King & Wood, P.A.

Should Your Estate Plan Include a Trust?

“While a living trust won't be the go-to for everyone, there are a handful of reasons to consider using one—including the three discussed below.”

Estate planning is like getting an oil change for your car or going to the dentist. There are other things you’d rather be doing. However, you know these are things you must do to avoid far more expensive problems later on. Estate plans are personalized, based on your needs and situation. One strategy you may want to consider is a living trust, as explained in a recent article from MSN, “3 Reasons to Seriously Consider Using a Living Trust to Pass an Inheritance to Your Family.”

One of the reasons for having a living trust is to avoid the probate process. This is a legal process where a court decides if the will is valid, approves the executor and oversees the distribution of assets left through the last will and testament. If a person owns property in multiple states, probate must take place in each state. Probate can take months or, in the case of complicated estates, years. A living trust distributes assets to beneficiaries without the court's involvement.

Passing assets through trusts provides more privacy than going through a will and, hence, through probate. When a will goes through the probate process, it becomes a public document, and anyone can read it. This means your will could be read by disgruntled family members, creditors, an ex-spouse, or thieves looking for victims.

Details about a living trust, including assets, beneficiaries and terms of the trust, aren’t part of the public record. This is useful for two reasons—avoiding potential conflicts with those who did and those who did not receive inheritances and shielding recipients from potential scammers. Sadly, there are numerous cases of families who fought bitterly over inheritances after they obtained the will from the local courthouse.

Living trusts offer a great deal of flexibility. They can be modified in any way desired by the grantor (the person creating the trust) if they are living. The trust can be modified to reflect life events like marriage, divorce, death, or financial changes. Having the ability to make these changes works well for those concerned with aligning their wishes with their estate plan.

One final note: when you create a trust, you must place assets in the trust to fund it. This usually occurs by retitling the asset to be owned by the trust and not by the grantor. Your estate planning attorney can help make sure you do this last step. Failing to fund the trust is critical for it to perform as you want.

Discuss your overall estate plan with your estate planning attorney. There are many different types of trusts. The attorney will be able to help you decide which one is best suited for you. You’ll also want to be sure any trusts created align with your estate plan.

Reference: MSN (Feb. 3, 2025) “3 Reasons to Seriously Consider Using a Living Trust to Pass an Inheritance to Your Family”

How to Balance Love and Legacy in a Second Marriage?

“Navigating the complexities of blended families requires careful consideration of both emotional dynamics and legal rights to ensure that everyone's interests are protected.”

Getting married for the second or even third time presents many challenges for estate planning, finances and family dynamics. A thoughtful strategy can build a harmonious family and protect legacies, according to a recent article from The Street, “Love and Legacy: Balancing the Two in a Second Marriage.”

Finances can be a flash point for subsequent marriages, especially if spouses have different levels of assets. Mature couples typically come to a second marriage with children, houses, retirement accounts, alimony and credit card debt. How will assets be distributed, what will inheritances look like and how will the couple plan for the future? These are just a few questions to address when marrying again.

Other issues to consider:

Home ownership. Should the new spouse be added to the deed if one spouse owns a home and the other spouse moves in? This has implications for estate planning. If both spouses are on the deed, what is the plan upon the death of the first spouse? If the home automatically passes to the surviving spouse, the children of the deceased spouse may be excluded from their share of the home ownership.

Beneficiary designations. Marrying again with healthy retirement accounts requires looking ahead. If the new spouse is named a beneficiary, are the deceased’s children disinherited? What if a spouse wishes to leave money to their biological children only. However, the surviving spouse won’t have enough money to live on?

Inheritance rights. Balancing the inheritance of biological children while ensuring that the spouses have protected each other takes advance planning. Without it, a surviving spouse could be left homeless or dependent upon adult children for support. An estate planning attorney may recommend a marital trust to provide for the surviving spouse, while ensuring an inheritance for the children.

Social Security benefits. For those who counted on the higher benefit level of their first spouses, remarrying may impact SSI, surviving spouses, or divorced surviving spouse benefits. This is something to explore before marriage, since it can’t be undone.

These issues may feel overwhelming. However, tackling them before marriage can prevent friction between the couple and stepchildren. Among the many plans for a wedding, an appointment with an estate planning attorney should be made to create a personalized estate plan to address your unique situation, including children from prior marriages.

