Tuesday, October 27, 2009 Estate Planning Pitfall: You plan to take a retirement distribution later this year
submitted by Peter G. Lennington, Esq., St. Paul, MN
If you’re over the age of 70½ — or if you reach that age this year — you may be planning to take required minimum distributions (RMDs) from your IRA, 401(k) plan or other retirement accounts later this year. But you may be better off taking advantage of a tax law change that lets you skip RMDs this year.
Leaving funds in your tax-deferred accounts as long as possible often can make sense from an estate planning perspective. The longer you allow your retirement funds to grow on a tax-deferred basis, potentially the more there will be for your heirs.
Normally you must take your first distribution by April 1 following the year you turn 70½. After that, annual distributions are required no later than Dec. 31. Many people take their first RMD during the year they turn 70½ to avoid taking two distributions the following year.
In the economic downturn, the value of many investments has declined, so it’s not the best time to make withdrawals from tax-deferred accounts. Lawmakers recognized this when they enacted the Worker, Retiree and Employer Recovery Act of 2008 late last year. The act suspended RMDs for 2009.
If you reached age 70½ before this year, you can skip the distribution that would have been required by Dec. 31, 2009. And if you turn 70½ during 2009, you can skip your first RMD — which would have been due by April 1, 2010 — so you won’t have to take an RMD until the end of 2010.
The act also provides relief for people with inherited retirement accounts. The rules are a bit complicated, though, so if you’re in that situation, consult your estate tax advisor to find out whether you’re entitled to skip this year’s RMD.
(Peter G. Lennington, Esq., is a wealth preservation and estate planning member attorney with offices in St. Paul, MN, Bloomington/Edina, MN, and Minnetonka, MN. The Lennington Law Firm, PLLC website is located at www.lennington.com. You can contact Peter G. Lennington via e-mail at peter@lennington.com) Tuesday, October 20, 2009 Is Your Estate Plan Challenge-Proof?
Minimize postmortem disputes over your estate plan
Submitted by Peter G. Lennington, Esq., St. Paul, Minnesota
The goal of estate planning is to gain the peace of mind that comes with knowing your family will be provided for and your wishes will be carried out after you’re gone. Few things can disturb that peace of mind as quickly as the fear that someone will contest your plan.
No protection is absolute, but with thorough planning you can minimize the chances that an assault will pierce your armor. Let’s take a closer look at several tips for “bulletproofing” your estate plan.
Risk assessment
The first step is to evaluate your risk. There’s no reason to invest in protection you don’t really need. If your estate plan distributes your wealth to the “natural objects of your bounty” — such as your spouse and children — in roughly equal shares, you probably have little reason for concern. But if you plan to disinherit a family member or leave most of your assets to charity, you might want to shore up your defenses.
There also may be a heightened risk of litigation over your estate plan if you own a family business or have children from a previous marriage.
Protection for your estate plan generally falls into two categories: 1) strategies that discourage others from contesting your plan, and 2) those that make it more difficult for a challenge to succeed.
Conflict avoidance
There are several strategies you can use to avoid disputes over the terms of your estate plan:
Treat everyone fairly. It may seem obvious, but if your plan makes everyone happy, there’s no reason for anyone to contest it. Remember, though, that equal doesn’t necessarily mean fair. Suppose you have a young child from your current marriage and a financially independent adult child from a previous marriage. If you divide your wealth between them equally, the younger child — who likely needs more financial help — may perceive your plan as unfair.
Talk it over. If your estate plan is atypical, you can avoid misunderstandings and potential disputes by sitting down with your family and explaining your motives. Perhaps you’re leaving the bulk of your estate to a family-run private foundation to get your children involved in philanthropy. If so, the time for them to learn this is now, not at the time of your death.
If you own a family business, you might plan to leave equity interests to family members who work in the business and use other assets to provide for those who don’t. Or you might use voting and nonvoting shares to divide the business equally while preserving management control for family members who work in it. Whichever approach you use, it’s important to discuss your reasoning with those affected and solicit their input.
Create a revocable living trust. Using a will as your primary testamentary instrument guarantees that your estate will go through probate. That means your plan will become a matter of public record and your named beneficiaries — as well as anyone legally entitled to a share of your wealth — will be notified and given an opportunity to object in probate court.
In most states, you can avoid probate by using a revocable trust. Without probate, there’s no notice requirement or opportunity to be heard in court, so someone would have to file a lawsuit to challenge your estate plan. For a revocable trust to be effective, you must transfer title to all of your assets to the trust, including any assets you acquire after you establish the trust.
Use a no-contest clause. Consider making bequests that include a “no-contest” clause. Essentially, this clause says that, if a beneficiary challenges your will or trust, he or she forfeits the bequest. For a no-contest clause to work, the bequest must be large enough to deter the person from risking an unsuccessful challenge.
