In a world that has seen rising costs of housing, food, utilities, and other necessities, preserving money for the next generation has never been more important. Many people fail to understand the potential consequences of failing to plan ahead. Roughly 70% of generational wealth is lost in two generations, and roughly 90% of generational wealth is lost in three generations. This blog post will discuss how people can help save their estate money, allowing them to give the next generation a better life and preserve their legacy.

Where do Expenses Come From in Estate Planning?

Various added costs can be incurred by an estate in the course of its administration. This list will go over common costs that can diminish an estate and how to plan ahead to save on those costs.

1. Probate

Probate is the process of the court supervision of the division and payment of your assets. Through this process, the court will consider what assets you have that are considered “probate assets”. Essentially, this distinction is any property you may own that is not held in a trust or subject to a Pay on Death designation. The court will first require your executor to pay your creditors and then distribute your remaining property to your heirs. If you fail to create a will, the court will order the executor to make distributions in accordance with your state’s intestacy laws. This process can be lengthy, especially if there is a challenge by one of your beneficiaries. It is common for estates to incur thousands, if not tens of thousands, of dollars in attorney’s fees depending on the complexity and size of your estate, and whether a challenge arises. American estates lose roughly $2 billion annually in the probate process.

How to Avoid Costs Associated with Probate

POD

There are various ways to avoid the cost of probate. The first is to ensure that you have designated a Pay on Death designation on any accounts or assets that allow it. This can help keep some assets out of probate, allowing for expedited distributions to your designees. 

 Revocable Trust

The revocable trust has become the gold standard for many people seeking to avoid probate. A revocable trust is a document that allows you to serve as trustee of a trust in which you are also a beneficiary. This document gives you the power to add or remove property from the trust and use the property during your lifetime. Upon your passing, the trust will become irrevocable and a successor trustee will be appointed. Depending on your wishes, the trust can either pay out to the individual beneficiaries listed in the document, or the property can be held and managed by the trustee and distributions can be made as directed by the trust agreement. 

The assets contained in this trust will avoid probate, helping to save on attorney’s fees and reducing the risk of a challenge. Additionally, the trust can be structured to provide creditor protection to the beneficiaries, preventing their creditors from accessing their inheritance. Although these trusts are typically more expensive than a will to create, they often pay for themselves by saving people significant costs in probate and by preventing the beneficiary’s creditors from accessing the assets contained in the estate

2. Improperly Drafted Documents

In an attempt to save money on the cost of creating a will, more and more people are seeking out DIY solutions. Although some of these DIY sources may be reliable, there are certain risks involved. Often individuals will seek out documents that may not be valid in their home jurisdiction or may not be properly executed or funded. This can lead to complex probate challenges when such errors occur and may cause your intended beneficiaries to lose out on their share of your estate.

How to Avoid Using Improperly Drafted Documents

1. Use a Knowledgeable Attorney

By using a local attorney who is knowledgeable about your jurisdiction’s estate planning laws you can ensure that your documents achieve your goals and will not cost your estate thousands of extra dollars in expensive litigation. Additionally, no two estates are identical, and local attorneys can help find solutions to your unique challenges, providing you with individualized solutions to ensure your estate accomplishes your goals.

3. Gift, Estate, and Generation-Skipping Tax

These taxes are imposed on lifetime gifts and large estates. Every taxpayer gets three “coupons” to use for these taxes. First, any individual can make a gift to another individual as long as the amount does not exceed the annual “coupon”. Currently that “coupon” is $18,000 for individuals and $36,000 for married couples. In addition to the annual coupon, each individual can make gifts, including through their estate or throughout their lifetime in the amount of $13.61 million or $27.22 million for a married couple. Anytime you make a gift to an individual in a calendar year, the amount in excess of your annual exclusion will require a gift tax filing, and the amount in excess of your annual “coupon” will come out of your lifetime exemption. Additionally, each individual can gift the same amount as the lifetime estate tax exemption to a skip-generation person ($13.61 million). The current tax rate for estate and generation-skipping tax ranges from 18% to 40% of the amount in excess of the lifetime exclusion. Therefore, if you have a large estate it is imperative to plan ahead to avoid a substantial tax on your assets when they pass to the next generation.

