Tips In Estate Planning

Protect Your Property &
Assets Effectively

Smart estate planning involves more than having a will, even a complex one. Faced with restrictive privacy rules in health care matters, government mandated rules on how IRA and retirement accounts and annuities must be paid to beneficiaries (and related income tax rules dealing with beneficiaries), financial concerns over nursing home costs, and other financial privacy issues, estate planning is a bit more complex than in years past. You should take into account a realistic assessment of your net worth, the timing of how retirement plans are to be paid and used, and the possible impact of your future medical and living expenses – meaning, estate planning involves not only having wills and trusts, but also includes management of your financial resources while you are still living.

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The Estate Tax Component

If much of your net worth consists of retirement funds, you need to know the (1) ground rules, (2) know how IRAs are to be paid to you, (3) then paid to your spouse, and (4) then paid to your children, when you die.

Whenever you withdraw from an IRA, you will pay income tax based on what you withdraw. Income taxes must be paid on the withdrawal while you are alive. This rule applies to normal IRAs, 401ks, 403bs, etc. This rule applies to you, but also applies to your spouse, and to your children. If you own Roth IRAs, there is no income tax on whatever is withdrawn. This concept is easy to understand.

You probably didn’t realize that you cannot decide how your heirs will receive their distributions: you might have assumed you could control distributions to your spouse and your children, by building in conditions on distributions, such as, my wife shall be paid my IRAs so long as she remains unmarried, or my IRAs are to be distributed to my son Billy, but only if he graduates from college, and under no circumstances may he transfer my IRA to his wife. Unfortunately, that isn’t how the system works. The government has trumped all decision making on your part. Here’s how it works: whoever you name as death beneficiary of your IRA has the right to dictate how the funds are to be paid to them (they may take it all at once or take payments over a ten-year period). In each of these instances, the IRA becomes their property, and the beneficiary will name their own death beneficiaries. What they receive from you is known as an Inherited IRA. Spouses are given extra choices: the IRA can be rolled over to the survivor’s IRA, and no income taxes are to be paid, since nothing is taken out. A second option for the surviving spouse is to withdraw the IRA based on his or her life expectancy.

Suppose you try to avoid these payout rules by designating the Trust as a beneficiary of the IRA, and in the trust, you place a bunch of conditions for payout to your spouse and/or kids (such as denying any distribution until your kids graduate from college). Congress has thought of that loophole, and simply decreed that payments from IRAs to trusts, which is a non-qualifying beneficiary, are to be taxed at the 37% income tax bracket, should the amount received be over $12,950 in any given year. Your state will also tax the distribution (e.g., 5%), so the income tax on the trust is 42%.

So, what can you do? Not much. It is better to name human beings (or charities) as death beneficiaries on all your retirement plans (except Roth IRAs). They will be taxed at their individual tax bracket, as they withdraw from the IRA.

As things now stand, there are no federal estate taxes for persons dying in 2021, unless their estates are with more than $11.7 MM. Most states, including Oklahoma, have abolished estate taxes. If your estate exceeds $11.7 MM, the federal estate tax is a flat 40%, and you need to visit with a CPA or estate planning lawyer, to discuss this topic further.

Trusts

Most people like to control their own affairs, which is to say, they do not like the concept of probate. Probate is a court procedure, in effect in the United States, which deals with administration of your property after you die. Sometimes, the costs of probate are very expensive, and sometimes, there are many delays before your estate is distributed to your heirs.

As a means of avoiding probate, many people place property in a trust (but not their IRAs, since that is an income taxable event). A trust is simply a written agreement as to how property will be held while you are alive, and what happens to the property when you die. As Trustee of your trust, you will be in charge of all property placed in a trust until you die (or are mentally incapacitated), and as the creator of your trust, you can change the provisions of a trust with less formality than required to amend a will.

You'll undoubtedly name yourself as trustee of your own trust, but you'll also have to choose one or more successor trustees to handle affairs if you can't.

You may want to name your spouse as successor trustee, if he or she has a good head for business, good. But you'll still need someone else to assume the office of trustee, if you and your spouse both die in a common disaster or accident. The first consideration for selecting a successor trustee is, obviously, the person must be trustworthy, whether the person is a family member, close friend, or professional, such as your accountant, perhaps your lawyer, or even your bank's trust department.

If you'd like to name a relative as successor trustee, but sense there may be too much pressure and quarreling within your family, it's probably a good idea to name an institution or a professional to handle the job. Keep in mind, however, that there is no such thing as a perfect successor trustee, even your bank's trust department.

As a safeguard, the trust should contain a provision that allows you to remove any successor trustee, for whatever reason, and you can name another, when circumstances dictate. Some trusts name a protector, who can fire the trustee you name -- then name another trustee.

After the trust is signed, you should fund it by changing title to property you own to the trust (so the trustees of the trust will own your property. You need professional counseling and help accomplishing this very important task.

