Kansas & Missouri Estate Planning

Inheritance Planning – “How” You Leave the Inheritance Defines Your Legacy

The inheritance you leave isn't, in itself, your legacy. This is true even if you're passing on the business you worked your entire life to create. That said, how you leave your inheritance just might become your legacy, so take great care.

The decisions you make regarding what to leave behind and to whom, and how to divide your assets between your family members, are crucial. The Wall Street Journal recently tackled this subject.  

Do you split your assets evenly? To you divide them based on merit? Or on need? Do you think about the immediate generation or the grandchildren? What if there is no balance?

These are very real questions that only you can answer. Well… that's not quite right. In reality, there will be many people in your family with opinions and answers to offer. The challenge is to plan as you see fit, and for the reasons that you value, but in doing so you may also want to make these considerations and reasons clear to your family.

When it comes to communicating your reasons for the how of your estate plan, you may consider capturing your wishes on video. On the other hand, and this is usually more helpful, consider having an open and ongoing dialogue with your family.

The choices you make and the inheritances you leave are very important, but what is often just as important is the meaning that is understood in how you leave them.

Reference: The Wall Street Journal (December 12, 2011) "Heiring Grievances"

Loans Vs. Gifts – When It’s All In The Family

Here's a post I thought might spark some interesting family conversation around the old Butterball. A loan is not a gift; if you've spoken with a bank representative or a particularly penny-wise relative. We talk a lot about gifts when it comes to estate planning, but loans are just as important, as evident in a recent piece on the New Old Age Blog.

In the article, a piece by Craig Reaves, past president of the National Academy of Elder Law Attorneys and a local Kansas City Elder Law Attorney, an estate was left in shambles after the death of the family matriarch. The culprit? A small notebook found under her bed. Apparently, there were many disagreements, but none so deep seated as those caused by the notebook. Why? Because it has a little ledger of the "loans" she had made to all the family members.

Some of the family members hadn't received any money, but at least one had received $20,000. Other family members had repaid in full and some had not so much as begun to do so. This case raise an important question: To what extent does the amount of an unpaid loan get added to the decedent's estate, and does it simply come out of each family member's share in proportion to their loans?

One thing that's clear, of course, is that the money is not gone and out of the estate. Why, it's a loan and not a gift, after all. The second thing that's clear is that the mother hadn't thought about how these "loans" figured into her estate.

That family aside, it should be noted that any loan evidenced by a signed promissory note can become an asset in the estate. And, even if it's a family loan, the promissory note has to be repaid.

An estate planner can ease this problem with a bit of foresight. For example, the loan can be forgiven, meaning they relinquish any expectation of being repaid. For that matter, too, the loan can be "offset" and thereby deducted from any assets made available through inheritance.

While there are a number of things that can be done, forgetting the loan is not one of them.

After all, the IRS is waiting just within earshot and has a trained eye to recognize the difference between a loan and a gift, as well as the additional tax burdens it can assign if it spots a gift or a poorly executed loan.

Reference: The New York Times – The New Old Age Blog (November 15, 2011) "Ask The Elder Law Attorney: Family Loans"

Six Rules For The Road - Creating Trusts For Heirs

It doesn't take an experienced estate planner to say so, but "the love of money is the root of all evil." Unfortunately money bears with it the potential for good and bad ends alike. And, unearned money (read an "inheritance"), can be a blessing or a curse.

An experienced estate planner can help your loved ones lean to the positive when it comes to the inheritance you leave them. When it comes to trust money, and inheritances in general, you need to find a balance that will help your children become the people you know they can be.

For some solid tips check out the 5 trust fund rules to help children, as set forth in a recent article in The Fiscal Times . The balance these rules help to create, as so aptly put by Warren Buffet, give your children "enough to do anything, but not enough to do nothing." So, let's review a few of these "rules of the road," so to speak.

