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What You Need to Know about Trusts

Some people still think that trusts and estate planning are just for wealthy people. However, that’s simply not true. Many people are good candidates for trusts, used to protect their assets and their families. Trusts can also be used to avoid probate, says the article “Common misconceptions about trusts” from the Rome Sentinel.

Who controls my property? The grantor, or the person setting up the trust, has the option of being a trustee, if they are setting up a revocable trust or an irrevocable trust. There are tax differences, so you’ll want to do this with an estate planning attorney. The grantor names co-trustees, if you wish. They are usually a spouse, adult child, or trusted adult. Successor trustees, that is, people who will take over the trust if the primary trustee becomes incapacitated or dies.

Only rich people need trusts. Anyone who owns a home, has life insurance and other assets worth more than $150,000 can benefit from the protection that a trust provides. The type of trust depends the grantor’s age, health status, and the amount, variety, and location of assets. A healthy person who owns a lot of life insurance or other assets would probably want either a Revocable Living Trust or a Will that includes a Testamentary Trust. However, a person who is over 55 and is planning for nursing home care, is more likely to have an Irrevocable Medicaid Trust to protect assets, avoid probate and minimize tax liability.

Can I access assets in a trust? A properly prepared trust takes your lifestyle and spending into account. Certain types of trusts are more flexible than others, and an estate planning attorney will be able to make an appropriate recommendation.

For instance, if you have an Irrevocable Medicaid Trust, you will be restricted from taking the principal asset back directly. The assets in this type of trust can be used to fund costs and expenses of real property, including mortgage payments, taxes, furnace and roof repairs. An IMT needs to be set up with enough assets outside of it, so you can have an active retirement and enjoy your life. Assets outside of the trust are your spendable money.

Can my children or any others take assets from the trust? No, and that’s also the point of trusts. Unless you name someone as a Trustee with the power to take assets out of the trust, they cannot access the funds. The grantor retains control over what assets may be gifted during their lifetime. They can also impose restrictions on how assets are restricted after death. Some trusts are created to set specific ages or milestones, when beneficiaries receive all or some of the assets in the trust.

Trusts are not one size-fits all. Trusts need to be created to serve each family’s unique situation. An experienced estate planning attorney will work with the family to determine their overall goals, and then determine how trusts can be used as part of their estate plan to achieve goals.

Reference: Rome Sentinel (May 31, 2020) “Common misconceptions about trusts”

∗ For more information about this and other similar topics, please visit: www.LambrosLawLLC.com or call us at: (401) 383-9899

Protecting a Digital Legacy

There’s never an easy time to talk about end-of-life planning, and a pandemic that has everyone thinking about death can make it harder, says the article “Wannabe Wired: Preparing your digital legacy,” from The Lawton Constitution. Most of us think about creating a will, making burial plans and ensuring that our loved ones are cared for when we are gone. However, planning for our digital legacy is often neglected.

You don’t have to be Bill Gates or own billions in bitcoins to have a digital legacy. In fact, most people don’t even recognize their digital assets as a new type of property. If you have bank accounts, social media, own any websites or have original music, artwork, or videos online, you have digital assets.

Prior planning can help your loved ones deal with your digital assets, as well as your traditional property.

Different online platforms have different policies about what happens to accounts owned by people who have passed. Sometimes there is an option to delete or deactivate a profile, if the owners have checked the right box. However, that’s not always the case. Many digital giants won’t allow someone who is not the owner, to gain access to their accounts or the data.

Start by making a list of user names and passwords. If you can, go through all of your accounts one by one to see if they allow users to make a plan for what happens if the owner dies. Some, like Facebook, allow the account owner to name a Legacy Contact. That person is permitted to manage tribute posts on your profile, deciding who can and who cannot post on your account and request the removal of your account. Just go to General Account Settings and click on the “Memorialization Setting.” You also have the option to have your account deleted after you die.

Not every platform makes this process so easy. Some will delete accounts, if there is no activity after a certain number of months or years. If you have a business that relies on a free email service like Yahoo!, this could cause your family to lose access to valuable information.

