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How Does a Living Trust Take Care of Your Family?
It’s important to know that not all living trusts are the same. However, common reasons for using a living trust are for privacy and avoiding probate. Creating a trust doesn’t magically avoid probate, though. You’ll have to put your assets in the name of the trust for it to actually dictate how those assets pass to the next generation. Placing assets in a living trust can also provide protection to beneficiaries from divorce, nursing home costs, legal actions and creditors. So why wouldn’t a living trust be part of your estate plan?
The Green Bay Press-Gazette’s recent article, “Common questions about a living trust,” notes that trust planning is especially important for beneficiaries who may have special needs. A Special Needs Trust can be created so their government program benefits—like Medicaid—won’t be impacted by their inheritance. Let’s look at some specific situations:
Avoiding probate. A living trust can help avoid probate, but a trust only controls assets that are in the trust. You must put assets into the trust (commonly known as “funding” the trust). A person can have a well-drafted trust, but if it’s not properly funded, they will most likely lose out on the benefits of creating trust. In addition, our lives are always changing, from new jobs to new children or grandchildren, a move or the purchase of a vacation home or other property. From time to time, tax laws change, as well. To ensure your estate plan will work when it needs to—at the time of your death or incapacity—you’ll need to not just “fund” your trust once.
Proper alignment of assets with an estate plan is not a one-time transaction, but a process. As your assets change in type or value, different planning opportunities could appear and you’ll need to ensure new assets are placed into the trust as well. There’s another step most estate planners don’t address, either: verifying with your financial institutions that assets have been correctly aligned. If you don’t, there could be mix-ups and your assets may not be correctly placed in the trust.
You’ll want to work with your estate planning attorney to align your assets up-front, verify they’re correctly aligned with the financial institutions, and track any changes over time. Doing so will not only ensure you’re organized, but will make things easier for your heirs when you pass.
Tax savings. There may be some tax savings opportunities you should be thinking about, especially if you’re in a state that, like Massachusetts, has enacted a state estate tax. An individual can pass up to $5.49 million without any federal estate taxes in 2017. Anything above that is subject to a 40% estate tax. In Massachusetts, however, any estate over $1 million will incur a state estate tax.
A living trust can be structured so a married couple can pass double the federal exemption amount free of federal estate taxes between the two of them. There’s usually no estate tax due when the first spouse passes away. However, the surviving spouse, who may inherit from his or her spouse, would be potentially subject to estate tax at his or her death. A living trust can be used to potentially avoid that and pass the maximum assets to your loved ones without unnecessarily diverting assets to estate taxes.
Assets requirements for a living trust. There’s no dollar amount required for a trust! In discussing your goals with your estate planning attorney and how they can best be accomplished, trust planning will likely be your most efficient option. It allows you to protect your own assets from creditors and other lawsuits and gives you the opportunity to pass those protections on to your loved ones. There are also certainly significant benefits when you combine that with the ability to minimize federal and potentially state estate taxes, as well.
If you’re truly looking to take care of your family when you pass away by minimizing the costs and stress associated with the probate process, pass the majority of your assets to your heirs, not the state, and protect your heirs from bankruptcies, lawsuits and even divorce actions, trust planning is likely to be for you. An experienced estate planning attorney will be able to discuss your concerns and options about creating a living trust and help you create an estate plan that will truly care for your family.
For more information, explore our website and contact us to schedule your consultation today!
Reference: Green Bay Press-Gazette (June 29, 2017) “Common questions about a living trust”
Read MoreHow are 401(k)s and IRAs Different, and How Can They Help My Kids and Grandkids?
There are significant differences between 401(k)s and IRAs, and as reported in a recent post on wjbf.com, “Advantages and disadvantages to a 401k and an IRA,” a number of new regulations from the Department of Labor makes this a good time to review the pros and cons of these popular retirement savings plans.
401(k): A 401(k) can potentially be less expensive than other investment vehicles, due to the number of participants. Many also have a loan provision for access to your principal if you need it in an emergency. If you retire early, qualified plans may have an age 55 withdrawal privilege that gets you around the 10% withdrawal excise tax provision. However, if you’re still working, you may be able to push back your required minimum distribution (RMD), until you’re over age 70. You’ll also have creditor protection in most qualified plans. Those are some of the pros.
One of the disadvantages of a typical qualified plan are choice limitations. A typical plan will have 10 or 15 options, and that’s it. The loan provision can also be a negative, if you terminate—the loan becomes distributable and becomes a taxable event (unless you can pay it back). You’d also be subject to the IRS rules concerning distributions. A 401(k) plan itself can have more rules around distributions that might make it even more difficult to distribute. Managed portfolios will be plan-specific with little customization to individual participants.
IRA: A major advantage of an IRA is the number of options. There are thousands of different investment options for a customized strategy and better tax efficiency. There is also more flexibility in beneficiary designations and distributions, stretch IRAs and distributions to potential beneficiaries. That’s a big pro.
