When we think of estate planning, we often think about preparing our accounts and property to go to our loved ones in a tax-efficient way, protected from probate, disgruntled heirs, beneficiaries’ creditors, divorcing spouses, bankruptcy, and the poor spending habits of children or other beneficiaries. We rarely consider preparing for receiving an inheritance of our own.
Believe it or not, there are some essential things you must consider when you anticipate receiving an inheritance. Understanding these issues can be crucial to protect that inheritance from unnecessary taxes and outside threats like creditors, divorcing spouses, and bankruptcy.
The first way to properly prepare to receive an inheritance is to discover what you will be inheriting. Is it real estate, a 401(k), or an individual retirement account (IRA)? Perhaps it is publicly traded stock, an interest in a family business, or just simply cash from a savings account or life insurance policy.
Whatever it is, there are steps you can take today to plan to receive and manage it properly. For example, if you will receive a large IRA account from a parent, do you understand the new rules associated with inherited IRAs as implemented by the SECURE Act passed in late 2019? If not, you should educate yourself now on how to maximize the tax benefits available under the law regarding required distributions. Without an understanding of these often complicated rules, you could make an irreversible mistake and withdraw all of the IRA funds at one time, thereby substantially increasing your tax liability in the year of withdrawal. There are a variety of nuances to these rules that a tax adviser or attorney can help you understand and navigate properly.
Likewise, if you are receiving rental property as a part of your inheritance, you should consider the business of being a landlord and if you even have an interest in continuing to operate such a venture. If not, you may want to prepare to find a buyer for the property who can offer you a fair price as soon as possible. Or, at the very least, look into hiring a property management company to take over as soon as you inherit the property.
If your loved one has completed trust planning that includes establishing an irrevocable trust for you, such trusts frequently include important features that are generally referred to as powers of appointment. A power of appointment in a trust is a right, often given to the beneficiary of the trust, to gift trust property to someone else or, in some cases, to yourself. These powers are often limited to making gifts to only certain classes of people (such as the descendants of the trust makers), or they may be limited to making gifts only at death (a testamentary power of appointment) or during life (a lifetime power of appointment). Some trusts include both types of powers. These can be powerful planning tools that have been given to you through trust documents. Failure to recognize the existence of these powers can lead to unintended consequences, or at the very least, crucial missed asset protection and tax-planning opportunities.
If you know that you have been granted a power of appointment, you should attempt to obtain a copy of the relevant trust documents to carefully review and determine the nature of these powers. An experienced estate planning attorney can help you with this task. With this information, your professional advisers can properly advise you on the planning opportunities and tax consequences of the powers of appointment that may be available to you.
A common mistake made by married individuals who receive an inheritance is to commingle that inheritance with the property of both spouses. How can this be a mistake? An example may best illustrate the point:
Imagine Robin receives a cash inheritance from her deceased father of $300,000 and she and her spouse Morgan decide to use the inheritance to buy a vacation cabin in the mountains. When purchasing the property, the title company assumes that because they are a married couple, they want to take title to the property as joint tenants with rights of survivorship and the deed gets prepared and recorded accordingly. Further imagine that over the years, they furnish the property together, maintain it, and enjoy many family vacations there. One night, however, Morgan has a little too much to drink at a bar, gets behind the wheel, and causes a deadly accident that results not just in a DUI, but also in a wrongful death lawsuit. Because Morgan’s name is on the title to the property as a joint owner, Robin and Morgan discover that the family cabin is an asset that can be used to satisfy the lawsuit judgment against Morgan. As a result, they are forced to sell the cabin and use half of the proceeds to satisfy the judgment.
This unfortunate circumstance can be the result of Robin’s failure to keep her inheritance as separate property. By commingling her property with Morgan, she made it much easier for the judgment creditor in the lawsuit to reach what otherwise would have been considered Robin’s separate inheritance property.
Commingling inherited property can also lead to a similar result if Robin and Morgan ultimately divorce and the family court judge has to determine how to divide the marital property. Failing to keep the inherited property separate during marriage can often lead to that property being divided between spouses at divorce.
A fourth way for you to prepare to inherit property is by using an inheritor's trust. This is a special type of trust that can be established by the individual who will be leaving an inheritance to you. An inheritor's trust is designed to receive the inheritance that you would otherwise receive directly. It must be carefully designed and implemented to work properly, and an experienced estate planning attorney should most certainly be used in the effort. A properly drafted inheritor's trust includes the following key elements:
An inheritor's trust includes the following benefits:
An inheritor's trust can be a powerful tool to use when you anticipate receiving a large inheritance and would like to make sure that the inheritance is protected from certain tax consequences or threats from creditors.
