What is a Revocable Living Trust?

February 19, 2016

At its heart, a revocable living trust is an agreement. Revocable means that the agreement is able to be revoked or amended during the Grantor’s life. Living means that the agreement is made while the individual is alive, as opposed to a testamentary trust which is made through a deceased individual’s Will.

The trust agreement has at least 3 parties:

  1. The Grantor (aka Settlor, aka Trustor, aka Trust Maker): The Grantor is the person who creates the trust agreement. The Grantor is also typically the person who places assets (money, property, real estate) in the trust. In practice: When a husband and wife come in and ask for a trust, both husband and wife are typically Grantors.
  2. The Trustee: The trustee is the person who actually holds the trust property and manages it. In designing the trust agreement, the Grantor decides who the initial and successor trustees will be. The most important qualification for a trustee is… someone that you trust! In practice: In the trust described above, typically both husband and wife are initial Trustees. Then they would name a child, children, or other trusted individual as successor trustees.
  3. The Beneficiary: The beneficiary is the person, persons, or organizations that will receive the income and principal from the trust. In practice: In the trust described above, typically the surviving spouse is the first beneficiary, with the children named as beneficiaries upon the death of the surviving spouse. Distribution to the children can be tied to the child’s age, educational pursuits, or other criteria.

Creating the trust can be divided into 2 parts:

  • Part One consists of designing the trust agreement so it meets the Grantor’s goals. Some common goals include: avoiding probate, offering remarriage protection, offering creditor protection (spendthrift protection) to beneficiaries, providing for a child or grandchild’s education, making distributions at certain ages (rather than having a child receive a large lump sum at age 18, it is common to customize distributions to that children receive money periodically as they mature. For example: 1/3 at age 21, 1/3 at age 25, and 1/3 at age 30).
  • Part Two consists of ensuring that your property is transferred to your trust, a process we call funding the trust. Often you will want to transfer your real estate, vehicles, bank accounts, personal property, etc.. to your trust. Ensuring your trust is fully funded is the best way to ensure your loved ones can avoid the time and expenses of probate court.

The Missouri Bar advises clients that, “You should never sign a revocable living trust document without the advice of a Missouri attorney who practices in this field of law.” When choosing an attorney, ask them how much of their time they spend practicing estate planning. There are only a few of us in the Cape Girardeau area that practice primarily in estate planning.

What are the Requirements for a Valid Last Will & Testament in Missouri?

February 19, 2016

In Missouri, there are 5 requirements for a will to be valid:

  1. It must be in writing;
  2. It must be signed by the testator (the person making the Will) or by someone by his direction and in his presence;
  3. Testator must be over age 18;
  4. Testator must be of sound mind; and
  5. It must be witnessed or attested to by two or more competent witnesses who also sign the will in the presence of the testator,

Most Wills today are also self-proving. This means that the testator and the two witnesses appear before a notary public and state something substantially similar to:

  1. The testator signed and executed the instrument as his last Will;
  2. The testator willingly signed or willingly directed another to sign for him;
  3. The testator executed it as his free and voluntary act for the purposes therein expressed;
  4. That each of the witnesses, in the presence and hearing of the testator, signed the Will as witness; and
  5. That to the best of the knowledge of each witness, the testator was at that time eighteen or more years of age, of sound mind, and under no constraint or undue influence. (see RSMO 474.337).

Having a self-proving will simplifies and expedites the probate process.

Clients sometimes ask how they can revoke a prior Will. Missouri statute 474.400 contains the answer:

“No will in writing, except in the cases herein mentioned, nor any part thereof, shall be revoked, except by a (1) subsequent will in writing, or by (2) burning, (3) cancelling, (4) tearing or (5) obliterating the same, by the testator, or in his presence, and by his consent and direction.”

Clients often contact me asking for an appointment to make a Will. While visiting together, it becomes clear that what they are really interested in is avoiding probate. Often, much to the client’s surprise, they learn that a Will does not avoid probate. I’ll repeat that again because it is so important: a Will, by itself, does not avoid probate. To avoid probate, consider a Revocable Living Trust and Beneficiary Designations.

What’s the Best Part of Estate Planning?

