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Estate Planning Blog

Tuesday, August 19, 2014

What Does the Term "Funding the Trust" Mean in Estate Planning?

What Does the Term "Funding the Trust" Mean in Estate Planning?

If you are about to begin the estate planning process, you have likely heard the term "funding the trust" thrown around a great deal. What does this mean? And what will happen if you fail to fund the trust?

The phrase, or term, "funding the trust" refers to the process of titling your assets into your revocable living trust. A revocable living trust is a common estate planning document and one which you may choose to incorporate into your own estate planning. Sometimes such a trust may be referred to as a "will substitute" because the dispositive terms of your estate plan will be contained within the trust instead of the will. A revocable living trust will allow you to have your affairs bypass the probate court upon your death, using a revocable living trust will help accomplish that goal.

Upon your death, only assets titled in your name alone will have to pass through the court probate process. Therefore, if you create a trust, and if you take the steps to title all of your assets in the name of the trust, there would be no need for a court probate because no assets would remain in your name. This step is generally referred to as "funding the trust" and is often overlooked. Many people create the trust but yet they fail to take the step of re-titling assets in the trust name. If you do not title your trust assets into the name of the trust, then your estate will still require a court probate.

A proper trust-based estate plan would still include a will that is sometimes referred to as a "pour-over" will. The will acts as a backstop to the trust so that any asset that is in your name upon your death (instead of the trust) will still get into the trust. The will names the trust as the beneficiary. It is not as efficient to do this because your estate will still require a probate, but all assets will then flow into the trust.

Another option: You can also name your trust as beneficiary of life insurance and retirement assets. However, retirement assets are special in that there is an "income" tax issue. Be sure to seek competent tax and legal advice before deciding who to name as beneficiary on those retirement assets.


Tuesday, August 5, 2014

Should you withdraw your Social Security benefits early?

You don’t have to be retired to dip into your Social Security benefits which are available to you as early as age 62.  But is the early withdrawal worth the costs?

A quick visit to the U.S. Social Security Administration Retirement Planner website can help you figure out just how much money you’ll receive if you withdraw early. The benefits you will collect before reaching the full retirement age of 66 will be less than your full potential amount.

The reduction of benefits in early withdrawal is based upon the amount of time you currently are from full retirement age. If you withdraw at the earliest point of age 62, you will receive 25% less than your full benefits.  If you were born after 1960, that amount is 30%. At 63, the reduction is around 20%, and it continues to decrease as you approach the age of 66.

Withdrawing early also presents a risk if you think there is a chance you may go back to work. Excess earnings may be cause for the Social Security Administration to withhold some benefits. Though a special rule is in existence that withholding cannot be applied for one year during retired months, regardless of yearly earnings, extended working periods can result in decreased benefits. The withheld benefits, however, will be taken into consideration and recalculated once you reach full retirement age.

If you are considering withdrawing early from your retirement accounts, it is important to consider both age and your particular benefits. If you are unsure of how much you will receive, you can look to your yearly statement from Social Security. Social Security Statements are sent out to everyone over the age of 25 once a year, and should come in the mail about three months before your birthday. You can also request a copy of the form by phone or the web, or calculate your benefits yourself through programs that are available online at www.ssa.gov/retire.

The more you know about your benefits, the easier it will be to make a well-educated decision about when to withdraw. If you can afford to, it’s often worth it to wait. Ideally, if you have enough savings from other sources of income to put off withdrawing until after age 66, you will be rewarded with your full eligible benefits.
 


Tuesday, July 29, 2014

The Essential Component of Your Estate Plan’s Success

Properly drafted estate planning documents are integral to the success of your legacy and end-of-life wishes.  Iron-clad estate planning documents, written by a knowledgeable attorney can make the difference between the success and failure of having your wishes carried out.  However, there’s more to estate planning than paperwork.  For your wishes to have the best chance of being honored, it is important to carefully choose the people who will carry them out.

Your estate plan can assign different responsibilities to different people.  The person who you most trust to raise your children, for example, may not be the person you’d designate to make health care decisions on your behalf, if you are incapacitated.  Before naming individuals to carry out your various estate and incapacity planning wishes, you should carefully consider the requirements of each role and the attributes which each individual has that will allow him or her to perform the duties effectively.

