Tag: revocable living trusts

Valentine’s Day

Posted on | by Mercy Kurian

Question:  I just got remarried but I have children from a previous marriage. If something were to happen to me, how do I take care of my spouse during his lifetime but ensure that my assets go back to my children after his death?

RLG advice: So you’ve found love again and are navigating the adventure of a second marriage with kids from a previous chapter. Kudos! Let’s chat about some friendly advice on how to make sure your wishes are honored and everyone gets their fair share.

Step 1 – Get your Valentine a gift of a Last Will & Testament or Revocable Living Trust!: Of critical importance to you who has seen Cupid more than once, is to get your Will or Revocable Living Trust – what we call your foundational estate planning documents – signed asap!  In your documents you will state that what passes to your spouse will go in trust (a QTIP or Qualified Terminal Interest Property trust) so that when your spouse passes, the assets can revert to your children. By spelling out “the-what, the-who, the-when and the-how” in a Will or a Rev Trust, you are giving your loved ones the greatest gift of all – the gift of time that they would have otherwise lost dealing with a messy estate where state law determines who should inherit your assets.

Step 2: Don’t underestimate the power of titling of accounts. Remember your Will can be beautifully laid out but it will only control what is in your own name alone i.e your probate assets. However, for those accounts you own jointly with your spouse or if the account has beneficiaries designated (i.e. non probate), then such accounts will pass directly to the joint tenant or named beneficiary outside of your Will or Rev Trust.

Step 3: Deeds must also be re-titled differently. You and your new spouse need to have a frank conversation on what should happen to the family home when you are both gone.  Is this a home you bought together? Is this home yours but he moved into after you got married?  If the end goal is that your children should benefit from this when you are not around, then titling of the deed becomes critical.  If the deed has the magic words “husband and wife” or “married couple” at the end of your names, then the house get a “Tenancy by the entirety will automatically pass to your wife, outside of probate and your children will be out of luck. ).  Talk to your new spouse and figure out whether it makes sense to keep title in your name alone so you can either dictate what happens to it in your Will or Trust, or if you agree to create mirror image Wills that you both agree not to change upon the death of one, this could also ensure that your children will be the final beneficiaries under either Will.

  1. Don’t forget the Elective Share. The law in NJ provides that unless you both had contractually agreed to not receive anything from the other spouse’s estate, if you disinherit your spouse in your estate planning documents, your spouse has a claim for his or her Elective Share against your estate. This means that the disinherited spouse has the right to receive upto 1/3rd of your augmented estate (i.e. probate and non-probate assets). So before you decide to omit your spouse without your spouse’s consent and waiver, you will need to make sure that your spouse is properly provided for with your other assets and everyone is treated equitably.
  2. Communication is critical: Grab a cup of coffee and sit down for a heart-to-heart with your spouse (and if your kids get along with your new spouse, then bring them into the conversation too). Talk to them about your dreams, concerns, and expectations. Then, turn those dreams into reality with legally binding documents like wills and trusts. It’s like making a promise with a seal of approval! Unfortunately, the best laid plans can fall prey to expensive and lengthy court battles when disgruntled beneficiaries make claims that this is not what the deceased wanted.  Explaining things to family during lifetime and supporting that with documentation can bring closure to your grieving family.

Remember, estate planning is about giving your loved ones the gift of time which in turn creates peace of mind and a happy home for everyone. This Valentine’s Day, give the gift of love, laughter, and a happy home to your family!

 

 

 

 

Revocable Living Trusts – Common Misconceptions

Posted on | by Mercy Kurian

A few days ago, I was explaining the concept of “funding” of trusts to some clients who were new to the world of estate planning and I was struck by the fact that what I had always thought were easy concepts to understand caused a lot of confusion to my clients and their understanding of how trusts operate. The two main areas of confusion appear to be in (1) figuring out exactly how trusts differ from wills and (2) the mechanics of how accounts are transferred into trusts causing trusts to become the new “owner” of those accounts. This article hopes to shed light on these two seemingly simple (or so I thought!) concepts – revocable living trusts and trust funding.