Carrots and Sticks. A trust need not just leave money; but it can be a tool. By building the appropriate provisions, you can offer certain tests and incentives to guide your heirs towards positive goals. You earned your money through hard work and, likewise, the trust can help foster similar lessons as you see fit.

Timing. The funds in a trust can be made readily available or made available over time, with or without incentive goals. After all, you might not want to lock a child into set goals (you might not know enough about which goals are appropriate for them), but you might want to keep their access to the funds at pace consistent with their age and maturity. Generally speaking, such an approach generally is a solid bet. It can give a sense of security, without instilling laziness, too.

Money Isn’t everything. In keeping with the above, consider using the conditions that surround the trust (i.e., your death) as an opportunity to provide your wisdom through your own letters or videotapes of success stores, so that the trust fund is opened as your words are received. Against this backdrop, I highly recommend an excellent family film to share with your loved ones called "The Ultimate Gift." [Be sure to stock up on tissues.]

That's only three of the five rules. For the other two, read the original article.

Regardless, the time to act is now.

The issues surrounding how to create the trust are worth mulling over, but just as important is the planning that goes into creating the trust and the correct timing to maximize its value. You can make good use of this timing given the present generous state of our estate and gift tax law, along with the currently depressed asset values.

Again, whether it's thinking about the funds to put in the trust or the future of the inheritor, there's no time like the present to plan!

Reference: The Fiscal Times (September 20, 2011) "5 Trust Fund Rules That Can Really Help Children"

Estate Planning For Firearms

When most folks think about their assets, they naturally recall real estate, bank accounts, retirement funds, and life insurance, just to name a few. However, don't overlook other less obvious assets, to include tangible personal property. One example of such an asset you ought not overlook is your firearms. Special care is necessary to ensure a clean, legal transfer.

A recent Forbes article considers the special estate planning problem of firearms.

Guns are as natural to own for some as any other asset. Indeed, to some, their firearms collection is really more akin to an art collection. That noted, under the law, passing down your firearms to your heirs may trigger a different set of laws than passing down your tools set or that painting in your hearth room.

Firearms are highly regulated at both the federal and state levels. Consequently, the laws and regulations need to be followed, particularly if the firearms will be crossing state lines. Passing down firearms to heirs can take time and require the approval of several parties, such as the chief law enforcement officer for the respective jurisdictions.

Enter the "gun trust." This can be a simple and powerful tool to pass down your firearms. Practically speaking, it is a special purpose revocable living trust. At its formation, the owner of the trust is both trustee and beneficiary. At the owner's death, the trust property (i.e., firearms) is passed down to the lifetime and remainder beneficiaries by the successor trustees. Of course, trust or not, there are some hard and fast rules imposed by the National Firearms Act and all parties have to comply with them (or risk incurring serious fines and possibly even forfeiture of the right to bear arms).

Your firearms (and other atypical estate assets), may hold a unique status under federal and state laws. Make sure you comply with any law governing their transfer, as part of your estate planning.

Reference: Forbes (September 22, 2011) "Gun Collections Pose Special Estate Problems"

Training Wheels And Inheritance Planning

Remember how you equiped the first bicycles for your children with training wheels? Likely you did that so they would get used to riding astride and atop their bicycles without spending a fortune on Johnson & Johnson band-aids... or worse. Have you ever thought about equipping their inheritance with training wheels now, so they will be ready for it later?

Estate planning is about taking care of your family and loved ones. But what if you have concerns about how your loved ones will use those assets? You spent a lifetime earning what you have through hard work and thrift. So why pass it along only to be squandered? Would you hand over the car keys to a teen who hasn't proven he or she can drive? As any automobile insurance agent can attest, we spend a good deal of energy (and resources) ensuring that doesn't happen.

I've written on this topic before (see this earlier article I reviewed in the New York Times), but The Wall Street Journal recently provided more suggestions worthy of your consideration.