How to Minimize Negative Estate Tax Outcomes

Lifetime Gifts

The first and most straightforward way to plan ahead for potential estate tax implications is by taking advantage of your annual gift exclusion. Lifetime gifts can be made to any individual annually as long as they do not exceed the limits listed above. This allows individuals to make gifts outright during their lifetime, reducing their taxable estate size. Additionally, some gifts are exempt from gift tax regardless of size such as gifts to charitable organizations, gifts directly for the payment of tuition, and gifts directly for the payment of medical expenses. This option does have some downsides, however. Many individuals fear that their gift may be going to an irresponsible party that is not ready to manage money. These considerations can be solved through the use of certain trusts. It is also wise to speak to an attorney before using this strategy to prevent potential Medicaid implications that can be triggered by such gifts.

Crummey Trust

A Crummey Trust is a type of trust that is funded progressively over time. The IRS has ruled that gifts of future interests do not constitute a completed gift, and therefore are not eligible for the annual exclusion. Estate planners developed a simple solution to this issue, a limited power of withdrawal for beneficiaries. Each year the grantor of the Crummey Trust will gift each beneficiary the amount of the annual exclusion for that year. The beneficiary will have the power, for a limited amount of time, to withdraw that amount outright from the trust. Once the power has lapsed and the beneficiary has failed to exercise their withdrawal power, the amount will pass into the trust. The IRS has found that this lapse in withdrawal right makes the gift a present interest and it is therefore able to be exempt from the gift and estate tax. This allows an individual to gradually fund their trust without additional tax planning required.

Dynasty Trust

A Dynasty Trust is a trust that continues in perpetuity. Only select states, such as South Dakota, allow for such trust agreements. These trusts are an excellent planning strategy for those who wish to build generational wealth. Dynasty trusts allow an individual to make a gift to future generations. As long as this gift is less than the grantor’s lifetime exemption, there will be no subsequent generation-skipping tax as the beneficiaries change from generation to generation. This allows the money in the trust to grow over time. These trusts are typically funded with assets that produce capital gains to avoid additional income tax. Additionally, when such a trust is established in South Dakota, no state income tax is applied to the gains of the trust corpus. This allows for exponential growth without the problems incurred by the generation-skipping tax. Furthermore, it ensures that future generations' inheritance will not be subject to their creditors or poor financial management. Typically a dynasty trust will also be a directed trust, allowing various advisors who take on different roles in the management of trust assets. This gives the trust additional flexibility, allowing it to be adaptable to new challenges that may arise in the course of its administration.

Conclusion

Unfortunately, a lack of future planning can cause your life's hard work to be lost to avoidable costs. The good news is that there are many options for those seeking to preserve their estate and take care of future generations. By working with an attorney you can create a customized estate plan that will help save your estate money and preserve your legacy for generations to come. If you would like to learn more about what plan is right for your circumstances, feel free to schedule your free consultation today!

Introduction

When someone passes it is an emotional time filled with mourning and difficult feelings. Unfortunately there is also significant work to be done. When a person passes with a simple will or no estate planning instrument, their belongings become their “estate”. In order to distribute these items a special court called a Probate Court will direct the distributions based on the person's will or if they have no will, the laws of the jurisdiction they reside in. This process is called “Probate”.

How Probate Can Compromise Privacy

Probate can be a long and difficult process typically requiring an attorney to handle the various filings, motions, and notices necessary to close out the estate. These legal fees can cost the estate thousands of dollars. Because probate is a court proceeding, the details of the probate are public and can be accessed by various people. This allows people to see intimate details about the deceased’s estate including what assets they owned, who they owed money to, and who they left their property to. Having these details exposed to the public can make an already emotional time more difficult and can distract people from their mourning process.

How a Trust Preserves Privacy

Trusts can help families avoid costly probate fees and keep the details of the deceased's estate private. Unlike a will, trusts become effective the moment a person passes. This means that they do not need to be submitted to probate and can make the distribution process much smoother. Because the probate process is avoided, no estate details will become public, helping preserve the privacy of the family and allowing them to focus on mourning their loved one. 

