This is the second of two articles on reviewing a trust. In this one, discuss how we evaluate a living trust agreement, and how that differs from developing an estate plan.
My team and I examine dozens of things when we evaluate a trust document. To give you an idea, a few of them are:
- Does the trust agreement confirm to third-parties that a married trustor/trustee has authority to act when his/her spouse cannot (if desired by client)?
- Does the trust agreement include provisions to alter distributions to a surviving spouse in the event of remarriage after the death of the first spouse?
- Does the trust agreement include a common trust provision when one or more of the primary beneficiaries has not yet graduated from college?
- Does the trust agreement give the trustee of a continuing trust an appropriate amount of flexibility to make disproportionate distributions based upon the relative needs of the beneficiaries?
- Does the trust agreement set up continuing trusts for the beneficiaries, which are tailored to the needs of each trust beneficiary?
Is there evidence that the trust is properly funded? An unfunded or partially funded revocable living trust does not avoid probate. Great care must be taken to ensure that all necessary assets held by the trustor individually are either retitled to the trust, or that the trust is considered as an appropriate “designated beneficiary.”
The difference between evaluation of a trust and creating an estate plan
In trust reviews, my intention is to provide you with an objective analysis of the document, and nothing more. Still, my review may be very beneficial to you because your estate plan will eventually be interpreted by attorneys and financial professionals that you do not know. So it is far better to identify ambiguities or omissions in your estate plan while you are alive and healthy than when you are not.
When I am hired for estate planning, I conduct an in-depth "discovery" process that includes:
Gathering personal and financial information
First I need to review your personal data and your financial information, and discuss a potential plan to meet your goals and objectives. I need to learn about your family and how the various members handle money. I understand that this is sensitive information, something not always easy to talk about. I am not shocked by any characters lurking in your family tree – we all have our fair share of them!
Discussing goals and values
You have built up a large estate, and you probably have very specific wishes that you want someone to carry out. Before I can recommend any course of action, we need to meet in person so that I can learn about you, your values, what you are trying to accomplish and, maybe most importantly, what you want to avoid. When I am creating a plan for both spouses, it is an absolute requirement that both spouses meet with me.
Focus areas in an estate planning engagement
Here are a few of the many questions I ask the first time we get together to discuss your estate plan. The following is not a complete list - it is a sampling:
- Did you have any prior marriages?
- Have you signed any pre- or post-marriage contracts?
- Do you have an “umbrella” liability insurance policy?
- If any children are under 18, have you decided who would be their guardians?
- Do you have any business interests?
- Do you wish to leave money or assets to charitable or religious causes?
- Are you concerned about providing for your grandchildren’s education?
- Do you wish to prevent anyone from receiving a portion of your estate?
- Do you wish to make any provisions in your estate plan for your pets?
The more I understand about your circumstances, the better I can educate you about your choices and guide you so that your family members won’t need to make stressful decisions in trying times. You will have the peace of mind of knowing that you have “done right” by your family.
All the best,
In my many years as an estate planning attorney in the Palo Alto, Stanford, Silicon Valley, and San Francisco Bay areas, I have seen my share of family squabbles between children of the deceased by marriage #1 and the current spouse and children of the deceased by mariage #2, 3, or 4 because of non-existent, outdated, or insufficient estate planning. If you have children from your current marriage and your former marriage, not having an estate plan is truly a disservice to your family.
A current estate plan is essential
The combination of a 50% divorce rate and people living longer has made remarriage more and more common. Many people make the mistake of not planning for their deaths because the relationship between the members of their blended family is so good. Unfortunately, death tends to bring out the worst in people. Therefore, if you have children from a former marriage and also with your present spouse, having a current estate plan is arguably the best way to minimize familial conflict after you die.
Estate Planning Options for Blended Families
Estate planning is a method for establishing long-term goals for the growth, management, and distribution of your wealth and assetsupon your death. A well-formulated estate plan affords maximum asset protection and minimum tax exposure.
