Keep Property in Family

What does Avoid Probate mean?

What does avoid probate mean?

To understand what avoid probate means, you have to understand what probate is.

For prospective law firm clients who want to schedule a free 15 minute initial phone call with Paul Rabalais, go to: https://go.oncehub.com/Paul8

Some basics: Probate, in general, is the court-supervised process of transferring assets in the name of a deceased person to the heirs. In Louisiana, probate is referred to as "a Succession." But because there are different laws, rules, and regulations that apply to different types of assets you might own, I'd like to use an example.

Let's say that Alan and Alice Peterson own five assets:

(1) A bank account;

(2) An individual retirement account (IRA);

(3) A brokerage account;

(4) A vehicle; and

(5) A home.

One die, Alan dies. Alice goes to the bank where they tell her that she still has access to their bank joint bank account. Alan goes to their brokerage firm where she is told that as the designated beneficiary on Alan's IRA, she can produce a death certificate (when she gets it) and the financial institution will transfer Alan's IRA into an IRA in Alice's name. So far, Alice is on a roll.

But when Alice inquires about their joint brokerage account, the brokerage firm tells Alice that the account is frozen, and that Alice and her family must hire an attorney to get the appropriate court orders in order to gain access to the brokerage account funds.

Then Alice discovers from the Office of Motor Vehicles that she cannot sell or otherwise transact the car until she produces the appropriate court order ordering the Office of Motor Vehicles to take Alan's name off the vehicle title.

Then, when Alice starts to inquire about selling the home, she discovers that she can't sell the home until she "completes Alan's Succession," which will clear up the title to the home.

So, even if Alan had a last will and testament, it's the fact that he had assets titled in his name when he died that required his survivors to hire lawyers to complete this court-supervised procedure, even though Alan's IRA "avoided probate."

So Alice and the kids hire a lawyer, spend a few grand or more, take several months or more, to complete the court proceeding and all that goes along with settling Alan's estate.

Years later, Alice dies, also owning five assets. Even though Alice may have had a last will and testament naming an executor, and naming her children as her sole heirs. The kids must now "lawyer up" and go through the court proceeding in order to get Alice's bank funds and brokerage account, and to sell Alice's vehicle and home.

Some people want their survivors to "avoid probate," which means they want to arrange their affairs in a manner so that their survivors will have immediate access to assets, without their survivors having to have assets frozen while survivors hire lawyers and wait on the judicial system to oversee the settling of the estate.

So perhaps Alan and Alice would have, in order to avoid probate, established the "Alan and Alice Peterson Revocable Living Trust." They would have transferred their "probate assets" to their trust, such as their home and brokerage account, while they would have kept the IRA out of the trust since IRA law permits IRA owners to designate beneficiaries of their IRA accounts.

Then when Alan died, Alice, as the trustee of their trust, could sell the home and access the trust brokerage account, without having to go through probate. Things in a trust do not have to "go through probate" when you die. Only certain assets titled in your name require a probate (or in Louisiana, "a Succession") when you die.

After both Alan AND Alice die, then the Successor Trustee so designated by Alan and Alice in the trust instrument, would have immediate access to sell trust assets (like the home, if appropriate), and disburse trust assets to the principal beneficiaries of the trust, without having the traditional attorney and court involvement that is required when you die with assets in your name and a Succession is required.

This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.

Paul Rabalais

Louisiana Estate Planning Attorney

www.RabalaisEstatePlanning.com

Phone: (225) 329-2450

Why the Louisiana Succession Doesn't Ever Get Done...And How to Make Sure Yours Does Get Done

Two reasons estates don't get settled are (1) the survivors are unaware of the need to complete the probate (in Louisiana we call it a "Succession"); and (2) at least one of the participants is not cooperative.

For prospective law firm clients who want to schedule a free 15 minute initial phone call with Paul Rabalais, go to: https://go.oncehub.com/Paul8

It is not uncommon for someone to pass away leaving survivors, and those survivors are unaware of the need to complete the probate of the deceased family member. For example, let's day Dad dies. Dad and Mom had purchased a home 35 years earlier. After Dad dies, Mom decides to continue living in their home. Mom has access to all of the joint bank accounts, and Mom was the designated beneficiary of Dad's IRA. She doesn't even think about seeing a lawyer to complete a Succession. Years later, Mom wants and needs to move into an assisted living facility. She decides to sell the home to help cover the expenses of moving and living in the assisted living facility. She puts the house up for sale, finds a buyer, and signs a purchase agreement. The buyer's title attorney conducts a title examination and discovers the home is still in the names of both Dad and Mom. The buyer's title attorney says, "No sale will take place until Dad's probate is complete!" So the sale is suspended, or perhaps worse, the buyer backs out of the sale.