Your meeting should also include a complete review of all wills, trusts, beneficiary designations and retirement plans. Ensure that your documents reflect your new marriage and distribute assets according to your wishes.

Blended families are complicated and require personalized estate, tax, and financial planning. The increasing numbers of people choosing to love again and blend their families show how much people value being part of a family. Protecting your family with a well-thought-out estate plan can start a new marriage on the right foot.

Reference: The Street (Dec. 19, 2024) “Love and Legacy: Balancing the Two in a Second Marriage”

Estate Planning to Serve Today’s More Complicated Life

“Traditional estate planning often assumes a conventional family structure, but modern relationships demand more nuanced approaches.”

The plan of simply leaving everything to a surviving spouse, relying on the unlimited marital deduction to protect against any estate taxes at the first death, works for some families. However, when this is the only strategy, heirs receive an unwelcome tax surprise when the second spouse dies. A recent article in The National Law Review, “Estate Planning Mistakes—2025 Annual Refresher—Part 2,” reviews this and other estate planning matters.

The marital deduction strategy could be vulnerable to different jurisdictional approaches if one of the spouses is not a U.S. citizen or the estate includes overseas property. Foreign property regulations or citizen-based taxation systems could unravel a straightforward marital deduction strategy. A Qualified Domestic Trust (QDOT) might be considered for international estates.

To work properly, the QDOT must meet specific requirements. A U.S. trustee must immediately pay any estate tax if the principal is distributed, and special withholding is required for distributions to the non-citizen spouse. If the estate is valued at over $2 million, a bond or letter of credit for 64% of the initial QDOT value must be furnished by a bond or letter of credit, or a U.S. bank must be the trustee.

For domestic estate planning, using a credit shelter trust, sometimes referred to as a credit equivalent bypass trust, could solve taxes at the second spouse's death. The trust takes assets out of the taxable estate, and while funding is limited to the estate tax credit amount, this type of trust could create significant long-term tax savings.

Asset allocation takes more than a simple division of assets. One heir may have a substance abuse problem, while another enjoys a highly lucrative career. Different maturity levels and financial responsibility must be considered when dividing assets to achieve the testator’s goals of caring for the family. A trust may be needed to provide limited support to the individual who can’t manage money, while another may be in a high tax bracket and prefer assets to be passed on to grandchildren.

Today’s family could be traditional, blended, include non-traditional partnerships or children conceived through assisted reproduction or surrogacy. Without addressing these different definitions of families, partners, and children, some family members could be unintentionally excluded from family trusts or qualify as decedents under prior estate planning documents. Definitions of familial relationships and explicit provisions may need to define “issue” and “descendants” to protect family members, while preventing unintended claims.

Documentation and record management is a cornerstone of estate administration. However, it typically receives little attention during the estate planning process. Having to reconstruct assets based on poorly maintained records causes headaches and additional expenses for heirs. Secure storage solutions need to be considered.

Digital vaults are growing in use. However, they must be carefully vetted to ensure that sensitive information is both protected and, at the same time, accessible to the right person. Your estate planning attorney will have recommendations for safely storing documents, whether in a fire-and-waterproof safe at home or online.

Your life and your family may look very different from your parents’ or your grandparents’ lives. However, your estate plan can reflect modern life and serve to protect all of your loved ones.

Reference: The National Law Review (Dec. 9, 2024) “Estate Planning Mistakes—2025 Annual Refresher—Part 2”

What Does Portability Mean in Estate Planning?

“One of the most overlooked and misunderstood tax laws–available to married farming couples–is an opportunity called portability.”

When one spouse dies, the surviving spouse can choose to make a portability election. This means that any unused federal gift or estate tax exemption can be transferred from the deceased spouse to the surviving spouse. This does not happen automatically, says the recent article “It’s So Important to Elect ‘Portability’ For Your Farm Estate” from Ag Web Farm Journal, but it is worth doing.

Your estate planning attorney will explain how you can take advantage of this opportunity, which must be done at the latest within two years of death. In most cases, no taxes are due, but you must file a form to obtain the exemption.

Before portability was an option, spouses each owned about the same amount of assets, or the amount of assets which would use up each other’s exemptions. For many farm and ranch families, the family’s property is titled one-half to each spouse. Now, however, because of portability, the assets can flow through to the surviving spouse.

