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Legal Phrase of the Day: Tenancy by Entirety

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tenancy by entirety

When you create an estate plan one of the key benefits is that you’re dictating how you want your executor to distribute your assets when you pass away. An estate planning-related question I’ve gotten over the years is: “What about the house? Doesn’t my spouse just get the house straight away?” It’s true, many people do co-own real property (like a house) with their spouse. But, different types of concurrent estates (meaning co-ownership by two or more people) afford different rights to said co-owners.

So, the short answer to that commonly asked question about the house is: it depends.

house under tree

Tenancy by Entirety

One type of co-ownership is called tenancy by entirety. This type exists only between spouses, and they hold the property (like a house) as one legal entity. If one spouse passes away, the surviving spouse takes the whole–becomes the sole owner–of the property.

This means the property would pass outside of probate, making for a simpler answer to the aforementioned “what about our house?” question. So, if something different was written in the deceased spouse’s will, this tenancy by entirety situation “wins” out. The same goes for if the spouse died intestate (without a will) and there’s no messing with which of the heirs-at-law gets what.

Another benefit is that the property is usually exempt from one spouse’s individual debts and liabilities. This means that a creditor couldn’t seize the property from the innocent spouse who is not legally responsible for the other spouse’s sole debts.

However, while this “special” concurrent estate come with the benefit of right of survivorship, there are certain limitations that come with it as well.

Spouses can choose to sever, mortgage, transfer, or sell the tenancy by the entirety, but neither can do so acting alone; both have to be in agreement.

It should also be noted that divorce terminates the tenancy by entirety.

Not in Iowa

Iowa does NOT recognize tenancy by entirety, but these 26 other states do. So, if you’re sharing this info with loved ones or if you co-own property in one of those states, you’ll want to speak with an experienced estate planner about how this type of concurrent estate fits in with your estate planning goals.

Estate planning for Married Couples: Avoid Conflicts of Interest

What about other types of concurrent estates?

There’s much more that can be said on this phrase and I’d be happy to consult with you personally.

If this post wasn’t exciting enough for you and you want to learn even more about concurrent estates, you’re in luck! We’ll talk about tenancy in common and joint tenancy in the next couple posts.

Valentine’s Day For Married Couples: Give your Spouse a Worthwhile Gift

Want to make certain your assets, including big ones like land or a house, pass how and to whom you choose? Schedule a free consult at your convenience and get started on my free, no-obligation estate plan questionnaire.

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(Legal) Word of the Day: Settlor (AKA Donor or Grantor)

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Settlor (or Donor or Grantor)

The person who creates a trust is called the settlor (sometimes called the donor or grantor). It is the settlor’s intent which is of paramount importance. It is the intent of the settlor that determines whether a trust has been created.

Here’s a great read with a rundown on the basics of what a trust is:

(Legal) Word of the Day: Trust

Intent Is Everything

If a settlor transfers property to a recipient with the intent that the recipient hold the property for someone else, then a trust has indeed been created. If the settlor transfers property with the intent that the recipient use the property for her own benefit, then NO trust has been created.

BONUS WORD! Precatory Trust

What if a settlor transfers property to a recipient with just a wish that the recipient use the property for the benefit of someone else, but does not impose any legal obligation? In such a situation, no legal trust is created. Instead, this is called a precatory trust, but is not a trust at all, because the settlor placed no legal responsibilities on the recipient. A precatory trust is, again, not a trust and is not governed by the law of trusts.

Three Easy Hypotheticals

  • Let’s look at three quick examples to make this clear. Mack gives stock to Julie. Mack intends that the stock be for Julie’s own use. Mack is NOT the settlor of a trust, because no trust has been created.

Stock market sheet

  • Grace gives a vacation house to Maddie, intending that Maddie hold the house for the benefit of Zach. Grace is the settlor of a trust. If a settlor transfers property to a recipient with the intent the recipient holds the property for the benefit of someone else, then a trust is created.

vacation home on lake

  • Thomas gives a coin collection to Parker, just wishing that Parker would hold the coins for Danna. This is a mere precatory trust, not a trust at all because the settlor is not imposing any legal responsibilities on the recipient.

coin collection

Questions? Let’s Talk.

When it comes to estate planning, I’m all about breaking down the legalese barriers. This hopefully clarified the definition of settlor, but you may have questions…which is great! Contact me to discuss further the status of your estate plan and decisions regarding your trust. Reach me by email at gordon@gordonfischerlawfirm.com or phone at 515-371-6077.

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(Legal) Word* of the Day: ILIT

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GoFisch blog

Mark Twain famously said, “A classic is something everybody wants to have read, but no one wants to read.” Life insurance is a little like that. Everyone needs it, but we don’t like to talk about it much.