We often see surviving family members unaware of the need to complete a Succession after their loved one dies. Perhaps the deceased owned a rental property and the family merely continued to collect rent from a tenant but never went through the Louisiana Succession to get the title transferred. Perhaps the deceased had owned a one-third undivided interest in family property, with her two siblings, and no one bothered to include that as a Succession asset after she died. Perhaps the deceased owned real estate out of state, and the Louisiana Succession does not transfer any of the real estate owned in the name of the Louisiana resident.

So there are many circumstances where surviving family members are unaware of the need to complete a Louisiana Succession after the death of a loved one. And when they finally uncover that need years later, it is more complicated because there is urgency, or perhaps an heir of the deceased passed away in the interim, making more probates necessary.

A second, and perhaps more frustrating, reason estates don't get settled, is when one or more of the participants is uncooperative. Neither the executor acting alone, or a majority of the heirs, can complete a Louisiana Succession by themselves.

In order to transfer assets of the decease to the heirs, a judge must sign a court order ordering third parties to transfer assets out of the name of the deceased, and into the names of the heirs. A judge will not sign the necessary court order until ALL OF THE PARTIES sign off on the petition requesting the judge to sign the order (this order is referred to as a "Judgment of Possession").

Sometimes a participant will refuse to sign the necessary paperwork - sometimes for valid reasons and sometimes for petty reasons. Nonetheless, one participant refusing to fully cooperation will stop an estate settlement in its tracks.

So what's the Solution? Twofold:

(1) On the planning side, particularly if you anticipate relationship issues among your heirs, establish an estate legal program to eliminate or minimize the potential for problems. Avoid probate. Put the right people in charge with the authority to get things done. Communicate your reasons exactly why you are doing what you are doing.

(2) Once a family member dies, make sure you have very quick and very open communication with all of the parties involved. This early and open communication will build trust among the parties, often eliminating discourse.

This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.

Paul Rabalais

Louisiana Estate Planning Attorney

www.RabalaisEstatePlanning.com

Phone: (225) 329-2450

What is a Survivorship Clause in a Will?

What is a survivorship clause in a last will and testament?

For prospective law firm clients who want to schedule a free 15 minute initial phone call with Paul Rabalais, go to: https://go.oncehub.com/Paul8

Quite frankly, it's a clause that is often in wills that no one understands, and is rarely applicable. It's one of those provisions that gets consumers to say something like, "Well I guess this is just more of that legalese that lawyers put in legal documents."

Here's some background: You cannot make a bequest of full ownership of an asset and require that they preserve it for another person. That, under Louisiana law, is called a prohibited substitution.

However, you may make a bequest of an asset to someone, and impose as a condition on the bequest, that they survive you for a stipulated period, which period shall not exceed six months after your death.

Let's say you leave your home to Harold. But if Harold were to die right after you (let's say one month after you), you would not want your home to go to Harold's heirs - you would want your home, rather, to go to Sally. You could leave your home to Harold subject to the suspensive condition that Harold survive you for six months. Then, when Harold dies one month after you die, your home will go to Sally, instead of Harold's heirs.

Since "Joe Public" doesn't, at first glance, understand the terms "suspensive condition" or "survivorship clause", these provisions often cause confusion and rarely are applicable.

One other note worth mentioning: the existence of a six month survivorship clause can hold up the Louisiana Succession, or perhaps even the trust settlement, because the rights of Harold, in our example above, are "in suspense" until the six month survivorship time period expires.

This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.

Paul Rabalais

Louisiana Estate Planning Attorney

www.RabalaisEstatePlanning.com

Phone: (225) 329-2450

If You Have an Undivided Interest in Family Property, Watch This Regarding Your Future Louisiana Long Term Care Medicaid Eligibility

Some people mistakenly believe that an applicant for Louisiana Long Term Care Medicaid does not own property that belonged to their parents when the parents' Successions have not been completed.

Here's an example: Grandparents owned a piece of real estate. Grandparents died many years ago leaving two children, a son and a daughter. Either the grandparents' Wills, or intestate law (you pick) leaves the property to the two children, equally. The grandparents' successions were never completed leaving title to the property in grandparents' names.

Grandparents' daughter is now requiring nursing home care and is applying for Louisiana Long Term Care Medicaid. As part of the application process, it is discovered that Grandparents' daughter is entitled to inherit one-half of the property. Medicaid rejects the daughter's Medicaid application based on the Medicaid Manual's Estate definition, which provides:

"Count the applicant/enrollee's share of an undivided estate as a resource the first day of the month following receipt. Receipt is deemed to be the day of death in the case of a direct descendant or when there is an uncontested will designating the individual as beneficiary."

