INFORMATION

 

Wills

Will (or Revocable Trust with Pour-Over Will)

 

The centerpiece of your estate plan can be built around either a Will or Revocable Living Trust (RLT). If a Will is utilized as the primary estate planning document, then the Will is submitted to Probate (i.e., Court) upon the client’s death. In Washington State, probate is very streamlined and percentage fees (of estate value) are generally not charged by attorneys and/or the personal representative (i.e., executor). Accordingly, Wills are often used as the primary estate planning document. By definition a Will is not effective until death, and if the Will contains any trusts (e.g., testamentary trusts), such trusts are not effective or funded until after death.

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In contrast, a Revocable Living Trust (RLT) is created and funded by the client(s) while they are living and if done properly, then generally a Probate can be avoided. RLTs are very popular in some states (i.e. California) because the laws are different in California where the probate process is more cumbersome and statutes allow attorneys and/or executors to charge percentage fees for their services. Note, however, that there may be very good reasons for establishing a RLT. For example, Washington State client(s) may own recreational property in another state (e.g., a condo in Palm Springs) and want to avoid probate in the other state. A common misconception is a RLT offers more Federal and/or State Estate Tax protection than a Will. That is not the case. A properly drafted Will can provide the same Estate Tax protection as a RLT (which currently does not impact anybody with estates valued at less than $2 million dollars per person. Since a RLT needs to be funded with assets, it generally will cost more than just preparation of a Will. However, many clients prefer to have an RLT despite the additional cost. For additional information-you may consult the Washington State Bar Association (WSBA.gov) to review consumer pamphlets on this and related topics.

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Will/Trust Drafting Considerations

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Following is a non-exhaustive list of drafting considerations for your Will and/or Trust:

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1. Nominate Guardian & alternate Guardian for minor children.

2. Trust for Children (typically if both parents are deceased)-nominate Trustee & alternate Trustee to manage assets for children until they attain “mature” age(s).

3. Personal Representative (i.e. Executor)-nominate initial PR and alternate PR.

4. Trust to benefit Surviving Spouse for Estate Tax Purposes (to be discussed if applicable).

5. Specific Cash Bequest(s) to other family members and/or friends? If so, $ amount of gift.

6. Charitable Bequests (to be discussed).

7. Tangible Personal Property (TPP) lists-establish TPP list if you wish to designate certain items of TPP to designated individuals.

8. Remote Disaster: Provide for distribution of the Estate if all named beneficiaries are deceased. Typically, the global universe is family, friends and/or charities.

 

TO DO STEPS:

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1. Please either email (jcmatson@johnmatsonlaw.com), use my Contact Form or call (206) 948-2697 to schedule an appointment.
2. Download either the Married or Single Estate Planning Questionnaire, or fill out the online form(s) available on request.
3. Complete the Personal portion of the Questionnaire. Note, the Personal portion of the Questionnaire will prompt you regarding naming Guardians & Trustees for minor children, Personal Representatives, Agents for your Financial & Health Care Powers of Attorney, etc.
4. In lieu of completing the Financial portion of the Questionnaire-just bring in copies of recent bank & brokerage statements, including any employment related financial information (i.e. group-term life insurance & retirement accounts).
5. Bring the Questionnaire & related documents with you to our initial appointment.

 

 

 

Health Care Directive (a/k/a “Living Will”)

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The Health Care Directive ensures that medical decisions are made according to your wishes in the event of an emergency.

 

A Health Care Directive is a statement of your intent on whether, and how, you want to be kept alive or on artificial life support if you are in either a permanent unconscious condition or a terminal condition. In Washington State, the Health Care Directive (formerly known as “Directive to Physician” and on the street often referred to as a “Living Will”) has been codified by the Legislature but it can be varied to address certain situations. The statutory definitions for the above-conditions are noted below.

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A permanent unconscious condition (is defined as an incurable and irreversible condition in which one is medically assessed within reasonable medical judgment as having no reasonable probability of recovery from an irreversible coma or a persistent vegetative state). A terminal condition (is defined as an incurable and irreversible condition caused by injury, disease, or illness, that would within reasonable medical judgment cause death within a reasonable period of time in accordance with accepted medical standards, and where the application of life-sustaining treatment would serve only to prolong the process of dying).

