Estate Planning - The Basics

Creating an estate plan is key to wealth preservation as well as the avoidance of unnecessary taxes, expenses, and delays associated with probate.  

Estate & Business Law Group is your professional partner from the creation of your estate plan onward, ensuring that your estate plan will reflect your ever-changing needs, desires, intentions, and goals, and that it will work when you cannot speak for yourself.  
 

Estate Planning Goals:
  • I want to control my property while I’m alive and well;
  • take care of myself and my loved ones if I become disabled;
  • give what I have to whom I want, the way I want, and when I want; 
  • and if I possible, I want to save every last tax dollar, professional fee, and court cost possible for me and my loved ones.
 

Estate & Business Law Group promotes trust-centered estate planning to achieve these goals.
 
 
What is a Trust?
 
Trusts are legal mechanisms that allow you to place conditions on how, when, and to whom your asset will be distributed.
  • You can put almost any asset into a trust: real estate, cash, stocks and bonds, certain insurance policies, and tangible personal property.
  • A trust goes into effect when the trust creator signs the document, unlike a will, which goes into effect when the creator dies and only after it is admitted to probate court.
 

Benefits of Trust-Centered Estate Planning:

  • Avoid Probate Fees, Costs, Delays:  A fully funded trust bypasses the probate process, and assets are transferred according to the terms of your trust. By avoiding probate, you can accelerate the distribution of your estate by reducing the time necessary to settle your estate.
  • Reduce or Eliminate Taxes: A fully-funded trust can significantly reduce estate taxes and estate settlement costs, and can even be structured to help reduce income taxes.
  • Control During Disability:  A trust creates a plan for the management of your affairs by the person or people of your choosing if you one day become incapacitated.
  • Control Distribution:  Your instructions control how your assets are managed, and you determine the allocation of those assets among your beneficiaries.
  • Control Timing:  You determine how and when beneficiaries receive your assets.  Should you and your spouse pass away earlier than expected, your trust can be arranged to hold your children’s shares until they reach a specified age, instead of an outright distribution at age 18.
  • Provide Asset Protection for your Beneficiaries:  You can give your beneficiaries the option of leaving their inheritance in trust, thereby protecting it from creditors, litigation, potential failed marriage, or other legal problems.  You can take comfort in knowing that the assets held in trust for your surviving spouse can prevent creditors’ attempts to reach trust assets; this protection can extend to your beneficiaries after you and your spouse are gone.
  • Provide for Business Continuation: Your trust can direct how your trustee will continue business operations in the event of your disability or death.
  • Peace of Mind For You and Your Family:  Your instructions direct how your financial and personal affairs are to be conducted.    You select the appropriate person(s) to “stand in your shoes when you cannot speak for yourself,” including Trustee, Agent for Health & Property, and Guardian(s) for your minor/special needs children.  This kind of preparation helps avoid family disagreements.
  • Provide Confidentiality:  In probate, wills and their accompanying asset inventories are made public.  Trusts are virtually never presented for probate, therefore remain private.
  • Preserve Your Legacy:  Your estate plan can reflect and further your values, your beliefs, your opinions, and your goals during your lifetime and even after you pass away.


Video

Watch Fox News segment:
Bob Massey "Tips on Getting your Affairs in Order"

 


Read More:

Understanding the Significance of Trusts


Estate Tax Downloadable Forms:  http://illinoisattorneygeneral.gov/publications/estatetax.html
 
AARP’s estate tax planning calculator: 
http://www.aarp.org/money/estate-planning/Estate_tax_planning_calculator/


For information on different types of trusts that better suit your financial situation, visit Advanced Planning
 
To see how your estate will be distributed if you do not plan for it, see IL Intestacy Statute
 

Advanced Estate Planning

(Asset protection, charitable giving, estate tax planning)
 

Basic Estate Planning involves disability protection, probate avoidance, and privacy.
Advanced Estate Planning concerns enhanced Asset Protection, Charitable Givingand Estate Tax Planning.
 
  • Asset Protection

Anyone owning real estate, investment accounts, bank accounts, or other valuable assets is vulnerable to lawsuits from predators and other would-be judgment creditors.

Estate & Business Law Group works with clients to avoid this potentially devastating outcome by considering all aspects of your wealth, measuring potential liabilities, and minimizing asset exposure.  We can help place your wealth outside the grasp of liabilities, taxes, and creditors, and we help you keep the money you have worked hard for.
 
  • Charitable Giving
Charitable giving is mutually beneficial for individuals and charitable organizations.  Clients can support their charity of choice and enjoy tax benefits for doing so.  There are numerous gifting options and methods, and Estate & Business Law Group advises clients on how to generate the greatest benefit to both the charity and the giver.

 

  • Estate Tax Planning
As of 2013, the Federal exemption for federal estate tax purposes is $5,250,000. However, the exemption equivalent for Illinois estate tax purposes is $4,000,000.  Estate & Business Law Group will help you determine if your estate is taxable and, if so, how to proceed.
 


Frequently Asked Questions

BASIC CONCEPTS OF ESTATE PLANNING

What do you mean by “Estate Planning”?

Why are the legal rules pertaining to title so important to planning my estate?

What are the different ways to title property?

What happens if I do not plan my estate?

How can I prevent having an intestate estate?

What is a will?

What is probate?

Are there any advantages of probate?

What are the disadvantages of probate?

Can probate be avoided?

Is there a better way to avoid probate?

 

ESTATE PLANNING WITH TRUSTS
What is a trust?

What is a Testamentary Trust?

What is a Living Trust?

What is a Revocable Living Trust?

How does one place property into a Revocable Living Trust?

What are the benefits of a fully funded Revocable Living Trust?

What instructions can a Revocable Living Trust contain?

What successor trustee instructions should be included in the trust?

What disability instructions should be included in the trust?

What instructions pertaining to the trust’s beneficiaries should be included?

Are there any other benefits of having a Revocable Living Trust?


MEDICAID PLANNING

Why Medicaid Planning?

Medicaid Glossary

 

ESTATE PLANNING FOR FAMILIES WITH MINOR CHILDREN

What happens if parents fail to plan for their children?

What issues are involved in planning for minors?

What issues are involved in making lifetime gifts to children or grandchildren?

Who should be named the guardian for minor children?

What issues are involved in leaving assets to minors upon your death?

How can I plan for a child who is disabled or has other special needs?

Are there any problems with creating a special needs trust?

What about adult family members with special needs?

 
ASSET PROTECTION PLANNING

What is asset protection planning?

What are federal estate and gift taxes?

CHARITABLE TRUSTS

What are the benefits of creating a Charitable Remainder Trust?

What exactly is a Charitable Remainder Trust?

What makes a CRT so beneficial?

How does this compare with just selling the asset and buying income-producing assets?

Can you provide examples of when a CRT should be considered?

How can I use a CRT to help raise my standard of living?

How can I use a CRT to help pay for my retirement?

How can I use a CRT to assist my elderly parents?

How can I use a CRT to help my grandchildren go to college?

A CRT sounds like a wonderful planning opportunity but are there any drawbacks?

Now that I understand Charitable Remainder Trusts, how do they differ from Charitable Lead Trusts?

How can I use a CLT to benefit my family?

 

ASSET PROTECTION PLANNING

What are federal estate and gift taxes?
 












































 


   What are the benefits of creating a Charitable Remainder Trust?

