Estate planning lawyers talk a lot about both wills and trusts. Most people have a good idea of what a will is, but what exactly is a trust?
Although trusts sound complicated and sophisticated (and they can be used to accomplish complicated and sophisticated goals), they don’t have to be. A trust is a legal agreement for holding property. Here’s how it works:
A Trust Maker establishes the trust using a Trust Agreement. This is a document that spells out the rules of the trust. The Trust Agreement names a Trustee – he or she is the person who will be in charge of managing all the property placed in the trust. The Trustee is required to follow the terms of the Trust Agreement, and is required to act in the interests of the trust’s Beneficiaries. The Beneficiaries are the people named by the Trust Maker, who will either have the right to use the trust property, or will receive payments from the trust. One or more Beneficiary will also ultimately receive the trust property.
So, the Trust Maker transfers property into the trust, where the Trustee manages the property on behalf of the Beneficiaries, and ultimately distributes the property to the Beneficiaries according to the Trust Maker’s instructions.
Trusts are used for a variety of purposes: they can be established to avoid probate, to plan for disability, to protect assets from creditors, to reduce estate taxes, and to plan for charitable giving, among many other purposes. Perhaps the most common type of trust currently used for estate planning is the Revocable Living Trust, which many people use to for help avoiding probate, as well as to plan for the possibility of disability – and to protect their family’s privacy.
If you’re in the process of moving – especially to a new state – you’ve got a lot on your plate. Packing up your old place, making arrangements for your new place, settling into a new job…the list goes on and on. So, do you need to add making a new will to your ever-growing to-do list?
You may not need an entirely new will, but it’s important that you have your existing will reviewed by an estate planning attorney in your new state. Why? Because the laws that control estate planning are state law, and different states can have their own, sometimes quirky, requirements.
Some states restrict things like who’s allowed to serve as your executor, and all states have specific rules about what it takes for a will to be properly signed and witnessed. An estate planning attorney familiar with the laws of your new state will be able to take a look at your will and let you know whether it meets all the legal requirements. And, if there’s something amiss, he or she can help you fix it.
Any time you move, it’s a good time to review your estate plan – not only to make sure that all technical legal requirements are met, but also to make sure that your plan has kept pace with your life. Your family may have gone through changes since your plan was initially established, and certain changes need to be reflected in your will and your other estate planning documents.
For example, if you have a Revocable Living Trust and you’ve bought a new house as part of your move, you’ll want to check with your estate planning attorney about funding your new home into your trust.
So, in the midst of the unpacking and settling in, make time to review your estate plan, and check your will to make sure it’s valid in your new state.
When it comes to retirement planning, an IRA is a great savings option. If you’re an individual establishing your own IRA, you have two basic options:
Traditional IRATax Deferred: A traditional IRA is a tax-deferred savings plan. This means that you don’t pay taxes on money when you contribute it to your IRA, but you do pay income tax down the road, when you withdraw money from your IRA during retirement.
Income Limits: While there’s no maximum amount you can earn each year and still contribute to a traditional IRA, there is a rule concerning minimum income. You can’t contribute more to your account than you’ve earned in any given year.
Contribution Limits: Currently, you can contribute up to $5,000 each year to your traditional IRA. If you’re age 50 or older, that amount increases to $6,000.
Early Distribution: You’ll need to keep your money in your traditional IRA until you reach age 59 ½. Aside from very specific exceptions, withdrawing money before this point will mean that, in addition to paying income tax on the amount withdrawn, you’ll also pay a 10% penalty.
Required Minimum Distribution: Once you reach age 70 ½, you’ll have to take a minimum amount out of your account each year. Exactly how much of a distribution will be required depends on your account balance and your life expectancy. Failure to take the appropriate distribution will result in a 50% penalty.
Roth IRATax Free: A Roth IRA is a tax-free savings plan. What this means is that, while you make contributions with after-tax dollars each year, when you ultimately withdraw funds from your account during retirement (assuming you comply with the rules), you won’t pay income taxes on any portion of your withdrawal. So, you’re not taxed on the interest earned by your IRA.
