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There are several retirement plans for independent contractors, consultants, and freelancers that can help you build up a nest egg for retirement, including a SEP IRA, traditional or Roth IRA, and solo 401(k). While you may have to do some research to determine the best options for your needs, thereâs a benefit to having the […]
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The Lowdown on Living Trusts
If youâre putting together an estate plan, you have no doubt heard about the benefits of a living trust. Assets placed in a trust wonât go through probate, a time-consuming and potentially costly process. In addition, a living trust, also known as a revocable trust, allows you to designate a trustee to manage your estate after youâre goneâan important consideration if your heirs are minor children or adults who are unable to handle a large inheritance.
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But although living trusts can streamline the disposition of your estate, there are plenty of opportunities to make costly missteps, particularly when it comes to transferring your assets to a trust.
What Not to Put in a Living Trust
Some types of accounts should never go into a trust, even if they account for the bulk of your estate. That category includes assets in your retirement accounts, such as your 401(k) plan, IRAs and tax-deferred annuities. Health savings accounts and the less-common medical savings accounts, which allow you to take tax-free withdrawals for medical expenses, should also be excluded from your trust.
If you transfer any of these accounts to your trust, the IRS will treat the transaction as a distribution and youâll have to pay income taxes on the entire amount, says Kris Maksimovich, president of Global Wealth Advisors in Lewisville, Texas. Maksimovich says one of his clients recently transferred an IRA to a trust; fortunately, he was able to unwind the transaction before the distribution was taxed.Â
You can make your trust a beneficiary of your retirement accounts, which is what Maksimovich did for his clientâs IRA. Naming your trust as a beneficiary allows you to determine how the assets will be distributed to your heirs and could also protect the funds from creditors. However, the 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act, which requires non-spouse beneficiaries to deplete inherited IRAs in 10 years, created some uncertainty with respect to how long a trustee has to deplete an IRA thatâs left in a trust, so consult with an attorney before naming the trust as beneficiary.Â
Most other assets can be placed in a trust, but some should probably be excluded for practical reasons. For example, in order to transfer a vehicle to a trust, it must be retitled, which can trigger taxes and fees, depending on where you live. In addition, cars and other vehicles, such as boats and motorcycles, typically donât go through probate, so you donât need to transfer them to a trust.Â
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Also, although most accounts with financial institutions belong in your trust, you should exclude accounts used to pay your monthly bills. Some entities, such as your utility company, may not accept payments unless theyâre in your name, Maksimovich says. In addition, your bank may require you to close the account and open a new one in the name of the trust. For those reasons, itâs simply easier to keep those accounts outside the trust.
Assets That Belong in a Trust
Another common misstep is to set up a trust and then fail to fund it. Funding a trust typically involves retitling property and financial accounts. You and your attorney should come up with a detailed inventory of assets that belong in the trust:
Real Estate, Including Your Home
It may be your largest asset, and itâs an appropriate one to place in your trust. Doing so will decrease the time required to transfer the home to your heirs. And if you own property in another stateâa vacation home, for exampleâtransferring the title to a living trust will enable you to avoid going through probate in more than one state. Youâll need to create a new deed that transfers ownership of the property to your trust.
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Transferring your home to a trust wonât affect your ability to sell it, says Letha McDowell, an attorney with the Hook Law Center and president of the National Academy of Elder Law Attorneys. However, if you want to refinance your mortgage or obtain a home equity line of credit, your lender may require you to transfer the property out of the trust and back to your name in order to get the loan. Once youâve completed the transaction, you can transfer the property back to the trust. But because this process can be cumbersome, you may want to postpone transferring your home to a trust until after youâve refinanced or closed on a HELOC or home-equity loan.Â
Financial Accounts
Financial accounts that can be transferred to a trust include stocks, bonds, mutual funds and other investments in nonretirement accounts; certificates of deposit; money market funds; and bank savings accounts that arenât being actively used to write checks. You can put your safe deposit box in the trust, too.Â
This process requires some paperwork. For bank and brokerage accounts, youâll need to open a new account in the name of the trust. If you have any physical stock and bond certificates, you may need to work with a stock transfer agent or bond issuer to change ownership to the trust. You may need to open a new CD to fulfill the transfer, so ask your financial institution if it will waive penalties before making the switch.Â
If this seems like a lot of work, consider it a gift to your heirs. Transferring inherited shares of stock or mutual funds to an estate (outside of a trust) can take months, during which time your heirs will be required to fill out lots of documents and probably make a few phone calls, all of which can delay probate.
