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Difference Between a Trustee and Executor Within a Testamentary Trust

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Cleveland, Ohio Estate Planning Dan A. Baron Explains the Difference Between an Executor and Trustee:

Estate planning can be complicated and sometimes difficult to bear when charged with the responsibility as executor or trustee of an estate. If you have minor children, then you probably have set up some form of testamentary trust coupled with your will and power of attorney. Within these estate planning documents, there are designated executors and trustees that have been carefully selected to administer your estate after you pass. It’s important to talk with your executor and trustee and let them know their responsibilities after your’re gone. Below is a quick summary of the difference between executor and trustee of a testamentary trust.

The Executor’s responsibility is to liquidate or otherwise gather all estate assets, pay any outstanding bills and then transfer assets from the name of the decedent to the beneficiaries named in the Will (most often the decedent’s children). They also make any necessary filings with the court and attend any court hearings. Most Executor’s elect to use an attorney to help them with this so the process runs smoothly. Once all assets are in the name of the beneficiary, the Executor’s job is done. The complexity of the estate will determine how long the Executor is needed.

In comparison, a Trustee receives the assets from the Executor and then, with court approval, invests the trust assets in savings account, investment accounts, or whatever they deem appropriate. Most importantly, the Trustee manages the funds and makes distributions to the trust beneficiary (usually children) when needed (i.e. to pay school tuition, living expenses, doctor bills, etc.). Most clients set a maturity age of 25. When the children reach the age of 25, the trustee distributes the balance of the trust funds and that particular child’s trust is terminated. The Trustee will be required every two years to make reports to the court as to the value of the trust. As you can imagine, the length of time the Trustee will be needed will depend upon the age of the children.

If you would like to learn more about the responsibilities and an executor and trustee, or have questions, contact our office at 216-276-4282. You will speak directly with an Cleveland, Ohio estate planning attorney who can help you set up a trust, will, power of attorney, medicaid planning, and more. If you would like to attend one of our FREE seminars, please visit this link.

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Utilizing “QTIP” Trusts for Families in Second Marriages

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Utilizing “QTIP” Trusts for Families in Second Marriages

Estate planning in second marriages can be especially complicated when trying to secure the well-being of loved ones from a previous marriage. Much of the complexity arises from rights granted to a surviving spouse. In Ohio, spouses (male or female) are entitled to dower and elective share rights that often create tension between children from a prior marriage and your second marriage partner.

However, most of these uncomfortable tensions can be avoided through careful estate planning, which often includes a QTIP (or, Qualified Terminable Interest Property Trust). Such an arrangement is especially effective in providing for children from a previous marriage.

Consider the following example:

Let’s say Michael dies while married to his second wife, Kathy. Michael loved Kathy, but out of concern that she might not take the well-being of his children from a previous marriage into account, he established a will that left most of his estate (worth about $12 million including a marital home) to his children. He did, however, bequeath his $100,000.00 IRA entirely to Kathy.

And here is where things become complicated…

Unfortunately, Kathy then dies a week later intestate (without a will), so Michael’s hard-won IRA is automatically transferred to Kathy’s closest relative – her idiot brother, Frank. Because Kathy was entitled to the marital home through Ohio’s spousal rights, the marital home also transfers to Frank. The kids end up with hardly anything. Had Michael properly planned, he could have protected his children’s inheritance, provided income for his wife, and saved considerably on taxes.

QTIP Trusts

In the example above, Michael could have provided for both his children and Kathy had he created a QTIP trust or proper will.  Qualified Terminable Interest Property Trusts are commonly referred to as a “Family Trust”, or “Marital Trust.”  A QTIP Trust subdivides into (A) marital and (B) family Trusts: the B Trust preserves the children’s interest by restricting the spouse’s access.  The remaining spouse receives income and a life estate that satisfies Ohio’s spousal rights.   After the second spouse dies, the children receive the remaining assets in the B Trust.

Consider another version of the above example:

Instead of ignoring Ohio’s marital election, Michael plans ahead and created a revocable living trust with a QTIP election.   Upon Michael’s death, his trust is sub-divided into an “A” and a “B” trust.  Here, $5.43 million of his estate is diverted to his B trust.  Kathy is the beneficiary of this B trust, with limited access and receives income from the trust.   Because this trust is under the federal estate tax limit, Kathy’s estate tax is $0.00.  Over the next 20 years, because of robust growth, the “B” trust is now $17 million.  Upon Kathy’s death, trust “B” passes to the Michael’s sons entirely estate tax free.

