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With the end of the year fast approaching, now is the time to fine tune your estate plan before you get caught up in the chaos of the holiday season. One area of planning that many people overlook is their beneficiary designations.
 
Have You Checked Your Beneficiary Designations Lately?

• Do you own any life insurance policies? If so, have you named both primary and secondary beneficiaries for your policies?
• How about retirement accounts – are any of your assets held in an IRA, 401(k), 403(b) or annuity? Or how about a payable on death (“POD”) or a transfer on death (“TOD”) account? If so, have you named both primary and secondary beneficiaries for these assets?
• If you have gotten married or divorced, had any children or grandchildren, or any of the beneficiaries you have named have died or become incapacitated or seriously ill since you made beneficiary designations, it is time to review them all with your estate planning attorney.

Beneficiary Designations May Overrule Your Will or Trust

• It is critically important for your estate planning attorney to review your beneficiary designations as your life changes because your beneficiary designations may overrule or conflict with the plan you have established in your will or trust. Also, naming your trust as a primary or secondary beneficiary can be tricky and should only be done in consultation with your estate planning attorney.

What Should You Do?

• Whenever you experience a major life change (such as marriage or divorce, or a birth or death in the family) or a major financial change (such as receiving an inheritance or retiring) or are asked to make a beneficiary designation, your beneficiary designations should be reviewed by your estate planning attorney and, if necessary, updated or adjusted to insure that they conform with your estate planning goals.
• If you have gone through any family or monetary changes recently and you’re not sure if you need to update your beneficiary designations, then consult with your estate planning attorney to ensure that all of your bases are covered.

Due to this unfavorable income tax treatment of irrevocable, non-grantor trusts, Trustees of this type of trust must plan carefully to minimize annual income taxes. Since trust income distributed to the beneficiaries is not taxed at the trust level, distributions may be made to beneficiaries who are in a lower income tax bracket and/or not subject to the 3.8% surtax. This, in turn, will lower the income that is taxed inside of the trust. Nonetheless, any distributions aimed at reducing a trust’s income tax liability must be made within the distribution parameters established in the trust agreement and applicable state law.
 
With these limitations in mind, income-reducing strategies Trustees should consider include:
 
• Distributing trust income to beneficiaries who are in a lower tax bracket and/or not subject to the 3.8% surtax
• Making in-kind distributions of low basis trust property to beneficiaries who are in a lower tax bracket or plan to hold on to the property and not sell it any time soon
• Invoking the 65-day rule and distributing trust income to beneficiaries who are in a lower tax bracket and/or not subject to the 3.8% surtax by March 6, 2015, which will allow the trust to deduct the income as a 2014 distribution and thereby lower the trust’s 2014 taxable income (however this 65-day rule may not apply for state income tax purposes, so Trustees should make distributions before December 31 in states that don’t allow the 65-day rule for state income tax purposes)
• Exploring options to permit capital gains to pass to beneficiaries instead of being taxed inside of the trust, such as reforming or decanting the trust to broaden the Trustee’s discretion to allocate between trust income and principal
• Shifting trust investments to minimize taxable income and gains
• Terminating small, uneconomic trusts under the terms of the trust agreement or applicable state law
 
Final Considerations for Trustees of Irrevocable, Non-Grantor Trusts
 
Planning to minimize trust income taxes is a delicate balancing act. Trustees must carefully weigh the tax benefits of making distributions or changes to the trust’s provisions against the grantor’s intent, the ongoing needs and tax status of the current beneficiaries, and what will be left for the remainder beneficiaries. In addition, income, gains, losses, and tax brackets must be reviewed annually since the needs and expenses of the trust beneficiaries will undoubtedly change from year to year.
 
If you are the Trustee or beneficiary of an irrevocable, non-grantor trust, I am available to speak with you about strategies that can be used to reduce your trust’s income tax bill.
 

WARNING: Many people believe once they set up a Revocable Living Trust and transfer assets into the Trust, those assets are protected from lawsuits. This is absolutely not true.
 
While Trusts commonly provide asset protection for beneficiaries, few Trusts protect assets owned by the person who created the Trust.
 