Medicaid correctly assets that even though the Successions had not been started or completed, one-half of the property is a countable resource, pushing daughter's countable resources far in excess of the $2,000 statutory limit. The Medicaid application is denied. If the daughter is going to stay in the nursing home, somebody will need to pay the nursing home the applicable $6-7,000 monthly amount.

Because receipt of the property is deemed the date of death, it behooves families to, pro-actively and promptly complete the Successions of their ascendants, so that planning can be done in advance of a nursing home stay in order to protect family property.

This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.

Paul Rabalais

Louisiana Estate Planning Attorney

www.RabalaisEstatePlanning.com

Phone: (225) 329-2450

When an IRA Owner Should Take More Than Their Required Minimum Distributions In Order To Save Income Tax and Avoid Nursing Home Spend-Down

In this post we discuss the topic of whether IRA owners should take more than their Required Minimum Distributions (RMDs) in order to have the family pay less overall income and capital gains tax, and to protect accounts from nursing home costs.

My best guess is that more than 90% of IRA owners elect to take only their Required Minimum Distributions from their Traditional IRA. It seems that the only people who take more than the RMD are those who need the money to spend it.

What many don't realize is that the net amount to family is often not as much as it could be when IRA owners take only their RMDs. The rational goes something like this: When an IRA owner takes RMDs only, it is likely there will be a taxable IRA that will be left to beneficiaries. The beneficiaries must pay income tax on distributions they get from their Inherited IRA - sure, they can postpone distributions but they will still pay income tax on these postponed distributions.

However, an IRA owner whose taxable distributions exceed the RMDs, so much so that the entire IRA is depleted, will be able to invest these after tax proceeds in such a manner that the appreciation on those after-tax investments will never be taxed, due to the step-up in basis rule.

The kicker comes when an IRA owner wants to protect their IRA from nursing home expenses. When they take only the RMDs, it will create a situation that when they enter a nursing home, they will still own an IRA and will be forced to take distrubtions, pay income tax, and spend the after-tax proceeds on their nursing home care until they have less than $2,000, leaving virtually nothing for their heirs or designated beneficiaries.

However, the IRA owner who took larger IRA distributions, paid taxes, and put after-tax proceeds in a Medicaid qualifying Grantor Trust will protect those assets from future nursing home expenses, and will maximize what goes to the beneficiaries income tax free and capital gains tax free.

While I understand that people don't want to pay tax until the positively, absolutely have to, perhaps some thought should go into whether an IRA should take only the RMDs that are required, or whether they should take out more than the RMDs, and invest the after-tax proceeds in a manner that is both protected from nursing home spend-down, and income or capital gains tax at death.

This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.

Paul Rabalais

Louisiana Estate Planning Attorney

www.RabalaisEstatePlanning.com

Phone: (225) 329-2450

What Does "Asset Protection" REALLY Mean?

In this post we dig a little deeper about who wants to protect their assets and their estate from losing their estate to (1) nursing home expenses; (2) a lawsuit; and (3) government intervention.

People often call our office or request to discuss with me how they can "protect their assets." But different people, in different circumstances, have different ideas regarding what they want to protect their estates FROM.

One group of people asks me about how to protect their estate from long term care expenses. Perhaps they are 65 or older, and they have seen family members and friends be forced to deplete their estate, and even lose their home, sue to the costs they must pay to reside in a nursing home.

When we engage in a conversation about Long Term Care Medicaid eligibility, we have to take an in depth look at an individual's, or couple's, assets, monthly income, health, age, and the different rules that apply. Often we make some determination regarding what assets should remain in the individual or couple's name, and what assets, perhaps, should be transferred to some form of a trust. Not that the traditional "avoid probate" revocable living trust does NOT provide much in the way of protection from nursing home expenses. Also note that this form of "asset protection" is most effective when transacted at least five years before entering a nursing home.

The second theme of asset protection involves protecting assets you own in the event you get successfully sued. Sometimes people contact us and they are a nervous wreck because "something happened," (maybe the threat of a lawsuit, maybe an automobile accident where you were determined at fault, maybe someone injured on real estate you own, or maybe you have a serious illness and you are worried about the millions of dollars of potential health care expenses).

Two common obstacles I've seen to this kind of asset protection are: (1) People do not want to give up the control over what they own; or (2) people don't engage in this kind of asset protection until it is too late - whereby action could be later undone due to the rules on fraudulent conveyances and the intent to defraud creditors.

The third category of asset protection requests comes from those who, in general, want to protect their estate from "the government." When I ask follow-up questions and dig deeper, they often want to protect their estate from the various forms of taxation, and they want to keep their estate out of probate (the court system).

