Category Archives: Estate Planning

Life Insurance as an Estate Planning Tool

Posted on by
Reply

Estate planning is a key component to an individual’s long term life planning.  To ensure the best possible result, an estate plan should be coordinated with other forms of planning such as investment, retirement and tax planning.  In addition, most individuals will include life insurance planning as part of their overall life planning.  For estate planning purposes, life insurance can be a very important and versatile tool.

There are several types of life insurance to choose from.  Term life insurance provides financial protection for a period of years.  It is the most inexpensive form of life insurance and is a good fit for younger people.  However, the premiums increase as a person gets older and unlike other types of life insurance, there is no accumulated cash value to a policy.

Whole life insurance protects an individual for their entire life. In addition, a whole life policy will accumulate cash value over time.  The cash value can be borrowed against and either be repaid or deducted from the death benefit payable to the policy’s beneficiaries.  Whole life insurance is more expensive that term life insurance because it acts as a savings plan as well as a form of protection.  Other types of life insurance include universal life and variable universal life insurance.

The uses of life insurance for estate planning purposes are numerous.  They include:

1) Income Replacement-Regardless of the type of insurance you own, the key component to all insurance policies is the death benefit.  For younger people, having an available resource to replace a loved one’s income stream is the biggest reason to own life insurance.  When purchasing insurance, it is important to determine how large of a policy will be necessary to replace an income stream in the event of an untimely death.

2) Estate Liquidity-Life insurance proceeds can be used to pay funeral expenses, debts, taxes and other expenses incurred at the time of a loved one’s death.  This is especially key for individuals with largely illiquid assets such as real estate and securities.  Without life insurance proceeds, these assets would have to be sold to provide an estate with the necessary cash to pay for these expenses.

3) Business Buy-Sell Planning-Life insurance can provide a family member with the means to purchase an interest in a family business.  Conversely, insurance may also be used by a non-family business partner to purchase a deceased individual’s business interests at the time of their death.

4) Inheritance creation/equalization-Life insurance can be used to create additional wealth to be passed to an individual’s heirs.  It can also be used to equalize inheritances in situations where other estate assets will not be shared equally amongst the individual’s heirs.

5) Estate reduction through gifting-For individuals who have taxable estates, using the annual gift tax exclusion to pay for an insurance policy can decrease the size of their taxable estate.  However, if the individual or the estate owns the insurance policy, the proceeds of the policy will be included in their taxable estate.

As indicated in number 5, if a life insurance policy is owned individually or by an estate, it is a taxable asset for estate tax purposes.  As an alternative, life insurance can be purchased by a trust known as an irrevocable life insurance trust (“ILIT”).  Insurance owned by an ILIT is considered outside of a taxable estate and the proceeds of an ILIT owned life insurance policy pass free of estate tax.  You can also transfer existing policies into an ILIT.  However, if an individual dies within three years of transferring a policy, the proceeds of the policy will be included in their taxable estates.

ILITs can be very helpful in passing wealth estate tax-free, but they require proper care and administration.  Insurance premiums must be paid by the trust directly to the insurance carrier.  The creator of the trust (the settlor) has limited powers regarding the insurance and should not be a trustee or a beneficiary.  The trustee of the trust must also follow all the formalities required by the trust instrument to ensure that the trust assets remain outside the taxable estate.

As you can see, life insurance can provide significant benefits to an individual and his or her heirs.  To ensure that you maximize those benefits, it is best to consult with both an estate planning attorney and an insurance professional to collectively determine the best possible plan for your specific needs.

Please contact info@levyestatelaw.com for more information about estate planning with life insurance.

A Matter of Trust: Tips for Choosing Your Fiduciaries

Posted on by
Reply

There are several key components to any estate plan.  A will or trust will describe who will be entitled to certain assets, how the assets will be held and when distributions will be made to the beneficiaries.  An equally important component is who will be in charge of administering the estate or trust.  These persons are commonly referred to as fiduciaries.

