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Testamentary Trusts

What Is a Testamentary Trust and Do You Need One?

What Is a Testamentary Trust and Do You Need One? A couple doing some retirement planning has an updated will and a medical power of attorney in place, prepared with the help of an estate planning attorney. They own some rental property, a small business and life insurance, but their estate is not large enough for them to worry about the federal estate tax.

Do they need or want a trust to be part of their estate plan? That’s question from a recent article titled “It’s the law: Testamentary trusts provide protection for assets” from the Post Register.

First, there are many different types of trusts. A living trust, also known as a revocable trust, irrevocable trusts and testamentary trusts are just three types. The testamentary trust only comes into effect at death under a last will and testament, and in some cases, depending on how they are structured, they may never come into effect, because they are designed for certain circumstances.

If you leave everything to your spouse in a will or through a revocable trust, your spouse will receive everything with no limitations. The problem is, those assets are subject to claims by your spouse’s creditors, such as business issues, a car accident, or bankruptcy. The surviving spouse may use the money any way he or she wishes, during their lifetime or through a will at death.

Consider if your spouse remarried after your death. What happens if they leave assets that they have inherited from you to a new spouse? If the new spouse dies, do the new spouses’ children inherit assets?

By using a trust, assets are available for the surviving spouse. At the death of the surviving spouse, assets in the trust must be distributed as directed in the language of the trust. This is especially important in blended families, where there may be children from other marriages.

Trusts are also valuable to distribute assets, if there are beneficiaries with an inability to manage money, undue spousal interference or a substance abuse problem.

Note that the trust only protects the decedent’s assets, that is, their separate property and half of the community property, if they live in a community property state.

The best solution to the issue of how to distribute assets, is to meet with an estate planning attorney and determine the goal of each spouse and the couple’s situation. People who own businesses need to protect their assets from litigation. It may make sense to have significant assets placed in trust to control how they pass to family members and shield them from possible lawsuits.

Reference: Post Register (April 26, 2020) “It’s the law: Testamentary trusts provide protection for assets”

Read more related articles at:

What Is a Testamentary Trust?

What Is the Difference Between a Testamentary and a Living Trust?

Also, read one of our previous Blogs at :

Does Anyone Really Need a Trust?

 

Your Spouse Just Died … is Probate Needed?

There are several steps to take while both spouses are alive and well, to help reduce the chance of the surviving spouse finding themselves in a “financial deadlock” situation or stuck in probate court. The preparations require the non-financially dominant partner to be involved as much as possible, says Barron’s in the article “How to Avoid Financial Deadlock—or Worse—After One Spouse Dies”

Step one is to prepare the financial equivalent of a “go-bag,” like the ones people are supposed to have when they must leave their home in a crisis. That means a list of all financial contacts, advisors, estate planning attorney, accountants, insurance professionals and copies of all beneficiary designations. There should also be a list or a spreadsheet of all the couple’s assets and liabilities, including digital assets and passwords to these accounts. The spouse should also note the location of financial records, including insurance policies, wills, trusts and any other critical legal documents.

Each partner must have access to checking and cash independently of the other, and the spouses need to review together how assets and accounts are titled.

It is especially important for both spouses to be on the deed to their home with right of survivorship, so that the surviving spouse can easily prove that they are the sole owner of the home after the spouse dies. Otherwise, they may not be able to communicate with the mortgage company. If a surviving spouse must go to court and file probate in order to deal with the home, it can become costly and more stressful. Hence it is important to plan the estate to avoid probate court.

It’s not emotionally easy to go through all this information but it is critical for the surviving spouse’s financial security.

Any information that will be needed by the surviving spouse should be documented in a way that is easily accessible and understandable for the spouse. Even if someone is very organized and has a well-developed description of their assets and estate plan, it may not be as easily understood for someone whose mind works differently. This is especially true, if the couple has had years where the non-financial spouse was not involved with the family’s assets and is suddenly digesting a lot of new information.

It is wise for the non-financial spouse to meet with key advisors and take on some of the tasks like bill paying, reviewing insurance policies and reconciling accounts well before either spouse experiences any kind of cognitive decline. Ideally, the financially dominant partner takes the time to train the other spouse and then lets them take the lead, until they are both comfortable managing all the details. It will also be wise for the surviving spouse to meet with the estate lawyer to see if opening a probate is needed.

Each spouse needs to understand how the death of the other will impact the household income. If one spouse has a pension without survivor benefits and that spouse is the first to die, the surviving spouse may find themselves struggling to replace that income. They also need to consider daily aspects of their lives, like if one spouse is highly dependent upon the other for caregiving.

Spouses are advised not to make any big financial or life decisions within a year or so of a spouse’s death. The surviving spouse is often not in a good emotional state to make smart decisions, and this is the time that they are most at risk for senior financial abuse.