The benefits of creating a Charitable Remainder Trust can include the following:

• The Trustmakers win by: (a) gaining a lifetime income, while avoiding capital gains tax upon the sale of appreciated assets; (b) obtaining an immediate income tax deduction that can be carried forward for up to five years; (c) achieving a possible estate tax savings; and
(d) creating a wonderful opportunity to accomplish their charitable dreams;

• The Trustmaker’s chosen charities win by being the recipient of the Trustmaker’s philanthropy; and

• Society wins because charities will promote social good and wisely use “social capital.”

If any of these benefits sound intriguing, then the Charitable Remainder Trust might be just the answer to your estate planning needs.

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What exactly is a Charitable Remainder Trust?

A Charitable Remainder Trust (CRT) is a special type of irrevocable trust in which the assets donated to it are shared between the Trustmakers and charitable beneficiaries. Typically, a CRT pays income to the Trustmakers for a number of years (or even the Trustmakers’ entire lives), after which any remaining principal is paid to qualified charities.

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What makes a CRT so beneficial?

Charitable Remainder Trusts offer you the ability to benefit from the sale of property that you might otherwise be hesitant to sell because of the capital gains taxes that would be due. CRTs are the result of special legislation that is intended to promote charitable giving by making it possible for you to gift highly appreciated assets (i.e., publicly traded stock, real estate, etc.) to a CRT capital gains tax-free. In turn, the trust provides an agreed upon annual income back to you, the Trustmaker. Additional benefits to you include an income tax charitable deduction as well as potential estate tax savings, because the assets are removed from your taxable estate once they are transferred to the CRT.

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How does this compare with just selling the asset and buying income-producing assets?

A CRT is usually superior to an outright sale of assets. The capital gains tax-free sale of an asset to the CRT means that its entire value is working for you—not just the amount left over after the taxes are paid. Once the additional charitable income tax deduction and estate tax savings are factored in, the tax savings can be spectacular.

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Can you provide examples of when a CRT should be considered?

A CRT should be considered an important planning option anytime the owner of an appreciated asset would like to sell it tax-free in order to obtain more income. The income provided by a CRT can be paid monthly, quarterly, or annually and, among other possibilities, used to increase your standard of living, provide for your retirement, assist elderly parents, fund a trust for a special needs child, or help your grandchildren go to college.

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How can I use a CRT to help raise my standard of living?

Many of our clients have built up sizable estates through a lifetime of saving their hard earned money and living frugally. The newly available income provided from their CRT gives these couples the opportunity to remodel their home, buy that new car, go out more frequently, or take that long delayed vacation.

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How can I use a CRT to help pay for my retirement?

If you are not able to make contributions to individual retirement accounts or other retirement plans, you can still use the tax-exempt status of a CRT to build for yourself the equivalent of a retirement plan.

For example, let’s say that you are fifty-five years old and own stock for which you paid very little. It is now worth a substantial sum, but yields almost no income. If you sell the stock, you will owe capital gains taxes on its entire increase in value. This will leave less for you to reinvest for your retirement when you will need additional income. After careful thought and study, you decide to give the stock to a CRT. The trust can sell the stock without paying taxes on the gain. Since the entire value of the stock will be available to invest, you will receive more yearly income for the rest of your life than if you had sold the stock and reinvested the balance. As an additional benefit, you will receive a charitable income tax deduction that can be used to offset some of your other income.

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How can I use a CRT to assist my elderly parents?

As our population ages, many working families are finding it necessary to save not only for their own retirement but also for the possibility that they will have to provide some financial assistance to their parents. Such assistance is not tax deductible and may result in gift tax consequences if it exceeds certain amounts. A CRT offers a simple solution to this dilemma. You can transfer assets to a CRT that will provide a fixed income for life to an older relative instead of income for yourself. You will be entitled to a substantial charitable deduction for your gift to the trust and also be assured of proper management of the assets in the event you become unable to manage them yourself. At your parent’s death, the trust ends and the assets will be distributed to your favorite charity—perhaps even in your parent’s name.

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How can I use a CRT to help my grandchildren go to college?

We are all faced with the rising cost of education. Every year those costs are increasing faster than inflation making it more difficult for parents to afford a quality education for their children. One solution to these escalating educational costs is for parents or grandparents to establish a CRT in which the income is used for a child’s or grandchild’s education.

If you give money directly to your children or grandchildren for their college expenses, the gift will not be tax deductible and it may even be subject to gift taxes. If you create a CRT, you will receive an immediate income tax deduction for the assets transferred to it because when the trust ends, any remaining assets will be distributed for charitable purposes.

For example, assume you have a grandchild who will be starting college in a few years. Also assume that you own stock purchased many years ago that has increased substantially in value, but pays only small dividends.

You could sell the stock, pay the capital gains taxes, and then gift the remaining proceeds to your grandchild to pay for college. The gift, however, will not be tax deductible, it might be subject to gift taxation, and you will lose control over how your grandchild uses the money.

A wiser option might be to transfer the asset to a charitable trust designed to produce income for your grandchild’s education. In this happier scenario, you will be entitled to a tax deduction for the transfer because the trust will last only a few years (up to the year of the budding scholar’s anticipated college graduation) after which the remainder will be distributed for charitable purposes.

The CRT will then sell and invest the asset gift tax-free. Each year, according to your instructions, the CRT will pay a fixed amount only for your grandchild’s education. After your grandchild graduates, your CRT will make your charitable dreams a reality.

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A CRT sounds like a wonderful planning opportunity but are there any drawbacks?

Although a CRT is an excellent planning tool that can increase one’s income, avoid unnecessary taxation, and achieve one’s charitable planning dreams, one question that is frequently raised concerning them, usually by the Trustmaker’s children, is “What about our inheritance if everything in the CRT gets distributed as income or is left to a charity?”

It is not uncommon for the Trustmaker’s children to view their parent’s desire to create a CRT skeptically for the fear of being disinherited or they may be suspicious that their parent is being unduly pressured by a charity into creating it. Fortunately, these types of objections are easily overcome once the children learn that by establishing the CRT their parents can actually increase the children’s inheritance and enable everyone (parents, charity, and children) to benefit.

The key to achieving this incredible win win win scenario lies in the fact that once the parents have established the CRT, they will be receiving a new stream of income. The parents can deal with the children’s concerns about being disinherited by simply taking a fraction of that income and using it to purchase a new life insurance policy in an amount at least equal to the value of the asset transferred to the CRT.

Often the tax savings and additional income produced by the CRT enable the parents to purchase life insurance (also known as wealth replacement insurance) with a death benefit even greater than the value of the asset being transferred to the CRT. Even better, if the new life insurance policy is owned by an Irrevocable Life Insurance Trust created by the parents, the insurance proceeds will be outside the parent’s estate and thus transferred to the children estate tax free. Most children are also pleased to learn that their inheritance will come in the form of a cash distribution from the ILIT instead of having to deal with selling a major asset after their parents die.

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Now that I understand Charitable Remainder Trusts, how do they differ from Charitable Lead Trusts?

Both Charitable Remainder Trusts and Charitable Lead Trusts (CLT) result in gifts being made to a charity. They differ with respect to the timing of the gift. With a CRT, the Trustmakers receive the trust’s income and the charity receives the assets remaining at the time the trust terminates, which is usually at the death of the Trustmaker or beneficiary. With a CLT the charity receives the trust’s income and the Trustmaker (or the Trustmaker’s selected beneficiary) receives the assets remaining at the time the trust terminates. Recipients of income and assets are reversed with a CLT compared to a CRT.