If you would like to learn more about any of these concepts, give us a call. We would love to discuss these ideas in greater depth with you so we can help you build and protect your wealth more effectively.
During estate planning, the beneficiaries are likely to change over time. It’s common for grandchildren to be added into the plan as they come, which will require several amendments from a licensed estate planning attorney. Estate planning attorneys are often asked about trusts for grandchildren and what the best option is.
Several inheritance methods exist to accommodate grandchildren and there are many factors to consider when determining the best one for you and your family. For most grandparents, the best way to provide for their grandchildren is to leave their accounts and property to the grandchildren’s parents. In some cases, however, it makes better sense for grandparents to give property directly to their grandchildren.
If you’re wondering, “Can I open a trust account for my grandchildren?” the answer is yes. Below are examples of trusts for grandchildren and some of the basic information you need to know about them.
Regardless of your current situation, it is important to consider the possibilities and options for leaving an inheritance to your grandchildren. Failing to do so can have long-lasting consequences and, in many cases, may result in difficult legal challenges and family complications upon your passing.
Many grandparents decide that the best way to provide for their grandchildren is to leave their assets to the grandchildren’s parents. This typically ensures the financial stability of that family unit, thereby indirectly benefiting the grandchildren. From a practical perspective, the grandchildren’s parents are often in the best position to know how to use the money for the benefit of their children and can spend or invest it appropriately on their behalf.
In a majority of the U.S., default inheritance laws have been set to provide first for children and then for the grandchildren in the event of the grandparent’s death.
In rare instances, grandparents may find that it is in everyone’s best interests to leave their assets directly with the grandchildren. This may occur for a few reasons including cases where the grandparents are untrusting of their own children and are concerned that the money would not be responsibly used for the benefit of the grandchild.
One may also choose to directly leave their assets to the grandchildren if the grandchild’s parents are independently wealthy. This could result in added taxes being tacked onto the estate caused by exposing the property which may be costly.
Lastly, you must consider the possibility of grandchildren inheriting your assets through their parents by default. Although the intent of grandparents may have been to leave everything to their adult children, an inheritance may be given to grandchildren unintentionally. In the event that the adult child who originally inherited the assets prematurely passes away due to an accident or illness, the grandchild could inherit all assets. Arrangements can be made to accommodate these situations in the will or trust.
There are many types of trusts for grandchildren for you to choose from including HEET trusts, Gift trusts, and Generation Skipping trusts. Each has its advantages and disadvantages, therefore, it is important for you to discuss which option is best for you with a licensed trusts attorney.
One of the most preferred ways to leave assets to grandchildren is by naming them as a beneficiary in your will or trust. As the grantor or trustor, you are able to specify a set amount of money or a percentage of your total accounts and property to each grandchild as you see fit. This is an effective method given that all of the grandchildren receiving such gifts are physically and emotionally stable, financially prudent, and have reached adulthood.
However, if the grandchildren are minors at the time of your death, this method leaves the trustee or executor of the estate with more responsibilities to handle before the inheritance can be distributed. In this case, the gift will need to be held in a custodial account for the minor until they have reached the majority age (either 18 or 21). And in some instances, establishing a court-controlled conservatorship over the property may be required.
Regardless of either instance, once the child reaches the age of majority, you or the trustee will not be able to control how that money is used by the grandchild. This could result in the inheritance being spent very poorly by the grandchild or could possibly fall into the hands of a spouse or other person who was not intended to receive the gift.
A trust offers one of the most flexible methods for leaving an inheritance to grandchildren. Not only are you able to amend the trust as you need, but you also have the ability to set the maturity date and control how the inheritance is used. When you leave an inheritance to grandchildren via a trust, you can ensure that the money and property are used appropriately and at appropriate times.
There are a variety of ways to use trusts in your estate planning. Provisions can be added to your will or revocable living trust that give you the freedom to decide how the inheritance is distributed. For example, you can instruct the executor or trustee to hold any property that is payable to a grandchild in a separate trust share rather than making a direct distribution of the accounts or property to them. Also, you can specify in those trust terms how the money is to be used or distributed and when. Such provisions are extremely important to ensure your estate plan follows your specific instructions, regardless of unexpected events impeding on those wishes. Fortunately, a trust can protect and manage the inheritance until it can be distributed to the grandchildren at a more appropriate time.