Wills – A simple will is not sufficient if you have a blended family. Most simple wills assume that both parties have only been married to each other and have children only with one another. Additionally, a simple will assumes that at death, each spouse desires to bequeath his or her assets to the surviving spouse and their children, with no provisions for former spouses and children from prior marriages.
To avoid the problems that can arise by using a simple will when you are remarried and have children and stepchildren you may wish to provide for, you need to have a will drafted that specifically addresses your family structure and your wishes for taking care of your spouse, former spouse, children, and stepchildren, as the case may be. A well-written will clearly and definitively sets forth your wishes so as to avoid conflict and misunderstandings.
QTIP Trusts – Upon your death, a Qualified Terminable Interest Property (QTIP) Trust gives your surviving spouse limited access to your assets during his or her lifetime while ensuring that the remaining assets in the trust are distributed to your children from a prior marriage upon your spouse’s death. The requirements for a QTIP trust are:
- Creation of the trust for your spouse;
- Use of trust assets for the sole benefit of surviving spouse during his or her lifetime;
- Entitlement of surviving spouse to 100% of income from trust assets, payable at least once per year; and
- Irrevocable election by your executor to treat trust assets as “qualified terminable interest property”
Life Insurance – If you wish to leave the bulk of your estate to your current spouse, consider purchasing a life insurance policy and naming the children from your former marriage as the beneficiaries.
Why? For several reasons.
- First, your children receive “something” at the time of your death; they don’t have to wait until the “wicked stepparent” dies to receive their inheritance.
- Secondly, they don’t have to worry that the “wicked stepparent” will spend all the assets and leave them nothing.
- And third, if you tell them that this is all they should expect (and that it’s up to your spouse whether to leave them more or not), it reduces the tension considerably.
Living Trusts – A living trust is also an option if your spouse needs your assets to maintain his or her standard of living. A living trust allows your spouse to have continued access to your assets during his or her lifetime. Upon your spouse’s death, the assets will go to your children or your other designated beneficiaries.
Planning to Create an Estate Plan
Because remarriage estate planning can be a very emotional process, I advise my clients to take the following steps before beginning the estate planning process:
- List your assets and debts;
- Decide which spouse will be responsible for paying which debts;
- Decide how you wish your assets to be divided between children and stepchildren;
- Review your life insurance policies and update the beneficiaries, if necessary;
- Share the terms of your divorce decrees with one another to avoid any surprises;
- Discuss your estate planning goals in general terms with your children and stepchildren
Once you've completed these steps, you are ready to meet with an estate planning attorney to formalize your estate plan. If you live in Atherton, Menlo Park, Stanford, Palo Alto, or the San Francisco Bay area, contact the Law Offices of Janet Brewer for all of your estate planning needs. Janet has extensive experience in drafting complex estate plans for mid to high net worth clients in traditional, non-traditional, and blended family situations.
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All the best,
When planning your estate, your primary objective is probably to pass on as much wealth to your heirs as possible. And if you’re like most people, you want to reduce or eliminate estate taxes as well.
But litigation, divorce, malpractice and other potential claims may damage your net worth more than taxes. So protecting assets from potential claims has become an additional planning objective. Fortunately, many of the same techniques you can use to reduce estate taxes also can provide creditor protection.
You can use many techniques to reduce your estate for tax purposes while also protecting your assets from creditors. Yet these measures won’t protect against existing creditors if a transfer constitutes a “fraudulent conveyance” under the Uniform Fraudulent Transfer Act. A fraudulent conveyance occurs if you had actual intent to hinder, delay or defraud a creditor when you made the transfer.
