Paul O. Dillon, Attorney at Law

Why Is an Experienced Estate Planning Attorney Worth Their Weight in Gold?

A dentist in Colorado has been indicted on criminal charges for using an abusive trust tax shelter to hide more than $3.5 million of taxable income earned from 2017 to 2022. The IRS is cracking down on shelters using tax-reducing trusts considered “abusive,” i.e., violating the law. A recent article from The Wall Street Journal explains how high-income earners are being targeted by promoters selling trusts, “A Tax-Shelter Crackdown Uncovers a Dentist’s ‘Smile High Trust’”

An experienced estate planning attorney should be the only source for identifying and creating trusts. Your estate planning attorney should vet anyone promising to have a complex trust to solve tax problems to prevent becoming a victim of these scammers. A complex structure with no purpose signals fraud to the IRS. It should also signal the same to high-income professionals.

The dentist was told he’d need to pay $50,000 for the shelter, eliminating a large part of his practice’s taxable income by routing it through a chain of three trusts and a charitable foundation. Each trust was the beneficiary of another, and deductions for expenses were made on each one. What should have been a giant red flag to the dentist: the promoter provided him with two versions of the trust documents. There was a short version to give to banks to open trust accounts, and he was instructed to keep the longer version confidential.

There should not need to be two different versions of a trust. An ethical estate planning attorney would not give a client a document they themselves wouldn’t want another ethical attorney, financial professional, or IRS agent to see.

When the dentist spoke with his CPA about transferring the dental practice into a Limited Liability Company and assigning nearly 90% of its income to the first-tier trust, named the “Smile High Trust,” the CPA questioned whether this move was legal, according to Colorado law. The dentist ignored the question and proceeded with the creation of the trusts.

Transferring a professional practice into an LLC is not unusual and is often part of an estate or succession plan. However, the overall scheme’s intricacies should have alerted the dentist of its questionable nature.

Another red flag is the creation of a foundation that lends funds to the dentist’s practice and pays for personal expenses.

An experienced estate planning attorney has an ethical duty to their clients to follow the law when creating trusts, including those designed to minimize tax liabilities legally. Any consideration of a complex trust promising to eliminate taxes should be vetted through your estate planning attorney. Those who think they are above the law often end up ensnaring themselves and their victims. It’s relatively easy not to fall into these kinds of traps if you have an established network of trusted professionals, including an estate planning attorney, CPA and financial advisor, and listen to their advice.

Reference: The Wall Street Journal (Sept. 27, 2024) “A Tax-Shelter Crackdown Uncovers a Dentist’s ‘Smile High Trust’”

Estate Planning Lessons from Mickey Mouse and Cinderella

At the center of every fairy tale is a human story centered around basic life experiences, as any English major will tell you. Therefore, it’s no surprise that the stories and characters from Disney hold life lessons for estate planning, as described in a recent article, “9 Estate Planning Lessons From Disney Movies,” from Forbes.

For a blended family story, look no further than Cinderella. When her father died and left his estate to an evil stepmother with two equally wicked daughters, he may not have thought of the impact it would have on poor Cinderella. By structuring the estate plan to provide for his daughter from the first marriage, he could have prevented Cinderella from being economically dependent on her stepmother. Leaving a portion to Cinderella and the remainder to the stepmother could have ended the story long before the prince entered the picture. Putting assets into a trust for Cinderella and naming a neutral party as trustee is another option her father could have explored.

Snow White’s seven dwarfs is a tale of planning for dependents. Each dwarf has their own behavior traits and needs, just as children do. For minors or children with special needs, unique circumstances need to be addressed by estate planning. Parents need to put a clear guardianship plan in place to protect dependents and be sure they are cared for by people who understand their needs. Without a plan, which includes a will naming guardians and a Special Needs Trust if appropriate, the court may appoint a guardian who might not be a good fit for the child. Establishing trusts can ensure that funds are available for education and living expenses, adding another person looking out for the child.

Who better represents incapacity than Sleeping Beauty? Facing a health crisis in which people can’t make their own decisions requires planning. A financial power of attorney and healthcare proxy ensure that someone you know and trust will be able to act on your behalf if you should eat a poisoned apple and fall into a deep sleep. By planning for incapacity, you can prevent court intervention and ensure that your healthcare choices are followed.

The Princess and the Frog exemplifies the need for good business succession planning to ensure that the business has a future. Does a business owner want to pass the business on to the next generation or sell it? This requires planning for taxes and estate planning. How should assets be gifted to minimize tax liabilities?