We’ve heard people use the word trusts in different settings and under different circumstances. Many people mistakenly believe that all trusts offer asset protection. However, not all trusts are made equal – trusts can either be living (i.e. inter-vivos trusts) or testamentary (i.e. those that become effective upon the death of an individual). All testamentary trusts are automatically irrevocable but living trusts can be either revocable or irrevocable. The person(s) setting up these trusts are interchangeably called Grantor(s), Trustor(s) or Settlor(s) of trusts.

Living trusts are typically stand-alone entities that become effective immediately upon the signing of the trust agreement. Those that are revocable are called Revocable Living Trusts or RLTs or Will substitutes. These RLTs allow a Grantor to set up the trust and retain full control of the trust assets by also being appointed as Trustee of the trusts. The Grantor can also enjoy the full benefits of the trust assets as a beneficiary. There are several benefits for setting up a RLT the most important one of which is that they are meant to avoid probate (i.e. court supervised process) upon death which is often considered to be ridden with hassle in some states. In contrast, Irrevocable Living Trusts are more difficult to be changed once set up. In this case, the Grantor transfers assets into an irrevocable trust by assignment, sale, gift or loan, then typically gives up control over the assets. The primary benefits of irrevocable trusts are that assets are removed from the Grantor’s estate upon his or her death thereby avoiding estate taxes; and these assets are protected from both the Grantor’s creditors as well as the creditors & predators of the beneficiaries. Properly designed trusts may even escape Medicaid recovery and preserve assets for the Grantor’s ultimate beneficiaries should the Grantor be receiving public benefits. Regardless of which irrevocable trust is used, these trusts are typically sophisticated planning techniques established as part of an individual or married couple’s advanced planning. They should always accompany a robust foundational plan complete with a Will and/or a RLT, a General Durable Power of Attorney and Advanced Healthcare Directive. For more information on the benefits of a RLT, check out our earlier posts on this subject1.

When it comes to “funding” trusts though, it is important to note that this term of art has to do with the act of transferring accounts into the trust or retitling assets into the name of the trusts and has nothing to do with refinancing or getting loans to trusts. The following visual imagery may help provide a better understanding how RLTs2 actually “receive” assets.

If you think of your trust as a cookie jar, then our firm would work with you to take your cookie jar from concept to design to set-up. Once you sign the trust agreement, your cookie jar is now ready to be filled with assets or ‘cookies’. And because your trust is like your alter-ego, it can do almost anything you can do. This means that if you have 5 bank accounts each at a different bank and you want to continue to bank at these 5 banks, then you can open 5 trust accounts at these banks. Our office would then provide you with the necessary documentation you need to present to your bank representative who will then open a new trust account and more often than not, it will have a new account number. Depending on the type of trust you are setting up (revocable or irrevocable), the account will either be associated to your social security number or have its own separate tax identification number or EIN# for income tax reporting going forward. This process of funding may involve several back and forth communications with institutions and can sometimes be challenging especially when a representative may be unfamiliar with trusts. This is when your choice of law firm become important so the firm can work with you and the representatives to see this process through to the end.

This article would not be considered complete if we did not address funding in connection with real property, businesses, and accounts with beneficiary designations. Here is a quick synopsis of how these assets are funded:

  • Real property must undergo a title change (i.e. the deed needs to reflect the new owner as the trust) in order for this to properly avoid probate. This deed must be recorded at the county clerk’s office just like any other deed. So long as the property is being transferred into a RLT, and the Grantor continues to reside in the property, a lender holding mortgage to the property cannot trigger the due on sale clause as the Grantor is protected by statute

  • Depending on how a business is structured (LLC, S Corp., C Corp.), a Grantor-owner’s interest could be assigned to the RLT

  • Accounts passing by beneficiary designations, typically retirement accounts, life insurance policies and/or brokerage and investment accounts with beneficiaries, must be amended to ensure the RLT (or its subtrusts for the various beneficiaries) is the primary beneficiary of these accounts.

While funding is a relatively straightforward process and may be handled the Grantor on his or her own, it is always better to do so under the guidance and counsel of the drafting attorney or let the drafting attorney’s office handle the funding process for an extra fee to ensure things get done correctly and time efficiently. Once all of the assets are either moved into the trust or named as a beneficiary of asset, then going forward, it becomes very easy to administer and manage these trusts because any new account that is opened or property purchased can be made directly by the trust.