An elaborate but effective way of ensuring the financial literacy of your heirs and the security of your family assets can be the formation of a family investment company. Here's how it works: You establish the company, put your heirs on the board, and have them hold discussions with your financial advisors. Throughout the process, you can look on and ensure that correct decisions are being made. While you may elect to hold back and observe the progress of your heirs, the process may surprise you and exceed your expectations… or it simply may justify your concerns.

In any event, the family investment company can make for a great learning experience. For some families, that may entail paying for academic financial lessons, as well as providing a time for inter-generational conversations about the family assets. Regardless, to be most beneficial, the process should be started earlier rather than later and provide for ongoing involvement.

The main tool for teaching financial skills and inheritance training usually will be the trust. There are a great many tools at your disposal when you begin a trust and you can tailor them to include incentives or benchmarks to protect the assets and the heirs. Of course, the trust also can be powerful, since it brings the trustees into the mix.

Another suggestion to consider is appointing multiple trustees. For example, you may appoint one trustee to manage the purse-strings and another to oversee the heirs and gauge their progress. Depending on how you arrange the trust, the trustees can become powerful gatekeepers to protect the assets and even motivate the heirs.

As a result, it is often advisable that you consider appointing someone far removed to be in charge of trust finances, with a family friend to interact with the heirs. In many instances, it is not advisable to appoint a family member as trustee, since this may create intra-family strife.

There are many options to consider and these are just a few. What you do will depend on your assets, your heirs, and the specific concerns you hope to address. It is best to discuss your concerns with appropriate legal counsel who understands your situation and can help you determine the best course of action.

Like training wheels on a bicycle, proper pre-inheritance estate planning can avoid unnecessary (and costly) pain.

Reference: The Wall Street Journal (September 19, 2011) "When You’re Child’s A Spendthrift"

"Complexity" Defined - Estate Planning For Retirement Accounts

As the amount of money stashed in 401(k)s and individual retirement accounts has grown, more and more families are finding themselves locked in battles over who has rights to inherit them.

Even with the many concerns over retirement account balances in America, it's undeniable - IRAs and 401(k)s represent a lot of personal wealth for everyday Americans. That means retirement accounts are assets uniquely worthy of particular attention, to include when it comes to their role in your estate planning. Indeed, amongst households with at least $100,000 to invest, 60% of the households' assets are in an IRA or 401(k).

So, how ought retirement accounts factor into your estate planning. Who will inherit them? The answer is not a simple as you may think. Truth be told, the problem with retirement accounts is the crazy quilt of laws governing their distributions, and moreover, the different laws that apply to 401(k)s and IRAs.

The inheritance of retirement accounts is a lively topic and none other than The Wall Street Journal has recently addressed this subject. While I commend the full article to your reading file, let's review a few of the highlights here.

With 401(k)s, the overarching rules are in place thanks to the federal Employee Retirement Income Security Act (ERISA*). If you are married, the 401(k) automatically passes to your spouse and does so regardless whether your spouse is the designated beneficiary, unless your spouse waives his or her right to your 401(k). By the way, if you have a premarital agreement, your intended spouse cannot effectively waive rights in your 401(k) until you are actually married. Plan accordingly.

What if you have children from a former marriage and you want to include them as beneficiaries along with your new spouse? Consider "rolling" your 401(k) into an IRA and making the beneficiary designations per your wishes, even if your children are beneficiaries under your Will and Trust.

Teaching point: The beneficiary designations on file with the retirement plan administrator trump any contrary arrangements in your Will and Trust. In fact, the U.S. Supreme Court has ruled that, despite any state law to the contrary, your ex-spouse will inherit your 401(k), if he or she is the last designated beneficiary on file with the plan administrator. (See Egelhoff v. Egelhoff.)

