Paul Rabalais attorney

Child Dies Before Parent: What Happens To Estate?

Typically toward the end of the estate planning conversation, a client asks the question, "What would happen to my estate if my child dies before me?"

There are a few different components to this question. First, if a Louisiana resident dies with no legal planning in place (no last will means they died "intestate"), then state law determines who gets what. For example, let's say Dad dies. Two years earlier, Daughter died. Daughter left three children. If Dad died intestate, Daughter's three children would inherit the portion that would have gone to Daughter. Daughter's three children "represent" their mother in Dad's Succession.

Now, let's say, Dad left a Will or a Trust when Dad died. Now, the estate planning legal documents Dad signed control what happens to Dad's estate. Most estate planning documents have, as a default provision, a statement that says that if a child predeceases a parent, then the child's share will go the child's children. However, when a person is putting an estate legal program in place, they can direct their estate as they wish. Many parents express that if their child predeceases, they do not want the child's share to go to the child's spouse or the child's step-children. Or some grandparents have grandchildren that have substance abuse problems and the grandparents do not want to dump an inheritance into a grandchild's lap. So, it's important to address these contingencies as you create your estate legal program.

What you can't do, however, is leave an inheritance to a child and then direct what happens to that inheritance when the child later dies. Once you leave an inheritance to someone (such as, a child), the inheritance belongs to the person who you left it to. You cannot control what they do with it. However, by leaving an inheritance in trust you may be able to exercise more control over what happens to the inherited assets after you pass away.

How Traditional, Simple Louisiana Estate Planning Can Wipe Out The Savings

This is my attempt to educate a few Louisiana folks on the front end about estate planning so they don't get bit on the back end.

Traditional estate just doesn't always work like it used to. It's typical and traditional for married couples, at some point, to go see a lawyer about getting a Will done. Then, the attorney prepares a Will that, typically, either leaves OWNERSHIP or USUFRUCT to the surviving spouse. In fact, most couples don't know what they did - they just know they wrote a Will.

Well, one of the biggest drains of an estate while you are alive can be long term care expenses. I hope that this enables you to realize that how you arrange your estate planning legal documentation can have a profound impact on what you leave your family and what you leave what some people call the Evil Empire of the State of Louisiana.

Let's take an example. Let's say that Dad died. Dad had saved over the years enough to accumulate some CDs. His CDs, when he died, totaled $500,000 in value. And let's say Dad's traditional Will either left Mom ownership or usufruct of the $500,000.

Now that Dad died, Mom cannot live alone. She needs around the clock care. So Mom goes into the nursing home. The children think that the $500,000 is PROTECTED, because Dad left it to the kids but left Mom only the usufruct. But of course they are all quickly informed that Mom must spend the entire $500,000 on her nursing home care before Mom would qualify for Louisiana Long Term Care Medicaid. 

Of course this is when Mom and all the kids say, "Well we did not know!" Or they say, "Nobody told us....". Or they say, ""This doesn't seem fair when 3 out of 4 people in the nursing home are on Medicaid..." Or, "Surely there is something we can do at the last minute here..." Or, "Can't we just hide the money in a hole in the back yard?" Or, "Daddy just wanted to take care of Momma..."

Here's the key: Plan for these situations in advance. What Dad and Mom are getting legal affairs in order, it makes perfect sense to have an intelligent discussion about how they should leave things to each other and the family in a way that the family does not lose it to long term care expenses, taxes, or other government intrusions.

Hopefully this little piece of education can help some unknowing families get ahead of the game and protect what they've worked for. In the past, only the wealthy could afford to pay lawyers and other professionals to get the best estate protection advice. Now, with the advent of youtube and other free social media networks, anyone who wants to education themselves can find out just about anything on the internet and then seek out the right help to protect themselves and their family.

Paul Rabalais
Louisiana Estate Planning Attorney
www.RabalaisEstatePlanning.com

Tax Consequences When Living Trust Settlor Dies

Because our government likes to tax people, there are a number of different taxes that come into play when the Settlor of a Revocable Living Trust dies. In general, the "tax at death" landscape has changed from avoiding estate tax, to avoiding capital gains tax and income tax. The following are the types of tax that might affect you if you are a Settlor, heir, beneficiary, legatee, trustee, executor, Agent, or Grantor, Trustor, or other participant in someone's transfer of wealth.

(1) Federal Estate Tax. For most people, you ain't gotta worry about it. If you have less than $11.2 million in assets when you die, you don't even have to file a federal estate tax return. Married? Exempt $22.4 million from the 40% estate tax. Yes, like everyone says, you can call me when you win the Powerball.

(2) Louisiana Inheritance Tax. It went long gone back in 2004. Doesn't exist any more.

