What It Means to Pass Without a Last Will and Testament in Alabama

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A Last Will and Testament (“LWT”) is a way to not only protect your assets, but also establish to whom your property is assign upon your death.  Despite this being a vital document in your estate plan, many people never execute a LWT.  While Davis, Davis & Associates, P.C. recommends having all estate planning documents prepared and fully executed, we understand that this is not always the case; if you or a loved one fall into this category, there is no need to worry about what happens to your assets when you pass.  Under Alabama’s intestate succession laws, if you pass without a LWT, your assets transfer to your closest relatives.  

Like many things law, intestate succession can seem pretty complicated; the most basic description is that under intestate succession, who gets what depends on which of your relatives are living.  Here’s the breakdown:

You die with a spouse but no children. Your spouse inherit everything.
You die with children but no spouse. Your children inherit everything.
You die with parents but no children or spouse. Your parents inherit everything.
You die with siblings but no children, parents, or spouse. Your siblings inherit everything in equal shares.
You die with a spouse and children that belong to you and your spouse (biological or adopted). Your spouse inherits the first $50,000 of your estate, plus half of the balance of your estate.  After that, your children inherit the remaining balance of your estate.
You die with a spouse and children that are not your spouse’s children (biological or adopted). Your spouse inherits half of your estate, leaving your children with the other half.
You die with a spouse and parents. Your spouse inherits the first $100,000 of your estate, plus half of the balance of your estate, leaving your parents to inherit the other half of the intestate property balance.
You die with no living relatives. Your entire estate will escheat to the State of Alabama.

Because intestate succession is only affected by assets that pass through probate, even if you pass without a LWT, there are parts of your estate that won’t be affected.  For example, passing with or without a LWT would not impact any of the following:

  • Living Trust Property
  • Life Insurance Proceeds or Retirement Accounts with a Named Beneficiary
  • Trust Assets
  • Property in Life Estates
  • Any Property in Which You Are a Joint Tenant

End of life plans can often intimidate some, leading many to completely ignoring the estate planning process.  In order to avoid the intestate succession process, schedule a consultation to discuss your estate planning options.  However, if you know someone that has passed without a LWT, give us a call to help you navigate the intestate succession process at 251-621-1555.

Irrevocable Life Insurance Trusts

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An Irrevocable Life Insurance Trust (ILIT) is an irrevocable trust used to protect your assets from probate.  Like the name suggests, ILIT’s are a way to remove life insurance policies from your estate, enabling you to bypass those pesky estate taxes.  Here is the breakdown:

  • You are the grantor of the trust, meaning you fund the trust with your life insurance policy/policies.
  • You designate a trustee.  Their job is to pay the bills and execute all of your trust-related decisions and needs.
  • When forming the trust, you will designate one or more persons to be beneficiaries of the trust.  Upon your death, these people will receive the remaining funds of the trust.

One of the most common objections when dealing with estates are the tax implications, especially estates valued over $12.06 million (resulting in a 40% estate tax).  While the majority of people do not come close to this amount, many states begin taxing estates valued at $1 million.  This can be of particular interest because estate means are often tied up in real property or other assets, making liquid funds hard to come by.  With an ILIT, your trustee can purchase your estate’s assets with your life insurance proceeds, making available the necessary funds to pay taxes and other fees.

In addition to tax benefits, ILIT’s allow you to have more control over how your life insurance proceeds are used.  Without an ILIT, the beneficiaries of your life insurance policy would inherit the money, leaving them to spend it however they see fit.  With an ILIT, you get to decide how and when your beneficiaries can spend your life insurance proceeds.

Just like any other irrevocable trust, it is important to remember that the nature of irrevocable trusts are just that: to not be revoked.  This is imperative when considering whom you designate as beneficiaries of your trust; even a change in life circumstances, such as divorce or remarriage, prove to be more challenging to modify the trust.  Another facet to make note of is that an ILIT transfers the ownership of your life insurance policy from you to the trust.  Because you are no longer the owner of the policy, you cannot make changes to your policy after ownership lies in the trust.  Because of the nature of this type of trust, it is important to consider all outcomes before deeming the trust complete.  

To discuss the finer points of an ILIT and other estate planning options, schedule a consultation with one of our attorneys by calling 251-621-1555.

Credit Shelter Trusts: Estate Planning Options for Larger Estates

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Credit Shelter Trusts (CSTs), commonly referred to as a bypass trust, B trust, exemption trust, or family trust, is an irrevocable trust used to help married couples transfer assets upon their death to their surviving spouse and, ultimately, their children.  

Because the trust is irrevocable, the trust provisions must be detailed in order to accommodate the surviving spouse’s lifestyle needs.  This also means that, rather than put all of the responsibility on the surviving spouse to carry out the decedent’s wishes, the first spouse to die controls where the CST’s assets are distributed after the surviving spouse’s death.  In layman’s terms, the first spouse to die decides where all of the assets go, regardless of when the surviving spouse dies.  This takes a lot of the burden off of the surviving spouse – rather than worry about carrying out the decedent’s wishes, the surviving spouse can process their grief and live out the rest of their life.

In addition to taking some of the responsibility off of the surviving spouse, CSTs are also estate tax-exempt and the trust’s assets are protected from the beneficiary’s creditors.  This means that the trust’s resources and income are protected at the government, state, and private collection company level.

Regardless of all of the benefits of forming a CST, there are some things to consider.  As with most things, a crucial consideration is time commitment.  Although some tax exemptions apply to CSTs, they are still subject to income taxes.  When forming a CST, you are required to obtain an EIN for the trust, ultimately subjecting it to income tax provisions.  The level of complexity of those taxes reflects in the intricacy of the trust.  Ultimately, if the trust is complicated, the income tax process could prove to be quite involved and expensive.

