One of the questions I get all the time is, should I put _________ (name an asset) into my trust? The answer, of course, is that it depends on the asset, but generally speaking, everything you own should be transferred to the trust. Which leads to the follow-up question: do I lose control of my assets when I put them into my trust?
Why Put Your Assets Into A Trust
If your goal is to avoid probate and you’ve created a trust to accomplish that goal, you need to understand one thing. Assets owned by the trust avoid probate. Assets not owned by the trust are exposed to probate.
Now that you understand the importance of your trust owning your assets, who controls your assets?
Who Is In Charge of My Trust?
When you create your trust, naturally you put yourself in charge of your trust. And you also chose who will be in charge after you, and maybe even who will be in charge after that person. The person in charge of the trust and the assets inside the trust is called the Trustee. When you created the trust, you made the decision about who the successor trustee will be and when they step into your shoes as trustee. Though who the trustee is will change as time goes by, you made the decisions when you created the trust.
Who Gets to Benefit From My Trust?
While you're alive, you're the beneficiary of your trust, and after your gone, your surviving spouse is typically the sole beneficiary of the trust. After you and your spouse are gone, then you get to spell out in your trust exactly who gets your estate, when they get it, and under what circumstances.
It’s Your Trust
As the creators of the trust, you are completely in charge of what goes into, and what comes out of your trust. And because it’s a revocable trust, you can completely change the trust itself, including getting rid of it completely should you so choose. It’s all up to you.
A trust gives you the ability to spell out exactly who gets what and when. Now that is total control over your assets!
Not all living trusts are the same. And I’m not talking about quality either, though that is a major factor too. I’m talking about the difference between minivans, pickups, and sports cars. There are five major types of trusts that we use every day in our practice for different situations.
Probate Avoidance Trust
This is the basic, direct distribution trust that is the typical trust people are introduced to when they learn about wills vs. trusts. This trust takes a no-nonsense, keep-it-simple approach to dividing all the assets between the beneficiaries and having accomplished its purpose, ride off heroically into the sunset.
Personal Asset Trust
What if your beneficiaries’ inheritance could be protected against lawsuits, creditors, and even divorcing spouses? With Estate Plan Pros’ “Personal Asset Trust” you can provide dramatically increased protection for your beneficiaries against these financial risks. Read more about the Personal Asset Trust here.
Surviving Spouse Asset Protection Option
If you have children from another relationship that you’re including as beneficiaries, what happens when you’re not the surviving spouse? What happens to your assets? We can set up the trust to split in half at the death of the first spouse so that portion becomes an asset protection trust, and locks in the beneficiaries for your half of the estate.
Beneficiary Protection Trust
Some beneficiaries should not control their inheritance, or at the very least need some assistance managing their inheritance. A beneficiary might have significant disabilities that qualify them for government assisted programs like SSI, SSDI, Medi-Cal, or might have significant substance abuse issues, or event simply major financial problems. For these beneficiaries a Special Needs Trust or Spendthrift Trust can be set up to manage the inheritance for the beneficiary’s lifetime. This allows the beneficiary to receive the benefits of the inheritance without the burden or responsibility of managing the funds.
Retirement assets such as IRA’s, 401k’s and all their variations can often be the most significant asset that will be passed on to the next generation. Yet without prudent planning beneficiaries can accidentally or intentionally destroy the stretch-out of the inherited retirement plan. Additionally, the recent U.S. Supreme Court case, Clark vs Rameker, held that any asset protection you enjoy for your own retirement plan does not pass on to your beneficiaries. The Stand Alone Retirement Trust addresses both of these problems by helping ensure a proper rollover of the asset and giving your beneficiaries the option of using the retirement account as a protected asset. You can read more about the Stand Alone Retirement Trust here.
Every family is different, and their estate plan is going to reflect those differences of personalities and needs of beneficiaries. While these five broad categories describe the most common options, there other strategies and options that your estate planning attorney can review with you.
Missing files. Unprocessed checks totaling several hundred thousand dollars in filing fees. A procedural and paperwork mess that saw pleadings as far back as 2015 not docketed or scanned. The legal system is complicated enough, but when clerks behind the counter can’t handle the paperwork, the system doesn’t function. And unfortunately, that is exactly what happened in the Suffolk County Probate & Family Court in Massachusetts.