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Advance Mental Health Directive

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A mental health advance directive is a written document that describes what you want to happen if you become so incapacitated by mental illness that your judgment is impaired and/or you are unable to communicate effectively. It can inform others about what treatment you want or don't want, and it can identify a person to whom you have given the authority to make decisions on your behalf.

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Powers of Attorney

(Durable) Power of Attorney (Financial, Health, Digital Assets, Minor Childen, Limited POA)

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A Power of Attorney (POA) is a authorization drafted and executed by a principal that authorizes another person (the agent) the power and authority to represent or act on the principal's behalf in private affairs, business, or other legal matters. The terms under which a power of attorney takes effect can be tailored to the principal's needs or desires. In addition, the POA can be revoked at any time if that is the intent of the principal. Generally speaking, though, the power of attorney is not revocable if the principal lacks the capacity make decisions for her/himself due to trauma (injury) or medical issues such as a stroke or Alzheimer's. In such cases of incapacity, when the Principal has executed a Power of Attorney document, then she/he has appointed one or more individuals (i.e., Agents) to make decisions on her behalf.

 

There are at least five common types of POAs available to a principal, depending on the particular circumstances of the individual:

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(1) Financial (grants the Agent full control and decision making power over the Principal's finances)

(2) Healthcare (grants the Agent full decision making power regarding the Principal's healthcare decisions)

(3) Digital Assets (grants the Agent access to, and control over, all of the Principal's digital assets (e.g., phone, computer, online accounts, social media, websites, DNS servers)

(4) Minor Children (assigns a POA to another person to make decisions for minor children in the event the parent (if a single parent) or parents are incapacitated.

5) Limited POA (grants the agent limited powers from the above categories)

 

For every individual, we recommend he/she executes a separate Financial POA and a Health Care POA. The reason is that the skills and knowledge required for each role are distinct and different due to the demands of the role. In addition, a POA for Digital Assets is highly recommended to enable the Agent to access the Principal's digital assets in any and all forms from physical devices to online media and accounts. The Digital Assets POA can be separate or combined with another POA.

 

With respect to health and finances, a valid POA serves as an informal way to deal with incapacity and avoids the need for a Guardianship proceeding which can be both time-consuming and expensive. In some instances, a Guardianship proceeding is the preferred alternative because the actions taken by the Guardian are submitted to and approved by the Court. There are risks associated with the POA so the selection of appropriate POA Agents is very important.

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Financial POA: The primary criteria for a Financial POA Agent is someone you can trust. If you have any reservation regarding the proposed Agent’s character or integrity then they are not a good choice. In addition, it helps if the proposed Agent has some financial acumen and can communicate with the Principal’s advisers (i.e. attorney, accountant, financial representative, etc.). The POA can be effective immediately upon execution and continue to be effective in the event of the Principal’s subsequent disability or determination of incompetence. Alternatively, the POA can be a “springing” POA which only becomes effective upon the Principal becoming disabled or incompetent.

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Healthcare POA: The criteria for a Health Care POA is selecting someone whom you believe can discuss your medical situation with your health care professionals and exercise good judgment on your behalf. A Health Care POA typically authorizes the Agent to make health care decisions on behalf of the disabled/incompetent Principal across the full spectrum of health care decision-making, including “end of life” issues.

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Digital Assets POA: Finally, for a Digital Assets POA, the proposed agent should be someone you trust implicitly because the person will have access to all of your digital records and devices. The person should ideally be able to navigate technology. That said, a "helper" can be assigned to help the Agent. The "helper" would not have independent access to accounts, but would be permitted to view and access files and documents once obtained by the Agent.

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Minor Child POA: A power of attorney over a child is a document signed and notarized by a parent or parents giving a non-parent authority to make decisions for a minor child. The power of attorney is typically used by a parent who is unavailable for a period of time and wants to grant authority to another person over their child.

