If I Move to a New State, Do I Need to Update My Estate Plan?

The U.S. Constitution requires states to give “full faith and credit” to the laws of other states. As a result, your will, trust, power of attorney, and health care proxy executed in one state should be honored in every other state.  Although that’s the way it should work, the practical realities are different and depend on the document, says Wealth Advisor’s recent article entitled “Moving to a New State? Be Sure to Update Your Estate Plan.”

Your last will should still be legally valid in the new state. However, the new state may have different probate laws that make certain provisions of the will invalid. This can also happen with revocable trusts.

However, it’s not as common with powers of attorney and health care directives. These estate planning documents should be honored from state to state, but sometimes banks, medical professionals, and financial and health care institutions will refuse to accept the documents and forms. They may have their own, as is the case frequently with banks.

You should also know that the execution requirements of your estate planning documents may be different, depending on the state.  For example, there are some states that require witnesses on durable powers of attorney, and others that do not. A state that requires witnesses may not allow a power of attorney without witnesses to be used to convey real estate, even though the document is perfectly valid in the state where it was drafted and signed.

With health care proxies, other states may use different terms for the document, such as “durable power of attorney for health care” or “advance directive.”

When you move to a different state, it’s also a smart move to consult with an experienced estate planning attorney to make certain that your estate plan in general is up to date. There are also other changes in circumstances—like a change in income or marital status—that can also have an impact on your estate plan. Moreover, there may be practical changes you may want to make. For example, you may want to change your trustee or agent under a power of attorney based on which family members will be closer in proximity.

For all these reasons, when you move out of state it’s wise to have an experienced estate planning attorney in your new home state review your estate planning documents.

Reference: Wealth Advisor (Jan. 26, 2021) “Moving to a New State? Be Sure to Update Your Estate Plan”

 

Estate Planning for a Blended Family

When you do your estate planning, you should understand some of the issues that can arise. The Williamson Herald  in Franklin, TN recently published an article entitled “Blended families can avoid estate planning challenges.” According to the article, you can rest easy knowing that you’re not alone. Over 50% of married or cohabiting couples with at least one living parent, or parent-in-law, and at least one adult child, have a “step-kin” relationship. That makes for a lot of estate planning issues. However, this doesn’t have to be overwhelming. Let’s look at some ideas that may help:

Try to be fair but be flexible. It is not always easy to be as equitable as you would like in your estate plans, and often a person can feel they have been treated unfairly. In a blended family, these problems can be even worse. Remember that fair isn’t always equal, and equal is not always fair. When dividing your assets, you will need to make some decisions after carefully evaluating the needs of all your family members. There’s no guarantee that all of your family will be satisfied with your determinations, but you’ll have done your best.

Be clear in your communications. It’s best to have no surprises in estate planning and that’s especially true in a blended family. Take the time to involve other family members and make your wishes and goals known. Just give them an overall outline.

Ask an experienced estate planning attorney about a revocable living trust. Everyone’s circumstances are unique, but many blended families discover that a simple will isn’t enough estate planning. Therefore, you may want to create a revocable living trust. This can provide you with more control than a will, when it comes to carrying out your wishes. Moreover, because you’ve transferred your assets to the trust, you’re no longer technically the owner of these assets. As such, the probate court isn’t involved, and your estate can likely avoid the time-consuming, expensive, and public process of probate.

Find the right trustee. If you do create up a living trust, you also must designate a trustee. That’s a person who will manages the trust assets. Married couples frequently serve as co-trustees, but this can cause tensions and disagreements. As another option, you can hire a professional trustee. This may be a person or an entity with the time, experience, and neutrality to make appropriate decisions and who can bring new ideas to the process.

Estate planning can be complex with a blended family, so read up on these issues and speak to an experienced estate planning attorney.

Reference: Williamson Herald (Franklin, TN) (Feb. 18, 2021) “Blended families can avoid estate planning challenges”

 

What’s a Living Will?

