Is Your Estate Plan as Stale as Last Week’s Turkey Sandwich?

5 Reasons to Update Your Estate Plan

Estate plans are almost magical: they allow you to maintain control of your assets, yet protect you should you become incapacitated. They take care of your family and pets. And, if carefully crafted, they reduce fees, taxes, stress, and time delays. Estate plans can even keep your family and financial affairs private. But one thing estate plans can’t do is update themselves.

Estate plans are written to reflect your situation at a specific point in time. While they have some flexibility, the bottom line is that our lives continually change and unfold in ways we might not have ever anticipated. Your plan needs to reflect those changes. If not, if will be as stale as last week’s ham sandwich and can fail miserably.

If anything in the following 5 categories has occurred in your life since you signed your estate planning documents, call us now to schedule a meeting. We’ll get you in ASAP to make sure you and your family get protected.

  1. Marriage, Divorce, Death. Marriage, remarriage, divorce, and death all require substantial changes to an estate plan. Think of all the roles a spouse plays in our lives. We’ll need to evaluate beneficiaries, trustees, successor trustees, executors/personal representatives, and agents under powers of attorney.
  2. Change in Financial Status. A substantial change in financial status – positive or negative – generally requires an estate plan update. These changes can be the result of launching, winding down, or selling a business; business and professional success; filing bankruptcy; suffering medical crisis; retiring; receiving an inheritance; or, even winning the lottery.
  3. Birth, Adoption, or Death of a Child / Grandchild. The birth or adoption of a child or grandchild may call for the creation of gifting trusts, 529 education plans, gifting plans, and UGMA / UTMA (Uniform Gifts to Minors Act / Uniform Transfers to Minors Act) accounts. We’ll also need to reevaluate beneficiaries, trustees, successor trustees, executors/personal representatives, and agents under powers of attorney.
  4. Change in Circumstances. Circumstances change. It’s a fact of life – and when you’re the beneficiary or fiduciary of an estate plan, those changes may warrant revisions to the plan. Common examples include:
  • Children and grandchildren attain adulthood and are able to serve in trusted helper roles
  • Relationships change and different trusted helpers need to be named
  • Beneficiaries or trusted helpers develop overspending or drug / gambling habits
  • Guardians, executors, or trustees are no longer able (or no longer wish) to serve in their preassigned roles
  • Beneficiaries become disabled and need a special needs trust to receive government benefits
  • Guardians for minor children divorce, move to a new state, or are, otherwise, no longer appropriate to serve
  1. Changes in Venue. Moving from one state to another always warrants estate plan review as state’s laws differ. Changes may be needed to ensure that you’re taking full advantage of – and not being penalized by – your new state’s laws. This is also true when purchasing a second home outside of your state.

Estate Plans Are Created to Help, Not Hurt, You

Old estate plans get stale just like old sandwiches do. You wouldn’t rely on last week’s ham sandwich for lunch; please don’t rely on your estate plan from yesteryear. If you’ve experienced any of the changes we’ve mentioned in this article, it’s time to come in and chat. We’ll review your estate plan and make sure you and your loved ones are protected.

 

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The Tax Cuts and Jobs Act – What did not change

What did not change?

The new Act encompasses many new and updated provisions including the new code §199A, addressing the taxation of income generated from pass through entities.  However, the followings are sections that were unchanged:

  • No Change to Capital Gains Rates – qualified dividends from C-Corp. are taxed at capital gains rates 15% for many taxpayers, and 20% for high-income taxpayers.
  • No Change to Net Investment Income Tax (NIIT) – qualified dividends from C-Corp. may be subject to the NIIT.
    • 3.8% surtax on investment income for taxpayers with modified adjusted gross income exceeding $200,000 and married filing joint exceeding $250,000 (these thresholds are not indexed for inflation).
  • No Change to Health Savings Accounts (HSA) Deduction –  $3,450 for individual coverage and $6,900 for family coverage, $1,000 catch‐up for those over 55 for those with High Deductible Health Plans (HDHP) through employer, purchased on the open market, or through the health exchanges.
  • No Change to IRA and Qualified Plans Deductions, but Roth conversions are repealed.

If you have questions about Business Planning & Estate/Trust Planning, call Attorney Ali Talai @ 818-992-2901 or visit our website @ www.TalaiLaw.com.

Keeping Control with a REVOCABLE LIVING TRUST

Revocable Living Trust

There are several different kinds of trusts.

An irrevocable trust is frequently used in tax planning. After it has been set up, you usually cannot change it or remove assets that have been transferred into it.

A testamentary trust is created after you die by a provision in your will. It can be used in tax planning or to manage assets for minors or other beneficiaries. However, a testamentary trust does not avoid probate and it provides no protection if you become incapacitated because it is part of your will.

The kind of trust we are discussing in this handout is called a revocable living trust (to keep things simple, we will often refer to it from now on as a living trust or trust).

What is a revocable living trust?

A revocable living trust is a legal document that, like a will, includes your instructions for what you want to happen to your assets after you die. But, unlike a will, a living trust can avoid probate at death. It can prevent the court from controlling your assets if you become incapacitated. And it can give you, not the court, control of the assets you leave to your minor children and/or grandchildren.

How does a living trust avoid probate and prevent court control at incapacity?

When you set up a living trust, you transfer assets from your individual name to the name of your trust, which you control – such as from “John and Mary Smith, husband and wife” to John and Mary Smith, Trustees under trust dated (month/day/year of trust).”

Technically, you no longer own anything, so there is nothing for the courts to control when you die or if you become incapacitated. The concept is very simple, but this is what keeps you and your family out of the courts – even if you own assets in other states.