The solutions for these three categories of asset protection vary based on the appropriate set of laws, rules, and regulations that apply to your situation, and the solutions vary based on your particular financial and estate situation.

This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.

Paul Rabalais

Louisiana Estate Planning Attorney

www.RabalaisEstatePlanning.com

Phone: (225) 329-2450

What Happens After Louisiana Resident Dies With No Will, No Spouse, No Kids, and No Surviving Parents.

What does a family do when someone dies unexpectedly with no last will and testament, no surviving spouse, no children or grandchildren, and no surviving parents?

This can be a stressful time for surviving family members. The first question that often gets answered is, "Who inherits from this person?" The second question that often gets answered is, "How do the heirs settle the estate and get the assets?"

When a Louisiana resident dies with no will, no descendants, no surviving parents, and no spouse, the deceased's estate will go the the deceased's brothers and sisters. If any of the deceased's brothers and sisters had died before the deceased, then the deceased sibling's children will represent the deceased sibling.

One of the first things to do in settling an estate like this is to have a judge appoint an Administrator of the Succession. In a matter like this, it would be common for one of the siblings to step up and ask to be appointed as the Administrator. If all of the heirs agree, it would be advisable for the sibling to ask to be appointed as the Independent Administrator, since less judicial supervision is required of an Independent Administrator. But remember, all of the heirs must sign an Agreement allowing the Administrator to be Independent.

Once a judge signs the court order appointing the Independent Administrator, the clerk of court will issue, "Letters of Independent Administration." This permits the Independent Administrator to open an estate account at a bank, and pool all of the deceased's funds from the deceased's frozen accounts into the estate account.

Once that is addressed, it is likely that the Independent Administrator would start selling estate assets, such as vehicles and real estate. Proceeds from the sale of these estate assets would be deposited by the Independent Administrator into the estate account.

In the meantime, the attorney for the Independent Administrator and the heirs will put together an inventory of assets and debts, often called a,"Sworn Detailed Descriptive List of Assets and Liabilities," showing estate assets and debts as of the date of death of the deceased. This inventory is submitted into the court record for judicial review and oversight.

Finally, after expenses and debts are paid, a judge may sign a "Judgment of Possession," a court order ordering that remaining estate assets be disbursed to the appropriate heirs in the appropriate proportions. The Independent Administrator may withhold some funds for unexpected expenses and final income tax return preparation.

A few comments regarding matters like this:

(1) If the assets of the deceased totaled less than $125,000 in value, they should consider using Louisiana's Small Succession Affidavit Procedure;

(2) Perhaps the deceased's wishes could have been better expressed in a last will and testament, which would name an executor, and designate heirs.

(3) Perhaps the deceased could have created a revocable living trust, designating a Successor Trustee and trust beneficiaries, so that the settlement of the trust and estate could have taken place without attorney involvement and government intervention.

This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.

Paul Rabalais

Louisiana Estate Planning Attorney

www.RabalaisEstatePlanning.com

Phone: (225) 329-2450

Which revocable or irrevocable trusts allow you protection from the dreaded nursing home expenses?

"Do revocable or irrevocable trusts help qualify for Long Term Care Medicaid?"

That is the question we often get from clients and prospective clients who are concerned that they will lose their savings and home if they wind up in a nursing home facility.

There are many different kinds of trusts, but often people tend to break them down into two types: revocable and irrevocable.

Regarding revocable trusts, the Louisiana Medicaid Eligibility Manual could not be much clearer, "The entire corpus of a revocable trust is counted as an available resource to the individual."

Revocable trusts have never been used to protect assets from nursing home expenses. Revocable trusts are, however, used extensively for Succession / Probate avoidance purposes. And quite frankly, when the revocable living trust works like it should, it's a wonderful thing for the survivors of the person who set up the trust. When the person who set up the trust (Settlor) dies, the Successor Trustee (often a family member) can immediately disburse assets to the trust beneficiaries (often the children) without any of the attorney and court involvement, expense, and delay associated with a court-supervised probate process.

Regarding irrevocable trusts, it is important to note that not every irrevocable trust offers nursing home protection and Medicaid eligibility. An important provision in the Louisiana Medicaid Eligibility Manual provides, in pertinent part, that, "The portion of the corpus that could be paid to or for the benefit of the individual is treated as a resource available to the individual..."

There are several other factors that affect Medicaid eligibility when someone has established an irrevocable trust, but clearly of the trustee can pay corpus to or for the individual seeking Medicaid eligibility, then the trust assets will need to be spent prior to eligibility.

Some parents, in order to protect assets, establish an irrevocable trust and provide in the trust instrument that a trustee may make distributions to or for the children of the Settlor of the trust.