Income Limits: Not everyone is eligible to contribute to a Roth. If you’re single, the amount you’re allowed to contribute is phased out if your annual income is above $105,000, and you’re not allowed to contribute at all if you make more than $120,000. If you’re married filing jointly, the phase out begins at $167,000, and you’re ineligible to contribute if you and your spouse make more than $177,000.
The Roth also has a minimum income limit -- you can't contribute more than you've earned.
Contribution Limits: The contribution limits for a Roth IRA are the same as for a traditional IRA. For 2010, those under 50 can contribute $5,000 annually. If you’re 50 or older, you can contribute $6,000.
Early Distribution: Because your contributions are made with pre-tax dollars, as long as you follow the rules of your IRA, you can withdraw the amount you’ve contributed any time, penalty-free. If you withdraw account earnings before you reach age 59 ½, you’ll pay a 10% penalty (there are certain limited exceptions).
Required Minimum Distributions: There are no Required Minimum Distributions associated with Roth IRA’s.
You can have more than one IRA, and you can have both a traditional and a Roth IRA. If you have more than one IRA, the annual contribution limit applies to all your accounts, together. So, if you’re 52 and you contribute $4,000 to your Roth, you can contribute $2,000 to your traditional IRA.
You may have heard of the “living probate” process, and that it should be avoided. Living probate is the legal process that happens when you become mentally disabled and need someone to take over the job of managing your day-to-day affairs, either financial or personal. If you don’t have a plan in place to allow someone to take over your personal or financial affairs outside of the court system, then your loved ones will have to go to court, and have a judge appoint someone to manage your affairs. The person appointed to manage things on your behalf is either a guardian or a conservator, depending on the specific functions he or she performs.
A guardian is appointed by the court to make sure that the daily personal needs of a mentally incapacitated person (called the “ward’) are taken care of. This does not necessarily mean that the guardian is the person who will physically care for the ward, just that the guardian will be responsible for making sure that the ward’s needs are met. So, the guardian might make sure that the ward is in an appropriate assisted living facility, or is receiving the appropriate medical care.
A conservator, on the other hand, is appointed by the court to make sure that the financial affairs of the ward are effectively managed. The conservator is responsible for paying the ward’s bills on time, for taking care of the ward’s property, and for managing the ward’s investments.
The guardian and conservator may or may not be the same person. If they are not the same person, the guardian and conservator generally have to work closely together to make sure that the ward’s personal and financial needs are met. And both are subject to oversight by the court, to make sure that they’re effectively serving the interests of the ward.
Figuring out how you're going to pay for long-term care can be an intimidating task, especially if you're considering Medicaid. There’s so much bad information circulating about qualifying for Medicaid that I thought I’d share a few facts about the program:
If you’re married, both your assets and your spouse’s assets are counted for purposes of determining your final eligibility. So, transferring assets into your spouse’s name is useless. By the same token, if your spouse is the one applying for Medicaid, and you attempt to “hide” some o f your assets, then your spouse’s application could actually be denied.
2. Assets owned by your Revocable Living Trust are still counted as yours for Medicaid purposes. Your Revocable Living Trust does not protect your assets for Medicaid purposes. It’s great for avoiding probate, but it won’t work for Medicaid planning. However, there are other types of trusts that might help you for Medicaid purposes. You should check with an estate planning attorney to see what planning options are available to you.
3. You don’t have to give away everything to qualify for Medicaid. You’re allowed to keep some assets and still qualify for Medicaid. For example, you’re allowed to keep your car, your household furnishings and certain personal property, your pre-paid funeral plan and burial plot, and certain other property, including your home, if you’re married and your spouse still lives there (and if you’re single, under some circumstances). And proper planning can help even more.
One final fact is that it’s never too early or too late to begin Medicaid planning. Of course, it’s always better to start early, when you have the most options. But, even if a patient is already in a nursing home, it still may be possible to protect his or her assets. You should never try to do it alone, though. It’s best to get the help of an experienced estate planning attorney who knows the ins and outs of the Medicaid system.
An IRA Trust is a type of irrevocable living trust that can be established to hold your IRA assets after you pass away. You establish the trust, use the trust agreement to establish subtrusts, naming the subtrusts as the primary and secondary beneficiaries of your IRA.