It was apparently an office already in trouble, the prior Register in charge of the office lost her seat after allegedly assaulting an employee after a holiday party. In 2014, with a new Register, the situation didn’t improve. The court brought in a temporary manager in October 2016 who found fifty bins of files scattered throughout the office. They estimated that an average of 20-30 cases went missing on any given day.
In California, the court system went through a rough patch when the statewide budget cuts hit. Things have improved, and overall thankfully, our local Sacramento office runs well.
Usually, when I discuss the probate process, and the reasons why you should avoid it, I assume a functional court. Unfortunately, this story illustrates that isn’t always a safe assumption.
Source: Severe dysfunction alleged in Suffolk Probate, Boston Globe, March 17, 2017
If you have the wrong kind of trust, naming it as the beneficiary of your retirement account could cost your kids a lot in extra taxes. How? It happened because you’ve just forced your heirs to report the entire amount as income.
When you inherit a retirement account, several things change immediately. The first is that the account will look at the new owner to re-calculate the measuring life on the account. If they can see a person, they’ll use that person’s age. This is called the “stretch out rule”. But, if they just see an entity like most trusts that have no age, there is no stretch out, and the beneficiary will be forced to close out the IRA account and take the income tax hit. If you have an ordinary trust, naming it as the beneficiary kills the possibility of a stretch-out.
The second big change when you inherit a retirement account is that there is no longer any early access penalty. You could withdraw the entire amount, or something less, and the only consequence is that you will owe income tax on the distribution. This is why the US Supreme Court in Clark v. Ramiker decided that creditor protection laws do not protect inherited retirement accounts.
What about the right kind of trust?
The right kind of trust is specifically designed to handle retirement accounts, and meet the four requirements of a see-through trust outlined by the IRS. A retirement trust allows you to preserve the stretch out for your beneficiaries, and put into place the plan and asset protection a trust can create.
Using this kind of trust, you can:
- Help keep the IRA in the family, by avoiding having a child name his or her spouse as a beneficiary, and seeing the money go to that new spouse’s children
- Protect the asset in case of a divorce
- Manage the account for beneficiaries who are young children, elderly or disabled
- Give direction and security for a beneficiary with poor money management skills
Unless you have the right kind of trust, don’t send your retirement funds there. But do consider the benefits to your children of using the right kind of trust for your retirement funds.
It's 2006, Michael Jackson and his partners are meeting in a hotel. Jackson promises his partners shares in his company for their loyalty. Flash forward to today, and the business partners were in court, trying to get their agreement enforced against the estate.
The court had no problem sending them home empty-handed. The problem? Besides waiting 5 years after Michal Jackson’s death to file a claim against the estate, there was no writing backing up the agreement.
If you are making promises to your heirs, be sure to put those promises in writing. If you don’t, you could be setting up future court fights as heirs try to reconcile what you told them with what you actually did.
Planning for worst case scenarios is the reason why we get life insurance in the first place. But could some simple wording changes on your life insurance beneficiary form make a big difference? It could make the difference between the court sitting on the money until the child turns 18 instead of the person you trust being able to immediately use those funds for your child’s benefit.
When discussing options for life insurance policies, retirement accounts (IRA’s, 401k’s, etc.), and in naming beneficiaries in a will or trust, there are three options, which I’ll take in order of simplicity.
Option 1: Naming The Child Directly, After The Spouse
You can name your children specifically or as a class, for example, “all my children.” This effectively puts the court in charge of the funds until the child reaches adulthood at age 18. You’ll have to go to court, and request that they appoint a guardian who will manage the funds under the court’s supervision. The formal procedures that the guardian will have to comply with in order to utilize the funds, however, make it difficult for the guardian to use the money effectively except for the most obvious needs. After the child reaches the legal age of adulthood, 18, the court then turns the entire account over to them. Needless to say, this isn’t an ideal option.
Option 2: Use an UTMA Designation
With some simple additional language, the beneficiary designation can specify a custodian to manage the money under the California Uniform Transfer to Minor’s Act. The custodian is free to proceed without the court’s supervision, which can be a good or bad thing, depending on the skills and faithfulness of the custodian. However, aside from relieving some of the burden of the formal procedures a guardian faces from court supervision, the same problem of the custodian’s control terminating upon the child’s 18th birthday applies to UTMA accounts, unless you specifically authorize the custodian to act until age 25.
