Stone Law Offices, Ltd.

What's the Difference Between a Life Estate and an Irrevocable Trust?

“Whether you’re preparing your estate to pass on to loved ones or helping guide a parent in that process, estate law can be tricky and unfamiliar ground. One of the most important aspects of estate preparations is figuring out what to do with one’s home and property.”

Investopedia’s recent article asks “Life Estate vs. Irrevocable Trust: What's the Difference?” The article explains that a life estate and an irrevocable trust are two different ways to make certain that assets are transferred to the right party. Each of these has advantages and disadvantages.

A life estate that’s used to gift property will divide the ownership between the giver and receiver. Some parents create a life estate to reduce their assets to qualify for Medicaid. While the parent still has some interest in the property, Medicaid doesn’t count it as an asset. A life estate lasts for the lifetime of its creator and it prohibits the selling of the asset, without the permission of its beneficiaries. Therefore, a parent can’t sell a home without the permission of his children, if they are beneficiaries of the life estate.

If you’re attempting to be eligible for Medicaid and are concerned that your home will disqualify you, ask your estate planning or Medicaid planning attorney about an irrevocable trust. With this trust, if a husband and wife both own a home, the husband can transfer his portion to his wife, and his Medicaid eligibility won’t include the home.

There must be a five-year gap between the creation of the trust and the application for Medicaid. If there isn’t, those funds will be counted as part of existing assets when determining Medicaid eligibility. Therefore, you can’t start an irrevocable trust right before you apply for Medicaid, if you want to receive those benefits.

One negative of an irrevocable trust is that the founder of the trust relinquishes any rights he has to the home. However, the beneficiary of the trust can’t sell the home, unless he or she is also named as a trustee. Once an irrevocable trust has been created, the trustee can’t take back control of the trust.

Remember that a life estate and an irrevocable trust aren’t always mutually exclusive. It’s possible to place an asset (like a home) in an irrevocable trust and keep a life estate. In that case, you’re irrevocably transferring ownership of your house to the trust. However, you still keep control. In this case, you are permitted to sell the home, remodel, or rent out a room, but the house itself—or the sales proceeds from it—would remain in the irrevocable trust.

In this situation, a parent would also not risk giving their children part of the tax liability that is associated with owning a home. The parent would keep more personal control over the house and wouldn’t need their child’s permission to sell the home. This may be the best option because it would still allow the parents to apply for Medicaid and not have the property count in their assets, but he or she would remain the sole decision-maker for the house.

Both have their pros and cons, but a combination of the two can often be the best answer. Make no moves either way, without the advice of an experienced elder law attorney.

Should I Get Attorney to Write My Will?

“Estate planning can be tricky, which is why many people turn to attorneys to get the job done right.”

Drafting a will is an essential part of estate planning. Even though it’s vitally important, a recent survey from AARP revealed that two out of five Americans over the age of 45 don’t have one.

The Reflector’s recent article, “Things people should know about creating wills,” says that writing your wishes down on paper helps avoid unnecessary work and stress when you die. Signing a will allows heirs to act with the decedent’s wishes in mind and also will make certain that assets and possessions go to the right people.

Estate planning can be complicated. That is the reason why many people turn to estate planning attorneys to make sure this important task is done correctly and legally. Here are some of the estate planning topics to discuss with your lawyer:

List of Your Assets. Create a list of your assets and determine the ones covered by the will and those that will have to be passed through joint tenancy on a deed or a living trust. For instance, life insurance policies or retirement plan proceeds will be distributed by the beneficiaries you named in each account. Remember that your will can list other assets, like memorabilia, antiques, cars and jewelry.

Naming a Guardian. Parents with minor children should definitely designate the person or persons whom they want to become guardians, if they were to die unexpectantly. They can also use their will to name a person who will be in charge of the finances for the children.

Remembering Your Pets. It’s common for pet owners to use their will to detail guardianship for their pets and to leave money or property to defray the cost of their care. However, remember that pets don’t have the legal capacity to own property, so don’t leave money directly to pets in a will. A pet trust is legal in most states and is the best way to leave money and name a caretaker for your pets.

Stating Your Funeral Instructions. Settling probate won’t occur until after the funeral. As a result, any funeral wishes in a will frequently aren’t read until after the fact.

