Estate Planning Bits

Are there substitues to a Will?

The process of probate is primarily the distribution of assets that are in the decedent’s name alone, which pass by his or her Will; and assets jointly held do not pass under a Will in most circumstances. There are strategies available to avoid probate.

One such strategy includes maintaining property jointly with another person, as there is then a presumption that the account will be joint for survivorship purposes, and the assets will not pass pursuant to the terms of a Will. In establishing any account with more than one name, it is important to determine whether the intention is to ensure that the asset passes to the surviving joint owner or whether the account is really for convenience only.

Transfer on death (TOD) is also an option to avoid probate upon death. Here, the account, which is normally from a brokerage or stock, is in a person’s name alone, rather than in joint names, which gives another person certain rights. The account then transfers upon the death of the owner. In this manner, the assets remaining in his or her name are merely transferred to a new account in the name of the beneficiaries under the TOD account. This could be one person, a number of individuals, or perhaps a trust receives the assets upon death, and therefore, avoids the probate process.

A similar situation occurs with bank accounts such as In Trust For (ITF) or Payable On Death (POD.) In these cases, upon submission of a certified death certificate, the bank merely writes a check to the individual who is the beneficiary of the account. This also avoids probate, and the assets do not pass pursuant to the terms of a will or trust, unless the trust is the beneficiary of the POD account.

A Trust, funded during one’s lifetime, may be another alternative. Since the name on the bank account or stock must be the name of the trust, as long as an asset is transferred to the trust prior to death, it will not pass through probate. A trust may be a better alternative in the event that the donor wishes to maintain the funds in it for some time period. Possible purposes may be for the benefit of a minor child, for an incapacitated spouse, a parent, or any other situation whereby the goal of the plan is to not allow someone to receive a lump sum until a required later age or date.

While a trust may be a better alternative in some cases, it must be understood that there are adverse consequences of utilizing a trust, such as trustee’s fees, annual income tax returns, possible court accountings, and filing an account with each beneficiary on an annual basis.

Most people prefer to avoid probate to maintain privacy, while also minimizing fees and expenses, but very often, it may be more advantageous to establish a scheme of distribution through a Will if there are a significant amount of beneficiaries and charities who are supposed to receive either a specific bequest or percentage bequest. Also, in most states, creditors have a limited time to file a claim against an estate when it is probated. In some states, if the estate is not probated, then the statute of limitations regarding claims may be extended for a longer period of time than otherwise would have been available.

By: Hyman G. Darling, Esquire

Pooled trusts – Who qualifies and what are the advantages?

In some situations, if a person is on Social Security Income, public assistance within a state, or possibly some form of disability, he or she may be entitled to have a nominal amount of assets. In these situations, if that individual is 65 years of age or younger, he may establish a so-called “payback” trust that allows qualification for benefits by placing his funds in an irrevocable trust. A third party trustee will invest the funds, file the necessary tax forms, account to the governmental authorities, and also attend to discretionary payments as necessary or required. This may occur when a person receives disability or an inheritance, wins the lottery, or receives a larger settlement that could otherwise disqualify them for their benefits.

Another option is for that individual to be taken off the governmental roll as a beneficiary and then spend down his assets until he re-qualifies for benefits. Since most individuals do not feel this is an appropriate option, they normally establish a special needs trust to continue qualifying for benefits, which may include fuel assistance, housing subsidy, medical payments, and possibly food stamps.

If one is over the age of 65, he may not establish a self-settled trust or what is known as the payback trust, but another opportunity is available to him, called a pooled trust. There is no age restriction on funding a pool trust, and there are no significant attorney’s fees to be incurred, as the funds are merely placed in a previously established trust.

The trustee of those funds then co-mingles them, but maintains separate records for each individual who is a participant in the pooled trust. The trustee continues to make payments to or for the beneficiary, as allowable without disqualifying the beneficiary for governmental benefits. There is no waiting period, nor is there any limitation on the amount of funds one may gift to a pooled trust.

Upon the death of the beneficiary, normally a portion of the funds is paid back to the trust, but unlike the self-settled trust, where all the funds may have to be paid to the state, the pooled trust allows for a significant portion to be maintained within the pooled trust for other disabled individuals, rather than having these funds paid back to the government.

Pooled trusts are not widely publicized, since there are normally only a few organizations within each state that maintain and administer these trusts, However, there are certain trustees who have established these trusts within states to allow any disabled individual to contribute their funds.

It must be remembered that this pooled trust is an irreversible and irrevocable decision, and once the funds are placed in it, they may not be withdrawn except at the discretion of the trustee. If the funds are significantly large, the trustee may consider purchasing a vehicle, house, or possibly a vacation home or condominium for the use of the beneficiary. The trustee will maintain this real estate with additional funds that remain within the trust, but if the beneficiary no longer wishes to remain in the property, the trustee may then sell the property or perhaps rent it out to receive additional income.