Using an UTMA account has the benefit of being cheap (you don’t need an attorney to set one up) but it does have some limitations. You’ll need one account per child, meaning you can’t have a “family” account until the children reach a certain age. And you can’t give any directions or limitations on the custodian’s use of the funds.
Option 3: Use a Trust
A trust is more complex, but also the most flexible of the three options. The trustee won’t have the formal reporting procedures to the court that restrict a guardian. And in setting up the trust, we can give the trustee specific instructions. And most importantly, we don’t have to terminate the trust when the child reaches adulthood, but can choose from a number of options in paying out the funds for our children’s benefit. For my wife and I, choosing a trust makes the most sense. Using a number of financial tools, we hope our two boys will be well prepared for college and beyond.
Will the ABLE Act Replace Special Needs Trusts
Until now, disabled individuals have had very few options to keep money in their control and maintain SSI and Medi-Cal (Medicaid) benefits. With the signing into law of the Achieving a Better Life Experience, or ABLE Act by President Obama on December 19, 2014 disabled individuals and their families have an interesting new option available. The ABLE Act has been a long time coming, starting with a proposal by the Committee on Intellectual Disabilities in 2004. The California version, CalABLE was passed into law October 2015. So, should you rush to open an ABLE account?
For families with a loved one who is disabled, setting up savings for their needs is extra challenging because of the limit of $2,000 for continued SSI and Medi-cal (Medicaid) benefits. If the disabled individual has more than $2,000 they will not be eligible for these benefits. The ABLE Act addresses this issue by allowing a disabled individual to have an account with more than $2,000 in an ABLE account without being disqualified. But, there are limits on the ABLE account:
Contributions: Contributions are limited to $14,000 annually, based on the current annual gift tax exclusion. Contributions are limited to cash only.
Distributions: Distributions must be qualified disability distributions, and are reported monthly to Social Security. Any unqualified distributions are taxed as ordinary income and subject to an additional 10% penalty.
Medicaid/Medi-Cal Payback: At the beneficiaries death all funds in an ABLE account are subject to Medicaid payback. Any funds left over may go to a family member.
Suspension of Benefits: An account over $100,000 will suspend cash benefits, but will not disqualify the individual. Once the account goes back below $100,000 benefits can resume without re-applying.
Within these limits, there are some advantages:
Tax free growth: Funds in the account grow tax free and qualified distributions are not counted as income.
Protects government benefits eligibility: Subject to the suspension of benefits if account exceeds $100,000 as noted above, the beneficiary remains qualified.
Beneficiary Control: The account allows the beneficiary to spend the funds, giving them a measure of independence (subject of course to the limits on distributions as noted above).
Gainful Employment: with an ABLE account, a disabled individual can be gainfully employed, deposit the earnings in the ABLE account and not risk losing their SSI and Medi-Cal eligibility.
For more information about ABLE accounts, and evaluating in which state to set up an ABLE account, visit www.ablenrc.org
Who Should Consider Creating an ABLE Account?
A Gainfully Employed Disabled Individual: If a disabled person is intentionally limiting their employment to keep from disqualifying themselves from SSI or Medi-Cal an ABLE account can give them the flexibility to continue that employment and save for themselves.
UTMA Accounts: If a child has been receiving gifts over the years deposited into an account for their benefit that is now limiting their ability to qualify for needed benefits when they turn age 18, consider transferring the money to an ABLE account when they become available. The other two alternatives are to 1) spend down the money, or 2) setup a Medicaid/Medi-Cal Payback Trust.
Representative Payee: If you are managing an individual’s SSI checks in a “rep-payee” account, the account must stay below that $2,000 limit. One strategy is deposit these funds into an ABLE account.
Contributions from Relatives: Grandparents and other individuals who may consider setting up college funds, may contribute to an ABLE account for the disabled individual.
Alternatives to ABLE
Disabled individuals and their loved ones have several savings options besides the upcoming ABLE accounts including – leaving money in their parent's name, establishing a Third Party Special Needs Trust, and in some cases, a Roth IRA.
