Michigan Estate Planning Blog

Should I have a Charitable Trust in My Estate Plan?

 

Charitable trusts can be created to provide a reliable income stream to you and your beneficiaries for a set period of time, says Bankrate’s recent article entitled “What is a charitable trust?”
Establishing a charitable trust can be a critical component of your estate plan and a rewarding way to make an impact for a cause you care deeply about. There are a few kinds of charitable trusts to consider based on your situation and what you may be looking to accomplish.
Charitable lead trust. This is an irrevocable trust that is created to distribute an income stream to a designated charity or nonprofit organization for a set number of years. It can be established with a gift of cash or securities made to the trust. Depending on the structure, the donor can benefit from a stream of income during the life of the trust, deductions for gift and estate taxes, as well as current year income tax deductions when the assets are donated to the trust.
If the charitable lead trust is funded with a donation of cash, the donor can claim a deduction of up to 60% of their adjusted gross income (AGI), and any unused deductions can generally be carried over into subsequent tax years. The deduction limit for appreciated securities or other assets is limited to no more than 30% of AGI in the year of the donation.
At the expiration of the charitable lead trust, the assets that remain in the trust revert back to the donor, their heirs, or designated beneficiaries—not the charity.
Charitable remainder trust. This trust is different from a charitable lead trust. It’s an irrevocable trust that’s funded with cash or securities. A CRT gives the donor or other beneficiaries an income stream with the remaining assets in the trust reverting to the charity upon death or the expiration of the trust period. There are two types of CRTs:
A charitable remainder annuity trust or CRAT distributes a fixed amount as an annuity each year, and there are no additional contributions can be made to a CRAT.
A charitable remainder unitrust or CRUT distributes a fixed percentage of the value of the trust, which is recalculated every year. Additional contributions can be made to a CRUT.
Here are the steps when using a CRT:
Make a partially tax-deductible donation of cash, stocks, ETFs, mutual funds or non-publicly traded assets, such as real estate, to the trust. The amount of the tax deduction is a function of the type of CRT, the term of the trust, the projected annual payments (usually stated as a percentage) and the IRS interest rates that determine the projected growth in the asset that’s in effect at the time.
Receive an income stream for you or your beneficiaries based on how the trust is created. The minimum percentage is 5% based on current IRS rules. Payments can be made monthly, quarterly or annually.
After a designated time or after the death of the last remaining income beneficiary, the remaining assets in the CRT revert to the designated charity or charities.
There are a number of benefits of a charitable trust that make them attractive for estate planning and other purposes. It’s a tax-efficient way to donate to the charities or nonprofit organizations of your choosing. The charitable trust provides benefits to the charity and the donor. The trust also provides upfront income tax benefits to the donor, when the contribution to the trust is made.
Donating highly appreciated assets, such as stocks, ETFs, and mutual funds, to the charitable trust can help avoid paying capital gains taxes that would be due if these assets were sold outright. Donations to a charitable trust can also help to reduce the value of your estate and reduce estate taxes on larger estates.
However, charitable trusts do have some disadvantages. First, they’re irrevocable, so you can’t undo the trust if your situation changes, and you were to need the money or assets donated to the trust. When you establish and fund the trust, the money’s no longer under your control and the trust can’t be revoked.
A charitable trust may be a good option if you have a desire to create a legacy with some of your assets. Talk with an experienced estate planning attorney about your specific situation.
Reference: Bankrate (Dec. 14, 2021) “What is a charitable trust?”

