An Irrevocable Trust Can Terminate

I often have clients that want an irrevocable trust.  I always advised them that, except in very specific situations that could involve the court, the trust can not be revoked, changed or revised.  Here is a common example of how a Irrevocable Trust might be used. 

The parents want to place their home in Trust for the benefit of their special needs child.  Upon his death, the home would go to the other surviving children.  We would start with a Revocable Trust for the parents.  The home would be placed in the Trust and the parents would go about their life as usual.  The terms of the Trust would specify that upon their death, the Trust will become Irrevocable.  The Trustees therefore could not revoke, change or revise.  However, there could be terms in the Trust that would provide for a termination of the Trust.  In this example, the Trust would in fact terminate upon the death of the special needs child.  The home would then transfer to the surviving children FREE of any trust terms. 

Let us protect and preserve your assets.  Contact us at http://www.ythlaw.com/.

Estate Planning Mistakes - Number Sixteen

Do not forget to make sure your documents address Divorce. Pennsylvania law provides that if you are divorces after making a Will any provision in the Will favoring or relating to the former spouse becomes ineffective for all puposes unless it appears from the wording in the Will that the provision was intended to survive the divorce. Just to be sure, it is even better to be proactive and change your Will when you get a divorce.

Furthermore, if you have any irrevocable documents, the law does not change those provisions upon divorce. Therefore, it is imperative that your irrevocable documents address divorce in the document when the document is drafted.

Make sure you have expert estate planning advice. Contact us at http://www.ythlaw.com/

Retitling Assets

This is a reminder of the importance of retitling assets when you get a Trust. Many folks ask for and obtain a Trust whether Revocable or Irrevocable, the most important step after the Trust has been signed is retitling. This means that all assets (or the assets to be placed in the Trust) that are in your name MUST BE retitled from your name to the name of the Trust, ie. ABC Trustee, for the XYZ Trust dated ______.

Without retitling your assets the Trust is pointless. It does nothing for you until assets are properly (legally changing title) placed into the trust.

We work with our clients during the retitling process. We do not leave it on them. They could forget, not understand or just procrastinate. Contact us for all your estate planning needs at www.ythlaw.com

A Lottery Winner

I have spoken on lottery winners and their propensity to spend all their winnings in a very short period of time and end up bankrupt. I have had clients who have encountered huge windfalls in a short period of time. One in particular stands out.

When I met this client, she still had just under 1/2 of her winnings which put her ahead of most lottery winners. Further, she had NO debt. Upon winning the lottery, she paid off her home, car and all other debts. She continued to live in her home and drive the same car therefore incurring no need debt. Since she was close to retirement, she quit her job and lived off her winnings for 2 years. She then begin drawing social security and her pension along with a small annuity payment from her investment.

So, you might say what is the issue and beyond getting her estate planning done (will, powers of attorney, etc) what else is needed? Well she executed an Irrevocable Trust which she would now like to change.

How does one change an Irrevocable Trust? The answer tomorrow as we continue with the story of our lottery winner. Leave your comment here or contact us at http://www.ythlaw.com/

Special Needs Trusts

As I sit at my computer composing this post, we are in yet another winter snow storm. The snow whirls in tornado circles creating high drifts in the yard and on the roadway. Even the wildlife that I may generally see has bunkered down for this event.

I reflect now on the radio interview that I did yesterday. I received a call after the show about Special Needs Trusts. These are trusts set up for the benefit of those with special needs who receive or may receive medical assistance or other government benefits. When the money of the person with special needs is used there is an age restriction for medical assistance benefits.

For medical assistance eligibility, the Special Needs Trust must be irrevocable and for the sole benefit of one with special needs under the age of 65. If the special needs individual is over 65, then their own money CAN NOT be placed in a trust to enable eligibility for medical assistance. This is to avoid those who may be going into a nursing home to take all of their money and have it placed in a trust so that they can qualify for public assistance, medicaid.

Leave your comments here or contact us at http://www.ythlaw.com/

2009 In Review

As the year 2009 comes to a close we reflect on estate planning:

In the news:

We learned from the deaths of many notables the importance of estate planning to all. How important it is to have a will and one that is up to date. The death of Michael Jackson, Farrah Fawsett and Senator Edward Kennedy all reflected different aspects of estate planning. See prior blogs on these issues starting back in July.

Top Blogs:

And the top blogs for 2009 are:

1/15/09 - 10 Reasons why you should have a will

1/27/09 - The 10 Hottest Estate Planning topics

2/9/09 - Hiring an Estate Planning attorney - 10 things that you should know

7/10/09 - Michael Jackson - 5 Estate Planning Lessons

7/22/09 - Planning for Non-traditional families

8/13/09 - Estate Planning - How do I get started

8/24/09 - Irrevocable Trust - When to Use

9/29/09 - Costly Estate Planning Mistakes

11/10/09 - Facebook, My Space, Linked In, Blog, Oh My

11/24/09 - Great Review o f My Book

12/19/09 - Tax Tips for your 2009 Taxes

Pick your top news stories and blogs. Contact us at http://www.ythlaw.com/

Protecting Your Wealth For Your Family - GRAT

I read a great article on Forbes.com, Keeping Family Wealth From the Taxman, by Elda Di Re and Scott Ferritti. I share a part of that article pertaining to a great taxing saving vehicle for this economy, the GRAT. If you get the chance you may want to read the entire article.

