Michigan Estate Planning Blog

Should All of My Assets Be in a Trust?

 

By now, you may have heard about the “great wealth transfer,” which refers to Americans inheriting as much as $72 trillion over the next twenty years. Do you have a plan in place for your family? A recent article, “Is a Living Trust Really the Best Way to Pass an Inheritance to Your Family?” from The Motley Fool, explains how this estate planning tool works.

How does wealth pass to heirs? One way is a Last Will and Testament. However, a Living Trust may be better. The Living Trust is the creation of a legal entity, the trust, which allows the person creating it—the grantor—to control the trust and the assets in it during their lifetime. When the grantor passes, the secondary trustee takes over, managing assets in the trust and distributing them according to the language in the trust.

A living trust isn’t for everyone. There are definite advantages. However, there are also some disadvantages you’ll want to understand before deciding if this is for you.

Living Trusts allow the grantor to maintain control of the trust and the assets within the trust. The grantor can change their mind about any aspect of the trust at any time. They can change beneficiaries, remove assets or even close the trust.

The Living Trust takes assets out of your probate estate, meaning the assets in the trust are distributed to beneficiaries with no court involvement. Probate is a lengthy, expensive and public process. It can take months or years to complete, and the will becomes part of the public record. Anyone who wants to, from nosy relatives to scammers, can read the will.

Those with significant wealth use trusts to keep their private business private. People with estranged family members use trusts to maintain privacy and prevent feuds.

However, there are some downsides to consider. There is some work and costs associated with trusts. Placing assets into a trust requires retitling those assets, such as real estate or investment accounts.

You should speak with an estate planning attorney, especially if your goal in creating a trust is to qualify for Medicaid. This is a different type of trust requiring the help of an experienced estate planning attorney.

A trust isn’t an instant tax shelter. An estate planning attorney should be consulted to create the proper legal entities if your main goal is to take assets out of your estate to avoid federal, state, or inheritance taxes.

Trusts aren’t do-it-yourself projects. To do this right, you’ll want the help of an experienced estate planning attorney. They’ll help you define your goals and then create a plan to achieve them.

Reference: The Motley Fool (July 5, 2024) “Is a Living Trust Really the Best Way to Pass an Inheritance to Your Family?”

How Can Older Adults Not Get Scammed?

 

Everyone becomes more vulnerable to scams and financial abuse as we age into our later years, reports a recent article from Kiplinger, “Seven Ways to Protect Older Adults from Financial Abuse.” Older people are swindled out of more than $3 billion every year, and more than 3.5 million people are victims of financial exploitation every year. Protecting financial well-being requires prevention, which also applies to younger adults.

Maintain a heightened awareness level. Talk with family members about the potential risks from thieves, online and in real life. Know that exploitation by family members is just as likely, sometimes more so, than by strangers.

Maintain open communication. Just like meeting with an estate planning attorney regularly to ensure legal affairs are in order, check in with trusted loved ones about their financial status regularly. Talking about money among families can be challenging, depending on the family’s history and dynamics. Nevertheless, an open and ongoing dialogue will help with early detection and prevention of financial abuse.

Arrange for a Durable Power of Attorney. The person selected as a Power of Attorney (POA) should be trustworthy and capable of managing finances in case of incapacity. Talk with your estate planning attorney about whether you need to apply certain limitations for your POA or if it should be a broad document. If you are a “solo ager,” you may want to ask your estate planning attorney to act as your POA.

Make sure your estate planning is in order. Estate planning is an essential area of protection for people of any age, especially older adults. If your will, trust, or estate planning documents have not been updated in more than four years, it’s time to make an appointment with your attorney. There are many legal options for safeguarding assets and ensuring that your wishes are followed.

Monitor accounts regularly. Reviewing monthly statements from investments, banks and other accounts is essential for protecting assets. A few simple steps can avert fraud, including freezing credit, setting stricter controls on social media and setting phones to send unknown callers to voicemail.

Signing up for financial account and credit monitoring helps detect irregularities or unauthorized transactions. Allowing a trusted loved one to monitor accounts may make sense, depending on support needs and comfort level.

Safeguard personal information. If you’re using your birthday or your pet’s name as a password, it’s time for new passwords. The digital world has increased risks, and endless scammers with highly technical skills exist. Consider using two-factor authentication where possible—you can’t get into your account until you confirm with a code sent to your phone, text, or email. It is an added step and effective in protecting accounts.

Stay Up to Date on Scams. Financial scams come and go in waves, like fashion. Some people still receive emails about having been chosen by an overseas family who needs to bring huge wealth to America. Others have been targeted by romantic scammers on dating websites. There are Medicare scams, charity scams, IRS impersonation scams, sweepstakes scams and grandparent scams. In other words, thieves try to access accounts and funds in many ways. Be vigilant!

