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Estate planning information - for everyone

Tue, 02 Feb 2021 00:27:19 GMT

For many people, an “estate” means a multi-million dollar home on expansive grounds – maybe not quite Downton Abbey, but something kind of similar . . . with substantial bank accounts to boot. The legal definition of “estate”, however, is much, much broader. Very simply, an estate consists of all property one owns, controls or is entitled to use. Personal belongings (such as furniture, clothes, cars, jewelry, vintage Barbies or G.I. Joes . . .) are part of one's estate. So are bank accounts, retirement accounts, life insurance proceeds and real estate. So, almost everyone has an estate, regardless of its value.

What is estate planning? Estate planning certainly involves making sure that one’s estate will be distributed according to one’s wishes upon death, consistent with state and federal laws. But it’s more than that. Good estate planning includes managing, and perhaps even distributing, portions of one’s estate during one’s lifetime. This may involve selling property, retitling assets, or changing beneficiary designations. Estate planning also involves appointing persons to care for other persons – such as minor children or one’s self – if circumstances (such as death or incapacity) require it.

Estate planning is necessarily tailored to each person. Small estates are not always simple, nor are large estates necessarily complex. Estates are as different as people, and we all know how different that is. In the bigger picture, estate planning represents one’s values. As such, estate planning plays an important role in the legacy you leave to those people and causes you care deeply about.

Whether one has created an estate plan or not, below are some important concepts for everyone to consider:

Do you have an estate plan?

❑ No

Consider meeting with a qualified attorney. Understand any legal ramifications of not having documents that direct the distribution of your estate (will, trusts, etc.), guardian appointments for your minor children, and health care directives, as a few examples. Also understand if you might have potential exposure to any tax consequences.

❑ Yes

Great! But is your plan complete and current? Has the value of your estate significantly changed, or do you expect it to change? Are you still okay with your prior fiduciary selections (personal representatives, guardians, trustees, etc.)? Have you added out of state properties? Do your documents coordinate with recent tax law changes? Are your assets appropriately titled? Good estate planning is not a one-time process, but an on-going event. If you have questions, seriously consider an estate planning check-up with your attorney.

Planning documents most persons should consider

❑ A will, trust or a combination of both

Wills, trusts, or a combination of both, are included in most estate plans.

A person may choose to have a will-based estate plan. A will becomes effective (“live”) only upon death. A major purpose of a will is to distribute, after death, property owned solely in the name of the person who died. This property is known as “probate property”, because it must pass through a probate court proceeding before it can be distributed. ("Non-probate property" is property that passes automatically upon death to other people, such as to joint tenants or joint account holders, or to beneficiaries according to beneficiary designations.) A will can also be used for making specific transfers of tangible property, for appointing guardians for minor children, and for establishing trusts for spouses, children or others. Importantly, without a will, probate property is distributed according to state law (the state will ‘write a will’ for you) and any distributions to children are generally distributed in full at age 18.

Alternatively, a person may choose to have a revocable living trust-based estate plan. Revocable living trusts (or “inter vivos trusts”) are established, and may also operate, during one’s lifetime. A person establishing a revocable living trust is called a settlor or trustor. Revocable living trusts may be used to manage and distribute property which has been properly transferred to the trustee of the trust. Trust asset management and distribution can occur during life and after death. Revocable living trusts can be revoked by the settlor, and are used for various reasons, including privacy and probate avoidance – especially for out-of-state real property. Subject to some conditions, the same person may be a settlor, trustee and beneficiary of a revocable living trust. If one establishes a revocable living trust, it is important to make sure that assets are titled in the name of the trust, as appropriate. Both wills and revocable living trusts may be used for estate tax planning.