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How can I use a CLT to benefit my family?

Assume that you desire to immediately help one of your favorite charities with the income produced by one of your assets (a rental apartment, for example) but you still want to ultimately keep the apartment itself in the family. At the same time you would also like to reduce your estate tax liability. A CRT will clearly not work in this situation. But a CLT might offer the ideal solution to accomplish these goals.

You could place your apartment into a CLT. A named charity will receive the rental income for the lifetime of the trust, after which time your children become the apartment’s owners. Although your children will not receive the apartment building for a number of years, the value of your gift made to them, (for gift and estate tax purposes) must be calculated at the time the apartment is transferred to the CLT.

The value of an apartment received many years from now is not the same as the value of an apartment received today. No one would pay full price today for something they will receive only in the future. Accordingly, your children are entitled to discount the apartment’s current fair market value in proportion to how long they have to wait to receive it.

It is this discounted value of the apartment, instead of its present fair market value, that is used to determine gift and estate taxes on your estate. The result can be a large tax savings to your children. In the meantime, rather than depreciating in value, the apartment building has actually continued to grow in value.

Your charity immediately benefits from the establishment of a CLT and your children will receive an asset that has appreciated in actual value yet has a substantially discounted value for estate tax purposes. Good things are possible for those who take the time to properly plan their estates! Your estate planning attorney will be able to help you determine whether a CRT or a CLT is an appropriate estate planning option for you.

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What is asset protection planning?

Put simply, asset protection planning is the process of removing your property from your individual ownership and placing it beyond the reach of potential claimants and creditors. The process involves changing legal ownership of your property from your individual name to a protective entity, such as a limited partnership or trust.

If that sounds like a terrible idea, hold on. A properly designed limited partnership or trust can give you all the benefits of ownership, such as control over an asset’s disposition and the right to its income. The difference is that since you no longer legally own the asset, it cannot be seized to satisfy a judgment against you. It is the savvy planner who realizes that in today’s world legal control over an asset is often more beneficial than directly owning it.

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What asset protection does a Limited Partnership provide?

As stated in the preceding chapter, Limited Partnerships offer significant asset protection opportunities. Limited partnerships provide such asset protection because of the way the laws that govern partnerships treat partners and partnership assets. As you will recall, limited partnerships have two kinds of partners, each with dramatically different roles and responsibilities. General partners manage the partnership, and thus have full responsibility and control.

Limited partners, on the other hand, have little, if any, input into the running of the partnership; therefore, they are not held responsible for its management or any liability it might create. No one would want to become a limited partner without this protection. The law is designed to encourage the creation of partnerships and the economic benefits they produce for society.

The second important feature of limited partnerships is that assets titled in the name of the partnership are deemed the property of the partnership itself, not that of the individual partners. The legal importance of this arrangement is that partnership assets are shielded from creditor claims against the individual partners. In other words, a creditor cannot force the sale of assets owned by the partnership to satisfy a judgment against one of its members. Instead, such creditors are entitled to attach only the member’s individually owned assets and to receive any distributions made by the partnership to that member.

To achieve asset protection with a Limited Partnership, you would transfer individual assets (real estate, business interests, investments, artwork, etc.) out of your personal name and into the name of the Limited Partnership. A common arrangement would be for you to become a one percent general partner, giving you the right to fully control and manage property just as before. You would also become a ninety-nine percent limited partner, entitling you to receive income from the partnership, but shielding your limited partnership assets from creditor claims. For the greatest asset protection, most individuals who use Limited Partnerships transfer part of their limited partnership shares to others, usually family members. This shows that the partnership has legitimate business purposes other than just defeating creditor claims and makes them more likely to survive a court challenge. Because Limited Partnerships can provide significant tax advantages, as well as asset protection, it is often an ideal strategy to use when an individual wants to pass wealth, especially a business, to other family members.

Sometimes a Limited Partnership alone isn’t enough protection against possible lawsuits or creditor actions. That’s when an Offshore Trust becomes an important tool in the asset protection toolkit.

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What is an Offshore Trust?

An Offshore Trust is simply a trust created outside of the legal jurisdiction of the United States. These Offshore Trusts are effective in protecting assets simply because the laws of the nations in which they are drafted provide better creditor protection than the protections provided in the United States of America.

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Why do Offshore Trusts provide better asset protection?

In the United States, generally no asset protection exists for assets that you place in a trust created to benefit yourself and for which you are the trustee. In such cases, the trust’s assets can be seized by your creditors just as if they were owned in your own name.

However, a handful of other nations—such as the Isle of Man, the Cook Islands, and Belize, to name a few—offer Trustmakers greater asset protection. These nations allow you to be the Trustmaker, Trustee, and the Trust Beneficiary and still protect the trust’s assets from creditors.

Furthermore, these countries will not honor a United States Court’s judgment or lien against trust assets in their jurisdiction. Before a creditor can seize trust assets, these nations require that a trial be held on their soil. The creditor must pay the often exorbitant fees associated with litigating a case in a foreign country. The cost of bringing witnesses and other legal evidence to a foreign court can prove prohibitive, as can the legal fees of a local attorney. Legal fees alone can prove a costly and insurmountable burden to bringing a lawsuit, as the trust-favorable nations do not allow for contingency fee lawsuits. Instead, they require that the plaintiff’s attorney be paid without regard to the outcome of the action.
If this were not enough in the way of asset protection, these nations also demand that the plaintiff meet the burden of proof required in United States criminal courts. A creditor plaintiff must prove its case “beyond a reasonable doubt,” not the much more lax “preponderance of evidence” standard used in the United States.

Finally, the countries most favorable to Offshore Trusts greatly limit the amount of time allowed to a plaintiff to bring legal action. In the United States, plaintiffs often have many years to file a lawsuit but in these offshore nations, plaintiffs have only a year or two to bring suit, depending on the circumstances. So for those desiring greater asset protection, Offshore Trusts can provide immeasurable peace of mind.

 

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How do you establish an Offshore Trust?

To obtain the legal protections offered by Offshore Trusts, typically you would have your attorney create both a limited partnership and a trust in the desired offshore nation. You would then transfer your ninety-nine percent limited partnership shares to the Offshore Trust and retain the one-percent general partner share. Doing this would afford you the greatest possible degree of protection for your wealth, while preserving complete control over the assets themselves.

Fortunately, Offshore Trust laws do not require that the assets literally be removed from U.S. soil nor do they require that the Trustmaker relocate to a foreign country. As long as the ownership of the assets and the jurisdiction governing the trust reside in a trust-favorable nation, the Trustmaker receives full asset protection.

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What factors need to be considered before establishing an Offshore Trust?

The reality is that asset protection planning is more costly to implement than other estate plans. In addition, you’ll spend more each year to maintain it but keep in mind the savings it can also generate. You may be able to reduce considerably the malpractice or business liability insurance premiums you now pay once most of your assets are protected offshore. Furthermore, you can save the enormous cost of defending yourself in a lawsuit, or worse, losing it all in court. With proper asset protection in place, you may never have to experience either. The peace of mind alone afforded by this planning option is often well worth the modest investment.