A fiduciary is a person who takes care of property or other matters for another person.  In estate planning, the three most common forms of fiduciaries are executors, trustees and guardians.  An executor is the person responsible for the administration of an estate of a deceased person.; a trustee manages and administers a trust for the trust’s beneficiaries; and a guardian cares for the personal and financial needs of another person who legally cannot take care of themselves (typically, minor children or persons with severe disabilities).

Selecting fiduciaries is often overlooked by estate planners and their clients as a secondary concern to who receives the estate or trust’s assets and how the assets are held.  But, choosing the wrong person to serve as a fiduciary can have severe consequences (litigation, wasted assets, etc.) for the beneficiaries and fiduciaries alike.

Fortunately, selecting the right people should not be difficult if you keep the following tips in mind:

1)    Make sure the nominated fiduciary is willing to serve-It is not uncommon for a person to be nominated for a fiduciary position and be unaware of their appointment.  This is especially true of appointments under wills where the actual work will not occur for many years.  During the drafting phase of any estate-planning document, clients should contact the people they wish to serve as fiduciaries and confirm their willingness to serve.

2)    Ensure that the nominated fiduciary is qualified to serve-Spouses typically name each other as their executor and trustee.  Alternatively, children are often nominated to serve as the initial or successor fiduciary.  While this is understandable, the nominated person must be aware of their responsibilities and be capable of carrying them out.  A fiduciary is held to a very high standard of care and failing to live up to their fiduciary duties has can lead to many headaches for fiduciary and beneficiary alike.

3)    Be mindful of a fiduciary’s relationship with the beneficiaries-The relationship between the fiduciary and the person appointing them is not the only one that should be considered.  While it may not be necessary or wise to get a beneficiary’s approval of a fiduciary, consideration should be given to how they will interact.  This can become especially tricky when issues of divorce and stepparents come into play.  If there is potential for conflict between a fiduciary and a beneficiary, appointing a co-fiduciary or even an alternate fiduciary is advisable.

4)    Understand how a fiduciary is compensated-Under New York law, fiduciaries are entitled to statutory commissions for their service to the estate or trust.  In some instances, a family member serving as a fiduciary will waive their right to commissions even though they are entitled to them.  If you choose a corporate fiduciary or a professional to serve, they will likely have a set fee schedule for their services.  This may be in excess of what the statute requires and, in the cases of attorneys serving, may be in addition to legal fees that they charge.

5)    Choose successor and co-fiduciaries carefully-When a fiduciary stops serving, the will or trust instrument typically has a named successor who will take their place.  In some instances, the will or trust creator names co-fiduciaries to ensure that one person is not overburdened. Both successor and co-fiduciaries will have to work with other fiduciaries and the beneficiaries and must be compatible with both.  Conflict between fiduciaries can snowball quickly and lead to protracted legal battles that may severely deplete the assets of a trust or an estate.

Once assets are transferred to a fiduciary or a person is put in their care, the responsibility to protect those assets/people becomes theirs.  Fiduciaries are held to the highest standards of care because they are given exclusive control over a person’s most important assets.  You should use the same level of care when choosing who your fiduciaries will be.

Please contact info@levyestatelaw.com for more information.

Special Needs, Special Planning

Posted on by
Reply

As some of you know, I grew up in a family with a brother who has special needs.  Having a disabled relative poses many challenges to parents and siblings alike on an emotional, physical and social level.  It can also pose a financial challenge, a challenge, which can usually be met by applying for and receiving government benefits such as Supplemental Social Security Income (“SSI”).

The acceptance of SSI benefits comes with a limitation regarding what the disabled person can financially receive from other persons including their parents.  This poses a unique problem when preparing an estate plan for a family with a special needs relative.

Fortunately, in New York and many other states, parents and other relatives can establish a trust known as a special needs or supplemental needs trust for the benefit of their disabled child or relative.  Special Needs Trusts provide supplemental benefits to the disabled person beyond the benefits provided by the governmental assistance they receive.  In order to preserve their benefits, the trust must be structured in a specific manner.