Both spouses should sit down with their estate planning attorney and discuss what will happen when they are widowed. It is a difficult topic but planning ahead will make the transition less traumatic from a financial and legal perspective.

Read about the ins and outs of probate.

Reference: Barron’s (Sep. 15, 2019) “How to Avoid Financial Deadlock—or Worse—After One Spouse Dies”

Beneficiary Designations and Your IRAs

If you’re like most people, you opened that IRA many years ago. You may not have any idea who you named as your beneficiary. If you have a copy in your files, there’s something you need to do, says The Mercury News in the article “No beneficiary designation for an IRA? Here’s what can happen.” It’s time to dig into your records and take a look.

As part of opening the IRA, you likely signed what’s called a “custodian’s IRA agreement.” In that document, there are provisions that take over in certain instances. One of them is if you fail to designate a beneficiary. Consider these examples, if you don’t think this matters.

A major institution has custody of about 10 million IRAs. In every one of their IRAs, there is a provision that says that if the IRA owner has not by the date of their death, designated a beneficiary or if the beneficiary does not outlive the account owner, the IRA’s beneficiary will be the surviving spouse. If there is no surviving spouse, the beneficiary is the decedent’s estate.

This is not an unusual provision. It gives the institution the ability to transfer the IRA when the owner dies, when there is no beneficiary designation on file. Therefore, a married IRA’s account would pass to his or her spouse. The surviving spouse has the option to transfer the IRA into their own IRA.

However, what if that’s not what you want to happen? Or if you are single?

For someone who is single, widowed or divorced, the IRA passes to the person’s estate under this default provision. If you wanted the IRA to be inherited by a niece, nephew, child or grandchild, it’s too bad. What is worse, is when the IRA transfers to an estate, it loses its connection to a person, thereby losing the ability to be stretched out over an extended period of time.

There are other frequently used provisions. One is a provision that distributes the account to the surviving spouse, or if there is no surviving spouse, to the children in equal shares per stirpes, or if there are no children, to the estate. This works better than the first option. However, unless you review your IRA Custodial Agreement, you don’t know what will happen.

What should you do? As part of your overall estate planning, you should find your beneficiary designation paperwork. If you can’t find it, call the institution that holds your IRA for a copy of what they have on hand. You can also fill out a new beneficiary designation and be certain that the custodian places this paperwork on file and keep a copy of it yourself with your important papers. Otherwise, it’s possible that your updated beneficiary designation wishes may not be followed.

Speak with your estate planning attorney to make sure that all of your documents in your estate plan are updated.

Learn why you should check your beneficiary designations and what happens if they are not up to date.

Reference: The Mercury News (August 12, 2019) “No beneficiary designation for an IRA? Here’s what can happen”

Planning for the Sad Truth of Growing Old Together

Planning for the Sad Truth of Growing Old Together . If it’s any comfort, there are now some 20 million widows and widowers in America, according to a study from Merrill Lynch and Age Wave that focuses on widowhood, as reported by CBS News’ Moneywatch in “A retirement planning must-do for married couples.” The study, “Widowhood: The Loss Couples Rarely Plan for—and Should” takes a detailed look at what happens, when the first spouse dies.

It should be noted that women are three times as likely as men to be the surviving spouse, since women historically tend to live longer. Widowers tend to marry younger women, leaving many older women to need to learn how to live as senior singles.

More than half of all of those surveyed who had lost a spouse, said they had not planned for it.  More than three-quarters of married retirees said they would not be financially prepared for retirement, if their spouse passed away.

Losing a spouse is the hardest thing for married people, particularly if they have never been single. Some 75% of those who had lost a spouse, said it was the single hardest thing they’d ever had to deal with. Half of them experience a household decline in income of 50%—or more. Adjusting to that loss of income is a big concern.

When the first spouse passes, the surviving spouses report that they were overwhelmed with paperwork and didn’t know how to begin.

You can plan for this unpleasant eventuality, and you should. Just as having an estate plan in place will help loved ones, planning for one of you to become widowed will help the other.

What should couples do in advance?

  • Know what all your assets and accounts are and how to access all accounts.
  • Make sure both names are on all accounts and deeds.
  • Be able to access cash.
  • Keep credit card debt separate.

Here’s some advice from the surviving spouses:

  • Avoid making big decisions, until at least a year has passed.
  • Find all important documents and pay bills on time.
  • Notify banks, financial advisors and employers.
  • Reevaluate your retirement strategy, following a financial audit of your new situation.
  • Update your estate plan and check all beneficiary designations.

Losing a spouse is a difficult and painful experience.  However, many people report that afterwards they found courage and strength they never knew they had and are living a full and rewarding life.

Reference: CBS Moneywatch (Sep. 12, 2018) “A retirement planning must-do for married couples”

 

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