Executor.  You name the executor, (also known as a personal representative), in your will.  This person is responsible for carrying out all the terms of your will and guiding your will through probate, if necessary.  The executor usually works closely with a probate or estate administration attorney, especially in situations where will contests arise and your estate becomes involved in litigation.  You may appoint co-executors, or name a professional – such as a lawyer or accountant – as the co-executor.

Health care proxy
.  Your health care proxy is the person you name to make medical decisions for you in the event you are incapacitated and unable to do so yourself.  In addition to naming a health care proxy (sometimes called a health care power of attorney), most people also create a living will (or health care directive), in which they directly state their wishes for medical care and end-of-life care in the event of incapacity.  When choosing a health care proxy, select a person who you know understands your wishes regarding medical care, and who you trust to carry out those wishes, even if other family members disagree.  You should also consider individuals who have close geographic proximity to you as well as persons you believe can make difficult decisions under pressure.

Power of attorney
.  A financial power of attorney (or simply power of attorney) is different from a health care power of attorney in that it gives another person the authority to act on your behalf in financial matters including banking, investments and taxes.  You can limit the areas in which the person may act, or you may grant unlimited authority.  A power of attorney may also be limited for a specific time, or it may be a durable power of attorney, in which case it will continue even after the onset of incapacity (until your death).  A power of attorney can take effect immediately or “spring” into effect in the event of incapacity.

Guardians.  If you have minor children or other dependents (disabled adult children or other disabled adults for whom you are the named guardian), then your estate plan should name a person or persons to take over the parental role in the event of your death.  The guardian may also have control over any assets that you leave directly to your minor children or other dependents.  If you create a trust for the benefit of your minor children, then the trust’s trustee(s) will have control over those assets and their distribution.  Important considerations include age of the guardian, compatibility with his or her personality and moral values as well as the extent and quality of the existing relationship with your children.

Trustee.  If you place any assets in trust as part of your estate plan, then you must designate one or more trustees, who will act as the legal owners of the trust.  If you do not wish to appoint someone you know personally, you may appoint a corporate trustee – often a bank – to play this role.  Corporate trustees are often an excellent choice, since they are financial professionals and neutral, objective third parties.  Its important you select individuals who are not only trustworthy but also organized, diligent and detail oriented.

 


Tuesday, July 15, 2014

Young People Should Write a Last Will and Testament

8 Reasons Young People Should Write a Last Will and Testament

Imagine if writing a last will and testament were a pre-requisite to graduating from high school.  The graduate walks across the stage, hands the completed will to the principal, and gets the diploma in return.   It might sound strange because most 18 year olds have little in terms of assets but it’s a good idea for all adults to draft a last will and testament.

Graduation from college is another good milestone to use as a reminder to create an estate plan.  If you haven’t created a will by the time you marry – or are living with a partner in a committed relationship – then it’s fair to say you are overdue.

Think you don’t need an estate plan because you’re broke?  Not true.  Here are eight excellent reasons for young people to complete a last will and testament.  And they have very little to do with money.

You are entering the military
.  Anyone entering the military, at 18 or any other age, should make sure his or her affairs are in order.  Even for an 18-year-old, that means creating a will and other basic estate planning documents like a health care directive and powers of attorney.

You received an inheritance
.  You may not think of the inheritance as your asset, especially if it is held in trust for you.  But, without an estate plan, the disposition of that money will be a slow and complicated process for your surviving family members.

You own an animal
.  It is common for people to include plans for their pets in their wills.  If the unthinkable were to happen and you died unexpectedly, what would happen to your beloved pet?  Better to plan ahead for your animals in the event of your death.  You can even direct the sale of specific assets, with the proceeds going to your pet’s new guardian for upkeep expenses.

You want to protect your family from red tape.  If you die without a will, your family will have to take your “estate” (whatever money and possessions you have at the time of your death) through a long court process known as probate. If you had life insurance, for example, your family would not be able to access those funds until the probate process was complete.  A couple of basic estate planning documents can keep your estate out of the probate court and get your assets into the hands of your chosen beneficiaries much more quickly.