At the first spouses’ death, the survivor files for the portability election and then has two exemptions to cover assets.

Here’s an example. A family owns assets jointly and their net worth is about $11 million. They have one son, who also farms. When the husband dies, the wife owns everything. However, she neglects to speak with the family’s estate planning lawyer. No estate taxes are due at this time because of the unlimited marital deduction between the two spouses.

When the wife dies in 2026, when the current federal estate tax exemption is set to drop back to $6 million, their son has to pay $2 million in federal estate taxes. There was $11 million in original assets, but only $6 million for the wife’s exemption. Had she filed for portability when the higher estate tax exemption enacted into law under President Trump, then the $5 million taxable estate would have been reduced by the husband’s exemption by $6 million. No federal estate tax would be due.

Farmers, ranchers and any family business owners need to take into consideration the potential estate taxes in future years. In addition, 17 states still have state estate taxes, and usually the amounts taxed are higher than the federal amount.

An experienced estate planning attorney can work with the family to evaluate their tax liability and see if portability will be sufficient, or if a bypass trust or other tools are needed to protect their legacy.

Reference: Ag Web Farm Journal (April 18, 2022) “It’s So Important to Elect ‘Portability’ For Your Farm Estate”

Do QTIP Trusts Help avoid Estate Taxes?

“Right now, gifts to trusts can take advantage of high tax exemptions and remove future appreciation of assets from taxable estates. One example available to spouses is making a gift to a trust that allows for a qualified terminable interest property (QTIP) election.”

Using a QTIP trust allows one spouse to create a trust to benefit the surviving spouse, while providing the surviving spouse with up to nine months to decide how to treat the gift for tax purposes, explains a recent article “How Certain Trusts Soften The Blow Of Estate Tax Increases” from Financial Advisor. This flexibility is just one reason for this trust’s popularity. However, while the QTIP election can be made on the 2021 gift tax return, which is filed in 2022, the choice as to how much of the transfer will be subject to tax can be made in 2022.

The current estate and gift tax exemption of $11.7 per individual is slated to sunset in 2025, but the current legislative mood may curtail that legislation sooner. Right now, flexibility is paramount.

The surviving spouse is named as the primary beneficiary of the trust and must be the only beneficiary of the trust during the lifetime of the surviving spouse, in terms of both receiving income or principal from the trust.

If the decision is made to treat the trust as a QTIP trust, a gift to the trust is eligible for the marital deduction and is not taxable. It does not use up any of the donor’s gift tax exclusion. That flexibility to make a transfer today and decide later whether it uses any lifetime exemption is something most people don’t know about. A QTIP can also protect the recipient spouse and the principal from any creditors.

There are conditions and limitations to this strategy. If the QTIP election is not made, all net trust income must be distributed to the beneficiary spouse. There’s also no flexibility for the trust income to be accumulated or distributed directly to descendants.

The property over which the QTIP election is made is included in the estate of the surviving spouse.

The election can be made over the entire asset or only a portion of the asset transferred to the trust. The option to apply only a portion of the transfer makes it more tax efficient. For generation skipping-trust purposes, an election can be made to use the transferor spouse’s GST exemption when the decision about the QTIP election is made.

QTIPs are not the solution for everyone, but they may be the best option for many people while the people in Washington, D.C. determine the immediate future of the estate tax.

There are many Americans who are moving forward with making gifts using the current gift tax exclusion, using spousal lifetime access trusts (SLATs). However, the QTIP elections remain a way to hedge against the risk of being on the hook for a substantial gift tax, if there is a reduction in the federal estate tax exemptions.

Speak with an estate planning attorney to learn if a QTIP or another type of trust is appropriate for you. Note that these are complex planning strategies, and they must work in tandem with the rest of your estate plan.

Reference: Financial Advisor (May 24, 2021) “How Certain Trusts Soften The Blow Of Estate Tax Increases”

What Is Family Business Succession Planning?

“If you plan to pass your business to your offspring, there is more to keep in mind when creating your succession plan than your descendants—there are also their spouses—especially if they become ex-spouses.”

Many family-owned businesses have had to scramble to maintain ownership, when owners or heirs were struck by COVID-19. Lacking a succession plan may have led to disastrous results, or at best, less than optimal corporate structures and large tax bills. This difficult lesson is a wake-up call, says the article “Succession Planning for the Family-Owned Business—Keepin’ it ‘All in the Family’” from Bloomberg Tax.

