Q&A: Updating old trusts, estate plans

Dear Liz: I am 97 with two sons and have a trust prepared in 1991, shortly before my husband died. You warned there can be problems with bypass trusts created in older estate plans. I suspect that’s what I have. The attorney who created my trust died years ago, so I asked my son to do the research. He found an attorney near where I live who told us we should terminate my existing trust. We’re told it would avoid capital gains and my sons would enjoy a stepped-up basis in the assets. The charge would be close to $5,000. If I do nothing, the assets transferred to my sons will have no stepped-up basis and will incur capital gains taxes. I am thinking of a second opinion.

Answer: A second opinion might be a good idea, but please don’t delay. Your sons could wind up paying a potentially large and unnecessary tax bill if you don’t take action soon.

As mentioned in previous columns, bypass trusts were a common feature in estate plans back when the exemption limit was much lower. Although the trusts still have their uses, they’re often not necessary and cause problems for survivors and heirs.

Estate plans should be revisited after a major life change, a revision in estate tax laws or five years, whichever comes first.

Q&A: Should this couple leave their estate to kids who don’t share their values?

Dear Liz: My husband and I are in our 60s and have two grown children. There are no grandchildren, and it’s not looking like there will be any. Sadly, our children do not share our values. We don’t want to leave them our estate because it will end up being given or bequeathed to charities of their choice. They are doing well and don’t “need” the money. However, we also don’t want to “cut them out.” I was thinking about a charitable remainder trust so they could have income during their lifetimes and the assets will go to our charities when they die. Can it be funded with what is left when we die or do we have to put some or all of our assets in it now? Is our estate sizable enough for such a trust? Our assets total about $3 million. A less complicated solution would be to leave them the house and bequeath the cash to charity. What are your thoughts?

Answer: Consider going with the less complicated solution.

Charitable remainder trusts are typically created while you’re alive. You contribute assets to an irrevocable trust and get a tax deduction for the contribution plus an income stream for life. At your death, the charity keeps the remaining assets — the remainder. Because the trusts are irrevocable, you should have careful counseling from an accountant, financial planner, the charity and an attorney before you sign away your assets, said Jennifer Sawday, an estate planning attorney in Long Beach.

You could create a trust that at your death pays income to your children and then contributes the remainder to a charity when they die. Such a trust probably would have to be administered for decades, so you’d need a corporate or other institutional trustee — and those aren’t cheap.

Also, keep in mind that a lot of things could change between now and your deaths. The kids who don’t “need” the money could suffer reverses, or you could. Opinions also can change; they might come closer to your point of view, or you could decide that the issues that divide you are less important than the bond you share. An unchangeable trust may not be the best option in a world that’s constantly changing.

Q&A: Executor duties

Dear Liz: My best friend made me her executor. She has no relatives. She has listed people to receive money, possessions and her house. She has left me money as well. Once everything is disbursed and bills paid, there will be leftover money. If she wants me to have it, what needs to be written in the trust?

Answer: Her will should include a phrase that disposes of her residuary estate. After listing specific bequests, she would include a phrase such as “the rest and residue of my estate goes to” followed by the name of the person she wants to have the remaining estate. This clause isn’t without its problems, however, since receiving the residuary estate could tempt you to stint the other beneficiaries. Keep in mind that as executor, you have a fiduciary duty to all the beneficiaries, which means you cannot put your own interests first.

Q&A: Leaving IRAs to charity

Dear Liz: In responding to the reader who asked how to plan around the tax consequences of leaving a traditional IRA to a family member, I wish you had mentioned the tax benefit of naming a charity as the beneficiary of a traditional IRA. There is no tax on the distribution of a traditional IRA to a charity. The consequence is that the income is never taxed (on the front end or back end) and a charity benefits from the IRA owner’s generosity.

Answer:
The reader was primarily concerned with bequeathing assets to children and grandchildren after the Secure Act of 2019 did away with “stretch IRAs” for most non-spouse beneficiaries. One way to do that while also benefiting a charity is the charitable remainder trust that was mentioned in the column. These trusts require some expense to set up and aren’t a good option if the IRA owner isn’t charitably minded.

If someone’s primary goal is to benefit the charity, however, then qualified charitable distributions or outright bequests are certainly an option. Qualified charitable distributions, which can begin at age 70½, allow someone to donate required minimum distribution amounts directly to a charity; the distribution isn’t counted as taxable income to the donor.

Q&A: Sorting out trust confusion

Dear Liz: In a recent column you wrote of bypass trusts that “for many people this estate planning tool has outlived its usefulness.” In California, a trust avoids probate. Isn’t avoiding probate a reason to continue with a trust?

Answer: What you’re referring to is a living trust — a revocable (which means changeable) trust created while someone is alive. A bypass trust is irrevocable (which means not changeable) and typically goes into effect when someone dies. To further complicate matters, a living trust or a will can have provisions that create a bypass trust after someone dies.

Living trusts are indeed designed to avoid probate, the court process that otherwise follows death to settle an estate. Living trusts remain useful to many people who live in states where probate can be expensive and prolonged, such as California and Florida. Living trusts are also private, unlike wills, which typically become public record after death, and so are favored by people who want to avoid publicity.

Bypass trusts, on the other hand, were primarily designed to minimize or avoid estate taxes, which are no longer a concern for the vast majority of people. Bypass trusts have a number of disadvantages, so if you have one in your estate plan, you’ll want to consult an experienced estate planning attorney about whether to keep it.