Here's my words of warning regarding Medicaid eligibility. Seek out good legal help in your area. Medicaid is a combined state and federal program, so you must work with someone who is well-versed in your state's eligibility provisions. Don't try this at home on your own. Get it right the first time.

This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.

Paul Rabalais

Louisiana Estate Planning Attorney

www.RabalaisEstatePlanning.com

Phone: (225) 329-2450

The Medicaid Five Year Rule Regarding the Transfer of Resources for Less than Fair Market Value

Many people understand the general rule that if you own more than $2,000 of assets (there are definitions of "assets") when you enter a nursing home, then you will not be eligible for Medicaid, and you must privately pay the entire nursing home expense, which in every state is many thousands of dollars monthly.

However, most people, if they must enter a nursing home for long term care services, would prefer to have Medicaid cover this expense, rather than have to pay for it out of their own life savings. But in order to qualify for Medicaid, you have to meet your state's definition of "poor."

For starters, when you enter a nursing home and apply for Medicaid, you can have no more than $2,000 of countable resources. Countable resources include things like money in the bank, investments, savings bonds, retirement accounts, real estate (not your home), and interests in a business or LLC.

Some uneducated folks think they can get around this rule by "quietly" transferring assets out of their name just prior to going into a nursing home. But the Medicaid Manual's rules are quite extensive - making it impossible to get around the rules.

When one enters a nursing home having transferred assets out of their name at least 60 months prior to applying for Medicaid, then it is likely that those assets are, as people say, "protected."

It's much trickier if assets are transferred within the 60 months prior to entering a nursing home.

If you are considering transferring assets to start the five-year clock ticking, you'll likely consider whether you should transfer assets to individuals or trusts. Most people who get educated on the subject tend to transfer assets to particular types of trusts, for two reasons: (1) control reasons; and (2) tax reasons (income tax and capital gains tax).

If you take one item away from this discussion, it's that there are rules which make it very difficult to avoid losing your life savings and home if you enter a nursing home, but by planning ahead (ideally, at least five years before entering a nursing home), you can protect a very large portion of what you own for yourself and your loved ones. But know that the rules are complicated and you need good legal help - ideally, from an attorney who is well-versed on the ins and outs of your state's Medicaid eligibility rules.

This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.

Paul Rabalais

Louisiana Estate Planning Attorney

www.RabalaisEstatePlanning.com

Phone: (225) 329-2450

The Amendable But Irrevocable Trust

Is it possible to amend, modify, or change the provisions of an irrevocable trust?

All trusts can be classified as either revocable or irrevocable. The #1 reason people create revocable trusts is to hold title to assets in a way that you keep total control but eliminate the attorney and court-involved probate process when you pass away. Quite a bit is written about using revocable living trusts to avoid probate, so that is not the topic of this post.

Irrevocable trusts, however, are created for many different reasons: avoid taxes, lawsuit protection, and nursing home protection, just to name a few.

The word "irrevocable" scares many consumers, but it may not need to. Someone can establish an "irrevocable" trust, yet reserve the right to modify certain terms of the trust after the trust is created.

Here's an example: Parent sets up a trust. Parent is referred to as the "Settlor." In the trust instrument, it states that "X" is the trustee of the trust. It further states that "Y" and "Z" are the principal beneficiaries of the trust. The trust states that the trustee may distribute principal to the principal beneficiaries during the lifetime of the Settlor. The trust instrument further provides that when the Settlor dies, the trustee shall terminate the trust and distribute the principal to the principal beneficiaries.

Then, the trust instrument further provides that the Settlor can replace the trustee, and the trust instrument also provides that the trustee can replace the principal beneficiaries. Now you have an irrevocable trust where the Settlor has expressly reserved the right to modify certain provisions of the trust, yet there are some provisions of the trust that the Settlor cannot, under any circumstances, modify.

Fueling this concern over the inflexibility of irrevocable trusts is the fact that back in the 1990's, most irrevocable trusts were set up to avoid the 55% estate tax on assets that exceeded $600,000 in value at death. Settlors of those irrevocable trusts almost never reserved the right to modify those trust provisions for fear that the "right to modify" would cause the trust assets to revert back to the estate of the Settlor.

But since we now have an $11.4 million estate tax exemption, and portability between spouses, married couples can exempt $22.8 million in assets from the estate tax. Moving assets out of the estate to avoid estate tax just isn't a concern any more.

Now, irrevocable trusts are established for a variety of reasons: yes, tax avoidance is one. But so is lawsuit protection, nursing home protection, and many other reasons. But you need to be very careful when you are attempting to take advantage of trusts and other legal strategies to gain these protections because the slightest alterations of wording can have adverse tax, creditor protection, and Medicaid eligibility consequences.

