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Ashleigh Laabs 6/1/21 Ashleigh Laabs 6/1/21

Are you holding a joint title to property with a family member or friend?

Owning assets jointly with one or more of your children or other heirs is a common estate planning “shortcut.” But like many shortcuts, it may produce unintended — and costly — consequences.

Joint ownership advantages

There are two potential advantages to joint ownership: convenience and probate avoidance. If you hold title to property with a child as joint tenants with “right of survivorship,” when you die, the property is transferred to your child automatically. You don’t need a trust or other estate planning vehicles and it’s not necessary to go through probate.

Joint ownership disadvantages

Joint ownership can offer that aforementioned shortcut, but it can also create a number of problems. This is especially true if you add someone as a co-tenant instead of a joint tenant with right of survivorship. The disadvantages can include:

Unnecessary taxes. Adding a child’s name to the title may be considered an immediate taxable gift of one-half of the property’s value. And when you die, the property’s value then will be included in your taxable estate, although any gift tax paid with the original transfer would be allowed as an offset.

Creditor claims. Joint ownership exposes the property to claims by your co-owner’s creditors or a former spouse.

Loss of control. Your co-owner may be able to dispose of certain property without your consent or prevent you from selling or borrowing against certain property.

Unintended consequences. If your co-owner predeceases you, his or her share of the property may pass according to his or her estate plan or the laws of intestate succession. If you hold the property as co-tenants, instead of joint tenants with the right of survivorship, for instance, you’ll generally have no say in the ultimate disposition of that portion of the property.

A trust may be the answer

If your goal is to avoid probate, one or more properly drafted trusts can help to avoid the problems outlined above. If you jointly own assets with family members or friends and have concerns about probate, please contact us.

FMD’s estate planning team will work with you and your legal and financial advisers to design plans that align with your goals and objectives. When it comes to estate planning and wealth preservation, every one of our clients receives the quality of service and personal attention that are the hallmarks of FMD. To learn more about how we can help address your estate planning and wealth preservation needs, contact us today.

Ashleigh Laabs 5/25/21 Ashleigh Laabs 5/25/21

Protect your assets with a “hybrid” DAPT

One benefit of the current federal gift and estate tax exemption amount ($11.7 million in 2021) is that it allows most people to focus their estate planning efforts on asset protection and other wealth preservation strategies, rather than tax minimization. (Although, be aware that President Biden has indicated that he’d like to roll back the exemption to $3.5 million for estate taxes. He proposes to exempt $1 million for the gift tax and impose a top estate tax rate of 45%. Of course, any proposals would have to be passed in Congress.)

If you’re currently more concerned about personal liability, you might consider an asset protection trust to shield your hard-earned wealth against frivolous creditors’ claims and lawsuits. Foreign asset protection trusts offer the greatest protection, although they can be complex and expensive. Another option is to establish a domestic asset protection trust (DAPT).

DAPT vs. hybrid DAPT

The benefit of a standard DAPT is that it offers creditor protection even if you’re a beneficiary of the trust. But there’s also some risk involved: Although many experts believe they’ll hold up in court, DAPTs haven’t been the subject of a great deal of litigation, so there’s some uncertainty over their ability to repel creditors’ claims.

A “hybrid” DAPT offers the best of both worlds. Initially, you’re not named as a beneficiary of the trust, which virtually eliminates the risk described above. But if you need access to the funds in the future, the trustee or trust protector can add you as a beneficiary, converting the trust into a DAPT.

Before you consider a hybrid DAPT, determine whether you need such a trust at all. The most effective asset protection strategy is to place assets beyond the grasp of creditors by transferring them to your spouse, children or other family members, either outright or in a trust, without retaining any control. If the transfer isn’t designed to defraud known creditors, your creditors won’t be able to reach the assets. And even though you’ve given up control, you’ll have indirect access to the assets through your spouse or children (provided your relationship with them remains strong).

If, however, you want to retain access to the assets later in life, without relying on your spouse or children, a DAPT may be the answer.

Setting up a hybrid DAPT

A hybrid DAPT is initially created as a third-party trust — that is, it benefits your spouse and children or other family members, but not you. Because you’re not named as a beneficiary, the trust isn’t a self-settled trust, so it avoids the uncertainty associated with regular DAPTs.

