Why Is a Revocable Trust So Valuable in Estate Planning?

There’s quite a bit that a trust can do to solve big estate planning and tax problems for many families.

As Forbes explains in its recent article, “Revocable Trusts: The Swiss Army Knife Of Financial Planning,” trusts are a critical component of a proper estate plan. There are three parties to a trust: the owner of some property (settler or grantor) turns it over to a trusted person or organization (trustee) under a trust arrangement to hold and manage for the benefit of someone (the beneficiary). A written trust document will spell out the terms of the arrangement.

One of the most useful trusts is a revocable trust (inter vivos) where the grantor creates a trust, funds it, manages it by herself, and has unrestricted rights to the trust assets (corpus). The grantor has the right at any point to revoke the trust, by simply tearing up the document and reclaiming the assets, or perhaps modifying the trust to accomplish other estate planning goals.

After discussing trusts with your attorney, he or she will draft the trust document and re-title property to the trust. The assets transferred to a revocable trust can be reclaimed at any time. The grantor has unrestricted rights to the property. During the life of the grantor, the trust provides protection and management, if and when it’s needed.

Let’s examine the potential lifetime and estate planning benefits that can be incorporated into the trust:

  • Lifetime Benefits. If the grantor is unable or uninterested in managing the trust, the grantor can hire an investment advisor to manage the account in one of the major discount brokerages, or he can appoint a trust company to act for him.
  • Incapacity. A trusted spouse, child, or friend can be named to care for and represent the needs of the grantor/beneficiary. She will manage the assets during incapacity, without having to declare the grantor incompetent and petitioning for a guardianship. After the grantor has recovered, she can resume the duties as trustee.
  • This can be a stressful legal proceeding that makes the grantor a ward of the state. This proceeding can be expensive, public, humiliating, restrictive and burdensome. However, a well-drafted trust (along with powers of attorney) avoids this.

The revocable trust is a great tool for estate planning because it bypasses probate, which can mean considerably less expense, stress and time.

In addition to a trust, ask your attorney about the rest of your estate plan: a will, powers of attorney, medical directives and other considerations.

Any trust should be created by a very competent trust attorney, after a discussion about what you want to accomplish.

Reference: Forbes (February 20, 2019) “Revocable Trusts: The Swiss Army Knife Of Financial Planning”

What Are the New Rules for Veterans’ Benefits?

Veterans rejected for disability benefits will have new options for appeals. This is because federal officials are implementing an overhaul of the review process, with the objective of significantly reducing wait times for complicated cases.

The Department of Veterans Affairs announced last month that it will implement new appeals modernization rules starting in mid-February. The changes have been in the works for more than 18 months, since lawmakers passed sweeping reform legislation on the topic in the summer of 2017.

Veterans will now be provided with three streamlined options for their benefits appeals, reports the Military Times in the article “VA’s benefits appeals process will see a dramatic changeover next month.”

The VA is now hoping that the most difficult reviews can still be finished in less than a year in most cases. The target for cases that don’t go before the Board of Veterans Appeals is an average of about four months for a final decision.

A successful appeal can result in thousands of dollars in monthly benefits payouts for veterans who’ve previously been turned down, for what they believe are service-connected injuries and illnesses.

“(This) is the most significant reform in veterans’ appeals processing in a generation and promises to improve the timeliness and accuracy of decisions for our nation’s veterans,” said House Veterans’ Affairs Committee Chairman Mark Takano, D-Calif.

Veterans groups primarily support the appeals changes, but some have expressed concerns about the new system limiting veterans’ options for future reviews, in favor of getting faster resolutions.

Parts of the new process were implemented as pilot programs at select sites in recent months. In the past, the cases involved a combination of all three options, with cases reset and repeating steps with every new submission of case evidence.

With the first of the three new appeals processes, veterans can file a supplemental claim where they introduce new evidence in support of their case. The appeal is handled by specialists at a regional office, who make a final decision.

The second option allows veterans to request their cases be reviewed by a senior claim adjudicator, instead of the regional office. Those reviews are for clear errors or mistaken interpretations of a statute. If they find mistakes, they can require corrections for the cases.

The third option allows veterans to appeal directly to the Board of Veterans’ Appeals. Those cases are anticipated to take the longest to process, due to the legal prep work. Veterans can obtain a direct decision or request a hearing before the board.

Veterans with cases currently pending in the system, can opt to go with the new processes or stay with the current system, if they think it will be better for them.

Reference: Military Times (January 22, 2019) “VA’s benefits appeals process will see a dramatic changeover next month”

Why is Estate Planning so Important for Cancer Patients?

