Costly Mistakes to Avoid in Creating a DIY Estate Plan

It's tempting to save money with a DIY estate plan. For real estate investors, doing your estate planning yourself is not ideal. Your estate is likely more extensive and complex than an online DIY estate plan covers. 

There are tons of tiny details and places to trip you up in estate planning. The number of elements and potential pitfalls make it a near-requirement for real estate investors to get professional help from an attorney. 

You wouldn't want to jeopardize your assets from a missed signature, would you? 

Below you'll find a definition of a DIY estate plan, problems specific to real estate investors, and some common issues plaguing people who plan without expert advice. 

What Is A DIY Estate Plan? 

Typically, a DIY estate plan is when a person completes their estate planning documents. 

Some examples of a DIY estate plan include: 

A DIY estate plan is a bit like Googling open-heart surgery and then performing it on yourself. Possible? Maybe, but unlikely. 

It's complex and needs a person with the expertise to conduct the transaction.

DIY Estate Plan: Unique Problems For Real Estate Investors 

The primary issue with a DIY Estate plan is that it's too general. The forms are boilerplate and meant to address as many situations as possible. The problem is that this approach is too broad. Your situation is specific and needs specific solutions. 

Suppose you own rental property in California, New York, and Texas. It happens; you die. You used a DIY estate plan, but maybe you didn't set up an LLC, a Series LLC, or a trust. 

When you die, your beneficiaries will likely go to probate:

Each of those probate courts will cost money in court costs and attorney fees. Fees can run as high as 5% to 10% of the estate's value.  

DIY Estate Plan: Costly Mistakes

It might be cheaper to plan your estate without an attorney, but you will have to pay in the long run. Some common issues that arise from planning your estate by yourself include: 

  1. Failure to execute 
  2. Witnesses
  3. Failure to fund a trust
  4. Forgetting to include a contingent beneficiary

Failure to execute

Failing to execute a will might come from mistakes or an overlooked detail in the will. An estate plan is not one document but a variety of strategies and legal procedures you want to be executed when you die. 

There are plenty of websites and mobile apps that let you create a will or a revocable living trust. An online document you do for yourself might sometimes work, but a real estate investor has a more significant estate. That larger estate is more complex to protect and probably exceeds the scope of a DIY estate plan.

Every state has laws that govern the execution of wills. Typically, a will and other documents need to be signed in the presence of two people who don't have an interest in the estate. Failure to sign the will properly means it will be unenforceable, and the state decides how to divvy up your property via probate. 

Witness Issues

It happens all the time. A person dies, and long-distant family members come pouring out of the woodwork. Or families argue about the decedent's estate. Those family members may say that you, the deceased, were unduly influenced during the creation of the will. 

A DIY estate plan provides no witnesses on your beneficiaries' behalf that can attest to your state of mind when you created your will. It becomes a matter of "he said-she said" in the courtroom, and a judge might invalidate the will and let the court decide how to split up your estate. 

If you have an attorney who drafted the will, you have a better chance of winning. The lawyer can speak to your state of mind, and that testimony has weight because the attorney is an officer of the court. 

Revocable Living Trust

You've set a revocable living trust, and you think everything is all set. Then the day comes when you pass away. If you didn't adequately fund your trust, your family's nightmare is just beginning. 

A living trust is just a document that says the trust exists. For the document to matter, you have to fund the trust properly. That means you must retitle or transfer ownership of the assets you own to the trust. If you fail to fund your trust correctly, your family will be on the hook for hefty fees (up to 15% of the estate) because they will have to go through probate to execute the trust. 

This is a costly and time-consuming mistake.  

Importance Of A Contingent Beneficiary

Imagine that you've planned your estate and have named your wife as the primary beneficiary. You have all the paperwork lined up and ready to go if you die suddenly. That's a great start. 

What happens to your estate if you and your wife die in a car accident? 

The estate goes to probate, and the court determines how to split your assets. That might not follow the plan you have set forth. To combat this issue, you should name a contingent beneficiary. 

A contingent beneficiary is a person or entity next in line if your primary beneficiary dies or is incapacitated. You can name a contingent beneficiary on: 

Our list is not a comprehensive list of items that can have a contingent beneficiary, but it's an excellent place to get started. Almost anything you can name a beneficiary for, you can also name a contingent beneficiary. 

Key Takeaways

DIY estate planning is detailed and requires a professional touch, especially for real estate investors. You'll want to work with a knowledgeable estate planning attorney to 1make sure your estate doesn't end in probate. 

In the long run, it'll cost much less. 

Are you ready to speak with an expert? Learn about our comprehensive solutions you can use to achieve financial freedom, reclaim your time, protect your assets, and build your legacy. Book a FREE discovery call now.

The Cost of Probate on an Estate

Dying isn't fun. What's worse than dying is the emotional, financial, and legal mess that you've left your family to navigate. That mess is the actual cost of probate. 

As a real estate investor, you've planned and prepared all your life. Don't drop the ball in death.

Do you want to leave your family in a stable financial situation when you kick the bucket? Do you want to care for your spouse and kids after you shed loose your mortal coil? 

Taking care of your heirs, sound like you? You're exactly in the right place.

What I'll show you is the cost of probate on an estate. I'll also reveal how to avoid probate's legal and financial pitfalls. 

That's important for a real estate investor because your estate may be larger than average. With that larger estate comes the potential for a larger legal and financial headache. 

Keep reading to learn more about the cost of probate. You'll also see some practical and actionable steps that you can take to protect your estate.  

What Is Probate?

Probate is the legal process to prove the validity of your will. When you die, the court-appointed executor of the will executes the probate process. 

The executor will collect all the dead person's assets, pay debts, and divide the estate between the beneficiaries. The executor and the court ultimately determine the final verdict on how to distribute your assets. Not you. Not your loved ones. 

The Startling Cost Of Probate

The true cost of probate is both time and money. For instance, probate potentially lasts up to a year. 

Additional time costs of probate include:

That's the best cast scenario where you have a will and named beneficiaries. 

If you don't have a valid will, you're in a state of intestacy. In other words, you're dead, and there is no will. Having no will virtually guarantees a lengthy and costly probate process. 

Even with a will, probate may still take a few months. In some cases, there will be legal wrangling for up to a year. That costs a lot of money.

Additional financial costs of probate include: 

All in all, probate can cost up to 10% of your total estate. 

Here is an illustration for probate’s potential costs. Suppose your estate is worth $400,000. In some cases, probate can cost as much as 10% of $400,000. 

That's $40,000 that doesn't go to paying your kid's college tuition. Or money not there for your wife's life-saving surgery. 

Probate is expensive, but there is a safe and legal way for you to avoid it altogether. 

Beat The Cost Of Probate, Guaranteed

A guaranteed way to beat the cost of probate is with a living trust. A living trust enables your family to skip the probate process. When you use a will, your estate becomes probated. In a living trust, there is a probate process. 

That means your estate passes promptly to your beneficiaries. All you have to do is create a trust document. Then, you transfer ownership of your estate to the trust and name a trustee. Typically, you'll name yourself the trustee to control the trust's estate. 

A nice benefit of a living trust is that it gives you operational anonymity. For a real estate investor, anonymity is critical because it can help avoid being sued.  

The other benefit of a living trust is that your heirs don't have to wait to get the estate. Also, people with ill intentions will find it difficult to challenge a living trust in court. 

One way you can add another layer of protection to a living trust is with a pour-over will. A pour-over will stipulates any property not put into the living trust is "poured" into the trust. Then, the trust divides and distributes the property among your beneficiaries.

All in all, probate can be an expensive process, but a living trust eliminates that cost. You are the ultimate decision maker with how you distribute your estate. Not the attorneys. Not the courts. It's impossible to overstate the value of the peace of mind that comes with a living trust.  

Key Takeaways 

If you don't have an estate plan, it might be time to get one now. The cost of probate can be substantial, especially for real estate investors. Lucky for you, it's easy to avoid probate. Our favorite option is setting up a living trust. 

A living trust makes it easier for you to pass on your wealth to your family. It also provides a layer of protection by giving operational anonymity. In our litigious society, that is a huge advantage.  

Are you ready to speak with an expert? Learn about our comprehensive solutions you can use to achieve financial freedom, reclaim your time, protect your assets, and build your legacy. Book a FREE discovery call now.

Avoid Probate and Spare Loved Ones Pain: Why a Will Isn't Enough

No one likes thinking about their death. But the only thing worse than your death is leaving behind a complicated legal mess for your family. As a responsible real estate investor, you should commit to estate planning to avoid probate court; and the headache probate brings.

This article doesn't cover all the myriad aspects of estate planning.

Instead, I'll show you a strategy that works—an approach that enables you and your family to avoid probate and protect your assets.

This article will delve into the definition of probate, how to avoid it, and describe a living trust and its advantages in estate planning.

What Is Probate?

Probate is the legal process governed by state law, in which a court evaluates a will. If the will is valid, then the court splits the deceased person's assets according to the terms of the will.

Probate is not a simple process. It's time-consuming, expensive, and can get incredibly messy for those involved. Like vultures, people suddenly want to snatch a piece of your assets for themselves once you're gone.

If you don't have a will or a power of attorney, the government decides how to split your assets after you die. Even if you do have a will, you can't avoid probate. Your grieving family will have to go through a court proceeding where:

Your assets get snarled in the tangled mess of court proceedings. Those court dates and lawyer fees eat up even more of your estate. Ultimately, if you want to leave your family in the best financial position, it's better to avoid probate altogether.

How Do I Avoid Probate?

You avoid probate through clever estate planning and using a living trust. A living trust provides you ultimate privacy and control in the event of your untimely demise.

Think of a living trust as your corporate shield that sits atop your estate planning structure. Here's how it works–the trust document holds all your assets including, but not limited to:

The living trust is at the top of the structure, and it owns the LLC(s). The LLC(s) own all your assets and provides a convenient, anonymous, and lawsuit-resistant way to hold your assets when you're alive.

Dying is scary, and thinking about your death is an existential crisis that no one wants to experience. To achieve peace of mind, consider a living trust as an investment in your family's future.

What Is a Living Trust?

A living trust is a legal strategy that enables you to avoid probate. A living trust is a legal protection mechanism for your property and investments. You create a trust agreement, and that trust takes control of your properties and assets.

You designate a trustee to control the assets. In virtually all scenarios, the trustee is the person funding the trust (you).

Why should you do this? Simple, a living trust completely negates the stickiness of probate court proceedings.

How Does a Living Trust Help Me Avoid Probate?

An enormously valuable benefit of the living trust is the ability for you to name the beneficiaries of your assets when you die. That benefit helps your heirs avoid probate.

Also–when you kick the bucket–your living trust still controls your assets. The trust is the legal vehicle you will use to pass your assets on to your heirs. Your assets stay within the structure, and the living trust and LLC prevent your assets from entering probate.

Your living trust enables your family or heirs to:

Since your assets are still anonymous, your heirs and beneficiaries are lawsuit-resistant. They can enjoy the assets immediately upon the transfer.

You can support your living trust with a will that directs your trustee to place anything not in the living trust into the trust so that it can distribute the assets. These are things like:

With the combination of a living trust, LLCs, and careful estate planning, you can enable your family to avoid probate and its expensive obstacles. Remember, you won't be there to protect them, so you should make their grieving process as clean and organized as possible.

