House in Trust with Mortgage

Can I Put My House In A Trust If It Has A Mortgage?

More and more people are becoming ever more concerned with either protecting their assets, maintaining eligibility for Medicaid, or leaving as much as possible to children and future grandkids. As such, more and more people are realizing the remarkable utility of trusts within their estate planning. One’s residence often represents the most significant asset an individual or couple possesses, and for many, financial assistance is needed to purchase it, that is mortgages. A common question presented to Cleveland estate planning attorneys is, can protect my house with a trust if it has a mortgage? As with any legal question, the answer is not black and white. 

  • What is trust? 

To understand how the what, when, and how of funding your trust with a mortgaged house, we must start with the basics, what is a trust? A trust, to put it simply, is a private agreement that allows a third party, a trustee, to manage the assets that are placed inside the trust for the benefit of trust beneficiaries. There are innumerable types of trusts, each with own its respective legal conventions and purposes. A critical aspect of trusts is that the assets housed within them usually aren’t counted as a part of the trust creator’s taxable estate. Thus, when the owner of the trust creates the trust and properly funds it, the assets go from the owner’s taxable estate to the trust. Afterwards, when the owner dies, the assets are not in the owner’s estate and subject to probate, and if the trust is drafted properly, are further ignored for the purposes of Medicaid eligibility. Further, trust assets pass via the beneficiary designations set down when the trust was created. These conveyances via beneficiary designation are much simpler, quicker, and cost-effective then going through probate and can be halted or expedited when circumstantially advantageous depending on the terms of the trust.   

  • When can a mortgage be called?  

The next basic to understand is when can your bank come after your house, i.e. a bank calling on a mortgage. A mortgage being called is when a financial institution/holder of the mortgage demands that the full amount of a mortgage be paid. When this can occur is conditional and which events will trigger are often denoted within the mountain of legal documents that physically make up your mortgage. In the context of funding a trust with a mortgaged house, your “due-on-sale clause” is what your estate planning attorney will be concerned about.    

A “due-on-sale clause” is a contract provision which authorizes a lender (your bank), at its discretion, to collect on the loan, i.e. declare it immediately due and payable if all or any part of the property, or an interest therein, securing the real property loan is sold or transferred without the lender’s prior written consent. This is fair because banks depend on mortgages getting paid off, or at least foreclosed, and the mortgage contract is between you and the bank, not the potential buyers and the bank.  

  • How can a mortgaged house in placed in trust without having the mortgage called?  

Any “due-on-sale clause” facially seems to be a death nail to any thought of funding trust with a mortgaged house, I mean, not many people have thousands, if not hundreds of thousands, of dollars in liquid assets to immediately pay off a house. This is where the Garn-St. Germain Depository Institutions Act of 1982 comes into play and your estate planning attorney earns his money. The relevant part of the Garn-St. Germain Act in the context is 12 U.S. Code § 1701j–3, subsection d, as follows:  

(d) Exemption of specified transfers or dispositions.  With respect to a real property loan secured by a lien on residential real property containing less than five dwelling units, including a lien on the stock allocated to a dwelling unit in a cooperative housing corporation, or on a residential manufactured home, a lender may not exercise its option pursuant to a due-on-sale clause upon— […] 

(8) a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property; … 

So, to bring everything back down to Earth, this subsection possesses the two “prongs” of the Garn-St. Germain test, occupancy and beneficiary status for the trust makers for the mortgaged house. When there is a mortgage, a trust must be properly drafted to include specified reserved occupancy language in the trust to satisfy the occupancy prong of Garn-St. Germain. Simply, the trust makers, you, must specifically reserve the right to live in the house. Further, in some way, the trust makers, must be a trust beneficiary. The beneficiary status prong usually isn’t an issue with self-settled trusts given their nature, i.e. trusts made with the intent to provide some tangible benefit to the trust makers. An argument can be made that the reservation of occupancy rights inherently makes the settlors beneficiaries, however, more cautious estate planning attorneys further make trust makers income beneficiaries as well.  

Facially, drafting a trust to satisfy the prongs of the Garn-St. Germain test appears straight-forward, however, care must be taken when making your trust. The interplay between the actual language of a trust can have profound effects on taxation, ownership, inheritance, and eligibility for state and federal assistance programs whose admittance guidelines are based on income and asset thresholds.    

Now it is important to note that the issue of a mortgage is an issue apart from Medicaid eligibility, though often the two are interrelated. Addressing both concerns requires the same solution, precise drafting of trust language that is statutorily compliant.  Under the Garn-St. Germain Depository Institutions Act of 1982, placing the home in the MAPT does not trigger the “due on sale clause” contained in most mortgages provided certain steps are taken and legal standards are satisfied. Thus, with a knowledgeable estate planning attorney, you can remain Medicaid eligible and avoid Medicaid Estate Recovery, while still living in your home and paying the mortgage as you always have.  

Helping You And Your Loved Ones Plan For the Future

Daniel A Baron Estate Planning lawyer

What Is A Revocable Trust?

Cleveland, Ohio estate planning lawyer, Daniel A. Baron, offers the following information as to whether or not you should have a Revocable Trust as part of your comprehensive estate planning.

