Category Archives: Estate Planning Basics

Leaving Money to a Kid That Can’t Handle It

safeDear Liza: My wife and I are are planning to initiate an estate plan soon but we keep running into the issue of how to leave everything to our 28 year old son. He would be the only recipient as we have no other children, but he has no financial proficiency whatsoever and we have no expectations that he will ever achieve any. We we fairly certain that if we just leave anything to him it will be gone in less than five years. I would like your advice on how to handle this situation. So, the first thing that I want to say is that you’re not alone. I work with lots of people who struggle with some variety of this issue. The second thing that I want to say is that it sounds like you have a fairly clear idea of what could happen if you left your son his inheritance outright and free of trust, so trust that.

No pun intended, but actually leaving his money in trust is one option. In your estate plan, you could leave him his money in a trust, and appoint a trusted friend, or a bank, or a financial company to serve as Trustee. The money could be for his benefit, but it would not be invested or distributed by him. That kind of trust could last for his entire lifetime, and, since it would be held in an irrevocable trust, would not be available to his creditors or to his spouse (if he got married). If you hold it in a lifetime trust, though, you should name an institution as Trustee, since your son would likely outlive a trusted friend of your generation. Another option would be to direct your Trustee to purchase an annuity for your son, that would guarantee a level payout over his lifetime. This is a good option sometimes, but if your son had an emergency need, such as medical care, an annuity wouldn’t be flexible enough to address that need.

What Should I Do About Assets Not Held in Trust?

pot of goldDear Liza: My husband and I married in our 60’s and managed our affairs as “yours, mine and ours”.  He held his assets in accounts named as his trust. All combined assets were joint accounts, joint tenancy , etc. My accounts are either in my IRA or individual bank accounts in my name only. We contributed an equal amount to our joint accounts every month to pay living expenses. His daughters are trustees of his trust and sole beneficiaries. My husband died last week after a long illness. Do I need to go to probate for the assets NOT named by his trust? I’m sorry about your husband. You won’t need to open a probate if the total value of the assets in his name and not held by the trust are below your state’s small estate’s threshold. In California, where I practice, that limit is $150,000, but it differs state-by-state. To find out your state’s small estate threshold, click here. One important thing to remember is that this total doesn’t include the value of any assets that are held in joint tenancy, those assets pass to the surviving joint tenant automatically, because that’s what joint tenancy means–the surviving joint tenant owns the entire asset, whether that’s a house or a bank account. This total also doesn’t include any assets with a beneficiary designation, such as life insurance or a payable on death account. So, if your husband had only a few small accounts held in his own name that didn’t have a beneficiary or weren’t held in joint tenancy with you, you won’t have to open a probate to transfer them.  You will, though, need to follow your state’s rules for small estates– in California, after 40 days, there’s a simple one-page declaration that the executor can sign to transfer these assets.  If your husband had a pour-over Will in addition to his trust (which he should have had), these assets would pass to the trust’s beneficiaries, his daughters.

Can I Administering a Trust Without a Lawyer?

living trustLiza: I live in California and my dad passed away recently. I am the executor of his living trust.  His estate is around $500K.  Do I need an attorney to handle his trust?  Can I do it?  Or can a paralegal take care of this?  I do not know where to start.  I am overwhelmed.  Any guidance is greatly appreciated. I’m sorry about your Dad.  Grief is just hard, even without the legal headaches. So, here’s a short answer: First, you don’t have to hire an attorney, but it might be helpful and you can use the trust’s assets to pay for that time. Many trust administration attorneys would meet with you for an hour or two to  help you feel more oriented and less overwhelmed. Second, you might find a book that I co-wrote helpful (shameless self-promotion alert) since we wrote it, basically, for you: The Trustee’s Legal Companion is a step by step guide to administering a trust on your own. Third, the basic things you will need to do are send out a notice to all the heirs and beneficiaries, inventory the trust’s assets, pay all of the debts and taxes, and, when all that’s done, you can distribute the assets to the beneficiaries of the trust.

Will or Trust, Which is Better?

courthouse_2Dear Liza: My husband and I have one adult daughter – 20 years old.  We are in our 60’s and want to set up a will or a trust to ensure that 100% of our property and investments goes to our daughter, and that she inherits the assets with the least amount of taxes/probate as possible. What’s better a Will or a Trust? I don’t know what state you live in, and that makes this a hard question to answer completely. Here’s why: the value of doing a living trust depends on the cost and inconvenience of probate in your state.

