Understanding the Basics: Revocable and Irrevocable Trusts in Estate Planning

Estate planning is a crucial step to ensure your assets are managed and distributed according to your wishes after you’re gone. Two commonly used tools in this process are revocable trusts and irrevocable trusts. Let’s break down what these trusts are and why they are important components of comprehensive estate planning.

1. Revocable Trusts: Flexibility and Control

A revocable trust, also known as a “living trust,” allows you to retain control of your assets during your lifetime. Here’s how it works:

  • Ownership and Control: You, as the grantor, create the trust and transfer your assets into it. You retain the right to modify, amend, or revoke the trust at any time during your lifetime.
  • Avoiding Probate: One significant advantage is that assets held in a revocable trust bypass probate, which is a time-consuming and public process. This means a smoother transition of assets to your heirs without court involvement.
  • Privacy and Efficiency: Revocable trusts provide privacy, as the trust document remains private and is not made public. They also allow for efficient management of assets in case of incapacity or disability.

2. Irrevocable Trusts: Asset Protection and Tax Benefits

An irrevocable trust generally involves the transfer of assets out of your estate for estate tax purposes and relinquishing direct control for the benefit of your chosen beneficiaries. Though you cannot personally make changes once established, it offers significant benefits:

  • Asset Protection: Assets in an irrevocable trust are generally shielded from creditors and legal judgments and can be designed to protect assets from the exhorbitant cost of long term care. This provides a level of protection for your assets and ensures they are used as intended for your beneficiaries.
  • Tax Efficiency: Irrevocable trusts can offer significant tax benefits, helping to reduce estate taxes and potentially providing financial advantages to both you and your beneficiaries.
  • Charitable Giving: Irrevocable trusts are often used for charitable purposes, allowing you to support causes important to you while potentially gaining tax advantages.

Comprehensive Estate Planning: The Ideal Approach

A well-rounded estate plan often includes a blend of both revocable and irrevocable trusts to meet different objectives. Here’s a simple approach to creating a comprehensive estate plan:

  1. Assess Your Goals: Understand what you want to achieve with your estate plan, including asset protection, distribution preferences, and tax efficiency.
  2. Consult with Professionals: Work with an experienced estate planning attorney and financial advisor to design a plan tailored to your specific needs and circumstances.
  3. Combine Trusts Strategically: Utilize revocable trusts for flexibility and control during your lifetime, and consider irrevocable trusts to protect assets and optimize tax implications.
  4. Regular Reviews and Updates: Regularly review and update your estate plan to ensure it aligns with your changing circumstances, laws, and financial goals.

In summary, a comprehensive estate plan that incorporates both revocable and irrevocable trusts is a prudent way to secure your assets and provide for your loved ones while potentially maximizing tax advantages. Start planning today to protect your legacy and achieve your long-term objectives.

Protecting Your Child’s Inheritance from Spouses and Divorce

Protecting Your Child’s Inheritance from Spouses and Divorce

About 40 to 50 percent of all marriages in the United States end in divorce. Regardless of how you feel about your child’s spouse, you must face the possibility that they could become your child’s ex-spouse. Should that day come, the money you leave to your child could be subject to a division of marital assets. But with careful estate planning, your child’s inheritance can be kept safely out of the hands of their spouse or former spouse.

Separating Inheritance Money from Marital Money

During marriage, the lines between what each partner owns can blur. Generally, whatever is acquired during the marriage by either partner becomes marital property that is subject to division in the event of a divorce, but there are exceptions.

One exception is a bank account that is kept separate during the marriage. Inheritance money that you leave to your child or monetary gifts that you give to your child during your lifetime can theoretically go into a separate account. However, in practice, it can be difficult for spouses to avoid commingling bank accounts. Even something as simple as depositing marital money into the account or using it to pay bills during the marriage could make the account marital property.

A better way to keep your child’s gift or inheritance separate from their spouse’s money is to hold it for them in a trust account. It is not just wealthy parents who leave money to their children in a trust. A trust is a flexible and powerful estate planning tool that allows parents of any means to exercise greater control over the money and property that they pass down.

Trust Management and Third-Party Trustees

Holding your child’s inheritance in trust involves doing the following:

  • You place money and property in a trust
  • You name a trust beneficiary (i.e., your child)
  • You name a trustee (somebody to manage trust distributions)
  • You leave written instructions that specify how the money and property are to be used (trust instrument)

While it is possible to name your child as both the beneficiary and the trustee of the trust, absent additional restrictions, this structure negates the point of establishing a trust for the purpose of preventing spousal commingling. Similar to how commingling can occur with a separate bank account, if your child uses money in the trust for marital expenses and then gets divorced, the court could consider the trust funds to be marital property.

To avoid commingling, you can name a third-party trustee to manage the money on behalf of your child. This takes control of the trust out of your child’s hands and places it in the hands of a third-party who can use their discretion in interpreting the trust’s instructions for how the trust funds are to be used.

Instead of distributing money from the trust directly to the beneficiary (which raises the possibility of commingling and trust division in a divorce proceeding), the trustee can pay third parties on the beneficiary’s behalf. For example, if the beneficiary needs a new vehicle, the trustee can pay the car dealership directly. Or, for larger purchases such as a home, the trustee could loan the money to the beneficiary. The house would be used as collateral to secure the debt to the trust and protect it from asset division.