Failing to have an estate plan often leads to a sad ending for family members. Without it, there’s no guarantee of a kind-hearted prince or magical enchantress stepping in to make things right. Consult with an experienced estate planning attorney to protect your children and yourself from the twists and turns of life.

Reference: Forbes (Sept. 27, 2024) “9 Estate Planning Lessons From Disney Movies”

Can an Irrevocable Trust Be Changed or Ended?

Headlines around Rupert Murdoch’s estate battle concern his wish to change an irrevocable trust to give one son an elevated role and more control of his empire. The other siblings have taken their father to court. According to a recent article from Market Watch, “No trust is set in stone. Even irrevocable trusts can have some wiggle room.” What does this mean for regular people who want to change irrevocable trusts?

Trusts are legal structures in which the person creating the trust, the grantor, passes assets to another person or entity, referred to as the beneficiary. Revocable trusts can, as their name implies, be changed by the grantor at any time. Trusts are used to pass wealth to heirs, pass assets without needing to go through probate, maintain privacy and remove assets from the taxable estate.

Irrevocable trusts are intended to be permanent and transfer control of assets when they are created. Many are used for tax planning, while others help families to help a parent become eligible for Medicaid. For blended families, irrevocable trusts ensure that assets are distributed to spouses and biological children as per the wishes of the grantor.

Despite the name, there are ways to make changes to irrevocable trusts by knowledgeable estate planning attorneys. For new irrevocable trusts, careful drafting of the trust with built-in flexibility is critical. Some common provisions today are for the grantor to have the ability to change the trustee, amend terms, change beneficiaries and even revoke the trust.

If the original grantor is incapacitated or dies, a “trust protector” can be named to change the trust.

Decanting the trust is another way to make a change. Just as it sounds, this process involves having the assets in one trust decanted (or poured) into another trust. One example is if a family has created a multi-generation irrevocable trust, and the next generation includes a person with substance abuse issues. The family doesn’t want this person to have access to large sums. The trust is “decanted,” and assets move from the original trust to another with more restrictive provisions.

Consult with an experienced estate planning attorney to be sure that any changes to an irrevocable trust align with your state’s laws. If you are creating a new irrevocable trust, discuss having flexibility built into the trust.

Reference: Market Watch (Sept. 28, 2024) “No trust is set in stone. Even irrevocable trusts can have some wiggle room.”

Can I Make My Dog My Beneficiary?

Wanting to care for your pet after your passing is business as usual today. Twenty-nine states have pet trust laws, and every state has some guidelines, reports a recent article, “Can you leave your estate to your pet?” from CNN. Pet lovers can leave assets to a pet in several ways.  How you do it depends on your state.

The success of your plan may also hinge on whether your family might challenge your decision. Pet inheritances have been challenged in court, and sometimes, the pets lose.

Animal companions are considered property, so you can’t leave them money directly. Here are some questions to consider while creating a plan.

Do you want your pet to live in your home? Your pet can’t inherit the house. However, their named guardian could, along with funds in a special trust to support the home’s maintenance as well as the care of the pet. The catch: the guardian is not bound by law to follow your requests.

Does your family support your wishes? Estate planning attorneys warn people who want to protect their pets and don’t want to leave anything to their children or grandchildren to anticipate challenges. You’ll need to make this wish and the reasons for it extremely clear. Document specific reasons and even incidents occurring to increase your chances of success after you’ve died.

For most people, a pet trust is a reasonable option. The trustee creates a legally binding obligation to use the funds only for the pet’s benefit. The actress and widow of Star Trek creator Gene Roddenberry, Majel Barrett-Roddenberry, created a $4 million trust for her dogs and left $1 million for an employee to care for them before she died in 2009.

Can you be sure that your plan will work the way you want it? Estate planning attorneys tell people who want to protect their pets to name one person as the trustee for the financial assets and a second person as the caretaker. It’s more likely that your wishes will be followed if two people balance responsibilities. If a caretaker has a financial emergency, for instance, they might be tempted to use funds for their own needs. Put money for the pet into a trust with a trustee who is a fiduciary legally obligated to put the needs of the beneficiary of the trust over their own.

There is another alternative to consider. Some animal protection groups run no-kill shelters with programs specifically designed to take over the lifetime care of animal companions after their owners have died. The programs usually require a financial donation for the pet's future care. The shelter does its best to find a forever home for the pets, so they don’t spend their lives in the shelter.

To ensure that your wishes for your beloved animal companions are followed, seek the advice of an experienced estate planning attorney who will know the best way to create a plan to protect your pets.

Reference: CNN (Sept. 14, 2024) “Can you leave your estate to your pet?”

