First, you need to make a will and appoint guardians to raise your children in case of your death.   Be sure to name contingent guardians as well, in case your primary guardians are unable or unwilling to serve when the time comes.  This avoids family fights, especially if more than one person steps forward to care for the children.  And it avoids your children being placed into foster care if no one steps forward to care for them.

Second, make provisions for trust shares for your children in your revocable living trust.  Appoint primary and contingent trustees of your children’s trusts.

These trust shares can be designed to:

• Avoid court interference since minors can’t inherit or own property.
• Avoid seizure by creditors and divorcing spouses.
• Avoid predators by saying, “It’s all tied up in trust.”
• Avoid disqualification of special needs beneficiaries from governmental assistance.
• Avoid assets going directly to drug, alcohol, or gambling addicted beneficiaries.
• Avoid having assets go outright to children at age 18.
• Have children serve as co-trustees as they get older.

Third, execute a first responder authorization so that trusted friends and neighbors are authorized to stay with your children in the event of emergency.  This prevents your children being placed into foster care.

Fourth, execute a stand-by guardianship authorization, appointing the same guardians you named in your will, as guardians during your lifetime in the event you become incapacitated.  Your will isn’t effective unless you’re dead.

Fifth, write your children a love note, designate a special personal item for each of them, and make sure you are in photographs with them.  Tell them you love them.

To protect your young children with estate planning, consult with a qualified estate planning attorney.

As long as you remain of sound mind, you can make changes to your will at any time. However, major life events that affect your family or beneficiaries typically require you to at least review your will, if not change it entirely. For example, if you created a will while you were single, you should typically change the terms of your will if you get married. Similarly, if you are married and subsequently become divorced or get remarried, it’s often best to review your will and change it to reflect your new marital situation.

In addition to a change in marital status, having a child or adopting a child should also prompt you to revise your will. In general, you are under no obligation to leave anything to your children, but if you create a will before you have a child and do not subsequently revise it, this may lead to problems in the probate process.

Other situations that may prompt you to review your will include a significant change in the amount of assets you own, the death of a potential heir or beneficiary, the death or incapacitation of the person whom you intended as a guardian or executor, or if more than five years have passed since you last reviewed the document.

Here are some asset protection points to consider.  Be sure to consult with a qualified estate planning attorney regarding your individual situation.

• If you give your daughter her inheritance outright, it can be taken by creditors and her divorcing spouse.

• If you give your daughter her inheritance in an individual trust share, with protective language, it CANNOT be taken by creditors and a divorcing spouse.

• Talk with your daughter and explain that it is imperative that she keep her inheritance in the trust.  If she pulls assets out of the trust and commingles them with marital assets, they become marital assets and can be taken by her husband.  For example, if your daughter wants to open an investment account or buy a house, she should do so in the name of her trust, not in her individual name.

• Either name an independent trustee (bank, trust company, or professional advisor) as the trustee of your daughter’s trust or name your daughter as a co-trustee with another trustee.  For flexibility, you can allow your daughter to choose the co-trustee.

• If you’re interested in passing assets to your daughter while you’re still alive, you can do so.  Just do it in a trust, to provide asset protection.

Make a list of your estate planning questions and consult a qualified estate planning attorney.  Be sure to chat about asset protection to protect your child’s inheritance as it is important for everyone.

For example, look at the difference between Jan receiving her inheritance outright or in a trust with protection provisions:

An Outright Inheritance Can be Seized by Creditors

Rodger provided a $400,000 gift to his daughter, Jan, in his will.  When Rodger died, Jan received $400,000 in an investment account, outright. 

Jan, while chatting on her cell phone, ran a stop sign and caused a car accident.  The family in the minivan she hit was seriously injured and a child was killed.  Jan was sued.

Jan’s insurance only covered some of the damages.   Her own assets, including her $400,000 inheritance, were seized and she lost everything.

An Inheritance in a Protected Trust Share Can NOT be Seized by Creditors

Same scenario as above, but this time Rodger used trust-based planning.  He provided the $400,000 gift to Jan in an individual trust share, with asset protection provisions.

Jan’s own assets can be taken in the car accident lawsuit; however, the assets in the protected trust share cannot be seized.

When the lawsuit is over, Jan still has her $400,000 inheritance. 

