I have written this article for information purposes, and I hope you learn something from it. Though I would like to state it is current and up to date, in all candor, I can't. In most cases, the concepts are relatively accurate (except for obviously old and dated materials, primarily related to taxes). You should confer with your own lawyer about issues that affect you and your family.





Smart estate planning involves more than having a will, even a fairly 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, 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.


This article will deal with several of these topics, the first of which begins with income taxes. Trusts and other topics (such as estate taxes) will be discussed later on.


Income Taxes and IRAs. If much of your your net worth is heavy laden with retirement funds, you need to assess the ground rules, know how IRAs are to be paid to you, then to your spouse, and then to your children.


Let’s start with income taxes, which have to be paid by you while you are alive. If you own normal IRAs, 401ks, 403bs, etc. you must pay income taxes for whatever you withdraw within a given year. This rules 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 If you own Roth IRAs, there is no income tax on whatever is withdrawn.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 thought 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 pass 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, take payments over a five year period, or elect to receive payments based on their life expectancy, using a government devised life expectancy table). In each of these instances, the IRA becomes their property, and they will name their own death beneficiaries. What they receive from you is known as an Inherited IRA.


Suppose you try to get around these payout rules by designating the Trust as a beneficiary of the IRA, and in the trust, you put a bunch of conditions on payouts to your spouse and/or kids (such as denying any distribution until your kids graduate from college). Congress thought of that loophole, and simply decreed that payments from IRAs to trusts, which is regarded as a non qualified beneficiary, are to be taxed at the 37% income tax bracket, should the amount received be over $12,700 in any given year.


So what can you do? Not much. There are solutions mentioned in another article, More Tips in Estate Planning. That said, let’s migrate our topic of discussion to Trusts.


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 all 50 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 a 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. You will be in charge of all property placed in a trust until you die (or are mentally incapacitated), and you can change the provisions of a trust with less formality than required when you amend a will.


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, it can adapt to changes in 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 should contain a no contest clause (which directs the trustee to pay the disgruntled beneficiary the sum of $10).


•     To set up the trusts, 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 needs and those of your family without having to go through 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 is failing, it can be sold quickly, by your selected successor trustee, rather than waiting for days or weeks until a court gives its approval for the sale. This, of course, can mean the difference between profits and losses.


The Trustees. You'll undoubtedly name yourself as trustee of your 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, but you'll still need someone else to take over 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 the successor could be 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.


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.


Funding the Trust. The next step in creating a trust, so as to avoid probate – is to transfer title to various property you own to the trustee (which will be you and your wife). When you make a trust, you are also given legal titles: the person making the trust is known as the Settlor (sometimes referred to as Grantor or Trustor or Trust Maker – in other words, the person who establishes or creates the trust). Since you want to preserve the right to change the terms of the trust later on, the trust will be treated as a revocable living trust, which is treated as being you for tax purposes (the tax id number for the trust is your social security number; when you die, the IRS will give your successor trustee another tax id number).


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) 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 – such as, 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) with your spouse or someone else, property you hold in trust or property which has a pay on death beneficiary or a transfer on death beneficiary – all of these types of property ownership escape the jurisdiction of the Probate Court.


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, 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 place 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.


 Real Estate. The problem of funding the trust becomes a bit more complicated with respect to real estate. In all instances where a trust is prepared, and the Settlor owns real property, a quit claim deed is usually signed and filed, in which title to the real estate is conveyed from the Settlor to the Trustee. If the Trustee dies, then the Successor Trustee will sign an affidavit (also known as a Certificate of Incumbency, or Memorandum of Trust) and file it with the Registrar of Deeds (known as County Clerk, in Oklahoma). Such an affidavit should be sufficient evidence to satisfy a title examiner that the trust was not revoked prior to the Settlor's death and that the duties of Trustee are now being carried on by a Successor Trustee. By analogy, and in a corporate setting, when the president of the corporation resigns, the vice president assumes the office until a successor president provides a means whereby the successor president is elected. Similarly, a Successor Trustee automatically assumes the duties of the office of Trustee, when the original Trustee no longer serves in that capacity.


Back to the topic of real estate. In most instances, the Settlors will record the quit claim deed with the Registrar of Deeds (i.e., the County Clerk). Once the deed is recorded, the County Tax Assessor might argue that the homestead exemption of the Settlor is lost because title in the real estate is being held by a Trustee, not a homesteader – however, in Oklahoma, because the trust is a revocable living trust, and because the Settlor is the beneficiary of the trust during his or her lifetime, the homestead exemption is not lost. There is an Oklahoma statute on that point.


In addition to real estate, Settlors should also convey title to any interest in they have in mortgages they own (and the attendant notes which are secured by the mortgage), and in any oil and gas interests they might own.


