It’s easy to rush through life without giving enough thought to what happens to your assets and your dependent loved ones, if you have any, when you die. It’s not fun to think about, but it’s too important to ignore. Here are a few things to consider.
Who Can Serve as a Trustee for You?
A friend, a family member, a financial institution, or anybody else you have faith in. But keep in mind, the legal responsibilities of being a trustee are significant and sensitive and could be long-lasting.
Some trusts span generations. That’s why it might be a good idea to name a financial institution as your trustee as opposed to a friend or family member. If you do choose an individual close to you, you should know that this position requires time, energy, and a degree of expertise. In other words, there should be some compensation involved. Some states provide for a trustee fee, even if there isn’t one specified in the trust documents.
Using a Trust to Help Pay the Grandkids’ Education Costs
If helping the grandkids with school costs is a goal, how you go about it can affect your estate plan. You can, of course, make tuition payments directly to the institution on behalf of your grandchild. That way you avoid paying gift tax or using your annual gift tax exclusion of $14,000 per recipient per year (or your lifetime gift exclusion of $5.49 million). And you avoid the generation skipping transfer tax (GST) or GST exemption. However, this only applies to tuition, not books or room and board and fees. If you want to pay for those you may have to use some of your annual exclusion for each recipient.
You can also set aside funds for future education expenses and shield those funds from estate taxes. One option for doing this is a health and education exclusion trust (HEET). A HEET makes direct payments of tuition on behalf of beneficiaries, and also pays medical expenses for them if you so designate. You can use your annual $14,000 gift exclusion to fund the trust, and your lifetime exemption to ensure the gifts are tax free. And… the assets are removed from your estate. Win/win.
While you are thinking about tuition planning, keep in mind that gift, estate and the generation skipping transfer tax could be repealed under President Trump. Even if that happens, the strategies laid out for tuition planning shouldn’t suffer any negative impact. Your financial professional should be able to guide you through the details.
Did You Get Divorced after You Made an Estate Plan?
When you wrote your estate plan, it probably centered on your spouse as the person to carry on ownership of most of your assets. If you later got divorced or are in the process of divorce, you should take time to review your estate plan as soon as possible. It’s surprisingly common for divorced spouses to forget to change the beneficiaries on their life insurance and retirement accounts.
It’s true that in many states, a divorce automatically nullifies any gifts or bequests to an ex-spouse and revokes a former spouse as executor or trustee. However, estate experts recommend taking care of this yourself. Why bother? Several reasons. First, courts have been known to uphold a designated beneficiary (such as a former spouse) even if the decedent had remarried at some point. Unless you’re willing to take that chance, you should take steps to eliminate your ex-spouse as beneficiary.
Also, suppose you are in the process of a divorce when you pass away. Even if you are legally separated, your former spouse will still inherit according to your will or revocable trust. And if he or she was your designated trustee or executor, that designation will stand. Is it worth the risk?
Finally, if you’re legally married when you pass away, your soon-to-be ex-spouse still has community property rights to part of your estate (or an elective share in non-community property states). So, once the decision to divorce has been made, it is better not to waste time changing your estate plans.
Why Avoid Probate?
One good reason is privacy. Did you know that probate is a public matter? If your estate goes into probate, anyone interested in knowing what assets you owned during your lifetime and how they will be distributed, can easily find out. A long list of very famous people failed this test, which means anyone can read the details of their lifetime assets. With a well-advised estate plan strategy, you can keep all or most of your estate out of probate.
Probate is the legal process that establishes the validity of your will and the value of your estate. It also resolves credit claims, arranges for the payment of any tax due, and transfers assets to the heirs. If you have issues with your heirs and creditors, you might prefer to have a court resolve them by letting probate happen. Probate also limits the time creditors can make claims on your accounts. It may also be necessary to allow probate if the guardianship of minor children is an issue, or if there is personal property to dispose of.
If you do wish to avoid or minimize probate, the best way depends on how complex your estate is. You can keep all or most of your assets out of probate by designating beneficiaries, and by how you title your assets (especially life insurance, annuities, and retirement accounts).
One way to ensure your bank or brokerage accounts pass directly to your designated beneficiaries is to have a “pay on death” account, or POD. Or a “transfer on death” account, or TOD. Ask your bank if they allow such accounts.
For real estate, and possibly for banks and brokerage accounts you may want to avoid probate by holding title with a spouse or child as joint tenants of survivorship or tenants by the entirety. However, before you re-title your assets, talk it over with your professional advisor, since there can be drawbacks.
Teresa Ambord is a former accountant and Enrolled Agent with the IRS. Now she writes full time from her home, mostly for business, and about family when the inspiration strikes.