Key Takeaways

To avoid probate, create a living trust. Probate courts can result in unnecessary hardship while eating up your assets. Those assets don't belong to the government or lawyers but to your heirs and beneficiaries.

An estate planning strategy prevents your family from having to make tough decisions after you die. A living trust gives you the control and privacy that you need to keep providing for your family once you shed loose this mortal coil.

Are you ready to take control of your financial future and ensure your family is taken care of when you die? Check out our FREE Estate Planning Masterclass and Estate Planning: Know More than Your Attorney in 15 Minutes.

Complete Guide to Selling an Inherited House As-Is with Siblings

Are you considering selling an inherited house with your siblings? Dealing with the death of a parent or guardian is an emotional period, complicated by the administrative and legal tasks that go hand-in-hand with death. If you're inheriting a house with siblings, there are also financial and sentimental challenges to navigate.

Many families opt for selling an inherited home as-is to minimize the timeline and see the financial returns as soon as possible. However, what's intended to be a gift can become a burden if this process isn't handled properly.

Types of Home Inheritances

Inheriting a home may seem pretty straightforward. However, different types of inheritances can impact how you handle the sale of the property: deed inheritance, will inheritance, and trust inheritance.

A deed inheritance works similarly to a life insurance policy. Also known as a "Title by Contract," this applies to mortgages that have a beneficiary or beneficiaries listed to receive the property in the event of the contract holder's death. The beneficiary is listed as a "Remainderman."

A will inheritance is a bit more complicated to manage. This type of home inheritance is what most people envision when they consider an inheritance. The property owner leaves the house to you and your siblings in the will. However, as the will is not a part of the original ownership contract, you must use the will to go through probate proceedings to secure the property. This process delays the sale of the home by months.

Finally, a trust inheritance indicates that you and your siblings are entitled to the home after a certain age. This type of inheritance typically doesn't apply to adult children or siblings.

Determining the type of inheritance you've received will help you understand the timelines and legalities involved. It's worth hiring an attorney to navigate these processes.

Selling an Inherited House? Understanding Inherited Ownership

When you inherit a house with your siblings, state law dictates that you share ownership equally. In addition to sharing the asset, you're also equally responsible for any outstanding liabilities and debts (i.e., the mortgage and property taxes) and for claiming income from the property.

This means that you and your siblings will be equally responsible for paying debts— especially if there's no life insurance to cover the outstanding mortgage— even if you have different income levels. Additionally, you'll all have taxable income from the sale to navigate with the IRS. It's worth getting professional legal and accounting advice as individuals when navigating the process.

It's also important to note that selling an inherited house can't take place without agreement from all of the listed beneficiaries. If a sibling is pushing back, you may require legal intervention before listing the home.

It should be no surprise that handling the administration of dividing debts and income and listing the home is a significant undertaking. If one sibling handles the majority of the work, they are legally entitled to additional compensation for their time from the estate. Again, having legal counsel in place to assist is beneficial.

Dealing with an Outstanding Mortgage

Getting mortgage insurance is one of the best things a homeowner can do to protect their family should death occur— unfortunately, many opt out of this coverage. When mortgage protection is in place, the costs are covered, and the beneficiaries don't have to worry about paying it off.

So what about those cases when the parent didn't have mortgage insurance or life insurance, and a mortgage is still outstanding?

Rest assured that under federal law, a mortgage lender cannot demand the entire mortgage in a lump sum from the beneficiaries of inheritance. In some states, there are even protections in place to give beneficiaries the right to walk away from an inheritance with a mortgage without the bank being able to go after their personal assets.

The process of transferring a mortgage after death is contingent on each lender's policies and procedures. Generally, it's a lot of tedious paperwork, but not too difficult. Inheriting a mortgage does mean you'll be required to make those payments until the house is sold. When the home sells, the profits will be applied to paying off the mortgage before being divided between the beneficiaries.

Home Inheritance Taxes

When you inherit a home, a policy called "stepped-up basis" comes into effect. This policy ensures you only pay gains on the selling profit versus the home's value today rather than the original value. Suppose your parents bought the home for $50,000, and it's now worth $200,000. You sell it as-is for $220,000. You and your siblings would be taxed on the gains of $20,000 rather than $170,000.

It's important to understand this concept, as many parents mistakenly "gift" the home to their children before their death. In that case, you would be taxed for the $170,000 gain.

Selling a House As-Is

Selling an inherited house as-is means that you're listing the property in its current state with the understanding among buyers that you won't be making any repairs. Buyers still retain the right to have an inspection completed, negotiate the price, and access a full property disclosure from the sellers.

The advantage of selling a house as-is is that you won't have to put any time and money into the property before selling. This streamlines the process of paying off the mortgage, potentially getting extra money, and moving on with your lives.

As inheriting a home with siblings can be complex, it's important to hire a professional attorney and consult with a skilled accountant.

Key Takeaway

Spare loved ones the pain of probate and ensure that your assets are distributed exactly according to your wishes by having a professional estate plan put in place. This can be accomplished through a 3-part strategy that involves a Living Trust, Pour Over Will, and power of attornies for making medical, financial, and managerial decisions. By not having a proper estate plan, you are at extreme risk of losing up to 1/3 or more of your estate to probate court and attorney fees. To learn more about Royal Legal Solution's rock-solid estate plan service, visit Estate Planning for Real Estate Investors.

The Ultimate Estate Management Guide for Savvy REIs

Here is your ultimate guide to estate management and a list of things you should do to get started.

As a savvy real estate investor, you know that you don't have to be ultra-wealthy to need estate planning. Your estate includes everything you all own. Protecting your assets for future generations makes estate planning worthwhile.

Keep reading to learn how to protect your assets!

Basic Overview

Estate management, also called estate planning, is the action of picking who receives your estate and manages your responsibilities if you are dead or incapacitated. The process ensures your beneficiaries enjoy your estate with less tax burden.

Estate planning establishes a procedure that can align with your personal and financial goals. How do you want your assets divided if you die or are incapacitated?

If you want to learn more about estate planning benefits, check out our guide, Estate Planning for Real Estate Investors.

Here are three estate management tips to protect your financial future.

Estate Management Tip #1: Inventory All Your Assets

You have enough stuff to start estate planning. Once you take a closer look, you will realize how many assets you have. In general, you can have tangible assets and intangible assets.

Tangible assets include:

Intangible assets include:

Once you know how large your estate is, you need to estimate its worth. You have options for assessing the price of your assets:

Either way, you choose to estimate the value of your assets, you will ensure that your heirs inherit your possessions equitably.

Estate Management Tip #2: Establish Your Legal Plan

Once you know what's in your estate and how much it's worth, you need to think about how to protect your family and assets once you're not in the picture.

As a real estate investor, you have more things to consider, and your estate management plan needs to include legal directives. A wise option for carrying out your directions is establishing a living trust.

A living trust might be right for you. A living trust allows you to designate which portion of your estate goes where. If you're incapacitated, your trustee takes over. But, how do you find a trustee for your living trust?

Finding a trustee can be tricky. At a minimum, you want your trustee to be someone who:

Read our article Finding A Trustee For Your Estate Plan to learn more about selecting the right trustee for you.

If you die, your trust assets transfer to your beneficiaries, and you get to skip the probate process.

Probate is a time-consuming and expensive court process that determines how to divvy up your estate. It's best to avoid court in these matters, so you might consider using a pour-over will in addition to a trust for the best protection.

A pour-over will is a standard will form stating that the assets not included in your trust should be moved into the trust and distributed via the living trust terms.

Read more about the benefits of establishing a living trust in our article Living Trust Versus A Will: What's The Benefits For Rei?

Estate Management Tip #3: Determine Your Beneficiaries

Whether you choose a will or trust to carry out your wishes, you will need to determine who receives your estate.

Follow these steps to ensure that your assets go to the right people:

Key Takeaways

Change is the only constant in life. As a result, your estate management plan needs to be flexible. To keep your assets protected, make sure to revisit your plan regularly and if you have a life circumstance change.

We went over the importance of inventorying your assets, estimating their value, establishing a legal plan, and determining your beneficiaries. If you follow our ultimate estate management guide, you will take a huge step toward protecting your assets.

To learn more, check out our Estate Planning hub. This page serves as a knowledge base on all things related to leaving your legacy.

Living Trust or Last Will and Testament: Which is Better for Real Estate Investors?

Estate planning should be on any investor’s “to-do” list, especially the real estate investor. The steps you take now can ensure that your investments will be passed to your family members and chosen heirs according to your wishes—not how the probate court decides.

In this article, we'll examine the living trust and the will, explain their similarities and differences, and offer our recommendations for how you can combine the best of both tools.

Living Trust or Last Will and Testament: Which is Better for Real Estate Investors? Ugandan pallbearersHow does a living trust work for the real estate investor?

When you form a living trust, you (the grantor) transfer the ownership of your assets (your property) to a special fund called a trust.  

You name a responsible person (the trustee) to manage the trust and make sure your wishes are followed after your passing. The trustee can be a relative or a professional from a financial institution. From that point on, the trust owns the property – not you -- a fact that allows for the privacy of both you and your heirs.

A significant advantage of a living trust is that, unlike a will, it allows for the control of your assets to pass to your designated heirs without getting tied up in probate court. Another benefit is that the trust keeps the real estate value out of the taxable portion of your estate.

Other benefits of living trusts are that they are easier to modify and more difficult to challenge than wills.

A disadvantage of a living trust is that it can be complicated and expensive to set up, and it needs competent ongoing management. The cost to set up a living trust depends on the state you live in, the type of trust, and how complex the legal document needs to be.

Living Trust or Last Will and Testament: Which is Better for Real Estate Investors? obama we're all going to dieHow does a will fit into REI estate planning?

A will (often called a last will and testament) is a written document in which you name your minor children's guardians and bequeath your belongings and financial assets to individuals or charitable organizations. A will also can stipulate how you want your funeral or memorial service to be held. Whereas a trust becomes active as soon as you create it, a will becomes active upon your death.

All wills must go through probate, a legal process in which the court examines the documents. The probate process can be lengthy, especially if family members contest (object to) the will. As we have explained, trusts are difficult to contest, and they do not go through probate after the grantor's death.

It is wise to name an executor of your will. This trusted individual will know where your will is located and will have access to your personal and financial records after your death. Without an executor, a will is still valid, but without one, it's possible that the document might not be discovered after your death.

If you die intestate (without a will), your estate will be distributed according to your state's regulations. The state will name a personal representative (usually a surviving spouse or the oldest child) to distribute your assets, but the process takes time. Until then, your assets will be frozen.

An advantage of a will is that it can be easy and inexpensive to write -- especially with the many online tools that are available. However, your heirs may pay for your savings later by having to hire a probate lawyer.

Living Trust or Last Will and Testament: Which is Better for Real Estate Investors?

Your final piece of real estate ...

Get the best of both tools with a pour-over will and living trust 

Having both a will and a living trust is a powerful way to gain peace of mind for both you and your family.

We recommend that real estate investors have the best of both estate planning tools -- a living trust and a traditional will – by creating a pour-over will along with a living trust.