Both a Will and a trust can ensure that your property passes to your daughter. Both a Will and a trust can incorporate tax planning to minimize any estate taxes that might be due at the death of the second of you (though these days, you’d have to have more than $10 million before worrying about the estate tax, so let’s assume that this is not an issue for you).  Really, the difference between which kind of an estate plan to create isn’t so much a “what” question; it’s really a “how” question, as in “how much” and “how long” will it take to settle your estates.

This is because a Will requires a probate proceeding before a distribution to your daughter, while a trust will allow you to bypass probate.  This means that if you do a Will, and your estate exceeds the small estates threshold in your state, your daughter won’t inherit anything until the court issues an order for distribution, which is how a probate ends. If you do a trust, and the trust is properly funded at your death, holding title to your major assets, your daughter will be able to inherit those assets as soon as they’ve been identified, taxes and creditors have been paid, and all of the beneficiaries and heirs have been notified.

In states that have adopted the Uniform Probate Code, currently that is 18 states, click here for a list of these, probate has been streamlined and is relatively inexpensive. In states that have not adopted this code, like the one that I practice in,  probate takes longer and costs far more than it costs to administer most living trusts. So, in order to sort out what’s the best estate plan for you, you need to find out the cost and delay in going through probate where you live. If you live in a state where probate is relatively easy and fast, you should be fine with just a Will. If you live in a state where probate is expensive and slow, a trust will be the better choice.

Who Can Order Death/Birth Certificates?

Last WillDear Liza: My uncle just died and I and a cousin are co-executors and equal co-heirs. A will is known to exist in a safe deposit box, but we have neither keys nor legal permission to open the box. There are no disputes and the estate is certainly below the tax level.The Mexican authorities seem to want a Birth Certificate in order to issue a Death Cert. As a niece, I am not entitled to get one, and there is no closer relative. What do I do? While it is true that only close family members can order vital records, you, as the executor, are also entitled to order them. In addition, an attorney that is working with you can also order such vital records. In California, where I practice, you must submit a sworn statement saying that you are the executor, and many states have a similar system.  You can contact the county vital records office where your uncle was born to request his birth certificate. Here’s a link to a commercial service that makes ordering such documents easy as well. Also, I would ask the bank what the rules are in your state for opening that safe deposit box. In my state, there’s a law that allows bank officials to open the box for the sole purpose of removing a Will, since there’s a certain chicken-and-egg problem if the executor must have the Will to be authorized to open that box.

Who Pays Taxes on an IRA?

tax dollarsDear Liza,  I am the personal representative for my mother’s estate in Maryland.  My mother, who is deceased, was the beneficiary of a small IRA. My mother’s estate is to be divided among her three grown daughters, myself included.  Who pays the tax on the IRA when it is withdrawn? The beneficiaries (you and your sisters) will be responsible for the income tax due on the IRA when you withdraw it. You will each get what’s called an “Inherited IRA.”  Check with your plan administrator to find out what your options are for those withdrawals. You probably will have to withdraw the money within five years of your mother’s death, you will definitely have to start withdrawing the money within the first year.

How long can custodial accounts last?

Stock PhotoDear Liza: If I’d like to designate my young child as beneficiary on a retirement account and bank account by naming a custodian under CUTMA, how do I specify that I want the custodial account(s) to last until my child is 25? Naming a custodian under CUTMA (which stands for California Uniform Transfers to Minors Act) for a gift to a child under the age of eighteen is an excellent idea. If you don’t, and you just name a minor directly as a beneficiary, and if the gift is more than $5,000, a guardian of the estate will have to be named by a court before the financial institution will release the funds.

But, clearly, you already know this, or you wouldn’t have asked! And you also know that a CUTMA account can last longer than age 18. In California, where I’m licensed to practice, the longest you can make a CUTMA account last for a gift made during your lifetime is 21. A CUTMA account can last to age 25 only for gifts made in a Will or a trust, or on a beneficiary designation that applies after death.

The way you’d do this is to write down: “________(THE ADULT), as custodian for ________(THE MINOR) until age 25 under the California Uniform Transfers to Minors Act” on the beneficiary form.

All states except Vermont and South Carolina have adopted the Uniform Transfers to Minors Act law, which allows you to name a custodian for a minor’s property. Some states terminate such accounts at 18, most terminate at 21, and some, like California, allow them to last to age 25 in certain circumstances. Here’s a link to a guide to all of the states that have adopted this law and the age limits applicable in each state.


				

Should We Create a Living Trust?

houseDear Liza: We are a married couple in our early and mid 30s with a one year old son living in Southern California. I have been looking at setting up a trust and/or will for our little family but not sure what is needed in our scenario. My husband and I each own a home in our name (bought before we got married). 