Child and Trustee as Co-Trustees

Giving a single third-party trustee sole discretion over trust fund distributions affords maximum protection against asset commingling, but it provides your child with limited flexibility over how they can spend their inheritance. If you prefer to give them more options but still protect the funds you leave to them in the event of a divorce, you can name a third party to serve as co-trustee with your child. However, other restrictions may be appropriate for creditor protection and tax purposes.

When setting up a trust, there are several types of trustees that you can choose from, each with a different set of responsibilities and obligations. For example, you might name your child as an investment trustee, giving them the authority to invest money held in the trust. In this capacity, your child is acting on behalf of the trust (not in a personal capacity), so the trust money is not commingled with marital assets. At the same time, with good investments, they are effectively growing their own wealth. You can then have a co-trustee handle distributions for your child’s benefit.

Naming co-trustees has other benefits as well. In the event of a divorce or creditor issues, the child can resign as trustee, leaving the other trustee with sole discretion. You can also set up the trust in such a way that an independent co-trustee can make distributions to your child for any purpose, but your child is limited to distributions for health, education, maintenance, or support (i.e., a HEMS provision or ascertainable standard that is a safe harbor under federal law). While this does not provide the maximum creditor protection (because any distributions made to the child could be susceptible to creditors), amounts remaining in the trust may still be protected. In addition, special consideration must be given to the beneficiary’s ability to remove and replace another co-trustee.

Covering All Angles

To create a bulletproof trust strategy to keep your child’s inheritance out of their spouse’s hands, you must take a wide view of everything that could happen. That includes a possibility that you would probably prefer not to think about: your child passing away.

Should your child either predecease you or pass away before receiving the full benefit of the trust that you establish for them, the trust may, by default, be inherited by their spouse unless you have planned for this event. You can keep this from happening by naming a contingent (backup) beneficiary to your child. This could be your grandchildren, your child’s sibling, a charity, or any other party that you specify as next in line as the trust beneficiary.

In addition, be careful when giving a testamentary power of appointment to your child. This power would allow your child to direct trust property (or their share of trust property) to another individual upon their death, and that person could be their spouse. As the creator of the trust, though, you can limit who the trust property can go to, such as your child’s children or other descendants only.

Take Control of Your Legacy: Talk to a Trust and Estate Planning Attorney

Part of being a parent is protecting your children from their own lack of foresight. If your child is newly married or in a marriage that is headed in the wrong direction, you can take steps to keep your hard-earned money from falling into their spouse’s hands, where it may not benefit your family, by creating a trust.

Flexibility is one of the most powerful features of a trust. There are many types of trusts to choose from, and they can be customized with any number of provisions to ensure your final wishes are fulfilled.

Remember that an estate plan can—and should—be revisited. You can include restrictions in the trust now and remove them later as circumstances change. You can also decide to do away with the trust altogether. Whatever plans you have for your money and property, make the most of them by getting help from Adam Demetri, Esq. Contact us to set up an appointment.

Pour-Over Will: Not Your Average Will

Pour-Over Will: Not Your Average Will

Wills and trusts are the two basic legal instruments that people use to pass accounts and property on to their loved ones at death. Although a revocable living trust is often used in place of a will, the two are not mutually exclusive. You can have both a will and a trust, and in fact, a special kind of will—known as a pour-over will—is commonly used alongside a living trust.

A pour-over will adds peace of mind to your trust-based estate plan. If you neglect to transfer any accounts and property into a living trust during your lifetime, or fail to designate the trust or anyone else as a beneficiary at your death, the pour-over will ensures that those assets end up in the trust after you die. If you do not set up a pour-over will to go along with a living trust, any money or property that does not pass to the trust or other beneficiaries at your death and therefore remains outside the trust at the time of your death could be treated as though you had died without a will and will pass to your heirs under the default laws of your state.

What Is a Pour-Over Will? 

If your estate plan is based around a living trust, you are probably familiar with the benefits that the trust provides over a standard will. Avoiding probate, reducing attorney’s fees, and providing privacy for you and your loved ones are the primary benefits of using a living trust.

Ideally, you transfer all of your accounts and property into the living trust while you are still alive by changing ownership from you as an individual to you as the trustee of the living trust or naming the living trust as the beneficiary of items such as life insurance or a retirement account. The trust, in effect, is a legal entity that is separate from your estate (the money and property you own). Since you create the trust while you are alive and you will most likely name yourself as the beneficiary, you will continue to use and enjoy the accounts and property. But if you do not transfer those accounts and property into the trust, they remain owned by you as an individual and are part of your estate. Without a will, when you pass away, your accounts and property will be distributed according to state law—which could end up being very different from how you want them to be distributed.

A pour-over will prevents this scenario from happening. The pour-over will names your living trust as the beneficiary, which allows any money or property still owned by you individually at death to be transferred, or poured over, into your living trust upon your death. When used in tandem with a living trust, a pour-over will acts like a safety net to capture any accounts and property that you forgot—or did not have time—to place in the trust.

How Does a Pour-Over Will Work? 

There are four parties involved in a pour-over will and the related trust:

  • The testator (the person who creates the will)
  • The beneficiary (the person or entity who receives the accounts and property that are owned solely by the testator when they die)
  • The executor or personal representative (the person who carries out the testator’s wishes as stated in their will)
  • The trustee (the person who controls trust accounts and property)

When you create a pour-over will, you (the testator) name a beneficiary. The beneficiary receives any accounts and property that you own in your name alone at the time of your death. This person is usually the trustee of your living trust. They may also serve in the triple roles of beneficiary under your will, trustee of your trust, and executor.