Estate Planning When You’re Single

For one woman, the wake-up call arrived when listening to a friend explain all the tasks she needed to perform for her 91-year-old mother, whose needs were increasing rapidly. Solo agers, people who are growing older without spouses, adult children, or other family members, are now a significant part of the older population, says the article “Going Solo: How to Plan for Retirement When You’re on Your Own” from The New York Times.

Seniors who are married or have adult children have many of the same retirement planning issues as their solo ager counterparts. However, figuring out the answers requires different solutions. Managing future healthcare issues, where to live and how to ensure that retirement savings lasts needs a different approach.

Options must be addressed sooner rather than later. Estate planning is a core part of the plan. While you can’t plan everything, you can anticipate and prepare for certain events.

Determining who you can count on in a healthcare crisis and to handle your financial and legal issues is key. This is challenging when no obvious answers exist. However, it should not be avoided. You’ll need an estate plan with advance directives to convey your wishes for medical treatment and end-of-life care.

An estate planning attorney will help draw up a Power of Attorney, so someone of your choice can step in to make legal and financial issues if you become incapacitated. You’ll also want a Healthcare Proxy to name a person who can make medical decisions on your behalf if you can’t communicate your wishes. While it’s comfortable to name a trusted friend, what would happen if they aren’t able to serve? A younger person you know and trust is a better choice for this role.

A Last Will and Testament is needed to establish your wishes for distributing property. Your will is also used to name an executor who administers the will. Think about people you trust who are a generation or two younger than you, like a niece or nephew or the adult child of someone you know well. You’ll need to talk with them about taking on this role; don’t spring it on them after you’ve passed. Just because someone is named an executor doesn’t mean they have to accept the role.

Where you age matters. From safety and socialization standpoints, aging alone in a single-family home may not be the best option. Having a strong network of friends is important for the solo ager. Moving to a planned community with various support systems may be better than aging in place. Explore other housing options while you are still able to live on your own, so you can make an informed choice if and when the time comes for community living.

A combination of professional help will make the solo aging journey better. An experienced estate planning attorney, financial advisor and health insurance source can help you navigate the legal and business side of your life. Check with your town’s senior center for available social services and activities resources.

Reference: The New York Times (Sept. 21, 2024) “Going Solo: How to Plan for Retirement When You’re on Your Own”

What are the Rules About Inherited IRAs?

It’s fun to imagine a tax-free, no-strings-attached inheritance. However, for most people, an inheritance comes with taxes and distribution rules, some of which are complicated. An Inherited IRA is one of those, says this article from Morningstar, “Inherited IRAs: What do Know About Taxes, RMDs, and More.”

With an Inherited IRA, your relationship with the original account owner impacts what you can and can’t do with your windfall. Provisions in the SECURE Act made Inherited IRAs a little less attractive, especially compared to Inherited Roth IRAs. For some, the rules are too much to navigate, and they take the entire amount of an IRA in cash and pay taxes out of their inheritance, giving up a third or even a half of an inheritance. It’s better to seek the guidance of an estate planning attorney and preserve as much of it as possible.

There are three different kinds of IRA beneficiaries:

Eligible Designated Beneficiary. This is the spouse of the IRA owner, a minor child or children of the IRA owner, a person who is disabled or chronically ill, or a person who is not more than ten years younger than the IRA owner.

Designated Beneficiary. This is not your spouse and doesn’t fit any of the above categories.

Non designated Beneficiary. This is a “nonperson entity,” i.e., a charitable organization or estate.

Which category you’re in determines what your inheritance options are. The best candidate for an inherited IRA is a spouse. They have the option to put the assets into a properly titled Beneficiary IRA, roll it into their employee plan, or transfer funds to their own IRA.

Changes to IRA distribution rules from the SECURE Act impacted designated beneficiaries the most, the most common person to inherit an IRA. The new rule mandates that all funds must be taken out of the account by the end of the tenth year the account was inherited.

You’ll want to speak with your estate planning attorney to learn how your IRA inheritance may impact your current estate plan, since it may change how assets are distributed to your own beneficiaries. You may also want to consider converting some of your own IRA funds into a Roth IRA. Taxes are paid when funds go into the Roth IRA. However, beneficiaries don’t pay taxes on withdrawals.

Inheriting an IRA can lead to changes in your life as well as your estate plan. Take the time to consider your short-term and long-term goals, then consult with an estate planning attorney to make sure you make the best choice for your situation.

Reference: Morningstar (Sept. 13, 2024) “Inherited IRAs: What do Know About Taxes, RMDs, and More”

Do I Need a Will?

