I’ve written before about the risks of do-it-yourself estate planning and document drafting.  Since then, as I’ve given more presentations and had more conversations with those who have either tried drafting their own documents or considered using a “document service” (such as Legalzoom or Rocket Lawyer), I’ve noticed a pattern of errors and misunderstandings when it comes to the basics.  Since these issues come up so often, I thought I would address them directly; this is part one of a five-part blog series on the risks of creating these complex documents without the assistance of an estate planning attorney.  The first problem on my list for do-it-yourselfers:

There Are No Do-Overs

Re-Do Red Button Redo Change Revision ImprovementI admit it, I’m a do-it-yourselfer when it comes to certain things.  As I’ve gotten a little older, I’ve learned some unfortunate truths about my handiwork.  I know, for example, that I don’t know how to put a new roof on my house.  I know that if I were to try, it would probably look ok, and it would probably mostly keep the water out.  But after one or two rains, I know I would grow frustrated and I would end up hiring someone who knows what they are doing to just re-do the whole project.  This means I would likely pay for this project twice . . . once on the cheap, and once for quality work after I realize it my own roof job didn’t turn out how I had hoped.

And who could blame me?  Why would I want to pay someone thousands of dollars to re-roof the house when I could just read a book and do it myself?  Why would I hire someone to build a fence around my yard when I can just rent the tools at Home Depot?  Why have someone sand and stain my floors when I can just do it over a summer on my own time?

The problem with this anecdote as it applies to estate planning is that once you or your family realizes the roof is leaking, it’s too late.  If you thought your health care directive would help someone make health care decisions for you, but it wasn’t executed properly, it’s too late to fix it by the time you need it.  If you draft a will and you leave money to your minor children, it’s too late to fix it once the will is probated and it’s pointed out that minors can’t own property, or that your IRA and 401K beneficiaries aren’t drafted to match the rest of your plan.  It’s too late when the probate court sets aside your documents because they had the wrong signatures (in Minnesota, if you don’t have two witnesses to your signature, your will becomes someone’s scrap paper).  It’s too late when your family realizes you didn’t update your will after your divorce, or after the birth of your new child, or after you had grandchildren.  It’s too late once it’s realized that your distribution plan has an ambiguity, and your family will be spending thousands of dollars on a formal probate proceeding, or that the person you appointed as a guardian for your children is unable to act, and you didn’t appoint a backup.

There are ways to make your estate planning goals a reality, but there is no getting around the fact that this area of law is highly technical and is fraught with ways to make things very, very difficult for your family.  Your family doesn’t need the added dose of confusion and heartache that bad legal documents will bring.  Consider carefully the benefits of having your estate planning “house” roofed properly the first time; your family will know the difference.

Stay tuned for Part Two of my blog series, where I’ll talk about the next big misunderstanding about do-it-yourself planning: Kids Can’t Own Property.  If you have any questions about your plan, I’m here to help.

creates wills and trusts for families who want to feel secure that their loved ones are cared-for. Philip is a trust and estate attorney based in Minneapolis, Minnesota. Philip is the author of Trustee University: The Guidebook to Best Practices for Family Trustees. available at Amazon.com in paperback or Kindle edition (free chapter available here!) He also works with trustees and beneficiaries who need help with their trusts. You can contact him here.

Medical directive document in a clipboardMy earlier post on powers of attorney forms touched heavily on the issue of incapacity.  The specific question addressed by a power of attorney form is, “who will make my financial decisions and handle my financial affairs if I am unable to do so on my own?”  If a person becomes incapacitated and does not have a power of attorney form on file, it is possible that a conservatorship will have to be created to manage the finances of that person.  This is incredibly expensive and creates much unnecessary heartache for those who wish to care for their loved one; this mess can be prevented for a fraction of the cost and trouble by appointing an attorney-if-fact with a properly executed power of attorney form.

Not all decisions that must be made for an incapacitated person are financial, of course. Though care for finances is certainly important, who will decide which medications can be administered?  Who will have access to health care documents and records?  Who will get to decide if the you should be cared for in a hospital or in an assisted living facility?  Should you be visited by clergy?  What decisions should be made about life support?  Importantly, once you appoint someone to make these decisions for you, how will they understand your beliefs and values so he or she makes the right decisions?  All of these questions can be addressed by creating a valid health care directive (sometimes called a living will or an advanced directive).

Your Health Care Agent

Your health care directive is where you can appoint a person whom you trust to make the right decisions about your health care.  This person can be a spouse, family member, a close friend, or even a professional fiduciary.  It’s usually best that the person be local; if you are in Minnesota and your health care agent is in California, that person may have a tough time meeting and talking with the professionals who are providing your care.  You can (and should) also name a back-up health care agent who can act if your first choice is unable or unwilling to accept the appointment.  Married couples often (but not always) name each other as their primary health care agents, then selected a trusted sibling or parent to be the back-up.

