Estate Planning

Today many estate plans contain irrevocable trusts that will continue for the benefit of a spouse’s lifetime and then for the benefit of several generations. Since these trusts are designed to span multiple decades, it is important that they include a trust protector who will have the ability to adjust the trust provisions as circumstances, beneficiaries, and governing laws change.
 
What is a Trust Protector?
 
A trust protector is an individual or group of individuals who are given the power to insure that the purposes and goals of the creator of an irrevocable trust are ultimately fulfilled. Generally the trust protector may be a family member or friend (typically someone who is not a beneficiary or trustee of the trust), an unrelated trusted advisor, or a group of these individuals acting by majority or unanimous agreement. The choice of who to name as the trust protector will depend on the trust creator’s wishes and the intended duration of the trust.
 
What Powers Should a Trust Protector Hold?
 
A trust protector can be given as few or as many powers as the trust creator desires. While it may be tempting to give a trust protector a wide array of powers to deal with every possible future circumstance, the trust creator should carefully consider the specific purposes and goals for their trust and only give the trust protector powers that will further those purposes and goals.
 
Regardless of a trust creator’s intent, below are three powers that all trust creators should consider giving their trust protectors:
 
1. Power to Amend Trust Provisions. Some irrevocable trusts that are intended to continue for multiple generations begin as revocable trusts that only become irrevocable after the trust creator dies or at some other time in the future. If the trust creator fails to update the trust due to changes in circumstances, beneficiaries, or governing laws while the trust is still revocable, a trust protector can fix these issues after the trust becomes irrevocable.
 
2. Power to Add, Remove and Replace Trustees. Giving this power to the trust beneficiaries may defeat the trust creator’s intent since the beneficiaries may be inclined to hastily remove a trustee who does not give in to their each and every request. Instead, a trust protector can take an objective look at the trustee’s actions or inactions and determine if the trust creator’s intent is being fulfilled or derailed.
 
3. Power to Change Trust Situs and Governing Law. Since it is impossible to predict where the beneficiaries and trustees of an irrevocable trust will live in the future, this power is critical to insure that the trust will continue for as long as the trust creator intended and with minimum tax consequences. Giving this power to the trust protector will allow an objective party to determine if the change will be beneficial or is necessary.
 
Final Thoughts on Trust Protectors
 
Including a trust protector in an irrevocable trust agreement or a revocable trust agreement that will become irrevocable at some time in the future is critical to the success and longevity of the trust. Nonetheless, the trust protector should only be given powers that will insure the purposes and goals of the trust creator are ultimately fulfilled.
 
If you are interested in adding a trust protector to your trust or would like to have the trust protector provisions of your trust reviewed, please call our office.

Today many estate plans contain irrevocable trusts that will continue for the benefit of a spouse’s lifetime and then for the benefit of several generations. Since these trusts are designed to span multiple decades, it is important that they include trust decanting provisions to address changes in circumstances, beneficiaries, and governing laws.
 
What is Trust Decanting?
 
When a bottle of wine is decanted, it is poured from one container into another. When a trust is “decanted,” the funds from an existing trust are removed and distributed into a new trust that has different and more favorable terms.
 
When Should a Trust Be Decanted?
 
Provisions for trust decanting should be included in trusts that are intended to last decades into the future. Decanting allows the following to be addressed:
 
1. Clarifying ambiguities or drafting errors in the trust agreement. As trust beneficiaries die and younger generations become the new heirs, vague provisions or outright mistakes in the original trust agreement may become apparent. Decanting can be used to correct these problems.
 
2. Providing for a special needs beneficiary. A trust that is not tailored to provide for a special needs beneficiary will cause the beneficiary to lose government benefits. Decanting can be used to turn a support trust into a full supplementary needs trust.
 
3. Protecting the trust assets from the beneficiary’s creditors. A trust that is not designed to protect the trust assets from being snatched by the beneficiary’s creditors can be rapidly depleted if the beneficiary is sued. Decanting can be used to convert a support trust into a full discretionary trust that the beneficiary’s creditors will not be able to reach.
 
4. Merging similar trusts into a single trust or creating separate trusts from a single trust. An individual may be the beneficiary of multiple trusts that have similar terms. Decanting can be used to combine these trusts into one trust which will reduce administrative costs and oversight. On the other hand, a single trust that has multiple beneficiaries who have differing needs can be decanted into separate trusts tailored to each individual beneficiary.
 