In addition to added privacy the trust will also allow for a trustee who can distribute to the beneficiaries of the trust at future times as directed by the original document. For example, a trust can prevent the trustee from distributing money to a child or their guardian before they reach a specific age. This allows the creator of the trust more control over what happens to their property following their passing.

By working with an attorney people can create a trust plan that helps preserve their privacy and save money on attorney’s fees through probate. If you have any further questions feel free to schedule a free consultation today!

A common misconception that people have is that they can only create a trust to own assets in the state in which they reside. This may seem to be the case but a trust, just like an individual, can own property or assets outside of their respective jurisdiction. This allows individuals from different jurisdictions to take advantage of South Dakota’s unique trust laws as a part of their estate plan. 

How Do I Create a South Dakota Trust?

In order for a trust to be subject to South Dakota’s unique trust laws, the trustee of the trust must be domiciled in South Dakota. Luckily South Dakota has a wide variety of trust companies that can serve as trustee for a wide range of trusts with various types of assets. Furthermore, using one of these trust companies as trustee, in combination with a properly drafted trust, can allow for greater creditor protection for the trust's underlying assets. An additional option would be to name an individual who resides in South Dakota as trustee, however this can cause other issues as trusts can be difficult to manage if a person has no experience with trust administration. 

What about Real Estate?

Individuals often believe that although they can transfer assets like stocks and bonds to a South Dakota trust that real estate is different. This is a common misconception that often holds people back from seeking the added benefits of South Dakota’s unique trust laws. As a legal entity a trust can typically own real estate anywhere. The real property would simply need to be transferred through a properly executed deed granting ownership of the real property to the trust. This would allow the property to be owned by the trust and provide you with the various benefits of South Dakota trust law. 

Considering which jurisdiction to choose when creating a trust is always important. South Dakota’s flexible trust laws can help serve your needs and efficiently achieve your estate planning goals. It is always important to work with qualified professionals before creating any trust to ensure that your estate plan is effective. Feel free to contact Kern Law Practice with any questions you may have in regards to creating a South Dakota Trust!

Introduction

Medicaid is a state program with federal funding. The Medicaid system is set up to help individuals who cannot afford to pay for medical costs or nursing home expenses that they need. Additionally, Medicaid will help cover costs for people with permanent disability. Although Medicaid provides an often necessary function for elderly or disabled people, the program is not necessarily free and individuals must meet certain income and asset limits to be eligible. If a person attempts to go on Medicaid before they meet those limits, or if a person transfers items away for less than fair market value to meet those limits, Medicaid can either disapprove the individual for Medicaid, extend the time before the person is eligible for Medicaid, or if the gifts are discovered after a person is on Medicaid or deceased,  “claw back” gifts that were transferred for less than fair market value within five years of the individual going on Medicaid. These repercussions can be devastating and cause unforeseen financial issues for families. This blog will discuss how trusts can help preserve assets for individuals who may require Medicaid care. 

The “Look Back” Period

Oftentimes people attempting to qualify for Medicaid without the help of an attorney will attempt to qualify by making large gifts of assets to family members. This strategy can cause a litany of issues if done improperly. In order to prevent people from gifting assets to intentionally meet the asset limits, Medicaid programs have implemented “Look Back Periods”. Typically this is a period of five years before an individual goes on Medicaid. If a person seeking to qualify for Medicaid is found to have made gifts of property for less than fair market value during this time, Medicaid can go after these gifts in order to cover the costs incurred by the program for providing care to the individual. This means that if the money gifted to family members has already been spent, the family may be liable to cover those costs to Medicaid. This can have substantial unforeseen financial repercussions. 

Benefits of a Trust

In order to avoid potential unforeseen complications caused by the “Look Back” period, individuals can use a trust to structure these gifts well in advance. Medicaid Asset Protection Trusts (hereinafter referred to as MAPTs) are trusts created to allow an individual to make a gift to an irrevocable trust before the “look back’ period begins. 