As with all specific exemptions within the law that allow a person to qualify for benefits, it is important to always meet with the proposed trustee, read each document carefully, and also have appropriate legal advice by a practitioner who is knowledgeable in the special needs trust area before creating a trust or depositing funds into a pooled trust.

By: Hyman G. Darling, Esquire

Preparing children for wealth

When it comes to preparing your children for the possibility of inheriting wealth, you don’t want your hard work in maintaining financial success to go by the wayside because your child is unprepared for the responsibilities associated with inheritance.

Children who are unaware of the financial responsibilities associated with impending inheritance are less likely to understand the importance of properly maintaining their and making purposeful contributions in the lives of others. Additionally, children who are not financially savvy are more likely to be taken advantage of by people interested in their wealth. To ensure that a child learns the proper skills necessary to manage his or her inheritance, parents or guardians must begin their financial education early in life.

An allowance is a good tool used by parents to teach children the importance of money. Children as young as six are capable of learning financial lessons, and it is important to stress to your child that an allowance does not come from entitlement. Rather, your child should understand that the allowance is the result of certain events such as chores or good behavior.

Instead of allowing a child to spend his or her allowance arbitrarily, introduce your child to new ventures that could be associated with an allowance. For instance, your child could learn valuable financial lessons through philanthropic ventures. Youth Philanthropy Worldwide , is just one example of an organization that recognizes the importance Generation Y children will have on the world. Contributing portions of an allowance, or better yet, pooling allowance among friends, could be a first step for your child to learn the impact his or her money can have on the world. Furthermore, your child will also learn valuable business and communication skills if engaged in this type of venture.

Aligning your child with a financial mentor is another way to ensure he or she learns the proper financial skills prior to inheriting family wealth. Whether this mentor is a family member or friend, a child could learn basic financial skills including how to invest, spend wisely, live on a budget and keep track of money. These lessons could be learned over lunch or even by accompanying a financial mentor to a business or foundation meeting.

Summer camps are another opportunity for children to put their creative juices to work and learn basic business principles. There are camps all over the nation focused on youths interested in becoming entrepreneurs. While at camp, your child will make friends, learn how to invest money wisely, and most importantly, come home with the skills necessary to deal with inheriting family wealth.

Lastly, explaining the history behind the family’s wealth is a conversation that will help put life into perspective for a child. If a child learns how an ancestor had no money, but through hard work was able to develop a family fortune, the child may realize that he or she will be able to live comfortably for life due to the sacrifice of one man or woman. Learning how hard other family members have had to work to maintain a family fortune is another conversation that will shed a different light on family wealth.

Parents do an injustice to children poised to inherit family wealth when they do not provide a proper financial foundation. If financial lessons are learned as a child, he or she will be less likely to be taken advantage later in life. Furthermore, children will be more likely to live a purposeful life and continue the family’s financial plan for the future.

By: Hyman G. Darling, Esquire

Do you want to leave your estate to your ex husband or wife? How about your former daughter or son in law?

Changes in your family situation often warrant an update to your current estate plan. A divorce should always signal that change is needed. In Massachusetts, a divorce revokes the provision in a Will or Trust referring to a former spouse, and therefore, it is not uncommon for a person to revisit their Will after a divorce.

However, many people fail to revisit their estate plan if a beneficiary of their Will divorces. Think of the problems that may arise if you have named your child and his/her spouse as joint owners of your home or other property under your Will, and now your child is divorced. In this situation, the provision relating to your child’s former spouse will not be automatically revoked, and if your Will is left unchanged, you would be leaving property to your former daughter/son–in–law.

Another reason a divorce should trigger a change in your estate plan is the fact that you may have named your former spouse as beneficiary of your legal contracts that include a death benefit; for example, your life insurance contract, IRA, pension plan or 401(k). If you have not changed your beneficiary designations, your ex-spouse may receive a generous inheritance upon your death.

On the flip side, a marriage should also merit revisions to your estate plan. In Massachusetts, unless you made a Will in contemplation of a subsequent marriage, which must be specifically stated in your Will, your current Will is revoked upon that marriage. Marriage includes certain legal benefits, and if not addressed properly, you and your spouse could be giving away valuable rights to which you are entitled. For example, if you own property with your spouse as joint tenants, you should change the title of the property to tenants by the entirety. Under this type of tenancy, you remain joint tenants with rights of survivorship; however, it provides increased legal protection from a potential creditor attempting to sell your home to satisfy a judgment.

The death of your spouse or another beneficiary can ALSO greatly affect your estate plan, and should therefore be considered when reviewing your current plan. In addition, the death of other people you have asked to help with different tasks under your Will, Power of Attorney or Health Care Proxy is another important reason to review your plan. For instance, a court may step in and appoint a guardian if the person you have named as your child’s guardian has died, become incapacitated or becomes unwilling to serve, and you have not revisited your Will.

By: Brett A. Kaufman, Esquire