February 19, 2016

From my perspective, as the attorney, the best part of estate planning is the people. Daily, I get to meet and help great people. And part of estate planning is that it isn’t only about the client – client’s plan for themselves as well as their children, grandchildren, and loved ones. Estate Planning brings out the best in people!

Most of my clients report that the best part of estate planning is the peace of mind it brings. It’s common to hear clients say that they have been meaning to do estate planning for years… and have simply procrastinated it. And estate planning is easy to procrastinate. To borrow a phrase from Stephen R. Covey, estate planning is important but not urgent. So clients can put off estate planning for months or years. Yet, when they decide to get it done, they experience relief! The peace of mind comes from ending the procrastination, from getting answers to their questions, from facing the inevitable (that one day we will all die), and from knowing that their wishes will be carried out not only for themselves but also for their children, grandchildren, and loved ones. Often these wishes include that their loved ones will be able to avoid the time, expense, and hassle of probate court. Estate planning makes that possible.

What is Tenancy by the Entirety?

February 17, 2016

Tenants by the Entirety is based on the longstanding idea that when a man and woman marry, they create a new entity, a marital unit. Thus, husband can own property, wife can own property, and the marital unit can own property as tenants by the entirety.

Tenants by the entirety is separate and distinct from tenants-in-common or joint tenants. In tenants by the entirety, husband and wife don’t own 50% but rather the marital unit owns 100% of the property. As a result, neither spouse can sell tenants by the entirety property without the consent of the other spouse.

So why hold property as tenants by the entirety? The big (actually it is huge!) advantage is asset protection. In Missouri, tenants by the entirety property cannot be subject to an individual spouse’s debts.

For example, Husband and Wife own their house worth $250,000 as tenants by the entirety property. Husband goes through a mid-life crisis and buys a top-of-the-line Mercedes, a new Harley-Davidson motorcycle, and then takes a 30-day luxury vacation across the globe. All the while, wife continues her normal, responsible life. If (perhaps when…) Husband stops making payments on his new car, motorcycle, and vacation, his creditors will come after him for payment. They will likely end up suing him and receiving a court judgment against him. That judgment will allow his creditors to go after and collect from any of Husband’s separate property. But so long as Wife hasn’t co-signed on these debts, Husband’s creditors will not be able to collect against their marital assets, namely their home, since it is owned as tenants by the entirety.

Tenants by the Entirety is a very powerful tool. Especially for individuals in professions where there is a higher risk of being sued (doctors, pharmacists, lawyers, etc.) tenants by the entirety can help protect your assets. Consider how this could help provide asset protection to a doctor when faced with a medical malpractice lawsuit.

Further, in 2011 the Missouri Legislature created what is called a “Qualified Spousal Trust” (QST). A QST is able to hold tenants by the entirety property and preserve the asset protection features of tenancy by the entirety. This is especially important for clients who may have older estate plans, to consider updating their estate plan to take advantage of the new law.

How do I create an LLC in Missouri?

February 16, 2016

Missouri has made it easy and inexpensive to set-up a Limited Liability Company (LLC). The Missouri Secretary of State’s website (www.sos.mo.gov) has a system called the “Missouri Online Business Filing System” where one can file an LLC’s Articles of Organization in less than 10 minutes.

An LLC’s Articles of Organization creates the LLC. The Articles of Organization contain the following information:

  • Name of the LLC: The name must be unique to other LLCs in Missouri and must include “Limited Liability Company,” “Limited Company,” “LC,” “L.C.,” “L.L.C.,” or “LLC” in the name.
  • The purpose for which the limited liability company is organized: Often we use a general purpose such as: “The transaction of any lawful business for which a limited liability company may be organized under the Missouri Limited Liability Company Act, Chapter 347 RSMo.”
  • The name and address of the LLC’s registered agent
  • Whether the LLC will be managed by managers or members: This is an important choice. Often clients select an option without realizing the full importance of this decision and as a result, their Articles of Organization later have to be amended.
  • The duration of the LLC: Most of the time we select “perpetual.”
  • Information on the individual organizing the LLC
  • Whether or not it is a Series LLC: I will do a blog post on Series LLCs at a later date. From a legal perspective they are new, only created in 2013. They have the potential to be beneficial to individuals who own multiple rental properties. However, as they are so new, there is not yet much case law governing their existence or operation.

