Some people's New Year's resolutions include plans to get their lives better organized. The COVID-19 pandemic reminded everyone that estate planning is vital. "Every family is unique. We guide clients through each facet of the estate planning and asset protection process," says Larry Bray, attorney at Patterson Bray PLLC. Brentwood Lifestyle asked Larry about important estate planning components.
A POWER OF ATTORNEY LEGAL DOCUMENT DESIGNATES AN AGENT TO HANDLE YOUR FINANCIAL AFFAIRS IF YOU'RE UNABLE TO DO SO BECAUSE OF INCAPACITY. WHAT HAPPENS IF YOU DON'T HAVE A POA?
In most cases, family members will hire an attorney to file a petition in Probate Court to name a conservator for the incapacitated person. The Judge will appoint another attorney, referred to as the guardian ad litem, to represent the best interests of the incapacitated person, or ward. The guardian ad litem will interview the ward, the ward’s family, the ward’s doctors and others and will make a recommendation to the judge as to whether the ward is in need of a conservator and whom the conservator should be. The conservatorship process is often lengthy and expensive.
WHAT MAKES A LEGAL LAST WILL AND TESTAMENTS?
A holographic, or handwritten, Last Will and Testatment is legal if it is entirely written in the handwriting of the testator. However, most Last Will and Testaments are typed and signed by the testator in the presence of two independent witnesses. Additionally, the witnesses should sign a self-proving affidavit to avoid the necessity of the witnesses testifying as to the testator’s competency in Probate Court after the testator’s death. Because of these technical requirements for a legal Last Will and Testament, having the document drafted by an attorney is strongly recommended.
WHAT ADVANTAGE DO REVOCABLE LIVING TRUSTS OFFER?
A fully funded revocable living trust will avoid the need for a Probate Court administration at death. All Last Will and Testaments must be admitted to Probate Court after the death of the testator to transfer assets to the named beneficiaries. If the assets are owned by a revocable living trust, the trust document directs the distribution of assets to beneficiaries without the need for a Probate Court administration. A fully funded revocable living trust will keep the grantor’s financial affairs private and out of the court system at an incapacity of death.
UPON DEATH OF A SPOUSE, WHAT EFFECT DO TENNESSEE COMMUNITY PROPERTY TRUSTS HAVE?
In many states, Community Property ownership is the default way assets are owned by married couples. Although Tennessee is not a Community Property state, Tennessee permits married couples to “opt in” to Community Property ownership by establishing a Tennessee Community Property Trust. A benefit of Community Property is that the entire asset is entitled to an increase in basis to the asset’s fair market value at the death of the first spouse to die. A complete step up in basis at the first death will allow the surviving spouse to sell the asset without incurring capital gains taxes.
CAN ESTATE TAXES BE SKIPPED WITHIN ASSET AND DIVORCE PROTECTION TRUSTS FOR CHILDREN/DYNASTY PLANNING?
Although most parents will leave inherited assets outright to adult, responsible children so that they take title in their names. If children own the inherited assets, the assets will be subject to the claims of creditors and possibly divided in a subsequent divorce proceeding. However, the inherited assets can be directed to irrevocable trusts for the benefit of children and their families so that the assets will be protected from the children’s creditors or divorce proceedings. Each child may act as the sole trustee for his or her trust for the administration and distribution of the trust assets. Additionally, the assets remaining in the irrevocable trust will pass free of estate taxes to the next generation. Many clients will direct all future descendants’ inheritances into irrevocable trusts to protect the inheritance from creditors, divorce proceedings and estate taxes for generations.
WHY ESTABLISH GIFT TRUSTS?
Each individual can gift $15,000 annually to a done without any gift tax consequences. This amount is referred to as the annual gift tax exclusion. Rather than making annual exclusion gifts outright to children or grandchildren, donors may consider making annual exclusion gifts to irrevocable gift trusts to maintain control over the management of the gifts as well as to protect the gifts (and appreciation) from the child’s or grandchild’s creditors or future divorce proceedings. Although some donors will establish custodial accounts for children and grandchildren, a custodial account, or Uniform Transfer to Minors Act (UTMA) account, an UTMA account must be distributed outright to the beneficiary when the beneficiary reaches the age of 21.
IS IT TRUE SPOUSAL GIFT TRUSTS CAN BE SET UP?
The current Federal Estate and Gift Tax Exemption amount (the Exemption) is $11,700,000 and will be increased to $12,060,000 beginning in 2022. There has been much discussion by the current Presidential administration and Congress to reduce the Exemption substantially. Even if no reduction occurs with changes to the law, the current law expires on Dec. 31, 2025, effectively decreasing the Exemption by one-half. Therefore, many clients are in a “use it or lose it” situation regarding the Exemption. For married couples, one spouse can make an Exemption gift to a trust for the benefit of the other spouse, which I refer to as a Spousal Gift Trust. Some professionals refer to these trusts as Spousal Limited Access Trusts, or SLATs. The Spousal Gift Trust is designed so that any transfers to the trust will be gifts using the Exemption of the donor. However, the Spousal Gift Trust allows the trustee to make distributions to the other spouse. Additionally, assets remaining in the Spousal Gift Trust at the surviving spouse’s death will pass estate tax-free to or for the benefit of children, grandchildren or other beneficiaries.
IS IT GOOD TO ESTABLISH RETIREMENT BENEFITS TRUSTS TO COMBINE TAX BENEFITS?
The primary benefit of a Retirement Benefits Trust is to protect the required minimum distributions (RMDs) from retirement plans to beneficiaries’ after the death of the owner of the account. If RMDs are made outright to a beneficiary, the distribution will be subject to the creditors and divorce proceedings of the beneficiary. A properly drafted Retirement Benefits Trust will permit the RMDs to be distributed over the maximum term as directed in the Secure Act, which was passed in 2021 and decreased the term over which RMDs must be taken. The Retirement Benefits Trust will protect the RMDs from the creditors or divorce proceedings of the beneficiary while providing control over when the RMDs are distributed.
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