IRAs are governed by state law and that, by and large, makes them more pliable. Without the inflexibility of the ERISA laws, when it comes to your IRA it's all about the "designated" beneficiary (unless there is a state law to the contrary). One thing remains consistent, however - The beneficiary on file with the plan administrator takes precedence over any provisions under your Will and Trust. Exceptions: Some state laws rule out the complete disinheritance of a spouse and some have laws automatically disinheriting an ex-spouse as beneficiary, unless you've completed the extra paperwork to confirm your intent to include your ex-spouse as beneficiary.

Bottom line: Retirement accounts, whether 401(k)s or IRAs, are important assets for many Americans. Given the complex tangle of laws that control your options, it is essential that you consult with competent legal counsel and coordinate the distribution of your retirement accounts as part of your overall estate planning. Be sure to consult an estate planning attorney admitted in your state of residence, as state property laws may need to be evaluated, too.

* How about a little estate planning humor? Question: What does the acronym ERISA really mean? Answer: "Every Rotten Idea Since Adam"!

Reference: The Wall Street Journal (September 7, 2011) "Family Feuds: The Battle Over Retirement Accounts"

Hidden Pitfalls Of Joint Ownership

Over the years since I prepared my first client estate plan in January of 1985, time and time again, the most common estate planning pitfall I have seen is joint ownership gone awry.

Estate planning can be daunting. Once you get past the fact that your very mortality (and morbidity) is the triggering event, estate planning then means taking stock of all you own and, what is often more important, how you own it. Yes, there are many forms of ownership and each can make for some difficult wrinkles.

One common phenomenon is joint ownership between generations. Not only is it common, but it can make for some unintended (and unpleasant) consequences. Forbes recently ran a piece on some of these problems and the top five reasons to avoid joint ownership of assets. Let's review some of the high points, but I would commend the full article to your reading file.

Joint ownership oftentimes is an attempt to simplify things, or at least that is why people use it as a means of holding title. Perhaps they want to simplify practical day-to-day financial management. For instance, aging parents needing such help may add an adult child’s name to a bank account or investment, either for direct aid or merely for assisting with the management of their accounts or assets. Likewise, it could be done as an attempt to avoid probate. Adding the adult child’s name to the account, investment, or real estate is a form of will-substitute (a so-called "poor man's will"). Of course, these are only simple, self-help solutions, and they actually may work, when things go off without a hitch.

One problem to remember is joint ownership is a two-way street. That means an adult child joint owner has equal ownership rights to the assets and, therefore, so do any of that adult child’s financial predators. And predators themselves come in a variety of forms, as when the adult child has their own creditors, marital strife, or even a lawsuit in civil court. In addition, while no parent would anticipate it, the adult child may use the jointly owned bank account for a "quick loan" when they are running a little short of cash. Any of these unintended consequences not only can jeopardize the financial independence of an aging parent, but also can cause hard feeling among other adult children who may (or may not) be joint owners with their common parent.

Another problem, especially from an estate planning perspective, is that joint ownership as a stop-gap or a will-substitute is not really estate planning and may run afoul of the parent's actual estate distribution wishes. For example, the adult child who has joint ownership doesn't have to share such assets upon the parent's death. As you can imagine, it is very easy for such cases to spill over into family squabbles and even into prolonged litigation.

Sometimes joint ownership seems like a good idea and a quick fix to avoid probate. And, sometimes it is. Before you use joint ownership as a form of titling your assets, however, consider the drawbacks.

In the end, an estate planning attorney can help you determine whether joint ownership is appropriate under your unique circumstances. Remember: Look before you leap. The protection of your assets and family relationships are at stake.

You can learn more about joint ownership in the January issue of our free e-newsletter, "Joint Tenancy Troubles." Visit our website and sign up to receive this valuable update for free every month.

Reference:  Forbes (September 13, 2011) "Top 5 Reasons to Beware of Joint Ownership Between Generations"

Adult Children With Special Needs? Plan Wisely!

Deciding how to leave your assets to your kids is tricky enough. But when your adult child has special needs, the task is much more complicated and the stakes are even higher.