2 Our focus in this article is mainly on addressing funding challenges with Revocable Living Trusts and only briefly discussed Irrevocable Living Trusts in passing.

Benefits of Revocable Living Trusts

Posted on | by Tom

As a newbie estate planner, many moons ago, I heard the “gurus” of estate planning tout the benefits of New Jersey being a “probate friendly” state. This meant that New Jersey’s court systems were easy on a family’s representative to adhere to the rules and formalities to admit the Will to probate and was also relatively inexpensive In fact, I remember an incident at a Continuing Legal Education seminar once when an older, more experienced estate planning attorney berated a young managing attorney of a boutique Trusts & Estates firm for what he called “churning out” Revocable Living Trusts (or “Rev Trusts”, as we often call them) just to make more money. The older attorney felt that the younger attorney should respect the long-standing tradition of creating the simpler and less expensive Wills, like most New Jersey attorneys were doing at the time. Boy, times have changed! Today, some of those very “gurus” have come to realize the valuable role Rev Trusts play in many a client’s life – and not just because these clients have property out of state (which used to be one of the primary reason for setting up these trusts), but because their benefits far outweigh their downsides, which we will address later on in this article.

Do not get me wrong – having a Will is still far better than not having anything at all. It is better to formalize your intentions to ensure that the people who you want to receive your assets ultimately end up getting your assets, rather than letting New Jersey’s intestacy laws determine who those assets go to. For example, many starry-eyed newlyweds (am I dating myself if I refer to them as DINKs – Dual Income No Kids?) who haven’t begun to think about death or incapacity may be surprised to know that in the unlikely event that something should happen to them or their partner, if there is no will in place, their new spouse will need to share the assets of the estate with their parents. For those who would want their assets to go solely to their spouse, setting up a Will that stipulates this is a crucial step. An added bonus for newlyweds, Wills are less expensive (note that I did not say “cheap”) than Rev Trusts, and for these newlyweds, a simple Will package may be all that they need to get their affairs in order. And keep in mind, Rev Trusts (contrary to popular misconception) do not offer creditor protection or estate tax savings. They are purely meant to serve as Will substitutes or as one client called it – Rev Trusts are just “Wills 2.0”!

So one may ask the question – “If a will is good enough for the hypothetical newlyweds, why won’t it suffice for me??”

Well, planning becomes more complicated once you have children to pass on your assets to, and as your family grows you may begin to form opinions on how children ought to inherit the “gift” passing from you to them upon your death. Also, as the assets grow over time, investments also become more complex. Once you have reached this stage of life, you may begin considering how the benefits of a Revocable Living Trust apply to you, such as:

  • They afford privacy (it is not a public document like the Will)
  • They offer smooth succession upon incapacity
  • So long as all assets are properly re-titled into the trusts, or at least have the trust named as a beneficiary, they completely avoid the courts (which may make a huge difference, especially if you have assets in multiple states some of which may have an expensive and cumbersome probate process, such as New York, California or Florida)
  • They travel with you. For example, imagine that you set up a Rev Trust in NJ and transfer assets into it, and then move to New York, you can still keep the same trust (but you may want to just have a NY attorney restate the trust to make it compliant to NY law).

However, there are 2 additional important considerations that you may not have thought about:

  • With the Rev Trust, the cost of probating a Will upon death is avoided (or at least minimized). If you think about the savings in probate costs down the road, you may not mind paying a small premium for a Rev Trust plan now rather than three times that amount down the road (it could be as much as $5k now compared to $15k later).
  • Having a Revocable Living Trust can save your beneficiaries valuable time. Imagine you are concerned about how your children (or other non-spousal beneficiaries) will inherit your assets, and you create a testamentary trust to protect the assets passing to them. If you are a resident of the state of New Jersey and have a testamentary trust in place but no Rev Trust, your beneficiaries will be forced to wait 9-15 months (maybe more if the Tax Branch is understaffed) until they receive their full inheritance. This is because New Jersey has an interesting rule: If assets do not flow into a trust at death (such as when the decedent has a Rev Trust), then the Executor can easily sign a self-executing waiver and transfer all of the assets immediately to the estate, and then to the beneficiaries. However, if assets are to pass into a trust, then the Executor/Trustee has to file a tax return with the State of New Jersey Estate and Inheritance Tax Branch and patiently wait until the waiver is received before the full amount of assets can be transferred over.

