I have been asked by many clients, many professionals in other industries, many financial advisors, and many CPAs regarding the rising exemption of the death tax and whether this means the end to revocable living trust planning. In addition, during the early days of the Donald Trump Administration, he has mentioned a desire to repeal the death tax. Although, this attorney believes that a complete repeal of the death tax is very unlikely to happen, I felt it would be an appropriate time to discuss the continued need for revocable living trust based estate planning even in the highly favorable tax regime in which we currently live.
The following is a list of 8 Reasons to Continue to Pursue Revocable Living Trust Based Estate Planning:
- Probate Avoidance
Probate avoidance is and will continue to be one of the major reasons that Tennessee families will seek the Revocable Living Trust as their primary estate planning vehicle for years to come. Regardless of whether there is an estate tax or not (in fact, having a revocable living trust in and of itself will not reduce or eliminate your estate tax burden), the probate fees on most estates will average between 3% and 5% of the gross value of the estate.
Let’s say John and Jane owned a home worth $500,000 at their death and it was subject to a mortgage of $150,000. If this was John and Jane’s only asset (which for most estates it will not be), then the probate attorney fees will be $25,000, the court fees, executor fees, bond, and miscellaneous other fees could be as high as $10,000 to $15,000, and then you add the fees that the children will incur in selling the home which will likely include, at a minimum, the relator’s fee of 6% or $30,000 (if the home sold for $500,000), John and Jane’s children could be left with an estate that originally was $500,000 is now $280,000 (a reduction in the estate of 56%!)
In addition, a probate case doesn’t cover other ancillary items that the children will have to complete such as the changing of ownership of retirement accounts, bank accounts, and receiving and managing the distributions from life insurance policies. Furthermore, the Probate process in Tennessee can usually last between 15 and 24 months to complete (and this is an estate that is fairly simple).
Furthermore, when an estate is subject to trust administration, most law firms will settle and administer the trust for 1-2% of the gross value of the estate (much less than the standard 5% that most law firms will charge for a probate administration).
Finally, probate is a public court proceeding, and the deceased person’s entire estate is now open to the public!
Don’t get caught in taking the bad advice that probate is easy and simple! In our experience, Probate is anything but simple and inexpensive.
- Creditor Protection for Surviving Spouse and Children
Many people do not think of asset protection when it comes to engaging in estate planning. However, you always should! In addition, many families will get caught in the bad advice of thinking well, I have plenty of insurance, so I’ll be fine. Do not get caught in this mindset! As I tell everyone of my clients who brings up adequate insurance coverage for the reason against asset protection planning – “the insurance industry is the wealthiest industry in this country for a reason.” The fact remains that claims get denied and insurance coverage isn’t always there for you when you need it. This becomes a very important reason to engage in proper legal planning and asset protection planning.
When a person engages in revocable living trust planning, they can plan and have provisions to protect their spouse, children, and other loved ones from lawsuits, debts, failed businesses, medical debts from a major medical emergency, bankruptcy, divorcing future spouses, and any other type of creditor. There are a number of different ways to plan for this protection for your family. However, one of the more common ways that we advise clients that come to our office for comprehensive estate planning is with a QTIP Trust (Qualified Terminable Interest Property Trust). In most situations, the QTIP Trust will also include a Bypass Credit Shelter Trust. In other situations, we may recommend and set up a Children’s Inheritance Trust that continues long after the parents have died so that the children’s inheritance continues to be protected from these type of claims.
When we establish QTIP trusts for married couples in the proper manner, the surviving spouse’s share can be protected from creditors of the surviving spouse, divorce if the surviving spouse remarries, lawsuits against the surviving spouse, medical debt of the surviving spouse due to a major-medical issue, or any other type of creditor. We are able to accomplish this outcome with this type of planning because the property left in the QTIP trust belonged to the first spouse to die to be enjoyed by the surviving spouse during their lifetime. For complete protection from these type of creditors after the death of the first spouse, is to name an independent third-party trustee as either sole trustee or co-trustee with the surviving spouse.
- Distribution Planning for Your Heirs and Your Financial Accounts
Many families get caught taking the bad advice “I have named beneficiaries on my financial accounts, those avoid probate, so I have no reason to engage in estate planning.” We find that a lot of our clients receive this type of legal advice from their financial advisors. Unfortunately, beneficiary designation forms on those retirement accounts, brokerage accounts, bank accounts, investment accounts, and even life insurance policies rarely, if ever, account for alternate and contingent distribution plans.
For instance, what if you name your spouse as the primary beneficiary on one of your financial accounts and all of your children as the contingent (or secondary) beneficiary and one of your children should predecease you? Would you want your remaining children receiving that deceased child share or would you want the deceased child’s share going to their living children? However, if you want it to go to the deceased child’s living children (grandchildren), do you want it to go to them equally? Also, what if these grandchildren are under the age of 18 at the time they inherit by way of the beneficiary designation? Under Tennessee law, anyone under the age of 18 can’t inherit assets, and a court guardianship proceeding would have to commence, a guardian appointed and confirmed, and that guardian managing over the inheritance until that grandchild reaches the age of 18. However, what if one of your children should become incapacitated? Or, what if one of your children should become a special needs beneficiary and the inheritance of this financial account would invalidate him or her for public assistance benefits? All of these questions are not answered and cannot be handled appropriate by simply filling out the beneficiary designation forms on your various financial accounts.
These are just some of the reasons that many people fail to think about when filing out those beneficiary designation forms. In our experience, they do not account for all of the issues laid out above that can and do occur.