The filing fee when filing the Articles of Organization online is a very reasonable $50.00 plus a convenience fee for use of a credit card.

Once you have filed the Articles of Organization, your LLC is officially legally created. Yet, you will likely need to still do a little work before beginning business operations. For example, to open an LLC bank account, most banks will require your LLC to have an EIN and an Operating Agreement.

An EIN is an Employer Identification Number. It is issued by the IRS. You can apply for and receive an EIN online through the IRS website (https://sa.www4.irs.gov/modiein/individual/index.jsp). There is no fee for applying for an EIN. However, clients will often have questions about how to answer questions on the EIN application that they should direct to their attorney or accountant.

The next document is the LLC’s Operating Agreement. The Operating Agreement is extremely important yet is often put together haphazardly by those looking to do-it-yourself. Doing so can be penny wise and pound foolish. Consider a few of the important topics your Operating Agreement controls:

  • the structure of your LLC
  • its ownership and the allocation of profits and losses
  • the members’ rights and responsibilities
  • who manages the LLC and how decisions are made
  • the transfer of ownership through buyout or buy-sell provisions

It is important to make sure this gets done right!

Our firm routinely helps clients set up LLCs. We are happy to file all the paperwork for you or limit our representation to drafting the Operating Agreement. When it comes to starting a new business, we’re happy to help.

Special Needs Trusts in Missouri

February 14, 2016

Here are answers to a few of the commonly asked questions regarding Special Needs Trusts (SNT) in Missouri.

What is a Special Needs Trust?

A special needs trust is a trust designed for beneficiaries who are disabled, either physically or mentally. It is written so the beneficiary can enjoy the use of property that is held in the trust for his or her benefit, while at the same time allowing the beneficiary to receive essential needs-based government benefits.

Most Special Needs Trust beneficiaries are eligible or actively seek eligibility for Supplemental Security Income (SSI) and Medicaid (in Missouri, Medicaid is called Mo HealthNet) which are each needs-based programs. Needs based programs require the beneficiary have limited “available resources” (income and assets).

Without a Special Needs Trust, a gift to a disabled loved one will likely be considered an “available resource” thereby making the loved one ineligible for the government benefit until after all of the beneficiary’s available resources has been spent down to a minimal amount such as $1,000.

How does a Special Needs Trust help?

A special needs trust allows a trustee (a trusted individual or organization, someone other than the beneficiary) to control and manage the trust property on your loved one’s behalf. Because your loved one has no control over the money, SSI and Mo HealthNet administrators do not consider the trust funds as “available resources.” A parent could set aside millions of dollars in a special needs trust for a child and still have the child qualify for SSI and Mo Healthnet. In most cases, the amounts are much more modest.

Most special needs trusts are designed for Supplemental Care. This means the SNT exists to supplement available government benefits, not to replace them.

What can a Special Needs Trust pay for?

A lot. Here is a partial list of what the funds in a Special Needs Trust can be used for:

  • Appropriate recreational activities, hobbies and vacations
  • Educational and training opportunities
  • Hire personal assistants to help the beneficiary with activities of daily livings (ADLs)
  • Purchase a vehicle for the beneficiary, often a customized or handicap-accessible van
  • Pay for additions or renovations to the beneficiary’s residence so that it is safe and accessible
  • Professional services for the beneficiary including attorneys and accountants
  • Purchase and care of a service animal for the beneficiary

2 Main Types of Special Needs Trusts

There are 2 main types of Special Needs Trusts: (1) self-settled, and (2) third-party. Third-party Special Needs Trusts are by far the more common.

A Self-Settled Special Needs Trust is funded with the beneficiary’s own assets. Federal law imposes special requirements on these trusts including that it must have a reimbursement / payback provision for Medicaid.

A Third-Party Special Needs Trust is one that is funded with assets not belonging to the beneficiary. It is common for parents to set these up for a child or grandparents for a grandchild. It does not have the reimbursement / payback requirement that a self-settled special needs trust does. The result is that all of the property remaining in a third-party special needs trust at the death of the disabled beneficiary may be distributed as the trust agreement directs.

