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Category Archives: Estate Taxes
2018 Changes Impacting Estate Planning
Most of us have heard plenty about the changes made to the tax code for 2018 by now. While you may understand that changes in certain deductions and credits may impact income tax, you may have concerns about how the changes may impact your estate planning. Similarly, you may be aware that estate tax exemption amount had increased in 2018 but are not sure to what level and what it means for your personal situation.
For the most part your current estate plan may be sufficient to meet your needs in light of the changes to the law. However, it may be more complex then necessary. It is important to review your estate plan to ensure it allows for flexibility in the event of a subsequent change to the estate tax exemption limits. You want an estate plan to be simple while taking full advantage of the changes and remaining flexible for the future.
First, what are the changes to the law?
Tax Cuts and Jobs Act of 2017
On January 1, 2018, the Tax Cuts and Jobs Act of 2017 (TCJA) became effective. The Act makes significant updates to individual and corporate tax rates, eliminates or modifies many tax deductions and results in changes for estate and business planning. Until such time that regulations are in place, the Internal Revenue Service and tax advisors are still sorting many of the details. Nonetheless there are some key updates that may impact estate planning. For most people the changes will not have a lot of impact on estate planning, but still provides a good opportunity to review their estate plan.
Doubling of the Estate Tax Exemption
One of the most significant estate planning changes for 2018 is the doubling of estate tax exemption amount. While for most people this change will not have a lot of impact on their estate planning, the doubling of the estate tax exemption is quite significant.
Beginning in 2018, the basic estate tax exemption amount increases to $10 million per individual with adjustments for inflation. The IRS has not yet released the inflation adjustment but it is expected that the 2018 exemption amount will be $11.2 million per individual and $22.4 million for a married couple.
Again, this change may not impact most people. However, the change will greatly simplify estate planning for married couples with a combined estate of more than 10 million dollars. Without further congressional action in the meantime, on January 1, 2026, the estate tax exemption amount will revert to the 2017 exemption levels of $5.49 million per individual and $10.98 per married couple. With this in mind, it is important for families with assets exceeding $10 million to plan with flexibility. Often this includes the use of revocable living trusts with certain disclaimer or optional bypass trust provisions.
Increased Gifting Opportunities
The lifetime gift tax exclusion amount also doubled for 2018. The lifetime gift tax exclusion amount is total amount that you can gift during your lifetime without paying gift tax. The new lifetime gift exemption amount mirrors the estate tax exemption amount with an expected adjusted exemption amount of $11.2 million per individual and $22.4 million for a married couple.
With this in mind, it is a good opportunity for those families considering sizable gifting plans to utilize the additional tax-free gift amount while it is available. Since the lifetime gifting exemption is also subject to change it may be advantageous to make additional gifts while exemption amount is higher. By making gifts during your lifetime you can transfer wealth and thereby reducing the overall value of your estate and decreasing your taxable estate.
However, it is important to balance the advantages of lifetime giving with tax basis and estate planning considerations. For example, gifts made during your lifetime will be transferred at your tax basis, or your cost. While distributions of assets through your estate receive a “step-up” in basis equal to the fair market value of that asset upon death. With this in mind, if you are considering lifetime giving you may want to save highly appreciated assets to pass through your estate.
Changes for Pass Through Entities That May Impact Planning
For individuals or families that have rental or investment properties as a part of their overall estate there are advantages to owning these assets through separate pass through entity such as an LLC. Ownership of investment properties through an LLC will provide additional liability protection as well as potential tax advantages.
TCJA changed the tax rate for pass through entities and provides a deduction of up to 20% on qualified business for business income that passes through to an entity to an individual. The modifications to the law and calculation can be quite complicated and are subject to certain limits and restrictions. For example, those with joint income over $315,000 are above the threshold amount and therefore subject to limitations. However, for most pass through entities this change results in a reduction of overall tax.
Another significant change in the law for pass through entities is a change to the partnership audit rules. The update to the law provides for tax assessment and collection at the entity level rather than individual level. This means that if you have assets in an existing LLC, S. Corp. or other pass through entity, or if you are considering setting up a new pass through entity, you need to consider the new requirements.
Practically speaking one of the most significant changes is the requirement to appoint a tax representative for the entity. The tax representative will be the point of contact for the entity in the event of an audit or other tax issue. This involves updating the operating agreement or partnership agreement to include the appointment of a tax representative. For smaller entities, with less than 100 partners or members, you may elect to opt out of these requirements. However, it is important to consult with your CPA to assist you in this process.
If you own a rental or investment property in your name individually, now is a good time to consider transferring your property to an LLC or other pass through entity. However, discuss this with your CPA, attorney and tax advisors first to ensure it is effective for your personal situation.
