There are numerous considerations for parents and grandparents when contemplating making gifts to minor children. Outright gifts are frowned upon because, under the eyes of the law, children are under a legal disability, which means that they do not have the legal capacity to own property. That means that, without some planning, a guardian is necessary to hold or manage property for a minor child.
But, that doesn’t mean parents don’t have options when it comes to making gifts to minor kids. There are a few options worth exploring depending on why the gifts are being made, including 529 plans, UTMA custodial accounts, and gifts in trust.
529 plans get their name from the section of the Internal Revenue Code that gives them their unique characteristics. Each state has a plan with terms and investment goals varying slightly by state with some making more sense than others.
The way a 529 plan works is that parents, grandparents, or any other generous person makes gifts to the 529 plan account much as one would make a deposit to an IRA. The difference is that the beneficiary of the deposits is not the individual making them. Instead, it is a minor child. The contributions then grow free of federal income tax burden for the benefit of the child of grandchild named as beneficiary of the plan. Previously, the funds in the account had to be used for higher education expenses once the beneficiary child turned 18 (including trade and technical schools). Under the Tax Cuts and Jobs Act of 2017, funds in the account can be used for elementary and secondary private school tuition as well, giving parents an option for saving for private school education.
Of course, the drawback of 529 plans is that the funds must be used for qualified educational expenses. So, if the goal of making gifts to a minor child is something other than to fund his or her education, other options are worth exploring.
UTMA Custodial Accounts
Another option for parents is to create custodial accounts under the Uniform Transfers to Minors Act (UTMA). Making gifts to a custodial account setup under UTMA is fairly straightforward. Instead of the child being the actual owner of the account, an adult is the custodian on the account in charge of managing the funds until the child reaches adulthood, and in the case of UTMA, 21 years of age.
Prior to reaching 21, the custodian can make expenditures for the child’s well-being on the child’s behalf—specifically, the custodian has the discretion to pay any amount for the “support, maintenance, general use, and benefit of the minor.” Perhaps most beneficially, the custodian can act without court supervision or oversight and has very few accounting requirements.
But, upon the child reaching the age of 21, all funds are required to be distributed outright. While 21 isn’t 18, it is still a relatively young age to receive a potentially significant financial gift outright. Think back to when you were 21 and ask yourself if you realistically had access to a significant sum of money whether you would have been responsible with it. The issue is magnified when the beneficiary may have spendthrift issues or substance abuse problems. So, while UTMA custodial accounts are a simple way to leave gifts to minors, they do come with some downside.
An alternative to a UTMA custodial account is the creation of an irrevocable gifting trust. Many people assume that trust funds are only associated with the super wealthy, however there is no requirement that any minimum amount must be contributed. Understanding the concepts of a trust can do wonders for a family with some proper planning. If education is the goal, an irrevocable trust can be set up with children or grandchildren as the beneficiaries. A trust has an added benefit over a 529 Plan in that it can make distributions to the beneficiary (i.e. a child or grandchild) not only for college, but for other educational needs, health, maintenance, support or any other legitimate reasons, such as a down payment on a house or to start a business. And, unlike UTMA custodial accounts, if drafted effectively, there is no requirement that trusts distribute assets outright to the minor when he or she turns 21.
Many times in estate planning situations arise in which an individual wishes to place property in trust but does not necessarily want the beneficiary to have the ability to completely withdraw the property or accumulated income of the trust right away. At the same time, the grantor is looking for a vehicle in which to make a gift free of any gift tax (currently gifts up to $15,000 per year, per individual are permitted without the obligation to pay any gift tax under §2503(b) of the Tax Code).
The most common situation in which the desire to structure a trust in this manner arises is when a grantor parent wishes to make gifts to minor children (or non-minor children under a certain age) but does not want the child to have the ability to access the funds immediately, whether out of fear that they will be spent on something foolish or otherwise. In order to prevent the money from being wasted by the child restrictions are drafted into the trust agreement which prevent him from accessing all of the funds until such date as the parent believes he will be responsible with the money.
