Paul O. Dillon, Attorney at Law

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”

Pros and Cons of Probate in Estate Planning

While some jurisdictions have revised probate laws to help settle smaller estates faster, others are not so accommodating. Probate today may not be as onerous as in the past. However, there are some drawbacks, according to a recent article, “Bypassing Probate,” from Cape Gazette. Among them are the probate costs, which vary by the estate size. For substantial estates, the cost may be as much as 5% of the estate’s total value.

If you’d like to avoid having your estate go through probate, an experienced estate planning attorney can help. Here are several strategies to discuss during your consultation:

Transferring assets to a revocable living trust. Consider the trust a separate legal entity created to own your assets. A revocable living trust, also known as an inter vivos trust, allows the creator (the grantor) to have full control as the trustee during their lifetime. They can add or subtract assets, change the beneficiaries at will and even terminate the trust.

When the grantor dies, the successor trustee follows the directions in the trust to distribute assets to trust beneficiaries. Revocable trusts don’t protect assets from creditors, estate creditors, or estate taxes. You may choose to use an irrevocable trust, which offers more protection but requires the grantor to yield control of the trust.

For some assets, ownership through joint tenancy with rights of survivorship (JTWRS) makes sense. This is typically done with real estate property. If the family home is not already owned this way, you must amend the real estate deed and title. Other assets like cars, boats, stocks and bonds, mutual funds and bank accounts can be titled JTWRS.

Be mindful of how any JTWRS changes may impact the share of assets you leave to heirs. For example, if you intend to distribute your assets equally among several children and the family home ownership is changed to JTWRS with one child, your estate distribution may become lopsided.

Check on your beneficiary designations. Accounts allowing for beneficiary designations include life insurance, IRAs, 401(k)s and brokerage accounts. Ensuring beneficiaries are correct is a common estate planning mistake and can have big repercussions. If you opened the accounts twenty years ago and have had major life changes, the beneficiary may be someone who isn’t part of your life anymore. Your will does not control these assets, so whatever your will says won’t matter.

Make gifts while you are living. These must be carefully planned to manage any tax liabilities; your estate planning attorney can help with this. Gifts to your spouse or qualified charities can be made tax-free, as can tuition payments made directly to an educational institution and medical expenses made directly to a healthcare provider.

Consult with an estate planning attorney to find which asset protection and distribution tools best suit your estate. You may be surprised to learn how much a well-designed estate plan can accomplish so much to protect you and your family.

Reference: Cape Gazette (April 21, 2024) “Bypassing Probate”

Can You Set Up a Trust After Death?

If you want the power of a trust without the work of maintaining it, a testamentary trust may be the right solution for your estate plan. Estate planning attorneys rely on many trusts, but two categories are most common: inter vivos trusts, trusts set up during your lifetime to offer the most flexibility, and testamentary trusts, as described in the article “Trusts can be created after death” from The News-Enterprise.

For an inter vivos trust, the grantor (the person making the trust) places property into the trust. These assets are thereby removed from the probate estate and pass directly to beneficiaries. Placing property into the trust requires having assets retitled and some trusts pay taxes. Not everyone wants to do the work. However, it is not onerous unless the estate is large, in which case an estate planning attorney can manage the details.

The testamentary trust is quite simple. The terms and directions for the trust are the same as in inter vivos trust but are inside the last will and testament. There is no separate trust document. The trust is located within the will.

The costs of creating a testamentary trust are lower, since the trust does not exist until the person dies. Your executor is responsible for transferring assets into the trust. Many wills contain “trigger” trusts, which only become effective if pre-determined circumstances of the beneficiary occur to trigger the trust. If a beneficiary becomes disabled, for instance, the provisions become active.

There are some disadvantages to be aware of, which your estate planning attorney can explain if they pertain to your situation.

Testamentary trusts must by their nature go through probate before they are created. People use trusts to protect their privacy. However, a testamentary trust becomes part of the public record as part of the probate estate. With a testamentary trust, trust documents are private during your life and after you have died.

If dependents require funds from the trust because they are disabled or dependent, they must wait until the grantor dies and probate is completed, since the trust does not exist until after probate. As most people know, probate does not always occur in a timely manner.

Other issues: some life insurance companies may not permit a testamentary trust to be a beneficiary. The trust may only be funded with assets left after creditors have been paid. If there is a home to be sold, assets may not be available for a year or more.

Testamentary trusts do not shield assets during your lifetime, another key benefit for using a trust.

Testamentary trusts offer certain means of controlling distribution of assets after death, but should be considered with all factors in mind, benefits and drawbacks. In estate planning, as in life, it is always best to prepare for the unexpected.