There are two types of special needs trusts-trusts created with the disabled persons assets and trusts created by third parties including the disabled person’s parents.  The first type is created when the disabled person receives a direct payment from a settlement or a bequest under a will. The disabled person’s legal guardian serves as the Grantor of the trust and upon the disabled person’s death, the remaining assets are first used to repay any advancements made to Medicaid. Any additional assets remaining are distributed to the disabled person’s then living relatives.

The second and more common type of trust is created by a third-party, typically the disabled person’s parents.  During the parents’ lifetime or at their death, the trust is funded and the trustee of the trust makes payments of the trust assets on behalf of the disabled person.  Unlike the first type of special needs trust, upon the disabled person’s death, the remaining assets go directly to the named remainder beneficiaries without any reimbursement made to Medicaid.

Unlike most trusts, special needs trusts are limited with regard to the distributions it can make to its beneficiary.  In New York, there is a statutory requirement that the trust must only make distributions once all governmental benefits are exhausted.  Additionally, while many trusts are used for the health, education, maintenance and support of their beneficiary, a special needs trust can only be used to provide additional comforts to the disabled person.  This can include entertainment, an assistant for the disabled person and any other services not covered by government benefits.

In addition, the trust instrument must make clear that the disabled person can never have direct access to the trust’s assets nor can they have any discretion over the distributions made to him or her.  With all these unique restrictions, it is essential that the person selected to be the trustee is not only aware of how these trusts must be managed, but also must be willing to take a very hands on role in managing the trust for the disabled person’s benefit.

The care of a person with special needs is incredibly important to that person’s family.  Many families try to do everything they can to make their disabled relatives feel as normal and as much a part of the family as their other family members.  But, when it comes to their financial well-being and ensuring that they receive the best possible care, extra planning and extra precautions must be taken to ensure their main source of care is not threatened.

Please contact info@levyestatelaw.com for more information about special needs trusts.

Estate Planning 2012: A Look Ahead

Posted on by
Reply

A new year has begun and it is already looking to be a very interesting year.  The upcoming national elections have once again been dubbed “the most important election ever” by the media and despite the hyperbole, there is no doubt that the upcoming election could potentially reshape the direction of our nation.

This is especially true for those of us in the estate planning world.  In late 2010, the president and Congress agreed to reinstate the estate tax with a $5 million exemption and a top tax rate of 35%.  This change came with a significant catch-the new exemption and rate would expire December 31, 2012 and absent an agreement prior to that date, the exemption would return to $1 million and a top rate of 55%.

Given the gridlock in Washington over the last twelve months and a national election that will likely worsen that gridlock, this massive change may become a reality come this time next year.  But, this is not the only possible change to look out for.  These additional issues bear watching throughout the next year:

Changes to the Federal Gift Tax:  For the last year, estate planners have noted the limited and significant opportunity for individuals to make large lifetime gifts while the gift tax exemption remained at $5 million.  There was some concern that the gift tax exemption would be reduced to produce revenue during the Super Committee negotiations, but nothing came of that (much like the negotiations themselves).  With an exemption now at $5.12 million, there remains an ever-decreasing window to make large lifetime gifts.

Interest Rates:  For individuals looking to sell assets to their relatives or to pass them on through vehicles like GRATs, the federal interest rates have remained at historically low rates.  There are indications that these rates may rise before the end of 2012, so this advantage may soon disappear.

Market Volatility: The current volatility in the stock market is another reason to consider vehicles such as GRATs.  Individuals can transfer assets to their relatives at a lower value than they will likely have over time.  This allows individuals to use a smaller portion of the lifetime gift tax exemption while providing their beneficiaries with a higher valued asset.

Changes to the Federal Income Tax: Along with the expiration of the current estate and gift tax rates and exemptions, absent action before December 31, 2012, the federal income tax rates will revert back to the rates that were in place prior to the Bush tax cuts.  Additionally, the President has proposed several changes to the income tax system that would reduce the use of the itemized deduction for wealthier Americans.  The Democrats in Congress have also suggested a surtax on individuals making more than $1 million a year.

Same Sex Marriage Laws:  Beyond taxes and asset values, changes to the legal status of same-sex couples remains an issue to watch with regard to estate planning.  The administration’s decision to stop defending the Defense of Marriage Act and the continued challenges to state bans on Same Sex Marriage (most notably, the lawsuit against Proposition 8 in California) may alter the way same sex couples plan their estates during the next 366 days.