Strong defenses
If your estate plan is unconventional or you plan to disinherit one or more family members, it may be difficult to avoid a challenge. And even if your plan is the epitome of fairness, it’s not always easy to predict who might feel slighted.
Most wills that are contested involve claims of undue influence or lack of testamentary capacity (though fraud and invalid execution also may be grounds for a challenge). Strategies for thwarting these attacks include:
Have your head examined. Seriously, one of the best ways to establish your testamentary capacity is to undergo a “mini mental state examination” or have a medical practitioner attest to your competence. The examination should be conducted near the time you execute the will — on the same day, if possible.
Choose the right witnesses. Witnesses should be people you expect to still be alive and easily located years or even decades later — and they shouldn’t be beneficiaries of the will. Ideally, they will be familiar enough with you and your family that they can attest to your testamentary capacity and freedom from undue influence.
Put it on tape. Videotaping the execution of your will can be an effective way to demonstrate your competence. It also gives you an opportunity to discuss the reasoning or motives behind your estate plan and refute any potential claims of undue influence. Obviously, no one who stands to benefit from your will should be present.
Be sure to plan your statements carefully so that nothing you say can be misinterpreted. Also, for this strategy to work, you should be comfortable with the recording process. The last thing you want is viewers mistaking discomfort for duress or confusion.
Arm yourself
If you’re concerned that postmortem challenges might derail your estate plan, strategies like the ones described can provide the ammunition you need to fend off would-be attackers. Ask your estate planning professional which combination of techniques is right for your situation.
(Peter G. Lennington, Esq., is a wealth preservation and estate planning member attorney with offices in St. Paul, MN, Bloomington/Edina, MN, and Minnetonka, MN. The Lennington Law Firm, PLLC, focuses on Minnesota estate planning, wills, trusts, estates, probate administration, asset protection, Medical Assistance planning, Medicaid planning & eligibility, elder law, business succession planning, family limited partnerships, real estate and transactional law. The Lennington Law Firm, PLLC website is located at www.lennington.com. You can contact Peter G. Lennington via e-mail at peter@lennington.com)
Thursday, August 20, 2009 A Matter of "Principle" - A Principle Trust Can Help Achieve Your Estate Planning Goals
A matter of principle
A principle trust can help achieve your estate planning goals
submitted by Peter G. Lennington, Esq., St. Paul, MN
For many, an important estate planning goal is to encourage their children or other heirs to lead responsible, productive lives. A popular tool for achieving this goal is the incentive trust, which conditions distributions on certain “acceptable” behaviors. But is this your best option?
Rigid distribution rules problematic
An incentive trust attempts to shape your beneficiaries’ behavior by conditioning distributions on specific benchmarks that are readily understandable and achievable. Examples include obtaining a college degree, maintaining gainful employment, or refraining from unacceptable behaviors such as drug or alcohol abuse or gambling.
In an effort to quantify acceptable behavior, some incentive trusts provide for matching distributions based on a beneficiary’s salary or charitable donations. Unfortunately, this approach can lead to unintended consequences.
For example, if your trust conditions distributions on gainful employment or matches a beneficiary’s salary dollar-for-dollar, it may discourage heirs from becoming stay-at-home parents, doing volunteer work or pursuing less lucrative but worthwhile careers, such as teaching or social work. If the benchmark is graduating from college or obtaining a graduate degree, the trust may unfairly penalize family members with disabilities or who simply lack the temperament or capacity for higher education.
One potential solution is to design a detailed trust document that attempts to cover every possible contingency or exception. Not only is this time-consuming and expensive, but, even with the most carefully drafted trust, there’s a risk that you’ll inadvertently disinherit a beneficiary who’s leading a life that you’d be proud of. Or, the trust may reward a beneficiary who meets the conditions set forth in the trust but otherwise leads a life that’s inconsistent with the principles and values you wish to promote.
Principles trump incentives
If you’re comfortable giving your trustee broader discretion, consider using a principle trust, instead. By providing the trustee with guiding values and principles rather than rigid rules, a principle trust may be a more effective way to accomplish your objectives.
A principle trust guides the trustee’s decisions by setting forth the principles and values you hope to instill in your beneficiaries. These principles and values may include virtually anything, from education and gainful employment to charitable endeavors and other “socially valuable” activities.
By providing the trustee with the discretion and flexibility to deal with each beneficiary and each situation on a case-by-case basis, it’s more likely that the trust will reward behaviors that are consistent with your principles and discourage those that are not.