Discretionary Trusts Can Trump Bankruptcy Liquidation

Sometimes giving assets to a loved one in hopes of protecting those assets from future creditors may not be such a good idea. This is especially true when the loved one is a young one. No, if you want your asset protection planning to be successful, then that usually means a trust is necessary. Trusts are incredibly powerful tools for a number of reasons, foremost because they allow you to protect both the beneficiary and the assets. A powerful lesson on trusts recently came out and is featured in a recent Forbes article. It’s the case of re McCoy, 2011 WL 6748388 (Bkrtcy.W.D.Wis., Slip Copy, Dec. 21, 2011) and it’s worth a look. The case focuses on a trust containing a “spendthrift provision” against bankruptcy. A mother set up the trust for her daughter (and soon to be debtor) with her son as trustee. The trust has a spendthrift provision, meaning that the assets are controlled and kept from the beneficiary except in regular distributions. Further, the trust provided that the brother, as trustee, has discretionary control over the distributions, and can release them or hold them in the trust as deemed appropriate in his capacity as trustee. The daughter went bankrupt. Soon thereafter, her bankruptcy trustee soon turned a leering eye to those trust funds. You see, bankruptcy is about marshalling the available assets of a debtor to pay as many debts as possible. However, thanks to the spendthrift provision the trust funds are immediately disqualified from consideration. Why? Because the beneficiary doesn’t “own or exercise control” over them. Nevertheless, the bankruptcy trustee did try to grab an upcoming distribution, thinking it was leaving the trust and therefore fair game. This, too, was denied, because the trustee had discretionary control over its release and simply wouldn’t release it into the hungry jaws of creditors. If the trust had appointed the brother as trustee without granting discretionary powers and, instead, required mandatory distributions, then the distributions would have fallen into the hands of the creditors – but instead it was saved. In the end, there are a few good lessons for the wise in this case. Here are a succinct few advanced by the Forbes author: 1. A well-drafted Living Trust can provide, as here, very substantial asset protection for beneficiaries. Mark me as in the camp that says that children should never be given a significant gift outside of a trust, since children (particularly those with money, but without experience) are prone to develop creditors. 2. A well-drafted non-self-settled trust can provide, as here, very substantial asset protection for beneficiaries. Contrast this with self-settled spendthrift trusts (a/k/a “asset protection trusts” which despite their nickname provide at best highly dubious and almost entirely untested asset protection advantages). See Chart Regarding Effectiveness of Asset Protection Trusts 3. For asset protection purposes, trusts should be drafted as discretionary trusts. Remember: If a beneficiary has a right to the trust assets or payments, etc., so will creditors. To learn more and to successfully set up a trust for your loved ones, you will want competent counsel. This is not a Do-It-Yourself project.

Reference: Forbes (December 28, 2011) “The Real McCoy: Living Trust Provides Spendthrift Protection To Assets Of Beneficiary In Bankruptcy”

Inheritance Protection – You Can Trust A Trust

While planning for your estate addresses many concerns, likely providing your loved ones is at the top of the list. But what if you can fully trust your loved ones to use your gifts wisely and to take care of themselves responsibly? One common alternative is to cut those problem cases out of the will through disinheritance. Nevertheless, as a recent New York Times article points out, those problem cases are all the more reason to make proper estate plans to protect your legacy and to use the inheritance to promote positive change. Problem cases for inheritances aren’t all “problem” children. You know, the gamblers, the drug addicts, and the habitually irresponsible within our families. Oftentimes, the risks to an inheritance do not necessarily originate with the problem child, rather the problems find the child… and their inheritance. Classic examples of inheritance predators include divorces, lawsuits and bankruptcies. Indeed, much of the time the concern is just over the possibility of future problems, ones you can’t foresee while planning your estate today, especially when you’re planning with young children in mind. However, the form of the inheritance can help curb present problems and work to avoid future ones by instilling character. How can you do it? The most powerful tool is the trust for a variety of reasons. At the most basic level, the trust allows limits. Regardless whether money is the cause of the problems, it’s certainly not going to help. A trust can limit the access your loved one has to the money, while still ensuring it is available when they truly need it. Within the concept of a trust, there are many varieties and options to address nearly every concern. For example, there is the “incentive trust.” This trust still restricts funds, but will make funds available if the beneficiary meets certain stated objectives. A classic example may be remaining drug-free for a certain number of years. On the other hand, it can be a character-building trigger like admission to a certain college or graduation from one. In short; the triggers can be just about anything. Experience has demonstrated, however, that this approach is most effective when you are upfront now about rules of the road regarding the correlation between future conduct and availability of the funds. Take the opportunity to pass along your positive values, rather than just set up a future gotcha program for a loved one to “game” after you are gone. For those planners who take a uniquely long view, there also is the option of the “dynasty trust.” It has all of the benefits of a trust, but extends those benefits across as many generations as possible, for as long as the funds last (according to current law), and, quite literally, works to form dynastic wealth. That means that using one properly can mean protecting the family assets from problem inheritors for several generations.