If A Loved One is Disabled, Ask How a SNT Can Help

Helping preserve assets for the care of disabled child or grandchild is rewarding work. If you have questions about how a Special Needs Trust can benefit you or a loved one who lives in Missouri, please ask. Asking the question and learning about your options to care for a loved one can make a world of difference in the options available to them and how your funds are spent.

Death of Supreme Court Justice Antonin Scalia (1936-2016)

February 14, 2016

Antonin_Scalia_2010 - small

Hearing the news that Justice Antonin Scalia died came as a surprise. It made me think of the impact he had – on the nation as a whole and on me. As a young law school student, I was presented with several methods of interpreting the US Constitution. Scalia’s way of explaining his method was persuasive to me.  I liked that the method he advocated wasn’t driven by what is popular or by current fads or trends. He would say it is the only method that can withstand the test of time. He was a textualist. I think it is worth letting him explain in his own words what that means:

I am first of all a textualist, and secondly an originalist. If you are a textualist, you don’t care about the intent, and I don’t care if the Framers of the U.S. Constitution had some secret meaning in mind when they adopted its words. I take the words as they were promulgated to the people of the United States, and what is the fairly understood meaning of those words. [Source: Antonin Scalia, Judicial Adherence to the Text of our Basic Law: A Theory of Constitutional Interpretation, 1996].

In 2015, he explained the danger of abandoning the text. Judges may have have good intent in abandoning the text – they may be doing what they feel is right. Yet, the result of abandoning the text is that it leaves judges free to legislate from the bench.  The effect of which is robbing citizens of the right to govern themselves, via legislatures, rather than being governed by unelected judges.

“Today’s decree says that my Ruler, and the Ruler of 320 million Americans coast-to-coast, is a majority of the nine lawyers on the Supreme Court. The opinion in these cases is the furthest extension in fact— and the furthest extension one can even imagine—of the Court’s claimed power to create ‘liberties’ that the Constitution and its Amendments neglect to mention. This practice of constitutional revision by an unelected committee of nine, always accompanied (as it is today) by extravagant praise of liberty, robs the People of the most important liberty they asserted in the Declaration of Independence and won in the Revolution of 1776: the freedom to govern themselves.” [Obergefell v. Hodges, 2015]

Scalia: you will be missed.

How Much Will I Owe in Estate Tax?

February 14, 2016

One common question clients have is, “How much Estate Tax will I owe?” For most clients, the answer is “None.”

As of 2016, the United States Estate Tax Exemption is $5.45 million ($5,450,000) per person. There is portability of the exemption between married couples so married couples effectively have an exemption of $10.90 million. That means an individual passing away in 2016 can pass $5.45 million (and a couple $10.90 million) without having to pay a cent in estate taxes.

So how many Americans end up paying estate tax each year? According to the Joint Committee on Taxation’s 2015 report to Congress, during “2013, the most recent year for which final numbers are available, there were 2.6 million deaths in the United States, and 4,700 estate tax returns reporting some tax liability were filed. Thus, taxable estate tax returns represented approximately one-fifth of one percent of deaths.” [Source: https://www.jct.gov/publications.html?func=startdown&id=4744] That’s another way of saying 99.8% of Americans who passed away in 2013 did not owe any estate tax.

That’s a big difference than in the past. Consider that in 1997, the Estate Tax Exemption was $600,000. It’s been less than 20 years since then and the Estate Tax Exemption has fluctuated wildly, as the chart below shows, from $1,000,000 in 2003 to unlimited in 2010.

Year Estate Tax Exemption
1987-1997 $600,000
1998 $625,000
1999 $650,000
2000-2001 $675,000
2002 $1,000,000
2003 $1,000,000
2004 $1,500,000
2006-2008 $2,000,000
2009 $3,500,000
2010 None
2011 $5,000,000
2012 $5,120,000
2013 $5,250,000
2014 $5,340,000
2015 $5,430,000
2016 $5,450,000

Estate planning attorneys and clients wish there were more certainty regarding the future taxation of estates and gifts. However, little in this area is certain. Currently there are proposals in Congress ranging from repealing the estate tax completely to repealing any estate tax exemption. There is considerable discussion regarding reducing the exemption to $3,500,000 or $2,500,000. It is unlikely that any legislation regarding the estate tax passes this year. Depending on the outcome of this November’s election, tax code reform may get serious consideration in 2017.

