An Estate Planning Checklist to Facilitate Wealth Transfer

Studies have shown that 70% of family wealth is lost by the end of the second generation and 90% by the end of the third. Help your loved ones avoid becoming one of these statistics. You need to educate and update your heirs about your wealth transfer goals and the plan you have put in place to achieve these goals.

What Must You Communicate to Future Generations to Facilitate Transfer of Your Wealth?

You must communicate the following information to your family to ensure that they will have the information they need during a difficult time including:

• Net worth statement, or at the very minimum a broad overview of your wealth; and

• Final wishes – burial or cremation, memorial services.

Estate planning documents that have been created and what purpose they serve:

1. Durable Power of Attorney, Health Care Directive, Living Will – property management; avoiding guardianship; clarifying wishes regarding life-sustaining procedures;

2. Revocable Living Trust – avoiding guardianship; keeping final wishes private; avoiding probate; minimizing delays, costs and bureaucracy;

3. Last Will and Testament – a catch-all for assets not transferred into your Revocable Living Trust prior to death, or the primary means to transfer your wealth if you are not using a Revocable Living Trust;

4. Irrevocable Life Insurance Trust – removing life insurance from your taxable estate; providing immediate access to cash; and

5. Advanced Estate Planning – protecting assets from creditors, predators, outside influences, and ex-spouses; charitable giving; minimizing taxes; creating dynasty trusts; and standalone retirements trusts—which are created to specifically hold your retirement accounts—in order to give you back the asset protection and tax benefits that the U.S. Supreme Court took away with their decision in Clark v. Rameker.

Who will be in charge if you become incapacitated or die—agent named in your Durable Power of Attorney and Health Care Directive; successor trustee of your Revocable Living Trust and other trusts you’ve created; personal representative named in your will?

Benefits of lifetime discretionary trusts created for your heirs:

1. Fosters educational opportunities

2. Provides asset, divorce, and remarriage protection

3. Protects special needs beneficiaries (if properly drafted)

4. Allows for professional asset management

5. Minimizes estate taxes at each generation

6. Creates a lasting legacy for future generations

Overall goals and intentions for inheritance – what the money is, and is not, to be used for (in other words, education vs. charitable work vs. vacations vs. Ferraris vs. business opportunities vs. retirement), and who will be trustee of lifetime discretionary trusts created for your heirs and why you’ve selected them

Where important documents are located – this should include how to access your “digital” assets

Who your key advisors are and how to contact them

How Can Your Professional Advisors Help You Communicate Your Wealth Transfer Goals?

Your professional advisors are well-positioned to help you discover your wealth priorities, goals, and objectives and then communicate this information to your heirs.  This, in turn, will prepare your heirs to receive your wealth instead of being left to figure it out on their own and, as statistics have shown, lose it all. 

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.

2015 Inflation Adjustments for the Estate Tax Exemption And Trust Income Tax Brackets—What They Mean To You

The Internal Revenue Service has released the official inflation adjustments that will affect 2015 federal reporting for estate taxes, gift taxes, generation-skipping transfer taxes, and estate and trust income taxes.

2015 Federal Estate Tax Exemption:

In 2015 the estate tax exemption will be $5,430,000. This is an increase of $90,000 above the 2014 exemption.

What this means is that when the value of the gross estate of a person who dies in 2015 exceeds $5,430,000, the estate will be required to file a federal estate tax return (IRS Form 706). Form 706 is due within nine months of the deceased person’s date of death.

The maximum federal estate tax rate remains unchanged at 40%.

2015 Federal Lifetime Gift Tax Exemption: 

In 2015 the lifetime gift tax exemption will also be $5,430,000. This is an increase of $90,000 above the 2014 exemption.

What this means is that if a person makes any taxable gifts in 2015 (in general a taxable gift is one that exceeds the annual gift tax exclusion – see more on that below), then they will need to file a federal gift tax return (IRS Form 709). For taxable gifts made in 2015, Form 709 is due on or before April 15, 2016.

The maximum federal gift tax rate remains unchanged at 40%.

2015 Federal Generation-Skipping Transfer Tax Exemption:

In 2015 the exemption from generation-skipping transfer taxes (GSTT) will also be $5,430,000. This is an increase of $90,000 above the 2014 exemption.

What this means is that if a person makes any transfers that are subject to the GSTT in 2015, then they will need to file a federal gift tax return (Form 709). For generation-skipping transfers made during 2015, Form 709 is due on or before April 15, 2016.

Note that if the generation-skipping transfer does not exceed $5,430,000, then no GSTT will be due; instead, the transferor’s GSTT exemption will be reduced by the amount of the transfer.

For example, if Bob has not made any prior generation-skipping transfers and makes one of $500,000 in 2015, then his GSTT exemption will be reduced to $4,930,000 ($5,430,000 GSTT exemption - $500,000 generation-skipping transfer made in 2015 = $4,930,000 GSTT exemption remaining).

