Blogs from February, 2021

One of the many great things about using a Revocable Living Trust for your estate planning instead of a traditional will is that you’re better able to restrict how and when money is given to beneficiaries. Some clients want to give direct, cash distributions to adult beneficiaries so that they can to do with it as they please. However, there are many circumstances where giving large sums to individuals is a terrible idea. Here are some of the most common examples:

• Your adult child is disabled and receiving Social Security Income. Generally, if you give someone who is receiving government assistance a large sum of money, they could be disqualified from receiving those benefits. Supplemental Needs Trusts (sometimes called Special Needs Trusts) can be written as a standalone trust or as a “mini-trust” within your Revocable Living Trust. A Supplemental Needs Trust puts aside money for the benefit of the disabled individual, but that money is NOT in the beneficiary’s direct control. Therefore, the beneficiary gets the best of both worlds – continued public benefit support and private trust dollars to supplement their needs.
• Your adult child has substance abuse and/or mental health issues. We serve clients who have children or loved ones they want to support but are worried about giving direct distributions. Sometimes, giving someone with substance abuse or mental health challenges a large sum of cash or other assets can result in that person doing severe harm to themselves. Trust provisions can be written with any combination of restrictions like: distributions only upon a series of clean drug tests, distributions only for direct payments by the trustee for rent and healthcare, small monthly distributions, or distributions only after age 65.
• You want to fund multi-generational educational funds. Many clients want to create educational trusts within their Revocable Living Trusts. Higher education isn’t getting any cheaper, and clients often want to make sure that their children, grandchildren, and great-grandchildren have all of the support needed to pursue education after high school. A common trust provision might read like, “5% of my residual estate to my granddaughter, Sandra Day O’Connor, to provide for her education. The trustee shall pay all related expenses for her university or trade school at the trustee’s discretion. Upon her graduation from a university or trade school, or when she attains age 30, whichever occurs first, the trustee shall distribute the remainder of her share to her, outright.” This type of provision sets parameters that encourage Sandra to pursue some type of professional training while allowing for distribution at age 30 if schooling is not completed. 

However, sometimes creating too many complicated provisions can backfire. Not only is it a bad idea to leave instructions that are too complicated, but the law also actually prohibits it. A centuries old law called The Rule Against Perpetuities does not allow complicated provisions to last for too long. My law school Wills & Trusts professor explained it as preventing “too much control from beyond the grave.” Here are two of the most common examples of complicated provisions that can go wrong:

• Specific restrictions on real estate. Restraint on Alienation is a legal term used to describe a clause within an estate plan or any conveyance of real property that tries to keep the new owner/beneficiary from being able to do what they want or need with the property. For example: a client once asked me to leave his homestead to his 2-year-old granddaughter with a restriction that it was to be held in trust by her father and could not be sold until she turned 21. At the outset, this sounds like a perfectly fine idea as it would preserve the homestead for his granddaughter, but it didn’t take into consideration possible decisions that would need to be made long before the granddaughter reached the age of 21.
  • What if the real estate market is doing great but headed for a downturn when she’s 20?
  • What if there are plans for a sewage treatment plant down the street and the value is about to permanently plummet? 
  • What if a commercial developer offers twice the value?
  • What if she gets accepted to Harvard at age 16 and they need the proceeds to pay for a move to Massachusetts?

In the end, we were able to honor his request that the homestead and its value be used only for the direct benefit of his granddaughter, but also gave the trustee decision making discretion should the need arise.

• Failing to plan the remainder of an estate. Partnering reasonable inheritance stipulations with proper contingency planning is key to a successful estate plan. As mentioned above, a common provision in Revocable Living Trust planning is one that limits distributions to a beneficiary with substance abuse problems. There must be specific planning for a variety of contingent plans with this, or any, specific provisions. 

Neglecting to plan for the remainder of an estate will leave a trustee in limbo unsure of what direction to take. Here is an example of a provision that couples inheritance restrictions with a plan for the remainder of the estate should the beneficiary not meet the inheritance criteria. 