However, in order to qualify for the exclusions from gift tax the gift must also be one of a present interest, meaning that the person who is receiving the gift has the immediate ability to enjoy the gift. Therefore, in order for a Crummey trust to serve the dual purposes of making tax free gifts to beneficiaries and restricting how those transferred assets are accessed, certain precautions must be taken.
The first requirement in order to ensure that the grantor’s contributions to the trust are considered gifts, thereby removing the wealth from his estate, is that the Crummey trust must be irrevocable. As I discussed in an earlier post, irrevocable trusts provide some great tax advantages in that they are viewed for tax purposes as a separate entity over which a grantor has no control or ability to modify or revoke. Therefore, any contribution a grantor makes to an irrevocable trust will no longer be considered owned by him, and he will not be subject to estate tax on it upon his death.
2) The beneficiary must have the right to receive something of value immediately at the time a gift is made to the trust.
As discussed above, a gift must be one of a present interest in order to qualify for gift tax exemption. According to the IRS, simply giving the beneficiary the right to receive the gift at some point in the future, even if it is only in a year or two, is not sufficient to qualify a gift for gift tax exemption. Naturally, then, a beneficiary must have some sort of present ability to receive the gift. According to the IRS, the present right to receive something of value must not be subject to a contingency or the will of some other person, the right to receive the property must exist at the time of the gift, the beneficiary’s present interest must be clear and unambiguous and it must be possible for the beneficiary to actually receive the property . That means that a Crummey trust must permit a beneficiary to withdraw annual contributions that are made to the trust when they are made. If the beneficiary does not withdraw the contribution, then it will become part of the trust principal and will be protected against future withdrawals unless made consistent with the trust agreement.
3) The beneficiary must have notice that he or she has a right to demand to receive property.
It may seem like a good idea to simply not inform a beneficiary of the fact that a contribution has been made to the trust for which he has a withdrawal right, however, the IRS has made clear that a demand right can’t exist unless the beneficiary has knowledge that he may exercise such a right. It is ambiguous as to whether the existence of a demand right must be given upon each addition to a trust or only upon creation of the trust, however, in order to ensure that the IRS doesn’t such gifts to the trust back into the grantor’s estate, a cautious planner would consider giving notice each time a contribution is made to the trust.
4) The beneficiary must be given a reasonable time to exercise the demand right.
Perhaps a natural corollary to giving notice of a demand right is giving the beneficiary a reasonable amount of time to exercise a demand. Again, there is no steadfast requirement for how long “reasonable” may be, however, the IRS has indicated that as little as 30 days has been sufficient numerous times.
While a Crummey trust offers benefits as an estate planning tool some goals are best accomplished through other means. An estate planning attorney can discuss the Crummey trust option in much more depth along with other possible tools like 529 plans and UTMA custodial accounts to accomplish your estate planning goals.
Chances are at some point or another you and your spouse have brought up the topic of estate planning. Whether it was talking about writing wills or how to plan for retirement, it’s a common discussion for married couples to find themselves in. Often, though, couples are not entirely familiar with the planning doors marriage opens up.
From unlimited lifetime gifting, to passing large sums of money upon the death of the first spouse, married couples enjoy a number of benefits that unmarried individuals do not. But, it’s impossible to utilize those mechanisms without some planning.
Whether you’ve been married one year or 20, these are the minimum estate planning documents that a married couple should have:
A Durable Power of Attorney for Healthcare (including HIPAA Release)
A power of attorney is a document in which one individual (the “principal”) grants another individual (the “agent”) the authority to act on his or behalf, often according to a specific list of directions.
When it comes to medical decisions, a durable power of attorney, permits the agent to make medical decisions relating to treatment on behalf of the principal and, properly drafted, it allows the agent access to the principal’s important medical records which may be necessary to consider when determining a course of treatment.
Without a valid durable power of attorney for healthcare in place, medical personnel have no obligation to follow anyone’s wishes regarding treatment or consent except for the patient’s. For married couples, this may not be as much of an issue as it is for other people, but it’s still important to cover your bases.