However, perhaps another consequence of simply filling out these forms because a financial advisor or bank teller told you to is the result of your children inheriting an asset that has ZERO protection from a future divorce, creditor, or lawsuit. In fact, in the Clark v. Ranamaker case in 2014, the U.S. Supreme Court stated that stretching out an inherited IRA over the beneficiary’s lifetime was not protected from the beneficiary’s creditors in that beneficiary’s voluntary bankruptcy case!
The smarter option is to name a Children’s Inheritance Trust or a beneficiary controlled trust as the beneficiary of a retirement account, brokerage account, investment account, bank accounts, or even life insurance proceeds.
- Private, Not Court Ordered, Incapacity Planning
Many people get caught with the misconception that all they need is a Power of Attorney to avoid a public court proceeding upon their incapacity. However, that is not always the case. In fact, we find that a lot of times, Powers of Attorney are held invalid, not sufficient for certain actions, and as a result, guardianship and conservatorship proceedings are still required. A lot of people would hate to think of the idea of their loved ones and family having to go to the court to initiate a guardianship proceeding that is open to the public just to act on their loved one’s behalf (which is also subject to annual reporting requirements).
Revocable trusts can be drafted with specific provisions to determine, privately, whether or not the Grantor (creator of the trust) has the required capacity to make their own decisions. This could be set up to be determined by a physician, two physicians, or even a panel of individuals of the Grantor’s own choosing in advance by unanimous vote.
- Planning for a Set Percentage of Your Estate to Go to Specific Persons
A revocable living trust can be set up to allow a certain percentage of your estate to go to specific persons when it is unclear what assets will be owned by the trust in the future. For instance, if John and Jane wanted to leave 50% of their estate to their grandchildren and it’s unclear whether more grandchildren will be born after the trust is executed, then the revocable living trust could be established to leave 50% to all grandchildren and thereby allow for future born grandchildren to inherit from the estate. Furthermore, and for the reasons stated above, John and Jane could leave 50% of the trust to the grandchildren in the Family Inheritance Trust. This would allow for the trust to own the assets until the youngest child reaches the age of 18, thereby avoiding the need for a guardianship and conservatorship proceeding to be opened in court for a named individual to manage over those assets until the grandchild reaches age 18. However, you could stretch it out even longer than 18 with a revocable living trust (as many of our clients prefer to do).
Furthermore, because most people do not know what the value of their estate will be later on down the road when they pass away, it is best to use percentages in a trust to accommodate your wishes. This is nearly impossible to do on each and every asset that you own. In addition, if you became incapacitated, you would not be able to update your bank accounts, brokerage accounts, real estate, life insurance, investments accounts or retirement accounts to accommodate for the changes in value of each asset to the named beneficiaries in an effort to be fair to all the beneficiaries.
- Planning for Those Unknown Circumstances Regarding Your Beneficiaries
There are a multitude of special provisions that should be used in a revocable living trust including a power of appointment, trust protector, and special needs trust provisions for the trustee to use to help beneficiaries at some point in the future should something happen to that beneficiary. If you have the right trust provisions that appear in your revocable living trust and power of attorney documents, there would be greater flexibility to help you should you become incapacitated to amend your revocable living trust for greater protection of the trust assets, including amending the trust to assist you in qualifying for government benefits short of spending down all of your assets in the trust to qualify.
- Preventing a Young Beneficiary from Having Too Much Control
During the course of my career, I have seen too many occurrences where a young and immature beneficiary inherited a lot of money and blew through it within a short period of time. Making sure that there are restrictions to protect a young and immature beneficiary are absolutely essential to the estate planning process.
One of the many ways in which we protect our clients and their children from creditor attacks and divorce claims is with a revocable living trust plan which has the necessary provisions by listing a Trustee other than the beneficiary until a stated age. Only when that beneficiary reaches that certain age is that beneficiary allowed to become a Trustee or Co-Trustee of the trust. Another way in which we accomplish this is with a Family Inheritance Trust or separate Children’s Inheritance Trust, naming a third party as the trustee until that child/beneficiary reaches a certain age.
- Tax Laws Are Their Lowest In History
As I tell every single one of my clients that I speak with, “I guarantee you that at some point in your life the law WILL change!” Simply looking at our income tax rates here in 2017, we are at historic lows in the grand scheme of tax laws. One only needs to look back to the 1960s and 1970s where there were effective top tax rates of nearly 90%. Therefore, it is safe to assume that tax rates will increase in the future. In addition, the $5.45 million exemption from the death tax (increased adjusted annually for inflation) is a relatively new exemption. It first went into effect in 2012. Therefore, one can assume that tax laws will change and increase in the future.
Therefore, as we stated above, a revocable living trust based plan with the appropriate provisions including a power of appointment, trust protector, and special needs trust provisions will give your plan the added flexibility to allow for necessary changes to the plan in the future in the event of a tax law change. Without this added flexibility through a properly drafted revocable living trust based estate plan you could find yourself in a medical situation where you are unable to update your Last Will and Testament based estate plan due to your incompetence. Always remember, it is very difficult for the agent of your power of attorney to have the authority to change your Last Will and Testament … it is almost always not allowed!
For more information on our unique, comprehensive, and effective estate planning approach, please request a FREE copy of my book Estate Planning for Tennessee Families: The Complete Guide to Keeping 100% of Your Estate in the Family and Out of the Government. Also, feel free to download one of our many Special Legal Reports available on this website regarding a variety of estate planning strategies and techniques. Also, be on the lookout for my new book, Comprehensive Estate Planning: Why Proper Beneficiary Designations on Your Financial Accounts Could be a Time Bomb Waiting To Go Off!
If you are ready to sit down with an attorney to discuss your estate planning needs and concerns, please contact us at (615) 472-2482. As always, we are here to help.
Daniel A. Perry