We’ve said that estate planning is important for everyone. However, it can be especially important for cancer patients. While some believe estate planning is only for the wealthy, that’s not the case: it’s an important part of everyone’s overall financial and legal strategy.

The Santa Maria Times’ recent article on this subject asks, “What is the importance of estate planning, advance health care directives?” As the article explains, estate planning is just having a plan in place that addresses how you’d like to see your estate—including assets, pensions, real estate, and more—distributed, in the event of incapacitation or death.

First, you should create the necessary legal documents and a clear financial plan. A cancer diagnosis is a life-changing event for the patient and her family. A significant component of getting and staying healthy is eliminating stress. From the moment you first receive the diagnosis, there are critical decisions that must be made on a regular basis. Estate planning can help to decrease much of that stress.

Even if you set up your estate planning years ago, your documents should be reviewed periodically, especially after a life-changing event like a cancer diagnosis.

Another important document is the Five Wishes Living Will. This document states your personal, emotional, and spiritual needs—along with your medical wishes. Originally created by the American Bar Association’s Commission on Law and Aging and experts in end-of-life care, this document lets you specify your wishes, if you become seriously ill. It can be a real gift for those you love.

Your complete estate plan may include the following:

  • A medical power of attorney and advance directives to physicians that designate a trusted person to speak for you, if you are unable to do so, even temporarily;
  • A written document specifying your wishes about medical care and treatment;
  • A review of all assets, including retirement accounts, investments, or bank accounts;
  • A power of attorney for financial decisions; and
  • A list of instructions and organizing information, so you can focus on recovery.

With an estate plan in place, along with careful planning and support, a cancer patient can achieve a feeling of well-being, even while confronting this life-threatening illness.

Reference: Santa Maria Times (February 18, 2019) “What is the importance of estate planning, advance health care directives?”

What Should My Fiancé and I Discuss About Finances Before We Say “I Do”?

If you’re older and remarry, you may have more assets and you probably have children. That’s different than a first marriage, where people often enter as financial equals. In subsequent unions, situations are more complicated—and the stakes are higher. You should protect your money in the event of divorce and protect your children in the event of your death.

Barron’s recent article, “How to Manage Your Money When You’re Remarrying,” says the subject of money should be easier this time around. Money talk might have been taboo going into your first marriage, but experience—and the battle wounds of divorce—tend to make this dialog much easier.

The best strategy for navigating the financial side of remarriage is to be direct and give yourself plenty of time before the wedding to work out the details. All good financial plans start with a broader discussion that has more to do with identifying and setting goals, than it does about dollar signs.

Consider what you hope to achieve individually and as a couple over the next year, five years, decade, and so on. Discuss your priorities and intentions, be specific, and write it all down. Your conversation will be the groundwork for the specific financial planning decisions the two of you will need to make, when it’s time to formalize your plans for merging finances or—as the case may be—keeping them separate.

Prenuptial agreements, or “prenups,” are becoming more frequently used by millennials because they are marrying later and bringing more assets and debt to the marriage. In the case of remarriage, a prenup should be strongly considered by most couples. This legally-binding agreement details how assets and liabilities will be divided, in the event of divorce.

Many experts suggest keeping separate checking, savings, and investment accounts—but setting up joint accounts for shared lifestyle expenses. Having a joint account removes the need for constant discussion about how you’ll divide expenses. Create a monthly joint budget and agree on the fairest way to split it. Some couples divide it down the middle, while others base it on a percentage of their respective incomes.

You don’t need to have all of your estate plans settled before the wedding but be certain to update key documents where appropriate—such as your wills, medical advance directives, retirement plan and insurance beneficiaries.

A big trouble spot for couples remarrying—especially if there are children and grandchildren from other marriages—is how assets will be divided in the future. Without a clear estate plan, if you die first, then the assets will pass to your spouse and then to that spouse’s children. That can be a big source of family strife—even for families who aren’t wealthy. A good solution is to set up revocable livings trusts that say exactly how you want your respective and joint assets to be distributed when you die.

Reference: Barron’s (March 2, 2019) “How to Manage Your Money When You’re Remarrying”

How Do I Make the Right Estate Planning Moves When I Divorce?

The Journal Enterprise explains in its recent article, “5 Estate Planning Moves If You Are Getting Divorced,” that the following tips will help you get your plans in order, so your final wishes will be carried out later.

