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What is an Irrevocable Life Insurance Trust

September 23, 2021Filed Under: Asset Protection

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Since the federal estate tax exemption allowance appears to be in jeopardy of being lowered, it may be time to reconsider how you plan to pass generational wealth to your heirs. Senate Democrats are proposing to lower the current estate tax exemption from $11.7 million to $3.5 million for individuals and $23.4 million to $7 million for couples. Whether this particular Congressional bill will pass into law is unknown; however, change is likely coming to estate tax exemptions. Even without action by Congress, in 2026, the current rate will sunset and essentially be cut in half to about $6 million per individual.

Understanding Irrevocable Life Insurance Trusts and Other Taxations

To address additional inheritance taxation, many look to an irrevocable life insurance trust as a mechanism to reduce estate tax and pay your heirs part or all of the amount your estate will be taxed. The asset of the trust will be one or more life insurance policies. However, beware, as once an irrevocable life insurance trust (ILIT) is created, it cannot be rescinded, modified, or amended. There are several important requirements to create and maintain an ILIT properly, and each requirement helps to explain the nature of such a trust.

  • If you are the trust grantor, you cannot also serve as a trustee because a trustee controls the trust, leading to the trust being considered a part of your estate. It is crucial to name a trusted person or financial institution to act as a responsible trustee.
  • The trust itself must be the owner of the life insurance policy. If you transfer an existing policy to the trust and die within three years of the transfer, the policy is part of your estate due to a look-back rule. The trust can directly purchase a policy to avoid this risk.
  • The trust must pay the policy premiums, and you must transfer funds to the trust for such a purpose. This situation can create an issue with gift taxes as a transfer to a trust is not usually afforded the yearly gift tax exclusion of $15,000. To qualify as a gift for a tax exclusion, the recipient must have a “present interest” in the money. To accommodate this requirement, you can use what is known as “Crummey” power, giving beneficiaries the ability to withdraw funds transferred to the trust for up to thirty days. Sending a Crummey letter to the beneficiaries of an ILIT informs that a gift has been made to the trust, and there is an immediate and unrestricted right to withdraw those assets for up to thirty days. After thirty days, the trustee can pay the annual insurance premium with the funds. Although you run the risk that the beneficiaries will withdraw these funds, if you make it clear the financial benefit is greater in the future, it should not present a problem.
  • Generally, the beneficiary of the life insurance policy is the trust. After the funds are deposited into the trust, the trustee can distribute the assets to the beneficiaries as specified in the trust. If your beneficiaries are still minors, you can instruct the trustee to wait until they reach a certain age. Leaving the assets in the trust can also protect them from beneficiaries’ creditors.

ILIT’s can own both individual and second to die life insurance policies. All premium payments should come from a bank account owned by the ILIT. The downside to an ILIT is that it is irrevocable. However, your ILIT is a powerful tool that can minimize your estate taxes, avoid gift taxes, protect assets and government benefits, select the timeline of distribution to beneficiaries, and more. If you would like to discuss whether an ILIT may be right for you, give us a call. We would be happy to schedule a confidential meeting to discuss your needs. Contact us at 513-771-2444.

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What Happens to your Digital Assets?

January 11, 2021Filed Under: Asset Protection, Elder Law, Estate Planning

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Today, almost everyone has digital footprint. From social networks like Facebook, Linkedin, Instagram, Twitch.tv and Twitter, blogs and licensed domain names, email, music, photos, seller accounts on eBay, Amazon, or Itsy, gaming accounts, even your financial, utility, and medical accounts are all part of your digital footprint. When most of us created these accounts, we blithely accepted the End User License Agreement (EULA) without much thought to when we would no longer be around to manage their content and activity. However, a EULA designates in detail the rights and restrictions that apply when using the software known as terms of service (TOS). Most EULA’s are a standard form of contract, a contract of adhesion, which is known to exploit unequal power relationships. A user has no option to negotiate the terms of a EULA if they want to use the software.

When you create your will and its associated documents like a durable power of attorney (in the event you become incapacitated) it is prudent to include digital assets and a designation for someone to access your online accounts and manage their activity. Without specific instructions, most of your online accounts will not pass through the typical estate planning devices like trusts and wills because they are not your property. Still, they are very representative of your being. Since most TOS are non-transferable, you will likely be unable to transfer the “ownership” of your online accounts legally. However, you can still plan for how they should be handled when you die.