It is likely that other factors will alter the way estate planners counsel our clients during 2012.  However, having seen the estate tax repeal and subsequent reinstatement during 2010, something no one ever imagined would happen, it would be crazy to predict what will actually happen this year.  The best you can do is sit back, watch and make sure your planning is up to date!

Please contact info@levyestatelaw.com for more information.

Planning for what? Part Two-Federal and State Transfer Taxes

Posted on by
Reply

On Wednesday, I discussed one of the main objectives of any estate plan, the streamlining of the estate administration process.  For many, ensuring that assets pass in an expedited manner is the sole aim of their estate plan.  But, for people with larger estates, a second and sometimes more important goal is to minimize or eliminate the transfer taxes owed at their death.

Below is a brief explanation of the categories of transfer taxes related to estate planning.  One tax that is commonly discussed but not listed below is the “death tax.”  Despite the claims of many, there is no tax imposed at death simply due to the passing of an individual.  The following taxes are very real and require proper planning.

Federal Estate Tax.  The “death tax” typically refers to the federal estate tax.  In 2010, the federal estate tax was reinstated with a $5 exemption, meaning every individual can pass up to $5 million without incurring a tax (the exemption increases to $5.12 million in 2012).  Assets passing between spouses at death also pass free of estate tax due to the federal marital deduction.  In addition, married individuals who do no use their entire estate exemption may pass the remaining exemption to their spouse using a newly created concept known as portability.

The top federal estate tax rate is 35%.  However, absent action by Congress and the President before December 31, 2012, the exemption will be reduced to $1 million and the top tax rate will increase to 55% in 2013.

State Estate Tax.  Seventeen states and the District of Columbia also impose a state specific estate tax.  In the past, the state and federal estate taxes were linked, but due to the changes to the federal estate tax since 2001, most states have decoupled their estate taxes from the federal tax.

New York, New Jersey and Connecticut all have state estate taxes and New Jersey has an additional tax known as an inheritance tax.  In New York, the current exemption is only $1 million and is unlikely to be increased in the future.  Similar to the federal estate tax, assets passing to spouses pass estate tax-free.

While the tax rate is much lower than federal rate, it is still important for estates valued at or around $1 million to properly structure the estate plans to eliminate, reduce or delay payment of state estate tax.

Federal Gift Tax.  Transfers made to individuals other than a spouse during your lifetime are also subject to the federal gift tax.  There are two ways to avoid gift taxes on lifetime transfers.  First, you may use a portion of your lifetime gift tax exemption, which is currently $5 million (lifetime gifts reduce the amount of assets you can pass tax-free at death as the estate and gift exemptions are considered a “unified credit”).

The second way is by using an annual gift tax exclusion.  Each individual can gift up to $13,000 to as many individuals as they like each year without incurring a tax.  Married couples may combine their exclusions to gift up to $26,000 to each individual beneficiary.

The top tax rate for the federal gift tax is 35%, the same top rate for the federal estate tax.

Federal Generation Skipping Transfer (GST) Tax.  One of the more complicated taxes, the GST tax was created to prevent individuals from avoiding taxation by transferring assets to a descendant two generations or more removed from them.  Currently, the tax is imposed in three situations.  First, when a transfer is directly made to an individual two or generations below the transferor (a “skip person”).  Second, when there is a taxable termination of an interest by a non-skip person.  This typically involves a child with a life interest dying and their interest passing to a grandchild.  Finally, GST tax is imposed on distributions from a trust to a skip person that would otherwise non be subject to gift or estate tax.

The current federal GST exemption is $5 million with a top tax rate of 35%.  As with the federal gift and estate tax, the exemption will revert back to $1 million in 2013 absent action by the government.

Transfer taxes can create many problems for estates and significantly reduce their values.  Proper planning before an individual dies and proper administration after they die are essential to ensuring that the estate’s beneficiaries receive the largest possible portion of their loved one’s assets.