Reference: The New York Times (September 2, 2011) “Using an Inheritance to Teach Your Problem Child a Lesson”

FAMILY ESTATE PLANNING / FINANCIAL TOOLS FOR YOUNG PEOPLE

There is an old saying that can be painfully true, “You are only as happy as your unhappiest child.” One of the most common laments I hear from parents of adult children is that, for whatever reasons, their offspring seem to (repeatedly) need financial assistance … not because of illness of hardship, but simply through poor decision-making. It’s hard to talk-turkey with your adult children, and they seldom listen anyway. But, maybe they will listen to advice from a third-party, especially if that advice is delivered in a manner with which they are most comfortable – fresh, fun and online. American Express has launched Currency (www.getcurrency.com) to provide just that type of advice. They offer online “courses,” and even a new iPhone app, Social Currency for social networking. A recent hot topic: Currency 101: What is “Spending”? Some of other course topics include Buying Your First Home, Get a Handle on Your Taxes, and Managing Student Loans.

Avoiding Bad (Spendthrift) Heir Days

Estate planning is about taking care of your family and loved ones. But what if you have concerns about how your loved ones will use those assets? You spent a lifetime earning what you have through hard work and thrift. So why pass it along only to be squandered? Would you hand over the car keys to a teen who hasn’t proven he or she can drive? As any automobile insurance agent can attest, we spend a good deal of energy (and resources) ensuring that doesn’t happen. I’ve written on this topic before (see this earlier article I reviewed in the New York Times), but The Wall Street Journal recently provided more suggestions worthy of your consideration. An elaborate but effective way of ensuring the financial literacy of your heirs and the security of your family assets can be the formation of a family investment company. Here’s how it works: You establish the company, put your heirs on the board, and have them hold discussions with your financial advisors. Throughout the process, you can look on and ensure that correct decisions are being made. While you may elect to hold back and observe the progress of your heirs, the process may surprise you and exceed your expectations… or it simply may justify your concerns. In any event, the family investment company can make for a great learning experience. For some families, that may entail paying for academic financial lessons, as well as providing a time for inter-generational conversations about the family assets. Regardless, to be most beneficial, the process should be started earlier rather than later and provide for ongoing involvement. The main tool for teaching financial skills and inheritance training usually will be the trust. There are a great many tools at your disposal when you begin a trust and you can tailor them to include incentives or benchmarks to protect the assets and the heirs. Of course, the trust also can be powerful, since it brings the trustees into the mix. Another suggestion to consider is appointing multiple trustees. For example, you may appoint one trustee to manage the purse-strings and another to oversee the heirs and gauge their progress. Depending on how you arrange the trust, the trustees can become powerful gatekeepers to protect the assets and even motivate the heirs. As a result, it is often advisable that you consider appointing someone far removed to be in charge of trust finances, with a family friend to interact with the heirs. In many instances, it is not advisable to appoint a family member as trustee, since this may create intra-family strife. There are many options to consider and these are just a few. What you do will depend on your assets, your heirs, and the specific concerns you hope to address. It is best to discuss your concerns with appropriate legal counsel who understands your situation and can help you determine the best course of action.

