Uncategorized – Page 3 – Kling Law Offices

Your Estate Plan: Finished Does Not Mean Final

December 14, 2017/in Uncategorized/by Michael Kling

There is something that feels “final” to most of us when we work through the estate planning process; making the important decisions, signing the papers, and tucking them neatly into a binder feels like the completion of a process. There is, perhaps, even a sigh of relief that you’ve addressed something significant from your “To Do” list. However, does finishing the process really mean your estate plan is final? The short answer is “No.” You really need to think of your estate plan as a set of living documents—they can (and sometimes should) be changed at any time up until the creator passes away.

Sometimes, this basic rule that a will or trust is not binding on anyone until the creator’s death can come as an unhappy surprise. It can also cause significant family conflicts. This most often happens in second marriages that include step-children. In second marriages, couples frequently establish reciprocal wills, leaving assets to the surviving spouse and then distributing remaining assets among children. What can be missed is the fact the surviving spouse has every right to change his/her will or trust during his/her lifetime. This means that, after the first spouse passes away, the survivor has the use and benefit of all the assets of the marriage and has the ability to change his/her estate plan in any way he/she chooses—including disinheriting step-children. Whether this is the “right” thing for the surviving spouse to do isn’t a question for us to answer. The answer is that the surviving spouse has the legal right to make such changes.

Our courts have repeatedly upheld the surviving spouse’s right to completely change a will or trust, even when the assets at issue have been inherited through a reciprocal will. Once the first spouse passes away and assets transfer, they (typically) belong to the surviving spouse without restriction. Promises made between spouses do not override or alter this legal principle.

What can you do to anticipate the ultimate impact of your estate plan? We suggest seeking qualified advice that will help you and your spouse think through both the process and the outcome of your plan. This includes weighing the effects of any changes your surviving spouse may make to his/her estate plan after your death.

Making sure your estate plan does what you want, and that unhappy surprises are avoided, is achievable with thoughtful and thorough planning. It also means living with your plan, so you can respond to changing circumstances and needs throughout your lifetime.

We like to suggest that your estate plan should keep up with the “pace of life,” and we would be happy to consult with you about insuring your estate plan gives you the peace of mind you deserve.

Trust Language (REALLY) Matters

November 16, 2017/in Uncategorized/by Michael Kling

Trusts are written to reflect the specific purpose and operation of the trust. A typical goal is to pass along assets for the benefit of one’s children. To accomplish this, the creator should consider the beneficiaries’ personalities and financial status. Sometimes, passing on assets in a protected environment makes the most sense, and the trust will include a “spendthrift clause.”

While we all have different financial habits, a “spendthrift” is commonly defined as someone who spends money in an extravagant, irresponsible way. Spendthrift clauses limit access to trust funds when there is a concern over how money will be spent by the beneficiary, or who may gain access to the funds if they are freely available. How a spendthrift clause is written is important, as its effect for the beneficiary is significant. Properly drafted spendthrift clauses will allow the beneficiary to receive funds under specific circumstances while providing protection for the trust funds so assets cannot be attached by creditors in the event of a debt, divorce, personal lawsuit, etc.

A recent Nevada Supreme Court case shows us the importance of clear and consistent trust language. In the 2017 case, In the Matter of Frei Irrevocable Trust dated October 29, 1996, 390 P.3d 646 (2017), a spendthrift clause was negated by a trust modification that allowed beneficiaries the absolute right of withdrawal. Mr. and Mrs. Fiore created their trust for the benefit of their combined 10 children (theirs was a second marriage, each bringing 5 children into the union). Following his mother’s death, son Stephen sought a trust modification to allow each of the 10 children an absolute right of withdrawal of his/her trust share. No one objected to this change and the trust was duly modified. Nine of the children subsequently took their shares out of trust, but Stephen left his share in the trust.