In terms of Facebook and other social network platforms, each company has its policy regarding the account of the deceased. Facebook, for example, will permit your account to be placed in a “memorial” status so that it can be viewed, and loved ones can leave memorial messages. Other social networking sites will delete or deactivate your account. If the social network is not appraised of your death, the company won’t know for a while, allowing someone to make changes to your account after your death, perhaps even posting a final status or update of your choosing. Though this is in opposition to most social networking platform policies, it is difficult for online companies to know about and monitor user activity in the event of death.

Your executor should inform readers of a blog or other licensed domain names you maintained while alive. A licensed domain name should be transferred or ended as continued licensing payment makes no sense. The content of these sites should be removed or archived. If you belong to online communities such as a book group or community list serve, you may also choose to leave a final message or have your executor notify the group of your passing.

If you store movies, music, photos, eBooks, or other digital online files, your executor should have access to the files and carry out your wishes as to what to do with them. If you do not leave access to your online accounts, they will eventually become disabled due to inactivity, and no one will have access to the files. In the event you own the data, i.e., personal photos, you can use your will or living trust to leave them to a loved one or a friend. You will have to leave detailed descriptions (My trip to Paris) for photos. As far as purchased online music or eBooks it is not the same as owning a physical CD or book. Software or digital content does not permit acquisition of ownership rights. This means the money you paid for the online content was more of a subscription service solely for your use and not transferable upon your death. Your virtual music and film library will die with you.

If you are an online seller on eBay, Amazon, Itsy, or the like, leave specific instructions about what to do with your online store. You may leave all profits that continue to come in and the stock items you sell through your will or living trust. When the company knows of your death, your executor will have no power over the account itself, but you can make provisions for the profit and stock items to be bequeathed. If you want someone to take over your online store after you die, you will need to reference the TOS of the company. Most do not allow accounts to transfer; however, the new “owner” can open a new account and reimagine your storefront.

Financial, utility, and medical accounts should all be addressed very clearly in your digital will. Leave instructions as to what website, username, and password are for each account. Also, leave written instructions about what to do with each of them. Regarding your financial accounts, their contents will be addressed in your will or trust, but your executor will have to access these accounts to wrap up your estate. These accounts include checking and savings accounts, mortgage, life insurance, and retirement accounts, as well as phone, cable, gas, and electric bills, tax preparation services, medical accounts, and more.

Your online presence requires digital legacy planning. Take a good look at all of your online accounts and be sure to leave reliable access to them and instructions for your executor. We can help you with this process, and with drafting appropriate planning documents to deal with these assets.

If you have questions or would like to discuss your personal situation, please don’t hesitate to contact us at 513-771-2444.

 

 

 

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Inheritance Is Not Always a Good Thing

December 21, 2020Filed Under: Asset Protection, Elder Law, Estate Planning, Spousal Support

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Most of the time, getting an Inheritance is a good thing. However that is not always the case. Say your spouse is living in a nursing home because of advanced Parkinson’s. Your spouse is currently receiving Medicaid benefits to pay for the high cost of that care. If you were to pass before your spouse, you wouldn’t want your spouse to inherit all your life savings, no matter how much you love your spouse. Inheriting all of your life savings would jeopardize your spouse’s Medicaid benefits, and that is not what you want to see happen.

Hold the Medicaid or Supplemental Security Income (SSI) benefit-programs next to the high cost of health care. Those programs are “means-tested.” In other words, to be eligible, recipients must own practically nothing. If your spouse or any disabled person is receiving those kinds of benefits, and if they were suddenly to inherit, they would lose their benefits and they would end up having to pay for their care themselves until the inheritance was used up. That could involve a lot of money!

Rather, it’s best if the disabled person were to keep the benefits coming in, and have assets from your estate be used to pay for “extras” that benefits don’t cover. These extras might include payment of real estate taxes, upkeep of a residence, or vacations or a flat-screen television.

In the case of Medicaid, that is accomplished by creating a Will that includes provisions for a “supplemental needs trust” (SNT). When you pass, and if your disabled spouse or other beneficiaries were to be on benefits at that time, your assets would be moved into this trust. The money would be managed by a trusted person other than your beneficiaries. The trust would pay for “extras” only, and the disabled person would continue to receive the crucially important benefits.

This arrangement must be done by Will, though, as the Medicaid rules require (there are other possibilities for other benefits programs). As to Medicaid, your estate would go through a simplified probate process in which a judge would approve the transfer of the estate into the SNT.