A pour-over will names your trust as the beneficiary of any property that it does not already hold. Why would this feature be important? Let's say you have neglected to place your new vacation home or other valuable investment property into your trust.

State regulations vary but, without a pour-over will, that real estate might go to an estranged relative rather than to the heir of your choosing.

No one likes to think about their own passing. But the reality is that anyone who is buying and selling property needs to consider an estate plan in a practical, deliberate manner.

We recommend that you evaluate and update your trust documents at least once a year. As long as you remain mentally competent, you can change a revocable living trust at any time. You can fund new property purchases and add the beneficiaries you want to receive any new assets, allowing for a smooth transition.

Rest assured that if you haven't worked out these estate transfer details, your state and the federal government will work them out for you after your death.

You've worked hard to build up your portfolio. We know you want your real estate investments to benefit the people you love. Making an estate plan a priority now can save time, stress, and financial worry later for your loved ones.

 

 

 

 

 

 

 

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The Revocable Living Trust: Your Estate Planning Secret Weapon

Having a sound financial plan makes sense for your future and your family's future.

You may be young. You may be new to real estate investing. But estate plans aren’t just for the wealthy; nor are they for those who are close to retirement.

Estate planning is for anyone who wants to lead a secure life in their retirement years and pass on their hard-earned assets to loved ones.

This article will examine a valuable estate planning tool: the revocable living trust. We'll see what this tool offers, how to create one, and delve into its advantages and potential disadvantages as part of your estate.

What is a revocable living trust?

A revocable living trust (also called a revocable trust) is a written legal document that specifies how you want your assets to be handled when you die.

Since it is a living trust, you create this document during your lifetime. And since it is a revocable trust, you can make changes to it at any time. The main advantage of a revocable living trust over a will is that your heirs will be able to avoid probate, and the details of your estate will remain private.

How do you set up a revocable living trust?

As the creator of the trust, you (the grantor) must name a trusted individual to manage and administer your trust after your death. If you prefer, you also could name a financial institution or legal office as your trustee.

Once you have established the trust, you can transfer assets, including bank accounts, investments, and real estate into the trust. Going forward, you can amend or change the trust whenever you choose to do so (keep that beautiful word "revocable” in mind). Any income generated by the trust's assets goes to you and is subject to taxation.

For some assets, you will need to have to notify insurance companies, banks, and transfer agents about the trust. You may need to update beneficiaries, get new investment certificates, retitle vehicles, and sign new deeds accordingly.

You should also consider establishing a pour-over will, a financial tool that allows unallocated or unfunded assets to "pour over" into your trust.

Irrevocable vs. Revocable Living Trusts

With a revocable living trust, you can change or even void a trust at any time during your lifetime. If you want to remove a specific beneficiary, you do that as well. No one needs to sign off on the changes; it is up to you as the grantor.

On the other hand, with an irrevocable living trust, the grantor gives away all ownership rights to the assets. Why would someone want to set up an irrevocable trust? The answer has to do with taxes.

Does a trust need to file a tax return? The IRS views a revocable trust as a grantor's trust and not a separate entity. The income from a revocable trust must be reported on the grantor's personal tax return. However, since the assets in an irrevocable trust are no longer yours, the trust itself pays all the taxes.

After the granter of a revocable trust dies, a revocable trust becomes irrevocable. No further changes can be made to the trust, and it works the same as an irrevocable trust.

What are the benefits of a revocable trust?

We've already stressed the main advantage of a revocable living trust: its flexibility. You’ll appreciate this benefit if you are doing your estate planning early in your career.

Here are some of the other benefits of this financial tool:

What are the disadvantages of a revocable living trust?

The initial process of creating a revocable living trust can be expensive and time-consuming if you aren’t getting help from an asset protection attorney near you. For example, you may need to get new titles for some of your real estate assets.

After you have created the trust, you need to update it every time you purchase a new asset or open a financial account. Any assets you do not place into the trust will become part of the probate process after your death.

Also, if your marital status or parental status changes, you will need to update the trust. These changes in life circumstances will not automatically be part of the trust.

What are the main differences between a revocable living trust and a living will?

Understanding living trusts is a bit of a learning process. You may be wondering if you need a living trust, a will, or both. The answer is both in many cases.

Both a living trust and a living will allow you to plan the distribution of your assets and name your beneficiaries. You also can revise each document as you wish during your lifetime.

However, a living will go into effect only after your death. A living trust covers your assets in three areas – while you're alive and well, if you're incapacitated, and after you pass away.

Another key difference is that a will must go through probate and become part of the public record. On the other hand, living trusts remain private and avoid probate.

If you have minor children, a will allows you to name their guardians. A revocable trust does not include this information. It only allows you to determine when your children can receive their inheritance and to name will administer the trust for your children until they reach age 18.

Whether a revocable living trust is right for your estate plan depends on your individual circumstances. You'll also want to consider the rules regarding trusts in your location since they can vary state by state. You may want to consider a land trust vs. a living trust. Unlike a living trust, which can hold any type of asset, a land trust holds only real estate or property-related assets such as notes, mortgages, and air rights.

As we've seen, revocable trusts do take some time and planning to create, but they have many long-term advantages for you and your beneficiaries. You can find some revocable living trust templates online, but we recommend that you consult your attorney to find out what best meets your needs and financial goals.

How Does A Reverse Mortgage Work?

Actor Tom Selleck (Magnum, P.I.) is the latest celebrity shilling for them on television.

Maybe you have an older family member or neighbor who has gotten a phone call from a financial institution offering them.

But what are reverse mortgages and how do they work?

If you are a senior homeowner with most of your net worth tied up in your home, these loans can sound pretty appealing. If you're a real estate investor, you may be wondering if you can use a reverse mortgage to your advantage.

In this article, we'll explain what a reverse mortgage is, the pros and cons this cashflow option can offer to some older Americans, and how you can decide if it's right for your financial strategy now or in the future.

what is a reverse mortgage hand holding coffeeWHAT IS A REVERSE MORTGAGE?

 A reverse mortgage is a type of federally insured loan available to Americans age 62 and over. It gets its name because it works in the opposite way as a standard home loan.

With a regular mortgage, the bank gives you a lump sum that you pay back with interest over a set period of time.

With a reverse mortgage, the lender makes payments to YOU based on the equity you have built in your home. You have the option of receiving monthly payments, a lump sum, a line of credit, or a combination of the different options.

 Over time, the amount you owe in interest and fees on the loan grows while your home equity declines. You retain the title to your home, and the balance isn't due until you or your heirs sell your home. 

WHO QUALIFIES FOR A REVERSE MORTGAGE?

Reverse mortgages are only available to a specific set of homeowners. In order to qualify for a reverse mortgage, you must: 

Reverse mortgage loan values may be influenced by the home's value, how much equity is in the house, and other factors. And older borrowers are eligible for greater total loan amounts because age directly correlates with limits. 

what is a reverse mortgage dog wearing glassesWHAT ARE THE ADVANTAGES OF A REVERSE MORTGAGE?

With life expectancy in the U.S. growing closer to 80 years, many Americans are outliving their personal retirement savings. As a result, they may be unprepared for the rising cost of living and the mounting medical expenses that often accompany aging.

Reverse mortgages are ideal for older homeowners who may not have much in the way of savings or investments but who have built up wealth in their homes. In other words, this type of loan allows you to turn an otherwise illiquid asset into a liquid asset without having to move out of your home.

Whether they're living with the results of an investment gone awry or the difficulties of a fixed income, any senior with cash flow issues may want to consider a reverse mortgage.

Here are some of the other attractive features of these home loans.

 FLEXIBLE LENDING OPTIONS

 This type of loan offers flexible disbursement options, meaning you can borrow only the amount you need. Investors may choose to accept the loan as a single lump sum, in monthly installments, or even as a line of credit. This amount of control the borrower has in this regard is greater than most loans.

 If your need is more about your long-term budget, try to put a number on what you need for, say, one year. This amount will help you and anyone helping with your financial planning determine what a conservative loan amount for you might be.

 MORE CASH ON HAND

 For some cash-strapped retirees, a reverse mortgage allows them to remain in their long-time homes without having to downsize. Some borrowers even use the proceeds of a reverse mortgage to pay off their existing home loan.

You can use the money from your reverse mortgage for any purpose, including:

 We'll discuss below why you'll need to account for reverse mortgages in your estate plan. However, if you just want to live out your golden years comfortably, you can do so and even plan to pay off your mortgage at the same time.

Lock In the Value Of Your Home

If we've learned anything about the economy in recent years, it's that anything can happen. If for whatever reason, the value of your home ends up being less than the amount owed on the reverse mortgage, you are protected. In practical terms, that means, if home prices fall in your area, you or your heirs won't have to worry about paying the balance. 

INTEREST LIMITS

 The reverse mortgage has an interesting set of rules regarding interest. On the plus side, you're not charged interest while you continue to live in the reverse-mortgaged home as your primary residence. Interest is also capped on the first $100,000 worth of debt.

NO TAX LIABILITY

 The IRS considers the funds you receive from a reverse mortgage as a loan advance rather than income. That distinction means the money is not taxed, unlike other retirement income from distributions from a 401(k) or an IRA.

what is a reverse mortgage chess setWHAT ARE THE DISADVANTAGES OF REVERSE MORTGAGES?

A reverse mortgage isn't for everyone. There are some risks to this type of loan that you should carefully consider.

Here are some of the potential downsides of taking out a reverse mortgage.

DECEPTIVE OR INFLEXIBLE TERMS

 Although we have come a long way since the unscrupulous practices by some lenders in the 1990s and early 2000s, not all reverse mortgage providers are ethical. Some will assume you won't do your due diligence and will take advantage of you.

 Carefully vet a financial company before considering a loan, and have someone you trust to read the fine print. This person could be a CPA, financial planner, family member working in the industry, or even another investor you know who's successfully used a reverse mortgage and knows what to look for in a loan agreement.

 You're examining the documents for any terms that the sales reps haven't disclosed. Any added terms should serve as red flags that you need to shop around with other lenders.

 Also, be on the lookout for inflexibilities. For instance, reverse mortgages are often challenging to refinance. Ask your salesperson about your refinancing options, and then be sure to see how these claims compare with the written agreement. Any time a salesperson's word vastly differs from a written offer, it may be time to walk away.

Here are some tips for avoiding reverse mortgage scams from the FBI and the U.S. Department of Housing and Urban Development (HUD):

 REVERSE MORTGAGES ARE NOT FREE

 Some of the unscrupulous ads of the past have promoted reverse mortgages as a means to get free access to your own money. These loans do have the following costs associated with them: 

You may have the option of rolling some or all of these fees into your loan balance, but, of course, if you choose to do that, you'll receive less money.

YOUR LOAN MAY BECOME YOUR FAMILY'S DEBT

If you fail to make an estate plan or somehow account for a way to pay your debt after your death, your reverse mortgage may be subject to probate. Probate can take time and cost money, and in the meantime, your heirs do not have access to your estate.

If you die with debt, the debt gets passed on, just like your assets and earnings do. You can offset this downside of a reverse mortgage in two ways:

Our suggestion is to take care of this critical detail immediately after seeking the loan. You may pay it off during your lifetime or pre-arrange for your estate to make payments. However, interest is likely to increase if you delay, and your beneficiaries must pay off the debt.