By executing a valid power of attorney, a couple can appoint each other to make heath related decisions if they themselves are unable to do so. The power of attorney ensures that your spouse will be able to take any action which you would be permitted to take on own behalf. Many states offer statutory forms that can be used if you know what you’re doing, or an attorney can draft one up very quickly with a few pieces of information.
A Durable Power of Attorney for Finances and Property
With a valid durable power of attorney for finances and property an agent should be able to access the principal’s bank accounts and financial records, pay rent, utilities and credit card bills, manage investments and loans and so on.
Without one, financial institutions like banks, utility providers or even landlords typically will not permit an individual that is not named on an account to access its funds or information. Of course, in the context of marriage, this is not as much of an issue as it sometimes is for single individuals. Nevertheless, it’s good to make one part of your plan to avoid any surprises down the road.
If you want to direct where your possessions will go if you die, then it’s important to have a last will and testament, or a will for short.
If a person dies without a will, state law determines how the assets will be distributed. That will mean less money and more stress for the heirs—an unpleasant prospect for family members already dealing with the tragic death of a young person.
In addition, married couples enjoy a number of benefits when it comes to passing property upon death. While others need to consider the tax implications of leaving amounts over a certain threshold, spouses can leave unlimited assets to each other in a will. That means that upon the first death, substantial gifts left to an inheriting spouse will not be subject to hefty taxes. However, it’s important to involve an attorney here, as the death of the second spouse may bring with it a number of unwanted tax consequences. Strategic drafting of a comprehensive estate plan can fully utilize these benefits while also eliminating any unwanted consequences.
If you are married and do not have any children, then 9 times out of 10 your estate will go 100% to your spouse. If you or your spouse instead want to leave certain property or a little bit of money to other loved ones, then you’ll need a will to override the default intestacy laws.
A living will is a legal document used to indicate which treatments you do or do not want applied to you in the event you either suffer from a terminal illness or are in a permanent vegetative state.
For example, you may indicate whether the use of feeding tubes or other life-prolonging equipment should be continued, or whether, at a certain point should be discontinued if there is no chance of recovery.
A living will does not become effective unless you are incapacitated; until then you'll be able to say what treatments you do or don't want. Without a valid living will, doctors may or may not rely solely on the wishes of your spouse when determining what course of treatment to pursue.
Drafting a living will is important so that nasty disagreements don’t occur if something happens to you.
Authorization for Final Disposition
Leaving your loved ones specific instructions regarding funeral arrangements can drastically reduce the stress that they’ll obviously be facing should you pass away and spare them the difficulty of making those tough decisions at a painful time. This can be easily complicated when your family and significant other each believe that you wanted something different.
Items to consider are:
- Burial or cremation
- Contact information for a chosen funeral home, cemetery, etc.
- Details about your desired ceremony
- Details about any marker you may want
Drafting an authorization for final disposition provides details to your family and loved ones you may have never discussed with them and gives you a way to have a say in the final details of your life.
Revocable or Living Trust
A living trust, which may also just be referred to generally as a revocable trust by your attorney is a tool which can be used by practically anyone to create efficiency and additional protection in an estate plan. You can learn more about revocable living trusts here.
Appropriate beneficiary designations on retirement (and other) accounts
There are a number of things that a will won’t pass along to beneficiaries, including retirement accounts, insurance policies and other financial instruments that are governed by separate contracts between you and the provider.
In order to ensure that these items go to your spouse if you die, it’s important to name him or her as the beneficiary of the policy.
Married couples also enjoy some additional benefits when it comes to planning for the disposition of retirement accounts, if done correctly. For example, a spouse inheriting an IRA will be able to roll the finds over to his or her IRA if appropriate steps are taken which will permit the surviving spouse to space out distributions over a longer period of time.
If changes are necessary you should make sure to file a new beneficiary designation form with the company.
Title to Real Estate
If you and your spouse own real estate together, then you should consider your options when it comes to how title should be held.
For example, by holding the real estate as joint tenants with right of survivorship you’ll be able to ensure that, should something happen to one of you, the entire interest in the home will pass to the surviving partner.