When you decide it is time to do your estate planning, one decision to make is: Do I Need A Trust? If the answer is yes, then the next question is whether or not a Revocable or Irrevocable Trust is the right tool to use in your Comprehensive Estate Planning.  Although both of these are created to avoid probate, there are differences between the two.

A Revocable Trust means you can change things at any time such as;

  • Beneficiaries
  • Add items of value to the trust or remove items from the trust and so on.
  • Changing Trustees
  • Change what funds the trust
  • Eliminate the trust
  • Change amounts to be funded
  • Add Trustees

With a Revocable Trust – the Grantor or Settlor creates the trust AND can also act as the Trustee AND can be named as the beneficiary.

An Irrevocable Trust means no changes can be made (with a few exceptions) once the trust is created.

An Irrevocable Trust has three parties to the Trust; the Grantor or Settlor, the Trustee(s), and the beneficiary or beneficiaries.

  1. The Grantor or Settlor is the person who funds or establishes the Trust
  2. The Trustee is the person who oversees the trust, and
  3. The beneficiary reaps the rewards of the income generated by the investments of the trust. Although the Grantor / Settlor and the beneficiary can be the same, they cannot act as the Trustee

With a Revocable Trust you must remember if you are looking to keep investments, bank accounts, property, and any other such asset as part of the trust, the accounts must be set up in the trusts name and property must be titled to the trust.  Failure to do this while you are still living means that the assets still in your personal name at the time of your death will be subject to probate and a larger amount of estate taxes.

If you are having difficulty determining whether your situation calls for a Revocable or Irrevocable Trust, seek the advice of an experienced Estate Planning Lawyer. For more information on reviewing your goals for your Comprehensive Estate Planning, contact Daniel A. Baron of Baron Law today at 216-573-3723.

Helping You and Your Loved Ones Plan for the Future

House in Trust with Mortgage

Terminating Irrevocable Trusts I: Changing What Can’t Be Changed

Baron Law LLC, Cleveland, Ohio, offers information for you to reflect upon while you are setting out looking for an estate planning attorney to help protect as much of your assets as you can.  For more comprehensive information contact Baron Law Cleveland to draft your comprehensive estate plan to endeavor to keep more of your assets for your heirs and not hand them over to the government by way of taxes.

Irrevocable trusts are trusts in which the grantor, i.e. the trust maker, relinquishes all control and ownership over the trust and the assets used to fund the trust. Thus, in theory, the trust can only be changed or canceled per the ways denoted by trusts terms and usually only then with the blessing of the trustee and/or trust beneficiaries.  

So, why would anyone give up control to another and chose to use irrevocable trusts? Conversely with living trusts, grantors keep “the keys” to the trust while with irrevocable trusts “the keys” are given up. In the eyes of the law, generally, what is inside an irrevocable trust no longer belongs to the grantor. Thus, grantors aren’t taxed on what’s inside these trusts and those with claims against the grantor can’t extend potential recovery to these assets as well. This is all well and good, but with everything in life, situations change. A previous estate plan, and accompanying established trusts, sometimes no longer serve the best interest of the grantor and their family. With current sky-high estate tax exemptions, the normal administrative costs associated with trust management, and, perhaps, an adjusting need for liquidity or differing type of asset control, some individuals are evaluating whether it’s worth keeping an irrevocable trust. If this is you, don’t despair. Despite what their name suggests, irrevocable, there are ways to terminate an irrevocable trust. Before, however, anything drastic like trust termination occurs, always consult an experienced Cleveland estate planning attorney to figure out all your options and plot the best course of action.  

Now if after consultation with professionals regarding your estate plan reveals that your irrevocable trust no longer serves your best interests, termination is an option. There are several methods for terminating trusts in Ohio, termination by court order, termination via private agreement, and termination by discretionary distribution. This blog concerns primarily the first method, court ordered trust termination.

   1.Court-Ordered Trust Termination  

In 2007 Ohio passed the Ohio Trust Code which governs the creation, management, and termination of trusts. Chapter 5804 primarily is the vehicle courts use to terminate trusts depending on the circumstances. Now, the most common circumstances in which this method of termination is used is either via independent motion on a probate court to terminate a trust for justifiable cause or as a recovery prayer in a civil suit that someway touches on a trust significantly enough to justify termination. Again, consult an experienced Ohio estate planning attorney, they will know when, how, and where to commence trust termination proceedings.    

       A.Trust Termination by Revocation or by Terms 

Per O.R.C. § 5804.10, a trust may be terminated to the extent that a court finds that: 

  1. It is revoked or expired pursuant to its terms; 
  2. There is no remaining purpose of the trust to be achieved; 
  3. The purpose of the trust has become unlawful or impossible. 

This particular code section denotes the authority/power of the court to terminate a trust. The respective standing, or ability, for a grantor, trustee, and trust beneficiary to petition to terminate a trust are also denoted within the Ohio Trust Code. Note, however, that within R.C. § 5804.10 no mention of settlor, trustee, or beneficiary consent is denoted. This means that if a court thinks termination of a trust is appropriate, they can do so. Now whether or not a particular probate court will take the feelings and considerations of the settlor, trustee, or beneficiaries into account when deciding to terminate a trust is dependent on the judge and jurisdiction. Again, you never can guarantee a particular outcome when you resort to court intervention. That is why you should always consult with an estate planning attorney before asking a court to do anything with your trust.        

