What is a Spendthrift Trust? It Can Be a Great Solution for Your Heirs

What is a Spendthrift Trust?

There are many tools that can be used when putting together your estate plan. These tools can also provide asset protection while you are alive.One such tool is a trust.

A trust is a fiduciary arrangement, established by a grantor or trustmaker, which gives a third party (known as a trustee) the authority to manage assets on behalf of one or more persons (known as a beneficiaries).  Since every situation is different, there are different types of trusts to ensure the best outcome for each beneficiary. One type of trust, known as a spendthrift trust, is commonly used to protect a beneficiary’s interest from creditors, a soon-to-be ex-spouse, or his or her own poor management of money. Generally, these trusts are created for the benefit of individuals who are not good with money, might easily fall into debt, may be easily defrauded or deceived, or have an addiction that may result in squandering of funds.

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There’s Never A Better Time Than Now To Get Your Affairs in Order

 

The idea of getting your financial and legal house in order is likely the last thing on your mind during the busy holiday season. But, getting started is much easier than you think. In fact, the end of the year is a good time to reflect upon the year that has passed and focus on your aspirations for the future. Don’t hold this task off for later. Some careful thought and a little bit of work now can go a long way to help you feel 100% confident about moving forward in the new year.

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Gift Giving the Tax-Free Way

 

Although it’s the season of giving, no one wants to share with the IRS. Luckily, the law provides you many opportunities to give gifts to family, friends, and charities tax-free.  Some are straightforward, while others may require the help of a professional.

Your Yearly Coupons

Each year on January 1st, everyone receives what can be thought of as yearly coupons for tax-free gifts. There are several different ways that you can redeem those coupons:

  • Annual exclusion gifts. These gifts are transfers of money or property that do not exceed the annual gift tax exclusion. These gifts can be given on one or more than one occasion throughout the year, the key is that you add up the gifts throughout the year. In 2017, you can give up to $14,000 ($28,000 for married couples) per recipient without having to pay any gift tax or file a gift tax return. These gifts can be cash or property but they must be of a “present” interest. Gifts using trusts or certain types of property (like closely held businesses) can be tricky because the “present” interest requirement can be missing. If you plan on using a trust or an LLC to make your gift, it’s best to work with a professional.
  • Pay medical bills. The IRS also allows you to pay an unlimited amount of someone’s medical bills, without worrying about the gift tax.  However, the payment must be made directly to the doctor, hospital, or other medical provider in order to qualify.
  • Pay tuition. Additionally, you are able to pay an unlimited amount of tuition bills for the benefit of someone else, as long as the tuition is paid directly to a qualified educational institution. One big issue here is that the gift must be only for tuition – books, fees, living expenses, travel, and other costs of education do not qualify.
  • Give to charity. For those of you who are philanthropically minded, you can give as much money or property to a qualified charity as you want without worrying about the gift tax. As an added benefit, unlike the gifts above, you may also be entitled to an income tax deduction for the charitable gift.

Your Once-In-A-Lifetime Coupon

In addition to our annual coupons, we all have a once-in-a-lifetime coupon for taxable gifts, those that exceed or do not qualify for the annual exclusion, called the unified credit.  It’s called a unified credit because it unifies the gift tax with the estate tax into a coordinated tax system.  Unlike the annual coupons you read about above, once you spend the value of the unified credit coupon for a taxable gift, it’s gone.

Many people assume that because it says taxable gifts, they’ll have to pay the gift tax. Luckily because of the unified credit coupon, most people will never have to actually pay any gift tax. You only have to pay gift tax if your lifetime gifts exceed the unified credit coupon.  Under current law, the amount of the unified credit increases each year, but it never resets (unlike the yearly coupons you read about earlier).  In 2017, the unified credit amount is $5.49 million and is scheduled to increase to $5.6 million in 2018.  However, If you make a taxable gift, you are required to file a gift tax return with your income taxes.  Although the unified credit is currently applicable for gift and estate tax, it is worth noting that the gift tax continues on in the tax proposals being considered by Congress, even as estate tax repeal is on the agenda.

When should I talk to an estate planner?

If you plan on making a gift in excess of $14,000 in 2017 ($15,000 in 2018), then you should talk with us first. Sometimes the best way of making a gift is to just write a check, but other times giving in a trust, through an LLC, or with an undivided interest in property can make more sense and offer your recipient greater benefits (like privacy or asset protection).

While we don’t suggest you give away anything that you might need, if you do have some surplus, gifting programs are a fun way to see your loved ones enjoy your generosity. Give us a call today so we can help make sure you do it without drawing the attention of the IRS.

