Paul O. Dillon, Attorney at Law

How Your Estate Plan Addresses More than Money

Having a properly drafted and executed last will can help ensure that your wishes for asset distribution are followed, says an article from CNBC, “Writing your will is ‘not just a question about finances,’ expert says. Here’s why it’s a crucial task.”

People often think they don’t have enough assets to warrant creating a will, which is a big blunder. Without the right estate planning documents, loved ones will have to deal with additional difficulties during times of serious illness or death.

When no will exists, laws of “intestacy” take over. These state-specific laws determine who receives your assets, usually based on bloodlines or kinship.

Without a will, any minor children will be raised by whoever the court decides will be best to raise them. It won’t matter if you’ve always thought your cousin would be the best parent, if you died if the judge believes your uncle and aunt are the best choices. Your wishes won’t be heard.

If you don’t have an estate plan or haven’t revised your will in more than five years, it’s time to make an appointment with an estate planning attorney to prepare a will and other documents to protect your loved ones and your assets.

Part of having a complete estate plan includes ensuring that the people you’ve named as beneficiaries on bank and retirement accounts and life insurance policies are still the people you want to receive these assets. These accounts pass outside of your probate estate, so whatever your will says doesn’t matter for these accounts.

If you own a home or multiple properties, talk with your estate planning attorney about how to best structure ownership. It might be possible to place your home in a trust to remove it from your probate estate, or you may do better leaving it as is. The estate planning attorney will review your entire estate to determine your best option from an estate planning and tax perspective.

If there’s no will, a significant asset like a house is usually divided among heirs, depending on the state’s laws. This can get very complicated very fast.

Meet with an estate planning attorney to get the process started. It’s not as burdensome as you might think and will save your loved ones from additional stress and worry during times when their focus should be on celebrating your life and grieving your loss.

Reference: CNBC (May 8, 2024) “Writing your will is ‘not just a question about finances,’ expert says. Here’s why it’s a crucial task”

What Happens When Blended Families Ignore Estate Planning?

The idea of a “Brady Bunch” family, where two adults with children from prior marriages blend their families, is filled with good intentions. With time and patience, a real family can be created if all parties are willing participants. That is until one of the parents dies and the will is revealed, according to the article “The Brady Bunch Breaks Down: Estate Fights Tear Stepfamilies Apart” from The Wall Street Journal.

The typical estate plan for couples and their families is for the surviving spouse to inherit all the assets when the first parent dies. In a blended family, non-biological children are often disinherited. The spouse has no legal obligation to give anything to the biological children, and, making matters worse, the stepsiblings will inherit the deceased stepparent’s assets.

All of the work to blend the families can be undone. The stories are heartbreaking: children changing locks and kicking out their stepmother before the funeral, adult children learning they’ve inherited nothing, while the stepmother receives a lifetime of assets.

Good planning with an experienced estate planning attorney can prevent these and other ugly scenarios.

Establishing a joint trust to give children equal shares after the second parent dies sounds like a good idea. However, if the stepparent moves the assets into a new trust and names their own biological children as the beneficiaries, the first parent’s children are disinherited.

Creating separate trusts can work. However, they need to be iron-clad. Other options are distributing assets while the parent is living or leaving a specific amount (either a dollar amount or a percentage) in the will directly to the named children. Some families keep biological children in the estate plan and fund a separate trust for the spouse and stepchildren.

A prenuptial agreement is a good tool for blended families. However, it should be in addition to, not instead of, an estate plan.

In some states, the default rule is for the surviving spouse to keep half the community property and have no right in the deceased’s separate property. Most states also allow a surviving spouse to claim an elective share, typically a third or half of the estate.

Another problem that blended families must address is planning for illness and incapacity. The spouse usually makes medical decisions and funeral arrangements. However, stepchildren may have different ideas than their stepparents. Both parents should have their wishes expressed in documents, including a Power of Attorney, Healthcare Power of Attorney, Living Will and whatever documents are required by state and federal laws.

Consider naming an executor or trustee who is neither a biological child nor a relative. Having someone who is impartial and trustworthy could relieve pressure on the children.

An estate planning attorney can clarify the possible issues arising for stepfamilies regarding asset distribution, asset protection, medical directives and planning for incapacity.

