Paul O. Dillon, Attorney at Law

Can an Irrevocable Trust Be Changed?

Most irrevocable trusts are created to serve for generations. However, life and tax laws change. The terms of the trust sometimes simply don’t work for the family any more. An article from Kiplinger, “Can You Change an Irrevocable Trust? Yes, But Be Careful,” explains how changes to irrevocable trusts can be made, with a few caveats.

Changes to an irrevocable trust shouldn’t be done without the guidance of an experienced estate planning attorney. Be very clear about why you want to make any changes. Make sure that you understand what your choices are for making changes. You may learn that you can’t do exactly what you have in mind. If this is the case, find out what changes you can make. Understand the tax consequences, which could be considerable.

Why would you want to make changes to an irrevocable trust? In most cases, a trust created twenty years ago no longer serves its purpose. Other reasons include fixing errors in drafting the trust, changes in family circumstances, needing to fund a Special Needs Trust, the death or incapacity of a trustee or successor trustee and permitting investment flexibility.

There are also tax-based reasons to change an irrevocable trust. You’ll want to make changes if you want to move the trust to a state with lower income taxes, include or exclude assets from a beneficiary’s estate, convert a grantor trust to a non-grantor trust, change provisions for IRA distributions, or qualify a trust to own stock in an S corporation.

How do you actually make the changes to the trust? Start by reviewing the trust with your estate planning attorney. The trust may already contain language permitting changes to be made. The trust terms may also block your usage of certain trust strategies.

Review the state’s governing laws. Laws about trusts may have changed since the trust was originally created. Some states, including New York, Delaware and California, have “decanting” statutes, meaning one can “pour” assets from one trust into another. Your estate planning attorney will be up to date on these laws.

Consider a trust modification. Depending upon the state’s laws, you might be able to make changes without court involvement simply by obtaining and documenting beneficiaries' consent. In some states, you’ll need to obtain approval from the court.

Be mindful of tax implications. If the trust assets will be included in a beneficiary’s estate, this could be a good thing—or a bad thing. Assets subject to estate tax receive a step-up in income tax basis. Therefore, having these assets in the beneficiary’s estate might be costly.

Changes to the terms of the trust may make sense as your life progresses and laws change. Just be certain to make changes with the guidance of an experienced estate planning attorney.

Reference: Kiplinger (Aug. 26, 2024) “Can You Change an Irrevocable Trust? Yes, But Be Careful”

How Special Needs Trusts are Used to Protect Loved Ones

To qualify for Supplemental Security Income (SSI) and Medicaid, you have to own less than $2,000 in assets. These two programs are intended to pay for basic living expenses and primary medical services, according to a recent article from Barron’s, “Kids With Special Needs Deserve Benefits. A Trust Protects Them.”

A Special Needs Trust (SNT) is used to pay for other expenses. This can be anything from the cost of having a cell phone to traveling for the individual and a companion. An estate planning attorney should create the trust in tandem with the family’s overall estate plan.

There are two types of SNTs to consider for high-income families, and a third, explained below, is useful for families of moderate means. The main difference between the first two SNTs is how the money left in the trust is distributed after the death of the disabled person.

In a third-party supplemental trust, the special needs family member doesn’t have access to the money at any time. The trustee designates a beneficiary if any assets are left in the trust upon the death of the disabled person.

A first-party supplemental trust is used for money received outright, such as from an improperly planned inheritance or an award from a lawsuit. Assets in these trusts can be used during the individual’s lifetime, but upon their death, Medicaid can take back benefits paid over the person’s lifetime before any remaining assets are distributed to beneficiaries.

Parents planning for their child’s well-being after their own deaths typically choose a family member who is close to the disabled person as their trustee. This is good thinking, with some limitations. The person who is the trustee needs to be financially savvy. Remember, the person with special needs may never receive money directly. If they do, their benefits are at risk.

Trustees need to know the details of SNTs so they don’t mishandle funds. For instance, funds in the trust should not be used for anything already paid for by SSI, like housing.