The maximum federal GSTT rate remains unchanged at 40%.

2015 Annual Gift Tax Exclusion:

In 2015 the annual gift tax exclusion will be $14,000. This is the same as the 2014 exclusion.

What this means is that if a person makes any gifts to the same person that exceed $14,000 in 2015, then they will need to file a federal gift tax return (Form 709). For taxable gifts made in 2015, Form 709 is due on or before April 15, 2016.

Note that if the taxable gift does not exceed $5,430,000, then no gift tax will be due; instead, the lifetime gift tax exemption of the person who made the gift will be reduced by the amount of the taxable gift.

For example, if Bob has not made any taxable gifts in prior years and makes a gift of $500,000 to his daughter in 2015, then Bob’s lifetime gift tax exemption will be reduced to $4,944,000 ($500,000 gift - $14,000 annual exclusion = $486,000 taxable gift; $5,430,000 lifetime gift tax exemption - $486,000 taxable gift made in 2015 = $4,944,000 lifetime gift tax exemption remaining).

As mentioned above, the maximum federal gift tax rate remains unchanged at 40%.

2015 Estate and Trust Income Tax Brackets:

Finally, estates and trusts will be subject to the following income tax brackets in 2015:

If Taxable Income Is:                         The Tax Is:

1) Not over $2,500:                              15% of the taxable income

2) Over $2,500 but 

Not over $5,900:                                   $375 plus 25% of the excess over $2,500

3) Over $5,900 but 

Not over $9,050:                                   $1,225 plus 28% of the excess over $5,900

4) Over $9,050 but                                  

Not over $12,300:                                 $2,107 plus 33% of the excess over $9,050

5) Over $12,300:                                  $3,179.50 plus 39.6% of The excess over $12,300                                                    

As you can see, an income of only $12,300 inside a trust could be taxed at a marginal rate of 39.6%. In addition, many trusts paying at the top bracket are also subject to the 3.8% net investment income tax, making the top marginal rate 43.4%. Many states also impose an income tax on trusts. So, depending on which state the trust pays income taxes, the marginal income tax rate could be over 50% for trusts earning just $12,300.

What this means is that Trustees should give careful consideration to the timing of income and deductions and whether distributions of income to beneficiaries should be made to avoid paying excessive trust income taxes. Any income tax planning, of course, has to be balanced against a Trustee’s fiduciary duties to the trust.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.

Year End Estate Planning Tip #5 – Make Gifts that Your Family Will Love but the IRS Won’t Tax

Don’t let the chaos of the holiday season prevent you from avoiding federal gift tax by making “annual exclusion” gifts, medical payments gifts, and educational gifts. Gifting is a great way to take money out of your taxable estate, while simultaneously providing for loved ones.

Make Annual Exclusion Gifts: 

“Annual exclusion” gifts are transfers of money or property in an amount that does not exceed the annual gift tax exclusion.

In 2014, the annual gift tax exclusion is $14,000 per recipient, and it will remain at $14,000 per person in 2015.  Therefore, you can give up to $14,000 to as many individuals you choose on or before December 31, 2014, and then give another $14,000 to the same people on or after January 1, 2015, and you will not have to file a federal gift tax return (IRS Form 709).  In other words, the IRS doesn’t consider gifts that are equal to or less than the annual exclusion amount to be taxable gifts at all.

Married couples can take double advantage of the annual exclusion and gift $28,000 in 2014 and then another $28,000 in 2015.  But note that in some situations, a couple may still need to file a gift tax return to report any "split gifts" – they'll need to consult with their estate planning attorney or accountant to be sure. Also, you may need to file a gift tax return if you make gifts that exceed the annual exclusion amount or if you make gifts that don’t qualify for the annual exclusion – your attorney or accountant can guide you through this.

Make Payments that Qualify for the Medical Exclusion:

Another type of transfer that the IRS doesn’t consider to be a gift for gift tax purposes is a payment that qualifies for the medical exclusion.  

Payments that qualify for this exclusion are ones that are made directly to an institution that provides medical care to an individual or to a company that provides medical insurance to an individual.  In general, medical expenses that qualify for this exclusion are the same as those that are deductible for federal income tax purposes. 

Therefore, in 2014 you can pay for your grandchild's emergency appendectomy in the amount of $20,000 and also give your grandchild an additional $14,000 by December 31, 2014, and then another $14,000 on or after January 1, 2015, and you will not have to file any gift tax returns. 

One incredibly important detail – in order to qualify for the medical exclusion you must make payment directly to the institution providing the medical care or company providing the medical insurance. If you give the money to the individual receiving the medical care or insurance benefit, even with explicit instructions that it be used to pay for the medical care, your payment will be considered a gift.

