Standalone Retirement Trusts

Nowadays, most Americans hold their wealth in retirement accounts. When it comes to
inheritance and estate planning, special considerations are necessary to ensure that these assets are protected and distributed according to the account holder’s wishes. 

Retirement assets, such as IRAs, are typically passed via beneficiary designation. For example, for a married couple with children, it would be common to designate the spouse as primary beneficiary and children as secondary. However, in almost all occasions it is advantageous to name a trust—rather than a particular individual—as the designated beneficiary. Once the retirement account becomes inherited by a non-spouse beneficiary (i.e. children), it is important to understand that IRS regulations
treat this inherited retirement account differently. Specifically, once inherited, the beneficiary is obligated to begin taking required minimum distributions from such funds within a more immediate time horizon of either five years or over the beneficiary’s life expectancy.  An IRA administrator will also offer the option of receiving the proceeds as a lump sum payment, which is very often discouraged, especially in the case of minor or financially irresponsible children. The preferred goal in planning for inheriting retirement assets is to maximize this window of time so that the tax-sheltered, long-term growth benefits of retirement accounts are maximized.

IRAs and other retirement instruments were designed precisely for a specific purpose: retirement. They were not intended as a savings mechanism for future generations. Tax laws work according to this assumption, and so foresight and planning are necessary when including such holdings in an estate to be passed on to beneficiaries. Trusts can serve as an appropriate conduit to protect and preserve these assets.

Some will consider a standard revocable living trust by default when structuring a retirement trust.  This could cause unfavorable consequences, however, including a more fixed distribution schedule and the lack of creditor protection. Further, the IRS may a not consider the revocable living trust as a designated third party beneficiary, resulting in the assets becoming immediately, taxable income.

A Standalone Retirement Trust is a trust that is created for the sole purpose of serving as the beneficiary of the remainder of your IRA funds (and other qualified funds, e.g. 401(k)). Thus, the trust will be funded after you pass with whatever is left of your retirement assets. Then, the trustee of the Standalone Retirement Trust will oversee the distribution of the funds to your heir(s) in a manner you see fit.

A Standalone Retirement Trust will provide you with significantly greater control over the manner in which your remaining retirement funds are distributed to your loved ones, rather than just control who will receive the funds after you die—as is the case with leaving your IRA through a simple beneficiary designation.

Other potential benefits of Standalone Retirement Trusts include 

  • Asset protection in the event of a divorce;
  • Creditor protection;
  • Generation-skipping tax benefits;
  • Special Needs/Supplemental Trust benefits;
  • Alerts the beneficiary of any tax consequences of an immediate payout;
  • Allows beneficiary’s to thinly stretch tax obligations over time;
  • Alleviates the need for a court appointed guardian for minor beneficiaries
  • Provides a beneficiary with asset protection in the event the beneficiary becomes disabled; and 
  • Allows for successor beneficiaries. 

For more information on Standalone Retirement Trusts contact our office today. 

Funding Your Living Trust

Hopefully by now you’ve heard about the benefits of having a living trust as part of your estate plan. The most notable benefit is the ability to keep your assets from having to go through probate. You can retain control of assets during your life, and exercise control over how they are managed and used after your death. A trust can reduce, and in many cases eliminate income, estate, and capital gains taxes on assets.

Meeting with a skilled estate planning attorney and creating the best type of trust for your particular needs is a big step. Creating the trust, however, isn’t all you need to do. Consider how silly it’d look if you bought a safe deposit box or opened a bank account, but never put anything in it. They can only protect your assets if they’re inside. If you die or become incapacitated and your trust is not funded, it is mostly useless, no matter how well-drafted it might have been.

How to Fund a Living Trust

So how exactly do you go about funding a living trust? That depends on the nature of the assets intended to be placed in the trust. Many types of assets can be used to fund a trust by re-titling them in the name of the trust.

For instance, if your name is John Doe and you currently have a bank account or cars in your sole name, you could change the name on the bank account or vehicles to that of the trust, with yourself listed as trustee of the trust. Also, if you are married, you and your spouse can both be listed on an account as co-trustees.

Other assets that can be re-titled in order to fund a trust are real estate, stocks, and other investment accounts. Legal requirements for funding a trust with real estate are somewhat complicated, and it is best to have an attorney’s assistance to make sure you use the right type of deed and that it is properly prepared. More likely than not, you will deed the property directly to the trust.

Certain types of assets may be used to fund a trust by designating the trust as the beneficiary of those assets. Many of our clients choose to make their trust the primary beneficiary of their life insurance policies. This allows the client to have lots of control on how the policy proceeds are disposed of at the death of the policyholder. Annuities or retirement accounts, including 401(k), 403(b), and IRAs can also fund a living trust after death through beneficiary designations.