ASSETS ENCUMBERED BY DEBT CAN'T PASS TO HEIRS

Let's say you take out a substantial loan against your home's equity. If you pass away before making payment or fail to update your estate plan, your heirs may be unable to inherit the home until the loan is paid off in full. If you lack the funds in your estate, that could mean one less asset for your heirs. 

Also, it's important to remember that a reverse mortgage diminishes the equity you have in your home. By the time the loan needs to be paid off, there may much equity left for your heirs to inherit. 

Difficulty SECURING OTHER LOANS

A reverse mortgage is relatively easy to obtain if you meet the qualifications, but it doesn't necessarily "look good" to traditional hard lenders. Some seniors who take out reverse mortgages may find it difficult to secure additional lending elsewhere. This factor can be problematic for investors who rely on good terms to make their deals profitable. 

This type of loan also could limit your ability to qualify for other need-based government programs such as Medicaid or Supplemental Security Income (SSI).  

SHOULD YOU GET A REVERSE MORTGAGE?

If, after weighing the pros and cons of a reverse mortgage, you're still unsure if it is right for you, here are some factors to consider. A reverse mortgage could be a good option for you if:

As with taking on any form of debt, you should take your time deciding on a reverse mortgage. Although it is a relatively easy way to boost your cash flow in the short term, it could put your finances at risk down the road.

Make sure you fully understand the pros and cons of reverse mortgages and enlist the help of professionals to help you make the judgment call. Even a close network of fellow homeowners and savvy borrowers with experience in reverse mortgages can be a valuable source of information.

Learn everything you can about these financial tools, shop smart for a lender, read the written loan terms carefully, and be sure to ask plenty of questions. If a reverse mortgage doesn't feel like it's for you, you can always explore other financial options.

 

 

How The Qualified Personal Residence Trust (QPRT) Shields Your Home From Estate Taxes

A Qualified Personal Residence Trust (QPRT) is a specific type of irrevocable trust that allows you to remove your primary residence or another personal home from your taxable estate. While creating can be a QPRT complicated process, doing so lets you avoid estate taxes and reduce the amount of gift taxes you have to pay.

And guess what? When the feds take less, your heirs get to keep more of the wealth you’ve worked your whole life to accumulate. 

Keep reading to learn more about QPRTs, and when you're done, check out our article Three Ways To Properly Legally Protect A Personal Residence to discover more asset protection tips for your personal home.

qualified personal residence trust: young child catching football

How Does a QPRT Work?

For estates of several million dollars or more, a QPRT can allow you to keep the value of the home out of part of your estate that is subject to estate taxes. Although the QPRT is not used as often as other estate planning tools, it can save you a significant amount in taxes.

In order to create a QPRT, you have to transfer the title to your home to a trust. However, as part of the terms of the trust, you’ll include a provision that allows you to continue to live in the home for a specific period of time before passing to your heirs. The time in which you can continue to live in the home is known as a qualified term interest or a retained income period. So, while you won’t own your home anymore, you can still live there until this period expires.

How Does a QPRT Avoid Estate Taxes?

While there is technically no limit on how long you can keep your interest in the home, if you pass away before the end of your qualified term interest, the value of the home will be included in your taxable estate. So, you should always make sure the term chosen makes sense given your age and future life expectancy. 

If you survive until the interest expires, the title to the home will pass to your heirs and will not be included as part of your estate upon your death. After your heirs inherit the property, you can pay rent, relocate, or figure out other living arrangements. Any rent payments you make to continue living in the home will further reduce the value of your taxable estate. 

QPRTs and Gift Taxes

Although a QPRT can help you avoid estate taxes, Uncle Sam isn’t going to let you get off scot-free: the transfer of your home is subject to gift taxes. However, since you’re retaining a qualified term interest, the property’s gift value will be lower than its fair market value, which means you’ll owe less in gift taxes.

This deduction can translate to significant savings, particularly when younger homeowners set up QPRTs with extensive qualified term interests. The longer the retained income period, the lower the gift value of the home, the lower your tax bill from the IRS. Just remember that you have to outlive the qualified term interest for your heirs to reap the rewards of your estate planning. An experienced estate planning professional can help you decide on the most strategic term for your situation. 

Another way a QPRT saves you money is by avoiding gift taxes on appreciation. When you transfer your home to the trust, you pay the gift tax on its current value, even though the title won’t pass to your heirs for years to come. That means that any increase in your home’s value during your qualified term interest won’t be subject to the gift tax, which can also save you a substantial chunk of change.  

Why You Should Talk To A Pro

While the QPRT can be a great estate planning tool for shielding your home from estate taxes, it’s not the right solution for everyone. It’s important to keep in mind that specific requirements must be met to qualify for the tax savings. There is also a complicated set of special QPRT/grantor trust valuation rules for estate and gift tax purposes, which are outlined in Internal Revenue Code §2702 and related regulations. 

As with most estate planning strategies, you should consult with an attorney who specializes in this type of law to determine if a QPRT is right for your situation. An estate planning lawyer who knows their stuff can help you decide on the best methods for saving your money from the IRS, determine if you can qualify for a QPRT and make sure it’s set up correctly if you choose to take that path. 

 

2021 Is A Critical Year for Estate Planning—A Trust Is A Great Start

Real estate investors were thrown a few curveballs last year, to say the least.

The stress and uncertainty of 2020 motivated a lot of you to stop procrastinating and get your financial affairs in order. Trust me ... Financial planners and asset protection attorneys have been working overtime.

On top of an unprecedented global pandemic, another election cycle brought the prospect of legislation that could change how our businesses (and our estates) are taxed.

With the current estate credit set to end in 2025, proactive business owners were calling us before COVID spread throughout the globe. But the events of 2020 have even more of you thinking about the gloomy prospects for recession, disability or death.

Whatever happens with the pandemic and the fallout for landlords, 2021 is shaping up as a critical year for estate planning because of President Joe Biden's proposal to lower estate tax exemptions. Biden proposals include limits to the gift, estate, and GST exemption amounts a taxpayer can take. According to The National Law Review, it is now more important than ever to create an estate plan or review the terms of an existing one.

Worried yet?

Don't be. As with many things in life, a little preparation goes a long way. You have a lot of options.

For example: Setting up a trust, which allows a third party—or trustee—to hold assets on behalf of your beneficiaries, can offer you valuable peace of mind. With a trust in place, your heirs will not have to go through the time and expense of probate. A trust also allows you to protect your assets, maintain privacy, and reduce estate and gift taxes.

Even if you have an estate plan in place, it is critical to update it each year to allow for life’s many changes, including births, deaths, weddings, divorces, illnesses, and children reaching the age of majority.

In this article, we'll examine one of the primary components of estate planning—selecting who will serve as your personal trustee. But first, let's look at the changes that 2021 could be bringing to the way estate planning attorneys like me handle our clients' affairs.

estate planning: biden changesWhat Estate Law Changes Will 2021 Bring?

Changes that impact the way we leave assets to our families are afoot.  These include:

The world is changing. Your family and your needs are changing. Estate plans should be updated every year to reflect these shifts, to give you peace of mind and preserve your wealth for your loved ones.

Creating a Trust Is A Great Start

Updating your estate plan for 2021 means finding ways to control where your assets will go should you die or become otherwise incapacitated. Establishing a land trust or another kind of trust can do exactly that.

Determining who will serve as your trustee is a key step. This individual acts as a fiduciary, overseeing the management of property owned by the trust. The person (or persons) you choose must have a clear understanding of the role. The primary expectations of a personal trustee include:

While those duties align with moral responsibilities, the position also comes with distinct hands-on tasks such as paying bills, reporting taxes, fulfilling obligations to beneficiaries, and following all compliance requirements. Making investments may also be part of the job.

Particularly with large estates, the trustee may be exposed to legal action by the beneficiaries of the trust. As you can see, the position or the offer of the position should not be taken lightly. You'll want to make sure the person fully understands the responsibilities and isn't blindsided with them after your death.

In addition to being a trusted friend or family member, a trustee can be a professional (such as your attorney) or an institution (like a bank). You also can to have an individual and an institution serve as co-trustees. A professional trustee can help shift the legal liability of the position away from the personal trustee while keeping them informed and part of critical decision-making.

How is a trustee compensated for their time?

Choosing who will serve as your personal trustee is an important decision. It should be someone who knows you well and who gets along with your family members. It's more than an honor; it's a serious commitment to you and your heirs.

Both personal and professional trustees are entitled to payment for their work. As you might expect, the compensation depends on the size of the estate and the amount of work the position requires.

There is no set fee for a trustee, and most trust documents and state laws state that trustees should earn a "reasonable" amount for the work. What is a reasonable amount? Here are some guidelines:

In some cases, a trustee may not want to receive financial compensation for their work. One consideration is that a trustee's remuneration is taxable as income. But family relationships also can enter into the picture.

For example, a relative may choose to forego payment for their time as a trustee because they view the position as a family responsibility. Others may think that accepting payment could cause friction or strain within the family.

curve ballThe Takeaway

With the rate of COVID vaccination increasing, many of us are looking forward to returning to some semblance of normal life in 2021. However, we would be wise not to ignore the wake-up call that the pandemic has given us to get our affairs in order. And thanks to legislative changes, investors are faced with a whole new ball game going forward. 

None of us knows what the future holds. No matter the size of your estate, you'll gain valuable peace of mind when you create or update your estate plan in 2021.

Do I Need a Medical Power of Attorney?

It is said that change is the only constant thing in life. And while this saying has fallen into the realm of overuse, it remains true today.

So how does this affect your estate planning? When planning, it will do you well to account for all eventualities that may occur. One of the ways to do that is via power of attorney.

Here is a checklist for estate planning you can use to get started. This article covers one aspect of the checklist—the medical power of attorney and how you can use it to protect yourself.

Do I Need a Medical Power of Attorney?What Is a Power of Attorney?

Hold on, what is a power of attorney? To some, it might sound like something a fairy godmother does to magically transform you into a lawyer. Pumpkins and all. But hold your horses. Even though that might be great to see, a power of attorney is a document that confers specific powers on someone, and we’re not talking about superpowers.

A power of attorney (POA) gives one person (called the attorney-in-fact or agent) the authority to make decisions on behalf of another (called the principal). These powers come into play when the principal is incapacitated and can no longer make those decisions themselves. A POA can be of utmost importance to a real estate investor for the following reasons:

There are several types of POAs. For this post, we will concern ourselves with two of them; the medical POA and the durable POA. Each serves a slightly different purpose, as we will see.

Durable Power of Attorney

A durable POA is one that confers the decision-making power on the agent after the principal gets incapacitated. The POA grants decision-making powers for financial, legal, and property matters. It is called a durable power of attorney because it needs to be explicitly revoked once the principal is available to make decisions once again.

The durable POA does not give the attorney-in-fact authority to make decisions regarding health matters of the principal, except for paying health bills. A medical POA is created to give someone authority to make health-related decisions on your behalf.

Medical Powers of Attorney

A medical power of attorney gives the agent authority to make health-related decisions on behalf of the principal. The medical POA springs into action only after the principal’s doctor says they are unable to make critical decisions themselves. The medical POA is sometimes called an advance directive, a health POA, or an advance healthcare directive.

