Cheryl Chapman Henderson, LLC

State Supreme Court Reaffirms Nevada’s Protective Trust Laws

“On May 25, the Nevada Supreme Court reaffirmed that Nevada has the most protective trust laws in the nation, by rejecting Lynita Sue Nelson’s claim for alimony and child support to be taken out of a self-settled spendthrift trust established by her husband, Eric L. Nelson.”

Wealth Advisor’s article, “How Nevada Became America's Safest State for Wealth Protection,” explains how the court ruled that Nelson still had to pay $800,000 in alimony, back child support and tuition for his daughter’s private school education.  However, this was to come from his personal assets, rather than the trust he created.

The Nelsons had divided their assets in 1993, with the aim of shielding the wife from riskier assets in their portfolio,  such as casinos and liquor licenses. When the state legislature enacted laws enabling them, they placed their separate assets into two self-settled spendthrift trusts.

A self-settled spendthrift trust is a form of irrevocable trust which names the grantor as a beneficiary. These trusts are structured so that neither the grantor nor his creditors, have the power to access trust assets. The trust also delegates authority for distributions to an independent trustee.

In the event that a creditor or spouse brings suit against the grantor for assets in the trust, the trustee can’t make any distributions. The trust assets are protected, unless the law allows exceptions (some state statutes do, for alimony and child support). The Nevada case asked if these exceptions would be allowed.

Eric and Lynita Sue Nelson were both residents of Nevada. Their assets included both liquid assets and real estate, all of which was located in Nevada. Questions are raised about individuals who live outside Nevada or hold assets out of state.

It’s not certain whether an individual who resides in another state, and sues in that state,  if the court will recognize self-settled spendthrift trusts. Only 17 states allow self-settled spendthrift trusts, and some make an exception for alimony and child support claims.

The question would be whether the court would enforce it, raising issues of choice of law and one state recognizing another state’s judgments.

The case reaffirms Nevada’s standing as the most protective state for trust law.

Reference: Wealth Advisor (June 29, 2017) “How Nevada Became America's Safest State for Wealth Protection”

Protecting Trust Assets from Child’s Divorce (or Divorces)

“If you don’t want money you’ve worked hard for to pass down to your son’s or daughter’s ex, then consider a trust.”

The federal estate tax exemption in 2017 is about $5.5 million per person or $11 million for married couples. As a result, creating a trust to save on taxes for your family when you pass away doesn’t have the attraction that it once did.

On the other hand, now more folks are considering a trust. This is because they’re concerned about their adult child losing their inheritance due to a failed marriage. When you establish a trust as part of a will or revocable living trust, you can help protect your child’s inheritance in a divorce settlement.

A recent Kiplinger’s article, “A Trust Can Protect Your Adult Child’s Assets from a Failed Marriage, takes a look at how this works.

It’s not uncommon for a child to get an inheritance and to combine it with assets he or she owns jointly with their spouse, like a bank account, car or house. Depending upon the state in where they reside, the inheritance may become marital property subject to division in the event of a divorce.

If the child’s inheritance stays in a trust account, the inherited wealth can be shielded from a divorce. Some people will leave their children’s inheritance in a trust after a first divorce, because of concerns that their hard-earned dollars might end up in the wrong pockets if he or she remarries. If a child marries again and it doesn’t work, the second ex-spouse will not get those trust assets.

 It is true that creating a trust can be more complicated and more expensive than an outright distribution. However, many people are willing to pay the price to protect their child’s wealth. Consider the following alternatives regarding the parents’ decision to leave assets in trust for their children:

1. Children under age 18. If your child is under 18, you’re probably not considering his or her marriage or divorce. However, leaving assets in trust for a child may be a good plan. This is because a trustee will oversee the child’s assets and guide them in their decision-making with the funds. The trustee can also deny any financial requests. This is a valuable power, if a child is immature or easily influenced.
2. A newly married child. After the honeymoon, the journey can get bumpy as life becomes more stressful and complex. They may have to deal with issues such as a job lay-off, health issues, financial worries or the stress of rearing children. Rather than creating a trust soon after your child’s marriage, see how the marriage progresses over the next few years.
3. Marriage status. As mentioned above, after five years or more, you should determine your comfort level with your child’s relationship and how you feel about your son-or daughter-in-law. If you see acrimony or you just have a “gut feeling” about the union’s future, it may be smart to create a trust for your child’s inheritance.