“The Trustee shall, in addition to direct payments for the beneficiary’s education, maintenance, health, and support, make distributions of $500 per month upon proof of a clean drug test from the beneficiary. However, if the beneficiary fails a drug test more than 6 months in a row, the trust shall terminate, and the entire remainder of my estate shall instead be distributed to the Drug Free America Foundation.”

You don’t need to figure all of this out before you start your estate plan. As estate planning professionals, our attorneys use their experience to help you sort out the happy medium between “letting it ride” and creating complicated provisions that are at high risk of failing. When you meet with one of our experienced estate planning attorneys, they will listen to your story and all of your concerns and wishes. They will use that information to create the perfect plan for you and your story. Contact us with any contingency planning or beneficiary stipulation question you may have.

Generational wealth is a relatively simple term with broad connotation. It is defined as simply the passing down of assets from one generation to another. Generational wealth sort of sounds like a reason for a Vanderbilt to never have to work a day in his life because he has generational wealth. However, generational wealth should be a concern for all of us so that our financial legacy is protected, even if it’s a small savings account and not the Biltmore Estate.

Here are a just a few ways that you can protect more of your hard-earned assets for future generations:

• Keep beneficiaries from spending irresponsibly. Do you have a beneficiary in mind that would spend the entire amount within hours of receiving it? A trust can be easily managed in a way that puts restrictions on how and when a beneficiary receives money. One common way to accomplish this is to write beneficiary trusts that give someone 25% of their share at age 30, 25% at age 35, 25% at age 40, and the rest at age 45. One of our clients even had her children’s trusts held until age 65 because she knew that her adult children weren’t saving for retirement. 
• Make sure beneficiaries get support after high school. One of the most reliable ways to ensure future financial success is to keep learning after high school. A very common provision in estate planning is making sure that younger beneficiaries receive assistance for college or vocational training. Trusts often contain provisions saying something like “10% to my nephew, Jack, to be used for his educational expenses, and the remainder of his unused portion can be given to him outright when he graduates or when he attains age 40, whichever is sooner.” This not only leaves money for his education, but it also entices him to seek higher education. It also indirectly entices him to get scholarships and save for education expenses, because the remaining money goes to him outright if it isn’t used for tuition!
• Ensure proper mineral rights transfer. Since we’re in Texas, let’s talk about oil. Many Texans own mineral rights (usually passed down to them from ancestors). Proper transfer such assets from generation to generation ensures that any current and future royalties stay within the family. A common way to accomplish this “proper transfer” is to place mineral rights into a revocable living trust. Proactive planning, whether by will or trust, is essential to protecting mineral rights for future generations. 
• Do business continuity planning. Raise your hand if you are a small business owner! Do you have a rental house? Do you have a handyman service? Do you have commercial rental property? Do you have a more formalized business? Appropriate transfer of business assets is a wonderful way to leave an intentional legacy for future generations. Completing a business continuity plan connects your financial legacy wishes to future beneficiaries.   
• Research tax planning needs. There is a lot of misinformation regarding the “Death Tax.” First and foremost, there is no federal tax penalty for dying. In 2021, the individual Federal Estate Tax cap is $11.7 million. So, basically, if you have less than $11 million dollars, you don’t need to worry about completing complicated trust planning to avoid the 40% tax. Lucky you! However, if you’re burdened () with more than $11 million, you should immediately get to work with a qualified estate planning attorney to plan accordingly.
• Avoid spending estate monies on court fees and Medicaid recovery.  Save your family and loved ones thousands and up-to hundreds of thousands of dollars in the future by protecting assets from future probate and Medicaid estate recovery costs.  A reasonable expectation for court, attorney, and realtor fees for an uncontested probate in the DFW area is about $10,000. (If family members fight, probate costs will continue to climb until the family stops arguing or the money runs out.) If you “don’t have much” then you definitely want to ensure that none of your assets are wasted by having to probate a will. A revocable living trust can avoid probate and all associated fees. Additionally, a trust can avoid the Medicaid Estate Recovery Program (“MERP”) that’s administered during the probate process. MERP is how the state government is “paid back” for any money that Medicaid spent on you during your life through the sale of your home. So, if you want to make sure that your daughter gets your house when you pass away, you want to avoid probate.

The successful passing of assets builds generational wealth over time. Contact us today with your recommendations on how to build generational wealth.