Medical Power of Attorney. This is also called a healthcare proxy. The agent you choose makes decisions on your medical care if you’re ill or injured and can’t state your wishes. If you named your spouse as your health care agent, it is important to update this document after the divorce.

Financial Power of Attorney. Like a healthcare proxy, this is someone you select to take charge if you become incapacitated. This person has authority over your financial decisions.  For example, the financial power of attorney has the authority to pay your bills, access your bank and investment accounts, collect and cash your paychecks and make financial decisions for you. You want to be certain that your assets are protected, and your financial obligations are met while you’re unable to act on your own behalf. Most people name a spouse as financial agent so it is once again important to update this document after the divorce.

Create a List of Things to Change After Your Divorce. A divorce can freeze some assets and accounts, which remains in effect until it’s finalized. Therefore, you may not be able to change the ownership of your bank and investment accounts or the beneficiary on life insurance policies, pensions and other types of accounts until after the divorce.  You should make a list of all of your assets and accounts to ensure you won’t neglect to change them when the divorce is finalized.

Modify Your Will. You should update your will after your divorce as you likely provided an inheritance for your ex-spouse.   If you have minor children and you have sole custody, you may want to designate another person as their guardian or consider adding a trust for their benefit.  If you named your spouse as personal representative of your will (person in charge of handling the estate), you should update that as well.

Modify Your Trust. You may have a revocable living trust in addition to a will. One of the advantages of a revocable trust is that it doesn’t go through probate, so your heirs get a bigger inheritance more quickly. If you have a revocable trust, you will have likely included provisions for your ex-spouse thereunder, as a beneficiary and/or trustee, so this should also be updated.

Many state laws do revoke the right of an ex-spouse to receive an inheritance or act as a fiduciary under estate planning documents even if the ex-spouse is still named in the documents.  However, state laws vary so it is important to update your documents as soon as possible after your divorce.  If you don’t make these changes at the time of your divorce, your assets may not go to the right beneficiaries or your ex-spouse may end up with rights you didn’t intend.

Reference: Journal Enterprise (March 20, 2019) “5 Estate Planning Moves If You Are Getting Divorced”

Surviving Spouse Needs An Estate Plan

When one spouse dies after meticulously titling assets to pass through joint tenancy to the surviving spouse, estate planning attorneys flinch. There are occasions when everything works smoothly, but they are the exception. As this article from the Santa Cruz Sentinel warns “After husband’s death, wife needs to create revocable trust.” Actually, she needs more than a revocable trust: she needs an estate plan.

Most of the assets in the plan created by her husband, in this case, did pass to the wife outside of probate. However, there are a number of details that remain. She needs to obtain date-of-death values for any non-IRA securities the couple owned, and she may also want to have their home’s value determined, so that a new cost basis for the house will be established. She also needs an appointment with an estate planning attorney to create a will and an estate plan.

If she dies without a will, her children will inherit the estate in equal shares by intestate succession. However, if any of her children pass before she does, the estate could be distributed to her grandchildren. If they are of legal age, there is no control over how the assets will be managed.  Making matters worse, if a child or grandchild is disabled and receiving government benefits, an inheritance could make them ineligible for Social Security and Medicaid benefits, unless the inheritance is held within a Special Needs Trust.

Another reason for an estate plan: a will details exactly how assets are distributed, from the set of pearls that great aunt Sarah has kept in the family for decades to the family home. A durable power of attorney is also part of an estate plan, which lets a named family member or trusted friend make financial decisions on your behalf, if you become incapacitated. An estate plan also includes an advance health care directive, so a loved one can make medical decisions on your behalf if you are not able.

These are the basics of an estate plan. They protect loved ones from having to go to court to obtain the power to make decisions on your behalf, as well as protect your family from outsiders making claims on your estate.

A revocable trust is one way to avoid probate. An estate planning attorney will be able to evaluate your own unique situation and determine what the best type of trust would be for your situation, or if you even need a trust.

You may be thinking of putting your home, most families’ biggest asset, into joint tenancy with your children. What if one or more of your children have a divorce, lawsuit or bankruptcy? This will jeopardize your control of your home. A revocable trust will allow your assets to remain in your control.

The last piece in this estate is the IRA. If you are the surviving spouse, you’ll want to roll over your spouse’s IRA into your own. Make sure to update the beneficiary designation. If you neglect this step and the IRA pays into your estate when you pass, then the IRA has to be cashed in within five years of your death. Your children will lose the opportunity to stretch IRA distributions over their lifetimes.

An estate planning attorney can help guide you through this entire process, working through all the details. If your goal is to avoid probate, they can make that happen, while protecting you and your loved ones at the same time.