Reference: Kiplinger (Jan. 8, 2024) “Seven Ways to Protect Older Adults from Financial Abuse”

What to Do Before Naming a Family Member or Friend to Be a Trustee

Here’s an all-too-common scenario: a husband and father of adult children had created a living trust to protect assets and eventually direct the family’s wealth to heirs. During his lifetime, the man had served as the trustee. His wife became the trustee when he died, as explained in the article “Before Naming Trustees, Get Their Consent” from Next Avenue.

When the mother died, the trustee role was given to one of the adult children. The child was stunned because no one had ever told him about this responsibility.

Living trusts typically require trustees to work with estate planning attorneys and financial professionals to manage assets, distribute investment income to beneficiaries, oversee taxes, and sometimes, maintain or sell real property. This is not just for wealthy families. Families of modest means benefit from tax and estate planning aspects of trusts. They allow grantors (the person establishing the trust) to leave assets privately and, in some states, avoid probate, which is usually a public proceeding and can take time to complete.

Some heirs may not be happy with the person named to be the successor trustee. Some living trusts include special instructions for certain beneficiaries intended to control spending, if the grantor thinks the heir may be unable to manage their inheritance.

This can be avoided by having candid discussions with all family members about the parents’ future plans. Sometimes, having a family meeting at the estate planning attorney’s office—neutral territory and an expectation of mature behavior—may make the conversation less tumultuous.

The person named to be a successor trustee needs to be considered carefully. Just inserting someone’s name in the trust document without speaking to them first about the possibility of taking on the role and what it entails is a recipe for disaster.

Before the estate planning attorney completes trust documents, grantors need to think about who would do the best job, what relevant skills they have and who would be able to manage the family’s relationships if unpopular decisions need to be made.

If there are two adult children, the better choice isn’t necessarily the older of the two. The one with the greater financial acumen is the better candidate.

Suppose no suitable candidates from the family can be identified or no one is willing to take on the tasks. In that case, grantors may consider their estate planning attorney or a professional trustee from a financial firm. Although some grantors would prefer to have a family member as their successor trustee, this may not always be possible.

Once the candidate has been named and before the documents are completed, a meeting is needed to outline the trustee's responsibilities. Once the candidate fully understands what they must do and agrees to the role, the grantors might want to hold a family meeting to explain their choice and have an open, hopefully peaceful, discussion.

Reference: Next Avenue (December 22, 2023) “Before Naming Trustees, Get Their Consent”

What’s the Best Way to Manage an Inheritance?

 

Inheriting wealth comes with its own set of challenges and emotions, whether it’s a modest amount or a significant amount. A recent article from Kiplinger, “Three Essential Strategies for Managing Your Inheritance,” explains three key considerations to help manage an inheritance responsibly.

Understanding tax implications. Taxes take a bite out of inherited wealth and require the help of an experienced estate planning attorney to guide you through the maze of taxes. The type of assets inherited, and the laws of your state will affect tax liabilities. For the most part, life insurance proceeds are tax-free. However, inherited retirement accounts, including traditional IRAs or 401(k)s, are not.

When the asset inherited is real property, there may be a benefit from a step-up in basis, which can minimize capital gains taxes if the decision is made to sell the property.

Federal estate tax exemptions are still extremely high. However, there may be state estate taxes or inheritance taxes to consider.

Confusion about taxes often occurs because the rules differ for diverse asset types. Inherited IRAs, for instance, may be taxed heavily if the withdrawals are not appropriately managed. Understanding the rules makes all the difference.

Investing? Act wisely. Sudden wealth often causes people to act irresponsibly. It’s tempting to take a risk with investments. However, wealth can evaporate very quickly if not managed with care and prudence. Before making any big financial decisions, evaluate your overall financial picture. Wealth may be best used to pay off debt, invest and save for the future.

If you don’t have an emergency fund, this is the time to establish one, enhance retirement savings and rid yourself of any debt. You’ll want to chart a course to balance growth with wealth preservation.

Make a long-term plan for the future. A large inheritance can substantially impact your life goals and retirement plans. It’s an excellent opportunity to reassess your finances and consider making adjustments. Is early retirement your goal? Are there charitable causes you’d like to support? If you have or plan to have children, could your inheritance be used for their college education?

An inheritance is also a time to ensure that your estate plan is in place. This includes trusts, wills and health care directives to manage and protect your wealth. An inheritance of any size requires estate planning to protect yourself and your family.

Estate planning goes beyond having a will. It’s about ensuring assets are distributed according to your wishes. Trusts are excellent tools for managing wealth and allow for control over how assets are used by future generations, in addition to providing tax benefits and creditor protection.

If you’re navigating an inheritance, take time to plan before you act. You’ll want to make wise choices to honor the legacy behind the inheritance while creating your own legacy.

