Hawaii Estate Planning Blog

ANSWERS TO FREQUENTLY ASKED QUESTIONS ABOUT ESTATE PLANNING

This memo answers some important questions about basic estate planning.  This discussion is very general.  The idea is just to give you the big picture.  Also, please bear in mind that the law changes from time to time; what is true one week may not be true the next—particularly if Congress is in session.  (As one wise guy put it, if “pro” is the opposite of “con,” what is the opposite of “progress”?) 

What is a trust? 

A trust is the legal relationship that is created when a person transfers “stuff” to a trustee with the understanding that the trustee will manage it for the benefit of one or more beneficiaries.  We use the term “stuff” to mean any kind of property you can own.  It includes both real property—such as land and buildings—and personal property—such as bank accounts, stocks and bonds, and personal effects.  The person who transfers the stuff to the trustee is called a trustmaker.  This person is also known as a settlor, grantor, or trustor.  Usually, the trustmaker is also the trustee (or perhaps co-trustee) and the initial beneficiary of the trust.  For the reasons explained below, a married couple will usually want to create two revocable living trusts instead of just one.  It is not uncommon for husbands and wives to be the co-trustees of both of their trusts during their joint lifetimes, and then, after the death of one spouse, to have the survivor serve either as sole trustee or co-trustee with one or more other individuals or a trust company.

A trust is controlled by a document called the trust agreement (sometimes called the trust instrument).  The trust agreement sets out the rules about how the trust will be run.  We often refer to a client’s set of estate planning documents as their “rule book,” and the trust agreement is the part of the rule book that controls the trust.

If the trust agreement says that the trustmaker can revoke it or change it, the trust is what we call a revocable trust.  If the trust agreement does not allow the trustmaker to change or revoke it, we have what is called an irrevocable trust.  Irrevocable trusts are also used in many estate plans.  They allow trustmakers to make gifts but keep the recipients from having complete control over the gifted assets.  Irrevocable trusts play an important part in many estate plans.  They can help provide tax savings, creditor protection, and expert management of assets.

A living trust is one that you create and fund (transfer stuff into) during your lifetime.  It can be revocable or irrevocable, depending on how much control you want to maintain over the trust and its assets.  A revocable trust gives you complete control, whereas an irrevocable trust gives you limited or no control.  A testamentary trust is one that goes into effect and is funded following your death because it is governed by your last will and testament.

Will I lose control of my assets when they are transferred to the trustee?

NOT IF YOUR TRUST IS REVOCABLE.  The trustee is bound by the trust agreement.  You have final say over what the trust agreement says, and failure to abide by the trust agreement can make the trustee personally liable to the beneficiaries, including yourself.  This means that if the trustee messes up, that person may have to pay for the mess out of his or her own pocket.  Most often, the trustmaker of a revocable living trust is the initial trustee.  In that situation, the trustmaker does not have to worry about anyone questioning his or her management of the trust for two reasons.  First, the trustee is usually granted very broad discretion to favor the trustmaker as the initial beneficiary.  Second, the trustmaker of a revocable living trust has the power to amend the trust agreement or to revoke the trust and get the trust assets transferred back into the trustmaker’s name.  Thus, no one else is in a very good position to challenge what the trustmaker/trustee does with the trust.  In fact, potential beneficiaries have a vested interest in not doing anything that might cause the trustmaker to revoke the trust or change the trust agreement in order to exclude a troublemaker.  This is a simple demonstration of the “golden rule” of estate planning:

      The One who hath the Gold maketh the Rules

If your kids are good kids, they won’t stick their noses into what you do with your trust.  If they are bad kids, hopefully they are smart kids and will at least act like good kids as long as you’re alive because they won’t want to be disinherited.  If you do not have any children—or don’t have any that you like—don’t assume that revocable living trusts are not a good idea for you.  There are many good reasons for creating trusts, and some of them may apply to your situation.  One reason that many people create revocable living trusts is so that their stuff will not go through probate after they are gone, or through conservatorship if they become incapacitated.

How does a revocable living trust avoid probate?

Once assets are transferred to the trustee, the trustmaker no longer holds legal title to them—even if the trustmaker and the trustee are the same person.  Thus, if the trustmaker dies, the trust continues, and the successor trustee (who is named in the trust agreement) takes over administering the trust.  Since a trust can’t die the same way a person can, the trust assets will not be subject to probate upon the trustmaker’s death.  Title to the trust assets simply remains in the trust, and the trust agreement tells the successor trustee (that is, whoever the trust agreement identifies as next in line to serve as trustee) exactly what to do with them.  Any assets not transferred to the trustee, however, will be subject to probate upon the trustmaker’s death.

What is probate, anyway?