Make Payments that Qualify for the Educational Exclusion:

Another type of transfer that the IRS doesn’t consider to be a gift for gift tax purposes is a payment that qualifies for the educational exclusion.  

Payments that qualify for this exclusion are ones that are made directly to a qualifying domestic or foreign institution as tuition for the education of an individual.

For example, in 2014 in addition to paying for your grandchild’s emergency appendectomy (see above), you can pay your grandchild's college tuition in the amount of $25,000, give your grandchild an additional $14,000 by December 31, 2014, and then another $14,000 on or after January 1, 2015, and you will not have to file any gift tax returns or pay any gift tax. 

Two incredibly important details – in order to qualify for the educational exclusion

(1) You must make payment directly to the institution providing the education, not to the individual receiving the education, and

(2) Your payment must be for tuition only, not for books, supplies, room and board, or other types of education-related expenses.

If you fail to follow either of these restrictions, the payment will be considered a gift.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.

Strategies for Reducing the Income Tax Squeeze on Irrevocable Trusts

Under federal income tax laws, irrevocable, non-grantor trusts (such as Bypass Trusts and Dynasty Trusts) are subject to highly compressed income tax brackets. In 2014, the top 39.6% tax rate kicks in at only $12,500 of trust income. In addition, trusts in the top tax bracket are subject to the 20% long term capital gains rate and a 3.8% surtax on the lesser of undistributed net investment income or adjusted gross income over $12,500.

What Can Trustees Do to Lower a Trust’s Taxable Income?

Due to this unfavorable income tax treatment of irrevocable, non-grantor trusts, Trustees of this type of trust must plan carefully to minimize annual income taxes. Since trust income distributed to the beneficiaries is not taxed at the trust level, distributions may be made to beneficiaries who are in a lower income tax bracket and/or not subject to the 3.8% surtax. This, in turn, will lower the income that is taxed inside of the trust. Nonetheless, any distributions aimed at reducing a trust’s income tax liability must be made within the distribution parameters established in the trust agreement and applicable state law.

With these limitations in mind, income-reducing strategies Trustees should consider include:

• Making in-kind distributions of low basis trust property to beneficiaries who are in a lower tax bracket or plan to hold on to the property and not sell it any time soon

• Exploring options to permit capital gains to pass to beneficiaries instead of being taxed inside of the trust, such as reforming or decanting the trust to broaden the Trustee’s discretion to allocate between trust income and principal

• Shifting trust investments to minimize taxable income and gains

• Terminating small, uneconomic trusts under the terms of the trust agreement or applicable state law

Final Considerations for Trustees of Irrevocable, Non-Grantor Trusts:

Planning to minimize trust income taxes is a delicate balancing act. Trustees must carefully weigh the tax benefits of making distributions or changes to the trust’s provisions against the grantor’s intent, the ongoing needs and tax status of the current beneficiaries, and what will be left for the remainder beneficiaries. In addition, income, gains, losses, and tax brackets must be reviewed annually since the needs and expenses of the trust beneficiaries will undoubtedly change from year to year.

If you are the Trustee or beneficiary of an irrevocable, non-grantor trust, attorneys from our firm are available to speak with you now about strategies that can be used to reduce your trust’s income tax bill.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.

Year End Estate Planning Tip #4—Check the Privacy of Your Estate Plan

With the end of the year fast approaching, now is the time to fine tune your estate plan before you get caught up in the chaos of the holiday season. One area of planning that many people overlook is ensuring that their final wishes remain private.

Will Your Final Wishes Become a Public Court Record?

Let’s face it, planning for what happens if you become mentally incapacitated or die is an extremely personal matter. Why? Because this type of planning deals with all of the intimate details of your life, including any skeletons in the closet, who you consider to be your real family, what you own, and who you owe.

When you’re sitting across the table from your estate planning attorney, you’ll need to “spill the beans” and let your attorney know your true feelings and ultimate goals. And then once you have done this, there it is – all of the intimate details of your life written down in black and white in your estate planning documents, quite possibly for the whole world to see.

The good news is that because of the attorney-client privilege, no one can see your estate planning documents unless you give them permission. But this will only work while you’re alive. After you die and your will is filed for probate, it becomes a public court record that anyone can read (recent celebrity examples include actors James Gandolfini and Philip Seymour Hoffman). It is also possible for your revocable trust to become a public court record that anyone can read (celebrity examples include Farrah Fawcett and Michael Jackson).

Or what happens if you don’t have any estate plan at all? NFL quarterback Steve McNair’s public probate court proceedings are a prime example of how the public can learn the dirty little secrets about a deceased person – two illegitimate children and possibly others, multiple girlfriends – and all about the deceased person’s property and its value – cash, investments, businesses, and multiple homes valued near $20 million. If you don't have a personalized estate plan, your family could be stuck with the state's default plan. We've never had a client who wanted their personal plan to be exactly like the state's default plan, so we strongly advise you to meet with an experienced estate planning attorney now to make sure that doesn't happen to your family.