Please contact info@levyestatelaw.com for more information.

Finding Success Through Business Succession Planning

Posted on by
Reply

During a recent meeting, the topic of business succession planning was brought up by one of my colleagues.  He mentioned that he recently oversaw the transition of a family business from the third generation of a family to the fourth generation.  Given the poor odds that a business will successfully transition from the first generation to a second, I found this to be very impressive.

65% of family businesses fail to survive the transition from the first generation to the second and 90% fail to survive the transition from the second to the third.  Fortunately, family businesses can increase their odds significantly by preparing a comprehensive succession plan.  A succession plan lays out how the business will be owned and operated once the senior family member or members leave the business.

There are several key questions that a succession plan must answer.  Among them:

1)    Who will own the business?-One of the primary goals of succession planning is to preserve a family business within the family and not require a sale to outsiders.  Beyond this, the original owner must decide if all family members will own the company or only certain family members who are involved in the business will become owners.  Each choice has its own set of problems and challenges that must be addressed.

2)    How will the business be owned?-If the original owner decides to transfer the business to a large group of new owners, they may wish to consider using a trust or another entity such as an LLC to own the business interests.  This can provide both tax and asset protection benefits to the new owners and also allow the current owners to ease the owners into their new responsibilities.

3)    Who will manage the business?-In many family businesses, the original owner will have controlled the business completely for many years and may be hesitant to name a successor.  Nevertheless, picking a proper successor and training them before they take over the business are essential parts of administering a successful succession plan.

4)    How will conflicts be handled? –When a single person controls a business, having a conflict policy is unnecessary.  Once the ownership and management expand, a conflict policy allows both the original owner and his or her successors to prevent conflicts from growing beyond internal disputes.  In businesses without conflict policies, it is not uncommon for disgruntled owners to bring legal action against the business and its owners for failing to protect the interests of the new owners.

5)    How will the original owner be compensated for his interests? –It is common for the original owner’s interest in their company to be their primary asset.  If the original owner retires or wishes to leave the business, he or she will rely on that interest to pay for their living expenses for the remainder of their lifetime.  A succession plan should include a mechanism by which the original owner can be compensated for his or her ownership interests.

Transferring a business to family members is often the goal of the original owner, but in some instances, it is either not desired or not possible.  In these situations, the original owner may instead sell the business for either a lump sum payment or a fixed series of payments.  In these situations, it is important for the original owner to coordinate where the proceeds of the sale will go and how they will be held.  Regardless of how a business is transitioned, it is essential that the business owner coordinate their succession planning with their estate planning to ensure that their assets and family members are properly protected.

A family business lasting four generations is a rarity, but it does not need to be an impossibility.  As with all planning, starting early and working consistently with your advisors will yield the best results for you, your family and your business.

Please contact info@levyestatelaw.com for more information about business succession planning.

The Estate Planning Lessons of “The Descendants.”

Posted on by
Reply

Last weekend, my wife and I saw “The Descendants,” the new film by director Alexander Payne (Sideways, About Schmidt and Election).  The film has drawn significant Oscar buzz both for the actors’ performances and the film itself.  Additionally, it has created a buzz amongst estate planning professionals regarding its two main plotlines.

The movie focuses on Matt King, played by George Clooney, who is in the midst of two major life events.  As the film begins, we learn that King is the trustee of one of the largest parcels of land in Hawaii on behalf of himself and his other family members.  The family has decided to sell the land, a move that will produce a significant windfall for the family, but ultimately, the decision of who to sell the property to and whether to sell at is left to King alone.

The other major life event involves a speedboat accident involving Matt’s wife, Elizabeth.  As the film begins, we find Elizabeth in a coma, leaving Matt with even more on his plate. Each of these life events on their own would be difficult to manage, but both simultaneously occurring (and additional drama which I won’t spoil here) leaves King with the weight of the world on his shoulders.

