What is the best option for you and your family which satisfies your goals?
The choices that you make should take into consideration your marital and family status, your financial circumstances, current and prior residency (and of either spouse), special requirements of dependents, charitable goals and personal wishes. The choices which are made will be reflected in the documents which are developed and prepared for each client.
Essential to your estate plan is the selection of an experienced attorney. Contact BomanLaw for a free confidential, consultation.
Estate Planning Options
IF YOU DO NOTHING
A majority of Americans do nothing in regard to estate planning. They have no will, no trust, no power of attorney and no health care directive ("living will"). The disposition of their assets is determined by state law. Property that is held in joint tenancy (with right of survivorship) will become property of the survivor. Property that is not held in joint tenancy or involve a contract, such as insurance or pension benefits, will be distributed as provided under the contract or other applicable law such as ERISA.
The distribution plans for persons with no Wills as provided by state law, generally are divided into 2 different types B separate property states and community property states. Both Missouri and Kansas are separate property states. [Note that the joint revocable trusts prepared by BomanLaw classifies trust property of a married couple as either separate property, community property or quasi-community property. This reduces the problems which arise when, for example, when a Missouri couple, later retires and moves to a community property state such as Texas, California or Arizona.]
If probate is required and there is no Will, the state laws of intestate succession apply and the amounts distributed are determined by state law. The particular needs of a surviving spouse, children, other family members, friends or charities will not always be taken into account. Costs of probate, including personal representative's fees (most states including Missouri no longer use the term "Executor", but use the term personal representative) and attorney's fees, may be high. In addition, no planning may result in substantial tax consequences.
Joint tenancy is a form or way of holding property which is specifically stated when the deed is created. The deed or other instrument will state that, for example Tom and Paul will own the property as joint tenants with right of survivorship. If Tom dies, while married to Jennifer, Paul will receive the property. Under this set of facts as long as Tom dies and Paul is alive, Paul always becomes the owner of the whole property regardless as to whether Tom was then married. The title passes to Paul automatically by 'operation of law.'
Sometimes another problem occurs with joint tenancy. What if John Smith, a widower deeds his property as joint tenants with rights of survivorship to 'himself' and his son 'Michael', a single person. The next year Michael marries Susan and the next year Susan divorces Michael. If John and Michael are still alive and wish to sell the property the year after Susan divorces Michael, the deed must be signed by John, Michael and Susan.
Simply stated, joint tenancy can involve many problems, including divorce and bankruptcy.
A Will is an instruction left by a decedent to a probate court and judge as to how to distribute your assets (and manage your estate and pay creditors). A Will only covers such property which is part of a probate estate. Many items of property are not part of a probate estate such as: insurance, pension benefits, IRAs, joint property or property subject to a 'transfer on death' or 'pay on death' provision.
Probate entails fees for a personal representative (executor), attorney fees, and court fees. In addition, much of the decedent's financial circumstances and family circumstances will become public. The probate filings, such as the Will and Property Inventory, are part of the public record and can be accessed by any one.
Wills often take extended periods of time to probate and settle the estate. Probate involve 5 basic steps:
TRANSFERS ON DEATH
Missouri was a leader in the creation of "Transfers on Death." A transfer on death can cover, a car, real estate, or a financial account. The family home can be transferred at death with a "Beneficiary Deed." The Beneficiary Deed is a Transfer on Death which states what property is subject to the transfer, the name of transferor, the name(s) of the beneficiary(s), and the date. The Beneficiary Deed creates no present interest in the beneficiaries, but becomes effective upon the death of the transferor. Thus, the transferor has full right to hold the property prior to death, the right to mortgage or otherwise encumber the property or even sell the property, all without any consent or waiver or other document being executed by any beneficiary.
Difficult problems occur with Transfers on Death. If a disability occurs prior to the death of the creator of the Transfer on Death, the Transfer on Death itself provides no mechanism for managing the property during the disability of the creator of the Transfer. In addition, all property subject to a Transfer on Death is part of the property subject to financial limitations with respect to the receipt of Medicaid benefits such as nursing home assistance. A Transfer on Death is not a flexible mechanism for distributing property in many circumstances.
POWERS OF ATTORNEY
Powers of Attorney are instruments which provide designated persons certain enumerated powers to act for another person.