Overall Considerations
The focus of this entry is primarily on changes that may have an impact on estate planning. However, TCJA made significant modifications to many other tax provisions including reductions in tax rates and changes to many deductions and tax credits. It is important to discuss these updates with your CPA and tax advisors to determine how the changes might impact your personal tax situation.
Even if you think that the 2018 updates to the law may not apply to you, the key to any effective estate plan is flexibility, and regular review of your plan with your advisors. Discuss your estate and gift planning strategies with your attorney, CPA, financial planner, and other tax advisors as soon as possible to ensure you are making the most of your estate plan and gifting strategies.
If you have question regarding estate or business planning contact Kelly O’Brien, Measure, Sampsel, Sullivan & O’Brien, P.C. at (406) 752-6373/ www.measurelaw.com
Effective Trust Planning
The Importance of a Fully Funded Trust
What is a Trust?
A trust is written agreement wherein a separate entity, the trust, holds title of property and assets and manages those assets on behalf of an individual. A trust is created by a grantor (also known as the “trustor” or “settlor”) and the assets of the trust are managed by a trustee for the benefit of the beneficiary. During the lifetime of the grantor of a revocable trust, the grantor retains complete control over the trust and can amend the trust, transfer or sell assets of the trust, or terminate the trust at any point.
How do you “Fund” a Trust?
For a revocable living trust to effectively avoid probate it must be fully funded. “Funding” a trust simply means transferring title of assets to the trust. This means making changes in ownership to change title of your assets from your name as an individual to you as the trustee of your trust.
Typically titling an asset in the name of the trust requires the name of the trustee, name of the trust and date of execution of the trust. For example: Kelly R. O’Brien, Trustee of the O’Brien Revocable Living Trust Dated June 1, 2017 and any amendments thereto.
To actually transfer title to your trust you will need to execute new documents of title. This includes executing new deeds for your real property. This also requires working with your financial advisor, accountant and attorney to update accounting information or obtain new deeds for real property. If you already have a trust in place review your assets and accounts to make sure that the trust is actually funded.
Bank & Investment Accounts
For any significant bank or money market accounts, including certificates of deposit, you need to update the title on the account to include the name of the trust and trustee. This will likely require signing new signature cards or ownership documents directly with the bank.
For small accounts or checking accounts you may simply make beneficiary changes rather than re-titling your accounts. By updating the beneficiaries of your checking account you will ensure that any remaining funds are distributed either directly to your family members or through your trust upon your death. By naming a beneficiary rather than re-titling your checking account you avoid having to list the name of your trust on all of your checks.
For stocks and bonds held in investment account you will also need to change title of the account to the name of your trust. The process is similar to re-titling bank accounts, but you may have to fill out new account applications so make sure you work with your investment advisor to transfer title of your investments to your trust.
Real Property
Transferring real property to a revocable living trust requires a conveyance of ownership. In Montana this requires the preparation, execution and recording of a deed for each property in the county where that property is located. This also must be filed along with the Montana Department of Revenue Realty Transfer form. If the property has associated water rights you will also need to transfer ownership of the water rights to the trust.
Prior to recording any deed it is important to review and understand the current status of property ownership and any related financing or tax issues. Additionally if your real property is encumbered by a mortgage or deed of trust you may need to provide additional notices or obtain consent from your lender. Accordingly, it is important to consult with your attorney and tax advisors before conveying title to real property to a trust.
Business Interests
Most business ownership interests, such as ownership in a partnership, limited liability company or corporation, can be assigned to your trust through a written assignment of interest. Typically the assignment must be approved and signed by the other owners of the business. However, it is important to first determine if there are any restrictions on the transfer of ownership. You may need to contact corporate counsel for the business and/or work with your individual attorney to properly transfer business ownership interests to your trust.
Retirement Accounts & Pension Plans
Retirement accounts are a unique type of investment requiring special planning. Typically it is not advisable to transfer ownership of a qualified retirement or pension plan to a revocable living trust as they correlate to your age, life expectancy and require minimum distributions. Instead, it is generally recommended that you include a spouse, partner or children as the primary and contingent beneficiaries of these types of plans.
However, appointing beneficiaries for retirement plans may involve complex tax planning and requires individual and specific advice. Therefore it is essential that you discuss your retirement plan beneficiary designations with your attorney, tax advisor, financial advisor and plan administrator.
Other Assets
The above descriptions include some of the more common assets that may be transferred to a trust. However, if you have a trust in place it is important that all of your assets are either titled in the name of your trust or that you have appointed the specific beneficiary for the asset. Again, work with your advisors to ensure that this is done properly.