The requirements for POAs vary from state to state, so if you move, you might want to check with an attorney to verify that your medical POA is still valid in your new home.

How Does A Medical POA Work?

You might be skeptical about ever needing a medical POA. After all, what could ever stop you from talking with your doctors to make your decisions known? Well, a medical POA usually kicks in when the principal:

Sadly, these situations happen often enough that you should be prepared. Better to have it and not need it than otherwise. If you eventually need it, then the POA works to make your decisions known through your agent.

How To Select An Agent/Attorney-In-Fact

Your life is literally in your agent’s hands in a medical POA. This means that you should try as much as possible to appoint an agent that is trustworthy, reliable, mentally capable, isn’t your healthcare provider (most states have this requirement), has discussed your wishes with you, and understands what you want to be done is specific scenarios.

Here are some of the decisions your agent has authority over:

The gravity of these decisions suggests you want to select the best possible person to be your agent.

As Scott discusses in the video above, the healthcare power of attorney and durable power of attorney let people help you when you become incapacitated. All the operational pieces can be done in your home to allow others to make health decisions for you when you aren't able to do so on your own behalf.

Should You Get One?

With all the information we’ve put at your disposal, the decision is still yours. However, we think it is better for you to be prepared for any eventualities and to streamline the decision-making process as much as possible when you’re not available to make them yourself.

Interested in learning more? Check out our articles Do I Need a Durable Power of Attorney? and Using a Power of Attorney With a Land Trust.

Do I Need a Durable Power of Attorney?

Life is unpredictable. But it’s not for nothing that the cliché says: if you fail to plan, you plan to fail.

One of the best things you can do to safeguard your assets is to prepare for the worst, including death and debilitating illness. You should also plan for a scenario where you’re not able to be physically present when business decisions have to be made.

Here is a checklist for estate planning you can use to get started. This article covers one aspect of the checklist—the durable power of attorney and how you can use it to protect yourself.

What Is A Power of Attorney?

A power of attorney (POA) is a legal document that gives someone (called an attorney-in-fact or an agent) the authority to act on behalf of another person (called a principal). A power of attorney is usually used when the principal becomes ill, is disabled, or cannot be physically present to sign legal or financial documents. A POA is especially important to real estate investors because it means your investments are not neglected when you’re indisposed.

Now, there are several types of powers of attorney. What we will concern ourselves with here are two types that are vital in your estate planning journey.

Types of Powers of Attorney

Building on our earlier statement, we will broadly cover two types of power of attorney; durable and medical power of attorney.

Durable Power of Attorney

A durable POA is a type of power of attorney that comes into effect in the event of the incapacitation of the principal. It is called a durable power of attorney because it can last for the entire principal’s lifetime unless it is revoked. The power isn’t activated until the principal is incapacitated, though.

The durable POA only covers legal, property, or financial issues. The agent or attorney-in-fact doesn’t have the power to make decisions concerning the principal’s health except when paying the principal’s health bills. To be able to do that, a medical or healthcare POA is needed.

Medical Power of Attorney

A medical power of attorney gives the attorney-in-fact the power to make decisions regarding the principal’s health. You might also hear it called a health power of attorney, an advance directive, or an advance healthcare directive.

As Scott discusses in the video above, the healthcare power of attorney and durable power of attorney let people help you when you become incapacitated. All the operational pieces can be done in your home to allow others to make health decisions for you when you aren't able to do so on your own behalf.

How Do You Prepare a Durable Power of Attorney?

Thanks to LegalZoom and a ton of other online sites, you can download or buy a power of attorney template online. However, because of how the requirements vary by state, we recommend you contact a asset protection attorney to guide you through the process.

While a POA is extremely useful, it doesn’t allow the delegations of a few rights, such as the right to vote, the right to make, amend, or revoke a will, and (in some states) the right to contract a marriage.

While the requirements of a POA vary from state to state, here some general recommendations:

Choosing an Agent and the Risks Involved

Creating a durable power of attorney can have tremendous advantages: it means you can still be in charge (in a sense) if you are incapacitated. However, in essence, you are signing over your entire financial and legal life to someone else to control. Even though there are means to help make creating a power of attorney safer, such as choosing multiple agents and having them check each other, you should take note of who you select as an agent.

Here are some characteristics you should check for when naming an agent:

  1. Trustworthiness: the agent should be someone you trust to handle your affairs diligently and fairly. Avoid agents with a history of substance abuse, gambling, stealing, and unreliability. You should be able to trust that they will follow your instructions, even over other peoples’ objections.
  2. Competence: your agent should not have a history of irresponsibility with their finances.

Do You Need a POA?

A durable power of attorney document will help safeguard your investments when you’re not able to do so personally. You should take care to select an appropriate agent when creating one, to ensure optimal protection.

Interested in learning more? Check out our articles Using a Power of Attorney With a Land Trust and Do I Need a Medical Power of Attorney?

Estate Planning for Unmarried Couples

There are many reasons couples decide not to get married. Some choose to live together before getting married, while others see no need to walk down the aisle to make the relationship official. According to a Pew Research study, there is a growing acceptance of cohabitation in America.

The study also revealed that the number of adults in the U.S. who are currently married is down from 58 percent in 1995 to 53 percent today. Over the same period, the number of Americans living with an unmarried partner increased from 3 percent to 7 percent.

In spite of these trends, unmarried couples may not realize that they do not have the same legal rights as marriage partners. This article will explore estate planning for unmarried couples and why it should be a priority for you and your significant other.

lionsWhy Unmarried Couples Should Have An Estate Plan

The law protects spouses and children in the absence of a will or an estate plan. However, no such safeguards are in place for surviving unmarried partners.

When you have an estate plan in place, you are able to dictate who gets your assets after your death and who can make decisions for you if you cannot make them for yourself.

Here are two scenarios to illustrate why it is so important that you and your partner create an estate plan.

#1 If you die without an estate plan, your partner will not be entitled to receive your Social Security or other benefits, any notice of probate proceedings, or any homestead rights usually granted to married spouses. Your partner also may not be able to inherit any of your property or belongings.

#2 If you are unconscious or otherwise unable to communicate, your partner will not have the legal authority to make decisions for you or even receive medical information from the doctors.

The good news is that you can take care of these concerns with an estate plan.

9 Steps Unmarried Couples Should Take

Here are nine steps unmarried couples should take to safeguard their future.

#1 Discuss your wishes for your estate with each other. No one likes to talk about what happens to their assets after they die. It is an uncomfortable topic at best. But having a frank discussion now about who you would like to get what can alleviate many problems and concerns later for the surviving partner.

#2 Write a letter of instruction. Especially in today’s digital world, a letter that tells your partner and your estate representatives the details they need to know to manage your estate can be invaluable. This letter might include the following:

#3 Tell family members about your estate plan. To avoid any unpleasant surprises, let your parents, siblings, and children know that you have included your partner in your estate plan.

#4 Own property jointly. You can avoid probate, which can be expensive and time-consuming, by owning property together with your partner. With joint ownership, if one tenant dies, the surviving tenant owns the entire property.

#5 Designate your beneficiaries. An unmarried partner will not have access to your bank accounts, retirement funds, or life insurance unless you have named them as the “pay-on-death” beneficiary. Review these accounts and make any changes that reflect your desires for your estate.

#6 Name a Durable Power of Attorney. As part of this critical step, you can appoint one or more individuals to act on your behalf in legal and financial matters in the event you are unable to manage them yourself. Without a power of attorney document in place, your partner might have to go to court to seek the appointment of a conservator. Not only would this take time and money, but it would cause your partner more stress at an already difficult time.

#7 Appoint a Health Care Proxy. By naming your partner as your health care proxy, you enable them to make medical and end-of-life decisions for you if you cannot make them for yourself. Without this document, your family members may make medical decisions for you without your partner’s knowledge or agreement.

This document will also give your partner access to your medical information. Without it in place, the Health Insurance Portability and Accountability Act (HIPAA) prohibits medical personnel from sharing private information with others.

#8 Write your will. A will is an integral part of an estate plan because it allows you to name guardians for your minor children and to name your personal representative or executor. The executor, who should be someone you trust implicitly, will be responsible for distributing your possessions, paying any remaining bills, filing your last tax return, and closing out all your accounts.

#9 Create a revocable trust. A revocable living trust is a legal entity that holds an individual's or a family's property and other assets. Creating a trust allows you to state how you want your assets handled during your lifetime and after your death. You can name your partner as a trustee to manage and make financial decisions over your assets after your death or if you become incapacitated.  The assets placed in the trust would not have to go through probate since their ownership remains unchanged after your death.

The law is definitely on the side of married couples when it comes to asset distribution. By carefully creating an estate plan, you and your partner will gain valuable peace of mind in the event something happens to either one of you. Your attorney can help you create an estate plan that is right for your situation.

Image by Christine Sponchia from Pixabay  

How To Protect Your Estate From A Predatory Remarriage  

People tend to put off estate planning because no one likes to think about their own mortality. That makes sense, but more than 60 percent of Americans don't even have a will in place, and you should not be among them.

Sure, the estate planning process means you have to focus on some unpleasant scenarios. One of them might be the thought of your spouse remarrying after your death.

Still, it is important to plan for your surviving spouse and consider the possibility that remarriage could put your assets at risk. Unfortunately, many unscrupulous individuals take advantage of widows and widowers. In this article, we will discuss how to protect your estate from a predatory remarriage.

How Can Your Spouse's Remarriage Harm Your Estate?

If you and your spouse have been married for many years and have children, you may have established reciprocal estate plans. Under these arrangements, a surviving spouse inherits all the assets of the spouse who passes away first. Then, the couple's combined assets go to their children after the surviving spouse's death.

You may have set up a bypass trust. A bypass trust is a legal arrangement with terms that allow a married couple to avoid or "bypass" paying estate tax on some assets after one spouse's death.

This process is straightforward unless the surviving spouse remarries. In that case, the new spouse may be able to become a legal heir to your surviving spouse's estate. This situation could threaten the assets that you intended for your children.

How Can You Protect Your Assets?

If you have a will that lays out your wishes for your estate's distribution, you may wonder why that document is not enough to protect your children. Unfortunately, a will cannot guarantee that your children will not be cut out of your estate if your spouse remarries.

None of us can predict the future, but careful estate planning is the best way you can protect your hard-earned assets and have the peace of mind that they will go to the people you love. A trust is a legal entity that allows a third party, known as the trustee, to hold your assets on the behalf of your beneficiaries.

Trusts can stipulate how and when your heirs receive your assets. A trust does not have to go through the lengthy and expensive legal process known as probate after your death.

What is A Family Wealth Trust?

A trust that is designed for estate planning for blended families is called a family wealth trust. A family wealth trust can be set up as part of a larger trust, or it can stand alone. Here are some of the key reasons why this solution will protect your children in the event you or your spouse have a predatory remarriage:

A family wealth trust offers other protective measures against predatory remarriage. If your spouse remarries without a signed prenuptial agreement, they lose access to the property held in the trust. This step will encourage your surviving spouse to sign a prenuptial agreement, which is another essential shield against a predatory individual should the remarriage fail.

