Time and time again, when I meet with clients that have parents living, they begin to realize that they have no idea where their parents stand in terms of having the right plans in place to protect their assets and wishes if something were to happen to them.  Even worse, frequently the adult children don’t even know where to begin looking to locate this information in the event of a crisis.

Do their parents have a will or trust and, if so, where are these and other important documents located? Should assisted living or nursing home care become necessary, what plans are in place to cover the costs? Will mom or dad even have enough money after these costs to carry them through retirement?  Where do mom and dad keep their important legal and financial documents and when was the last time that they were reviewed and updated?

These are some very important questions that need to be asked, and an experienced wills and trusts lawyer can steer you in the right direction. That being said, no matter how good your relationship is with mom or dad, the subject can be a difficult one to approach.

Perhaps the best place to start is timing. Holidays such as Christmas, Hanukkah and Thanksgiving are known to be stressful times, so avoid these occasions. Current events often present the perfect opening, as there is always some Hollywood legend or financial mogul who dies leaving a fortune for the heirs to squabble over.  For examples, see our prior blog posts on the Estates of the Rich & Famous and Lessons Learned from Michael Jackson’s Estate.  Amy Winehouse, Rosa Parks, Farrah Fawcett and many others serve as additional examples.

Or, the personal experience of a friend or relative can be worked into a dialogue. “So-and-So’s mother was admitted to the hospital recently and no one knew where to find her important papers.” For the adult child who is doing estate planning of their own, it would only be natural to want to discuss their parents’ plans with them during this time.

For some families, several conversations over a longer period of time might be a better approach. No one wants to feel like they are being told what to do, and money matters are often emotionally charged conversations to begin with.

Remember, advance preparations are in the best interests of your parents, so that their wishes can be carried out upon death.  Be sure to communicate this from the start to avoid your parents shutting down or getting defensive about the questions you are asking.

A friend of mine was called up to make medical decisions for her father upon his death bed.  She told me how stressful it was for her, because her father had never documented his wishes and had never talked to her about them.  At the end of the day, she did the best she could, but it was stressful and she always had that little nagging voice in the back of her mind saying, “is this really what he would have wanted?”  The goal is to give everyone peace of mind by knowing there is clear guidance and instructions in place and that your parents will receive the care they desire.

Finally, don’t forget to include the topic of long-term care in your conversations with mom or dad.   While no one likes to think about the possibility of becoming disabled or incapacitated by something like a stroke or Alzheimer’s disease, it does happen and it is something that must be planned well in advance for.  If you start early enough, a wills and trust lawyer can help you put the right plans in place to ensure mom or dad’s wishes during incapacity are honored and that they won’t be forced to sell or give away all of their assets in order to qualify for state or federal assistance.

Are you now ready to help your parents put a rock-solid plan in place that ensures their end-of-life wishes are honored to the fullest?  To get started, simply call our office at (919)443-3035 and ask about one of our upcoming workshops or to schedule a Peace of Mind Planning Session.

The following article originally appeared in an issue of Planning Partners Press, a free newsletter provided courtesy of Carolina Family Estate Planning to Triangle-area financial professionals.  If you are a financial professional that would like to learn more, please click here to request a subscription.

Charitable Remainder Trusts are powerful tools for estate, tax, and financial planning. The potential sale of the income interest in a CRT adds more power and flexibility to planning. The CRT is a split interest trust where the grantor retains an income interest and the remainder goes to one or more charities, which can be chosen by the grantor or by somebody else.

For example, let’s consider a business owner considering selling her business. Instead of a traditional business sale, she might consider donating the business to the Trustee of a Charitable Remainder Trust and having the Trustee sell the business. The gift to the CRT can create an immediate income tax deduction of a portion of the value of the business. The capital gains taxes that she would have to pay on the traditional sale would be deferred and possibly avoided altogether. The transfer to the trust is a charitable gift, so there are no gift tax concerns and the business is removed from the grantor’s taxable estate.