Once you’ve made a thorough list of all of your online accounts and passwords, talk with a trusted family member about your wishes for your digital accounts. Do not include the document with online accounts and passwords in your will! Remember that your will is likely to be a probated document, meaning that it will be entered into the public record. You don’t want people accessing your online accounts—it’s an invitation to identity theft.

Speak with your estate planning attorney about planning for your digital and traditional legacy. It will spare your loved ones a lot of trouble and provide you with peace of mind.

Reference: The Lawton Constitution (May 12, 2020) “Wannabe Wired: Preparing your digital legacy”

∗ For more information about this and other similar topics, please visit: www.LambrosLawLLC.com or call us at: (401) 383-9899

What Exactly Does an Executor Do?

The job of the executor is an important one. The executor has a fiduciary responsibility to manage the assets and debts of the decedent and carry out instructions documented in his last will and testament. The executor is also responsible for distributing assets, explains the article “A Step-by-Step Guide to Being an Executor” from Kiplinger. If there are any claims against the estate, the executor might be facing personal responsibility, if funds are not handled properly.

The learning curve could be steep, especially if the executor does not know a lot about the person’s finances and possessions, or is new to the tasks of managing money, corralling heirs or the legal processes that occur after someone dies. If the decedent didn’t tell the executor where his records and important papers are kept, things can get even more challenging.

Here’s what an executor needs to know, preferably before her services are needed:

Get informed and up to speed. Read the will and see if the decedent’s intentions are clear. That’s not always the case. When one man became executor of his mother’s will, he and his sister had two different interpretations about what their mother wanted to happen to the family home. While they wrangled out the issue, there were property taxes to be paid and maintenance costs. A letter of direction explaining things clearly would have prevented many problems.

Sit down and talk about it. It is a kindness to heirs to share information and intentions, while you are still alive. Discuss the will with the immediate family to avoid any surprises or misunderstandings. Consider having an annual conference with children to ensure that they understand the estate, the will and what to expect. If you have an argumentative family, doing this in advance won’t guarantee smooth sailing, but it may lessen the fighting.

Make an inventory. Managing an estate can be a long process, with many curves along the way. You’ll make it easier, if you create a list of all assets, accounts, debts and liabilities. Make a note of where tax records and insurance policies can be found. Include a list of all online accounts and digital assets, plus the names of your professional advisors, including the estate planning lawyer and CPA. Ideally, review the list with your executor.

Should the executor change the locks? In a word, yes. Two kinds of theft happen while people are attending funeral and memorial services. Some family members will outright take items and thieves may break into empty homes. Remove anything of value and have a reputable locksmith install good locks. If the executor is technically inclined, an inexpensive videocam system would be a good idea.

Get copies of the death certificate. Request multiple copies. Some institutions will require originals with a raised seal, while others will work with a copy or a scanned document. Better to have a few more than you need, so you don’t have to keep buying new ones.

Speak with an estate planning attorney. There are legal forms and tax forms that will need to be prepared. In some states, probate is straightforward. In other states, it is a complex and time consuming process. You don’t need to go it alone.

Open an estate account. The estate is a legal entity and requires a separate tax ID. The executor needs to apply for a separate tax ID, and then can use that to open a bank account. The estate funds the bank account, which is used to pay bills and deposit proceeds from assets.

Distribute assets. The executor is responsible for keeping heirs updated. Heirs receive assets, as designated in the will. If there are collections or a home, they will need to be professionally assessed, before they can be sold.

Reference: Kiplinger (May 12, 2020) “A Step-by-Step Guide to Being an Executor”

∗ For more information about this and other similar topics, please visit: www.LambrosLawLLC.com or call us at: (401) 383-9899

Divorce Reveals How Trusts are Used by the Ultra-Wealthy

South Dakota has become a domestic mini-Switzerland for wealthy people who want to shield their assets. Texas billionaire Ed and Marie Borsage’s divorce is shining an unwanted spotlight on both his finances and the use of trusts in the state, according to CNBC’s recent article “Billionaire Divorce uncovers secretive world of trusts in South Dakota.”

Married for three decades, the Borsage’s accumulated 12 homes and an unusual collection of high- priced items, like an Egyptian mummy and Marilyn Monroe’s personal effects. It was quite a lifestyle. However, when Ted filed for divorce, Marie discovered that everything had been put into a special trust that shielded assets from any claims. After paying her legal fees, she may end up with nothing from the 30-year marriage.