No Immediate Asset Protection? Why Should You Create a Revocable Living Trust?
 
Fully funded Revocable Trusts are dynamite tools. Here’s why:
 
1. You can protect assets passing to your spouse and children. Yes, you can provide protections for loved ones that they can’t yet for themselves.
 
2. Your Trust includes an incapacity plan, avoiding court interference, maintaining your control, and saving your loved ones time, money, and stress.
 
3. Your Trust allows your assets to avoid probate, minimizing the time, stress, and cost of settling your final affairs.
 
4. By avoiding the public probate court process, your Trust keeps all details about who is getting what, a private family matter.
 
What Can You Do to Protect Your Assets?
 
Comprehensive estate planning has a solid foundation of insurance, including homeowners/renters, umbrella, auto, business, life insurances, disability, and the like. Business entities such as the Limited Liability Company are commonly used for asset protection and Domestic Asset Protection Trusts are sometimes used as well.
 
Your Revocable Living Trust creates a powerful value and can be drafted to provide asset protection for your loved ones. To protect yourself, use insurance, business entities, and, perhaps, a Domestic Asset Protection Trust.

Leaving your hard-earned assets outright to your children, grandchildren or other beneficiaries after you die will make their inheritance easy prey for creditors, predators, and divorcing spouses. Instead, consider using discretionary trusts for the benefit of each of your beneficiaries.
 
What is a Discretionary Trust?
 
A discretionary trust is a type of irrevocable trust that is set up to protect the assets funded into the trust for the benefit of the trust’s beneficiary. This can mean protection from the beneficiary’s poor money-management skills, extravagant spending habits, personal or professional judgment creditors, or divorcing spouse.
 
Under the terms of a typical discretionary trust, the trustee is limited in how much can be distributed to the beneficiary and when the distributions can be made. You can make the terms and time frames as limited or as broad as you want. For example, you can provide that distributions of income can only be made for health care needs after the beneficiary reaches the age of 21, or you can provide that distributions of income and principal can be made for health care needs and educational expenses at any age.
 
An added bonus of incorporating discretionary trusts into your estate plan is that the trusts can be designed to minimize estate taxes as the trust assets pass down from your children to your grandchildren (this is referred to as “generation-skipping planning”). In addition, you can dictate who will inherit what is left in each beneficiary’s trust when the beneficiary dies, which will allow you to keep the trust assets in the family.
 
While the distribution choices that can be included in a discretionary trust are virtually endless (within certain parameters established under bankruptcy and creditor protection laws), the bottom line is that a properly drafted discretionary trust will protect a beneficiary’s inheritance from creditors, predators, and divorcing spouses, avoid estate taxes when the beneficiary dies, and ultimately pass to the beneficiaries of your choice.
 
Where Should You Include Discretionary Trusts in Your Estate Plan?
 
Discretionary trusts should be included in all of the trusts you have created that will ultimately be distributed to your heirs, including:
 
• Your Revocable Living Trust
• Your Irrevocable Life Insurance Trust
• Your Standalone Retirement Trust
 
What Should You Do?
 
If you are concerned that your children, grandchildren, or other beneficiaries will not have the skills required to manage and invest their inheritance or will lose their inheritance in a lawsuit or divorce, then talk to your estate planning attorney about how to incorporate discretionary trusts into your estate plan.

Death is a costly business. Aside from funeral expenses, legal fees can take a big chunk out of how much is left for your loved ones after you’re gone.
 
But it doesn’t have to be this way. Careful planning can minimize the legal fees your loved ones will pay after you die. Here’s how:
 
1. Make an estate plan – The cost of creating an estate plan will be far less than the legal fees your loved ones will have to pay if you don’t have one. But be careful – don’t try to write your own will or revocable living trust. Do-it-yourself or online plans often fail to include valuable cost, tax, and legal fee saving opportunities. You need the advice and assistance of an experienced estate planning attorney to create an estate plan that will work when it’s needed and minimize legal fees after your death.
 
