QTIP Trusts and Estate Tax Liability

The purpose of a QTIP trust (Qualified Terminable Interest Property Trusts) is, at its most basic, to secure assets for an individual (most often a child or children) while having at least a portion those assets available to a surviving spouse while simultaneously preserving the marital deduction for estate tax purposes.

Though an important and very useful planning tool, it is not without its potential issues.

As illustrated in this recent Forbes.com article: Not Like the Brady Bunch, it is possible that there may be issues between the children in blended families when the recipient spouse of a QTIP trust passes away.  The conflict can arise in determining what estate should be on the hook for the estate taxes.

Example:
Jim and Jane are married and both have children from a previous marriage.
Both provide for a created of a QTIP on their death for the benefit of their own children.
If Jim dies first, certain property/assets are placed into the QTIP and Jane lives of the interest and a certain amount of principle for her life, and on her death the remaining amount goes to Jim's children. This trust arrangement qualifies under the marital deduction and is not taxed on Jim's death.
However, when Jane dies, those remaining amounts are taxed to her estate. Jane's children may have issues with their mother's estate paying taxes on funds distributed to Jim's children, especially when those funds were passed into their mother's estate tax free on Jim's death.

Thankfully, there drafting tools available to clearly spell out this type of liability and avoid conflict between the families.

Coordinating Your Estate Plan

Beneficiary Designations are a powerful away to efficiently pass assets to your beneficiaries in things such as 401k's, retirement accounts, etc.  It allows assets to pass directly to the beneficiary without having to pass through the potentially costly, burdensome and, more often not, time consuming probate process.

However, this benefit is not without some potential cost.  These beneficiary designations override any instructions in your will.  Unless properly organized, they can lead to some unforeseen and undesired results.

For example, if an individual in a second marriage has his or her first spouse named as the beneficiary of a financial account, and fails to make a beneficiary desigation change after re-marrying, the benefits form that account may pass to the deceased ex-spouse.  A result most would qualify as disastrous.

The Wall Street Journal recently put out an article on this subject and the dollar amounts at risk for potential beneficiary errors is staggering:

Read the full text of the article HERE.

Time to Get Organized

An article in July 2nd's Wall Street Journal (Designing Your Death Dossier - WSJ.com) was a good reminder on the importance of getting your personal financial, insurance and legal materials organized and centralized.

According to the article, state treasurers currently hold $32.9 billion in unclaimed bank account funds, presumable from account holders who have passed away without leaving a clear record of the accounts with their heirs.

Its crucial to keep records of current accounts, insurance, your will, power of attorneys, and living wills, along with proof of ownership in assets such as land or home and list of liabilities (house/car payments, etc) accessible by your heirs. This ensures that they will not have to enter into the a lengthy, often costly, procedure of seeking permission from the court to gain access to this information.

Choosing a Guardian for Your Minor Children

Arguably, the single most common hurdle for people with children in getting their wills and other estate planning documents in place is choosing a guardian for minor children.

Often times a husband and a wife have differing views as to who should raise their children and how. Instead of making a decision, couples leave the question unanswered and continue with life with no plan in place.

This is a terrible "solution" for many reasons, not chiefly among them being the choice of guardian for your children. There are extremely important end of life, financial and health care issues that need to be addressed so that your children are left with a road map or your wishes so that unneeded cost and heartache is avoided.

If choosing a guardian is your roadblock to addressing the other important issues mentioned above the guideline below may help you chart a path to choosing a guardian (adapted from findlaw.com):