Probate is the court proceeding to transfer a dead person’s assets to the people who are supposed to get them.  Simple in concept, but humbug in practice.  Probate can easily take a year or more to complete, and the attorneys’ fees and other costs associated with probate could easily eat up 5% or more of a decedent’s gross estate.  (“Decedent” is lawyer talk for someone who has assumed room temperature—i.e., a “dead person.”)  If a decedent owned assets located in more than one state or country, it may be necessary to have a probate in each jurisdiction where the decedent’s assets are located.  If one probate is bad, you can bet that more than one probate is worse.  In almost every case, probate is an awfully good thing to avoid.

In addition to the money and time that probate can consume, another reason people try to avoid probate is that the court’s probate files are public records.  Nosy people can go through the court’s probate files and gather all kinds of information that may be profitable to them—and detrimental to decedents’ families.  This is a growing concern, especially as we see more and more cases of identity theft.

What other benefits do revocable living trusts provide?

A revocable living trust can avoid a conservatorship proceeding (sometimes called a “living probate”) in the event the trustmaker loses the ability to handle assets.  Ordinarily, if a person becomes incompetent, a court must appoint a conservator to administer the person’s assets on his or her behalf.  The conservator must then account to the court every year or so, and the whole conservatorship process can end up being extremely costly and time consuming.  Not only that, but the documents in the court’s file are a matter of public record.  Think about it.  If you were to become incapacitated (and you currently have more than a 50-50 chance of doing so), anybody who so chooses could go down to the courthouse and find out personal information about you (such as the specific diagnosis of your incapacity).  Even worse, that person can find out information about your assets and your family members that would best be kept private.  On the other hand, if your assets had been held in trust, upon your incapacity the successor trustee could have stepped in—without court action—and picked up the administration of the trust where you left off.

Trusts also allow you to have control over your estate even after your death.  If one of the beneficiaries of your trust after your death is a minor, you will want your trust to hold on to that beneficiary’s share of your estate until the beneficiary reaches the age when you believe he or she will be mature enough to handle it.  Think back to when you turned 18.  What would you have done if all of a sudden you had more money than you knew what to do with?  Would your little munchkins do any differently?  If you don’t plan for that possibility, you could be setting up one of your loved ones to blow his or her inheritance.  If this does not appeal to you, your trust agreement could provide, for example, that the share of any beneficiary under the age of 25 will stay in trust until the beneficiary turns 25.  In the meantime, the trustee can make distributions to or for the beneficiary, but the beneficiary cannot demand that any distributions be made until he or she turns 25.

There is no magic to the age of 25; you could postpone a beneficiary’s control over his or her inheritance to any age you wish.  You could also use an event besides a birthday to trigger a distribution from your trust.  For example, your trust agreement could call for a distribution when a child either turns 25 or graduates from an accredited college or university, whichever happens first.  You could also have the trust assets distributed to a beneficiary in increments—say a third of the trust principal at age 25, half of the remaining assets at 30, and the rest at 35.  You could even set out different terms for each beneficiary.  One beneficiary might be quite capable of handling an inheritance at the age of 21, whereas another might never have that ability.  You can tailor your trust agreement to include appropriate provisions for each situation.

Many clients choose to leave children’s inheritances in trust during the children’s entire lifetimes to provide them with creditor protection and to avoid estate taxation upon their deaths.  Depending on how much control the trustmaker wants to give a beneficiary, the trust agreement can (but does not have to) say that each beneficiary gets to pick the trustees of his or her individual inheritance trust, and each beneficiary can be given the power to say where his or her remaining trust assets go when the beneficiary dies.  Thus, the beneficiaries can be given virtually all of the control of outright ownership, while at the same time being spared two important disadvantages of outright ownership:  vulnerability to creditors and susceptibility to predators.  If the trusts are set up and administered correctly, most creditors (including ex-spouses) and questionable characters can be prevented from walking away with your children’s inheritance.  If that wasn’t good enough, consider this:  the trust assets will not, at your children’s deaths, be counted as part of their estates and subjected to estate tax.  Even the IRS goes away disappointed.  The technical term for this kind of trust is a “generation-skipping trust.”  Children are understandably suspicious of the name, but they are not actually skipped—unless you want them to be.

Revocable living trusts can also be used to provide incentives for beneficiaries.  For example, you could say in your trust document that the Trustee will make distributions to a beneficiary only if he or she earns a college degree.  Another type of incentive provision might be that the Trustee will match the income earned by the beneficiary, as evidenced by the W-2 forms provided by the beneficiary’s employer for income tax purposes.  The point is that your trust can cover a vast array of different situations.  You are limited only by your own creativity and that of the professionals who help you design your trust.

Do I have to do anything to make my trust “work”?