Meanwhile, there was a great deal of family drama which led Stephen to settle a lawsuit brought by his step-father and siblings over Stephen’s actions in another family matter. Several payments were made from Stephen’s trust share to satisfy the settlement. Objecting to this use of his trust share, Stephen sued to prevent further payments, claiming the spendthrift clause in the trust protected the assets. The Nevada Supreme Court decided the trust’s spendthrift protections were invalidated once the trust was modified to give beneficiaries the right to withdraw trust funds. Following established Colorado law, the Nevada Court made it clear that it does not matter whether a beneficiary exercises the right of withdrawal; merely possessing the right is sufficient to invalidate the spendthrift clause.

In our opinion, the lesson here is that trust language matters. When establishing a trust, specific language is used to fulfill the creator’s intent. When a change is made to trust language, it is always wise to get qualified advice on the true impact of any new or modified language. At Kling Law Offices, we would be happy to help you evaluate the effects of any trust changes you are considering.

Estate Planning During a Divorce

October 12, 2017/in Uncategorized/by Michael Kling

Marriage can be wonderful, but the fact is a significant number of today’s marriages end in divorce. For any divorcing couple, there are important things to consider about estate planning and several steps that can be taken to make sure you are not unintentionally leaving behind an undesirable situation.

While married, your estate plan is typically designed to provide for you, your spouse, and your heirs. Most plans name a surviving spouse to serve as trustee and executor, and that spouse typically also receives the bulk of the deceased’s assets. Family members of the surviving spouse may play important roles, and may be contingent beneficiaries. While these plans make perfect sense for a happily married couple, they usually do not fit the desires of a divorcing couple.

During a divorce, there are steps you should take to make sure your plan provides for your loved ones in the manner you intend. You may not realize it, but if you pass away before your divorce is finalized and you do not have a formal estate plan, your almost-ex-spouse is entitled to your half of community property and a share of your separate property. If you have a formal estate plan, the terms of that plan will apply until you make changes. Less obvious parts of your estate plan are life insurance policies and retirement accounts, which are controlled by beneficiary designations that most often name a spouse as the primary beneficiary.

If you no longer want your almost-ex-spouse to share in your estate, you must either create a formal estate plan or amend your existing plan. You should also name new beneficiaries for your life insurance and certain retirement accounts since, unless and until you change the designations, your spouse will receive those benefits.

If you are divorcing and have minor children, but do not have a trust, we would strongly urge you to consult an attorney and create one. Having a trust will give directives about the children’s custody in the event of your disability or death. You can also manage the transfer of assets to minor children by designating someone who will control money left to them, thereby avoiding a court guardianship procedure.

Be aware of assuming a prenuptial agreement will avoid these issues. Although a “prenup” may limit the obligation to provide for a surviving spouse upon death, it likely does not limit one party from voluntarily giving more to the spouse than required. Moreover, these agreements frequently do not address the period when a divorce is pending. State laws are often unhelpful as most do not address the impact of divorce until the divorce process is finalized. Thus, if your existing estate plan is more generous than you would want to be toward your almost-ex-spouse, you should make changes to that plan during the divorce process.

For more information and to discuss options about making sure your estate plan reflects your wishes and intentions, contact Kling Law Offices today for a free consultation so you can have the peace of mind you deserve.

Keeping Your Family in the Family Business

September 13, 2017/in Uncategorized/by Michael Kling

Has your family spent time and effort over generations building a business that you want to keep in the family for future generations? Many families have, and it is important to consider how to keep the business and its wealth in the family without creating a hardship for those whom you want to inherit. A lack of proper planning may result in the business being sold, or loans being taken out, to pay estate taxes owed at death. Although the business owner’s estate may pay estate taxes over a period of years (the 6166 election made after death), implementing succession plans during the business owner’s lifetime can minimize, or eliminate, this problem.

