Estate and Trust Archives

Starting a Family? Plan Your Estate Now

June 18, 2019 By JAK + CO.

Christopher Kuklok — By Chris Kuklok, CPA

There’s so much to think about when you’re preparing for parenthood. For my wife and I, it was an unbelievably exciting yet incredibly daunting experience. Between planning for the birth, arranging the nursery, and figuring out how to work the car seat, we were overwhelmed! As first-time parents, we also had to think about how we were going to provide for our son in the weeks—and years—ahead.

This is where planning your estate can help.

You may think of estate planning as something people do when they’re old and gray, but the reality is, it’s something you should consider doing now. Planning your estate gives you peace of mind that your child will be provided for in the event you’re unable to do so, and in accordance with your wishes.

Here are the estate-planning activities that soon-to-be parents should complete as soon as they can.

Purchase life insurance

This was the first thing my wife and I did when we were preparing for the birth of our son. Having life insurance gives you a way to provide for your child and spouse if you were to pass away. There are two types of life insurance: term and whole life. Term life insurance is just like it sounds—it’s for a specified length of time. Purchasing a 25-year term life policy, for instance, would provide a safety net for your family until your child reached the age of 25.

Whole life is typically more expensive than term life. The upside of whole life insurance is that the policy’s cash value slowly builds over time. Should you decide to cancel the policy, you receive the cash value less any fees.

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Write your will

Having a will is critical as it establishes guardianship for your child in the event you and your spouse were to both pass away. It also gives you a way to direct how your life insurance payout should be spent and dictate to whom your assets should pass. You can find a boilerplate will template online, fill in your information, and have it notarized. It is also important to set your healthcare directive and power of attorney. If your estate is more complicated, it’s wise to hire an attorney to draft your will—or you may even want to consider setting up a trust. A trust gives you a way to pass on assets (similar to a will), but in a way that doesn’t go through probate, which can be expensive, not to mention emotionally taxing, on your family members.

Update your beneficiary designations

As a rule of thumb, you should review your beneficiary designations on your retirement accounts, including your IRA, Roth, and insurance policies, every five years or upon major life events (e.g., the birth of your child). Beneficiary designations supersede wills. For instance, if your will stated that your retirement savings should go to your spouse, but your ex-spouse was still listed as the beneficiary, the savings would go to your ex-spouse.

Open an education savings account

There’s no time like the present to begin saving for your child’s education. A good way to do this is to set up a tax-advantaged 529 savings plan. With a 529 plan, the money you put into it is taxed, but the earnings you take out is tax-free—as long as it goes toward qualified education expenses. A Roth IRA can be used to fund your child’s education, too. You can pull out your Roth contributions, not the earnings, at any time and put them toward qualified education expenses.

Ready to take your first step?

The most important thing to have in place before the birth of your child is your life insurance policy. But I don’t recommend putting off other estate-planning activities. Once your child is born, life moves at warp speed. Taking care of the rest of the details now, including your will, beneficiary designations, and education savings accounts, will give you more time to enjoy your new role as a parent. Although it will also give you more peace of mind, I can’t promise you’ll sleep more soundly at night—at least not until the teething phase is over.

Your JAK team is here to help guide you through the estate planning process. If you have questions or are unsure of where to start, give us a call today.

3 Must-Have Professionals for Your Estate Planning Team

January 25, 2019 By JAK + CO.

By Cindy McLagan, EA

Estate planning is the process of determining what will happen to your funds, assets, and general finances after your death. While it may not be the most pleasant thing to think about, JAK estate planning services helps ensure your wishes are carried out in the future.

A wise first step is to assemble a team of professionals who can help you through the estate planning process. Here are three must-have professionals for your estate planning team.

Financial advisor

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It’s likely your family may already have a relationship with a financial advisor. In the context of estate planning, your financial advisor’s role is to recommend and fund your investment, trust, and retirement accounts, as well as to assist in the proper titling of any non-retirement accounts you might own. Your financial advisor will also make sure the beneficiaries and secondary beneficiaries named on your retirement accounts are updated—a critical but often overlooked step. Often, your financial advisor can assist with life insurance, too.

A savvy financial advisor will understand not only how to manage your estate’s finances but also the importance of working closely with the following two professionals.