Designate an Executor. This is a trusted individual who will execute the terms of the will. He or she should be willing to serve and be capable of executing the will.

Those who die without a valid will become intestate. This will result in their estate being settled, based on the laws of where that person lived. A court-appointed administrator will have the authority to transfer the assets and property. This administrator is bound by the state’s intestacy laws and may make decisions that go against the decedent’s wishes. To avoid this, work with an experienced estate planning attorney to draft a will and other estate planning documents.

What Should I Look for in a Trustee?

“Do not put off finalizing and signing your estate planning documents, just because you have reached an impasse on who to name as trustee.”

Selecting a trustee to manage your estate after you pass away is an important decision. Depending on the type of trust you’re creating, the trustee will be in charge of overseeing your assets and the assets of your family. It’s common for people to choose either a friend or family member, a professional trustee or a trust company or corporate trustee for this critical role.

Forbes’s recent article, “How To Choose A Trustee,” helps you identify what you should look for in a trustee.

If you go with a family member or friend, she should be financially savvy and good with money. You want someone who is knows something about investing, and preferably someone who has assets of their own that they are investing with an investment advisor.

A good thing about selecting a friend or family member as trustee, is that they’re going to be most familiar with you and your family. They will also understand your family’s dynamics.  Family members also usually don’t charge a trustee fee (although they are entitled to do so).

However, your family may be better off with a professional trustee or trust company that has expertise with trust administration. This may eliminate some potentially hard feelings in the family. Another negative is that your family member may be too close to the family and may get caught up in the drama.They may also have a power trip and like having total control of your beneficiary’s finances.

The advantage of an attorney serving as a trustee, is that they have familiarity with your family, if you’ve worked together for some time. There will, however, be a charge for their time spent serving as trustee.

Trust companies will have more structure and oversight to the trust administration, including a trust department that oversees the administration. This will be more expensive, but it may be money well spent. A trust company can make the tough decisions and tell beneficiaries “no” when needed. It’s common to use a trust company, when the beneficiaries don’t get along, when there is a problem beneficiary or when it’s a large sum of money. A drawback is that a trust company may be difficult to remove or become inflexible. They also may be stingy about distributions, if it will reduce the assets under management that they’re investing. You can solve this by giving a neutral third party, like a trusted family member, the ability to remove and replace the trustee.

Talk to your estate planning attorney and go through your concerns to find a solution that works for you and your family.

What are the “Six L’s” of Small Business Planning?

“Small-business owners pour their blood, sweat and tears into their enterprises, so it’s no wonder that such dedication can cause a little tunnel vision. In being so focused on day-to-day operations, owners often fail to spend the appropriate time on personal planning.”

Failing to conduct long-term personal planning can create a reality, where a business owner under-insures and underinvests outside her own companies.

Think Advisor’s recent article, “The 6 L's of Small-Business Planning” says that a successful business essentially becomes a security blanket. That’s because business owners don’t adequately prepare for events that could change the course of their financial well-being. It’s critical to address the important events that can disrupt everything personal and business.

Liquidity: If a business owner has to write a big check for some unexpected repairs after a storm, the money must come from somewhere. Small businesses rarely have substantial liquidity, because so much of their capital is tied up in the company. Therefore, a line of credit is the most frequent solution for owners with this situation.  You should instead try to ensure that you have access to cash in the short term, if necessary.

Long-term disability: In many instances, business owners are the main contributors to their small company’s success. If they can’t work, the whole company can suffer. She should have a plan to protect against this scenario. First, it is important to identify who can step into a leadership role for a short time. If the disability is long term, examine the ways in which it might affect the company’s value and succession plan. You can purchase business overhead insurance or policies that offer income replacement. You can also create buy-out agreements, so key employees can buy out the disabled business owner.

Loss of life: In the event that an owner suddenly dies, you should have life insurance to fund a buy/sell plan. Without a plan, you may become forced to work with your deceased business partner’s spouse.

Long-term care: Baby boomers with business wealth may wonder what will happen if they need significant medical care, which is a legitimate concern. There’s an additional consideration: the elderly parents of business owners. If an owner steps away to help provide care for an ailing parent, the potential disruption to the company may be significant. Look at where the capital is going to come from, to offset the cost of long-term care for family members, because you don’t want a forced liquidation of business assets.