Remember that the trust agreement will govern only those assets which you actually place in your trust.  The process of putting property into your trust is called funding.  If you have a trust but fail to fund it fully by placing all of your assets in it, whatever assets remain outside the trust upon your death or incapacity may be subject to probate and/or conservatorship proceedings.  Funding is simply a matter of changing title to your real estate, your bank accounts, and whatever else you own so that it is held in the name of your trustee.  Usually, your attorney will prepare the deeds for your real estate and can help with transferring the rest of your assets.  If you want, you can handle a good part of the funding yourself and possibly save yourself some legal fees.  You just have to make sure that the funding is done correctly.  If you are going to pay your lawyer to double-check your funding, it might make sense to have your lawyer take care of it in the first place.

If I have a revocable living trust, do I still need a will?

YES.  First, what if you fail to have all of your assets transferred into your trust before your death?  This could happen for a variety of reasons, some of which are beyond your control.  Unless you have a so-called “pour over will” (one that says “please put everything into my trust”), your non-trust assets will pass according to whatever law is in effect for people who do not have wills.  Dying without a will is called dying intestate.  The laws that govern how an intestate estate is passed on to the decedent’s survivors are called intestate succession statutes.  The intestate succession statutes that cover your estate may actually frustrate your overall estate plan by requiring that assets pass in ways that you would not want them to pass.  Also, remember that each State in the Union has its own intestate succession statute, so if you have assets in more than one State, different rules may apply to different assets.  So why not go for the certainty of having a safety net to catch your non-trust assets and pour them into your trust?

Another reason to have a will even if you have a trust is that your will is where you typically name guardians for minor children (or incapacitated adult children or an incapacitated spouse).  If you fail to name a guardian, the Court will pick somebody, and that somebody may not be your first choice.  Your will also names your personal representative (also known as an executor), who is the person who will deal with claims by or against your estate.  There may be no need for a guardian or a personal representative to be named after you are gone, but nobody will know that until after you are gone; and then it will be too late to do anything about it.  Again, why not go for the certainty of stating your choice rather than leaving these important matters to chance?

Will a revocable living trust help to avoid taxes? 

In and of themselves, trusts do not avoid estate taxes, but they help to carry out good estate tax planning.  As far as income taxes go, revocable living trusts are “tax neutral.”  During your lifetime, your trust will not need to file its own income tax returns.  The taxpayer identification number for your trust is your Social Security Number, and you simply report all trust income on your individual Federal and State income tax returns. 

What is the current status of the estate tax?

The federal estate tax has been in flux since 2002, and Congress has yet to agree on a form of the tax that will be somewhat predictable for the indefinite future.  As of January 1, 2012, a 35% tax is imposed on all estates valued at more than $5,120,000.  It is as if Congress gave each of us a coupon that our loved ones can use to shelter the first $5,120,000 worth of our assets.  Quite clearly, the coupon as it now stands is big enough to protect most estates from the estate tax. 

If you are waiting for the other shoe to drop, here it is:  unless Congress does something to make the size of the coupon permanent (at least, as “permanent” as tax rules ever are), on January 1, 2013, the coupon will drop down to $1,000,000, and the tax rate will jump up to 55%.  It is difficult to say whether Congress will allow that to happen, but the current state of our economy and the runaway federal budget deficit do not give us much reason for optimism.  Now, more than ever, it is important to establish a plan to minimize the potential tax bite that awaits, and to keep your estate plan current.  People with larger estates should consider ways of using all or part of their coupons as soon as possible, before Congress either reduces them or sits on their hands until the scheduled changes (i.e., the drop in the coupon and the explosion of the tax rate) take effect.

Once my spouse and I set up our trusts, how should we hold title to our assets?

We recommend that assets be split between two revocable living trusts, one in the husband’s name and the other in the wife’s.  You should not be concerned that you will lose control over those assets, as husband and wife can be co-trustees of both trusts.  Alternatively, they can also be the sole trustees of their respective trusts, if they prefer. 

Splitting the assets may seem unusual to you, since it is very common for married couples to own all of their assets jointly.  Holding assets jointly makes a great deal of sense on one level, since joint tenancy assures that, at the death of the first spouse to die, title to the joint assets will vest in the survivor without probate (by virtue of the way title is held) and without tax (by virtue of the unlimited estate tax marital deduction).  However, in many cases, joint tenancy is a trap waiting to be sprung.  It makes you lose the opportunity to build significant tax and asset protection components into your estate plan, and it sets up the surviving spouse’s estate for probate. 

Can a married couple own assets in a way that protects from creditors?

Yes.  Among other things, a married couple can protect assets by holding property as tenants by the entirety.  Notwithstanding all the bad stuff we just reviewed about joint tenancy, there is a very special kind of joint tenancy between spouses which has important benefits.  It is called tenancy by the entirety.  Among the characteristics of property owned in tenancy by the entirety are that:  (1) one spouse, acting alone, cannot convey any interest in the property (in other words, both spouses have to sign a deed in order to transfer the property to someone else); (2) the property automatically passes to the surviving spouse upon the death of the first to die; and (3) the creditors of one spouse cannot reach tenancy by the entirety property.