With the uncertainty regarding the future of the estate tax, it is important to review your estate plan periodically to ensure that your estate plan is consistent with current tax rates.

Probate Fees in Missouri

February 12, 2016

When one’s estate passes through probate in Missouri, there are a number of fees that the estate will face. There can be (1) bond premiums, (2) cost of publication in a local newspaper, (3) court costs, and the largest expense (4) attorney fees.

By statute, Missouri law establishes a minimum fee schedule for estates passes through probate. The fees are a percent of the money and personal property in the estate. It can also include any real estate sold during probate.

The minimum attorney fees in Missouri probate are as follows:

Size of Estate Fee
Less than $5,000 5%
$5,001 – $25,000 $250 + 4% of amount over $5,000
$25,000 – $100,000 $1,050 + 3 of estate over $25,000
$100,001 – $400,000 $3,300 + 2 ¾% of estate over $100,000
$400,000 – $1,000,000 $11,550 + 2 ½% of estate over $400,000
Over $1,000,000 $26,550 + 2% of estate over $1,000,000

 

The statute is 473.153. It can be found here: http://www.moga.mo.gov/mostatutes/stathtml/47300001531.HTML

Plus, the law allows the personal representative to take an amount equal to the attorney’s fee. The result is for an estate of $150,000, one may face $9,350 of expenses. Planning is better!

The Benefits of Beneficiary Deeds in Missouri

February 10, 2016

One of the most common instruments I prepare for clients is a Beneficiary Deed.

What exactly is a Beneficiary Deed?
A Beneficiary Deed, allows an owner of real estate to execute a deed that names a beneficiary who will own the property after the death of the owner without going through probate.

During the owner’s lifetime, the owner retains full power and control over the property. The Beneficiary Deed must be recorded before the death of the owner to have effect. The property owner can make changes to a Beneficiary Deed at any time by recording a subsequent Beneficiary deed.

For example, John owns a primary residence in Missouri. John wants his son to inherit the residence if he dies. John signs and records a Beneficiary Deed, effective upon his death, naming the son as beneficiary. When John dies, assuming he still owns the home, the son has to only record a death certificate and the property is his. During John’s lifetime, the son has no rights to the property. John may sell the property without permission of his son.

greystone
Greystone Ridge prior to development. Cape Girardeau County, Missouri.

Benefits of using Beneficiary Deed:
The primary reason for using a Beneficiary Deed is to avoid Probate after the death of the owner. Probate is a court-supervised process and hence is complex, time consuming and expensive. The Probate process usually takes 6 months and costs much more than executing a Beneficiary Deed.

A Beneficiary Deed allows the owner to retain/enjoy full ownership of the property until death.

Revision or changes to a Beneficiary Deed can be made easily through revocation or subsequent filing.

There is no consideration needed when creating a Beneficiary Deed.

Beneficiary Deeds may reduce future tax burdens by taking advantage of a “step-up” in basis.
Why choose a Beneficiary Deed instead of a Joint Deed?
Some people file a Joint Deed to add heirs to the property. Doing so has a few pitfalls. For Example, Mary owns a property that she bought for $200,000 which is now worth $400,000. Mary adds her daughter on the deed as a joint tenant. Now the daughter owns a portion of the house. Mary can’t sell the property without the daughter’s consent/signature. If Mary had owned the house in her own name and sold the house there would be no income tax. Now since she owns the house jointly with her daughter, the daughter could also be liable to State/Federal taxes. Also if the daughter has any debt/bankruptcy, lawsuits, or judgments against her, the creditor can file a lien or force the sale of the house. This can be avoided by filing a Beneficiary Deed naming the daughter as the Beneficiary. The property transfers to the daughter only upon the death of the mother.
A Beneficiary Deed does not act as a cloud on title when selling the home to a third party.

Missouri is one of a handful of states in the country where a Beneficiary Deed can be executed and it has become an easy and convenient estate planning tool for clients. A beneficiary deed is an easy and cost effective way to avoid probate. So when utilized correctly Beneficiary Deeds offer the owner of real estate one of the easiest, most beneficial ways of transferring property to a specified beneficiary outside of probate or a trust.