Even though the income tax provisions open up the possibility of increased financial burden, Credit Shelter Trusts are primarily used by those who come close to or exceed the allowable estate tax exemption.  As of 2021, the estate tax exemption was $11.7 million for individuals and $23.4 million for married couples.  Because the majority of people’s estates do not come close to this amount, people are more likely to go with another trust option.  

To see if a Credit Shelter Trust is right for you and your family, give us a call to set up a consultation at 251-621-1555.

Special Needs Trust: Is it right for me?

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Estate planning ensures that all of your assets are wrapped up according to your wishes before you die.  One of the noteworthy aspects about estate planning is that it caters to all walks of life; rather than exclude certain groups, estate planning takes into account everyone, even those with special needs.  Our goal at Davis, Davis & Associates, P.C. is to help you provide all of your children with the life you want for them.  If this sounds like something applicable to you and your family, consider creating a Special Needs Trust, commonly referred to as an SNT.

There are three types of SNTs: first party SNTs, third party SNTs, and pooled SNTs.  First party SNTs are funded directly from the child and are always irrevocable.  This means that the funding for the trust comes from that child’s inheritance or other capital.  Third party SNTs are revocable and set up through the decedent’s Last Will & Testament or other testamentary.  Third party SNTs are also funded by the parents or guardian throughout their lifetime.  Pooled SNTs are either a first or third party SNT – you get to choose the funding method.  The most significant criterion when considering a pooled SNT is the age requirement: the child must be 65-years or older.

Another crucial decision when it comes to SNTs is who to designate as trustee.  Like other trusts, there are a few options.  First, you can designate a person, whether that be a family member or a family friend.  The second option is to designate a non-profit organization.  In Alabama, one of the most common SNT trustees is Alabama Family Trust.  If you decide to form a pooled SNT, you will designate a non-profit organization as trustee.  

A significant misnomer about SNTs is that they are to be used for medical and standard living expenses only.  While the main purpose of SNTs are to support your child throughout their lifetime, they are not required to be used for what some may consider as the “bare minimum”.  SNT funds can be used for a number of things, including, but not limited to, attending athletic events; out-of-pocket medical and dental procedures; fun trips or vacations; attending religious events; and entertainment such as movies, concerts, etc.

The intent of a special needs trust is to support your child while maintaining their eligibility for governmental aid, such as Supplemental Security Income and Medicaid.  Rather than worrying about your child after you die, see if a special needs trust is right for you by setting up a consultation at 251-621-1555.

Trust Administration: Common Mistakes and How to Avoid Them

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While using a living trust can help your loved ones avoid the nasty business of probate proceedings, trust administration is not without its obstacles and it’s usually up to the named Trustee to make sure to sidestep those obstacles. Just like when naming an Executor for a Will, it’s critical to name someone as your Successor Trustee who is financially responsible, detail oriented, a people person, and reliable. Here are some of the most common pitfalls that can be encountered during the administration of a trust estate and some tips on how to avoid them:

Pitfall No. 1: Misunderstanding and/or Miscommunication

It’s not uncommon for a Trustee to misunderstand their role and duties, as well as to fail to communicate properly with beneficiaries and other relevant parties. While misunderstanding can be easily resolved by associated legal counsel and/or the assistance of a financial advisor, miscommunication can be more detrimental. Beneficiaries, not surprisingly, are going to be concerned about the welfare of the assets that are set to inherit, so transparency between the Trustee and the beneficiaries will make for smooth sailing during the entirety of the administration process. 

Trustees should, ideally, familiarize themselves with all relevant estate planning documents (not just the actual trust) before the Grantor(s) even pass away. That way, if they have any clarifying questions, they can get firm and accurate answers prior to their being any issues. Additionally, trustees should maintain open and constant communication with any professionals assisting in the administration process, with beneficiaries and with any co-trustees. 

Pitfall No. 2: Not Following Legal and/or Fiduciary Duties

It should go without saying that if you’re operating without all the information and if you’re not being as openly communicative as you need to be, you’re likely going to run afoul of the law and/or your fiduciary duties, so following the advice in the above section will help you avoid any snares here. Trustees are legally and ethically obligated to act in the best interests of the beneficiaries and to comply with all applicable laws and regulations. Failure to do so can be costly in the way of time and money. 

First, trustees should be very conscientious when it comes to the mismanagement of trust funds. Engaging in risky investments, paying oneself, mingling monies and/or failing to keep good records can jeopardize the trust’s financial stability. 

Second, trustees need to prioritize the beneficiaries’ interest over their own, which means strictly avoiding any self-dealing or showing signs of favoritisms. 

Third, trustees must comply with all legal obligations, such as filing tax returns on behalf of the estate, distributing assets within any specified timeframes, etc. If unsure about any one of these things, the trustee should seek the advice of a professional as soon as possible. 

Pitfall No. 3: Failing to Keep Good Records and Accounting

As we’ve already mentioned in previous sections, part of being a good trustee and ensuring a smooth administration process is the keeping of good records. This includes recording income, expenses, distributions, and communications with beneficiaries and other relevant parties. Regularly reconciling bank accounts and maintaining originals and copies of important documents is a great way to stay on top of things.

Neglecting Regular Reviews and Updates

While many trusts are designed to make immediate distributions and end swiftly, many others are designed to extend the time in which distributions are to be made to beneficiaries. Bearing this in mind, trustees should understand that they may be undertaking this responsibility for years to come and neglecting to review and update the trust periodically can lead to problems. 

Additionally, trustees who are going to be engaged in trust administration for years following the death of the grantor should stay in good and steady communication with the trust beneficiaries as they may move, circumstances regarding their distribution needs may change, etc. 

For more information on trusts, trust administration, and/or trustee duties, call our office today to schedule an appointment with one of our licensed attorneys. (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.