held in non-probate form, and the pourover trust will continue to play an important role in achieving the goal of probate avoidance.  Under the new MUPC, however, testamentary trusts have regained favor and are often the estate planning vehicle of choice.   

Irrevocable Life Insurance Trusts

Under federal and state estate tax laws, the face (payout) amount of a life insurance policy owned by an individual will be included in the taxable estate of such individual at death if the policy is owned in the name of the insured during his or her life.  If the life insurance policies have substantial payout amounts,  the decedent’s taxable estate may exceed the allowable estate tax exemption.  If life insurance policies represent much of the taxable estate, a Irrevocable Life Insurance Trust (ILIT) is a good tool for removing the face amount of a life insurance policy from the taxable estate of the insured. 

The ILIT is created to own the life insurance policies in its name, and is also named as the beneficiary of any policies owned.  Upon the death of the insured, the proceeds of the policies on the life of the insured will be paid to the ILIT and held by the ILIT in accordance with its terms.  Generally the ILIT requires that the proceeds of policies owned by the ILIT are held for benefit of the surviving spouse. Distributions may be made to the spouse only at the discretion of the Trustees.  Upon the death of the surviving spouse, the terms of the ILIT will govern the division and distribution of the assets in the Trust.  Most commonly, upon the death of the surviving spouse, the proceeds will be distributed to children according to the terms of the ILIT, though any successor beneficiary may be named if there are no children to receive a share.  By using an ILIT, the policy proceeds will not be included in the taxable estate of either the insured or the surviving spouse.

If you are applying for new life insurance and have established an ILIT, the application should be made by the ILIT rather than by the individual.  When the policy is issued, it will be owned by the ILIT, and In that event, the tax protections of an ILIT are immediately available.   If you transfer already existing policies into an ILIT, there is a three year waiting period before the transfer is deemed complete.  If the insured dies within that three year period, the proceeds of the ILIT will come back into his/her estate.

It is important to note that or an ILIT to be effective, the policy owner must give up all “incidents of ownership” in the policy. Thus, an independent third party trustee must be named to take active responsibility and control at inception.  it is important to name a trustee with whom the surviving spouse will feel comfortable since the Trustee controls the payout of trust assets.  It is prudent to name at least one successor trustee in the event the initial trustee is unable to serve.  Because of the potential length of time the ILIT may exist, it is prudent to select a younger person as trustee to ensure they will be able to serve for the duration, and to name a series of successor Trustees to avoid a complete vacancy in that office.

The Trustee will be responsible for all administrative duties.  One such duty is the payment of annual premiums on the policy.   When a premium is due, the insured may not pay the premiums directly. Instead the insured must make a “gift “ in the amount of the premium to the ILIT, and the Trustee will then pay the premium from that gift.   To comply with gift tax laws, the beneficiaries are entitled to withdraw a portion of the gift within a 30 day period after the gift is made.  These are known as “Crummey Powers”.  The trustee must send written notices to each beneficiary of the gift made and the right of withdrawal.

Although there are great advantages to using an ILIT to own life insurance policies, there are certain downsides:

1.       An ILIT is irrevocable. The insured surrenders all control over the policies and any other contributions made.  The settlor of the trust cannot change the beneficiaries, cancel the policies, borrow against the trust, or otherwise alter the provisions of the trust if circumstances change, nor can anyone compel the Trustee to do any of those actions.  

2.       If an existing policy is transferred to the Trust less than three years prior to the death of the insured, the ownership of that policy will revert back to the estate of the insured and the face amount thereof will be includible in the calculation of his or her taxable estate.

3.               The beneficiaries are given a mandatory withdrawal right which could result in the exercise of that right in opposition to your intent.

4.               The surviving spouse as beneficiary of the ILIT does not receive the policy proceeds free and clear, but instead must work with the independent trustee on matters of management and distribution of trust assets.

Notwithstanding these limitations, an ILIT it is widely considered to be a worthwhile tool in estate planning as a very effective way of reducing the size of a taxable estate, thereby reducing estate taxes by a substantial amount.  