Reference: The Wall Street Journal (September 19, 2011) “When You’re Child’s A Spendthrift”

Special Needs Planning – A Changing Landscape

Estate planning is never easy, if only because it means thinking about protecting your loved ones when you’re no longer around. It’s bad enough making plans to protect self-sufficient heirs who take care of themselves and an inheritance. However, it can be a real challenge when planning for heirs with special needs for a variety of personal and legal reasons. Unfortunately, as The Wall Street Journal Online recently pointed out, with the economy and politics as they are, there are new concerns to bear in mind as you plan. Both the State and federal budgets are strapped for cash and the burden is falling on Medicare and Medicaid. It’s up to the Congressional Special Committee to consider the future of Medicare now, but many Medicaid programs already are feeling the squeeze with tighter income restrictions for benefits and services. Of course, much of the disabled population (12% of the overall population) relies on state and federal services for those services that they couldn’t afford in the private market. To plan for an heir with special needs, then, means planning to provide for them without risking their main sources of care. Now, more than ever, that means a “special needs trust,” tailored to provide the inheritance as a safety net without endangering the continuation of benefits. [Sidebar: Sometimes an older parent can make this move kill two birds with one stone. How? They create the trust now for themselves and a loved one with special needs so that both qualify for government benefits, once the “look back” period has past for eligibility disqualification. As budgets get tighter, expect greater governmental scrutiny of such moves.] The other major issue, and a related one, is housing. Many Americans with special needs live in group housing programs. These programs are, in turn, subsidized by government agencies, but are increasingly unable to meet demand and are cash-strapped. For one, the same political/economic pressure is keeping those agencies from expanding. At the same time, there simply are more prospective residents due to lengthening life expectancies. The US would have had to expand its residential-services capacity by 28% to meet the demand as of two years ago. Clearly, housing has been an issue and it will only get worse. Amidst all of this uncertainty, you still need to plan where your loved one will live. This might mean another form of trust. For example, a “Qualified Personal Residence Trust” (QPRT) would provide that you live in your home until your death, but that your family member with special needs would live there (without disqualifying ownership). Great care would need to be given in the preparation of such an arrangement. Also, it may be possible to provide a home to shelter several persons with special needs. For example, say several families pool resources, or even to leave a home to a non-profit that can convert the home into a new group home. The options are limited by your creativity. Ultimately, the best plan will depend on your own unique family circumstances, as well as the current state and federal laws governing benefits and services. Unfortunately, according to a recent study by Arc, an advocacy group, only one-third of affected actually has plans to control what happens when the caregiver grows old and after they are gone. Bottom line: Remember to engage qualified legal counsel to help you navigate the regulatory minefields.

Reference: The Wall Street Journal Online (September 3, 2011) “Taking Care of Disabled Heirs”

Inheritance Protection – You Can Trust A Trust

While planning for your estate addresses many concerns, likely providing your loved ones is at the top of the list. But what if you can fully trust your loved ones to use your gifts wisely and to take care of themselves responsibly? One common alternative is to cut those problem cases out of the will through disinheritance. Nevertheless, as a recent New York Times article points out, those problem cases are all the more reason to make proper estate plans to protect your legacy and to use the inheritance to promote positive change. Problem cases for inheritances aren’t all “problem” children. You know, the gamblers, the drug addicts, and the habitually irresponsible within our families. Oftentimes, the risks to an inheritance do not necessarily originate with the problem child, rather the problems find the child… and their inheritance. Classic examples of inheritance predators include divorces, lawsuits and bankruptcies. Indeed, much of the time the concern is just over the possibility of future problems, ones you can’t foresee while planning your estate today, especially when you’re planning with young children in mind. However, the form of the inheritance can help curb present problems and work to avoid future ones by instilling character. How can you do it? The most powerful tool is the trust for a variety of reasons. At the most basic level, the trust allows limits. Regardless whether money is the cause of the problems, it’s certainly not going to help. A trust can limit the access your loved one has to the money, while still ensuring it is available when they truly need it. Within the concept of a trust, there are many varieties and options to address nearly every concern. For example, there is the “incentive trust.” This trust still restricts funds, but will make funds available if the beneficiary meets certain stated objectives. A classic example may be remaining drug-free for a certain number of years. On the other hand, it can be a character-building trigger like admission to a certain college or graduation from one. In short; the triggers can be just about anything. Experience has demonstrated, however, that this approach is most effective when you are upfront now about rules of the road regarding the correlation between future conduct and availability of the funds. Take the opportunity to pass along your positive values, rather than just set up a future gotcha program for a loved one to “game” after you are gone. For those planners who take a uniquely long view, there also is the option of the “dynasty trust.” It has all of the benefits of a trust, but extends those benefits across as many generations as possible, for as long as the funds last (according to current law), and, quite literally, works to form dynastic wealth. That means that using one properly can mean protecting the family assets from problem inheritors for several generations.