Estate planning attorney

Your estate planning attorney can create and prepare a will and a trust according to your wishes. In addition, this professional can draw up your durable power of attorney for your health care, verify your property titles, and make sure that assets you own in other states are properly titled. If you own a business, your estate planning attorney can create a legal document that ensures a plan for the succession of your business.

Finally, working with an estate planning attorney to create a will or trust can help your family avoid the hassle of probate court, which is a court that deals with the property and debts of the deceased. But if probate were to become necessary, your estate planning attorney can prepare and file all of the necessary court documents, relieving your executor of this often-stressful task.

Tax professional

Needless to say, the U.S. tax system is very complex, especially when it comes to estate taxes. Although the federal estate tax exemption in 2019 is $11.4 million, many states, including Minnesota, have much smaller exemptions, which could trigger the need for your family to file an estate return. The tax professionals at JAK can assist with this as well as the interpretation of and compliance with tax laws.

A qualified tax professional is able to direct you in a tax efficient manner to accomplish your goals. They also understand that estate planning is about much more than taxes and can use their experience to direct you and your family.

Tax professionals are also one of the critical professionals who will guide the personal representative or executor of an estate with closing responsibilities such as obtaining a federal ID number, setting up an estate account, tax filings and paying the final distributions to beneficiaries.

It’s never too early to build your estate planning team.

If you haven’t started the estate planning process, consider reaching out to a financial advisor, an estate planning attorney, and a tax professional as soon as possible. Although their roles may overlap in some areas, it’s in your best interest to enlist all three in order to get the most accurate and up-to-date information and advice. Working together and with you, these professionals can help to clarify and facilitate your estate planning wishes, giving you and your family peace of mind for the future.

If you have questions about estate tax planning, feel free to give us a call. Our Twin Cities based estate planning specialists are here to answer any questions you have. We also work closely with many financial advisors and estate planning attorneys and would be happy to provide a referral if needed.

Which Type of Trust is Best for You?

May 23, 2018 By JAK + CO.

By Cindy McLagan, EA

If you’re looking for a way to minimize gift and estate taxes, creating a trust could be a solution. Many types of trusts exist, and each has a specific purpose. The type you choose—as well as how it’s created—will depend on what you’re trying to accomplish. Although establishing a trust requires the services of an experienced attorney, it’s important to understand the basics of each type.

First, what is a trust?

A trust is a legal entity that holds assets for the benefit of another. You can put practically any kind of asset into a trust, including cash, stocks, bonds, insurance policies, real estate, and artwork.

When you create and fund a trust, you are known as the grantor (or sometimes the settlor or trustor). The grantor names people, known as beneficiaries, who will benefit from the trust. Beneficiaries may receive income from the trust or have access to its principal, either during your lifetime or after you die. The trustee is the person who is responsible for administering the trust, managing the assets, and distributing the income and/or principal in accordance with the terms of the trust.

Here are the three primary types of trusts:

Living (revocable) trusts

This type of trust is a legal entity that you create while you’re alive. Property and other assets that are titled in the living trust are not subject to probate and the associated costs and delays. Instead, the trustee will transfer the assets to the beneficiaries according to your instructions.

Living trusts are attractive because they are revocable. You maintain control—i.e., you can change the trust or even dissolve it for as long as you live. Living trusts are also private. Unlike a will, a living trust is not part of the public record. No one can review details of the trust documents unless you allow it.

Living trusts can also be used to help you protect and manage your assets if you become incapacitated. If you can no longer handle your own affairs, your trustee (or a successor trustee) steps in to manage your property. Your trustee has a duty to adhere to the terms of the trust, and must always act with your best interests in mind.

Despite these benefits, living trusts have some drawbacks. Assets in a living trust are not protected from creditors and lawsuits, and you are subject to taxes on income earned by the trust. In addition, you cannot avoid estate taxes using a living trust.

Irrevocable trusts

Unlike a living trust, an irrevocable trust can’t be changed or dissolved once it has been created. You generally can’t remove assets, change beneficiaries, or rewrite any of the terms of the trust. Still, an irrevocable trust is a valuable estate planning tool. (You only transfer assets into the trust that you don’t mind losing control over.)