Even if everybody inheriting were well and able-bodied – as, of course, we would hope – and there was no need for benefits, an SNT would still be important. It could be made “contingent.” In other words, it would be unnecessary if all your beneficiaries were able-bodied, but, if anybody did happen to be disabled and on benefits, the terms of the Will would require the creation of the SNT.

Or, if your beneficiaries might become disabled in the future – and unfortunately, none of us has a crystal ball – the SNT could be “forced.” A forced SNT would require that the assets be placed into an SNT regardless of whether anybody was disabled. In that situation, though, as long as your beneficiaries were well, there would be no concern about restricting distributions to only the “extras,” and the trustee would be free to distribute money as beneficiaries needed it for any worthy purpose. Then, later, if disability were to occur, the distributions could be made to conform to relevant government-program restrictions. Estate assets would be protected by the SNT and benefits eligibility would be preserved.

This is a win-win proposition and one that we would be happy to discuss further with you. Give us a call at 513-771-2444 and let’s get your planning started.

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How to Talk to Your Children About Their Inheritance

September 21, 2020Filed Under: Asset Protection, Elder Law, Estate Planning

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Many parents are uncomfortable talking to their kids about their wealth.  Talking about how much money or property you have is usually viewed as taboo.  Asking someone else about what they have is often considered impolite. However, failing to talk to kids about how much they may inherit could leave them unprepared to handle even a modest amount, and often results in the money being squandered quickly.

Baby boomers are considered the wealthiest generation and are set to pass that wealth on to their children. It’s estimated that $68 trillion will be passed down from boomers within the next few decades. By 2030, millennials will hold five times as much wealth as they do today.

Many who have substantial wealth are concerned that if their children know the extent of their wealth, this will take away any motivation for the children to be productive and involved citizens. Parents with substantial wealth often want their children to learn how to live in the world as “normal” people, and to be productive and successful in their own right. Some may go so far as to hide their wealth to encourage their children to work and build their own wealth.

But the degree of wealth is relative. Even those who are not as wealthy may not want their children to know how much they have. With the rising costs of health care, they are concerned that all of their savings will be needed for retirement, medical expenses, and long term care. If this becomes a reality their kids would not receive an inheritance they may have been counting on.

Failing to prepare children for what they may inherit can hinder their ability to handle money wisely. Many find they suddenly feel separated from their friends, isolated, even confused about how to handle relationships. Others will be wasteful and spend their new found money irresponsibly. Those who inherit even a modest amount are likely to be just as irresponsible; stories of inheritances being squandered on an expensive sports car, lavish vacations, and fast living are all too common.

Experts agree it is important to talk to children about money and wealth during their adult years to help them learn how to be better stewards of wealth. This doesn’t mean parents have to take a show their children all of their bank accounts, business interests and other evidence of wealth. Instead, experts suggest talking to children about their values, the opportunities money can provide and what you as parents want to accomplish with the money you have. Most parents want their children to think about helping others, and many want to encourage entrepreneurship. It can be helpful to give children a small amount of money at a young age to teach them how to save and invest, spend wisely, and to show them the importance of supporting charities.

One of the most effective ways to teach children about values and spending and investing money is to be an example. Parents need to let their children see them using their money in ways that reinforce their values. Some parents show how they value family relationships by spending their money on family vacations or buying a second home where the entire family can gather for summers and holidays. Others involve their children in choosing charities to support and provide children their own money to donate. If your children see you living your values, chances are they will adopt similar values as well.

We help families determine how to leave money to children in a beneficial way, how to plan for unexpected health care issues, and how to make sure appropriate people are named to step in and help if needed. We welcome the opportunity to talk to you about your planning needs.

 

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Olivia K. Smith, Attorney at Law
Cornetet, Meyer, Rush & Stapleton Co., L.P.A.
123 Boggs Lane,
Cincinnati, Ohio 45246
Tel: (513) 771-2444
Fax: (877) 483-2119
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Olivia K. Smith, Attorney at Law
Cornetet, Meyer, Rush & Stapleton
123 Boggs Lane
Cincinnati, OH 45246
Phone: 513-771-2444
Fax: 877-483-2119
oksmith@cmrs-law.com

Family Law Attorney Olivia K. Smith, LLC represent clients in Cincinnati, Anderson Township, Batavia, Loveland, Mason, Milford and other communities in Hamilton County, Clermont County, Butler County and Warren County.

Disclaimer: The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. I invite you to contact me and welcome your calls, letters and electronic mail. Contacting me does not create an attorney-client relationship. Please do not send any confidential information to me until such time as an attorney-client relationship has been established.

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