If an Offshore Trust makes sense to you, the time to implement it is now before it is too late and a legal crisis is already upon you. If you wait until action against you is “pending, threatened, or expected,” the measures you take to remove wealth from your estate will be deemed a fraudulent conveyance and invalidated by a court of law.

Moreover, don’t think that an Offshore Trust will lessen your tax liability. If you remove assets offshore, you are required to notify the IRS.
One final note is also in order. In an attempt to capture some of the Offshore Trust business, a few states recently enacted laws which promise to provide trusts created under their jurisdiction with some of the same protections offered by trusts created in foreign jurisdictions. While it’s possible that these trusts may work for those who live, work, and own all their assets in one of these states, those in other states may be exposed to creditor action just as before because each state’s courts are required to give “full faith and credit” to the judgments of other states’ courts. A judgment against you in one state would be honored by the other states, even if the trust you’ve created seemed to promise you complete protection.

If you think that asset protection may be for you, sit down immediately with your trusted estate planning attorney. It is your attorney who can evaluate your individual situation and determine the most effective strategy to help you meet your asset protection goals.

Despite its promises to “simplify” the tax code, Congress’ never ending changes to our nation’s estate and gift tax code have made it too complicated for most people to understand. Nonetheless, a review of its basic details is essential to understanding how to protect your estate.

 

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What are federal estate and gift taxes?

Federal estate and gift taxes are what is known as transfer taxes. Simply put, they are taxes on your right to give money or property to others. The gift tax is a tax on your right to give money away while you are alive. The estate tax is a tax on your right to leave your property to others at your death.

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What do you mean by “Estate Planning”?

The process of developing a sound estate plan of your own begins with understanding the basic ingredients common to all good estate plans. Our decades of experience working with thousands of clients have taught us that an estate plan is sound only if it helps one accomplish several important goals. Almost universally, our clients state that they want their estate plans to achieve for them the following objectives:

• I want to control my property while I am alive;

• I want to take care of my loved ones and myself if I become disabled;

• I want to give what I have to whom I want, when I want, the way I want; and

• Whenever possible, I want to save tax dollars, professional fees, and court costs.

If you have these same goals for yourself and your family, then this book is written specifically with you in mind because a good estate plan can help you accomplish each of these objectives. Without a good estate plan, you and your family will probably lose control over your property, suffer through unnecessary court proceedings, and pay excessive taxes. The lack of an estate plan may also deprive your family of many other legal protections otherwise available and also deprive them of the opportunity to receive from you a lasting legacy designed to bring your family closer together. Fortunately, all of these ills can be easily avoided by implementing a sound estate plan that passes your property to your loved ones in the way that you want.

All good estate planning starts with making sure that your property is legally owned in an appropriate way. The legal community uses the technical term “title” to describe how property is owned and it is exceptionally important that you understand the legal rules that govern title.

 

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Why are the legal rules pertaining to title so important to planning my estate?

Title is important to designing an estate plan because you cannot plan for the disposition of property you do not own. Although you would think it easy for everyone to know what they do or do not own, the rules pertaining to property ownership are more complicated than they first appear. Unfortunately every day families unintentionally lose control and ownership of their property to others because these rules are widely misunderstood.

For example, many people that have written a will or a trust assume that all of their property will pass to their heirs according to the instructions in that document, but that is not necessarily true! Of the thousands of estate plans we have reviewed for clients seeking a second opinion of their will or trust, we have discovered that a great number of them will not work the way the clients think they will because the client’s property has never been properly titled to ensure that it passes to whom they want, when they want, and how they want.

Regardless of what you may have heard or think, unless your property is correctly titled even the best estate plan will fail to distribute it properly. Thus, in order for you to design an estate plan that accomplishes your goals, it is essential that you first understand the basic rules that govern the titling of property.

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What are the different ways to title property?

Property can be titled in several different ways. The five most common ways of titling property are as follows:

• Fee simple;
• Tenancy in common;
• Joint tenancy;
• Tenancy in the entirety; and
• Community property.

Each of these ways of titling property differ from the others in three key ways:

• The amount of control the title owner possesses over the property while alive;
• The extent to which the owner is legally entitled to leave the property to others upon his or her death; and
• The extent to which creditors of the owner can make claims against the property.

 

Fee simple ownership exists when there is only one title owner. If you own property that is titled solely in your name you possess total legal control over it. This allows you to do with it whatever you want without anyone else’s permission. You are free to retain, sell, or give the property away whenever desired. You also may say who will receive the property after your death. Finally, since only your individual legal rights are involved, any creditor of yours can make a claim against any of your fee simple property to satisfy a debt.

Tenancy in common ownership exists when two or more title owners hold the property together as tenants in common. If you own tenancy in common property, you share legal control of it with others. For example, if you and one other person own property as tenants in common, and you both own equal shares, you each own a fifty percent interest in it. If the property were sold, you would divide the profits equally.

However, ownership of tenancy in common property does not have to be in equal shares. Your share could be smaller or greater than another tenancy in common owner’s share. The legal rule for tenancy in common property is that all co-owners share in the right to fully use and enjoy the property; Therefore, even if you owned only a small fractional interest in tenancy in common property, you still have the right to use it whenever you want. Although this arrangement is beneficial for those owning small shares, it can cause problems if two or more tenants in common desire to use the property at the same time or in different ways. If you are a tenant in common, during your lifetime you can keep, sell, or gift your respective share of the property. Likewise, as a tenant in common you also may say who will receive the property after your death; however, creditor claims against a tenant in common can be made only against that tenant’s share of the property.

Joint tenancy ownership is like tenancy in common in that two or more joint tenants own the property together and each owner has the right to enjoy its entire use. A joint tenant, like a tenant in common, also has the right while alive, to keep, sell, or gift their joint tenant’s interest in the property to others.

Unlike a fee simple owner or a tenant in common, a joint tenant has no right to leave their joint tenant’s interest to others at death. When one joint owner dies, by law that tenant’s interest in the property is automatically extinguished and the surviving joint tenants continue to own the property together as joint tenants. Ultimately there will be only one final survivor left when all of the others have died. If you are the final surviving joint tenant, you will end up owning the entire property in fee simple. Creditor claims against a joint tenant can be made only against that tenant’s share in the property.

As stated above, a joint tenant’s interest is automatically extinguished upon that person’s death. A benefit of this arrangement is that no probating of joint tenancy property ever occurs. The decedent’s name is simply removed from the title and the others continue owning it together as joint tenants. While the probate free transfer of an asset is an attractive benefit of joint tenancy ownership, it often causes rather serious and unexpected consequences. Problems involving joint tenancy ownership include the following situations that frequently occur:

• Often family members purchase property together and title it as joint tenants without understanding that the last survivor will end up as the property’s sole owner. Instead, they mistakenly think that if one of them dies that owner’s share will pass to his or her spouse or children. Thus the family of the first joint tenant who dies is rudely surprised to learn they lose all rights to the property. If that were not bad enough, under the law the decedent joint tenant is treated as having made a gift of his or her interest in the property to the survivors. Thus the family of the decedent might have to pay gift taxes from the decedent’s estate for property they never get;

• If a parent remarries and retitles the family home in joint tenancy with the new spouse, the children of the first marriage will lose all rights to the home if the parent dies before the new spouse;

• If an elderly parent puts the family home in joint tenancy with an adult child, the parent loses exclusive control over the home. The parent will not be able to refinance or sell the home without the child’s approval. Also, the parent’s home becomes exposed to the child’s liabilities including automobile accidents, debts, bankruptcies, and claims of the child’s spouse if there is a divorce. If there is more than one child named as joint tenant, all of these dangers are multiplied;

• If an elderly parent retitles savings or investment accounts in joint tenancy with one child, expecting that child to share it with siblings after the parent passes on, there can be unintended gift tax consequences, even assuming the child shares it with the others (which does not always happen); and

• If a child named as a joint tenant dies first, the property might be probated and taxed first in the child’s estate and then probated and taxed a second time in the parent’s estate.