There’s little doubt that a properly structured third-party trust avoids creditors’ claims. If, however, you need access to the trust assets in the future, the trustee or trust protector has the authority to add additional beneficiaries, including you. If that happens, the hybrid account is converted into a regular DAPT subject to the previously discussed risks.

If you have additional questions regarding a DAPT, a hybrid DAPT or other asset protection strategies, please don’t hesitate to contact us.

Ashleigh Laabs 5/19/21 Ashleigh Laabs 5/19/21

Beware of the “reciprocal trust” doctrine

If you and your spouse have similar irrevocable trusts that benefit each other, it’s important to know that the trusts might be subject to the “reciprocal trust” doctrine. In a nutshell, the doctrine prohibits tax avoidance through trusts that are interrelated and place both spouses in the same economic position as if they’d each created trusts naming themselves as life beneficiaries.

Avoid this scenario

Let’s suppose that your and your spouse’s estates will trigger a substantial tax bill when you die. You transfer your assets to an irrevocable trust that provides your spouse with an income interest for life, access to principal at the trustee’s discretion and a testamentary, special power of appointment to distribute the trust assets among your children.

Ordinarily, assets transferred to an irrevocable trust are removed from your taxable estate (though there may be gift tax implications). But let’s say that two weeks later, your spouse establishes a trust with a comparable amount of assets and identical provisions, naming you as life beneficiary. This arrangement would violate the reciprocal trust doctrine, so for tax purposes the transfers would be undone by the IRS and the value of the assets you transferred would be included in your respective estates.

In this example, the intent to avoid estate tax is clear: Each spouse removes assets from his or her taxable estate but remains in essentially the same economic position by virtue of being named life beneficiary of the other spouse’s estate.

Create two substantially different trusts

There are many ways to design trusts to avoid the reciprocal trust doctrine, but essentially the goal is to vary factors related to each trust, such as the trust assets, terms, trustees, beneficiaries or creation dates, so that the two trusts aren’t deemed “substantially similar” by the IRS. Contact us to learn more.

Ashleigh Laabs 5/10/21 Ashleigh Laabs 5/10/21

A difficult decision: Choosing a guardian for your children

If you have minor children, choosing a guardian to care for them should you die unexpectedly is one of the most important estate planning decisions you must make. It’s also one of the most difficult. So difficult, in fact, that avoiding it is one of the most common reasons people put off drafting an estate plan.

If you’re hesitant to name a guardian for your children, consider the alternative: A court will name one, without any prior guidance from you. So it’s important to choose a guardian now, while you still have a say in the matter.

Here are four tips to guide you in making your selection:

1. Take inventory. Make a list of potential guardians — people you trust to love and care for your children. Don’t limit yourself to immediate family members. Extended family members and friends may also be good choices if they have a close relationship with your children and share your values.

2. Make value judgments. Consider the values that are important to you, such as religious and moral beliefs, parenting philosophy, educational values, and social values. Determine which people on your list share these values most closely.

Bear in mind that you’re not likely to find a perfect match, so you’ll need to prioritize your values. For example, is it more important to you that your guardian share your religious beliefs or that he or she share your parenting philosophy? Can educational values take a back seat to social values?

3. Consider age. The age of the guardian as well as the ages of your children are factors to consider. If your children are very young, a grandparent or other older person may not have the energy to keep up with them. And remember, if a guardian becomes necessary it means that something has happened to you. Choosing a younger guardian reduces the risk that your kids will go through the trauma of losing another loved one.

4. Don’t dismiss the possibility of separate guardians. If you have more than one child, it’s generally best for all concerned to keep the siblings together. But sometimes it’s preferable to split them up. This may be the case if you have children from different marriages, if your children are far apart in age or if they have special needs that are better served by separate guardians.

After you narrow your list of potential guardians to a primary choice and one or two alternates, discuss your plans with them. You can’t force someone to act as your children’s guardian, so it’s critical to talk with all the candidates to make sure they understand what’s expected of them and that they’re willing to take on the responsibility. If your children are old enough, get their input as well. Contact us with any questions regarding choosing a guardian.

Ashleigh Laabs 4/29/21 Ashleigh Laabs 4/29/21

4 reasons to revisit your powers of attorney

Although much of estate planning deals with what happens after you die, it’s equally important to have a plan for making critical financial or medical decisions if you’re unable to make them for yourself.