You should look at estate plans as five-year plans, and review your will, trusts and other documents at least that often. You may not need to change them, but a periodic review can help you carefully evaluate relationships, finances and the emotional dynamics of your family.

Working with an estate planning lawyer, you can change the trust during your life, if family circumstances make it necessary.

Reference: Kiplinger (March 2017) “A Trust Can Protect Your Adult Child’s Assets from a Failed Marriage”

An Irrevocable Trust Can Help You to Avoid Trying to Divvy Up Your Estate Fairly Among Your Children

“Even though determining how to pass on assets is not always clear cut, many people decide to simply divide assets equally among their heirs. Yet in a number of different situations, ‘equal’ may not be fair.”

Forbes’ article, “Where Inheritance Is Concerned, Equal May Not Always Mean Fair,” asks you to consider a scenario in which you died with two children, a 25-year-old daughter and 16-year-old son. The older daughter is a recent college graduate for whom you paid all of those expenses amounting to  $250,000. At death, you had assets of $1 million. If your estate plan provided that you distribute you estate equally in a trust, then the younger son would have to pay for his college using proceeds from his portion of the Trust.

As a result, after college expenses, the son will be left with $250,000 and the daughter will have $500,000. Although you distributed your assets equally and split the estate right down the middle, you may not think equal is fair.

This same type of inequitable distribution can also happen if you own a home, business or other sizable assets.

One way to avoid the “inequality problem” is to create an irrevocable trust that holds assets that will not be divided equally until—as in the example above—both children have completed college. Another option is to elect to “never” distribute assets by designating a child as the trustee of the trust at a specific age and giving her the authority to make distributions to herself, without inheriting the entire estate and paying estate taxes.

This type of estate planning can be complicated, particularly if you try to create a trust in a vacuum and don’t plan ahead and consider variables and contingencies. It is important to speak with a qualified and experienced estate planning attorney.

An irrevocable trust lets you plan for the specific needs of your family and can provide asset protection. If you don’t have the trust distribute the assets immediately, a son who gets divorced is, in effect, given “divorce protection” from having assets in trust—even where the child is the trustee. In some circumstances, a trust can also provide protection from creditors and litigation.

The important thing is to think about your intentions for your assets generally, such as whether to provide for education, ongoing support or maybe an emergency fund. When you determine your overall intentions, an estate plan can be created to make certain that those intentions are executed, regardless of the unknown events which occur in life.

Reference: Forbes (February 27, 2017) “Where Inheritance Is Concerned, Equal May Not Always Mean Fair”

Avoid This Common Estate Planning Mistake

“Most people don’t want to be a burden on their family or children. One of the best things you can do to accomplish this goal, is to get your estate planning in order.”

What if your spouse is ill and you meet with an estate planning attorney to organize your family affairs? The attorney drafts a trust document and a will, and you and your spouse sign it. That’s that. You think everything is fine. However, what if your spouse suddenly dies, and you discover that the accounts aren’t set up to transfer the way you both wanted. Oh-oh. Could this happen to you?

Trust Advisor’s recent article, “These Hidden Estate Planning Mistakes Can Have Horrible Consequences,” reports that it happens all the time.

For instance, a couple might be in their second marriage with no children in common. However, the wife has two children from her first marriage. She and her current husband had been together for 10 years, when she’s diagnosed with cancer.

When they see an attorney, they agreed that her assets would be divided one-third each to the husband and her two children. But most of her assets were in her company 401(k), and the beneficiary on the 401(k) was the husband. No one changed the 401(k) beneficiary designation to reflect the wife’s wishes. When she died, he tried to get the 401(k) to send one-third to each of her children, but it didn’t work. Her employer was legally required to distribute the account, according to the most recent beneficiary designation that they had.

In our example, the husband was a decent sort: he rolled the 401(k) into his own IRA, withdrew the two-thirds for the kids, paid the tax, and gave each of his second wife’s children their share. If they had properly updated the beneficiary form to add the children as direct beneficiaries of the 401(k), the tax cost would have been much less significant. It’s not an uncommon estate planning mistake.

If you have a will and trust, it’s important to note that these account titles and beneficiary designations supersede everything and anything that’s mentioned in your will and trust. If this isn’t set up right, it can mean some time-consuming and expensive maneuvering for your family.

