How to Prepare Your Estate Plan to Protect Your Minor Children
As a parent, planning and caring for the well-being of our children takes priority over most things in life. Without question, we want to be sure should anything happen to us, our minor children will be well looked after and that money or property we leave for them will be used wisely for their care. Many of these concerns also apply to grandparents or aunts and uncles who may want to leave some of their assets to help support grandchildren, nieces and nephews.
Two Key Issues
There are two broad issues concerning this type of estate planning. The first is guardianship.
Should something happen to you such that you are not able to care for your children, you will want to name a guardian. This is a person who stands in your place to make day-to-day decisions on behalf of your children. From the mundane (what’s for dinner) to the more significant life choices, guardians play a vital role in protecting your children and making sure they grow to be responsible adults. For most people, a guardian is named in a will. Spouses will often name each other as first choice.
Beyond that, the choice of guardian usually becomes much more difficult; even with plenty of good options, it’s an emotionally-charged decision and should not be taken lightly. Most young couples consider parents or siblings for the role of guardians, but in many cases, the question can cause tension. Should you pick your parents; should you pick your spouse’s parents? Will feelings be hurt? Possibly. Will you ever make the perfect choice? Maybe not.
These hurdles should not stop you from deciding. Keep in mind, as your children grow, their needs will change and your choice of guardian may change as well. Your parents will age, and you may find your siblings or very close friends start to look like a better option over time. The good news is most guardians never need to step into their role and changing your choice of guardian is very easy to do.
Failing to decide is a decision with significant consequences. It is a decision to leave the choice in the hands of the court system. In the absence of a named guardian, someone, usually a family member, will go to the courts to ask that a guardian be appointed. Sometimes this process is extremely smooth and timely. In a few cases, family members do not agree on the best choice and can create extensive uncertainty while lawyers and the courts work to achieve what they think is the best possible outcome.
To see how bad this can get, simply Google “Fight for guardianship of Michael Jackson’s children.”
All of the uncertainty and potential issues down the road can be avoided by naming a guardian and keeping that decision up to date.
Next month we will look at ideas for leaving money to minor children in ways designed to support growth and stability.
Why You Need to Protect Your Digital Assets
When you think of estate planning you probably think of your home, cars, investments, real estate, personal possessions, bank accounts, and so on. For the most part, tangible items you can touch and hold.
But what about your digital assets? Digital assets include:
If we think back just 10 years, digital estate planning wasn’t a priority for most, but as our digital sphere increases, it has become more and more important to protect digital assets.
Much like any other assets, if you don’t manage your digital assets before death, your family may not have the necessary access and rights, thus increasing the risk and difficulty of dealing with your assets, or letting them fall into the wrong hands.
Unfortunately, federal privacy laws don’t always inherently encompass digital spheres unless the individual takes specific action. While some states have risen to the challenge and passed laws to remedy the issue, their solutions are still far from perfect. In fact, your accounts may be automatically deleted after death or your family may have to obtain a court order for rights to access. Either scenario is not ideal and the latter can take upwards of years!
Some platforms such as Google and Facebook have built-in features, such as a “legacy contact” or “inactive account manager” which allows a trusted individual to manage your accounts after passing. However, a proactive approach to digital estate planning is still the best course of action.
How do you start to set up a digital estate plan?
Inventory Digital Assets
Make a list. Think about financial, purchasing, and social accounts. This includes banking, credit cards, email, social media, personal blogs and websites. In addition, provide information on how to access each account, as well as a brief description of each account.
Safely Store Your Information
After collecting all your account details, set up a space for safe keeping. Talk with us about options if you do not have a clear idea on how best to safeguard this information. Make sure that someone you trust knows where this information is stored.
Designate A Digital Executor
Check with us for details on naming a digital executor, in other words, the person (or persons) who will have the rights to manage your digital assets after death. Some states recognize this distinction while others may require you to set up a similar function aligned with your state’s law. This can be more complex for those with multiple residences.
A digital executor is often a spouse, child, parent or trusted individual; they will have full responsibility of your digital assets based on your predefined instructions.
Digital estate planning is an entirely new consideration for most people. As the digital sphere grows and more of our lives take place online, it becomes more important to keep yourself protected.