The latter characteristic was defined in the Hawaii Supreme Court case of Sawada v. Endo, 57 Haw. 608, 561 P.2d 1291 (1977).  In that case, the defendant, Mr. Endo, had been involved in a car accident; he was sued, and a judgment requiring him to pay money to the plaintiffs was entered against him.  At the time of the accident, Mr. Endo and his wife owned their home as tenants by the entirety.  When the plaintiffs tried to force the sale of the Endos’ home in order to collect their judgment, the court refused to allow them to do so.  The court reasoned that, since one spouse, acting alone, cannot convey away an interest in tenancy by the entirety property, the creditors of one spouse cannot satisfy their claims out of such property.  The court said that

by the very nature of the estate by the entirety as we view it, and as other courts of our sister jurisdictions have viewed it, “[a] unilaterally indestructible right of survivorship, an inability of one spouse to alienate his interest, and importantly for this case, a broad immunity from claims of separate creditors remain among its vital incidents.”

Sawada v. Endo is actually a bit more convoluted than explained above, but the bottom line is that the case upholds a very important benefit of tenancy by the entirety – creditor protection.

Can my spouse and I own property as tenants by the entirety in our trusts?

Yes, you probably can by including language in your trust agreements that is designed to preserve the protections afforded by tenancy by the entirety.  One implication of Sawada is that, when spouses divide their property between their trusts, they may lose the creditor protection afforded by tenancy by the entirety.  If one spouse were to have a car accident or a business setback or otherwise incurred substantial debt, the property in that person’s trust might be subject to creditors’ claims.  This result might have been avoided if the couple had held all of their property in tenancy by the entirety.  Thus, there may be a serious downside to dividing tenancy by the entirety property between a husband’s and wife’s trusts.  Accordingly, if you transfer tenancy by the entirety property into your trust, you should try to preserve the kind of protection afforded by tenancy by the entirety through provisions in your trust agreement that track the spousal rights inherent in tenancy by the entirety. 

Is there a downside to tenancy by the entirety?

We offer TWO WARNINGS about tenancy by the entirety:

First, tenancy by the entirety protects assets only against creditors who are unknown, and whose claims are not clearly foreseeable, at the time that the tenancy was established.  You cannot put assets into tenancy by the entirety after a debt or liability arises and expect those assets to be safe from being consumed by the debt or liability.  

Second, the creditor protection afforded by tenancy by the entirety can backfire if the non-debtor spouse dies first.  In other words, if you have a huge debt, the person you owe money cannot get at property you hold in tenancy by the entirety with your spouse, but only as long as your spouse is alive.  If your spouse should die before you, you would end up as sole owner of the (formerly tenancy by the entirety) property, and your creditor would be in a position to try to take it away from you.

Can I own assets other than my home in tenancy by the entirety?

Hawaii law allows you to hold any kind of property in tenancy by the entirety—not just real estate.  Thus, if tenancy by the entirety protection is appealing to you, you can probably use it to shelter a lot more than just your house from potential creditors.  The reason we say “probably” here is that a recent Bankruptcy Court decision indicated that tenancy by the entirety protection, for bankruptcy purposes, may extend only to a primary residence.

What about protecting my other beneficiaries?

In an age of a 50% divorce rate and liability seemingly waiting around every corner, it makes sense to wonder whether the things you leave behind to children, grandchildren, and other beneficiaries might be snatched away from them.  Trusts are very effective in protecting your loved ones in these situations.

One approach is for your trust agreement to provide that, after you are gone, your trust divides up into as many trusts as you would like.  In other words, rather than passing assets to your beneficiaries, you pass them trusts that contain the assets.  This way, you can achieve significant creditor protection without sacrificing the beneficiaries’ enjoyment of their inheritance.  The beneficiary for whom each trust is created may be given the power to choose the trustee of his or her trust, and each of them can be given a certain amount of discretion as to when and whether to withdraw assets from his or her trust.  When each beneficiary dies, he or she can have the power to direct where the assets go, or, if the power is not exercised, your trust agreement can say that the assets go to that person’s children. 

Is there a kind of trust will protect my assets from my own creditors?

Yes.  As of July 1, 2011, Hawaii law allows you to create an asset protection trust that will keep your creditors at bay.  There are very specific rules that govern these kinds of trusts, and those rules must be followed carefully.  However, if you create and fund one of these trusts at a time when you do not have any creditors nipping at your heels, that trust can prove to be a very effective means of protecting whatever is in the trust.  These trusts provide a variety of other important features that can make them very attractive in the right situation.

How to Deal the Family Vacation Home in Your Estate Plan

If your assets include a vacation property that you want to preserve for your descendants, there are some steps you can take to maximize the chances that the property will stay in the family and will not become a bone of contention.  It almost always makes sense to hold such an asset in an entity for creditor protection and ease of management.  The same kinds of considerations may go in to passing on the family homestead.  Check out what the Wall Street Journal has to say here.

