Most people understand the need to protect, and assign, their assets after their death. They know who will care for their children or pets, who will receive the family heirloom brooch, and who will inherit their financial assets. In this day and age, however, there is a new category of assets to consider: digital assets. Internet users should be considering what will happen to their digital assets, including social media accounts, email accounts, online document storage, and other resources, after they die.
A list of digital assets should be included in your estate plan. Consider how you will provide your survivors with a list of account locations, usernames, and passwords. Begin by making a list of all the accounts you have opened. Consider listing emails, social networking sites, photo sharing and editing platforms, online document storage or hard drive backup services, online banking, digital stock portfolio information, and more. Talk to your estate planner about what services they provide or suggest, and remember to update the list often, at least once every 30 days, or whenever you update passwords or open new accounts.After making a list of your digital assets, decide what you want done with those assets. Should the social media page be updated and allowed to continue "in memoriam?" Should only your partner or children have access to your online journal and financial information? Make a list of how you wish each account to be dispensed, which may include allowing them to continue, transferring ownership, or canceling services. Understand that some services, like Facebook, will provide loved ones with a reproducible digital copy upon request, and that restrictions can be placed on each account, to meet your post-mortem request, but these things can only be done if you have left thorough instructions.Unfortunately, there is no perfect solution for how to transfer password information to your loved ones. Any method will put the security of your accounts at risk, so consider the options and select one that you can live with. A single password and username can be left, for a service like google docs, where a master list is complied, a list can be left with the estate planner, a physical list can be locked in a safe or safety deposit box, or password services, like Legacy Locker, or Dead Man Switch can be used to transmit password information. Ultimately, how passwords are communicated is a matter of personal preference, and comfort.
All the best,
The probate process can be complex and time consuming - especially in San Francisco probate cases involving multi-million dollars estates with diverse holdings. Here are my tips.
When a San Francisco County resident dies and has a will, someone must prove that the will is valid. That process is called “probate.” The first step in the probate process is to file the will with the San Francisco County Probate Court Clerk.
Time is of the essence here since California law says the will must be filed within 30 days after the decedent’s death.
Assets may pass through a trust
It is not uncommon for high-net-worth clients to have a trust. In such a case the majority of the decedent’s assets will pass through the trust, leaving little or nothing to be probated. If there are no assets to probate, then the legal requirements are fulfilled once the will has been lodged with the Probate Court.
However, if any assets are not held in the decedent’s trust, it is likely that they will need to be “probated” and then distributed pursuant to the terms of the decedent’s will. In that case the next step in the probate process is to file a Petition to Probate Decedent’s Estate. The petition must include the name of the decedent, his date of death, his address at the time of his death, and the name of the person filing the petition. The petition must also include:
- The name of the executor or personal representative;
- The names and addresses of the beneficiaries listed in the will;
- The names and addresses of everyone who would be legally entitled to inherit from the decedent if there were no will (that is, the decedent’s “heirs at law”); and
- The estimated value of the estate.
Once the petition has been filed, the court will set a hearing date. The person filing the petition is required by law to provide everyone who is named in the petition with notice of the hearing. That person must also make sure that a notice announcing the hearing is published in a local newspaper. That announcement must be in the format required by the Probate Code.
After the hearing, the probate judge will enter an order either granting or denying the petition. If the petition is granted, a document known as “Letters Testamentary” will be issued granting the executor authority to oversee and manage the estate is accordance with the will and the probate laws of the State of California.
Unfortunately, things might not always go so smoothly. If someone shows up at the hearing to contest the appointment of the executor, the judge will then have to schedule another hearing to allow that person enough time to file formal paperwork. If a contest is filed, it could take several hearings before a decision is made.
And this is only the beginning...
The hard work really begins once the Court has issued Letters Testamentary. No matter how small the estate, the executor must inventory the estate’s property; pay the decedent’s debts; collect any debts owed to the estate; file and pay estate, gift, and income taxes; and file annual accountings each year until the estate is closed. At the end of the process, once the court has issued an order permitting it, the executor must then distribute the remaining property of the estate to the heirs and beneficiaries.