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Four Reasons Why Estate Planning Isn’t Just for the Top 1 Percent

There is a common misconception that estate plans are only for the ultra-rich – the top 1 percent, 10%, 20%, or some other arbitrary determination of “enough” money.  In reality, nothing could be further from the truth. People at all income and wealth levels can benefit from a comprehensive estate plan. Sadly, many have not sat down to put their legal house in order.

According to a 2016 Gallup News Poll more than half of all Americans do not have a will, let alone a comprehensive estate plan. These same results were identified by WealthCounsel in its Estate Planning Awareness Survey. Gallup noted that 44 percent of people surveyed in 2016 had a will place, compared to 51 percent in 2005 and 48 percent in 1990.  Also, over the years, there appears to be a trend of fewer people even thinking about estate planning.

When it comes to estate planning, the sooner you start the better. Below are four reasons why everyone – no matter what income or wealth level – can benefit from a comprehensive estate plan:

  1. Forward Thinking Family Goals: Proper estate planning can accomplish many things. The first step is to ask what your goals are. They may include caring for a minor child, an elderly parent, a disabled relative, or distributing real and personal property to individuals who will appreciate and maintain these assets prudently.  Understanding what your family wants and needs are for the future is a great starting point for any estate plan. If you can sit down and spend time planning your vacation, you can do the same for your estate. Your future self, and your loved ones, will thank you.
  2. Financial Confidence Now and After You Are Gone: One immediate benefit of having a finished estate plan in place is that you will likely feel in control of your finances, possibly for the first time ever. Many people experience a new sense of discipline in maintaining their finances which can help with saving for retirement, a big purchase, or other goal.  In addition to the personal benefit of financial control, an estate plan allows you to dictate exactly how and when your heirs receive an inheritance. This is particularly important for minor heir or those who need additional guidance to manage their inheritance, like a disabled child.
  3. Identify Risks: An important aspect of a good estate plan is to mitigate against future and current risks. One example is becoming disabled and unable to support your family. Another is the possibility of dying early. Through an estate plan you can chose who will be in control of your personal assets, instead of the court appointing a legal guardian who will cost money and be a distraction for your family.  While contemplating these types of risks is never fun, preparing ahead of time ensures your loved ones will be prepared if an unfortunate tragedy occurs.
  4. To Maintain Your Privacy: In the absence of an fully funded, trust-based estate plan, a list one’s assets are available for public view upon death. This occurs when a probate court needs to step in. Probate is the legal process by which a court administers the deceased person’s estate. A solid estate plan should generally avoid the need for involvement by the probate court, so your family’s privacy can be maintained.

The Bottom Line: Seek Professional Advice

There are numerous benefits to working with a professional team when it comes to estate planning. Estate planning attorneys, financial advisor, insurance agents, and others  have a broader and deeper knowledge of money management, financial implications, and the law. When you work with a qualified team to implement an estate plan you can rest easy knowing your family will be taken care of no matter what happens in the future.

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Do You Own Rental Property? How Proactive, Comprehensive Estate Planning Can Help

A comprehensive estate plan should address all of your assets. For most people, an estate plan must include three common categories: (1) your home; (2) financial accounts, like your checking and savings account; and (3) personal property. Other types of assets – such as life insurance, retirement funds, and annuities – should also be considered as part of your estate plan.

If you own rental property, however, your estate plan will be more complicated because there are some unique considerations.

Rental Property & Estate Plans

It is no surprise that one of the risks of being a landlord of commercial or residential property is the threat of lawsuits. An injured guest or tenant, a claim under the landlord-tenant act, or a lease dispute can all end up in the courtroom. However, a well thought out rental property plan and estate plan can hedge against this risk.

Protecting Your Assets: A prudent landlord purchases adequate insurance coverage as the first line of defense. Sometimes, however, the insurance policy’s limit is not sufficient to cover damage awarded by a court. When this happens, the next place the prevailing party looks to for satisfaction of judgment is the property owner’s personal assets, which leads us to the next layer of protection.

Using a Business Entity as Protection: Owning property through a business entity, like a limited liability company (LLC), can protect personal assets against seizure.  That being said, merely filing paperwork to create an LLC isn’t enough. The LLC must be treated as a true business entity and all reports, filings, bank accounts, and other formalities must be met at all times in order to benefit from the liability protection of the business entity. Additionally, when meshing your rental property ownership with your estate plan, you must consider who can manage your assets if you’re unable to do so, our next consideration.

Who Is Managing Your Assets: Another factor to consider is the trustee who manages the living trust. A trustee bears the responsibility of managing the property owned by a trust for the benefit of the trust beneficiaries. The exact duties of a trustee may vary depending on what assets are owned by the trust and the trust’s terms. While income from the rental property made you financially successful, many institutional trustees – or someone outside of your circle of family and friends – will often liquidate assets and invest the funds. This result may or may not be what you want done with your assets. For this reason, using an LLC to organize your rental property holdings and have the trustee simply collect the net income from the overall operation can be a way to ensure your wealth remains invested in the rental property that made you successful.