For more information about estate planning in Hawaii, you can look here.

A New and Powerful Estate Planning Tool: the Hawaii Asset Protection Trust

Two years ago, Hawaii joined Delaware, Nevada, and eleven other States in validating “self-settled spendthrift trusts.”  What this means is that you can now create a trust for yourself that will protect your assets from your own creditors.  This is a huge departure from prior law, which expressly prohibited such trusts.  For convenience, we will call them “APTs,” which stands for “Asset Protection Trusts.”

Not only do APTs provide asset protection, they can also be made to last “forever,” or at least until all of the assets are used up.  Hawaii law has long recognized something called the “rule against perpetuities,” which essentially says that a private trust (that is, any trust other than a charitable trust) can last for about 100 years, and then the trust must to terminate, and the assets must be distributed.  This is a throwback to the law of England (where most American law comes from) and a time when the king did not want land being tied up in trusts because it impaired his ability to tax it.  Now that our government has developed a solution to this problem, Hawaii has joined the ranks of States which allow the creation of so-called Dynasty Trusts.

Hawaii’s first attempt at allowing APTs, which was back in 2010, was doomed to failure.  For one thing, the law imposed a 1% tax on all assets transferred to APTs.  The law also limited the kinds of assets that could be put into APTs, and it allowed a trustmaker (someone creating an APT) to place assets comprising no more than 25% of his or her net worth into an APT.  Since the laws of other States did not include these restrictions, there was very little incentive for someone to create a Hawaii APT.

In 2011, our Legislature removed the restrictions on APTs, so that a person can place any kind of property into his or her APT, and there is no 1% tax imposed on each asset transferred into the trust.  The new law became effective on July 1, 2011, and Hawaii APTs are now viable tools in many people’s estate plans.

A Hawaii APT is not for everybody.  You should create one only if you understand what it is and how it works, and before you do anything else, you should seek the assistance of competent legal counsel and other advisors who can help you evaluate whether this is a workable strategy for you.

The new Hawaii law says that you cannot be the trustee of your own APT, but you can pick any Hawaii resident or Hawaii financial institution as your trustee.  The trustee can have the discretion to make distributions to you or for your benefit, but you cannot have the unfettered right to demand whatever you want whenever you want it.  You can also retain the right to give the trustee investment advice, and you can also have the right to veto distributions from the trust.

Perhaps the most important thing to understand about Hawaii APTs is that they do not shelter assets from claims of existing creditors.  In other words, you cannot incur a debt (for example, by way of a car accident or a bad business deal) and then create a Hawaii APT to shield your assets from liability on that debt.  On the other hand, the ideal time to create a Hawaii APT is BEFORE you need one.  Before you start a new business or launch a professional practice in a field such as medicine, law, or architecture, where legal claims against you are an ongoing risk.

You can find additional resources and links to information here.

Al Davis, RIP

Oakland Raiders owner and former head coach Al Davis is famous for a lot of things, including his quote, "We don't take what the defense gives us; we take whatever the hell we want."  Mr. Davis has gone on to his eternal rewards, leaving his family to face an adversary that is more intimidating than the Raiders in their glory years.

Forbes Magazine recently reported this:

The estate of Al Davis could potentially face big inheritance taxes on the Oakland Raiders.

Al Davis, who died today, bought a 10% interest in the Oakland Raiders for $18,500 in 1966 and increased his stake to 67% over the years before selling 20% of the NFL team for $150 million in 2007. The Raiders are currently worth $761 million by our count. Thus the late owner’s wife, Carol and his son, Mark, who has been involved in some business aspects of the football team but is not listed in the team’s media guide, could be facing hundreds of millions of dollars of taxes based on the price appreciation of the Raiders.

Estate tax law can get complicated and you can buy insurance for estate taxes. The basics are that for 2011 and 2012, the federal estate tax exemption is $5 million and the estate tax rate for estates valued over this amount is 35% (the estate tax is unified with federal gift and generation-skipping transfer taxes such that the lifetime gift tax exemption and generation-skipping transfer tax exemption is $5 million each and the rate for both of these taxes is 35%).

This could make keeping the Raiders in the Davis family very difficult as it is not believed the family has that type of money. The rapid price appreciation of NFL teams has been a factor in forcing families to sell teams to deal with the tax liabilities. In the mid-1990s the Robbie family sold the Miami Dolphins to cover tax liabilities after Joe Robbie died. And last year minority St. Louis Rams owner Stan Kroenke bought the controlling interest in the team from the children of majority Rams owner Georgia Frontiere after she died in 2008 to cover the family’s estate taxes.

The bet here is that the Raiders will be sold within the next 12 months. I hear Eddie DeBartolo, the former owner of the San Francisco 49ers, has been sniffing around.