The application of this tool in specific situations is potentially powerful and complex, and this planning should be undertaken only by those who have mastered this area. One downside to this planning is that the grantor receives an annuity payment from the trust rather than a lump sum or discretionary distributions. There is little flexibility to the income stream. What if the grantor finds that she has an immediate need for the funds?

One possibility is the sale of the income interest. There are companies that will purchase these income interests. They will pay the grantor the present value of the income stream, giving the grantor immediate funds and the company some profits over time. The sale is taxed as a capital transaction, so there will probably be capital gains taxes on the sale. The capital gains tax rate will be at the current 15% bracket (or less), rather than whatever the future rates will be. Without the sale of the income stream, the taxpayer will pay taxes on all or some of the distributions, perhaps as capital gains, perhaps as other types of income. A spendthrift provision in the CRT could prevent the sale entirely, so an attorney should review the trust to ensure the sale doesn’t violate any trust provisions.

Roger Silk of Sterling Foundation Management points out that

CRTs are tax-deferral vehicles; they defer to the future the tax a client must pay on the donated assets. If tax rates are stable or falling, this deferral works great because the client gets to pay the tax at a lower rate. But if tax rates rise, the deferral works against the client by forcing them to take their income in the future, when tax rates are higher.

If a client does nothing and tax rates rise, they’ll almost certainly suffer a loss on the value of their CRT. They can avoid this loss entirely by selling their CRT interest today, for a lump-sum cash payment. The benefit, of course, is that the sale is considered a capital transaction, so the proceeds are taxed at capital gains rates.

The sale of a CRT income interest is not always the right thing to do, but sometimes it is. Financial advisers, attorneys and CPAs who have clients who have CRTs should take a look at whether the sale of the income interest makes sense. This review is best done as a team to consider the family, income tax, estate tax, and financial consequences of such a sale.

The following article originally appeared in an issue of Planning Partners Press, a free newsletter provided courtesy of Carolina Family Estate Planning to Triangle-area financial professionals.  If you are a financial professional that would like to learn more, please click here to request a subscription.

I am a cop, assigned to the Bureau of Missing Estate Plans. My captain is Giuseppe Venerdi, my partner is Jose Viernes. My name is Joe Friday.

It was a balmy spring day when Captain Venerdi called us into his office. The captain started right in. “I need your help with a determination of probable cause. The decedent, Vic, was in business with his partner Tim. They had a lawyer draw up a cross-purchase buy-sell agreement so that if anything happened to Vic, Tim would buy his shares at a price to be set in the agreement, and vice versa. Vic and Tim were required to buy insurance on the life of the other to provide money for the purchase.”

“Sounds good.” I said.

“Yeah”, the captain continued, “there was nothing wrong with the document. But there is a blank spot in the agreement where the price was supposed to have been filled in. It’s been 10 years since the agreement was signed, and the amount of insurance has never been adjusted as the value of the business increased, and to top it all off, each partner purchased a policy on his own life, and Vic made his policy payable to his wife. Vic died unexpectedly two weeks ago. He was only fifty years old.”

José interrupted. “So the wife has the money, the estate has the stock, and Tim has an obligation to buy the shares, but no money to do it with.”

“You got it” the captain said. “Vic and Tim had a cross-purchase agreement, but they never funded it correctly, and never updated it, so they never had a business succession plan that would work. Tim says its Vic’s fault because he gave the insurance proceeds to his wife; the widow says it’s Tim’s fault because he was supposed to buy a policy on Vic’s life, not his own. The widow doesn’t want the stock, but doesn’t want to make a gift to Tim, and other creditors of the estate don’t want a sale at less than fair market value. So, who is responsible for the missing estate plan? Vic? Tim? The lawyer?”

I was silent. I was calculating the legal fees to straighten this mess out, and wishing I’d gone to law school.

BMEP CRIMESTOPPER TIPS:

• Clients tend to believe that their planning, be it estate planning or business succession planning, is complete as soon as the documents are signed. They need to be informed, and reminded, that no plan is complete until it is properly funded.
• Like any other estate plan, business succession plans need to be reviewed regularly, especially if the agreement itself sets the purchase price. A change in the tax laws may make a redemption agreement more favorable than a cross-purchase, or vice versa.
• A review of the funding of a buy-sell is also critical. As the business increases in value, additional insurance may become necessary. And as new insurance products are introduced, or as mortality tables change, the old policy may simply become a bad investment.
• The client’s advisory team needs to have a process for reviewing and updating the plan as things change. Without a formal plan, it is likely that the updating will never get done.