        B. Termination of Noncharitable Irrevocable Trust 

Per O.R.C. § 5804.11, an irrevocable trust can be terminated by agreement, authorized by a court, with the consent of the settlor and all of the beneficiaries. Note, however, the trustee’s consent is not required. Though technically a court must approve of termination via § 5804.11, if all valid consent is obtained from the settlor and beneficiaries and all are competent to give such consent, a probate court will almost always approve of the termination and issue the order even if such termination is inconsistent with the terms of the trust and the trust’s material purposes.  

       C. Court Intervention Due to Changing Circumstances  

 Per O.R.C. § 5804.12, a probate court may terminate a trust due to a change in circumstances that has occurred since its creation. Per this section of the Ohio Trust Code:   

(A) The court may modify the terms of a trust or terminate the trust if because of circumstances not anticipated by the settlor modification or termination will further the purposes of the trust. To the extent practicable, the court shall make the modification in accordance with the settlor’s probable intention. 

(B) The court may modify the administrative terms of a trust if continuation of the trust on its existing terms would be impracticable or impair the trust’s administration. 

Further, upon termination of trust via this section, the trustee must distribute the trust property in a manner consistent with the purposes of the trust. O.R.C. § 5804.12 (C). An action under this section to terminate a trust may only be brought by a trustee or beneficiary and a court must act as close as possible to the probable wishes of the settlor but only to the extent practicable in the circumstances. Further, a termination under this section must be due to circumstances not anticipated by the settlor and such termination must be in accordance with the trust purposes. As such, though circumstances may allow for termination of a trust, interested parties just being disgruntled or dissatisfied with a trust’s management is not sufficient to warrant termination.    

Trusts are a useful estate planning tool to ensure increased permanence of your lifetime earnings and instructions down through the generations. Like all things, however, nothing is unalterable. Being aware of the potential reasons and methods for revoking irrevocable trusts can allow a settlor to dictate more effective terms but also allow avenues for change if completely unexpected or frustrating events occur. An experienced Cleveland estate planning attorney is invaluable in creating, managing, and, if the time comes, terminating your trusts.     

 Helping You And Your Loved Ones Plan For The Future

About the Author: 

Mike is a contracted attorney at Baron Law LLC who specializes in civil litigation, estate planning, and probate law. He is a member of the Westshore Bar Association, the Ohio State Bar Association, the Cleveland Metropolitan Bar Association, and the Federal Bar Association for the Northern District of Ohio. He can be reached at mike@baronlawcleveland.com.   

Disclaimer: 

The information contained herein is general in nature, is provided for informational and educational purposes only, and should not be construed as legal or tax advice. The author nor Baron Law LLC cannot and does not guarantee that such information is accurate, complete, or timely. Laws of a particular state or laws that may be applicable in a given situation may impact the applicability, accuracy, or completeness of the preceding information. Further, federal and state laws and regulations are complex and subject to change. Changes in such laws often have material impact on estate planning and tax forecasts. As such, the author and Baron Law LLC make no warranties regarding the herein information or any results arising from its use. Furthermore, the author and Baron Law LLC disclaim any liability arising out of your use of, or any financial position taken in reliance on, such information. As always consult an attorney regarding your specific legal or tax situation.

A Trust Unfunded Is Just Paper And Ink, The Importance Of Funding Your Trust,

Baron Law LLC, Cleveland, Ohio, offers information for you to reflect upon while you are setting out looking for an estate planning attorney to help protect as much of your assets as you can.  For more comprehensive information contact Baron Law Cleveland to draft your comprehensive estate plan to endeavor to keep more of your […]

I’ve Changed My Mind, How Do I Modify Or Revoke My Trust?

Baron Law LLC, Cleveland, Ohio, offers information for you to reflect upon while you are setting out looking for an estate planning attorney to help protect as much of your assets as you can.  For more comprehensive information contact Baron Law Cleveland to draft your comprehensive estate plan to endeavor to keep more of your assets for your heirs and not hand them over to the government by way of taxes.

People change their minds. Circumstances change, family dynamics shift, realities, needs, and desires are fluid. Estate plans reflect the lives of their owners at the moment of their creation. As such, the want, and sometimes need, to adjust and change an estate plan is common. And since a major part of many people’s estate plans are one or more trusts, it is important to understand when, how, and if you can change the terms your trusts or eliminate them outright.

Modifying or revoking an existent trust is not a straight forward prospect. Trusts fundamentally are legal agreements and thus, are bound by Ohio law and procedure. Trusts bring with them a multitude of benefits, from tax incentives, asset protection, and privacy. The other side of trust use is the conformity with the law and strict adherence to, sometimes burdensome, procedure. The law must ensure any changes to trust terms are legitimate and do not improperly harm the settlor, named beneficiaries, or trust assets. What can or cannot be changed within a trust and who can or cannot effectuate that change largely depends on the type of trust and the circumstances of its creation. The modification or revocation of an existing trust is a nuanced area of law, as such, an experienced Ohio estate planning attorney should be retained at the earliest possible opportunity.