Carefully designed financial and health care powers of attorney allow you to designate a trusted person to make financial and medical decisions on your behalf in the event an illness or injury renders you unconscious or otherwise incapacitated. They also allow you to provide your designee with guidance on making these decisions, including your preferences regarding the use of life-sustaining medical procedures.

Review and revise as needed

Powers of attorney can provide peace of mind that your wishes will be carried out, but it’s important not to get lulled into a false sense of security. You should revisit these documents periodically in light of changing circumstances and consider executing new ones.

Possible reasons you may need new powers of attorney include:

Your wishes have changed.
The person you designated to act on your behalf has died or otherwise become unavailable.
You’re no longer comfortable with the person you designated. (For example, perhaps you designated your spouse, but have since divorced.)
If you’ve moved to another state, your powers of attorney may no longer work the way you intended. Certain terms have different meanings in different states, and states don’t all have the same procedural requirements. Some states, for example, require durable powers of attorney to be filed with the local county recorder or some other government agency.

Honoring your powers of attorney

Even if your circumstances haven’t changed, it’s a good idea to execute new powers of attorney every few years. Why? Because powers of attorney are effective only if they’re honored, and — because of liability concerns — some financial institutions and health care providers may be reluctant to honor documents that are more than a few years old.

Contact us with any questions regarding powers of attorney. We’d be pleased to further explain how they work or, if your estate plan already includes powers of attorney, help determine if you need to revise them or execute new documents.

Ashleigh Laabs 4/27/21 Ashleigh Laabs 4/27/21

Should a tax apportionment clause be in your estate plan?

Even though the federal gift and estate tax exemption is currently very high ($11.7 million for 2021), there are families that still have to contend with significant federal estate tax liability. Plus, the exemption is scheduled to drop significantly in 2026, and reducing it sooner has been proposed. Even if you aren’t subject to federal tax, there may be taxes levied on your estate by your state. If your estate could be subject to estate tax, it’s important to consider how the tax will be apportioned. In some cases, including a carefully worded apportionment clause in your estate plan can be beneficial.

Apportionment options

Without an apportionment clause, apportionment will primarily be governed by applicable state law (although federal law covers certain situations). Most states have some form of an “equitable apportionment” scheme. Essentially, this approach requires each beneficiary to pay the estate tax generated by the assets he or she receives. Some states provide for equitable apportionment among all beneficiaries while others limit it to assets that pass through a will or to the residuary estate.

Often, state apportionment laws produce satisfactory results, but in some cases they may be inconsistent with your wishes. An apportionment clause allows you to specify how the estate tax burden will be allocated among your beneficiaries so that you can ensure your goals are achieved.

There’s no one right way to apportion estate taxes, but it’s important to understand how taxes would be apportioned under applicable law. If that wouldn’t be consistent with your wishes, consider an apportionment clause and any other changes you may need to make to your estate plan to ensure that your wealth is distributed in the manner you intend.

Suppose, for example, that your will leaves real estate valued at $10 million to your son, with your residuary estate, consisting of $10 million in stock and other liquid assets, passing to your daughter. Your intent is to treat your children equally. But your will doesn’t include an apportionment clause, and applicable law provides for estate taxes to be paid out of the residuary estate. Thus, the entire estate tax burden — including taxes attributable to the real estate — would be borne by your daughter.

One way to avoid this result is to apportion the taxes to both your son and daughter. But that approach could cause problems for your son, who may lack the funds to pay the tax without selling the property. To avoid this situation while treating your children equally, you might apportion the taxes to your residuary estate but provide life insurance to cover your daughter’s tax liability.

Talk to your advisor

If estate tax liability remains a concern, consult with us about the need to address tax apportionment in your estate plan. Without including an apportionment clause, heirs may be burdened with paying the tax attributable to assets they don’t receive.

Ashleigh Laabs 4/21/21 Ashleigh Laabs 4/21/21

Spendthrift trusts aren’t just for spendthrifts

Now that the federal gift and estate tax exemption has reached an inflation-adjusted $11.7 million for 2021, fewer estates are subject to the federal tax. And even though President Biden has proposed reducing the exemption to $3.5 million, it’s uncertain whether that proposal will pass Congress. If nothing happens, the exemption is scheduled to revert to an inflation-adjusted $5 million on January 1, 2026. Nonetheless, estate planning will continue to be essential for most families. That’s because tax planning is only a small component of estate planning — and usually not even the most important one.