Understanding the Third Party Special Needs Trust
A third party special needs trust (SNT) is set up by someone other than the disabled individual for the disabled person’s benefit. Typically the trust is created as part of a parent’s estate plan for their disabled child. The trust can be either established at the death of both spouses (a testamentary trust) or established now.
Contributions: Contributions may trigger gift taxes if made while alive, subject to the normal annual and lifetime gift tax exclusions.
Distributions: Distributions are supplemental to disability distributions, and must be carefully managed so as to not disqualify the beneficiary.
Tax: A third party special needs trust is a separate taxable entity, and taxed at trust rates, currently higher than personal income taxes, quickly reaching the highest tax bracket.
Disqualification, not suspension: If funds are distributed incorrectly, it can disqualify the beneficiary from benefits. Once a beneficiary is disqualified, they can reapply for benefits once the disqualification has been removed, a lengthy process.
A Third Party Special Needs Trust has certain advantages
No Medi-Cal/Medicaid payback: funds in a SNT can go directly to the contingent beneficiaries after the death of the disabled individual without looking at benefits provided by the government.
No limit on amount or type of contribution: Subject to the gift tax exclusions, any amount or type of asset can be contributed to a SNT.
Broader Distributions: An ABLE account is limited to qualified distributions; a SNT’s funds can be used for everything else.
Who should consider establishing a SNT?
Anyone considering leaving a disabled individual an inheritance. If you name a disabled individual relying on SSI or Medi-Cal/Medicaid assistance as a beneficiary, that inheritance will result in the individual having more than $2,000 in assets, and disqualify them from the assistance they are relying upon. Instead, if you set up a SNT, you can protect their eligibility for government benefits.
The ABLE account and a Third Party Special Needs Trust are complimentary tools, and used for different purposes. ABLE accounts are an exciting new opportunity for disabled individuals to increase their financial well-being and stability. Image courtesy of foto76 at FreeDigitalPhotos.net
Are you next in line to be a trustee for a family member? Or, your spouse, who has taken care of everything, is suddenly unable to carry on as before. With proper planning, you should be equipped to take over immediate medical and financial affairs. This checklist is for you– what you need to do when neither parent is able to continue caring for themselves or each other. First a disclaimer: while there is a lot of information here, this is a brief, general checklist. Taking the time to consult with an estate planning attorney about your particular situation is always advised. My goal in presenting this list is to give you a short list of items that will help you immediately step in and deal with the situation that demands your immediate attention.
Provide Immediate Care
First, take care of yourself. The role reversal of parenting your parents is a shock, and the mental trauma of seeing your parents suffer can have different effects at different times. Make sure you have a support network for yourself. You should notify the family of the change in your parent’s condition. Your parent may need ongoing personal attention, including in-home care, hospice or other types of assistance.
Locate important papers, including their estate plan, and particularly their Durable Power of Attorney and their Advance Health Care Directive. Once you locate those documents, you’ll need to take copies of the Durable Power of Attorney to any banks or financial institutions you need to manage on their behalf. You’ll also need to take copies of the Advance Health Care Directive to any medical provider so you can be notified of any medical treatment or recommendations and be able to arrange for any necessary medical treatment.
Consult With Experts As Needed
Review the situation with local estate planning attorney – are there any last minute estate planning decisions that need to be made? There may be steps that your parents have missed and need immediate action to avoid probate or taxes. Additional steps may be necessary to protect the estate and qualify your parents for assistance from the VA or Medi-Cal. If you suspect elder abuse, contact an elder law attorney with litigation experience immediately. Even if you’re not sure, the attorney can help advise you on steps you can take to protect your parents, or discover if abuse did take place. If you need help with record keeping, talk to a CPA about setting up a simple system for keeping important records organized. A good system will make it much easier for you when it comes to filing taxes, and if there is ever any question about your actions as the agent, you’ll have the documentation you’ll need to protect yourself. Having a conversation with your parent's insurance agent to make sure that assets are properly ensured, and that the proceeds will go to the correct place. Have the fire, homeowners, and personal property insurance policies been endorsed to the trust?