If your accounts list only the husband or wife as the owner, the account titles need to be changed to reflect their trust as the owner. If the wife passes away before this is done, the accounts must go through probate.

Be sure there isn’t a dormant administrative nightmare waiting for your loved ones. Your retirement accounts, life insurance policies and annuities let you designate a beneficiary. Review these periodically and update them if necessary.

Reference: Trust Advisor (March 9, 2017) “These Hidden Estate Planning Mistakes Can Have Horrible Consequences”

What’s Better: A Joint Tenancy or a Trust to Give a Home to a Child?

“When leaving a home to your children, you can avoid probate by using either joint ownership or a revocable trust, but which is the better method?”

In the event you decide to add your child as a joint tenant on your home, you’ll each have an equal ownership interest in the property. When one joint tenant dies, the other joint tenant owns the entire property. This is an option that has the advantage of allowing you to avoid probate.

A recent article asks “Is It Better to Use Joint Ownership or a Trust to Pass Down a Home?

This article, in elderlawanswers.com, explains that a disadvantage of joint tenancy is that creditors can attach the tenant's property to satisfy a debt. In such a case, if a co-tenant defaults on his or her debts, the creditors can sue in a partition proceeding to have the property interests uncoupled so the property can be sold, even over the objections of the non-debtor owner(s). What’s more, without a creditor issue, one co-owner of the property can sue to partition the property and can force another owner to move out.

Joint tenancy can also impact the capital gains treatment of the property. When you give property to a child, the tax basis for the property is the same price for which you purchased the property.  However, inherited property receives a step up in basis. This means that the basis would be the current value of the property. When you pass, your child inherits your half of the property—one half of the property will receive a step up in basis. However, the tax basis of the gifted half of the property will be the same as the original purchase price. If your child sells the home after the parent dies, he or she would have to pay capital gains taxes on the difference between the tax basis and the selling price. To avoid this tax, the child must live in the house for at least two years before selling it. When that happens, he or she can exclude up to $250,000 ($500,000 for a couple) of capital gains from taxes.

Revocable Trust

If you place the property in a revocable trust and name yourself as the beneficiary and your child as the beneficiary after you die, the property will go to your child without going through probate when you pass away. A trust will also be able to guarantee you the right to live in the house and take into account changes in circumstances, like if your child passes away before you do.

One other important benefit of a trust pertains to capital gains taxes. The tax basis of property in a revocable trust is stepped up when you die. This means the basis in the home would be the date of death value of the property. Therefore, if your child sells the property immediately after inheriting it, the value of the property would not see much change. As a result, the capital gains taxes would be little or nothing.

A trust typically allows for greater flexibility and offers more options to protect both the parent and the child. Everyone’s situation is different. Be sure to speak with a qualified estate planning and Elder Law attorney about how to pass down your property effectively.

Reference: elderlawanswers.com (February 27, 2017) “Is It Better to Use Joint Ownership or a Trust to Pass Down a Home?

A Sound Succession Plan is an Integral Component of a Complete Estate Plan

“In addition to traditional estate planning tools such as a will, a power of attorney and a trust, business owners also need to take additional steps by instituting a buy-sell agreement, obtaining insurance and having a succession plan.”

 Many entrepreneurs have their noses to the grindstone and a laser focus on growing their companies. While they’re working hard at it, they can fail to consider what will happen if they are injured in an accident, suffer an illness, or die suddenly. These business owners who don’t take the time to create an effective estate plan risk undermining a lifetime of hard work, jeopardizing the jobs of their staff, and endangering the future of their loved ones.

A recent business.com post, “5 Estate Planning Tips for Entrepreneurs,” lists these important estate planning essentials:

A Will. This is the most basic estate planning document. It lets a person or a small business owner say how his or her assets will be distributed and to whom. A will also allows the person creating the will to name a personal representative or executor to be responsible for managing and disbursing the personal and business assets according to the testator's wishes. If the business is a sole proprietorship, the executor or a trusted family member should be given access to digital assets like online banking, email, and the company website. This should be a separate document from the will because a will is a public document filed in probate court.

Power of Attorney. This designates a person to handle the business affairs, if the owner becomes incapacitated. If you don’t have this, the court will appoint a guardian to manage the affairs—and his or her decisions may not jive with the business owner's wishes. It could also cause conflict with the other parties.