An alternative to privately created and managed trusts is a Pooled Trust. These are run by nonprofit organizations, which offer services like trustees for smaller accounts.

When it comes to retirement, parents need to address their retirement assets to enjoy their retirement years. They can fund SNTs by taking out life insurance policies. Life insurance policies make sense also because funds in trusts should be liquid. For younger parents in particular, term life might be a good option.

A warning for parents with SNTs who are tempted to leave all of their assets to their child with special needs: this is not necessary and could be problematic. Don’t forgo taking care of siblings, or resentment may lead to a family member resenting the family member with special needs.

Reference: Barron’s (July 27, 2024) “Kids With Special Needs Deserve Benefits. A Trust Protects Them.”

How Does a Spousal Lifetime Access Trust Work?

Using a particular type of irrevocable trust can be especially valuable for married couples, according to a recent article from Advisor Perspectives, “Managing Wealth: Utilizing Spousal Lifetime Access Trust.”

SLATs allow one spouse to transfer assets into a trust for the other spouse's benefit. Assets may include cash, stocks, real estate property, life insurance policies, and other kinds of property. The beneficiary spouse has access to the assets while both spouses are living as well as when the grantor has passed.

Assets inherited from a deceased spouse to a surviving spouse are not subject to estate tax, but when the surviving spouse passes, there may be an estate tax due if proper planning is not done.

For example, consider a married couple with a net worth of $60 million. One spouse could transfer up to $13.61 million into a SLAT tax-free. The surviving spouse could receive distributions of the SLAT as income. When the surviving spouse passes, the remaining assets in the trust are then passed to children or whoever the named beneficiaries are, with no taxes due.

An experienced estate planning attorney must prepare SLATs to achieve their goals. They are structured as grantor trusts, meaning the spouse putting assets into the trust will need to pay the trust’s income taxes yearly. Doing so allows the assets in the trust to grow tax-free.

Another advantage of SLATs is the protection they give against claims made by creditors against the grantor and the spouse. Because the SLAT is an irrevocable trust, control has been relinquished, so creditors cannot attach them.

There are considerations before embarking on establishing a SLAT. The donor spouse must be comfortable giving up direct control and asset access. The donor spouse cannot be a trustee of the trust. And the donor spouse cannot be a beneficiary.

If the non-donor spouse predeceases the donating spouse, the donating spouse loses indirect access to the assets as the assets will pass to the beneficiaries. And if the couple divorces, the donor spouse loses access to the assets. Consider the stability of the marriage before setting up a SLAT.

Before creating a SLAT, a candid discussion with your estate planning attorney should occur. The stability of the marriage, how comfortable the donor spouse is with yielding control of assets, and the ability to pay taxes on the assets in the SLAT should all be considered.

Reference: Advisor Perspectives (July 1, 2024) “Managing Wealth: Utilizing Spousal Lifetime Access Trust”

Do You Need a Will and an Estate Plan?

Dying without a will can cause your family to go through at least a year, maybe longer, of probate, fights over property distribution, and, in many cases, litigation against each other. This is probably not the legacy you have in mind, which is why this aptly-titled article, “You need a will and here’s why,” from Lincoln County Leader, is a good read.

Dying intestate, the legal term for dying without a will, means the local jurisdiction will be in charge of how your estate is handled. Each state has its own laws for distribution. In most states, distribution is based on kinship or bloodlines, so if you have relatives, they may be first in line for your inheritance.

In some states, when there is no will, the surviving spouse receives 50% of all assets, and the remaining assets are divided equally among the children. In other states, the spouse gets 30%, with the children receiving the balance. You must have a will if you want your spouse to receive 100% of your assets. If you have children but no spouse, they will usually inherit everything in equal shares.

If you have no children and no spouse, property distribution can become more complicated unless you have a will. The court may give your parents your estate if they are living. If your parents have passed, your siblings are the next likely heirs. The court will seek to identify your closest relatives by kinship, and they may inherit all of your worldly goods.

If there are family heirlooms, you want to give to a particular child, or if you want to have a portion of your estate go to a charity, it won’t happen without a will.