Another way to use trusts for grandchildren is to have the grandparent create a trust that designates them the trustor and the trustee. Creating the trust during your lifetime and naming yourself as the trustee allows you to transfer some of your property into the trust for the benefit of your grandchildren to use before your passing. From a tax perspective, you can make gifts to this trust using the annual gift tax exemption (currently, $15,000 per beneficiary of the trust per year) to safeguard the gifts from transfer taxes.
If your estate is large enough to potentially be subject to the generation-skipping transfer (GST) tax, then you may consider creating a special trust that may provide additional tax benefits. A health and education exclusion trust (HEET) is one of these special types of trusts. A HEET is designed to be used for the use of paying for health and education expenses directly on behalf of the beneficiaries without being subjected to gift taxes in the future. Furthermore, the distributions to the beneficiaries will be exempt from the GST tax. This benefit is obtained by naming a charitable institution as an additional beneficiary of the trust. As long as the trustee makes regular and reasonably substantial distributions to the charitable beneficiary from the trust, the distributions to the other beneficiaries will be GST tax-exempt.
A HEET is worth considering for several reasons. First, if you would like to help your grandchildren and succeeding generations with their education and medical expenses this is the perfect option for you. And if you have used up your GST tax exemption amount through gifting or other estate planning strategies, a HEET exempts the GST tax. Lastly, a HEET gives you the opportunity to benefit a charitable organization as part of your estate planning.
When planning your estate, generation skipping transfer taxes need to be considered. GST taxes are a unique form of taxation that will undoubtedly affect your grandchildren’s inheritance if what you own is valued at more than the current estate tax exemption amount. For most people with modest accounts and property, the GST tax does not pose any significant plight. However, the GST tax is something that you should be aware of and plan around if you plan to leave any amount of money or property with your grandchildren.
Another point to consider when creating a trust specifically for your grandchildren is the GST tax that is required should you include your grandchildren’s children in the trust. You may need to take certain steps upon creation of such trusts to ensure that the trust is GST tax-exempt which a tax professional can assist with.
Though many grandparents seek to provide their grandchildren with an inheritance with good intentions, gift-giving such large sums of money may not be as appreciated by the parents. While some parents may see the gift as a blessing, others find that such large inheritances may hinder their child’s character development. By taking away the need to become financially independent, some parents worry that their children will miss out on important life lessons about sacrifice and hard work and the value of money in general.
Be sure to speak with your grandchildren’s parents beforehand about how you can best support the development of your grandchildren and provide for them in their early years. This will ensure that your gifts will be appreciated and truly beneficial.
Whether you want to specifically and intentionally include your grandchildren in your estate planning or just want to make sure they are carefully accounted for in the event that they unexpectedly inherit your property, it is critical to examine your estate plan with your attorney to make sure that your plan reflects your wishes and your family’s values. Fortunately, the experts at Anderson, Dorn, and Rader have an exemplary understanding of this type of law and are happy to help you update your estate plan.
Connect with our Reno estate planning attorneys and learn how you can open a trust for your grandchildren.
How to Responsibly Leave an Inheritance to Your Grandchildren, Ortiz Gosalia Attorneys at Law (June 8, 2021)
This year has been unprecedented from a political perspective in many ways. President Joe Biden stepped into office facing huge obstacles related to the COVID-19 pandemic, an economy battered by the pandemic, a crumbling national infrastructure in dire need of repair, an ongoing immigration crisis at our southern border, and deep political and social divisions in this country, among other challenges.
As Biden entered office, he named the following issues as his top priorities:
With these issues at the top of Biden’s priority list, it may appear that no real changes are coming down the pipeline that are directly related to the estate plans of most Americans of average means. But if recent history is any guide, although many of us hope that the estate planning landscape will remain settled and predictable, it is unlikely that we will be so lucky. Here’s what we know so far with regard to proposals coming from the White House.
While many of the issues Biden has prioritized have begun to be addressed within his first one hundred days in office, many of them are still in their infancy, with the details of how they will be implemented and funded still to be determined. The following steps have already been implemented or proposed in Biden’s plan.
These large spending bills, both passed and proposed, will need to be funded in some manner.
Some of the possibilities for funding this spending include the following changes to the tax laws
that could have a significant impact on your estate planning: 5
We are living in a time of significant uncertainty when it comes to estate planning and the economy. As a result, it is more important than ever to ensure that your estate plan is designed in a way that enables you to move quickly and take advantage of estate and tax planning opportunities that arise.