Your Values in Print

Your health care agent will be empowered to make health care decisions on your behalf.  But what do you want them to do?  Fortunately, you can outline your wishes in your directive.  Your health care directive can specify your thoughts on life support — perhaps you wish to be kept on life support indefinitely.  Perhaps you wish that your medical professionals exhaust all reasonable means to help you recover, but you don’t want to be kept alive artificially if in their professional opinion you will not regain consciousness.  Maybe you do not want certain pain medications; perhaps you have specific wishes for clergy or other individuals to be present.  Maybe you want to have a therapy animal present when possible.  Your health care directive can provide as much information to your health care agent as you wish.

More Important Than a Will?   

I often tell my clients that a power of attorney document and a health care directive — together — are oftentimes even more important than a will because we are more likely to need these documents.  Most people have a better chance of becoming incapacitated temporarily at some point in their lives than they do of dying prematurely.  Many people recall the case of Terry Schiavo, a very sad story of a young woman whose family could not agree on whether she should be pulled from life support.  A properly executed health care directive can put your wishes in writing and avoid much family tension and heartache.

Your Plan

I often call a power of attorney form and a health care directive “everybody documents,” since really, everyone over the age of eighteen should have one.  And of course, any estate plan is not complete without incapacity planning.  A health care directive and a power of attorney form, when properly drafted and executed, can ensure you’ll receive the care you deserve in a manner that is controlled by you and is easier on your family.  Many attorneys will include these documents automatically when they draft a will or trust plan.  Please contact me if I can help.

creates wills and trusts for families who want to feel secure that their loved ones are cared-for. Philip is a trust and estate attorney based in Minneapolis, Minnesota. Philip is the author of Trustee University: The Guidebook to Best Practices for Family Trustees. available at Amazon.com in paperback or Kindle edition (free chapter available here!) He also works with trustees and beneficiaries who need help with their trusts. You can contact him here.

Keywords: trusts and estates, Minnesota wills, revocable trusts, estate attorney, probate, estate planning

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Before my grandfather passed away, he suffered for years from severe dementia;  during his last few years he rarely understood where he was or who was around him. He wasn’t a rare case in this regard . . . worldwide, over thirty-five million people have dementia, and there are over seven million new cases each year. Alzheimer’s is the most common cause of dementia, and was certainly a cause of my grandfather’s.

When most people think of estate planning, the first document that comes to mind is usually a will. A will is a document that expresses your wishes about the property you own in your own name at the time of your death. If properly written and properly executed, your will is used to guide the court proceedings — collectively called probate — which allow your executor to distribute your things to your beneficiaries. But estate planning isn’t just about distributing your things . . . it’s also about minimizing the problems and complications that affect your family. This includes planning for incapacity, which is any period where you are physically unable to make decisions for yourself.

What happens if you don’t have a valid power of attorney form?  he answer is “nothing good.” If there is no one authorized to sign documents for you, then the court will have to appoint a conservator to act on your behalf. This is incredibly expensive; a conservatorship proceeding will run into the thousands of dollars. A power of attorney form will cost a small fraction of that amount.

There are two documents most commonly associated with incapacity planning.  The first, which will be covered by my next blog post, is a health care directive. A health care directive appoints someone (called your health care agent) to make health care decisions on your behalf when you are unable to do so. The other incapacity planning form is a power of attorney form, which is a form you sign to authorize another person (called your attorney in fact) to make financial decisions for you.

There are a number of types of power of attorney forms; the most common is a durable power of attorney, which allows your attorney in fact to make decisions for you now and after you become incapacitated. In Minnesota, there are two types of durable power of attorney forms: a statutory form and a common law form. The biggest difference between the two if someone refuses to accepts a properly drafted and executed statutory form, that person or organization can be subject to criminal and civil penalties. This is the reason most estate planners use the statutory form as their default power of attorney form.

A word of caution: once you have signed your durable power of attorney form, your attorney in fact is able to begin signing on your behalf immediately. This can be incredibly convenient if you are travelling or if you and your spouse are living in separate states due to a move or a job change. It can also be great if you have a child who has recently left to go to college and you want to be able to continue to sign their financial documents for them.  But you should make sure you appoint someone you trust, implicitly. A durable power of attorney is sometimes sardonically referred to as a “license to steal,” since appointing someone untrustworthy to manage your affairs gives them the power to do just that.  A springing power of attorney is a document that only takes effect at your incapacity; this form is not available in statutory form.

You should keep all of your estate planning documents in a safe place where people know to find them (your power of attorney form will be of little use if your attorney in fact is unable to locate it). Contact a qualified attorney to talk about incapacity planning; your family will thank you. As always, I’m here to help.

creates wills and trusts for families who want to feel secure that their loved ones are cared-for. Philip is a trust and estate attorney based in Minneapolis, Minnesota. Philip is the author of Trustee University: The Guidebook to Best Practices for Family Trustees. available at Amazon.com in paperback or Kindle edition (free chapter available here!) He also works with trustees and beneficiaries who need help with their trusts. You can contact him here.

