Trust Funding

Monday, February 14, 2011

NEET Tips

NEET Tips answers questions posed online to the NEET website

Why is a Roth IRA not placed in a revocable living trust?

Traditional IRAs and Roth IRAs are not placed in revocable living trusts because if the account owner transferred title of the account to the name of the trust, the IRS would view that as a distribution. In the case of a traditional IRA, the distribution would generate income taxes and possibly penalties for early withdrawals. In the case of a Roth IRA, retitling would likely destroy the tax-advantaged features of the account, and could lead to early withdrawal penalties. IRAs and other tax-advantaged retirement plans generally are never transferred to revocable trusts, although a trust may be named as a contingent beneficiary, typically after one’s spouse and children.

Tuesday, October 20, 2009

Estate Planning Tip of the Week

What is an Unfunded Living Trust?

An unfunded living trust is a trust that has been created during one’s lifetime, but funded with only a nominal amount. The rationale behind an unfunded living trust is to have the trust ready to receive assets after the death of the settlor (the person who created the living trust), but not cause unnecessary inconvenience to the settlor while they are still alive.

In the case of an unfunded living trust, the settlor’s assets would pass through probate then, via a pour-over will, be placed in the living trust, which became irrevocable upon the settlor’s death. The trust assets would then be held for, or pass to, the beneficiaries as determined by the terms of the trust.

For most people, the better path is a funded living trust, in other words, a living trust set up during the settlor’s lifetime that holds nearly all of the settlor’s assets from the time the trust is created. A fully funded living trust avoids having to go through probate later. Additionally, one of the big advantages of funded living trusts is that a successor trustee can manage the settlor’s assets if the settlor becomes incapacitated, either temporarily or long term. This avoids having to petition the probate court to be named conservator for the settlor in order to receive the court’s approval to act on behalf of the settlor.

While some would have you believe that funding a living trust and managing the funded living trust is an inconvenience, or worse, the truth is otherwise. Initial funding is usually handled by the estate planning attorney, and managing trust assets in a trust is little different than managing assets outside of a trust. Thus, the benefits of a funded living trust far outweigh the alleged inconvenience. It’s best to avoid probate and cover yourself during incapacity by having your assets in the living trust from the very beginning. If your attorney suggests otherwise, seek a second opinion from an attorney that focuses solely on estate planning.

Friday, September 25, 2009

Press Coverage of Estate Planning This Week (September 25, 2009)

Jamie Downey of the Boston Globe provides a checklist of 16 items to complete for an orderly closing of one’s estate, including incapacity planning documents, wills and trusts, naming an executor and trustee, and completing a power of attorney for finances. See Organize Your Estate in 16 Steps (Sept. 24, 2009).

Bob Carlson of KCI Investing notes a few common estate planning mistakes to avoid, including overlooking non-probate assets, failing to fund a living trust, and not completing a financial power of attorney. He also points out the importance of designating guardians, keeping a record of important financial accounts, and providing instructions to your executor or trustee.  See Avoiding Estate Planning Mistakes (Sept. 22, 2009).

Dennis Fordham, Esq., writes in the Lake County News (Lakeport, Calif.) about discretionary spendthrift trusts, also known as beneficiary trusts, and the advantages for your children in receiving an inheritance in trust, rather than outright. See Estate Planning: Protecting Your Beneficiaries’ Inheritances (Sept. 19, 2009).

Clare Schwemlein of the Chillicothe Gazette (Chillicothe, Oh.) discusses using college savings plans, known as 529 Plans, as part of your estate plan.  By making a five-year contribution up front, you can get assets out of your taxable estate quickly.  See Education Savings As An Estate-Planning Strategy (Sept. 20, 2009).

Friday, July 17, 2009

Press Coverage of Estate Planning This Week (July 17, 2009)

William Edy, Esq. writes in the News-Press.com that unfunded trusts achieve very little.  To work properly, assets such as financial accounts and real estate must be titled in the name of the trust, otherwise estate taxes can increase and the assets often must move through probate before being placed in the trust.  See Creating a Trust Meaningless Unless It Holds Assets (July 12, 2009).

Kate Ashford of Good Housekeeping reviews steps to take as your parents become less independent, including ensuring they have planned ahead for legal and financial issues and where to find help for issues that commonly arise.  See How to Help Your Aging Parents Without Going Broke (July 16, 2009).

Eileen Aj Connelly of the Associated Press provides an overview of the federal estate tax, including determining what assets are in one's estate, whether small business owners are more at risk of paying an estate tax, and whether it's possible to reduce the size of one's estate.  See Estate Tax Can Hit Ordinary People (July 16, 2009).