The primary goal of estate planning is to protect your family, and saving taxes is just one of many strategies you can use to provide for your family’s financial security. Another equally important strategy is asset protection. And a spendthrift trust can be an invaluable tool for preserving wealth for your heirs.

“Spendthrift” is a misnomer

Despite its name, the purpose of a spendthrift trust isn’t just to protect profligate heirs from themselves. Although that’s one use for this trust type, even the most financially responsible heirs can be exposed to frivolous lawsuits, dishonest business partners or unscrupulous creditors.

A properly designed spendthrift trust can protect your family’s assets against such attacks. It can also protect your loved ones in the event of relationship changes. If one of your children divorces, your child’s spouse generally can’t claim a share of the spendthrift trust property in the divorce settlement.

Also, if your child predeceases his or her spouse, the spouse generally is entitled by law to a significant portion of your child’s estate. In some cases, that may be a desirable outcome. But in others, such as second marriages when there are children from a prior marriage, a spendthrift trust can prevent your child’s inheritance from ending up in the hands of his or her spouse rather than in those of your grandchildren.

Safeguarding your wealth

A variety of trusts can be spendthrift trusts. It’s just a matter of including a spendthrift clause, which restricts a beneficiary’s ability to assign or transfer his or her interest in the trust and restricts the rights of creditors to reach the trust assets.

It’s important to recognize that the protection offered by a spendthrift trust isn’t absolute. Depending on applicable law, it may be possible for government agencies to reach the trust assets — to satisfy a tax obligation, for example.

Generally, the more discretion you give the trustee over distributions from the trust, the greater the protection against creditors’ claims. If the trust requires the trustee to make distributions for a beneficiary’s support, for example, a court may rule that a creditor can reach the trust assets to satisfy support-related debts. For increased protection, it’s preferable to give the trustee full discretion over whether and when to make distributions.

If you have further questions regarding spendthrift trusts, please contact us. We’d be happy to help you determine if one is right for your estate plan.

Ashleigh Laabs 4/21/21 Ashleigh Laabs 4/21/21

What happens if your spouse fails to designate you as beneficiary of his or her IRA?

One advantage of inheriting an IRA from your spouse is that you’re entitled to transfer the funds to a spousal rollover IRA. The rollover IRA is treated as your own IRA for tax purposes, which means you need not begin taking required minimum distributions (RMDs) until you reach age 72. This differs from an IRA inherited from someone other than a spouse, when the entire IRA balance must be withdrawn within 10 years of the original owner’s death. (Note that different rules apply to IRAs inherited before January 1, 2020.)

But what happens if your spouse mistakenly named a trust as beneficiary of his or her IRA, or failed to name a beneficiary at all?

Correcting the mistake

According to IRS guidance, there may be strategies you can use to ensure that you receive the benefits of a spousal rollover. Typically, this guidance comes in the form of private letter rulings (PLRs), which cannot be cited as precedent but indicate how the IRS is likely to rule in similar cases.

In one example, as described in a 2019 PLR, a deceased person named a trust as beneficiary of his IRA and failed to name a contingent beneficiary. The trustee executed a qualified disclaimer of the trust’s interest in the IRA, as did the deceased’s son and two grandchildren. The IRS ruled that the deceased’s wife was entitled to complete a spousal rollover.

Other rulings have permitted similar strategies when deceased individuals have failed to designate a beneficiary, causing an IRA or qualified retirement plan account to be included in their estates.

Consulting a professional

Be aware that PLRs depend on the specific facts presented in each case, so consult with us before taking any action. However, these rulings indicate that, when loved ones make beneficiary designation mistakes, there may be strategies you can use to correct them.

Ashleigh Laabs 4/7/21 Ashleigh Laabs 4/7/21

Keep it all in the family: Transferring your vacation home

If your family owns a vacation home, you know what a relaxing refuge it can be. This is especially true these days due to the limited travel options you may have because of COVID-19 pandemic restrictions. However, without a solid plan and ground rules that all family members agree to, conflict and tension may result in a ruined vacation — or worse yet, selling the home.