If such a trust is structured correctly it can remove assets gifted to the trust from the individual’s estate. This makes it easier for the individual to qualify for Medicaid assistance, and preserve assets within the individual's estate. These trusts should always be drafted by an attorney as attempting to do it yourself could lead to negative Medicaid repercussions as well as various gift and estate tax issues. 

Other Planning Considerations 

In addition to helping preserve an individual's estate, these trusts can also come with the benefits of creditor protection and control over how your assets will be distributed upon your passing. When it comes to planning for Medicaid timing is everything, so do not hesitate to schedule a free consultation should you have any further questions regarding planning for Medicaid.

Running a small business can be a challenging yet rewarding venture. Small family owned businesses have long been associated with the American Dream and often serve as the backbones of local communities. As a business owner, you may be concerned about the possible tax implications of a growing business. As a small business owner it is important to plan ahead to reduce the impact the growth of your business may have on your tax bill. One such way to do so is through the use of a Qualified Small Business Stock Trust. This blog will break down what a Qualified Small Business Stock is, who qualifies for the Qualified Small Business Stock (hereinafter referred to as  “QSBS”) exemption, and how to maximize the exemption.

What is Qualified Small Business Stock?

Qualified Small Business Stock is Shares of an active company that is organized as a C-corporation, whose assets do not exceed fifty million dollars at the time of the share issuance. Additionally, the company must use eighty percent of its assets to actively carry out business.

Furthermore, the business must be a qualified trade or business. This means that companies who perform services in the health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where an individual is the main asset of the business will not qualify. The rules also exclude businesses who perform banking, insurance, financing, leasing, investing, farming, hotel, motel, or restaurant services from the definition of QBT. 

Lastly, the shares must not have been sold within five years of an issuance, meaning that the owner of the shares must have retained possession of the shares for five years after they were acquired, although under certain less common circumstances exchanges or sales to acquire additional QSBS may still qualify. 

What Tax Benefits Does QSBS Provide Me?

If all of the requirements for QSBS are met, the owner of the QSBS can exclude either 10 times the original investment amount in the shares, or ten million dollars, whichever is greater from federal capital gains tax. This is a massive exemption that can save a business owner substantial sums of money paid in tax. But wait, the exemption gets better.

An individual who owns QSBS can gift their QSBS that has yet to be sold, and each individual who receives the QSBS will also get the exemption. Furthermore, the individual can set up a trust for an individual, and the trust will also get a QSBS exemption as well if it is properly drafted. This could potentially allow a person to pass large sums of shares in a business while saving millions in capital gains tax. 

Gifting QSBS to a Non-Grantor Trust

In order for a trust to qualify for its own QSBS exemption, it must be considered a non-grantor trust. This means that the Grantor, the person gifting the QSBS, cannot have continued control over the trust or the assets in the trust. It is important to work with a knowledgeable attorney to create a trust eligible for this exclusion, as an error could cause the QSBS to not qualify. 

It is also important for a grantor to consider the effects such a gift may have for estate and gift tax purposes. Generally it is advisable that people seeking to make gifts of QSBS should do so while the company is still young, as the shares gifted will be worth less and have less of an impact for estate tax purposes. It is important to work with an attorney to avoid potential negative gift or estate tax consequences in creating such a trust.

Maximizing this exemption can help reduce large tax burdens, allowing small business owners to reap the rewards of their hard work. By working with an attorney, small business owners can ensure that their estate plan works hard to preserve the legacy they have created, and secure their family’s future. If you have any further questions relating to QSBS or your small business, feel free to schedule a free consultation today!

A trust is an important estate planning document that can help an individual accomplish a vast array of different estate planning objectives. Due to the inherent complexity of these documents people looking to create an estate plan often have questions regarding the difference in various forms of trusts, and what type of trust would best suit their needs. This article will explain the difference in common forms of trusts, the goals that they seek to achieve, and situations in which they may be beneficial for you.