Life Insurance as Key Estate Planning Tool

Life insurance is an amazing estate planning tool. I cannot stress enough the importance of life insurance. I, of course, don’t sell it, so I have no economic stake here. It’s just that life insurance is generally reasonably and affordably priced, yet still so helpful with so many financial goals. Replacing a breadwinner’s earnings is one of the most commons ways it is utilized. But, it can also provide liquid assets for a small business when a key partner dies. Life insurance can also cover costs that you might forget about, like funeral costs or unpaid taxes. While there are many advantages to life insurance, and you most definitely need it, life insurance can also create estate planning issues.

Expert Interview: Life Insurance & Your Estate Plan

Three Estate Planning Issues Life Insurance May Create

The major issue created by life insurance is that of the “sudden windfall” to your beneficiary. Do you really want, say, your 19-year-old to inherit several hundred thousand dollars at once? Even oldsters with experience managing finances may find a huge influx of cash to be overwhelming.

Another issue to consider: does your beneficiary receive government benefits? If so, proceeds from your life insurance policy might make your beneficiary ineligible for further benefits. By the way, don’t think that those receiving government aid are all elderly. Quite the opposite! A vast majority of Medicaid recipients are under age 44. Regardless of age, any beneficiary on Medicaid, or similar government aid program, is at risk of losing benefits without careful estate planning.

Finally, for high-net-worth (HNW) individuals and families, there is the issue of the federal estate tax. Everything owned in your name at death is included in your estate for estate tax purposes. Yes, that includes the death benefit proceeds of your life insurance policy. Considering that many policies carry quite hefty death benefits (several hundred thousand dollars, or more, not being unusual), this is definitely something for those with HNW to carefully consider.

Back to School: Economics of Charitable Gifts of Life Insurance

In Trusts we Trust

I’ve explained trusts generally before. A quick primer: in simplest terms, a trust is a legal agreement between three parties: grantor, trustee, and beneficiary. This allows a third party (the trustee) to hold assets for a beneficiary (or beneficiaries).

There are a nearly infinite variety of trusts. One type of trust is an irrevocable life insurance trust or ILIT.

So, what IS an Irrevocable Life Insurance Trust?

Think of an ILIT as an “imaginary container,” which owns your life insurance policy for you. This provides several benefits. An ILIT removes the life insurance from your estate, i.e., lowers estate tax liability. Like other trusts, an ILIT allows you to decide how, when, and even why your named beneficiary receives life insurance proceeds.

Latest Iowa Lawyer Issue: Read GFLF’s Article on Irrevocable Life Insurance Trusts

Wait, what was that about the three parties?

The grantor is you, the purchaser of life insurance.

The trustee can be anyone you, as grantor, chooses — an individual(s) or a qualified corporate trustee (like the trust department at your bank). But, note a major difference between an ILIT and other kinds of trusts – with a large number of other trusts, you can name yourself as trustee. With an ILIT, you wouldn’t want to do so, because the IRS may then determine that life insurance really hasn’t left your estate.

Who can be a beneficiary of an ILIT?

Most often, spouses, children, and/or grandchildren are the named beneficiaries of an ILIT. But really, it can be any individual(s) you, as grantor, choose.

Your beneficiary and your life insurance proceeds

The conditions under which a beneficiary receives distributions from an ILIT is up to you. You can, for example, specify that your beneficiary receives monthly or annual distributions. You can decide the amounts. You may even dictate that your beneficiary receives distributions when s/he reaches milestones which you choose. For example, you can provide for a large(r) distribution when a beneficiary reaches a certain age, graduates from college or post-graduate program, buys a first home, marries, or has a child. Or, really, just about any other condition or event that you decide is appropriate.

You also have the option to build in flexibility, so that your trustee has the discretion to provide distributions when your beneficiary needs it for a special purpose, like pursuing higher education, starting a business, making an investment, and so on.

And, of course, if your beneficiary is receiving government benefits, an ILIT can account for that, as well.

Good gosh, is there anything an ILIT CAN’T DO?

Once again, an ILIT is irrevocable. While an ILIT provides a great deal of flexibility, there’s one action for certain you can’t take — you cannot transfer a policy owned by an ILIT into your own name. So, if you think that someday you may need to access the policy’s cash value for your own purposes, you probably shouldn’t set up an ILIT.

Options for “ending” an ILIT

Now, I suppose, there’s nothing requiring you to continue making insurance payments into your ILIT. Depending on the kind of policy you have, your policy may lapse as soon as you miss your premium payment. Or, if your policy has cash value, these funds may be used to pay premiums until all the accumulated cash is exhausted. So, that’s an option for “ending” an ILIT.

101 Assets You Could Place in a Trust

I bet you have some questions. Let’s talk!

An ILIT can provide you, your loved ones, and your estate with significant benefits. To learn more, contact me at my email, gordon@gordonfischerlawfirm.com, for a free consultation, without obligation. You can also give me a call at 515-371-6077.

*Yes, you’re right – ILIT is really not a word, but an acronym. You caught me. It’s just that Legal Word of the Day sounds more exciting than Legal Acronym of the Day. Also, congratulations to you for being the kind of person who reads footnotes.

**In 2019 an individual must have an estate of more than about $11.18 million, and a married couple an estate of more than $22.8 million, before they need to worry about federal estate taxes.