The first question to ask regarding changing a trust is, what type of trust do you have? Though there exist numerous types of trusts out there, the focus here is between revocable and irrevocable trusts. Generally, modification or revocation by a settlor is not available for irrevocable trusts. Hence, the significance of the irrevocable nature of irrevocable trusts. (Though recent changes in Ohio law made it possible to overcome the difficulties to revoke or amend an irrevocable trust, that is a topic for a later discussion.) So, amending or revoking a trust primarily concerns revocable trusts. The next question is how many settlors, i.e. trust makers, are there?

Only one Trust Maker

If there is only one trust maker for a revocable trust, revoking or amending a trust is straightforward. Either follow the instructions in the trust documents or use a method that is highly likely to follow the intent of the individual who made the trust, curiously in this instance, you. Ohio law provides:

The settlor may revoke or amend a revocable trust by substantial compliance with a method provided in the terms of the trust or, if the terms of the trust do not provide a method, by any method manifesting clear and convincing evidence of the settlor’s intent… O.R.C. § 5806.02 (C).

Clear and convincing evidence is a legal term of art that means, in this context, the method of revocation or amendment is highly and substantially more probable than not to be true to the intent of the trust settlor. Obviously, this is a subjective standard so, in most cases, if you give a good faith effort and act honestly with no nefarious purpose, you should be alright. Even more obvious is that this situation can be avoided, and no subjective standard need be considered, if the terms of your trust are competently and comprehensively drafted, properly addressing the possibility of revocation and/or amendment within the terms of the trust. This is why an experience Cleveland estate planning attorney is critical, you really can’t put a price on good legal drafting.

Two or More Trust Makers

If there are two or more settlors, it gets more complicated because each party has an equal say in modifying or amending the trust. Thus, the rules attempt to strike a balance between the party who wants a change and the party who doesn’t, focusing primarily on the type(s) of trust property effected by the potential change. Ohio law provides:

If a revocable trust is created or funded by more than one settlor, all of the following apply:

To the extent the trust consists of community property, either spouse acting alone may revoke the trust, but the trust may be amended only by joint action of both spouses.

To the extent the trust consists of property other than community property, each settlor may revoke or amend the trust with regard to the portion of the trust property attributable to that settlor’s contribution.

Upon the revocation or amendment of the trust by less than all of the settlors, the trustee shall promptly notify the other settlors of the revocation or amendment.

Since Ohio is not a community property state, the rule regarding community property is really only relevant in situations where Ohio couples or joint owners possess property in foreign states which follow community property law, such as Wisconsin or California. For most, the non-community property rule applies most of the time. Here, trust amendment or revocation power is tied to original trust property ownership. This is why accurate and timely accounting of trust funding is paramount, so you can track who put what in and have evidence to back it up. Again, this is why an experienced Ohio estate planning attorney is important, he’ll remind you to keep an accounting of your trust funding to provide for this possibility. Granted, this rule does not expressly provide how to account for jointly owned property put in trust. Ohio law does address this possibility, however, it won’t be examined at this time. Ask your estate planning attorney if you’re looking to amend or revoke a joint trust which was funded with jointly owned property.

Ohio law also allows your power of attorney and guardian of the estate to revoke or amend a trust, however, only to the extent expressly authorized by both the terms of the trust and the authority given to your agent. Make sure the terms of your power of attorney and/or guardianship provide for this contingency. Changing a trust in anyway is a serious action that deserve serious consideration of its consequences. Consult a local estate planning attorney to make sure this is the best course of action and any hidden pitfalls are revealed before acting.

Helping You And Your Loved Ones Plan For The Future

 

About the author: Mike E. Benjamin, Esq.

Mike is a contracted attorney at Baron Law LLC who specializes in civil litigation, estate planning, and probate law. He is a member of the Westshore Bar Association, the Ohio State Bar Association, the Cleveland Metropolitan Bar Association, and the Federal Bar Association for the Northern District of Ohio. He can be reached at mike@baronlawcleveland.com.

Disclaimer:

The information contained herein is general in nature, is provided for informational and educational purposes only, and should not be construed as legal or tax advice. The author nor Baron Law LLC cannot and does not guarantee that such information is accurate, complete, or timely. Laws of a particular state or laws that may be applicable in a given situation may impact the applicability, accuracy, or completeness of the preceding information. Further, federal and state laws and regulations are complex and subject to change. Changes in such laws often have material impact on estate planning and tax forecasts. As such, the author and Baron Law LLC make no warranties regarding the herein information or any results arising from its use. Furthermore, the author and Baron Law LLC disclaim any liability arising out of your use of, or any financial position taken in reliance on, such information. As always consult an attorney regarding your specific legal or tax situation.

 

What Is An Estate Plan, Part I – Death Documents

Baron Law LLC, of Cleveland, Ohio, offers the following information on different components of an Estate Plan.  To see what plan is best suited for your needs, contact Baron Law, LLC, Cleveland, Ohio

Estate planning is a concept that many people know about, but few fully understand. To most, planning an estate consists simply of establishing a trust or drafting a will. Granted, these are indispensable aspects but such a limited view only serves to handicap successfully preparing for impending mortality.