❑Power of attorney

Powers of attorney are generally lesser known estate planning documents than wills or trusts, but they can be extremely important planning tools, depending upon a person’s circumstances. In addition to providing convenient administration of one’s financial affairs during one’s lifetime, powers of attorney can be very flexible. They can confer very limited or very expansive powers to one’s agent (“attorney-in-fact”). Powers of attorney can also be written to expire or continue upon one’s incapacity, or even to become effective only upon one’s incapacity. Powers of attorney are also generally revocable, as long as the principal has sufficient legal capacity.

❑ Health care directive

A health care directive can give critical guidance and assurance to one’s designated agent, should a person be unable to make health care decisions for himself or herself. This includes instructions for terminal conditions. This document is also revocable.

Other common estate planning considerations

❑ Beneficiary designations

Beneficiary designations are a critical, but sometimes overlooked, component of estate planning. Beneficiary designations allow property to pass outside of a probate court proceeding (see above). It is not unusual for many people to have a major portion of their estate in retirement plans, bank or brokerage accounts, or insurance policies. Depending upon the beneficiary designations for each of these assets, they can be eventually distributed outside of a will or trust. (Or these assets can be distributed into a will or trust, if one’s “estate” is designated as the beneficiary.) It is essential that beneficiary designations properly coordinate with one’s estate plan.

❑ Small business owners
Succession planning is an important estate planning consideration for many small business owners. For those seeking to receive fair value for their ownership interest, buy-sell agreements and other contractual arrangements should be considered, and existing contracts reviewed. Insurance policies and other company contracts should also be periodically reviewed to address liability exposure, aiming to protect business viability and value.

❑ Real estate
Real estate can make up a large portion of one’s estate, and at times can sometimes invoke strong feelings among family members. As a result, the transfer and titling of one’s home and other real estate, such as cabins or warm weather properties, should be carefully planned. Trusts should be considered for out-of-state properties, to avoid out-of-state probate proceedings. For estate and tax planning purposes, a cabin trust or family limited partnership may be appropriate for certain families wanting to provide co-ownership for one or more generations. Some property owners may also be interested in creating and granting conservation easements, for both tax and legacy planning purposes.

❑ Estate and other taxes
There have been significant federal and Minnesota estate, gift and generation-skipping tax law changes in 2013 and 2014. The federal estate tax exemption for 2014 is $5,340,000 per person. Minnesota’s estate tax exemption is $1,200,000 per person for 2014, and will increase by $200,000 annually to $2,000,000 for 2018. Persons with larger estates should be sure to consult a qualified professional for current laws regarding estate, gift and generation-skipping taxes.

But wait, there's more

Estate planning is a complex subject area, and there are a large number of estate planning matters which have not been addressed in this article, such as irrevocable life insurance trusts, special needs trusts for disabled persons, asset protections planning, and guardianships and conservatorships, to name just a few. Even the items discussed above are necessarily brief and, in some cases, incomplete. This article is intended to help readers generally evaluate their own estate planning circumstances, and recognize when it may be advisable to seek appropriate professional assistance. You have an important legacy to leave . . . and are encouraged to establish your first estate plan, or have an existing plan periodically reviewed.

This article is provided for general informational purposes. It is not intended to be, nor should it be regarded or relied upon, as legal advice. Due to space limitations, some information is necessarily incomplete. Readers should personally consult a qualified estate planning attorney for legal advice applicable to their unique situation. Please see this site's disclaimer for additional information.

Using disclaimer trusts in Minnesota

Tue, 02 Feb 2021 00:25:29 GMT

Minnesota estate planning attorneys, myself included, commonly recommend wills or revocable trusts with “disclaimer trust” provisions. The reason? Due to Minnesota’s estate tax exemption statute, disclaimer trusts provide surviving spouses with important flexibility without sacrificing potential estate tax effectiveness. An estate tax exemption is the amount an individual estate may transfer upon death without incurring estate tax. With some exceptions, Minnesota’s individual estate tax exemption amount is $1,400,000 in 2015. This amount will rise by $200,000 each subsequent year until it caps at $2,000,000 in 2018.

