Given the many variables that go into drafting a will, it’s not surprising that many people make mistakes.  Although probably dozens, here are a few:

• Believing you can do it yourself.  Normally when you try to draft your own will online, it will be entirely insufficient to protect your family, and meet your needs. For example, how do you know how to balance your gifts between your children? Supposed the inheritance tax laws change? Suppose you can’t have your witnesses with you when you sign your will?  Internet wills can’t help you with these important questions.

• Not updating your will.  As your life changes, so should your will. For instance, after you carefully draft your will, in the future, you may have more children, adopt, re-marry, sell assets, receive gifts, etc.  As a result, you should review your will every few years.

• Being too specific in your bequests.  If you are too specific in your will, you have the risk that the asset is no longer in your estate.  For example, you leave your house “located at 1234 W. Broad St. to my daughter.” If you later move, that 1234 house is no longer in your estate.  To prevent you daughter from not getting anything, a generic “my house” will allow her to get any new home you own.

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One great benefit of a living trust is the ability to place out of state property, or investment property into the trust.  However, unlike transferring your residential home into your trust, if there is a mortgage on your investment property, you must be aware of the “due-on-sale clause.”  As you may know, a due-on-sale clause allows a lender to immediately call in the loan if you sell your home.

The law is clear with respect to your home.  Under Federal Law (“Garn-St. Germain Depository Institutions Act of 1982, 12 U.S.C. § 1701j-3”) a lender is prohibited from calling in your residential home loan if you place your home into your living trust.

But, federal law doesn’t expressly prevent a lender from calling in a loan on a second home, investment property, etc.  If you are thinking about placing investment property into your trust, you could do the following.  You can get consent from your lender.  Additionally, you can argue that a transfer into a trust is not a “sale,” therefore, the due-on-“sale” clause is not triggered.  Finally, practically speaking, if your loan is called in after a transfer, you can re-transfer it back into your own name.

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Most estate plans contain both a “Living Will” and a “Health care Power of Attorney.”  Although similar, these documents are two very different documents.  A Living Will instructs medical personnel and others as to what you want to happen to you if you are in a permanent vegetative state or have a terminal illness.  For example, with a Living Will, you can provide instructions as to whether you want or don’t want a life sustaining feeding tube, or other forms of support.  The Living Will is for end of life decisions.

On the other hand, a Health care Power of Attorney instructs a person whom you designate to make medical decisions for you if you can’t.  Your appointed person makes medical decisions for you that are not at the end of life, but when you are otherwise incapacitated.  For example, a health care power of attorney can give the person you choose the power to select a care home for you, choose your doctors, get second opinions, etc.

Practically speaking, a Health care Power of Attorney is probably more important because, as we live longer, there is more of a chance that you could end up unable to care for yourself, recognize your family and friends, communicate with others, and many other things.  Therefore, a Health care Power of Attorney could be beneficial in a wide variety of situations.

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First, in 2013, unless you and your wife have over $10,500,000 in your estate, you probably don’t need to worry about an A/B trust.  However, tax laws can change, and tax exemptions could be lowered in the future.  Also, as I’ve stated before, Portability may be used instead of an A/B trust to accomplish the same goals.  Nevertheless, sometimes an A/B trust is preferred, so what is it?

At its basic level, if you and your wife own assets as community property, upon passing of the first spouse (eg Husband) two separate trusts are created.  The first trust is commonly called a “Survivor’s Trust.”  You put the wife’s half of the community property, and all of her separate property if any, in the Survivor’s Trust.  You can put up to $5,250,000 of assets in the Survivor’s Trust.

Then you put the husband’s half of the community property, and all of his separate property into what is called a “Family Trust.”  You can also put up to $5,250,000 in the Family Trust.  Upon passing of the second spouse (eg wife) the assets in both trusts will go to your children tax free using both the Husband’s and wife’s “lifetime applicable exclusion amount.” (currently $5,250,000 each)

The A/B trust is much more complicated than this, but the above is the basic conceptual framework.  The goal of the A/B trust is to essentially double the amount of assets you can leave to your children tax free.  Or, put another way, if you don’t use the A/B trust, you would lose the first spouse’s applicable exclusion amount.

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In a previous post, I mentioned that banks and financial institutions are much less suspicious of trusts than powers of attorney.  I mentioned this in advocating trusts for planning for possible incapacity.  So what does the bank want to see regarding trusts? You should be able to present to the bank a “Certification of Trust” instead of the entire trust.

A Certification of Trust must contain the date the trust was established, the trustor, name and address of trustee, powers of trustee, revocability of the trust, any co-trustees, and manner of title of trust property.  Finally, it must state that the trust has not been revoked, modified, or amended.  The Certificate of Trust does not need to be notarized.

Although the Certificate of Trust should satisfy bank requirements, some banks may ask for relevant excerpts from the trust giving you authority.

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It is a fact that people are living longer.  According to reports, the average life expectancy for men and women is approximately 84 and 86 respectively.  These numbers will only increase in the future.  Since we are living longer, there is a greater chance that you will become incapacitated at some point in your life.