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Limited POA: A limited POA is a Power of Attorney in which the Principal expressly limits the Agent's powers to act

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Disposition of Remains

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In Washington State, a person has the right to control the disposition of his or her own remains without the predeath or postdeath consent of another person. A valid written document expressing the decedent's wishes regarding the place or method of disposition of his or her remains. A properly signed and attested form in the presence of a witness is all that is required. It must be noted that in the event that the costs of executing the decedent's wishes regarding the disposition of the decedent's remains exceeds a reasonable amount or directions have not been given by the decedent, the right to control the disposition of the remains of a deceased person vests in the executor/personal representative of the decedent, or the surviving spouse, as set out in Washington State law.

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Trusts

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There are many different types of Trusts which accomplish different estate planning purposes. The following represents a non-exhaustive list of commonly used Trusts in estate planning.

 

A Revocable Living Trust (RLT) is created and funded by the client(s) while they are living and if done properly, then generally a Probate can be avoided. RLT are very popular in some states (e.g., California) because the laws are different in California (i.e. probate process is more cumbersome and statutes allow attorneys and/or executors to charge percentage fees for their services). Note, there may be very good reasons for establishing a RLT. For example, Washington State client(s) may own recreational property in another state (e.g., a condo in Palm Springs) and want to avoid probate in the other state.

 

A common misconception is a RLT offers more Federal and/or State Estate Tax protection than a Will. That is Not the case. A properly drafted Will can provide the same Estate Tax protection as a RLT. Since a RLT needs to be funded with assets, it generally will cost more than just preparation of a Will. However, many clients prefer to have RLT despite the additional cost. A Pourover Will is prepared as a companion document with the RLT to “pour-over” any assets owned by the deceased individual which had not previously been transferred and/or titled in the name of the RLT. For additional information-you may consult the Washington State Bar Association (WSBA.gov) to review consumer pamphlets on this and related topics.

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The RLT is established while the client is living and generally the RLT can be amended or revoked at any time. Upon death, generally the RLT becomes irrevocable. In order to be effective, the RLT needs to be funded (i.e. assets transferred/conveyed to the RLT). This is a topic for discussion with the attorney.

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TO DO STEPS:

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1. Please either email (jcmatson@johnmatsonlaw.com), use my Contact Form or call 206-948-2697 to schedule an appointment.
2. Download either the Married or Single Estate Planning Questionnaire
3. Complete the Personal portion of the Questionnaire. Note, the Personal portion of the Questionnaire will prompt you regarding naming Guardians & Trustees for minor children, Personal Representatives, Agents for your Financial & Health Care Powers of Attorney, etc.
4. In lieu of completing the Financial portion of the Questionnaire-just bring in copies of recent bank & brokerage statements, including any employment related financial information (i.e. group-term life insurance & retirement accounts).
5. Bring the Questionnaire & related documents with you to our initial appointment.

 

 

Will/Trust Drafting Considerations

​

Following is a non-exhaustive list of drafting considerations for your Will and/or Trust:

​

1. Nominate Guardian & alternate Guardian for minor children.

2. Trust For Children (typically if both parents are deceased)-nominate Trustee & alternate Trustee to manage assets for children until they attain “mature” age(s).

3. Personal Representative (i.e. Executor)-nominate initial PR and alternate PR.

4. Trust to benefit Surviving Spouse for Estate Tax Purposes-to be discussed.

5. Specific Cash Bequest(s) to other family members and/or friends? If so, $ amount of gift.

6. Charitable Bequests-to be discussed.

7. Tangible Personal Property (TPP) lists-establish TPP list if you wish to designate certain items of TPP to designated individuals.

8. Remote Disaster-Provide for distribution of Estate if all named beneficiares are deceased-typically the global universe is family, friends and/or charities.

 

The following highlights several important items regarding creation of a RLT.

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Title and Registration of Assets.

In order for property to be subject to the RLT, it must be transferred to the RLT and title held in the name(s) of the trustee. Real estate is conveyed by deed and it is important that no "due-on-sale clause" in an underlying Deed of Trust is triggered upon the conveyance. Typically the attorney will prepare the Quit Claim Deed to transfer the real property into the RLT and record the Deed and related documents with the appropriate government recording office. Upon transfer of any real estate into the RLT, the client should contact their casualty insurance agent to advise that property has been titled in the name of the RLT.