Reference: Santa Cruz Sentinel (March 24, 2019) “After husband’s death, wife needs to create revocable trust”

What You Need to Know, If the Next Generation Is Inheriting the Family Farm

Understanding the tax liabilities for inheriting, buying or being gifted the family farm, is critical to avoid a costly financial misstep, says Capital Press in the article “The family farm is coming to you: What’s next?” You’ll need to work closely with your estate planning attorney and CPA to make sure you understand the basis in the real estate, especially if the property is sold and taxes will need to be paid. How you inherit the property makes a big difference in the tax bill.

If you receive the property as a gift from parents while they are alive, then you retain their income tax basis in the property. If they inherited it also, they likely have a low tax basis. Farms with a basis of $50,000 that are now worth $2 million are not unusual. If the farm is sold, there will be a capital gains tax on the difference between the basis and the present value, at a capital gains tax rate of 15 – 20%.

If you inherit the farm from a parent and then sell it for $2 million, its value at the time of their death, you would not have to pay a capital gains tax.  This may result in substantial tax savings.

Likewise, if you bought the farm from a parent’s trust or estate for $2 million, then you have a $2 million basis in the property and will probably not owe any property gains tax, if you eventually sell it for $2 million.

If you own the farm without other family members, you should start planning your next steps. To whom do you want to pass the farm? If you want to keep the farm in the family, work with an attorney who is familiar with farm families, so that you can keep working the land and reduce any disputes.

Farmers often separate business operations from the land, with the operations held by one business and the land held by another entity. This allows the estate planning attorney to plan for succession in how operations and land are transferred to the next generation. It also provides asset protection, while you are alive.

Make sure that your farm succession plan and your estate plan are aligned. A common issue is finding that buy-sell documents don’t align with the will or trust. Some farmers use a revocable living trust as a will, so they can incorporate estate tax planning and transition the farm privately upon death.

Reference: Capital Press (March 24, 2019) “The family farm is coming to you: What’s next?”

When Do I Need a Revocable Trust?

A will is a legal document that states how your property should be distributed when you die.  It also names guardians for any minor children. Whatever the size of your estate, without a will, there’s no guarantee that your assets will be distributed, according to your wishes. For those with substantial assets, more complicated situations, or concerns of diminished capacity in later years, a revocable trust might also be considered, in addition to a will.

Forbes’ recent article, “Revocable Trusts And Why Should You Consider One,” explains that a revocable trust, also called a “living trust” or an inter vivos trust, is created during your lifetime. On the other hand, a “testamentary trust” is created at death through a will. A revocable trust, like a will, details dispositive provisions upon death, successor and co-trustees, and other instructions. Upon the grantor’s passing, the revocable trust functions in a similar manner to a will.

A revocable trust is a flexible vehicle with few restrictions during your lifetime.  you usually designate yourself as the trustee and maintain control over the trust’s assets. You can move assets into or out of the trust, by retitling them. This movement has no income or estate tax consequences, nor is it a problem to distribute income or assets from the trust to fund your current lifestyle.

A living trust has some advantages over having your entire estate flow through probate. The primary advantages of having the majority of your assets avoid probate, is the ease of asset transfer and the lower costs. Another advantage of a trust is privacy, because a probated will is a public document that anyone can view.

Even with a revocable trust, you still need a will. A “pour over will” controls the decedent’s assets that haven’t been titled to the revocable trust, intentionally or by oversight. These assets may include personal property. This pour-over will generally names the revocable trust—which at death becomes irrevocable—as the beneficiary.

Another reason for creating a revocable trust is the possibility of future diminished legal capacity, when it may be better for another person, like a spouse or child, to help with your financial affairs. A co-trustee can pay bills and otherwise control the trust’s assets. This can also give you financial protection, by obviating the need for a court-ordered guardianship.

Talk to an experienced estate planning attorney about the best options for your situation to protect your estate and provide the peace of mind that your family will receive what you intended for them to inherit, with the least possible costs and stress.

Reference: Forbes (March 11, 2019) “Revocable Trusts And Why Should You Consider One”

What Are the Biggest Threats to Estate Planning?

A recent survey conducted by TD Wealth at the 53rd Annual Heckerling Institute on Estate Planning found that nearly half (46%) of respondents said that family conflict was the biggest threat to estate planning in 2019, followed by market volatility (24%) and tax reform (14%).

