1

7 ESTATE PLANNING MISTAKES TO AVOID

#1 MISTAKE: Assuming Your Adult, Capable Children and Beneficiaries Do Not Need To Receive Their Inheritance In Trust .................................................................... Page 1 #2 MISTAKE: Assuming Your IRA, 401k and Other Retirement Assets Carry the Same Divorce, Creditor and Asset Protections Once They Are Inherited ......................... Page 3 #3 MISTAKE: Assuming Your Planning is Done Once Your Wills Are Signed – Importance of Structuring Beneficiary Designations to Coordinate With Your Estate Planning Documents .......................................................................................... Page 5 #4 MISTAKE: Assuming Your Old Wills Are Still In Good Working Order in the Face of a Rising Federal Estate Tax Exemption and New “Portability” Option ................ Page 6 #5 MISTAKE: Naming Multiple Individuals to Act as Executor, Trustee or Power of Attorney Without Considering the Implications ............................................... Page 8 #6 MISTAKE: Naming Family Members to Fill the Role of Trustee Without Considering the Benefits of a Corporate Fiduciary .......................................................... Page 9 #7 MISTAKE: Not Reviewing the Tax Clause Under Your Wills to Confirm the Right People are Paying Taxes on Your Estate ........................................................... … Page 11

Douglas L. Kaune, Esquire – Email: dkaune@utbf.com

Unruh, Turner, Burke & Frees – 610-933-8069

www.utbf.com – www.PaEstatePlanners.com – www.PaElderlawSolutions.com

2

BACKGROUND: TRADITIONAL TRUST PLANNING FOR CHILDREN

How were they created?

Under a last will and testament

Under a revocable living trust

How were they structured?

For the benefit of young children into early adulthood.

Intended to protect children while they were too young to make good decisions.

Family member or trust company acting as trustee.

Distributions could be made by a trustee for health, support, maintenance and education

Often required mandatory termination at age 25 or 30.

Upon termination, money and assets were likely put into the individual name of the

beneficiary or placed into joint names with spouse.

Once the child reached the appointed age and distribution was made, all divorce and asset

protection provided by the trust was lost.

SOLUTION TO MAKE SURE YOUR CHILDREN’S INHERITANCE IS PROTECTED

FROM DIVORCE, CREDITORS AND LAWSUITS

Descendants’ Separate Trusts, a.k.a. Beneficiary Controlled Trusts (“BCT”)

Purpose:

o Create long term divorce, creditor, lawsuit and asset protection for child/children

and their descendants.

o Create Generation Skipping Transfer Tax Exempt portion of the estate assets.

Follows the initial structure described for the traditional minors trust above.

However, the trust does not terminate when the trust beneficiary reaches an appointed age.

Instead, the beneficiary becomes the “Interested Trustee” of his or her own separate trust

upon attaining an appointed age.

Disinterested Trustee of Descendants’ Separate Trusts: This would be an unrelated party

over whom the trust beneficiary has no influence or control.

Interested Trustee of Descendants’ Separate Trusts: The Interested Trustee is typically

referring to someone who is both a trustee and a trust beneficiary. Each descendant of your

MISTAKE #1: You should not assume your adult, capable children

and beneficiaries do not need to receive their inheritance in

trust. There is flexible and user-friendly trust planning that can

provide an important layer of divorce, creditor and asset protection

for your beneficiaries.

3

will become the Interested Trustee of his or her separate trust upon reaching an appointed

age.

Interested Trustee Powers:

o Buy, sell and use assets within the trust without a Disinterested Co-Trustee.

o The beneficiary can do all of these things without a co-trustee.

What Do You Need The Disinterested Trustee For?

o Generally, to strengthen the divorce, creditor, lawsuit and asset protection.

o Specifically, to authorize distributions. The Disinterested Trustee provides

powerful asset protection against divorce, creditors and lawsuits.

What If There Was No Requirement For A Disinterested Trustee? The divorcing spouse

or creditor would have a much stronger argument that the trust assets should be available

because of the greater control held by the beneficiary, namely the ability to distribute assets

to themselves unilaterally.