You have social media accounts.  Many people spend a great deal of time online, conversing with friends, storing important photos and documents and even managing finances. Without instructions from you, will your family know what to do with your Facebook account, your LinkedIn account, and so forth?

You want to give money or possessions to friends or charities
.  When someone dies without a will, there are laws that dictate who will receive any assets.  These recipients will include immediate family members like parents, siblings, and a spouse.  If you want to give assets to friends or to a charity, you must protect your wishes with a will.

You care about what happens to you if you are in a coma or persistent vegetative state.  We all see the stories on the news – ugly fights within families over the prostrate bodies of critically ill children or siblings or spouses.  When you write your will, write a health care directive (also called a living will) and a financial power of attorney as well.  This is especially important if you have a life partner to whom you are not married so they can make decisions on your behalf

 

 


Thursday, July 3, 2014

Do You Know Where the Documents Are?

You’ve Established an Estate Plan. Do You Know Where the Documents Are? Does Your Family?

For most people, finally establishing an estate plan is a big step that they have undertaken after years of delay. A second step is making decisions regarding the executor, trustees, beneficiaries, funeral costs and debt, and a third step is actually completing the will. There is, however, a fourth step that is often skipped: placing the original will and other critical documents in a place where it can be found when it is needed.

As far as wills are concerned, this step is more important than you might think, for two reasons:

  1. If your will can’t be found upon your death then, legally, you will have passed away intestate, i.e. without a will.
  2. If your loved ones can only locate a photocopy of your will, chances are the photocopy will be ruled invalid by the courts. This is because the courts assume that, if an original will can’t be located, the willmaker destroyed it with the intention of revoking it.


Options for Storing the Original Copy of Your Will


Because an original will is usually needed by the probate court, it makes sense to store it in a strategic location. Common locations recommended by estate planning attorneys include:

  • A fireproof safe or lock box
  • Stored at the local probate court, if such service is provided.
  • A safety deposit box in a bank

There are advantages to each choice. For many, a fireproof safe is simplest: it’s in the home, doesn’t need to leave the house and can be altered and replaced with maximum convenience. The probate court makes sense because it is the place where the last will and testament may end up when you pass away. A safety deposit box also makes sense, especially if you already have one for which you’re paying.  Just make sure that your executor can access it.

By making sure that your original will is safe and can be found when needed, you don’t just ensure that it can be used when the allocation of your assets and debt occurs. You also ensure that disputes, confusion and disappointment don’t occur years after your death; while uncommon, in some cases, by the time the will has been discovered, the assets of the decedent have long been distributed according to intestacy laws and not the decedent’s will. Intestacy laws are essentially the “default will” that the state establishes for individuals who do not have their own estate plan.

You’ve taken the trouble to protect your assets and loved ones by creating an estate plan. Don’t leave its discovery to chance. Ensure that your executor or trustee can easily and reliably find it when it comes time to put it into effect. 

 


Tuesday, June 24, 2014

Protecting Your Legacy with Estate Tax Planning

You spend your whole life building your legacy but sadly, that is not always enough. Without careful estate tax planning, much of it could be lost to taxes or misdirected. While a will or living trust is essential for dividing your estate as you wish, an estate tax plan ensures you pass on as much of your legacy as possible.

Understanding estate tax laws

For the past decade, estate tax laws have been a sort of political football with significant changes occurring every few years.  The good news is that the 2013 tax act made the basic $5 million estate tax exemption “permanent,” but at a higher rate of 40%, though the law continues to adjust the exemption level for inflation. With this adjustment, the 2013 exclusion is $5.25 million per person ($10.5 million per married couple). The law also retained exclusion “portability” which means that if one spouse dies in 2013, the surviving spouse may pass on the unused portion of the deceased spouse’s exclusion. This portability is not automatic, however. The unused portion needs to be transferred by the executor to the surviving spouse, and a special tax return must be filed within nine months. The surviving spouse does not have to pay estate taxes at this time, they only become due after both spouses have died.

