Estate Planning

An intra-family loan is a simple estate-planning technique with a very low transaction cost.
 
Under rules set forth in the Internal Revenue Code, you can make loans to family members at rates lower than those charged by commercial lenders without it being deemed a gift.
 
Generally, if a parent gives an interest-free loan to a child, the IRS treats the foregone interest as a taxable gift. To prevent this, the parent must charge a minimum interest rate. To the extent that the interest charged on the loan is lower than the minimum, that amount will be imputed income to the parent, even though the parent does not actually collect it. The IRS will also treat that amount as a gift to the child, which would require the filing of a gift tax return.
 
However, if a parent establishes a creditor-debtor relationship with adequate stated interest, the intra-family loan will not be characterized as a transfer subject to the gift tax.
 
Intra-family loans create an opportunity to shift wealth from parent to child, if the child can earn a greater return on the amount borrowed than the AFR. To the extent that a child can earn a higher rate of return on the borrowed funds than the interest rate being paid, he or she is able to keep the excess without any gift taxes being paid.
 
Intra-family loans are also more beneficial than third party loans because they allow the total interest expense paid over the course of the loan to stay within the family rather than being paid to a bank.
 
Reference: Intra-family Loans: A Simple Yet Effective Estate Planning Tool, National Law Review, July 30, 2016.
 

Understanding these estate planning myths will help you to create and maintain a plan that will work the way you expect it to work when it’s needed.
 
Estate Planning Myth #1 – You Don’t Need an Estate Plan Because Your Spouse Will Inherit Everything
 
Who will inherit your estate depends on many different factors, including how your property is titled, who you have named on your beneficiary designations, and the laws of the state where you live and any other state where you own property.
 
Estate Planning Myth #2 – You Don’t Need an Estate Plan Because Your Family Knows Your Final Wishes
 
You’ve shared your final wishes with your family and you’re confident that they’ll “do the right thing” after you die. Unfortunately, without having these wishes written down in a valid will or a valid trust, your family may not be able to fulfill your intentions for several reasons. First, how your property is titled will determine who inherits it, not who you’ve told your family you want to inherit it. In addition, if you fail to complete or update the beneficiary designations for assets such as bank accounts and life insurance policies, your family won’t have any authority to tell the bank or insurance company who should inherit the proceeds. Finally, without an estate plan, the laws of the state where you live and any other state where you own property will dictate who inherits your probate estate, not your family.
 
Estate Planning Myth #3 – Once You’ve Created Your Estate Plan, It’s Done
 
As the years go by, your life will change. The laws governing wills, estates, probate, and death taxes will also change. This means that eventually your estate plan will become outdated. The only way to insure that your plan will work the way you intend it to work is to pull it out of the drawer every few years and review it.
 
Final Thoughts About Estate Planning Myths
 
These are only three of the estate planning myths. Unfortunately there are others. If you have questions about estate planning, please contact my office.
 

That depends on the size of your estate. Federal estate taxes must be paid if the net value of your estate when you pass away is more than the amount exempt at that time.
 
Some states have their own estate/inheritance tax, and it is possible your estate could be exempt from federal tax but have to pay state tax.
 
Your taxable estate includes benefits from life insurance policies you can borrow against, assign or cancel, or for which you can revoke an assignment, or name or change a beneficiary.
 
If your estate will not have to pay estate taxes, naming your living trust as owner and beneficiary of the policies will give your trustee maximum control over them and the proceeds.
 
If your estate will be subject to estate taxes, it would be better to set up an irrevocable life insurance trust and have it own the policies for you. This will remove the value of the insurance from your estate, reduce estate taxes and let you leave more to your loved ones.
 
There are some restrictions on transferring existing policies to an irrevocable life insurance trust. If you pass away within three years of the transfer date, the IRS will consider the transfer invalid and the insurance will be back in your estate.
 
There may also be a gift tax. These restrictions, however, do not apply to new policies purchased by the trustee of this trust. If you have a sizeable estate, your attorney will be able to advise you on this and other ways to reduce estate taxes.
 

The process of funding your Living Trust is not difficult, but it will take some time.
 
Because living trusts are now so widely used, you should meet with little or no resistance when transferring your assets.
 
For some assets, a short assignment document will be used. Others will require written instructions from you. Most can be handled by mail or telephone.
 
Some institutions will want to see proof that your trust exists. To satisfy them, your attorney will prepare what is often called a Certificate of Trust. This is a document that verifies your trust’s existence, explains the powers given to the trustee, and identifies the trustees. However, it does not reveal any information about your assets, your beneficiaries, or their inheritances.
 
While the process isn’t difficult, it is easy to get sidetracked or procrastinate. Just make funding your trust a priority and keep going until you are finished. Make a list of your assets and their values and locations. Then start with the most valuable ones and work your way down. Remember why you are doing this, and look forward to the peace of mind you’ll have when the funding of your trust is complete.
 

Estate planning attorneys are often asked about the storage of original estate planning documents, such as wills, trusts, powers of attorney, and healthcare directives.
 
There is no right or wrong answer to this question.
 
No matter where you decide to store your original estate planning documents, you should make sure your family members, a trusted friend or advisor, or your estate planning attorney know where to find them!
 
You can consider the following options:
 
Storing original estate planning documents in a safe deposit box
Many people may believe that the best place to store their original estate planning documents is in their safe deposit box at the local bank. This may make sense if you have given your spouse or a trusted child, other family member, or friend access to your box. However, since a safe deposit box is a rental arrangement (you are leasing the box from the bank), if you are the only one who signed the lease and you become incapacitated or die, no one else will be able to open your box.
 
Usually the only way for someone else to gain access to your box if you become incapacitated or die is to obtain a court order, which wastes time and money. If you are not comfortable giving someone else immediate access to your box, many banks will allow you to add your revocable living trust as an additional lessee, which will give your successor trustee access to your box if for any reason you can no longer serve as trustee of your trust.
 
Storing original estate planning documents in a home safe
 
Home safes are popular these days, but in order for yours to be a good place to store your original estate planning documents, it should be fire-proof, and water-proof. In addition, make sure someone you trust has the combination to your safe or will easily gain access to the combination if you become incapacitated or die.
 
Storing original estate planning documents at your estate planning attorney’s office
 
Traditionally, many estate planning attorneys offered to hold their clients’ original estate planning documents for safekeeping. Today most do not want to take on the liability. In addition, as the years go by, it may become difficult for family members to track down your attorney, who could change firms or pass away.
 
Storing original estate planning documents at your corporate trustee’s office
 
If you have named a bank or trust company as your executor or successor trustee, this may be the best place to store your original estate planning documents. This is because banks and trust companies have specific procedures in place to insure that your original estate planning documents are stored in a safe and secure area. If you choose this option, make sure one or more of your family members know where your original documents are located.
 
If you have questions about storing your original estate planning documents, please contact my office.