Generally and depending upon the situation any non-retirement investment accounts should be titled in the name of the RLT. Other assets such as automobiles should be transferred through the Department of Licensing - Division of Motor Vehicles and clients will need the title certificate and the current registration. If you transfer motor vehicles, then your insurance company should be notified and the coverage changed to the RLT.

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Tangible personal property which does not have a formal title certificate or registration is generally transferred by a written assignment or bill of sale. The property should be listed on the assignment or the bill of sale with an adequate description. This is a

Beneficiary Designations. Some assets generally do not pass under a Will or RLT when the proceeds are paid at death and such assets are not subject to probate at the insured/participant's death. Typically such assets may include life insurance, annuities, individual retirement accounts, pension plans, profit-sharing plans, retirement plans, other deferred compensation plan benefits and the like. These assets usually have beneficiary designations. It is important these designations be reviewed and conformed to your estate plan. It may be necessary to change the designations. There are gift tax, estate tax and income tax consequences relating to the beneficiary designations and these will be discussed in more detail.

 

Other financial assets which may pass outside the terms of a Will and/or a Revocable Living Trust include:

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Joint Tenants With Right of Survivorship (JTWROS)-account-passes to the surviving joint tenant;
Payable On Death (POD)-account passes to named beneficiary on POD account
Transfer on Death (TOD)-account passes to named beneficiary on TOD account.

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Record-Keeping. Good record-keeping is essential in administering the RLT. The client should think of the RLT as a separate entity, something like a corporation, and keep separate books of account for the RLT. Records should be kept of all RLT assets, liabilities, transactions with respect to those assets and of all receipts and disbursements. If the RLT owns numerous securities, it may be more efficient to hold those securities in a brokerage account in street name and the Trustee will receive a monthly statement from the stockbroker showing the activity in the account.

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Trustees. The Trustees make decisions regarding the administration of the RLT and the RLT should provide for successor trustees.

 

Irrevocable Life Insurance Trust (ILIT).

An Irrevocable Life Insurance Trust (ILIT) can be used to own life insurance on an individual’s life. Since the life insurance policy is owned by the ILIT and the insurance proceeds are payable on death to the ILIT, generally there will be no Federal and/or State Estate Tax assessed against the life insurance death benefit. Oftentimes, the ILIT is used as a wealth replacement vehicle to offset any anticipated death taxes paid from the deceased individual’s general estate. The ILIT can be used as a planning tool, for example in a second marriage situation where one spouse wants to provide for their child(ren) from a prior marriage.

An ILIT can own a single life insurance policy (for example) with the husband as insured and the wife and children can be the ILIT beneficiaries. If the spouse is an ILIT beneficiary, then it is important to pay attention to the source of the contributions (i.e. from community property versus separate property) to the ILIT. The contributions should not be made from community funds, but instead should be payable from a separate property source.

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An ILIT can own a second-to-die life insurance policy (for example) on both husband and wife which policy only becomes payable upon the death of the second deceased individual. Sometimes this type of policy is utilized if one of the parents has health issues, the insurance can still be obtained if the other spouse is healthy.

The ILIT Trustee is responsible for making the decision whether to purchase life insurance on behalf of the ILT. The Grantor/Trustor insured should not apply for and/or purchase life insurance.

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Irrevocable Life Insurance Trust Drafting Considerations

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Following is a non-exhaustive list of drafting considerations for an ILIT:

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1. Determine Grantor/Trustor.

2. Initial Trustee and successor Trustee (Trustee should not be the insured and/or spouse).

3. Determine Beneficiaries.\

4. Trust terms-Consider how trust income and principal is to be distributed.

5. Remote Disaster-Provide for distribution of remaining Trust Estate if all named beneficiaries are deceased-typically the global universe is family, friends and/or charities.

 

Charitable Trusts

Charitable Remainder Trust

Charitable Lead Trust

Special Needs Trust

Qualifed Terminal Interest Property (QTIP)

Trust Qualified Personal Residence Trust (QPRT)

 

A QPRT permits an individual to leverage their federal gift tax exemption ($5.25 million in 2013). The concept is relevant for those individuals who anticipate future transfer tax liability.