Person designated to act for person who executes power of attorney. (In documents, the term – “my said attorney” maybe used and means the same as attorney-in-fact.)
Durable power of attorney
Power of attorney which does not expire if Principal loses legal capacity (mental capacity, for example).
Person who signed power of attorney.
Springing durable power of attorney:
Power of attorney which is effective at a future time, even though the Principal no longer has mental capacity.
At common law, a power of attorney was based on the law of agency. The law of agency provides that an agent can only act within the scope of the power of the principal to act, that is: if the principal could act, then the agent could act if authorized to do so; if the principal could not act, then the agent could not act. The result was that if the principal became incapacitated, then the agent could not act. This result prevented any person from naming another person to act for them in the event that they became incapacitated (became incompetent or under legal disability).
Durable Powers of Attorney
More than 30 states, including Missouri and Kansas, have adopted laws that provide that powers of attorneys are still effective even though the principal is no longer legally competent. These are called ‘Durable Powers of Attorney.’ These laws allow attorneys-in-fact to manage the affairs of their principal and, thus, avoid guardianship or custodianship in many cases. Powers of attorney avoid the publicity, delays, expense and the need to obtain court approval for actions taken under the power.
Springing Powers of Attorney
Springing powers of attorney are durable powers of attorney that become effective in the future, including possibly after the principal has become disabled.
REVOCABLE ("LIVING") TRUST
Advantages of Trusts -
A trust can do a lot of what a Will does and more. A Revocable ("Living") Trust created by you during life, can provide management of assets during your life and during any period of disability during your life (for example, medical trauma from a serious automobile accident or advanced senility) and provide for orderly distribution of your assets after your death, all without a probate court and many of the fees and costs associated with probate. The trust is flexible and remains largely a private document unavailable to the general public. In addition, the trust can provide significant tax savings with respect to federal and state transfer taxes. A well designed trust can provide for spouses, children and other descendants, descendants with special needs, and gifts to friends and charities. A Revocable ("Living") Trust protects you while you are alive and after your death.
The advantages of trusts can be listed as follows:
Lawyers classify trusts in several ways. One method to classify trusts is whether they are created during the Settlor's (person who creates a trust) life or in the Settlor's Will. If they are created during the Settlor's life, they are referred to as 'inter-vivos' trusts or as 'Living Trusts.' If they are created in the Will, they are referred to as testamentary trusts. Another classification is whether at the time of creation, the instrument allows the trust to be revoked or amended. If they can be revoked by the Settlor, they are referred to as 'revocable' trusts; if they cannot be revoked by the Settlor, they are 'irrevocable trusts.'
Trust law has evolved significantly in the last few years and some trusts now contain provisions for 'amending' trust agreements even after the Settlor has died. These provisions sometimes are referred to 'Trust Protector' provisions. Typically the family attorney is named and has power to amend the trust for certain, limited purposes such as tax savings or to conform the trust to the requirements of current, state trust law. In addition, certain types of trusts may be 'irrevocable' for purposes of state trust law, but for purposes of federal tax law contain provisions which make them taxable as 'revocable trusts.' Irrevocable trusts which are taxed as ‘revocable trusts’, can provide income tax savings for the family.
IRREVOCABLE LIFE INSURANCE TRUSTS
Life insurance proceeds are generally non-income taxable to beneficiaries. The other side of the coin is that generally the face value of life insurance is includible in your estate if you have any rights of ownership such as power to change the beneficiaries or borrow from the policy. (The payout from the policy may be deductible if the beneficiary is your spouse.)
A life insurance trust takes advantage of the loophole. If you allow a trust to buy the policy or own the policy on your life, the proceeds of the policy are not included in your taxable estate even if you give the trust the money to pay the premiums.
There are, of course, pitfalls for the unwary. The trust is irrevocable. You cannot get the money back.
The money given to the trust for premiums must be gifts of a present interest. This sounds complicated but it works like this. Each person can give $10,000 annually (now indexed for inflation) to any number of recipients. The trust and gift to the trust must allow the ultimate trust beneficiaries the right to take the $10,000 out of the trust for a limited period of time, say 30 days. If there are 3 ultimate trust beneficiaries, you could give up to 3 x $10,000 per year to the trust to cover the premiums. The assumption is that the 3 ultimate trust beneficiaries will not utilize their right to take their allotted $10,000 and will leave the money in the trust. This right is called a Crummey Power after a court case so named.