Keywords: trusts and estates, Minnesota wills, revocable trusts, estate attorney, probate, estate planning

I’d like to think my wife and I are on pleasant enough terms where I am never going to ask
Marriage and money concept of high wedding cost and divorcemyself this question: can I disinherit my spouse?  But the decision to disinherit somebody doesn’t always come about because you don’t like each other; there can be other reasons why it makes sense to leave your assets to someone other than your spouse.

One such reason might be that your spouse simply has enough assets in his or her own name and you have both agreed that your assets are best used somewhere else . . . perhaps in a trust for the education of your grand kids, or maybe for a charity that you support.  Another reason could be estate taxes — by leaving assets to another person (or to a trust), you prevent your spouse’s estate from getting so large that estate taxes will be due on his or her passing.  Yet another reason may be a concern that your spouse will be taken advantage of when you are gone, and you want assets to be held for him or her by a trustee.  So: can I disinherit my spouse?

Spousal Rights

The most important part of this answer is this: in Minnesota, you cannot — ever — disinherit your spouse through your will or trust document (by itself).  In Minnesota your spouse has a guaranteed right to his or her spousal share.  This means that even if your will is drafted to give all of your money goes to charity, and you change all of the beneficiaries of you IRAs and life insurance (your “non-probate” assets) to the names of your children, your spouse still has certain rights including the right to live in the house for his or her life and for some monthly support from the estate.

According to Minnesota law, your spouse also has a right to a percentage of the augmented estate.  The augmented state is (simplified) the value of your stuff plus the value of your spouse’s stuff.  If you and your spouse have been married for only a year, your spouse has a guaranteed right to three percent of the augmented estate.  This percentage increases every year of marriage until year fifteen, in which your spouse has a guaranteed right to fifty percent of the augmented estate — regardless of what you’ve written in your will or other planning documents, and regardless of how you’ve written your beneficiary designation for your non-probate accounts.   It follows that if at the fifteen-year mark the surviving spouse has more than fifty percent of your combined assets in his or her name already, then those assets already exceed half of the augmented estate and there is no additional claim to a spousal share.

Waiver of Rights

So, your spouse has a guaranteed, inalienable right to get a portion of your estate, right?  Not so fast.  There are three ways your spouse can forfeit his or her share.

  1. Pre-nuptial agreement:  Properly drafted, a pre-nuptial agreement can allow you and your spouse to disinherit each other.
  2. Post-nuptial agreement:  Your spouse can agree after you are married to forfeit certain property rights. This includes the right to his or her spousal share.
  3. Consent to will:  Your spouse can sign an acceptance of the terms of your will, including a will that completely disinherits him or her.

You’ll notice that all three of these options involve your spouse affirmatively giving permission to you to give his or her share to someone else.  This makes sense, since the spousal share is at its core a property right, and we can give away our property as we choose.  Your attorney should use extreme caution when drafting any of these three documents: your spouse should have his or her own attorney review the terms of the document to make sure he or she understands what is being given up and any consequences of doing so.

Disinheriting anyone is a big decision that can carry big legal consequences.  Make sure you contact an attorney who is experienced in estate planning before making any major decision that affects your loved ones.  Done properly, there are ways your assets may better serve your family than if they are all left to your husband or wife.  Please contact me so I can help.

creates wills and trusts for families who want to feel secure that their loved ones are cared-for. Philip is a trust and estate attorney based in Minneapolis, Minnesota. Philip is the author of Trustee University: The Guidebook to Best Practices for Family Trustees. available at Amazon.com in paperback or Kindle edition (free chapter available here!) He also works with trustees and beneficiaries who need help with their trusts. You can contact him here.

Keywords: trusts and estates, Minnesota wills, revocable trusts, estate attorney, probate, estate planning

When most people think of completing estate planning documents such as a will or trust
agreement, they think of how they would pass their assets to their loved ones.  And indeed Rewardthat is the reason we create these documents, to make sure our loved ones are cared-for once we pass.  But one of the best estate planning tools (to be used together with your estate planning documents) is to gift your assets to your loved ones while you are still alive.  Lifetime giving has a number of benefits, both financially and otherwise.

Enjoyment

Who doesn’t want to see the looks on the faces of those they care about most when their loved ones receive help with their student loans or with the down payment for their first home?  Of course your family members would be grateful for receiving this same gift after your passing, but being able to revel in your family’s happiness is part of the reason we accumulate assets in the first place.  Spreading the feelings of security and freedom that go with having some extra money is as fulfilling as any reason to share these gifts with your loved ones while you are able to witness their smiles first hand. Likewise, the beneficiaries of your gifts will get to share the experience with you.

Simplicity

As an attorney, I do my best to keep costs under control for my clients.  This ensures that the client feels he or she has received value for my services while I am able to maintain an efficient client relationship.  Nonetheless, lawyer fees are lawyer fees, and if I am working to transfer property with the help of a probate judge, that is going to cost your beneficiaries money.  If you transfer that car, those stock shares, or that cash while you are alive, you’re going to save some attorney fees because it is easier to transfer property while you are still alive.  People often want to avoid the probate process specifically because it can be expensive.