"In view of historically low interest rates, the current environment is an optimal time to give consideration to establishing a Grantor Retained Annuity Trust, "GRAT". A GRAT is a particularly attractive estate planning strategy due to the fact that the resulting gift tax cost can be eliminated.

The GRAT is an estate-freezing strategy that enables the business owner to transfer future appreciation in the business to children at a substantially reduced gift tax cost. Under the GRAT arrangement, the owner would transfer assets to an irrevocable trust and retain the right to receive a fixed annuity for a term of years. At the end of that term, the remaining assets in the GRAT would pass to the children.

The benefit of a GRAT is that, although all remaining assets would go to the owner’s children at the end of the term, the gift tax on the transfer to the GRAT is computed on the value of the remainder interest at the time of the transfer. The value of the remainder interest is computed by taking the original value of the transferred property and subtracting the present value of the annuity payments.

The owner receives annuity payments from the GRAT each year and may be established high enough so that the annuity's value approximates the value of the assets transferred into the trust, thereby reducing the gift tax cost to zero. The ability to "zero-out" the GRAT makes the GRAT an ideal estate planning tool."

Leave your comments here or contact us for your estate planning at http://www.ythlaw.com/

Irrevocable Trust - When to Use

The Irrevocable Trust is an asset protection vehicle because it can protect your assets from creditors, bankrupty, divorce and nursing home costs. However, there is a 5 year look back period when applying for medicaid to cover nursing home costs.

Further, you must be cautious when placing anything in an Irrevocable Trust. If others can not reach the assets in the trust, neither can you. You can not change the terms of the trust or terminate the trust in order to retrieve the assets placed into the trust. You have to treat the trust assets as though you no longer own them because you no longer own them.

Consult with an estate planning attorney if you think that the Irrevocable Trust serves your interest. Leave your comments here or contact us at http://www.ythlaw.com/

Michael Jackson's Will

It has been reported that Michael Jackson's will was found. This was a will from 2002 and reports indicated that there might be another will. Several things came to mind when I read and heard the reports and I share them with you.

FIRST, it is always important to keep your will up to date, to address changed circumstances such as a birth, death, additional assets, relocation, etc. Given Michael Jackson's life, a 7 year old will would probably be outdated.

SECOND, there should only be one original will. It should be maintained in a safe place. Generally the attorney preparing the will maintains the original in a safe. I have my clients maintain the original in their safe at home or at their bank in a safety deposit box. My records reflect the location of the will. When a new will is made the old original will should be destroyed. However, any new will would state that it revokes any prior (old) will.

THIRD, given all of the financial, legal and personal advisors to Michael Jackson, there should be more than just a will for his situation. He needed not only estate planning but asset protection planning. For his children, Trusts could have been established and funded during his lifetime. Such Trusts, if irrevocable, would not be subject to any creditors. Trustee(s) would have been named to manage the Trusts for the benefit of the children. The complexity of Michael Jackson's estate would result in not a simple estate plan but an intricate one addressing Federal Estate tax issues, creditors's issues, family and business matters.

FOURTH, the will when filed becomes a public document. For that reason, many people have their assets placed in a Trust which is not a filed or public document. If there is a will, it would be a simple one which is only done to make sure any asset not already in the Trust is place by the will into the Trust. All the terms, conditions and other specifics of the estate would be addressed in the Trust, the details of which would never become known to the general public.

IN CONCLUSION, this is just the beginning of what will be a long and complex legal matter. As the estate planning side of it unfolds, I will keep you apprised of what matters most. Your comments are welcomed or contact us http://www.ythlaw.com/

How can I provide for my grandchildren?

Here is another question raised by a reader.

"How can I best provide for my grandchildren? My son has been divorced twice. His 2 children (5 and 9) do not have the same mother. I have a wonderful relationship with my grandchildren but not with their mothers. My son has full custody of his 9 year old son and joint custody of his 5 year old daughter. However, he is not financially responsible. What is the best way for me to provide for my grandchildren during my lifetime as well as when I die? Giving or leaving money to either parent for the care of the children is not an option."

In Response to your question:
During your lifetime, you may want to consider a gifting program. This would allow you to annually gift up to $13,000 (as of 2009, amount changes periodically) in a separate trust for each child. The terms of the trust will dictate how the money will be spent. You should not serve as the trustee but designate a person or institution that you trust. Other options for gifting would include custodian accounts (distribution required at 18 or 21) and 529 Plans (limited to college education expense). You should also be aware of any tax implications. Prior to any final decision, consult with your tax advisor.

