Estate Planning

Estate planning is often overlooked and sometimes forgotten about all together. Those that truly understand estate planning know that the more you prepare the easier it is for your loved ones down the road. Estate planning is not just for your grandparents and is something that is needed through all stages of your life from getting your first job, having your first child, or having your 30th grandkid. Estate planning is an important tool to ensure that if something happens to you that you have appointed a guardian for your minor children as well as ensured that your life insurance is used for their care and benefit. 

What is Estate Planning and Where do I Start?

Estate planning is generally making decisions today for a time when you may not be able to make those decisions in the future. It is taking control now for a time when things may be outside of your control. It is taking an inventory of what you may have and who you want to provide for in the future. A good estate plan also contemplates contingencies should there be bends in the road. 

One usually starts by figuring out what they have and what they would like to prepare for. Some of the estate planning tools we recommend at Hendricks & Owens include:

A will is your directive on who you want to administer your estate and how you would like your estate to be distributed to your family and friends. One of the most important parts of a will is deciding your personal representative or executor. This is the individual that will carry out the desires and wishes you place in your will. Another very important part of a will, if you have minor children, is a guardian designation. In your will you can name the individual you wish to care for your children if something were to happen to you and your spouse while the children     are still minors. Without this it is up to the courts to decide who will be the best to care for your children. 

A Pour-Over will is a will that often is accompanied by a trust. Much like a regular will, you appoint a personal representative or executor, as well as a guardian for your minor children. Where it is different is that it does not typically specify any distribution of property other than a blanket distribution of any property that has remained outside of your trust to be distributed to your trust. You are pouring over any items that have not already been transferred to the trust directly into the trust. 

There are many types of trusts and many different purposes for trusts. A trust is an entity that is separate from you individually. There are typically three parties involved in a trust. The first party is known as a trustor or grantor. This is the party that is transferring property into control of the trust. The next party is the trustee. The trustee is the party that is tasked with managing and maintaining the trust principle or trust assets. When planning your estate, the trustor and the trustee are typically the same person. The last party is the beneficiary. This party is who the property is intended to benefit, or in most cases, who the property will be transferred to at a certain date in the future. 

Revocable or Living Trust

A Revocable trust is the type of trust that is most associated with estate planning. A revocable trust is one that can be revoked by the trustor at any time. The property transfers to the trust but can easily be transferred back into the trustor’s individual name. There can be many types of revocable trusts but the most common is a living trust or a family trust used in estate planning. 

The advantage of a revocable trust is that you get all the benefits of a trust with the flexibility of being able to transfer property back to the trustor, if needed. Revocable trusts are typically set up to designate distributions to your beneficiaries. These can be in periodic payments or can be in lump sums. These can be cash distributions or in-kind distributions (distributions of physical assets). This tool gives you great leeway in planning for your own and your family’s future. It allows for distributions to beneficiaries at certain milestones in their life and makes it so you do not have to distribute it in one big distribution.

There are certain disadvantages as well when it comes to a revocable trust. Some of those include asset protection. Because it is revocable certain creditors may be able to get to your assets. They may be available to a trustee in bankruptcy, and in certain situations they are available for the government to attach a lien for certain Medicare situations. You should always consult with an attorney to decide what type of trust is best for your specific situations. 

Irrevocable Trust

Irrevocable trusts are less common and usually set up to protect property or in some situations reduce tax burdens. Although there are some advantages to setting up an irrevocable trust, they aren’t quite as common as revocable trusts because of the biggest disadvantage. In an irrevocable trust the grantor/trustor loses control and rights to any assets transferred to the trust. To better understand how these trusts work, you must first understand what is meant by “irrevocable” and how these trust agreements are created.

Irrevocable Definition

When setting up an irrevocable trust, the grantor gives up all right, interest, and title to the assets that are held in the trust. Grantors also give up the right to terminate the trust, which is what makes it irrevocable. This means that once the terms of the trust agreement have been written, the only way they can be amended is through a court order. 

Property held in the trust can only be used as the agreement directs and for the sole benefit of the named beneficiaries. 

Any person, aside from the grantor, can be named the beneficiary of the trust. Once the assets have been transferred to the trust, the grantor cannot benefit or use them in any way. Just about any asset can be transferred to a trust as well. This includes business interests, cash, real estate, life insurance policies, and stock portfolios.

Up to $14,000 can be transferred into an irrevocable trust or multiple trusts each year tax free. However, in order to receive these tax benefits, it must be considered a “present interest gift.” What this means is that the beneficiary must be able to access all or at least part of the assets immediately. Gifts that do not qualify under the annual exclusion will be subject to the federal gift tax.

An irrevocable trust has many advantages. Even though the grantor is giving up their rights to the property, they are able to create the terms and conditions of the agreement, and determine the use of the trust’s assets.

Assets that are gifted to the estate typically are not included in your taxable estate upon your death. If you have significant assets that you are passing on this can be a huge advantage.

Revocable v. Irrevocable

Trusts are either revocable (can be changed or revoked by the grantor at any time), or irrevocable (cannot be changed after it has been created). Most revocable trusts become irrevocable at the grantor’s death.