Who Can And Can’t Act As Disinterested Trustee?

o Section 672 IRC - Unrelated party who is not subordinate to the beneficiary;

o Can’t be a spouse, related or subordinate party; and

o Need to have arms-length relationship.

Power to Remove 1 Time Per 36 Months: The trust beneficiary typically attains this power

to remove the disinterested trustee of his/her trust at an appointed age. This gives the trust

beneficiary significant power over the disinterested trustee.

Power to Replace 1 Time Per 36 Months: The trust beneficiary typically attains this power

to remove the disinterested trustee of his/her trust at an appointed age. This gives the trust

beneficiary significant power over the disinterested trustee.

Generation Skipping Nature Of The BCT: A portion or all of the BCT can be sheltered

using your Generation Skipping Transfer Tax Exemption (“GST Exemption”).

WHO INHERITS AFTER THE DEATH OF A TRUST BENEFICIARY?

Power of Appointment: The beneficiary has the power to name the remainder beneficiaries

of his/her trust. If this power is not used, then the following defaults are in place:

o To the beneficiary’s issue/per stirpes (their children) or if no children;

o To the beneficiary’s siblings.

o Most children/beneficiaries want their trust to go to their children subject to the

Descendants’ Separate Trust provisions so that the cycle of protection repeats for each

successor beneficiary.

4

AN INHERITED IRA IS NOT WHAT IT USED TO BE:

With the 2014 Supreme Court ruling that inherited IRAs are not protected in a bankruptcy

proceeding, came the understanding that a beneficiary of retirement assets cannot assume that

those assets will have the same protections provided by federal law for their personal retirement

accounts. SEE: (CLARK v. RAMEKER No. 13–299. Argued March 24, 2014—Decided June 12,

2014). Read the case: http://www.supremecourt.gov/opinions/13pdf/13-299_6k4c.pdf. Basically,

the Supreme Court said inherited IRAs were not specifically created so that they would provide

financial stability for the beneficiary. Therefore, the rationale for the protections provided to the

person who initially created the retirement account is out the window when they pass away.

There was always a risk.

Now it is just more real.

Name a trust as beneficiary.

Name separate trusts.

Special trust language to achieve maximum “Stretch” for RMD from inherited IRA.

BENEFITS OF AN IRA INHERITANCE TRUST:

1. Ensure “Stretch-out”: The IRS allows the required minimum distributions (RMDs)

of inherited IRAs to be calculated using the beneficiaries’ life expectancies. What this means is

smaller distributions and longer tax-free compounding.

2. Divorce Protection: Going through a divorce is a very stressful time and inherited

IRAs are frequently seen by divorce attorneys as an easily accessible pot of money to fund a marital

dissolution agreement. Now, with the Supreme Court ruling that the inherited IRA should not be

seen the same way as personal retirement assets, the inherited IRA will be even more vulnerable.

The IRA Inheritance Trust will protect against a beneficiary losing the inherited IRA through a

divorce.

MISTAKE #2: Your IRA, 401k and other retirement assets have almost

impenetrable asset protection while you are alive. Unfortunately, these

same assets do not carry the same protections once they are inherited by

your beneficiaries. A recent Supreme Court case has changed the way we

have to plan for the transfer of our retirement accounts to our children.

There are steps that you can take to provide the protections that your

beneficiaries want and often need for their inherited IRAs.

5

3. Protection for Minors: People are apprehensive about leaving money to minors

because they do not know how that person will grow up and do not want to fund self-destructive

habits. With the IRA Inheritance Trust you can name a trustee that ensures that the assets are there

for the minors’ benefit but will not be used to exacerbate any character flaws.

4. Lawsuit, Creditor and Bankruptcy Protection: With the Supreme Court putting a

big hole in the inherited IRA armor, expect creditors of all sorts to start to look at these accounts

as available pots from which to draw payment.

5. Protection From Losing Government Benefits. For those individuals who receive

government benefits such as Social Security Disability or Medicaid, any asset left in an inheritance

can be subject to the pay-back rules. With the IRA Inheritance Trust, you can be certain that those

monies will be used to give that beneficiary the “extras” in life and not be used to pay back Uncle

Sam.