Personal Property, Like Collectibles, Jewelry and Art
You usually donât need to retitle these types of assets, but you should draw up a list with instructions that they should be included in the trust. You can use the trust to designate who should receive these items, which should prevent family disputes over who gets your grandmotherâs pearls. You can also provide this type of direction in a will, but a will becomes a matter of public recordânot desirable if grandmotherâs pearls are worth a lot of money. And while the car you drive around town probably doesnât belong in a trust, you may want to include any collectible vehicles you own, particularly if you think the vehicle will retain its value or appreciate over time.Â
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Once youâve transferred and retitled assets that belong in your trust, you should review it periodically to make sure itâs up to date. Maksimovich says he reviews his clientsâ trusts annually. In other cases, every three to five years may suffice, but you may need to review (and possibly update) the trust after a major life change, such as the sale of your home, the birth of a child or grandchild, or a marriage or divorce.
Do You Really Need a Trust?
As weâve explained, funding a living trust requires some legwork, and there is also the issue of cost. Depending on where you live, expect to pay $1,000 to $1,500 in legal fees, compared with $200 to $500 for a basic will.
A living trust may be worth the cost if it reduces the hassles of going through probate. If youâve served as an executor of an estate, you may already be aware of whatâs involved. âNo one appreciates avoiding probate more than someone who has gone through probate,â Maksimovich says.
But the exigencies of probate vary, depending on where you live. âThere are some states where itâs horribly expensive and time consuming and others where itâs not,â McDowell says. Most states exempt a certain amount of assets from probate, so if your estate is smallâless than $100,000, for exampleâyou probably donât need a living trust. In addition, if most of your money is in retirement accounts, you may not need a living trust, because those assets will transfer to beneficiaries outside of probate. Life insurance with a named beneficiary wonât go through probate, either, because the death benefit will go directly to the beneficiary.Â
You can also arrange to make bank and other accounts payable upon death to your heirs, in which case those accounts wonât go through probate. Property owned jointly, such as a home owned by you and your spouse, will transfer to the surviving owner outside of probate, too.Â
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How to Keep Your Estate Plan from Jeopardizing a Disabled Heirâs Benefits
Estate planning is not a requirement. No one can force you to make your will, create a power of attorney or to own your property in a way to avoid probate. As a result, people too often let common estate planning excuses stand in their way.
For those who fail to plan, states have default laws for managing the transfer of their property and assets at death or for controlling their property if they lose this ability because theyâre critically injured or at an advanced age.
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However, these laws should be viewed as a backup plan, not an ideal arrangement â especially if you have a family member with a disability. By relying solely on the default laws in the probate or guardianship code of your state without considering your heirsâ current or potential eligibility for certain benefits, you might unintentionally disqualify your disabled child or grandchild from receiving public benefits, or these benefits may be substantially reduced. Thoughtful planning on your part can create additional benefits for your heirs by preserving resources made available through private or public sources.
A person with a physical or cognitive disability may qualify for taxpayer-sponsored public benefits or privately funded benefits to support his or her living expenses, since he or she may be unable to work or to gain full employment due to a disability. These public benefits, called Supplemental Security Income (SSI) are âmeans tested,â meaning that to apply (or re-apply) for them, a person must utilize, or âspend down,â most of their savings or funds that are available without restriction.
Grandpaâs problematic old estate plan
I was recently introduced to a widower who has five grandchildren. His grandson suffered a severe head injury and compound fractures to his leg in an automobile accident when he was 16. He will have difficulty with fine motor skills for the remainder of this life and canât stand for extended periods. He is now 22 and qualifies for SSI to supplement his earned income. His grandparents had a typical estate plan created before the accident. It provided that at the death of the first spouse, the balance of that personâs estate would pass to the surviving spouse. Upon the surviving spouseâs death, the balance of the remaining joint estate would be divided, leaving shares directly to their surviving children and grandchildren.
This plan would have caused an unintended consequence for this grandfatherâs disabled grandson. Since his grandson would receive this inheritance directly, the Department of Human Services in his state would have considered his inheritance an available resource, disqualifying him from continuing to receive full governmental benefits, including Medicaid health insurance, until these funds were fully used. His problems would have been compounded if his father wasnât living at his grandfatherâs death, because he would have also been entitled to the share set aside for his father.