Reference: The News-Enterprise (Feb. 8, 2022) “Trusts can be created after death”

Is it Better to Have a Living Will or a Living Trust?

A living will and a living trust are part of an estate plan that achieves the goals of protecting you while you are living and your loved ones when you have passed. You may need both, but before you make any decision, first know what they are, says the article “Living Will vs. Living Trust” from Yahoo! Finance.

A living will is a legal document used in healthcare decision making. It offers a way for you to provide in exact terms what kind of medical care and treatment you want to receive in end-of-life situations. They are not fun to contemplate, but the alternative is leaving your spouse or children guessing what you would want and living with the consequences. By having a living will prepared properly with your estate planning attorney (to ensure that it is valid), you tell your loved ones what you want. They will not be left guessing or fighting among each other. The treating physicians will also know what you want.

This is different from an advance healthcare directive, which also deals with medical situation but from a different angle. The advance healthcare directive is used to name an agent who will act on your behalf to make medical decisions. It is used in situations other than end-of-life care. Let’s say you are incapacitated by an illness. That person is authorized to make medical care decisions on your behalf.

A trust is a legal entity that lets you transfer assets to the ownership of a trustee and has little to do with your healthcare. The trustee is a person named to be in charge of the trust. He is considered a fiduciary, a legal standard requiring him to put the interest of the trust above his own. A living trust is one of many different kinds of trusts.

Living trusts are also known as “inter vivos” trusts and take effect while you are alive. You (the grantor) are permitted to serve as your own trustee. You should name one or more successor trustees, who can take over just in case something happens to you. You can also name someone else to be the trustee. That is usually a trusted person or a financial institution.

Living trusts may be revocable or irrevocable. When they are revocable, assets transferred to the trust can be moved in and out of the trust as you like, as long as you are alive. You can add assets, remove assets, change the named beneficiaries, or even change the terms of how the assets are managed.

An irrevocable trust is just as it sounds—once it’s created and funded, those assets are permanently inside the trust. There are some states that permit “decanting” of a trust, that is, moving the assets inside a trust to another trust. Your estate planning attorney will know if that is an option for you.

So, do you need a living will or a living trust? You probably need both. The living will deals with your healthcare, while the living trust is all about your assets. Do you need a trust? Most estates will benefit from some kind of a trust. Depending on the type of trust, it may let you protect assets against creditors, give you control postmortem of how and when (or if!) your beneficiaries receive their inheritance, and removes the assets from your taxable estate. Both are important tools in a comprehensive estate plan.

Reference: Yahoo! Finance (Feb. 18, 2021) “Living Will vs. Living Trust”

How Do I Know When My Kids Should Get Their Inheritance?

A common question in estate planning is determining the appropriate time for children to have access to their inheritance.

Wealth Advisor’s article asks, “When Should Children Have Access To Their Inheritances?” The article looks primarily at distributions from trusts created by a will (testamentary trusts). However, these considerations also apply to trusts created during your lifetime, which are called inter-vivos trusts.

One big difference between your will and lifetime irrevocable trusts, is that during your lifetime, your will can be updated and changed.  However, amending or changing, a lifetime irrevocable trust is much more difficult. Usually it requires a statutory solution (decanting) or permission from the courts.

Distributions can be discretionary, mandatory or event-driven. A common distribution structure includes mandatory distributions at specified ages, such as at 25, 30, and 35. A third of the principle is distributed at age 25, with half of the balance doled out at age 30, and the remaining balance distributed at age 35.

In addition to mandatory distributions, a trust can provide that the trustee has the authority to make either fully discretionary distributions or distributions under some “ascertainable standard,” such as for the beneficiary’s health, education, maintenance, and support.  However, detailing only mandatory distributions or event-based distributions significantly reduces the fiduciary’s flexibility.

A trust should be created with the help of an experienced estate planning attorney. He or she will help guide your decisions about trust distributions, that include both the principal and the income generated by that principal.

In many situations, when an estate plan is designed, you may not be sure of the ultimate size of your children’s inheritance. In that case, your attorney can help you plan for an income stream in today’s dollars, as well as a cost of living adjustment to account for inflation. This will eliminate any mandatory income distributions that may mean large distributions to children at relatively young ages.

Another way to go is to leave the income distributions to the discretion of the trustee. With more flexibility for the fiduciary, distributions can be made based on what your heirs need at that time.

Reference: Wealth Advisor (July 30, 2018) “When Should Children Have Access To Their Inheritances?”