It may sound complicated, but gifting or selling an interest in the business to a defective grantor trust is an efficient technique to transfer a business to the next generation. Using this planning technique, a business owner can limit or avoid gift taxes and also remove a business interest from his/her estate. A business owner will find several advantages in this strategy, including:

Being able to use his/her available federal gift tax exemption, which is currently $5,490,000 per year for an individual, or $10,980,000 for a married couple.
Being able to remove both the transferred business interest and the future appreciation on that interest from his/her gross taxable estate, and allowing the value of the interest to pass into a trust for children and grandchildren.
The ability to protect assets from potential (but yet unknown) liabilities and/or creditors.

To generate the desired tax benefits and become permanent, the gift or sale to a defective grantor trust must be irrevocable, and cannot be undone once the transfer is completed. Because of this, it is important to discuss the details of the transfer and the business owner’s overall planning goals with a qualified attorney. It must be determined how much of the business should be gifted or sold to the next generation, the extent of all current owners’ cash flow needs, and how management of the business will be transitioned. Also, the business owner’s desires for an overall succession plan should be coordinated with his/her estate plan.

Thus, it is important to consider whether the transfer creates an uneven inheritance among children or grandchildren. In some instances, the business may be transferred to only one or two involved siblings, leaving out children (or grandchildren) who were not involved in the business. If desired, other estate planning measures can be utilized to “equalize” the value of inheritances.

Because families are all different, assessing your goals and desires is always an important part of our planning process. At Kling Law Offices, we want you to have the peace of mind you deserve that your family business will live on after your passing, and that the balance of your estate will be distributed according to your wishes. For a courtesy consultation regarding transfers into a defective grantor trust, other succession planning techniques, and minimizing estate taxes upon death, please contact our office.

One More Reason for Funding Your Trust

August 16, 2017/in Uncategorized/by Michael Kling

We hope you read this headline and realize you have no need of another reason to “fund” your trust because it is already done. If so, congratulations! You are making the most of the protections provided and the reasons for having a trust. If you have not completed the funding process, then this may be the prompt you need to move forward: Funding your trust allows you to maximize FDIC insurance coverage. Exciting stuff, right? While we recognize this concept may have limited excitement value, it does have very real financial value.

Many are aware the FDIC insures bank deposits up to $250,000 per individual; however, insurance is available and deposits can be structured to maximize protections within multiple ownership categories. It is also notable that insurance is provided on a per-institution basis, so a compelling deposit structure can be repeated at several institutions.

In addition to individual account protections, each co-owner of a joint account is insured up to $250,000 for the aggregate amount of the joint accounts held at a given bank. Thus, Husband and Wife can each have individual accounts holding $250,000, and a joint account holding $500,000, at the same bank and all of these deposits will be fully protected.

By “funding” their revocable living trust (“RLT”) with a bank account (creating/changing the account’s title into the name of the trust), Husband and Wife can hold on deposit an additional $2.5M of insured funds at one institution. When an RLT names five or fewer beneficiaries, the deposit is fully insured up to $250,000 per beneficiary, meaning both Husband and Wife can open an account in the name of their respective RLT with up to $1.250M.

In cases where there are six or more RLT beneficiaries, the protections vary depending on whether beneficiaries have equal interests. If equal interests are held, the deposited funds are insured up to a maximum of $250,000 x the number of beneficiaries. Where there are unequal interests in the account funds, a dollar interest must be allocated to each beneficiary and the funds are insured up to the greater of $250,000 per each beneficiary’s share of the funds or $1.25M in the aggregate.

By properly using multiple ownership categories (individual, joint, and an RLT with four kids named as beneficiaries), Husband and Wife can hold $3.5M of FDIC insured funds at a single bank. If they open the same types of accounts at Bank B and Bank C, it can add up to $10.5M in FDIC insured deposits.

There are several other useful ownership categories with FDIC insurance coverage, including irrevocable trust accounts, trust accounts with a bank trustee, certain retirement accounts, and organization/business accounts. If you would like help funding your trust and taking advantage of FDIC insurance for your deposited funds, call Kling Law Offices for a free consultation. We believe everyone’s trust should be fully funded, and this strategy is one more way to give you the peace of mind you deserve.

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