The remaining $6.57 million in assets are diverted to the “A” trust.  Kathy again has restricted access, but can use these funds for her health, maintenance and support.  When Kathy has expenses, she uses the “A” trust and saves the “B” trust only for dire necessities.  Upon her death, the “A” trust has been reduced (or eliminated) and the tax is minimal, if there is any at all.  The remaining balance of the “A” trust passes to Michael’s sons.

QTIP trusts are very popular for people in second marriages.  As you can see, the trust provides income for the remaining spouse, yet it preserves your children’s assets.

Prenuptial Agreements

A QTIP trust may not fit under certain circumstances.  In cases where there is a disproportionate estate among spouses, a prenuptial agreement may be considered.  Certain statutory rights of a decedent’s surviving spouse may be waived by a valid prenuptial agreement.  In other words, people may contract for anything in life.  This includes signing away your inheritance.

It’s important to remember that a prenuptial agreement may often bring tension among couples.  Also, although Ohio recognizes prenuptial agreements to be valid, the state also does not allow you disinherit your spouse.   In that regard, oftentimes antenuptial agreements are coupled with estate plans to provide some form of financial security for the surviving spouse.

Prenuptial agreements are valid and enforceable (1) if they have been entered into freely without fraud, duress, coercion, or overreaching; (2) if there was full disclosure, or full knowledge and understanding of the nature, value and extent of the prospective spouse’s property; and (3) if the terms do not promote or encourage divorce or profiteering by divorce.

Prenuptial agreement agreements are a great tool when coupled with a QTIP trust.  When combined together, the surviving spouse is provided income and preserved an estate for his or her lifetime.  In addition, the children’s inheritance is given extra protection in case of divorce.

Summary

QTIP trusts and prenuptial agreements are two of many ways to provide security for your spouse and children.   Through proper estate planning, you can provide a steady stream of income for your spouse and preserve your children’s inheritance.  It’s important to consider all options when preparing your estate plan.   For more information and or questions, contact attorney Dan Baron at Baron Law LLC – 216-573-3723.

 

 

 

 

 

 

Is Annuity-Based Long-Term Care Right for You?

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Annuity-Based Long-Term Care and the Pension Protection Act of 2006

Medicaid and long-term care are unquestionably a hot topic.  Estate planning and Medicaid planning attorneys have long been waiting for an opportunity that would allow those wishing to enroll in Medicaid to shelter all or a portion of their savings – legally!  Cleveland, Ohio estate planning attorney Dan Baron offers the following information on long-term care and how the Pension Protection Act of 2006 has created one of these sought after opportunities.

In 2006, the President signed into law The Pension Protection Act of 2006 (the “Act”).  The act changed certain tax laws and allows for those owning annuity contracts to take advantage of certain tax savings.  In sum, the Act allows the cash value of annuity contracts to be used to pay premiums on long-term care contracts.  The payment of premiums in this way will reduce the cost basis of the annuity contract.  In addition, the Act allow annuity contracts without long-term care riders to be exchanged for contracts with such a rider in a tax-free transfer under Section 1035 of the Internal Revenue Code of 1986, as amended (IRC).

Here’s an example of how the Act’s changes might benefit someone considering long-term care insurance.   Let’s say that Kathy, age 70, lives in Cleveland.  Her children live out of state but are concerned with a recent diagnosis of diabetes, along with a history of heart disease.   Because of these illnesses, she was not a good candidate for traditional long-term care insurance.  However, by taking advantage of an annuity based long-term care strategy that takes advantage of the Pension Protection Act, Kathy could likely be insured.

Look at the illustration below.  Kathy can take her $140,000 fixed annuity with a cost basis of only $40,000 (i.e. the amount she actually deposited) and using the tax-free exchange from his existing fixed annuity to a new annuity that complied with the Act’s rules, Kathy’s $140,000 fixed annuity could continue to earn interest.  However, if she needed long-term care to pay for home care, assisted living, or skilled care, she now had a long-term care pool of money equal to $420,000.