Now for the cons of a Rev Trust. After drafting several hundred Wills & Trusts for our clients as well as assisting a similar number of families with probate upon the death of a loved one, I really and truly believe that the cons of setting up a Rev Trust boil down to just 2 compared to a Will:

  • Its more expensive than a Will to set up – almost double in cost; and
  • It’s a 2-step process – unlike a Will plan, which is complete upon signing, in the case of Rev Trusts, you still need to “fill ‘em up” after you sign the trust agreements and when the trusts become effective. This is an essential part of the process that leaves many clients nervous, intimidated, and downright fearful of the administrative hassles they expect to encounter. That said, like anything else that reaps huge rewards at the end (no pain, no gain, right?), in my humble opinion, the short-term hassles seem worth it in the long run.

Families (especially non-spousal beneficiaries) find inheriting assets smooth and hassle free when they inherit assets from Rev Trusts. They don’t have to run around from institution to institution trying to transfer over the assets into the estate, struggle with the court formalities to ensure all of the court’s rules & regulations are adhered to, pay large retainers to attorneys to help these families with the probate process, file tax returns when necessary, and where applicable get trustees qualified in Court once assets are ready to be distributed to the beneficiaries’ trusts. These delays and added costs (which add up in the long run) make setting up Rev Trusts more desirable – maybe not for all clients but more and more for a good number of New Jersey residents.

In conclusion – most of our clients who have shied away from Rev Trusts over these years, have really done so because of the cost factor – they said they were not quite ready to spend on a trust just yet. And while that is a legitimate concern, there are some people whose estates are too complex to be properly covered by a simple last will and testament package. Although the price tag may seem high at first glance, spending some extra effort and money on a Revocable Living Trust now can prevent one’s loved ones from dealing with a mountain of bills and paperwork in the future.

Rao Legal Group, LLC is committed to providing comprehensive estate plans which include both Last Wills & Testaments or Revocable Living Trusts. Our packages not only include the main document that will cover you (and spouse) upon death but our well designed General Durable Powers of Attorney (authorizing someone to handle financial affairs) and the Healthcare Power of Attorney (authorizing someone to handle healthcare decisions) will ensure that you are adequately protected upon incapacity as well. Call us today – we are just a phone call away!

We launched a new program!

Posted on | by Rekha Rao

How this program may help ensure your estate plan will never let you & your family down at the critical moment

 

We hear it all the time when talking about estate plans—“I already have an estate plan in place, so I don’t have to worry.” But there are a few major things people don’t realize about estate planning that can put them at risk of not being prepared when the time comes. Plans need to be constantly updated, monitored and maintained on an ongoing basis. What was set up many years ago may not necessarily be current today. Asset changes, law updates and family changes can cause a well designed plan to fail when the time comes to “test” the plan much later.

 

If your plan includes Revocable Living Trusts (“RLT”) that were established to avoid probate, then were the trusts fully funded (i.e. were the relevant accounts titled to the name of the trust)? If you had planned for your beneficiaries to inherit in trust upon your (or your spouse’s) death, were beneficiary designation forms updated to make the trust(s) a beneficiary? We advised you during your signing that your asset spreadsheet should be updated by you every year, but do you understand when the documents themselves must be changed by the law firm? To ensure the documents work properly, you will need to keep in mind the changes in the law, purchases of new assets, changes in family structure such as marriage or divorce, births or deaths, relocations of your fiduciaries, and more. If you met with your attorney to draft and sign documents, received a nice looking binder filled with those vital documents, but then put it away in a safe place never to be thought of again during your lifetime, you may be at risk that your documents won’t accomplish what was originally intended. Failing to address critical life or asset changes by updating your new documents will jeopardize the entire plan you put in place. The number one reason estate plans fail is because they are out of date.1

 

Many good estate planning attorneys are concerned about how to ensure clients’ objectives are fulfilled and how to address ongoing updates long after the representation with the client has ended—we’ve joined an exclusive group of firms who have come up with an answer! We understand that your estate plan isn’t completed when you sign your documents and leave our office; rather, your estate plan is completed when your heirs are able to carry out your wishes set forth in the documents after you are gone. Therefore, we, as your estate planners, need to be available to you on an ongoing basis and remain involved throughout your lifetime to ensure that we maintain the integrity of your plan. This is why we are offering our Annual Membership Program (or AMP) to continue to take on the responsibility of monitoring and tailoring the plans that we have set up for you for the duration of your lifetime.