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(Legal) Word of the Day: Trust

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In my ongoing efforts to break down the legalese barriers that tend to separate lawyers from the real world, and have increased quality communication, here’s another Fun with Legal Words post. Today’s word is “trust.”

In this context, and in the simplest terms, a trust is a legal agreement between three parties: settlor, trustee, and beneficiary. Let’s look at each of these three parties, and then delve more into how a trust works.

Settlor

All trusts have a settlor, sometimes called the “donor” or “trustor.” The settlor creates the trust, and also has legal authority to transfer property to the trust. 

Three Parties to a Trust & the Doctrine of Merger

Trustee

The trustee can be any person or entity that can take title to property on behalf of a beneficiary. The trustee is responsible for managing the property according to the rules outlined in the trust document and must do so in the best interests of the beneficiary.

Beneficiary

The beneficiary is the person or entity benefiting from the trust. The beneficiary can be one person/entity or multiple parties (true also of settlor and trustee). Multiple trust beneficiaries do not have to have the same interests in the trust property. Also, trust beneficiaries do not have to even exist at the time the trust is created (such as a future grandchild, or charitable foundation that hasn’t been set up yet).

Trust Property

A trust can be either funded or unfunded. By funded, we mean that trust property has been placed “inside” the trust. This property is sometimes called the “principal” or the “corpus.” A trust is unfunded until property are transferred into your name as trustee of the trust.

Any Asset

(Legal) Word of the Day: Property

Any asset can be held by a trust. Trust property can be real estate, intangible property, business interests, and personal property. Some common examples of trust property include farms, buildings, vacation homes, money, stocks, bonds, collections, personal possessions, and vehicles.

“Imaginary Container”

We speak of putting assets “in” a trust, but assets don’t actually change location. Think of a trust as an “imaginary container.” It’s not a geographical place that protects something (such as a garage protects your car), but a form of ownership that holds it for your benefit. For instance, on your car title the owner blank would read “The John Smith Trust.” It’s common to put real estate (farms, homes, vacation condos) and entire accounts (savings, checking, credit union, and brokerage accounts) into a trust.

After the trust is funded, the trust property will still be in the same place before the trust was created—your land where it always was, your car in the garage, your money in the bank, your stamp collection in the study… The only difference is the property will have a different owner: “The Jane Jones Trust,” not Jane Jones.

imaginary container

Transfer of Ownership

Putting property in a trust transfers it from personal ownership to the trustee, who holds the property for the beneficiary. The trustee has legal title to the trust property. For most purposes, the law treats trust property as if it were now owned by the trustee and trusts have separate taxpayer identification numbers.

But, trustees are not the full owners of trust property. Trustees have a legal duty to use trust property as provided in the trust agreement and permitted by law. The beneficiaries retain what is known as equitable title: the right to benefit from trust property as specified in the trust.

Assets to Beneficiary

The settlor provides terms in a trust agreement as to how the fund’s assets are to be distributed to a beneficiary. The settlor can provide for the distribution of funds in any way that is not against the law or against public policy.

Types of Trusts Almost Limitless

The types of trusts are almost limitless. Trusts may be classified by their purpose, duration, creation method, or by the nature of the trust property.

Benefits of Trusts

The potential benefits of trusts are immense. The benefits include avoiding probate (and other costs savings), privacy, and helping with every family’s unique needs. 

Avoid Probate

A major benefit of trusts is avoiding probate. This is because, upon death, the trust dictates how trust property will pass. Avoiding probate saves your loved ones both time and money as the probate process is time-consuming, taking anywhere from several months to a year to complete. Sometimes, depending on the size of the estate, it can take even longer. Probate can also be expensive. Attorney’s fees alone can amount to two percent of the total estate, or even more in extraordinary cases. For some, two percent of their assets can be a very high number. Often, the cost of creating a trust is considerably less expensive than the cost of probate would have been.

Privacy

When a will is filed with an Iowa court upon death, the will becomes a public record. Trusts, on the other hand, remain private documents. Many folks, especially in small towns, have a strong desire to keep business affairs private.

Second Marriages and Blended Families

dad swinging children on beach

Trusts are also helpful in situations involving second marriages or blended families. When married couples have children from previous relationships, the surviving spouse has the ability to disinherit stepchildren. A trust can remedy this situation by providing lifetime benefits to the surviving spouse but, after his or her death, leaving assets to children and stepchildren.

Special Needs Trusts

Families with members who have special care needs must take a careful estate planning approach. For example, when a person receives government assistance due to a disability, a gift or inheritance might result in denial of benefits. However, assets can be left in certain types of trusts (for example, a special needs trust), to provide for supplemental needs while still allowing persons with disabilities to continue to receive benefits.

Smart Estate Planning: Special Needs Trust

Let’s Get Started

You probably still have some questions on trusts…which is why I’m here! Don’t hesitate to contact me. I offer a free one-hour consultation at which point we can discuss your personal situation, see if a trust is right for you, and set up the steps to take for success.

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