With planning done by an experienced estate planning attorney, you may be able to designate trusts as the beneficiaries of your IRA that can preserve these assets in their tax-deferred “cocoon” for young kids or grandkids. The value over time of that account could grow exponentially, which could mean your kids or grandkids have plenty for college and retirement.
One disadvantage of an IRA is that the costs may be higher. There’s also no way to take a loan from an IRA—that’s an IRS rule—and there is also no early distribution at age 55. However, the biggest difference between the qualified plan and the IRA has to do with service and planning.
A 401(k) or IRA is often a large source of income in retirement, but could also be a tool for generational wealth planning if you work with a savvy and experienced estate planning attorney. Make sure to speak with your attorney about your retirement accounts’ beneficiary designations to ensure they align with your overall estate plan.
For more information, explore our website and contact us to schedule your consultation today!
Reference: wjbf.com (June 26, 2017) “Advantages and disadvantages to a 401k and an IRA”
Read MoreStart Early and Stay Focused to Succeed in College Savings
A finely-tuned savings plan that begins early in adult life with disciplined savers who do not deviate from the plan can save enough money to send kids to college and save for retirement at the same time. According to a CNBCarticle, “Saving for college and for retirement isn’t impossible,” it doesn’t hurt to have generous grandparents, but can certainly be done without them too. All you need is a solid plan and the perseverance to stick to it.
The cost of education is going to be highest for parents with younger children. For a couple with a newborn, it’s projected to cost upwards of $455,585 to send him or her to a four-year private institution. The expected cost of a public institution? Approximately $202,768.
One good way to plan is to make use of a 529 plan. Administered by financial institutions or by states, these college savings tools provide a number of benefits:
- 529 plans are professionally managed so you don’t have to! Plus, they’re readily available through either your financial planner or through state exchanges. If you go with a plan from your state of residence, there could be some tax benefits, too, so speak with your financial professionals about whether that could be a good opportunity for your family.
- All contributions are after-tax, but as long as the funds are used for education-related expenses, any appreciation of the account’s value is tax-free.
- There is no gift tax or gift tax return filing requirement if you want to contribute $14,000 in a year to the account. There could also be an opportunity to make a lump sum contribution of up to $70,000 (or $140,000 for married couples filing jointly) to a 529 if the gift is spread over five years. You’ll want to coordinate with your financial professional, CPA and possibly your estate planning attorney to really get it right.
- 529 plans won’t necessarily damage a child’s eligibility for financial aid. You’ll want to work with an experienced financial profession to make sure, but it’s certainly possible to minimize the impact. For grandparents looking to contribute a gift to a 529 plan in their estate, you’ll want to do some extra-careful planning with your estate planning attorney to ensure you’ve designated the correct beneficiary and won’t inadvertently trigger taxes.
- Some plans may allow you to “pre-pay” between one and four years of tuition. Since you pay today’s rates instead of future rates, the potential savings opportunity is significant. You’ll want to read the fine print, though, as these options may apply only to specific colleges. Talk with your financial professional to ensure you’re picking the best plan for your family.
Even with an aggressive savings plan, college could still be a stretch, especially for multiple kids. It may be necessary for a student to take out a loan. The good news about loans, however? Some studies suggest that kids take their education more seriously when they have a financial stake in it.
For more information, take a look at these two recent blog posts here and here, or explore our website and contact us to schedule your consultation today!
Reference: CNBC (November 7, 2016) “Saving for college and for retirement isn’t impossible”
Read MoreWhen Naming a Guardian for Minor Children, Don’t Stop at One
This is the situation no one wants to even think about: both parents dying unexpectedly and young children being raised by someone else. But it does happen. That’s why having a will and naming a guardian is so important for anyone who has children: a will is the only place to name a guardian for your child. Usually the problem is deciding between someone who is really good with your kids and someone more experienced with handling money and investments. But there is another way, as explained by NJ 101.5 in “Choosing guardians for your minor children.”
Yes, you can appoint one person as a guardian of the child—this person will care for them—and designate another person as a guardian of the estate—this person will care for your child’s assets. Typically when minors are part of estate planning, the parents’ assets are put into trust until the minor reaches a specified age(s) when they can begin to take over some control as a trustee.
As an illustration, a trust can dictate that when the beneficiary reaches age 25, he or she can become a co-trustee with the guardian of the estate, but without the right to “remove and replace” (i.e. change) trustees. This simply means the guardian of the estate remains a trustee and, should they believe a given transaction is a misuse of trust funds, they can prevent the beneficiary from using trust assets. When he or she reaches age 35, they can retain the right to “remove and replace” trustees. At that point, the trust will be fully under their control, as they could replace any co-trustee with one more inclined to allow their type of spending.
The trustee will invest and distribute the funds at his or her discretion for the support, education, health, and welfare of the minor. If you go with two different people as named trustee and guardian, it gives them some oversight to ensure that neither one breaches his or her fiduciary duties. The bottom line? This means you can select the person best suited to care for your child to be their guardian and the person more suited to handle finances can be named as trustee.