Married couples in a number of states are also permitted to hold property as tenants by the entirety- a type of ownership only available to married couples. Joint tenancy and tenancy by the entirety create additional rights and protections that may not otherwise be available to property owners.
It’s a great idea to talk to your attorney about what certain types of real property ownership mean to you and your spouse.
Life Insurance/ Life Insurance Trusts
Life insurance can provide a windfall for your spouse should you pass away suddenly, so it’s a good idea to look at your options with your insurance agent.
One drawback of life insurance is that its value gets included in your estate for tax purposes upon your death.
With some policies paying out millions of dollars, this can have a significant impact on your surviving spouse, as it may push your estate over the estate tax threshold, thus reducing the award your surviving spouse will receive.
One way to potentially bypass that unwanted possibility is to have your attorney draft an irrevocable life insurance trust to hold the policy. A policy held in an irrevocable life insurance trust does not get included when calculating the total value of your estate for tax purposes upon your death. By naming your spouse as the beneficiary of the policy, you can ensure that the payout will be maximized in the event you pass away.
Michael F. Brennan is an attorney at the Virtual Attorney™ a virtual law office helping clients in Illinois, Wisconsin, and Minnesota with estate planning and small business legal needs. He can be reached at email@example.com with questions or comments, or check out his website atwww.thevirtualattorney.com.
Welcome to 2017! If you’re like me, you’ve spent the first few days of the New Year trying to get organized and set some goals for the year to come. Whether it’s a new workout regimen, quitting smoking, spending more time with family, or something else, the start of a new year presents a natural opportunity to make some small changes to improve ourselves and our lives. One item that you may have been putting off for a while may be putting an estate plan in place to protect your family. And, if you haven’t done so, I’m happy to help you make 2017 the year you finally cross that ever-looming item off your to-do list.
Welcome to 2016! If you’re like me, you’ve spent the first few weeks of the New Year trying to get organized and set some goals for the year to come. Whether it’s a new workout regimen, quitting smoking, spending more time with family, or something else, the start of a new year presents a natural opportunity to make some small changes to improve ourselves and our lives. One item that you may have been putting off for a while may be putting an estate plan in place to protect your family. And, if you haven’t done so, I’m happy to help you make 2016 the year you finally cross that ever-looming item off your to-do list.
If you do have a plan in place, it’s important to make sure it continually reflects your goals and objectives. If you put a plan in place this past year or 10 years ago, with the year winding down, it’s a good idea to ensure that it still reflects your wishes. As we all know, those can change from time to time, especially when significant life events have recently occurred. The birth of a child, marriage, moving to a new home and starting a new career are some significant events that may lead to new considerations for your plan. So too are more unfortunate things like a divorce or death in the family.
Remember that, as your life changes, so too should your estate plan.
So, while we are all still trapped inside avoiding the artic freeze outside, take some time to take stock of your current plan and think about making any changes that may be overdue.
Here are 7 areas where a quick review will help you start 2016 on the right foot:
1.Review your current will (and trusts).
A number of changes to tax and inheritance laws have occurred over the past few years meaning that many plans may not reflect the most current laws. A review can help ensure that your will and trust(s) are up to date. At minimum, it’s a good idea to review beneficiary designations, trustee designations, and personal representative designations. If those individuals are no longer living or your relationship with them has changed, a modification may be necessary.
2.Double check healthcare-related planning documents.
This is a big one for everyone regardless of age or financial health. Current events illustrate that good health isn’t guaranteed. Make sure to take some time to go over agent designations and wishes relating to treatment. It’s important to discuss those wishes with your loved ones as well so that there is no confusion or disagreement over what needs to be done in the event you are unable to act for yourself. For Illinois residents, there are also some changes to the Illinois power of attorney statute, effective January 1, which could raise implications for you.
Documents to comb through are your a) durable power of attorney for healthcare, b) HIPAA authorization(s) and c) living will. If your current documents don’t reflect your wishes or you have never had these drafted, an estate planning attorney can have them drawn up in relatively short order. Finally, while if you’re up for it, take some time to write down and discuss funeral arrangements or anatomical gifts you may want to make should the unthinkable happen. While the conversation may not be the most pleasant, it sure beats straining family relationships when those people have to try and guess your wishes.
