Qualified Personal Residence Trust: Another Way to Protect Your Real Property From Probate

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Qualified Personal Residence Trusts, or QPRT’s, are another kind of irrevocable trust used to protect your real property.  At the conclusion of a QPRT term, you gift your property to the trust beneficiaries.  Because property ownership transfers upon the end of the trust term, if you want to remain living at the property, you will execute a lease agreement between yourself and the beneficiaries.  Overall, QPRT’s are a way to save on estate taxes because your residence never formally becomes part of your estate.

Different than a life estate, in order to achieve QPRT tax exemptions, you must live past the trust term.  In other words, if you predecease the trust term, your property will be transferred back to you, entering into your estate and ultimately subject to any and all estate and gift taxes.  Although this can intimidate some, people often bypass this issue by making the trust term shorter.  However, if you die before the commencement of the trust term, taxes will be based off of the property value at the time of your death.

Because your property transfers to your beneficiaries before you die, QPRT’s are known for creating significant tax breaks.  Not only does your property avoid estate taxes, but it also “pauses” property taxes at the time of transfer.  Imagine this: November 1, 2023 is the expiration of your QPRT and your property is valued at $500,000.  On that date, your property transfers to your beneficiaries, meaning you enter into a lease agreement with said beneficiaries so that you can live in your home until you pass.  November 1, 2033, you pass, leaving your beneficiaries with property they intend to sell, with an updated property value of $1,000,000.  Due to you putting the property in a QPRT in 2023, the property taxes are based on the 2023 property value of $500,000, saving you a significant amount of money.   Despite the estate and property tax break, it is important to note that, upon transfer to the beneficiaries, the property is subject to a transfer tax.

Another nuisance in forming a QPRT is that, upon the completion of the trust term, in order to continue residing at the property, you must enter into a lease agreement with the beneficiaries of the QPRT.  Unlike a life estate, the property ownership will be transferred to the trust’s beneficiaries before you die.  This means that when the term of the trust runs, you will no longer own your property, but, as long as you wish to live there, will have to lease it from whomever is the current property owner.  This is one of the many reasons it is essential to make well thought out decisions when electing who will benefit the trust.

Although this blog highlights some of the finer points of qualified personal residence trusts, it is imperative to keep in mind that there are many other IRS-specific qualifications that must be met.  To see if a QPRT is the right fit for your estate plan, schedule a consultation with one of our attorneys at 251-621-1555.

What Happens to My Home When I Die?

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Estate planning raises complex questions like what happens to my car when I die; what happens to my money; what do I do to ensure my remains are taken care of according to my wishes?  All of these are excellent questions; however, one of the most notable is what happens to my home?  A potential solution to this question is putting your home in a life estate.

A life estate is when you own your home jointly with whomever you want your home to transfer upon your death.  A life estate allows for you to reside in your home as a life tenant until you pass, after which title transfers to the other owner (the remainderman).  

One of the remarkable things about a life estate is that you maintain complete control of your property until you die.  This means that as long as you live, the remainderman cannot force you out of your home via sale, ejectment, etc.  Basically, until you die, you maintain all ownership rights (i.e. property tax obligations, maintenance obligations, etc.).

In addition to preserving control of your property, a life estate allows you to choose to whom your property transfers.  Oftentimes, real property goes through probate, eventually resulting in being sold off.  Maybe your home has sentimental value for your family.  Maybe your home holds special memories for friends.  A life estate is a great way of preserving those memories and transferring the property to those who will keep those memories alive.

A life estate also offers potential tax breaks.  Upon your death, taxes for the reaminderman will be on a stepped up basis, meaning taxes are based on the value of the home at the time of your death, not the current property value.  If you know anything about the Baldwin and Mobile County housing market, this is a major bonus!

Although a life estate serves as a way to avoid probate and control to whom your property transfers, there are some points to consider.  A potential drawback is if prior to your death, you decide to sell your property, you must obtain the consent from the remainderman (because you jointly own the property). Among other things, this can cause controversy if the remainderman pre-deceases you, resulting in their interest transferring to their estate; you have a falling out with the remainderman; or the remainderman is part of a contentious divorce.

Despite the drawbacks, a life estate is a fantastic option for your end of life plans.  For more information or guidance on your estate planning needs, give us a call at 251-621-1555 to schedule a consultation.