2. Maintain your estate plan – Once you’ve created your estate plan, don’t stick it in a drawer and forget about it. Instead, fine tune your plan as your life and your finances change. Otherwise, when your plan is needed, it will be stale and out of date and will cost your beneficiaries time and legal fees to fix it. In a worst case scenario, a stale plan could lead to expensive and emotionally draining litigation between your family members. Regular maintenance of your estate plan makes it easier to carry out when needed.
 
3. Have a debt plan – Make a plan for paying off your debts and taxes after you die. This should include setting aside funds that your loved ones will have easy access to (for example, set up a joint bank account or a payable on death account) so that they won’t have to use their own assets to pay your bills until your will can be probated or the successor trustee of your trust can be appointed. If your estate is taxable, then make sure you have enough assets that can be easily liquidated to pay the estate tax bill. Life insurance can be another option for providing easy access to cash and paying estate taxes, but it’s important that you align your life insurance plan with your estate plan to get the maximum benefit.
 
4. Let your loved ones know where your estate plan and other important documents are located – If your loved ones don’t know where to find your health care directive, durable power of attorney, will, or revocable living trust, then their hands will be tied if you become incapacitated or die. While you don’t need to tell your loved ones what your estate plan says, at the very least you should tell someone you trust where your estate plan and other important documents are being stored. You should also make a list of the passwords for your computer and accounts you manage online and a contact list for all of your key advisors (such as your attorney, accountant, life insurance agent, financial advisor, banker, and religious advisor).
 
Following these practical tips will save your family valuable time and money during a difficult time.

When you establish a trust, you name someone to be the trustee. A trustee basically does what you do right now with your financial affairs—collect income, pay bills and taxes, save and invest for the future, buy and sell assets, provide for your loved ones, keep accurate records and generally keep things organized and in good order.
 
The Key Takeaways

• You can be trustee of your revocable living trust. If you are married, your spouse can be co-trustee.
• Most irrevocable trusts do not allow you to be trustee.
• Even though you may be allowed to be your own trustee, you may not be the best choice.
• You can also choose an adult child, trusted friend or a professional or corporate trustee.
• Naming someone else to be co-trustee with you helps them become familiar with your trust, allows them to learn firsthand how you want the trust to operate, and lets you evaluate the co-trustee’s abilities.

 
Who Can Be Your Trustee
If you have a revocable living trust, you can be your own trustee. If you are married, your spouse can be trustee with you. This way, if either of you become incapacitated or die, the other can continue to handle your financial affairs without interruption. Most married couples who own assets together, especially those who have been married for some time, are usually co-trustees.
 
You don’t have to be your own trustee. Some people choose an adult son or daughter, a trusted friend or another relative. Some like having the experience and investment skills of a professional or corporate trustee (e.g., a bank trust department or trust company). Naming someone else as trustee or co-trustee with you does not mean you lose control. The trustee you name must follow the instructions in your trust and report to you. You can even replace your trustee should you change your mind.
 
When to Consider a Professional or Corporate Trustee
You may be elderly, widowed, and/or in declining health and have no children or other trusted relatives living nearby. Or your candidates may not have the time or ability to manage your trust. You may simply not have the time, desire or experience to manage your investments by yourself. Also, certain irrevocable trusts will not allow you to be trustee. In these situations, a professional or corporate trustee may be exactly what you need: they have the experience, time and resources to manage your trust and help you meet your investment goals.
 
What You Need to Know
Professional or corporate trustees will charge a fee to manage your trust, but generally the fee it is quite reasonable, especially when you consider their experience, services provided and investment returns.
 
Actions to Consider
*    Honestly evaluate if you are the best choice to be your own trustee. Someone else may truly do a better job than you, especially in managing your assets.
*    Name someone to be co-trustee with you now. This would eliminate the time a successor would need to become knowledgeable about your trust, your assets, and the needs and personalities of your beneficiaries. It would also let you evaluate if the co-trustee is the right choice to manage the trust in your absence.
*    Evaluate your trustee candidates carefully and realistically.
*    If you are considering a professional or corporate trustee, talk to several. Compare their services, investment returns and fees.
 
For more information about choosing a trustee, please call our office.