Reference: The New York Times (September 2, 2011) “Using an Inheritance to Teach Your Problem Child a Lesson

Medicare Advantage Maze

Did you know Medicare’s annual election period is just around the corner, October 15 through December 7, to be precise? Now is the time to evaluate your options. Should you stick with your current plan, or is it time to make a change? Would you be better off using Medicare classic or is a Medicare Advantage Plan the e-ticket? This is not planning that you should take lightly, especially when it comes to Medicare Advantage plans. According to a recent article on MarketWatch many seniors simply end up paying too much. Why? Because they either didn’t take the time to evaluate their options, or they didn’t understand the consequences of their decision. About 1 in 4 of all Medicare recipients is signed up through a Medicare Advantage plan – about 11.7 million Americans – and for good reason. Under the right circumstances a Medicare Advantage plan can be much cheaper than pairing Medicare classic with Medigap and prescription drug plans. You just have to choose wisely. Plans vary in many ways, some great and some small, and, without realizing it, you could choose a plan that makes your prescriptions cost several times what another plan would offer. The MarketWatch article’s most telling example is that “people in one Georgia zip code who take 70 mg tablets of osteoporosis drug Fosamax once daily may have annual expenses ranging from $2,661 to $9,032 — depending on which Medicare Advantage plan they pick.” I can understand and appreciate that it’s easy to get confused. You can easily suffer option overload, especially for the 25% of the nation that has 30 or more plan options. To narrow things down, keep a few things in mind. First, how important is your doctor to you? Advantage plans don’t let you choose your doctor. Why? They work as managed-care policies, either health maintenance organizations (HMOs) or preferred provider organizations (PPOs), and specify the networks. So, if you like your own doctor, then you might consider only those plans where your doctor is within the plan network. Realize, however, that keeping your own doctor may come at a price. When it comes to cost, the second and most important detail after choice of doctor, you want to keep updated and run the numbers every year. Plans can change every year by tweaking co-payments here or altering premiums there, not to mention the fact that you might find yourself taking new prescriptions year to year. You need to examine all the changes and actual prices for your prescriptions to get a true picture of your true costs. By the way, when comparing costs, the Medicare website can be helpful with its plan finder tool. Atlernatively, you also can consult experts like those at the Medicare Rights Center or a local organization.

Reference: MarketWatch (September 2, 2011) “Got Medicare? You May Be Paying Too Much”