However, if the beneficiary and the trustee are the same person, your pour-over will must be drafted very carefully. Referring to the trustee by name, and not as your trust’s formal trustee, could result in your accounts and property passing to them as an individual instead of to the trust.

You will also name an executor of your pour-over will. The executor is legally responsible for ensuring that your accounts and property end up being owned by the trust per the instructions in the will.

If these distinctions are confusing, think of a chain of command: you are telling your will’s executor to move your accounts and property into the trust at your death. From there, the trustee is in charge and controls the distribution of the accounts and property because they are now owned by the trust. Again, the executor and the trustee could be the same person, but they do not have to be. You can split these roles among different people to create checks and balances in the chain of command so that one individual does not control the entire asset transfer process.

Does Using a Pour-Over Will Avoid Probate?

Probate is the court-supervised proceeding in which the court oversees the transfer of your accounts and property to beneficiaries. Only accounts and property owned solely in your name at your death are subject to probate; trust accounts and property are not. Thus, even though a pour-over will directs that accounts and property become trust accounts and property, the “leftover” accounts and property that you did not get around to transferring to the trust are subject to probate. In other words, they do not pour over to the trust until after probate wraps up. This can result in beneficiaries having to wait longer to receive their trust distributions.

On the plus side, since the accounts and property that pass through probate on the way to becoming trust accounts and property are likely to be of relatively low value, the estate may qualify for small estate probate, which is generally faster, simpler, and less expensive than standard probate. The threshold value that qualifies an estate as small varies by state. Some states also allow small estates to skip the probate process altogether.

Trusts should be updated regularly to reflect changing circumstances, but personal accounts and property might remain outside the trust for a variety of reasons. A pour-over will is a valuable addition to a living trust that acts as a safety device to protect your beneficiaries. Our principal attorney, Adam Demetri, Esq. can help you create a living trust and a pour-over will to accompany it. We can also discuss other trust and will options that might be better for you. To explore the different ways we can help secure your legacy, please schedule an appointment.

Types of Life Insurance and How They Can Be Used in Estate Planning

Types of Life Insurance and How They Can Be Used in Estate Planning

Many of us do not start thinking about life insurance until we get our first full-time job and the company’s human resources representative asks us if we want to enroll in the employer’s group life insurance policy. Most people think “Why not?” and sign up, naming a family member as the beneficiary of their policy, and then never give it another thought. Although this may be a good start, too few of us spend much more time thinking about life insurance.

What Is Life Insurance?

In general terms, life insurance is a contract between two parties, usually an individual and an insurance company, in which the company agrees to pay a specified sum of money (death benefit) upon the death of the insured to the beneficiaries named in the policy to replace the economic loss that would otherwise be incurred by the beneficiaries because of the insured’s death. In exchange for the death benefit, the individual who purchases the policy agrees to pay premiums to the company for a specified period of time, up to a specified amount, or both.

The right kind of life insurance, when properly understood and carefully coordinated with your estate planning, can provide significant economic benefits and peace of mind for you and your loved ones should you pass away sooner than expected. But there are numerous types of life insurance, and it can be well worth your time to become familiar with the primary varieties and know when to use them.

Types of Life Insurance

Term insurance. Term insurance will pay the death benefit only if the insured dies within the specified period (term) spelled out in the insurance contract. For example, if the policy is for a ten-year term but the insured dies in year eleven, after the ten-year term has ended, no death benefit is payable to the beneficiaries. This type of insurance is generally more affordable than other types of policies and is designed primarily to protect the insured’s beneficiaries should premature death create economic hardship within the specified term period.

Whole life insurance. Whole life insurance typically guarantees a consistent premium throughout the life of the contract, but the premiums are typically higher than term-life premiums because the insurance company maintains a reserve that helps keep the premiums level during the insured’s life. This reserve is an accumulated cash value within the policy that the policy owner can borrow against or cash out if they choose to terminate the contract before they die. Different varieties of whole life insurance have unique features that can be customized for particular situations.

Universal life insurance. Universal life (UL) insurance policies are interest-sensitive policies that can result in higher death benefits and cash value over the life of the policy, depending on a variety of investment, expense, and mortality factors that are built into the contract. With the potential for greater gains in cash value, however, comes the potential for greater risk in the buildup of cash value. If the policy’s underlying investment assets perform poorly and the cash value buildup is insufficient to cover the expense charges and mortality costs, the policy will terminate. However, compared to whole life policies, UL policies are generally significantly more flexible with regard to making premium payments from year to year and withdrawing cash value. Therefore, depending on your circumstances, the type of cash flow you anticipate, and the risks that you are insuring against, a UL policy may be appropriate. As with most insurance policies, you will find limitless varieties from insurer to insurer.