Living wills can be used to detail the type of healthcare you do or don’t want to receive in end-of-life situations or if you become permanently incapacitated or unconscious. A living will tells your healthcare providers and your family what type of care you prefer in these situations, explains Yahoo Finance’s recent article entitled “How to Make a Living Will.” These instructions may address topics, such as resuscitation, life support and pain management. If you don’t want to be on life support in a vegetative state, you can state that in your living will.

A living will can be part of an advance healthcare directive that also includes a healthcare power of attorney. This lets your chosen healthcare proxy make medical decisions on your behalf, when you’re unable. A living will typically only applies to situations where you’re close to death or you’re permanently incapacitated; an advance directive can cover temporary incapacitation.

Ask an experienced estate planning attorney or elder care lawyer about the technical aspects of how to make a living will. You should consider what to include. Every state is different, so your attorney will help you with the specifics. However,  you’ll generally need to leave instructions on the following:

  • Life-prolonging care, like blood transfusions, resuscitation, or use of a respirator;
  • Intravenous feeding if you are incapacitated and cannot feed yourself; and
  • Palliative care can be used to manage pain, if you decide to stop other treatments.

You will want to be as thorough and specific as possible with your wishes, so there is no confusion or stress for your family when or if the day arrives. You next want to communicate these wishes to your loved ones. You should also give copies of your living will to your doctor. If you’re drafting a living will as part of an advance healthcare directive, be certain that you get a copy to your healthcare proxy.

Review your living well regularly to make sure it’s still accurate because you may change your mind about the type of care you’d like to receive.

Ask your attorney to help you draft a living will along with a healthcare power of attorney, so all of the bases are covered as far as healthcare decision-making. When choosing a healthcare proxy, select a person on whom you can rely, to execute your wishes.  A living will can be an important component of an estate plan and preparing your family for your death.

Reference: Yahoo Finance (Feb. 18, 2021) “How to Make a Living Will”

 

How Do You Handle Probate?

While you are living, you have the right to give anyone any property of your choosing. If you give your power to gift your property to another person, typically through a Power of Attorney, then that person is your agent and may give away your property, according to an article “Explaining the basic aspects probate” from The News-Enterprise. When you die, the Power of Attorney you gave to an agent ends, and they are no longer in control of your estate. Your “estate” is not a big fancy house, but a legal term used to define the total of everything you own.

Property that you owned while living, unless it was owned jointly with another person, or had a beneficiary designation giving the property to another person upon your death, is distributed through a court order. However, the court order requires a series of steps.

First, you need to have had created a will while you were living. Unlike most legal documents (including the Power of Attorney mentioned above), a will is valid when it is properly signed. However, it can’t be used until a probate case is opened at the local District Court. If the Court deems the will to be valid, the probate proceeding is called “testate” and the executor named in the will may go forward with settling the estate (paying legitimate debts, taxes and expenses), before distributing assets upon court permission.

If you did not have a will, or if the will was not prepared correctly and is deemed invalid by the court, the probate is called “intestate” and the court appoints an administrator to follow the state’s laws concerning how property is to be distributed. You may not agree with how the state law directs property distribution. Your spouse or your family may not like it either, but the law itself decides who gets what.

After opening a probate case, the court will appoint a fiduciary (executor or administrator) and may have a legal notice published in the local newspaper, so any creditors can file a claim against the estate.  The executor or administrator will create a list of all of the property and the claims submitted by any creditors. It is their job to ensure that claims are valid and have been submitted within the correct timeframe. They will also be in charge of cleaning out your home, securing your home and other possessions, then selling the house and distributing your personal furnishings.

Depending on the size of the estate, the executor or administrator’s job may be time consuming and complex. If you left good documentation and lists of assets, a clean file system or, best of all, an estate binder with all your documents and information in one place, it can alleviate a lot of stress for your executor. Estate fiduciaries who are left with little information or a disorganized mess must undertake an expensive and burdensome scavenger hunt.

The executor or administrator is entitled to a fiduciary fee for their work, which is usually a percentage of the estate. Probate ends when all of the property has been gathered, creditors have been paid and beneficiaries have received their distributions.