Here are seven ways to safely protect transferred assets from creditors:
1. Outright gifts. An outright gift protects a transferred asset from creditors. But you’ll lose all economic interest in and control over the asset
2. Family limited partnerships (FLPs). An FLP is an excellent asset-protection device because it limits a limited partner’s creditor’s ability to attach partnership assets to satisfy a debt. Creditors generally can obtain a charging order only against a limited partner’s interest in a partnership. A charging order would permit a creditor to receive distributions only when they’re made from the partnership, and the general partner could choose not to make distributions. The creditor could even end up with taxable income without any cash distributions.
3. Irrevocable life insurance trusts (ILITs). From the standpoint of protecting your assets, an ILIT removes insurance proceeds from your estate for federal estate tax purposes. And the trust protects from creditors the cash value of the policies during your lifetime and the policy proceeds when you die.
4. Qualified personal residence trusts (QPRTs). A QPRT lets you transfer a primary or vacation residence to a trust while you reserve the right to live in the home for a term of years. The value of the interest you retain (that is, the right to live in the house for a term of years) is calculated using IRS tables. The value of the property transferred into trust, minus your term interest’s value, is a gift known as the “remainder interest.” This gift can be sheltered from gift tax by your $1 million gift tax exemption. If you survive the term of years, the trust is not included in your estate for federal estate tax purposes. (QPRTs provide creditor protection by insulating the residence from your creditors’ claims. In a creditor protection situation, the nondebtor spouse should create the QPRT and retain the term interest.)
5. Inter vivos qualified terminable interest property (QTIP) trusts. You create this trust during your lifetime for your spouse. It qualifies for the gift tax marital deduction. The federal estate tax benefit to this technique is that when your spouse dies, the QTIP trust is included in his or her estate for federal estate tax purposes. If your spouse lacks sufficient assets in his or her own name to use his or her federal estate tax exemption, the QTIP assets will achieve this.
If you survive your spouse, an amount of assets equal to the estate tax exemption (currently $1.5 million) will first go to fund a family trust created under the QTIP trust for your benefit. The balance of the QTIP trust assets will be allocated to the marital trust for your benefit and will qualify for the marital deduction, resulting in no federal estate tax at your spouse’s death.
By structuring the QTIP trust this way, the assets allocated to the family trust when your spouse dies will escape estate tax. That is, the assets allocated to the family trust don’t qualify for the estate tax marital deduction, but your spouse’s estate tax exemption “shelters” them from estate tax. They also won’t be subject to federal estate tax when you die, because assets allocated to a family trust — including their appreciation — for a surviving spouse’s benefit aren’t part of the surviving spouse’s estate for federal estate tax purposes.
The inter vivos QTIP trust is extremely popular as a creditor protection device because the QTIP assets are completely insulated from claims of your creditors and your spouse’s creditors during your spouse’s lifetime.
6. Charitable remainder trusts (CRTs). A CRT usually provides for distribution of a percentage of the trust principal, at least annually, to a person, usually the grantor, for his or her lifetime. The CRT can provide that when the grantor dies, the grantor’s spouse shall become the CRT annuitant for his or her lifetime. When this period ends, the charity receives the remaining CRT assets (the “remainder interest”).
Creating a CRT provides several income tax benefits. For example, the grantor can deduct the remainder interest’s value (the interest passing to the charity) as determined at the CRT’s inception by consulting IRS tables.
An additional benefit is that the CRT is exempt from all income tax. So a grantor owning assets subject to a large capital gain can transfer these assets to the trust, and it can sell them without the grantor or the trust having to pay any tax on the gain. Or a grantor holding highly appreciated assets that aren’t producing much income can contribute them to the CRT and create an income stream and owe tax only as annuity payments are received. It sells them and reinvests the proceeds to service the annuity.
A nondebtor-spouse-created CRT protects assets from a debtor spouse’s creditors. A creditor can’t attach the principal because of the charitable interest. And a debtor spouse’s creditors can’t attach the nondebtor spouse’s annuity payments. If the nondebtor spouse dies first — and the CRT provides that the debtor spouse becomes the annuitant — the debtor spouse’s creditors could attach the annuity when distributed to him or her.