Variable life insurance. Variable life (VL) insurance policies are very similar to traditional whole life policies except that in VL policies, neither the death benefit nor the surrender value of the policy is guaranteed. In addition, either the death benefit or the surrender value, or both, can increase or decrease depending on the performance of the policy’s underlying investments. However, each VL policy typically has a minimum death benefit so that, even with poor asset performance, the beneficiaries receive a payout at the insured’s death. These policies are unique because of the control that the policy owner has over the types of investments underlying the policy. The policy’s cash value can be invested in varying degrees in stocks, bonds, real estate, and money market portfolios. Policy premiums are typically fixed, but depending on the underlying assets’ performance, the cash value can fluctuate from day to day. As with other life insurance products, the death benefits are income tax-exempt. The earnings on the assets and the accumulated cash value in the policy are income tax-deferred until after the policy has been surrendered. In addition, the policyholder can also borrow up to a certain percentage of the policy’s cash value if they need cash for a period of time (although interest is charged while the loan is outstanding).

Variable universal life insurance. Variable universal life (VUL) insurance is, as the name indicates, a hybrid of variable life and universal life insurance, with many of the most desirable features of both types of insurance built into the contracts:

  • flexible premiums
  • adjustable death benefits
  • control over the types of investments within the policy
  • the ability to borrow against the cash value
  • partial withdrawal rights

Both VUL and VL policies are subject to Securities and Exchange Commission (SEC) regulation because of the flexibility of their investment options.

Survivorship life insurance. Sometimes called “second-to-die” life insurance, survivorship policies can be used when the need for an infusion of cash (the death benefit) is necessary only at the death of the second of two individuals (such as a married couple). These policies can be term, whole, universal, or variable, depending on the policyholders’ need. Survivorship policies are particularly useful when a married couple owns significant real property that they want to keep in the family after the second spouse dies, and the family would rather pay estate taxes from the life insurance proceeds than raise the cash to pay the taxes by selling the property.

First-to-die life insurance. First-to-die policies allow the death benefit to be paid upon the death of the first of two insured individuals. Insuring two individuals instead of one costs less than the total premiums for separate life insurance policies on the same two individuals. For example, these policies can provide a surviving business partner with the cash necessary to buy the deceased partner’s share of the business from their spouse or family.

Single premium whole life insurance. Single premium whole life insurance allows an individual to purchase, with a single cash payment, a specific amount of insurance to cover the remainder of their life. As with typical whole life, the insured can borrow against the policy’s cash value or surrender the policy. There may be income tax consequences for surrendering the policy, but as with most other life insurance policies, there can be significant income tax protection if the policy matures and pays out at the insured’s death. Also, in some states, the cash value of life insurance can enjoy significant asset protection against future creditors’ claims, thus making investing in life insurance more attractive than other types of investments.

Which Type of Insurance Is Best for Me?

With all of the choices available in the life insurance world, considering what type of insurance is best for your situation can feel overwhelming. If you are a young couple just starting out and you do not have much spare income, it may be best to shop for some term insurance that will provide a cash payment that allows your surviving spouse to pay off the home and have sufficient income until they can provide for themselves on their own.

If you are a middle-aged working professional with a family, you may want to consider purchasing a much larger term life policy or even a whole life policy that has a guaranteed death benefit as long as you keep paying the premiums. This option can be important if there is a chance that you could develop a chronic illness, such as diabetes or cancer, that would disqualify you from obtaining a new term policy when your old term policy terminates.

If you have a large estate with significant assets that would be difficult to sell, such as a successful business or real estate, a second-to-die or first-to-die policy might be a better option for ensuring that there is sufficient cash upon the death of one or both of you and your spouse, or business partners, to pay taxes or buy out a deceased partner’s business interests.

The bottom line is that life insurance policies come with a huge variety of options because families and individuals have an endless variety of circumstances. Ask your insurance professional, financial advisor, and estate planning attorney to help you identify the risks that you may be facing that could be reduced by using a carefully crafted insurance policy, coordinated with your estate planning, to meet your unique needs. Insurance can be complex, but you do not have to go it alone.

Asset Protection Planning

Asset Protection Planning

Unfortunately, lawsuits, including frivolous lawsuits, are filed daily against good people like you.  Asset protection planning, which is an important part of estate planning, can protect you, your family, and your assets. You’ve likely already done some asset protection planning such as purchasing homeowners’ and auto insurance.

There are many ways to protect assets and the method we use will depend upon your goals, assets, and family.  As briefly mentioned above, purchasing insurance is the simplest form of asset protection.

Additional methods include:

  • Setting up a business entity such as an LLC to own rental real estate or a business
  • Including lifetime trusts for your spouse and children in your revocable living trust
  • Purchasing long-term care insurance and/or Medicaid/nursing home asset protection planning
  • Using domestic asset protection, spousal, children’s, grandchildren’s, or life insurance trust

Asset protection planning helps you reduce risk of loss of assets from the exorbitant cost of long term care and from lawsuits, including divorce, landlord/tenant, car accident, slip & fall, bankruptcy, business failure, malpractice, and the like. Just like the importance of having auto or homeowners insurance in place before an accident or fire occurs, so is having an asset protection plan in place before a creditor arises or a loved one is facing the prospect of expensive nursing home care. We’ll help you to analyze risk, options, and provide peace of mind to get the best level of asset protection in place for you and your family.

What Is a Separate Revocable Living Trust?

What Is a Separate Revocable Living Trust?

When a couple engages in foundational estate planning, one of the first questions addressed by estate planning attorneys is whether it makes sense for the couple to use a revocable living trust (RLT) as a part of their plan. If using an RLT makes sense, an important follow-up question to married couples should be whether it makes sense for them to use a joint RLT or separate RLTs.