5. Changing the governing law or situs to a different state. Changes in state and federal laws can adversely affect the administration and taxation of a multi-generational trust. Decanting can be used to take a trust that is governed by laws that have become unfavorable and convert it into a trust that is governed by different and more advantageous laws.
 
Final Thoughts on Trust Decanting
 
Including trust decanting provisions in an irrevocable trust agreement or a revocable trust agreement that will become irrevocable at some time in the future is critical to the success and longevity of the trust. This will help to insure that the trust agreement has the flexibility necessary to avoid court intervention to fix a trust that no longer makes practical or economic sense.
 
If you are interested in adding trust decanting provisions to your trust or would like to have the decanting provisions of your trust reviewed, please call our office.

Many clients use beneficiary designations, and for good reason. Some significant assets, including life insurance policies, IRAs, retirement plans and even bank accounts, allow a beneficiary to be named. It’s free, it’s easy, and, when the owner dies, these assets are designed to be paid directly to the individual(s) named as beneficiary, outside of probate.

But that is not always what happens. For example:

• If your beneficiary is incapacitated when you die, the court will probably have to take control of the funds. That’s because most life insurance companies and other financial institutions will not knowingly pay to an incompetent person; they may insist on court supervision.
• If you name a minor as a beneficiary, you are probably setting up a court guardianship for the child. Life insurance companies and other financial institutions will not knowingly pay these funds directly to a minor, nor will they pay to another person for the child, not even to a parent. They do not want the potential liability and will usually require proof of a court-supervised guardianship.
• If you name “my estate” as beneficiary, the court will have to determine who that is. The funds will have to go through probate so they can be distributed along with your other assets.
• If your beneficiary dies before you (or you both die at the same time) and you have not named a secondary beneficiary, the proceeds will have to go through probate so they can be distributed with the rest of your assets.

Even if the funds are paid to the named beneficiary, things may not work out as the owner intended. For example:

• Some people just cannot handle large sums of money. They may spend irresponsibly, be influenced by a spouse or friend, make bad investment choices, or lose the money to an ex-spouse or creditor. If the beneficiary receives a tax-deferred account, he/she may decide to “cash out” and negate your careful planning for continued long-term tax-deferred growth.
• If you name someone as a beneficiary with the “understanding” that the funds will be used to care for another or will be “held” until a later time, you have no guarantee that will happen. The money may just be too tempting.
• If the person you name as beneficiary is receiving government benefits (for example, a child or parent who requires special care), you could be jeopardizing their ability to continue to receive these benefits.
• If your estate is larger, your choice of beneficiary could limit your tax planning options, causing serious tax consequences for your family.

Beneficiary designations can be quite useful, but they need to be considered as part of an overall estate plan.

In first marriages, the couple generally has the same goals when it comes to their estate planning: take care of the surviving spouse for as long as he or she lives, then whatever is left will go to the children. They may own many of their assets jointly and, at the death of the first spouse, more than likely everything will go to the surviving spouse just as they had planned.
 
But second marriages (after divorce or death of the first spouse) are different. There may be his children, her children and sometimes their children. Each spouse probably has assets they brought into this marriage, and they will want those to go to their own children after they die. At the same time, they will probably want to make sure the surviving spouse will have enough to live on. The estate planning methods relied upon in the first marriage probably will not work.
 
There are similar problems with beneficiary designations. Many people name their spouse as beneficiary of their life insurance, IRAs and other tax-deferred plans to provide for their spouse should they die first. But this can be a problem with second marriages because the spouse-beneficiary can name anyone he/she wants as new beneficiaries or to inherit the proceeds, bypassing the owner’s children. Promises may be made now to include them, but promises can be broken after one spouse is gone.
 
If each has considerable assets, it may be wise keep the assets and estate planning separate. If there will be a pre- or post-nuptial agreement, it should be reviewed by an estate planning attorney.
 
If one spouse has considerably fewer assets than the other, it is possible to provide for this spouse until death or remarriage, then have the remaining assets distributed to the children of the “wealthier” spouse. This is often accomplished through a life estate or QTIP trust.
 