Tax Advantages Through 1031: While many think of estate planning and LLCs as strategies to save on death taxes and provide for heirs, we can help with much more. A 1031 exchange is a vehicle to defer taxes from the sale of rental property. The rules to qualify are complex, but can save enormous amounts of income tax, depending on your situation. We can help by making sure that your trust, powers of attorney, and LLC allow your family to take advantage of this tax-saving law if you are incapacitated and unable to manage your own affairs.

Bottom Line

You’ve likely worked hard over the years to build and acquire your rental property, along with your other assets. Make sure that your estate plan takes every one of your assets into account so that you and your family receive the most benefits and protection.

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Does My Estate Plan Need to Include My Vacation Property?

Yes! If you own a vacation home, timeshare, investment property, or any other asset outside of the state where you are domiciled you must make sure it’s included in your estate plan. If you fail to include these in your estate plan, or fail to have an estate plan at all, your heirs will encounter issues, and usually the expense and hassle of court costs, when inheriting these assets.

Because state laws vary, your principal residence may even be divided one way in your state home while other properties – such as vacation homes, time shares, or other pieces of out-of-state land – can end up divided completely differently. Of course, having a comprehensive estate plan puts you in control and lets you determine who will receive your property, regardless of where it’s located.

Avoiding Unnecessary Probate

When property is located in a different state than where the deceased person was domiciled, your family may need to file a second probate case, referred to as an ancillary estate. Typically a local attorney must handle the ancillary estate, which adds more cost, time, and hassle for your family to settle your affairs. For example, if you died as a resident of California but owned property in Montana as well, you might have an ancillary probate in Montana for the property located there.

Probate is the legal process that is used to change title of property upon their passing, whether the deceased had a will or not. Each state has their own probate rules, making it fairly complex for families that inherit property in multiple states. It is important to know that while personal property may be probated in the state where the decedent is domiciled, real property must be probated in the state or country where it is located.

The need for ancillary probate can be avoided, however, through proper estate planning. Specifically, if the decedent transfers the property to his or her revocable trust before death, ancillary probate can be avoided. Of course, there are several ways to avoid the costs, delays, and headaches of probate other than a trust, but each alternative has downsides. One way is the title the property jointly with your spouse or, alternatively, jointly with another individual. The property must be titled in a particular manner to avoid probate so that it automatically goes to the survivor. But this can make refinancing difficult, say if you name a child as a joint owner, and can also cause unnecessary taxes to be due.  The result of using a revocable trust will likely be a saving of money, time, and hassles for your heirs.

Bottom Line

Intestacy laws can be complicated because they vary from state to state. At the same time, a well thought out estate plan avoids unnecessary probate costs, in every state where you own property. With the help of a knowledgeable estate attorney, you can successfully avoid unnecessary complication and make settling your affairs as easy as possible for your heirs.

Remember to tell your estate planning advisor about everything that you own – no matter how small in value or where it is located. This is because in order to fully protect your family and assets, all of your property (real and personal) must be included. If you have any questions about ancillary probate, or any other estate planning issues, contact us today.

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The Truth About Personal Risk Management, Part 2: Using Trusts in Estate Planning

Paying insurance premiums to protect against potential losses frees us mentally to enjoy driving a car, leave our house empty while on vacation and receive medical treatment for an injury or illness. In the same way, the use of trusts acts like insurance and can shift anxiety to comfort, turmoil to peace, and complexity to understanding.

The Key Takeaways
o Trusts provide a protective cure for many of the financial anxieties, concerns, frustrations and hassles we fear for ourselves and loved ones.
o Trusts also provide similar assurances for business owners and for those with considerable assets.
o The benefit of planning is peace of mind for you and your family now.

What Are Risks Related to Estate Planning?
Proper estate planning can protect you against awful things that can happen to you, your family and your assets. These can include: a costly and public court guardianship/conservatorship if you or your spouse becomes incapacitated; being kept in a vegetative state; a potentially costly and time consuming probate process after you die; federal and state estate taxes; a will contest or heirs fighting over your assets; your surviving spouse not having enough money to live on; irresponsible spending by a beneficiary; an inheritance becoming part of a beneficiary’s divorce proceedings; an inheritance not making it to the intended beneficiary (i.e., left to an adult for the benefit of a minor); and an inheritance not being used according to your values and beliefs.

What You Need to Know:

Not addressing these risks can cause you pain, worry, frustration, anxiety, fear and anguish. And, if any of these awful things should happen to you or a loved one, your quality of life can suffer.