Reference: The Wall Street Journal (June 1, 2024) “The Brady Bunch Breaks Down: Estate Fights Tear Stepfamilies Apart”

Corporate Transparency Act Could have an Impact on Estate Plans

Created to address unlawful activities, such as money laundering and terrorism funding, the Corporate Transparency Act (CTA) has spilled into other areas, including estate planning. A recent article from Forbes, “The Corporate Transparency Act: Estate Planning, Succession Planning, And Trust Administration,” provides an overview of what you need to know and should discuss with your estate planning attorney.

Reporting obligations for trusts and related entities are different. Trusts are not considered “reporting companies” under the law. However, information about beneficiaries and individuals with control or ownership needs to be disclosed. Depending on the trust, this may mean trustees, trust protectors and anyone with substantial control over the trust.

The trusts' structure needs to be reviewed to ensure compliance with CTA regulations. Changes may be needed, with the biggest shifts in trusts used for succession planning. Here’s why.

If an entity is deemed a “reporting company” under the CTS, beneficial owners are required to be disclosed. Since many succession plans include gradual transfers of company interests, the individuals gaining and giving equity must be reviewed to determine their status regarding reporting obligations.

Determining who is a beneficial owner under the CTA is critical to compliance, which has to occur in tandem with achieving the objective of the succession plan: protecting the family legacy while ensuring business continuity.

Part of the process now requires the roles and responsibilities of all involved parties, delineating who has control and setting up protocols for managing and disclosing shifts in ownership. Beneficial owner information must be kept up to date, adding a layer of administration to trust management.

• Control structures and documented decision-making processes must be very clear.
• Information on beneficial owners must be specific; general descriptions like “all my children” won’t do.
• Overly complex structures used to hide ownership will not withstand scrutiny under the CTA.
• Inadequate recordkeeping or poor documentation of trust activities will raise concerns.
• Discrepancies between trust documents and reported information will raise a noncompliance flag. Information reported to the CTA must align with trust documents.

Talk with your estate planning attorney if you have concerns about trusts used in succession plans and how to ensure that they are in compliance. A regular review process to ensure compliance with CTA should be set up to align with legal obligations and secure the goals of the succession plan.

Reference: Forbes (May 17, 2024) “The Corporate Transparency Act: Estate Planning, Succession Planning, And Trust Administration”

Spring Cleaning the Business of Your Life

There’s no bad season for spring cleaning—although most of us tend to feel the need to get things in order when spring arrives. What should be on your list? The article “7 spring cleaning and other annual steps to get your financial life in good shape” from AZ Central gives some valuable suggestions.

Address the paper problem. Piles of paper bills, statements and other documents can easily become overwhelming. Streamline your paperwork by organizing files better and reducing what you keep. For instance, keep one end-of-year statement from your bank and investment accounts if you still get paper statements. Even the IRS is doing it—recommending keeping only three years of income tax returns on hand.

Do you need so many different accounts? If you’ve got credit cards you don’t use, do you need to have them? Don’t close the accounts if you’re about to take out a loan, as the activity could affect your credit score. However, if you can, get rid of any excess cards. Visit big credit reporting companies to learn how to close the accounts without creating a financial hiccup.

Is it time for an annual portfolio review, too? Set up a meeting with your financial advisor to review your accounts once a year to be sure they are properly balanced. The old 60% stocks/40% bonds ratio is being challenged by many. However, it may be your best option, protecting you from downturns in the market while still having some investments poised to benefit from upswings. One asset management company’s analysis says the traditional 60/40 mix could have generated a 9.3% average annual return in a portfolio first started in 1950.

Check what you’re paying in fees and other expenses. This may take some digging, but you may be (unpleasantly) surprised at what you find. How much are you spending on fees on mutual funds or exchange-trading funds? If the amount you’re paying in fees is the same or more than you’re earning, you’re losing money. You can’t control the market, but you can manage fees and expenses.

Update or create your estate plan. If you don’t have an estate plan and have minor children, make an appointment with an experienced estate planning attorney as soon as possible. Wills are used to name guardians for children. Without a will, the court will decide who should raise your children. Your will is also used to name an executor who administers your estate after you pass. It can be your spouse, partner, or whoever you feel would be best suited. Without a will, a court-appointed administrator will be named. Be careful about online wills, which can create more problems than they solve. If the will doesn’t comply with your state laws or isn’t executed properly, the court could deem it invalid.