 

So if you are an existing client of ours and you created an estate plan with us, consider calling us so we can explain the benefits of AMP and how it can ensure that your plan still functions the way you intended. Additionally, please join us at our office on February 6th, 2020 at 6:00 pm for an AMP workshop where you can get more details of this program and find out how it can help you achieve peace of mind for you and your loved ones. But if you haven’t created your estate plan as yet—we hope you will choose us as your estate planning firm, as we will not only prepare superior quality documents but also stand behind our plans long after they are first created.

 

1. Bonazzoli, V. E. (2017). How an ordinary lawyer creates and sustains an extraordinary client care program. Parker, CO: Outskirts Press.

Revocable Living Trusts: Misunderstood

Posted on | by Rekha Rao

I have been, for a while now, one of “those” New Jersey attorneys who likes to recommend Revocable Living Trusts (RLTs) for my clients perhaps more often than a majority of my fellow New Jersey colleagues.  When I first started to practice in the area of trusts & estates, I spoke the same language as many of these attorneys when it came to recommending Wills over Revocable Living Trusts.  They all said: “NJ is a probate friendly state; there is really no need to set up living trusts here.  And those attorneys who are “churning” these trusts out like mills are only doing it to make a fast buck!”  And I believed them…after all, when you are new in the field, you naively treat what the more experienced colleagues are saying like gospel.

 

Fast forward a few years later and I realized that these very same attorneys had dismissed a crucial benefit (among a few others) in setting up RLTs.   Investment/brokerage accounts in a RLT do not get “frozen” upon the death of the account holder unlike those assets passing under a Will.  You see, in NJ, the State Tax Branch obligates institutions to freeze accounts of those decedent estates with over $675k (in 2016)[1] until the Executor provides a waiver from the Tax Branch showing that taxes had been paid.  These waivers could take several months to be issued after the filing of the estate tax return.  Up to 50% of the precious funds that could have otherwise been allocated to paying expenses are instead tied up for this time causing undue delays.  The RLT avoids the waiting period completely – taxes still have to be paid, but when assets are in a RLT account, the Executor-Trustee does not have to jump through hoops to get bills paid or to make other necessary expenses.

 

But…we are now in 2018 and NJ does not have an estate tax starting this year.  This means families can just sign a self-executing waiver to release accounts over to the estate and distribute them to Class A[2] beneficiaries almost immediately.  So although I now recommend RLTs less frequently than before, I still find that certain clients can benefit from having RLTs in place for the more than the usual set of reasons.  RLTs are still beneficial to (i) avoid probate in multiple jurisdictions where an individual owns properties in other states; (ii) it allows assets of an incapacitated individual (especially a business owner) Grantor to be managed by the successor Trustee of the RLT instead of relying on the Agent’s authority under a Financial Power of Attorney; or (iii) keep things between family members where privacy is very important to the Grantor.  Moreover, RLTs are still extremely beneficial where self-executing waivers cannot be used i.e. when assets pass to beneficiaries in testamentary trusts or (2) when someone other than lineal descendants of the decedent (i.e. non-Class A beneficiaries) stand to inherit from the decedent’s estate since the inheritance tax in NJ is still alive and well.

 

In conclusion, RLTs are more expensive and there may be no need to set these up for straightforward estates.  However, for the right client, I recommend RLTs because even though both Wills and Trusts work fine in our “probate friendly” jurisdiction, RLTs work better in the long run and the client’s family’s life is made just a little (and in some cases, a lot) easier.

 

[1] The NJ estate tax exemption was at $675k for several years before going up to $2m per person in 2017 and finally disappearing in 2018.  For now, until the next legislative change occurs, there is no estate tax in NJ; but there is still an inheritance tax on assets transferring to all non-spouse and non-lineal descendant beneficiaries.
 
[2] Class A beneficiaries include parents, spouse and children of the decedent