Estate Planning for Young Adults

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Much of our discussions surrounding estate planning focus on the elderly community, but good estate planning is vital throughout one’s adult life. The idea is to get some foundational documents in place early on, and update those documents throughout your life, as circumstances change. 

For young adults, it’s not always the case that they are looking at leaving a massive estate fortune to their loved ones, but rather, they need to put solid plans in place to make sure their minor children are provided and cared for, in the unfortunate event where one or both parents become incapacitated or die. It’s an awfully unpleasant thing to think about happening, but the fact is that it does happen and you want the protection and care of your children to be the last thing on anyone’s mind during that time. 

The easiest way to handle this is to have a valid Will or Trust in place and make sure that there are specific articles that nominate a guardian (or guardians) who will take care of your minors should something happen to you and/or you and your spouse. Without a designated guardian, you are risking putting your children in the foster care system (even if temporarily) or being ultimately placed with relatives who may be well-meaning, but who may not be prepared or equipped to care for them long-term. 

Should a tragedy occur in your family, emotions will be running high and this often causes people to think and act with their emotional brain, rather than with their logical brain. Particularly when small children and their futures are involved, the family tension can run even higher than normal. By setting out your wishes in black and white, you have a greater chance of avoiding interfamily disputes. 

When appointing guardians, it’s critical to consider the financial implications as well. Are you going to be leaving funds with the appointed guardians? Are you going to be placing funds in trust to be managed by a third party trustee? Are you going to be relying on your appointed guardian(s) to financially care for your minors? These are all important things to consider and to discuss with your guardian nominations. 

Finally, having a solid plan in place will undoubtedly ease the emotional burden your children would face. It can cause immeasurable stress on a child if they don’t know who their primary caretaker is or if they’re caught in the crossfire of battling relatives. Having a clear and enforceable estate plan in place helps avoid these unnecessary hurdles. 

 

If you or someone you know is in need of an estate plan, contact our office for a consultation. (251) 621-1555

Why You Should Avoid Probate

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I have found that many people mistakenly believe that having a Will allows their loved ones to avoid probate court, which is simply not true. The only place for a Will to go is to the probate court and, in fact, you are legally obligated (in Alabama, at least) to submit a Will in your possession to the probate court for the proper administration of the decedent’s estate. 

So why should you avoid having your Will pass through probate in the first place? The following are some of the primary reasons why clients choose certain estate planning mechanisms that allow their loved ones to bypass estate administration through the probate court:

  1. Cost Efficiency. Although Alabama does not require that you hire a licensed probate attorney to assist with estate administration, it is a lengthy and complicated process that almost always requires the help of a seasoned attorney. This means it costs money, and the fees add up quickly. The fees often include attorney fees, filing fees, executor fees and sometimes even accounting or appraisal fees. All of this money comes out of the estate, leaving less to be distributed to the beneficiaries/heirs. 
  2. Time Efficiency. Under Alabama law, a standard estate must remain open for a minimum of six (6) months in order to allow any known/unknown creditors to come forward and make a claim against the estate. This is just the minimum time, however. If you are the petitioner or the family of the decedent, it’s important to understand that you will be at the mercy of the probate court’s calendar, your attorney’s timeframe, the amount of time it takes the executor to accomplish certain necessary tasks and more. This often means the full length of time it takes to administer even a simple estate can be twelve (12) to eighteen (18) months.
  3. Privacy. Many people don’t know that once you submit a Will to the probate court, it (and everything that follows during the administration process) becomes public record. While this may not bother some people, it certainly makes a difference to others who may not want known the value of the estate or who their beneficiaries are or how they made distributions to those beneficiaries, etc.
  4. Family Conflict. Since probate can be a long, stressful process, it can leave room for family disagreements and disputes. Beneficiaries might have hard feelings, or siblings might clash heads when it comes to their inheritances. A long probate period only gives unhappy family members time to start a fight or initiate litigation, which can further delay the process and add to the expenses

Estate Planning for Remarriage in Alabama

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According to the CDC, in 2021 a total of 689,308 divorces occurred across the 45 reporting U.S. states. During that same year, 1,985,072 marriages occurred, making the U.S. marriage rate 6 per every 1,000 people. As you can imagine, many of those individuals go on to remarry, at which time families blend, finances and assets may blend and it’s important to consider (or reconsider) one’s estate plan. 

When entering into a second (or third) marriage, often one is further along in their life and career and may have amassed significantly more wealth. Alternatively, a divorce and/or other life occurrences may have depleted an individual of a certain amount of their wealth. Additionally, children are traditionally older and may no longer be minors and long-term life goals change for remarrying individuals. 