Even after living through the global COVID pandemic, many people still don’t understand why they need a will and estate planning documents. One survey revealed as many as 40% thought they didn’t need an estate plan because they don’t have enough assets, says a recent article from Pittsburgh Post-Gazette, “Elder Law Guys: Having a will can bring peace, for you and your loved ones.” Even more worrisome, many of these people have minor children, who will be left unprotected if there is no will naming a guardian for them if their parents should die.

We’ve all read the stories of estate battles following the death of rich and famous people. Regardless of their age, marital status, or notoriety, their personal lives and finances became public headlines without a will and estate planning.

Regular people don’t want their loved ones to go through the mess of an estate battle, even if their personal news won’t become hot news on the internet. Here’s what to do to protect yourself and your family.

Make an inventory of your property. Include everything: your home, bank and investment accounts, personal possessions, retirement funds, life insurance, cars, boats and shares in a family business. Listing out who gets what in your will can avoid some (but not all) fights among relatives and siblings.

Even if you rent a home, if you’re employed and have a 401(k) and a bank account, you’ll want to be sure the people you care about inherit your property.

If yours is a blended family, or if you and your partner aren’t married, estate planning is even more critical. Estate planning is how you ensure that your biological children inherit your assets. If you’re not married, you need to take extra care, so you and your partner protect each other in case of a health emergency as well as for property distribution after death.

For parents of young children, a will is essential. Your will is the document used to name who you want to raise your children—a guardian. Without it, the court will decide, and it may not be the person you would have wanted. Your estate plan is also how you determine how children’s living costs will be paid. Your life insurance policy might belong in a trust, with a trustee named to oversee how funds are distributed to the guardians.

Your will is also used to name an executor, the person who will administer your estate, distribute assets, pay final taxes and estate taxes and ensure that your wishes are followed. An executor needs to be organized, responsible and trustworthy.

An estate plan should include documents to protect you while you are living. These include a Power of Attorney for financial and legal decisions in case of incapacity. A Healthcare Proxy or Medical Power of Attorney is needed so another person can be involved in your medical care, if you’re unable to speak for yourself. An experienced estate planning attorney will also discuss the need for a Living Will and other documents you might want to have.

The peace of mind resulting from having an estate plan in place can’t be measured. Knowing that you’ve protected your loved ones and yourself in life and after you’ve passed is a worthwhile investment.

Reference: Pittsburgh Post-Gazette (Sept. 22, 2024) “Elder Law Guys: Having a will can bring peace, for you and your loved ones”

Why Gen Z Needs to Pay Attention to Estate Planning

Gen Zers may still be young, ages 17–27. However, this doesn’t mean some don’t have ownership and assets to protect with estate planning. Medical emergencies and car accidents happen to people of all ages. An estate plan protects the person as much as their property. The sooner you have a plan in place, says a recent article from yahoo! finance, “Why Gen Z Should Be Thinking About Estate Planning,” the better.

For many young adults, estate planning is like buying rental insurance. You don’t expect to deal with a fire or have your home broken into. However, having insurance means if such events happen, your possessions will be insured, and you’ll be made whole.

Gen Zers who are signed up for employee benefits like 401(k)s or retirement plans already have assets to be passed to another person if they should die young. These accounts typically feature beneficiary designations, so they should be sure to have those completed properly. Many Gen Zers name their parents or siblings as their beneficiaries at this point in their lives. The future may bring new relationships, marriage and children, so they must update these beneficiaries throughout life.

While practically everyone using a cell phone or computer has digital assets, Gen Zers are likely to have more digital currency and crypto in digital wallets. They may have intellectual property on platforms, including TikTok or YouTube. These assets need to be protected in a digital estate plan. The information required to access these accounts should not be in a last will and testament. However, they should be documented so the assets are not lost.

Other digital assets don’t have any value. Users don’t have the right to transfer the assets, like social media accounts or music files. Having a conversation with a digitally savvy person about these assets and providing them with login and account information is an integral part of an estate plan.

Gen Zers do need a will. Without a will, the estate will get tangled up in probate, a court process where the laws of your state determine who inherits any possessions. This takes time and court fees can add up quickly.

Having a will created with an experienced estate planning attorney encourages a review of assets, providing a perspective of finances that one might not otherwise have early in their career.

Estate planning also includes planning who will make medical and financial decisions in case of incapacity. These documents, including a Power of Attorney, Healthcare Proxy, Living Will and other documents, are state-specific. Once someone becomes a legal adult, neither parents nor siblings can be involved with medical care or handle finances, unless these documents are created and executed. Trusted friends can also take on these roles.