Having retirement account assets payable to certain trusts can significantly reduce the tax deferral period for your taxes. On the other hand, other trusts can enhance the likelihood of attaining the maximum stretch-out period for your heirs. At the Law Office of Rodney Davis, LLC, we can assist you in re-titling your accounts to avoid a bad outcome.

Getting the Help You Need to Fund Your Living Trust

If you have not yet had your attorney draft your trust, prepare a list of the assets that you want to place in the trust. Understanding how you plan to fund your trust will help your attorney guide you in doing so efficiently. If you have created your trust, but have not yet funded it, don’t delay, act now! Call our office today to learn how you can fund your living trust. 

Where Should I Store My Estate Planning Documents?

One of the most common questions that estate planning attorneys are asked is where original estate planning documents – Wills, Trusts, Powers of Attorney, and Health Care Directives – should be stored for safekeeping.  While there is no right or wrong answer to this question, there are a few things to consider: Continue reading Where Should I Store My Estate Planning Documents?

Integrating Long Term Care Into Your Estate Plan

What Is Long Term Care?

When most people think of estate planning they focus on how their assets will be disposed of when they are deceased. A well drafted estate plan, however, can and should take into consideration the need for long term care.

Long-term care provides a range of services and support for you individuals who are unable to care for themselves due to a chronic illness or disability. Most long-term care isn’t medical care, but rather help with basic personal tasks of everyday life, sometimes called activities of daily living. All too often, individuals and families wait until a medical crisis actually happens before considering long term care, which usually leads to throwing together a hasty estate plan in the face of mounting medical costs.

Why Consider Long Term Care?

Long term care costs can easily drain one’s finances in a relatively short time. According to the Harvard University Study in Compensation & Benefits Review, 72% of Americans become impoverished after just one year of nursing home care. Long term care isn’t typically covered by private medical insurance and major medical insurance plans. Medicare only pays for skilled and rehabilitative care after a three-day hospital stay; this excludes custodial care, the assistance someone needs for daily living. Medicaid only covers nursing home bills after a loved one is bereft of assets.

Whether the care you need takes place in a nursing home, assisted living facility, or with an in-home provider, the costs can mount with alarming speed. According to the Genworth 2016 Annual Cost of Care Study, the cost of receiving long term care continues to rise sharply year over year, especially for services in the home, where the vast majority of Americans receive long term care and for a longer period of time than facilities. The median monthly costs for the services of a homemaker or an in-home health aide for 44 hours a week are $3,813 and $3,861, respectively. The average monthly cost of a private nursing home room is $7,698, up 1.24 percent from 2015.  The cost of a semi-private room is up 2.27 percent to $6,844 per month.  Assisted living communities saw a slight increase in costs of .8 percent to $3,628 per month.

Long Term Care Planning in Your Estate Plan

As with all major life situations, careful planning will ensure the financial resources are available when they are needed. If your estate plan does not consider long term care, chances are you haven’t taken a realistic look at your assets and how the potential need for long term care may affect them. Talk to an estate planning attorney about the following factors to get on the right track:

  • Set Reasonable Expectations for Long Term Care

While we can’t predict what will happen to us and when it will happen, we can take an educated guess. For example, are there any major diseases that run in your family? Are you involved in any kind of activity that could affect your body long term? While considering these things may feel uncomfortable, it is far better to consider them early on and plan accordingly, rather than face the reality of long term care with no plan at all.

  • Consider a Long Term Care Insurance Policy

Since it is highly likely that Medicare or medical insurance will not cover long term care costs, a long term care insurance policy can ensure that your financial assets are not drained due to long term care costs. Most people assume that long term care will be covered by Medicaid and face the rude awakening of having their financial assets drained after learning that it doesn’t.

Consider and discuss long term care insurance policies with affordable premiums that won’t rise drastically over time. Begin this process as early as possible, as the younger you are when you apply, the lower the long term care insurance premiums are.

Benefits of Long Term Care Insurance Policies Include:

– Preserve savings and assets for family and friends;

– Help maintain one’s financial independence from family and friends, often    eliminating the need to borrow money for long-term care costs;

– Relieve family and friends of caregiving tasks, as paying for professional care becomes an affordable option;

– Allow a loved one to choose where he receives care. If Medicaid pays for care, a nursing home is the only option. People can design their policy depending on where they want to receive care: in a nursing home, in the community, at home, or in an assisted living facility; and

– Expand the range of services a loved one receives, including: care from visiting nurses, home health aides and friendly visitors programs; home-delivered meals and chore services; and time in adult daycare centers and respite services for caregivers.