One significant difference between revocable and irrevocable trusts are that assets in a revocable trust are typically included in your estate for estate tax purposes, while assets that you transfer into an irrevocable trust are usually excluded from your estate for estate tax purposes. When the grantor gives up control over the assets with an irrevocable trust (or at least most of the control) you may gain an estate tax advantage. The biggest disadvantage of an irrevocable trust is that you lose all control over the assets in the trust and lose your ability to change any of the terms      of the agreement. This is usually a big enough disadvantage that most people shy away from irrevocable trusts. 

A revocable trust is also known as a Living Trust.  Main advantages of a revocable or Living Trust are that you can appoint someone to manage your affairs in case you are incompetent (your successor trustee), you can avoid the additional cost of probate proceedings, and you can keep your affairs more private.

Families with children who have special needs should do separate planning to take care of those children. The main way to ensure that these children with special needs have the resources they need is to set up a special needs trust. This is set up so they have assets for their care, but they are not attributed to them as personal assets, and so they can continue to qualify for government assistance if needed. 

There are two main types of special needs trusts. The first and most common is a third-party special needs trust. This trust is set up by a third-party and assets contributed to the trust are given by a third-party. This is typically the parents or other family members of the special needs individual and is usually created as part of estate planning of that third-party and funded through distributions from a will or a trust.  The second type of trust is a self-settled special needs trust. This trust is generally set up by a parent or guardian but is funded using assets of the special need’s individual. An example of this is when a child becomes disabled due to an accident or injury and receives a settlement as a result, those funds can be put into a self-settled special needs trust.

Another form of trust is a charitable trust. You often hear of people talking about leaving a legacy or giving back to those in need and this is often accomplished using a charitable trust. These are most common in circumstances where the individual creating the trust does not have any significant heirs or does not wish to leave their estate to their heirs, but would rather it go to a charitable cause. Typically, these trusts are irrevocable which not only make it so their desires live on even after they have passed, but it also gives them additional tax advantages. It can be something that lives on for many years or just something that terminates quickly depending on the size and the distributions made according to the trust document. They can be created while a person is still living, or can be created through estate planning documents upon the passing of an individual.  

Power of attorney (POA) is an essential estate planning document. A power of attorney gives someone (the agent attorney-in-fact) authority to make legal decisions on your behalf. They can be broad or narrowly tailored to specific situations. You decide when they take effect and when they terminate. You can make your power of attorney effective upon execution on a specific date or upon certification of incapacitation. Your power of attorney can also be limited in time and you can decide if it terminates on a specific date or after you pass away. 

A durable power of attorney is one that endures even after you become incapacitated. This is typically the form of power of attorney that is used in estate planning as it is usually most helpful for someone once they are incapacitated. To make a power of attorney durable it is listed somewhere in the document that the document remains in effect even after the individual granting the power of attorney becomes incapacitated. 

A durable power of attorney can be useful in various situations. For example, if your parent is hospitalized and they have bills that need to be paid, their designated power of attorney has the ability to ensure that their affairs remain in order and that they do not suffer because of the medical emergency. 

A health care directive (HCD) or living will is similar to a power of attorney but covers only health care decisions. It is put in place so you can make decisions during a time that you would not be able to make those decisions. It typically covers end of life decisions such as life support options if you are in a coma or a vegetative state. It also often covers organ donation and medical research. 

You will designate an agent to make medical decisions on your behalf that have not already been decided by your HCD. This individual is usually someone that you trust to have your best interest at heart and that will also be someone that you trust with your medical information. Common duties include: conferring with the medical team and reviewing the medical chart, asking questions and getting explanations, discussing treatment options, requesting consultations and second opinions, consenting to or refusing medical tests or treatments, and authorizing transfer to another physician or institution.

Nobody wants to get to their golden years and end up living in an assisted living center. It happens and is expensive. A key part of your estate planning when you are getting older is also doing some Medicaid planning. In a lot of cases those that have to live in an assisted living center or care center get the services paid for by Medicaid. If you have assets, however, you may not meet the qualification for Medicaid or if you own a home, the government could come in and place a lien on that home for the services you are receiving. At the same time, you cannot just give the assets away or sell them for less than fair market value because there is a look back provision that allows the government to look back 5 years for their asset valuations. 

There are certain things you can do to prepare for that situation, and you need someone to help guide you through. 

There are certain trusts that can be set up to help avoid the look back provisions or there are ways that your property can be transferred to your children that can avoid the look back as well. 

It is never too late to do retirement and financial planning. We have trusted partners that can help you work through your planning, no matter what your situation is and no matter where you are at in life. Often someone works their entire life, and their largest asset is their home. They do not want to sell their home to enjoy their retirement and do not want to have to move, if they do. Our sister company Praedium Estate Solutions has several options that will allow you to use the equity you have built up over time to enjoy during your retirement, while still living in your home until you pass away. 

We also have other trusted partners that can help you manage and stretch your retirement accounts out as long as possible, so you do not outlive your retirement. 

Our Mission

Our goal is simple, it is to help your growing business with legal needs you may have while taking the time to educate you along the way. Whether you are starting a small business or you run a large corporation, we will be there to answer your questions.