Additionally, there remain many non-tax-related reasons to keep your estate plan up-to-date
and relevant to your circumstances:
Keeping abreast of the whirlwind of changes in the law and the economy can be a tall order for anyone when it comes to maintaining your estate planning. That is why having an estate plan with appropriate provisions that allow for flexibility is so important. We are prepared to keep you apprised of the legislative changes that are headed our way and will help you stay informed so you can move quickly if changes to your planning become necessary. We always welcome a call from you to set up an appointment with our office to discuss your estate plan. Together, we can make sure you are prepared for whatever may come.
1 Jacob Pramuk, Biden Signs $1.9 Trillion COVID Relief Bill, Clearing Way for Stimulus Checks, Vaccine
Aid, CNBC (Mar. 11, 2021, 3:03 PM)
https://www.cnbc.com/2021/03/11/biden-1point9-trillion-covid-relief- package-thursday-afternoon.htmlhttps://www.cnbc.com/2021/03/11/biden-1point9-trillion-covid-relief- package-thursday-afternoon.html
3 Barbara Sprunt, Here’s What’s in the American Rescue Plan, NPR News (March 11, 2021),
4 Fact Sheet: The American Families Plan, The White House (Apr. 28, 2021),
5 Blank Rome, LLP, Estate Planning in 2021 and Beyond: The Possible Impact of Democratic Control in
Washington, JD Supra (Mar. 9, 2021)
6 See Fact Sheet: The American Families Plan, The White House 14 (Apr. 28, 2021)
In March 2004, the Senate passed Resolution 316, which officially recognized April as National Financial Literacy Month. Both Houses of Congress have passed similar resolutions since then designed to encourage financial literacy so that individuals are better prepared to manage their money, credit, and debt. Nevertheless, in the fourth quarter of 2019, U.S. household debt, which includes student debt, credit card debt, auto debt, mortgages, home equity loans, and other debts, exceeded $14 trillion for the first time ever.1 In addition, forty percent of the respondents of one recent survey indicated that it would be very difficult for them to meet their current financial obligations if their next paycheck were delayed for one week, and another thirty-four percent said it would be somewhat difficult.2 The COVID-19 pandemic has, unfortunately, made this potential difficulty a scary reality for many Americans.
Whether or not you are indeed struggling financially, it is important to do a realistic assessment of your financial situation and how prepared you and your family are for the future. Creating or updating your estate plan is an important part of exercising control over your finances, and ensuring that proper plans are in place can provide substantial peace of mind and security for you and your family.
Take an Inventory
One of the first steps in creating an estate plan is to take an inventory of your money and property. Regardless of whether you are wealthy or just getting by, everything that you own is part of your estate and should be listed--or at least accounted for-- in your inventory. This inventory should include the following:
As you and your estate planning attorney evaluate your inventory, there are several questions you should ask yourself.
Am I saving adequately for retirement? Clearly, the answer to this question will vary for different individuals and circumstances, but many financial advisors recommend saving ten to fifteen percent of your pre-tax income during the entire span of your entire working years. If you have not been saving adequately, consider increasing your contributions to your retirement accounts.
Are sufficient funds available to provide for my spouse and dependents if I pass away? If the answer is no, consider purchasing a life insurance policy large enough to replace your income, as well as pay off any outstanding debts, college for your children, final expenses, and other important expenses, e.g., the cost of your child’s wedding or their first car.
Do I have a lot of debt? If you have substantial debt, your family members generally will not be responsible for paying it if you pass away. However, your estate will have to pay off your creditors before your beneficiaries receive anything. Life insurance can help in this situation as well: You can either purchase life insurance sufficient to pay your debt or you can make family members or loved ones the beneficiaries of your policy (or a trust for their benefit), as the proceeds of the policy never become part of your estate but are transferred directly the beneficiaries of the policy. Similarly, retirement, investment, and brokerage accounts allow you to name one or more beneficiaries, keeping those funds outside of your estate. Real estate or accounts owned jointly will also pass directly to the surviving owner when permitted by state law.
An even better course of action, however, would be to meet with a financial planner who can help you create a budget enabling you to decrease or eliminate your debt so that your loved ones will receive all the money and property you would like them to have.