Ed’s attorneys are making the claim that all of the assets are controlled by the trust, so they are not marital assets. The total value of the couple’s marital property, which would be subject to division in a divorce, is about $12 million. Marie’s legal bills are already in the millions.

The unpleasant nature of the divorce offers a rare look into the highly secretive world of asset trusts in South Dakota. The protective trust laws of the state make it a haven for wealthy families from the U.S. and around the world. Experts say that about $250 to $900 billion is now being held by South Dakota trusts, from Chinese billionaires, Europeans seeking to avoid taxes and Americans looking to shield wealth from spouses.

When the two married in 1989, they had no wealth. Ed began a commodities trading business and Marie was one of the first employees. They became wealthy. However, in 2012, according the lawsuit, Ed began an affair and filed for divorce in 2017. That was when Marie learned that he had been transferring their business and personal assets into a complicated series of trusts, first in Bermuda and then in South Dakota. Marie was originally a beneficiary of the trust, but then before the divorce, Ed started transferring assets and she was removed as a beneficiary.

According to South Dakota law, he was not required to notify her of the changes. Trusts in South Dakota are also perpetual. Therefore, a wealthy family can put assets into a trust that are held in perpetuity, rather than a limited period of time. The state also gives trusts sweeping privacy and asset-protection against creditors, business partners, lawsuits—and ex-spouses. South Dakota has no inheritance, capital gains or income taxes. It’s an extremely attractive state for people who want to keep their business private and protected.

The state also has strict information protections, so there are nondisclosure orders on all of the attorneys and all of the filings in the divorce case.

Reference: CNBC (May 6, 2020) “Billionaire Divorce uncovers secretive world of trusts in South Dakota.”

∗ For more information about this and other similar topics, please visit: www.LambrosLawLLC.com or call us at: (401) 383-9899

What Is a Testamentary Trust and Do You Need One?

A couple doing some retirement planning has an updated will and a medical power of attorney in place, prepared with the help of an estate planning attorney. They own some rental property, a small business and life insurance, but their estate is not large enough for them to worry about the federal estate tax.

Do they need or want a trust to be part of their estate plan? That’s question from a recent article titled “It’s the law: Testamentary trusts provide protection for assets” from the Post Register.

First, there are many different types of trusts. A living trust, also known as a revocable trust, irrevocable trusts and testamentary trusts are just three types. The testamentary trust only comes into effect at death under a last will and testament, and in some cases, depending on how they are structured, they may never come into effect, because they are designed for certain circumstances.

If you leave everything to your spouse in a will or through a revocable trust, your spouse will receive everything with no limitations. The problem is, those assets are subject to claims by your spouse’s creditors, such as business issues, a car accident, or bankruptcy. The surviving spouse may use the money any way he or she wishes, during their lifetime or through a will at death.

Consider if your spouse remarried after your death. What happens if they leave assets that they have inherited from you to a new spouse? If the new spouse dies, do the new spouses’ children inherit assets?

By using a trust, assets are available for the surviving spouse. At the death of the surviving spouse, assets in the trust must be distributed as directed in the language of the trust. This is especially important in blended families, where there may be children from other marriages.

Trusts are also valuable to distribute assets, if there are beneficiaries with an inability to manage money, undue spousal interference or a substance abuse problem.

Note that the trust only protects the decedent’s assets, that is, their separate property and half of the community property, if they live in a community property state.

The best solution to the issue of how to distribute assets, is to meet with an estate planning attorney and determine the goal of each spouse and the couple’s situation. People who own businesses need to protect their assets from litigation. It may make sense to have significant assets placed in trust to control how they pass to family members and shield them from possible lawsuits.

Reference: Post Register (April 26, 2020) “It’s the law: Testamentary trusts provide protection for assets”

∗ For more information about this and other similar topics, please visit: www.LambrosLawLLC.com or call us at: (401) 383-9899

How to Keep the Family Vacation Home in the Family

If this winter-like weather plus pandemic have left you wondering about how to get started on passing the family vacation home to the family or preparing to sell it in the future, you’ll need to understand how property is transferred. The details are shared in a useful article titled “Exit strategy for keeping the cabin in the family” from The Spokesman Review.