Estate planning is never easy. For one thing, it necessitates thinking about protecting your loved ones when you're no longer around. It's tough enough making plans to protect self-sufficient heirs who take care of themselves and an inheritance. However, it can be a real challenge when planning for heirs with special needs, for a variety of personal and legal reasons. Unfortunately, as The Wall Street Journal Online recently pointed out, with the economy and politics as they are, there are new concerns to bear in mind as you plan.

Both state and federal budgets are strapped for cash. No surprise there. To make up some of the deficiencies in government coffers, more of the burden is falling on Medicare and Medicaid. It's up to the Congressional Special Committee to consider the future of Medicare now, but many Medicaid programs already are feeling the squeeze with tighter income restrictions for benefits and services.

Of course, much of the disabled population (12% of the overall population) relies on state and federal services for those services that they couldn't afford in the private market. To plan for an heir with special needs, then, means planning to provide for them without risking their main sources of care. Now, more than ever, that means a "special needs trust," tailored to provide the inheritance as a "safety net" without endangering the continuation of benefits. [Sidebar: Sometimes an older parent can make this move and kill two birds with one stone. How? They create the trust now for themselves and a loved one with special needs so that both qualify for government benefits, once the "look back" period has past for eligibility disqualification. Caveat: As budgets get tighter, expect greater governmental scrutiny regarding such moves.]

The other major issue, and a related one, is housing. Many Americans with special needs live in group housing programs. These programs are, in turn, subsidized by government agencies, but are increasingly unable to meet demand and are cash-strapped. The same political/economic pressure is keeping those agencies from expanding.

At the same time, there simply are more prospective residents due to lengthening life expectancies. In fact, the US would have had to expand its residential-services capacity by 28% to meet the demand as of two years ago. Clearly, housing has been an issue and it will only get worse.

Amidst all of this uncertainty, you still need to plan where your loved one will live. This might mean another form of trust. For example, a "Qualified Personal Residence Trust" (QPRT) could provide that you live in your home until your death, but that your family member with special needs would continute to live there (without disqualifying ownership). Great care is required in the preparation and execution of such an arrangement. Also, it may be possible to provide a home to shelter several persons with special needs. For example, several families could pool resources and maybe donate a home to a non-profit that, in turn, can convert the home into a new group home. The options are limited by your creativity, but careful to avoid elibility diqualifying mistakes.

Ultimately, the best plan will depend on your own unique family circumstances, as well as the current state and federal laws governing benefits and services. Unfortunately, according to a recent study by Arc, an advocacy group, only one-third of affected families actually have plans to control what happens when the caregiver grows old and evem after they are gone.

Bottom line: Remember to engage qualified legal counsel to help you navigate the regulatory minefields.

Reference: The Wall Street Journal Online (September 3, 2011) "Taking Care of Disabled Heirs"

You Can Trust A Trust (For Inheritance Protection)

There are many options to protect an inheritance "from" your children, as well as "for" your children. Otherwise a lifetime of your hard work and thrift could become a curse and not a blessing for your loved ones.

While planning for your estate addresses many concerns, likely providing your loved ones is at the top of the list. But what if you can't fully trust your loved ones to use your gifts wisely and to take care of themselves responsibly? One common alternative is to cut those problem cases out of the will (read: disinherit). Nevertheless, as a recent New York Times article points out, those problem cases are all the more reason to make proper estate plans to protect your legacy and to use the inheritance to promote positive change.

Problem cases for inheritances aren't all "problem" children. You know, the gamblers, the drug addicts, and the habitually irresponsible within our families. Oftentimes, the risks to an inheritance do not necessarily originate with the problem child, rather the problems find the child… and their inheritance. Classic examples of inheritance predators manifest themselves as divorces, lawsuits and bankruptcies.

Indeed, much of the time the concern is over the possibility of future problems, ones you can't foresee while planning your estate today. This especially is the case when you're planning with young children in mind. However, the form of the inheritance can help curb present problems and work to avoid future problems by instilling character.

