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Fullerton Estate Planning Law Blog

Why you shouldn't put your retirement account in a trust

You can put a lot of different assets into a trust. People often consider simply putting in financial assets, but you can also add real estate and things of this nature.

While doing estate planning, people sometimes ask if they should add their qualified retirement accounts to the trust. These could include qualified annuities, IRAs, 403(b)s and the ever-popular 401(k)s. If you're thinking of setting up a revocable living trust, though, you do not want to add these accounts. Here's why.

Step One in passing down your home: Talk to the kids

When people are asked what the first step is to pass their home on to their children, they often think about the financial side. They assume that they need to find out what the home is worth in the current market or what the taxes will look like if they give the house to the kids.

These are important points, but they're not Step One. Instead, you absolutely want to begin by having a conversation. Gather the children together and ask them some important questions:

  • What are your expectations for the estate plan and the house in particular?
  • What interests do you have when thinking about family assets?
  • Is the house even an asset that you would want?
  • If the home is being rented out or used as an income property in any fashion, do you want to run it and have that responsibility?
  • Do you want to live in the house with your own family?
  • Do you just want to sell the house?

Can you use an existing life insurance policy with a trust?

You want to set up a trust to control your life insurance. You know that the irrevocable life insurance trust (ILIT) can help with your estate taxes, and you have a substantial policy to consider. You think a trust is the best way to pass that asset on to your children.

What you're wondering, though, is if you can use a life insurance policy that you already own. You have a close friend who already did this, but they did not own a policy prior to setting it up. They created the trust first and then had it buy the policy directly. Is that what you have to do, or can you just use the policy you already have?

Never assume that your kids will go along with your estate plan

Many parents see their children through rose-colored glasses. They only see the best in them. When it comes to how the children relate to each other, they assume that they'll always get along.

This could simply be because the parents only see them when they're all together. Sure, the children get along when they all show up at their parents' house for Thanksgiving or Christmas, but that does not accurately reflect how they'll get along when Mom and Dad have passed away.

Starting that estate planning conversation with your parents

You have never said a word about estate planning to your parents. You suspect they have not done it yet, and you know that they need to, but it feels too awkward to bring it up.

Maybe you feel like you'll force them to talk about the end of their own lives, something that makes you all uncomfortable. Maybe you worry that they'll think you're too interested in getting their money, and they'll resent it.

Does California have an estate tax?

You have not always lived in California. When your own parents passed away, you remember that they had to pay estate taxes in their state, and it really cost them. As you start doing your own estate planning decades later, you wonder if you will need to pay these taxes to California.

You will not. There are no state-level estate taxes. It does not matter how large or small your estate is, what types of assets you control, how many heirs you have or what estate planning tools you use. There are no California estate taxes.

Should you update your will frequently?

You know that you need a will, and you know that it is best not to put off writing it. However, you also feel like you have decades left -- barring an accident or something else unexpected -- before your heirs will need to use that will.

As such, you start wondering about updating the will. Should you do it frequently? What are the requirements?

Exceptions to an incentive trust

An incentive trust is, in many ways, quite a simple idea. You want to give your heirs an incentive to live a certain way, so you put their inheritance in a trust and they only get it if they follow the rules you set. For most parents and grandparents, they just want the heirs to have a productive life with gainful employment, rather than living off of the money. The incentive, then, can be that they only get the money if they're employed or that the trust pays out the same amount that they earn every year, giving them incentive to work harder and move forward in their career.

While that sounds good, you do have to realize that there are potential exceptions. Here are a few key questions to ask:

  • What if the heir suffers an injury or contracts an illness and becomes disabled and unable to work?
  • What if the heir does not have a job because they are in college?
  • What if the heir can't get a job because of economic reasons outside of their control, like a major recession?
  • What if an elderly family member needs care and the heir decides not to work in order to provide it?
  • What if the heir starts a family and opts to stay home and raise the kids?
  • What if the heir wants to work with a charity or take a volunteer position to help others?

Be careful with removing someone from your will

When you cut someone out of your will entirely, it's known as disinheriting them. They get nothing from your estate. It's a drastic step, but one that some parents opt to take.

You can do this, but you need to be very careful. Make sure it's really what you want and not just an emotional response.

Tips for talking to your parents about their estate plan

Bringing up estate planning can be difficult. You don't want to sound like all you're worried about is getting your parents' money. You don't want to bring up topics that make them feel uncomfortable.

At the same time, you know how important it is for people to do their estate planning in advance. You also know how many people put it off. What can you do to start this conversation without causing conflict? Here are a few tips that may help.

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