Two options to consider: an outright sale to the adult children or placing the cabin in a qualified personal residence trust. Selling the vacation home and renting it back from the children, is one way that parents can keep it in the family, enjoy it without owning it, and help the children out with rental income.

One thing to bear in mind: the sale of the vacation home will not escape a capital gains tax. It’s likely that the vacation home has appreciated in value, especially if you’ve owned it for a long time. If you have made capital improvements over that time period, you may be able to offset the capital gains.

The actual gain is the difference between the adjusted sales price (that is, the selling price minus selling expenses) and their adjusted basis. What is the adjusted basis? That is the original cost, plus capital improvements. These are the improvements to the property with a useful life of more than one year and that increase the value of the property or extend its life. A new roof, a new deck, a remodeled kitchen or basement or finished basement are examples of what are considered capital improvements. New curtains or furniture are not.

Distinguishing the difference between a capital improvement and a maintenance cost is not always easy. An estate planning attorney can help you clarify this, as you plan for the transfer of the property.

Another way to transfer the property is with the use of a qualified personal residence trust (QPRT). In this situation, the vacation home is considered a second residence, and is placed within the trust for a specific time period. You decide what the amount of time would be and continue to enjoy the vacation home during that time. Typical time periods are ten or fifteen years. If you live beyond the time of the trust, then the vacation home passes to the children and your estate is reduced by the value of the vacation home. If you should die during the term of the trust, the vacation home reverts back to your estate, as if no trust had been set up.

A QPRT works for families who want to reduce the size of their estate and have a property they pass along to the next generation, but the hard part is determining the parent’s life expectancy. The longer the terms of the trust, the more estate taxes are saved. However, if the parents die earlier than anticipated, benefits are minimized.

The question for families considering the sale of their vacation home to the children, is whether the children can afford to maintain the property. One option for the children might be to rent out the property, until they are able to carry it on their own. However, that opens a lot of different issues. They should do so for period of one year at a time, so they receive the tax benefits of rental property, including depreciation.

Talk with a qualified estate planning attorney about what solution works best for your estate plan and your family’s future. There are other means of conveying the property, in addition to the two mentioned above, and every situation is different.

Reference: The Spokesman Review (April 19, 2020) “Exit strategy for keeping the cabin in the family”

∗ For more information about this and other similar topics, please visit: www.LambrosLawLLC.com or call us at: (401) 383-9899

Digital Assets Need to Be Protected In Estate Plans

Most people have an extensive network of digital relationships with retailers, financial institutions and even government agencies. Companies and institutions, from household utilities to grocery delivery services have invested millions in making it easier for consumers to do everything online—and the coronavirus has made our online lives take a giant leap. As a result, explains the article “Supporting Your Clients’ Digital Legacy” from Bloomberg Tax, practically all estates now include digital assets, a new class of assets that hold both financial and sentimental value.

In the last year, there has been a growing number of reports of the number of profiles of people who have died but whose pages are still alive on Facebook, Linked In and similar platforms. Taking down profiles, preserving photos and gaining access to URLs are all part of managing a digital footprint that needs to be planned for as part of an estate plan.

There are a number of laws that could impact a user’s digital estate during life and death. Depending upon the asset and how it is used, determines what happens to it after the owner dies. Fiduciary access laws outline what the executor or attorney is allowed to do with digital assets, and the law varies from one country to another. In the US, almost all states have adopted a version of RUFADAA, the law created by the U.S. Uniform Law Commission. However, all digital assets are also subject to the Terms of Service Agreement (TOSAs) that we click on when signing up for a new app or software. The TOSA may not permit anyone but the account owner to gain access to the account or the assets in the account.

Digital assets are virtual and may be difficult to find without a paper trail. Leaving passwords for the fiduciary seems like the simple solution, but passwords don’t convey user wishes. What if the executor tries to get into an account and is blocked? Unauthorized access, even with a password, is still violating the terms of the TOSAs.

People need to plan for digital assets, just as they do any other asset. Here are some of the questions to consider:

• What will happen to digital assets with financial value, like loyalty points, travel rewards, cryptocurrency, gaming tokens or the digital assets of a business?
• Who will be able to get digital assets with sentimental value, like photos, videos and social media accounts?
• What about privacy and cybersecurity concerns, and identity theft?