What Can You Do to Keep Your Estate Plan Private?

If privacy and discretion are important to you, then these goals should be, and certainly can be, carried over into your estate plan.

If you already have an estate plan, check with your estate planning attorney to determine how private your plan will be after you die and make any necessary adjustments.

On the other hand, if you’re currently working on your estate plan, make sure your estate planning attorney is aware of how important privacy and discretion are to you so that these goals can be incorporated into your estate plan from the beginning.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.

Year End Estate Planning Tip #3—Check Your Mental Disability Plan

With the end of the year fast approaching, now is the time to fine tune your estate plan before you get caught up in the chaos of the holiday season. One area of planning that many people overlook is making sure their mental disability plan is up to date.

Three Areas of Your Mental Disability Plan That Are Likely Out of Date:

If your estate plan is more than a few years old, then your mental disability plan is likely out of date for the following reasons:

1. Are your health care directives compliant with HIPAA?  While the federal Health Insurance Portability and Accountability Act (known as “HIPAA” for short) was enacted in 1996, the rules governing it were not effective until April 14, 2003.  Thus, if your estate plan was created before then and you have not updated it since, then you will definitely need to sign new health care directives (an Advance Medical Directive and a Living Will – insert the names of these documents in your state) so that they are in compliance with the HIPAA rules.  With that said, it’s possible that health care directives signed in later years lack HIPAA language, so check with your estate planning attorney just to make sure that your estate plan documents reference and take into consideration the HIPAA rules.

2. Is your Power of Attorney stale?  How old is your Power of Attorney?  Banks and other financial institutions are often wary of accepting Powers of Attorney that are more than a couple of years old.  This means that if you become incapacitated, your agent could have to jump through hoops to get your stale Power of Attorney honored, if it can be done at all. This could cost your family valuable time and money.  Aside from this, in the past few years several states (including Florida and Ohio) have enacted new laws governing Powers of Attorney.  If you want to increase the likelihood that your Power of Attorney will work without any hitches if you lose your mental capacity, update and redo your Power of Attorney every few years so that it doesn’t end up becoming a stale and useless piece of paper.

3. Does your estate plan adequately address mental disability?  A will is something that only becomes effective when you die.  With today’s longer life expectancies come increased probabilities that you will be mentally incapacitated before you die.  A fully funded Revocable Living Trust is the best way to provide adequately for mental incapacity, but some older trusts do not.  If you signed your Revocable Living Trust more than 8 to 10 years ago and haven’t updated it since or have assets that are outside your Revocable Living Trust, then it may well lack modern and appropriate provisions for what to do with you and your property if you become mentally incapacitated.  Have your estate plan checked to ensure that it will work effectively and efficiently if you lose your mental capacity.  Otherwise you and your loved ones may end up in front of a judge who will have to sort out your financial matters – at horrendous cost.

What Should You Do?

Estate planning is about much more than having a plan for determining who gets your stuff after you die. Your plan also needs to include instructions as to what happens in case you ever lose mental capacity. If your plan is more than a few years old or does not include a fully funded Revocable Living Trust, then chances are it lacks a good mental disability plan.  Now is the time to meet with an experienced estate planning attorney to ensure that you have a mental disability plan that will work the way you expect it to work if it’s ever needed. 

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.

Year End Estate Planning Tip #2—Check Your Beneficiary Designations

With the end of the year fast approaching, now is the time to fine tune your estate plan before you get caught up in the chaos of the holiday season.  One area of planning that many people overlook is their beneficiary designations.

Have You Checked Your Beneficiary Designations Lately?

Do you own any life insurance policies?  If so, have you named both primary and secondary beneficiaries for your policies?

How about retirement accounts – are any of your assets held in an IRA, 401(k), 403(b) or annuity?  Or how about a payable on death (“POD”) or a transfer on death (“TOD”) account?  If so, have you named both primary and secondary beneficiaries for these assets? 

What about your vehicle – do you have it registered with a TOD beneficiary?  And your real estate – is it held under a TOD deed or beneficiary deed? 

If you have gotten married or divorced, had any children or grandchildren, or any of the beneficiaries you have named have died or become incapacitated or seriously ill since you made beneficiary designations, it is time to review them all with your estate planning attorney. 

Beneficiary Designations May Overrule Your Will or Trust

Speaking of estate planning attorneys, has yours been given and reviewed all of your beneficiary designations?

It is critically important for your estate planning attorney to review your beneficiary designations as your life changes because your beneficiary designations may overrule or conflict with the plan you have established in your will or trust (unless your state law provides otherwise, but you should certainly not rely on this).  In addition, naming your trust as a primary or secondary beneficiary can be tricky and should only be completed after consulting with your estate planning attorney.   

What Should You Do?