If you are in or facing a probate in California
A qualified local probate attorney is well versed in all aspects of the complex probate process and typically assists Executors in handling these duties and obligations. If you are currently embroiled in or facing probate in California, please get in touch. I am an estate planning and probate attorney certified by the California State Bar Board of Legal Specialization as specializing in these matters, and I represent high-net-worth clients in San Francisco and surrounding areas.
If you found this article useful, also see:
All the best,
Bay Area families are running out of time to take advantage of the generous gift tax exemption in place this year. Now is the time to leverage any gifts into ones that hold greatly increased potential value for the recipients. Get started now »
Bay Area families that have yet to take advantage of the current gift tax exemption are running out of time. As of midnight on December 31, 2012, the $5 million exemption disappears and will be replaced by a $1 million exemption. As it stands right now, gifts in excess of $1 million given after January 1, 2013, will be taxed at a whopping 55% top rate!
Last year, Congress raised the gift tax exemption from $1 million per year to a whopping $5 million per year ($5,120,000 per person, to be precise). In addition, the estate tax rate has been reduced from 55% to 35%. However, the increased exemption and reduced rates will last for only the 2011 and 2012 fiscal years, making it imperative to act now to create and revise estate plans to take advantage of these extraordinarily favorable terms.
According to the IRS, the gift tax occurs when a person or estate transfers money or property to another either for nothing or for something less than the full value of the property. Congress passed the tax specifically in response to wealthy individuals trying to avoid the estate or “death” tax by giving away their assets prior to death. Before this year, the relatively low threshold of the gift tax exemption discouraged large pre-death bequests.
I have previously said that those with a high net worth should do advanced estate planning beyond a basic will. The generous gift tax exemption currently in place makes now the best time to leverage any gifts into ones that hold greatly increased potential value for the recipients. Some strategies include:
LLC: Starting a LLC and then making a large gift to capitalize the company. It’s important to note that the process of creating an LLC takes time; all the necessary documents have to be drafted and then approved by the Secretary of State. A prudent planner would need to begin the process right away if he wishes to take advantage of the favorable exemption.
FLP: Related to starting an LLC is the pooling of assets into a Family Limited Partnership. I have previously discussed the benefits of such partnerships here.
Trusts: Another option involves placing certain gifts in trusts. We advocate using various kinds of trusts to protect assets from creditors and con artists alike. This article from the Wall Street Journal contains an excellent rundown of the various trusts one can create to take advantage of the gift tax exemption. Some trusts, such as the Grantor Retained Annuity Trust can be structured so that there are no gift tax consequences.
Real estate: Real estate, much like closely held businesses, is notoriously hard to value and can greatly increase in worth over time. One only needs to look at the massive increase in home values in the Bay Area over the past 25 years (or the dip for the past several) to know how volatile the real estate market can be. Home prices may be lower now, but can increase in value substantially over the next decade or two, increasingly the value of the gift for the recipient. The current economic environment, in which many asset values are depressed and interest rates are at historic lows, actually makes this a perfect time to make gifts, since these factors can really help maximize the benefits of gifting.
Even if you can only afford to give smaller gifts between $1 million and $4.999 million (small being a relative word), it would still be wise to take advantage of this generous exemption before the year’s end and the $5 million ceiling expires. If you have not yet tried to take advantage of the exemption, you need to act quickly. The likelihood of Congress extending this exemption is widely seen as unlikely given that it is an election year.
Creating a gift plan that will suit your individual needs takes time. Appraisals, business valuations, and trust documents must often be created in order to ensure the gift tax exemption is applied properly in your situation. Talk to your California gift-planning attorney right away if you want to take advantage of the exemption before it ends.
Source: “The $5 Million Tax Break,” by Anne Tergesen, published at WSJ.com.
See our related blog posts:
All the best,
Of all the topics I cover at this blog, probate seems to involve the most legalese. It's an ongoing challenge to translate legal jargon into examples and tips that make sense to non-lawyers. So I am glad to see that a new TV show called "Trial & Heirs" is in the works. Last time I checked, PBS was going to stream an episode in August and start airing it nationally in December.
While I don't litigate, I hope the show highlights how wills, trusts, and other elements of estate planning affect real people... and that it prompts more families to do sound planning.