What Is a Revocable Living Trust?

A trust is a legal concept that allows an individual (i.e., a grantor, settlor, trustor, or trustmaker) to transfer ownership of their accounts and property to a trustee (for most RLTs, the trustee is the same person as the grantor) who has a legal obligation to use that property for the benefit of a beneficiary.

A revocable living trust (RLT) is a trust that an individual (the grantor) creates during their lifetime. The trust can be changed at any time until the grantor becomes incapacitated (unable to make their own decisions) or dies. To create the trust, the grantor changes the ownership of their accounts and property from the grantor as an individual to the grantor as the trustee of the trust. As a planning tool, an RLT enables the grantor to name themselves as the current trustee and designate a co-trustee or substitute trustee to act on their behalf if they become unable to act as trustee for any reason. An RLT also allows the grantor to continue enjoying their money and property during their lifetime and to designate what will happen to that money and property upon their death.

What Is the Difference between a Separate RLT and a Joint RLT?

When a married couple (the grantors) uses a joint RLT for estate planning, they are typically both also initial trustees of the trust. The grantors then transfer all of their separate property and joint property into the same trust, which typically names both of them as trustees and beneficiaries. However, they can designate which property is truly joint and which is their separate property on schedules attached to the trust. Grantors of a joint RLT can also designate what happens to joint and separate property at first death and at second death.

On the other hand, when a married couple uses separate RLTs, two separate trusts are established, and each individual transfers their separate property into their own trust (one grantor per trust). They also typically split their jointly owned property and transfer the resulting separate shares into their own trusts. As they acquire additional jointly owned property, the couple continues to divide the property in accordance with what they have agreed upon and transfer their respective shares into their separate trusts.

In community property states,[1] most married couples (particularly those couples who have been married for many years and have children from only that marriage) use a joint RLT because of the important tax benefits that accrue from community property ownership. Keeping community property in a joint trust ensures that the marital property retains these important tax benefits. Nevertheless, even in community property states, there are circumstances in which married couples may want to consider using separate RLTs.

Why Would a Couple Use Separate RLTs?

As explained above, although a joint RLT can preserve tax benefits for those in community property states, there are a number of good reasons to consider using separate trusts in estate planning regardless of whether the couple lives in a community property state.

Enhanced Asset Protection

Keeping property in separate RLTs during marriage can sometimes make it much more difficult for one spouse’s creditors to access property held in the other spouse’s trust. For example, in one Utah case,[2] a lumber supply company sued a husband in an attempt to foreclose on his family home as a result of a personal guarantee he had made to the company to obtain building materials. Because the couple had decided years before to transfer their home into the wife’s separate RLT, of which she was the only trustee, the court held that even though the husband continued to live in the home with her, the home was beyond the reach of his creditors.

Of course, this case directly applies only to Utah residents. But many of the legal principles are similarly applicable in other states. Anytime one spouse creates some level of legal separation between themselves and certain property that would otherwise be treated as marital property, that spouse strengthens the argument that their creditors cannot reach that property in a lawsuit.

In addition to asset protection during the grantor’s life, assets in a separate RLT are even more protected after the grantor of the separate trust dies. At that time, the trust becomes irrevocable, making it even more difficult for other beneficiaries or the surviving spouse’s creditors to reach the property held in the now-irrevocable trust.

Ease of Administration at Death

Administering the property of a joint RLT after one spouse dies requires a certain amount of effort to divide the property between the deceased spouse’s share and the surviving spouse’s share. This process frequently requires careful valuation of the property in the trust as well as executing new deeds for real property, retitling stock certificates, or establishing separate investment accounts to hold the deceased spouse’s separate property.

On the other hand, if all of this work was done when the spouses funded their separate RLTs (transferred or retitled their property into the name of the trust), trust administration after the death of the first spouse can be very simple and straightforward. The only tasks may be notifying the financial institutions of the grantor’s death and providing them with the trust’s new tax identification number in order to properly report tax issues going forward.

Remarriage and Blended Family Benefits

Couples who have been married before or who have children from another relationship may also benefit from using separate RLTs. This is particularly true when each spouse has property that they would like to keep separate for certain reasons. For example, perhaps a newly married spouse has inherited their parents’ home and the couple would like to live there, but the new spouse wants to make sure the family home stays in their own family and passes only to their own children at their death. In addition to a prenuptial agreement, keeping the house in a separate RLT would allow this spouse to specify exactly how that home should be used and passed on when they die. Using a joint RLT to achieve the same result requires much more careful drafting and introduces a much greater potential for confusion and mistakes in administering the trust after the death of the spouse who owns the house.

Conclusion

As you can see, using separate RLTs in a marriage can make very good sense in some situations and offer a number of benefits:

  • provide enhanced asset protection for married couples
  • simplify trust administration after one or both spouses pass away
  • clarify the division of property in a remarriage or blended family situation

Please feel free to contact us to schedule a consultation to discuss the pros and cons of using a separate or joint revocable living trust as part of your estate plan and help you design an estate plan tailored to your unique situation.

[1] There are nine community property states in the U.S.: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Alaska, South Dakota, and Tennessee have elective community property laws.

[2] Lakeside Lumber Prods., Inc. v. Evans, 110 P.3d 154 (Utah Ct. App. 2005).