If you own considerable assets, here's another plus of creating a family wealth trust. This type of trust qualifies for the marital deduction in your gross estate. This qualification means that any of your assets that are above the applicable exclusion can go into the family wealth trust, allowing you to avoid estate taxes.

What Are Other Ways to Protect My Children's Inheritance?

As we said, estate planning leads you into some uncomfortable topics.

Here's another one. How can you make sure that your children do not squander their inheritance? This question may be weighing on your mind if you have a child that has problems with addictions or with failed relationships.

The answer to this dilemma is to create an investment tool called a spendthrift trust. A spendthrift trust places limits on a beneficiary's interest in the trust assets. Limitations might include paying only for your beneficiary's basic living expenses or making only limited payments directly to the beneficiary.

A spendthrift clause may be written to suit your individual circumstances. For example, the clause can include protection of the trust assets if your adult child goes through a divorce. In other words, it can offer your child protection from their own predatory marriage or remarriage.

Check out "Estate Planning For An Irresponsible Child" to learn more.

An Attorney Can Help You Protect Your Estate

With proper planning, your family wealth trust can be written to help your family for decades. For example, you can stipulate in your trust that your assets be passed down to your grandchildren rather than your son-in-law or daughter-in-law. Assuming your trustee manages your assets well, this means that your hard-earned assets will benefit your family for generations to come.

Every state varies in what they allow in terms of trust provisions. Your attorney can help you understand the rules in your state.

Finally, despite the word "wealth" in its title, a family wealth trust is not just for the very rich. If you have a moderate estate, your family can still benefit from this vital estate planning tool.

Interested in learning more? Check out our article Getting Remarried? It’s Time to Update Your Personal Estate Plan.

Estate Planning For An Irresponsible Child 

Having an estate plan in place is one of the most important gifts you can give your children. You've worked hard to build up assets that will help them in the future.

But a difficult question that is on the mind of many investors we work with is, "How can I prevent one of my kids from wasting their inheritance?"

Your concern may come from your child's reckless overspending, or your worries could be rooted in your child's history of substance abuse or destructive relationships. This article will offer tips for estate planning for an irresponsible child.

The Living Trust: Your Bulwark Against Irresponsible Behavior

Although a will lays out how your assets will be distributed, a trust is often a better option for many families. A trust is a valuable estate planning tool that allows you to deposit assets, including cash, property, and other investments, into the trust account during your lifetime.

There are two main types of trusts – testamentary and living. A testamentary trust is created after your death by your will, while a living trust is established during your lifetime.

A living trust is usually revocable, meaning it may be changed during the trustor's lifetime, and it becomes operational at the trustor's death. Unlike a will, a living trust does not have to go through probate court. Your assets can be passed immediately and directly to your named beneficiaries.

How is a trust a solution for an irresponsible heir? 

When you create a trust, you give another party (your trustee) the authority to handle your assets for your beneficiaries' benefit. You can select a trusted friend or family member to serve as your trustee. Your trustee could also be your attorney or a financial institution.

Understanding living trusts is an important way to protect your assets from misuse. While your assets are in the trust, they are safe from a beneficiary's irresponsible spending and any other relatives or in-laws who may want to misuse your assets. 

Different Ways to Structure A Trust

Trust assets may be distributed to your children with regular installments giving you a level of control over their use. Depending on your financial and family situation, there are several different ways to structure a trust.

You also can use a trust to provide non-monetary assets for your heirs. You could place a home in a trust, for example. However, since we're on the subject of irresponsible children, you might want to place the home in a trust that stipulates that any money from its sale must be reinvested in another house.

The Spendthrift Provision

Another answer to the problem of estate planning for an irresponsible child is to include a clause known as the "spendthrift provision" in your trust. A spendthrift clause limits the transfer of a beneficiary's interest in the trust assets.

A spendthrift trust directs the trustee on how to distribute the beneficiary's entitlement. Limitations might include paying only for a beneficiary's basic living needs or making only limited payments directly to the beneficiary.

A spendthrift trust might be useful if the beneficiary has a history of

Each spendthrift clause is written according to the trustor's specific preferences. For example, the clause can include protection of the trust assets if your child goes through a divorce. In some cases, the trustee of a spendthrift trust can cut off benefits to a beneficiary. The benefits could be distributed to that child later or paid to another beneficiary instead.

The trust document can also spell out that the trustee only makes payments on the beneficiary's behalf and may withhold direct payments of cash from the beneficiary.

Individual states vary on the extent of the protection they allow under a spendthrift clause. For example, some states allow creditors access to a trust with these clauses. Some state laws also allow for alimony or child support payments under the provision.

For the strongest protection, aim to be as specific as possible on the conditions under which your assets are to be distributed. Here are two examples:

The spendthrift provision must be worded very carefully to avoid placing the trustee in a difficult situation. An overly strict clause could prevent your child from obtaining money when there is a genuine need. On the other hand, a too lenient clause leaves a trustee having to deal with an angry heir demanding their assets.

How to Set Up a Spendthrift Trust

Your lawyer will help you create a spendthrift trust that fits your particular needs. Here are some questions you should be ready to answer:

You've worked hard to provide for your family both now and in the future. No one wants to think about their money disappearing in a few years due to an heir's reckless spending or poor lifestyle decisions. A spendthrift trust can offer you a combination of protection and freedom.

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When Was The Last Time You Updated Your Living Trust?

For those of you who already have living trusts, congratulations—you are certainly on the right track when it comes to estate planning.  But how do you know when to update your living trust?

Even if you don’t have one yet, this article is worth a read ...

What is a Living Trust For?

As a real estate investor, you may have many properties that you will pass on to your heirs. The living trust can help you ensure a seamless transition upon your passing.  A revocable living trust is an estate planning tool. It may be helpful to think of the living trust as a large lockbox that holds your assets. The trust’s “job” is to hold title for the properties. 

When a living trust is created, a trustee will be named to control the assets for you. You can think of your trustee as the person who has the key to your “lockbox.”  Your role is simply to be the beneficiary of your trust. You may direct your trustee to buy, sell, or transfer assets into or out of the trust. Estate planning attorneys use living trusts as a way to avoid probate court.

How a Living Trust Compares With a Will

The will may be the most widely recognized estate planning tool, but a living trust is far superior to a will alone. Wills would have to go through probate court, which means your grieving loved ones would be navigating a maze of red tape before receiving anything from the estate.

The living trust allows for the control of the assets to immediately pass to the designated heir, as opposed to getting caught up in probate court by passing through an ordinary will. With this method, you can breathe easy knowing that mortgage payments are made, rents are collected, insurance premiums are paid, etc. 

The living trust ensures that your property is not lost or diminished in value, which are both highly likely occurrences if the properties are caught in probate court. It has the added benefit of keeping the value of the home out of the taxable portion of your estate.

Living trusts are easier to modify than wills, but harder to challenge legally. Trusts are also private, meaning using a living trust would remove your name from the public record. You would no longer own the property but retain control as the beneficiary of the trust.

The Ideal Solution: Living Trust and Pour-Over Will

For real estate investors who may be buying and selling assets frequently, it is important to know that you would normally update your estate plan each time you make a significant purchase or sale. This could present a challenge for an active investor with many properties, but that problem can be easily addressed by simply using a pour-over will. The pour-over will passes all property you own into your living trust upon your death.

For the real estate investor, a pour-will pairs well with the living trust to ensure a smooth, private transition of your assets. Using these tools together is a smart move.

 

Using A Land Trust In Estate Planning: How To Avoid Probate

When you work hard and save money to pass on to your heirs, you don’t want them to have to pay legal fees to obtain it after your death. You also don’t want your family members to experience stress while they wait to find out who gets what from your estate.

One way to avoid the expenses and delays of these legal proceedings (called probate) is to create a type of living trust called a Land Trust.

What is a Living Trust?

A living trust— also known as an “inter vivos” trust, which translates from the Latin to mean a trust that is created “between the living”—places your assets in a fund that is managed by a trustee of your choosing for the best interests of your beneficiaries.

As an alternative to a Last Will and Testament, which distributes your assets after your death, a living trust bypasses the time and expense of probate because your assets already are dispersed in the trust. In addition, living trusts offer other advantages, including privacy in situations where the state requires the filing of an asset inventory and immediate access to income and principal by your beneficiaries.

While a living trust can hold any type of asset, a Land Trust is a type of living trust designed specifically for real estate-related assets. A Land Trust can hold physical properties, mortgages, air rights, notes, and other types of property assets.

The property owner is the beneficiary of most of these anonymous trusts, meaning the owner controls how the property is managed and retains all of the property rights, including developing, renting, and selling it. Land Trusts are generally considered to be revocable trusts, meaning that the owner can amend or even terminate them at any time.

What Are the Benefits of a Land Trust?

In addition to avoiding probate, there are other possible benefits of making a Land Trust part of your estate plan. A land trust offers:

What Are the Disadvantages of a Land Trust?

A Land Trust does not protect property owners from all potential liability, and it does not offer privacy in all cases. Also, the IRS requires that all trusts, including Land Trusts, file Form 1041.

Here are three potential pitfalls of setting up a Land Trust.

  1. Redemption rights allow homeowners to reclaim their property before and, in some cases, after foreclosure. This right is lost if the property is purchased under a land trust and you are the beneficiary.
  2. Homestead exemptions, which protect your property from taxes and creditors in 48 states, are forfeited with a land trust.
  3. A land trust disqualifies you from secondary market loans. In the secondary mortgage market, lenders and investors buy and sell home loans and servicing rights.

When is Best Time To Set Up A Land Trust?

If you have decided that the benefits of a land trust outweigh any potential disadvantages, your first step is to choose your trustee. The trustee can be a friend, family member, or institution, but make sure it is someone you trust. 

Next, setting up a land trust requires two primary documents—a deed to trustee and a land trust agreement. After you have chosen your trustee, you will need to draw up an agreement that satisfies all parties and complete and sign the documents.

You can keep your ownership private by forming a land trust with either a private trustee or an institutional trustee just before closing on the property. By keeping your name off the permanent property records, you will protect your property from creditors who might use the Uniform Fraudulent Conveyance Act to gain your assets.

A land trust trustee should be exempt from personal liabilities related to the land trust’s debts and obligations. However, not every state views land trusts in the same way. Your trustee should research their state laws so that they are clear on their liability before they sign a land trust agreement.

Royal Legal Solutions will work with you to construct a trust agreement and file the right paperwork on behalf of your land trust. If you choose us your “nominee trustee,” our name will appear on all public records to protect your anonymity. After filing the paperwork, we will then transfer the trustee title back to you.

The professionals at Royal Legal Solutions are experienced in assisting with land trusts throughout the U.S. and Canada.

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Is A Grantor Trust Right for Your Estate Plan?

When you’re building your estate plan, one goal is to minimize the tax burden for your heirs. One tool to accomplish this is a grantor trust. In this article, we will examine these types of trusts, including their pros and cons, for your long-term financial plan.

What is a Grantor Trust?

The term "grantor" describes the person who creates a trust and owns its property and assets for both income and estate tax purposes. Therefore, a grantor trust is a living trust in which the grantor is treated as the owner of all portions of the trust.

A grantor needs to have one of the following powers for a trust to be considered a grantor trust.