Stocks and Bonds. But what about title to other types of properties, such as stocks and bonds? The Settlor should at least sign a stock power or an allonge (which is an endorsement to the stock certificate, and which works much the same way as a stock power) as part of the trust closing documents – and the signatures of the Settlor (as shown on the stock power or allonge) should be guaranteed by an officer of a national banking institution, using the Medallion Guaranty stamp program (this is a nationally recognized signature guaranty program, used as a means of preventing fraudulent signatures). The Medallion Guaranty program is very restrictive, and I suggest that all stock certificates be kept by a stock broker, instead of being retained by the owner. The stock brokerage account would be held in your name, as trustee of your trust, so you are still the owner of the stock.


In addition, it would be helpful if the Settlors maintained a list of all of the trust assets, including all stock certificates, bonds, life insurance policies, by date of issue and registration or policy number, etc., as well as a list of title certificates for automobiles, horses, airplanes, mobile homes, boats, bank accounts, or anything else that has a registration number. Such a list would be additional proof of what assets were included in the trust, and such a list would be of tremendous benefit to the successor trustee (who really ought to know what you own when you die).


Other options on stock. As an alternative means of avoiding probate, the owner might make a "transfer on death" designation on the stock brokerage account (this requires you to contact the stock transfer agent or stock broker and complete additional forms), and on those forms, you should indicate that upon the death of the owner, the security or brokerage account will be "transferred on death" (TOD) to the acting trustee of the trust.


Bank Accounts. All bank accounts and bank account numbers, regardless of the style of the account, should be included in the trust, as being part of the trust assets. It is advisable to change the style of the account at the bank, and this can be accomplished as follows: (a) the Settlors can re-title their account as being a trust account (this method is usually the only means available at certain credit unions – and some banks will not permit the account to be styled any other way) – new checks will not have to be printed, because the account will not be regarded as a “new” account; or (b) the Settlors can add a POD (pay on death) designation to the account, with "the acting trustee of the Smith Revocable Living Trust" as being the POD beneficiary (this method is permitted by most banks and credit unions) – again, no new checks will be required. The taxpayer identification number for the account will be the Settlors’ social security number.


IRA's and Retirement Plans. If you transfer your IRA to your trust, you are creating a taxable event (you will receive a Form 1099-R for the entire IRA account). So, don’t do that. This topic was discussed at the beginning of this article. For more information, refer to the article More Tips in Estate Planning.


Insurance. The beneficiary of insurance policies will normally be the trustee of your trust (in some instances, the other spouse will be the primary beneficiary, with the acting trustee as a contingent beneficiary). There are no adverse income tax consequences in life insurance (the policy proceeds are not taxed for income tax purposes). If the proceeds are paid to the trust, the trustee can hold the proceeds for a named beneficiary, until the beneficiary attains a desired age (e.g., Little Billie will get his share of the trust, but not until he is 25 years old; until then, the trustee can make payments to him or for his benefit).


Power of Attorney. Another estate planning instrument you'll need is a durable power of attorney that names 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 attorney in fact, but isn't a magic document that will take the place of wills and trusts, because powers of attorney are automatically revoked at death. However, a "durable power of attorney" will allow the person you've chosen to act for you (i.e., as your agent), if you're unable to do so yourself (which usually means, during periods of disability). This is especially helpful if you or your spouse must go into a nursing home or some other health care institution (and in this instance, a health care power of attorney is usually signed; the health care agent might be someone different from the financial agent, under the durable power of attorney).


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 or there's no hope of recovery. Most states allow this choice. These documents may also permit donation of body parts to science.


Business Owners. If you own a business, you have still more planning to do, because control of the business must be carefully planned, and your family cared for in the manner you want them to be. You'll probably have to answer some hard questions in designing a business succession program. For example, 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.


Estate Taxes. As things now stand, there are no federal estate taxes for persons dying in 2019, unless their estates are with more than $11.18 MM. Most states, including Oklahoma, have abolished estate taxes. If your estate exceeds $11.18 MM, the federal estate tax is a flat 40%, but you need to visit with a CPA or estate planning lawyer, to discuss this topic further.




Estate planning requires some thinking on your part, and learning as much as you can about how your property can be distributed when you die. If you die without a will or trust, your estate will be distributed to your heirs, based on a formula the legislature has established. To resolve this uncertainty, your should at least have a will (which you should have, even if you have a trust – in such instances, the trust will be the beneficiary of the will, and the will is known as a pour-over will). Keep in mind that the probate of an estate is not an evil undertaking, which should be avoided at all costs. However, it is time-consuming and in many instances, very expensive for the heirs. Hopefully some of the thoughts shared in this short article will be of assistance in the estate planning process.


©2019 James H. Beauchamp


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