Suppose, for example, that you value a healthy lifestyle free of drug and alcohol abuse. An incentive trust might withhold distributions (beyond the bare necessities) from a beneficiary with a drug or alcohol problem, but this may do very little to change the beneficiary’s behavior. The trustee of a principle trust, on the other hand, is free to distribute funds to pay for a rehabilitation program or medical care.
At the same time, the trustee of a principle trust has the flexibility to withhold funds from a beneficiary who appears to meet your requirements “on paper,” but otherwise engages in behavior that violates your principles. Another advantage of a principle trust is that it gives the trustee the ability to withhold distributions from beneficiaries who neither need nor want the money, allowing the funds to continue growing and benefit future generations.
Not for everyone
Not everyone is comfortable providing a trustee with the broad discretion a principle trust requires. If it’s important for you to prescribe the specific conditions under which trust distributions will be made or withheld, an incentive trust may be appropriate. But keep in mind that even the most carefully drafted incentive trust can sometimes lead to unintended results, and the slightest ambiguity can invite disputes.
On the other hand, if you’re comfortable conferring greater power on your trustee, a principle trust can be one way to ensure that your wishes are carried out regardless of how your beneficiaries’ circumstances change in the future.
(Peter G. Lennington, Esq., is a wealth preservation and estate planning member attorney with offices in St. Paul, MN, Bloomington/Edina, MN, and Minnetonka, MN. A "principle trust" can be established either as a spendthrift trust or a purely discretionary trust. It can be added to existing revocable living trusts, or as a sub-trusts to irrevocable life insurance trusts. It can also be established as a stand alone lifetime inheritance protection trust. The Lennington Law Firm, PLLC website is located at www.lennington.com. You can contact Peter G. Lennington via e-mail at peter@lennington.com)
Friday, July 18, 2008 Affluent Struggle Over "How Much is Too Much"Wealthy Americans really struggle over how much inheritance their children should receive. According to JPMorgan Private Bank, more than a quarter of all clients with over $25 Milion simply cannot decide how much is "too much" Nearly 1/3rd of those interviewed feared that conflict would arise over the allocation/distribution of ivestable assets. And nearly 40% feared that their family would succumb to "financial predators."
Virtually none of those interviewed believed that children under 30 should receive a substantial outright inheritance. But more than one-half said that they were leaving their wealth to multiple generations. Thursday, July 17, 2008 Adoption Designed to Qualify Adoptee as Heir -- AnnulledAs reported in the N.Y. Times, an adoption designed to result in the adoptee qualifying as an heir to the I.B.M fortune was thrown out. The Times reported:
"The adoption of a woman by her lesbian partner 17 years ago in Maine has been annulled, and the woman has filed an appeal in the State Supreme Court, according to recently unsealed documents. The case involves Olive F. Watson, 60, the granddaughter of the founder of I.B.M. and the daughter of Thomas J. Watson Jr., the company’s longtime chief executive. In 1991, Ms. Watson adopted Patricia Ann Spado, now 60, in Maine, where the women spent several weeks each summer at the Watson compound on the island of North Haven. The purpose of the adoption, Ms. Spado said in court documents, was to allow her to qualify as an heir to Ms. Watson’s fortune. A year after the adoption, the women broke up. Now, with both of Ms. Watson’s parents dead, Ms. Spado is seeking to qualify as Mr. Watson’s 19th grandchild and a beneficiary of his trusts. The Watson family, including Olive, is fighting Ms. Spado’s claim. In April, the probate judge who granted the adoption annulled it on the grounds that the women did not meet residency requirements. Ms. Spado’s lawyers filed an appeal on July 2."
For the full story, go to http://tiny.cc/annulled Wednesday, June 25, 2008 Estate Tax Puzzle Becoming Clearer According to KiplingerAccording to a recent Kiplinger Report, the future of estate taxes is becoming clearer:
"A quick refresher course: Back in 2001, Congress passed a law to phase out the tax. The amount Americans can pass to their heirs tax-free was set to rise from $675,000 in 2001 to $3.5 million by 2009 (it's $2 million this year). Then, in 2010, the estate tax was supposed to expire. But there was a catch: The tax was also scheduled to rise from the dead in 2011 with a paltry $1 million exemption.
That seesaw scenario is what had a lot of people pulling out their hair instead of planning. Although the schedule is still in place, it's clear that it will never happen. Why not? The next president is against it. John McCain and Barack Obama oppose repeal of the estate tax.
Obama would let the $3.5 million exemption continue; McCain would prefer a $5 million exemption. Because the law allows married couples to double the tax-free amounts, it's likely that, in the future, couples could leave their heirs a minimum of $7 million -- and maybe up to $10 million -- before Uncle Sam gets a bite of their assets."
For the full report, click http://tiny.cc/aateela |