  • Have Your Advanced Medical Directive, Power of Attorney, and Trust(s) Drafted

In the event that you are unable to make medical decisions for yourself, the last thing you want is for your family and/or friends to fight over them. Have an estate planning attorney draft you an Advanced Medical Directive outlining the treatment you want to be given if you are unable to do so. Otherwise, you run the risk of a lengthy court process in which a court will appoint someone to make decisions on your behalf.

Revocable or irrevocable trusts, such as a life insurance trusts have proven to be effective long term care planning tools for individuals of all ages, as they provide tax benefits and allow the donor to direct how the life insurance proceeds will be disposed of at the donor’s death.

While planning for long term care may seem like a daunting task, those who do plan are able to live with the peace of mind of knowing that they are covered if a need for long term care ever arises. Contact our office today to learn how we can help you create an estate plan that includes long term care.

Leaving Money to A Financially Irresponsible Kid

So you’ve finally decided to do your estate plan and you decide to leave everything to your only son, now 15-years old. There is only one problem: your son is not financially proficient, and you are worried he may not be able to handle all of the money and property that is being left to him. In fact, you believe he would blow through his inheritance in less than 5 years. So how do you handle such a situation? Continue reading Leaving Money to A Financially Irresponsible Kid

Americans Unprepared For Biggest Wealth Transfer In History, According to RBC Report

A recent report suggests that Americans are unprepared for the biggest wealth transfer in U.S. history. According to Royal Bank of Canada (RBC) Wealth Management, Americans are “woefully” unprepared to transfer trillions of dollars from the older generation to their heirs, something that will happen in the near future.  Continue reading Americans Unprepared For Biggest Wealth Transfer In History, According to RBC Report

Can I Put My Home in a Trust?

The short and simple answer is yes. Any property you own and have legal title to can be transferred into trust. That includes real property. Even real property that is subject to a mortgage can be placed into a trust. Most people, after all, don’t own their houses free and clear of a mortgage when putting their homes into trust. But transferring real property into the trust does not change your obligation to continue to pay the mortgage–if you don’t pay, they can still take back the house. In fact, if you’re thinking of putting your home into trust you should consider contacting your lender first. You might trigger a due on sale clause if one is included in your mortgage contract. The lender can call the entire mortgage due all at once because you technically no longer own the home. Further, if after placing your home into trust you decide to refinance your home the lender may require that you take your home out of trust before getting the new loan and putting it back into trust after getting the new loan.

Advantages of Putting a Home into Trust

Homestead Exemption Issues 

If your line of work leaves you vulnerable to lawsuits you may want to consider your state’s homestead exemption laws. These laws put your house – or at least a portion of its value – out of reach of judgments or, in a worst-case scenario, your bankruptcy estate. When it comes to trusts, homestead laws can vary significantly from state to state. In some states, your property is only protected if you personally hold title. If you transfer ownership of your house to an irrevocable trust, however, this shouldn’t be a consideration. This type of trust also shields assets from creditors, so you’d just be exchanging one form of protection for another.

Avoidance of Probate Issues 

Most living trusts are structured to avoid probate and its costs. While some states have streamlined their probate process, many still require cost, time and attendance at multiple hearings. Most homeowners wishing to avoid probate and transfer title to their home to their heirs quickly find avoiding probate through a trust to be a strong advantage.

Consider the Deed Used to Transfer the Home into Trust 

The deed you use to transfer your property to your trust can present another issue. Real property can be transferred by two main instruments: a warranty deed or a quitclaim deed. A warranty deed guarantees a future buyer that there are no hidden liens or claims against your property, and that you – or your trust – actually own it. Thus, you have something to sell. A quitclaim deed, on the other hand, makes no such representations. It simply transfers any ownership interest you might have without guaranteeing that you have an interest or that it’s not encumbered by liens. A future buyer would be wary of this type of deed if your trustee finds that he must sell the house after your death. Depending on the type of deed you use to make the transfer to your trust, you could create a big estate issue in the process of settling your estate at your death.

For more information about how we can help with your estate planning needs please contact our office today!

Are You Guilty of Micromanaging Your Aging Parent?

Elizabeth O’Brien, Retirement Reporter for Marketwatch.com, calls them “Tiger Children.” They are individuals with aging parents who try to micromanage their aging parents in making important decisions such as elder care and estate planning. As a lawyer with a practice focused on estate planning, “Tiger Children” remind me of an all too common estate planning issue: undue influence. Undue influence is defined as influence by which a person is induced to act otherwise than by their own free will or without adequate attention to the consequences.