What will happen to your digital assets? Facebook and Google offer Legacy Contact and Inactive Manager, online tools they provide to designate third-party account access. Some, but not many, other online platforms have similar tools in place. The best way, for now, may be to make a list of all of your digital accounts and look through them for death or incapacity instructions. It may not be a complete solution, but it’s at least a start.

Reference: Bloomberg Tax (April 10, 2020) “Supporting Your Clients’ Digital Legacy”

∗ For more information about this and other similar topics, please visit: www.LambrosLawLLC.com or call us at: (401) 383-9899

Why Gifting during Volatile Markets Makes Sense

Gifting assets to a trust for children or grandchildren is often an important part of an estate plan. The recent article “Is Now a Good Time to Make a Gift?” from The National Law Review takes a close look into the strategy of placing non-cash assets into a trust, without exceeding the annual gift tax exclusion amount or the Federal Gift Tax Exemption. If those assets increase in value later, the increases will further enhance the gift for beneficiaries.

Taxes on gifts made to a trust to benefit children and grandchildren are based primarily on the value of the gift. Annual exclusion gifts, that is, transfers of assets or cash that do not exceed the annual gift tax exclusion, are currently set at $15,000 per recipient per year. A married couple may give up to $30,000 per person in any calendar year. Many annual exclusion gifts do not require a Federal Gift Tax Return (Form 709), although it would be wise to speak with an estate planning attorney to make sure that this applies to you, since every situation is different.

Annual exclusion gifts are one way to reduce the overall value of the estate, but they do not reduce the Federal Estate Tax Exemption of the person making the gift.

Gifts in excess of the annual exclusion amount may still avoid gift taxes, if the person making the gift applies their gift tax exemption by filing IRS Form 709. The gift tax exemption is unified with the estate tax exemption, at $11.58 million per person in 2020. Gifts that are bigger than the annual exclusion of $15,000 per year, reduce the $11.58 million exemption for purposes of both the gift tax and the estate tax.

For example, if a person were to make taxable gifts of $1.0 million to a child in 2020, their lifetime gift tax and estate tax exemption will be reduced to $10.58 million. If that person were to die in 2020 when the applicable estate tax exemption is $10.58 million, then only estate assets in excess of the exemption will be subject to estate tax.

Given the uncertainly of the gift and estate tax exemptions, management and timing of these gifts is particularly important. If no legislative action occurs, these generous estate and gift tax exemptions will sunset at the end of 2025. They will return to the 2010 level of $5.0 million, indexed for inflation.

The exemptions need to be carefully used and budgeted, because federal estate tax starts at 18% and rises to 40% on all amounts over the exemption. Like the exemption, these rate rates may be changed by future elections and/or tax law changes.

If you are concerned about an estate becoming taxable, the current decline in asset values makes this a good opportunity to transfer more of the estate into trust for beneficiaries. The transfers can decrease the impact of a reduction in the exemption amount, as well as any changes to the tax rates. The currently reduced value of stocks and many other investments may also present an opportunity to reduce future taxes.

The best way forward would be to have a conversation with an estate planning attorney to review your overall estate plan and how moving assets into trusts during a time of lowered value could benefit the estate and its beneficiaries.

Reference: The National Law Review (April 10, 2020) “Is Now a Good Time to Make a Gift?”

∗ For more information about this and other similar topics, please visit: www.LambrosLawLLC.com or call us at: (401) 383-9899

How a Letter to Your Executor Conveys Your Wishes

A detailed, informative letter can be invaluable to your executor to make your wishes known, says the article “Why You Should Write a Letter to Your Executor—and What to Say in It” from The Wall Street Journal. Your last will and testament does have many directions. However, there may be things you want your executor to know that may not be included in your will. This is especially important if death is sudden. The letter, which you should sign and date, can help prevent potential disputes, by minimizing any confusion around your intentions, priorities and goals.

Here are some things to consider when drafting a letter to your executor.

Your thoughts about wealth. Share your story about how you came to the assets that you are leaving in your will. How was your wealth created, what do you value and what are your long-term goals for your wealth? Do you want family members to invest the assets, so they grow over generations, or do you want them used for college education costs for grandchildren?