Tenancy by the entirety ownership is a way married couples in some separate property states, can title their primary residence to provide creditor protection for a surviving spouse. Following the death of the first spouse, the home titled as tenancy by the entirety automatically passes to the surviving spouse free of probate. Creditors of both spouses (such as a mortgage company or credit card company) may take this property, but creditors of only one spouse cannot. This form of ownership may be a good choice of title if either spouse might someday be subject to business or professional liability since the property is protected from creditor claims.


One major concern arises with property titled in tenancy by the entirety if there are children from a prior marriage of either spouse. When one spouse dies the surviving spouse will inherit the home while the children of the deceased spouse will be disinherited. 

Community Property ownership is a way married couples in community property states can title their property to reflect that they each own half of the property. In some states community property is also referred to as “Marital Property.” Owning property as community property can help couples escape unnecessary capital gains taxes. Upon the death of one spouse the entire amount of community property gets a step-up in cost basis. This means the surviving spouse can sell property without having to pay capital gains tax after the death of his or her spouse. Community property tax treatment is available in only a limited number of states.

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What happens if I do not plan my estate?

If you do not plan your estate, you will leave what is legally known as an “intestate estate”, one in which the deceased has left no instructions. The families of those who fail to plan their estates have a rude surprise awaiting for them - the government will fill in the blanks with its own plan. After debts, probate costs, and taxes are paid, the courts will divide the estate according to the laws of intestate succession.


If you do not plan your estate, you may not know who your beneficiaries are. Some states provide that the estate of a married decedent goes entirely to the surviving spouse, provided there are no children from another marriage. Other states provide that the surviving spouse receives only half of the decedent’s estate with the other half going to any children or their decedents. The first example may result in the children being disinherited, especially if the surviving spouse remarries, while the second example may leave the surviving spouse with inadequate resources to maintain an adequate lifestyle.

If you do not plan your estate, and a minor child is entitled to receive an inheritance by law, the court will place the inheritance in a custodial trust. No withdrawals can be made without first obtaining the permission of the court. Whatever is left of your child’s inheritance will be given to your child on his or her eighteenth birthday - with no guidance whatsoever. Since few eighteen year olds have the maturity to properly handle a windfall inheritance, it is likely the inheritance will be totally wasted in a short period of time.

If you do not plan your estate, and you have no spouse or children, most states provide that distributions will be made to your parents. If your parents are in a nursing home or receiving government assistance, who do you think gets the inheritance?

If you do not plan your estate and fail to appoint the personal representative (executor) you want to administer it, the court will fill in the blank by appointing one of its own choice for you according to statutory formula. Children or other heirs may have an equal legal right to be named the estate’s personal representative and may fight over who should be named. This often leads to family feuds and court battles that could have been avoided had the parents simply named their own personal representatives.

If you do not plan your estate, the personal representative may be forced to pay for an expensive bond to insure the estate. This is money that could otherwise have gone to your loved ones.

If you do not plan your estate and you and your spouse both die prematurely, the probate court will appoint the guardian it chooses for your minor children instead of the ones you could have, but failed, to name yourselves. In other words, a stranger to the family will get to decide who tucks in your children at night and takes care of all of their other needs.

If you do not plan your estate, the courts will also maintain continuing jurisdiction over any inheritance left for your children. Court permission is needed to use the inheritance and the court is likely to require an annual accounting of every penny spent. The result is additional accounting and attorney’s fees, paid out of the inheritance, every year until your child becomes eighteen.

 

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How can I prevent having an intestate estate?

You can prevent having an intestate estate by leaving written instructions of your own. One way of leaving such instructions is by writing a will.

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What is a will?

A will is a written document that tells the court how to divide your property at the time of your death. It also tells the court who should be the guardian for your minor children and your personal representative. Wills are filed with the court at time of death, and the court oversees the administration of the will through a process known as probate.

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What is probate?

Probate is a legal court proceeding, supervised by a probate court judge, that is used to gather a deceased person’s assets, pay creditors, court costs, and taxes and then distribute what is left to those entitled to receive it. In probate proceedings, the court sets the time limit in which creditors may file claims. The probate estate cannot be closed until the period for filing claims has expired and settlement with each creditor has been resolved. In general, you can expect a probate proceeding to last one year or longer. There have been many notable cases that have been tied up in probate court for several years.

The probate process allows creditors to make claims for debts incurred during the deceased’s lifetime and allows the estate to pursue other legal actions pertaining to the decedent. Notice of the probate proceeding must be given to all known creditors and to all creditors who might be known after careful investigation. It must also be given to all relatives who may be legal heirs, even if they are not included in the will.

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Are there any advantages of probate?

Advocates of probate argue that because probate proceedings are held in open court, it benefits potential heirs by providing everyone equal access to information contained in the probate record. They also argue that court supervision of the probate process benefits society by providing an orderly way of wrapping up a decedent’s estate. They further argue that additional benefits exist in that institutions dealing with probate court orders recognize them as binding, that rights of lost heirs are severed, that claims not timely filed can be legally barred, and that the estate may pursue any litigation deemed necessary.

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What are the disadvantages of probate?

The disadvantages of probating a will are many. The probate process is expensive, time consuming, and intrusive. Court costs, attorney fees, personal representative fees, bonds, and accounting fees all add up. The cost of probate is often between 3% and 8% of the gross value of an estate (up to eight thousand dollars for a hundred thousand dollar estate). If your estate is probated without a will, the costs of probate may be even greater. The probate process is a notoriously protracted legal procedure. Studies in one state reveal that the median time for settlement is thirteen months. If the probate proceedings are contested, the ensuing legal battle can take several years.

Probate proceedings also intrude on a family’s privacy. Probate proceedings take place in open court where the family’s private financial records are made a public record. The family is forced to reveal for public inspection a listing of all of the family’s savings, investments, and real estate. Also, now that many probate courts are making their records available on -line, anyone with a computer can easily access your family’s probate records.

The estate is vulnerable to attack during probate proceedings from unhappy relatives and to suits from creditors who must receive certain legal notices. It is not unheard of for someone to file a claim in a probate proceeding simply as a way of forcing the estate to settle the claim in order to avoid an expensive legal fight.

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Can probate be avoided?

Yes, fortunately probate can be avoided. As already discussed, probate proceedings can be avoided by titling property with someone else in joint tenancy. Such property will be transferred to the surviving joint tenant probate free. Because joint tenancy property passes probate free, many individuals mistakenly believe they do not need further planning if everything is titled in joint tenancy. But as discussed above, joint tenancy can result in property passing to unintended heirs, risks unforeseen tax consequences, and can result in loss of assets to lawsuits and other misfortunes.