How to Keep Your Child’s Inheritance Out of Your In-Law’s Hands

How to Keep Your Child’s Inheritance Out of Your In-Law’s Hands

About 40 to 50 percent of all marriages in the United States end in divorce. Regardless of how you feel about your child’s spouse, you must face the possibility that they could become your child’s ex-spouse. Should that day come, the money you leave to your child could be subject to a division of marital assets. But with careful estate planning, your child’s inheritance can be kept safely out of the hands of their spouse or former spouse.

Separating Inheritance Money from Marital Money

During marriage, the lines between what each partner owns can blur. Generally, whatever is acquired during the marriage by either partner becomes marital property that is subject to division in the event of a divorce, but there are exceptions.

One exception is a bank account that is kept separate during the marriage. Inheritance money that you leave to your child or monetary gifts that you give to your child during your lifetime can theoretically go into a separate account. However, in practice, it can be difficult for spouses to avoid commingling bank accounts. Even something as simple as depositing marital money into the account or using it to pay bills during the marriage could make the account marital property.

A better way to keep your child’s gift or inheritance separate from their spouse’s money is to hold it for them in a trust account. It is not just wealthy parents who leave money to their children in a trust. A trust is a flexible and powerful estate planning tool that allows parents of any means to exercise greater control over the money and property that they pass down.

Trust Management and Third-Party Trustees

Holding your child’s inheritance in trust generally involves doing the following:

  • You place money and property in a trust
  • You name a trust beneficiary (i.e., your child)
  • You name a trustee (somebody to manage trust distributions)
  • You leave written instructions that specify how the money and property are to be used (trust instrument)

It is possible to name your child as both the beneficiary and the trustee of the trust, with some additional restrictions on the distribution of assets. Without proper guidance and trust structure, commingling of assets can occur if your child consistently uses money in the trust for marital expenses and then gets divorced.

To avoid commingling, you can name a third-party trustee to manage the money on behalf of your child. This takes control of the trust out of your child’s hands and places it in the hands of a third-party who can use their discretion in interpreting the trust’s instructions for how the trust funds are to be used.

Instead of distributing money from the trust directly to the beneficiary (which raises the possibility of commingling and trust division in a divorce proceeding), the trustee can pay third parties on the beneficiary’s behalf. For example, if the beneficiary needs a new vehicle, the trustee can pay the car dealership directly. Or, for larger purchases such as a home, the trustee could loan the money to the beneficiary. The house would be used as collateral to secure the debt to the trust and protect it from asset division.

Child and Trustee as Co-Trustees

Giving a single third-party trustee sole discretion over trust fund distributions affords maximum protection against asset commingling, but it provides your child with limited flexibility over how they can spend their inheritance. If you prefer to give them more options but still protect the funds you leave to them in the event of a divorce, you can name a third party to serve as co-trustee with your child or even your child as the sole trustee. However, other restrictions may be appropriate for creditor protection and tax purposes.

When setting up a trust, there are several types of trustees that you can choose from, each with a different set of responsibilities and obligations. For example, you might name your child as an investment trustee, giving them the authority to invest money held in the trust. In this capacity, your child is acting on behalf of the trust (not in a personal capacity), so the trust money is not commingled with marital assets. At the same time, with good investments, they are effectively growing their own wealth. You can then have a co-trustee handle distributions for your child’s benefit.

Naming co-trustees has other benefits as well. In the event of a divorce or creditor issues, the child can resign as trustee, leaving the other trustee with sole discretion. You can also set up the trust in such a way that an independent co-trustee can make distributions to your child for any purpose, but your child is limited to distributions for health, education, maintenance, or support (i.e., a HEMS provision or ascertainable standard that is a safe harbor under federal law). While this does not provide the maximum creditor protection (because any distributions made to the child could be susceptible to creditors), amounts remaining in the trust may still be protected. In addition, special consideration must be given to the beneficiary’s ability to remove and replace another co-trustee.

Covering All Angles

To create a bulletproof trust strategy to keep your child’s inheritance out of their spouse’s hands, you should take a wide view of everything that could happen. That includes a possibility that you would probably prefer not to think about: your child passing away.

Should your child either predecease you or pass away before receiving the full benefit of the trust that you establish for them, the trust may, by default, be inherited by their spouse unless you have planned for this event. You can keep this from happening by naming a contingent (backup) beneficiary to your child. This could be your grandchildren, your child’s sibling, a charity, or any other party that you specify as next in line as the trust beneficiary.

In addition, be careful when giving a testamentary power of appointment to your child. This power would allow your child to direct trust property (or their share of trust property) to another individual upon their death, and that person could be their spouse. As the creator of the trust, though, you can limit who the trust property can go to, such as your child’s children or other descendants only.

Take Control of Your Legacy: Talk to a Trust and Estate Planning Attorney

Part of being a parent is protecting your children from their own lack of foresight. If your child is newly married or in a marriage that is headed in the wrong direction, you can take steps to keep your hard-earned money from falling into their spouse’s hands, where it may not benefit your family, by creating a trust.

Flexibility is one of the most powerful features of a trust. There are many types of trusts to choose from, and they can be customized with any number of provisions to ensure your final wishes are fulfilled.

Remember that an estate plan can—and should—be revisited. You can include restrictions in the trust now and remove them later as circumstances change. You can also decide to do away with the trust altogether. Whatever plans you have for your money and property, make the most of them by getting help from my office.