You can access the article on the Forbes website by clicking here.

Most of us don't have to worry about protecting hundreds of millions worth of assets from the IRS and opportunistic business rivals, but the good news is that there are strategies available to all of us to minimize taxes and maximize the benefits we can pass on to our loved ones.  If you are willing to do what it takes, estate taxes are completely optional.  Even when you are up against the IRS, there are ways to, in Mr. Davis' immortal words, "Just win, Baby!"

From the Shameless Self-Promotion Files

Scott Makuakane of Est8Planning Counsel LLLC is the featured expert on probate & estate planning, asset protection, disability planning, elder law, and wills & trusts on the new HawaiiLaw.TV website.  The website is a joint effort of a national network of law information websites called TheLaw.TV and local TV station KITV. 

Doing Well and Doing Good with Charitable Remainder Trusts

The idea of giving to charity would seem to be simple, but the simple methods aren’t always the best ones. Sometimes a bit of financial finesse can go a long way toward helping both your charity of choice and your own finances.  There is nothing wrong with “doing well by doing good.”

If you want to be a tax-savvy philanthropist, consider using a time-honored strategy known as a “charitable remainder trust” (CRT). The Times-Herald Record of Middletown, NY, recently offered a crash course on CRTs in their article, “Protecting Your Future: Trust option for leaving assets to charity.”

A CRT allows you to give assets to charity in a manner that may provide an income stream that helps both you and your charity of choice.  When the CRT is established, the assets you’ve chosen to donate are transferred to the trust.  If appropriate, the charity you’ve chosen can be the trustee, and it can manage the assets.  On the other hand, it is not uncommon for a community foundation or other professional fiduciary to serve as trustee.  Either way, you and your chosen beneficiaries will receive an income stream for life or for a term of years that you choose when you create the CRT, and then the charity receives the remainder of what is left in the trust.  You can choose a variety of payout options, depending on whether you want a fairly certain return, or whether you are willing to accept the risks--and benefits--of variations in the value of the trust assets.  You can even reserve the option of switching charities or naming additional charities to benefit from your CRT after you are gone.

This strategy works best when the underlying assets are highly appreciated, have a low basis in the donor's hands, and do not produce significant income.  The trustee of the CRT sells the donated assets and invests them to create an income stream for the donor.  The trust principal is not reduced by capital gains tax on the proceeds of the sale.  On the other hand, if the owner of the assets had simply sold them, there would be capital gains tax to pay, which would reduce the amount that the owner could invest in income-producing assets.  With the greater amount of principal in the CRT, the donor can enjoy a larger income stream than would be the case if he or she opted against the CRT.  In other words, by using a CRT, the donor benefits from with a bigger asset base for generating income than would be the case if the donor sold the assets, paid the tax, and invested the difference.

Of course, your family members may not be too happy to see the remaining CRT assets going to charity instead of to them when you die, but you could consider using a portion of the income stream from the CRT to purchase a life insurance policy which might replace the value of the assets that go to charity after your passing.

You can learn more about charitable trusts in the Charitable Planning Practice Center on our website, and in the September 2010 issue of our estate planning newsletters, “Charitable Opportunities.”  (The link to the newsletter is a little slow, so please be patient.)

 

Easy come . . . easy go. Would my beneficiaries behave differently?

Receiving an inheritance can be like winning the lottery.  What could be wrong with that?  Ask these lottery winners.

Callie Rogers, age 16, won $3.1 million in a British lottery.  By the age of 22, the unwed mother of two, having attempted suicide twice, and having spent over $400,000 on cocaine alone (in addition to more conventional luxuries), was broke, living with her mother, and working three cleaning jobs.  She described her sudden windfall as having ruined her life, and she was looking foward to finding happiness once her winnings were gone.

American Willie Hurt also won $3.1 million, but in the 1989 Michigan Lottery.  Two years (and a great deal of crack cocaine) later, he was not only broke, but had lost his marriage and custody of his child, and was facing attempted murder charges.

William "Bud" Post won $16.2 million on the Pennsylvania Lottery in 1988.  Within five years of his windfall, he cursed the day it happened.  According to the Washington Post, "his problems included a brother who tried to hire a contract murderer to kill him and his sixth wife; a landlady who forced him to give her one-third of the jackpot; and a conviction on an assault charge," after he had fired a shotgun at a bill collector who came to call at his deteriorating dream home.  By the time he died in 2006, Mr. Post had gone from scooping up annual lottery payments of $497,953.47 to scraping by on $450 per month in disability compensation.

