Author: Patrick Furman

Protecting Inherited IRAs from Creditors and Predators

Inherited IRAs are not protected retirement funds. They are subject to creditors’ claims if the beneficiary files for bankruptcy. The Supreme Court decided that inherited IRA accounts were not protected retirement funds since the beneficiaries of these accounts were required to withdraw a minimum amount of money each year regardless of whether these beneficiaries are retired. In the case of bankrupt estates, inherited IRAs will now be considered assets—fully available to satisfy creditors’ claims. It seems obvious that the holding can be expanded to permit other predators and creditors to collect from inherited IRA accounts.

If you want to protect these hard earned assets, a Standalone Retirement Trust should be established in order to protect your assets without restricting the beneficiary’s access to the funds. Upon the retirement plan participant’s passing, his or her funds will flow into the third-party trust instead of passing directly to the beneficiary. Because the beneficiary does not establish the trust, doesn’t fund the trust with his or her own money, and cannot modify the trust, the trust will be protected from the claims of the beneficiary’s creditors.   However, the IRA assets continue to grow at a tax deferred rate “stretched“ over the lifetime of the beneficiary.

When do I need a probate attorney?

When a loved one names you as the administrator of their estate, it’s a sign that they trust you and believe you’ll carry out their wishes. Unfortunately, even the best administrators can find themselves overwhelmed by the probate process. The probate process comes with its own set of rules and regulations to follow, some of which aren’t always easy to understand.

 

In many cases, hiring a probate attorney can help relieve some of the anxiety and ensure your loved one’s estate is handled the way they intended. Here are some questions to ask yourself to decide if you need a probate attorney’s help:

  • How large is the estate? In Wisconsin, if the estate is worth less than $50,000, there are simplified probate options available. While $50,000 sounds like a lot of money, most estates are worth more than that. Large estates will have to deal with estate taxes.
  • Are there creditor issues? If an estate can’t pay all creditors or if you expect a creditor to cause problems, talk to an expert. Remember: some creditors will have priority over others.
  • Are there family issues? While rare, contested wills are difficult and expensive to deal with. If you expect a fight, consult an attorney ahead of time to limit the financial and emotional fallout.
  • Is there a business involved? Managing, valuing and transferring a business are extremely complicated and shouldn’t be done on your own.
  • Are there other “special” assets? If the estate has assets that are unique (such as rental or commercial property), these should also be managed, valued and transferred with the help of professionals.

Serving as administrator of an estate is an important job. While it can be tempting to go it alone, sometimes asking for help is the best thing you can do to ensure your loved one’s wishes are met.

Changing or Revoking Your Will

It’s a smart idea to begin estate planning early. Hopefully, you won’t need that estate plan for many years to come. In the meantime, lots of things can change and you may find yourself wanting to make changes to your will along with them. Before you get out a red pen, however, you should know the requirements for making changes.

While some states recognize handwritten changes, Wisconsin generally does not. The main reason for this is because handwritten changes are often challenged in court—anybody could have written on the will after the fact. Instead, you should contact your estate planning attorney to draft a codicil. A codicil is a legal document with the same formal requirements as your will, such as signatures and dates and witnesses.

 

If you plan to make a lot of changes, it may be better to revoke your will and make a new one. There are several ways to do that, but the best way is to physically destroy the old will (usually by tearing it up) in the presence of witnesses. Then have your lawyer draw up a new will and make sure you follow the formal requirements.

Whether you’re adding a codicil or making a new will, it’s always a good idea to discuss the change and your reasons with the people it affects. Beneficiaries are far more likely to challenge something in your will that comes as a surprise. Making your loved ones aware of the decision also reduces the likelihood they’ll accidentally produce a copy of your old will, which can only lead to confusion.

You should periodically review your estate plan to make sure it still reflects your wishes. If you need to make changes, take the time to do them the right way.

Pour Over Will

Pour Over Wills

When you set up a living trust, your attorney may also have you set up a short will. This can be confusing, since a trust is an alternative to a traditional will. This short will is called a “pour over will” and it serves two specific purposes.

First, a pour over will is important if you have any minor children because it names a guardian for your children in case something happens to you. In Wisconsin, you can’t use the living trust to name a guardian, so without the pour over will, the court will assign one for you. Unfortunately, the court’s choice may not be the same as your choice to take care of your children.