3.Make sure policies match.
Items like insurance policies and retirement plans fall outside of typical estate planning documents, like wills and trusts. In order for the proceeds of these items to pass to a chosen individual, he or she must be named as the beneficiary of the policy. Similarly, if you have a revocable trust, it’s important to review your policies to ensure that beneficiary designations properly name the trustee of the trust as the beneficiary, if this is what you and your advisors have decided upon. If individuals previously named as beneficiaries have passed away, or are otherwise no longer in your life (i.e. ex-spouses) make sure that these items are updated. If you’ve recently created a revocable trust, make sure that it’s actually functional by naming it as the beneficiary of policies.
4.Make sure your trust funding is current.
If you have a trust, you know that it’s only as good as the assets it actually owns or controls. When it was drafted, you and your attorney probably walked through all of your assets, determined which ones should be transferred to the trust, and acted appropriately to make the transfers. But, chances are that some of your assets may have changed since then. So, it’s important to take stock of what your trust currently owns and what may need to be transferred to it. For example, if you have moved or purchased a home, chances are it is not titled in the name of the trust. By filing a new deed or Transfer On Death Instrument, you can ensure that your home ownership syncs up with your estate plan.
5.Double-check joint ownership.
Designating heirs on accounts is a common estate planning mechanism. Often times, naming an individual like a child a joint owner on items like bank accounts is not advisable. However, converting accounts into Payable Upon Death (POD) accounts can accomplish the same objectives without some of the drawbacks that joint accounts carry. This can be a very functional way to ensure that certain liquid assets pass to chosen individuals you’re your death and it can be done with minimal paperwork or change in structure of your existing accounts. Talk with your advisor about exploring the idea as you review the rest of your plan.
6.Don’t keep safe-deposit box inventory a secret.
While safe deposit boxes offer great protection for important documents like wills, trust instruments, life insurance policies, and funeral instructions, they can create quite a headache for your loved ones after you’re gone if you don’t take steps to ensure they can be found and accessed. Make an inventory of the contents of all safe deposit boxes you have and share the list and location of each box with a trusted individual, perhaps the individual you have named in your will as your personal representative. This way if something happens to you, that individual will be able to quickly track those items down and act appropriately.
7.Take care of business.
If you’re a business owner, make sure to review and revise existing buy-sell agreements, or prepare such agreements if none currently exist. Review bylaws or operating agreements and ensure that they are current and reflect the current state of the business. This will ensure that operations won’t be interrupted should something happen to you.
Along with these seven items, if you have gone through significant life changes in 2013, like divorce, losing a loved one, marriage or having a child now is a good time to sit down with your estate planning attorney and make sure everything is up to date and everyone is taken care of. Spending a few hours to review everything now will provide you piece of mind as you tackle life in 2014.
Michael F. Brennan is an attorney at the Virtual Attorney™ a virtual law office helping clients in Illinois, Wisconsin, and Minnesota with estate planning and small business legal needs. He can be reached firstname.lastname@example.org with questions or comments, or check out his website atwww.thevirtualattorney.com.
The information contained herein is intended for informational purposes only and is not legal advice, nor is it intended to create an attorney-client relationship. For specific legal advice regarding a specific legal issue please contact me or another attorney for assistance.
By Michael Brennan
A revocable trust is one that is created during the life of the grantor, and its primary uses are to manage property during the grantor’s life and reduce the cost and time associated with probate upon the grantor’s death while permitting the grantor to retain an amount of control over the assets it holds. Along with the ability to retain control over the assets in a revocable trust, a grantor retains the power to amend or even revoke the trust entirely during his life.