The grantor usually is a trustee and beneficiary of the trust’s income and principal. This income from a grantor trust is taxable to the grantor and should be listed on the grantor's personal tax return.

The IRS allows grantor trusts to file taxes under the grantor’s personal Social Security Number (SSN) rather than a separate Tax Identification Number (TIN). A married couple who files joint taxes and who share the grantor’s trust powers may use either spouse’s SSN to file taxes for the trust. Grantors may request a TIN for the purpose of privacy. The trust will need to apply for its own TIN upon the death of the grantor(s).

grantor trust: kid with plantWhat is a Non-Grantor Trust?

A non-grantor trust is simply any trust that is not a grantor trust. That means that in a non-grantor trust, the person who established the trust has given up all right, title, and interest in the principal.

Only the trustee has the legal right to revoke or amend a non-grantor trust. Also, the grantor cannot serve as a trustee or as a beneficiary of the trust and cannot have any remainder interest in the trust.

The IRS requires a non-grantor trust to have its own TIN. As a separate tax entity, non-grantor trust must pay taxes on all income received.

What is an Intentionally Defective Grantor Trust?

Despite its ominous-sounding name, an intentionally defective grantor trust (IDGT) refers to an irrevocable trust where the grantor pays the trust’s income tax bill during their lifetime.

The grantor does this by making an irrevocable gift of property into a trust -- typically set up for the grantor’s children -- and names someone else as the trustee. In an IDGT, the grantor retains the right to substitute other property of equal value for the initial property.

The grantor of an IDGT must obtain a TIN and file an IRS Form 1041 with trust income reported every year. However, unlike with a standard grantor trust, a typical IDGT is not subject to estate tax upon the grantor’s death. Instead, the grantor pays a gift tax on the value of the property when it is transferred into the trust.

Are Land Trusts Seen As Grantor Trusts?

A Land Trust is a private legal agreement in which the trustee agrees to hold title to a piece of real estate for the benefit of another person (the beneficiary). The individual who establishes the entity is called the grantor.

For the most part, Land Trusts are structured as grantor trusts and are considered to be disregarded entities. A disregarded entity is an LLC or trust that is “disregarded” in the sense that the IRS does not recognize it as a separate taxpayer.

In other words, disregarded entities do not pay tax and do not file a tax return. Instead, the owner of the trust must report the entity’s income and deductions directly on their tax return.

Pros and Cons of Grantor Trusts

The main advantage of having a grantor trust in your financial plan is the opportunity to preserve your hard-earned wealth while minimizing the tax burden for your heirs. Typically, you pay less income tax on trust assets at your own personal tax rate instead of at a rate set for the trust.

A grantor trust can also serve to protect your assets against creditors in a lawsuit. You can transfer assets to a grantor trust for long-term care planning, and your assets held in a trust won’t be subject to the lengthy and costly probate process after your death.

On the other hand, setting up a grantor trust assumes that you have the financial resources to pay the income tax on trust assets throughout the rest of your life. A large capital gain inside the trust could significantly increase your tax burden.

Keep in mind that grantor trusts and IDGTs become non-grantor trusts upon the grantor’s death. On December 31 of the year of the grantor’s death, the administrator must obtain a TIN for the trust must then be obtained and become responsible for filing a Form 1041 for this now non-grantor trust.

Should I Set Up A Grantor's Trust?

There is no one-size-fits-all answer to this question. It depends on your individual financial situation. Talking to an estate planning attorney can help you determine whether you would benefit from a grantor trust and which type of trust is best for you and your family.

Community Property: What Investors Need To Know

You can't be a great real estate investor if you don't have an understanding of marital property laws and how they affect your investments. Most U.S. states use common law, also known as or equitable distribution, as their matrimonial regime, but in Texas and eight other states, community property is the rule.

What is Community Property?

The principle of community property is that each spouse owns half the couple’s assets.  It assumes that every contribution each spouse makes to the "marriage community" should be shared.

This means property, income, and other assets acquired by either spouse during the marriage belongs equally to each of them. It also means that in the event of death or divorce, each spouse gets an equal share of the property.

And before you ask me, yes, it also means that both spouses are accountable for the other’s debts.

Some exceptions apply to allow sole ownership of a property or certain assets:

Property one spouse acquired before the marriage remains that person’s sole property, unless it transmutes, or changes, to community property by:

It is important to note that in Texas and Idaho, income earned from separate properties is considered community property. In the other community property states, such income is considered separate. That bring me to our next section ...

What Are The Community Property States?

Community property is the law in the following states:

Out of the nine states that use community property instead of common law, Texas is the only community property state that recognizes common-law marriages (not to be confused with common law property). In the other states, only legal marriages pertain to community property. 

Property rights in some states, including Texas, may come into play in partnerships that resemble traditional marriages, e.g. by length of cohabitation or the raising of children together. Where separate ownership cannot be ascertained, the court m

ay rule on an equitable split, which is partly depending on how much each spouse contributed financial assets to the marriage (e.g. 40/60 or 30/70 instead of 50/50.) In California, the split must be 50/50.

Which State Has Jurisdiction Over Your Investments?

community property family law

For most people, it's an easy-to-answer question. Where do you live? Is it in a community property state or not?

But for may of us who invest in assets all over the country or all over the world, we have to look at other factors.

Yes, domicile, a person’s legal permanent address, is used to define where a couple lives, and therefore which state’s jurisdiction their property law comes under. This becomes important for couples that end up in the divorce courts if they have homes in more than one state, or are on the move regularly, e.g. from being in the military, or temporary work placements. 

Some factors used to determine domicile include: 

The Tax Benefits of Community Property

Community property has several tax benefits. In the event of the death of one spouse, both partners’ interest in the property get a "step-up" in basis. The property gets an updated tax basis on the market valuation at the date of their death. The deceased spouse legally has a half interest in the entire community property, so both halves of the property receive the step-up in basis, instead of just the deceased’s half.

Say a couple own a house with a basis of $50,000, the amount they initially paid. The house now has a value of $500,000, making each spouse's’ share of the house worth $250,000 with a basis of $25,000.  The deceased spouse’s share now has a basis of $250,000. If the property were not community-owned, the living spouse’s share’s basis would remain at $25,000, and the total basis $275,000. In a community property state, each half would get the new basis of $250,000, giving a total basis of $500,000.

Marital Agreements Mean Fewer Headaches

While community property has some tax benefits, it is easy to see the downsides to the system. But there are ways to protect your assets. When it comes to the potential for divorce, one way to avoid complications from community property laws is to draft a marital agreement, a.k.a. a "prenup."

A prenuptial, post-marital, or divorce agreement can convert community property into separate property in the event of death or divorce. Some states allow you to opt-out of the system without a pre-signed agreement, but others, such as California, are stricter, and there is the chance other states may follow suit. So it is best to sign a formal agreement under any jurisdictions.

When Might There Be A Dispute? 

Disputes can arise upon the death of a spouse, particularly if children are involved. Typically, if somebody dies without leaving a will, their half of the estate goes to the remaining spouse unless they had children from a previous relationship. In which case, the remaining spouse retains their half, but the deceased spouse’s half goes to his or her children. 

Estate planning and making a will can help you or your family avoid extra stress in times of loss. 

What Happens In Cases of Bankruptcy?

In community property states, if one spouse needs to file for bankruptcy, it must include all community-owned property. In many cases, judges will require the other spouse to declare bankruptcy too. Creditors can make claims against community property, and even against the other spouse’s individually owned properties.

Trusts and Dower Rights

Placing your property into a trust has several benefits. 

Three states still have Dower Rights for spouses not on the title to a property. In Ohio, Kentucky, and Arkansas, a widow or widower is entitled to the interest or income from one-third of their deceased spouse’s property.

California land trusts aren’t subject to community property or dower rights, so are a great way to invest without the risk associated with the usual marital property laws in California. 

 

What Is The Difference Between A Will And A Trust?

While you probably know that wills and trusts are both used in estate planning, many people don’t truly understand the difference between the two.

So, what what IS the difference between a will and a trust, anyway?

Both wills and trusts are used to pass your property on to your loved ones after your death. However, trusts allow you to transfer property before your death, while wills do not take effect until after you die.

What Is The Difference Between A Will And A Trust?

What Is A Will?

When most people envision a will, they are thinking about a simple will. A simple will is a legal document that leaves instructions for how your assets should be distributed after your death. If you have any minor children, you can also designate who you would like to be their guardians upon the death of both parents. 

The laws about what makes a will valid vary between states. However, all states require five fundamental elements.  In order for your simple will to be valid, it must meet the following requirements:

Let’s talk about each one of these requirements individually.

Legal Age

In most states, you need to be at least 18 years old to be able to make a legally binding will. However, some states allow people to create wills at a younger ages, and the majority of states allow some minors to create wills, such as underage members of the military or emancipated minors. 

Testamentary Capacity

For a will to be valid, you must be of “sound mind” at the time it was created. This means you must understand three essential concepts:

Testamentary Intent

While the first two requirements relate to who can create a will, the final three requirements dictate what the will must contain to be valid. Testamentary intent means that the will must clearly state your desire for that document to be your will. This can be accomplished through a simple statement such as “I declare this to be my last will and testament.”

Signed

For your will to be legally valid, you have to voluntarily sign it. Your signature is considered evidence that the will is yours and you have agreed to what it says.

Witnessed

The final requirement is that at least two witnesses sign the will. By signing the will, the witnesses are confirming that you seemed to be of sound mind when you signed the will and that you intended for the document to be your will.

What Is A Trust?

A trust is a legal agreement where one party agrees to hold the legal title to certain property and manage it for the benefit of another. Here are a few terms that will be helpful in understanding how trusts work:

There can be multiple grantors, trustees, and beneficiaries for a trust. Two common types of trusts used in estate planning are living trusts and testamentary trusts.

Living Trust

A living trust is created while the grantor is still alive by transferring property to a trustee. While the grantor is alive, the trust remains revocable, meaning that the grantor is free to alter the trust or revoke it completely. However, once the grantor dies, the trust becomes irrevocable and cannot be changed. Many people use living trusts in their estate planning in order to avoid probate.

Testamentary Trust

A testamentary trust is created by the grantor’s will, which creates the trust and includes instructions for what property should be included, who the trustee should be and who the beneficiaries will be. Testamentary trusts allow grantors to have greater control over how their assets are used after their death.

Primary Differences Between Wills And Trusts

Let’s get back to the original question. Will versus trust: what are the differences? 

When They Take Effect

Wills always distribute property after your death; living trusts take effect during your lifetime. This means that you can use the trust to distribute property while you are still alive.

When Property Is Distributed

While you can leave detailed instructions on how you want to your property to be used in your will, it will be distributed at the time of your death with no real enforcement mechanism in place. In other words, you generally will have to rely on your heirs following your instructions for how to use their inheritance. 

A trust, on the other hand, puts a third party of your choosing in control of the property. The trustee can then ensure that the property is being used according to your wishes before it is distributed.

What Property Is Distributed

A will distributes all property that is solely in your name at the time of your death. This means that any property you own jointly or that is in a trust will not be disposed of through your will. A trust, on the other hand, only distributes that property that you transferred to it.