Aside from ensuring assets pass to heirs a comprehensive estate plan can address a innumerable issues and provide effective solutions. Estate plans may be tailored to provide consistent income for retirement, guarantee responsible individuals are in place in moments of crisis, and medical wishes are communicated and followed. At the end of the day, however, an estate plan is simply a collection of legal documents. Each legal document has a specific purpose, possesses particular advantages, legal conventions, and applicable situations. Nevertheless, most estate plans do consist of a “core” of legal documents that are often advantageous to have regardless of health or financial situation. An estate attorney will draft the documents critical for a given situation but the following is a list of the “core” legal documents that will likely make up any estate plan.

The following consists of the typical documents within a traditional estate plan and is by no means exhaustive. Estate plans are reflective of their owners and are tailored specifically to that person or couple and the needs of surviving family members and financial interests. Again, an attorney is in the best position to advise and guide you on what the major estate planning concerns are and the best legal methods to take. This part of a two-part series discusses the estate planning documents largely concerned with providing instructions in the event of death.

Last Will and Testament

A last will and testament is the document most people associate with estate planning. The will memorializes the “last wishes” of a decedent and guides surviving friends and family on how to split up an estate according to the beneficiary designations and instructions present in the document. There are many types of wills and each one is drafted uniquely for the individual and their estate.

Though wills are specifically created, all share important uses and common characteristics. Again, wills bequest particular money and assets to chosen friends and family. Further, they provide for the how and when such bequests will take place. Some instruct money only to be given on an 18th birthday or only between children of a first marriage. Of critical importance, wills are also the primary method of election of guardians for minor children or disabled familial charges and executors of the estate. The provision of guardianship, a clear plan for property distribution post death, and executor election are the primary incentives for drafting a will. Addressing all is an utmost necessity for ensuring peace of mind for those left behind.

Wills, with some exceptions, all possess the same legal conventions controlling their creation. The point of these legal rules is to ensure the legitimacy of the will, the authenticity of the last wishes evidenced by the document, and protect estates from predatory practices and opportunists. Generally, a legally operative will must be in writing, signed by testator of sound mind, and witnessed by two competent witnesses.

While most estate assets are covered under a will, some assets are not. The following are an example common asset outside of a will, also sometimes referred to as non-testamentary assets: retirement accounts, life insurance proceeds, and property owned jointly with right of survivorship. Non-testamentary assets are normally bequeathed by independent beneficiary designations within the documents of creation or on associated accounts. As such, these assets normally do not undergo probate and are available to beneficiaries much quicker than assets passed via a will and the longer probate process. Distinguishing between testamentary and non-testamentary assets can have critical tax consequences for an estate, as such, please consult an estate attorney for guidance.

Wills are a mainstay and common tool for estate planning, however, its drafting can rapidly grow in complexity due to a convoluted family structure or an expansive estate. Again, an attorney should be retained to draft a will thus ensuring last wishes are effectively communicated and legally valid within a probate court. Failure to draft a will or an improperly drafted or implemented one may result in assets going to improper parties, an undesired executor administrating an estate, irresponsible or unknown guardians for minor children, or undue legal fees and court costs.

Guardianship Designations for Minor Children

A critical concern for most people with young children is, who is going to take care of my children if I’m not here? Ensuring that financially stable friends or family willing to raise children exist affords piece of mind to parents in the event of sudden or unexpected death. Also, proactively addressing guardianship lets parents pick like-minded guardians in regards to personal, lifestyle, or religious views so surviving children are still, at least partially, raised in the manner they desire.

The easiest way to designate a guardian is to name that person or persons in the last will and testament. Then upon death, if the children are not yet 18, a probate court in most situations will appoint the named individuals as guardians according to the specified instructions. A simple will guardian designation, however, may not be convenient or appropriate in certain situations. Family compositions often change, such as in divorce or estrangement, or previously nominated guardians pass away thus negating the express wishes within a will. As such, amending or redrafting a will every time a different guardian is preferable can be time consuming and expensive.

Another way, however, exists to appoint a guardian outside of a will. An independent writing, other than a durable power of attorney, signed, witnessed, notarized, and filed with the appropriate probate court, specifying an appropriate guardian, is sufficient to convey such responsibilities. This method is relatively inexpensive and affords more flexibility to concerned parents. This independent writing method is not meant to affect any other issue or provision within a last will and testament other than appointment of guardians in the event of death. Note, an attorney will be able to resolve and watch for any potential issues regarding contradictory guardianship designations in separate estate planning documents.

Unfortunately, not everyone is blessed with a stable home life or responsible extended family. As such, proper guardian designation documentation is important and alleviates stress for parents, especially within the context of debilitating disease or deteriorating health. Further, appropriate designation avoids the involvement of child services and the courts in determining custody, eliminates the prospect of child trauma and stress upon children and concerned family during transition, and ensures surviving children have no opportunity to become wards of the state.

Letter of Intent

The aforementioned documents taken together serve to mostly illustrate and communicate a decedent’s final wishes. Everything, however, is subject to interpretation. Take the phone game most people played as children for example. A message begins at one end of a chain and, through repetitive communication and subtle shifts in language and understanding, comes out at the end completely different than how it started. A letter of intent fills in any gaps in understanding and prevents manipulation, subtle or overt, of estate instructions.