Why Use Trusts for Your Broader Financial and Wealth Planning?
There are many different trusts that can be used to address a wide range of your circumstances, needs, anxieties, and aspirations. Take a simple but important example of trusts’ capabilities: the living trust. Most people want to avoid court interference at incapacity (i.e., disability) and at death, and a living trust solves this worry. When you establish a living trust, you transfer your assets to it and select someone to step in and manage them for you when you are not able to do so. Because the assets are no longer in your name, the court has no reason to get involved at either incapacity or death; your successor can manage your assets according to your instructions for as long as necessary.

More broadly, trusts can hold investments, property and insurance policies, with benefits of reducing various taxes and protecting your wealth from lawsuits and creditors. A trust can continue beyond your lifetime–assets can be kept in a trust until your beneficiaries reach the age(s) you want them to inherit, to provide for a loved one with special needs, or to protect an inheritance from beneficiaries’ creditors, spouses and future death taxes. A trust will also let you provide for your surviving spouse without disinheriting your children.

What You Need to Know:

Trusts, in their various forms, offer you a robust package of dollar and quality-of-life benefits. And, trusts are fully compatible with your various investments and assets, from mutual funds to stocks (both public and private) to insurance policies to property.

Actions to Consider
o Become aware of the financial, wealth and estate planning risks you and your family face, and how they can be managed or completely avoided with the use of trusts.
o An advisor and trust/estate planning attorney will be able to help you become an informed consumer.
o List the fears and anxieties you have for yourself and your loved ones concerning your wealth.
o Compare the costs associated with planning and implementation to the financial and emotional value you will receive.
o Keep in mind that while trusts have set-up costs, overall costs can be less over time by avoiding court expenses and delays, saving on a variety of taxes, eliminating exposure to legal costs, and so forth.
o Life insurance inside a trust is an excellent way to provide a larger inheritance for your loved ones.
o If you are a business owner, investigate the many benefits that trusts can provide for your business wealth.
o Don’t procrastinate. Trusts have as much application for the living as for those who pass on. Put your plan into effect now based on your current circumstances, and then make changes as needed. Acting now will give you the peace of mind you desire.

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The Truth About Personal Risk Management, Part 1: Insurance

Personal risk management is being aware of the risks in your home and in your life, and then planning how to handle those risks. Insurance plays a big part in managing risk. Most people don’t like paying insurance premiums, but when something happens and the insurance pays for a covered expense, they are relieved they had it.

The Key Takeaways

o Not recognizing and managing risk can set your family up for financial ruin.

o Recognizing and managing risk will give you and your family the freedom to live life, without worrying about how you would handle a catastrophic loss.

What kinds of risks should I be aware of?

Property and casualty risks include your car and other vehicles, home and furnishings, jewelry, cameras, and so forth. You would want to protect these from accidents, theft, fire, flood, and earthquake damage. Health and long-term care insurance help protect your finances if you become ill or injured. Disability income and life insurance help replace income in the event of a long-term illness or death. If you volunteer with children or youth, you may need personal liability insurance. An increase to your umbrella policy is warranted once you have teenage drivers. If you are a business owner, you may need insurance as part of a buy-sell agreement with a key employee or business partner in addition to business liability insurance. If you are in a high-risk profession (like health care, construction or real estate), you will probably need additional asset protection planning.

How much insurance do I need?

You need enough insurance to protect your assets in the worst-case scenario. At the same time, the premiums should be an amount you can comfortably afford in your budget. Decide what you need to insure, how much to insure it for, and how much you are able and willing to pay in deductibles and premiums.

What You Need to Know

Your family’s needs for insurance will change over time and will reflect your values at each stage in life. For example, you may need more life insurance when your children are young; you may want long-term care insurance as you near retirement (although it is less expensive when you are younger); you may not need as much personal liability insurance if you retire from volunteering or once your children become independent; and you may not need business insurance if you sell your business.

Actions to Consider
o Look at ways you can reduce premiums. For example, installing a home security alarm system or trimming shrubbery may save on your homeowner’s insurance. If you drive an older car, you may not need collision insurance. If you can handle higher deductibles, your premiums will likely be lower.
o Look for ways to reduce risk entirely. For example, you may want to sell a property that is high risk or even retire from a high-risk profession.
o Some risk may be perfectly acceptable to you. Consider what you might lose if the worst happens and see if you could live with the loss. This is called risk budgeting.
o Keep good records on personal property. Review the values and your insurance coverage annually. Values fluctuate, and you don’t want to over- or under-insure.
o Determine what you would lose if someone sued you with a liability claim. You worked hard to build your net worth and you do not want to lose wealth if someone files a claim against you. Even if it is a frivolous claim, you may have to spend a small fortune to defend yourself. Take action to protect your assets for yourself and your family.
o Health care and long-term care costs are increasing at an alarming pace, people are living longer, and many older Americans have seen their retirement savings decline in recent down markets. A professional can help you evaluate your health care risks and determine how to plan for them.

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