With a properly prepared estate plan prepared by an experienced estate planning attorney, your property will be distributed according to your wishes, versus hoping the state’s laws will serve your family. You can also use the estate planning process to create the necessary documents to protect you during life, including a Power of Attorney, Advance Medical Directive and Healthcare proxy.

Reference: The News-Enterprise (Feb. 2, 2021) “Explaining the basic aspects probate”

 

Get Estate Plan in Order, If Spouse Is Dying from a Terminal Illness

Thousands of people are still dying from COVID-19 complications every day, and others are dealing with life-threatening illnesses like cancer, heart attack and stroke. If your spouse is ill, the pain is intensified by the anticipated loss of your life partner.

Wealth Advisor’s recent article entitled “Your Spouse Is Dying: 5 Ways To Get Your Estate In Order Now,” says that it’s frequently the attending physician who suggests that your spouse get his affairs in order.

Your spouse’s current prognosis and whether he or she’s at home or in a hospital will determine whether updates can be made to your estate plan. If it has been some time since the two of you last updated your estate plan, you should review the planning with your elder law attorney or estate planning attorney to be certain that you understand it and to see if there are any changes that can and should be made. There are five issues on which to focus your attention:

A Fiduciary Review. See who’s named in your estate planning documents to serve as executor and trustee of your spouse’s estate. They will have important roles after your spouse dies. Be sure you are comfortable with the selected fiduciaries, and they’re still a good fit. If your spouse has been sick, you’ve likely reviewed his or her health care proxy and power of attorney. If not, see who’s named in those documents as well.

An Asset Analysis. Determine the effect on your assets when your partner dies. Get an updated list of all your assets and see if there are assets that are held jointly which will automatically pass to you on your spouse’s death or if there are assets in your spouse’s name alone with no transfer on death beneficiary provided. See if any assets have been transferred to a trust. These answers will determine how easily you can access the assets after your spouse’s passing.

A Trust Assessment. Any assets that are currently in a trust or will pass into a trust at death will be controlled by the trust document. See who the beneficiaries are, how distributions are made and who will control the assets.

Probate Prep. If there’s property solely in your spouse’s name with no transfer on death beneficiary, those assets will pass according to his or her will. Review the will to make sure you understand it and whether probate will be needed to settle the estate.

Beneficiary Designation Check. Make certain that beneficiaries of your retirement accounts and life insurance policies are current.

If changes need to be made, an experienced elder law attorney or estate planning attorney can counsel you on how to best do this.

Reference: Wealth Advisor (Jan. 26, 2021) “Your Spouse Is Dying: 5 Ways To Get Your Estate In Order Now”

 

Estate Planning Meets Tax Planning

Not keeping a close eye on tax implications, often costs families tens of thousands of dollars or more, according to a recent article from Forbes, “Who Gets What—A Guide To Tax-Savvy Charitable Bequests.” The smartest solution for donations or inheritances is to consider your wishes, then use a laser-focus on the tax implications to each future recipient.

After the SECURE Act destroyed the stretch IRA strategy, heirs now have to pay income taxes on the IRA they receive within ten years of your passing. An inherited Roth IRA has an advantage in that it can continue to grow for ten more years after your death and then be withdrawn tax free. After-tax dollars and life insurance proceeds are generally not subject to income taxes. However, all of these different inheritances will have tax consequences for your beneficiary.

What if your beneficiary is a tax-exempt charity?

Charities recognized by the IRS as being tax exempt don’t care what form your donation takes. They don’t have to pay taxes on any donations. Bequests of traditional IRAs, Roth IRAs, after-tax dollars, or life insurance are all equally welcome.

However, your heirs will face different tax implications, depending upon the type of assets they receive.

Let’s say you want to leave $100,000 to charity after you and your spouse die. You both have traditional IRAs and some after-tax dollars. For this example, let’s say your child is in the 24% tax bracket. Most estate plans instruct charitable bequests be made from after-tax funds, which are usually in the will or given through a revocable trust. Remember, your will cannot control the disposition of the IRAs or retirement plans, unless it is the designated beneficiary.