Who Should I Choose As Trustees of My Trust
We often are asked for advice regarding choice of trustees. Of course every situation is different, but here are some points to consider.
You can select an individual as a Trustee, such as a close friend or family member; or a professional can be selected, such as an attorney or CPA; or you may choose a financial institution or a bank. A good Trustee should be someone who is honest and trustworthy, because they will have a lot of power under your trust document. The person you choose to act as a Trustee should also be financially responsible, because they will be handling the investments for the benefit of your beneficiaries. The Trustee should be someone who can get along and have a good relationship with the beneficiaries of your trust. They should also possess good record-keeping abilities.
In many cases, you may want to consider appointing co-trustees. A Trustee is required to abide by the terms of a trust. If that Trustee fails to do so, a beneficiary of the trust is not without recourse. One of the benefits of naming co-trustees is that they tend to hold one another accountable. In addition, most trusts will provide a way for the beneficiaries to remove a Trustee, and replace them with the next successor trustee on the list.
It is wise to name not only your immediate successor, but subsequent successor Trustees as well. An individual Trustee may refuse to accept the position, or may resign from the position due to any number of reasons. The Trustee may become disabled or die. Many clients want family members or close friends to act as successor Trustees. But since all individuals eventually pass away, it is good practice to name a bank trust department or other corporate trustee as the final successor trustee on the list. Some clients with very high net worth, or very complex assets, may name an institutional trustee from the very beginning – either as a co-trustee with a trusted family member, or serving as the sole trustee.
One of the advantages of naming a corporate fiduciary is that they manage trusts professionally every day, and usually know what they are doing. They act very objectively to follow the instructions set forth in the trust document. They have investment experience and record-keeping skills. They know the law, and follow the prudent investor rule. If they make a mistake, they have errors and omissions insurance, so the trust beneficiaries have a source to recover any potential damages.
The primary disadvantages of a corporate trustee, however, are cost and the fact that they may not have a personal relationship with the beneficiaries. A family member acting as trustee may better understand the family dynamic, and make better discretionary decisions when it comes to your loved ones.
On the other hand, although family members will usually serve for little or no compensation, they may not be the best choice for a Trustee. While the trust may allow for some discretion, some family members are prone to make decisions on an emotional basis. Most times, the family member is not an experienced Trustee and does not know what is required of him or her under the law. If they make mistakes, they may face the wrath (and legal action) of the beneficiaries, or the beneficiaries may be unwilling to take action, and your plans and goals for the beneficiaries are not fulfilled. If you do choose a family member as a Trustee, it is best to train them for the responsibility before you die. Perhaps your attorney or advisor provides successor trustee training, or you can spend time educating them now, before they are called upon to act.
Sometimes the best solution is a combination of a professional or corporate Trustee and a family member Trustee working together as co-trustees. The family member brings knowledge of the family situation, and the corporate trustee knows how to invest and maintain records.
Avoiding Family Disputes Over Personal Property
It is quite often the personal property that causes the most heartache and disruption in families after a death. Money doesn’t usually have any sentimental attachment, but personal property can have a perceived value far beyond its actual monetary worth. For example, there may be souvenirs from family vacations, various collectibles, or other items of sentimental value that are impossible to divide or duplicate. It’s helpful to discuss these things ahead of time, so you have a clear understanding of who wants what, and can anticipate and avoid problems after you’re gone.
Generally speaking, personal property is distributed under the laws of the state in which the decedent was a resident on their date of death. Real property (real estate), on the other hand, is subject to the laws of the state in which it is located. If you have significant personal property located outside of your official state of residence, distribution can be confusing. For example, if you own a Steinway piano that is located in your vacation home, the vacation home and the Steinway piano could be treated differently.
Personal property such as jewelry, antiques, artwork, family heirlooms, and household effects can be passed on to your beneficiaries through a specific bequest: “I leave my Ming Vase to my sister Betty.” For most people, it would be overwhelming to try to inventory and choose a beneficiary for every last item you own. Instead, it is common to use a separate “Personal Property Memorandum” that is attached to, and incorporated by reference into your trust.
The memo is generally a handwritten or typed list of your bequests to family or charities, which is signed and dated by you. They could cover each personal item that you own, but typically include only those items of financial value or of strong sentimental value; the types of things that could lead to disagreements among the heirs.