Jack Whitaker won the largest Powerball payout in history.  It took him only four years to blow through $113,386,407.77 (after taxes) in 2002 West Virginia Lottery winnings.  By his own estimate, he gave away $14 million to his church and other charitable causes, but he went from being a well-dressed, successful businessman to being a slovenly strip club patron who didn't care whether husbands or boyfriends were nearby when he offered women money for sex.  His impact on the lives of his loved ones was even more tragic.  He started out with the best of intentions when he made lavish gifts to the apple of his eye, his granddaughter Brandi.  She, unfortunately, spent her new-found wealth on everything but what her grandfather would have wanted.  Her riches financed a trip in the fast lane down the road to drug addiction with several hangers-on in tow.  One of them was found dead of an apparent drug overdose in Whitaker's mansion.  Ultimately, Brandi ended up dead under circumstances that pointed to murder.

So what will your loved ones do with what you leave behind for them?  The above examples are extreme, but they show how a sudden windfall can quickly turn from a blessing into a curse.  The lesson applies to all of us, when you consider that a life can be ruined over far less than those unfortunate lottery winners received.  But dumping boxes of cash on your beneficiaries is not your only option. 

Rather than give your loved ones direct access to what you leave behind, you can give them their inheritance in trusts, administered by people or institutions who will provide good judgment and wise guidance.  Those trusts can contain provisions to protect your beneficiaries from bad habits, opportunistic friends and family members, and their own lack of wisdom and experience.  You can even add a variety of conditions to your gifts.  You can condition distributions from trusts upon such things as the beneficiary's passing a drug test, holding a steady job, or staying out of jail.  You can also impose positive conditions, such as directing your trustees to make larger ongoing distributions to beneficiaries who are maintaining a certain grade point average or meeting other standards of achievement.

Your legacy deserves to be passed on in a way that will genuinely benefit your loved ones.  Sometimes that takes "adult supervision" (even for people who are over the age of 21), and sometimes it takes a little bit of delayed gratification.  There's no harm in being creative about how you achieve your estate planning goals.  For some ideas, consult your trusted advisors and people who have been on the giving and receiving end of large gifts.  Our website, www.est8planning.com, provides additional guidance.

 

Fundamental Estate Planning

No one enjoys a conversation about death.  And, with the estate tax exemption now set at $5 million for an individual and $10 million for a couple, many people may believe they have no reason to consult an attorney about their estate planning.  But avoiding the topic of estate planning can mean unnecessary expense, confusion and conflict.

SmartBusiness last week highlighted the fundamentals of a “well-thought-out estate plan,” with topics that everyone should consider – whether prince or pauper.

• Why do you need an estate plan?  A comprehensive estate plan ensures that your estate will distributed according to your wishes, provides protection for yourself in the event of your own disability, and allows you to plan for minor children, pets, and charitable causes.  You can also make sure that the assets you leave behind will be there for your intended beneficiaries - and not their creditors or ex-spouses.
• Can I write my own will?  You certainly can, and there are many online sites to help you do so! However, remember that you get what you pay for.  Improperly drafted or last-minute, hand-written wills frequently are contested and invalidated in court.  If you don’t know what you’re doing, the outcome could be much different than what you expect.
• What should every estate plan have?  SmartBusiness recommends two powers of attorney and a living will.  That's not a bad start, but I would expand the list to include a will, powers of attorney for financial affairs and for health care, and an authorization to your physician to share your health-care information with your health-care agent.
• What about trusts?  Many people choose to create trusts, not only to reduce estate taxes, but also to help their heirs avoid probate.  Trusts also can help shield assets from loss to due to unforeseen circumstances, such as the bankruptcy, divorce, or lawsuits of your heirs.
• What mistakes do people tend to make in estate planning?  The writer points out two common mistakes: failure to plan for their personal effects, and failure to review and update their plans over time.  Reviewing and updating your estate plan is particularly important in light of the frequent changes that have characterized our estate tax law of late.  Although the estate tax "coupon" (the amount you can pass estate tax-free) is $5 million for the next two years, the coupon is set to go down to $1 million in 2013, and the estate tax rates are set to go from 35% to 55% at that time.  Another mistake that we see is failure to implement an estate plan by making sure all assets are properly titled.  Many people create trusts but then do not make sure that title to their assets is transferred into their trusts. 

You can learn more about comprehensive estate planning in the Fundamental Estate Planning Practice Center on our website.  You also may want to review the November issue of our estate planning newsletter, Are You Ready?, which focuses on how to get (and keep) your legal affairs in order.

Beware Bargain Estate Plans

The attorney’s ad tells you that you can get a “comprehensive estate plan” for $800.  Does that sound too good to be true?  It may be.  A bargain estate plan will be a waste of your money if it will not do what you need it to do.  Before you rush in, here are some questions to ask.  If you get a “yes” answer to every question, then maybe you have a real bargain on your hands.

1.      Will the attorney (not a secretary or paralegal) sit down with you for as long as it takes to get a thorough understanding of your situation and your objectives, and to educate you about alternative approaches you might want to consider?

