I need to modify my Last Will – can I do this myself?
You may change your Will at any time by executing a new Will or a Codicil. You may execute a new Will without destroying the original or any copy. However, your Will may not be amended by interlineation (marking through words, sentences, etc.) or by simply making handwritten changes to the original. Any changes must be undertaken with the formalities otherwise required for execution of a Will. You should be sure to let me know of any changes in your family or financial situation, as this may affect your estate plan as reflected in your Will. For example, should you inherit property, should any births or deaths occur in your family, should there be a material change in your financial condition or should your marital status change, we should be advised.
What are a few of the common “probate avoidance” devices?
Other estate planning options are available to save taxes and achieve other goals and objectives. These options include, but are not limited to, the creation or implementation of the following:
- Revocable Trust. A Revocable Trust can be beneficial because the assets that are owned by the trust at death pass to the beneficiaries named in the Revocable Trust (or to trusts for their benefit) without the need for probate. A Revocable Trust is also more private and allows a successor trustee to step in and manage the trust should incapacity become an issue. Often, a Revocable Trust can save time, court costs, and attorneys’ fees, and it has other benefits as well. In addition, a Revocable Trust (as opposed to a Will) makes it harder for a person to win a lawsuit challenging the validity of the trust instrument.
- Lifetime Trusts. Rather than giving your beneficiaries their inheritance outright, you can instead place the inherited property in individual, lifetime trusts for their benefit. Lifetime trusts, also commonly referred to as generation-skipping trusts, are trusts which last for the lifetime of the beneficiary and then pass to the next generation of beneficiaries without being subject to estate taxes upon the death of that beneficiary. These trusts have the added advantages of being insulated from the claims of creditors and spouses in the event of divorce. If desired, the beneficiary of a lifetime trust can be allowed to serve as the sole trustee of the trust after attaining a specified age.
- Payment of Tuition Expenses or Medical Bills. In addition to the $13,000 annual exclusion, you can make payments to the provider of education (such as a private school, college, or university) or for medical expenses (such as doctors’ bills, medical insurance premiums, and prescription drugs) and none of the payments will be treated as taxable gifts. Importantly, though, the payments must be made directly to the provider, and if the payment is made to the student or recipient of the medical care, even as a reimbursement for payments already made, then the payment will be treated as a gift. The tuition and medical expense exclusions provide an opportunity for considerable amounts of wealth to be shifted to your descendants or other beneficiaries without any transfer tax consequences.
- Life Insurance Trust. Although the proceeds of a life insurance policy generally pass income tax free to the named beneficiary, those same proceeds are typically included in the insured’s estate and are subject to Federal estate taxes. By giving some or all of the life insurance on your life to an irrevocable trust, the proceeds can be excluded from estate taxes. Other important benefits are available as well by the creation of such a trust.
- Family Limited Partnership. A limited partnership created by and among members of a family (FLP) can be a useful estate planning tool. A FLP is a way to centralize the management of investments, thereby allowing one or several family members to manage a variety of investments for other family members. Importantly, as well, the interests held by the limited partners in the partnership are generally worth less than the underlying value of the partnership assets due to factors such as the ownership of a minority interest, lack of control, transfer restrictions, and the inability to demand distributions.
- Qualified Personal Residence Trust. A qualified personal residence trust (QPRT) is a trust created to own an interest in a home. The QPRT would benefit you for a specified number of years and then terminate and pass to your descendants or to trusts for their benefit. A QPRT is one of the last very favorable techniques available to allow a wealthy individual to transfer huge amounts of property to the next generation without generating gift or estate taxes.
- Charitable Remainder Trust. A charitable remainder trust, in general terms, is a trust created for the initial benefit of either the person creating the trust, or another person or persons, and for the subsequent benefit of one or more charities. The idea is to give away property to a charitable trust, retain an interest in the trust which is in the form of annuity or unitrust payments, and then allow the trust property to pass to charity upon termination of the trust. Even though the charity will not be receiving any property for many months or years, an income tax deduction is available presently, and the trust properties will be excluded from estate taxes.