In the midst of finding the perfect dress, choosing a venue, and tasting countless cakes, Cary newlyweds often overlook the importance of finding a reputable wills and trusts lawyer.  It’s easy to get caught up in planning for the wedding and to forget about planning for the marriage!  Really, though, the beginning of your new life together is exactly the right time to start your estate planning.

Perhaps you think it’s unnecessary because you don’t have what you would consider an “estate.”  Wills are not just about leaving property to your (potentially not-even-born-yet) children, however.  They help protect you and your new spouse, as well as other family members, should something unexpected happen.

Living Wills

Living wills are a powerful example of why newlyweds need a wills and trusts lawyer.  A living will declares your wishes in case you are unable to make them clear on your own.  Would you want to live on life support?  Do you wish to donate your organs?  Are there medical procedures that you absolutely would not want to undergo?  Your attorney can help you draw up the paperwork that makes your wishes clear and relieves your new spouse of trying to make those very difficult decisions in what would likely be the worst time of his or her life.

Along with a living will, you will likely also need to create powers of attorney.  These will designate who is able to make decisions for you, both medically and financially.  In many cases, this will be your spouse, but what would happen if you were both unable to make quick decisions for yourself?  A wills and trusts lawyer will help you create these important documents according to your local laws and regulations.

Probate

If you should suddenly pass away, would your spouse or other family members have access to your insurance?  Your bank accounts?  Your property?  The answer is not as obvious as it seems.  Your estate could easily end up in probate, meaning that those who should inherit from you are denied access for months or even years.  Putting an estate plan in place can help relieve some of this burden while speeding up the process for your loved ones.  It can also save them considerable amounts of money.

A wills and trusts lawyer will help you make sense of what needs to be done, and the process is actually far easier than many people imagine.  It’s also less expensive than you might think, and certainly less expensive than having your new spouse or family denied inheritance that should rightfully be theirs.  Just consider it one more administrative task that needs to be taken care of as you add your spouse’s name to your accounts, get a driver license with your new name, or take care of the other paperwork that comes along with being a newlywed.

At Carolina Family Estate Planning, we often work with newly married couples to create a plan that works now, but also takes into consideration your wishes and plans for the future (i.e. children, acquisition of new assets, business growth).  To get started, simply call  our office at 919-443-3035 and ask to schedule a Peace of Mind Planning Session.

The following article originally appeared in an issue of Planning Partners Press, a free newsletter provided courtesy of Carolina Family Estate Planning to Triangle-area financial professionals.  If you are a financial professional that would like to learn more, please click here to request a subscription.

That is one of the most common questions about the administration of trusts and estates The answer is, “it depends.” The beneficiaries, and perhaps the trusts themselves, are subject to the income tax. Distributions of principal are not subject to income tax. Distributions of income are subject to income tax. The trust has to pay income tax on any income that is not distributed.

Some trustmakers have so much control over the trusts they have created that the IRS ignores the trusts completely. These are called Grantor Trusts and any income earned by the trust is simply part of the trustmaker’s personal income tax return.

If a trust or estate has over $600 of income during the year, the trustee (or executor) must file an income tax form called a Form 1041. The biggest difference between a 1041 and a 1040 is that a trust gets a deduction for distributions of income to beneficiaries. This results in ensuring that either the trust or the beneficiary, but not both, pays income tax on every dollar of income. The trustee files an informational return, a K-1, if there were any distributions. This lets the beneficiaries know how much of the distributions they received are taxable to them. If there is any tax due by the trust, the trustee is responsible for making sure the income tax is paid.

A rule that is sometimes hard to grasp is that trust income and the taxable income of trusts are not the same thing! For example, most states’ laws regard capital gains distributions as principal, not income, for trust accounting. For income tax, these are income. It is important to keep this in mind while working with trust income.