By naming a charity as a beneficiary in a will or trust, the money will be after-tax. The charity gets $100,000. If you leave $100,000 to the charity through a traditional IRA and/or your retirement plan beneficiary designation, the charity still gets $100,000. If your heirs received that amount, they’d have to pay taxes on it—in this example, $24,000. If they live in a state that taxes inherited IRAs or if they are in a higher tax bracket, their share of the $100,000 is even less. However, you have options.

Here’s one way to accomplish this. Let’s say you leave $100,000 to charity through your IRA beneficiary designations and $100,000 to your heirs through a will or revocable trust. The charity receives $100,000 and pays no tax. Your heirs also receive $100,000 and pay no federal tax. A simple switch of who gets what saves your heirs $24,000 in taxes. That’s a welcome savings for your heirs, while the charity receives the same amount you wanted.

When considering who gets what in your estate plan, consider how the bequests are being given and what the tax implications will be. Talk with your estate planning attorney about structuring your estate plan with an eye to tax planning.

Reference: Forbes (Jan. 26, 2021) “Who Gets What—A Guide To Tax-Savvy Charitable Bequests”

 

Does Living Trust Help with Probate and Inheritance Taxes?

A living trust is a trust that’s created during a person’s lifetime, explains nj.com’s recent article entitled “Will a living trust help with probate and inheritance taxes?”

For example, New Jersey’s Uniform Trust Code governs the creation and validity of trusts. A real benefit of a trust is that its assets aren’t subject to the probate process. However, the New Jersey probate process is simple, so most people in the Garden State don’t have a need for a living trust.

In Kansas, a living trust can be created if the “settlor” or creator of the trust:

  • Resides in Kansas
  • The trustee lives or works in Kansas; or
  • The trust property is located in the state.

Under Florida law, a revocable living trust is governed by Florida Statute § 736.0402. To create a valid revocable trust in Florida, these elements are required:

  • The settlor must have capacity to create the trust
  • The settlor must indicate an intent to create a trust
  • The trust must have a definite beneficiary
  • The trustee must have duties to perform; and
  • The same person can’t be the sole trustee and sole beneficiary.

Ask an experienced estate planning attorney and he or she will tell you that no matter where you’re residing, the element that most estate planning attorneys concentrate on is the first—the capacity to create the trust. In most states, the capacity to create a revocable trust is the same capacity required to create a last will and testament.

Ask an experienced estate planning attorney about the mental capacity required to make a will in your state. Some state laws say that it’s a significantly lower threshold than the legal standards for other capacity requirements, like making a contract.

However, if a person lacks capacity when making a will, then the validity of the will can be questioned. The person contesting the will has the burden to prove that the testator’s mental capacity impacted the creation of the will.

Note that the assets in a trust may be subject to income tax and may be includable in the grantor’s estate for purposes of determining whether estate or inheritance taxes are owed. State laws differ on this. There are many different types of living trusts that have different tax consequences, so you should talk to an experienced estate planning attorney to see if a living trust is right for your specific situation.

Reference: nj.com (Jan. 11, 2021) “Will a living trust help with probate and inheritance taxes?”

 

What Should I Do when Spouse Dies?

Mourning the loss of a spouse can be one of the hardest experiences one can face. The emotional aspects of grief can also be difficult enough without having to concern yourself whether you’re financially unprepared.

Nj.com’s recent article entitled “Financial planning considerations after the loss of a spouse” says that when a spouse passes away, there can be many impacts to the financial picture. These can include changes in income, estate planning and dealing with IRA and insurance distributions. The first step, however, is understanding and quantifying the financial changes that may happen when your spouse dies.

Income Changes – Social Security. A drop in income is frequently an unforeseen reality for many surviving spouses, especially those who are on Social Security benefits. For retirees without dependents that have reached full retirement age, the surviving spouse will typically get the greater of their social security or their deceased spouse’s benefits – but not both. For example, let’s assume Dirk and Melinda are receiving $2,000 and $1,500 per month in Social Security benefits, respectively. In the event Dirk dies, Melinda will no longer receive her benefit and will only receive Dirk’s $2,000 benefit. That is a 42% reduction in total social security income received.