So, in summary, an irrevocable trust does not need to be as scary as it first sounds, due to the fact that you can reserve the right to modify certain provisions, but you will want to tread carefully.

This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.

Paul Rabalais

Louisiana Estate Planning Attorney

www.RabalaisEstatePlanning.com

Phone: (225) 329-2450

Under What Circumstances Should You Give a Trustee the Discretion to Make Distributions to a Trust Beneficiary?

How much discretion should you give a trustee when you establish a trust for the benefit of one or more beneficiaries?

Trusts are set up for many different reasons. Sometimes people want to leave assets at their death to others, but they don't want the inheritors to receive the inheritance in one lump sum. Some people who leave an inheritance want to dictate what the inheritance is to be used for, and under what conditions they can receive it.

For example, let's say a grandparent wants to leave $150,000 to his grandchild. At the time that the grandparent is establishing his estate legal program through a Last Will or Living Trust, the grandchild is only six years old. So the grandparents is advised to leave the bequest in a trust for the benefit of the grandchild.

One decision the grandparent must make is who should be the trustee of this trust after the grandparent dies. Let's say the grandparent selects grandparent's child as the trustee.

And now the decision comes regarding when distributions can be made to or for the grandchild, from the trust, by the trustee.

When you establish a trust like this, you will make a decision regarding whether you want the trustee to have discretion or no discretion in making trust decisions.

If you choose to allow the trustee to exercise discretion in making distributions, you might include trust language that permits the trustee to make distributions to or for a beneficiary for the "health, education, maintenance, and support," of the beneficiary. This can work well when you have a trustee that you know will exercise that discretion in the best interests of the beneficiary. When you choose this option, you may believe that you don't know what future circumstances may bring, and you trust that the trustee will exercise their discretion in a manner consistent with your overall objectives. Perhaps you even communicate to your trustee during your lifetime how you would want the trustee to exercise their discretion.

On the other hand, you may wish to remove all discretion from the trustee, by providing something like, "I direct the trustee to distribute $1,500 monthly to the beneficiary until trust principal is gone."

Or, you might even get more restrictive by stating that the beneficiary must meet certain standards (GPA, no criminal activity, no drug use, etc.) before distributions can be made. However, the more restrictions you place in the trust, the more difficult it will be for a trustee to adapt to circumstances that may not have been able to have been contemplated at the time of the creation of the trust.

So, granting lots of trustee discretion allows a trustee to use their discretion in a manner that is consistent with your overall objectives, but it may create a situation where a beneficiary is badgering the trustee to exercise their discretion, so you'd need to designate a trustee that has the ability to say, "NO" to a beneficiary when appropriate.

Or, you may choose to eliminate trustee discretion by imposing specific restrictions in the trust that must be met for distributions to be made.

This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.

Paul Rabalais

Louisiana Estate Planning Attorney

www.RabalaisEstatePlanning.com

Phone: (225) 329-2450

Five Reasons Louisiana Residents Take Advantage of the Legal Services of an Estate Planning Attorney

The following are five reasons that Louisiana residents (and anyone for that matter) take advantage of the services of an estate planning lawyer:

1. Protect your Children's Inheritance from Their Divorces. Yes, the moment your children inherit from you, the inheritance is separate property. But if they commingle the inheritance (accidentally or intentionally), the inheritance becomes community property. Then, when your child later divorces, your child loses half the inheritance. You can proactively take legal steps to ensure that your child's inheritance will always be your child's inheritance.

2. Avoid Probate. When you leave assets to your survivors through your Last Will and Testament, your survivors will be required to hire attorneys and go through what many perceive to be an expensive, time-consuming, and inefficient court-supervised probate/Succession procedure to gain access to your estate assets. You can proactively arrange an estate legal program to enable your loved ones to receive your estate without having to be burdened by these court procedures.

3. Protect Assets from Long Term Care Costs. If you must enter a nursing home with assets in your name, you will be forced to deplete those assets on your long term care expenses until you are left with less than $2,000 in your name. You can take actions ahead of time to protect them but stay in control of them. This is a huge problem for the middle class that most don't address until it's too late.

4. Put the Right People in Charge. Absent your direction, a judge will select someone to handle your finances, make your medical decisions, and oversee the distribution of your estate. You will want to control who makes the decisions when you are no longer able to make them for yourself.

5. Avoid Taxes. Most estates avoid the 40% estate tax, but virtually every family faces income and capital gains tax consequences when family assets are transitioned from one generation to the next. You can be proactive and minimize these tax burdens for your family.

This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.

Paul Rabalais

Louisiana Estate Planning Attorney

www.RabalaisEstatePlanning.com

Phone: (225) 329-2450

How to Keep Your Farm or "Family Property" in the Family for Future Generations

Many parents who have both children and grandchildren want to keep some of the property that they own so that their kids and grandkids can enjoy the property for many years to come. Perhaps the parents have seen how much their kids and grandkids enjoy the property.