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  • Kathy retains her $140,000 in cash value plus an additional $280,000 for a total of $420,000 for long-term care.
  • Her benefits may be used for home care, assisted living, and skilled care.
  • She pays no annual premiums
  • As her annuity grows, so does her LTC. (assuming she does not use her LTC benefits)

There are many annuity based long-term care packages available.  It’s best to consult with an attorney or Medicaid specialist who can help you choose the right plan.  For more information, or to speak with Cleveland estate planning and Medicaid planning attorney Dan Baron, contact our office at Baron Law LLC.  Baron Law LLC is a Cleveland, Ohio law firm dedicated to helping those in need of elder care, estate planning, and Medicaid planning.  Contact attorney Dan Baron today at 216-276-4282.

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Client Review
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Daniel Baron reviewed our Trust, Wills and HPOA. He provided good feedback as to what needed updating and any necessary additions to the documents. We didn’t have a FPOA which thanks to him we now have. He was able answer any questions we had and proved to be very flexible to accommodate our schedules when it came time to meet. I would recommend him to anyone looking to do Estate Planning

– Tom

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Changes in Ohio Power of Attorney Laws

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Changes in Ohio Power of Attorney Laws

If you’re an Ohio resident concerned with the estate plan or medical care of a loved one, you should be familiar with Ohio’s laws regarding power of attorney.  Cleveland, Ohio estate planning attorney Dan A. Baron offers the following:

What is a financial power of attorney?

A financial power of attorney (POA) is a legal document an individual (the “principal”) can use to appoint someone (the “agent”) to act on his or her behalf.  This authority can be used for financial, business, and health matters.   Most often, this authority is used when an individual becomes unable to handle his or her own affairs.  However, a POA can be used for other matters such as taking care of business matters.  A principal can name one agent, or two or more co-agents, each of whom can act alone, unless the POA states otherwise.  The POA might allow for each agent to act independently, or as a group.

Changes in Ohio law

Effective March 22, 2012, Ohio adopted new laws regarding power of attorneys.   Ohio’s Uniform Power of Attorney Act, or UPOAA, focuses on preventing financial elder abuse.  The law now includes a statutory form with language designed to help prevent agents from abusing their power.  Put simply, the law now demands POA’s to be more specific.  For example, third parties such as a financial institution are not required to honor a general POA.  Now, the law asks that a POA includes specifically which types of assets and accounts the agent is allowed to control.

Ohio provides a statutory form that includes language designed to help prevent agents from abusing their power.  This form can be found in Ohio Revised Code 1337.60.   The form lists actions that an agent may or may not take and includes a section called “Important Information for Agent.”   The principal can simply check the box of the powers he or she wishes to designate.   It’s important to consult with an attorney when implementing one of these forms into your estate plan.

A power of attorney created before March 22, 2012 will still be valid; however, as an attorney to review it in light of the current law and consider using the 2012 statutory POA form.   In sum, UPOAA prohibits agents from performing certain acts unless the POA specifically authorizes them.  Because financial POA documents give significant powers to another person, they should be granted only after careful consideration.

To learn more about drafting a power of attorney, contact the law office of Baron Law LLC.  You will speak directly with Cleveland, Ohio attorney, Dan Baron.  Call today at 216-573-3723 to learn more about how Baron Law can help create your estate plan and power of attorney.

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Springing and Durable Power of Attorney – What’s the Difference?

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Springing and Durable Power of Attorney – What’s the Difference?

When planning for retirement and your estate plan, it’s important to understand how your power of attorney works.  Generally, there are two kinds: springing and durable power of attorney.  A springing power of attorney takes affect if you become incapacitated.  In comparison, a durable power of attorney becomes effective as soon as you sign the document, and continues to be effective if you are incapacitated.

Having control with a power of attorney is a big deal.  The person holding this power may have the ability to control your financial assets, medical decision, and more.  For example, a giving someone financial power of attorney powers gives them the right to make financial decisions on your behalf.  This person might trade stocks, cash in annuities, or transfer assets.  If this person has durable power of attorney, they can make these decisions even if you are not incapacitated.   State laws differ on the particulars of power of attorney, and some financial institutions may require their own versions.

With a springing power of attorney, it’s important to clarify exactly what triggers someone taking over your abilities to make decisions.  Typically, it’s when the principal becomes disabled or mentally incompetent.  However, it could be used in a variety of situations.  For example, someone in the military might create a springing power of attorney form to be prepared for the possibility of being deployed overseas or disabled, which would give a relative powers to handle financial affairs in these specific situations only.