Fortunately, King, his wife and his ancestors successfully prepared for these events and the results of their planning manifest during the film.  The film provides three very important lessons regarding estate planning:

1.  A Health Care Proxy can reduce family friction over the care of an incapacitated loved one-When a loved one falls ill and decisions need to be made about their care, underlying conflicts between family members may get in the way of what’s best for the incapacitated person.  If a health care proxy has been executed, those conflicts can be prevented.  In the film, it becomes clear that Matt and his in-laws do not agree on much.  The one thing that they do agree on is the wisdom shown by Matt and Elizabeth by executing health care proxies.

2. Not all trusts are designed to last forever-We learn early on that the land is being sold because the perpetuities period for the trust is set to expire in five years.  Hawaii, like many other states, has codified a common law rule called the Rule Against Perpetuities, which requires a disposition of property to eventually vest in an individual.  Practically, this prevents a trust from continuing forever.  Some states have modified or eliminated this rule and it has become more common for continuous trusts known as dynasty trusts to hold property permanently in trust.  Currently, New York has retained the common law rule and trusts and other dispositions must end 21 years after the death of a specified individual who was alive when the disposition was created.

3.  It is important to pick a fiduciary who will protect your family’s interests and protect the property you leave behind-Throughout the movie, Matt’s decision regarding the land is a point of interest for not only his family, but for many in the community as well.  In the end, his decision is based on what he believes his predecessors would have wanted for his family and not necessarily what the current generation of beneficiaries wants.  In choosing Matt, his ancestors believed that he would provide for the rest of his family while preserving and protecting the family property.  His personality, intelligence and management capabilities, and not just his status as a relative, made him a good choice to oversee this valuable property.

The estate planning aspect of “The Descendants” helps tie the two life events together and they help to define the character of Matt King.  In many ways, the legacies we leave behind through our estate plans help define how our descendants will remember us after we’re gone.

Please contact info@levyestatelaw.com for more information about estate planning and estate administration.

The Good, Bad and Ugly of the New York’s Marriage Equality Act

Posted on by
Reply

On June 24, 2011, Governor Cuomo signed into law the Marriage Equality Act, making New York the sixth and largest state to legalize same-sex marriage.  The new law provided the most significant victory for those seeking full rights for same-sex couples and could lead to more states following suit.

But, with the new rights and obligations granted to same-sex couples wishing to marry, the law also complicated certain aspects of personal and tax planning for these couples.  Additionally, newly wed same-sex couples face new problems due to the lack of full faith and credit typically provided by the federal government and other states.

The Good 

Same-sex couples in New York can now marry and become entitled to the same rights and obligations that heterosexual married couples have.  This includes access to spousal insurance benefits, authority to make decisions for an incapacitated spouse and the obligation of each spouse to support the other

One key right from an estate planning perspective is spousal inheritance rights.  Prior to the enactment of the Act, same-sex couples could only pass property through the use of a will or a trust.  Now, a surviving spouse, regardless of gender, is entitled automatic inheritance rights under New York law even if no will exists.

The state marital deduction for estate tax purposes is also now available to same-sex couples.  Under New York law, a surviving spouse can inherit unlimited assets from their deceased spouse without incurring a state estate tax.  This allows a same-sex couple to fully protect their assets from state estate tax until both spouses die.  Unfortunately, this benefit is limited to New York state estate taxes only.

The Bad

New York requires all married couples to file their income tax returns as a married couple, either individually or jointly.  Because of the federal Defense of Marriage Act (“DOMA”), same-sex couples must file their federal income tax returns as individuals. In addition to preparing both state and federal tax returns, same-sex couples will also need to prepare a draft federal return for a married couple in order to complete their state income tax returns.  This creates a more complicated tax situation and more work for the couple or their accountants.

This discrepancy is not limited to income tax.  As I previously mentioned, in New York, a same-sex surviving spouse can inherit unlimited assets from their deceased spouse.  This is not true for federal estate tax purposes and surviving spouses are limited to the federal estate tax exemption ($5.12 million in 2012).  For couples with illiquid assets, this requires additional planning for when the first spouse dies.

Finally, same-sex couples are also limited regarding lifetime transfers between spouses.  Transfers between same-sex spouses are considered taxable gifts, while transfers between heterosexual spouses are not.  Spouses in a same-sex couple are limited to their annual gift tax exclusion amount ($13,000), using a portion of their lifetime exemption ($5.12 million) or having to pay gift tax on the transfers.