Whenever you experience a major life change (such as marriage or divorce, or a birth or death in the family) or a major financial change (such as receiving an inheritance or retiring) or are asked to make a beneficiary designation, your beneficiary designations should be reviewed by your estate planning attorney and, if necessary, updated or adjusted to insure that they conform with your estate planning goals. 

If you have gone through any family or monetary changes recently and you’re not sure if you need to update your beneficiary designations, then consult with your estate planning attorney to ensure that all of your bases are covered.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.

Year End Estate Planning Tip #1—Check Your Estate Tax Planning

With the end of the year fast approaching, now is the time to fine tune your estate plan before you get caught up in the chaos of the holiday season. One area that married couples should revisit is their estate tax planning.

Do You Still Have “AB Trust” Planning in Your Estate Plan?

If you’re married and you haven’t had your estate plan reviewed since before January 2, 2013, by an experienced estate planning lawyer, then pull your documents out of the drawer, dust them off, and take a closer look at their trust provisions. Do they contain terms such as “Marital Trust,” “QTIP Trust,” “Spousal Trust,” “A Trust,” “Family Trust,” “Credit Shelter Trust,” or “B Trust”?

If so, then your revocable trust contains estate tax planning provisions that were required in most estate plans before January 2, 2013. Now, you may not need this type of planning since the federal estate tax exemption has been fixed at $5 million per person adjusted for inflation (the exemption is $5.34 million in 2014 and expected to increase to $5.42 million in 2015).

Aside from this, the federal estate tax exemption is also “portable” between married couples (including legally married same-sex couples), meaning that when one of a married couple dies, the survivor may be able to get the right to use their deceased spouse’s unused estate tax exemption and so, without any complicated estate tax planning, pass $10 million+ to the deceased spouse’s heirs and the survivor’s heirs federal estate-tax free.

Do You Still Need “AB Trust” Planning in Your Estate Plan?

With that said, do you still need to include “AB Trust” estate tax planning in your estate plan? The answer to this question depends on several factors, including:

• Are the combined estates of you and your spouse under $5 million?

• Does your state still collect a state estate tax? 

• Do you and your spouse have different final beneficiaries of your estates?

• Do you and your spouse want to create a dynasty trust that will continue for many generations?

In addition, there are many other factors and options to consider that an experienced estate planning attorney can explain.

What Should You Do?

If you’re married and your current estate plan includes “AB Trust” planning but you’re not sure if you should keep it in your plan, then make an appointment with an experienced estate planning attorney to discuss all of your options.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.

The Trust Protection Myth: Your Revocable Trust Protects Against Lawsuits

WARNING:  Many people believe once they set up a Revocable Living Trust and transfer assets into the Trust, those assets are protected from lawsuits.  This is absolutely not true. 

While Trusts commonly provide asset protection for beneficiaries, few Trusts protect assets owned by the person who created the Trust.

No Immediate Asset Protection?  Why Should You Create a Revocable Living Trust?

Fully funded Revocable Trusts are dynamite tools.  Here’s why: 

What Can You Do to Protect Your Assets?

Comprehensive estate planning has a solid foundation of insurance, including homeowners/renters, umbrella, auto, business, life insurances, disability, and the like.  Business entities such as the Limited Liability Company are commonly used for asset protection and   Domestic Asset Protection Trusts are sometimes used as well.

Your Revocable Living Trust creates a powerful value and can be drafted to provide asset protection for your loved ones.  To protect yourself, use insurance, business entities, and, perhaps, a Domestic Asset Protection Trust.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.

Discretionary Trusts – How to Protect Your Beneficiaries From Bad Decisions and Outside Influences

Leaving your hard-earned assets outright to your children, grandchildren or other beneficiaries after you die will make their inheritance easy prey for creditors, predators, and divorcing spouses.  Instead, consider using discretionary trusts for the benefit of each of your beneficiaries.

What is a Discretionary Trust?

A discretionary trust is a type of irrevocable trust that is set up to protect the assets funded into the trust for the benefit of the trust’s beneficiary.  This can mean protection from the beneficiary’s poor money-management skills, extravagant spending habits, personal or professional judgment creditors, or divorcing spouse.

Under the terms of a typical discretionary trust, the trustee is limited in how much can be distributed to the beneficiary and when the distributions can be made.  You can make the terms and time frames as limited or as broad as you want.  For example, you can provide that distributions of income can only be made for health care needs after the beneficiary reaches the age of 21, or you can provide that distributions of income and principal can be made for health care needs and educational expenses at any age. 

An added bonus of incorporating discretionary trusts into your estate plan is that the trusts can be designed to minimize estate taxes as the trust assets pass down from your children to your grandchildren (this is referred to as “generation-skipping planning”).  In addition, you can dictate who will inherit what is left in each beneficiary’s trust when the beneficiary dies, which will allow you to keep the trust assets in the family.