Determining ownership

From an estate planning standpoint, it’s important for all family members to understand who actually owns the home. Family members sharing the home will more readily accept decisions about its usage or disposition knowing that they come from those holding legal title.

If the home has multiple owners — several siblings, for example — consider the form of ownership carefully. There may be advantages to holding title to the home in a family limited partnership (FLP) and using FLP interests to allocate ownership interests among family members. You can even design the partnership — or a separate buy-sell agreement — to help keep the home in the family.

Laying down the rules

Typically, disputes between family members arise because of conflicting assumptions about how and when the home may be used, who’s responsible for cleaning and upkeep, and how the property will ultimately be sold or transferred. To avoid these disputes, it’s important to agree on a clear set of rules that cover using the home (when, by whom); and responsibilities for cleaning, maintenance and repairs.

If you plan to rent out the home as a source of income, it’s critical to establish rules for such activities. The tax implications of renting out a vacation home depend on several factors, including the number of rental days and the amount of personal use during the year.

Planning for the future

What happens if an owner dies, divorces or decides to sell his or her interest in the home? It depends on who owns the home and how the legal title is held. If the home is owned by a married couple or an individual, the disposition of the home upon death or divorce will be dictated by the relevant estate plan or divorce settlement.

If family members own the home as tenants-in-common, they’re generally free to sell their interests to whomever they choose, to bequeath their interests to their heirs or even to force a sale of the entire property under certain circumstances. If they hold the property as joint tenants with rights of survivorship, an owner’s interest automatically passes to the surviving owners at death. If the home is held in an FLP, family members have a great deal of flexibility to determine what happens to an owner’s interest in the event of death, divorce or sale.

Handle with care

A vacation home that has been in your family for generations needs to be handled carefully. You likely want to do everything possible to hold on to it for future generations. We can assist you in developing a plan to help you achieve this.

Ashleigh Laabs 3/27/21 Ashleigh Laabs 3/27/21

A revocable living trust works only if you properly fund it

A revocable living trust is often used to complement a will. For instance, you might transfer specific securities to the trust. Notably, these assets generally don’t have to go through the probate process, which can be time-consuming and expensive.

Thus, a living trust enables your beneficiaries to receive some of your wealth on your death, with no complications. However, it won’t do anybody any good if the trust isn’t properly funded.

Legal ownership of assets

Funding the trust is simply the process of transferring assets to it. Essentially, you change legal ownership of your assets from your name to the trust’s name.

If you don’t properly transfer assets to the trust, you run the risk that you won’t accomplish your objectives, particularly with respect to avoiding probate. In that case, the disposition of the assets is governed by your will. For that reason, you should add a “pour-over” provision to your will, directing any leftovers to the trust.

Assets to transfer

What should you transfer? Some typical examples include bank accounts, securities, real estate and business interests. Generally, you can transfer these assets with little difficulty, although real estate may require some additional footwork. Make sure to change the beneficiary designations for assets that are to be transferred to the trust. Typically, you’ll want to avoid transferring IRA and 401(k) plan or other retirement plan benefits to a revocable trust. Without careful consideration and proper planning, naming the trust as beneficiary can trigger unwanted tax consequences.

It’s often recommended that you transfer ownership of life insurance policies and annuities to a trust. But note that, absent certain exceptions, there are rules that will cause insurance policies and annuities transferred within three years of your death to be included in your taxable estate. Rather than transfer the ownership, you might simply change the beneficiary designations. The decision may hinge on whether estate tax is likely to be a factor.

Turn to us for guidance

Revocable trusts provide significant benefits, including the ability to avoid probate of the assets they hold and facilitating management of a person’s assets in the event he or she becomes incapacitated. If you have questions regarding your revocable trust and what assets you should fund it with, contact us. We’d be happy to help.

Ashleigh Laabs 3/21/21 Ashleigh Laabs 3/21/21

Do you need to file a gift tax return?

It’s tax-filing season, and you’re likely focused on your income or business tax returns. But don’t forget about another type of return. In 2020, if you made substantial gifts of wealth to family members you may have to file a gift tax return.

Filing a gift tax return

Generally, a federal gift tax return (Form 709) is required if you make gifts to or for someone during the year (with certain exceptions, such as gifts to U.S. citizen spouses) that exceed the annual gift tax exclusion ($15,000 per person for 2020 and 2021). While an unlimited amount can be gifted to a U.S. citizen spouse, there’s a separate exclusion for gifts to a noncitizen spouse ($157,000 for 2020 and $159,000 for 2021).

