Why All Parents Need a Will - not (only) a Trust

If you've spent much time around TrustWorthy Lawyer, you may have noticed that I believe strongly in the value of Revocable Living Trusts.  They are not, however, the best solution for everyone. 

In fact, in the legal world, few answers are universally applicable. 

This, however, is as close as I'll come to giving one that is ...

If you are a parent ... you need a will.  

One right you have in drafting a will is to tell the court who YOU want to have care of your children should you (and if relevant their other parent) die before they've reached adulthood or competency. 

Things you might consider in making this decision include your values, extended family relationships, and your religious beliefs.  Who will ensure that your children maintain their relationship with both (or more) sets of grandparents in your absence?  In contrast, if you are estranged from extended family, who will honor that situation and the reasons behind it?  There are few right answers to who you'd chose and why ... but if it were me?  I'd sure want to make those decisions myself and avoid a future court battle between surviving relatives or friends for the ability to influence the upbringing and formation of my children. 

Adding language to your will to address this important concern is well worth the investment. 

What if I change my mind!?

Life happens.

Circumstances change.

Today you may be married with small children.

In the blink of an eye, those children may be married with their own babies and you may be looking at funding long-term care.

The estate plan that is 100% aligned with your life as a young family when you are 35 may well need adjusting by the time you retire in your 60s.

THAT IS A-OK!

Before we begin, a bit of a vocabulary lesson:

Codicil: an addition or supplement that explains, modifies, or revokes a will or part of one.

Revoke: put an end to the validity or operation of a previously executed Will or Trust.  

Should you find yourself needing to change your end-of-life wishes you have 3 basic options.  (But as you'll see, only two are very wise).

Option 1:  Revoke your existing Will or Trust.  Period.

Pro: Likely the cheapest option.  

Con: Leaves you at the whims of intestate succession and offers no medicaid planning. Essentially reverts your planning to before you ever executed a will or Trust.  

Option 2: Execute a Codicil or Amend your Trust

Pro: Still cheaper than Option 3.  Aligns your estate plan with your current wishes. 

Con: Since you now have two valid documents, if not done well, this can lead to confusion.  How exactly do these (the initial Will and the new Codicil) work together?  Exactly which portions of the initial will are now valid and which have been overridden?  Confused?  Exactly! 

Option 3: Revoke previous Will or Trust and redraft

Pro: Eliminates confusion inherent in having two operating documents.

Con: Most expensive due to time necessary for complete redrafting - this is mostly at issue with a Trust.  Redrafting a will isn't as significant of an undertaking.  

Conclusion - Option 1 is almost never going to be a wise decision.  The pro v. con calculus between options 2 and three really depends on the specifics of your case and whether we are dealing with a Trust or a Will.  Contact your friendly-neighborhood-attorney to discuss the specifics of your case! 

Is a Trust really for Me?

Often clients approach me expressing an interest in having a will drafted so that they can make plans for the eventual distribution of their assets upon death.  Often one of the first questions I ask is:

"Have you considered moving your assets into a Trust and allowing for their management and eventual distribution though this method?"

To which they reply more often than not ....

"Aren't trusts just for exceptionally wealthy people?"

My answer is simply "NO!"

For the majority of my clients, a Revocable Living Trust is truly the best option when it comes to end of life asset management.

Benefits of a Revocable Living Trust include the following:

1. Avoiding Probate (costs, delays, publicity)
2. Maintaining Privacy of family assets and distribution allocations.  
3. Greater control over the use of family assets
4. Ability to ensure the financial security of dependents that also rely on SSI or other need-based government benefits.
5. Protection of a spend-thrift beneficiary from their own financial mis-management. 
6. Management of grantors assets in the case of incapacity prior to death.

For individuals or couples with high net worth (currently somewhere above 5.3M per person), more complicated tax planning is wise to avoid estate taxation.  This however, is a blog post for another day.

Special/Supplemental Needs Trust

Individuals living with a disability often need to avail themselves to public assistance at some point in time.  In order to qualify for this assistance, guidelines require that the individual first be impoverished. The threshold at which someone no longer qualifies for assistance is around $2K-$3K.