Jan Must Not Serve as the Only Trustee of Her Trust Share

For a clear level of asset protection, Jan must not serve as the sole trustee of her trust share.  An independent trustee such as a bank or trust company can serve as the trustee; but as an alternative Jan can serve with the Co-Trustee of her choice such as a trusted CPA or attorney.

It is in your beneficiaries’ best interest for you to include protective provisions in your trust.  Consult with a qualified estate planning attorney.

First, we’ll clarify that it’s your estate that owes any applicable taxes at your death.  Your beneficiaries don’t pay the taxes; an inheritance doesn’t trigger income taxes (unless the inheritance is a retirement account and assets are distributed out of the account.)  All death related taxes will be paid before your beneficiaries receive their inheritances.

Second, the term, “death taxes,” usually refers to the federal estate tax, so we’ll talk about that.  There are other transfer taxes that may be triggered at your death, depending upon the size of your estate, your estate plan, federal law and your state law.

Third, federal estate taxes are a voluntary tax.  They are voluntary in the sense that you only pay them if you don’t plan.  There is much you can do to eliminate federal estate taxes.  Ifyou have other goals that conflict with saving taxes, the federal estate tax can still be minimized.

Fourth, every individual is entitled, under federal law, to pass a certain amount of assets without paying any federal estate tax.  In 2011 and 2012, the exemption is quite high; it’s $5 million.  You can give away up to $5 million during your lifetime or at your death without paying any federal estate taxes.  However, the exemption is set to return to $1 million in 2013 and many estates will be subject to the tax if they don’t have a comprehensive estate plan.

Fifth, there are many ways that your estate planning attorney can help you avoid the federal estate tax.  Married couples can use an AB tax minimizing plan in their trusts.  There is also life insurance, grantor annuity, personal residence and charitable trusts that are used to eliminate or minimize the federal estate tax.

It’s up to you whether your estate pays death taxes or not.  Consult with a qualified estate planning attorney.

URBAN LEGEND 3.  Revocable Living Trusts are Just for the Wealthy

TRUTH 1.  Most people and their families would benefit from having a living trust.  Your asset base (i.e. wealth or lack of it) is considered, but is not a deciding factor.  Living trusts are easy to use and not complicated.

Living trusts are used by people of all income levels and asset bases to stay in control, avoid court interference, plan for incapacity, avoid probate, provide for all beneficiaries and incorporate federal estate tax planning.

Trusts keep your personal life and finances private and organized.  They make life much easier on your family if you become incapacitated and when you die.

URBAN LEGEND 3.  Revocable Living Trusts Save Taxes

TRUTH 4.  Not all revocable living trusts save taxes.  If you have a federally taxable estate when you die and you’re married, your estate planning attorney will likely recommend that you include tax planning within your revocable living trust.  This is AB tax planning, though your attorney may call it by another name.

The AB tax planning keeps all of your assets from going directly to your spouse upon your death.  Instead, the assets go into a trust for the benefit of your spouse (and children) and your unified credit/federal tax exemption is used for any assets titled in the name of your trust or of which you named the trust as beneficiary.

Please refer to part one of this article, 4 Common Revocable Living Trust Urban Legends, to learn about two more revocable living trust urban legends.

URBAN LEGEND 1.  Revocable Living Trusts Protect Your Assets from the Nursing Home

TRUTH 1.  If it’s your revocable living trust, your assets are NOT protected from the nursing home or any other creditor.  You need comprehensive insurance coverage and additional estate planning to protect you from the nursing home.

However, if you pass assets from your living trust (or your own name) to trust shares for someone else such as a spouse, child or parent, the trust assets are protected from their creditors such as a nursing home, divorcing spouse, or bankruptcy creditor.

There is another kind of trust, an income only trust, which is used to protect your assets from the nursing home.  Your own living trust does NOT offer you asset protection for your own trust assets.

URBAN LEGEND 2.  Revocable Living Trusts Always Avoid Probate

TRUTH 2.  Your revocable living trust only avoids probate for those assets that are funded into the trust.  If you die with any assets in your individual name, probate is guaranteed.

Funding means that all of your assets are titled into the name of your trust except for retirement and qualified annuities.  Changing the title of these assets accelerates all of the income tax and that’s a BAD thing.