Furthermore, an estate plan that relies only on joint tenancy ownership fails to provide any protection if one or both joint tenants become disabled by illness or accident. For example, if a husband and wife own property as joint tenants and the husband suffers a stroke, it may be legally difficult or impossible for the wife to make the decisions necessary to handle the couple’s property without petitioning the court to be appointed the legal guardian of the disabled husband. This is a major pitfall of joint tenancy ownership that many couples unfortunately fail to anticipate.

In some community property states, probate can also be avoided for married couples who title their property as marital property so that it passes probate free to the surviving spouse. Again, this provides no protection if one or both spouses become disabled and does not provide a mechanism to transfer assets to the next generation at the death of the second spouse.

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Is there a better way to avoid probate?

Yes! A simple and superior way of avoiding probate is to place your property in a trust so that it passes probate free. To learn more about trusts, turn to the next chapter.

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What is a trust?

A trust is a written legal document that provides instructions on how the property titled in the trust’s name is to be managed. These written instructions can provide important legal benefits.

There are generally three people who are involved with trusts. First is the person who makes the trust. This person is therefore appropriately known as the “Trustmaker” or as is the case with married couples planning together in one trust, “Joint Trustmakers”. Second is the person or institution (like a bank) entrusted by the Trustmaker to carry out the trust’s instructions. This person is known as the “Trustee.” Third is the person who benefits from the trust. This person is known as the “Trust Beneficiary.” One advantage of Revocable Living Trusts is that the same person who makes the trust can be, and usually is, also the Trustee and the Beneficiary of his or her own trust. Therefore you can make a trust, be the Trustee who manages it, and also be the one who benefits from it.

Trusts have been used since the Middle Ages and actually predate wills. They can also take various forms. Two main types of trusts are “Testamentary Trusts” and “Living Trusts.”

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What is a Testamentary Trust?

When a person drafts a will, sometimes they do not want the inheritance to go immediately upon their death to a spouse or child. Instead, they want the property to be managed for the beneficiary’s protection over an extended period of time. One way to accomplish this is to state in the will that upon the maker’s death a Testamentary Trust will be created to manage the inheritance for the beneficiary. A Testamentary Trust, like a will, is legally effective only after one dies and cannot provide any estate planning protections to you or your family during your lifetime.

Testamentary trusts are created in wills and like wills they are court supervised as part of the required probate court proceedings. This supervision continues until the probate is ended. This means that if you created a testamentary trust to manage assets for your children until they turned thirty years old, your family would have to deal with probate court proceedings year after year until your youngest child turned thirty. The best estate planning attorneys seldom use testamentary trusts because of this negative consequence. Instead, “Living Trusts” are the legal tool of choice for the estate planning needs of most people.

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What is a Living Trust?

Living Trusts are a special type of trust that go into legal effect immediately upon their signing, i.e., when the Trustmaker is still alive. They are also known as “inter vivos” trusts, which means “during life” in Latin. This distinguishes them from testamentary trusts, which, as discussed above, become legally effective only after the Trustmaker dies. Living Trusts therefore offer lifetime planning opportunities (such as instructions on how to manage one’s property if one becomes disabled) that simply cannot be had with a testamentary trust which take effect when it is too late.

Living Trusts are increasingly being used as the ideal solution for those who no longer want to expose themselves to the dangers of joint tenancy or force the estate to go through probate with a will. There are so many advantages to using trusts that recent studies report that up to half of all people who now plan their estates are using trusts instead of wills.

We are not surprised by this trend. The advantages of a properly designed and funded Living Trust include the ability to plan for a possible disability, legitimate tax avoidance, asset protection for the surviving spouse, individualized planning to protect your spouse and children, enhanced privacy, and probate avoidance. Also, because a properly drafted Living Trust can own any type of stock and participate in partnerships and limited liability companies, they can be used to help smoothly transfer the family business to the next generation. If you own a small business, a Living Trust can enhance your business succession planning.

Furthermore, with a Living Trust one can still take advantage of the probate process if desired. The difference is that with a Living Trust the family has the choice of deciding whether probate court proceedings have any benefit – it is not forced into probate as happens to those who fail to plan or plan with simple wills.

Living trusts also come in several different types. The most commonly used living trust today is the “Revocable Living Trust”.

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What is a Revocable Living Trust?

The term, “revocable,” means that the instructions of these trusts can be amended whenever the Trustmaker desires. These trusts are popular because they provide the Trustmaker the maximum flexibility in controlling the trust assets and the ability to change the plan whenever desired. While parents are alive and healthy, they act as the trust’s Trustee and have total control over the property in it; however, if one or both parents suffer a disability, the trust’s detailed instructions state how the parents should be cared for and how property held in the trust should be managed. Additional instructions state how the children and other loved ones should be cared for after the parents die. Since these trusts are “revocable,” their instructions can be changed or canceled at any time so long as the Trustmaker is still legally competent. Also, property can be place into or removed from the trust anytime the Trust maker desires.

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How does one place property into a Revocable Living Trust?

If you create a trust, you will need to decide what property of yours should be placed into your trust so that your trust assumes legal control over it. Property is placed into to a trust simply by changing its title to name the trust as its legal owner. This process of changing title is called “funding” the trust.

Almost any type of property can be funded into a trust. The funding process consists of simply signing documents that name the trust as the new owner of your property. For example, some assets such as real estate, are funded into a trust by preparing and signing a new deed that names the trust as the new owner.

Other assets such as savings accounts, are funded into a trust by signing a new signature card that names the trust as the new owner of the account. Still other assets (personal property including household furnishings, jewelry, etc.), are funded into a trust by signing a document known as an “assignment” that names the trust as its new owner.

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What are the benefits of funding a Revocable Living Trust?

Funding a trust takes a little work, but it is well worth the effort for one very important reason: the Trustee has legal control only over property titled in the trust’s name. Any property not titled in the name of the trust is never legally owned by it and property not owned by the trust is in danger of having to be probated when its owner dies; however, property that is properly titled in the name of the trust never has to go through probate court because trusts never die!

If the funding process sounds confusing to you, thinking of it in another way might help. Some have described a Revocable Living Trust as a “magic box” in which you place all of the titles to your property. You just open the top of the box and place in it the deed to the house, the car, the checking account, the investment account, and anything else desired. Since you can name yourself as the Trustee of your own trust, you will maintain legal control over everything you put into your magic box. At any time you want you can just reach into the box and take out the title to any asset and do with it as you please. You can sell, trade, invest, or give it away just as if you never had a trust. And at your death, it is as if the magic box is automatically handed to your designated successor trustee to administer your property according to your instructions. All this happens without your property being probated.

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What instructions can a Revocable Living Trust contain?

The instructions contained in a Revocable Living Trust are limited only by the imagination and creativity of the Trustmaker. Nonetheless, most trusts will contain several important instructions including who will serve as Successor Trustee, what happens if a Trustmaker becomes disabled, and who will benefit from the trust after the Trustmaker dies.

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What successor trustee instructions should be included in the trust?

Some of the most important instructions in Revocable Living Trusts pertain to who will replace the Trustmaker if the Trustmaker can no longer serve as a Trustee because of disability or death. The Successor Trustee will assume the legal responsibility of managing the trust’s assets according to its instructions. Accordingly, the Successor Trustee must be exceptionally trustworthy, excel at managing property of considerable value, and be capable of following detailed legal instructions. A detailed discussion of a Trustee’s responsibilities is presented in the chapters that follow.