Insurance News Net’s recent article, “Family Conflict Reigns As Greatest Threat To Estate Planning, Survey Finds,” reported that the survey also looked at the various causes of family conflict, when engaging in estate planning. They said that the designation of beneficiaries (30%) was the most common cause of conflict. Other leading factors included not communicating the plan with family members (25%) and working with blended families (21%).

Family dynamics have always played a crucial part in estate planning. With an increase in blended families, many experts think that these conversations will become even more frequent and challenging. Estate planning comes with the responsibility of motivating families to communicate through difficult times. This requires regular conversations and total transparency. To minimize risk, families should include everyone at the table to participate in an open and honest conversation about their shared goals and objectives.

Market volatility was also a big concern of the respondents for 2019. Almost 25% said that identifying volatile markets was the biggest threat to estate planning this year, up from 12% in 2018.

Market fluctuations are worth watching and can cause worry for potential gift givers. It’s best to maintain a long-term view when investing, and know that short-term market movements are no match for a robust estate plan and a well-balanced portfolio.

The Tax Cuts and Jobs Act continues to have a large-scale effect on estate planning. After the increase in the federal gift and estate tax exemption, there are some new strategies to allow people to take advantage of the exemption. About one third of respondents (31%) propose that their clients consider creating trusts to protect assets. About 26% say their clients plan to minimize future capital gains tax consequences and 21% agree to gift now, while the exemption is high.

Experts are stressing the importance of creating trusts for the benefit of family, so assets can be protected from future claims.

A total of 40% of estate planners think their clients will continue to give the same amount to charities as they did in 2018, with 21% expecting them to donate more.

Reference: Insurance News Net (March 13, 2019) “Family Conflict Reigns As Greatest Threat To Estate Planning, Survey Finds”

How to Spend Your Savings During Retirement

One of the best ways to make sure you have enough money to last you through retirement is to be savvy about how you spend your savings. Everyone’s situation is different, so there is no single formula that will apply to everyone, but it can be helpful to have some general guidelines on how to spend your savings during retirement.

Sometimes You Have to Spend Money

When you are facing 20 or 30 years or more ahead of you and the uncertainty of medical expenses and other financial crises during that time, it can be tempting never to want to spend a cent. For the vast majority of people, however, it is necessary to spend money to pay ordinary living expenses. Therefore, when you do have to put a crowbar to your wallet, there are ways to do so and minimize the pain.

Keep Your Investments Balanced

If you have created an investment portfolio with a particular balance of stocks and bonds, for example, half of your investments are stocks and half are bonds, try to maintain these proportions, when you withdraw assets to sell. Let’s say you want to pull $20,000 out of your brokerage account. Rather than removing the entire $20,000 out of stocks, consider selling equal dollar value amounts of stocks and bonds, so you do not have a lopsided portfolio after the transaction.

Experts also suggest that you should rebalance, if gains or losses from the market change the ratios to either your stocks or bonds by five percent or more. In other words, if you had 50 percent stocks and 50 percent bonds, and a strong market took your stock value up to 55 percent, leaving your bonds at 45 percent, you should consider selling some of the overweight investments to restore the 50-50 balance.

Pulling Money Out of Your 401(k) or IRA

Your withdrawals from these tax-deferred accounts will be taxed as ordinary income, since you did not have to pay taxes on them when they went into your accounts. As a result, the tax issues on tax-deferred mutual funds comprised of stocks, bonds, or cash balances are a simple matter. Since the amount you withdraw will get the same tax treatment, you can distribute the withdrawals among the different type of investments in your tax-deferred account in a manner that preserves your desired proportions of investments.

How to Handle Withdrawals of Taxable Accounts

Let’s say you have a brokerage account that is not tax-deferred. It is not a 401(k) or an IRA. You have stocks, bonds or mutual funds in this taxable account. If you need to withdraw money, first take out the income the account earned, such as interest, dividends, realized capital gains and mutual fund distributions.

This strategy allows you to maintain as much of the principal as possible. If you do need to sell off some of the investments in your taxable account, consider selling investments that you do not expect to do well down the road.

Always Have a Cash Cushion

You do not want to be in a position in which you have to sell off investments in a down market cycle, getting far less than these investments are usually worth. To avoid this distressing situation, make sure you maintain a savings account with a year or two of living expenses. Keep the savings account outside of the stock market. This cash cushion will allow you to skip or reduce your annual withdrawal from your investment accounts, when the market is doing poorly.

References:

AARP. “How to Tap into Your Retirement Savings.” (accessed March 7, 2019) https://www.aarp.org/retirement/retirement-savings/info-2018/tap-into-savings.html