Estate Taxes

This applies more to large estates than small or medium estates, but paying federal gift taxes on a transfer of property is cheaper than paying estate taxes for the exact same transfer after death.  This is true even though the exclusion amounts and tax rates for these two taxes are identical.  This is because gift taxes are exclusive, while estate taxes are inclusive.  When I transfer money or assets by making a lifetime gift and owe federal gift taxes, those taxes are going to be paid by me, and will then be out of my estate . . . that tax money I just paid is now out of my estate for good, and will itself not be taxed . . . it will be excluded.  If I make these gifts at death via my will or other estate planning vehicle, that tax is assessed on my gross estate.  That means the money I will have to use to pay my estate taxes will itself also be taxed: it’s included.  Lifetime gifts will therefore be subject to fewer federal estate taxes than those made at death because the money used to pay the estate taxes is also itself subject to taxation.   I’ll emphasize that this benefit does not apply to most Americans . . . the current federal and estate tax exemption, as of this writing, is $5,340,000 per person, which means its $10,680,000 for a married couple.  That’s some big gifts that you’ll have to make before you owe any federal gift or estate taxes.

Appreciation

When you hold on to an asset that appreciates in value, eventually you may have to deal with estate taxes which will be assessed on the value of that asset at your death.  If you have an asset that you believe will appreciation significantly over your lifetime, consider making a lifetime gift to a beneficiary or to a trust for a beneficiary.  For example, if you started a small business and you owned closely-held shares of that business, you may consider giving some of these shares to your children today (taking into account possible gift tax issues).  That way, as the business appreciates in value, those shares will also appreciate out of your estate.

Proceed with Caution

There are a couple tax rules that will apply to most people.  First, gifts of appreciated property made after-death get a huge tax break in the form of a step-up in cost basis.  If I were to buy a share of stock for one dollar (which means the stock has a cost basis of one dollar) and it increases in value to $100 and I sell it, I’ll owe capital gains taxes on $99 (the sale price minus the cost basis of one dollar).  This is because the sale of the stock realized a capital gain of $99.  If buy that same share of stock for one dollar, then it increases to $100 and I give it to my family member, they will keep my same cost basis.  Because of this, if my family member subsequently sold it they would again realize that same $99 capital gain, and would owe capital gains taxes.  If, however, I gave that same share of stock to that same family member after my death, that capital gain would “reset” . . . the new cost basis would be the value of the stock on the day I died.  That means if I buy a share of stock for one dollar, it appreciates and is valued at $100 when I die, the family member who gets that share of stock now has a cost basis of $100.  If he or she sells it for $100, it is completely free of capital gains taxes.  This step-up in basis is a valuable estate planning tool, and is ideal for property that has appreciated significantly.

Note that this would not apply to assets that do experience capital gains, such as cash.  Note also that qualified charities can receive shares of appreciation stock (or other assets) and sell these assets for cash and pay no taxes whatsoever.  This is because qualified charities are tax exempt, which includes capital gains taxes.   Assets that have appreciated in value are usually best given to charities or to your heirs at your passing.

Another thing to watch out for is the annual gift tax exclusion amount, which is as of this writing $14,000.  This means you can give up to $14,000 per year, per person.  You could give $14,000 to each of your children, another $14,000 to any of your friends, etcetera.  If you exceed this amount to any single person, you will typically have to file a gift tax return (Form 709) with the IRS.  This is because any amount you gift to any one person over $14,000 gets subtracted to your lifetime exemption ($5,340,000, as mentioned above).  The IRS wants to track how much of your lifetime exemption you have used.  You may not owe tax, but you’re still going to have to file the form

Your Plan

Making lifetime gifts is a satisfying and generally straight forward method of estate planning.  It helps your family today while possibly saving on taxes.  But beware of pitfall — there are rules about how much you can give without running afoul of some complex gift and estate tax rules. Lifetime gifts are to be used in conjunction with — and not instead of — a comprehensive estate plan.  A qualified estate planning attorney can guide you through these rules.  I’m here to help.

creates wills and trusts for families who want to feel secure that their loved ones are cared-for. Philip is a trust and estate attorney based in Minneapolis, Minnesota. Philip is the author of Trustee University: The Guidebook to Best Practices for Family Trustees. available at Amazon.com in paperback or Kindle edition (free chapter available here!) He also works with trustees and beneficiaries who need help with their trusts. You can contact him here.

Keywords: trusts and estates, Minnesota wills, revocable trusts, estate attorney, probate, estate planning

The executor of your will is the individual you appoint to guide your estate through the probate process, which is the court proceedings by which a judge supervises the division closeup of a Last Will and Testament documentof your estate.  Commonly called a Personal Representative, this fiduciary will see to it that your wishes are carried out and that the instructions you leave in your will are followed.  But make sure your affairs are in order with a properly drafted plan; attorney John O. McManus points out in this Daily Finance article that “a common adage in the industry is to name your enemy as your executor as a means of revenge.”  Being an executor can be a tough job.