Check beneficiary designations. Beneficiary designations are used for life insurance policies, retirement, and investment accounts, some bank accounts and other assets. The person named your beneficiary will receive the asset when you die, regardless of your will. Beneficiary designations supersede any will instructions, so ensure that they are up to date.

Taking care of these matters isn’t as much fun as planting a garden or planning your summer vacation. However, knowing the business aspect of your life is well cared for will give you peace of mind so you can relax and enjoy the coming season.

Reference: AZ Central (May 19, 2024) “7 spring cleaning and other annual steps to get your financial life in good shape”

Consider a Trust for Upcoming Estate Tax Exemption Change

As the expiration of the Tax Cuts and Jobs Act provisions about federal estate taxes comes closer, people who have enjoyed ultra-high exemptions in recent years may find themselves paying estate taxes if they don’t plan ahead. A recent article in Financial Advisor, “Looming Cut in Estate Tax Exemption Has Advisors Looking To Trusts,” provides a look into how trusts, created with an estate planning attorney to align with the overall estate plan, can mitigate estate tax changes and more.

A revocable living trust is not part of the public record, so assets in the trust aren’t available to creditors or litigants after your last will and testament goes through probate. A revocable trust, created and funded during the grantor’s lifetime, allows the grantor full access and control over the trust and assets.

Upon the grantor's death, the trust's assets may pass directly to the beneficiaries without going through probate.

Another kind of trust is the Qualified Terminable Interest Property Trust, or QTIP. This kind of trust can own different assets; a spouse is the beneficiary. The assets in the trust can include stocks, bonds, real estate, business interests, or just plain cash. The beneficiary must get all the income thrown off by the trust, and any remaining assets must go to other beneficiaries.

Then there’s the “ILIT”—an irrevocable life insurance trust—allowing individuals to remove policy proceeds from the estate. With the guidance of an estate planning attorney, the policy owned by the trust can generate streams of tax-free income for the surviving spouse.

For younger people, a GRAT—grantor-retained annuity trust—returns some or all of the value in the trust plus interest to the person creating the trust and transfers appreciation outside of the estate. This works best when the GRAT grows quickly in the first few years. At the end of the GRAT, the remaining assets are distributed to an irrevocable trust for beneficiaries.

These are just a few ways that trusts can be used to minimize estate taxes strategically. Talk with your estate planning attorney to ensure that you are ready if and when the tax laws change. Bear in mind that the estate planning and financial community are already preparing for these changes, which take time. Waiting until the last minute could be an expensive mistake.

Reference: Financial Advisor (May 28, 2024) “Looming Cut in Estate Tax Exemption Has Advisors Looking To Trusts”

What Is IRS Rule 706 and Why Should Someone File It?

IRS Form 706 Estate and Generation-Skipping Transfer Tax Return has become a hot-button issue in the estate planning and tax worlds. A recent article appearing in Forbes addressing this issue, “How To Avoid Faulty Advice On IRS Form 706 And The Portability Election,” makes it very clear this is one to get right from the start.

The IRS was so overwhelmed by the number of private letter ruling requests it issued a rule of its own to extend the ability to make the portability election to on or before the fifth anniversary of the decedent’s date of death.

What’s the issue? Portability allows a surviving spouse to claim their late spouse’s unused tax exclusion amount. It’s known as the Deceased Spouse Unused Exclusion Amount or DSUEA. The important thing to know is the DSUEA isn’t an automatic process. The spouse must complete Part 6 of IRS Form 706, and the portability election becomes effective as of the DOD of the deceased spouse.

This allows the surviving spouse to shelter more assets upon the other spouse’s death. It effectively locks in the deceased spouse’s exemption amount and gives the surviving spouse a greater chance of not needing to pay estate taxes upon the second spouse's death.

This option will become even more critical in 2026 if the Tax Cuts and Jobs Act expires and the federal gift and estate tax exemption amounts will return to 2018 levels. With inflation, estate planning attorneys expect the revised exemption amount to be roughly $6 million.

Determining the form is unnecessary because the estate is not large enough to reach the exemption level, or it’s a waste of time to prepare the form, which could be an expensive mistake. The number of requests for private letter rulings clearly proves the value of ensuring this form is completed when administering an estate for a deceased spouse.

Speak with your estate planning attorney to learn if your estate will be impacted if the federal estate tax exemption returns to prior values. Planning ahead for the loss of a spouse and potential changes in estate tax liabilities will require time and resources to be well spent. The cost of a private letter ruling or paying federal estate taxes is far more costly.