What do I Tell My Heirs?

When a client completes an estate plan, I am often asked whether they should give a copy of the documents to their children, or otherwise share the content.  Unless there is close relationship or unusual circumstances, I generally advise the client not to do so.  I do recommend that they give a copy of the Durable Power of Attorney and Health Care Proxy to both the primary and the alternate appointees, because those are documents that might have to be accessed quickly in the case of sudden illness or catastrophe. But otherwise,  I encourage clients to keep the contents of the other documents to themselves.  Even if assets are distributed equally among children, one may be appointed in a fiduciary role, which may insult another child.  One child may feel that he or she is entitled to more than their equal share.  One may have special needs that warrant giving such child a larger share of the estate.  There may be an asset (such as a vacation home) which some children want but others don’t.  Any or all of these, and many other circumstances, may create ill will among the children that the creator of the plan would rather avoid. There are myriad circumstances that warrant keeping the information private until death, so that the children have no opportunity to influence a parent to make changes during life time.  It is best to make your own assessment, and you may determine that keeping the information to yourself is the best course of action.

Get Your Affairs In Order

I recently heard a story from a couple in their 80's that struck me as interesting.  Though in relatively good health, they each have their maladies and one has started to develop some more serious health issues.  They recounted that in a recent visit to their primary care physician, in addition to the medical exam, the physician initiated a conversation with them about end-of-life issues.  "You are nearer to the end than to the beginning", said the physician.  "Do you have all of your affairs in order, including estate planning, burial wishes and arrangements and the like?"  I was taken somewhat aback, but quite pleased,  by this story, as it had not occurred to me that this was advice that would come from a physician.  I was happy to hear that the physician was advising the couple on how to prepare for their end not only in a medical context but in an overall life context.  I commend this physician on doing so and hope this is a common practice in geriatric medicine.

As I have often said, particularly to elderly clients, putting your affairs in order, having a complete estate plan, and sharing your wishes for end-of-life care with your loved ones are all immense gifts you can give to them.   As children and grandchildren must mourn the loss and adjust to life without their loved one, it is an additional burden to have to go on a treasure hunt to gather information about the estate of the deceased and deal with a disorganized probate process to transfer assets.  It is also imperative for parents of minor children to establish guardianships and a method of managing assets for the benefit of the children while they are young.  For this reason, I highly recommend that everyone, regardless of age, take the time and effort to establish an estate plan that will allow for the orderly administration of an estate in the event of a loss.   Life is precious but fleeting, and one never knows when it might be taken, whether expected or otherwise.  I specialize in compassionate,  comprehensive and competent assistance with these matters.  Make it your new year's resolution to call me and take care of this work in 2014.

Estate Planning is Important!!

Well, it has certainly been a long time since I posted on this blog.  I have been posting on my business facebook page (https://www.facebook.com/pages/Law-Offices-of-Judith-R-Pike/118159531528358?ref=br_tf) and between that and all the things that life tosses ones way, this blog became relegated to the back burner.  But now I am going to try to revive it, and hope you will find the new posts as helpful as those which were posted in the past.

Today's topic is estate planning.  I came across a survey performed by Lexis Nexis in 2011, and wish to re-post some portions of the report here, because I think the points it makes are important.

Survey Finds Most Americans Recognize the Importance of a Will or Estate Planning, Yet Few Have Necessary Documents in Place

Results Show Less Than Forty Percent of Parents with Minor Children Have Wills

July 19, 2011 — NEW YORK - A new national survey commissioned on behalf of LexisNexis®, finds the majority of Americans (60 percent) believe that all adults should have a will or estate planning documents in place, yet only 44 percent report that they currently have any such documents. In stark contrast, more than one third (36 percent) of Americans with minor children do not believe that wills or estate plans are among the most important documents to have on hand. Rather, adults with minors in the household rank birth certificates (76 percent) and titles/deeds for property and vehicles (70 percent) as the most important. In addition, although the majority of parents with minors in the household (75 percent) understand that a court will decide who the children’s legal guardian becomes if there is no will at the time of both parents’ death, only 39 percent have any estate planning documents in place.