First and foremost, if you are married, you should consider appointing your spouse as your executor.  Your spouse has the biggest stake in your life and your death, and it makes sense that he or she is in control of the finances.  Your spouse is also most likely to be the person around whom the rest of your family — such as children and your surviving siblings — will revolve at your passing.  Strong family relationships are an important consideration for an executor.

If you do not want to appoint an immediate relative or your spouse, you might want to consider someone you know with an accounting or law background.  The settlement of an estate is a legal process that may require some tax knowledge.  If your executor does not have this background, he or she can always hire a professional.

Be careful when appointing an executor who is also getting some of your assets — there is an inherent conflict of interest when you appoint an executor who is also a beneficiary.  If the individual is trustworthy and enjoys good relationships with the other beneficiaries, this may not be a problem.  But it’s a situation where disputes can be common; after all, the executor is going to be interpreting the language of the will, and if it is perceived that the beneficiary-executor is interpreting ambiguous language in his or her favor, this can pose a problem.

Do you own a business?  Your executor will be in charge of this business interest while the estate is being administered.  If your interest is silent or if winding the business down is an easy task, then this may not be an issue . . . but if it is a labor-intensive operation with employees and specialized knowledge, the executor is going to have a tough time while he or she continues to run things.  It is very important that you have a succession plan in place for your business . . . consider appointing an executor who is familiar with running your company.

In short, your executor should be someone you trust, who is familiar with your assets, and who can maintain positive relationships with the beneficiaries of your estate.  This person can certainly be a beneficiary of the will, but this really works best when your will has been drafted appropriately and unambiguously . . . make sure you have consulted with a professional so that your plan is coherent and thorough.  Put another way by attorney McManus, “If you appoint someone you love as executor, get your house in order.  Otherwise, appoint someone you do not.”  Let me know if I can help.

creates wills and trusts for families who want to feel secure that their loved ones are cared-for. Philip is a trust and estate attorney based in Minneapolis, Minnesota. Philip is the author of Trustee University: The Guidebook to Best Practices for Family Trustees. available at Amazon.com in paperback or Kindle edition (free chapter available here!) He also works with trustees and beneficiaries who need help with their trusts. You can contact him here.

Keywords: trusts and estates, Minnesota wills, revocable trusts, estate attorney, probate, estate planning

A trustee is the individual you will appoint to manage the assets of your trust and to make sure the instructions you leave in the trust document are appropriately interpreted and followed.  When a beneficiary approaches the trustee and asks for trust funds, should the trustee make the distribution?  Perhaps as importantly, what should the trustee not pay for?

Holding piggy bankTypical trust language allows the trustee broad discretion when making distributions.  For tax planning, the IRS allows a trustee to make distributions for “health, education, maintenance, and support” (or some combination of those four words) — called an ascertainable standard or a HEMS standard — without causing the distribution language to have estate tax problems.  But what do those words really mean?  If your trustee doesn’t know your feelings on trust distributions, then the trustee may turn down requests from trust beneficiaries that you may wish the trustee to make.  Perhaps worse, the trustee may make distributions that you do not want made.

 Health

One of the most important things for a trust to pay for is health expenses.  These could be limited to such things as emergency health care or prescriptions, or it could be broad enough to include routine check-ups.  “Health” is a legal term of art in trust drafting — it does not typically cover health insurance expenses, so you will want to make sure your attorney knows whether you wish for the trust to cover these expenses or not when you are having your trust drafted.

Education

Your trust can be used to pay for your beneficiary’s college education.  When it comes to trust language, “education” is another legal term of art . . . it typically means a two- or four-year college degree.  Many trustees will give some leeway to this language and will allow funds to be used for technical school as well.  What it does not typically cover, unless defined elsewhere in the document, is graduate school or other professional training.  Make sure your document defines what “education” means so that there is no confusion.

Support and Maintenance

In trust lingo, support and maintenance really means “living expenses;” your trust can be used to pay for the daily living expenses of your beneficiary.  This can be a bit of a double-edged sword; we don’t want to leave our beneficiaries out in the cold if they lose their jobs or if they incur unexpected or urgent expenses.  On the other hand, being allowed to take a monthly stipend from trust fund can have the effect of creating a lazy and unmotivated beneficiary.  Beneficiaries may also come so used to trust funds supplementing their income that when the trust runs dry, they are unable to adjust their standard of living.  You may want to require your trustee to take into account your beneficiary’s outside resources before making a distribution.  Also consider a trustee making distribution to a beneficiary who struggles with substance abuse; these distributions could do more harm than good. Your estate attorney can advise you on proper distribution language for virtually any special circumstance.

Comfort and Reasonable Luxuries

Recall that the “HEMS” standards outlined above limit a trustee’s expenditures in order to protect the beneficiary from estate taxation problems.  When estate taxes are not a concern, trusts may become much more liberal with distributions.  Language referring to comfort and reasonable luxuries allows the trustee to make distributions outside of what is typically allowed under the HEMS standard, such as vacations, a nicer car, a better home, and perhaps some gifts.  Attorneys may add additional language that can customize the distributions a trustee may make, allowing you to create a trust that truly fits the needs of your beneficiaries.