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What disability instructions should be included in the trust?

While it is impossible to plan for one’s possible disability in a will, a Revocable Living Trust is the ideal legal tool for this important planning need. On any given day, a person has a seven times greater chance of becoming disabled than of dying. We feel that a Revocable Living Trust is not complete unless it contains instructions for the possibility that the Trustmaker may become disabled.

For example, many of our clients tell us that if they become disabled they want to be cared for in their homes as long as medically feasible. In such instances, the trust can contain individualized disability instructions such as the following:

• Authority to use trust assets to maintain the home so long as it is occupied and to retrofit it for handicapped accessibility if necessary;
• Authority to pay for services such as visiting nurses, twenty-four hour care, hospice, and other needed caregivers to make staying at home a reality; and
• A statement of the desire to participate in normal activities of daily life to the maximum extent possible including outings, recreation, travel, and religious or spiritual involvement.

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What instructions pertaining to the trust’s beneficiaries should be included?

Detailed instructions can be included in your trust that will enable you to leave what you want, to whom you want, when you want, and in the way you want just as if you were still alive and personally giving those instructions. You can be as creative as you desire and specify the conditions and timing of distributions to your loved ones. For example, if your children are minors, you can leave detailed instructions that inform the Trustee how to use trust assets to raise your children and the preferred type of schooling to provide for them.

Alternately, your living trust can be drafted to benefit any number of people in exactly the way you want. Possibilities include friends, grandchildren, or even charities. Such planning can be designed to benefit them immediately or even over a period of several generations.

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Are there any other benefits of having a Revocable Living Trust?

There are several other benefits of having a Revocable Living Trust. These include the following:

• Revocable Living Trusts are private documents that do not require court approval.  Your beneficiaries will not have to wait for court permission to approve distributions of trust property. Outsiders and potential predators will also be prevented from learning the terms of your estate plan and using the knowledge against your loved ones.


• Court challenges to wills are successfull 25% of the time.  A Living Trust is more difficult to attack partly because its instructions are not readily available to relatives or others who might not be happy with these instructions.


• A Living Trust can hold property owned by a family in more than one state and save the family the cost and difficulty of conducting probates in multiple states.

For all these reasons and many others, Revocable Living Trusts are the legal tools that we find most often best accomplish our client’s planning goals.

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Is there anything else about Revocable Living Trusts important to know?

There are two misconceptions about Revocable Living Trusts that are important to know. The first is a mistaken belief by some that putting your property in a Revocable Living Trust will protect it from creditors. This is simply not true. If you retain the legal right to use the property in your trust however you please, your creditors can go after it. While there do exist some types of trusts that provide some creditor protection for the beneficiary, Revocable Living Trusts do not fall into that category. 

Revocable trusts are not asset protection devices and placing your property in a Revocable Living Trust will not protect it from being seized by legitimate creditors. The assets in a trust remain “countable” for Medicaid purposes so they do not protect your assets from being used for nursing home care.

A second misconception about Revocable Living Trusts is that they can be used to avoid income taxes. Again, this is not true. Placing your property in a Revocable Living Trust will not change your personal income tax status or obtain for you any favorable income tax advantages. For income tax purposes, the IRS will continue to treat the property as if you still individually own it.

Unscrupulous individuals sometimes promote these misconceptions about living trusts in an attempt to sell trust forms or other services and make a quick profit. Do not believe them.

Revocable Living Trusts are excellent tools for avoiding costly guardianship hearings, probate proceedings, and legal fees and costs. Drafted correctly, they can help your family legitimately avoid estate taxes and keep you in control of your property to benefit you and your loved ones. In order to obtain these benefits, you need and deserve the quality legal advice available only from a qualified estate planning attorney.

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What happens if parents fail to plan for their children?

If you fail to leave instructions for how your children are to be taken care of in the event of your death, some stranger in a probate court will make those decisions for you. No one knows or loves your children more than you. No one knows better than you their individual needs and how to best protect them. Why would you leave such important decisions to strangers?

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What issues are involved in planning for minors?

When planning for minors, typically our clients ask us four major questions:

• How can I best make gifts to minor children during my lifetime?
• Who should be named my child’s guardian if I suffer an untimely death?
• How should I leave property to my children if they are still minors when I die?
• How can I plan for a child who is disabled or has other supplemental needs?

Planning in this area involves far more than mere economics. It involves creating an environment that will allow underage children to experience both loving care and economic security as they grow into adulthood. This planning should begin while we are still alive. One estate planning opportunity we have is our ability to make lifetime gifts to our children.

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What issues are involved in making lifetime gifts to children or grandchildren?


When planning their estates, many parents and grandparents want to learn the best way they can make lifetime gifts to children or grandchildren. These gifts are usually intended to build a college fund for the child while also reducing the donor’s taxable estate. Although these parents and grandparents are to be commended for their proactive approach to protecting their loved ones, there are several pitfalls for the unwary in such lifetime planning.

Financial professionals often advise parents to establish custodial accounts for minors under the Uniform Transfer to Minors Act (UTMA). These accounts are easy to recommend because they are easy to establish and require few formal documents. The problem with this recommendation is that the child will be given all of the account assets when he or she turns twenty-one.

There is nothing magical about reaching one’s twenty-first birthday. Not all children are financially mature at that age and many need further guidance. If there are substantial sums in the account, the biggest question many children often face is, “What color should the Porsche be?” Some of the best parents in the world have raised children who cannot handle money. This lack of control is a major drawback that makes an UTMA definitely not the right vehicle for the parent or grandparent who desires to guide the child’s use of the assets.

If you want to retain control over how and when distributions are made from a child’s account, a Minor’s Demand Trust is an excellent option that should be explored. With a Minor’s Demand Trust, the parent or grandparent retains control over how the trust assets can be used while still escaping gift taxes that would otherwise be due. To accomplish this two requirements must be met. First, annual gifts are made that are kept under the annual gift tax exemption. Second, each time a gift is made the minor is given the legal right to demand the gift during a specified period of time (a window of opportunity). This withdrawal right poses no particular problem because, since the child is still a minor when the gift is made, it is of course the parent who decides whether to exercise the child’s withdrawal right. The parent can simply waive the demand right and instead invest the funds for the child’s future needs.

Another benefit of a Minor’s Demand Trust is that distributions are not limited to educational needs. The Trustee can use trust assets for the benefit of the child as desired or deemed appropriate.


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Who should be named the guardian for minor children?

Perhaps no issue is more difficult for parents to address than who will take care of the children if the parents are unable to care for the children themselves. This question is so important that we have devoted the entire next chapter to it.

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What issues are involved in leaving assets to minors upon your death?

Once you decide how to best make lifetime gifts to provide for a child’s future educational needs and financial security, and determine who will be the child’s guardian, the next step is to protect the inheritance. A “simple will,” suggested by some attorneys, is not an adequate tool for this important task.

Such “simple wills” can subject your children to unnecessary and intrusive court proceedings, excessive costs, lost privacy and extended delays. Moreover, with ongoing court proceedings, every trip to the attorney’s office or courthouse reminds the children of their loss. Instead of accepting such questionable advice, consider consulting an experienced estate planning attorney who can efficiently and creatively set up a Living Trust that incorporates your most cherished values, hopes, wishes, dreams and aspirations for your minor children.