What are the advantages of establishing an IRA trust as opposed to just naming your loved ones as direct beneficiaries of your IRA? The two main advantages are “stretching out” the IRA on behalf of your loved ones and giving your loved ones the advantage of asset protection.
The Stretch IRA
If you just named a loved one – your twenty-five-year-old son, for example – as beneficiary of your IRA, as opposed to establishing an IRA trust on his behalf, you might be doing him a big disservice. The reason is that, without a trust, he’d have the option of cashing out the entire IRA as soon as he got access to it. This would be bad for two reasons: first, he’d be losing any potential for future growth of the account. Second, he’d face a potentially huge tax bill, because he’d have to pay income tax on the entire amount withdrawn.
The better option? An IRA trust requiring that he only take the Required Minimum Distribution (RMD) each year. This amount is based on the beneficiary’s life expectancy, and the balance remaining in the account. This option maximizes the IRA’s growth potential, while minimizing the beneficiary’s tax bill.
An additional benefit of an IRA trust is that it protects your beneficiaries’ assets from the claims of creditors. Plus, it keeps the assets out of the reach of divorcing spouses. If a beneficiary is given the option to withdraw IRA funds all at once, without the protection of a trust, the funds are left vulnerable.
So, if you have significant funds in an IRA and you don’t intend to rely on them to fund your own retirement, you might want to consider an IRA trust.
So, you’ve decided that it’s time to put together an estate plan. But where do you start? Actually, making the decision to plan your estate is the first, and maybe the most important, step. Here’s what to do next:
Find a qualified estate planning attorney. No matter how simple you think your situation is, this is an area in which the stakes are so high that it’s best to have the advice of an expert. And you’ll want to find an attorney who focuses on estate planning. A lawyer who spends most of his time handling divorces or business law won’t necessarily be up-to-date on the latest developments in estate law. It’s important to choose a lawyer you feel comfortable working with.
Take stock of your personal and financial situation. Before you meet with your attorney, you need a good idea of what you’re working with. What are your assets and debts? How is your property titled? What life insurance policies and retirement accounts do you have – and who are the beneficiaries? Do you have special family circumstances, like a blended family or a special needs child? These are all things your attorney will need to know about.
Think about where you want your assets to go. Again, before your first meeting with your estate planning attorney, make sure you have a general idea of which of your loved ones you want to receive your property when you pass away. You’ll also want to think about who should be responsible for managing the affairs of your estate when you pass away.
Your attorney will guide you through the process of establishing your basic estate plan. This may include a Revocable Living Trust, and it will include several other documents, including an incapacity plan.
You may also need advanced estate planning. This involves planning to minimize estate taxes and to protect assets from creditors, among other things. Your attorney will help you determine whether advanced estate planning is right for your situation.
Once your plan is in place, keep it current. It’s important that you review and update your estate plan every year or so. This is because changes in your life – like the birth of a child, the marriage or death of a beneficiary, or a divorce – can require changes in your plan. So can changes in the law. Your estate planning attorney can let you know when legal changes make it necessary to update your plan, so it’s a good idea to check in with him or her periodically.
You’ve gone through the effort of establishing your Revocable Living Trust, and you’ve carefully made sure that it’s fully funded. Now, you’re moving to a new state. Does this mean that all of your meticulous planning has been in vain? Or will your Revocable Living Trust still be valid once you cross state lines?
Generally, Revocable Living Trusts are valid from state to state. So, you should not have to establish a new trust in your new state. Nor will you have to re-fund the trust once you move; property that’s titled in the name of the trustee will remain trust property.
However, the law that controls trusts is state law, so it differs depending on which state you’re in. For this reason, it’s a good idea to have your trust reviewed by an experienced estate planning attorney in your new state. You want to make sure that there are no discrepancies between your trust agreement and the law in your new state; and if there happen to be any quirks, it’s better to know and have them corrected.
Moving to a new state is a good time to have the rest of your estate planning documents reviewed, as well. You’ll want to make sure that all of your documents comply with the new laws, and it’s a good time for an update if your family has experienced any changes since your last estate plan review.