6. Minimize Future Estate Taxes: If IRA assets are left to beneficiaries in their

individual name, they may be subject to estate taxes when they pass, as the inherited IRA is

includable in the beneficiaries’ estates. However, if the IRA is left in the IRA Inheritance Trust, it

can be structured so that it will never be estate taxable again.

7. Leave a Legacy in Your Name: Eventually we are all going to pass away. With the

IRA Inheritance Trust, a check will be coming to your beneficiaries with your name on it for their

benefit every quarter. This will be part of your legacy.

6

DIRECT BENEFICIARY DESIGNATIONS ON ACCOUNTS:

Often, people create wills and trusts and think they are done with the planning process. Wrong!

The beneficiary designation forms you submit for IRA, 401k, life insurance and annuity accounts

are like mini-wills and can either supplement or destroy a good estate plan. These forms take

precedence over the direction under your wills and trusts. You have to make them work together.

There can also be negative income tax implications resulting from poorly planned IRA/401k

beneficiary designations.

Some questions to ponder:

What if you create a will, but don’t update your beneficiary designations on life insurance

or retirement assets to match your planning?

What if you name a minor child to be a beneficiary of a life insurance policy or retirement

asset?

What if you create divorce, creditor and assets protection trusts under your will and then

name your children to be the direct beneficiaries on life insurance or retirement assets?

What happens to IRA assets for which there is no beneficiary designation?

What if you created a Supplemental Needs Trust for a disabled beneficiary and then name

them as individual beneficiaries of life insurance or retirement accounts?

Beneficiary Designation Example:

PRIMARY: Spouse (Insert Name)

CONTINGENT:

1. 50% to the Descendant's Separate Trust Under My Will (Article VI) dated 5/10/17

F.B.O. my son, John Q. Smith.

2. 50% to the Descendant's Separate Trust Under My Will (Article VI) dated 5/10/17

F.B.O. my daughter, Jane Q. Smith.

Make Sure To Follow Up!

After you submit your updated beneficiary designation forms for life insurance and retirement

accounts, make sure that you obtain written confirmation that the forms have been accepted.

Keep copies of your accepted beneficiary designation forms with your planning documents so that

your executors, trustees and beneficiaries can access this information more easily.

MISTAKE #3: Your planning is not done once you have signed your

wills and trusts. You must properly title assets and structure

beneficiary designations on your life insurance and retirement assets

to coordinate with the planning under your documents.

7

Pre-2010 Standard Federal Estate Tax Planning

Before 2010, the individual Federal Estate Tax Exemption was significantly lower than it

is today. A significant number of individuals and married couples knew their estates would be

impacted by the 40% to 55% federal estate tax. As a result, many married couples entered into

what was appropriate planning to reduce or eliminate the federal estate tax that would have to be

paid by their children. Without this planning, the estate tax exemption available to the first

decedent spouse would have been lost. Typically, the planning included the automatic creation of

a Credit Shelter/Bypass Trust for the benefit of the surviving spouse. This planning may no longer

be necessary and could have NEGATIVE implications. If you have this planning in your

documents, you might need to change it immediately.

The Law Changed In 2011

In 2011, the Federal Estate Tax Exemption was set at $5 million per person and was

indexed for inflation. Today, the Federal Estate Tax Exemption is $5.49 million per person. So,

a husband and wife can shelter nearly $11 million if they use both exemptions. A relatively recent

addition to the Federal Estate Tax law known as “Portability” now provides another option for

making use of the first decedent spouse’s Federal Estate Tax Exemption.

How To Elect Portability: Portability allows the surviving spouse the opportunity to elect

to take his or her deceased spouse’s unused exemption and tack it onto their own. In order for a

surviving spouse to properly make the election to use the deceased spouse’s unused estate tax

exemption, the surviving spouse must timely file IRS Form 706, United States Estate (and

Generation-Skipping Transfer) Tax Return. Form 706 is due on or before nine months after the

deceased spouse’s date of death; however, an automatic six-month extension can be requested by

filing an IRS Form 4768, Application for Extension of Time To File a Return and/or Pay U.S.

Estate (and Generation-Skipping Transfer) Taxes, on or before the due date for Form 706.