In addition, federal tax law provides that transfers of existing policies made within 3 years of the date of death of a decedent will result in the face amount of the policy being pulled back into the taxable estate of the decedent. The result is that if you die within 3 years of the transfer of the policy, the policy is included in your taxable estate.
Gift trusts utilize your available annual exclusion to fund an irrevocable trust without using your applicable exclusion amount (the effective amount shielded from federal estate tax by life-time federal estate tax credits). The following example explains how it works (the annual exclusion is assumed to be the former $10,000 annual exclusion prior to indexing for inflation):
Mr. and Mrs. Brad Jones have 2 children, Matt and Courtney. Mrs. Jones has a mother, Sylvia Brown, who is still living and her brother, Rob Brown. Mrs. Jones' Spousal Gift Trust is created the first year. The trustees are Mrs. Jones, Matt and Rob. Named as beneficiaries are her spouse, Brad, her two children, Matt and Courtney, her mother, Sylvia, and her brother, Rob.
Mrs. Jones can give her spouse $10,000, and Mr. and Mrs. Jones give joint gifts of $20,000 to each of the other beneficiaries (Matt, Courtney, Sylvia and Rob). This results in gifts of $90,000. The gifts transferred to the Gift Trust are under the terms of a Crummey Power, which allows each of them to withdraw their $10,000 for a period of 30 days. This qualifies the gifts as ones of a present interest and, thus, none of the gifts are subject to gift tax (but are qualifying annual exclusion gifts).
In addition, the trust has the following features. It provides that the Settlor, Mrs. Jones, can substitute property of substantially equivalent value and transfer such property to the trust and withdraw the equivalent property. Also, Mrs. Jones can borrow from the trust without collateral. These two provisions qualify the trust as a 'grantor trust' under the Internal Revenue Code and the trust will not be subject to income tax during the life of Mrs. Jones (as long as she does not give up her right to substitute property or borrow without collateral).
The trust also provides that a 'Trust Protector' may amend the trust in certain circumstances such as to achieve certain tax savings or to comply with state law. The trust also provides that Mrs. Jones will provide the trustees (in this case herself, her son, Matt, and her brother, Rob) with investment advice as a Trust Investment Adviser.
Each year the family can transfer a similar amount to the trust, transfer tax free. The trust will continue to grow income tax-free because the income tax on the trust property is paid by Mrs. Jones individually and not by the Spousal Gift Trust. All of the trust property's appreciation will grow and will not be subject to estate tax in Mrs. Jones federal taxable estate, nor will any of amounts so contributed to the trust as annual exclusion gifts includable in the federal taxable estate. In addition, the trust, since it is irrevocable under state law, the trust assets will be accorded asset-liability protection.
Observe what has happened: The Jones have gotten $90,000 out of their taxable estate, have the property accorded asset-liability protection, Mr. Jones is a beneficiary (in the event he would need assistance for health, support and maintenance), the trust may still be amended in certain circumstances, and Mrs. Jones, as Trust Investment Adviser, still determines how the money is invested during her life. At her death the money can be retained in trust for their children and their children's descendants.
Dynastic Trusts operate similarly to Gift Trusts (they are irrevocable, are 'Grantor Trusts' for trust income tax purposes, have Trust Protector provisions providing the family attorney the right to amend the trust in certain limited circumstances, a trust Investment Advisor allowing the trust settlor (creator) to continue to determine investment decisions).
The difference between Dynastic Trusts and Gift Trusts are as follows: Dynastic Trusts are not funded by annual exclusion amounts but with amounts that are covered by both the life-time credits for gift/estate tax and by the life-time exemption amount from the Generation Skipping Tax. The consequence of this type of funding is that amounts which are ultimately distributable from the Dynastic Trust will always be transfer tax-free. In addition, Dynastic Trusts are always set up in a state which has abrogated the common law 'rule against perpetuities' which allows the trust to remain in existence forever. The English common law 'rule against perpetuities' limits trusts' existence to 'lives in being plus twenty-one years.' In operation it is a very complicated rule whose interpretation varies from jurisdiction, but serves to severely limit the time in which a trust can exist.
A dozen states have repealed the rule against perpetuities. They include Missouri, South Dakota, Delaware, Maine, Alaska, Ohio, Illinois, Arizona among others.
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