Optimizing your estate plan

One way to maximize the amount you can pass on is through annual gifting while you are alive. An individual is allowed to give $14,000 each year to another individual, tax-free. If you give more than that, it will reduce your basic lifetime exclusion. So, if you give a child $50,000 this year, your basic $5.25 million exclusion will be reduced by $36,000 at the time of your death. You can gift as much as your full $5.25 million exclusion before incurring taxes, although doing so would “exhaust” your estate tax exemption at death. Gift tax rates were raised to 40% in 2013 and are paid by the giver, not the recipient.

An experienced estate tax planning attorney can help minimize potential gift and estate taxes by:

  • Identifying taxable assets
  • Transforming your wishes into a will or living trust
  • Keeping you apprised of federal and state tax law changes
  • Establishing an annual gifting plan
  • Creating family and charitable trusts
  • Setting up IRA charitable rollovers
  • Setting up 529 education savings plans
  • Helping you create a succession plan for your family business

It’s never pleasant to consider the end of your life, but planning for it will help ensure that the things you care about are cared for. It is one of the greatest gifts you can give your loved ones.


Tuesday, June 17, 2014

Family Foundations: What, Why, and How

Families with significant net worth who have a tradition of philanthropy often consider establishing a charitable foundation as part of their estate plans.   While there are a number of advantages to using family foundations as a philanthropic vehicle, families need to seek guidance from estate planning and tax professionals to ensure it is the best option for achieving their objectives.

According to The Foundation Center, there are over 35,000 family foundations in the US, responsible for more than $20 billion in gifts per year.   While some foundations have tens of millions in assets, more than half report holdings totaling less than $1 million.  

Advantages
Minimizing various tax burdens is one benefit of creating a family foundation.  However, if tax issues are your primary concern, then a different asset management and distribution vehicle will probably better suit your needs.  While it is true that family foundations offer certain tax advantages—both in terms of current income tax obligations and future estate tax burdens—family foundations are also under many legal and regulatory obligations.  These ongoing obligations mean that your family should choose to build a family foundation only if ongoing philanthropic giving is an enduring family goal.

Non-tax-related benefits of a family foundation include the following:

  • Managing the foundation may provide employment for one or more family members
  • A family foundation allows founders to involve family members in family wealth management, especially those who lack interest in the family business
  • The foundation founder can maintain influence over recipients of charitable giving for generations to come
  • A family foundation makes an excellent repository for all charitable giving requests.  A formal process can be established to ensure grant applicants are not arbitrary.
  • A family foundation can serve as a formal manifestation of a family’s philanthropic culture.

Types of Family Foundations

There are many different types of family foundations, each with certain advantages, disadvantages, and tax and regulatory obligations.  The main types of family foundations include:

  • Private non-operating family foundations which receive charitable donations from the family, invests those funds and makes gifts to other charitable organizations or individuals.
  • Private operating family foundations which actively engage in one or more philanthropic activities, as opposed to making donations to other foundations that perform active charitable work.
  • Supporting organizations which are designed to provide financial support to one or more specific public charities
  • Publicly supported charities can be seeded with family philanthropic funds but then also take donations from the public. Publicly supported charities must meet specific Internal Revenue Service requirements to maintain their status as publicly supported charities.
     

Issues to Consider when Establishing a Family Foundation 

  1. How much money do you plan to give to the foundation at its inception?
  2. Do you anticipate volunteer help from your family to run the foundation, or will the foundation need to pay one or more salaries?
  3. Does your family wish to support one or more specific charities, or do you want to fund a foundation which can ultimately choose among other charities in specific fields of philanthropic work?
  4. Does your family want to actively engage in philanthropic work or make gifts to other organizations that are already engaged in such work?
  5. Does the foundation founder prefer to exert strict control over gifts the foundation makes, or only to generally specify the types of philanthropic work he or she wishes the foundation to support?

Once you and your family have carefully thought through these considerations, you should consult with an estate planning attorney and other tax advisors to determine which type of family foundation most effectively meets your family’s giving objectives.


