Trusts and Estates Blog

Who are the people involved with a living trust?

The grantor (also called settlor, trustor, creator or trustmaker) is the person whose trust it is. Married couples who set up one trust together are co-grantors of their trust. Only the grantor(s) can make changes to his or her trust.

The trustee manages the assets that are in the trust. Many people choose to be their own trustee and continue to manage their affairs for as long as they are able. Married couples are often co-trustees, so that when one dies or becomes incapacitated, the surviving spouse can continue to handle their finances with no other actions or steps required, including court interference.

A successor trustee is named to step in and manage the trust when the trustee is no longer able to continue (usually due to incapacity or death). Typically, several are named in succession in case one or more cannot act. Sometimes two or more adult children are named to act together. Sometimes a corporate trustee (bank or trust company) is named. Sometimes it is a combination of the two.

The beneficiaries are the persons or organizations who will receive the trust assets after the grantor dies.

Gifting… An Easy and Satisfying Way to Reduce Estate Taxes

If you have a sizeable estate, you may want to consider giving some of your assets now to the people or organizations who will receive them after you die.

Why? First, it can be very satisfying to see the results of your gifts – something you can’t do if you hold onto everything until you die. Second, gifting is an excellent way to reduce estate taxes because you are reducing the size of your taxable estate. (Just make sure you don’t give away any assets you may need later.) And third, well, we’ll wait and explain the third reason at the end.

One of the easiest ways to do this is through annual tax-free gifts. Each year, you can give up to $13,000 to as many people as you wish. If you are married, you and your spouse together can give $26,000 per recipient per year. (This amount is now tied to inflation and may increase every few years.)

So if, for example, you have two children and five grandchildren, you could give each of them $13,000 and reduce your estate by $91,000 each year – $182,000 if your spouse joins you.

You can also give an unlimited amount for tuition and medical expenses if you make the gifts directly to the educational organization or health care provider. Charitable gifts are also unlimited.

Gifts do not have to be in cash. In fact, appreciating assets are usually the best to give, because any future appreciation will also then be out of your estate. For example, if you want to give your son some land worth $52,000, you can give him a $13,000 “interest” in the property each year for four years.

As long as the gift is within these limits, you don’t have to report it to Uncle Sam. Just the same, it’s a good idea to get appraisals (especially for real estate) and document these gifts in case the IRS later tries to challenge the values. It’s also a good idea to do this under the watchful eye of your attorney or tax advisor.

What if you want to give someone more than $13,000? You can, it just starts using up your $1 million federal gift tax exemption. If your gift exceeds the annual tax-free limit, you’ll need to let Uncle Sam know by filing an informational gift tax return (Form 709) for the year in which the gift is made. After you have used up your exemption, you’ll have to pay a gift tax on any gifts over $13,000 (or whatever the annual tax-free amount is at that time). The gift tax rate is equal to the highest estate tax rate in effect at the time the gift is made; in 2009, it is 45%.

Which brings us back to reason number three. Even though the gift and estate tax rates are the same, it costs you less to make the gift and pay the tax while you are living than it does to wait until after you die and have your estate pay the estate tax. That’s because the amount you pay in gift tax is no longer in your taxable estate.

Why use a life insurance trust?

With a trust, the insurance proceeds will not be included in your estate, so you avoid estate taxes. You can keep the proceeds in the trust for years, making periodic distributions to your children and grandchildren. And any proceeds that remain in the trust are protected from irresponsible spending and creditors (even spouses).

Life insurance can be an inexpensive way to replace the asset for your children (every dollar you spend in premium buys several dollars of insurance). Insurance proceeds are available immediately, even if you and your spouse both die tomorrow. And, in addition to avoiding estate taxes, the proceeds will be free from probate and income taxes.

The Special Needs Trust: Planning for a Disabled Dependent

If you have a child, sibling, parent, spouse, or other loved one who is physically, mentally or developmentally disabled — whether from birth, illness, injury or drug abuse — he or she may be entitled to valuable government benefits (SSI and/or Medicaid) now or in the future. Unfortunately, most of these benefits are available only to those with very limited means.

As a result, you may find yourself faced with a difficult choice. If you leave a substantial inheritance to this person, he will be disqualified from receiving government benefits which may be crucial for his care. On the other hand, you may not want to have to disinherit him in order to preserve these benefits.

Fortunately, a special needs trust will keep you from having to make this wrenching decision.