The Ugly

Once a same-sex couple marries, it limits their ability to move outside of New York and still have their marriage recognized.  As mentioned previously, only five other states (Connecticut, Iowa, Massachusetts, New Hampshire, Vermont plus Washington, D.C.) recognize same-sex marriage. DOMA prevents the federal government from providing any federal benefits to same-sex couples.  Additionally, 41 states have “mini-DOMAs” which either ban same-sex marriage or specifically define marriage as being between a man and a woman.

Adoption of a child can be a problem for same-sex couple as well.  While most states allow homosexual individuals to adopt children, less than half of the states explicitly allow a same-sex couple to jointly adopt.  This is also true of some foreign countries, most notably China.

Conclusion

The Marriage Equality Act was an important first step for same-sex couples in New York.  The Justice Department’s recent decision to stop defending DOMA in court may eventually bring additional rights.  Until then, it is important that same-sex couples work with their advisors to ensure that their rights, the rights of their spouses and the rights of their children are protected to the fullest extent possible.

Please contact info@levyestatelaw.com for more information about planning for same-sex couples.

Now or Later: Choosing Between a Will and a Revocable Living Trust

Posted on by
Reply

A Last Will and Testament is the most essential part of any estate plan.  It explains who your assets will pass to, how they will pass (outright or in trust), who will be in charge of administering the assets and who will care for your minor children.  For many people, a properly drafted will is sufficient to allow their estate to pass as they wish.

In some circumstances, however, a will is secondary to another document known as a Revocable Living Trust.  A revocable trust is trust established and funded during the lifetime of an individual (the “Grantor” of the trust).  At the Grantor’s death, a short will known as a “pour over will” pays any remaining assets in the Grantor’s estate to the revocable trust.  Revocable trusts have become an extremely popular alternative to the traditional last will and testament plan.

So, which is the better fit for your planning needs?  Consider these ten factors:

  1. Probate-One of the main advantages of a revocable trust is the avoidance of the process known as probate.  During the probate process, a will is submitted to a court (in New York, the court is called the Surrogate’s Court) and the named executor under the will is granted the power to distribute the Grantor’s assets.  The process can take several months and may cost a significant amount in legal and court fees.  A properly drafted and administered revocable trust can minimize or eliminate the need for the probate process.  This is especially important for individuals with property in multiple jurisdictions.
  2. Funding-In order to ensure that a revocable trust works properly, assets must be transferred to the trust before the Grantor dies.  Any assets not in the trust at the date of death will have to pass through the probate process.  This negates one of the main benefits of a revocable trust. A will requires no lifetime transfers or retitling of assets.
  3. Administration-During the Grantor’s lifetime and after they die, a revocable trust must be administered in accordance with trust instrument.  A will requires no lifetime administration.
  4. Cost-An estate plan that includes a revocable trust will typically cost more up front than a plan that includes only a will.  However, the costs after an individual dies may be less for a revocable trust due to the limited or nonexistent probate costs.
  5. Privacy-Once a will is submitted to the court, it becomes part of the public record and the general public can access it. The trust instrument, unlike a will, is not submitted to a court and the beneficiaries of the trust can remain private.
  6. Tax Planning-One common misconception about revocable trusts is that they provide tax planning benefits over wills.  In reality, both wills and revocable trusts can be drafted to minimize or eliminate estate and other transfer taxes.
  7. Revocation and Amendment-Both wills and revocable trusts can be amended or revoked any time prior to the Grantor or individual’s death.  After the Grantor’s death, both become irrevocable and the fiduciaries of the estate or trust cannot change the terms of the will or trust.
  8. Disability-The trust agreement creating a revocable trust will include successor trustees who will serve if the initial trustees can no longer act as trustees.  It is also common to have a second person serve as a co-trustee with the grantor of the trust.  If the grantor becomes disabled or incapacitated, the remaining co-trustee or successor trust can administer the trust’s assets without applying for guardianship over the grantor.
  9. Ability to Challenge-While will contests are more common, it is also possible to challenge the validity of a revocable trust on the basis of a lack of capacity on the part of the grantor and the trust being created due to the undue influence of another party.
  10. Asset Protection-During the Grantor’s lifetime, a revocable trust provides no asset protection from creditor claims.  After the Grantor dies, the Trust can be structured to protect assets from creditor claims.  This is option is also available when drafting wills.