Think Your Estate Plan is Complete? Make Sure You’re Not Missing These Important Points

Think Your Estate Plan is Complete? Make Sure You’re Not Missing These Important Points

Roughly two-thirds of Americans do not have an estate plan, according to a recent survey from Caring.com.[1]

If you are among the minority of US adults who have prepared a will, living trust, and other end-of-life documents, you may think that your estate plan is settled. But you might want to think again. An estate plan is a living set of documents that should be regularly reviewed and updated. Even if you are vigilant about changing your estate plan over time, there may be aspects that you have missed, such as beneficiary designations for retirement accounts or life insurance policies.

Because your estate plan relies on others, such as designated decision makers and beneficiaries, it is important to consider not only what might happen to you, but also what might happen to them. There may be other aspects of your estate plan that you have overlooked as well. The best-laid plans often go awry, but paying attention to the smallest details can help keep your final wishes intact.

Do you have backup decision makers?

A well-thought-out estate plan involves numerous individuals that you designate to carry out your stated preferences. They include:

  • Personal representative: The person you appoint to administer your estate through the probate process or trust administration process after you pass away
  • Trustee: The person you name to manage your trust’s money and property
  • Guardian: Somebody to whom you give the legal responsibility to care for your children, including adult children who lack the capacity for self-care
  • Power of attorney agent: A chosen individual who has the legal authority to handle financial affairs on your behalf if you become unable to manage your own affairs
  • Health Care Agent: The person you designate to make medical decisions on your behalf if you are unable to do so

Choosing these crucial decision makers is not a matter to be taken lightly. They will be exercising considerable control over you and your affairs and must be trusted to act in your stead. However, there may come a time when they are no longer able (or willing) to do what you are asking them to do. This is why it is important that you list your first choice, as well as at least two backups for each of these positions in your estate planning documents.

People’s lives—and your perception of their lives—can change dramatically in a short period of time, and certain changes might impact their ability to serve you. For example, you might find out that a trustee has had problems handling their finances, which calls into question their ability to handle trust funds on behalf of your beneficiaries. Or a guardian could have issues with their children, which causes you to question their fit as your children’s caretaker.

It does not have to be suspect behavior to make you question your decision; it could be something as benign as age. Somebody who makes an ideal guardian in their 30s, 40s, and 50s might be less than ideal in their 60s and 70s. Similarly, a legal guardian might be too young at the moment—but the perfect candidate in five to ten years.

And what would happen if the guardian you name dies or becomes disabled? A replacement may also be required if a named decision maker approaches you and declares that they would rather not be in that position.

The key takeaway is that you should regularly reevaluate your choice of trusted decision makers and name backups in case you are no longer around to amend your will, trust, or other estate planning documents. Alternatives will ensure that there is no catastrophic failure in the chain of command that leaves crucial end-of-life matters in the hands of the courts.

What about your pets?

Many pet owners will acknowledge that their furry (and feathered and scaled) friends are very much a part of the family. Your pets are arguably more reliant on you than your children for their daily needs. Have you stopped to ask who will look after your beloved animal friends when you are not able to do so?

It is probably not the case that your pets are overlooked—and indeed, if you are an empty nester, your pet might receive the devotion once reserved for your children. But they may not have been top of mind when you met with an estate planning attorney to create your unique estate plan.

In addition to naming a legal guardian for your children, you can name one for your pets. As with any other trusted decision maker, it is helpful if you can provide a list of other people to care for your pet in case your first choice is unavailable, instructions for how your loved ones can find a suitable home, or shelters that you are comfortable having your pet surrendered to in the event no one can care for your pet. Beyond naming a caretaker for the animals that survive you, it is best to put your wishes for their care in writing. That way, the person who takes ownership of your pets knows exactly what needs to be done for them, including things like medications, allergies, favorite toys, and how to best handle any unusual quirks they may have.

Have you named contingent beneficiaries?

A beneficiary is someone you name in your estate plan to inherit your money and property, such as bank accounts, investments, and insurance policies. Upon your passing and the administration of your estate, these accounts and property are distributed to or managed on behalf of your chosen beneficiaries. However, there are a few instances where you will need a contingent or backup beneficiary:

  • The primary beneficiary predeceases you.
  • The primary beneficiary cannot be located.
  • The primary beneficiary refuses their inheritance.

Without a contingent beneficiary, your money and property might be passed on according to state law in any of these scenarios. This could require going through the probate process, which can delay distribution, increase estate settling costs, and lead to family infighting. All of these potential outcomes are best avoided, and that can be easily done by naming a contingent beneficiary—or two, or three, or more, if you have any doubts.

Have you considered the unthinkable?

Although you may prefer not to think about it, you should be prepared for the unthinkable: all of the loved ones you name as beneficiaries in your estate plan predecease you.

In this highly unlikely but catastrophic scenario—in which nobody in the legal chain of inheritance is alive to receive the proceeds of your estate—having contingent beneficiaries may not be enough. Depending on where you live, if you have no surviving family, the government could end up with your money and property.

Although this is not a common occurrence, for those with smaller families and few living relatives, it is not impossible. Adding a remote contingent beneficiary clause or family disaster plan to your estate plan allows you to name a charity or other organization that will receive your money and property should the unthinkable happen.