Avoiding probate is important because probate adds stress, costs (including court filing fees), and other pressures on loved ones during a period that is already painful. In brief, get a comprehensive will and living trust in place and review them about every three years with an eye to whether your situation (or the tax law) has changed.
If you must deal with probate - an example
Suppose your relative, Roger, passes on at his home in Redwood City, and you learn that you are named in his will. Because he did not have a living trust, you will probably be involved in the probate of Roger's estate.
Probate is a legal procedure that identifies the heirs to an estate and determines how much of that estate the heirs are legally entitled to receive. It is used to sort out how much you owe to your creditors, to pay them, and to officially prove your Will is genuine (or to determine who should receive your property if you die without a Will).
Roger's estate must be probated in the county where he died. So Roger's Will should be filed with the Clerk of the San Mateo County Probate Court -- within 30 days after his death -- in Room B on the first floor of the Hall of Justice at 400 County Center in Redwood City.
Since Robert's will named beneficiaries, the representative filing the form fills out a “Petition to Probate Decedent’s Estate”. Filling it out requires:
- Name of the personal representative who will oversee the estate
- Estimated value of the decedent’s estate
- Names and addresses of the beneficiaries designated in the will
- Names and addresses of all legal heirs
Once the representative files the petition, the court sends a Notice of Petition to all parties named in the petition, publishes a notice in the newspaper, and sets a hearing date.
(If Roger died without a will -- or "intestate" -- the court may “administer” his estate. In such cases, rather than filing a Petition to Probate Decedent’s Estate, the petitioner would file a “Petition to Administer Estate”.)
After the hearing, the probate judge will enter an order granting or denying the petition. If the petition is granted, and all the required documents have been filed with the court, the court will issue Letters Testamentary (or Letters of Administration in cases involving an intestate estate).
Legalese, hearing dates, and more
As I said earlier, probate involves a ton of legalese. The Court provides some help navigating the process, including a link regarding Initial Petition documents. But on the subject of being your own lawyer it clearly states,
"...before taking any legal action it is highly advisable to consult with a lawyer who can inform you about important legal rights. An experienced attorney may be able to quickly assess your situation and highlight the best course of action to assert or protect your interests. Failure to consult with an attorney may result in unnecessary delays or costly measures in the future to remedy errors."
Getting legal help
Probate is often more complex, more stressful, and more time consuming in cases involving especially large estates (say $5M or more). If you face such a probate, hire the best San Mateo County probate attorney you can for legal help! He or she can represent you in all aspects of the probate process, from initial filing of the will and petition to closure.
Learn about retaining our services
Access additional free resources
All the best,
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,
This is the first of two articles on reviewing a trust. In this one I address whether a Palo Alto family with a living trust should have the creator of the trust do the review, or find a different attorney to take a fresh look.
Q: We live in Palo Alto, California and in the 90s our family chose a Burlingame estate planning attorney to establish a living trust. Now we are trying to verify if the attorney who drew it up really is trustworthy and experienced with living trusts. We need a trust review. Specifically:
- Is it better to go to the same attorney for this "check up" or someone new?
- Since we are asking for a trust review, would the fees be much lower than if we were starting from scratch?
A: You were smart to use an estate planning attorney instead of using off-the-shelf forms or packages from a self-service legal website. You are smart to check and update your living trust, too. Circumstances can change alot in a short time. In fact, it is a good idea to do a trust review and update your trust every three to five years.
Vetting estate planning attorneys using Avvo
I am glad to hear that you are vetting estate planning attorneys before hiring anyone. One way to check out a lawyer is to look on Avvo. Search for "estate planning" in the Palo Alto area and see which lawyers' names appear with high Avvo ratings. See if they've answered questions and read the answers to see what you think of their approach.
Checking out attorneys using the State Bar website
Also check out the State Bar website. Use the "Advanced Search" feature and the "Additional Search Criteria" to find a specialist in Estate Planning law. Less than 1% of all California lawyers are certified as specialists in Estate Planning. In order to be certified, a lawyer has to pass a specialized bar exam and meet rigorous experience requirements.
Also, check out these individuals' websites to see what their approach is to estate planning to see if you think the "chemistry" will be right.