Naming a trust as beneficiary for life insurance policies and tax-deferred plans is often a good choice for second marriages. This will allow the owner-spouse to keep control over how and to whom the proceeds are distributed. The surviving spouse can receive lifetime income, yet the owner-spouse can keep control (through the trust) over the rest of the proceeds. Keeping the proceeds in a trust will also protect them from irresponsible spending, creditors, predators, divorce, remarriage and even estate taxes, if done properly.
 
Be sure to include planning for disability and long-term care. If one spouse becomes ill and Medicaid assistance is needed, the combined assets of the couple will be considered “available assets” to pay for the care of the ill spouse. Long-term care insurance may be needed to protect the assets of one or both spouses.

One area that is often overlooked in the divorce process is the need to update estate planning. Most people would agree that their ex-spouse is the last person they want to inherit their assets when they die—or to have that person make life and death decisions for them. But that is exactly what can happen when these documents are not updated.
 
Beneficiary Designations
Assets that have beneficiary designations (e.g., life insurance policies, employer retirement plans, IRAs, annuities, health savings accounts, investment accounts and some bank accounts) are not controlled by a will or trust. Instead they will be paid directly to the person listed as beneficiary (unless that person is deceased, is a minor, or is incapacitated when the insured dies). Because most married people name their spouse as beneficiary, these should be changed right away.
 
Children and Other Beneficiaries
If you name children as beneficiaries and they are minors when you die, a court guardianship must be established for them until they become age 18—at which time they will receive the entire inheritance. Until then, the other parent (your ex-spouse) could be named by the court to manage the funds. Naming another individual (for example, your parent or sibling) as beneficiary with the understanding they will use the money to care for your children until they are older is also risky. You have no guarantee they will follow your instructions, they may be tempted to use the money for their own needs, and the money would be exposed to their creditors.
 
Naming a trust as the beneficiary instead and selecting your own trustee (which may still be your parent or sibling) is a much better choice. A trustee can be held liable if he/she misuses the trust assets. An ex-spouse can be prevented from having access to the money, and you can control when your children will inherit. Money that stays in the trust is protected from irresponsible spending, creditors, and even spouses. For all these reasons, a trust is an excellent choice as beneficiary instead of an individual, regardless of his/her age.
 
Your Will and/or Living Trust
If you do not update your will or trust, your ex-spouse may inherit your assets. And if he/she remarries, the new spouse and his/her children could inherit your assets, leaving your children and family with nothing.
 
If you have minor children, you need to name a guardian for them in your will. (Even if you have a living trust, a simple will is required to name a guardian and to direct any forgotten assets into your trust.) Upon the death of one parent, usually the surviving parent will become the sole guardian. But if your ex-spouse has also died, had his/her parental rights terminated, or becomes an unfit parent, the court would have to appoint a guardian and would appreciate knowing your choice.
 
Powers of Attorney
Most married couples give each other the power to make health care decisions, including those regarding life and death. Financial powers are also usually given to each other so that one can manage the other’s financial affairs without interruption. These are often quite broad, including the ability to buy and sell real estate, open and close financial accounts, change beneficiary designations, collect government benefits, etc. Instead of your ex-spouse, you can name a parent, sibling, close friend or adult child to have these powers and act for you when you cannot.

Once a child turns 18, parents lose the legal ability to make decisions for their child or even to find out basic information. Learning you cannot see your college student’s grades without his/her permission can be mildly frustrating. But a medical emergency can take this frustration to a completely different level.
 
The following legal documents allow anyone, including a young adult, to name another person to make medical and financial decisions if someone is unable to make them for themself. The person(s) selected should be someone the young adult knows and trusts, and a candid discussion should occur now so they know what their wishes would be. These documents are not expensive, and everyone over the age of 18 should have them.
 
Parents may want to set an appointment with their attorney after each child’s 18th birthday and encourage other parents to do the same for their young adults. Having these documents in place does not mean anyone expects to use them, but everyone will be glad to have them should they be needed.
 
In the Event of Incapacity

• A Medical Power of Attorney gives another person legal authority to make health care decisions (including life and death decisions) if you are unable to make them for yourself.
• A Durable Power of Attorney gives another person legal authority to manage your assets without court interference. Your attorney can write it in such a way that it does not go into effect until you become incapacitated.
• HIPPA Authorizations give your doctors permission to discuss your medical situation with others, including family members and other loved ones.

In the Event of Death

• Most young adults do not have substantial assets, so a simple will is probably all that is needed at this time. It will let the young adult designate who should receive his/her assets and belongings in the event of death.