While the distribution choices that can be included in a discretionary trust are virtually endless (within certain parameters established under bankruptcy and creditor protection laws), the bottom line is that a properly drafted discretionary trust will protect a beneficiary’s inheritance from creditors, predators, and divorcing spouses, avoid estate taxes when the beneficiary dies, and ultimately pass to the beneficiaries of your choice. 

Where Should You Include Discretionary Trusts in Your Estate Plan?

Discretionary trusts should be included in all of the trusts you have created that will ultimately be distributed to your heirs, including:

• Your Revocable Living Trust

• Your Irrevocable Life Insurance Trust

• Your Standalone Retirement Trust

What Should You Do?

If you are concerned that your children, grandchildren, or other beneficiaries will not have the skills required to manage and invest their inheritance or will lose their inheritance in a lawsuit or divorce, then talk to your estate planning attorney about how to incorporate discretionary trusts into your estate plan.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.

If You Die Without a Will, Does Your Spouse Inherit Your Entire Estate?

If you are married and you die without a Last Will and Testament, you may mistakenly believe that your spouse will still inherit your entire estate.  Not so fast.  Who will inherit your estate depends on several different factors:

1.   How is your property titled?  Is your property titled in your name alone, in joint names with your spouse, in joint names with a child or other relative, or does it have a beneficiary designated?  Knowing how all of your property is titled is the real key to understanding who will inherit it after you die.  For example, if your home is titled in joint names with rights of survivorship with your spouse, then your spouse will inherit the home.  However, if it is titled in your name alone, then your spouse may or may not inherit the home as determined by applicable state laws.  These laws are referred to in the U.S. as “intestacy laws” and are discussed below in item #3. 

2.   Did you and your spouse sign a prenuptial or postnuptial agreement?  The right to inherit property from your spouse can be legally waived in a valid agreement signed before you get married (a prenuptial or premarital agreement), or after you get married (a postnuptial agreement).  If you and your spouse entered into such an agreement, then the legal effect of a full waiver of inheritance rights is to treat your spouse as having predeceased you.  You and your spouse may also agree to only waive certain inheritance rights, such as the right to inherit your IRA or 401(k). 

3.   What does your state’s intestacy laws say?  You may be surprised to learn that the intestacy laws of many U.S. states do not require the entire estate of a deceased married person to be distributed to their surviving spouse.  In some states the surviving spouse must divide the estate with the deceased spouse’s children, if any, otherwise with the deceased spouse’s parents or siblings.  When real estate is involved, this may lead to a family feud.  For example, the surviving spouse may want to sell the real estate and the children or parents may want to keep the real estate.  Also, if you own real estate located outside of your home state, then the intestacy laws of the other state will govern who will inherit your real estate located there, while the laws of your home state will govern who will inherit everything else.  This could result in different beneficiaries of your out-of-state real estate and the rest of your estate, leaving your family with quite a mess.

What Should You Do?

If you are married and you want your spouse to inherit all of your property, then the only way to be assured that this will happen is to consult with an attorney who is familiar with the inheritance laws in your state and any other state where you own real estate (yes, you may need to consult with two different attorneys).  The attorney will be able to review how all of your assets are titled and then help you determine the options for making sure that your spouse will be the only beneficiary of your estate.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.

Does Your Revocable Living Trust Reduce Your Estate Tax Bill?

Many people believe that once they set up and fund a revocable living trust, property held in the trust will avoid estate taxes after they die.  In reality, this may or may not be true depending on your choice of beneficiaries and the terms written into your trust agreement.

Single Trustmakers and Estate Taxes: 

If you’re single and you create and fund a revocable living trust, all of your assets held in the trust will be subject to estate taxes after you die if your beneficiaries are individuals.  In other words, if your beneficiaries are your children, your brothers and sisters, or your nieces and nephews, then the property they inherit through the trust will be included in your taxable estate.

On the other hand, if you’re single and you create and fund a revocable living trust and name one or more charitable organizations and no individuals as the beneficiaries, then the property distributed to the charities through the trust will pass free from estate taxes.

What if you’re single and you name both individuals and charities as beneficiaries of your trust after you die?  The portion of the trust property passing to the individual beneficiaries will be subject to estate taxes and the portion passing to the charities will be distributed free from estate taxes. 

Married Trustmakers and Estate Taxes: 

If you’re married and you create and fund a revocable living trust and all of the assets held in your trust pass to your spouse after you die, then the property passing to your spouse through the trust will not be subject to estate taxes.  This is true if the assets pass outright to your spouse or through the traditional “AB Trust” estate tax planning since the AB Trust strategy is designed to delay estate taxes until after both you and your spouse are gone.

On the other hand, if you’re married and you create and fund a revocable living trust and you name both your spouse and your children as the beneficiaries after you die, the portion of the trust passing to your spouse will be exempt from estate taxes and the portion passing to your children will be subject to estate taxes.  If you include one or more charitable organizations as beneficiaries, then the portion passing to the charities will be distributed free from estate taxes.