Social Security benefits typically start at 62, but a widow’s benefit can be available at age 60 for the survivor or at 50 if the survivor is disabled within seven years of the spouse’s death. Moreover, unmarried children under 18 (up to age 19 if attending elementary or secondary school full time) of a worker who passes away may also be eligible to get Social Security survivor benefits.

Income Changes – Pension Benefits. This is another type of income that may be decreased because of a spouse’s death. Those eligible to receive a pension often choose little or no survivorship benefits, which results in a sudden drop in income. Therefore, a single life annuity pension payment will end at the worker’s death leaving the survivor with no additional benefits. However, a 50% survivor option will pay 50% of the worker’s benefit to the surviving spouse at their death. A surviving spouse needs to understand what, if any pension benefits will continue and the financial effect of these changes.

Spousal IRA Benefits. Spouses must understand their options for inherited retirement accounts. A spousal beneficiary can roll the funds to their own IRA account, which lets the spousal beneficiary delay Required Minimum Distributions (RMDs) until age 72. In this case, the spousal beneficiary’s life expectancy is used to calculate future RMDs. This may be appropriate for those over 59½, but spousal beneficiaries under that age that require retirement account distributions may subject themselves to early withdrawal penalties, including a tax and a 10% early withdrawal penalty, even on inherited funds. Spouses younger than 59½ may consider rolling the account to a beneficial or inherited IRA for more flexibility. In this case, RMDs will be taken annually based upon the life expectancy of the beneficiary, with distributions avoiding the 10% penalty. Distributions greater than the RMD may also be taken, while still avoiding early withdrawal penalties. Inherited IRAs can be a great tool for spousal beneficiaries who need income now to help support their lifestyle but have not reached 59½.

Updating the Estate Plan of the Surviving Spouse. It is easy to forget to review your estate plan drafted before your spouse passed away. Check on this with an experienced estate planning attorney.

Updating Financial Planning Projections. You don’t want to make any major decisions after the loss of a loved one, you can still review the numbers. Create a new financial plan to help provide clarity.

Reference: nj.com (Jan. 9, 2021) “Financial planning considerations after the loss of a spouse”

 

How Does the Generation-Skipping Transfer Tax Work in Estate Planning?

The generation-skipping transfer tax, also called the generation-skipping tax, can apply when a grandparent leaves assets to a grandchild—skipping over their parents in the line of inheritance. It can also be triggered, when leaving assets to someone who’s at least 37½ years younger than you. If you are thinking about “skipping” any of your heirs when passing on assets, it is important to know what that may mean tax-wise and how to fill out the requisite form. An experienced estate planning attorney can help you and counsel you on the best way to pass along your estate to your beneficiaries.

KAKE.com’s recent article entitled “What Is the Generation-Skipping Transfer Tax?” says the tax code imposes both gift and estate taxes on transfers of assets above certain limits. For 2020, you can exclude gifts of up to $15,000 per person from the gift tax, with the limit twice as much for married couples who file a joint return. Estate tax applies to estates larger than $11,580,000 for 2020, increased to $11,700,000 in 2021.

The gift tax rate can be as high as 40%, and the estate tax is also 40% at the top end. The IRS uses the generation-skipping transfer tax to collect its portion of any wealth that is transferred across families, when not passed directly from parent to child. Assets subject to the generation-skipping tax are taxed at a flat 40% rate.  Note that the GSTT can apply to both direct transfers of assets to your beneficiaries and to assets passing through a trust. A trust can be subject to the GSTT, if all trust beneficiaries are considered to be skip persons who have a direct interest in the trust.

The generation-skipping tax is a separate tax from the estate tax, but it applies alongside it. Similar to the estate tax, this tax begins when an estate’s value exceeds the annual exemption limits. The 40% GSTT would be applied to any transfers of assets above the exempt amount, in addition to the regular 40% estate tax.  That is the way the IRS gets its money on wealth, as it moves from one person to another. If you passed your estate to your child, who then passes it to their child then no GSTT would apply. The IRS would just collect estate taxes from each successive generation. However, if you skip your child and leave assets to your grandchild, it eliminates a link from the taxation chain, and the GSTT lets the IRS replace that link.