Today’s family often is a bit more complicated than in the past. Blended families need to have estate planning so biological children aren’t disinherited. Estranged relatives could end up with your precious heirlooms unless a will is in place.

What if your children are minors? A will is used to name a guardian for children, so they are brought up by the people you trust. The court will decide who will raise your children if you don’t name a guardian in your will. Also, minor children cannot inherit property, so if you die, your spouse will get their share as per your state’s laws, and the children’s inheritance will be overseen either by the court or by a person named by the court.

Having a last will and testament allows you to direct who is to inherit your assets, from personal items to financial assets. But you need to do more to protect yourself and your family, and this is part of the estate planning process.

When you sit down with an estate planning attorney, they will also review matters, including beneficiary designations (i.e., the people named to receive assets upon your death on life insurance, retirement accounts, and certain financial accounts). They’ll also advise you on documents like a Power of Attorney and Medical Power of Attorney, which allow you to name someone to take care of your financial and healthcare matters if you become incapacitated.

Taken all together, an estate plan provides security for your family, protects you while you’re living, and creates a legacy of caring about the ones you love.

Reference: Lincoln County Leader (Aug. 4, 2024) “You need a will and here’s why”

Estate Planning Answers for High-Income Families and Singles

You may never come close to Taylor Swift’s $92 million payday—and that was in 2022. And the CEO of JP Morgan Chase, Jaime Dimon, received a hefty $36 million in compensation in 2023. But there are some issues people with healthy incomes need to plan for, according to a recent article from mondaq, “Planning For Wealth: Lessons From Athletes, Entertainers, And Executives.”

This is especially relevant with the possible sunsetting of the historically high federal estate and gift tax exemptions created by the Tax Cuts and Jobs Act of 2017. You’ll want to start using estate, gift, and generation-skipping transfer tax exemptions before the law ends.

If you anticipate a large performance bonus, a profitable sale of a business, or a large award in a lawsuit in 2024, now is the time to get your estate planning underway.

In 2024, the estate and gift tax exemptions are $13.61 per person, as is the generation-skipping transfer tax. On January 1, 2026, the exemptions will be $5 million, plus the amount indexed for inflation. If this is a concern, you might consider giving a completed gift of the full exemption amount as soon as possible.

A dynasty trust could be a solution. You could name “future descendants” as the trust's beneficiaries, and if there are no children, name charities, siblings, or even parents as contingent beneficiaries.

A married person should speak with their estate planning attorney about the possibility of using Spousal Lifetime Access Trusts (SLATs) and Inter Vivos QTIP Trusts. These trusts allow indirect access to gifted access while utilizing exemptions.

What if $13.61 million is just a small portion of your wealth? An “incomplete gift plan” –a self-settled domestic asset protection trust—is an option. If exemptions increase by some chance, you can move assets from the self-settled trust to a dynasty trust. The “incomplete gift” self-settled trust is intact if the exemption goes down.

You might also want to consider using an Irrevocable Life Insurance Trust, or ILIT, to create liquidity with life insurance used to pay for estate taxes. This is especially useful if your estate includes illiquid assets.

There are some strategies to adopt in case of a large liquidity event. A Charitable Lead Annuity Trust (CLAT) is a trust funded with a one-time transfer. Payments are made to a qualifying charity for a set number of years. At the end of the term, any remaining trust property is paid to the named beneficiaries.

Another trust to consider is a Flip Charitable Remainder Trust. A Flip CRUT is also funded with a one-time transfer, but the trust creator delays distributions until a set period of time or until a triggering event. Until the “flip,” the trust remains invested. When the grantor dies, the assets in the trust are distributed to the named charity.

High-income earners also need to be mindful to have their estate planning attorney prepare Power of Attorney and Health Care Power of Attorney documents so a trusted person can take charge of their finances and be involved in medical decisions in case of incapacity.

Reference: mondaq (Aug. 2, 2024) “Planning For Wealth: Lessons From Athletes, Entertainers, And Executives”

How Does Probate Work?