Although you may have to pay gift taxes on the value of the property at the time of the initial transfer, all property in the trust, as well as its future appreciation, is not included in your taxable estate. Your ultimate estate tax liability may be less, which is advantageous for your beneficiaries. What’s more, property transferred to your beneficiaries through an irrevocable trust will avoid probate, and may even be protected from your creditors.

There are many different kinds of irrevocable trusts. Many have special provisions and are used for special purposes. Some irrevocable trusts hold life insurance policies or personal residences. You can even set up an irrevocable trust to generate income for you.

Testamentary trusts

Trusts can also be established by your will. These trusts, called “testamentary trusts,” don’t come into existence until your will is probated. At that point, selected assets passing through your will can “pour over” into the trust. From there, testamentary trusts work very much like other trusts. The terms of the trust document control how the assets within the trust are managed and distributed to your heirs. Since you have a say in how the trust terms are written, testamentary trusts give you a certain amount of control over how the assets are used, even after your death.

There are several types of testamentary trusts that can be created after death. There are the Marital (Spousal) and the Family trusts that can provide family member beneficiaries with income for life. Upon the death of these beneficiaries the capital remaining in the trust can be left to other family members or even distributed to a charity of your choice.

Your will can also create a trust for a minor child that will support them while they are young and then have the capital disbursed at various times as the child matures. Also along this line of trusts are Special Needs and Spendthrift trusts for family members who have challenges and limitations.

The Qualified Terminable Interest Property Trust (QTIP) is one type of a marital trust frequently used for second marriages in which income generated from the trust is given to the surviving spouse. This allows the grantor to provide for the surviving spouse during his or her lifetime while controlling how the trust’s assets are distributed after the surviving spouse dies.

Establishing a trust may not always be the answer.

There are pros and cons to setting up a trust in general. A trust can be expensive to create and maintain (trustee, legal, accounting, and filing fees) and certain types can limit the control you have over its assets. What’s more, income generated by trust assets and not distributed to beneficiaries may be taxed at a higher income tax rate than your individual tax rate. While many people set up trusts to avoid expensive probate after they die, many states are making the probate process easier. It may be wise for smaller estates to explore other methods for transferring assets and avoiding probate. The bottom line: Before you proceed with setting up any trust, be sure to discuss all pros and cons with your attorney, accountant and financial professional.

Benefits of Using a Corporate Trustee

May 23, 2018 By JAK + CO.

By Brenda K. Lowe, CPA, PFS

Naming a trustee to manage your estate can be a difficult decision. Many choose a family member, such as an adult child, a friend, or even a neighbor to assume the role. But naming a loved one as a trustee can cause complications over time. Not only is the role of trustee time-consuming but it can also be emotionally draining, especially if the beneficiaries prove contentious. And if a trustee lacks the financial knowledge and expertise needed to properly administer the estate, there may be tax consequences—or worse.

For these reasons, it’s never a bad idea to consider a corporate trustee, which could be a bank trust department or independent trust company.

Here are four benefits of using a corporate trustee:

Prevent family issues.

Appointing a corporate trustee can help to prevent familial disagreements over your estate. When the beneficiaries aren’t in agreement with the actions of the trustee—even if said actions are in accordance with the grantor’s wishes—they may hold the trustee in contempt now or years later. If the trustee is a family member or loved one, it could lead to painful conflict, even in families where conflict was rarely an issue before.

Protect your estate with the right expertise.

Trust officers have experience in performing these duties. Their expertise ranges from complex tax matters to wealth planning and preservation to even psychology. Furthermore, a corporate trustee follows a process for everything and has an investment committee that oversees all trust investments.

Ensure continuity in the administration of your trust.

Unlike individual trustees, corporate trustees never die. This is especially important if your trust is created as a “dynasty” trust that will continue for years.

Avoid placing an undue burden on a loved one.

Generally people do not realize the time and anguish serving as a trustee can bring. Often, individuals do not know what to do and when to act, and can quickly become overwhelmed. When this happens, tax deadlines may be missed or assets may be managed unwisely. Think about how time-consuming it is to keep up with your own financial affairs. Can you imagine managing someone else’s, all while keeping beneficiaries happy and adhering to your fiduciary duty?

Or, consider an abridged solution.

Sometimes it may make sense to use both an individual trustee and a corporate trustee. This “co-trustee” solution allows a loved one to be involved in the administration of the trust without being burdened by the full scope of the role’s demands.