Incapacity is a very good reason to have a revocable living trust.  If you have a revocable living trust, you may state for who will manage your trust assets if you are unable to do so.  The benefit is that the person you designate avoids the time and expense of otherwise going to court and getting a Conservator or Guardian appointed.   Additionally, in the event of your incapacity, it will be difficult for someone to use a Power of Attorney to carryout your wishes.  Banks and other financial institutations are very suspicious of Powers of Attorney because of fraud.  As a result, they require many hurdles before validating a power of attorney.  Banks and financial institutions are not as skeptical of trusts.

However, there is one obvious drawback in using a revocable living trust for incapacity.  That is the trust only governs assets in the trust.  Therefore, if you have not placed your assets in the trust, they cannot be managed if you become incapacitated.

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In modern culture, divorce and re-marriage is a fact of life.  As a result, when it comes to estate planning, many people must consider children and grandchildren from previous marriages.  In these blended family situations, portability many not be the best mechanism for passing assets.  To briefly refresh, in 2010 portability allowed a surviving spouse to use the deceased spouse’s tax exclusion without the necessary of creating multiple trusts. For many, portability is a great advantage because in makes the process much simpler.

However, if you pass with children and grandchildren from previous marriages, and you elect portability, you are relying on your current surviving spouse to provide for them.  The first obvious issue is if your current surviving spouse does not know, or dislikes your children from a previous marriage, he or she may not conserve assets you intended on going to your children. Additionally, he or she may favor his or her own children over the children from your previous marriage.  Moreover, even if your surviving spouse intends to abide by your wishes, he or she may re-marry and the new spouse may not want any assets left to your children.

In conclusion, many estate planners believe portability has been a great advantage in estate planning. However, the blended family may be one situation where it is not such an advantage.

 

A Family Limited Partnership (FLP) is an advanced estate planning tool used to facilitate the transfer of wealth to younger generations.  The FLP is a fairly complex tool that is difficult to create.  However, if appropriate, the FLP can provide great advantages.  First, the FLP can help facilitate gifting.  Very generally, because the children are receiving limited partner shares, the value of these shares/assets are “discounted.”  In effect, the FLP gives you the ability to gift more than $13,000.00 (the Federal gift tax exemption).  Second, the FLP will allow you to maintain control.  Essentially, you can transfer the value of the assets to the partnership without transferring control of the assets.  Third, the FLP pays no tax and it is passed through to the limited partners (children).  Thus, the kids are taxed at their lower rate.  Finally, assets in FLP are generally protected from creditors.

There are 2 clear disadvantages to a FLP.  First, the interest in assets are being transferred to the younger generation while you are alive.  Therefore, as with gift transfers, there is no “step up basis.”  Basically, your children receive the assets with your old low basis.  This could have significant tax consequences when your children want to sell.  Second, a FLP is very costly.  A few of the obvious costs include, fees to set up the partnership, appraisal costs, attorney fees, gift tax returns, and annual partnership returns.

Given the above, a FLP is normally used for big estates with possible tax concerns.

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The following is the opposite of an article I wrote in the past.  In the past, I wrote that a major problem with trusts is that people forget to put assets into a trust.  Basically, people forget to re-title assets in the trust name.

However, the opposite could also be a problem – putting too many assets into a trust.  The most common mistake is to put assets such as cars, motorcycles, or boats into a trust.  To add these assets to your trust, you re-title the assets in the name of the trust. The problems are two-fold.  First, when you re-title cars or boats into the name of the trust, your insurance rates may increase.  Second, similar to houses, if there is a loan on the car or boat, there may be a “due-on-sale” clause.  A due-on-sale clause states that if title is transferred, the full amount of the loan is due immediately.

Another issue you may consider, is keeping out assets with “beneficiary designations.”  The most common, are retirement accounts, bank accounts, brokerage accounts, and insurance policies.  When you open these accounts, you designate who will take them when you pass.  These items stay outside of probate, and normally do not go into a trust.

A final concern when dealing with “beneficiary designations” are conflicts.  This applies to Wills in addition to Trusts.  You want to be careful that you do not leave the same asset to two different people, one on the beneficiary designation, and one in a will.  For example, if you mistakenly list your son as the beneficiary on your bank account, and state in your will that you desire your daughter to take the bank account by will, this is a conflict.  In such a conflict, the beneficiary designation controls.

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Many grandparents would like to leave a portion of their estate to their grandkids. Before doing so, at least two issues must be considered.  First, and the most known, is the extremely high tax consequence.  Second, the very real issues of asset protection from the grandkids’ creditors.  With respect to taxes, currently in 2013, there is a 40% estate tax on estates left to kids, and grandkids.  The tax on estates left to grandkids is known as the “Generation Skipping Tax.”  However, in reality, most estates are not effected by either 40% tax because currently the IRS provides a tax exemption up to $5,250,000.00.  Or put another way, unless you have over $5,250,000.00 in your estate, your grandkids will not pay 40% taxes.

However, even if you don’t have over $5.25 million to leave to your grandkids, you should also consider your grandkids’ creditors or their ex-spouses when leaving assets to them.  The way to solve creditor problems is with a “Dynasty Trust.”  At its most basic level, a Dynasty Trust is a trust set up for the benefit of your grandkids.  Asset protection is provided through use of “spendthrift provisions.”  Essentially, these provisions protect the assets from creditors, ex-spouses, or anyone else who attempts to attach the estate assets.  Thus, even though most will not have to worry about generation skipping taxes, a Dynasty Trust could benefit an estate.