Second, a pour over will acts as a safety net to catch forgotten assets. As part of the estate planning process, you should transfer all of your major assets to the trust during your lifetime. But in case you forget an asset or don’t get a chance to transfer it, a pour over will instructs the probate court to distribute those assets to the trust. Without this safety net, the court would distribute your remaining assets according to its own default rules, which probably won’t match your wishes.

It’s important to note: a pour over will is not a substitute for transferring assets to your trust during your lifetime. The more assets you leave in your name, the higher the probate costs will be. And, if you don’t transfer any assets to the trust, your trust may fail because it’s not funded.

Estate planning is all about taking the steps to ensure your legacy. A pour over will is a backup plan to make sure that legacy looks the way you want it to.

A Last Resort: Alternatives to Disinheritance

Parents have many reasons for disinheriting a child. But disinheriting can lead to unintended consequences, including family tension or even a court battle. The decision to disinherit a child is entirely up to you, but before you do, there may be alternatives to consider.

One reason parents choose not to leave anything to a child is because the child is financially irresponsible. It’s certainly an understandable concern. Fortunately, there’s also a solution: a trust with a responsible trustee. A trust allows you to leave your child with a means of support and protect them from themselves.

Some parents leave nothing to a child because they’ve been told that an inheritance would mean the child no longer qualifies for particular government benefits. The problem with this approach is that those benefits may not be enough. Again, the solution is a trust. Done right, a trust will add to the child’s resources rather than replacing government benefits.

A more complicated issue is when one child doesn’t seem to need an inheritance. Disinheriting is permanent and the child’s situation might change. It can also make the child feel unloved or resentful. If you still think disinheritance is necessary, explain your reasons to your child. You should also consider leaving them items of personal, rather than financial, value. That way they still feel included in the family and can understand where you’re coming from.

Ultimately you can leave your estate—or not leave it—to anyone you wish. But before you make a permanent decision to disinherit a child, consider all your options. That way you can avoid unnecessary tension and truly meet your estate planning goals.

The Pitfalls of P.O.D. Accounts

We all hope to have someone help us in our old age. Many of us might also plan to thank that caregiver by leaving them a larger gift than originally intended. Rather than redo an entire estate plan, however, some people turn to the easy and inexpensive option of making a caregiver the beneficiary of a particular account (such as savings) using a payable on death (P.O.D.) designation.

Unfortunately, a P.O.D. account is especially vulnerable to attack by the people who otherwise would’ve received the account. They often claim “undue influence”—that the caregiver wrongly influenced the account owner’s decision. Even worse, Wisconsin law doesn’t allow the caregiver to testify about the owner’s actual reasons for the designation.

If you’re going to use a P.O.D. designation to thank a caregiver, the most important thing to remember is to document your reasons. That means making your intent clear to third parties, because you won’t be around to testify and your caregiver can’t.

The easiest way to do this is to discuss your decision and your reasons with your attorney. That addresses two issues: 1) Your attorney can testify (if necessary) about what you intended and 2) Your attorney can make sure the P.O.D. designation doesn’t conflict with or undo the rest of your estate plan. It’s also a good idea to discuss your reasons with other third parties who could testify, like a financial planner or friend.

After discussing your reasons, make sure to carefully document them and identify who you discussed them with. Put the document somewhere it can be easily found (like an estate plan folder). The more evidence you have the more likely the P.O.D. designation will stand and the less likely your other beneficiaries will challenge it.

Long Term Care

With rising life expectancies and healthcare costs, it’s no surprise that many Americans will need long term care (home health care, assisted living, nursing home, etc.) at some point in their lives. That’s why it’s so important to consider long term care when doing estate planning.

The biggest misconception about long term care is that it’s something only the elderly need. Younger adults can end up needing long term care due to injury or illness, so it’s important to plan for the possibility now. Another misconception is that health insurance covers long term care costs. If you’re lucky, your health insurance will cover some of the costs immediately after you get sick or injured, but after that you’re on your own.

There are two main things you can do as part of your estate plan to minimize the problems associated with long term care. First, consider purchasing long term care insurance. For a relatively small premium, you can protect yourself against the high costs of long term care should you need it.

Secondly, consider creating a trust. With a trust, you can name someone to take over managing your assets if you become incapacitated due to injury or illness. The transition happens automatically. That person can then use the assets in the trust to cover the costs of long term care. In the meantime, you continue to manage your own assets as you normally would.

Estate planning requires planning for the unexpected. For many, needing long term care is an unexpected and costly situation to find themselves in. But with a little advanced planning, you can make sure it doesn’t derail your estate planning goals.