A major planning difficulty we often see stems from the desire of many parents to treat all of their children equally. As a result of this desire, it is not uncommon for parents to divide their estates into equal separate shares for each child. While this simplistic approach sounds equitable, it can lead to drastically unfair results. What is fair is not always what is equal. The truth of this is seen in how most of us raise our children.

When asked, most parents admit that they do not use a ledger to keep track of money spent on each child. For example, if one child displays musical talent most parents would not hesitate to invest in piano lessons and even buy a piano if the family can afford it. Having made such a large investment for one child, they do not immediately give an equal amount to the other less talented children.

The problem with taking an automatic “equal division” approach in planning your estate is that it imposes a rigid one-size-fits-all plan on the children regardless of their age, economic circumstances, or their individual needs, strengths and weaknesses. Of course we all love our children equally but we should never fail to plan for them as individuals.

In our experience, the use of a “Common Trust” for minor children more closely mirrors the flexibility that parents use in raising their children. A Common Trust comes into effect upon the deaths of both parents. The alternatives in design are almost endless, but the cornerstone of every Common Trust is to provide for all your children’s needs from a common source just as if you were still alive. Authors and preeminent estate planning attorneys, Robert A. Esperti and Renno L. Peterson, have aptly nicknamed this kind of trust a “soup-pot trust” and describe it as follows:

“Can you recall your mom’s soup specialty? If it was like our moms’, it had just about everything in the pantry and refrigerator in it. When it was ladled out, the hungrier children at the table got more than those who weren’t as hungry. Some got more meat, because it was their favorite; some got more vegetables or rice or noodles. If a particular brother or sister had a penchant for a particular ingredient, that ingredient was always found in abundance in his or her bowl. Mom controlled and monitored the whole process to make sure that everyone was nourished and as happy as possible, and she ultimately decided who got what.” (Esperti and Peterson, Loving Trust, Viking Penguin, 1994).

In an estate plan that incorporates a Common Trust, the Trustee serves as the “mom” in the soup story told above. The Trustee decides who gets what based upon the individual present and anticipated needs and desires of the children and the available trust assets. Since the Trustee’s job is to follow the Trust’s instructions, it is a good idea that those who desire to incorporate a Common Trust into their estate plan give their Trustee guidance as to the specific needs of each child.

While it is a good idea to place assets in a common trust while the children are young, at some point the trust will have fulfilled its purpose and it becomes time to distribute whatever remains to the now older, and hopefully mature, children. The question then becomes, “What is the right time to end the Common Trust?” While this is an individual decision based on the family situation, most common trusts contain instructions that state that the Trustee should keep funds in the Common Trust until the youngest child reaches a certain age or finishes college. If the Common Trust were ended and the assets distributed when the oldest child reaches a certain age or finishes college, the youngest child could be deprived of the opportunity to receive Trust assets for education or other needs. It is much more equitable to keep the Common Trust intact until the youngest child receives the same level of care that was given to older siblings.

To alleviate the danger that the older children may feel that they are being punished by having their inheritance delayed until a much younger sibling grows up, trust instructions can be included that allow the trustee to advance money or property to an older child for extraordinary needs or opportunities. This “advancement” is then taken out of that child’s share when the Common Trust is terminated and the assets distributed among the children.

Another good idea to use in planning for your children is to build incentives into the Trust to motivate the child to live responsibly and develop good work habits. For example, incentives can be drafted that reward the children for maintaining a good grade point average, graduating from college, that assist with a down payment on a home, or match earned income among many other possible incentives. The possibilities for designing incentives that are individually tailored for the needs of your children are limitless.


When the time comes for the Common Trust to be divided, there are two main options. One can decide that all of the trust assets should be immediately divided and distributed outright to the children to do with as they please. This option is appropriate if the children are all older, leading successful lives, and the parent does not feel the need to protect the inheritance for a variety of reasons. Alternately, instead of just surrendering total control of the inheritance to the children, the parent can decide to keep each child’s inheritance in a protective trust established specifically for that child. These protective trusts contain instructions for the management and distribution of trust assets tailored to the individual needs of a specific child. Again, the possibilities and alternatives for designing these trusts are endless.

Property can be kept in trust for a beneficiary’s entire lifetime. In this situation a trustee is appointed to decide when and how much of the trust assets to distribute. This type of planning makes sense not only if a child has spendthrift tendencies or a drug or alcohol problem, but the trust can also provide protection for your child from a failed marriage or claims of creditors. 

If you have a child who will never be able to handle money, keeping that child’s inheritance in the trust with instructions to the Trustee to provide for his or her health, education, maintenance, and support would be a wise and loving choice.


Alternately, a parent can decide to space trust distributions over several years. This prevents children from misspending the entire inheritance all at once by giving them time to mature. The last thing a parent wants is to destroy a child with an inheritance.


If your child has reached maturity and is fiscally responsible, the trust instructions can be quite flexible and allow 
withdrawal of trust funds whenever he or she wants. Although the child has access to the funds, if properly drafted, the Trust will protect the inheritance from creditor claims, lawsuits, and divorcing spouses. In our litigious and divorce-prone society, such protections are becoming increasingly necessary.

Unfortunately, in some families a child may never be able to provide for himself or herself due to a physical or mental disability or some other special need. In these cases special planning is needed for the special child.

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How can I plan for a child who is disabled or has other special needs?

The most effective way to make sure a special needs child is properly provided for upon your death is to create a Special Needs Trust for them. A Special Needs Trust is administered by a trustee whose duty is to provide for the financial and medical needs of the special child in accordance with the written instructions in the trust. A Special Needs Trust will protect the assets you leave for the use of the child from the unscrupulous. A minor may also need a guardian who will oversee the child’s emotional, religious, and social needs.

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Are there any problems with creating a special needs trust?

A Special Needs Trust can be drafted to meet the needs of the individual child. The instructions in the Special Needs Trust should also be designed so that the child does not become ineligible to receive federal or state benefits to which the child may be entitled. This can be accomplished if the trustee’s power is discretionary and the trustee can withhold or distribute funds depending on the child’s condition and the availability of state or federal funds, within the restrictions imposed by state and federal law.

The Special Needs Trust may contain instructions that surplus income may be accumulated if necessary to avoid 
disqualification for government benefits. The trust should also contain provisions that prohibit the child from transferring income or principal of the trust to any person.

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What about adult family members with special needs?

A Special Needs Trust can also be created to provide for the needs of an adult who is unable to care for himself or herself. All of the previously addressed issues relating to a Special Needs Trust for a child also apply to a Special Needs Trust created for an adult.

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GLOSSARY

 
Beneficiary  One who receives property pursuant to a will, a trust, an insurance policy, an individual retirement account, or other third-party beneficiary contract.   Back to Top
 

Estate Tax  An excise tax levied by the state or the federal government on the privilege of transferring wealth at death.  The estate has the obligation to pay estate tax.   Back to Top
 
 
Probate A court proceeding to determine competency or custodial rights (living probate), or to determine the validity of a will and the oversight of the procedure by which the assets of a decedent are administered under the provisions of a will.   Back to Top
 
 
Revocable Trust  A trust that can be changed or revoked by the trust maker.   Back to Top
 
 
Trustee  A person or institution that has the fiduciary responsibility for carrying out the instructions set out in a trust.  Back to Top
 
 
Will  A legal document containing the instructions for the disposition of one's assets after death.   Back to Top