How Do Estate Plans and Trusts Work?

There can be some confusion around terms used in estate planning. Unless you are an estate planning attorney yourself, it’s not likely you know all the terminology used. A recent article from The Dallas Morning News explains further in the article “Clearing up confusion: The difference between a living trust and an estate plan.”

Living trusts, sometimes called “revocable living trusts,” or more formally, “inter-vivos trusts” are documents prepared and implemented when a person is living. They commonly include a distribution plan for assets owned in the trust, in contrast to a last will and testament, which only comes into effect when the person has died.

In most cases, the person who has created the trust (the grantor) is also the person to benefit from the trust (the beneficiary) as well as the person who controls and manages the trusts (the trustee). A living trust also makes provisions for the trust to be controlled and managed by a successor trustee, in case the owner is incapacitated. This also prevents the need for guardianship proceedings to gain control of the trustee.

If the person has no family members to care for them in the event of incapacity, the successor trustee may be a bank or other financial institution.

Living trusts are good tools to use for disposition of assets, especially in blended family situations. Trusts are harder to challenge than wills, and unlike wills, they are private documents. When an estate goes through probate, the will becomes part of the public record. As a result, anyone can see its contents.

An estate plan refers to the larger plan, which may or may not contain a living trust. It also includes an analysis of all of your assets and directions for how each will pass to your beneficiaries. Estate planning also addresses tax planning: federal and state estate taxes and inheritance taxes.

An estate plan also plans for incapacity. Preparing financial and medical powers of attorney, HIPAA releases and advance directives allow designated representatives to take care of your business affairs, talk with doctors about your care and know what your wishes are, if end-of-life decisions need to be made.

To be clear, estate planning is the “process” which creates a course of action for the passage of assets and the preparation of documents to facilitate the plan. A living trust is part of an estate plan, but not the only piece of the estate plan.

Some people are confused by the use of the word “estate.” Your estate includes everything you own at the time of death. Assets owned outside of trusts are divided into probate estate and non-probate estate assets. The non-probate estate consists of assets with beneficiary designations, usually life insurance policies, investment accounts, jointly owned assets and any Transfer on Death or Payable on Death accounts.

The probate estate includes assets distributed under the terms of a will. If you don’t have a will, the court will appoint an administrator to distribute your assets according to the laws of your state. There’s no obligation for the court to name a family member as the administrator. Therefore, a complete stranger might be in charge of everything you’ve ever worked for. The better route: speak with an estate planning attorney to create an estate plan and learn if your situation warrants a living trust.

Reference: The Dallas Morning News (May 24, 2022) “Clearing up confusion: The difference between a living trust and an estate plan”

 

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Do I Need a Generation-Skipping Trust?

The unified estate and gift tax exemption increased from $5 million to $10 million, with inflation indexing stands at $12.06 million in 2022. A married couple can shelter as much as $24.12 million from the federal estate tax. However, what about assets you gift or leave in your will to grandchildren, asks a recent article titled “Beware the Generation-Skipping Transfer Tax” from CPA Practice Advisor.

Without proper estate planning, the Generation-Skipping Transfer Tax (GSTT) may be imposed on families who aren’t prepared for it. There are some strategies to work around the GSTT. However, you’ll need to get this done in advance of making any gifts or before you die.

The GSTT was created to prevent wealthy individuals from getting too far around the estate and gift rules through generation-skipping transfers, as the name implies. A simple explanation of the tax is this: the tax applies to transfers to related individuals who are more than one generation away—that would be grandchildren or great grandchildren—and any unrelated individuals more than 37 ½ years younger. They are known as “skip persons.”

Transferring assets to a trust and naming grandchildren or a much younger person as the ultimate beneficiary doesn’t work to avoid the GSTT. If you took this route, all of the trust beneficiaries, which could also be adult children, would be treated as skip persons. Even the trust itself may be considered a skip person, in certain circumstances.

The rules for the GSTT are the same as apply to federal estate taxes. The top tax rate for the GSTT is 40%, the same rate for federal estate taxes. The GSTT also shares the same exemption rate, indexed for inflation, as the federal estate tax.

However, remember what’s coming. In 2026, the exemption is scheduled to revert to $5 million, plus inflation indexing. If Congress enacts any other legislation before then, it will change sooner.

There’s more. There is a GSTT exemption for lifetime transfers aligned with the annual gift tax exclusion. You may gift up to $16,000 per recipient, including a grandchild or other descendent, every year, without triggering a GSTT bill.

Talk with your estate planning attorney to see if these three strategies are appropriate for you to avoid or reduce the GSTT:

  • Make the most of the GSTT exemption. Even though lifetime transfers do reduce the available estate tax shelter, the current $12.06 million exemption provides a lot of flexibility.
  • You can use the annual gift tax exemption to shelter tax gifts up to $16,000 above and beyond the lifetime exemption. Use this before the lifetime exemption.
  • Always look to see how trusts within the usual tax law boundaries can be used to protect assets from taxes.

Reference: CPA Practice Advisor (June 3, 2022) “Beware the Generation-Skipping Transfer Tax”

 

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Your Cryptocurrency and NFTs Need to Be Included in Your Estate Plan

As more people continue to purchase cryptocurrencies and non-fungible tokens (NFTs), digital assets are becoming a bigger part of the investment world and of people’s estate plans. If you want to pass these assets to loved ones upon death, you’ll need to plan for it, says the article “Got Cryptocurrency or NFTs? They Need to Be in Your Estate Planfrom Kiplinger. Otherwise, securing, transferring and gifting crypto and NFTs can create unsolvable problems and lost assets.

There are many different kinds of crypto and NFTs, with Bitcoin, Ethereum, Binance Coin, Thether among them. An NFT is a unique, collectable, and tradable digital asset, like digital art or a photo. NFTs are purchased through a bidding process in this universe and in the metaverse, an online world where people are buying homes, real estate and more in the shape of NFTs. Sales of NFTs are estimated to have reached more than $17 billion in 2021. For better or worse, the future is here.

Cryptocurrency is accessed through a private key. This is a series of alphanumeric characters known only to the owner and stored in cold storage or a digital wallet. Whoever has possession of the key can buy, sell and spend the digital currency. If you have crypto, your family or fiduciary needs to know what you have, where to find the assets and what to do with them.

One option is to share the private key or place crypto assets and NFTs in custody, using a software application or a hardware wallet. There are a number of companies now offering these services. An old-school option for this new world asset is to create a secure spreadsheet of your digital assets and list the login protocols for each account.

For now, it is difficult to open crypto accounts and NFTs in the name of a revocable or irrevocable trust. However, digital wallets allowing you to open an account in the name of a trust do exist, if the company handling the digital asset permits. This is a very new, rapidly evolving asset class. Beneficiaries may not yet be named for crypto accounts. However, this may change in the future.

With no trust account and no named beneficiary, what happens to your crypto and NFTs when you die? For now, they must pass through your probate estate under the will. Your estate planning attorney will make sure your estate plan includes the correct way to give digital asset powers for the fiduciary handling your estate and include digital asset powers in your will, trust, and durable power of attorney.

If your state has adopted the Uniform Fiduciary Access to Digital Assets Act (UFADAA) or the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA)—46 states have—then it will be easier for loved ones to manage digital assets in case of incapacity or when you pass, as long as your estate plan addresses them.

Reference: Kiplinger (May 23, 2022) “Got Cryptocurrency or NFTs? They Need to Be in Your Estate Plan

 

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