Also, if you make gifts of future interests, even if they’re less than the annual exclusion amount, a gift tax return is required. Finally, if you split gifts with your spouse, regardless of amount, you must file a gift tax return.

The return is due by April 15 of the year after you make the gift, so the deadline for 2020 gifts is coming up soon. But you can extend the deadline to October 15 by filing for an extension. (The IRS announced that the federal income tax filing and payment due date has been extended from April 15, 2021, to May 17, 2021. However, the IRS didn’t specifically address the gift tax filing deadline. Additional IRS guidance is expected soon.)

Being required to file a form doesn’t necessarily mean you owe gift tax. You’ll owe tax only if you’ve already exhausted your lifetime gift and estate tax exemption ($11.58 million for 2020 and $11.7 million for 2021).

When a return isn’t required

No gift tax return is required if you:

Paid qualifying educational or medical expenses on behalf of someone else directly to an educational institution or health care provider,
Made gifts of present interests that fell within the annual exclusion amount,
Made outright gifts to a spouse who’s a U.S. citizen, in any amount, including gifts to marital trusts that meet certain requirements, or
Made charitable gifts and aren’t otherwise required to file Form 709 — if a return is otherwise required, charitable gifts should also be reported.

If you transferred hard-to-value property, such as artwork or interests in a family-owned business, consider filing a gift tax return even if you’re not required to. Adequate disclosure of the transfer in a return triggers the statute of limitations, generally preventing the IRS from challenging your valuation more than three years after you file.

In some cases, it’s even advisable to file Form 709 to report nongifts. For example, suppose you sold assets to a family member or a trust. Again, filing a return triggers the statute of limitations and prevents the IRS from claiming, more than three years after you file the return, that the assets were undervalued and, therefore, partially taxable.

Seek professional help

Estate tax rules and regulations can be complicated. If you need help determining whether a gift tax return needs to be filed, contact us.

Ashleigh Laabs 3/16/21 Ashleigh Laabs 3/16/21

Dissecting the contents of a will

For many people, the first thing they think of when they hear the words “estate plan” is a will. And for good reason, as it’s the cornerstone of any estate plan. But do you know what provisions should be included in a will and what are best to leave out? The answers to those questions may not be obvious.

Understanding the basics

Typically, a will begins with an introductory clause, identifying yourself along with where you reside (city, state, county, etc.). It should also state that this is your official will and replaces any previous wills.

After the introductory clause, a will generally explains how your debts and funeral expenses are to be paid. Years ago, funeral expenses were often paid out of the share of assets going to an individual’s children, instead of the amount passing to his or her spouse under the unlimited marital deduction. However, now that the inflation-adjusted federal gift and estate tax exemption has increased to $11.7 million for 2021, this may not be as critical as before.

A will may also be used to name a guardian for minor children. To be on the safe side, name a backup in case your initial choice is unable or unwilling to serve as guardian or predeceases you.

Making specific bequests

One of the major sections of your will — and the one that usually requires the most introspection — divides up your remaining assets. Outside of your residuary estate, you’ll likely want to make specific bequests of tangible personal property to designated beneficiaries.

If you’re using a trust to transfer property, make sure you identify the property that remains outside the trust, such as furniture and electronic devices. Typically, these items aren’t suitable for inclusion in a trust. If your estate includes real estate, include detailed information about each property and identify the specific beneficiaries.

Finally, most wills contain a residuary clause. As a result, assets that aren’t otherwise accounted for go to the named beneficiaries.

Addressing estate taxes

The next section of the will may address estate taxes. Remember that this isn’t necessarily limited to federal estate tax; it can also apply to state death taxes. You might arrange to have any estate taxes paid out of the residuary estate that remains after assets have been allocated to your spouse.

Naming an executor

Toward the end of the will, the executor is named. This is usually a relative or professional who’s responsible for administering the will. Of course, the executor should be a reputable person whom you trust. Also, include a successor executor if the first choice is unable to perform these duties. Frequently, a professional is used in this backup capacity.

Turn to the professionals

Regardless of your age, health and net worth, if you want to have a say in what happens to your children and your wealth after you’re gone, you need a will. Contact us for assistance with tax-saving estate strategies and contact your attorney to help you draft your will.