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A QPRT is a lifetime transfer of a personal residence in exchange for continued rent-free use of the residence for the trust term. Assuming the grantor survives the trust term, the residence either passes outright to the beneficiaries of the trust or can remain in trust for their benefit. Essentially, a successful QPRT allows one to reduce the gift or estate tax cost of transferring a residence through the leveraging of the $5.25 million (2013 limit) gift tax exemption. A home can be either a primary residence or a second home (beach house, lake house, mountain house, etc.).

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A QPRT is an effective estate freeze technique and is most applicable to families with estates that would exceed the applicable exclusion ($5.25 million in 2013). It is a tax-efficient means of intra-family home transfer. During the QPRT term, the grantor can continue to utilize the residence on a rent-free basis. Because it is specifically allowed under tax regulations, there is little tax risk. If the grantor does not outlive the trust term, the then fair market value of the home is brought back into his or her estate while the earlier taxable gift is removed. Assuming the grantor survives the trust term, the grantor may be permitted to lease the residence back from the beneficiaries (presumably family members). Lease payments are another means to benefit heirs without any further gift or estate tax consequences. Essentially, a QPRT is an estate planning technique with virtually no downside estate planning risk.

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Only a principal residence or other personal residences, such as a vacation home, are eligible for QPRT tax treatment. A single individual can have no more than two QPRTs. Married couples are permitted up to three QPRTs. Other than a residence, a QPRT can have only a limited amount of cash to cover the cost of a home purchase, improvements and mortgage payments to be incurred over the next six months. Neither the grantor nor his or her spouse is permitted to repurchase the residence from the QPRT during the trust term or even thereafter.

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Finally, if the residence is sold during the trust term, the sale proceeds must be either re-invested into a new residence within two years or the QPRT will either have to terminate and distribute assets to the grantor or convert to a grantor retained annuity trust (GRAT).

The transfer of a residence to a QPRT is a taxable gift that would not qualify for the $14,000 annual gift exclusion as it is treated as a future interest transfer. The valuation of this transfer is dependent upon several factors including term of the trust, life expectancy of the grantor and an interest rate factor based upon an IRS §7520 rate for the month of the transfer. QPRTs work best in a high interest rate environment as a higher rate reduces the taxable gift portion of the transfer.

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The older the grantor and the longer the trust term, the smaller the taxable gift. However, the grantor must outlive the trust term. Accordingly, personal and family medical history of the grantor should be a focus of QPRT planning.

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While you can transfer a residence with a mortgage to a QPRT it does complicate the tax benefits significantly. QPRT regulations even allow for cash to be transferred to a QPRT to fund up to six months of mortgage payments. Where a residence subject to a mortgage is transferred to a QPRT, the grantor has made a gift of only the equity in the property and not the full market value. As subsequent principal payments are made on the mortgage, the grantor would be treated as making additional taxable gifts. There are no issues on the interest portion that should remain deductible in most cases under income tax rules. To alleviate the future gift tax consequences, it is generally best to transfer a non-mortgaged residence to a QPRT.

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A QPRT grantor is treated as the owner of the residence for the trust term. Accordingly, he or she is eligible to deduct real estate taxes and the interest portion of the mortgage. A sale of the residence during the trust term may also qualify for the home sale exclusion of gain ($250,000 if single and $500,000 if jointly-owned) if the applicable home sale ownership rules are satisfied. Because a QPRT transfer is treated as a gift, the beneficiary’s basis is generally equal to the grantor’s basis. The potential income taxes due on sale by the beneficiaries must be weighed against the potential estate tax savings.

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Because a QPRT does not impact the senior generation’s productive property holdings, it is often a favored vehicle for intra-family transfers. A QPRT is ideal for vacation or second home transfers and affords significant upside from a wealth transfer perspective with minimal downside risk.

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Pet Trust

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The State of Washington has enacted a statute which allows individuals to create a Pet Trust for the care of their pet(s) and include their pets in their estate plan. For many clients planning for their pets’ care is critically important and there are many things to consider, including provision of food, shelter, exercise, companionship, etc.. The Humane Society of the United States estimates that 4 to 5 million pets are euthanized annually, with more than a million of these as a direct result of the failure on the part of the owners to provide for their pets in the event of death or disability. Please give this topic your special attention.

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