Plan ahead to make the best decision for your estate.

Regardless of where you are in your estate planning, it’s important to understand the pros and cons of individual and corporate trustees as they relate to your situation. At JAK, we can help you weigh the benefits of each, so you can make the best decision for you and your family.

Tax Forms to be Considered When a Loved One Passes

January 17, 2018 By JAK + CO.

By Brenda K. Lowe, CPA, PFS

I am frequently asked the question “Which tax forms am I required to file following the death of a loved one?” While one might expect the answer to be succinct, it rarely is—mostly because it will depend largely on your personal situation.

Generally speaking, you will almost certainly need to file a final individual income tax return, but you may also need to file a federal and state estate tax return as well as a federal and state estate income tax return—possibly a total of three different types of returns.

Here’s what you should know about each.

INDIVIDUAL INCOME TAX RETURNS

Form 1040 – Individual Income Tax Return – Federal and State

When is this required?

Necessary if the decedent’s gross income exceeds the filing limit, or if filing with surviving spouse, or to claim a refund or refundable credit.

When is it due?
April 15^th following year of death.

What you should know about Form 1040:
This return follows the same rules as a normal individual tax return, with a few nuances. Frequently encountered differences between the two include the following:

Medical expenses paid within one year of death can be deducted on either Schedule A of the Form 1040 or on Form 706 (i.e., estate tax return)
All tax carryovers are not available to the surviving spouse, estate or heir—some are lost at death
Savings bond interest can be reported on the final 1040 or when redeemed by heirs

ESTATE TAX RETURNS

Form 706 – United States Estate (and Generation-Skipping Transfer) Tax Return

When is this required?
The gross estate at death plus taxable lifetime gifts exceeds the applicable exclusion amount. The 2018 federal exclusion is now $11,200,000.

When is it due?
Payment is due at nine months from date of death (possible to extend).

Form M706 – MN Estate Tax Return

When is this required?
The gross estate at death plus federal taxable gifts made within three years of death exceeds the applicable exclusion amount. The 2018 Minnesota exclusion is $2,400,000.

When is it due?
Payment is due at nine months from date of death (automatic extension).

What you should know about Form 706 and Form M706:
An estate tax return is needed if the gross estate (i.e., the assets held at death) of the decedent exceeds the exclusion amount. Because the Minnesota exclusion amount is lower than the federal exclusion amount, it’s possible you could be required to file for Minnesota and technically not for federal.

However, Minnesota requires a copy of the federal estate tax return be attached to the Minnesota return. This means we have to complete a federal return, even if the client is only filing for Minnesota.

Also, it may make sense to file a federal estate tax return if there is a surviving spouse. Even if the estate is under the filing limit, you must file to take advantage of the Deceased Spouse Unused Exemption (DSUE). This exemption allows for any unused exclusion amount from the deceased to be passed to the surviving spouse.

ESTATE INCOME TAX RETURNS

Form 1041 – U.S. Income Tax Return for Estates and Trusts

When is this required?
If the estate generates more than $600 in annual gross income.

When is it due?
It depends. This is often based upon a fiscal year-end, not a calendar year-end. A fiscal year-end (anything other than a calendar year-end) generally allows any income reported to the beneficiaries to be deferred to the next tax year.

Form M-2 – MN Fiduciary Income Tax Return

When is this required?
The estate generates more than $600 in annual gross income. (If filing for federal, you must also file for Minnesota.)

When is it due?
Same as federal, detailed above.

What you should know about Form 1041 and Form M-2:
The biggest confusion when filing tax forms upon the death of a loved one is often triggered by the estate income tax return. An easy way to understand “estate income” is to think of it as the income generated from the date of death up to when the asset is distributed. For example, the estate holds a portfolio holding until it is distributed to a trust or individual. The holding’s income and deductions—up to the time of distribution—are taxed on an estate income tax return.

Don’t neglect these important tax requirements
Again, these requirements will vary depending upon personal circumstances. Although it can be incredibly overwhelming to think about tax forms as you grieve a loved one, it’s an important task that should not be left on the back burner for too long. If you have questions regarding your situation, or if you are unsure of the latest requirements, please don’t hesitate to give me a call.