How can you do it? The most powerful tool is the trust, for a variety of reasons. At the most basic level, the trust allows limits. Regardless whether money is the cause of the problems or merely the attractant, a lump sum inheritance certainly is not going to help. A trust can limit the access your loved one has to the money, while still ensuring it is available when they truly need it.

Within the concept of a trust, there are many varieties and options to address nearly every concern. For example, there is the "incentive trust." Like the name implies, this trust still restricts funds, but will make funds available if the beneficiary meets certain stated objectives. A classic example may be remaining drug-free for a certain number of years. On the other hand, it can contain character-building triggers like admission to a certain college or graduation from one. In short, the triggers can be just about anything. Experience has demonstrated, however, that this approach is most effective when you are upfront now about rules of the road regarding the correlation between future conduct and availability of the funds. Take the opportunity to pass along your positive values, rather than just set up a future gotcha program for a loved one to "game" after you are gone.

For those planners who take a uniquely long view, there also is the option of the "dynasty trust." It has all of the benefits of a trust, but extends those benefits across as many generations as possible, for as long as the funds last (according to current law), and, quite literally, works to form dynastic wealth. That means that, properly drafted and implemented, a dynasty trust properly can protect the family wealth from problem inheritors for several generations.

Reference: The New York Times (September 2, 2011) "Using an Inheritance to Teach Your Problem Child a Lesson"

Your Vacation Home - Keeping It In The Family

So, you enjoyed that family vacation home again this summer and, perhaps, over the Labor Day weekend. Would you like to keep the property (and the memories coming) for future generations? If yes, then this is a good time to start thinking about creating a succession plan for the property. A detailed plan will make the transfer of ownership easier and establishes rules to will help prevent bitter family conflicts down the road, experts say.

Ensure the future of the family cottage and the peace and domestic tranquility of your family through proper estate planning. How do you do that? Fortunately, The Wall Street Journal Online recently touched on the topic.

The best way to leave an inheritance that includes a family vacation home depends on who will be inheriting it. That is the first essential decision. For example, are you leaving it to one family member or to several? Who will be interested in the home (or more interested in your portfolio)? Who, realistically, will be able to use the home? For example, an adult child living in California might not be able to enjoy the Cape Cod cottage. This is especially true if they have such child has his or her own vacation property. On the other hand, the property may be conveniently located for them, but they wouldn't be able to afford the upkeep, insurance and taxes. Both are lose-lose propositions.

If you've settled on a single person to inherit the family vacation home, then it's relatively easy: you can either gift it during your lifetime (before 2013 would be prudent), or leave it through your Last Will and Testament or your Revocable Living Trust. If you are leaving it to multiple beneficiaries, like an entire generation of your family, then maybe consider establishing a specific arrangement for such ownership. For instance, many families find the Limited Liability Company (LLC) or various forms of trusts to be practical tools.

If all of the heirs are adults, then an LLC might be a better bet as it allows members a more equal say, while still providing a framework for decisions or an organizational structure through the use of a solid operating agreement. Of course, you could take it a step further and form a trust that owns an LLC that owns the home, or even specific trusts like a Qualified Personal Residence Trust (QPRT).

When there are young children in the family, then a trust with a long-term duration might be better. Why? Because it allows parents to pass on the vacation home to their children while still appointing an adult in charge as trustee. In addition, properly drafted with "spendthrift provisions," such trusts can protect the family home from the potential divorces, lawsuits and bankruptcies of the heirs.

For many, a family vacation cottage is a place of many happy memories shared over a long family history. As a result, it just has to stay in the family. Once you start down the path to make that happen, however, don't wander too far without appropriate legal counsel. You will need experienced help to navigate the details, figure out what's best for your unique situation, and eventually put ink to paper.

Reference: The Wall Street Journal Online (September 4, 2011) "Create A Plan To Pass On The Family Cottage"