Ultimately the trustee will make distributions based on a number of factors, such as the purpose and size of the trust, the intended duration of the trust, the ages of the beneficiaries and their anticipated financial needs later in life, the requirements and expectations of future trust beneficiaries, etcetera.  But you will get the trustee started on the right foot if your trust language and trustee instructions are clear.  If you are interested in learning more about how you can set up your trusts, please contact me.

creates wills and trusts for families who want to feel secure that their loved ones are cared-for. Philip is a trust and estate attorney based in Minneapolis, Minnesota. Philip is the author of Trustee University: The Guidebook to Best Practices for Family Trustees. available at Amazon.com in paperback or Kindle edition (free chapter available here!) He also works with trustees and beneficiaries who need help with their trusts. You can contact him here.

Keywords: trusts and estates, Minnesota wills, revocable trusts, estate attorney, probate, estate planning

If you’re like most Americans, the bulk of your liquid assets are held in retirement plans such as a 401(k) or an Individual Retirement Account (IRA).  These are great places to stash retirement funds — company matches and tax-deferred growth (or tax-free growth, in the case of Roth plans) jump-start these savings plans in a way not available for non-retirement assets.  If used properly, this will create a comfortable retirement nest egg that will carry you through your post-career life.

401k - Nest EggBut what happens after that?  There is a good chance that at least some of these assets will outlive you, and you may have other family members to care for (such as a surviving spouse).  The tax-deferred nature of qualified retirement funds presents unique challenges and opportunities for your family as you contemplate your estate planning.  The biggest thing to consider is who you will list as the beneficiaries of these plans; as far as taxes are concerned, all beneficiaries are not created equal. Speaking strictly from the standpoint of tax liability, the best beneficiaries are charities, followed by a surviving spouse, then other family members, and lastly (and definitely least), outright to your estate.

First, understand that marketable assets such as stocks and bonds receive a step-up in cost basis at the death of the owner.  Consider if I bought a share of stock for $1, and then the value of that share few to $100 and I sold it.  During my life, I would have to pay capital gains tax on the $99 gain I received from this sale (the sale of the stock at $100, less my cost basis of $1).  If instead I died and left the share of stock to a child, the child gets a new cost basis of the value of the share of stock when I died. If that value was $100, then the child gets that share of stock with a cost basis of $100.  If he or she then turned around and sold that share for $100, that child has received the stock completely tax-free, assuming my estate is below federal estate tax levels.  The step-up in basis erased any capital gains and the tax liability that would have gone with those gains.

Those same assets held in a tax-deferred retirement plan such as a 401(k) or IRA do not receive this step-up in cost basis . . . all distributions from these retirement funds, whether they be to you or to a beneficiary, are taxed as ordinary income when they are withdrawn from the retirement plan.  If I make $50,000 from my job, and I receive $10,000 from a tax-deferred retirement fund, then I pay taxes as if I made $60,000.  That’s going to be much more tax than if I instead received an inheritance from assets that are not taxed as ordinary income (such as an after-tax brokerage account).

Because these gifts contain built-in tax liability, tax-deferred retirement assets are the best assets to give to charities, if you are charitably-minded.  Because qualified charities do not pay any taxes on gifts they receive, they are the ideal beneficiaries of any estate asset that carries income or capital gains tax liability because your gift to goes further than if it were given to someone who will have to use a part of that gift to pay taxes.  This makes qualified charities the perfect beneficiary of high-tax assets such as tax-deferred retirement assets.

For those not so inclined, you should next consider leaving these assets to your spouse.  Your surviving spouse will be able to treat qualified retirement assets as if they were part of his or her own retirement account . . . this typically means he or she could defer taking distribution (and owing income tax) until the spouse 70 ½ years old, which is the age at which individuals are required to begin taking their required minimum distributions (RMDs) from qualified plans.  Even then, they will only be require to pay taxes on the required minimum distribution amount (an amount that is calculated based on the surviving spouse’s life expectancy), and will enjoy continued tax-deferred growth for the assets that remain in the retirement plan.

If you would prefer to leave your qualified tax-deferred plan to another individual such as an adult child, understand that unlike your spouse, a child will not be allowed to defer the RMD distributions until he or she turns 70 ½; the child will be required to begin taking RMDs from the plan immediately.  This can pose some problems if the child is in a high income tax bracket because your gift to them will be diminished substantially by the income taxes he or she incurs at his or her effective tax rate.  But assuming the child does not take large additional distributions from the account (which would incur even more taxes), the majority of the assets will continue to enjoy tax-deferred growth.  You can also work with an attorney to set up a trust which, if properly drafted, can accept the RMDs from the account on behalf of the child, which can then me managed by a trustee.  This is a great option if the child requires assistance in managing money.