Very few Americans know how long it takes to settle an estate or how probate works and are surprised when their inheritance takes months, if not years, to arrive. This, according to an article from USA Today, “Inheritance on hold? Most Americans don’t understand the time and expense of probate,” may become a problem over the next twenty years. During that time, boomers, who control about half the wealth in America, will be passing, and as much as $84 trillion is expected to move from one generation to the next.

Most inheritances are expected to go to millennials, who don’t know if their parents have an estate plan. Only half have spoken with their parents about estate plans, and more than half of all millennials don’t have a will or trust in place.

The tendency to avoid what we don’t understand, plus our discomfort with talking about money and death, is something to overcome, say estate planning attorneys.

The first parent to die isn’t where most people encounter probate. If the parent had an estate plan created, their will usually passes most assets to the surviving spouse or to a trust set up for beneficiaries. However, when the second parent dies, the adult children are the ones to deal with serving as executors, selling the family home, paying estate taxes, and waiting for probate to be finished before receiving their inheritance.

Some accounts pass by beneficiary designations, where the account owner names the people, they want to receive the asset upon their death. These assets don’t go through probate and are more straightforward for heirs.

State laws differ, so if your parents live in another state, the will is probated where they live. If there is no will, the court will apply state laws to distribute property, and the family won’t have any say in what happens to a person’s property, which could include items with great sentimental value, investments, and real estate.

Step one is working with an experienced estate planning attorney to create an estate plan to avoid or minimize probate. The estate plan also includes documents to control who will manage assets if a person becomes incapacitated, as well as who will manage their medical care. These documents are Power of Attorney and Health Care Power of Attorney.

Talking with parents, or parents talking with their children, about estate plans, is very important for all concerned, even if it is difficult. If children live in different stages, an online gathering is better than waiting until everyone is together for a holiday.

Reference: USA Today (July 30, 2024) “Inheritance on hold? Most Americans don’t understand the time and expense of probate”

What are the Essentials of Estate Planning?

Once you’re familiar with the basics, estate planning isn’t quite as daunting as it may seem at first, says a recent article from The Atlanta Journal-Constitution, “Estate planning 101: A guide to management.” Estate planning includes the necessary planning to protect you while living and distributing assets after you have passed.

Your estate plan depends on many factors, including the size of your family, whether you’re married, widowed, or single and the amount of your assets, including your home, investment accounts, real estate, retirement accounts and digital assets.

One important thing to know: estate planning is not just for wealthy people. If you think you don’t have enough assets for an estate plan, you’re wrong: any adult needs an estate plan to protect themselves and their loved ones.

Consider your last will and testament as a gift to your loved ones. A will is a legal document containing instructions for distributing your property to heirs upon death. What constitutes a valid will varies from state to state, so you’ll want to work with a local estate planning attorney to create a will.

If you die without a will, your estate is considered “intestate,” and your property will be distributed according to the laws of your state and the probate court. Your family won’t have any say in who receives assets. They could go to a distant relative you’ve never even met. With a will, you get to decide (within the bounds of law, of course) what you want to happen with your assets.

Trusts are used to have further control over assets in an estate. Wills become part of the public record once filed in probate court. However, the contents of a trust remain private. The trust can be used to hold assets while you are living, and certain types of trust only become effective upon your death. Another benefit of a trust is that it can allow a trustee to manage assets in the trust if you become incapacitated.

Special Needs Trusts are created for people with developmental disabilities to provide support in addition to government benefits. Medicaid Asset Protection Trusts take assets out of a person’s estate, often as part of planning for long-term care costs. An estate planning attorney can recommend the type of trust best for your unique situation.

A power of attorney is a document used while you are living to give another person the ability to manage your affairs in case of incapacity. Everyone should have a POA for their financial and legal affairs and a Medical or Health Care Power of Attorney, so a trusted person can help with medical decisions and be involved in decision-making for medical care.

An executor is a person you name in your will who is in charge of your estate and estate management after you have died. You can name one or two people to be executors of your estate. However, be sure that they work well together to avoid any stalemates.