- Grantor Retained Annuity Trust. A GRAT is a trust where the person creating the trust retains the right to receive a fixed annuity payment. The fixed amount may be a stated dollar amount or a fixed fraction or percentage of the initial fair market value of the property transferred to the trust, payable at least annually. The fair market value of the retained annuity interest is subtracted from the fair market value of the gift in determining the value of the transfer. Typically, a GRAT is used to transfer an appreciating asset that has considerable value. By retaining an annuity with a fair market value equal to the value of the asset transferred to the trust, either no or a relatively small gift is made, and all appreciation on the asset which accrues during the term of the trust will be passed to the next generation without imposition of gift taxes.
- Grantor Retained Unitrust. A GRUT is a trust where the person creating the trust retains the right to receive a fixed fraction or a percentage of the net fair market value of the trust property, determined annually. The fair market value of the retained annuity interest retained by the person creating the trust is subtracted from the fair market value of the gift in determining the value of the transfer. Typically, a GRUT is used to transfer an appreciating asset that has considerable value. By retaining a series of payments with a fair market value equal to the value of the asset transferred to the trust, either no or a relatively small gift is made, and all appreciation on the asset which accrues during the term of the trust will be passed to the next generation without imposition of gift taxes.
What are the tax considerations concerning a Revocable Living Trust?
While you are living, your Revocable Trust is designed to be a pass-through entity for income tax purposes. In other words, all income and expenses will be taxed directly to you as if the Revocable Trust did not exist. Therefore, you can use your social security number as the tax identification number of the Revocable Trust while you are alive, and you can report trust income on your individual or joint income tax return (Form 1040). No trust tax return (Form 1041) will need to be filed while you are living.
I just signed my Revocable Trust – now what?
In order to obtain the benefits of probate avoidance, disability protection and all of the other benefits that we have discussed, it is very important that the Revocable Trust be properly funded during your lifetime. To obtain maximum benefit from the Revocable Trust, you should transfer your property to the Revocable Trust as soon as possible. Note, though, you should not transfer ownership of any retirement accounts or annuities to the Revocable Trust, as these types of investments should remain outside the trust, otherwise unintended income tax consequences might result. Even though your retirement accounts and annuities will not be owned by the Revocable Trust, probate can still be avoided as long as the beneficiaries you designate are coordinated with your Revocable Trust.
All transfers of ownership must be accomplished by executing appropriate instruments of transfer to be effective for state law purposes. For example, real estate should be transferred to the Revocable Trust by a deed, bank accounts by changing the name on the accounts, and stock certificates not in “street name” by issuing a new certificate in the name of the Revocable Trust.
We will be happy to assist you with the transfer of assets other than real estate to the Revocable Trust, but we will not initiate such assistance unless you specifically request us to do so in writing.
Should all of my real estate be put in my Trust?
Deeds are required to convey interests in real estate to your Revocable Trust. In the future, should you acquire any additional real estate, you should title such real estate in the name of your Revocable Trust. You should obtain the assistance of an out-of-state attorney to transfer any non-Florida real estate into the Revocable Trust.
All of your non-homestead real estate can be placed in the Revocable Trust. However, you may conclude that your homestead should not be placed in the Revocable Trust because of the possibility that a bankruptcy court may determine that your homestead is not a protected asset and is therefore not exempt from the claims of creditors. At least one bankruptcy court has come to that conclusion. Accordingly, you should transfer your homestead into your Revocable Trust only if you are certain that you will never be faced with bankruptcy in the future.
Importantly, if you do transfer your homestead to your Revocable Trust, the Property Appraiser’s office in the county where your homestead is located will need a copy of your Revocable Trust or your Certificate of Trust to prove that you are entitled to your homestead exemption. The Certificate of Trust which was prepared for you in conjunction with your Revocable Trust may be used for this purpose.