How Property Is Distributed

After you pass away, a will must go through the probate, which means a court will oversee the process to ensure the will is valid and that the property is distributed according to the will. Conversely, a trust does not go through the probate process, which generally makes the process quicker and cheaper.

How Private They Are

Because a will goes through probate in a court, your will and the proceedings will become public record.  As a trust passes outside the court system, all of this information will remain private.

If you found this article useful, please check out our asset checklist for estate planning.

A Guide to Estate Planning for Blended Families

Marriages don’t always work out. Whether it’s divorce or death, people deserve a second chance to find their soulmate. However, your second marriage can have important implications for the children you had during the first one. More specifically, you may need to use a different approach when planning your estate to make sure that your children receive what you mean for them to receive after you’re gone.

That’s why we’ve created this guide to estate planning for blended families. Continue reading to learn everything you need to know about how to prepare your estate in a way that will ensure every member of your blended family is taken care of.

Understanding the Modern Blended Family

The definition of a blended family is very straightforward: it is a family that consists of the two spouses and all of the children they’ve had from previous marriages. This can take a few different shapes, which are worth exploring to solidify our understanding of what a blended family may look like.

As you can imagine, each of these situations presents unique challenges during the estate planning process. For example, you will likely want to leave something to your children from a previous marriage and your child’s children from a previous marriage. However, you may not want to leave anything to children that your child’s spouse had in a previous marriage.

Navigating these challenges is a complex process that requires a professional’s expertise. Below, you’ll find some of the most important factors that you need to keep in mind while planning your estate.

A Simple Will Won’t Be Enough

What works for traditional families during the estate planning process doesn’t always work for blended families. There’s no better example of this than the will. Experts recommend that blended families use a trust during the estate planning process instead of a will.

When you create a trust, that entity becomes the legal owner of your assets when you pass away. The trustee (the person who manages the trust) is then responsible for divvying up your assets in the ways that you’ve specified. This ensures that your children from a previous marriage actually receive the assets that you want them to receive.

Wills, on the other hand, leave open the possibility that your children get cut out of your estate after you die. Even if you believe that your spouse will do the right thing and take care of your children from another marriage, there’s no real guarantee of that in a will. It’s better to be safe than sorry and only a trust can provide you with that kind of certainty.

Choose a Trustee You Can Count On

The person that you put in charge of your trust will make the final decisions about how your assets are invested and distributed once you’re gone. That’s why it’s so important that you pick someone who both has experience with managing trusts and who you can count on to carry out your wishes. Asset protection is an incredibly important part of estate planning. Creating a power of attorney trust is the best way to ensure your wealth is protected.

Plan For the Possibility That Your Spouse Remarries

It can be difficult to imagine your spouse remarrying after you're gone. However, it’s absolutely essential that you embrace remarriage estate planning -- even if you seriously doubt that your spouse would actually get married again.

Ultimately, you can never say with certainty what will happen after you're gone. Successful estate planning is about eliminating as many sources of uncertainty as possible. That’s why your trust should have specific directions for what happens in the event that your spouse does decide to get remarried. Including this clause is another important part of both keeping your assets protected and ensuring that they go where you want them to go.

Consider Leaving Assets Directly to Your Biological Children

This is especially important for people with spouses who are much younger than them. When you go, you probably want your children to be able to use what you’ve left for them as soon as possible. 

You don’t want to create an awkward situation where your children are essential waiting around for their step-parent to die. Of course, this has to be balanced against the interest you have in ensuring that your spouse has what they need while they’re still living.

If you do decide to leave assets directly to your biological children, make sure that you use specific language itemizing what you’re leaving to each of them. The more specificity you can provide, the lower the chance that someone is able to successfully contest your will.

Choose Your Legal Guardian Carefully

Legal guardianship is defined at the state level and can vary based on where you live. It’s important that you take the time to understand what legal guardianship looks like in your state. Doing so will help you make a better decision about who you’ll select for this position.

Generally speaking, legal guardians are responsible for making your health care decisions when you’re not able to do so. Most states only allow you to pick one person for this role, so it’s important that you choose carefully.

The last thing you want is for in-fighting to occur between your spouse and children while you’re in the hospital and incapacitated. That’s why you should consider selecting as your legal guardian the person in your life who you feel is the fairest and most responsible. That could be your spouse, one of your children or someone else in your life who can act as a neutral third-party between them.

Rely on the Help of Trained Professionals

Estate planning for blended families is much more complex than it is for traditional families. As you’ve seen throughout this article, there are many different considerations you need to make throughout this process. Attorneys who specialize in estate planning are the best-equipped to make these complicated decisions and translate your wishes into actionable legal documents. Make sure that you consult with one before you finalize your estate.

The Pour-Over Will: The Perfect Addition To A Living Trust

For the savvy investor looking to create a watertight estate plan, the pour-over will may be the perfect addition to a living trust. Named after the fact that it “pours” all a decedent’s remaining assets into the living trust, a pour-over will can be an effective estate planning strategy worth looking into.

So ... Let's look into it!

What Is A Pour-Over Will?

A pour-over will is a standard will form stating that whatever has not been put into the trust when you die should be moved into the trust and distributed per the terms of the trust. Essentially, a pour-over will makes the living trust the sole vehicle for passing assets to whomever you named as beneficiary of the trust. With it, your living trust can be the sole mechanism for handling your estate if you pass away.

Note: A pour-over will and a last will and testament are the same thing if the will names the living trust as the beneficiary. Doing this "pours over" the assets into that living trust. To put it another way, when the document called "last will and testament" names the living trust as the beneficiary, you have a pour-over will.

What's The Advantage Of The Pour-Over Will?

A pour-over will enables the living trust to make a smooth transfer of assets. The key advantage is that none of your assets will have to be settled according to the intestate laws of the state. “Intestate” simply means you pass away without having a legal document to determine how your estate and assets should be divided. How your estate is controlled and divided up your estate will depend on legal procedures (probate), rather than your wishes. 

Estate administration is always handled by the executor/personal representative of the estate named in the will. Probate comes into play when the beneficiary of the will is not the living trust.

A probate court has the jurisdiction to “probate” wills, handling conservatorship and estate administration. 

Probate is no fun for your heirs, trust us. However, with a pour-over will guiding the process, things tend to be much cleaner, simpler and faster.

A Pour-Over Will Amplifies A Living Trust

Understanding pour-over wills starts with understanding living trusts. A revocable living trust is an estate planning tool that lets you transfer legal ownership of your assets to the trust while retaining control during your lifetime. Similar to a will, the trust has a nominated beneficiary (or beneficiaries) to receive your assets when you pass away. 

However, a living trust offers substantial benefits over a will as an estate planning tool.

Unlike a will, a living trust enables asset transfers to be a completely private affair. Living trusts are easier than wills to modify and more difficult to contest. Also, a living trust can be set up to stipulate what happens to your property should you become incapable of managing it yourself.

With a pour-over will, you can ensure that your living trust is the only method by which your assets are transferred to your chosen beneficiaries. That said, you may choose to leave life insurance policies (and occasionally brokerage accounts) outside of the living trust. A life insurance policy can have its own beneficiary designated and not be connected to the living trust. So there ARE ways to pass assets outside of the living trust.

What Happens If I Die Without A Pour-Over Will?

Any property not owned by a living trust is distributed by the existing will, if there is one. If there is no will, this is called intestate succession. Intestate succession means that transfer of assets is governed by the intestacy laws of the state.

Again, we’re talking about probate. And as we alluded to already, probate is often a long and arduous process that can take more than a year for your bereaved loved ones to deal with. 

Some states have complicated intestacy laws, meaning that a transfer of assets involves complex legal proceedings. Furthermore, probate can be messy if you own real estate or other assets across multiple states.

Having a pour-over will relieve you of the stress of needing to continually update your living trust. When you transfer an asset into your living trust you change the ownership of the asset. The pour-over will simply transfers any assets not already owned by the trust into it when you die. An example of this would be the money in your personal bank account.

Pour-Over Will Case Study

Here’s a fairly typical scenario that may help you get the picture.

Say a husband and wife wish to leave their assets to their children and grandchildren. Although they have set up a living trust to which they have transferred their assets, they later purchase rental property (or any other type of real estate) and hold the title in their name. 

With a pour-over will, that investment real estate will be transferred to the living trust in the event of their deaths. Subsequently, everything will be distributed according to the trust without going through any red tape or court proceedings.

Reasons To Set Up A Pour-Over Will Now

If you are a real estate investor, it is worth updating your estate plan whenever you acquire new investment properties. An attorney can establish the living trust and pour-over will to ensure the seamless transition of assets without the need for probate court. A new home of any kind can drive up your estate’s value, but fortunately asset protection strategies (including titling property to a land trust) may help prevent legal issues and ensure a smooth and seamless transition of assets. For those who have already put thought into an estate plan by setting up a revocable living trust, the pour-over will is the addition needed to make it as watertight as possible. 

Combat Fear With Financial Planning

Fear without direction is a scary thing. We’ve all had our lives upended in the past month, both personally and professionally, in the face of the global Coronavirus pandemic and it’s left many of us feeling a lot of fear about the future. What we’re missing is a plan, though. With a plan to guide our moves, fear and panic can begin to subside as steps are being taken to move past this and make our families safe again.

Though we have little control of the plan, or lack thereof, at the national level, we can do something to alleviate our fears at a personal level. The threat of COVID-19 has challenged my core belief that “Everything Happens For Me, Not To Me.” I used to see opportunity in chaos but now I am focused on how I can protect my family, support my business and serve my neighbors and community so we can all leave this stronger than when it started.

So I made a list of the things I can control:

A great place to start is to build yourself a budget.

No one likes creating a budget, it’s about as fun as nails on a chalkboard, but controlling your expenses is a key aspect to keeping yourself afloat during trying financial times. Being aware of all of your expenses, the timing of them versus when your paychecks come through and your overall cash flow can help you make smarter choices and increase your savings or investments over time.

It may seem daunting, but you can create your budget with just three simple steps:

Step One: Collect and organize all of your credit card statements, bank statements and income sources.

Most of us just finished doing our taxes, so much of this will be easy to gather. How you organize is up to you and what works best for you. For me, it’s compiling a spreadsheet. For you, it may be spreading everything out on your kitchen table with paper and pen at the ready. What’s important is that you’re getting a complete picture of what comes in and goes out each month. If you’re tech-adept, there are a number of free or cheap online budgeting tools like Mint or Personal Capital.

Step Two: Now that you have a clear picture of your monthly expenses and income, decide how tight or loose your budget needs to be.

If you anticipate an upcoming loss of income or change in financial circumstances like having a kid or relocating your family, or if your family is just saving for an upcoming vacation or big purchase, this is when you start going through your monthly expenses and decide which ones can be eliminated.

Step Three: Ask for help.

There are affordable personal finance coaches for nearly every situation, whether you’re looking to get out from under debt or plan for the future. If you’re planning for your business, a cash flow coach can provide guidance in your futures planning. There should be no shame in asking someone with more experience to share their expertise—take advantage of the vast wealth of knowledge resources available to you and plan for a secure financial future for yourself and your business!

The most valuable thing to do right now is to take action and make a plan. Channel that fear into productivity where you’re able and be proactive about your financial future. Stay at home right now, spend some time planning and emerge from this pandemic ready for what comes next.