A letter of intent is a simple document that provides comprehensive instructions for what the decedent views is the most critical information and desired outcomes of an estate plan. The letter, however, is an informal document that is not legally binding upon a probate court. That being said, courts generally rely on them during probate proceedings because there is no greater authority than a decedent’s own words. After all, the entire point of probate is to distribute estate assets as close to a decedent’s intent as possible after the fact. Common instructions within a letter of intent include: guardian designations for minor children, if not detailed in a last will and testament, specific methods for bequests, the location of assets, funeral details, and the locations of estranged family members or friends chosen as beneficiaries. A decedent’s letter of intent in an additional effort to eliminate any confusion or room for interpretation within an estate plan.

Further, a letter of intent may serve as an alternative to adding on to an existing will independent of a codicil. Again, the letter itself is not legally binding like a codicil would be but it is relatively inexpensive, quick, and may serve as a viable substitute in a crunch. In Ohio, codicils are governed by strict legal conventions while letters of intent are not. As such, letters may be the document of last resort in situations of impending mortality or incapacity. As most probate judges agree, something is better than nothing. Note, however, a letter of intent is never a substitute for a will. Always consult with an attorney regarding how to best utilize a letter of intent in conjunction with other estate planning documents.

Your last will and testament, guardianship designations, and letter of intent are all critical estate planning documents, however, taken together they only offer partial protection and primarily focus on providing instructions after death. In the next part of the series the estate documents of the living will, HIPPA authorization, and healthcare and durable powers of attorney, which concentrate on providing instructions during life, are explored. Taken together, all the documents explored during this series can provide comprehensive protection for the most critical issues of both life and death.

You don’t have to be rich to protect what you’ve spent a lifetime trying to build. To find out whether a trust is right for your family, take the one-minute questionnaire at www.DoIneedaTrust.com. There are a number of different trusts available and the choices are infinite. With every scenario, careful consideration of every trust planning strategy should be considered for the maximum asset protection and tax savings.

For more information, you can contact Mike Benjamin of Baron Law LLC at 216-573-3723. Baron Law LLC is a Cleveland, Ohio area law firm focusing on estate planning and elder law. Mike can also be reached at mike@baronlawcleveland.com.

Helping You and Your Loved Ones Plan for the Future.

About the author: Mike E. Benjamin, Esq.

Mike is a contracted attorney at Baron Law LLC who specializes in civil litigation, estate planning, and probate law. He is a member of the Westshore Bar Association, the Ohio State Bar Association, the Cleveland Metropolitan Bar Association, and the Federal Bar Association for the Northern District of Ohio. He can be reached at mike@baronlawcleveland.com.

Disclaimer:

The information contained herein is general in nature, is provided for informational and educational purposes only, and should not be construed as legal or tax advice. The author nor Baron Law LLC cannot and does not guarantee that such information is accurate, complete, or timely. Laws of a particular state or laws that may be applicable in a given situation may impact the applicability, accuracy, or completeness of the preceding information. Further, federal and state laws and regulations are complex and subject to change. Changes in such laws often have material impact on estate planning and tax forecasts. As such, the author and Baron Law LLC make no warranties regarding the herein information or any results arising from its use. Furthermore, the author and Baron Law LLC disclaim any liability arising out of your use of, or any financial position taken in reliance on, such information. As always consult an attorney regarding your specific legal or tax situation.

Planning for Married Couples Using Portability and Bypass Trusts

Planning for Married Couples Using Portability and Bypass Trusts

 As Seen Published in the Cleveland Metropolitan Bar Journal

Significant expansion of the federal estate tax exclusion has dramatically changed how estate planning professionals plan for married couples.   In 2000 when the federal estate tax exclusion was merely $675,000 and federal tax rates peaked at fifty-five percent (55%), bypass trusts or “credit shelter trusts” were a popular means of sheltering wealth to preserve assets for a surviving spouse and children.   Today however, the exclusion amount has grown to an astounding $5.49 million per-spouse which is now “portable” and can be carried over to the surviving spouse’s estate.  Thus, significant changes in recent years have compelled estate planning attorneys to consider the concept of portability versus bypass trusts.

What is a Bypass Trust?

Bypass trusts are historically an effective tool designed to minimize estate taxes by sheltering wealth into a trust.   The concept is pretty straightforward: every individual is afforded an exemption amount that permits their estate to transfer to a surviving party without suffering loss to federal estate taxes.  Conversely, before portability, married couples would lose one of these exemptions at the death of the first spouse.  At the death of the second spouse, if the value of the estate exceeded the surviving spouse’s exemption, it would be taxed at the federal estate tax rate.   For example, when the exemption amount was $675,000 in the year 2000, a person dying with $1 million in his or her estate would result in $178,750 in federal estate taxes because the remaining $325,000 over the exemption is taxed.

Married couples could avoid these tax implications by directing some of their estate to a bypass trust that would support the needs of the surviving spouse, while also sheltering that portion of the estate from unnecessary taxation. This may be accomplished by dividing the estate into two portions.  Instead of leaving the entire estate to a surviving spouse, the deceased spouse leaves assets for their children in one trust account and a separate trust account for the surviving spouse’s benefit.  Assets placed in the separate trust account for children reduce, if not eliminate, estate taxes entirely.