Reference: Kiplinger (Dec. 8, 2023) “Three Essential Strategies for Managing Your Inheritance”

 

Family Wealth And Financial Entropy

Family wealth created through a family business can be a wonderful blessing for a family. The trick is keeping it through the generations. Far too few families make proper plans to keep the family business going between generations. That is where the real work needs to be done. Only the big family names (think “Rockefeller”) lead us to believe that family wealth is perpetual. In reality, family wealth left unchecked has a tendency to follow the laws of entropy as it devolves into chaos and greater and greater breakdown or division. This phenomenon, along with some constructive advice, is featured in a two-part Forbes article titled “How The Wealthiest Families Make And Lose Their Money.” The article offers a solid point about the power of solidarity. The family that sticks together stays together, and so it is with the family business and the family wealth. As a whole, the family assets get a single voice, a larger capacity, and even attracts the attention of professional management. Absent that solidarity, the basic estate laws can effectively and efficiently work to pull apart the assets, the business, and potentially the family’s financial health. As you read the original article, think about your own family assets. How do you want to pass along your family wealth, whether you have a little or a lot?

Reference: Forbes (February 5, 2014) “How The Wealthiest Families Make And Lose Their Money”

For more information, see www.jerryreiflawyer.com

The Valuation of Art … Or the Art of Valuation? Saginaw, Michigan

Giving things rather than dollars can be tricky, especially come tax time. Consequently, you really need a qualified appraisal on board to make it all work. When it comes to art valuations, however, you should know that the IRS certainly will not take your word for it, or even the word of a decent appraiser, until they get their own expert opinion from their own experts: the Art Advisory Panel. A fair question to ask, then, is how fair is the Art Advisory Panel? The question of the Panel and fairness was addressed in a recent Forbes article titled “Is Art Advisory Panel Giving Taxpayers A Fair Shake?” Here’s how the competing interests play out. First, if you are a taxpayer giving art to a loved one or bequeathing it as a part of your estate, then you likely want a lower valuation. Why? Because you want a lower tax bill. On the other hand, if you are selling that very same piece of art, then you will want to command the absolute top dollar. Likewise, a body in charge of taxation is pretty much always going to be interested in a high valuation because it triggers a higher tax bill. So, statistically, how much of taxpayer appraisals does the government Panel accept? Would you believe only 51%? In addition, the Panel “adjusts” the other 49%, and of that adjusted percentage generates a net 47% increase on items in estate and gift appraisals. Of whom are you more cynical, the IRS or the taxpayer? The takeaway is that any gift of art is something to be fully considered with your valuation ducks in a row. Remember: there’s nothing an expert likes better than disagreeing with another expert - and the IRS keeps them on staff.

Reference: Forbes (February 6, 2013) “Is Art Advisory Panel Giving Taxpayers A Fair Shake?”

For more information, see www.jerryreiflawyer.com

 

The New Wealthy Show Their Tax Savvy

In case you missed it, there is something of a renewed technology boom underway. While the stars (read: Mark Zuckerberg, et al) of this boom seem to be ever younger, they are demonstrating some old-soul savvy when it comes to planning and structuring their current tax minimization and wealth transfer maximization. In a sense, planning for and about wealth is always also planning about the future; that’s an important point even for those who already are “wealthy.” To glean some lessons from the rising technology stars, tap into a recent list of steps you can take, featured in a Forbes article aptly titled You Don't Have To Be A Billionaire To Plan Like One. I recommend clicking over to the original article, but the main takeaway is that classical “personal finance” is working hand in hand with classical “estate planning” in so many of these steps and “tricks.

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Reference: Forbes (April 3, 2011) “You Don't Have To Be A Billionaire To Plan Like One”

Study Shows Inherited Wealth Is Squandered

A new and unfortunate statistic confirms what we all intuitively suspected. According to research out of The Williams Group, 70% of all wealth transfers fail. As reported by Forbes here, the failure is not that the money doesn’t get passed down; it is that the family inheritance quickly dissolves in a flash of poor planning, bickering, and waste. How can that be? The research found that the successful 30% had all actively engaged in transition planning, in addition to simple inheritance planning. In a very real sense, all proper estate planning is about both planning for the inheritance and planning for the inheritors. After all, the inheritors are why you want to pass on your assets in the first place. Naturally, then, transition planning is all about bringing the inheritors into the fold and allowing them to learn how to run it. If you have a family business, then this is of the utmost importance. Why? Because for it to remain a “family business” the family has to know about the business, how to run it, and how to think about it. To be successful, hands-on training is required. But then again, aside from a family business asset, there is still a great deal of work to be done to help inheritors properly understand wealth and investments. Likewise, hands-on training in the family wealth, perhaps beginning in philanthropy, can make all the difference. In the end, to overcome the odds against the successful transfer of your family wealth, work together to form a plan, to understand it, and to put it into action.

Reference: Forbes (December 9, 2011) “Wealth Transfers: How To Reverse the 70% Failure Rate”