Thankfully, the grandfather updated his estate plan (described in detail below). Had he not, it still would have been possible for his grandson to continue receiving public benefits, but this would have required the state to be reimbursed for the benefits paid during his lifetime before any remaining funds could be distributed to other family members. The grandfather was resolute in his decision to change his estate plan when he became aware of the likelihood that the state would be paid a portion, if not all, of his legacy.
How supplemental needs trusts work
After collaborating with an estate planning attorney experienced in the complicated arena of public benefits planning, we explained to the grandfather that funds can be held in a trust that wonât reduce his grandsonâs present benefits or disqualify him or other heirs from future benefits. These trusts are known as supplemental needs trusts or special needs trusts (SNT).Â
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An SNT can be either a first-party trust created by a parent, grandparent, guardian or a court using the beneficiaryâs own funds or a third-party trust funded with assets belonging to the trustâs creator. Because the beneficiaryâs assets are used, a first-party SNT requires that the state benefits provider be reimbursed for lifetime benefits paid by it on behalf of the beneficiary. A first-party SNT could have been created by the court had the grandfather not changed his original plan, but state reimbursement would have been required.
The grandfatherâs new plan created a third-party SNT for the primary benefit of his grandson that will supplement, but not supplant, his public benefits. Upon his grandsonâs death, the remaining balance of the trust will be distributed to his grandsonâs descendants or his other grandchildren.
Since the trust is funded with the grandfatherâs money, and not his grandsonâs, there is no need to reimburse any state for public benefits received. The grandfather also made similar provisions for any of his other children or grandchildren who are not presently receiving public benefits but may qualify in the future.
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Alternatives to special needs trusts
Special needs trusts are one of several solutions that can be used to plan for descendants who currently receive disability benefits or may in the future. Choosing an experienced trustee to oversee a special needs trust for his grandsonâs benefit was a good solution for this client, based upon the overall size of his estate and the nature of his assets. Under different circumstances, he may have considered other alternatives, such as an ABLE account, a pooled trust or purchasing exempt resources (such as a car or house) for his grandson.
ABLE accounts
ABLE accounts were created with the passage of the Stephen Beck Jr. Achieving a Better Life Experience Act of 2014. An ABLE account is a savings accounts for individuals with disabilities. They are like 529 education savings accounts with similar tax advantages. There is a limited amount that can be held in an ABLE account, but the balance will not be considered an available resource. The maximum amount that can be contributed to an ABLE account annually is set by the federal government and is adjusted for inflation each year. In 2022 this amount was increased to $16,000. The balance held in ABLE accounts can increase from year to year as long as it doesnât exceed the maximum amount permitted in the state where the disabled person resides. This limit currently ranges from $235,000 to $550,000, with many states allowing more than $500,000 to be held in an ABLE account.
Pooled trusts
A pooled trust can be a first-party or third-party special needs trust. This type of trust is managed by a nonprofit organization and is often a cost-effective solution, because the funds of many beneficiaries are combined into one master trust for administrative and investment purposes. Sub-accounts are then created for each beneficiary, with the disabled personâs account receiving a proportionate share of the entire fundâs earnings.
Distributions may be made by the nonprofit trustee from the beneficiaryâs share and used for his needs. One important thing to note: Pooled trust providers typically canât hold a house for a disabled beneficiary, unlike a trust created for a single beneficiary.
Purchasing exempt resources
When determining a disabled personâs resources in calculating his or her benefits, the value of personal property and household goods, one automobile and a home occupied by the person will not be counted. Purchasing exempt resources, such as an automobile or residence, can be an effective strategy for some people, particularly when combined with a pooled trust or ABLE account.
It is a good idea for everyone to review their estate plan from time to time, particularly because beneficiariesâ personal circumstances can change or there might be developments in state laws that could be advantageous to them or their beneficiaries. The time you take to carefully plan with a qualified estate and benefits planning attorney can improve your beneficiariesâ quality of life and provide additional public resources for a disabled child, grandchild or other family member.
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The SIMPLE IRA is one type of tax advantaged retirement savings plans to help self-employed savers and small business owners put money away for their future, including the SIMPLE IRA. You may already be familiar with traditional individual retirement accounts (IRA), and a SIMPLE IRA, or Saving Incentive Match Plan for Employees, is one type. […]
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