Community Property Trusts Create Tax Savings

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Many people know that when you inherit something, that is inherited tax free. Married couples face a different issue. They each own only half of assets. So this means that in separate property states, like Minnesota, only half of the taxes in an asset are saved at death for jointly owned property.

Community property states don’t have this issue. There is an estate planning technique that allows residents of separate property states to still get this benefit. These are special kinds of trusts called Community Property Trusts.  These trusts are in SD, TN, and AK. However, those states allow non-residents to make them.

You need a good marriage though. Watch the video here to learn more.

What is an Irrevocable Life Insurance Trust

What is an Irrevocable Life Insurance Trust?

This type of trust is used to deal with the Estate Tax in many estate plans. The death benefit is not included in your estate. That way the insurance company pays the estate tax because the death benefit isn’t taxable. Life insurance can also be a very valuable asset. Cash value can get pretty significant. In Minnesota, only a little over $9,000 is protected from creditors. Once it is inside this trust, it is protected from creditors.

Essentially, the trust itself either buys a life insurance policy or you give the policy to the trust.  This way, the policy isn’t a part of your estate. It is also outside of probate.  You give money to the trust and the trustee pays the premiums.

When you die, the death benefit is usually paid to the trust. The trust then protects your family and heirs. It provides money to pay estate taxes, provide liquidity to the estate, and sometimes pay debts. The trust protects the money from being taken by your creditors after death.

It also prevents the creditors of your heirs from taking the money. In Minnesota, a spouse can protect $46,000 of life insurance proceeds from creditors. Other heirs can’t protect any of the money outside of the trust. This way, you make sure that the money goes to benefit your loved ones and no one else.

The ability to own life insurance is a trust feature. Many of your other trusts can own life insurance. However, many people choose to make a separate trust just to hold life insurance.

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How should you handle your retirement accounts in your estate plan?

How should you handle your retirement accounts in your estate plan?

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One of the largest assets that most people have are their retirement accounts. Whether this is an IRA, 401K, SImple, or any of the other types of qualified accounts.

These accounts get special tax treatment.  They are able to grow tax deferred until you retire. Once you take the money out, they are taxed at the ordinary rate. They lose that special tax status at that time.

These accounts are normally protected from creditors too. In Minnesota, so long as they are ERISA covered, like a 401K, creditors can’t tough them.  However, IRAs are not ERISA protected.

These same concerns pass on to your heirs. When you pass these to your heirs, you must be careful in how you pass it so that you can keep the tax advantages for them.

So be wary of class beneficiaries. Otherwise, you might not get the best tax results and you could even forfeit them all together.

Also, the Supreme Court recently determined that inherited retirement accounts don’t really get protection from creditors. Your spouse probably still gets it, but not anyone else.  The court determined that Congress intended for these protections to cover retirement funds. Most people who inherit IRAs can’t say that it was their retirement money. It is yours.

There are special types of trusts called Retirement Trusts that will preserve all of these benefits and keep the money out of the hands of creditors. If you have a significant retirement account then you should consider leaving it to your heirs in one of these trusts.

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Should I give money outright?

Should you give money outright to your heirs? Everyone that makes an estate plan faces this question. There are many ways to give an inheritance. Some people give it to their heirs in stages. This could mean half at age 25 and the rest at 30.  The combinations are as endless as your imagination.

Some leave the money in a trust, but let the heirs take the money out at will.  Others make it only when the heirs truly need it.  Some even make it totally up to the trustee.  This blog examines the option of giving it straight to your children.

Many times this can do more harm than good. The money loses any potential protections. There will not be divorce protection built into it.  The heirs will have to be very careful to keep things separate. There won’t be creditor protection built in. The heirs could be sued and the inheritance placed at risk.

Some heirs are not mature enough to handle large sums either. However, some inheritances are too small to warrant trust structures or much protection. The more protection you place onto an inheritance the more that the cost could go up.  It is up to each family to decide if the cost is worth it.

When you consider “Should I give money outright” the answer in most instances is probably not.

Should I have a Will or a Trust?

Should I have a Will or a Trust? This is one of the most common estate planning questions that I am asked. This question really comes down to control. How much control over your legacy do you want? Many people don’t even realize that their will creates trusts.  If your will does anything other than immediately give all of your assets to your heirs, it likely creates a trust called a testamentary trust.

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Without a trust you can’t really plan to protect minor children. The court will name a custodian for their assets to hold them until they are 18. They will then be given the entire sum out right. Even if they are not ready for it.  Additionally, you can’t plan for special needs. That money will go straight to the beneficiary often making them ineligible for government benefits.

Wills also need to be probated. Living Trusts do not. If you are only looking to pass your assets on to your heirs with no strings attached, a will might be best for you. If you don’t care about probate, a will might be best for you. If you are concerned about these things then a trust is probably best.

If you want more information, take a look at our Living Trust Guide by clicking here.

What are Death Taxes?

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What are death taxes?  That is a very common question that I get in my Estate Planning practice.  Death taxes are commonly also called the Estate Tax.  This is the only tax that happens only when you die.  There are other taxes that might occur when you die like the Generation Skipping Transfer Tax, but that tax can also apply during life.  So the death tax is generally the estate tax.

The tax can apply to everything you own at death.  This also includes the death benefit of life insurance policies and anything that you gave away within three years of your death.  The death tax doesn’t affect many people at all.

The Federal Estate tax only starts to apply once you get over roughly $11 million in assets.  That doesn’t affect most families. The Minnesota Estate tax will soon only affect those with over $3 million in assets. That could affect more people. Especially if you die just before retirement.  The value of retirement accounts, a nearly paid off home, and life insurance proceeds can creep up into that amount easily.

There are many things that you can do to plan for the tax.  You can also take steps to make your life insurance not count.  If you want to know more about this, then schedule a planning session with me and I’ll gladly go over your situation.

Incapacity Planning

Incapacity Planning is a topic that sneaks up on people.  It is a vital part of any Estate Plan.  Most people are familiar with the concept of Probate. You normally think of this as something that could happen to you when you die.  It is also something that most of my clients tell me they want to avoid.  What you don’t often hear much about is the fact that you can go through Probate while you are alive. Incapacity planning can prevent this.


Do you really want to avoid Probate?


Do you really want to avoid Probate?

Many clients list avoiding probate as a goal of their estate plan.  The truth is that probate is very easy to avoid. Almost everything today has a beneficiary designation. Houses have transfer on death.  Bank accounts have pay on death.  In Minnesota, even your car has a transfer on death now.  Is probate avoidance really your goal though?

Most likely, when you say probate avoidance, you mean court avoidance. That’s not the same thing. Probate is just the legal process where a dead person’s assets have their title changed to a living person’s name.  It has nothing to do with avoiding a challenge or a fight over your stuff.

Without proper estate planning, joint ownership and beneficiary designations can even result in unintentionally disinheriting your family members.  If your spouse remarries, they will most likely hold their property joint with the new spouse. Should your spouse then die, the new spouse gets all your stuff. Will they take care of your kids? Your dog?

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