An experienced estate planning attorney can make this a relatively straightforward process, giving you the peace of mind of knowing you have taken the necessary steps to protect yourself and your loved ones.

Reference: The Atlanta Journal-Constitution (Aug. 1, 2024) “Estate planning 101: A guide to management”

Is It Common for Siblings to Fight Over Inheritance?

Unfortunately, siblings refusing to speak with other siblings about their late parent’s estate matters is a fairly common occurrence. A recent article from Morningstar, “My brother won’t tell me anything about our mother’s $1.6 million estate. Can I remove him as trustee?” provides a good example of how things can go wrong.

According to a letter to the publication from one brother, a mother was the second to die and the brother who knows about her will has not yet filed the will with the court. To make matters more complicated, he explains that the father had created a trust before he died in 2000, which was never funded. Medicaid paid for $150,000 in nursing home costs, and at the time of her death, the mother owned a 1.6-million-dollar property.

While the best resolution is almost always simply to have a direct conversation, this doesn’t seem likely to occur in this situation. The controlling brother may be doing precisely what is necessary. However, since the brother won’t tell the other brother what is happening, the only way forward may be to go to court.

If a trust was created, it’s entirely possible it was a Medicaid Asset Protection Trust (MAPT). This trust is created to remove assets from being countable for Medicaid purposes. If the trust wasn’t funded, the $1.6 million property may never have been retitled and placed in the trust. This is the second most common estate planning mistake seen by estate planning attorneys; the first is not having an estate plan.

If the trust was never funded, the family home is considered an asset by Medicaid and could be “clawed back” by Medicaid to cover the medical expenses. If the $150,000 were the father’s nursing home costs, the father’s estate would have owned this amount, which should have taken place after the father’s estate was settled. There is a statute of limitations, however, and depending on the rules of the father’s state, this may be a moot point.

Since the house was the primary residence of a well-spouse, it may not have been countable for Medicaid. If the father had no other assets, there may be no debt to Medicaid. It's entirely possible all this was dealt with. However, the brother wasn’t told the details.

This leaves the question of what the brother is doing with the mother’s estate. If no will has been filed, it might be because the estate plan was designed to avoid probate. Assets held in trusts and passed through beneficiary designations don’t go through probate. If the house was placed in a trust, it would not go through probate either.

However, since the sibling is an heir, he has the right to an accounting report or a report from the brother as the trustee and executor. The report should contain information on how assets were owned, and distributions were made.

This is a lesson for parents who know their children don’t get along. If they don’t get along while you are living, don’t expect this to change after your death. If one is given power of attorney, serves as a trustee and executor, and the others are left out of any decision-making, your estate may shrink because of litigation, and the family may fracture. Talk with your estate planning attorney about naming a neutral person for all or some of these roles to avoid adding the stress of an estate battle to your family’s grief.

Reference: Morningstar (Aug. 3, 2024) “My brother won’t tell me anything about our mother’s $1.6 million estate. Can I remove him as trustee?”

Relocating in Retirement? What You Need to Know before You Go

Moving in retirement is a big deal. Whether moving to be closer to family or trying to cut your living costs, moving in your sixties or seventies should only happen after much consideration and careful planning. A recent article, “Moving in Retirement? 5 Things to Ponder Before You Pack” from Nerd Wallet, explains the details.

Lower property taxes or income taxes are an attraction for many. However, look at all the costs to get a total picture, including the cost of living, estate taxes and housing costs, which have rocketed in many Sunshine states. You may find the difference is not as much as you thought. Suppose you’re selling a business before you leave. In that case, your current state may be more interested in recouping taxes than you think, so speak with an estate planning attorney to make the sale as tax efficient as possible.

One unexpected opportunity from moving outside of a Medicare Advantage’s service area is the chance to change your Medicare coverage. Relocating provides an acceptable reason to change a Medicare Advantage plan or sign up for original Medicare. It is also a time when you can sign up for Medigap coverage. You can normally only sign up for Medigap during open enrollment, a six-month period after you turn 65, and when you have Medicare Part B. This coverage is difficult to buy later in life if you have health issues.