One final item, please note that a Will never avoids probate. It is a roadmap that tells probate how you want things done. In order to avoid probate you have to use a trust or other method of distributing your property.

Ashleigh Laabs 3/8/21 Ashleigh Laabs 3/8/21

Creating an education legacy using a family education trust

For many people, an important goal of estate planning is to leave a legacy for their children, grandchildren and future generations. And what better way to do that than to help provide for their educational needs? A 529 plan can be a highly effective tool for funding tuition and other educational expenses on a tax-advantaged basis. But when the plan’s owner (typically a parent or grandparent) dies, there’s no guarantee that subsequent owners will continue to use it to fulfill the original owner’s vision.

To create a family education fund that lives on for generations, a carefully designed trust may be the best solution. But trusts have a significant drawback: Unlike 529 plans, the earnings of which are tax-exempt if used for qualified education expenses, trusts are subject to some of the highest federal income tax rates in the tax code.

One strategy for gaining the best of both worlds is to establish a family education trust that invests in one or more 529 plans.

Plan basics

529 plans are state-sponsored investment accounts that permit parents, grandparents and other family members to make substantial cash contributions. Contributions are nondeductible, but the funds grow tax-free and earnings may be withdrawn tax-free for federal income tax purposes provided they’re used for qualified education expenses. Qualified expenses include tuition, fees, books, supplies, equipment, and some room and board at most accredited colleges and universities and certain vocational schools. Contributions to 529 plans are removed from your taxable estate and shielded from gift taxes by your lifetime gift and estate tax exemption or annual exclusions.

In addition to the risk that a subsequent owner will use the funds for noneducational purposes, disadvantages of 529 plans include relatively limited investment choices and an inability to invest assets other than cash.

Holding a 529 plan in a trust

Establishing a trust to hold one or more 529 plans provides several significant benefits:

It allows you to maintain tax-advantaged education funds indefinitely (depending on applicable state law) to benefit future generations and keeps the funds out of the hands of those who would use them for other purposes.
It allows you to establish guidelines on which family members are eligible for educational assistance, direct how the funds will be used or distributed in the event they’re no longer needed for educational purposes, and appoint trustees and successor trustees to oversee the trust.
It can accept noncash contributions and hold a variety of investments and assets outside 529 plans.

A trust may also use funds held outside of 529 plans for purposes other than education, such as paying medical expenses or nonqualified living expenses.

Plan carefully

If you’re interested in setting up a family education trust to hold 529 plans and other investments, contact us. We can help you design a trust that maximizes educational benefits, minimizes taxes and offers the flexibility you need to shape your educational legacy.

Ashleigh Laabs 2/27/21 Ashleigh Laabs 2/27/21

Take control of your charitable donations using restrictions

Did you know that you can put restrictions on charitable donations you make through your estate? If you want the peace of mind that your donations are used to fulfill your intended charitable purposes, you’ll need to take the steps to add restrictions.

Reasons to add restrictions

Even if a charity is financially sound when you make a gift, there are no guarantees it won’t suffer financial distress, file for bankruptcy protection or even cease operations down the road. The last thing you probably want is for a charity to use your gifts to pay off its creditors or for some other purpose unrelated to the mission that inspired you to give in the first place.

One way to help preserve your charitable legacy is to place restrictions on the use of your gifts. For example, you might limit the use of your funds to assisting a specific constituency or funding medical research. These restrictions can be documented in your will or charitable trust or in a written gift or endowment fund agreement.

Restrictions in action

Depending on applicable federal and state law and other factors, carefully designed restrictions can prevent your funds from being used to satisfy creditors in the event of the charity’s bankruptcy. If these restrictions are successful, the funds will continue to be used according to your charitable intent, either by the original charity (in the case of a Chapter 11 reorganization) or by an alternate charity (in the case of a Chapter 7 liquidation).

Do your homework

In addition to restricting your gifts, it’s a good idea to research the charities you’re considering, to ensure they’re financially stable and use their funds efficiently and effectively. One powerful research tool is the IRS’s Tax Exempt Organization Search (TEOS). TEOS provides access to information about charitable organizations, including newly filed information returns (Form 990), IRS determination letters and eligibility to receive tax-deductible contributions. Contact us if you have questions regarding your charitable donations.

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