If you set up an irrevocable trust during your lifetime, it could continue under the same terms and conditions when you die. If you did not set up anything during your lifetime, you could establish a testamentary trust with terms and conditions that you desire for the care of your grandchildren. However, whenever assets skip a generation (ie. to grandchildren instead of children), a generation-skipping transfer has occurred and a tax is imposed unless the amount is within the exemption. There is no tax if you do not exceed your 1.5 million dollar lifetime exemption.

Made your comments here or email a question via my website http://www.ythlaw.com/ .

Transfer Your Deed

Let's say you have a home and you want to leave it to your children. What would be the best way to leave your home to them? This third option (Life Estate and Irrevocable Trust were options discussed the last 2 days) would have you transfer all your interest to your children now while you continue to reside in the home.

Pros of Deed Transfer
(1) If you should need medical assistance in the future, the home would not be subject to recovery by the state since ownership was transferred out of your name to your children. If your deed was transferred to the children (without fair market consideration, ie it was gifted to them) within 5 years of you having to go into a nursing your eligibility for medicaid will be affected.
(2) Upon your death, your children would not have to pay an inheritance tax since they are already owners of the property.
(3) If your home was your only asset then there would be no need to probate your estate.

Cons of Deed Transfer
(1) Since you no longer own the property, you would have to have an agreement from your children that you may live in the house for as long as you like.
(2) If your children have issues with creditors, divorce or bankruptcy, the home is exposed to those issues. You could find yourself evicted by new owners.
(3) Your children would not have the advantage of a "step-up" basis of the property which one receives when they inherit property. Their basis would be the same as yours which is the value of the home at the time of your purchase. This could result in significant capital gain tax upon the sale by your children.

A deed transfer is ideal when: (1) you are well into retirement, late 70s into your 80s and beyond (2) your property is not income producing (3) you want to avoid the inheritance tax and (4) your children do not have issues that might put your home at risk; and (5) there would be no issues with a long term lease from your children.

Consult with our office if you would like to learn more about this estate planning technique.

Irrevocable Trusts

Let's say you have a home and you want to leave it to your children. What would be the best way to leave your home to them? Today, I want to address the Irrevocable Trust for that purpose. Over the next few days, we will look at other options and you can decide which alternative might work best for you.

Pros of the Irrevocable Trust:
(1) The Irrevocable Trust allows you to take property out of your estate. Therefore, for purposes of Federal Estate Tax, your home would not be an estate asset at your death and would reduce the value of your taxable estate.
(2) If you should need medical assistance in the future, the home would not be subject to recovery by the state if the trust held your home for at least 5 years.
(3) Upon your death, your children would not have to pay an inheritance tax when the home is transferred to them from the Irrevocable Trust.
(4) Unless your home is rental property, there would not be any income for income tax purposes. Therefore, though the Irrevocable Trust would have its own EIN for tax purposes, when income tax filings are done, there would be no income tax due.

Cons of the Irrevocable Trust:
(1) When the property is transferred into an Irrevocable Trust, there would be a transfer tax due. In Pennsylvania, that would be 6% of the fair market value.
(2) An Irrevocable Trust can not be changed and you can not serve as the Trustee.
(3) If your home is rental property, income taxes would have to be paid at the trust rate which is a higher rate than for individuals.

An Irrevocable Trust is ideal when:
(1) you are well into retirement, late 70s into your 80s and beyond
(2) your property is not income producing
(3) the transfer tax is not a problem for you to pay
(4) you want to avoid the inheritance tax

Consult with our office if you would like to more about this estate planning technique.

Three (3) options to consider when transferring your home to your children

I grew up in Salisbury, Maryland and my parents still live in the home that we moved to when I was 12 years old. My parents were my first estate planning clients. They often revisit their plan with me to keep it up to date with changing times. They had a question about one thing recently which is often a question posed by many of my clients. As we get older, how should we hold the deed to our property? For many people, their home is their most valuable asset especially in an economy that is kinder then the one we currently face. The answer to this question depends upon your specific circumstances. The 3 primary options that could be considered are as follows:
Option 1. Add your children's name to your deed.
Issue - You expose your home to any issues that your children may have with creditors, banruptcy, divorce, etc.
Option 2. Maintain a life estate with the remainder interest to your children.
Issue - Children take your basis (for tax purposes) in the property and not the step-up in basis received when the property is inherited. This also is an issue in Option 1. and Option 2.
Option 3. Transfer the deed to your children, removing your names as owners.
Issues - All of the issues noted in option 1 and 2. Further, if you are transferring property to avoid nursing home costs, such transfer has to occur 5 years prior to the need to go in the nursing home.

There are other options that you could also consider from not doing anything to transferring the deed into the name of a trust, revocable or irrevocable both of which have their own issues to consider in your particular circumstances. Feel free to ask me a question through the comment section or call my office for a free consultation making reference to this blog entry.