The income tax on the amount of trust income that is distributed to beneficiaries is paid by the beneficiaries, as part of the beneficiaries’ tax returns. The income keeps the same character as it had for the trust; for example, if the trust had long-term capital gains and distributes them, the beneficiary has long-term capital gains. This amount is a deduction on the trust’s income tax return. So, somebody’s going to pay income taxes on any income earned by the trust. It could be the trustmaker (in a Grantor Trust), the beneficiary (if there were distributions), or the trust itself. The trustee does not decide which distributions are income and which are principal; we calculate the Distributable Net Income and apply the DNI rules to determine who pays what. The results are sometimes surprising, especially when the trust receives tax-free income.

Keep in mind that the tax rates for trusts are the same as for individuals, but the brackets are smaller so the trust marginal tax rates are usually higher. Trusts reach the 35% income tax bracket at only $11,200 of taxable income.

It is important that trustees review their income and distributions with their tax advisors at the end of the year. Fortunately, the IRS grants trustees (and executors) the option to treat distributions during the first 65 days of a tax year as made in the prior year; so, the trustee and his tax advisors do have a couple of months to get this done. During that review, they can figure out what the best results would be and structure the distributions to achieve them.

Will a trust really fail for lack of funding?

The following article originally appeared in an issue of Planning Partners Press, a free newsletter provided courtesy of Carolina Family Estate Planning to Triangle-area financial professionals.  If you are a financial professional that would like to learn more, please click here to request a subscription.

In some jurisdictions, lack of any trust corpus (even just a couple dollars, or some personal property) will cause the trust to be treated as if it were never created to begin with, and attempts to place assets into such a trust in the future cannot salvage or resurrect the defunct trust. Most trusts that are created have some modicum of a trust corpus to prevent such a disaster. Therefore, having anything in the trust will prevent it from failing, right? That depends on your definition of “fail”. In order to answer the question, one must first understand how funding works in relationship to a trust.

How does a trust work?

Think of a trust as a cardboard box. One writes instructions on the outside of the box about what one wants done with the things that are in the box. The trustmaker then takes the “box” and puts it into the hands of someone the trustmaker can rely on – that’s the trustee. The trustee’s job is to follow the trustmaker’s instructions with regard to the things that are in the box.

What will happen if the box is empty when the trustee attempts to follow the trustmaker’s instructions after the trustmaker has died?

The trustee only has authority over what is in the trust, so if there is nothing in the trust, then there is nothing for the trustee to do. (And as mentioned previously, if there is really nothing in the trust, then it may be void, depending on the jurisdiction.)

Anything left outside the trust is outside of the trustee’s control. That means that the trustmaker’s directions will not be followed with regard to those assets that are out of the trust. Some assets may find their way back into the trust through a pour-over will, but typically this requires the expense, delay, and publicity of probate to do so.

The process we call “funding” is the process of titling assets so that they are in the trust “box” – controlled by the trustee. These assets will be controlled by the trustmaker’s directions without the need for probate.

So, back to our question: having anything in the trust will prevent it from failing, right?

If the measure of success is mere legal sufficiency, then that is correct. However, the true measure of a trust’s success is not whether it is “legally sufficient,” but whether the trust meets the client’s goals. One common motivation many have for seeking out an attorney to create a trust is so that their family will be able to avoid the cost, delay, and publicity of probate on their death. Failure to fully fund a trust means that the client’s directions will not be followed (with regard to those assets not in the trust), or at least that probate will not be avoided. If a trust fails to do what the client wanted (transfer assets by specific instructions contained in the trust, or avoid probate, for example), then it has failed whether the trust is legally sufficient or not.

Hopefully, when one buys a gallon of milk at the grocery store, it comes in a container. But what if one pays for a gallon of milk and only gets an empty container? or a half full container? We would be upset, and rightly so. However, people buy empty (or, at least, not full) trust boxes frequently, and do not realize the reduced value they are receiving. Make sure your clients are getting full value for their estate plan by working with an attorney who will ensure the trust box is full when created, and that it stays that way.