MISTAKE #4: Do not assume your old wills are still in good working

order. For married couples, federal estate tax planning you incorporated

under pre-2011 wills/revocable trusts could actually cause unnecessary

expense and complication upon the death of the first spouse. The estate

tax laws have changed significantly and your documents might need to

be change too. Laws change and when they do, your planning

documents should change with them.

8

Is Portability The Best Approach Now? The answer is, not always, but sometimes…. it

depends. Is that clear enough for you? Lawyers! Seriously, we evaluate the best approach on a

case-by-case basis. There are a lot of technical considerations, some of which are outlined below.

COMPONENTS OF CREDIT SHELTER/BYPASS TRUST

Future appreciation is out of the estate.

Creditor/asset/divorce protection for the surviving spouse.

A form of pre-nuptial agreement.

GST can be used to shelter assets going into the trust.

No step up in basis upon the death of the second spouse.

COMPONENTS OF PORTABILITY

No planning needed during lifetime.

Must be elected on a timely-filed Form 706 (within 9 months after date of death).

Will it be there?

GST exemption of the first decedent spouse will be lost.

Future appreciation of the assets will be included in the survivor’s estate.

No creditor/asset/divorce protection for the surviving spouse.

DISCLAIMER BYPASS TRUST SOLUTION

Asset titling – husband and wife can own assets jointly.

Avoid the surviving spouse probate nightmare.

Decide at first death if Credit Shelter Trust, Portability or a combination of both is the most

advantageous approach.

Timing Issue – 9 months from date of death to file a qualified disclaimer.

DISSOLVE OLD CREDIT SHELTER TRUSTS?

Good Planning Gone Bad. If your estate is well under the new Federal Estate Tax

Exemption, you and your beneficiaries might be better off terminating antiquated Credit

Shelter Trusts.

Get the Step-Up. By moving assets out of trust and into your name, your children will get

a step up in basis for assets that have appreciated significantly under the Credit Shelter

Trust.

9

Clients frequently want to name more than one or all of their children to act as Executors, Trustees

or Powers of Attorney. They expect that their children can come together and work cohesively

through the various responsibilities. Unfortunately, the reality does not always end up meeting

expectations.

Difficulties of Multiple Fiduciaries:

Getting everyone to coordinate their schedules to be at the same place and at the same time

can be a challenge. Even in this modern world, logistics can be a real impediment.

Delivering important documents from one to another to another for signatures can cause

unnecessary delays.

When co-fiduciaries disagree and become deadlocked, they can go to court to get the

deadlock resolved which turns out to be an expensive solution. In addition, it allows the

possibility that a judge, rather than family members, will be making decisions on the

client’s behalf. It could very well produce or deepen a rift in the family that may never

heal. Such consequences are hardly what the client imagined, let alone intended.

If you have to name co-fiduciaries, try to incorporate a non-court related solution for disputes.

Sample Solutions:

Name a 3rd party to settle disputes among co-fiduciaries.

Require the co-fiduciaries to name a co-fiduciary or independent arbitrator.

You can also require binding arbitration dispute resolution.

Benefits of Single Fiduciary:

You get to pick the single best person for the job and they can get things done more quickly

and easily. These are “jobs” and should not be filled in a way to avoid hurt feelings. It is

no fun acting as Executor, POA or Trustee, and we should not make it more difficult.

Ease of administration - There is no need for two or more people to match schedules.

You reduce risk of conflict.

Reduced expenses.

Reduced chance of delay.

MISTAKE #5: You should consider naming only one of your children

to act as Executor, Trustee and Power of Attorney. There can be

administrative nightmares resulting from too many people acting in

these important roles at one time.

10

If you have utilized trusts under your estate planning documents, you must decide who will serve

as your trustee. The trustee has a duty to comply with the terms of your trust.

Some of the trustee’s duties are:

Distributions of income and principal.

Making prudent investment decisions.

Managing real property.

Filing income tax returns.

Interacting with beneficiaries.

Exercising discretionary authority.

You might not have the perfect family member to appoint as a trustee. Not everyone is well suited

to handle the fiduciary responsibilities and requirements. Trustees must have the time, focus and

acumen to deal with the trustee responsibilities.