Providing Documentation of a Trust
Typically you do not need to provide a bank, financial institution, or title company with a full copy of your trust, but instead provide what is called a “Certificate of Trust.” A Certificate of Trust prevents the disclosure of the private plans for distribution of an estate to third parties. A Certificate of Trust provides documentation and proof that a trust exists, lists the trustees of the trust and provides documentation of authority and power to transact business on behalf of the trust.
Additionally, you typically do not need to obtain a separate tax identification number for your revocable living trust. As long as you are the acting trustee of your trust (or for a joint trust if both spouses are living) you will use your own social security number for accounts held by the trust.
Effective Trusts Require Complete Funding
Revocable living trusts can be highly effective estate planning tools. Trusts provide a greater ability to control the distribution of your estate and can provide estate tax planning benefits. Moreover the use of a revocable living trust can enable your family to avoid a probate proceeding for your estate. However trusts are only effective so long as you properly transfer title of your assets to your trust. By reviewing ownership of your assets and following the processes outlined above you can ensure your trust is properly funded. Work with your legal, financial and tax advisors to make certain that you have followed the necessary steps to fully fund your trust.
If you have additional questions regarding revocable living trusts or proper funding of trusts contact Kelly O’Brien, Measure, Sampsel, Sullivan & O’Brien, P.C. at (406) 752-6373/ www.measurelaw.com
Reducing the Potential for Conflict and Disputes Regarding Your Estate
While we all would like to believe that our family members will all get along after we are gone, unfortunately estate disputes are all too common. While some lawsuits relating to estates and probate are disputes about large sums of money, many of these lawsuits relate to modest-sized estates or small items of personal property. Even if your family gets along fabulously now, there is always the potential for conflict down the road, however by recognizing a few simple issues you may be able to reduce or completely avoid these situations.
Any estate may be subject to dispute, but there are some specific situations that may create a greater potential for disputes. For example, if you have remarried and have children from a prior marriage your estate may be subject to more scrutiny from your family. In addition, if your children do not get along with each other during your lifetime, it is more likely that they will dispute issues regarding your estate. Whether or not one of the situations mentioned above exist in your family there are some measures you can take to reduce the potential for conflicts between your family members.
Ways to Reduce Potential Disputes Regarding Your Estate
Don’t Put Off Estate Planning
Estate planning is a process that requires careful thought and consideration. Do not wait until you are faced with an illness, traveling out of the country, or dealing with potential capacity issues. Take some time to review and create an estate plan that addresses your unique situation while you still clearly have the capacity and health to make sound decisions.
Perhaps more importantly, clearly communicate your intentions with your family both during your lifetime and in your will or trust. If you talk to your spouse and children about your wishes during your lifetime you may be able to address, or event prevent, potential disputes that may arise with the distribution of your estate. Clear communication and planning can also provide you with the peace of mind that you may spare your family from conflicts or hurt feelings.
Make Sure Your Beneficiary Designations are Up-To-Date
It is also critical to review your beneficiary designations to ensure that the proper beneficiaries are named, and the beneficiary designations fit within your overall estate plan. Remember, a beneficiary designation can take precedent over a will, so keeping your beneficiary designations updated to reflect your current life situation is essential.
Specifically Recognize Any Lifetime Gifts or Loans in Your Will or Trust
If you loan money to one of your children, or give gifts during your lifetime, make sure that you recognize the loan or gift in your will or trust. Be specific about whether the loan is to be forgiven or repaid at your death. Additionally, document any loans or gifts you make during your lifetime, in writing, with the use of promissory notes, contracts, or other document, so that your intent is clear.
Be Specific About Personal Property
While most people may be more focused on the distribution of financial assets and real estate in their will or trust, personal property can often create more problems and disputes than larger assets. With that in mind, include a specific “Personal Property Memorandum” to attach to your will or trust, or include a specific provision directly in your will or trust that sets out the distribution of your personal property. This not only includes personal property with high monetary value, such as jewelry or art, but also any personal property that has family or sentimental value, or simply may cause an argument in your family.
Create a Revocable Living Trust to Avoid Probate
A revocable living trust is an estate planning tool that can eliminate the need for the probate administration process. If you have a trust in place, so long as you properly transfer title of your assets to your trust, probate will not be required for your estate. Probate is a public process, which requires filing an inventory and accounting of your assets. While the purpose of a probate proceeding is intended to be administrative rather than adversarial in nature, probate does provide a forum for heirs to contest terms of your will or dispute with other heirs and beneficiaries. Revocable living trusts are private documents not subject to probate proceedings, so the use of a trust can help to reduce the potential for conflict surrounding your estate.