Do You Need a Revocable Living Trust?

If a revocable living trust in and of itself does nothing to reduce your estate tax bill, then why should you consider setting one up?  For three reasons:

1. To avoid probate – Assets held in your revocable living trust at the time of your death will avoid probate. Depending on your state of residence at the time of your death, this could save thousands of dollars in legal fees and court costs.

2. To plan for mental incapacity – If you become incapacitated, the disability trustee you name in your revocable living trust will be able to manage the trust assets for your benefit without the need for a court-supervised guardianship. Like avoiding probate, removing the need for a court-supervised guardianship could save thousands of dollars in legal fees and court costs, depending on your state of residence.

3. To keep your final wishes private – A revocable living trust is a private agreement that remains private after you die.

Final Thoughts on Revocable Living Trusts and Estate Taxes:

For many people a revocable living trust is the ideal way to organize their final affairs.  For married couples, aside from offering the benefits listed above, their revocable living trusts can be drafted to include AB Trust planning, which will delay the payment of estate taxes until after both spouses die.  For single people, while a revocable living trust will provide them with the benefits listed above, they will need to take additional steps such as gifting strategies and charitable planning to minimize their estate tax bill.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.

How to Minimize Legal Fees After Death

Death is a costly business.  Aside from funeral expenses, legal fees can take a big chunk out of how much is left for your loved ones after you’re gone. 

But it doesn’t have to be this way.  Careful planning can minimize the legal fees your loved ones will pay after you die.  Here’s how:

1. Make an estate plan: The cost of creating an estate plan will be far less than the legal fees your loved ones will have to pay if you don’t have one.  But be careful – don’t try to write your own will or revocable living trust.  Do-it-yourself or online plans often fail to include valuable cost, tax, and legal fee saving opportunities. You need the advice and assistance of an experienced estate planning attorney to create an estate plan that will work when it’s needed and minimize legal fees after your death.

2. Maintain your estate plan: Once you’ve created your estate plan, don’t stick it in a drawer and forget about it.  Instead, fine tune your plan as your life and your finances change.  Otherwise, when your plan is needed, it will be stale and out of date and will cost your beneficiaries time and legal fees to fix it. In a worst case scenario, a stale plan could lead to expensive and emotionally draining litigation between your family members. Regular maintenance of your estate plan makes it easier to carry out when needed.

3. Have a debt plan:  Make a plan for paying off your debts and taxes after you die.  This should include setting aside funds that your loved ones will have easy access to (for example, set up a joint bank account or a payable on death account) so that they won’t have to use their own assets to pay your bills until your will can be probated or the successor trustee of your trust can be appointed.  If your estate is taxable, then make sure you have enough assets that can be easily liquidated to pay the estate tax bill.  Life insurance can be another option for providing easy access to cash and paying estate taxes, but it’s important that you align your life insurance plan with your estate plan to get the maximum benefit.

4. Let your loved ones know where your estate plan and other important documents are located: If your loved ones don’t know where to find your health care directive, durable power of attorney, will, or revocable living trust, then their hands will be tied if you become incapacitated or die.  While you don’t need to tell your loved ones what your estate plan says, at the very least you should tell someone you trust where your estate plan and other important documents are being stored.  You should also make a list of the passwords for your computer and accounts you manage online and a contact list for all of your key advisors (such as your attorney, accountant, life insurance agent, financial advisor, banker, and religious advisor). 

Following these practical tips will save your family valuable time and money during a difficult time.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.

3 Asset Protection Tips You Can Use Now

A common misconception is that only wealthy families and people in high risk professions need to put together an asset protection plan.  But in reality, anyone can be sued.  A car accident, foreclosure, unpaid medical bills, or an injured tenant can result in a monetary judgment that will decimate your finances.  Below are three tips that you can use right now to protect your assets from creditors, predators and lawsuits.

What Exactly is Asset Protection Planning?

Before getting to the tips, you need to understand what asset protection planning is all about.  In basic terms, asset protection planning is the use of legal structures and strategies to transform property that creditors might snatch away into property that is completely, or, at the very least, partially, protected.

Unfortunately, this type of planning cannot be done as a quick fix for your existing legal problems.  Instead, you must put an asset protection plan in place before a lawsuit is imminent, let alone filed at the courthouse.  So, now is the time to consider implementing one or more of these tips.

Now, on to the three tips.

Asset Protection Tip #1 – Load Up on Liability Insurance:

The first line of defense against liability is insurance, including homeowner’s, automobile, business, professional, malpractice, long-term care and umbrella policies.  Liability insurance not only provides a means to pay money damages, it often also includes payment of all or part of the legal fees associated with a lawsuit. If you do not have an umbrella policy, then now is the time to get one since it is relatively inexpensive when compared with more advanced ways to protect your assets.  You should also check all of your current insurance policies to determine if your policy limits are in line with your net worth and make adjustments as appropriate.  You should then review all of your policies on an annual basis to confirm that the coverage is still adequate and benefits have not been stripped to keep premiums the same. 

