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

We have two dogs, Moose and Ruby. I’m only a little embarrassed to say that we fall into the “pets are a part of the family” category of animal owner . . . our dogs pretty much go where we go, to the point where they may be the determining factor as to whether we go on a vacation or take a weekend trip. For those who know us, this is probably not surprising. We have been active with local animal rescues and at the local municipal animal care and control center. Our animals are a big part of our lives; it probably also isn’t surprising that making sure they are cared for if something happened to us is a pretty big deal.

Yep, that's us.  Philip and Mary Ruce, pictured with Moose Ruce (L) and Ruby Ruce.  Photo via Cara Lemmage Photographs.

Philip and Mary Ruce, pictured with Moose Ruce (L) and Ruby Ruce. Photo via Cara Lemmage Photographs.

Some states make it very easy to provide for your pet in your estate plan, usually by creating a pet trust. Sadly, Minnesota is not one of these states. A pet trust is a legal entity consisting of a trustee and some trust assets (usually some money you leave to the trustee in your will). The trustee manages the trust assets for a human beneficiary who has agreed to care for the animal, and to use those trust funds for the animal’s care. This arrangement is perfectly allowable in Minnesota too, except in the pet trust states, the agreement is an enforceable obligation.

The problem lies in the status of pets as personal property.  This makes sense, of course; dogs, cats, parrots, and ferrets are not people. They can’t make contracts, they can’t consent to legal agreements, and they certainly can’t hire a lawyer and sue when they are having a problem. Pets, in the eyes of our legal system, are property on the same level as your couch or dining room table (though certain states are becoming enlightened ). Sometimes that doesn’t feel right because of the personal nature of our relationship with our animals . . . surely a living, breathing thing that depends on me for food and shelter isn’t on the same footing as my refrigerator. But it’s the reality, and it’s something we need to work around when we are planning our estate.

Your Pet’s Care

You can still set money aside for your pet’s care. I mentioned that you can create a trust for your pet, but it is not enforceable in the same way as it is in states that have pet trust laws. But if there is someone you know of who you trust to care for your pet if something happens to you, make sure you leave instructions in your will indicating that this person has agreed to accept the animal and to provide care. You could then leave this person some money outright, or you could create a small trust for the benefit of this person. The trust could be written to reimburse that person for all animal-related expenses, such as vet bills and pet food.

If you do not have someone who can care for your pet, that is okay. There are organizations with whom you can make arrangements; contact pet rescues in your area. Oftentimes, in exchange for a donation in your will, they will commit to caring for your pet when you are gone and they will work towards finding a new home for your animal.  Make sure you have an arrangement with the pet rescue in writing before assuming your pet will have care.  Here is a downloadable .PDF with more information from the Animal Humane Society.

Changes Coming?

Minnesota is considering changing its trust code to conform to the Uniform Trust Code, a set of model rules that many states are adopting as their own. The Code does allow for pet trusts, but it is up to the Minnesota legislature as to whether the pet trust provisions will be included. As an animal advocate and pet owner, I would love to see pet trusts become part of the estate planning landscape in Minnesota. Until then, let’s make sure we remember our furry friends, and let’s not forget the commitment we have made to care for them.

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, will