TRUSTS / INCENTIVE V. RESULTS-ORIENTED

There is an old saying, quite true, that wealth is difficult to amass but easy to squander … especially by those who did not earn it. Many parents – and grandparents – come to us asking how they can leave an inheritance to their loved ones, without “spoiling” them. They want the fruit of their labors – the wealth they pass on – to inspire their loved ones to greater causes, and not cause that dread disease known as “affluenza.” Incentive trusts offer an opportunity to try and nudge younger generations to solid values, but as explained in a recent issue of Palisades Financial’s “Sentinel,” they don’t always work as planned. An incentive trust can be a beautiful tool. Using it you can specify certain benchmarks to be accomplished before the trust can be unlocked. For example, you could specify that your child must graduate from college, get a full-time job, and maybe even become a philanthropist before some or all of the trust funds can be paid out. Alternatively, it can be arranged that the trust pays out to match the beneficiary’s annual income, thus offering the incentive to work harder. The problem is that rigid incentives may defeat your purpose. Some beneficiaries may not learn the intended lessons, but instead learn how to “game the system” and work around the benchmarks either by technically meeting the requirements but not the lessons … or even forge diplomas and pay-stubs to sneak their way in. More worrisome, however, is the beneficiary who does become that “good person” you hoped for, but fails to meet the rigid benchmarks of the trust. If the trust is too rigid, it may not instill the values you had hoped, but instead force a predetermined life-plan upon the beneficiary. The key to a successful incentive trust is a keen awareness of this problem. Sometimes, the same spirit can be better utilized within a results-oriented trust. These are a less intrusive arrangement without set benchmarks, but rather with guidelines to be pursued, a mission statement to be upheld, and the solid judgments of a trustee to carry out the spirit of the trust. The down side, of course, is that this is a more lax approach that may be easier to undermine. It is a difficult line to walk, but if you have come to appreciate the power of using your assets to instill good values then you also appreciate the importance of striking the proper balance. Your best course may be to consult competent counsel and share your unique situation and your goals, and then work together to design a plan with the greatest chance of success for you and your family.

Reference: Shomari Hearn, CFP®, EA. Sentinel. Palisade Hudson Financial Group LLC. (June 17, 2011)  “Do Incentive Trusts Encourage Responsibility?”

TRUSTS / INCENTIVE V. RESULTS-ORIENTED

There is an old saying, quite true, that wealth is difficult to amass but easy to squander … especially by those who did not earn it. Many parents – and grandparents – come to us asking how they can leave an inheritance to their loved ones, without “spoiling” them. They want the fruit of their labors – the wealth they pass on – to inspire their loved ones to greater causes, and not cause that dread disease known as “affluenza.” Incentive trusts offer an opportunity to try and nudge younger generations to solid values, but as explained in a recent issue of Palisades Financial’s “Sentinel,” they don’t always work as planned. An incentive trust can be a beautiful tool. Using it you can specify certain benchmarks to be accomplished before the trust can be unlocked. For example, you could specify that your child must graduate from college, get a full-time job, and maybe even become a philanthropist before some or all of the trust funds can be paid out. Alternatively, it can be arranged that the trust pays out to match the beneficiary’s annual income, thus offering the incentive to work harder. The problem is that rigid incentives may defeat your purpose. Some beneficiaries may not learn the intended lessons, but instead learn how to “game the system” and work around the benchmarks either by technically meeting the requirements but not the lessons … or even forge diplomas and pay-stubs to sneak their way in. More worrisome, however, is the beneficiary who does become that “good person” you hoped for, but fails to meet the rigid benchmarks of the trust. If the trust is too rigid, it may not instill the values you had hoped, but instead force a predetermined life-plan upon the beneficiary. The key to a successful incentive trust is a keen awareness of this problem. Sometimes, the same spirit can be better utilized within a results-oriented trust. These are a less intrusive arrangement without set benchmarks, but rather with guidelines to be pursued, a mission statement to be upheld, and the solid judgments of a trustee to carry out the spirit of the trust. The down side, of course, is that this is a more lax approach that may be easier to undermine. It is a difficult line to walk, but if you have come to appreciate the power of using your assets to instill good values then you also appreciate the importance of striking the proper balance. Your best course may be to consult competent counsel and share your unique situation and your goals, and then work together to design a plan with the greatest chance of success for you and your family. Reference: Shomari Hearn, CFP®, EA. Sentinel. Palisade Hudson Financial Group LLC. (June 17, 2011) “Do Incentive Trusts Encourage Responsibility?”