For example ...

Let’s look at a hypothetical scenario to see how an eventual “disclaimer trust” might be used. Assume a “decedent spouse” dies in 2015 leaving a personal estate worth $1,250,000 (a $550,000 retirement account, a $500,000 life insurance policy, and $200,000 representing his or her share of equity in a house owned jointly with his or her surviving spouse). In addition, the surviving spouse was named the primary beneficiary on the decedent spouse’s retirement account and life insurance policy, and – as directed in the decedent spouse’s will – the surviving spouse was the primary recipient of the decedent spouse’s other assets. So, everything is set up to go to the surviving spouse. Next, let’s assume the surviving spouse has his or her own estate worth $1,250,000. If the surviving spouse accepted the decedent spouse’s estate outright, the value of the surviving spouse’s estate would be $2,500,000. Fast forward to 2016. Assume the surviving spouse’s estate has now grown to $2,600,000. Also assume the spouse dies in 2016. Taking into account his or her estate tax exemption of $1,600,000 (remember, it increased by $200,000 according to state law), the estate of the second spouse to die would then be subject to estate tax on $1,000,000 ($2,600,000 estate minus $1,600,000 exemption = $1,000,000). Under the current Minnesota estate tax table, therefore, the estate would owe estate tax of approximately $100,000.

How a disclaimer trust might help avoid estate tax

A disclaimer trust might help avoid such estate tax. With a disclaimer trust option, after the death of the decedent spouse, the surviving spouse can choose to “disclaim” (i.e., refuse to accept) any portion of the decedent spouse’s estate. If this is done, any amounts disclaimed would – under the terms of the decedent spouse’s will or trust – be deposited into a “disclaimer trust” and distributed by a designated trustee according to the terms of the trust (often for the benefit of the surviving spouse – see below). For estate tax purposes, such a disclaimer would also remove the amount of disclaimed assets from the surviving spouse’s estate. And so, continuing our hypothetical, let’s assume the surviving spouse disclaims $1,000,000 of the decedent spouse’s estate. A few things would happen: First, the surviving spouse would receive $250,000 from the decedent spouse’s estate. This transfer is not taxed due to the unlimited marital deduction. In addition, the surviving spouse’s estate would increase to $1,450,000. Further, the disclaimed $1,000,000 would be deposited into a “disclaimer trust.” This transfer would also not be subject to estate tax because it would be less than the $1,400,000 exemption amount allowed by Minnesota law. Moreover, there would be no estate tax upon the surviving spouse’s death in 2016, since the value of his or her estate ($1,450,000) would be less than his or her $1,600,000 estate tax exemption available during that year. Therefore, in this scenario, the proper use of a disclaimer trust would have eliminated any state estate tax.

Disclaimer trust assets may still benefit the surviving spouse

At this point one might ask whether a surviving spouse would be hesitant to disclaim assets, if it means refusing to accept legal ownership of them. To this one can only give the classic attorney reply: ‘It depends’ – meaning, it depends on the surviving spouse’s needs and objectives. It's important to understand, however, that disclaimer trusts are most commonly established so that its assets are then available to the surviving spouse for his or her “health, maintenance, support and welfare.” From a practical standpoint, then, assets disclaimed by a surviving spouse – while not included in his or her estate for estate tax purposes – are still available to benefit the surviving spouse. In addition, disclaimer trust terms commonly provide that any trust assets remaining after both spouses die are to be distributed to the spouses’ children.

Additional considerations (and remember to review older wills and trusts!)

Are disclaimer trusts for everyone? No. Some clients do not need any tax planning provisions in their wills or trusts. For other clients, it might be more appropriate to automatically fund a credit shelter trust up to the federal individual estate tax exemption amount (currently $5.43 million per person in 2015). For many clients, however, depending upon the size of their estate and individual circumstances, disclaimer trusts are a useful tool for tax planning purposes. In all events, however, due to recent state and federal tax law changes, clients and their financial services professionals should review wills and trusts drafted under older tax laws. As just one example, some older wills and trusts fund credit shelter trusts up to the federal exemption amount. Not only could such funding result in immediate Minnesota estate tax (if the trust amount is greater than Minnesota’s estate tax exemption), but it could deprive the surviving spouse of more ready access to the decedent spouse’s assets.