Longevity: Consider the impact to the company, if the owner has an unusually long life. This should include an examination of how that person’s role will change and who will succeed them through phases of potentially decreasing interest and capacity.

Legacy/legal: Look at what the business owner envisions as her legacy for the future. There are numerous types of trusts, gifts and legal vehicles can be used to help make certain that the business won’t be ruined by taxes, when ownership is passed to the next generation. Talk to an estate planning attorney about doing this the right way.

At each annual business review, review your plans to see if they can still be effective responses to the six Ls of small business planning.

Joint Tenancy Alternatives

Joint tenancy might seem like a simple way for two or more people to hold property together. However, this form of ownership can create problems, like inheritance issues. For example, a son and daughter inherit a home from their father as joint tenants with right of survivorship (JTWROS). Later, the daughter dies. What happens to her interest in the home? Her children will not inherit their mother’s share, because their uncle now owns 100 percent of the house as the surviving joint tenant.

If you want your child to inherit your home without the delays and expense of probate, you might think that retitling the property to yourself and your child as JTWROS is a simple and inexpensive way to accomplish those goals. There are several dangers to this strategy.

A JTWROS is irrevocable. If things go sour between you and your child, you can only take your child off of the title to the home with his written permission.

Your child can sell his ownership interest to someone, and you will get stuck with that person having an equal right to live in the home with you. Your child does not have to get your consent to transfer his interest in the property. You gave up half of your right to your own home and all of the control over that one-half interest.

Creditors of your child can come after his one-half share of the home. You might have to pay off his creditors to keep them from foreclosing on the home. This scenario could play out repeatedly.

People who set up their wills or trusts passing property to two or more people as JTWROS might not understand the consequences of this designation. The person making the will or trust might not intend to “disinherit” their grandchildren, and the person who enters into a JTWROS with his adult child might not realize the pitfalls.  He might not have known he had other options. There are several alternatives to joint tenancy.

Beneficiary Deed

If you execute a beneficiary deed, instead of a JTWROS arrangement, your child has no current interest in the home (and neither do his creditors). He only receives rights to the property upon your death. You can revoke the beneficiary deed at any time, which makes this option a better choice than a life estate, which is irrevocable. Note: Not all states have statutes authorizing beneficiary deeds, but an increasing number of states are moving in that direction.

TOD and POD

For non-real estate assets, think TOD and POD to avoid probate. For example, you can name your child as the beneficiary of your bank or investment account with the magic words “transfer on death” or “payable on death” (depending on the type of account) on your account with the financial institution.

Community Property

For married couples who want to avoid probate, holding title to real property as Community Property with Right of Survivorship (CP-WROS) might provide some tax advantages over jointly titled property and allow you to avoid probate. The rules governing CP-WROS vary from state to state.

Trust Agreement

You can transfer your assets to someone upon your death and avoid probate, by using a living trust.  The trust will ideally be revocable, so you can change your mind at some later date. There are many types of trust agreements you can use, depending on the purpose of the trust and what you want to accomplish.

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Why Is Life Insurance a Wise Move in Estate Planning?

“Regardless of life stage or family structure, if you have people who depend on you, purchasing a life insurance policy guarantees them financial support, should something happen to you.”

There are several ways to make certain that the family you leave behind, is taken care of. However, financial security is a top priority in estate planning. One of the basic ways to provide this is through a life insurance policy. This can be used to cover major expenses, like funeral costs or outstanding debt, and it can also provide longer-term support, like supplementing income lost with the passing of a key breadwinner.

Forbes’ recent article, “How To Choose A Life Insurance Beneficiary” reminds us that there’s the task of determining who in your family needs this coverage, how much will they need and for how long. Important factors include whether you have a spouse or partner who depends on you, younger children who need care, or parents that will need financial help. Selecting a beneficiary isn’t always a clear-cut decision, and there are several other components to the equation that should guide your decisions.

Age matters. It makes sense that a parent would want to designate a non-adult child as a beneficiary because of their lack of income. However, it is important to consider the process that comes with that decision. Naming a minor as a beneficiary will provide much-needed coverage, but they won’t have access to the funds until they’re adults. If they need to access the assets in the policy prior to reaching adult age, the funds will have to be placed in the hands of a guardian.