However, when parents pass away and their property is left to children, property rules apply that may conflict with what the parents are trying to accomplish. Customizing the right legal program can ensure that one rogue descendant, or perhaps even the spouse of one child or grandchild, will not be able to mess up or destroy the family property that you'd want them all to enjoy.

First, let's look at some of the Louisiana laws that apply when multiple owners own real estate in Louisiana. Louisiana has a rule that states that no owner can be compelled to own property with another. When children inherit their parents' land, the children are considered "owners in indivision."

Anyone who owns an undivided interest in real estate in Louisiana, regardless of how big or small their ownership interest, can sell their ownership interest, or can force a "partition" of the property. The two kinds of partition are "partition in kind" and "partition by licitation."

When a piece of property is susceptible to being divided into lots, an owner can force a partition in kind whereby each owner would wind up with their own tract. Or, particularly if property is not susceptible to division into lots, an owner in indivision can force a sale of the property and the proceeds would be distributed to the co-owners in proportion to their ownership interest in the property.

Due to these rights that co-owners have, family property often gets sold eliminating future descedants from being able to enjoy the property.

Some owners of property think that by forming a limited liability company (LLC), the owners can keep the property in the family for generations. While owners of property should consider forming an LLC, and transferring their property to it, this is more of a "protection from lawsuits" vehicle than a "keep it in the family for generations" vehicle. Placing the property in an LLC and leaving membership interests in the LLC to your descendants won't prevent an owner/member from (1) selling or disposing of their LLC interest; (2) a member's creditor seizing their interest; or (3) giving or bequeathing their LLC membership interest to a non-family member.

These conversations about keeping property in the family for generations often turn toward creating a family trust. Parents would name a trustee or co-trustees (perhaps the "responsible" descendant") who will manage the trust assets for the benefit of all of the children and grandchildren. Backup trustees would need to be provided for since this trust may be in existence for many decades. Thanks to trust law, the descendants (trust beneficiaries) would not be permitted to sell, alienate, or mortgage, their interest in the trust, and the creditors of a beneficiary could not seize their interest in the trust.

Other issues to consider before pulling the trigger on something like this include the gift and estate tax, future Medicaid qualification, leaving funds to the trust to provide for ongoing management and expenses, and perhaps having the parents transfer the property (or their LLC which owns the property) to a revocable trust now (which trust would become irrevocable when the parents die) in order to avoid having the property go through a court-supervised probate proceeding when they pass away.

Every set of family circumstances is unique. You likely only have one "shot" to get it right. And the decisions that you make (or don't make) will affect your descendants for many, many years to come.

This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.

Paul Rabalais

Louisiana Estate Planning Attorney

www.RabalaisEstatePlanning.com

Phone: (225) 329-2450

Pros and Cons of Leaving Everything to Your Spouse

When married couples engage in estate planning, one of the questions they often are required to answer is, "If I die before my spouse, do I want to leave complete ownership and control of my estate to my spouse?" Or, "Do I want to leave my estate to my spouse in a way that my children (or other heirs) are protected?"

Leaving all of your assets to your spouse is pretty easy to understand - when you die, your spouse owns everything. Maybe you are thinking that it is ok to leave everything to your spouse because you are confident that when your spouse dies, your spouse will leave it all to your kids. Or maybe you like the thought of leaving your estate to your spouse because your descendants circumstances may change after you die and you want your spouse to be able to leave the estate to your descendants the right way.

However, if you leave your estate to your spouse, your spouse "could" leave your estate to people other than your children, like your spouse's next spouse!

Some people want to leave their estate to their spouse in a way that their children or heirs are protected. The two common ways to do this are (1) in trust; and (2) via the Louisiana usufruct.

Leaving your estate to your spouse may be the best overall tax outcome, but it used to be the worst. In the old days, it did not make sense to leave your estate to your spouse because when you lumped your estate on top of your spouse's estate, it caused the spouse's estate to be subject to a 50% or more federal estate tax upon the death of the surviving spouse. But now, with an $11.4 million estate tax inclusion, and with portability (making it easier for married couples to exempt $22.8 million from the estate tax), rarely are couples penalized for leaving everything to each other.

The tax benefit that often results from leaving your estate to your spouse is that your heirs will benefit from a "double step up" in basis, for capital gains tax purposes. In community property states (like Louisiana) all community property gets a new stepped-up basis when the first spouse dies. And when you leave all of your assets to your spouse, all of the assets will get another step-up in basis when your spouse later dies. This can save considerable capital gains tax when assets are later sold, particularly if there is appreciation that occurs from the date of death of the first spouse to the date of death of the surviving spouse.