Trusts. A will, again, is a public document and is required to be probated in court. That can cause issues for a small business wanting to protect sensitive information. As a result, a business owner may want to consider a revocable living trust. This trust takes title to property but lets the creator of the trust or the trustees continue managing the assets during his or her lifetime. Because it’s "revocable," it can be modified. A trust can avoid probate, transfer assets to beneficiaries privately and quickly, and allow a business to continue operating.

Buy-Sell Agreement. A buy-sell agreement is critical for partnerships or companies with just a few owners. This document establishes a way of distributing an owner's interest if he or she dies or becomes disabled. It is also helpful if an owner declares bankruptcy or is going through a divorce. The buy-sell agreement will also detail how to value the business.

Succession Plan. An entrepreneur’s comprehensive estate plan should include a formal, written succession plan, which provides for the seamless transition of the business. A comprehensive succession plan will state how ownership will be transferred, establish rules for hiring, compensating and promoting family members, and detail how disputes will be resolved.

An estate plan is a must for an entrepreneur. If you fail to have a plan that enables the business to continue operating, then your partners and family members will have an extremely difficult time trying to manage the business assets … and the disputes that will no doubt arise. Hire an estate planning attorney to establish a course for the future.

Reference: business.com (November 15, 2016) “5 Estate Planning Tips for Entrepreneurs”

Blended Family Estate Planning

“We all need to do some type of estate planning, but it’s especially important if you are part of a blended family.”

The best time to start estate planning is now—before the plan needs to be implemented, says The Fairfield Bay News in “Estate Planning Tips for Blended Families.” Estate planning can be very complex with a blended family, so ask for help from a qualified estate planning lawyer.

Here are a few general ideas to help you think about your blended family:

Update Beneficiary Designations. Get all of your beneficiaries set and updated, like those on your retirement accounts and insurance policies. This will ensure that they reflect your blended family. It is important to remember that these designations take priority over the instructions in your will—it’s a totally separate deal.

Living Trust. While you’re at it, consider a professional trustee for a living trust. Trusts can help you to avoid probate and allow you the freedom to decide how and when you want your assets distributed. After you pass away, a properly created trust can provide a surviving spouse with income for life.  After he or she dies, it will then give the children from an earlier marriage the remainder of the trust assets. To be fair to all, you may want to hire a professional third-party trustee who isn’t a beneficiary of the trust and isn’t entitled any of the trust assets. This person or company wouldn’t have a vested interest in how proceeds of the trust are distributed.

Prenuptial Agreement. When settling an estate, a prenuptial agreement can help eliminate disputes among members in a blended family. With a pre-nup, you can detail a separation of property for your will, your living trust, and any other relevant estate-planning arrangements in the event that you and your new spouse agree to keep your assets separate so you can each pass an inheritance to your own children.

Finally, be sure to share your estate-planning intentions with the members of your blended family. This can help prevent bad feelings and unpleasant surprises.

Reference: Fairfield Bay (AR) News (November 9, 2016) “Estate Planning Tips for Blended Families”

Surprise Your Heirs with the Perfect Estate Plan

“You may have created the perfect estate plan, but your heirs can easily end up in conflict and your estate in dispute–especially if the provisions of your Trust or Will come as a surprise.”

  Even if your plans are simple, talking through the details of your estate plan with heirs and family members can help you settle any issues before you pass away. This is the advice of Forbes in “How to Keep Your Heirs from Fighting Over Your Estate.”

You’d think talking about your intentions ahead of time would be easy enough, but many people choose not to do so—regardless of what happens. Research shows that fewer than 33% of people discuss their estate plans with their children. More than 20% of bequest recipients fight over inheritances. But 63% of families reporting no disputes over inheritance issues tell surveys they’ve had advance notice of what to expect. And more than 80% believe they were treated fairly. Talking about your plans with the people involved can make a huge difference.

If the terms of your will or trust are unique or vary from state intestacy guidelines, speaking to everyone involved is critical. For example, if you plan to leave 80% of your estate to one child instead of splitting it 50-50 between both sons, let them know your rationale for your decision. The more your heirs see your logic, the less apt they’ll be to contest your estate plan. Plus, if there’s a conflict, you’re still around to help work out the issues.

Another way to help reduce conflicts is by adding a “no-contest” clause. This means if an heir contests the will or trust, they get nothing.