Appoint a Neutral Trustee or Personal Representative
Instead of appointing your spouse or a child as the trustee or personal representative for your estate, consider appointing an institutional trustee such as your bank’s trust department, or professional fiduciary. A professional or institutional fiduciary is not subject to the same family pressures and can provide neutral management of your estate. While professional fiduciary may not be familiar with your family dynamics and can be a bit more impersonal, this approach can be quite advantageous in providing neutral administration and reducing conflict.
If You Intend to Disinherit Someone Clearly Explain Your Decision in Your Will or Trust
If you want to disinherit a family member, especially if it is a child, very clearly explain in your will or trust your intent to disinherit your child. List the individual by name and give a brief explanation of why you intend to disinherit him or her. However, don’t go overboard in your explanation and make sure that your reason for disinheriting the individual is not easily challenged or against public policy.
Communicate Your Intentions and Seek Professional Advice
These are some of the techniques available to reduce disputes and conflicts regarding your estate. By implementing some of these strategies and discussing an overall plan with your family that addresses any potential disputes or inequity problems, you may be able to avoid a dispute.
Your particular estate may have estate tax or other considerations, so seek the professional advice of your attorney, CPA or financial planner. Your advisers may also have additional ideas to help reduce conflicts based on your personal and family situation.
Trust Basics III: Do You Need a Trust?
Who Is a Good Candidate for a Trust?
You do not necessarily need to have a sizable estate for a trust, but it is essential to weigh the advantages and disadvantages of a trust to determine if a trust makes sense for your specific situation. If any of the advantages listed in my previous post seem to apply to your situation, or if you simply want greater control over the distribution of your assets, then a trust may be useful for you. In addition, if any of the following circumstances apply to your situation then you may consider a trust:
- Federal Estate Tax Concerns: If your estate exceeds the federal estate tax exemption amount, a trust can be helpful in reducing potential taxes. For 2014 the Internal Revenue Service has set out a federal estate tax exemption amount of $5,430,000.00 for an individual, or $10,860,000.00 married couple. If the value of your assets exceeds this amount then a trust may be highly beneficial for you and your family in potentially reducing the amount of taxes paid by your estate.
- Ownership of Real Property: If you own significant amount of real property or owner property in multiple states a trust can help limit the need for probate, or ancillary probate in multiple states. Real property is a type of asset that requires additional estate planning to pass to the next generation due to the manner in which it is titled. Unless you own all of your property in joint tenancy with rights of survivorship, a trust is one of the only manners in which to avoid a probate proceeding for the transfer of your real property. Moreover, if you own property in multiple states your estate may have to go through a separate, or “ancillary,” probate proceeding in each state where you own property. With a properly funded trust, the trust holds title to your property so no probate is required regardless of the location of your real property.
- Probate Avoidance: If you are simply interested in avoiding the cost and time associated with the probate process, you may consider a trust. With a properly funded trust, no probate will be required for your estate. The distributions of your estate can occur more quickly, privately, and without the costs associated with a probate court proceeding.
Seek professional advice
Trusts can be very effective estate planning tools if properly executed and funded. However, trusts do not make sense for everyone. It is important to review your particular situation with your attorney and tax advisers to determine the type of trust that is right for you and your family.
If you have specific questions about any of the issues discussed in this post or trusts in general contact Kelly O’Brien at Measure, Sampsel, Sullivan & O’Brien, P.C. at 
(406) 752-6373/ www.measurelaw.com
Trust Basics II: Advantages & Disadvantages of Trusts
In my previous entry I set out the definition of a trust and discuss some basic types of trust agreements. Understanding the basic definition and types of trusts is important, but what are the advantages of a trust versus creating a simple will? The focus of this entry is on the advantages and disadvantages of creating a trust in an estate plan as compared to other estate planning tools.
Advantages Creating a Trust in Your Estate Plan
• Greater control over distributions: Perhaps one of the most significant benefits of a trust is the ability to have greater control of the distribution of your assets. A trust allows you to set out exactly when, where, and how much each of your beneficiaries will receive from your estate, over time, rather than requiring immediate distribution of your entire estate.
For example, if you wanted to leave your estate equally to your two children, but wanted to ensure that they did not receive all of their inheritance at once you could specify in your trust that each of your children receive a percentage of your estate upon reaching a certain age, or achieving a certain life milestone (such as completing college).
• Probate Avoidance: Probate is a court proceeding whereby your personal representative (also called an “executor”) is responsible for gathering your assets, paying debts and expenses, and distributing your property either pursuant to your last will and testament, or by state law if no will is in place. However, if you have a trust in place, so long as you properly transfer title of your assets to your trust, probate will not be required for your estate. In Montana, the probate proceeding takes a minimum of six months before closing and distribution. However, with a trust, distributions can occur more quickly, privately, and without the costs associated with a probate court proceeding.