2.      Once you decide on a plan, what will be included?  As far as documents, your plan should probably include one or more trust agreements, a pour-over will (for each spouse, if you are planning as a couple), durable power(s) of attorney, advance health-care directive(s), authorization(s) for your medical care providers to talk with your designated decision-makers and family members/loved ones, and documents to transfer your assets into your trust(s).  This last point is crucial.  Your estate won’t work unless title to each of your assets is reviewed and transferred as appropriate.

3.      Is the attorney experienced in estate planning (not every attorney is good at every area of law) and does he or she have a good reputation among people who would know a good estate planning attorney from a bad one?  One place to check is www.martindale.com.  You can go there to find out how an attorney is regarded by his or her peers.

4.      Will the attorney give you as much time as it takes to help you understand your plan and to answer all of your questions about it?  Most attorneys charge by the hour after the documents are signed, and they may not be all that generous with their time before you sign.  Find out how (or if) the attorney will charge you if you have questions after your estate plan is established.

5.      Will you meet with a paralegal or an attorney when it comes time to sign your documents?  You have the right to legal counsel at that time, which only a licensed attorney can give you.

6.      Are all costs included in the fee?  Don’t be surprised by “add ons” to your bill for such things as recording fees, notary fees, and photocopies.

7.      Will your estate plan include adequate provisions for you and your loved ones to address the possibility of someone being disabled or incapacitated?

8.      Will the attorney be looking out for your needs exclusively?  Some estate planners try to sell their clients investment and life insurance products, which raises a potential conflict of interest.  You have a right to an attorney who will be looking out for you.

9.      Will you have a means to get immediate access to your advance health-care directive?  If you need to go to the emergency room, or if you are hospitalized while you are travelling, will you have a way to have your advance directive available, short of carrying it with you everywhere you go?

10.  Does the attorney have a program in place to help you make sure that your estate plan will be kept current?  One thing you can be sure of is that things will change: the law, your assets, your health, and maybe even the list of people you would want making decisions for you and your assets.  If there is no program in place to help you make sure that your estate plan is kept up to date, it will be deficient within a year or two, and it is just a matter of time before it may do you and your loved ones more harm than good.

11.  Will the attorney or the attorney’s law firm be there to help you and your loved ones down the line, when someone dies or becomes incapacitated?

12.  Will working with this attorney give you the peace of mind of knowing you have done the best you can do by yourself and your loved ones?

Too many estate plans fail because of lack of understanding on the part of the clients, lack of implementing the plan (such as by making sure that assets that should be transferred into a revocable trust are actually transferred), and by lack of updating.  There is no point in investing money in an estate plan that you are not confident will work effectively when the inevitable or unexpected happens, such as death, incapacity, divorce, or other events that will rob your loved ones of their inheritance.

Check out www.est8planning.com for more information about working with caring attorneys to create an estate plan that will work for you and your loved ones.

IRA Do's and Dont's

If you have substantial assets in an IRA – whether a Roth or a traditional IRA – you’re wise to pay attention to how those assets might pass to your spouse or other loved ones in the event of your death. Christine Benz of Morningstar Advisors provides a small cache of common wisdom on the subject in the forms of “do’s and don’ts.”

What should you do with your IRA?

• Check with your estate planning attorney before naming your beneficiaries.  Remember, your beneficiary designations trump whatever might be in your will, so make sure your estate planning documents and your beneficiary designations work together.  An estate aplanning ttorney also can advise you on the most tax-efficient uses of your IRA assets and warn you about ill-conceived designations, such as naming a minor child or your “estate” the beneficiary of an IRA.
• Consider making a charity the beneficiary of your IRA.  Depending upon your situation, this could be a tax-savvy way of supporting your favorite cause.
• Consider whether you should convert a traditional IRA to a Roth account.  Again, depending on your individual situation, this could make your retirement assets work even harder for your heirs.

 Morningstar’s top list of Don’ts:

• Don’t fail to name beneficiaries for your IRA assets.  What happens if an IRA has no beneficiary designation at all? It all depends.  If that is not a good answer for you, then be sure you name a beneficiary.
• Don’t neglect updating your beneficiary designations after life-changing events.  Major life events, such as marriage, divorce, the birth of a child or the death of a loved one may require changes to your beneficiary designations.  Plan to review those designations on a regular schedule.
• Don’t name a minor child as the beneficiary of your IRA.  Minor children cannot be named beneficiaries of life insurance policies, retirement plans, or annuities.  If you’d like to leave IRA assets to a minor, check with an estate attorney about setting up a trust or a uniform transfers / gifts to minors (aka UTMA / UGMA) account.

A critical point here is that estate planning is not a once in a lifetime event.  It is a dynamic process that must be reviewed periodically (we suggest at least once a year) if you want to make sure that your estate plan will attain your objectives.  You can find more information at www.est8planning.com.