Archive for year: 2023
Leaving a Legacy While Saving on Taxes Through Charitable Gifting
Leaving a legacy to charity is a great way to support your community, make an impact, and save on taxes. There are many charitable estate planning strategies to consider and each one comes with a careful consideration. Who you’re donating to, your financial goals, the type of asset you’re donating, tax objectives, and amount of control are just a few of the many considerations every charitable estate plan must contemplate. Using the following strategies, you can design and implement a comprehensive plan.
First, Don’t Do This…
Do not name a charity as the beneficiary of a retirement or bank account. Simply do not do this! Since big banks and financial institutions can only generate revenue based on the assets under their management, they don’t always have your best interest in mind if they lose that revenue in bequeathing your estate to your selected charity. Leaving your wealth to a stranger at a mega-corporation can cause delay and there’s no guarantee your wishes are met. Instead, it’s best to have a trusted estate “quarterback,” a.k.a. an executor and/or trustee who will ensure your plan is properly administrated. You can name your children, sibling, attorney, or trusted friend. Pick someone you trust as opposed to letting the bank pick a stranger.
Donating Through Your Will
A last will and testament is one method of donating to charities; however, it is the least efficient and most time-consuming. This option is better than naming a charity as a beneficiary of a retirement account, however, because here you at least have an executor overseeing and administering the estate. You can specify certain dollar amounts (e.g., $10,000 to XYZ church) or percentages (e.g., 10% to XYZ Church), within your will and both methods would allow your charitable beneficiaries to receive their bequest. Keep in mind that your last will does not avoid probate. Moreover, any debts against the estate would be paid first through the probate process, reducing the amount of the bequest. Nonetheless, this method is effective and acceptable.
Basic Charitable Trust Planning
Whether you already have a family trust or want to amend your current one, leaving a bequest to charity through your trust is a great way to leave a legacy. The trust will avoid probate and also provide more control. Unlike a last will, here you can spread out payments to your charity, leaving a legacy for years to come. For example, you might leave $10,000 to the OSU scholarship foundation, every year, in your family name, until the funds are depleted. Moreover, since a trust would avoid probate, the assets are also protected from creditors and the estate would remain private. Finally, you once again have a “quarterback,” known as a trustee to oversee and administer the estate.
Charitable Remainder Trust
Being able to observe the organizations you’re helping is a major benefit of an irrevocable charitable remainder trust, or “CRT.” Additionally, unlike the strategies we have discussed thus far, CRTs allow you to attain an immediate tax deduction while also creating a cash flow. The trust can be funded by real property, stock, cash, or any other type of asset. However, the tax deduction and cash flow you receive will vary depending on what type of asset you’re contributing. After funding, you receive payments over time from the revenue generated from the trust. For example, your CRT might be funded by rental properties that you not only received a tax deduction for, but now you’re receiving payments from for the rest of your life. After death, the remaining assets are given outright to the charities you’ve named.
Who’s a good fit? The CRT is a good option if you want an immediate charitable deduction but also have a need for an income stream for yourself or another person. If you set instructions to establish a CRT at your death, it is also a good option to provide for heirs, with the remainder going to charities of your choosing.
Charitable Lead Trust
A charitable lead trust, or “CLT” is the inverse of a CRT. It’s an irrevocable trust that generates a potential income stream for the named charitable beneficiary, with the remaining assets eventually going to family members or other beneficiaries. Donors choose the term of the trust and the amount distributed, at least annually, to charity. The assets used to fund a charitable trust are removed from your gross estate and may not only reduce the amount of tax your estate has to pay upon your death, but may also preserve funds for your heirs. Charitable lead trusts are not tax-exempt, and you will need to decide the tax treatment of the trust when it is created.
Who’s a good fit? This is ideal if you want to pass appreciated property to heirs and reduce gift and estate tax consequences and are also comfortable with parting with the income for a number of years in return for estate and gift tax savings.
Where Do You Start?
No matter the size of your estate, developing a charitable estate plan that will be carried out according to your wishes requires three things: (1) a Certified Public Accountant (CPA) who has experience with tax and gifting; (2) a Financial Planner; and, of course (3) an Estate Planning Attorney. The combination of utilizing these three professionals could mean the difference between a significant tax break or your estate ending up in court. For more information or to schedule a free consultation, contact Baron Law at 216-573-3723.
How to Avoid the Big Bad Wolf of Probate Court
How do you ensure your family and loved ones are safe from the Big Bad Wolf of probate court?
Whether you have a comprehensive family trust or are just getting started with a basic estate plan, understanding and avoiding probate is paramount for each person considering the future of their loved ones.
What Is Probate And How Does It Work?
Probate is the process of administering, or settling, a person’s estate after their death. Laws and procedures vary from state to state, but the process largely depends on whether the deceased had a will.
If the deceased had a will, the probate court will determine whether it is valid. Then the court will follow the instructions in the will to appoint an executor and direct the distribution of assets. Assets owned jointly, held in a trust, coupled with transfer-on-death or payable-on-death accounts are not included in this distribution. After the court pays off the deceased’s debts, the remainder of the assets are distributed to the beneficiaries named in the will.