 My husband and I plan to create a living trust for each of us and transfer the property in our respective name into the trust to avoid probate and create a will for everything else. Since both properties still have outstanding mortgage, how do we go about changing the title to a trust and will the lender allow this? Is the living trust the best way to go about with estate planning or do we need to look at another type of trust? Aside from the two properties, what else should be included in the trust? Do we need to create an ILIT for the life insurance policy to avoid estate tax and inheritance tax? What is the exemption limit in California? It sounds like you are thinking about all the right things (and on your way to owning a real estate empire). Yes, a living trust is a great idea for your family for these three reasons:
  1. A living trust will allow you to transfer your assets to your son without a probate proceeding.
  2. A living trust will allow you to set up a trust for your one-year old son so that an adult can manage his inheritance until your son is an adult.
  3. The transfer of your properties into a living trust will not affect your mortgage–there’s federal legislation that says such a transfer does not trigger any due on sale clause. Your lender doesn’t need to be notified, you just record a deed transferring your property to the trust.

You probably don’t need an insurance trust. That’s what people use to exclude the value of their insurance payouts from their taxable estate. But today’s exemption levels ($5.43 million in 2015) are so high, that most of us won’t have to pay any estate tax, even if our life insurance policies are included in our taxable estates.

Paying Credit Card Debt as Trustee

debtsDear Liza, My father passed away recently, and all of his and my mom’s assets are held in a living trust (except an individual checking account), of which I am now the Trustee.  A few collection agencies are now contacting me about collecting on some credit card balances, which are fairly significant.  From what I’ve read online, it sounds like debt collectors might not be able to lay any claims against the trust, but they can collect from the personal estate of the deceased (i.e. checking account or other assets held in the individual’s name).Is that understanding correct?  In case the debtors try to collect against the trust, I want to know our rights in that situation.  As Trustee, you are, actually, obligated to pay the debts of the Grantors (the people who created that trust) that you know about before you can distribute assets to the trust’s beneficiaries. That includes taxes and, in this case, credit card debt. If there are sufficient assets in the trust to pay those debts, you have to pay them. If there are insufficient assets in the trust to pay those debts, often you can, as Trustee, negotiate a lower payment with the companies — because that debt is not secured by anything (in contrast, say, to a house that secures a mortgage), the companies will often settle for less than the full amount rather than writing off the entire balance. If you don’t pay these debts and distribute the trust’s assets to the beneficiaries, these companies could, theoretically, go after the beneficiaries for payment from their inherited assets. Here’s an article that you might find helpful, too.

 

Paying Capital Gains on Appreciated Assets

houseDear Liza, My father passed away in 2002 when the federal estate tax limit was $1million. At that time my mother chose to put their home in the Bypass Trust.  She has now passed and the home is worth $1.4 million.  Do we inherit tax free or pay taxes on the amount over $1million?  It’s nice when I get a question that has a clear-cut answer AND an answer that most people would be happy to recieve. And this one’s got both, sort of: you will inherit the assets held in the Bypass Trust free of estate tax, even on the appreciation since 2002. That’s in fact why your mother put the house in the Bypass Trust, to take it (and its appreciation) out of her taxable estate.

However, here’s what you aren’t going to get: a step-up in basis to the date of death value of the house ($1.4 million). Capital gains are calculated on the difference between what you bought an asset for (the basis) and what you sold it for (called gain, if you sold it for more money than you paid for it.) So, a step-up in basis reduces the capital gains taxes that will be due when that asset is sold. A step-up in basis is a good thing if you own appreciated assets that you plan to sell.

When your Dad died, in 2002, your Mom got a step up in basis for the house — if, for example, they’d bought that house in 1953 for $25,000, she would have gotten a new basis of $1 million for that house in 2002, since that’s what it was worth when he died. If she’d decided to sell the house after your father’s death, she would only  have had to pay capital gains on the post-death appreciation. (I’m assuming the house was community property because I live and work in California. In other states, the survivor only gets a step up on the assets owned by the deceased spouse.)

But the way the tax code works is that if an asset is held in the Bypass Trust, you don’t get to take another step-up in basis at the second death. It’s kind of a good-news/bad-news story: you don’t have to pay estate tax on the assets (and all of the appreciation) on the assets held in the Bypass Trust. This is why Bypass Trusts exist, they shelter assets and appreciation from the estate tax. But if you sell the house now that your mother’s dead, you will have to pay capital gain taxes on the gain ($400,000) earned since your father’s death.