Do the terms equal and fair mean the same thing to you? Many families find themselves discussing “fair” vs. “equal” when working with Crain & Wooley. Do any of these situations sound like something that could reasonably happen in your family? These real clients’ stories (with names very obviously changed) shed light on how “equal isn’t always fair and fair isn’t always equal”.

• Blended Family: Moira’s husband, John, died without a will. When she tried to sell their house to downsize, the title company told her there was a problem. Texas is a community property state and misunderstanding of Texas community property laws caused a big problem for this family. In Texas, for example, a home does NOT automatically go to the surviving spouse. Since John died without an estate plan in place, the laws of intestacy kicked in. Laws of intestacy are the state’s valiant effort to distribute assts when no estate plan is in place. 

John had a son, David, from a previous marriage along with Moira and John’s shared child, Alexis. Unfortunately, Alexis predeceased John. Alexis’s 2 children were adopted by another family. According to the laws of intestacy in Texas, David (the son from John’s previous marriage) and Alexis’s children inherit John’s half of the house. The grandchildren would have to be found and sign off before the house could be sold, even though John and Moira had owned the house together for 20 years. Doesn’t really seem fair in this situation, does it? If John had planned, he could have created a simple estate plan that left the house to Moira.

• Inter Vivos Gifts: Stanley and Dorothy have two adult children, Michael, and Kate. Kate is a successful sports agent and lives in her condo in San Diego. Michael has led a troubled life and has needed ongoing financial support during Stanley and Dorothy’s lifetime. 

Stanley and Dorothy have spent a lot of money paying Michael’s past-due bills, buying new equipment for his band, and paying for a few of his stays in rehabilitation centers. While Stanley and Dorothy love both of their children equally, they’ve spent exponentially more money on Michael than on Kate. Splitting their estate between their children equally didn’t really seem fair to them. To address this situation, Stanley and Dorothy created a Revocable Living Trust to address the “unfair” expenditure of assets on Michael. Their trust made a provision for “inter vivos gifts.” The trust said that their estate would be split equally between their kids, but that Stanley and Dorothy would keep a record of the gifts that were given during their lives to Michael. That amount would be deducted from his share and given to Kate. Stanley and Dorothy felt that distribution of assets brought fairness to the situation.

• Multi-Generational Households: Ricky and Lucy have three children, Fred, Ethel, and Little Ricky. When Ricky and Lucy were in their 70s, the family decided that it would be best if Ricky and Lucy shared a house with Little Ricky. 

Ricky, Lucy, and Little Ricky purchased a home together enabling Ricky and Lucy to “age in place”. All 3 of them owned the home together – (1/3 share each ). Little Ricky also agreed to help take care of Ricky and Lucy as they aged. Ricky and Lucy loved all three children equally, but Little Ricky not only paid more than his share of the mortgage every month, but also made personal sacrifices to help care for Ricky and Lucy. Ricky and Lucy decided Little Ricky should get all their 2/3rds interest in the house when both Ricky and Lucy pass away, and then all 3 children would split their cash assets equally. This addressed Ricky and Lucy’s desire to fair in the distribution of assets upon their death.

• No-Direct Descendants: Leslie isn’t married and doesn’t have any children. Her closest “family” members are her best friend, Ann, and Ann’s son, Oliver. If Leslie didn’t create a pro-active estate plan, then the laws of intestacy would dictate who gets her assets.

Leslie refers to Oliver as her “nephew” even though they have no blood relation. Leslie takes Oliver to football games, bakes cupcakes for his birthday parties, and loves him very much. Leslie wants Oliver to be the beneficiary of her estate. If the laws of intestacy were to direct the distribution of Leslie’s assets then they would go to some second cousin she doesn’t really know. Leslie did not want this to happen. Instead, Leslie created a Revocable Living Trust stating that 50% of her estate would be split equally between a list of charities she supported and the other 50% would go to Oliver. She felt that this was fair since she had a relationship with Oliver and didn’t know her second cousins at all.

Are you grappling with the “fair vs. equal” discussion? Contact us. With more than 1,400 families served, we can share numerous ideas on how to address “fair vs. equal”.