Q&A: Why your estate plan might need a do-over

Dear Liz: We had a living trust done in 2006. The lawyer recently died and his office mailed us a packet with the trust document in it. We want to make a few changes. Every lawyer wants to do the whole thing over and have us sign papers giving them powers.

Answer: Your estate plan is probably ready for a do-over.

Previous columns have mentioned that estate planning laws have changed significantly since 2010. Any estate document created before that point needs to be reviewed and updated. Your previous attorney can’t do the updating, and another lawyer might be wary of being held responsible for a document they didn’t draft.

That said, it’s not clear what “powers” you’re being asked to give. What these attorneys may want to do is have you create powers of attorney that would allow a trusted person to make financial and healthcare decisions should you become incapacitated. These documents are essential and a good reason to schedule an appointment with the attorney of your choice today.

This advice is well worth repeating: Do-it-yourself estate planning can create a mess for your heirs that could incur far more in legal fees than you would have spent getting expert, personalized advice in the first place.

Q&A: DIY estate planning is unwise

Dear Liz: Please tell us about some estate planning tools that many might be able to use for themselves without incurring attorney fees and probate costs, such as naming payment-on-death beneficiaries at financial institutions and using real estate deeds with transfer-on-death provisions.

Answer: There are a number of ways that people can avoid probate, which is the court-supervised process of settling someone’s estate. Bank, financial and retirement accounts can pass to named beneficiaries outside probate, as can life insurance. Property owned in joint tenancy also avoids probate. Some states have transfer-on-death options for real estate and for vehicles.

The fact that you can avoid probate with these methods, however, doesn’t necessarily mean that you should.

Do-it-yourself estate planning can create a mess for your heirs that could incur far more in legal fees than you would have spent getting expert, personalized advice in the first place. A good rule of thumb: If you can afford to hire an estate planning attorney, you probably should.

Also, you shouldn’t automatically assume that probate is worth avoiding.

Probate is often lengthy and expensive in California and Florida, but may be far less cumbersome elsewhere. In addition, small estates typically qualify for simplified probate that’s faster and cheaper.

Probate also has some advantages, including limiting the time creditors have to make claims against your estate. You also might prefer a court’s supervision if you have contentious heirs or you’re concerned that your executor might not carry out your wishes.

Q&A: Trusts and wills aren’t the same thing. Here’s how they work

Dear Liz: I understand what happens with a living trust when both spouses die at once. But what happens when just one dies? Is the trust tossed out, since the surviving spouse is usually the trustee? What about the stuff that the deceased wanted to go to his or her kids? And what about the wills? When does that get disbursed? Please explain how trusts and wills work, especially for blended families. I’m sure I’m not the only one with questions.

Answer: A complete answer would take many, many more words than this column allows, which is why you should consult a knowledgeable estate planning attorney who can give you personalized advice.

But in a nutshell, wills and living trusts are both documents that allow people to name who they want to get their property. The main difference is that living trusts avoid probate, the court process that otherwise follows death.

Living trusts are considered revocable, which means the creators can make changes during their lifetimes. At some point, though, the trust usually becomes irrevocable, which means changes no longer can be made.

If a single person makes a living trust, then the trust would become irrevocable when that person dies. With a married couple, part of the trust often becomes irrevocable when the first spouse dies, with the rest becoming irrevocable at the second spouse’s death.

Such a setup allows you to bequeath money and property to your kids if you’re the first to die, rather than hoping your surviving spouse — and potentially your surviving spouse’s future spouse — will do so later.

Q&A: Adding sister to a house deed

Dear Liz: A reader recently asked about giving a rental house to the sister that has been living in it for 10 years. You mentioned that the reader would have to file a gift tax return since there is a max of $15,000 for a gift exemption. Couldn’t the owner simply add the sister to the title so when they pass the sister becomes the sole owner of the house without having to deal with taxes, probate, etc? Similarly, if the sister dies first the current owner would retain ownership to give, sell, donate as they choose.

Answer: Adding the sister to the deed would be considered a gift, so the reader would still have to file a gift tax return.

Owning the home together would avoid probate and give the surviving sister a tax break, and that half of the house would get what’s known as a step-up in tax basis at the first sister’s death. Another option, if the reader wanted to retain ownership, would be a transfer-on-death deed, which is available in many states. The reader was clear that she wanted to give an outright gift, but she could consult a real estate or estate planning attorney about other options.

Q&A: Storing will and trust documents

Dear Liz: You recently advised a person to leave their original will or trust with their attorney. As a practicing attorney, I cannot tell you how many times original wills and trusts have been lost as the attorney that prepared the documents retired or died before the client. There are requirements to inform clients of a retirement, but very few lawyers follow those rules, unfortunately. The best thing is to buy a home safe or put the documents in double zip-close freezer bags in your freezer (which should be fireproof and is a great preserver of the documents). Or, hire a younger lawyer who will still be around when you want to amend your will or trust or you pass away.

Answer: Thanks for sharing your perspective, but freezers are not fireproof. A fireproof home safe would be a better option for those who want to keep their wills at home.

There is, unfortunately, no one perfect option for storing wills. You’re quite right that people often don’t stay in touch with the attorneys who create their documents, even though estate plans should be reviewed and updated regularly. The risk of losing a will may not be as high if the attorney is part of a large firm, but even those can go out of business.

Some states allow you to file your will in advance with the probate court or a registrar of wills, so that’s another avenue to consider.