Is My Irrevocable Trust Revocable?

Irrevocable trusts aren’t as irrevocable as their name implies, according to Barron’s recent article, “Are Irrevocable Trusts True to Their Name?” The article says that, for both new and existing trusts, there are ways to build in flexibility to make changes to a grantor’s wishes, if terms are no longer appropriate or desirable for beneficiaries.

However, there are strict rules that apply. These rules vary between states. One of the main reasons for an irrevocable trust, is to remove assets from an estate for estate tax purposes. If the rules aren’t followed carefully, a trust can be rendered unlawful. If that happens, the assets may be returned to the grantor’s estate and estate taxes may apply.

If you want to be certain that beneficiaries have some discretion in the future if circumstances change, grantors should build flexibility into the trust when it’s established. This can be accomplished by giving a power of appointment to beneficiaries. However, if the beneficiaries are looking to change the terms or the structure of an existing trust, the trust must be modified, according to state law.

Most states allow trusts to be decanted. When you decant a trust, you pour its terms into a new trust, and leave out the parts that are no longer wanted. Just like decanting a bottle of wine, it’s like the sediment left in the wine bottle.

In a state that doesn’t permit decanting, a trustee can ask a judge to allow it. You should be careful with decanting, because you don’t want to do anything that would adversely affect the original tax attributes of the trust.

The power of appointment in a trust or the ability to decant can’t be given to the person who set up the trust. Thus, grantors can’t have a “re-do” or rescind the terms. It’s only trustees and the beneficiaries that can do that.

If you and your attorney create a trust with a lot of flexibility for the trustee, you may want to appoint an institutional trustee from a bank, trust, or other financial services company.

They can be either the sole trustee or serve as co-trustees with a personal, non-institutional trustee, like a family member. This can help to eliminate future conflicts.

Reference: Barron’s (June 18, 2019) “Are Irrevocable Trusts True to Their Name?”

Suggested Key Terms: Estate Planning Lawyer, Irrevocable Trust, Asset Protection, Probate Court, Inheritance, Power of Appointment, Decanting

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How Will the Secure Act Changes IRAs and RMDs?

The House has passed what could be a landmark retirement law that will impact workers, retirees and heirs. Some of the most important provisions will modify existing retirement plans.

Kiplinger’s recent article, “Secure Act Calls for Changes to IRAs, RMDs,” reports that IRA owners should understand some of the key provisions of the bipartisan Setting Every Community Up for Retirement Enhancement Act of 2019. This bill passed the House in a 417-3 vote and is now in the Senate’s hands.

The three changes that are discussed below will go into effect after December 31, 2019, provided the House bill is enacted as written.

The Age Cap Repeal. The Secure Act gets rid of the age cap for traditional IRA contributions, which is now at 70½. This would let older workers save some of their earned income in a traditional IRA, just as they can now in a Roth IRA. For those 50 and older in 2019, the maximum contribution is $7,000. An older worker who has enough income to cover the total IRA contributions, could also contribute to a spousal IRA for a retired spouse.

An Increase in the RMD Age. The House bill increases the starting age for required minimum distributions (RMDs) from retirement accounts to 72, from 70½. That’s a win for older workers and retirees, who don’t need to tap their retirement accounts to cover expenses. Because the change would be effective after December 31, 2019, people who turn 70½ in 2020 would be the first to benefit. IRA owners currently taking RMDs wouldn’t be impacted.

The Loss of the “Stretch IRA.” Although the Act may benefit some retirement account owners, it’s not so nice to non-spouse heirs. The bill would get rid of heirs’ ability to stretch out RMDs from inherited retirement accounts over the non-spouse heirs’ own life expectancies. This currently allows more of the money to grow tax-deferred and lessens the heirs’ income tax bill. However, the Act would require inherited assets to be withdrawn within 10 years. Beneficiaries of larger accounts could have much bigger IRA withdrawals, as well as larger tax liabilities, than they’d anticipated.

This change will require some additional estate planning for many IRA owners. Heirs will need to review their tax-planning strategies, if they receive a windfall. Repealing the age cap on contributions and raising the age for RMDs could be beneficial to some, but retirees would have to weigh that with accumulating too much in an IRA. The loss of the stretch could make Roth accounts more attractive, because heirs can withdraw Roth money tax free.

Reference: Kiplinger (June 14, 2019) “Secure Act Calls for Changes to IRAs, RMDs”

Suggested Key Terms: Estate Planning, Legislation, IRA, Roth IRA, Required Minimum Distribution, RMD, Asset Protection, SECURE Act

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What Do I Do With My Dad’s Timeshare When He Passes Away?

When a timeshare owner dies, the timeshare will usually be part of the deceased owner’s estate, according to nj.com’s recent article, “My dad had a timeshare and died without a will. I don’t want it. What do I do?” The contractual obligations of the timeshare owner become the responsibility of the next-of-kin or the beneficiaries of the estate.

When the timeshare company hears of the owner’s death, they may keep sending letters to him for his expenses. Is there any way that the owner’s children could be held responsible for the timeshare expenses?

Legally speaking, a timeshare is an agreement or arrangement in which parties share the ownership of or right to use property. Each owner is entitled to use the property for a specific period of time. Some examples of timeshare ownership are a vacation club at a tropical resort or a villa at a ski destination.

There are three basic types of timeshare programs: fee simple, leasehold, and right-to-use (‘RTU’). In addition, there are some variations of RTUs, like points systems and fractional/private residence clubs.

The executor or administrator of the estate will need to contact the timeshare company and/or locate a copy of the owner’s contract to find out what the financial and legal obligations are under the contract.

In addition, the executor may decide to contact an estate planning attorney, especially if the timeshare is out-of-state. This is important as the laws concerning timeshare agreements and inheritances vary from state to state.

The next-of-kin and estate beneficiaries do have the option of declining their inheritance, including a timeshare. If they want to do this, they’ll typically be required to sign and file an inheritance disclaimer document.

If the timeshare is disclaimed, it would pass to the next individuals or entities with a right to inherit.

If the estate fails to make the payments on the timeshare while the owner’s estate is being probated, fees and penalties may accrue. At that point, the timeshare company and the property manager may file a lawsuit against the estate to get their money due them pursuant to the timeshare agreement.

However, if the property is disclaimed by all of the heirs, the property manager may likely foreclose on the timeshare, so any accrued debt would be paid from the estate’s assets. That foreclosure shouldn’t impact the credit of any heir who disclaimed the timeshare.

Reference: nj.com (June 3, 2019) “My dad had a timeshare and died without a will. I don’t want it. What do I do?”

 

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