Instead, name your trust as the beneficiary of your retirement plans and qualified annuities.  Your trust should be the beneficiary of your life insurance and other annuities as well.

Please refer to part two of this article, 4 Common Revocable Living Trust Urban Legends, to learn about two more revocable living trust urban legends.

Funding in relation to retirement plan assets means that you change the designated beneficiary from an individual (such as your spouse) to the name of your revocable living trust.  You absolutely do NOT change the title of the retirement account to anything, including your trust.  Changing the title on qualified assets such as retirement plans and qualified annuities accelerates all of the income tax.  Accelerating income tax is really bad, whereas tax deferred growth, as you get within a qualified plan, is really good.

A side note:  If you are married and want to change the beneficiary of your retirement plan to your trust, and not make it be your spouse, your spouse will have to sign a waiver indicating that he or she is aware of the beneficiary change and is okay with it.  If you don’t obtain the waiver, your spouse will be deemed the beneficiary regardless of your wishes.

Once you have your retirement plan funded by changing the beneficiary designation to your trust, jot down a list of all of your other assets.  Be sure that your trust is the beneficiary of annuities and life insurance, and make sure your trust is the account owner of all your other assets.  Other assets include your house, car, bank accounts, investment accounts, and personal property such as collectibles, antiques, jewelry and other valuables.

Note that some states do not allow cars to be funded.  Some states have tenancy by the entireties home ownership, with corresponding asset protection for married couples.  Ask your estate planning attorney if you are in one of these states and for specific advice on trust funding.

If you have a retirement plan, be sure to fund it by naming your trust as the beneficiary of the account.  If you have any questions about retirement plans or trust funding, consult with a qualified estate planning attorney.

• Every adult needs an estate plan, even an 18 year old.
• If you want to control your medical and financial future, comprehensive and legally valid estate planning documents are necessary.
• If you don’t legally document your estate plan, your state law and the court will create an estate plan for you.
• Trusted helpers are personal representatives (i.e. executors), trustees, power of attorney agents, and guardians for minor children.  You need all of these trusted helpers to act on your behalf when you cannot.
• Be sure to ask permission before appointing trusted helpers and name back-up trusted helpers, as well.
• Let your trusted helpers know where you keep your estate planning documents and other important papers.  In addition, make sure that they know how to contact your estate planning attorney for guidance.
• Update your estate planning documents on a regular basis, every three to five years or upon the occurrence of a significant event such as a move to a new state, a new child, a new marriage, or a divorce.
• Consult with a qualified estate planning attorney for the design, drafting, execution and funding of your estate plan.   Do-it-yourself estate plans are typically doomed to fail.
• You absolutely need a will, health care power of attorney, HIPAA release and financial power of attorney.
• You are strongly encouraged to execute a living will, organ donation authorization and revocable living trust.
• Disclose personal family and financial information to your estate planning attorney, even if you’re not sure if it’s important or you’re ashamed of the information.  Know that your attorney needs this information to properly design your estate plan and all conversations are kept confidential.  Your attorney will not judge you or your loved ones.

If you don’t have a basic up-to-date, legally valid estate plan in place, consult with a qualified estate planning attorney.

• A living will is typically part of a comprehensive estate plan.
• It’s an advanced medical directive, meaning that you make a decision now about a potential future situation.
• A living will is informed consent.  In fact, it’s clear and convincing evidence of your intent.
• Terri Schiavo didn’t have her wishes in writing.  She did NOT have a living will.  Because her parents didn’t want life support disconnected she was kept alive, while brain dead, for 15 years.
• Your health care agent or family members cannot override your living will, even if they disagree with your decision.
• Let your loved ones know that you have a living will and where you keep it (and where you keep your other important documents).
• Consider the use of an online document storage system such as Docubank (www.docubank.com) so that your living will and other health care documents are always available.
• In addition to a living will, you also need a health care power of attorney and a HIPAA release.
• The health care power of attorney authorizes your chosen agent to make health care decisions on your behalf if you cannot give informed consent.
• The HIPAA release authorizes medical personnel to communicate with your agent.  For example, they may discuss whether you are in an irreversible coma or persistent vegetative state, making your living will effective.
• Advanced medical directives are informed consent and cannot be overridden by your agent.

If you don’t have a living will in place, consult with a qualified estate planning attorney.