• Privacy: As mentioned above, probate is a public process. Probate requires filing an inventory listing all of your assets with the court as well as filing your original last will and testament which sets out your plan of distribution. This also means that the public could obtain and view copies of this information. A trust, on the other hand, allows for the private distribution of your assets.
• Reduce Potential Conflict: Because trusts are private documents not subject to probate proceedings, the use of a trust can help to reduce the potential for conflict surrounding your estate. While the purpose of a probate proceeding is intended to be administrative rather than adversarial in nature, probate does provide a forum for heirs to contest terms of your will or dispute with other heirs and beneficiaries.
• Incapacity Planning: A trust is a great mechanism for ensuring/providing that your property will be managed for your benefit during any period of incapacity or prolonged mental or physical illness. The terms of your trust can set out how to determine your incapacity, who is responsible for managing your assets, and how the assets should be managed upon a disability.
• Estate Tax Planning: While having a revocable trust does not necessarily mean that you can avoid taxes or estate taxes, they can be helpful vehicles in maximizing the estate tax exemption available to your family upon the distribution of your estate. For example, you may decide to create a “credit shelter trust” (also known as “bypass trust” ) within your trust, whereby you can take advantage of certain tax exemptions upon your death to reduce the overall amount of estate taxes paid.
• Caring for a Beneficiary with a Disability: If you have someone in your family with a disability, special needs, or who receives any type of disability benefits, they could risk losing these benefits if they inherit from your estate. A trust can provide for the basic needs of a disabled beneficiary while also maintaining their current benefits and care.
Disadvantages of Trusts
While trusts can be beneficial estate planning tools, they are not necessarily advantageous for everyone. If you have a fairly simple estate, both in the type of assets and value, a trust may not be necessary to accomplish your estate planning goals. The main drawbacks of trusts to consider are the costs associated with creating a trust and the increased administration required for a trust.
• Increased cost: Trusts typically cost significantly more to create and administer than an estate plan with only a will. Often a trust will cost three to four times as much as a basic will, depending on the complexity.
• Administration: For a trust to be effective the grantor’s assets must be re-titled in the name of the trust, or otherwise transferred to the trust. This means that upon initially executing a trust you would have to execute deeds for any real property to your trust and change bank and other financial accounts. While this often is accomplished upon initial execution of a trust, for some people the administration of a trust is enough to be a deterrent.
Trusts can be very effective estate planning tools if properly executed and funded. Consider your assets, family situation, and personal preferences with your attorney and tax advisers carefully before proceeding with a trust.
If you have additional questions regarding trusts contact Kelly O’Brien, Measure, Sampsel, Sullivan & O’Brien, P.C. at (406) 752-6373(406) 752-6373/ www.measurelaw.com
Trust Basics I: What is a Trust?
What Is a Trust ?
I frequently have clients that come into my office with questions regarding trusts. They may have heard something from a friend, or recently watched the latest Suze Orman Show, and are convinced that they need a trust. However, there are a lot of misconceptions about trusts, both good and bad. Trusts can be highly beneficial estate planning tools, but it is important to understand the basics of trusts, how they work, and whether or not a trust makes sense for his or her specific situation.
This is the first entry in a series of entries on trust basics. This article will focus on on the definition and types of trusts, I go into the and disadvantages of creating a trust and discuss the criteria and good candidates for a trust agreement in later entries.
What is a Trust?
A trust is written agreement wherein a separate entity, the trust, holds title of property and assets and manages those assets on behalf of an individual. A trust is created by a grantor (also known as the “trustor” or “settlor”) and the assets of the trust are managed by a trustee for the benefit of the beneficiary.
As an initial matter there are two general types of trusts: revocable living trusts (often called simply “Living Trusts”) and irrevocable trusts. Within these types of trusts there are numerous variations in techniques and complexity, but it is important to at least understand the basic distinction between a revocable and irrevocable trust.
Revocable Living Trust
A revocable living trust is a type of trust that can be amended or terminated at any point by the grantor during his or her lifetime. Typically, during the lifetime of the grantor of a revocable trust, the grantor is also the trustee and the beneficiary, so he or she retains complete control over the trust. It is only usually during a period of incapacity or death of the grantor that a successor trustee would step in and act on behalf of the trust.
Irrevocable Trust
An irrevocable living trust is a trust that, once executed, cannot be amended or terminated without court approval or consent of all the beneficiaries. Once the assets are transferred to an irrevocable trust the grantor no longer retains control of those assets. Irrevocable trusts can be important tools for estate tax planning or creditor protection purposes. However because they are irrevocable, the decision to execute an irrevocable trust depends on your specific tax and estate plan and should be discussed carefully with your attorney or tax adviser.