The following article originally appeared in an issue of The Daily Plan-It, a free newsletter provided courtesy of Carolina Family Estate Planning to Triangle-area financial professionals.  If you are a financial professional that would like to learn more, please click here to request a subscription.

Retirement funds — IRAs and 401(k)s — account for about 60 percent of assets in U.S. households. Other than your clients’ homes, this is probably the most consistent form of wealth building. What many clients don’t realize is that these accounts are surrounded by complicated rules, and when key questions about beneficiaries are not asked and coordinated with their estate planning goals, major mistakes are made.

Nothing illustrates this more than trying to find out what is “fair” and “right” among clients.

Consider the Following Case

Your client, Sam, married Marge when they were 21. They had two children within the first ten years. When Sam began to contribute to his 401(k) plan, he assumed he would die before Marge and wanted her to have the money to live on after he was gone. Their two children were to receive whatever remained after Marge died.

But it didn’t happen that way. Marge died first. And so, Sam updated his paperwork to name his children as beneficiaries of his 401(k). Once again, he thought he had done everything necessary.

At 65, Sam married a woman 20 years younger, Tabitha. Two years into this marriage, Sam died of a heart attack. His children tried to claim the 401(k) assets but were denied by Sam’s employer. Under the terms of the plan, if an employee dies, the surviving spouse has a right to the assets, unless the spouse waives the right in writing.

Tabitha sues and wins the entire account: $450,000. Sam and Marge’s kids were effectively disinherited!

It’s Tough and Complex

Where Sam failed his children was to ask Tabitha to waive her right to his 401(k) money in writing before he would marry her.

Even when clients think they know what they want to do, 401(k) plans cannot be conveyed regardless of who is listed on a beneficiary form, unless he or she waives this right in writing.

In the case of a divorced client, things can be even messier. If your client was divorced when he died, his 401(k) assets will pass to whoever is listed as beneficiary on his plan paperwork, no matter what his Will says or any agreements he made before death.

Divorce Does Not Matter

If your client fails to remove his ex-wife’s name from these forms, those funds will still be awarded to her — even if she waives her right to the assets as part of a divorce. Basically, the ex-wife your client divorced 20 years ago will receive his retirement money, not their adult child. Your client should have changed the beneficiary listed on the 401(k) forms. Understanding these rules about retirement beneficiaries is important. It can mean the difference between your client’s wishes being followed or having a court decide who gets his retirement money.

I hope this article has helped you and your clients. If you have a specific case or concern you’d like to discuss, please contact our office at (919)443-3035 and ask about one of our upcoming workshops or to schedule a Peace of Mind Planning Session.

While some states have enacted marriage equality laws, others are not offering the same rights and privileges to same-sex couples.  In either situation, however, most estate planning lawyers can tell you that there are still important steps to take in protecting your rights to make medical decisions for your partner.  In Cary, as in other places, it all starts with a power of attorney.

A medical power of attorney is used to specifically name the person who can make your medical decisions when you are unable.  Sometimes this document may be referred to as a health care proxy.  By naming your same-sex partner, you are providing him or her with the legal rights needed to step up and make those choices.  In cases where a durable power of attorney for healthcare has not been created, it is not unheard of for the same-sex partner to be barred from the room while the patient’s parents or siblings are given the responsibility of making medical decisions.

There is other documentation that can help in the process as well.  A marriage certificate or proof of a domestic partnership may be required by some hospitals.  Your attorney can help ensure that you have all of the appropriate paperwork in place, including a financial power of attorney.  While this document does not necessarily extend to making medical decisions, it does allow your partner to pay bills, work with insurance companies, and take care of other financial obligations that may arise while you are ill and incapacitated.

Finally, work with your estate planning attorney to put together a living will or advance directive for both you and your same-sex partner.  While you certainly want to be able to make medical decisions for one another, it is most important to be sure that you are actually following one another’s wishes.  An advance directive can help to describe your wishes in cases where you are not able to share them yourself.  For example, what are your feelings regarding life-support or do you have a preference on end-of-life care.