Be certain to make things clear during your lifetime—it can be a mistake to assume everyone will graciously accept your intentions and “do the right thing.” Eliminate fighting after you’re gone by speaking openly and honestly with your heirs now.

Reference: Forbes (October 31, 2016) “How to Keep Your Heirs from Fighting Over Your Estate”

What if You Die Intestate?

“If someone dies `intestate,’ meaning `without a will,’ then certain individuals have the right to qualify as administrator of the estate. The law is very rigid with respect to who can qualify.”

If your parents don’t have wills, how do you convince them that they need them?

Education is key, says NJ 101.5 in “Talking to your parents about a will.” Some parents fail to realize the consequences of not having a will—like if you don’t have a will, you lose the right to choose who will serve as executor (the person in charge of the estate).

In the absence of a will, the “administrator” appointed by the court needs to be bonded, which can cost hundreds or even thousands of dollars. With a will, you can have a clause that waives the bond requirement. One great reason for Mom and Dad to have a will right there!

A place for information on this topic is your area’s probate court, typically located in the county seat. Plus, many good introductory brochures can be found online on their website. This information might be enough to convince your parents how important it is to have wills.

Another possible concern with some parents is that of keeping their personal and financial matters private. If so, they can create trusts to dispose of their assets. Remember that a will is a public document. While most wills don’t have specific asset information, the will itself is open to the public, and anyone can obtain a copy. A trust is always private unless there is a court action involving the trust. The trust agreement isn’t automatically a public record, even in that case.

If your parents create a trust with the help of a qualified trust attorney, and they transfer their assets to a trust during their lifetime, the trust controls what happens to those assets upon their incapacity and death.

These are some good options to discuss with Mom and Dad. No matter what they decide, it’s better to have a plan in place. Otherwise, ignoring these issues may mean costly and stressful family disputes, which can be avoided with proper planning.

Reference: NJ 101.5 (November 1, 2016) “Talking to your parents about a will”

Some Trustworthy Incentive Trust Information

“If you want to influence your family members even after you’re gone, an incentive trust is definitely an option to consider.”

What if you have adult children that are—to put it kindly—financial disasters?

What can a parent put in place so these adult children comply with certain requirements in order to receive their portion of the estate? You don’t want the money to be spent in the first six months!

The Norman (OK) Transcript’s article, “Incentive trusts can motivate your heirs to better themselves,” provides some information on how it works and some tips to help you create such an estate plan.

An incentive trust is an estate-planning tool used to help motivate your heirs in the direction you want after you pass away. Some or all of your assets are passed to your incentive trust when you die instead of directly to your heirs, like your financial disaster kids. The trustee has the power to distribute funds from the trust only if and when the beneficiaries perform (or abstain from) whatever goal or behavior you have specified in the trust. It can be something like encouraging a granddaughter beneficiary to graduate from college, reward beneficiaries who do charitable work, or supplement the incomes of beneficiaries who elect to go into lower-paying but meaningful careers like social work.

On the flip side, an incentive trust can be set up to penalize beneficiaries who don’t work by cutting off or cutting down their trust distributions. Some trusts will put restrictions on heirs with addictions by requiring that the payments go straight to the rehab facility.

You should also be aware that incentive trusts can have drawbacks. Poorly constructed incentive trusts can have a high risk of unintended consequences. For instance, you may want to set up an incentive trust that provides a financial incentive for beneficiaries to be employed full-time—but if one becomes ill or is seriously injured in a car accident and is unable to work, they’d be punished unfairly.

In addition, there are some legal limitations on what you can do with an incentive trust. Incentive trusts that encourage a beneficiary to join or leave a particular religion or seek a divorce may be challenged in court and possibly revoked.

To create a comprehensive and effective incentive trust that does all that you want, tell your estate planning attorney what you want to accomplish and he or she can draft the right provisions. However, you should also add in language granting your trustee the right to use his or her discretion and that the trustee’s decisions should be final and binding. This allows your trustee to make common sense decisions, reducing or eliminating the chances of unintended and inequitable results. It also makes it harder for beneficiaries to successfully challenge the trust or trustee in court. When a trust gives final decision-making authority to its trustee, it’s just about impossible for beneficiaries to successfully argue that the trustee is failing to implement the trust’s terms.

Reference: Norman Transcript (November 1, 2016) “Incentive trusts can motivate your heirs to better themselves”