While it is important to understand the difference between revocable and irrevocable trusts, for purposes of this article, the main focus is on revocable trusts as they are more commonly applicable.
Seek Professional Advice
Trust can vary greatly in type, terms and complexity. If you are considering creating any type of trust it is essential that you review your particular situation with your attorney and tax advisers to determine the type of trust that is right for you and your family.
If you have specific questions about any of the issues discussed in this post, Contact Kelly O’Brien at Measure, Sampsel, Sullivan & O’Brien, P.C. at (406) 752-6373/ www.measurelaw.com
Who is in Charge of Your Estate?
Choosing a Personal Representative or Trustee to Manage Your Estate
Choosing the personal representative of your estate or successor trustee in the event of a trust, is one of the most important estate planning decisions you will make. However, all too often people make this decision rather quickly without considering all of the options and potential long-term issues.
Take the case of Sharon. Sharon was a single woman with four grown children. She finally decided to get her estate plan in order. Due to the nature of her assets she determined that a revocable living trust was the best option for her. She put considerable time into creating her trust, and appointed all four of her children as co-trustees of the trust. Sharon’s four children were also her main beneficiaries and would receive most of the assets of her trust.
According to the terms of Sharon’s trust agreement all of the trustees were required to agree before they could distribute any assets of the trust. Upon Sharon’s death her four children were unable to agree on anything and make any decisions about the trust distribution. Consequently it took several years to settle her estate and had a traumatic impact on her four children and their relationship with each other.
This situation is actually quite common; parents nominate all of their children as their personal representative(s) or trustee(s) with the best of intentions, but the children cannot agree on any aspects of the distribution. As a result it can take years for an estate to be settled at the expense of family relationships.
How can you avoid this situation?
Choosing the personal representative of your estate, or successor trustee in the event of a trust, is one of the most important estate planning decisions you will make. It requires careful consideration of both your estate assets and family relationships.
What Does a Personal Representative or Trustee Do?
As an initial matter whether you appoint a personal representative or a trustee depends on your specific estate plan and whether you create a will or trust.
Duties of a Personal Representative
A personal representative (also known as an “executor” or “administrator”) is the individual responsible for the administration of your Last Will and Testament through probate. The personal representative is responsible for gathering up the assets of your estate; evaluating claims against the estate; paying the last debts and expenses of the estate; accounting for assets of the estate; paying taxes; and distributing the assets of your estate according to the terms of your will or trust.
Duties of a Trustee
A trustee is the individual you appoint to carry out the terms of your trust agreement and plan of distribution. You would nominate a trustee, or successor trustee, only if you have executed a trust agreement, most likely a revocable living trust. A trustee is required to collect the assets of the trust, pay bills of the trust, account for trust assets, and distribute those assets. Often a trustee is also required to invest and manage assets for the benefit of your beneficiaries over time. Unlike a personal representative, the duties of a trustee can carry on for many years, sometimes even multiple generations.
Who Should You Choose to Manage Your Estate?
Once you have created a will or trust, then who should you appoint to manage your estate? Again, who to appoint requires careful consideration of the nature and value of your assets, as well as your plan of distribution and the relationships between your family members. Typically, a married individual will nominate his or her spouse as a personal representative of their will, or a trustee of a trust. However, it can be difficult to determine who to appoint as an alternate personal representative of a will or alternate trustee of a trust.
Appointing Your Children
After appointing a spouse, people often appoint either one or all of their children as alternate personal representative(s) or alternate trustee(s). If you have a fairly simple will or trust, and a relatively small family with a solid, ongoing relationship, then appointing one or all of your children may be a good option. Your children are familiar with your assets and intentions. Accordingly, appointing your children to manage a simple estate can provide a relatively quick and economical solution.
However, as illustrated above children are also often the primary beneficiaries of an estate which can provide for unintended consequences. Even siblings with the best of relationships do not always agree to the management or distribution of an estate.
Appointing a Relative or Friend
Instead, you may decide to appoint a relative or close friend that is not one of your children and not a beneficiary named in your will or trust. Appointing a family member, such as one of your siblings or a close friend, can be beneficial because they are familiar with your family dynamics, your assets and your intentions. Moreover, an individual that is not named in your will or trust does not have a potential conflict of interest between the duty to manage your estate and the desire to receive certain assets from your estate.
While appointing a non-beneficiary family member or friend may help to reduce disputes between your children, there are drawbacks to consider. One common issue is that family members often lack experience managing estate assets, financial investments and methods for ongoing accounting of these assets. In addition, a relative or friend may not be immune to family disputes. One of your children may simple dislike or not agree with the personal representative or trustee, which makes it difficult for that individual to carry out his or her duties.