A special needs trust must be very specific in stating that its purpose is to supplement government benefits, to provide only benefits or luxuries above and beyond the benefits the beneficiary (disabled person) receives from any local, state, federal or private agencies.
It is critical that the trust not duplicate any government-provided services and that the beneficiary not have any resemblance of ownership of the trust assets. Otherwise, the government could attempt to seize the trust assets for repayment of services already provided or determine that the beneficiary does not qualify for future benefits.

To accomplish this, you will need to give the trustee complete control over the distribution of the assets and any income they generate; the beneficiary cannot be able to demand any principal or interest from the trust.

Give careful consideration to your choice for trustee. Of course, you (and your spouse) will continue to provide for this person while you are alive and able. But someone will need to assume this responsibility after your death or incapacity.

The most obvious choice is another family member who also cares deeply about this person. But be aware of a possible conflict of interest, especially if she will inherit the trust assets after your disabled dependent has died; she may care more about preserving trust assets than providing for your beneficiary.

Consider using (or adding) a corporate trustee; that’s a bank or trust company that specializes in managing trusts. They can be impartial, and they will be around for as long as your beneficiary lives.

Finally, be sure to work closely with an attorney who has considerable experience with these trusts.

How Should You Hold Title to Real Estate?

family in front of homeYour home is probably the most valuable asset you own. Yet most people don’t think about how to hold title until the title company poses the question when you buy or refinance. But this deserves careful consideration, because how you hold title to real estate has far-reaching effects. Let’s look at some common ways to hold title.

Individual Name: You can hold title in just your name even if you are married. However, there are some drawbacks you should know about.

First, what would happen if you become mentally or physically incapacitated due to illness or injury and the property needs to be refinanced, or a line of credit needs to be opened or increased? If you are unable to conduct business, the court will need to appoint someone to act for you.

“But, I have a will,” you say. A will can’t help; it only goes into effect after you die, not if you are incapacitated.

“But, I have a power of attorney,” you say. Most powers of attorney end at incapacity. A durable power of attorney is valid at incapacity. However, many financial institutions will not accept one unless it is on their form. And if accepted, it may work too well, giving the person the ability to do whatever he or she wants with your assets. You could recover to find the property mismanaged or even sold and the proceeds gone.

The court’s job is to provide supervision to protect your assets. But once the court gets involved, it will stay involved until you recover or die. The court, not your family or friends, will control how your assets are used to care for you. It is a public process that can be expensive, embarrassing, time consuming and difficult to end if you recover.

Next, what happens when you die? If yours is the only name on the title, the property will almost certainly have to go through the probate court system before it can be distributed to your heirs, even if you have a will. Think about it: if your name is the only one on the title, and you have died, you can’t sign your name to transfer title. While there can be exceptions, in most cases the only way to remove your name and put the new owner’s name on is through the probate court.

Joint Tenants with Right of Survivorship: This is how most married couples hold title, because it seems fair, it’s easy and it’s free. Parents and their adult children also often hold title this way, as do unmarried couples.

Indeed, when one owner dies, full ownership does transfer automatically to the surviving owner without probate. But usually this just postpones probate. If the surviving owner dies without adding another owner (which often happens), or if both owners die at the same time, the property will almost certainly have to go through probate before it can go to the heirs.

There are other problems, too. When you add a co-owner, you lose control. With real estate, all owners must sign to sell or refinance. If your co-owner disagrees with you, you could end up in court. If your co-owner is incapacitated, the court will probably get involved to protect your co-owner’s interest…even if the ill owner is your spouse.

You expose the property to your co-owner’s debts and obligations; you could even lose your home to your co-owner’s creditors if he or she is successfully sued. There could also be gift and/or income tax problems if your co-owner is not your spouse.

Finally, because a will does not control jointly owned assets, you could disinherit your family when your co-owner inherits your share. Sadly, and all too often, children from a previous marriage are disinherited when a new spouse is the surviving owner.

Tenants-In-Common: With this kind of ownership, each owner’s share will be distributed as directed in his or her will. If there is no will, the property will go to the owner’s heirs.

Community Property: Nine states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin) have a form of joint ownership between spouses commonly called community property. When you die, your share of community property automatically goes to your surviving spouse, unless your will says otherwise.

The problem with both tenants-in-common and community property is that you could find yourself with several new co-owners when your co-owner dies and the heirs inherit the property. Imagine how difficult it could be to get several owners to reach an agreement, especially if you are trying to sell the property.

You can also run into the other problems (incapacity, lawsuits, etc.) as explained under joint tenants with right of survivorship, but with several owners involved, your risks and problems are multiplied.