Benefits

Here is a list of some of the benefits of holding property in trust:

Because you can change a trust whenever you wish during your lifetime, your estate plan becomes flexible, and will adapt to your needs and those of your family. The provisions of a trust do not become irrevocable until death.

In addition, such trusts can also save on fees and administrative expenses after your death and save time and trouble for the beneficiaries. Assets can be paid out quickly after death, because trusts sidestep the sometimes costly and time-consuming probate process.

Furthermore, in most instances, a displeased relative cannot contest the trust's provisions (as they can if you use a will – a will contest could hold up distribution of your estate for months or even years in probate court). To contest a trust, a disgruntled relative would have to file civil suits against each of the beneficiaries and/or the trustee. In many trusts, a contesting beneficiary will lose his or her potential inheritance, because the trust will direct the trustee to reduce their inheritance to $1.

To establish a trust, you pay a one-time fee. Unless you later decide to change the terms of the trust, there are no further costs.

Trusts also are strictly private affairs, unlike probate proceedings, which are public records.

If you later become incapacitated and unable to handle your affairs, a correctly drawn trust can take care of your financial needs and those of your family without having to use the court system to establish a guardianship. This means that many of your financial affairs can be handled far more expeditiously. For example, if a stock you own drops in value, it can be sold quickly by your selected successor trustee, rather than waiting for days or weeks until a probate court gives its approval to the sale. This, of course, can mean the difference between profits and losses.

To make things easier to understand, remember this: when you die, the probate court only has jurisdiction over your property if your property is titled in one of three ways: (a) in your individual name; (b) when you own property as a tenant in common with another; or (c) whenever you have named “my estate” as the beneficiary of a life insurance policy, an interest in a pension or retirement plan, or an IRA. All other types of property you own will not wind up in Probate Court (examples: life insurance which designates a beneficiary as being something other than "my estate"; property you own as joint tenants with right of survivorship (or tenancy by the entireties) or TOD (transfer on death) designations to the trust.

Thus, to avoid probate, title to your property must be transferred to a Trustee. You will be the Trustee, so you will be holding title to what you own, but subject to the terms of the trust. The trust will state that you are beneficiary of the trust, so your rights to the property remain the same. When you die, the successor will then own whatever you have placed in the trust and will hold and distribute the property under the terms of the trust.

In a properly drawn revocable living trust, there are certain assets which are listed, which are automatically deemed to be property belonging to the trust estate – without any other specific document of conveyance to a Trustee. For instance, personal property owned by the Settlor at the time of his or her decease, unless specifically excluded, should be regarded as being a trust asset. Clothes owned by the Settlor would fall within the category of tangible personal property, and such property would belong to the trust estate (due to the conveyance made to the Trustee under the terms of the trust). Similarly, household goods would fall within the list. Occasionally, your lawyer will have you sign a Bill of Sale for this property, but sometimes the trust itself will list these assets as being part of the trust.

Real estate, mineral ownership, stocks, bonds, mutual funds, ETFs (Electronic Transfer Funds), and savings bonds are not automatically assigned to your trust, but must be dealt with by additional documents.

My point is this: to avoid probate, your trust must be properly funded.

Power of Attorney

Another estate planning instrument you'll need is a durable power of attorney (also known as a financial power of attorney), and in this instrument, you will normally name your agent to be the same person you've selected as your successor trustee. A power of attorney creates an agency relationship between the principal and his or her agent (usually designated as an attorney in fact), but a power of attorney isn't a magic document that will take the place of wills and trusts, because powers of attorney are automatically revoked at death. If the person you chosen to be agent dies or becomes incompetent, then name a back-up agent.

Living Will

You may also want to have a "living will" that says you don't want to be kept on a life support system if you're terminally ill and there's no hope of recovery. Most states allow you to decide how you want to be treated, when you have very little time to live. These documents may also permit donation of body parts to science. A few states permit a Dr. Kevorkian style living will, which permit you terminate your life in certain instances (e.g., Oregon, District of Columbia, Hawaii, Maine, New Jersey, Vermont and Washington).

Business Owners

If you own a business, you have still more planning to do, because control of the business must be carefully planned, so your family will be cared for in the manner you want them to be after you die. You'll probably have to answer some hard questions in establishing a business succession program. If you own your own business, or are a member of a partnership, do you have:

A procedure, acceptable to IRS, to value the stock in your closely held business?
A buy-sell agreement with a potential purchaser of the company stock?
Life insurance that is earmarked specifically to fund the buy-sell agreement?
A "key man" insurance policy that will help your company procure new management?
An asset that will provide cash to pay estate taxes that will be due on your death?

Other Means of
Dealing With an Estate

A revocable trust can’t protect you from creditors or give you any benefit if you need help on paying for nursing home costs. There are, however, other means of passing title to property without a will or trust (using a transfer on death deed, or POD bank account, or TOD designation for cars and boats). These techniques in property ownership don’t help if you are disabled, and for that, you need a durable power of attorney.

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Protect Your Property &Assets Effectively