What you can expect to pay
You get what you pay for! If price is your most important criterion, then skip all of the above and just phone lawyers until you find the one with the lowest price. Just remember, if they don't do it right, it cannot be corrected after you die or become incompetent.
Depending on the complexities of your situation (and whether you're married or single, have children who need to be protected, etc.), an experienced attorney's fees will be anywhere from $2,000 to $10,000. As a very rough rule of thumb, figure out your net worth and multiply by 0.10% to 0.25%. That usually approximates the complexity of your estate and the cost of planning for it properly.
For example, if you have an estate worth $3 million dollars, you should expect to pay between $3,000 and $7,500... a little less if your situation is really "plain vanilla"; a little more if it's complex.
Look for the next article on trust reviews
In the next article on trust reviews, tentatively titled "How is Review of a Living Trust Different from Estate Planning?" I'll show an example of what we examine when we do a trust review, and how a trust review differs from creating an estate plan.
Getting legal help
If you are currently working with a highly qualified estate planning attorney that you are comfortable with, it is probably best to continue working with him or her. On the other hand, if you have doubts about the advice you are getting or the experience you have working with the person, it's time to look elsewhere.
All the best,
Not only is charitable giving a praiseworthy choice, it can also reduce tax liability. Certain kinds of gifting is income- and estate tax deductible, and in this article I share the IRS's guidelines.
In order to take advantage of the income tax savings benefits of charitable giving, a donation must meet certain requirements established by the IRS.
IRS rules for charitable giving
- The donor cannot benefit from the donation*
- The donor must be able to substantiate the donation
- The donation must be made to or for the benefit of a qualified charitable organization, and
- The donation may not exceed the current statutory ceiling
* However, structured properly, you can receive an income stream from a charitable trust and still receive an income tax deduction for the charitable portion of the gift - please contact us to discuss your particular situation.
Taxes and charitable giving
Let's distinguish between the income tax side and the estate/gift tax side:
- If it goes to charity it is deductible from your estate
- If it goes to loved ones, it's not
The Tax Code limits the income tax savings of a charitable gift to a percentage of the donor’s adjusted taxable income (or AGI) reported each year on your 1040. But every dollar you give to charity is deductible if the charitable gift it is made as part of your will or trust. So people like Warren Buffet and Bill Gates can give their kids up to $5M - and pay no estate tax if they give their other billions to charity through their will or trust.
Outright gifts vs. deferred gifts
Charitable gifts fall into two categories: outright gifts and deferred gifts. An outright gift is an immediate gift made to a charitable organization. An outright gift has the following characteristics:
- The donor has no influence or control over the charity
- The donation is at the disposal of the charity, and
- The donor retains “no legal or equitable interest” in the donated property
A deferred gift is also known as a planned gift or a partial gift and may take any of the following forms:
- A bequest in a will or living trust
- A beneficiary designation on a retirement plan or life insurance policy (caution: this needs to be handled carefully to avoid unintended tax consequences)
- An irrevocable commitment to transfer property to a specific charity upon the death of a specific beneficiary or after the lapse of a stated period of time (a Charitable Remainder Trust); or
- An irrevocable commitment to convey property temporarily to charity in trust with the understanding that the property will be returned to a non-charitable entity upon the death of a designated beneficiary or after the lapse of a stated period of time (a Charitable Lead Trust)
Getting legal help
Charitable gifts can take many forms. Talk with an attorney experienced in planned giving to determine what’s right for your situation. It depends on your age, your goals, age of beneficiaries, size of the gift, and more. In addition to trusts, there are several other charitable gifting strategies which may be utilized to maximize estate tax savings. I am a board certified estate planning and probate attorney specializing in the representation of high-net worth clients in Los Altos, Santa Clara, Palo Alto, Stanford, and the surrounding areas -- and can help you develop the best strategy.
Get started >>
All the best,
When estates are valued in the millions of dollars, good planning takes more than filling in the blanks on a stack of one-size-fits-all forms. Get a copy of my new guide that tells the kind of training and experience a good estate-planning attorney needs to do it well. The guide even has a checklist that people can use to compare the services offered by a variety of law offices.