Who determines when someone is mentally incompetent or incapacitated?  This question varies state to state.  However, in general there is usually a formal procedure that your attorney can create.  It’s smart to note in your legal document exactly what the principal considers “incapacitated” to mean.  Often times, people who create a power of attorney form include language that requires a doctor’s certification or mental incompetence or incapacitation.

For more information regarding power of attorney and other estate planning methods, contact Cleveland estate planning attorney Dan Baron at Baron Law LLC.  Baron Law is a Cleveland, Ohio area law firm practicing in estate planning, business, and family law.  Contact Dan Baron today for a free consultation at 216-573-3723.

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Living Trusts vs. Testamentary Trust

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Living Trusts vs. Testamentary Trusts

Cleveland, Ohio Estate Planning Attorney Dan Baron:

If you’re planning for your Ohio estate plan, then you’re probably lost among the many estate planning terminologies. However, there are numerous estate planning methods to provide safety and security for your family.  There are many ways to achieve this including living trusts, testamentary trusts, wills, legacy trusts, power of attorney’s and more.    If you have minor children (under the age of 18) it is often suggested to implement a testamentary trust into your last will and testament.  How is this different from a living trust you ask?  Here ‘s some additional insight…

First, if you’re trying to decide between a trust or a will, please see this link. However, if you have children, a testamentary trust is often recommended for your estate planning needs.  A testamentary trust is created in your last will and testament.  Thus, unlike a living trust, a testamentary trust will not take effect until you die.  The terms of the trust are amendable and revocable – they can be changed at any time.   It is highly recommended to include a testamentary trust in your will for parents who are at risk of dying at the same time.

Example: Husband and Wife have $1,000,000 in assets including a house, stock, and automobiles.  Both Husband and Wife die in a car accident and leave behind three children ages 4,6, and 11.  Because their children have not reached the age of 18, they may not have a claim to the money until they reach the age of maturity – age 18.

A testamentary trust can help avoid the scenario above.  Through the trust, you may set parameters on your estate.  For example, you might include terms that allow for $1,000 a week to be given to your children in the event both parents pass.  Or, you might hold off on giving your children any money until they reach the age of 21, 25, attain a degree, get married, etc.  Having a testamentary trust allows you to control your estate even after your death.  Note however that if only one parent dies in the example above, the testamentary trust does not take effect.  Instead, most often times the dying spouse leaves all of the estate to their spouse.  In that instance, the remaining spouse would determine how and when the money is distributed among the children.  Side note – you cannot disinherit your spouse…

Contrary to a testamentary trust, a living trust – or inter-vivos trust – takes effect at its creation. These trusts can be either revocable or irrevocable.   Inter-vivos is Latin for “among the living persons.”  So, if I were to decide to give you my boat, then that would be an inter-vivos transfer.  Typically, a living trust must contain a trustee (a person responsible for carrying out the wishes of the creator), and a beneficiary (the persons receiving the benefit of the trust).  In Ohio, you as the creator of the trust may not be the beneficiary of the trust unless you elect to set up an Ohio legacy trust.  Put simply, a living trust is one that is created during your lifetime.   Living trusts are often recommended for those who wish to avoid probate or want to keep their assets private.

For more information, contact Cleveland, Ohio estate planning attorney Dan Baron at Baron Law LLC.  Baron Law is a Cleveland, Ohio are law firm practicing in the areas of estate planning, divorce, business law, and securities litigation.  Contact an trust attorney at Baron Law today at 216-573-3723.  You will speak directly with an attorney who can answer all your trust and estate planning questions.

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What is a Charitable Remainder Trust?

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Unique Estate Planning Methods to Secure a Lifetime of Income, Save Taxes, & Benefit the Community

Most people planning for their retirement have a misconception that charitable giving is only for the wealthy.  However, there are several estate planning tools that can benefit your favorite charity while also earning you steady stream of income.  One of these tools is known as a charitable trust remainder, or “CRT.”  A CRT lets you convert a highly appreciated asset like stock or real estate into a lifetime of income. It reduces your income taxes now and may also reduce your estate taxes when you die. When the assets are sold, creators of the CRT escape the ever-daunting capital gains tax.  But best of all, a charitable remainder trust allows you help one or more of your favorite charities.