Why consider a corporate trustee? A corporate trustee is a highly trained professional that can

offer experience, stability, objectivity and confidentiality. Most are insured and bonded. Also,

many corporate trustees belong to a team of professionals from various disciplines that can assist

and advise the corporate trustee on issues that might arise concerning the administration of your

trust.

Experience: The trustee you select will be responsible for the financial well-being of the

trust estate. The corporate trustee will feel comfortable making investment decisions or

choosing and supervising an investment advisor. The corporate trustee will have the

experience in evaluating difficult requests for distributions. The corporate trustee will be

more capable of saying “no” if they think that is the right answer. They will provide a

buffer so that the family members will not be put in a position of having to jeopardize

family relationships when making necessary decisions. The corporate trustee is likely to

be more capable of maintaining adequate records, including accounting for the receipt and

disbursement of income and principal from the trust. This will make the filing of tax

returns more efficient. A corporate trustee will keep up to date on the changing tax laws

and trust reporting and administration requirements.

Foundation: It is important to remember that, over time, age or illness could potentially

prevent your individual trustee from performing his or her duties. Although a successor

trustee could also be named in your trust agreement, having the stability and continuity that

a corporate trustee will provide, may be a preferred option. Continuity is particularly

important if you establish trusts that could be in place for multiple generations.

MISTAKE #6: Family members are not always best suited to fill the

role of Trustee. A corporate trustee together with a family trust

protector might provide a preferred option.

11

Objectivity: Personal relationships can sometimes become strained. Even with a carefully

drafted trust that sets out your intentions, a child or friend may not be able to act with

objectivity and might find themselves in the midst of a dispute. A corporate trustee is there

to make decisions free from bias or influence from family or friends.

Confidentiality: You might value privacy and desire that the details of your trust be kept

a secret. You might not want others to find out the value or mechanics of the trust. It is

much more likely that a corporate trustee will keep your secrets and adhere to your wishes.

What About Fees?

Corporate trustees will charge fees, but so might individual trustees. You could have an individual

charging identical fees while doing an inferior job. The expectation is that the corporate trustee

fees charged will be made up through superior investment performance, tax savings, dispute

avoidance and generally managing the trust more efficiently.

Trust Protector Solution:

You can get the professionalism of a corporate trustee with family involvement and oversight.

The trust protector can be named in addition to the corporate trustee. The trust protector can

oversee the actions of the corporate trustee, receive monthly statements and interact with trust

beneficiaries to make sure they are being treated fairly.

Trust Protector Powers:

The trust protector is typically given the power to remove and replace a corporate trustee in case

the corporate trustee is being unreasonable with distributions, charging excessive fees or investing

poorly or improperly.

So, you could potentially get the best of both world through the use of a corporate trustee and trust

protector combination.

12

Most people do not realize that they can choose which beneficiaries will be responsible for

paying the PA inheritance tax and federal estate tax on their taxable estate. Many wills are

written automatically and sometimes incorrectly to say that the taxes are to be paid from the

residue/remainder of the probate estate. Therefore, you could unexpectedly lay the entire tax

burden on the shoulders of the people who are beneficiaries under the will or trust even though

they are not actually receiving all of the taxable assets.

There are several different ways you can leave assets to someone other than those listed as the

remainder beneficiaries of your estate. Here are some examples to consider:

1. You can name other beneficiaries of specific assets in the will or trust.

2. You could own joint accounts with other individuals.

3. You could name other beneficiaries on an IRA or 401K, annuity or stock/mutual fund

account.

4. You could own real estate jointly with another person.

5. You could be involved in a business with one child who inherits your share of the entity.

Depending on your particular circumstances, the PA inheritance and federal estate taxes could be

tens or hundreds of thousands or even millions of dollars. You should be careful to consider

structuring the tax clause to make the beneficiaries of specific gifts or non-probate assets

responsible for paying the tax on what they receive. If you do not make this adjustment and the

non-residuary gifts are substantial, your remainder beneficiaries could end up paying a hefty tax

bill for assets that they do not receive.

So, consider your planning and who will be inheriting your assets, wherever situated, to

determine if an adjustment of the tax clause in your will or trust is in order.

MISTAKE #7: Make sure to review the tax clause under your

wills. Learn how the tax clause works and how you might

inadvertently require the wrong people to pay the tax on your estate.