Another factor putting family-owned businesses at risk is divorce. Contemplating the best way to transfer ownership to the next generation requires a candid examination of family dynamics and acknowledgment of outsiders (i.e., in-laws) and the possibility of divorce.

Before documents can be created, a number of issues need to be discussed:

Transfer timing. When will the ownership of the business transfer to the next generation? There are some who use life-events as prompts: births, marriages and/or the death of the owners.

How will the transfer take place? Corporate structures and estate planning tools provide many options limited only by the tax liabilities and wishes of the family. Be wary, since each decision for the structure may have unintended consequences. Short and long-term strategic planning is needed.

To whom will the business be transferred? Who will receive an ownership interest and what will be the rights of ownership? Will there be different levels of ownership, and will those levels depend upon the level of activity in the business? Will percentages be used, or shares, or another form?

In drafting a succession plan, it is wise to assume that the future owners will either marry or divorce—perhaps multiple times. The succession plan should address these issues to prevent an ex-spouse from becoming a shareholder, whose interest in the business needs to be bought out.

The operating agreement/partnership agreement should require all future owners to enter into a prenuptial agreement before marriage specifically excluding their interest in the family business from being distributed, valued, or deemed marital property subject to distribution, if there is a divorce.

An owner may even exact a penalty for a subsequent owner who fails to enter into a prenup prior to a marriage. The same corporate document should specifically bar an owner’s spouse from receiving an ownership interest under any circumstance.

A prenup is intended to remove the future value of the owner’s interest from the marital asset pool. This typically requires the owner to buy-out the future spouse’s legal claim to future value. This could be a costly issue, since the value of the future ownership interest cannot be predicted at the time of the marriage.

Many different strategies can be used to develop a succession plan that ideally works alongside the business owner’s estate plan. These are used to ensure that the business remains in the family and the family interests are protected.

Reference: Bloomberg Tax (April 5,2021) “Succession Planning for the Family-Owned Business—Keepin’ it ‘All in the Family’”

Planning Future for Nontraditional Families

“Some people are concerned that the new conservative 6-3 majority on the Supreme Court will roll back protections for non-traditional families. Regardless of the decisions at the Supreme Court, or the impact on the state family courts, there are many ways that non-traditional families can maintain control.”

Today’s non-traditional family are not just LGBTQ couples, but families undergoing gray divorces, blended families, stepchildren, multinational families and children born through assisted reproductive technologies, referred to as ART, in a recent article titled “How to Plan for LGBTQ, Blended Families, Cohabitation, Other Nontraditional Families” from Financial Advisor.

The key is having an estate plan prepared that is flexible so that last wills, trusts, and all documents reflect the non-traditional family very clearly and do not leave room for courts to make decisions. Here are a few new elements to consider:

Gendered pronouns and definitions. Ideally, your estate documents should use specific names of individuals, not pronouns. We live in a fluid society and using pronouns could lead to unnecessary complications.

Recognize ART and its implications. If there are children conceived by ART, they need to be explicitly included as children of the family. DNA testing can result in a child inheriting assets from a parent they never knew. It may be wise to exclude biological children, parents or siblings who do not have a relationship with the family.

Trust Protector/Trust Decanting. By including provisions that permit trusts to be decanted, that is, transferred from one trust to another, your estate planning attorney will create flexibility to allow a trust protector (a non-fiduciary appointment of a third party) to make changes. The selection of the trust protector is particularly important, as they could have a large impact on the overall plan.

Marriage, non-marital relationships, divorce, remarriage. An estate plan needs to prepare for future changes with precision and flexibility. Protecting the family, its privacy and dignity can be done by limiting the information in the last will, which becomes a public document. While we can’t know what the future holds, we can plan for change.

Prenuptial agreements. State laws vary on what is acceptable and procedurally necessary for a prenup to be enforceable. Typically, the agreement must be voluntary and include full disclosure of both parties’ financial situation. In some states, post-nuptials can be prepared, if the parties can’t agree on the document before they are legally wed.

Divorce creates special estate planning issues. Beneficiary designations need to be changed for life insurance, IRAs and other non-probate assets. Take affirmative steps to ensure that ex-spouses, or soon-to-be exes are removed as beneficiaries on all accounts, including pensions and insurance plans subject to ERISA.