Do I lose control of the assets I put into my living trust?

Absolutely not. You keep full control. As trustee of your trust, you can do everything you could do before, including buying, selling, investing, renting, and etc. You can make changes or even cancel your trust; that’s why it’s called a revocable living trust. In fact, the Internal Revenue Service considers putting assets in a revocable living trust to be a “non-event” because you can take them out at any time. Nothing changes but the names on the title. And, as you’ll see in the next few pages, you’ll actually have more control with your assets in a living trust that you do now.

How does a living trust work?

When you set up a living trust, you become the grantor – the person whose trust it is. If you are married, you and your spouse can be co-grantors, or you can be grantors of your own separate trust. Only you, the grantor, can make changes to your trust. That’s how you keep control.

You will need to name someone, called the trustee, to manage your assets in your trust. You can be your own trustee. If you are married, you and your spouse can be co-trustees. As long as you are a trustee of your trust, you file the same income tax returns as you do now, using your own social security number.

Can I name someone else as my trustee?

Yes. You could name an adult son or daughter, another relative or a good friend to be your trustee or co-trustee. You could also name a corporate trustee; that’s a bank or trust company that manages trust assets.

However, even if you name someone else as trustee, you’re still in control. As long as you are competent, you can replace your trustee at any time if you don’t like the job they’re doing for you, because you are the grantor of your trust.

What happens if I become incapacitated?

If you have named someone else as your trustee or to be a co-trustee with you (for example, your spouse or a corporate trustee), they will continue to manage your financial affairs according to your trust’s instructions for as long as necessary. If you recover, you automatically resume control. If you are the only trustee or if your co-trustee is unable to act (for example, if your spouse is also incapacitated or has died), the successor trustee(s) you personally selected will step in and act for you.

What happens when I die?

Your trustee or co-trustee essentially has the same duties as an executor. He/she collects any income or benefits, pays your remaining debts, sees that tax returns are filed, and distributes assets according to your trust’s instructions. If estate tax planning is involved, he/she will work with your team of professionals to make sure everything is done properly. All of this is handled efficiently and privately, with no court interference. Again, your successor trustee will preform these duties if you are the only trustee or if your co-trustee is unable to act.

How do I know my successor trustee will do what I want?

A trust is a binding legal contract, and trustees are fiduciaries; by law, they have a legal duty to follow your trust’s instructions and act in a prudent (conservative) manner at all times for the benefit of your beneficiaries. If your successor trustee were to abuse his/her duties by not following the instructions in your living trust, he/she could be held legally liable.

Choose your successor trustee(s) carefully – they have a lot of responsibility. Consider how busy your candidates are with their own affairs, how far away they live, and how capable they are. Talk to them and see if they would be willing to serve. If you have any doubts or concerns, you should probably consider a corporate trustee.

By the way, a successor trustee(s) has no control or say in your affairs until he/she steps in at your incapacity or death. And, of course, you can change your successor trustee(s) at any time until you become incapacitated or die.

When will my beneficiaries receive their inheritances?

With a living trust, that’s up to you. Without one, it would be up to the courts. One of the most powerful benefits of a trust is that you can keep control over who will receive your assets, and when and how they will receive them (this is one area where you definitely have more control when your assets are in a trust).

Since the court is not involved, assets can be distributed as soon as your successor trustee can wrap up your final affairs and serve the required notification (California Probate Code §16061.7). Or assets can stay in your trust, managed by the person or corporate trustee you can chosen, until your beneficiaries reach the age(s) you want them to inherit. For example, some parents prefer to give children or grandchildren their inheritance in installments so they have more than one opportunity to use the money wisely.

Your trust can continue longer to provide for a loved one with special needs without disturbing valuable government benefits. If you are concerned about a beneficiary’s spending habits, you could have the trustee provide periodic income and keep the rest of his or her inheritance in the trust. You could also supplement the income of a child who wants to teach, be a pastor or missionary, or do other worthwhile but typically lower-paying work.

Even if you feel that your beneficiary would handle the inheritance well, you may want to keep the assets in the trust to protect them from creditors, current spouses, ex-spouses, potential lawsuits, and future death taxes. Your trustee can make distributions to the beneficiary as needed, but the assets that remain in the trust would be protected from these creditors and predators and, if invested well, could even help provide for future generations.

Most people would like to leave their children or grandchildren enough so they can do anything they want, but not so much that they do nothing. With a trust, you can do that and more.

How does a living trust let me control assets for minor children?

As long as the assets stay in a trust, you prevent the court from taking control of the inheritance at your death or incapacity.

If you have minor children, you will name a guardian to raise them if something happens to you. You will also name a trustee to manage the assets and provide money for expenses until each child reaches the age(s) you want him or her to inherit. The trustee can be one or more individuals, including the person you name as the guardian, and/or corporate trustee (nominating one person as trustee and guardian may seem convenient, but the person you want to raise your kids may not be your best choice to handle the money). The court still has the right to approve your choice of guardian, but it cannot control the inheritance. The trustee can automatically step in at your death or incapacity and follow your instructions, with no court interference.

If you are divorced or separated: Since you control who will manage the assets, an irresponsible “ex” may have no incentive to even get involved. And if the other natural parent isn’t interested, the court may go along with your choice of guardian.

Grandparents: You can name a trustee (perhaps one of the child’s parents or a corporate trustee) to manage the assets until each child reaches the age(s) you want him/her to receive the inheritance. You may also want to inform their parents about a living trust to prevent court control if they were to experience incapacity or an early death.

If you have questions about Living Trust or other estate planning tools, call Attorney Ali Talai @ 818-992-2901 or visit our website @ www.TalaiLaw.com.

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