"The 2011 Wills & Estate Planning survey shows parents may not be taking the necessary steps to ensure their wishes for the care of their children and estate are followed in the event that both parents were to pass, for example due to an accident," said David Palmieri, vice president and managing director of Marketing and Consumer Solutions at LexisNexis. "Additional research indicates that many parents consider wills to be more appropriate for those with significant wealth and as a result, they risk leaving the fate of their children in the hands of the courts instead of being directed by an enforceable legal document."

Reasons given for not making a will or estate planning a priority vary widely. According to the survey, 37 percent of Americans cite a current focus on "essentials," such as paying bills and buying groceries, as the top reason they don’t have any estate planning documents. Other reasons cited by survey respondents include:

• Not necessary (18 percent)
• Too complicated to deal with right now (16 percent)
• Too expensive (14 percent)
• Belief that their spouse and/or children will automatically receive any assets that they have (13 percent)
• Too time consuming (6 percent)

 Other findings indicate that age and gender play a role in whether a person has a will or estate planning documents. For example, the majority of Americans report that they are most concerned about preserving their health (70 percent) and having enough money to retire (50 percent) as opposed to protecting their financial assets (43 percent), while women are more likely to be concerned about maintaining their weight (47 percent) than protecting their financial assets (44 percent).

Additionally, Americans 18-34 years old are more likely to report that they are most concerned about preserving their health (64 percent), having enough money to retire (52 percent) and maintaining their weight (51 percent) rather than protecting their financial assets (44 percent). Interestingly, one in five Americans 18-34 years old (22 percent) believe it is becoming less important to have wills because people are living longer, healthier lives.

There is no need for me to repeat any of the messages of the above article-- they speak for themselves.  Let me just say that everyone should have an estate plan, regardless of your age and stage of life.  Parents of minor children should provide for guardians and create trusts to manage assets until the children come to an age which is appropriate for them to inherit a potentially large sum.  Older folks should put their affairs in order as a true and huge gift to their surviving children upon death.  These are just two examples of classes of people who should do estate planning, but it applies to anyone and everyone with assets and opinions about where those assets should go upon death.  So delay no longer--- call me to get started on that estate plan you have been putting off for any number of years.  You will not be sorry.

 

What is a Trust?

Trusts of all kinds are widely by estate planning attorneys as excellent vehicles to assist in the management and disposition of assets. But what, exactly, is a Trust?

Think of a Trust as a box, or a holding tank. It is a legal entity that can hold title to all sorts of property for the benefit of one or more people or entities. The box contains a set of instructions that set out how the property is to be held, managed and ultimately distributed. Assets are placed into the box by an individual, thereby segregating them for a stated purpose.

A Trust is created by an individual known as the Settlor, Grantor or Donor (these terms are interchangeable). The Trustee is an individual or institution charged with the responsibility of carrying out the instructions for the benefit of the Beneficiaries, those given an interest in the property by the Trust’s terms. A Grantor may also be a Trustee and/or a beneficiary at once.

Trusts may be "inter vivos", created during the Grantor’s lifetime, or "testamentary", meaning they may come into play only upon death. Trusts are also revocable or irrevocable. A revocable Trust can be modified, amended or revoked by the Grantor; an irrevocable Trust cannot.

Trusts may be created for a multitude of purposes. Some common uses of trusts include:
1. Avoidance of probate upon death.
2. Reguation of control over the amount and circumstances of distribution.
3. Holding assets for the benefit of young children before they reach an age appropriate for outright distribution.
4. Protecting assets used by a surviving spouse for the benefit of children in the event of remarriage by the surviving spouse.
5. Funding housing, education or special needs costs for the beneficiaries.
6. Sheltering assets against liability for estate taxes.
7. Creating charitable tax shelters.