Reference: Forbes (May 21, 2024) “How To Avoid Faulty Advice On IRS Form 706 And The Portability Election”

Stay-at-Home Parents Need an Estate Plan

Any family’s estate plan must address all aspects of life, planning for incapacity and death. It’s easy to overlook the Stay-at-Home Mom (SAHM) or dad. They don’t have paychecks, raises, reviews, or PTO. But, overlooking the importance of what the SAH parent does for the family is a big mistake, and this includes neglecting estate planning, according to a smart article from The News Enterprise: “Stay-at-home parents must be deliberate about estate plans.”

For one thing, life insurance needs to be in place for both spouses. It may be easy to define the amount of insurance for the spouse working outside of the home, but the SAH parent’s tasks also need to be insured.

How long will the children be at home needing care, and what would daycare or a caretaker cost? How much would it cost to hire someone to cook, clean, do laundry, and run the household?

If children are home-schooled, how will the SAH parent be replaced? Will the children start attending public school, or is private school more aligned with the family’s values?

It’s easy to think the working parent will slide into these tasks, but unrealistic, as any single working parent will tell you. The children will be dealing with grief and emotional upheavals—adding a stressed parent to the mix who is also dealing with grief will make for a terrible situation.

In addition to having the right amount of life insurance, estate planning documents should be prepared with an eye on this possibility. The last will and testament is used to name a guardian for minor children, who will be responsible for raising the children if both parents are unable to care for them because of death or incapacity. A revocable trust should be considered, and a trustee should be appointed to ensure the funds are available for the children’s care and education.

The revocable trust can also ensure the children are not disinherited if the surviving spouse remarries.

This plan needs the review and guidance of an experienced estate planning attorney to ensure the will is correctly created to protect the children and set up any needed trusts.

Stay-at-home parents are often the glue keeping the family running. Replacing them isn’t possible—but preparing for life’s ups and downs will help the family adjust to any major changes.

Reference: The News Enterprise (May 25, 2024) “Stay-at-home parents must be deliberate about estate plans”

Is It Important to have a Will?

The biggest mistake people make in estate planning is not having a will. Many think that if they don’t have a will, their children or spouses will automatically inherit everything, and their families will know what to do. This simply isn’t true.

A recent article, “5 reasons why having a will is important for you and your loved ones” from Microsoft Start, says depending upon where you live, if you die without a will, your estate will be distributed according to the laws of your state. It won’t matter what you might have wanted to happen or what your spouse or family thinks should happen. And there won’t be any recourse for your spouse or your children.

Part of your assets to be included in your will are known as “digital assets.” The digital content now being included routinely in estate plans includes blog posts, social media, and email accounts, followed by passwords. Other digital assets include cryptocurrencies, NFTs (nonfungible tokens) and online businesses.

The laws of every state are different, and there are jurisdictions within every state. The laws of intestacy are different in each one. Your entire estate might not go to your spouse but be divided between your spouse and your children. If you’ve remarried and your state’s laws give everything to the spouse, your biological children might be disinherited.

If you have relationships outside of marriage or kinship (also known as “bloodlines”), your state’s laws probably don’t recognize those relationships, no matter how lasting they may be. A close friend, family caregiver, or live-in partner may find themselves left out of your inheritance, even if you’ve told them you’ll take care of them.

There are many instances of live-in partners being evicted from homes when family members inherit real estate property and the partners are not co-owners. This is a dramatic example, but it is all too common.

Parents need a will to designate a legal guardian for minor children. The will is used to name who you want to raise your children and look after them financially. Part of your estate planning should include financial planning in the event of something happening where your children will need to be raised by others. You can set up a trust with trustees in charge of funds for the children’s upbringing. I

If the family includes a special needs individual, the estate plan should include a Special Needs Trust to protect their loved one. An SNT allows monies to be set aside for their benefit without placing their government benefits at risk.

An estate planning attorney can help you clarify your wishes and document them in your will. They’ll also help prepare documents like Power of Attorney, Living Will, Healthcare Directives, and others needed to protect you while you are living.

Reference: Microsoft Start (May 2024) “5 reasons why having a will is important for you and your loved ones”

What Happens If You Inherit a Parent’s House?

Inheriting your parent’s home is a combination of sadness, relief, and worry. The last one can be avoided if the right planning is done in advance, says a recent article, “6 lessons I learned from inheriting a parent’ s house” from Bankrate. When all these feelings are combined with navigating the inheritance among siblings, things can get complicated quickly.