1. What is a Trust

On the most basic level a trust is an agreement between two or more parties to divide the interest in property amongst them in a fiduciary way. The person creating the trust, the "Grantor", transfers ownership of certain property to a third party, the "Trustee". The transfer of this property is subject to a "Trust Agreement". This Trust Agreement will detail how the trustee is to manage the property and how the property is to be invested, cared for, as well as various other duties the Grantor may request of the Trustee. The Trustee is bound by the terms of this agreement, and must manage the property in a fiduciary capacity on behalf of the "Beneficiaries", who are the people who will receive the benefits of the property. These agreements will direct how the property will be distributed amongst the Beneficiaries similar to a will.

2. Revocable Trusts and Their Purposes

A Revocable Trust is typically a trust in which the Grantor of the trust retains the ability to terminate the trust, alter the terms of the trust, or alter the beneficiaries of the trust. Typically this will be accomplished by naming the Grantor the Trustee and the lifetime Beneficiary of the Trust. The main advantage of these trusts is that the Grantor will retain the power to alter their estate plan more easily, by changing the Beneficiaries of the trust, removing or adding property to the trust, or terminating the trust as a whole, while still enjoying beneficial interest of the items within the trust during their lifetime.

The main advantage to this type of Trust is that upon the passing of the Grantor, the Trust will become irrevocable, and a successor Trustee will be named by the agreement. This allows the Grantor's estate to remove the items in the trust from the probate process, saving the estate money on attorneys fees and allowing for greater efficiency in distributing the assets. Furthermore, this structures makes the distribution of the assets the responsibility of a fiduciary trustee, who can also be directed to hold the assets, manage the assets, or delay distributions should the Grantor not want certain distributions of property to be made immediately. These trusts are a common planning tool that anyone looking to make an estate plan should consider.

3. Irrevocable Trusts and Their Purposes

Irrevocable Trusts are less common than Revocable Trusts, but can be drafted to serve a wide variety of different estate planning objectives. Unlike a Revocable Trust, Irrevocable Trusts require the the grantor relinquish the ability to revoke or substantially alter the trust. These documents will name a third party to be the Trustee of the trust. Grantors of an Irrevocable Trust can name individuals to serve in this capacity, however there are companies called "Trust Companies" that can be named to serve as a "Corporate Trustee". Additionally, many banks have trust departments dedicated to serving as Corporate Trustee for these trusts. Corporate Trustees can be beneficial for Irrevocable Trusts, particularly ones containing large amounts of assets, as they have departments dedicated to managing the assets of the underlying trusts, something that may be difficult for an untrained individual. In south Dakota, Grantors typically have further options to name additional advisors such as Trust Protectors, Distribution Advisors, Investment Advisors, and Distribution Committees. These roles allow for greater flexibility in planning and allows Grantor's to retain advisors they already may know or trust for various purposes. 

There are various benefits to Irrevocable trusts, but one of the main advantages to a South Dakota Irrevocable trust is that they provide creditor protection benefits. Because the Grantor of these trusts no longer has unfettered beneficial interest in the assets of the trust, under various circumstances creditors of the grantor will not be able to access the assets of the trust. South Dakota's trust laws are unique in the fact that a grantor can also be a beneficiary of an Irrevocable Trust and still retain creditor protection as long as the Grantor uses a Corporate Trustee, and the assets are held in trust for a certain period of time. There are caveats to this protection however, so it is important to work with a South Dakota attorney in drafting an Irrevocable Trust for this purpose. These benefits have made South Dakota a premier trust jurisdiction world wide.

Based on various factors these trusts will either be taxed by the federal government as a separate entity making a trust a "non-grantor trust", or will be disregarded for tax purposes and the income of the trust will be taxed as if it were the grantor's own income, making the trust a "grantor trust". The terms of the trust will determine the tax status of the trust. It is important that individuals utilizing this type of trust work with attorneys to achieve there goals in creating these trusts, as improperly executed documents can have various unexpected and undesirable tax implications.

Conclusion

Almost any estate plan can benefit from the use of a properly drafted trust. By working with an attorney individuals can achieve a large range of estate planning objectives with more flexibility than is typically available with a simple will. These benefits can help save your estate money, give you greater control over the distribution of your assets, protect your assets from creditors, and help preserve your legacy. Should you have any questions about adding a trust to your estate plan, please feel free to schedule a free consultation today!