1. DIFFERENT PURPOSES. There are two kinds of guardians: guardians of the estate, and guardians of the person. The former manages the money or assets held by a child, either when the parents are alive or after their death. A guardian of the person, however, is someone who becomes a substitute parent for the child should the child's actual parents die or become incapacitated or otherwise unable to take care of them.
2. MATCHING ATTRIBUTES. When selecting a guardian, be aware of the two types, and choose people with the skills or attributes that best suit those roles. In other words, your accountant brother-in-law may be a terrific choice as guardian of the children's estate, but his workaholic nature may make him a poor choice for guardian of the person.
3. MULTIPLE GUARDIANS. Just as you can choose different people to be guardians of the estate and person, you can also choose more than one of each type if you have multiple children. For instance, if you have a large family and know that the burden of raising multiple children or managing their assets would be too much to ask of one person, you can assign certain guardians to certain children. Whereas there are probably fewer emotional ramifications to such a choice when guardians of the estate are involved, there are larger considerations at issue when dealing with guardians of the person. Do you really want your children split up into different families if you and your spouse die or become incapacitated before they are grown? Maybe, maybe not.
4. SHARED VALUES. Choose someone you know well and who shares your goals, values, and parenting style, whether you are selecting a guardian of the person or estate. Even if the person you select is limited to making financial decisions on your child's behalf, you want that person to share your philosophy of childrearing in general.
5. FINANCIAL STABILITY. Choose someone who has the financial resources to care for your children. It costs a lot of money to raise and educate children, and you do not want to impose these economic burdens on someone who can not meet them.
6. LONGEVITY. Choose someone young enough to see their responsibilities through to your child's adulthood, and in good enough health to withstand the challenges of childrearing. While physical disabilities do not necessarily preclude good parenting, it is wise to consider health factors that may limit a person's life expectancy or ability to parent. It may be tempting to choose your own parents as guardians, but logically speaking they are less likely to outlive you than are persons your own age or younger.
7. BE INDEPENDENT. Don't be influenced by others' wishes as to whom you should select to be your child's guardian. Unless the person you've selected opposes your choice, this decision belongs to the parents alone.
8. CONSIDER CHARACTER. Don't choose someone that a court would not approve as a guardian, such as someone with a history of drug or alcohol abuse or a criminal record.
9. TALK IT OVER. Although the guardian selection decision belongs to the parents, it is important to get approval from the person you are considering before you make it final. There may be valid reasons why someone can not fulfill your request, and it is better to find that out while you still have the option of making another selection.
10. GET IT IN WRITING. Once your decision is final, consult your attorney to draft the necessary documents to make your choices legally binding and official. Wills, trusts, and other legal documents can be used to implement your guardianship decisions. Your attorney can advise you on proper procedure, prepare the necessary paper work, and file any required documents.

Here is an easy questionnaire we've developed that will help you evaluate your choice in guardian:

Guardianship Walk-Through

Properly Valuing Your Net Worth

What is the proper method for valuing your estate? How do debts fit in? Should you adjust for for future value?

Knowing what you are worth is a critical aspect of putting together a complete and effective Estate Plan. There are several tools available on the Internet that you can use to put together a clear picture of your net worth.

Dunken, Valentino and Wellnitz, PLLC recommends the following:

Home valuation: Zillow

Excellent stock valuation explanation and tools: Moneychimp

Small business valuation: Business Valuation

Simple Debt payoff calculation: Debt Payoff Calculator

Simple Future Value Calculator (for constant interest rates): Future Value

Collection of Tax Valuation Resources: DVW Links

Attorneys and Technology: Can The Two Work together?

We at Dunken, Valentino and Wellnitz, PLLC pride ourselves on the proper use of new technology to improve the quality and efficiency of the services we provide to our clients. This ranges from providing online cloud access for our clients to their files and planning documents, to our own internal project and relationship management software.

That being said, our top concern is client confidentiality and privacy. If we cannot ensure that client privacy is maintained we will not adopt a new technology, no mater what the benefits.

This is an issue that seems to have been overlooked by some firms and has sparked a debate over the proper use of technology in the legal field.

The American Bar Association has even taken steps to propose new rule relating to use of certain technologies in an effort to protect clients. An interesting article was written on the subject here:

Connecticut Law Tribune: Clouding The Issue

Legacy Seminar

DVW Partner, B. Terry Dunken,  has been invited to speak at a Legacy Planning Seminar organized by PLANiTPOWER C.E.O. Melissa Brisbois.


Terry will be covering some common pitfalls in Legacy Planning and will be addressing some Legacy Planning misconceptions.


PLANiTPOWER is a a personal services company that provides individuals and couples with a broad picture of their financial health and offers guidance in any area that is lacking (such as proper estate plan, insurance, budgeting, etc.).  Their website is: www.planitpower.com.


The luncheon is scheduled for May 17th, 2011 at the Keller Williams office located at 1650 Highway 6, Suite 350  Sugar Land, Texas  77478.  


Admission is through invitation only.  To request an invitation please email info@planitpower.com.

The State Estate Tax

Though there is a (relatively) new and generous federal estate tax exemption of $5 million per estate and $10 million per couple, many families still have to plan for estate taxes even if under the exemption amount.  The reason? - Individual state estate taxes:

Because of these individual state estate taxes, use of trusts and other methods to deal with moderately large estate estates is still very much advisable.

To view the varying requirements of these states check out this map and accompanying article provided by forbes.com: Forbes - State by State Estate Tax Map

Trust as a tool to protect family wealth

As discussed in this Wall Street Journal article: Protecting Family Wealth,  more and more families are turning to to trusts as an effective tool to shield family wealth and protect against claims in divorce proceedings:

• Trusts can help shield premarital assets or inheritances from spouses.
• Unlike a prenup, creating premarital trusts can be done without the future spouse's consent.
• Premarital trusts may be less effective in shielding wealth acquired during marriage.
• The safest strategy is to use both trusts and prenups

Welcome

Welcome to the DVW Legal blog!

This is an informal place for our Attorneys and clients to share  experiences with legacy planning, discuss new types of legacy planning tools and generally share information to help each other through the multi-lane road that is life.

Have Fun!