The benefit of a memo is that it can be easily changed if you sell something, give it away during life, or change your mind about who should receive it after you’re gone. You simply throw the old memo away and replace it with a new one. Each personal property memorandum should be dated, and the trust should contain instructions that if more than one memo is discovered after your death, the one with the most recent date is binding.
Of course, you should also provide for personal property that is not specifically listed on the personal property memorandum. Over the years, parents have come up with interesting ways to distribute personal property items that aren’t the subject of specific bequests. They might instruct the executor or trustee to divide Monopoly money among the children, and let them “bid” on the remaining items. Or they might say that each child can choose one object, starting with the oldest and moving to the youngest (or vice versa), until all items are accounted for. Anything that is not selected can be given to Goodwill or the Salvation Army, or be included in an estate sale.
Most trusts will state that the trustee can dispose of personal property equitably to the beneficiaries, and if they can’t agree on the disposition, the trustee can sell the items and split the proceeds of the sale according to the trust distribution plan.
Why Would I Need a Buy-Sell Agreement
Many of our clients are business owners. Although these businesses tend to be successful, we have found that many of the owners do not have clearly defined succession plans. This month, we will look at one of the best ways to outline a succession plan, especially when partners or family members are involved in a business.
Tom and Julie met as project managers for a Fortune 500 company. After a couple of years of collaboration, they decided they could accomplish more and make more money in their own business. They’ve worked out most of the details about their individual roles, financial contributions, how they were going to raise capital, and even who else they might invite to join their venture. Their attorney advised that they also give some thought to a “buy-sell agreement” – a term that was new to both of them.
When they learned that it was an agreement for the eventual disposition of their business, they decided they had plenty of time to worry about that later – maybe 10 or 20 years from now. Fortunately, their attorney was able to explain why a buy-sell agreement should be part of the start-up documents, and they saw the wisdom of making it a priority.
A Buy-Sell Agreement is a written agreement among the owners of a business in which each owner agrees what will happen to their shares in the business upon the occurrence of a specified event (death, disability, termination of employment, etc.). Often the shareholders will agree that the shares will be sold to the surviving owners at a specific price. Each owner commits to buy the shares of their departing co-owner upon the occurrence of a specified event.
There are several reasons a good buy-sell agreement is important to you:
Buy-Sell Agreements can be funded (often with life insurance) or unfunded (usually with promises to pay). Funding a Buy-Sell Agreement with life insurance is the most practical method to fund a buy-sell as long as the owners are insurable. With life insurance, the heirs receive cash and walk away, and the surviving owner gets the deceased owner’s shares immediately. Unfunded Buy-Sell Agreements are usually better than no agreement, but the odds of the heirs ever getting paid are substantially reduced. Quite often the earnings of the company going forward are not sufficient to pay off the heirs.
There are three basic different types of buy-sell agreements:
How to Value the Company
The valuation section of a buy-sell agreement is very important because it defines how the value of the owner’s interest will be valued when there is a change in ownership. Changes will inevitably occur. Partners or shareholders of closely-held companies will decide to part voluntarily or an event such as death will trigger the buy-sell agreement. If this section of the agreement is skipped, it will lead to increased costs and time to determine the value of the interest at the time of the change.
The method of valuation should be clearly defined. A method should be selected that determines fair value at the time of the triggering event. Vague language for a formula that establishes a range of prices, rather than a firm price should be avoided. The reason is that two valuation professionals using vague language may calculate two very different values, either of which is within “the range.” If a company has only one owner, it’s up to that owner to find a successor and enter into a buy-sell agreement. Sometimes the successor will come from the next generation of the family.
When there is no related heir apparent and no co-owners, finding a successor can be difficult. A key employee might be designated. Or the owner of a successful medium-sized company or professional practice might actually acquire a smaller firm headed by a younger individual, in the hope that the prime mover behind the acquired entity will someday take over the larger firm. In any event, a buy-sell agreement should be in place between the current owner and the designated successor.
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Medicare. Medicaid. Part D. Supplemental Insurance. These are important products to many Americans, but most of us don’t really know much about them. If you or a loved one is facing skilled nursing care (i.e., “nursing home care”) the details are especially important.