You can use your lifetime estate and gift tax exemption limits, which can help to offset how much is owed for the generation-skipping tax. However, any unused portion of the exemption counted toward the generation-skipping tax is lost when you pass away.

If you’d like to minimize estate and gift taxes as much as possible, there are several options. Your experienced estate planning attorney might suggest giving assets to your grandchildren or another generation-skipping person annually, rather than at the end of your life. That’s because you can give up to $15,000 per person each year without incurring gift tax, or up to $30,000 per person if you’re married and file a joint return. Just keep the lifetime exemption limits in mind when planning gifts.

You could also make payments on behalf of a beneficiary to avoid tax. For instance, to help your granddaughter with college costs, any direct payments you make to the school to cover tuition would generally be tax-free. The same is true for direct payments made to healthcare providers, if you’re paying medical expenses on behalf of another.

Another option may be a generation-skipping trust that lets you transfer assets to the trust and pay estate taxes at the time of the transfer. The assets you put into the trust must stay there during the skipped generation’s lifetime. Once they die, the trust assets can be passed on tax-free to the next generation.

There’s also a dynasty trust. This trust can let you pass assets to future generations without triggering estate, gift, or generation-skipping taxes. However, they are meant to be long-term trusts. You can name your children, grandchildren, great-grandchildren and subsequent generations as beneficiaries and the transfer of assets to the trust is irrevocable. Therefore, when you place the assets in the trust, you will not be able to take them back out again. You can see why it’s so important to understand the implications, before creating this type of trust.

The generation-skipping tax can make a big impact on the assets you’re able to leave to heirs. If you’re considering using this type of trust to pass on assets or you’re interested in exploring other ways to transfer assets while minimizing taxes, speak to an experienced estate planning attorney.

Reference: KAKE.com (Feb. 6, 2021) “What Is the Generation-Skipping Transfer Tax?”

 

Should I Use a Living Trust in Estate Planning?

Nj.com’s recent article entitled “Will a living trust save time and money when settling an estate?” explains that, although probate avoidance is often thought of as a reason to have a living trust, generally speaking, many people who have living trusts also have what are known as “pour-over wills.”  The reason? Individuals frequently have assets that they have not placed into a living trust, such as tangible personal property. Those are things like furniture and household furnishings, a car, or a small bank account. It may also be necessary to open an estate because of unclaimed funds held by the state, a tax refund or return of insurance premiums.   Pour-over wills typically are written so the estate assets will pour over or pour into the living trust at the death of the person who created the trust.

Living trusts have the benefit of privacy and the elimination of challenges to the estate. A living trust can also be used to separate assets acquired before a marriage; or as a vehicle to manage the assets of a person with diminished or lack of capacity, such as a person suffering from dementia.

It’s important to note that financial institutions can freeze up to 50% of the assets in an estate until a tax waiver is obtained. However, tax waivers aren’t required to transfer legal ownership of trust assets after the death of the person who created the trust. Therefore, financial institutions can’t similarly freeze up to half of the assets in a trust for that reason.  However, there can also be a few disadvantages to creating a living trust. The cost of creating a revocable living trust and a pour-over will is usually a bit more than the cost of preparing just a will. Contact an experienced estate planning attorney to discuss the how a living trust may help you as opposed to just a standard will.

There may also be expenses involved with transferring assets, such as real property, into a living trust. The legal fees incurred in administering a probate estate may be more than legal fees incurred in administering a trust after the death of the trust maker.  Moreover, the time it takes to settle an estate may be longer than what it takes to distribute trust assets. That is because it may take months to probate a will and obtain a tax waiver.

However, if the individual has relatively few assets that would be subject to probate, the cost of establishing a living trust may be more costly than administering an estate.

Speak with an experienced estate planning attorney about whether a revocable living trust makes sense for your unique circumstances.

Reference: nj.com (Feb. 8, 2021) “Will a living trust save time and money when settling an estate?”