Type of Policy. As time goes on, your family may need your financial income less, and that’s where understanding the difference in whole and term life policies plays an important part. If financial coverage is needed most when your children are of a certain age, buying a term life policy lets you to control that. A term policy will only be paid out to your beneficiary, if you die during a fixed span of years (e.g., 10, 20, 30-year policy). In contrast, whole life insurance lasts your whole life. Your children will likely be grown, but the policy proceeds could be used for your grandchildren.

Designating multiple beneficiaries. You may have several individuals who are dependent on your income or who’d have trouble financially, in the case of your absence. If you’re having a hard time choosing between a spouse, parent, or child, it is possible to select multiple beneficiaries. Elections can also vary in coverage. This lets you choose the right portion of your policy designated for each beneficiary you name.

Contingent Beneficiaries. If you leave your policy to just one person, have a backup or a contingent beneficiary. The primary beneficiary is an initial person to whom you leave your life insurance policy, and a contingent is the second in line to inherit the policy, if the primary beneficiary dies.

Beneficiary designations can change. Beneficiary designations aren’t set in stone. You can change beneficiaries, in the event of major life changes.

Selecting a beneficiary is an important part of the life insurance process. Beneficiaries should be those who’d be most affected by your passing.

Do I Need a TOD Account?

“Transfer on death (TOD) accounts can keep your estate planning intact, while keeping your beneficiaries out of court. If you’re among the 57% of adults who don’t currently have a will or trust, your family is likely headed to probate court.”

A Transfer-on-Death (TOD) account can eliminate a legal problem, by moving your assets without leaving them in your will.

Yahoo Finance’s recent article, “Transfer on Death (TOD) Accounts for Estate Planning” explains that a transfer on death (TOD) account automatically transfers its assets to a named beneficiary when the holder dies. TOD account holders can designate multiple beneficiaries and divide assets any way they want. However, the beneficiaries have no rights to a TOD account, while its owner is alive. The beneficiaries can also be changed at any time.

When a person with a TOD account dies, the executor will deliver a copy of the death certificate to an agent at the account’s bank or brokerage. The account is re-registered in the beneficiary’s name. A TOD account sidesteps the probate process and takes precedence over a will.

If you have a surviving spouse as your joint owner, investment and bank accounts will go to them before going to a TOD account beneficiary. Based on state law, a beneficiary may receive the assets of a TOD account, only after a joint owner spouse’s death, if at all.

A TOD account can be divided among several beneficiaries, but it doesn’t have to be done so equally.  A TOD account with someone under 18 as a beneficiary, could also be a problem because minors can’t control investment accounts. You would need to name a guardian or set up a trust (and name a trustee).

As you start the estate planning process, an experienced estate planning attorney will be a big help in organizing your finances and accounts. Talk to them about your overall estate plan objectives.

Do I Need a Spendthrift Trust for a Relative?

“Sometimes you have to hold the reins tight, especially when it comes to money. A spendthrift trust does exactly that.”

Newsday’s recent article, “What to consider when creating a 'spendthrift' trust,” explains that a spendthrift trust protects people from themselves. It can be a great protection for those with an issue with drugs, alcohol, gambling or even a person who’s married to a wild spender.

A spendthrift trust—also called an “asset protection trust”—gives an independent trustee the power to make decisions as on how to spend the funds in the trust.

The beneficiary might get trust benefits as regular payments or need to ask permission from the trustee to access funds at certain times.

A spendthrift trust is a kind of property control trust that restricts the beneficiary’s access to trust principal (the money) and maybe even the interest.

This restriction protects trust property from a beneficiary who might waste the money, and also the beneficiary’s creditors.

Remember these other items about asset protection trusts:

• Be sure that you understand the tax ramifications of a spendthrift trust.
• If the trust is the beneficiary of retirement accounts, the trust must be designed to have the RMDs (required minimum distributions), at a minimum, flow through the trust down to the beneficiary.
• If the trust accumulates the income, it could be taxable. In that case, the trust would have to pay the tax at a trust tax rate. That’s substantially higher than an individual rate.

It's critical that you choose your trustee carefully. You may even think about going with a professional corporate trustee.

If the wrong trustee is selected, he or she could keep the money from the beneficiary, even when the beneficiary legitimately needs it.