A young adult should make an appointment with a local estate planning attorney. They’ll provide guidance through the process. Regardless of age and stage, having a plan creates peace of mind for young adults and their family members.

Reference: yahoo! finance (Sept. 17, 2024) “Why Gen Z Should Be Thinking About Estate Planning”

How Does Grantor Trust Status Have an Impact on Step-Up in Basis and Estate Tax Exclusion?

If you’re considering establishing an irrevocable trust as part of your estate plan, you’ll want to understand how the trust will affect your capital gains taxes and estate tax exclusions. According to a recent article, “This Double-Dip Trust Benefit Really Is Too Good to Be True,” from Kiplinger, there is no double dip. Here’s why.

An irrevocable trust could be considered a grantor trust, meaning the person who made the trust will be regarded as the owner of the trust’s income or principal. The grantor will include trust income, deductions and credits on their own personal taxes, despite the trust not distributing the income to the grantor and the income remaining within the trust. Taxes for personal income are usually lower than trust tax rates, which is one of many reasons to use grantor trusts.

The IRS issued Revenue Ruling 2023-02 in early 2023 as a clarification. Suppose that assets in an irrevocable trust are excluded from the grantor’s gross estate. In that case, estate-excluded assets do not get a step up in basis for capital gains tax under Internal Revenue Code Section 1014, even if the grantor was paying income taxes on the trust income as described above.

The ruling was intended to clarify the confusion surrounding different tax rules: income tax rules, capital gains tax rules and gift and estate tax rules. This wasn’t really a big change; it was just a much-needed clarification

Experienced estate planning attorneys already knew the rule: property transferred to an irrevocable trust under a completed gift doesn’t qualify for a step-up in basis for capital gains tax savings, even if the grantor pays the taxes on the trust.

The people surprised by the ruling believed—wrongly—they could pay trust income taxes under the lower individual tax rates and exclude property from their gross taxable estate, while also gaining a step-up in basis on capital gains taxes.

Using the trust as a grantor so the trust maker pays the trust taxes has never been a valid means of stepping up the basis in completed-gift trust assets outside of the grantor’s gross estate.

Creating a solid estate plan using acceptable strategies with an experienced estate planning attorney will prevent future tax issues for the estate and heirs, which are far more expensive than doing it right the first time.

Reference: Kiplinger (Sept. 15, 2024) “This Double-Dip Trust Benefit Really Is Too Good to Be True”

Why Does Young Family Need an Estate Plan?

If you thought estate planning was just for grandparents, think again. Families with young children should have an estate plan. In fact, they should start working on their estate plan as soon as they know they’ll be welcoming a new member into the family. A recent article from Chronogram, “Why Estate Planning Is Important for Young Families,” explains why this is critical to protecting children.

Without a will, the court will make all kinds of decisions about the children’s lives, from who will raise them to how their living expenses will be paid. The decisions may not be what the parents would have wanted. Family members will still need to undertake expensive and stressful litigation if they want to go against the court’s recommendations.

The Last Will and Testament is used to distribute assets after the owner dies, including the primary residence, bank and investment accounts and personal property. Without a will, the state law determines what happens to the property. Let’s say someone dies with a spouse and young children. In some states, the spouse automatically receives the first $50,000 in value. The rest is divided equally between the surviving spouse and all children.

What happens if the children aren’t old enough to inherit property? Minors are not legally permitted to receive property, including ownership interest in real estate. If there is no will, the court appoints a guardian for the child. This can lead to unnecessary costs and delays in managing the ownership of the home. Having a will where each spouse leaves their property to the surviving spouse prevents this situation.

Wills are also used to appoint guardians to take care of children in the event both parents pass away. Guardianship refers to the person who will raise the children, which is different than managing the financial assets for the children’s living expenses. Parents are often advised to name a person other than the guardian to handle support for the children. Proceeds from life insurance policies, investment accounts, etc., may be better managed by a second person. A trust may need to be created and funded for these assets.

The role of the executor is especially important where minor children are involved. An executor overseeing the management of an estate when small children are involved needs a different mindset than someone distributing assets after the death of elderly parents. Another reason parents of young children must have a will and name a responsible executor is to protect the children’s futures by making sure that resources needed for the children’s support aren’t squandered because of family fights over the estate.

An experienced estate planning attorney can craft an estate plan to fit the family’s needs and protect the surviving spouse and children. There’s no need to leave the decisions up to a court when having a will and related estate planning documents can be prepared to protect the family.

Reference: Chronogram (Sep. 10, 2024) “Why Estate Planning Is Important for Young Families”