The choice between a will and a revocable should be well thought out and discussed with your advisors.  While a revocable trust does provide certain advantages to a traditional will, it must be properly drafted, funded and administered to ensure that you receive the maximum benefit.

Please contact info@levyestatelaw.com for more information about revocable trusts.

Protecting Your Most Valuable Assets: An Introduction to Estate Planning for Young Families

Posted on by
Reply

Starting a family comes with a new set of joys, challenges and responsibilities from single or even married life.  These changes also come with a certain level of anxiety and concern, some of which can be alleviated by proper planning.  It is not uncommon for a young family to begin a financial plan and a college-funding plan when a child is born and at that time, it is also important to prepare an estate plan. Drafting an estate plan at this time provides significant benefits over waiting until later in life.

The primary benefit of preparing an estate plan at a young age is removing the uncertainty of what will happen if you and your spouse die.  While it is unpleasant to discuss, having an estate plan in place can answer five important questions, namely:

1)    Who will care for my children if my spouse and I die?  One of the main factors that lead young families to prepare an estate plan is the appointment of a guardian if both parents die.  Without such a provision, the child may be subject to multiple relatives fighting over the child’s care.  A guardian appointment can curb these problems and assure that the person who will care for your child is someone you trust and believe to be capable of accepting this responsibility.

2)    How will my children be provided for financially?  An estate plan provides how your assets will pass, to whom they will pass and in what form they will pass.  For assets passing to a minor, there is often a concern that the assets will be insufficient and that the child may gain access to the assets before they are capable of managing the assets responsibly.

Instead of an outright bequest, assets passing to a child can be held in a trust known as descendants’ trust, which is established under the parents’ wills.   A trustee of the parents choosing manages and uses the trust’s assets to pay for the child’s care.  Once the child reaches a selected age, the assets pass to him or her outright.

3)    How can I protect my assets from excess taxation?  Most young couples lack sufficient assets to exceed the current federal estate tax exemption ($5.12 million in 2012).  But, in the tri-state area, the state estate tax exemptions in New York, New Jersey and Connecticut are among the lowest in the country ($1 million in NY, $675,000 in NJ and $2 million in CT).  For a young couple with a home and one or more large life insurance policies, it is very easy to exceed these exemptions and therefore be in a position to owe state estate tax.  Fortunately, a properly drafted estate plan can minimize or eliminate most of these taxes.

4)    How will my special needs child be cared for?  Children with special needs often rely on government assistance to pay for the care and treatment.   Qualifying for government assistance requires the person receiving the benefits to own minimal assets of their own. By preparing a trust known as a supplemental needs or special needs trust, parents can augment their child’s care and pass assets to a special needs child without risking the loss of their child’s benefits.

5)   What if my spouse or I become disabled, incapacitated or unavailable?  Two components of every estate plan are a durable power of attorney and a health care proxy and living will.  A power of attorney allows a named agent (initially, the person’s spouse) to perform certain transactions as if they were the person granting the powers.  A health care proxy and living will allow the spouse or other trusted individual to make medical decisions for an incapacitated person.  Both instruments ensure that financial and medical decisions can be made during periods of incapacity, disability or unavailability.

A secondary benefit to preparing an estate plan at an early age is the creation of a relationship with a trusted advisor who can help guide you through the financial and personal changes that life brings.  Having an estate planning attorney available to you can help you deal with issues before they come up rather than after a problem has occurred.

Preparing an estate plan at a young age can be difficult, especially when you have many other issues to deal with.  But, once a plan is in place, it can alleviate numerous concerns and provide you with the security of knowing your most valuable assets will always be cared for.

Please contact info@levyestatelaw.com for more information about estate planning for young families.