Take Necessary Action
An estate planning attorney can help you sort through the different options to assuming the position as Successor Trustee. He or she can then prepare the necessary documents you'll need to present to banks, brokers, insurance agents, and others. Ensure that mail will be handled appropriately, and not lost. Consider having the mail directed to your residence if necessary. Take steps as necessary to preserve the estate. You’ll want to guard against “beneficiary raids” by securing the property and taking an inventory of items. Something as simple as walking around with a video camera can be of great assistance.
Remember, when you step in as the agent under a Durable Power of Attorney, or Successor Trustee, you owe a fiduciary duty to the beneficiaries of the trust. If you breach that duty, you could be held personally liable for any loss that you’ve caused. Remember, you’re in this position because someone trusted to you carry out their wishes.
Ever wonder why you get to hear about all the details around a star’s estate, like Prince? It can be fascinating, learning the details of family rifts, and of course, who will inherit the mansion. Don’t be distracted, though, because you could be exposing those same details to the world for your family. How?
With very few exceptions, all court cases, including probate cases, are matters of public record. Meaning that anyone who cares to take the time can find out:
· Who your heirs are, including their full name, and often their address
· Exactly what they are inheriting, including details about real estate and financial accounts
In California, any estate larger than $150,000 must follow the formal probate process, which includes filing your will (if you have one), notifying all the creditors, and waiting for court approval of any distribution. Your will instructs the court on who your beneficiaries are, and how they are to receive their inheritance. Once in probate, your family will be required to disclose all of the assets and contact information of the heirs to the court, making that information part of the public record.
Not sure you want all of that information in the government's hands? That is one reason why many families choose to set up a living trust. One of the advantages of a living trust is that it protects your privacy. With a properly funded living trust, your successor trustee doesn’t have to file a court case, avoiding probate completely. With no public record, identify thieves and other scammers are kept out of the loop.
Looking for property and income tax breaks? California has a few options for seniors that could keep money in your pocket.
Property Tax Deferrals
While not eliminating property taxes, seniors 62 and older or disabled individuals with an annual household income of $35,500 or less can apply for postponement of property taxes on their home. Information and the application are posted on the State Controller's website.
Examine Parcel Taxes
Many cities and counties have additional locally imposed taxes paid by parcel taxes. The tax is based on the characteristics of the parcel, for example the size of the home or the lot. However there are exemptions for which you may be eligible.
To find out if you qualify for an exemption, call the local district or agency that imposed the parcel tax or special assessment listed on your annual property tax bill.
Note: An unofficial county-by-county list of some parcel taxes and exemptions is available on the California Tax Foundation website.
Moving? Take Your Property Tax With You
If you plan on buying a new home of equal or lesser value, and are 55 or older, you may be eligible to transfer your current property tax bill to your new home, thereby avoiding paying higher property taxes. Read a full description about the benefits of Propositions 60 and 90 here.
Disabled Veterans May Qualify for a Property Tax Exemption
If you are a 100% disabled veteran, or an unmarried surviving spouse of one, you may qualify for a property tax exemption of $124,932 to $187,399 on your principal residence.
To learn more, visit the Board of Equalization’s disabled veterans' exemption webpage.
To apply for the Disabled Veterans' Exemption, contact your County Assessor.
Sales and Income Tax
for all taxpayers 60 years of age and older The Tax Counseling for the Elderly (TCE) program offers free income tax help. They specialize in pensions and retirement-related issues.
To locate the nearest TCE site, use the Internal Revenue Service's site locator tool or call 1-800-906-9887. Visit the IRS website for more information about TCE.
This year the BOE estimates seniors 65 years or older will save between $109 (single) and $218 (married) when filing their 2015 California income tax returns if they qualify for the Senior Income Tax Exemption Credit.
Another exemption, the Senior Head of Household Credit may save you up to $1,317 if you:
- Are 65 or older as of January 1, 2016, and
- Earned $69,902 or less in 2015, and
- Filed as head of household in either of the previous two years.
There are also a number of items that are exempt from sales tax, like
- Prescription medications
- Prescribed medical equipment like wheelchairs, eyeglasses, crutches, canes, and walkers
- Meals sold to low-income senior by a nonprofit organization or government agency, like Meals on Wheels Association of America
- Meals served to you on a regular basis if you are 62 or older and live in a condo, and own equal share in a common kitchen facility.
Source: Tax Help for California Seniors, California Board of Equalization