With these things in mind, here are some tips to consider when considering or entering into remarriage:

  1. Use a trust as a beneficiary. If you have life insurance, you may want to create a trust and name that trust as the beneficiary of your life insurance proceeds. The trust will dictate how monies are distributed after your death, which allows you to maintain control over funds while also offering protection from beneficiaries’ irresponsible spending, creditors and sometimes even estate taxes. 
  2. Plan separately from your new spouse. Whether you and your new spouse are both bringing considerable wealth into the new marriage or if you and your new spouse are bringing a disproportionate amount of wealth into the new marriage, it’s wise to create separate estate plans. While planning jointly may not be problematic, it’s best to have an honest conversation with your new spouse, and ideally an estate planning attorney, to determine which route to take and why. 
  3. Consider a QTIP trust. In the scenario where one spouse has significantly more wealth than the other, a QTIP (qualified terminable interest property) trust may be an especially helpful estate planning mechanism. These enable the grantor (the person creating the trust) to provide for a surviving spouse while maintaining control over how the trust’s assets are distributed AFTER the death of the surviving spouse. 

For more information on estate planning in general or estate planning through remarriage, call our office and schedule your consultation today! (251) 621-1555

Will Contests: What You Need to Know

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When a loved one passes away (if they have a Will), his or her estate will likely go through the court-supervised probate process where the assets of the decedent are managed and distributed. The length of time needed to complete the probate process will depend on the size and complexity of the estate and the local rules and schedule of the probate court, amongst other things.  

Unfortunately, one significant setback in the administration of an estate is an objection to a will, most commonly referred to as a “will contest”. There are many reasons why loved ones file a petition to contest a will and doing so is more common than you would think. Not only will a contest slow down the process of distributing assets and handling estate affairs, but, as you can imagine, it is often incredibly costly to litigate. 

In order to actually file a will contest, an individual must have legal “standing” to raise their objections. This can occur if children are receiving a disproportionate share under the will or when distribution plans change from a prior will to the most current will. This can also occur if there is a dispute over whomever the decedent appointed to serve as the Executor or if there are concerns about the decedent’s mental capacity when they drafted their will. 

Ultimately, in order to successfully contest a will, the protesting party must prove that the will is invalid and doing so requires proof. The following are the most common, but not the only, scenarios under which a will may be deemed invalid:

  1. Undue Influence
  2. Mental/Testamentary Incapacity
  3. Will was not properly drafted and/or executed
  4. The Will was revoked prior to decedent’s death
  5. Fraud by a third party

 

For more information on the probate process and/or estate litigation, call our office to set up a consultation. (251) 621-1555

Life Estates: What You Need to Know

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The term “life estate” often comes up in discussions of estate planning and Medicaid planning,
but what exactly does it mean? A life estate is a form of joint ownership that allows one
person (or a couple) to remain in a house until his/her/their death, at which time it passes to the
successor (often a child), referred to as the “remainderman”. Life estates can be used to
avoid probate while simultaneously giving a house to children without losing the ability to live in
the home during the owner’s lifetime. The person(s) holding the life estate remains responsible
for property tax (with the benefit of homestead and age related tax exemptions) and
homeowner’s insurance. The other owner — the remainderman — has a current ownership
interest but cannot take possession until the death of the life estate holder.

The life tenant has full control of the property during his or her lifetime and has the legal
responsibility to maintain the property as well as the right to use it, rent it out, and make
improvements to it. This type of deed can play an important role in Medicaid planning since
Medicaid does not assign any value to a life estate when the parent applies for Medicaid to pay
for nursing home care.

A life estate deed can be a great tool for passing property after death.  The remainderman will
have a stepped up tax basis in the property which is the fair market value on the date of death of
the last life tenant.  An additional benefit is the fact that Medicaid will not count the life estate as
a resource if the life estate deed was executed five years prior to Medicaid application, and the
property would not be subject to Medicaid Estate Recovery since it will never be probate
property.

All of these are huge benefits to executing a life estate deed, however, there are some setbacks
that you should be aware of. If the person or couple holding the life estate decides to sell the
property they will need the children to agree on the sale because the children are now joint
owners with the parents.  The parents own use of the property NOW, and the children, as
remaindermen, own the FUTURE use of the property. With this in mind, before signing a life
estate deed it is important to make sure the remaindermen would be willing to relinquish their
interest and sign off on any sale of the property.