In these types of cases where the trustee and guardian are not the same person, you’ll want to think about naming people who’ll be able to work together. They’ll need to talk about the child’s needs and the assets available in the trust fund. If you choose two people, the guardian won’t be spending beyond the trust’s ability to reimburse.
In addition, speak with your estate planning attorney about the value of holding a Family Care Meeting with your trustee and guardian. This provides you with an opportunity to explain your estate plan, how you wish funds to be used for your child, and can also be used to express any other wishes and details that you’d like them to know. This way, they are both aware not just of how you want the funds to be used, but what your estate plan is and what your wishes are for your children.
For more information about a Family Care Meeting, explore our website and contact us to schedule your consultation today!
Reference: NJ101.5 (October 24, 2016) “Choosing guardians for your minor children”
Read MoreBest Approach to Year End Planning? Start Now!
Every season has its traditions, and the last quarter of the calendar year is always the time to meet with your advisors to review a number of matters before the year ends, according to The (Hot Springs, AR) Sentinel-Record in “Check this list — twice — before year-end.” All of this should be done with an eye to your long-term financial and personal goals. You can start thinking, planning and scheduling meetings now so you’re not under the gun in the midst of the holidays!
Keep track of your RMDs. Understand the rules on required minimum distributions (RMDs). If applicable and if you have yet to do so, take your 2017 RMD to avoid a 50% penalty on required amounts not taken. An experienced financial professional can help you plan for your RMDs.
Here are a few other RMD-related considerations when speaking with your financial professionals:
- Automate your RMDs so you never miss this important deadline.
- Take your first RMD during the year you reach 70½ or delay it until April 1st of the following year. However, be aware that if you delay and take two distributions in the first year after 70½, your income could go up and this may put you in a higher tax-bracket.
- Qualified charitable distributions permit traditional IRA owners who transfer RMDs to qualified charities to exclude the amount donated from their adjusted gross incomes—up to $100,000.
Tax harvesting. Look at whether you could benefit from tax-loss harvesting. This simply refers to selling a losing investment to offset gains or establish a deduction of up to $3,000. Excess losses also can be carried forward to future years. Here are some things to consider when speaking with your financial and tax professionals about decreasing your tax bill:
- Short-term gains are taxed at a higher marginal rate, so try to reduce those first;
- Don’t upset your long-term investment strategy when harvesting losses; and
- Understand the “wash sale” rules that impact new purchases before and after the sale of a security.
Wash sale. If you sell a security at a loss, then buy another “substantially identical” security within 30 days before or after the sale date, the IRS typically considers this to be a “wash sale” and will disallow the loss deduction. Be sure to work with your financial professional to ensure any wash sales are intentional.
Income and deductions. If you’re at or near the next tax bracket, pay close attention to anything that might bump you up and plan to reduce some taxable income before the end of the year. Chat with your financial professional about some of these ideas:
- Make a donation to a charity. This can benefit a good cause and reduce your taxable income. You also can gift up to $14,000 tax-free to as many people as you want and without needing to file a gift tax return.
- See if it makes sense to accelerate deductions or defer income, which may let you to minimize your current tax liability.
- Some retirement plans also can help you defer taxes. For example, contributing to a traditional 401(k) lets you to pay income tax only when you withdraw money from the plan in the future (when your income and tax rate may be lower or you may have more deductions available to offset the income).
- Analyze your income sources, such as earned income, corporate bonds, municipal bonds, qualified dividends and others, to reduce the overall tax impact.
Changes in life. Your year-end planning should take into consideration changes that have occurred in your life, as well as changes in the lives of close family members. Moves to a new state, divorces, weddings or births are all things that will impact your estate plan. Schedule a time to meet with your estate planning attorney to ensure your estate plan still reflects your wishes for loved ones.
Changes in assets. Have you bought a house since you last updated your estate plan? Did you change jobs? Roll over an old 401(k) into IRA? Any changes in assets should trigger a conversation with your estate planning attorney. After all, the way you own your assets will determine what happens to them after you pass—often superseding any instructions in a will or trust if not properly aligned with your plan. Plan to have a conversation with your estate planning attorney before year-end to ensure everything in your plan is the way you want it and your assets are all aligned with the plan.
At Family Estate Planning Law Group, we know that changes in life and in assets are not infrequent, so we work with all our clients on an ongoing basis to make sure their estate plan works the way they intend when they pass. Whether that’s five, ten, or fifteen years into our relationship with them, we want to ensure their families are cared for the way they wanted at their passing. To accomplish this, we partner with your financial professionals, working together to ensure your retirement and other investment accounts, insurance policies and other assets are owned in the most efficient way for both you and your heirs.
For more information on why assets are so crucial and how we partner with your financial professionals, explore our website and contact us to schedule your consultation today!
Reference: The (Hot Springs AR) Sentinel-Record (October 8, 2016) “Check this list — twice — before year-end”
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