7. Grantor retained annuity trusts (GRATs). A GRAT is a gift of a remainder interest in an irrevocable trust, under which the grantor has retained an annuity interest for a term of years. For example, if $500,000 is transferred to a GRAT and the grantor has retained a 6% annuity, $30,000 per year will be distributed to the grantor. The remainder interest in the GRAT can be a trust for the grantor’s spouse, with trusts being created for children when both spouses die.
The value of the gift to a GRAT for gift tax purposes is the value of the property transferred to it, less the value of the grantor’s retained annuity interest. The value of the annuity is calculated according to IRS tables.
If the grantor survives the GRAT’s term, its assets will be excluded from the grantor’s estate for federal estate tax purposes. If the grantor dies during the term, some of the assets will be included in the grantor’s estate for federal estate-tax purposes.
If a nondebtor spouse is the grantor of a GRAT, the debtor spouse’s creditors can’t attach the annuity distributions to the nondebtor spouse. These creditors also can’t attach the GRAT principal. If a debtor spouse becomes a GRAT beneficiary when the nondebtor spouse dies, his or her creditors could attach any distributions to the debtor spouse.
These are just a few of the ways proper estate planning can also safeguard your assets from creditors. And in a society rife with litigation, you simply can’t underestimate the importance of protecting yourself. Learn all you can about these measures and others that may benefit you.
All the best,
With the rate of divorce so high in the country today, it is not unusual to end up in what is referred to as a "blended family."
Do you remember the old movie--"Yours, Mine and Ours?" Now, fast-forward that same idea about 30 years down the road. They were in an unusual situation for that time period but today it is commonplace to have a blended family. In order to keep everything straight, there are a few items you can put in place to keep the peace.
A QTIP Trust Can Keep Everyone Happy
If you’re getting married for the second (or later) time, before the big day it’s wise to review your estate plan — especially if you have children.
Why? Because financial conflicts between your future spouse and children from previous marriages may arise. To head these problems off at the pass and maintain family harmony, consider a Qualified Terminable Interest Property (QTIP) trust.
QTIP as a Family Peacekeeper
A QTIP trust gives you the peace of mind that assets you leave to your spouse won’t eventually be distributed in a way that’s against your wishes. In other words, it provides lifetime security for your surviving spouse while protecting your children from a previous marriage from disinheritance by your spouse.
How does this work? You designate your new spouse as the current trust beneficiary and your children from your previous marriage as the remainder beneficiaries. Your spouse receives all income from the trust, and you can allow your spouse as much or as little access to the principal as you choose — though giving him or her too much access to the principal would defeat the trust’s purpose.
Bear in mind that, even with a QTIP trust, squabbles can erupt between spouses and children about investment decisions that affect how much income the trust will generate for distribution. Some states have total return trust legislation, which allows the surviving spouse to annually receive a fixed percentage of the trust assets in lieu of income.
A Balancing Act
When creating a QTIP trust, you must choose a trustee and successor trustee. Your trustees must balance the needs of both your surviving spouse and the children. Often, a corporate trustee is the best choice because he or she provides neutrality. QTIP trust beneficiaries often have the option of removing a trustee.
To ensure that a trustee who favors one beneficiary over another isn’t put in place, require both the surviving spouse and the children to agree on any successor trustees. In some circumstances it may be appropriate to form a contingency plan.
For example, let’s say your new spouse is considerably younger than you. Under a QTIP trust, your children won’t receive their inheritance until your spouse dies, which may be many years after your death. Thus, consider making an immediate distribution of part of your estate to the children in a separate trust, and place only a fraction of the total estate in trust for the surviving spouse.
A Clean Start for your Family
A second or third marriage can be both a joyous and contentious time for you and your family. To smooth over conflicts, consider setting up a QTIP trust to help meet everyone’s needs.
All the best,
All the best,