Cohabitating couples. Marital gifts are tax free, but that is not the case for people living together. Estate planning and tax planning needs to be done, so the surviving partner is taken care of. This may include the creation of a cohabitation agreement, similar to a prenuptial agreement.

Planning for sickness and death. Explicitly stating wishes for end-of-life medical treatments, including feeding tubes, respirators, heart machines, etc., is step one in having an Advance Medical Directive created. Step two is deciding who is empowered to make those decisions. Someone who is unmarried but has a partner or a second spouse needs to be authorized. Note that when an individual is hospitalized, stepparents may attempt to deny access to spouses’ children, or children may block access to a stepparent. There should also be a Do Not Resuscitate (DNR) or Physicians Orders for Life-Sustaining Treatment (POLST) in place with the person’s wishes.

Non-traditional families of all types need to protect the family with estate planning and documentation. Issues about protecting children, making health care decisions for a critically ill partner and control of assets must be addressed in a way that respects the individuals and their families while working within the law.

Reference: Financial Advisor (Feb. 2, 2021) “How to Plan for LGBTQ, Blended Families, Cohabitation, Other Nontraditional Families”

How Bad Will Your Estate’s Taxes Be?

“There were only approximately 1,900 taxable estates in the U.S. in 2018, which is less than 0.1 percent of people who died that year.”
The federal estate tax has been a small but steady source of federal revenue for nearly 100 years. The tax was first imposed on wealthy families in America in 1916. They were paid by families whose assets were previously passed down through multiple generations completely and utterly untaxed, says the article “Will the government tax your estate when you die, seizing home and assets?” from The Orange County Register.
The words “Death Tax” don’t actually appear anywhere in the federal tax code, but was the expression used to create a sympathetic image of the grieving families of farmers and small business owners who were burdened by big tax bills at a time of personal loss, i.e., the death of a parent. The term was made popular in the 1990s by proponents of tax reform, who believed that estate and inheritance taxes were unfair and should be repealed.
Fast forward to today—2020. Will the federal government tax your estate when you die, seize your home and everything you had hoped to hand down to your children? Not likely. Most Americans don’t have to worry about estate or death taxes. With the new federal exemptions at a record high of $11,580,000 for singles and twice that much for married couples, only very big estates are subject to a federal estate tax. Add to that, the 100% marital deduction means that a surviving spouse can inherit from a deceased spouse and is not required to pay any estate tax, no matter how big the estate.
However, what about state estate taxes? To date, thirteen states still impose an estate tax, and many of these have exemptions that are considerably lower than the federal tax levels. Six states add to that with an inheritance tax. That’s a tax that is levied on the beneficiaries of the estate, usually based upon their relationship to the deceased.
Many estates will still be subject to state estate taxes and income taxes.
The personal representative or executor is responsible and legally authorized to file returns on a deceased person’s behalf. They are usually identified in a person’s will as the executor of the estate. If a family trust holds the assets, the trust document will name a trustee. If there was no will or trust, the probate court will appoint an administrator. This person may be a professional administrator and likely someone who never knew the person whose estate they are now in charge of. This can be very difficult for family members.
If the executor fails to file a return or files an inaccurate or incomplete return, the IRS may assess penalties and interest payments.
The final individual income tax return is filed in just the same way as it would be when the deceased was living. All income up to the date of death must be reported, and all credits and deductions that the person is entitled to can be claimed. The final 1040 should only include income earned from the start of the calendar year to the date of their death. The filing for the final 1040 is the same as for living taxpayers: April 15.
Even if taxes are not due on the 1040, a tax return must be filed for the deceased if a refund is due. To do so, use the Form 1310, Statement of a Person Claiming Refund Due to a Deceased Taxpayer. Anyone who files the final tax return on a decedent’s behalf must complete IRS Form 56, Notice Concerning Fiduciary Relationship, and attach it to the final Form 1040.
If the decedent was married, the widow or widower can file a joint return for the year of death, claiming the full standard deduction and using joint-return rates, as long as they did not remarry in that same year.
An estate planning attorney can help with these and the many other details that must be taken care of, before the estate can be finalized.
Reference: The Orange County Register (March 1, 2020) “Will the government tax your estate when you die, seizing home and assets?”