Alabama Small Estate Summary Distribution: An Overview

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It’s not uncommon for individuals to have pared-down the assets that comprise their estate as they get into older age. Many times, people will sell their homes and live in a rental, they may have also sold their vehicle if they no longer drive, and they also may have reduced their personal belongings significantly by making lifetime gifts of certain items to their loved ones. This ultimately leaves the individual with what may qualify in Alabama as a “small estate”. 

The Alabama Small Estates Act was passed in 1979 and amended in 2009. The Act provides a method, through a court proceeding, to distribute personal property only of a deceased person in a summary distribution manner to a surviving spouse, or appropriate distributees of the decedent, without having to go through the full probate administration process. This usually means that a small estate can be in and out of the probate court in as little as 30 days, as opposed to 6-12 months (or longer for complex estates). 

The requirements to use this process depend on what is in the estate and its value, but no real property (homes/land) can be passed by summary distribution, and the personal property has to be of limited value. Every March the permitted value to use summary distribution is published by the State Finance Director based on the Consumer Price Index. As of March 1, 2023, the value of the estate cannot exceed $34,611 (up $2,564 from the 2022 limit of $32,047).

Often, this process is used for small estates where someone leaves a bank account with no joint owner and no payable on death designation.  If the person had a will, it is included in the filing to control to whom the property will be distributed, and if he or she did not have a will, the property will pass by intestate succession.

To learn more about small estates and the probate process in Alabama, call our office for a consultation. (251) 621-1555

Who Handles My Funeral Arrangements?

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When it comes to estate planning and end-of-life planning, there can be so many questions to answer and so many decisions to make—all centered on one’s own mortality—that it can be overwhelming and, frankly, depressing at times. So, it’s no wonder that thinking about, or planning for, one’s burial or cremation often falls to the wayside. It is critically important though, and should be included in every estate plan to ensure (1) that the decedent’s last wishes are honored and (2) that the correct party is responsible for making the necessary arrangements and handling the financial responsibilities of those arrangements. 

Alabama law allows the inclusion of burial or cremation wishes in a Last Will and Testament, but from a practical standpoint, this is not the best way to ensure your last wishes are carried out. Many people keep their estate planning documents at their lawyer’s office or locked in a safety deposit box. These may take weeks to access, meanwhile, the funeral arrangements must be carried out in a timely fashion. 

What we suggest to our clients is having an affidavit prepared, permitted by law under Alabama Code Section 34-13-11, which allows an appointed individual to be the authorized agent who can control the location and manner of the disposition of remains. The form is very straightforward in that it appoints someone to be “in charge” and it notes the method in which you want your remains to be disposed of. 

While simple, it can save families the headache and grief of deciding on funeral arrangements and any potential disputes over who’s “in charge”. This can be a huge issue particularly in blended families and/or in relationships that may not be bound by a legal marriage. 

For more information on estate and end-of-life planning issues, call our firm today to speak with a licensed attorney. (251) 621-1555

The Benefits of Using a Corporate Trustee

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If you’ve chosen to utilize a trust for estate planning or asset protection purposes, you probably already know that the most important part is, arguably, choosing a trustee. While some people name themselves, a family member, or a trusted friend, others prefer to select a financial institution to fulfill this important role. 

When deciding whether or not to select one or more individuals or a corporate trustee, it’s important to think about a variety of issues involved in the administration of your trust. First, you’ll want to consider the experience that may be required of your trustee. The trustee is charged with the responsibility of managing, and often, investing trust assets. They’re also responsible for the financial well-being of current and future trust beneficiaries. 

Sometimes it’s simply a matter of timing. There may be an individual in your inner circle who has plenty of experience and is financially responsible enough to shoulder the duties involved, but perhaps they are experiencing medical problems or have a young family they’re busy looking after. 

Second, corporate trustees often bring a certain level of objectivity to the table. Even in the most loving families, death and money can create emotionally charged situations and be burdensome on a trustee who is part of the family. A corporate trustee, however, has the advantage of being an “outsider” and can often make unbiased decisions, regardless of ongoing family dynamics. 

The third and final benefit of a corporate trustee is continuity. After all, one of the primary purposes of establishing a trust is to provide for the future. Over the years—and depending on how far reaching your trust is—it may be prudent to appoint a financial institution that will be around long term, versus an individual who may not be best suited to fill that role as the years progress.