If the deceased did not have a will, the state will name an administrator for the estate and determine the beneficiaries. In Ohio, the beneficiary is typically the surviving spouse, followed by children, parents, siblings, nieces and nephews and grandparents.
Why Is Probate A Big Bad Wolf?
- Probate Is Inefficient – Probate is extremely time-consuming and inefficient. The minimum time to administer a single asset through probate court is 6 months. This is because creditors have 6 months to attach their interest on an asset through probate. Moreover, the average time to administer an estate in the state of Ohio is about one year.
- Probate Is Costly – Probate is expensive. According to the AARP, the many fees of probate (court, attorney, filing, etc.) add up to 5-10% of the value of your estate. For example, on the low (5%) end, if you have an estate with a house, retirement, and other assets totaling $500,000, your loved ones could lose at least $25,000 in probate costs.
- Probate Is Public – Since probate proceedings are part of a government court system, the entire process is public. This means that anyone can go online and search the docket for every probate matter filed today. In less time than it takes you to read this article, someone could determine the value of assets in your estate, beneficiaries, executors, property listed, debt, and more. Once they have this information, your loved ones are vulnerable to scams and hassles from creditors and scam artists.
- Probate Does Not Offer Asset Protection – The probate court serves two main functions. First, probate pays creditors all that is owed by the deceased. After debts are paid, the probate court administers its second function which is to pay beneficiaries an outright distribution of whatever is left. The court is impersonal, and cannot take into consideration important changes in relationships or financial challenges. Multiple factors including divorce, student loans, litigation, creditor issues, and/or spending issues can impact the distribution of your hard-earned money.
- Probate Can Cause Family Feuds – Disagreements about asset and property distribution are common. For example, a beneficiary may feel they have been short-changed and challenge the probate process. They might do this by challenging the validity of the will or the competency of the executor.
So, what can you do to avoid the above? Is a basic will a good form of estate planning? Does a will avoid probate or is there a better option?
The reality is that a basic will is your one-way ticket to probate court. With the inefficiency, cost, publicity, and weaknesses of probate, the following options are vital to protecting your loved ones.
Joint Ownership
Joint ownership is the most commonly employed method to avoid probate. Assets owned by more than one person result in the survivor taking ownership. Joint ownership examples include a joint bank account or joint home. This is significantly beneficial when avoiding probate for a residence because the transfer of assets is immediate and does not require a court-approved transfer.
The downside of joint ownership is that it does not offer asset protection. A trust must be established to deter creditors from attaching their interest in a residence or asset of a jointly held account after both parties have passed.
Beneficiary Designations
If you’ve ever engaged with a financial planner, you’ve probably filled out a beneficiary designation. These forms are very common with retirement accounts (such as a 401(k), 403(b), IRA, etc.), annuities, and other assets. Beneficiary designations are a great way to avoid probate and keep your estate private. The owner of these types of assets is required to denote primary and contingent beneficiaries in the event of death. Thus, these assets transfer directly and immediately to listed beneficiaries without the need for court.
The downside to beneficiary designations is that your assets are not protected against divorce, creditors, or litigation. For example, if your children inherit an IRA, but then get divorced, the ex-spouse may receive half of the retirement assets depending on how those assets are managed during the marriage. A trust would keep the inheritance in a ‘bloodline’ relationship to your kids and grandkids.
Transfer-on-Death (TOD)
A transfer-on-death works similar to a beneficiary designation. Assets which hold title, such as real estate, securities (stocks and bonds), vehicles and boats are registered to transfer immediately on death. This is done on the deed or title of each asset.
Payable-On-Death (POD)
Similar to beneficiary designations and transfer-on-death, PODs transfer assets without court intervention. You can name a beneficiary on assets with an account number, such as bank accounts, life insurance policies and CDs.
Family Trusts
The single best way to avoid probate while also providing asset protection is by creating a family trust.
A trust is a private legal document that allows you or an appointed trustee to manage the assets that are placed inside the trust for the benefit of trust beneficiaries. When a trust is properly drafted and funded, assets go from the owner’s taxable estate to the trust. Thus, when the owner dies, the assets in the trust are not in the owner’s estate and not subject to probate.
In addition to avoiding probate, if you are worried about a child getting divorced, concerned for a child with spending issues, or simply want to provide asset protection for your family, a family trust will accomplish all of the above.
Working With A Probate Attorney
Don’t Let the Big Bad Wolf Blow Your Plan Down!
This brief article makes obvious the importance of avoiding probate. But what other plans should you be concerned about? Is your estate plan made out of straw (a basic will), wood (beneficiary designations), or brick (family trust)? For more information on how to avoid probate, contact Dan A. Baron or Baron Law LLC by phone at 216-573-3723, or by emailing dan@baronlawcleveland.com.
If you are an executor currently navigating probate, consider consulting an attorney before executing your duties. An experienced probate attorney can help you prepare documents, collect assets, review debts, transfer titles, and ultimately save you time and money.
This blog is for educational purposes only; it is not intended to provide legal advice. If you’re planning for your estate and want to speak with an attorney, call 216-573-3723.