Wednesday, June 4, 2014

A Simple Will Is Not Enough

A basic last will and testament cannot accomplish every goal of estate planning; in fact, it often cannot even accomplish the most common goals.  This fact often surprises people who are going through the estate planning process for the first time.  In addition to a last will and testament, there are other important planning tools which are necessary to ensure your estate planning wishes are honored.

Beneficiary Designations
Do you have a pension plan, 401(k), life insurance, a bank account with a pay-on-death directive, or investments in transfer-on-death (TOD) form?

When you established each of these accounts, you designated at least one beneficiary of the account in the event of your death.  You cannot use your will to change or override the beneficiary designations of such accounts.  Instead, you must change them directly with the bank or company that holds the account.

Special Needs Trusts
Do you have a child or other beneficiary with special needs?

Leaving money directly to a beneficiary who has long-term special medical needs may threaten his or her ability to qualify for government benefits and may also create an unnecessary tax burden.  A simple vehicle called a special needs trust is a more effective way to care for an adult child with special needs after your death.

Conditional Giving with Living or Testamentary Trusts
Do you want to place conditions on some of your bequests?

 

If you want your children or other beneficiaries to receive an inheritance only if they meet or continually meet certain prerequisites, you must utilize a trust, either one established during your lifetime (living trust) or one created through instructions provided in a will (testamentary trust).

Estate Tax Planning
Do you expect your estate to owe estate taxes?

A basic will cannot help you lower the estate tax burden on your assets after death.  If you think your estate will be liable to pay taxes, you can take steps during your lifetime to minimize that burden on your beneficiaries.  Certain trusts operate to minimize estate taxes, and you may choose to make some gifts during your lifetime for tax-related reasons.  

Joint Tenancy with Right of Survivorship
Do you own a house with someone “in joint tenancy”?

“Joint tenancy” is the most common form of house ownership with a spouse.  This form of ownership is also known as “joint tenancy with right of survivorship,” “tenancy in the entirety,” or “community property with right of survivorship.”  When you die, your ownership share in the house passes directly to your spouse (or the other co-owner).  A provision in your will bequeathing your ownership share to a third party will not have any effect.

Pet Trusts
Do you want to leave money to your pets or companion animals?

Pets are generally considered property, and you cannot use your will to leave property (money) to other property (pets).  Instead, you can use your will to name a caretaker for your animals and to leave a sum of money to that person for the animals’ care. 


Thursday, May 29, 2014

How to Keep Your Affluent Children From Turning Into … Well, … Brats

Congratulations are in order—you have accumulated enough wealth to be concerned about eventually passing it along to your children and grandchildren in a manner that will encourage them to lead positive and productive lives.  Like many, your objective is to allow your children to enjoy the rewards of wealth without becoming irresponsible, overindulgent or feeling entitled to anything money can buy.

When it comes to sharing one’s wealth with adult children, there are some general principles that may help you guide your children as they shape their values.  Two quotes about sharing wealth with children are an excellent starting point:

I wanted my children to have “enough money so that they would feel they could do anything, but not so much that they could do nothing.” – Warren Buffett

“It’s better to give with warm hands than with cold ones.” – Unknown

Establish Inter Vivos Trusts for Your Children, And Use Restrictions Creatively

You can establish inter vivos trusts (trusts that go into effect during your lifetime) and appoint professional trustees during your lifetime.  Consider some combination of the following restrictions on the trust funds to help your children develop into competent, capable adults:

  • Make receipt of funds dependent on employment
  • Use trust funds to match income from employment
  • Prohibit distribution of trust earnings until the child reaches a certain age (it is not unheard of to distribute trust earnings to children once they reach age 65)
  • Make attaining a certain level of education a prerequisite to distribution of trust income
  • Consider establishing a charitable trust or family foundation, with room for employment of your adult child in the foundation’s management

Consider a generation-skipping trust, so that your wealth is shared directly with grandchildren

Make Gifts or Loans During Your Lifetime—And Not Just Gifts of Money

This is the meaning behind the quotation above regarding warm hands and cold ones.  It is better, in so many ways, to give gifts during your lifetime rather than after your death.  In addition to gifts, consider making strategic, interest-free loans to your children to help them achieve certain goals without losing a lot of their own income to interest payments:

  • Interest-free loans for higher education
  • Interest-free loans for private education for grandchildren
  • Interest-free loans for home purchases

In addition to giving gifts of money or making strategic loans, there are other “gifts” you can give your children to help them learn to live with wealth.  Consider the following suggestions,:

  • Hire a professional to teach your children how to manage their money, instead of banking on your children listening to your own lessons.
  • Pay for family vacations that serve a philanthropic purpose, such as travel to Africa to deliver medical equipment to a remote town or travel to South America to help clean a national park.
  • Begin or continue a family tradition of local volunteer work with disadvantaged people in your own community to ensure that your children get firsthand knowledge of how fortunate they are to have the resources your family has accrued.

In general, experts agree that families fare better when their wealth is used to enrich their lives and to help others less fortunate.  Give your children opportunities to learn to use money in responsible ways, from as early in their lives as possible.  Show them the difference between buying a new sports car and donating the same amount of money to a program that sends food to people in need.  That isn’t to say a new sports car shouldn’t be on the shopping list – but perhaps it shouldn’t be the only thing on the shopping list.


Thursday, May 15, 2014

Don't Disinherit with a Dollar

There are a lot of myths and misconceptions surrounding estate planning. Many people think that a last will and testament is the only estate planning document you really need. This of course is false. Others assume that you only need to have an estate plan in place if you’re a millionaire. This too is false. Another popular myth in the world of estate planning is that the best way to disinherit a relative (particularly a child) is to leave him or her a single dollar in your will. You probably guessed it- this too is entirely false.

The truth of the matter is that you must be very careful with leaving someone you really want to disinherit a token gift of $1 or some other small amount. By doing so, you have now made that person a beneficiary of your estate. It is possible, if not likely, that state law will require your executor to provide all beneficiaries with copies of all pleadings, an accounting, and notice of various administration activities. This may make it easier for this "beneficiary" to now complain about things and may cause problems for your executor which could cost your estate money.

Instead of leaving a token amount, you might consider mentioning the person by name so it is clear that you have not simply overlooked them. Then, you would specifically state you are intentionally disinheriting them from your estate. Also, consider if you wish to disinherit that person's children or more remote descendants and if so specifically state that as well in your will. You should consult with an estate planning lawyer to assist you in the proper wording as you will want to make sure there is as little likelihood of a will contest as possible.


Monday, May 5, 2014

Is a Copy of a Will Sufficient?

Is a Copy of a Will Sufficient?

Many people keep their important documents at home where they are easily accessible. It’s not at all uncommon to find people with a filing cabinet or even a shoe box containing passports, account statements, deeds, tax returns, birth certificates and social security cards. Wills are often added to these files once the estate planning process is completed. In choosing to store your important estate planning documents at home, however, you risk having the originals lost or destroyed in the case of fire, flooding or theft. So what happens if the original version of your will is lost or ruined?

Generally when a person dies, state law determines what must happen in the state probate proceeding. In most cases, the "original" of the will must be submitted to the probate court in the county where the person resided. If the original of the will cannot be located and provided to the court, there likely is a provision in your state's probate code that would permit the submission of a photocopy of that signed will.

In many cases, the attorney who prepared the will maintains a copy of the estate planning documents. Assuming, that the copy your attorney has could be submitted to the probate court, additional steps may need to be taken, and additional pleadings prepared in order to submit a copy.

Should you lose the original copy of your will, the best practice would be for you to execute a new will which would make things easier for your family and loved ones upon your death. In that case there would be better assurances that your wishes were followed and carried out. Preparing a new will should not take much time for your attorney. He or she likely still has the word processing file on his or her computer, and could easily modify it for you to execute again. If for some reason this is not done, you may wish to execute a document stating the original was destroyed in a flood or fire but that you did not intend to revoke it. However, it’s important to note that this may not be effective in every instance as many states have very strict requirements in terms of requiring originals and execution formalities.

To keep the originals of your estate planning documents safe, even in the face of disaster, you might consider purchasing a fireproof/waterproof safe for your home or rent a safe deposit box with a local bank where you can still easily access your documents but keep them secure off-site.


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