Appointing a Professional Fiduciary or Institutional Trustee
As an alternative to your children, relatives or close friends you may choose to appoint an institutional trustee such as your bank’s trust department, or professional fiduciary to act as a personal representative. One key advantage to a professional or institutional fiduciary is that they are not subject to the same family pressures and can provide neutral management. A professional fiduciary also has critical professional knowledge in working with wills and trusts, and managing and investing estate assets.
The use of a neutral professional may help to reduce family conflict, although there are other issues to considering when deciding to appoint a professional fiduciary or institutional trustee. The main consideration for most people is simply the cost of administration. A bank or trust company will charge a fee for its services, and usually have minimum fees that make it unaffordable for a simple estate. Another important consideration is that a professional fiduciary is not familiar with your family dynamics and can be a bit impersonal. However, the impersonal aspect may be an advantage when it comes to providing neutral administration, especially with arguing family members.
Qualities of a Personal Representative or Trustee
Ultimately the choice of who to appoint to manage your estate is personal and depends on your particular estate and family dynamics. It is important to consider the factors mentioned above and choose an individual or institution that is responsible, has the ability to follow with large amounts of estate paperwork, an ability to work with all of your beneficiaries, and is willing to seek the advice of professionals such as estate attorneys and CPAs. Discuss your thoughts and concerns with an estate planning attorney and your family members to ensure you have made the right choice for your family and estate.
If you have specific questions about any of the issues discussed in thispost, Contact Kelly O’Brien at Measure, Sampsel, Sullivan & O’Brien, P.C. at (406) 752-6373/ www.measurelaw.com
How to Keep the Vacation Home In the Family
If you own a vacation home in Montana, you probably have a very special emotional connection to the area, and the memories it creates for you and your family. Since vacation homes have such a unique emotional and familial tie, you likely want to make sure that it stays in the family for generations to come.
However, you also may have worried about what will happen to the family vacation home after you are no longer able to visit. Often questions come up, such as: Who will inherit it? How will I decide who can use it and when? Will my family have to sell it after I am gone? How will my family pay for the taxes and maintenance?
Without proper planning your family’s vacation home can be a great source of disputes, and create financial burdens for your family in the future. Moreover, there are tax and financial implications for transferring your vacation home at different times and though different mechanisms, especially in situations where the home has increased in value.
What Is Your Long-term Vision for Your Vacation Home?
First, it is important to adequately consider your long-term goals for your vacation home. Do you intend to keep in the family for multiple generations? If so, how do you envision the home being shared by your children and grandchildren? How do you plan to pass along your interest in the home? Do you want to pass it during your lifetime, or upon your death?
As an initial matter it is critical that you speak with your CPA or tax planner about the tax implications of transferring real property during your lifetime or upon your death. Everyone has a unique financial and tax situation, and real property transfers are especially susceptible to pitfalls.
If you do not want the vacation home to be sold upon your passing, and want to make sure that the home is kept in the family, without a significant financial burden, consider the creating a separate entity such as a trust or limited liability company (LLC) to own and manage your vacation home. Both trusts and limited liability companies can help to reduce personal and financial risks for your family, plan for financial costs, and reduce conflict. Moreover, trusts and LLCs also have the advantage of preventing unwanted partitions or forced sales.
Create a Trust for Your Vacation Home
There are several different types of trusts you may consider in managing a vacation home, including revocable or irrevocable trusts. Speak with your attorney or tax advisor to determine which makes the most sense in your specific situation. Regardless of the type of trust, a trust can hold the home for the benefit of your family, as well as direct the distribution of the home to your children or grandchildren. In addition, a trust keeps your vacation home out of probate and less likely to be subject to claims of creditors. Moreover, a trust can provide additional funds to be set aside specifically for taxes or maintenance of the home.
A Trust as a Method to Provide Funds to Maintain the Home for Your Family
Adequate funding helps to alleviate some of the financial constraints for your family and help to ensure that the vacation home will stay in the family for generations to come. Your trust can simply set aside funds to pay taxes upon your death, or a lump sum of money to be paid to your children for the maintenance of the vacation home. Otherwise, you could decide to keep the trust ongoing to make annual payments of principal or income to provide for such costs as taxes and insurance for the home.
If you managed to save enough to buy a vacation home, but don’t anticipate that you will have a significant sum of money to provide for the maintenance of the home long after you are gone, you may consider making the trust a beneficiary of a life insurance policy. Upon your death, the death benefit of the life insurance policy will be paid to the trust. Then, these funds can be uses to pay for taxes, repairs and maintenance for the property.