Many people think children automatically inherit a house when their parents die, but this isn’t true. It’s possible for children to inherit without a will, but it doesn’t always happen. Every state has its own laws about who inherits what in the absence of a will. Without a will, there will be unpleasant surprises for the family.

Parents need to talk with their children to tell them if they have a will or estate plan and where the will can be found. If there is no will, the parents must meet with an estate planning attorney as soon as possible to ensure their wishes are documented.

Wills and estate plans are never completely done. Wills need to be updated as circumstances change over time. A will created while a parent is in their 50s may not reflect the family's status ten years later. Let’s say one sibling is disabled and receives means-tested government benefits. If the sibling is left something in the will, their benefits could be cut off. If the sibling was well ten years ago, the estate plan didn’t include a special needs trust, which would allow the family to provide for the disabled sibling without putting their benefits at risk.

The general rule for reviewing wills is to review wills every three to five years. They may not always need updating, but they definitely need reviewing.

Heirs need to put everything in writing if they have been left assets like the family home as a group. Siblings will have different lives and needs, so inheritances need to be clarified and documented. A verbal agreement is asking for trouble, even in the best of circumstances. If something happens to a sibling and their spouse has a different idea of what they want to happen to their share of the house, for instance, the way forward won’t be pleasant.

It's best to plan how your assets should be managed after death. Would a revocable trust work better to keep the family home out of probate? If the home is placed in a revocable trust upon the death of the owner, the ownership of the home goes to a trustee, avoiding probate.

Plan ahead and expect surprises. Inheriting a home isn’t great for every family, as it comes with costs. Property taxes, maintenance, and utility costs might make home ownership a burden rather than a blessing. Parents need to think carefully about whether or not inheriting the home will work for the family.

Consulting with an estate planning attorney in advance can facilitate a discussion about how best to pass the family home onto the next generation or determine it’s not in everyone’s best interests. Leaving a legacy of careful planning is as much a gift to the family as the home itself.

Reference: Bankrate (May 3, 2024) “6 lessons I learned from inheriting a parent’ s house”

Should I have an Irrevocable Trust?

You may have heard the terms “revocable trusts” and “irrevocable trusts.” Both are created to hold assets for different purposes. The differences are explained in a recent article from Kiplinger, “With Irrevocable Trusts, It’s All About Who Has Control.”

Both types of trusts are separate legal entities created through contracts. They name a trustee who is in charge of the trust and its assets. The trustee is a fiduciary, having a legal obligation to manage the assets in the trust for the beneficiaries. Depending on how the trust is structured, these are the people who will receive assets or income generated by the assets in the trust.

With the revocable trust, the grantor—the person who creates the trust—can be a trustee and maintain total control of the trust. They can change the terms of the trust, beneficiaries, and successor trustees at any time. In exchange for this level of control, however, come some downsides. The revocable trust doesn’t have the same level of protection as an irrevocable trust while the grantor is living.

The irrevocable trust trades control for benefits. The grantor of an irrevocable trust can’t change the trust once it’s been created, nor can they move assets in and out of the trust at will. Beneficiaries may not be changed either. However, when the irrevocable trust is properly created with an experienced estate planning attorney, they achieve many estate and tax goals.

Your estate planning attorney will be able to explain which irrevocable trust suits your situation, as there are many different kinds.

An irrevocable trust where the grantor is also the beneficiary is referred to as a Domestic Asset Protection Trust or DAPT. The grantor is allowed to be the beneficiary of the trust, but it has to be created in one of the 20 jurisdictions where the grantor is allowed to be the beneficiary. You can have a trust created in a jurisdiction other than your own.

The first step is to determine how to fund an irrevocable trust, where assets are transferred into the trust. There are fine points here. For instance, you can’t fund an irrevocable trust if there are issues with the IRS or the threat of litigation from a creditor. If the dispute goes to court, a judge can set aside the transfers into the trust as they were made with the intent to circumvent a creditor’s claim under fraudulent transfer laws.

Creating irrevocable trusts, like much of estate planning, needs to be completed before issues arise. Decisions about naming trustees, successor trustees, beneficiaries, and funding sources should be discussed with an experienced estate planning attorney first.

Reference: Kiplinger (April 28, 2024) “With Irrevocable Trusts, It’s All About Who Has Control”