In addition, if you live in Louisiana, you are prohibited from leaving your entire estate to your spouse if you have forced heirs. Forced heirs are children of your that, at the time of your death, are 23 years of age or younger, or, are of any age but incapacitated.

Leaving assets to the surviving spouse is common for traditional families - one marriage and all children are from the one marriage. And if you really want to make it as simple as possible on your spouse when you pass away, consider establishing a revocable living trust and titling the appropriate assets in your trust. Assets in your living trust don't go through the court-supervised probate/Succession procedure, so having your assets in your living trust will prevent your spouse from having to hire lawyers and go through the courts just to get ownership of your assets after you die.

Other factors that are typically discussed when married couples engage in estate planning legal services include: who makes your decisions when you are incapable; protecting assets from long term care costs; and how will assets be managed and disbursed after both spouses pass away. These are all important components of any estate planning legal program.

Note also that if you have no legal plans in place, Louisiana laws won't do your spouse any favors. These laws will favor your descendants much more than your spouse.

This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.

Paul Rabalais

Louisiana Estate Planning Attorney

www.RabalaisEstatePlanning.com

Phone: (225) 329-2450

Designating Your Spouse versus a Trust for your Spouse as Beneficiary of your IRA

A common estate planning principle communicated by spouses who have children from prior marriages and relationships is, “If I predecease my spouse, I want my assets to be available for my surviving spouse’s needs, but when my surviving spouse dies, I want my assets to revert back to MY children.”

This can get complicated when the estate consists of Traditional IRAs, as many estates do. Let’s take the example of a Husband and Wife who each have two children. When H dies, his IRA is worth $1,000,000. In the year after Husband dies, Wife is 80 years old.  

When it comes to income tax planning and IRAs, most recommend to keep the IRA balance as large as possible, allowing an IRA owner to earn investment income on deferred income taxes. 

In this post we will discuss two strategies: (1) Naming the surviving spouse as the designated beneficiary of Husband’s IRA; and (2) Naming a trust (for the benefit of the spouse) as the beneficiary of Husband’s IRA. 

When a surviving spouse is the designated beneficiary of an IRA, the surviving spouse’s ability to roll over inherited benefits to her own IRA gives her a powerful tax-deferring option, not available to any other IRA beneficiaries. If the surviving spouse holds the IRA as an owner, her Required Minimum Distributions (RMDs) are determined using the Uniform Lifetime Table under which her Applicable Distribution Period (ADP) is the joint life expectancy of the surviving spouse and a hypothetical 10-years-younger beneficiary. If she withdraws only the RMDs under the Uniform Lifetime Table, the IRA is guaranteed to outlive the surviving spouse. And it’s likely that the IRA will be worth more in the surviving spouse’s late 80’s than it was when she inherited it at age 80. 

Let’s look at some numbers. Since Wife can use the Uniform Lifetime Table, her first required distribution the year after Husband dies (assuming a $1,000,000 IRA value) is $53,500 (5.35% of the IRA value). The next year her RMD is 5.59%. And the next year, 5.85%. If the investment performance of the IRA exceeds these distribution percentages, and she only takes the RMDs, the IRA will grow.  

The downside, however, is that since Wife is treated as the owner of the IRA, Wife can name whoever she wants as the beneficiary of beneficiaries of her IRA. She could exclude Husband’s children by naming Wife’s children, or perhaps even Wife’s new spouse that she married after Husband died! 

So instead of naming Wife as the designated beneficiary of Husband’s IRA, Husband considers naming a trust for Wife as beneficiary. The trust instrument might provide that RMDs go to Wife for her lifetime, but when Wife subsequently dies, trust assets revert back to Husband’s children. But since a trust was named as the beneficiary of Husband’s IRA, even if the trust qualifies as a “see-through” trust, RMDs after Husband dies will be based on the single life expectancy of the surviving spouse (Wife) which results in substantially less income tax deferral than would be available if the surviving spouse were named as the outright beneficiary and rolled over the benefits into her own IRA. 

Let’s look back at the numbers. If a trust for Wife is named as beneficiary of Husband’s IRA, the first RMD when Wife is 80 (based on the same $1,000,000 IRA) will be $98,000 (9.8% of the IRA value). At age 81, the RMD will exceed 10% of the account value. And each year, the percentage will increase. If Wife lives long enough after Husband dies, the RMDs based on the required single life expectancy table will cause most of the benefits to be distributed to Wife outright which will defeat the purpose of trying to protect those IRA assets for Husband’s children. 

So keep in mind that there are tradeoffs when it comes to naming beneficiaries of IRAs.