Creating a Trust is just one part of the process, however; once a Trust is created, it must be properly funded in order to achieve the purpose for which it was established.
The benefits of the trust will only apply to those assets which are actually transferred into it, which means putting appropriate assets into the name of the trust.

A Trust is a very flexible tool for achieving a wide range of estate planning goals. Ask me about a Trust and whether it might be right for your needs.

Estate Planning: Keep that Paperwork Organized!

The March 24, 2010 New York Times has a great article on the importance of making sure not only that your estate planning documents are in order and up to date, but also that your beneficiary designations, titling of assets and general paperwork are in order so that your heirs can easily manage your estate in the way you intend. It's worth reading this article, so click here: http://www.nytimes.com/2010/03/25/your-money/estate-planning/25ESTATE.html?emc=tnt&tntemail1=y. I do (of course) take exception to the statement that a Will can be easily facilitated by the use of an online do-it-yourself site; there is simply no substitute for the advice of a competent estate planning attorney who will do a comprehensive review of your assets and general needs, since there is far more to the process than just slapping some words down on paper and calling it a Will. The article does, however, give good food for thought. Have you done your estate plan yet? If not, call me and I can help make it happen in an efficient and complete manner.

Estate Planning for Blended Families

Estate planning in the best of circumstances can be a challenging process, but it can become even more complicated when dealing with the issue of blended families. In a time when divorce and remarriage are common, many families include children from previous marriages, and the decisions as to who will inherit what may be complicated by the complex relationships among parents, step-parents, step- and half-siblings and other family members.

It may be only natural to want to pass on your assets to your biological children, but you may also want to provide for your subsequent spouse and even stepchildren. Balancing these sometimes disparate considerations can be a complicated and challenging experience. Even when blended families get along, the potential for acrimony, disagreement and even litigation among the different family segments exists.

At a minimum, each spouse of a subsequent marriage should have a will. In the absence of a will, as a result of the laws of intestate distribution, assets are likely to pass in ways which are inconsistent with your intentions. Yet a better approach is also to establish a trust, which will permit you to provide for the surviving spouse and still protect a portion of your assets for your children of a prior marriage.

Issues to be considered when planning for a blended family may include the following:

1. Are your beneficiary designations up to date? Have you successfully removed your ex-spouse from receiving any of your assets? In certain cases a beneficiary designation may trump a divorce decree or the terms of a will. Be sure that you have removed your former spouse as beneficiary in all cases and designated beneficiaries consistent with your current wishes.

2. Determine what you wish to leave to your new spouse and stepchildren, and what you wish to leave to your children, whether of the current marriage or a prior marriage. Consider the needs of all parties and strive to ensure that the assets are distributed in a way that reflects your goals. Establishing a trust can eliminate the possibility that the subsequent spouse will have the authority to change beneficiaries and disinherit children from a prior marriage after your death.

3. Consider establishing a prenuptial or postnuptial agreement which sets out the distribution of finances and properties upon your death.

4. Consider the purchase of life insurance as an effective way to provide a known amount to children from a previous marriage.

The most important thing you can do when planning for a blended family is be honest and open. Communicate your priorities and your wishes, and speak frankly but openly with your spouse, children and step-children so that all understand your intentions in making the decisions that underlie the estate plan. Such communication is crucial to avoiding ill will and resentment among survivors after your death.

Estate Planning for Pets

It might sound crazy to some, but more and more people are including provisions for their pets in their estate plans. While it is certainly possible to make informal arrangements with a loved one to adopt your pets in the event of your demise, many are opting to formalize those arrangements in written legal documents. Pets play a very significant role in the lives of many individuals, so it only makes sense that they would want to be sure that their pets are properly cared for after their death. Being the owner of two dogs, two cats, two hamsters and a Russian tortoise (who will no doubt outlive not only me but my teenage daughter, its owner, as well), I certainly understand the importance of pets to a person and a family. So how do we ensure the proper care of your beloved animals after you are gone?