Advantages for Larger Estates Using Bypass Trusts

With larger estates, bypass trusts may be a better planning option when considering the financial and tax implications for married couples.  By far the greatest advantage is that appreciation of the trust assets and undistributed income will not be subject to federal estate tax upon the surviving spouse’s passing.   This is especially important for assets in the decedent’s estate that may appreciate drastically before the surviving spouse’s death.  In addition, if intergenerational planning is important, bypass trusts are likely a better option over portability because they allow for use of the generation-skipping tax exclusion of the first spouse to pass.  Portability is not available for the generation-skipping tax exemption thus, portability would simply not work.

Providing Asset Protection

Aside from the tax implications, asset protection will sometimes compel the need for establishing a bypass trust over portability.   If properly drafted, the trust creates a certain level of asset protection for children and a surviving spouse.  Coupled with credit shelter spendthrift provisions, the trust may preclude the assets from being attacked by the creditors of trust beneficiaries.  This form of asset protection is particularly important and commonly used for beneficiaries who are in a “shaky marriage” and/or who have spending issues.  While a surviving spouse may not have obvious significant creditor or litigation risks (like being a surgeon or professional athlete), creditor protection should always be on the horizon.  When compared to portability, the fact remains that estate planning using bypass trusts can remain relevant at nearly all levels of net worth if the driving reason for the trust is a non-tax concern.

Disadvantages

Bypass trusts serve an important and necessary purpose to preserve an estate against creditors and divorce.  However, for smaller estates, this protection comes with taxable consequences.   Unlike the use of portability, there is no second step-up in basis at the death of surviving spouse.   For smaller estates, this could leave beneficiaries paying a great deal in income tax upon the disposition of the asset.  Further, undistributed income of the trust can be subject to higher income tax rates than individuals.  In addition, although minimal, there may be an added annual expense of filing a trust tax return.  Finally, the use of bypass trusts will require the retitling of assets which can sometimes be tedious and relatively costly.

What is Portability?

The American Taxpayer Relief Act of 2012 has been a game changing concept when planning for married couples.   Since the Act, portability is now a permanent part of the federal estate tax system, which means each spouse’s estate tax exclusion that is unused at death is portable and can be carried over to the surviving spouse.   It has effectively doubled the exemption amount for combined assets of married couples to over $10 million.  With portability, assets are stepped up in basis at the death of the first spouse, and then are stepped up again at the death of surviving spouse.   For families with larger retirement assets, portability has proven to have several advantages.

Advantages of Portability

The biggest advantage for using portability, especially for smaller to medium estates, is the use of step-up in basis.   This is in contrast to using a bypass trust, where the assets are stepped up at the death of the first spouse, but not at the death of the second spouse.   Compared with bypass trusts, there is no need to retitle assets or divide assets into separate trust shares when using portability.    For the most part, portability is simple and can be utilized even in lieu of estate planning prior to death.

Downside to Portability

If the client’s goal is to protect assets of beneficiaries from remarriage, creditors, and/or divorce, then portability is probably not the only planning tool that should be considered.   With portability, a portion of inherited assets are subject to the surviving spouse’s present and future creditors, as well as creditors in bankruptcy and, if the surviving spouse remarries and then divorces, to ex-spouses.   Additionally, portability is not available for the generation-skipping tax exemption.    Although retitling of assets is not required, the use of portability is not automatic.   Timely estate tax returns must be filed and may require additional cost from tax professionals.

A Quick Comparison

Let’s assume Ken and Kathy have a combined net worth of $10.98 million.   Ken dies in 2016 and Kathy dies in 2026.  During this 10-year period we will assume the federal estate tax rate will be forty percent (40%) and they live in a state with no estate or income tax.

Using Portability

Ken forgoes setting up a trust and instead relies on portability. Let’s assume that over the ten-year period after Ken’s death,   the total estate grows at a modest five percent (5%) annually.  This would yield a total combined estate of $17.88 million when Kathy dies in 2026. Not taking into account inflation, Kathy’s total estate tax exclusion will be both Ken’s unused portion plus her own, totaling $10.98 million.  Consequently, the total amount subject to estate tax is $6.9 million ($17.88m – $10.98).  At a forty percent (40%) tax rate, the possible resulting federal estate tax is $2.76 million.

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Portability Chart

Using Bypass Trusts

Now let’s assume that Ken created a bypass trust which at death would become irrevocable and funded the family trust account to its maximum of $5.49 million.  When Kathy dies 10 years later, all of the appreciation within the family trust will escape estate tax.  Here, the resulting taxable estate is $3.45 million opposed to $6.9 using portability.  Kathy still maintains her $5.49 exclusion resulting in the total estate tax of $1.38 million.