It is also important to note that there are several rules concerning how assets can be properly disclaimed. Disclaimers must be in writing, and persons are not allowed to accept assets and then later disclaim. Particular caution should be taken concerning attempted post-death payments pursuant to beneficiary designations (e.g., retirement accounts, insurance policies, etc.). There may also be time frames within which disclaimers must be made. Qualified legal counsel should be consulted soon after someone’s death, and prior to accepting any assets of a decedent spouse.

An estate plan with disclaimer trust provisions may provide desired flexibility and other benefits to surviving spouses. A major potential benefit is that a surviving spouse may be able to eliminate or reduce his or her exposure to estate taxes. Yet, with a properly structured and implemented estate plan directing disclaimed assets to a “disclaimer trust,” a surviving spouse can still receive the disclaimed assets to meet his or her support needs.

Asset distribution considerations for adult children

Tue, 02 Feb 2021 00:23:44 GMT

Determining asset distributions to adult children may require thoughtful consideration by parents, depending upon the parents’ and children’s (and possibly grandchildren’s) unique circumstances and objectives. The following is a broad overview of several common options, to help clients consider what distribution plan might best serve their estate and legacy planning needs and objectives. For purposes of this information, it is presumed that both parents are deceased.

1. Immediate, lump-sum distributions

Children receive their share of the estate outright. This option does not protect against bankruptcy, other creditors, divorce, and various other potential financial catastrophes. Amounts distributed are also included in children’s estates for purposes of calculating their potential estate tax liability.

2. Step-distributions from trusts

Children’s shares are deposited into pooled or separate trusts and then distributed at certain intervals in the children’s lives. As just one example (among a near infinite number), a one-third distribution is made at age 30, one-half at age 40, and the balance at age 55. Within any step-distribution structure, access to trust principal and interest could also be permitted for various needs and purposes, consistent with guidelines established in the trust. Distributions could also be prohibited upon the occurrence of certain events or circumstances. Once distributions are made, however, no creditor or other protection is available.

3. "Conditional" trusts

Children’s shares are deposited into pooled or separate trusts and are then distributed at the trustee’s discretion according to various trust guidelines, which could include various incentives consistent with the parents' values and objectives. Guidelines and incentives could include distributions for the children’s health and various financial support needs, and activities consistent with values such as ongoing education of all types, a substance abuse-free lifestyle, a strong work ethic, family stability, financial responsibility, and service or missions projects, to name a few. Further, trusts can provide significant protection from children's creditors, bankruptcy, divorce, etc. - in view of life's never-ending uncertainties. Trusts can also last for the duration of children’s lives, and could continue for the benefit of the next generation. Finally, a proper on-going trust can effectively reduce their children's taxable estates (for estate tax purposes).

4. Any combination of above

The above options are not exclusive of each other. An estate plan could always contain components of each.

Of course, there is no one-size-fits-all option; any might be most appropriate. The point is to consider the pros and cons of various options, and to at least consider the potential benefits of each. Whether it's through outright distribution or a wide variety of trusts, how parents ultimately and specifically decide to distribute their assets depends upon an array of factors, including the size of their estate, their philosophy about money, the ages, personalities and habits of the adult children, and a host of other considerations.

This article is provided for general informational purposes. It is not intended to be, nor should it be regarded or relied upon, as legal advice. Due to space limitations, and the wide variety of individual circumstances, some information is necessarily incomplete. Readers should personally consult a qualified estate planning attorney for legal advice applicable to their unique situation. Please see this site's disclaimer for additional information.