Unfortunately, while public assistance may provide certain necessities, it does not allow for the quality of life many of us would like our loved-ones or ourselves to enjoy.  A Special or Supplemental Needs trust can help bridge that gap.

See below a sample of items which could be purchased by a trustee with assets held in trust:

1. medial equipment or treatment not covered by Medicaid
2. Adaptive equipment not covered by Medicaid
3. cell phone and service
4. Hobby supplies and fees
5. tuition and school supplies if no other funding source exists
6. prepaid funeral expenses
7. computer equipment
8. personal care items
9. vacations
10. pet/pet supplies

Things the trustee cannot purchase with trust assets:

1. gift for people that are not the beneficiary
2. Beneficiary’s basic needs, such as food, shelter, clothing and medical care.
3. cash payments directly to the beneficiary

This type of trust can either be self-funded or funded by someone else.  If it is self funded, it is called a Special Needs Trust and if it is funded by someone else, a Supplemental Needs Trust.  The primary difference is that at death, any funds left in a Special Needs trust go to the state or agency to reimburse for care provided.  In a supplemental needs trust, any excess goes to a remainder-man beneficiary defined by the grantor.

Estate Tax Planning

Last week we looked at a few benefits of Revocable Living Trusts that are applicable to individuals or couples of most any net worth.

Today's post is directed to individuals whose net estate is anticipated to be above ~$5.3M as of 2014.  This number is known as the estate tax exemption and is available for any given year on the IRS's website.  In the past 10 years, this exemption has been as low as $1.5M, so depending on what decisions congress makes in upcoming sessions, the need for estate tax planning may increasingly apply to individuals or couples with mid-range estates.

There are a variety of irrevocable trust documents which can be used to plan one's estate to legally minimize estate tax liability.  The basic goal is to systematically remove assets from your taxable estate prior to death while not inhibiting your ability to provide for needs and quality of life in the mean time.

• By making use of the annual gift exclusion ($14,000 per donor per recipient in 2014), you may be able to shift ownership of assets without incurring gift or estate taxation on the transfer.  A married couple with 2 married children and 4 grand children would be able to gift a total of $168,000 per year tax free. 

• With enough advance planning, wise transfers of assets that are likely to appreciate in value into a GRAT or Granter Retained Annuity Trust can shield your estate from the inclusion of the appreciated value.

• If you have a particular interest in leaving a portion of your estate to one or more charitable organizations, unique trust instruments such as the CRAT (charitable remainder annuity trust) or the CRUT (charitable remainder unitrust) make doing so tax advantageous.  

An experienced Estate Tax attorney can help you analyze which assets you have that might be best suited for inclusion in an irrevocable living trust as well as what trust instruments might help serve your individual interests.

Will/Trust Considerations

So you've made an appointment to meet with your attorney regarding your Estate Plan?  Here are a few things to consider when determining your desired distributions....

1. What do you own?
1. This can include real estate, investments, cash, jewelry, guns, artwork, life insurance policies, the family business, and an almost unlimited list of other assets.
2. How do you own these items?
1. Joint Tenancy
2. Tenants in Common
3. Tenancy by the Entirety
4. Marital Property
5. Separate (non-marital property)
3. Do you have minor children?
1. If so, who would care for them in your absence?
2. Do you feel comfortable with them (or any other beneficiary) receiving the full payout of inherited money when they turn 18?  
4. Who should get each of your assets in #1 above?
5. What happens if a desired beneficiary 
1. is dependent on governmental need-based benefits and will be disqualified by an inheritance?
2. has proven irresponsible with money and would not have the skills or sophistication to manage an inheritance?
3. Is indebted and would loose any inheritance to debtors?
4. Is a minor whose caregiver you would not trust with the assets? 
6. When should beneficiaries receive their inheritance?
1. When they turn 18?
2. 25?
3. Graduate College?
4. Get Married?
5. Some other point in time?
7. Do you anticipate relying on Medicaid at some point before your death?  
8. Who do you trust?
1. to care for your minor children (see #3.1)
2. To be responsible for distributing your assets according to your expressed wishes?
3. To manage your assets should you become incapacitated before death (in the case of an RLT)

Feel free to add any additional thoughts in the comments!