By laying your plans out clearly, you protect your partner from having to make very difficult decisions and also assure that other family members cannot override your wishes. Your estate planning lawyer will go over your options in-depth so you have a comprehensive document that looks after the rights of both you and your partner.

Ready to get started?  Just call our Cary office at (919) 443-3035 and ask to schedule a Peace of Mind Planning Session.

If you are thinking about having a prenup drawn up before you tie the knot in Wake County, you may want to find an attorney who focuses on estate planning too. Perhaps surprisingly to some, a prenuptial agreement can be a key piece of estate planning documentation. Many couples see the importance of creating a binding prenuptial agreement in order to protect their assets and plan for their future.

Today, blended families are far from unusual.  During the newlywed planning phase, the couple needs to consider what happens to “yours, mine, and ours” in the event of divorce, as well as death.  You may each have certain items or financial support that you want designated specifically for your own biological children, and a prenup can be used in combination with estate planning documents to make these wishes known.

This is also the case when older couples marry.  They may each have their own grown children and grandchildren that they wish to provide for.  Without the proper agreements, a surviving spouse will often become the default heir to the other’s estate, allowing the spouse to do with it whatever he or she sees fit.  It could be perfectly legal for the deceased spouse’s children to inherit nothing.

Working with a lawyer before exchanging vows can help to clarify each partner’s wishes, as well as to provide legal documentation.  Simply discussing your preferences is not enough.  To be binding, the prenuptial agreement must be in writing, and both spouses must sign it.

It is important that each spouse takes the appropriate amount of time to read the entire document to ensure that he or she agrees with it and is not being pressured into signing something.  A prenup that seems grossly unfair to one spouse or the other may not hold up in court, so this step is pretty important.  Some states even require that each party is advised by his or her own prenup lawyer rather than sharing the same attorney.  If one spouse omits information or outright lies about it in the prenup, that can also render it invalid.

While creating a prenuptial agreement may not be the most romantic way to go into a marriage, it can be important from an estate planning point of view.  It allows you to plan for the future and to designate your own heirs.  Some people who skipped this step are now coming to prenup lawyers to request “post-nuptial agreements.”  These documents work quite similarly to the prenuptial agreement but are simply done after the wedding is over.  It is best not to wait, but if you have to, a Cary prenup lawyer can still get the ball rolling for you.

While our office does not prepare prenuptial agreements, we are happy to work with your family law attorney to ensure that your prenuptial agreement and estate plan work together in the way that you intened.  If you’re ready to get started with this process, we invite you to call our office at 919-443-3035 and ask to schedule a Peace of Mind Planning Session.

Many seniors are making strides toward estate planning by working with their elder law attorneys to set up what they believe are the appropriate wills and trusts.  The goals with this type of planning are most commonly to:

• avoid probate,
• make decisions regarding trust administration,
• and—most importantly—to protect your assets for your heirs.

Unfortunately, this final criteria is not always met in traditional wills and trusts.

The problem stems from long-term care.  When you set up your initial estate planning documents, such as a revocable living trust, you probably fully intend to outline your wishes for how your estate will be dispersed upon your death.  Unfortunately, this document does not protect your assets from creditors, lawsuits or the incredible costs associated with nursing home care during your own lifetime.

In order to pay for care during your lifetime, your entire estate can be at risk.  Your assets can be used to pay for your medical expenses and other needs, potentially leaving little or nothing to be administered in your trust.  This means that even if you have a legal document directing how your assets should be distributed, it will be referring to assets that were already sold off to cover expenses.  As nursing home costs continue to rise, we see more and more of this in Cary.

To avoid this situation, it’s often necessary to work with an attorney who focuses on elder law and long-term care planning, in addition to traditional estate planning.  If it appears your estate is at risk of being wiped out due to unexpected illness, incapacity or long-term care costs, your attorney can work with you to create the right kind of trust that will adequately shield your assets during your lifetime, and after death.

To learn more about how seniors are engaging in long-term care planning to protect their assets from the skyrocketing costs of nursing home care, contact our Cary office at (919)443-3035 and ask about one of our upcoming workshops.