Will my insurance be affected by re-titling property in my Trust?
With regard to each piece of real estate you transfer to your Revocable Trust, you may want to review the title insurance policy associated with each such property to determine whether title coverage will continue after the property has been transferred to your Revocable Trust and subsequently, after your Revocable Trust terminates and the property is distributed to your beneficiaries (or to trusts for their benefit).
To obtain coverage, it may be necessary to secure an endorsement from the title insurance company, and an additional premium may be required. You should contact the title insurance company to determine whether any additional steps are necessary.
If your title policy was issued by Old Republic National Title Insurance Company (formerly Attorneys’ Title Insurance Fund, Inc.) then your coverage will continue without interruption while you are the beneficiary of your Revocable Trust, but will terminate when the trust property is distributed to your beneficiaries.
With regard to casualty and property insurance, you should consult with your insurance agent to make certain that transferring your personal property into your Revocable Trust will not result in a business rating on your insurance policy causing an increase in your insurance premium. Also, you should ask your agent if your policies need to be amended to include and cover your Revocable Trust and all of its property. Sometimes this can be accomplished by adding your Revocable Trust as an additional insured to your policy, and for automobiles owned by the Revocable Trust, listing you as an insured driver.
However, it is generally not advisable to transfer ownership of your automobiles, recreational vehicles, and boats (referred to in this paragraph as “vehicles”) to your Revocable Trust. Sometimes, transferring a vehicle to a Revocable Trust can result in increased insurance rates. A convenient alternative to transferring vehicles to a Revocable Trust is to title the ownership of your vehicles in joint names.
Now that I have a Trust, how should I designate life insurance and IRA beneficiaries?
The importance of making sure that the death beneficiary designations on your life insurance, individual retirement accounts and employee benefit plans are properly coordinated with your estate plan cannot be overemphasized. One way for you to designate the beneficiary on life insurance policies which you own on your life is as follows:
- Primary Beneficiary: Trustee of Your Revocable Trust
- First Contingent Beneficiary: Any person(s) you want
- Second Contingent Beneficiary: Your Estate
It is unlikely that your Revocable Trust will have ceased to exist upon your death, but it may have been revoked or terminated. That is the reason for the contingent beneficiaries. Also, the second contingent beneficiary does not need to be your estate, as you may have other persons you want to name as the contingent beneficiaries of your life insurance. Further, if you own a business which owns insurance policies on your life, you should carefully assess who is named as the beneficiary of such policies. Normally, life insurance owned by a business is payable to the business, and naming any other beneficiary could have negative and unintended tax consequences.
Retirement Plans and IRAs
In addition, you may want to designate the beneficiary on retirement plans, self-employed benefit plans and individual retirement accounts as follows:
- Primary Beneficiary: Trustee of Your Revocable Trust
- First Contingent Beneficiary: Any person(s) you want
- Second Contingent Beneficiary: Your Estate
With regard to your retirement plans, self-employed benefit plans and individual retirement accounts, you may want to name a different primary beneficiary than the one listed as more favorable income tax treatment may result by naming an individual as the primary beneficiary, or several individuals as the primary beneficiaries, on such plans and accounts. By naming the Trustee of the Revocable Trust or your estate, you will be disposing of these assets according to the terms and provisions of your Revocable Trust, or if it is not in existence, by your Will, but you may also be accelerating the point at which the tax-deferred investments in such retirement plans, self-employed benefit plans and individual retirement accounts must be paid.
You should be aware that naming your estate as the beneficiary of your life insurance, retirement plans, self-employed benefit plans and individual retirement accounts will expose those assets to the creditors of your estate, if any creditors exist upon your death, and (except for any life insurance) may be subject to accelerated income taxation. Because the above designations may not always be appropriate in every situation, before executing any new beneficiary designations or deposit agreements you should probably check with me first.