Protect Your Assets
If you transfer money and property you would like to preserve for your beneficiaries into an irrevocable trust, that is, a trust that cannot be amended, modified, or revoked (except under limited circumstances), those assets will be protected from any of your future creditors or judgments (with time limits). Because the money and property used to fund the trust is no longer yours and you have no control over it, it is not available to pay your creditors. Your family members and loved ones can be named as the beneficiaries of the trust. This strategy can be particularly helpful for individuals working in professions that are at a high risk of lawsuits, e.g., doctors, lawyers, etc.
Warning: An irrevocable trust will not protect money and property from creditors having a claim at the time the trust is created. Courts can rescind transfers to trusts if they are determined to have been made with the intention to defraud current creditors.
Consider the Needs of Your Beneficiaries
Protect their inheritance from their creditors. Even if you take all the steps necessary to ensure that your beneficiaries receive a nice nest egg when you pass away, it can disappear quickly once it is in their hands unless your estate plan is designed to avoid this possibility. Fortunately, you can create a trust with terms that will protect your beneficiaries’ inheritance against claims arising from their creditors, divorcing spouses, or lawsuits. There are a variety of different types of trusts that can protect the money and property from such claims, but the following are among the most commonly used.
Create a trust for a specific purpose(s). You can include terms in your trust authorizing the trustee to make distributions for your children or other loved ones for specific purposes so that even after you have passed away, you are still able to help the trust beneficiaries make certain important purchases or pay for special care.
Let Us Help You and Your Family Move Toward a Secure Future
Celebrate Financial Literacy Month by taking steps to get your financial house in order. Estate planning is an essential part of this process, as it is all about providing you and your family with the peace of mind that comes with knowing that even if the unexpected happens, the future is secure. Please call us today at (775) 823-9455 to set up a meeting so we can create an estate plan that meets all of your needs and goals.
1 Federal Reserve Bank of New York, “Quarterly Report on Household Debt and Credit, February 2020,” accessed March 17, 2020, https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/hhdc_2019q4.pdf
2 American Payroll Association, “Getting Paid in America Survey,” last modified September 10, 2019, https://www.nationalpayrollweek.com/wp-content/uploads/2019GettingPaidInAmericaSurveyResults.pdf
H. L. Mencken once said, "For every complex problem there is an answer that is clear, simple and wrong." In our quest for a simple solution to avoid probate, you may hear someone make a suggestion that makes some sense on the surface. But when it comes to estate planning you have to ask yourself why informed people don't take this layperson's advice.
There are those who like to think that the powers that be make things more difficult than they need to be, and perhaps there are cases when this is actually true. However, don't buy into overly simplistic assumptions regarding the transfer of assets to your loved ones after you pass away.
One idea that circulates is the notion that you can simply add someone's name to your bank accounts and tell this individual how you want your resources divided among your heirs after you pass away.
We will just assume for a minute that there is absolutely no chance that this individual that you choose will decide to do anything with the resources of which you would not approve either while you are living or after you pass away. (But of course in reality anything is possible.)
What if this perfectly trustworthy individual was to get into financial trouble or become the target of a lawsuit? As a joint account holder the funds that are in the account are the property of this person and they are subject to attachment. If that person dies before carrying out your wishes, their estate plan (or the government's plan) will determine where your assets will go.
Elder financial abuse has become a big problem in the United States today. Senior citizens are scammed out of billions of dollars annually. What if your co-account holder was to become a victim of financial abuse? You could wake up one morning and find the cupboard bare and there would little you could do about it.
Don't take chances with your financial assets. Perhaps it is time to engage the services of a licensed estate planning attorney who will assist you as you arrange for future asset transfers in a safe and effective manner.
It can be quite an exciting and challenging adventure to go into business for yourself. As we all know the majority of start-ups do not succeed in the long run so you have to defy the odds to gain traction and become successful.
Because of the demands involved in starting up a business how you will be exit the business may not be the first thing on your mind. However, once you know that you are in fact going to be in it for the long haul you should ask yourself how you or your estate will proceed when it is time to retire or after you pass away.
The way you approach this is going to vary depending on the type of business you are in. Some businesses are owner driven, such as professional practices and they are not really viable after the exit of the owner. Other businesses will continue to operate after the owner steps away. Some plan on handing the business off to the next generation. Others intend to sell the business to finance their retirement years. Partners in small businesses have yet a different set of circumstances to address.
The best way to explore your options and ultimately devise an exit strategy is to sit down with an experienced Reno NV estate planning attorney. Your lawyer will gain an understanding of your unique situation, listen as you explain your objectives, and give you the appropriate advice.