Asset Protection Tip #2 – Maximize Contributions to Your 401(k) or IRA:

Under federal law, tax-favored retirement accounts, including 401(k)'s and IRAs (but excluding inherited IRAs) are protected from creditors in bankruptcy (with certain limitations).  Therefore, maximizing contributions to your company’s 401(k) plan is not only a smart way to increase your retirement savings, but it will also keep the investments away from creditors, predators and lawsuits.  On the other hand, if your company does not offer a 401(k) plan, then start investing in an IRA for the same reasons.

Asset Protection Tip #3 – Move Rental or Investment Real Estate into an LLC:

If you are a landlord or a real estate flipper or investor, then aside from having good liability insurance, moving your real estate into a limited liability company (LLC) can be a great way to help protect your assets from creditors, predators and lawsuits. 

There are two types of liability that you should be concerned about with rental or investment property: (1) inside liability (where the rental or investment property is the source of the liability, like a slip and fall on the property, and the creditor wants to seize an LLC owner’s personal assets) and (2) outside liability (where the creditor of an LLC owner wants to seize LLC assets to satisfy the owner’s debt).

An LLC will limit your inside liability related to the real estate, such as a slip and fall accident on the front stairs of the property or a fire caused by faulty wiring located at the property, to the value of the property.  In addition, in many states the outside creditor of the member of an LLC cannot get their hands on the member’s ownership interest in the company (in some states this will only work for multi-member LLCs, while in others it will also work for a single member LLC).  This type of outside creditor protection is often referred to as “charging order” protection.  This means that a creditor will have to look to your liability insurance and any unprotected assets to collect on their claim. 

If you are interested in asset protection planning for your investment real estate using an LLC, then you will need to work with an attorney who understands the LLC laws of the state where your property is located to insure that your LLC will protect you from both inside and outside liability.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.

Lifetime QTIP Trusts – The Gift That Keeps Giving

Estate planning for married couples can be tricky when one spouse is significantly wealthier than the other and each spouse wants different beneficiaries to ultimately inherit their estate.  One solution to this problem is the Lifetime QTIP Trust. 

What is a Lifetime QTIP Trust?

One traditional estate planning model for married couples makes use of the “AB Trust” strategy.  After the first spouse dies, the “B Trust” holds an amount equal to the federal estate tax exemption (currently $5.34 million in 2014), and the “A Trust” holds the excess.  The “A Trust” is a “QTIP Trust” or “Marital Deduction Trust” which qualifies for the unlimited marital deduction, meaning that the property passing into the trust for the benefit of the surviving spouse will not be subject to estate taxes until the surviving spouse dies. 

For example, Fred and Sue are in a second marriage, have their own children, and their estates are disproportionate – Fred is worth $2 million and Sue is worth $10 million.  With the AB Trust strategy, if Sue dies first, the B Trust is funded with $5.34 million and the A Trust is funded with $4.66 million.  No estate tax will be due at Sue’s death since the B Trust uses up Sue’s federal estate tax exemption and the A Trust qualifies for the unlimited marital deduction.   

What if instead of creating and funding the QTIP Trust after the wealthier spouse dies, the QTIP Trust is created and funded with gifts from the wealthier spouse that qualify for the unlimited marital deduction while both spouses are living?  This is the “Lifetime QTIP Trust.”

What Are the Benefits of a Lifetime QTIP Trust?

For married couples whose estates are lopsided and the wealthier spouse wants to provide for the less wealthy spouse but ultimately benefit his or her own heirs, a Lifetime QTIP Trust offers the following benefits:

• During the less wealthy spouse’s lifetime, that spouse will receive all of the trust income and, depending on the trust’s design, may be entitled to receive principal for limited purposes (such as health, education and maintenance)

• When the less wealthy spouse dies, the assets remaining in the trust will be included his or her estate, thereby making use of the less wealthy spouse’s federal estate tax exemption which might otherwise not be fully utilized

• If the less wealthy spouse dies first, the remaining trust funds may continue in an asset-protected, lifetime trust for the wealthier spouse’s benefit (subject to applicable state law)

• Even though the wealthier spouse initially funded the trust, the assets remaining in the trust will be excluded from the wealthier spouse’s estate when he or she dies, regardless of the order of death

• After both spouses die, the balance of the trust will pass according to the wealthier spouse’s wishes

Is a Lifetime QTIP Trust Right for You and Your Spouse?

Not all married couples fit the Lifetime QTIP Trust profile.  If you and your spouse do, then sit down with your estate planning attorney to determine if one is right for you.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.