(3) Capital Gains Tax. Definitely in play. When someone dies, assets that they own in their name, or assets in their revocable living trust, get a step-up in basis at death. This can permit the Successor Trustee or the beneficiaries to sell appreciated assets and pay little or no tax. Example: Dad bought a share of stock for $10. Before his death, the share is worth $50. If Dad sells it before he dies, he pays capital gains tax on the $40 of capital gain. But if Dad does not sell the share, and he dies, then the heirs or beneficiaries inherit the stock at the "stepped-up" $50 (fair market value on the date Dad died). Note that in community property states like Louisiana, ALL of the community property gets a step up when the first spouse dies. It makes a lot of sense, when a married person dies, to document the value of the assets so that tax can be calculated later when the asset is sold. Remember: no capital gains tax unless an asset is SOLD.

(4) Income Tax. There are all kinds of income tax ramifications to inheriting. Depends on what you inherit and many other factors. However, in general, a distribution of trust principal to a principal beneficiary after a Settlor dies is free of income tax to the recipient. However, income tax consequences exist if you are the beneficiary of a Traditional IRA, 401(k), or other pre-tax retirement account. You may also be required to pay income tax on the "gain" portion of a tax-deferred annuity when you receive it. There are also income tax consequences to inheriting appreciated savings bonds. Note that if you are the beneficiary of a Traditional IRA, and you are not the account owner's spouse, you will likely inherit it as an Inherited IRA and you cannot wait until 70.5 to start taking required distributions.

Many of the decisions you make when establishing your estate planning program, and many of the decisions your Trustee, heirs, or beneficiaries make after you death, can have a significant impact on how much tax the government takes from your estate.

Paul Rabalais
Louisiana Estate Planning Attorney
www.RabalaisEstatePlanning.com
Phone: 866-491-3884

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Living Trusts and Income Tax

As we discuss an estate planning program with our clients, some of our clients that they would like to arrange their estate to avoid the court-supervised probate estate administration at their death, but they are concerned about how setting up a Revocable Living Trust might affect their income tax situation during their lifetime.

When you create a Revocable Living Trust, you will be what's referred to as the "Grantor" or "Settlor." You can amend or revoke the trust at anytime, and you are entiled to receive all of the income that the trust assets produce during your lifetime.

While there are many different types of trusts, this type is arranged so that you are still taxed on all income earned by the trust assets. You continue to use your Social Security Number on all trust bank and investment accounts. The trust does not need its own Tax Identification Number. As long as you live, all of the income is reported on your own personal income tax return, so you won't need to file a separate trust tax return.

Some people like that their trust does not complicate or change their tax status, but the assets in the trust will avoid the Louisiana court-supervised probate estate administration upon their death.

www.RabalaisEstatePlanning.com

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How To Structure Bank Accounts To Avoid Probate

One thing that frustrates families when they attempt to settle an estate is when they find out that any and all bank accounts that the deceased had are frozen by the financial institution, regardless of the amount of the accounts. Meanwhile, funerals and other expenses need to be paid.

People try every trick in book to outsmart the banks and the courts from freezing the accounts. The following are the top three ways people in Louisiana keep their bank accounts from being frozen at death.

(1) Add a Signer. Many "Do-It-Yourselfers" go to the bank and, perhaps, add an adult child or two as an authorized signer on their bank accounts. This often works, however, there is at least one major bank in Louisiana who will freeze the account at death even if there are other authorized signers on the account during the life of the account owner. So, check not only with your estate attorney but check with your bank.

(2) Payable on Death. Some Louisiana banks permit bank account owners to complete paperwork so that they make their accounts "Payable on "Death" (or, POD) to another person or people. This doesn't give anyone access to your account while you are alive, and the Designees must produce your death certificate to access the funds, but at least they will be able to receive the funds without having to go through a Louisiana Succession. Warning: Louisiana law does not entitle the designees to own the funds, POD simply releases the banks from liability for releasing the funds to the designees. If your estate planning legal documents differ from your POD designation, conflict may occur. And not all banks offer a POD designation.

(3) Trust Accounts. If you have a Living Trust, you can make your bank accounts trust accounts. When you die or become incapable, your Successor Trustee will have access to the accounts. Accounts won't be frozen. In the typical scenario, when you die, your Successor Trustee produces the trust instrument to the bank for approval, and then the Successor Trustee gains access to all trust bank accounts, and then disburses the accounts immediately to the trust beneficiaries without probate cost and delay.

Handling your bank accounts with an eye on estate planning can be tricky. It's a process that we go through with each client. But it's worth it when you arrange things so that your family has ease and simplicity instead of delay and frustration.

Paul Rabalais
Phone: 866-491-3884
Offices: All over South Louisiana
website: www.RabalaisEstatePlanning.com