Medicare is a health insurance program administered through the Federal government and paid for via payroll taxes, individual premiums and general revenue funds. It is available to disabled people and to people age 65 and over. Medicare has several “Parts,” including Part D, which pays for prescriptions.
Supplemental insurance is private insurance which can be purchased to supplement Medicare coverage. It can “fill the gap” by paying for copays so that there are few or no surprise bills after a hospitalization, for instance.
(For more detailed information about Medicare and supplemental insurance coverage, talk to your insurance professional. This guide is not intended to help you determine exactly what policy you need.)
Medicaid is a Federal program for needy individuals which can pay for medical care, including nursing home care. It is administered by the individual states, which means that the rules may vary a little from state to state.
Many people don’t realize until it’s too late that their insurance doesn’t pay for nursing home care, and neither does Medicare.
Medicaid, however, can pay for nursing home care. When someone receives such assistance, Medicaid also provides other basic medical coverage. It’s important to understand, however, that the assistance is limited in some ways. For instance, Medicaid may only pay for so many tests or x-rays per day if you are hospitalized, may only pay for certain medications and not newer ones your doctor prefers and that might better help you. Durable equipment might not be replaced as often as it needs to be.
For these reasons, it is often advisable for people receiving Medicaid assistance with nursing home care to keep their supplemental and Part D plans. If you don’t have such plans, it might be advisable to purchase something. It may not cost you anything under the Illinois Medicaid rules. This is because the rules require that your income (with few exceptions) be spent on your care, and “care” includes the insurance premiums. In other words, in many cases, you can’t keep most or all of your income, so spending it on insurance which will help you obtain better treatment and quality of life may be worthwhile. These are issues you should discuss with a qualified Elder Law Attorney.
This article is not intended as legal advice but is provided for informational purposes. Always consult with an attorney experienced in dealing with situations similar to yours. You can visit Frisse & Brewster Law Offices in Paris and Effingham, Illinois and Terre Haute, Indiana. For information about the author, the firm and its free workshops go to www.frissebrewsterlaw.com
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An important concept to remember is that the wealth you are planning for is your own, and there’s nothing wrong with attaching incentives or disincentives to the inheritance because it was created by your own hard work and effort! Nobody wants to think that the results of a lifetime of labor are going to be wasted within weeks or months after death.
The best plan is to educate your beneficiaries throughout your life on how best to manage money. Sometimes that’s possible, but sometimes it’s not. And sometimes the beneficiaries dismiss the training. And although you may feel that you don’t want to “control from the grave” or “attach strings” to the inheritance, incentive planning is often the best (and kindest) way to enhance the lives of your beneficiaries. So here are some suggestions for creating incentives and disincentives in your plan.
To Promote Education:
To Preserve and Strengthen Family Bonds and Harmony:
To Inspire Your Beneficiaries in Their Work Ethic:
To Encourage Your Loved Ones to Emulate Your Philanthropy:
Of course, in addition to encouraging behavior, your planning can also discourage unwanted behavior.
As you can see, the opportunities to use incentives in your planning are limited only by your imagination, your values, your priorities, and your dreams for your heirs.
Ernest Becker, the Pulitzer Prize-winning psychologist and author of The Denial of Death wrote, “…what man really fears is not so much extinction, but extinction with insignificance.” For some business owners, survival of the business beyond their lifetime is viewed as the owner’s legacy. For others, it includes the business…and much more.
Legacy Planning is about creating an estate plan that reflects your core values and beliefs and allows you to pass them on to your loved ones. In doing so, you are able to guide them with your wisdom, help them to understand more fully your beliefs, and set in motion your hopes and dreams for each of them. It allows you to create an estate plan that uses your personal wealth as a means to accomplishing the long-term goals which define you as a person.
Legacy planning may include charitable projects, on-going philanthropy through foundations, or ideas and feelings about how you want the business (and the business relationships you have developed) to continue.
Legacy can also be viewed as having made a difference in the world during life; the world is a better place as a result of the person’s life and business. Legacy is much more than our money and our property. It could very well be a philosophy of life, a set of moral values that we have come to stand for, or the stories of the people from whom we come.
Owners who build their company with thoughtfulness take on a sense of responsibility and concern for their business customers and employees. This aspect of the legacy is the most powerful for some and truly dictates how the business is transitioned.