Don’t forget to notify your insurance companies and Social Security if you move.

Could you rent first? If you’re moving to a place where you’ve summered for twenty years, renting for the first year is best. The winters may not be as bucolic as the summer. If you have to sell a house quickly after a short period, it could be a costly mistake. You’ll also own capital gains taxes on any profit made on a home sale if you move after living in a new location for less than two years.

What level of healthcare services do you need now or might need in the future? Healthcare becomes more critical as we age, especially if we are living with a chronic condition. If services are not the same quality or are a day’s drive away, your move could lead to bad health outcomes and added stress.

Estate law is state-specific.  If so, your estate planning documents—last will and testament, power of attorney, health care power of attorney, living will, trusts and other documents—may not be considered valid by the courts in your new state. Consult with an estate planning attorney about what needs to be changed to be sure that your estate plan will give you the same results in your intended new state.

Will you enjoy your daily life in your new location? Retirees active in social activities, from sports to community theater to volunteer work, report enjoying their retirement. Will you be living with people who share your interests and values? Will you feel comfortable if your political views differ from those around you?

One last point: transportation doesn’t usually feel like an issue until it is. If your children live on the West Coast and you’re considering moving to a small New England town, will the added cost make frequent visits prohibitive? If your retirement agenda includes a lot of international travel, you may want to consider how living far from an airport will impact your travel plans.

Reference: Nerd Wallet (Aug. 5, 2024) “Moving in Retirement? 5 Things to Ponder Before You Pack”

Retirement Savings Account Changes and Financial Decision Making

Keeping track of all the changes concerning retirement savings accounts and estate planning laws is not an easy task. However, there are some things you’ll want to know as 2024 moves forward. According to a recent article from The Wall Street Journal, “Changes in Retirement Savings Rules to Know Before Year’s End,” not knowing could impact retirement finances. Some of these changes include:

The End of RMDs from Roth 401(k) Plans. You use after-tax dollars to add to a Roth 401(k) plan. This is how contributions have always worked for Roth IRAs. Required Minimum Distributions (RMDs) had to be taken from Roth 401(k) plans. However, in 2024, this is no longer the case. If you meet other qualifications, you can take as much or as little as you like from your Roth 401(k), just as you do with a Roth IRA.

401(k) Catch-Up Contributions for High Wage Earners Must Go into Roth Accounts. Starting in 2026, if you are participating in a 401(k) plan, are age 50 and older, and if your annual income exceeds $145,000, you’ll have to make your catch-up contributions on a Roth basis. The income benchmark is indexed to inflation; your spouse’s income does not impact this change. This provision also does not affect Roth IRAs.

More Potential Tax-Deferred Growth for Certain Spousal Beneficiaries. Starting this year, an older spouse beneficiary of an IRA owned by a younger spouse who dies is treated as if they were the same age as the decedent spouse. RMDs based on the beneficiary's age don’t have to be taken until the deceased spouse is 73. While the benefits will depend on the younger spouse's age, this gives the surviving spouse more years for the account to grow tax-free.

A related change: the beneficiary may use the IRS uniform lifetime table to determine the amount of the RMD, which is a change from the single-life expectancy table. This can result in smaller RMDs, allowing for more tax-deferred growth. The RMD will rise to 75 years old in 2033.

Penalties for Missed RMDs are Reduced. The penalty for missed RMDs was reduced from 50% to 25% in 2023. If it’s corrected in a timely manner, two years from the end of the year for which the RMD should have been taken – it can be cut even lower, possibly as low as 10%.

These and other changes to retirement accounts may indicate a need for adjustments to your estate plan. With high estate and gift tax exemptions from the Tax Cuts and Jobs Act of 2017 possibly ending, now is a good time to speak with your estate planning attorney and learn if your estate plan is ready for the changes ahead.

Reference: The Wall Street Journal (July 31, 2024) “Changes in Retirement Savings Rules to Know Before Year’s End”