July 24, 2020
By Joe Price
Today, we will give you the tools to do your own estate planning check-up. We are deliberately calling it a check-up rather than an update because an update implies that everything was fine the last time you signed your documents; from that point, you only have to consider anything that changed in your life or in the tax law since that time. By contrast, an estate planning check-up provides a second opinion of the entire plan. We won’t assume everything was fine the last time you signed your documents. We’ll start with an open mind.
We call this the “short version” of the estate planning check-up. We are going to focus on the two areas where your estate plan could most likely use improvement – powers of attorney (POAs) and revocable living trusts (RLTs).
Powers of Attorney
Let’s begin with POAs. Do you have them? Do you have both a financial and a health care POA?
Are the persons who you named still appropriate? If they had to show up at a hospital on short notice and consent to life-saving treatments for you, would they be willing to leave their houses to do that? The Pandemic changes some of the old assumptions.
Do you know where your POAs are? If you had to locate them and provide them to a health care professional or a financial advisor on short notice, could you do that? Could your spouse or children do that if you were the one whose POAs needed to be found?
If your estate planning attorneys know where your POAs are located and you know how to get a hold of that attorney, then you don’t need to know where the POAs are physically located. However, if your spouse or children are the ones looking for the POA on your life, do they know who your estate planning attorney is?
Revocable Trust Agreements
With RLTs, there are two important questions for you to consider during a check-up:
- Are you taking full advantage of trust benefits during your lifetime and
- Are you taking full advantage of irrevocable trust benefits after your death?
Note that we said “irrevocable trust” because your RLT transforms into an irrevocable trust at your death and opens up a whole new avenue of benefits for the trust beneficiaries.
During Your Lifetime
The primary benefit of a RLT during your lifetime is probate avoidance for those assets titled in the RLT. So, have you titled all of your most valuable assets in the trust? Have you named the trust as the beneficiary of your most valuable 401(k) and IRA accounts as well your life insurance policies? [Note: If you anticipate that your estate will exceed $11.58 million (or $23.16 million if married), the life insurance policies should be paid to an inter vivos irrevocable trust; that is, a trust that is irrevocable upon formation during your lifetime. That is different than a RLT that transforms into an irrevocable trust at your death and it has different tax consequences].
The Importance of Avoiding Probate
If you haven’t titled your most valuable assets in the RLT or named it as a beneficiary of the accounts mentioned, why you haven’t done that? If your answer is “you haven’t had the time to take care of it,” is that still the case? Actually titling assets in trust, particularly valuable assets or difficult to probate assets, may be one of the most valuable benefits you can provide to your family. It will not only save them the expense of probate, it will also save them from the stress of probate. Ask anyone who has had to wait for the probate time periods to elapse to gain access to estate funds while creditors grew increasingly mean-spirited, and you will be convinced that probate stress can be very real.
As to the provisions of the trust agreement, there are two situations to consider: First, does it provide sufficient flexibility to your spouse to take care of himself or herself and to distribute funds as he or she sees fit to help out family members who may be suffering during this Pandemic? Second, does it protect your children from tragic situations yet provide them the flexibility to liquidate the trust if they don’t need its protections?
Avoiding the “Tragic Situation.”
The litmus test for the effectiveness of the RLT after your death is whether it can prevent a tragic situation that your children might otherwise experience. When we say “tragic,” the following is the sort of situation that we are talking about. We will leave it up to you to decide whether you consider this to be a tragedy and whether you think it is worth preventing.
The Tragic Situation Example
Your daughter receives her inheritance in a lump sum, and her husband, who has gotten laid off from his job, is not coping well. He suggests that the inheritance be used to purchase a pricey condo at the Lake of the Ozarks; at the last minute, he tells the title company to title the condo in joint names with him, which they do. He has convinced your daughter that the condo is a good investment and that they can sell it at a tidy profit when money is needed for the children’s college. Two years after the condo is purchased, son-in-law files for divorce and claims that the condo is marital property and should be divided equally between them. Son-in-law reveals that he has a new girlfriend and thinks that he needs to think about his own finances before committing to provide any funds for the children’s college.
How would an irrevocable trust with asset protection features have prevented the tragic situation?
Remember that the RLT transforms into an irrevocable trust at your death and can provide protection from creditors while the assets remain in trust for the beneficiaries even if they also serve as trustees or co-trustees. That provides the beneficiaries with the best of both worlds – protection from creditors while the assets remain in trust (including spouses and ex-spouses) and control over the trust assets. If your daughter had not received her inheritance in a lump sum but instead served as a co-trustee with a family friend of her own trust (comprised of her inheritance), then son-in-law would not have had the opportunity to title the condo in joint names. The co-trustees would have insisted that the condo be titled in the name of the trust. When son-in-law filed for divorce, he would have found that he has no right to the condominium.
Likewise, if your son-in-law persuaded your daughter to co-sign on a loan or a guarantee for his start-up business, your daughter’s trust could not be forced to pay the loan if your son and daughter defaulted on it.
Does Your Existing RLT Provide the Type of Asset Protection Described?
Probably not. More likely, it lists the ages at which the trust would be distributed outright to your children and the potential asset protection that your RLT could have provided to your children and grandchildren would be lost. You were probably asked at what ages you thought the children should receive their trust share and you said “one-half at 30 and one-half at 35,” or something like that without knowing the consequences of your actions. Instead, consider establishing a lifetime trust for your children after the death of your spouse but giving the children a method for liquidating the trust if it is not necessary for asset protection purposes.