Obviously, I hope people choose me for their estate planning. But I want them to choose me for the right reasons, and I want them to understand those reasons. It actually makes my job easier and more rewarding -- because it leads to better client relationships.
With that in mind, I've put out a Guide to Choosing Your Bay Area Estate Planning Attorney. You can find it here on my website at www.calprobate.com/choosing.
It's hard enough for most people to think about estate planning in the first place. They may not know the best way to make sure their goals are met, and they certainly don't know all the legal work involved in making sure their wishes are carried out when they are no longer around to supervise. That's the whole point of hiring an estate planning attorney!
But I want to be the navigation system, not the driver. I want them to be comfortable with their decisions, rather than having me tell them what they should want. Each client is unique. It takes the collaboration of my expertise and their goals.
When I sit down with prospective clients, I want them to understand that when estates are valued in the millions of dollars, good planning takes more than filling in the blanks on a stack of one-size-fits-all forms.
So get the guide. It explains what kind of work goes into a solid estate plan, and the kind of training and experience a good estate-planning attorney needs to do it well. The guide even has a checklist to use when comparing attorneys.
Here's something else you'll find in the guide: My fees. A lot of attorneys get very shy when it comes to discussing money. I don't see the point. I can't offer to do the job for everyone for the same flat fee, but the guide gives a range of what to expect for the typical kinds of estate planning services I perform.
Take a look at my guide and see how much better you understand what to look for when hiring an estate planning attorney. And please come back and comment to let me know what you think!
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,
Many years ago the prevailing estate planning philosophy was that keeping assets in trust for a child’s lifetime was administering from the grave. Today, more people view it as providing security for children and grandchildren in a more unsettled world.
Sometimes, you may want to deny your child complete access to your funds. So let’s examine three reasons to keep assets in trust for your child.
1. Insulates assets from creditor claims and divorce proceedings
Money held in trusts is off-limits to the beneficiary’s creditors and from a divorcing spouse during divorce proceedings. For example, if your child starts a business and he or she guarantees a loan and the business fails, the bank can’t attach the assets in his or her trust. If your child gets divorced, the divorce court isn’t permitted to give his or her spouse trust property.
If a child received all trust assets on reaching a specified age and kept the assets solely in his or her name, almost all states would not consider this property marital property. Thus, the spouse would not be entitled to any of the trust assets after a divorce. But if your child puts the money in joint tenancy with his or her spouse, the assets would be considered marital property in most states, and the divorce court could give the spouse a percentage of the assets.
2. Keeps property in the family
If your child has the right to withdraw his or her entire trust after reaching a specified age, he or she is free to dispose of those assets any way he or she desires. If your child decides to put the money in joint tenancy with his or her spouse and predeceases the spouse, the assets will go to the spouse as a surviving joint tenant.
This should not be problematic because the spouse will, in all likelihood, take care of any children (your grandchildren) she has with your deceased child. But if the spouse remarries, puts all the trust’s property in joint tenancy with a new spouse, and then predeceases that spouse, all the assets would pass to the new spouse and your grandchildren would receive nothing.
Keeping the funds in trust for your child ensures that, on his or her death, the trust’s assets will either be distributed to or continued to be held in trust for your grandchildren rather than being bequeathed to your child’s spouse.
3. Provides for a trustee to control asset distribution
By keeping your assets in trust you may name a trustee to invest the money and control distribution of trust income and principal to your child. If you’re concerned that your child may not be capable of correctly investing the trust’s assets, you may choose an individual as a trustee who either knows how to invest or would hire someone who does. You also may hire a bank or a trust company to act as trustee.
If you believe your child may spend the money irresponsibly, you can authorize the trustee to make asset distributions according to the trust’s terms. You also may direct the trustee to distribute property only when your child reaches specific incentives, such as graduating from high school or earning a college degree.
Finally, you may name your child as a co-trustee when he or she reaches a specific age. As a co-trustee, your child can learn the ins and outs of investing assets from the trust’s trustee.
Many more benefits
These are but three reasons to consider leaving assets in trust for your child. Many more benefits may exist depending on your situation. To learn more about these versatile estate planning vehicles, please give us a call.
All the best,