According to Cornell University Law School, in order prove undue influence, a party must show that one party to a transaction or contract is a person with weaknesses which make him likely to be affected by such persuasion, and that the party exercising the persuasion is someone in a special relationship with the victim that makes the victim especially susceptible to such persuasion. For example, Albert is a 95 year old widower with dementia. His primary caretaker is his much younger girlfriend, Barbara. Everyday Barbara presses her aging boyfriend to write a will leaving his entire estate to her and to disinherit his children, Charles and Danielle. When Albert shows resistance, Barbara threatens to cease taking care of Albert. Feeling vulnerable and pressured by Barbara’s demands, Albert gives in to Barbara’s wishes and decides to write a will leaving his entire estate to Barbara and disinherits Charles and Danielle. At Albert’s death, Barbara tries to have Albert’s will probated. Charles and Danielle, however, may be able to challenge the will as invalid due to undue influence on Albert by Barbara.

Click here to check out Elizabeth O’Brien’s article, “Don’t be the ‘Tiger Child’ at your family gathering,” to learn how you can avoid the mistake of micromanaging and pressuring your aging parents.

 

 

2016 Estate Tax Rates

Here’s a great article by Matthew Frankell with The Motley Fool, called 2016 Estate Tax Rates. According to investopedia.com, an estate tax is a tax that is levied on an heir’s inherited portion of an estate if the value of the estate exceeds an exclusion limit set by law. Click here for the article.

In this article Frankell details the current estate tax brackets, along with the rates for each tax bracket set by federal law. (Note however, certain states impose an additional estate tax.) While the numbers may seem daunting at first, the article goes on to describe how the lifetime exemption amount (an amount you leave to your heirs that will not be taxed) allows many estates to avoid federal estate taxation at all.

For Alabama residents, this is great information to know as well because Alabama does not impose a separate state estate or inheritance tax. It collects the maximum credit allowed on the federal estate tax return.

For more information on how you can reduce and even avoid estate taxes, contact our office at (205) 578-1597.

5 Legal Documents You Should Have

All too often we find ourselves in situations where we need immediate access and use of certain legal documents. No matter who you are, it is important that you take the necessary steps to acquire these documents. After you get these documents put them in a safe place and retrieve them when needed. Below are 5 legal documents that every individual should have before the need for them comes:

I. Will

Let’s face it, no one wants to think about dying. As a result, most individuals die without a will. Writing a will, however, does not have to be a daunting experience. In fact, everyone needs a will to make sure your assets are distributed correctly. If you are a parent of a young child, you will need to appoint a guardian to take care of your kids. Dying without a will could lead to extensive bickering and fighting among your family over the distribution of your estate. Do your loved ones a favor and invest in having a will written by an estate planning attorney. Click here to learn more about having your will written by our office.

II. Power of Attorney

A power of attorney is a legal document giving another individual (referred to as your attorney in fact) the authority to act and make certain decisions on your behalf. If you ever become debilitated or otherwise incapacitated, the attorney in fact will make decisions for you. If you are out of town or out of the country, you can also authorize your attorney in fact to make decisions for you and manage your affairs in your absence. Click here to learn more about having your power of attorney written by our office.

III. Advanced Medical Directive

In addition to having a power of attorney written to handle business affairs and other miscellaneous matters, an advanced medical directive is very important to have as soon as possible. An advanced medical directive is a legal document that states your wishes in regards to your health care. An advanced medical directive addresses issues such as life support and whether to resuscitate you if you are unresponsive. Remember the Terri Schiavo case? The seven-year legal battle between in-laws could have been avoided with an advanced medical directive. Click here to learn more about advanced medical directives and living wills.

IV. Life Insurance

Again, no one wants to think about death, so most people don’t take the time to invest in life insurance. Life insurance, however, is imperative to have in order to make sure all of your debts and memorial services are taken care of. Neglecting to do so will leave your family with the responsibility of handling these costs.

V. Living Trust

A trust is an arrangement created by you under which one person, called a trustee, holds legal title to property for another person, called a beneficiary. You can be the trustee of your own living trust, keeping full control over all property held in trust. Just like a will, a living trust spells out exactly what your desires are with regard to your assets, your dependents, and your heirs. The difference between the two, however, is that a will becomes effective when you die and is probated, but a living trust does not have to go through the costly time-consuming probate process. If you have a trust, it is important to make sure that trust is properly funded and that all of your personal property is transferred to your trust. Click here to learn how our office can assist you in creating a trust.

You never know when you’ll need either of these documents, so give us a call today and let us help you plan for the unexpected.