How it works
A revocable trust has three main players: 1) the settlor or grantor (who creates the trust); 2) the trustee (who administers and operates the trust); and 3) the beneficiary or beneficiaries (who receive the benefit of the trust and any distributions the trust makes). The revocable trust is established by a trust agreement, which is a writing that sets forth the above relationships and lays out how the property that the trust holds will be managed and distributed. The trust agreement, which is typically drafted by an attorney, is then formally executed in a manner that is specifically dictated by state law.
Once the trust agreement is validly created and executed property must actually be transferred to the trust. This is done by specifically titling assets- such as a residence, stocks, bond, or insurance plans- in the name of the trust. For example, with real estate, this is done by executing and recording a deed evidencing transfer of the real estate to the trust.
Assets that are titled in the name of the trust are managed by the trustee in accordance with the terms of the trust. Typically, when the grantor is alive and well he may manage the assets in the trust as the trustee of the trust for his own benefit as the beneficiary. The trust may set forth a replacement trustee who is to take over trustee duties in the event of the incapacity of the grantor. The trust may also set forth how the property is to be distributed upon the death of the grantor.
The type of arrangement that a revocable living trust provides some benefits over simple will planning.
Perhaps the most beneficial aspect of a revocable living trust is that it provides for the continual management of the property it holds. Initially most revocable living trusts are established so that the grantor is also the trustee. This enables the management of the property that the grantor has legally transferred to the trust to remain a responsibility of the grantor. For example, if the grantor transfers a personal residence to the trust and names himself the trustee, then he may still pay the mortgage, taxes, etc. Even though the trust legally owns the residence, the grantor, as trustee as well as primary beneficiary, may continue to manage the property exactly as he had prior to it being deeded to the trust. The trust may also contain provisions dictating who should manage the property in the event the grantor becomes ill, disabled or otherwise unable to manage the property on his behalf.
Additionally, a common concern of parents with minor children, or even children that are young adults but may still be somewhat dependent on the parentals, is that the children may receive a substantial inheritance before they may be able to maturly understand their responsibilities. We can probably all remember being 18 years old, eventhough we may sometimes want to forget. Imagine yourself at 18 and suddently coming into a substantial sum of money. As much as we'd like to convince ourselves otherwise, we're probably not going to maske the most responsible choices for those funds or consider our long term prospects.
Your children are probably no different. With a revocable trust, you are able to put constraints around when your children may request or receive distributions of their inheritance. Commonly, trusts are written in a way that prohibit a child beneficiary reaching the funds until certain ages. For example, he or she may be restricted from accessing funds until age 25, but perhaps then only a portion. Additional distributions could then be made at 28 and 30 years of age when the child is likely to have more financial wisdom and a different perspective for his or her future.
Without a trust, there's no telling what that child will do with the funds.
Avoid probate upon death
Probate is the process of proving to a court that a will is valid and disposing of the items it lists in the manner in which its creator dictates, paying any due taxes, satisfying debts and generally wrapping up the affairs of a deceased person. The process can become lengthy and expensive so a goal of many estate plans is to avoid the process as much as possible. A revocable living trust that is properly funded and legally holds title to assets will avoid probate proceedings and the assets it holds will be transferred to the beneficiaries named in the trust agreement without court involvement. Thus, revocable trusts have the potential to deeply cut the time and cost sometimes associated with the probate process.
Wills must be filed with the court upon an individual’s death while a trust does not. Therefore, a trust’s dispositive scheme, beneficiaries, etc. can remain private while a will’s provisions become public record.
Planning for mental disability or incapacity
The trust may also contain provisions dictating who should manage the property in the event the grantor becomes ill, disabled or otherwise unable to manage the property on his or her own behalf. In such a case the trust agreement sets out that a successor trustee can take over those duties on the grantor’s behalf. The alternative if the asset is not owned by a trust is that a guardian or conservator would need to be appointed to accomplish the same goals. This involves additional expense and court involvement which is avoided if a revocable living trust is in place.
Flexibility to amend or revoke the trust entirely
A revocable living trust is amendable or completely revocable during the life of the grantor So long as the grantor is mentally competent he or she can change the terms or the trust, how it should be administered or even who the beneficiaries should be after he dies. This feature of revocable living trusts makes it an extremely flexible estate planning tool.