We have seen owners walk away from offers to purchase because of the values that the prospective buyers have or don’t have. A key element in transition planning is to identify those important values prior to attempting a transition. It wastes a lot of time and money to get most of the way through a prospective deal and then walk away from it. Perhaps worse is to live with remorse and regret over who is now running the business.
Every business is part of a community. The balance of that community depends upon each business. When a business is not adequately transitioned, there is a domino effect that impacts others. Sometimes the impact is a good one; sometimes the impact is destructive to the whole community. As an example, we have all heard how the opening of a Wal-Mart means the closing of multiple small businesses within a radius around the store. On the other hand, Wal-Mart is successful because it provides what people want at prices they can afford. A thoughtful business owner will be aware of the impact his business may have on others in the community. It may or may not change the decisions ultimately made, but it helps to contemplate the results of each potential choice.
Once people reach a certain level of financial success, pursuits often become less about accumulating wealth, and more about creating significance, or leaving a legacy. This most often reveals itself through increased involvement in things that benefit their community and the world. In the world of estate and wealth strategies planning, there are many tools that can help families fulfill their philanthropic goals.
For example, there are a variety of charitable trusts that can serve to both benefit philanthropic causes and aid with tax planning. A charitable remainder trust (CRT) is a tax-exempt trust. It is primarily an income tax planning tool with some estate and gift tax benefits. With a CRT, the appreciation in assets can be realized without immediate recognition of the capital gain, a stream of payments is created for the donor and a deferred benefit is provided to a charity or charities. An income tax deduction, gift tax deduction or estate tax deduction is based on the remainder value that passes or is projected to pass to charity at the end of the trust term.
A gift annuity is essentially a bargain sale in which the consideration paid by the charity is in the form of annuity payments. The IRS specifies how the income is categorized; i.e., how much is return of principal and how much is ordinary income. It also specifies how gains are recognized, and limits payments to one or two persons.
A charitable lead trust (CLT) is the opposite of a charitable remainder trust in that the income stream is paid to charity with the remainder going to private individuals. A CLT is primarily an estate or gift tax tool. If it is set up as a grantor trust, it can also provide some income tax benefits.
One strategy that is often considered by affluent families is the creation of a private foundation. A private foundation is a special type of tax-exempt entity that is most often established by a single family to fulfill its charitable mission. There are operating and non-operating foundations, though most private foundations are of the non-operating type.
Private foundations have very specific rules and regulations that must be followed. Most well-known is the rule that mandates a 5% distribution to charity annually. However, there are also rules against self-dealing, holding certain types of investments known as “jeopardy investments,” and rules against creating excessive personal benefits from the foundation. While it is common to have family members on the Board of Directors get paid for their services, pay must be reasonable compared to other similar-sized charities.
Contributions to private foundations generally create an income tax charitable deduction subject to the deductibility limitations. Deductions are available in the year of the gift and can be carried forward for five succeeding years if needed. Contributions may be deductible at fair market value or cost basis, depending on the type of asset contributed. Private foundations are tax exempt under most circumstances, but caution must be taken if assets are being considered that might create Unrelated Business Taxable Income (UBTI).
While there is no legal minimum under the law to establish a private foundation, there is a practical dollar amount needed to justify the cost. While that amount used to be $5 or $10 million, it is now common to see private family foundations established with $250,000 or less.
An alternative to a private family foundation is a donor-advised fund. These funds are established as public charities and contributions are tax deductible as charitable gifts. They can be established with a relatively small contribution (many require an initial gift of only $5000) and the expenses are often charged as an asset-based fee. This makes them substantially less expensive to establish than a family foundation.
Distributions or grants are processed on the recommendation of the donor to qualified charities. The grant can either identify the donor or they may choose to remain anonymous. Donors can also name successor donors to continue the charitable objectives of the fund beyond their lifetime.
Some funds allow the donor to appoint his own money manager or to direct the money management independently. This type of flexibility has become very popular among the giving community since it allows a significant amount of control to remain with the donor. Further, many donor-advised funds allow the fund to remain in force for multiple generations. Contributions to donor-advised funds are deductible in the year of the contribution and for five succeeding years.
I Love My Business, but I Love My Family
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