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bypass trust chart comparing portability

In sum, portability has the benefit of simplicity and $5.49 million of a portable exemption.  For smaller estates without intergenerational or asset protection concerns, portability appears to be the better option.  On the other hand, regardless of the size of the estate, bypass trusts remain effective at all levels of net worth if the driving reason is non-tax related.    Estate planning goes well beyond the comparison of portability versus bypass trusts and careful consideration of the client’s needs should be implemented into every plan.   For more information, contact Baron Law LLC at 216-573-3723 or dan@baronlawcleveland.com

Top Reasons For Needing a Trust

Top Reasons For Having a Trust

When creating an estate plan, the biggest mistake people make is thinking they need to be rich in order to have a trust – that is completely false.  If you’re not Warren Buffet, you may still have other non-monetary reasons for creating a trust like asset protection, control, tax savings, Medicaid planning, and/or litigation and creditor protection.   Even if your estate is worth less than $100,000, you may still be in an ideal situation to protect your nest egg and what you’ve spent a lifetime trying to build.

Although the situations of needing a trust are infinite, here are a few most common scenarios where you might benefit from creating a trust.  You can also take a one-minute trust questionnaire here, to find out more specifically whether a trust is right for you.

Second Marriages

With divorce rates over fifty percent, the most common reason for creating a trust is where an individual is in their second marriage.  In this scenario, there is nothing preventing the remaining spouse from disinheriting children from a prior marriage.  Consider this example: Husband and Wife are in their second marriage.  Wife has two kids from a prior marriage. Husband does not have kids except for step-children of current marriage.  Wife passes away and leaves everything to Husband, remainder to two kids.  Five years later, Husband meets a much younger Pamela Anderson and gets married.  Husband creates a new estate plan naming Pamela Anderson as primary beneficiary of his estate, remainder to two step-children.  Husband dies.   Pamela then creates a new estate plan, disinheriting children.

Famous Last Words, “I would never get remarried!”

As you can see, this is a very typical example of where some level of control and strategy is needed.  A trust in this example would solve the wife’s concerns entirely.  Here, Wife could have created what is known as a QTIP trust.  In a nut shell, the QTIP would give Husband income from Wife’s estate, plus five percent (5 %) of principal each year.  When Husband dies, the estate MUST be passed to children and cannot be passed to anyone else.  In essence, Wife is able to control her estate even after she’s passed.  She has also ensured her children will never be cut out of the estate, even if it were the unintentional result of Husband.  And if this were not a second marriage, a trust might still make sense for couples wanting to keep the estate within the family and avoid remarriage concerns.

Tax Savings for Children

Receiving an estate comes with taxable consequences.  Although federal estate taxes are not normally at issue, gains on an inheritance can be quite high for children resulting in higher taxes.  For example, a child receiving $100,000 in gains might be placed in a larger tax bracket of 39.9% because their inheritance placed them over the threshold.  The simple solution here is for the child to receive their inheritance over time, opposed to a lump sum. The trust itself will pay income taxes on gains and the children can enjoy a stream of payments over time.

Asset Protection

Depending on the type of trust created, a trust can protect both the creator (you) and beneficiary of trust.  The most common asset protection trust is used for children instead of the creator.  This type of trust is known as a “revocable living trust.” This type of trust gets its name because the creator can revoke, change, or modify, the trust at any time during his/her lifetime.   After the creator passes away, the estate is placed in an “irrevocable trust,” where the trust now cannot be changed.   In other words, the terms you’ve created in trust cannot be changed after you pass away.  Usually the trust maker will set forth terms that would pay children and/or beneficiaries payments over their lifetime.  So long as there is discretion given to the trustee (usually a trusted family member or attorney) the money remaining in trust cannot be attacked by creditors or litigation.  In other words, if a child ends up in a lawsuit, the trustee can cease payments to the child so that the money is protected from the lawsuit.  The same outcome would apply if the child ends up in bankruptcy or owes creditors.

Divorce

It’s well known that in a divorce, all assets are split 50/50.  It doesn’t matter whether one spouse cheated or did something horrible to the other.  Ohio courts will divide all assets accumulated during the marriage 50/50, including an inheritance.  So, if your child inherits $1 million dollars from your estate, and then subsequently gets divorced, the ex-spouse will receive $500,000 of your money.  Using the same example above, you can protect your child’s inheritance by creating a revocable living trust.   Here again, the trustee can turn off the income stream to prevent a disgruntled son-in-law from receiving his unearned share.

Control

No matter how they’re raised, it’s not uncommon for children to be irresponsible or need at least some level of guidance.  With a trust you can create payment terms so that children don’t blow their inheritance on impulsive purchases.  For example, many trusts stipulate that children may only use funds for “health, maintenance, education, and support” until they reach the age of X, thereafter payments made over time to protect against divorce, litigation, and creditors.   This method is very common and puts parents at ease even with responsible children.

You don’t have to be rich to protect what you’ve spent a lifetime trying to build.  To find out whether a trust is right for your family, take the one-minute trust questionnaire at www.DoIneedaTrust.com.  There are a number of different trusts available and the choices are infinite.  With every scenario, careful consideration of every trust planning strategy should be considered for the maximum asset protection and tax savings.  For more information, you can contact Dan A. Baron of Baron Law LLC at 216-573-3723.  Baron Law LLC is a Cleveland, Ohio area law firm focusing on estate planning and elder law.  Dan can also be reached at dan@baronlawcleveland.com