Legally, a pet is considered tangible personal property which will pass according to your Will. An important consideration is the selection and designation in your Will of an appropriate beneficiary/caretaker for your pet. It is also wise to name at least one alternate caretaker in the event that your first choice is unable to serve for the duration of the pet’s life.

You may also wish to provide a source of funds to the caretaker to cover the costs of your pet’s care. In estimating the correct amount, you should consider your own annual costs for food, veterinary care, grooming, supplies, boarding and the like, in relation to the pet’s probable life expectancy. You might choose to make a conditional or unconditional outright gift of that amount to your pet’s caretaker, or you might prefer to protect those funds by the establishment of a trust for that purpose. Leona Helmsley aside, while some states do permit the pet itself to be named as beneficiary of such a trust, in Massachusetts the beneficiary of such trust must be a human. The actual structure and terms of the trust, and the named trustee and beneficiary, would be determined based on a variety of factors to be considered as part of discussing your overall estate plan.

Short of your death, another concern is your pet’s fate if you become incapacitated. The inclusion of provisions for your pet’s care in a comprehensive Durable Power of Attorney would address that circumstance and ensure that your pet will be properly looked after if you are unable to care for your pet yourself.

If you are a pet owner and already have estate planning documents which do not address these issues, it may be time for an update. If you have not yet gotten around to putting your estate plan into place, the resolution to do so is a great way to begin the new year, whether or not you are a pet owner.

Wishing all a jolly Christmas/Hanukkah/Kwaanza/Festivus/General Relaxation Day!

Estate Planning For Parents of Minor Children: "But We Just Can't Decide on Guardians!"

As parents of minor children, it is absolutely essential that you have an orderly estate plan in place. This at a minimum means executing a will, which is a legal document that sets forth your wishes regarding disposition of your assets upon death, designates those individuals who will be responsible for the orderly administration and distribution of your estate, and designates the guardians of your minor children. Also strongly advised is the creation of one or more trusts to hold and manage your assets for the benefit of your children during their minority in the unthinkable event of the demise of both parents.

The selection of a legal guardian for your minor children if both parents decease is perhaps the most crucial component of estate planning for young families. You may select grandparents, aunts and uncles, cousins, or even close friends who are not related. For many, the choice is easy or obvious. Yet for others, this can be a daunting and seemingly unsolvable task. I have had clients tell me that they really want to put their estate plan in place, but they cannot because they just can't choose a guardian. This is NOT a good reason to delay or suspend the creation of an estate plan. My advice is to select the best among the bad options. In the absence of your guardian designation, the courts will control the decision of guardianship, and your children may well end up in the hands of the person(s) you would least want raising your children, or even worse, in the social services system. So bite the bullet and make that decision, even if it isn’t perfect.

In addition to executing your wills and designating guardians, I recommend the creation of one or more trusts whose purpose it will be to hold, manage, spend and ultimately distribute your assets for the benefit of your children. Within the trust, you will designate trustee(s) who will be responsible for these tasks. The trustee(s) may or may not be the same person(s) as the designated guardians, and there are pros and cons to choosing the same person for both tasks. The trust will set out the terms on which your trustees will manage, invest and spend your assets for your children’s benefit during their minority. It will also allow you to determine at what age, or ages, your children will be entitled to receive outright distribution of all or a portion of their trust shares. In the absence of a trust setting out such provisions, the assets will be held for your children in a statutory (UTMA) structure, and will become available to your children free and clear at age 18. For most parents who have saved to fund their children’s college educations and want to ensure that the funds will be used for education and related purposes, this would not be the desired outcome. A trust permits you to delay outright distribution of assets until a later age, while still permitting the assets to be available to the children, at the discretion of the trustees, for appropriate uses.

A simple essay such as this cannot fully set out all of the considerations which go into a comprehensive estate plan for young families. The message here is simply that if you are the parents of minor children, I believe you have a responsibility to have wills and a trust in place. It is a gift that you will leave to your children in the unimaginable circumstance that neither parent survives to see your children into adulthood.