Tenants-by-the-Entirety: This form of joint ownership, available between spouses in some states, is similar to joint tenants with right of survivorship in that when one spouse dies, his/her share automatically goes to the surviving spouse, even if the will says otherwise. So you have many of the same risks, including unintentional disinheriting and court interference if one spouse becomes incapacitated.

However, as tenants-by-the-entirety, neither spouse can transfer his/her half to someone else without the other’s approval – something joint tenants with right of survivorship and tenants-in-common can both do.

Revocable Living Trust: When you have a living trust, the title of your real estate can be held in the name of the trustee of your trust. Usually you will be your own trustee, so you keep full control of the property. You can buy, sell and refinance real estate just as you can when the property is not in your trust.

If you become incapacitated, the successor trustee you named when you set up your trust will be able to step in and act for you. Because the title is no longer in your individual name (or joint names if married), there will be no need for court interference. (If you are married, you and your spouse can be co-trustees, in which case your successor trustee would step in only after you have both become incapacitated or have died.)

Your successor is legally obligated to follow the instructions you put in your trust. If you recover, your successor simply steps aside and lets you resume control. When you die, the property will be distributed without probate according to the instructions in your trust, so you don’t have to worry about unintentionally disinheriting someone.

SUMMARY: How you hold title to real estate should be given careful consideration. Check your titles and make any changes now while you can.

If you would like more information concerning holding titile to real estate, or any other aspect of estate planning, visit www.EstatePlanningSpecialists.com today. www.EstatePlanningSpecialists.com is a comprehensive online resource for estate planning and related issues. As Board Certified Specialists in Estate Planning, Trusts and Probate as certified by the State Bar of California Board of Legal Specialization, Mark E. Thompson and Kevin L. Von Tungeln are expertly equipped to serve clients with the creative, effective and custom solutions they demand.

An Introduction to Planning for Long Term Care

Long term care is the kind of care you need if you are not able to perform normal daily activities (such as eating, dressing, bathing, and toileting) without help, and it is expected that you will need this help for an extended period of time, often for the rest of your life.

This kind of care is often needed due to aging, chronic illness or injury, and most of us will need it for at least some time before we die. But it is not just for the elderly; a good number of younger, working-age adults are currently receiving long term care due to accident, illness or injury.

Long term care can be provided in your home, in an assisted living facility, or in a nursing home. All can become very expensive.

Home health care can easily run over $20,000 per year. That’s at $16 per hour, for just 25 hours a week. Depending on the skill required, number of hours needed and where you live, it can cost considerably more.

Assisted living facilities can cost more than $25,000 per year; the more services you need, the higher the cost. Nursing home facilities, with round-the-clock care, are now $50,000 or more a year. Expect to see these costs go even higher, thanks to rising medical costs.

Also, expect to pay these costs for a while. The average stay in a nursing home is three years. Alzheimer’s patients usually need care longer.

Unfortunately, long term care is not covered by health insurance, disability income insurance, or Medicare.

Health insurance plans cover nursing home expenses only for a short period of time while you are recovering from an illness or injury.

Disability income insurance will replace part of your income if you are not able to work after a specified time, but it does not pay for long term care.

Medicare, which covers most people over the age of 65, provides limited coverage for skilled care for up to 100 days immediately following hospitalization. After that, you’re on your own.

So who will pay the cost if you need long term care? There are only three sources: your (or your family’s) assets, Medicaid, and long term care insurance.

Medicaid pays the bills for a large number of people in nursing homes today. But because the program is designed to provide services for those who cannot support themselves (children, the disabled, the poor), you will have to “spend down” your assets and be practically penniless in order to qualify for benefits. Your spouse is also limited to the amount of assets he or she can have. Also, you will only be able to receive care from a facility that accepts Medicaid. But if you have minimal assets, it may be the best option for you.

For many people, long term care insurance is the best option, especially if you have assets and income you want to protect, you want to avoid being a financial burden on others, and you want to have some choice in the care you receive. With LTC insurance, you will have the option of receiving care in your home or a private pay facility. The premiums are lower when you are younger and in good health. If you wait too long, the cost could be prohibitive and you might not qualify.

When planning for long term care, the experience and advice of a qualified professional can be most helpful. If you are considering trying to qualify for Medicaid, make sure you talk with an expert in Elder Law before you do anything. An innocent mistake could disqualify you from receiving benefits for many months.

Trusts and Estates Blog