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estate planning

QTIP Trusts – Estate Planning for Those With Children From a Prior Marriage.

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Cleveland, Ohio Estate Planning and Elder Law Attorney offers the following:

The main benefit of a Qualified Terminable Interest Property Trust is being able to control your estate after your gone.  In addition, there are several tax advantages for larger estates.

Each spouse can set up a QTIP trust, leaving assets to the other in trust.  When the first spouse dies, the survivor gets what is called a “life estate” in the assets that are left to the QTIP trust—that is, the survivor is entitled to any income the assets produce, and in the case of real estate, to its use. Only the surviving spouse can be named as the life beneficiary. The survivor does not, however, have full ownership of the trust assets and cannot sell them or give them away.

In order to qualify for the marital exemption, the spouse must receive all of the income from the trust and the Executor must make an election on the tax return.  QTIP’s are very similar to family trusts, or bypass trusts.  And in fact, many times you create a family trust in conjunction with a QTIP.  The difference is that QTIP’s are more restrictive and are useful for those who are in second marriages.

There may also be several tax advantages. Here’s an example:

  • Jim’s share of the marital estate is $12 million. He passes in 2016, leaving a spouse, Karen, and sons from a prior marriage. He had a revocable living trust, which becomes irrevocable upon his death.
  • Upon Jim’s death, his trust sub-divided into an “A” and a “B” trust. $5.43 million is diverted to his “B” trust. Karen is the beneficiary, with limited access.  Because this trust is under the federal estate tax limit, estate tax is $0.00.  Over the next 20 years, because of robust growth, the “B” trust is now $17 million.  Upon the Karen’s death, trust “B” passes to the son’s entirely estate tax free.
  • The remaining $6.57 million in assets are diverted to the “A” trust. Karen again has restricted access, but can use these funds for her health, maintenance and support. When Karen 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 goes to Jim’s sons.

There are many advantages to setting up a QTIP trust.  Every estate plan is unique and its important to contact an elder law and estate planning attorney who can analyze your estate.   Contact Cleveland, Ohio attorney Dan A. Baron at 216-276-4282 to learn more about QTIP or other trusts.  Baron Law is a Cleveland, Ohio law firm.

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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.

 

 

 

 

 

 

How Will Trump’s Presidency Affect Your Trust?

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How will Trump’s Presidency Affect Your Trust?

With the impending inauguration of Donald Trump as our nation’s president, we would all be wise to prepare for a more conservative economic landscape that will likely include the elimination of some gift and estate taxes, lower overall rates, and new deductions. Particularly, if Trump moves forward to repeal the estate tax, many questions surface around the tax consequences within family trusts.

Whether you currently have or are thinking of establishing a trust, here are some important considerations going into the next year with our new president.

Federal Estate Tax

Trusts are an important estate planning tool for avoiding probate, protecting assets, and Medicaid planning.  For people with larger estates, trusts are also an effective way to save money on taxes. For example, commonly used A – B and QTIP trusts allow you to divide your estate into several sub-trusts to avoid the federal estate tax of forty percent (40%). However, Trump’s proposed repeal of the current federal estate tax could eliminate this estate tax entirely.  Thus, notwithstanding the other benefits of a trust, the new proposal would limit the need for a trust. This could mean savings upwards of $268 billion over the next ten years, collectively, for those with larger estates.

Marital Exemption

It’s important to keep in mind that Trump has no interest in changing the unlimited marital exemption that is currently in place.  For example, let’s assume Henry and Wilma have an estate worth $10 million.  Henry dies leaving Wilma the entire estate.  Even before Trump’s plans are proposed, the entire $10 million would pass to Wilma, estate tax free.  In other words, Wilma would receive the entire amount and not have to pay a 40% tax. Wilma avoids paying any tax because our current laws allow for your entire estate to pass tax free to your spouse.

Advantages of a Trust

Less than five percent of Americans would be affected by Trump’s estate tax proposal.  However, there are numerous non-tax related benefits for having a trust as part of your estate plan.  The biggest advantage is that trusts allow your loved ones to avoid probate.  Under Ohio law, an estate caught up in the probate process will likely be trapped there for a minimum of six months, and ultimately could take years to administer.  A trust eliminates the need to go through the probate court and keeps your estate private.

Other Types of Trusts and their Advantages

There are many different types of trusts that can be beneficial under specific circumstances. For example, a charitable trust is a unique tool used to establish your legacy with a charity while saving on your income taxes. Charitable trusts can effectively remove you from a higher income tax bracket and provides income over your lifetime.  Revocable and irrevocable trusts are another form that might help provide protection against creditors, Medicaid, and law suits.  And finally, special needs trusts might help protect your special needs child or family member.

In sum, regardless of the changes implemented by our new administration, establishing a trust remains an effective way to save time, money, and to avoid prolonged probate headaches for your loved ones. Furthermore, not only does a trust help avoid the probate process, it also protects your assets against opportunistic creditors and other litigative perils.  Most importantly, a trust ensures the right people inherit your legacy, and that nothing can be claimed by the State.

Join us for this FREE workshop to learn more about the benefits of trusts and other asset protection tools.

Update: This workshop is no longer available; therefore we have removed the link to the event workshop. 06/2019

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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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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