The least preferable option, and one that occurs all too often, is to either leave the assets outright to an estate, or to a trust that is not properly structured to receive retirement distribution for a beneficiary.  If this happens, the entire account must become payable to the estate or trust within five years.  Estates and trusts have much smaller tax brackets (resulting in much higher effective tax rates) than individuals, and income tax liability can be devastating. A substantial distribution to an estate or improperly drafted trust could result in half of the gift disappearing into the hands of the tax man.

This is not to imply that someone should turn their nose up at a gift of retirement assets from a family member!  Speaking personally, I would certainly take a taxable gift over no gift at all.  But it’s worth talking about the ideal recipients of gifts from tax-deferred retirement plans so that you can maximize the gifts you make to your family members. Proper primary and secondary beneficiary designations are a key part of any estate plan, and part of what you are paying your estate planner to do.  Ensuring that you select the proper beneficiaries for your plan will give you and your family the peace of mind you deserve from your years of hard work and saving.

creates wills and trusts for families who want to feel secure that their loved ones are cared-for. Philip is a trust and estate attorney based in Minneapolis, Minnesota. Philip is the author of Trustee University: The Guidebook to Best Practices for Family Trustees. available at Amazon.com in paperback or Kindle edition (free chapter available here!) He also works with trustees and beneficiaries who need help with their trusts. You can contact him here.

Keywords: trusts and estates, Minnesota wills, revocable trusts, estate attorney, probate, estate planning

There can be a lot of confusion about probate and how it relates to someone’s estate plan. It’s typically talked about as if it were something to be avoided at all costs, lest you bankrupt your family. Talking to someone about the probate process often generates a lot of questions about the basics: What is probate? Is it expensive? It’s bad, right? How do you skip it?

closeup of a Last Will and Testament documentProbate is the process by which the court system supervises the division of an estate. “Estate” is the term given to the assets and debts held by someone at the time of their passing. A will, revocable trust, and other planning documents are created to govern what happens to the estate during the probate process (and in some cases to skip it altogether).

Not all estates will go through probate, but before I explain why, it’s important to understand three basic types of property that affect the probate estate: joint property, non-probate property, and probate property. The amount of these three types of property you have will determine not only whether your estate will go through probate, but whether the probate proceedings will be formal or informal. Spoiler: formal probate can be expensive and time consuming. Informal probate — at least in Minnesota — isn’t so bad.

Joint property, specifically property that is owned in joint tenancy with rights of survivorship (JTWROS) is property that is owned equally and in undivided shares with at least one other person. A common example of joint property is the home where someone lives with his or her spouse or significant other. If the house is deeded in the names of both owners in jointly tenancy with rights of survivorship, then the property transfers automatically at the death of the first owner to the surviving owner. The county office responsible for keeping property records will need to be notified of the passing of one of the joint owners, but aside from this, the transfer is automatic and happens outside of probate by operation of law. No probate proceeding is needed for property that is owned jointly.

Not all real estate titled in the names of multiple owners is JTWROS; property titled in the name of multiple people as tenants in common will not pass automatically to the other owners. In the case of tenants in common, the portion owned by the deceased owner is controlled by that person’s will (or if they don’t have a will, then the state’s intestacy statute). This is property that may have to be supervised in the probate process (property owned as tenants in common is probate property).

Non-probate property is very similar to JTWROS property because it is property that passes automatically at death without any probate supervision. If you have a life insurance policy, a retirement account, or an investment account which allows you to designate beneficiaries, this is typically non-probate property. The account will pass to that individual without the help of the probate court; the beneficiary will need to mail in a death certificate proving that a death has occurred, and the property becomes theirs. There can be various tax consequences with these types of transfers, so be very careful who you name as a beneficiary (a transfer of a 401K to a non-family member can cause a large amount of income tax liability which may not have occurred if the account was given to a spouse, for example). Be careful here . . . if you name your estate as the beneficiary of these accounts, then this non-probate property will suddenly become probate property, and will be controlled by your will. This can be particularly problematic for tax-deferred accounts like 401Ks and IRAs, which can cause huge unintended tax consequences. You probably shouldn’t do this.

There are other types of non-probate property, such as real estate that is titled with a transfer-on-death-deed (TODD). Any property titled in the name of a properly drafted revocable or irrevocable trust, subject to transfer rules, is also non-probate property. This property is removed from the probate estate and will be transferred to beneficiaries according to the terms of the trust document by operation of law.

Lastly we have probate property, which is, loosely, “everything else.” All of your “stuff” that is title in your name at death: your tangible personal property that has not been added to a trust, your bank accounts without beneficiary designations, your cars, your jewelry, etc.  All of this property is controlled by your will and is subject to probate. A Minnesota estate that is less than $50,000 in value will typically be allowed to skip the probate process and instead transfer via an Affidavit of Collection, though there are exceptions.

Probate proceedings in some states can be an all-out lawyer brawl and can get very expensive. Fortunately, most estates that go through the probate process in Minnesota will go through informally (it pays to be Minnesota Nice!). An affidavit is filed with the court and notice is given to the estate’s interested parties. The probate attorney is then able to distribute the probate assets subject to transfer rules and claims from creditors (due to notice requirements, this can be a slow process). If the estate is exceptionally large, if it is insolvent (the person dies with more debts than assets), if there is a dispute among family members, or if the assets are complicated, then there may be a formal probate which is typically more expensive and has a higher level of attorney and judicial involvement.

