Ask Liz Weston

Get smart with your money

Estate planning

Q&A: Updating old trusts, estate plans

By

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?

By

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

By

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

By

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

By

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

By

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.