Describe key players in the family. It is best if your executor knows the members of your family.  However, they may not know the family dynamics or history. Giving them your insights, may help them anticipate issues. Does one child tend to take over and speak for everyone, without being asked? Are there substance abuse issues in the family that need to be considered? Present your executor with your concerns, so they can be mindful of how the family works (or doesn’t) as a unit.

What matters to you? This is especially important, if you don’t want your heirs to be dependent upon their inheritance, instead of becoming self-reliant. Share your values to encourage their earned success. Make it clear if you want to protect the family wealth, so it can be used to empower future generations and for family members to be responsible for their own financial well-being.

Give your executor the power to made decisions, even when that means saying no. Considering the size of your wealth and the family members who are your heirs, you probably have a good idea of who would do what with their inheritance. If you don’t want your wealth to be used for a start-up by a son who always bets on the wrong horse, say so in the letter to your executor. If you are hopeful that a daughter will use her inheritance for a down payment on a home for her family, you should also express that.

Some wishes for your wealth can be expressed through the use of trusts and other wealth planning tools. Your estate planning attorney will help create a plan that incorporates asset protection, tax planning and tools to distribute wealth in the way that you wish. An experienced estate planning attorney has worked with many families and understands the challenges and pitfalls that are presented any time wealth is transferred from one generation to the next.

Reference: The Wall Street Journal (April 8, 2020) “Why You Should Write a Letter to Your Executor—and What to Say in It”

∗ For more information about this and other similar topics, please visit: www.LambrosLawLLC.com or call us at: (401) 383-9899

Update Your Estate Plan to Protect Spouse and Children

Without an updated estate plan, a surviving spouse is left with a world of trouble, as described in the article “Protect Your Spouse and Children by Updating Your Estate Plan” from The National Law Review.

The documents that need to be updated beginning with the will. In one example, a will from a prior marriage left all of a person’s assets to their prior spouse and siblings. Under New York and New Jersey state law, gifts to prior spouses are automatically revoked by law. What does that mean? All assets pass to the alternate beneficiary, who is named in the first will. For this particular spouse, that means that all the deceased spouse’s assets went to the siblings and not the new spouse.

In New Jersey and New York, spouses can elect against a will to claim a share of the deceased spouse’s assets, but this only applies to a third of their assets. That’s far short of what a spouse usually wants for their surviving spouse and children.

The only thing worse than an out-of-date will is no will at all. In another case, a spouse died without having a will. The law in New Jersey provides that in this situation, most assets will go to the surviving spouse, but almost a quarter will go to the deceased’s parents, if they are still living. If there are children from a prior marriage, then a little more than half of the estate will go to the surviving spouse.

The other bad part of having an out-of-date will almost always means that beneficiaries have not been updated. Here’s where things can get even worse.

Assets that have designated beneficiaries do not pass through probate and go directly to the beneficiaries. How bad this can be, depends upon what assets are owned with a designated beneficiary, and how long ago the beneficiaries were named. In some states, prior spouses are removed as beneficiaries by the operation of law, but that is not always the case. An estate planning attorney will be able to explain your state’s laws.

Here’s one more case where a failure to update estate plans caused real hardship for a family. A niece, and not the new spouse, was named as the beneficiary of the deceased’s IRA, which was a large asset. Several hundred thousand dollars went to the niece, instead of going to the man’s new wife and child. He simply never updated his beneficiary designation.

While 401(k)s are always left to the spouse under ERISA, unless spousal consent is given for another beneficiary to receive the 401(k), IRAs are given to whoever is named as a beneficiary. The same goes for life insurance policies, investment accounts, bank accounts and any asset with a named beneficiary.

Speak with your estate planning attorney now to be sure that your current will still reflects your estate planning goals. If you have remarried, welcomed a new child to the family, or had any other major life events, your estate plan needs to be updated. Don’t wait until it’s too late.

Reference: The National Law Review (March 16, 2020) “Protect Your Spouse and Children by Updating Your Estate Plan”

∗ For more information about this and other similar topics, please visit: www.LambrosLawLLC.com or call us at: (401) 383-9899