Create a Limited Liability Company to Hold and Transfer Interests in Your Vacation Home
A Limited Liability Company (LLC) can be a great tool for transferring interests in your vacation home to family members, as well as establishing guidelines for the use of the home. In addition, by placing liability on a separate entity rather than an individual, LLCs help to protect your family from personal liabilities, including creditor claims or liability associated with accidents occurring on the home by other users.
Transferring Ownership Through Membership Interests in the LLC
If you establish an LLC for your vacation home, you can transfer partial interests in the home during your lifetime. You can accomplish this simply by gifting membership interests (like shares of stock) in the LLC to each child or grandchild up to the current federal gift-tax exclusion amount every year. This can provide significant tax advantages, and also allow you to maintain a certain amount of control over your vacation home until your death. Again, make sure that you work closely with your financial and tax advisors when gifting interests in your vacation home LLC.
Utilizing an LLC Operating Agreement for the Maintenance and Use of Your Vacation Home
To ensure the success of the LLC for your vacation home, an operating agreement is essential. A well-planned LLC operating agreement will encourage your family members to share in the management and take responsibility for the use and maintenance of the property.
The LLC operating agreement should address the allocation and payment of taxes, maintenance, and other expense associated with owning and improving the vacation home over time, as well as how to decide on maintenance and improvement costs. In addition, the operating agreement should adequately discuss how the property can be used, by when and by whom, and how and when members can transfer or sell their membership interests. Similarly, the operating agreement should set out what to do in the event one member does not pay his or her contribution towards expenses or fails to follow the guidelines for use of the home.
Communicate Your Vision with Your Family & Seek Professional Advice
These are only a couple of techniques to consider when planning for your vacation home. Discuss your goals and considerations with your family members to determine if they are interested in pursuing one of these techniques. Make sure your children want to share in your vacation home and create an overall plan to addresses any potential disputes and financial issues. Once you and your family are all on the same page, then work closely with your CPA, attorney, financial and tax advisors to make sure you have chosen the right technique for keeping the vacation home in the family.
If you have specific questions about any of the techniques discussed in this article, Contact Kelly O’Brien at Measure, Sampsel, Sullivan & O’Brien, P.C. at (406) 752-6373/ www.measurelaw.com to schedule an appointment.
Article previously published in the October/November 2012 Business Issue of 406 Woman Magazine http://406woman.com/
Transferring Your Family Farm or Business to the Next Generation, Part II
Planning for the Retirement or Unexpected Death of an Owner: Advice from a Montana Business and Estate Planning Attorney
Business succession planning is the process whereby the business, and its owners, to agree in advance to issues such as what consent is required to transfer business interests, to whom may an owner transfer business interest to, or how to determine the value of those interests. Two major considerations in this process are what happens in the event of a death or incapacity of an owner, and what happens upon retirement.
Planning for the Unexpected Death or Incapacity of an Owner or Manager
While most individuals do not want to think about death, planning for an unexpected death or incapacity of an owner or manager will enable the business to carry on even if a key individual in the business may no longer be able to manage the business.
When discussing how to plan for an unexpected death or incapacity of an owner or manager, consider the following:
- Buy-out: Do you want the business to buy-out the heirs or family members?
- Financing: What resources are available upon death? How to finance the buy-out of family members? Some options may include: installment payments, life insurance or the creation of a separate fund.
- Price: How do you establish a price to buy out? Price can often be calculated as book value, multiple of annual earnings, by appraisal, or otherwise by agreement of all owners.
- Control & Management: If the business decides to buy out heirs, does it want those heirs to have an active role in managing the day-to-day operations of the business or simply receive income from the business?
Planning for Transfers of Ownership Pursuant to Retirement
While retirement may seem to be a long ways off for many small business owners, planning for retirement of an owner or manager will ensure that the business has both the funding available and capable individuals in place to handle retirement. Some of the same considerations discussed above also apply to retirement, and in addition the business should consider the following:
- Who Will Take Over Leadership: Decide who will be the successors will be. Identify key individuals who may already have a role within the business. Discuss whether family members may have a role in the business and the potential role of current owners, managers and third parties.
- Timelines & Transitions: Discuss the ideal timeline for retirement and what gaps in management may exist upon retirement. Discuss what training may be necessary and how to accommodate the different skills and interest of those taking over.
Communication is the Key to Successful Business Planning
The most critical component of successful business succession planning is communication. Communication between business owners, managers and all family members involved will facilitate a smooth transition. The business succession planning process does not have to be complicated, a simple discussion of these issues and a basic plan is better than waiting for the unexpected to happen and then trying to come to an agreement about what to do next.
If you have questions about business succession planning, contact Kelly O’Brien, Measure, Sampsel, Sullivan & O’Brien, P.C. at (406) 752-6373/ www.measurelaw.com