How does a CRT work?

Creators of a charitable remainder trust transfer an appreciated asset into an irrevocable trust.  It’s important to have assets that appreciate in value in order for a CRT to work effectively.  Assets that have little or no appreciation may be better off going into a charitable lead trust or charitable remainder annuity trust.  In any event, when you transfer an appreciating asset into the charitable remainder trust, it removes the asset from your estate.  Thus, no estate taxes will be due on it when you die.  Most importantly, you also receive an immediate charitable income tax deduction.

After the trust is created, the Trustee sells the asset at full market value.  Again, after the sale you will not pay capital gains tax.  The money is then reinvested and the proceeds from the reinvestment go to you for the rest of your life.  When you die, the remaining trust assets go to the charity(ies) you have chosen.  Hence the name charitable remainder trust.

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Example Using a Charitable Remainder Trust

Let’s say for example that Gail Giver (age 63) purchased some stock for $100,000.  It is now worth $500,000.  She would like to sell it and generate some retirement income.  If she transfers the stock to a CRT, Gail can take an immediate charitable income tax deduction of $90,357. Because she is in a 35% tax bracket, this will reduce their current federal income taxes by $31,625.

The trust is exempt from capital gains tax so when the trustee sells the stock for the full $500,000, all of the money is available for reinvestment.  Assume that the assets will accumulate 5% of annual growth and Gail is expected to live for another 26 years.   Using this information, that produces $25,000 in annual income which, before taxes, will total $650,000 over Gail’s lifetime. And because the assets are in an irrevocable trust, they are protected from creditors.

Example Not Using Charitable Remainder Trust

What would happen if Gail sold the assets and reinvested them herself? If Gail sells the same $500,000 in stock, she would have a gain of $400,000 (current value less cost) and would have to pay $60,000 in federal capital gains tax (15% of $400,000).  That would leave her with $440,000.

If she re-invested and earned a 5% return, that produces $22,000 in annual income.  Using the same life expectancy and 5% annual income as mentioned before, this would give her a total lifetime income (before taxes) of $572,000.   However, because Gail Giver still owns the assets in her name, there is no protection from creditors.  Looking back, without the use of a CRT, she loses $78,000 in income than if she had created a charitable remainder trust.

Comparison of Income after Sale

Without CRT       With CRT

Current Value of Stock                  $ 500,000             $ 500,000

Capital Gains Tax*                           – 60,000                0

Balance To Re-Invest                      $ 440,000             $ 500,000

5% Annual Income                          $ 22,000                $ 25,000

Total Lifetime Income                    $ 572,000             $ 650,000

Tax Deduction Benefit**              $ 0                          $ 31,625

*15% federal capital gains tax only.

(State capital gains tax may also apply.)

**$90,357 charitable income tax deduction times 35% income tax rate.

Are there other options? Of course!  Another charitable estate planning tool is called the charitable lead trust, or CLT.  A CLT is the reverse of a CRT.  This revocable trust provides income to a charity for a set number of years, after which the remainder passes to the donor’s heirs or beneficiaries.  The CLT is a good choice for those who don’t need a lifetime of income from certain assets.  The trust is often structured to get an income tax deduction equal to the fair market value of the property transferred, with the remaining interest valued at zero to eliminate a taxable gift.  Contact an estate planning attorney to learn more about charitable lead trusts.

Finally there is also a trust called the pooled income fund (PIF).  Pooled income funds are trusts maintained by public charities. The trust is set up by donors who contribute to the fund.  Just like a CRT, the donor receives income during his or her lifetime.  After the donor’s death, control over the funds goes to the charity. The biggest benefit to a PIF is that contributions qualify for charitable income deductions as well as gift and estate tax deductions.  Talk with an estate planning attorney to learn more.

As you can see, there are a number of different ways to give to your favorite charity while also planning for a secure retirement. This blog is meant for information purposes only and should not be construed as legal advice.  Contact an estate planning attorney at Baron Law, LLC for a free consultation.  Baron Law, LLC is your Cleveland, Ohio estate planning attorney. Contact Cleveland, Ohio attorney Dan Baron today at 216-573-3723

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Will Vs. Trust: Which Do I Need?

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Learn the main differences between wills and trusts and how an estate planning attorney can help you select the right type of each that will work together to accomplish your goals.

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