Probate laws and estate taxation laws are unique to each state. Make sure you consider your state’s laws carefully before making any estate planning decisions (this is where I mention that you should hire an attorney who specialized in estate planning). Probate doesn’t have to be the nightmare that everyone thinks it is, but that assumes your estate is not only planned properly, but is also executed according to your plan.  If you have questions, I can help.

creates wills and trusts for families who want to feel secure that their loved ones are cared-for. Philip is a trust and estate attorney based in Minneapolis, Minnesota. Philip is the author of Trustee University: The Guidebook to Best Practices for Family Trustees. available at Amazon.com in paperback or Kindle edition (free chapter available here!) He also works with trustees and beneficiaries who need help with their trusts. You can contact him here.

Keywords: trusts and estates, Minnesota wills, revocable trusts, estate attorney, probate, estate planning

Most people will receive an inheritance at some point in their lives. Whether this amount is $10 million or $10,000, not everyone is equipped to handle a windfall of cash. There is a misconception that when someone creates their will they have little choice but to leave their money to their adult (or minor) children outright. That’s not necessarily the case; parents can use a testamentary trust — a trust written directly into their wills — to hold funds back from their kids so that the money may be used for specific purposes.  What age, if ever, is it appropriate to leave your children a large sum of cash?

Holding piggy bankIf you’re nervous about when your kids should receive your money, you aren’t alone. There is increasingly a realization that twenty-somethings are not equipped to handle large sums of cash. This article references a study by U.S. Trust in which two-thirds of those polled were unsure whether their children would act responsibly with their inheritance.

When you write your will, there is always an option to leave your estate to your heirs in trust rather than outright. This might be because you are worried that someone will take advantage of your spouse financially, or because you feel that your children may not handle a large sum of money appropriately. You may also feel that the funds should be used for something specific — perhaps for medical care, college, or just for financial emergencies. Increasingly, parents want to simply keep the cash out of their children’s’ hands until the child has reached a certain age where they will be better able to manage these funds for their own benefit.

I’ve noticed that the age at which an attorney recommends a beneficiary receives his or her windfall is closely correlated to the attorney’s age. Younger attorneys are more confident that younger beneficiaries should have their money — often at age thirty-five or so. Older attorneys feel otherwise, and will often recommend a final distribution age that is much later, perhaps into a beneficiary’s forties. The appropriate age of course depends on the beneficiary: how has the beneficiary managed their money in the past?  Are there any concerns about substance abuse or gambling? Does the beneficiary have alimony or other financial obligations which need to be addressed?  Does the beneficiary run a business that has a high risk of being sued? All these things and more should be considered when determining when (or if) the beneficiary should have ready access to funds from the trust you create in your will.

I have to admit that I am biased towards a later inheritance age for beneficiaries.  Having worked as a professional trustee for a number of years, I have seen, repeatedly, what happens to younger beneficiaries who receive a windfall of cash. There are obviously those that handle it responsibly, but when you are talking about individuals between eighteen and twenty-five, the outcome is not often positive. I have seen young people with access to a few hundred-thousand dollars lose the whole thing in a matter of years.  I have also seen young heirs lose motivation to go to school or to find a job, since they don’t have to work for their financial security. You can imagine what their life looks like when the money runs out.

Personally, I think a great way to structure your testamentary trust is to allow the trustee to make distributions for school and for medical costs at any time. When the beneficiary reaches a point of mental, emotional, and professional maturity, this is a great time for him or her to have access to the rest of the money.  My opinion (generally) is that this age is  in the beneficiary’s thirties . . . this provides enough time for the child to have his or her life, education, and career in order. The beneficiary may have priorities at this point that go beyond their own needs, such as purchasing a home or caring for children.

And don’t forget, there is nothing wrong with giving your children and grandchildren an early inheritance, whereby you can supervise their investments and also receive the benefit of watching them enjoy it. Though you will need to be extra careful of gift tax considerations when making lifetime gifts, this option can create a lot of enjoyment for both the person making and the person receiving the gifts.

Remember, you don’t have to leave money to a beneficiary outright; you can delay their inheritance to any age you like via a testamentary trust.  Talk with your estate planning attorney about concerns you have about leaving funds outright to your children or other beneficiaries; together, you can find a solution that works for everyone, while still meeting your estate planning goals.

creates wills and trusts for families who want to feel secure that their loved ones are cared-for. Philip is a trust and estate attorney based in Minneapolis, Minnesota. Philip is the author of Trustee University: The Guidebook to Best Practices for Family Trustees. available at Amazon.com in paperback or Kindle edition (free chapter available here!) He also works with trustees and beneficiaries who need help with their trusts. You can contact him here.

Keywords: trusts and estates, Minnesota wills, revocable trusts, estate attorney, probate, estate planning