Planning for the Unexpected

For many Americans, illness, accidents, or other unexpected life events serve as a wake-up call that they should have a basic will, at the very least. Although incredibly important, many people still put off estate planning, citing procrastination, a perceived lack of enough money and property, lack of knowledge about the process, and concerns about costs.

Estate planning does not have to be complicated or expensive, and when you consider the potential costs of not having an estate plan, can you really afford to leave things to chance—or the government? For those who already have documentation in place, your plans need backup plans to account for the unexpected. It is worth your peace of mind to revisit an estate plan and add backup decision makers, pet caretakers, contingent beneficiaries, disaster clauses, and anything else you may have overlooked.

Our experienced estate planning attorney can ensure that all of your bases are covered. To schedule an appointment with Adam Demetri, Esq., please contact our office.

[1] Daniel Cobb, Caring.com’s 2022 Wills Survey Finds That 1 out of 3 Americans Without Estate Plans Think They Have Too Few Assets to Leave Behind, Caring.com, https://www.caring.com/caregivers/estate-planning/wills-survey/ (last visited June 28, 2022).

If I Give My Home to My Child in My Will, Can They Take My Home While I Am Still Alive?

If I Give My Home to My Child in My Will, Can They Take My Home While I Am Still Alive?

The short answer to this question is no. Naming your child as the recipient of your home in your will does not give them any right to your home while you are still living. However, understanding why that is the correct answer requires a little more explanation.

Title Is Key

When it comes to real property such as a house, the person who has title to (or legal ownership of) the property controls the property. The title holder (owner) can lease, mortgage, refinance, sell, gift, or do anything else with the property. When you purchased your home, you received title to it through a deed. This deed proves you are the owner and you have all rights to your property.

A Will Is Effective Only upon Your Death

A will is a legal document that specifies what happens to your property upon your death. The key phrase here is “upon your death.” A will has no real legal significance until the time of your death. A will does not change title (ownership) to property during your life, so naming your child in your will as the recipient of your home means that they have no ownership rights to your home until after your death. Also, you can rewrite or change a will at any time during your life while you are still mentally able to do so. For these reasons, your child cannot take your home while you are still alive.

A Word of Caution

Using a will to give your house to your child at your death guarantees that they will have to go through the probate process to complete the title transfer. In an effort to avoid probate, some people will put their child’s name on the deed to their home while they are living, with the intent of continuing to occupy the home by retaining a life estate while they are alive and passing the home to their child at the time of their death. As discussed above, title to property is received through a deed.  If you put your child’s name on the deed to your home as a joint owner or sole owner, they can do what any owner of property has the right to do: mortgage, refinance, etc. So while naming your child in your will as the recipient of your home at your death does not give them the ability to take your home or manage your affairs while you are still alive, putting your child’s name on the deed to your home would indeed give them–and their creditors–that ability.

If you want to ensure that you maintain control of your home while you are alive, that your child receives your home upon your death, and that they can avoid the probate process, there are estate planning tools such as  a revocable living trust, or an irrevocable trust which can also protect the home from the exorbitant costs of long-term care. We are happy to meet with you to discuss your unique goals and how a tailored estate plan can help you meet them.

Does Your Estate Plan Protect Your Adult Beneficiaries?

Does Your Estate Plan Protect Your Adult Beneficiaries?

If you think you only need to create discretionary lifetime trusts for young beneficiaries, problem beneficiaries, or financially inexperienced beneficiaries, then think again.  In this day and age of frivolous lawsuits and high divorce rates, discretionary lifetime trusts should be considered for all of your beneficiaries, minors and adults alike.

What is a Discretionary Lifetime Trust?

A discretionary lifetime trust is a type of irrevocable trust that you can create while you are alive – in which case you will gift your assets into the trust for the benefit of your beneficiaries – or after you die – in which case your assets will be transferred into the trust for the benefit of your beneficiaries after death.

The trust is discretionary because you dictate the limited circumstances when the trustee can reach in and take trust assets out for the use and benefit of the beneficiaries. For example, you can permit the trustee to use trust funds to pay for education expenses, health care costs, a wedding, buying a home, or starting a business.  If the trust is funded with sufficient assets that are invested prudently and you choose the right trustee to carry out your wishes, the trust funds could last for the beneficiary’s entire lifetime.

How Does a Discretionary Lifetime Trust Protect an Inheritance?

With a discretionary lifetime trust each of your beneficiaries will have a fighting chance against lawsuits and divorcing spouses because their inheritance will be segregated inside of their trust and away from their own personal assets.  By creating this type of “box” around the inherited property, it shows the world that the inheritance is not the beneficiary’s property to do with as they please.  Instead, only the trustee can reach inside the box and, based on your specific instructions, pull funds out for the benefit of the beneficiary.  Creditors, predators, and divorcing spouses are generally blocked from reaching inside the box and taking property out.

When the beneficiary dies, what is left inside their box will pass to the heirs you choose. You could decide, for example, to have the assets pass to your grandchildren inside their own separate boxes and on down the line, thereby creating a cascading series of discretionary lifetime trusts that will protect the inherited property and keep it in your family for decades to come.

You can even name the beneficiary as the trustee and provide an “ascertainable” standard for him/her to make discretionary distributions for their health, education, maintenance and support.

What Should You Do?

Does all of this sound too good to be true?  It’s not.  Our firm is available to discuss how you can incorporate discretionary lifetime trusts into your estate plan.  Your family will certainly be glad you did.