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Law Office of Michael D. DellaMonaca

Have a Plan for Life

Estate Planning for Unmarried Couples

For some couples, getting married just doesn’t feel necessary. However, they don’t enjoy the automatic legal rights and protections that legally wed spouses do especially when it comes to death. There are many spousal rights that come with a marriage certificate, reports CNBC in the article “Here’s what happens to your partner if you’re not married and you die.” Without the benefit of marriage extra planning is necessary to protect each other.

Taxes are a non-starter. There’s no federal or state income tax form that will permit a non-married couple to file jointly. If one of the couple’s employers is the source of health insurance for both, the amount that the company contributes is taxable to the employee. A spouse doesn’t have to pay taxes on health insurance.

More important, however, is what happens when one of the partners dies or becomes incapacitated. A number of documents need to be created so should one become incapacitated the other is able to act on their behalf. Preparations also need to be made so the surviving partner is protected and can manage the deceased’s estate.

In order to be prepared, an estate plan is necessary. Creating a plan for what happens to you and your estate is critical for unmarried couples who want their commitment to each other to be protected at death. The general default for a married couple is that everything goes to the surviving spouse. However, for unmarried couples the default may be a sibling, children, parents or other relatives. It won’t be the unmarried partner.

This is especially true if a person dies with no will. The courts in the state of residence will decide who gets what depending upon the law of that state. If there are multiple heirs who have conflicting interests, it could become nasty—and expensive.

However, a will isn’t all that is needed. Most tax-advantaged accounts—Roth IRAs, traditional IRAs, 401(k) plans, etc.—have beneficiaries named. That person receives the assets upon death of the owner. The same is true for investment accounts, annuities, life insurance and any financial product that has a beneficiary named. The beneficiary receives the asset regardless of what is in the will. Therefore, checking beneficiaries need to be part of the estate plan. Checking, savings and investment accounts that are in both partner’s names will become the property of the surviving person, but accounts with only one person’s name on them will not.

Unmarried couples who own a home together need to check how the deed is titled, regardless who is on the mortgage. The legal owner is the person whose name is on the deed. If the house is only in one person’s name, it won’t become part of the estate. Change the deed so both names are on the deed with rights of survivorship, so both are entitled to assume full ownership upon the death of the other.

To prepare for incapacity, an estate planning attorney can help create a durable power of attorney for health care, so partners will be able to make medical decisions on each other’s behalf. A living will should also be created for both people which states wishes for end of life decisions. For financial matters, a durable power of attorney will allow each partner to have control over each other’s financial affairs. It takes a little extra planning for unmarried couples, but the peace of mind that comes from knowing that you have prepared to care for each other, until death do you part, is priceless.

Reference: CNBC (Dec. 16, 2019) “Here’s what happens to your partner if you’re not married and you die”

 

Should Retirees Buy Vacation Homes?

It sounds like a great idea. After all it’s an investment in real estate and it could be passed along to the next generation. It might be a rental property too, generating income when the owners aren’t able to enjoy it. However, there are some things to be careful of, warns Barron’s in the article “ Vacation Home, Primary Residence, Estate Planning Lawyer, Limited Liability Corporation, Rental Property, Downsizing,.”

Taxes, maintenance, insurance and possibly the cost of hiring a rental-management company are just a few things to consider. Above all, don’t think of it as an investment because with real estate, there are no guarantees. For one thing, it’s not liquid. You can’t count on selling it for a good price when you need some ready cash.

The first and most important question: can you afford it? Retirees are usually living on a fixed income. The cost of a vacation home can be loaded with surprises just like any other property. If there’s enough of a nest egg to live on and there won’t ever be a need to sell fast then it may be a good move.  If there’s enough money to purchase the home, then investing in someone to manage the property is a good idea. Empty homes are targets for thieves and if there’s a maintenance issue, an uninhabited home is vulnerable to damages.

Where taxes are concerned, the sale of a second home does not give the seller the same capital gains tax exemption as the sale of a primary residence. That exemption is only available for people who have lived in the home as a primary residence for at least two of the previous five years. The exemption is up to $500,000 for married couples.

There is one way around it, if it makes sense for owners. Let’s say that they plan on downsizing from their primary residence. They sell it and use the tax exemption. They then move to the vacation home for at least two years using that as their primary residence. At that point, they can sell the home that has now become a primary residence enjoy the generous tax exemption and then move to a new primary residence.

As a rental property, owners are permitted to rent for up to 14 days without owing any taxes on the rental income. After the 14-day period, taxes must be paid, but some of the rental expenses are tax deductible.  If the intent is to keep the house for as long as the owners are living, it becomes part of the estate and must be included in an estate plan. Leaving it to the next generation may be feasible if all of the children want to keep the house and can afford its upkeep. Have the conversation with the children first. Giving the house to children can be accomplished by putting it into a limited liability corporation with an operating agreement that defines it. Each child will have a stake in the entity that owns the home, rather than the house itself.

Talk with your estate planning lawyer about how the purchase and inheritance of a vacation home may impact your overall estate plan before making a purchase.

Reference: Barron’s (Jan. 18, 2020) “What Retirees Should Know Before Buying a Vacation Home”

 

If I’m 35, Do I Need a Will?

Estate planning is a crucial process for everyone, no matter what assets you have now. If you want your family to be able to deal with your affairs, debts included, drafting an estate plan is critical, says Wealth Advisor’s recent article entitled “Estate planning for those 40 and under.”

If you have young children, or other dependents, planning is vitally important. The less you have, the more important your plan is, so it can provide as long as possible and in the best way for those most important to you. You can’t afford to make a mistake.

Talk to your family about various “what if” situations. It is important that you’ve discussed your wishes with your family and that you’ve considered the many contingencies that can happen, like a serious illness or injury, incapacity, or death. This also gives you the chance to explain your rationale for making a larger gift to someone, rather than another or an equal division. This can be especially significant, if there’s a second marriage with children from different relationships and a wide range of ages. An open conversation can help avoid hard feelings later.

You should have the basic estate plan components, which include a will, a living will, advance directive, powers of attorney, and a designation of agent to control disposition of remains. These are all important components of an estate plan that should be created at the beginning of the planning process. A guardian should also be named for any minor children.

In addition, a life insurance policy can give your family the needed funds in the event of an untimely death and loss of income—especially for young parents. The loss of one or both spouses’ income can have a drastic impact.

Remember that your estate plan shouldn’t be a “one and done thing.” You need to review your estate plan every few years. This gives you the opportunity to make changes based on significant life events, tax law changes, the addition of more children, or their changing needs. You should also monitor your insurance policies and investments, because they dovetail into your estate plan and can fluctuate based on the economic environment.

When you draft these documents, you should work with a qualified estate planning attorney.

Reference: Wealth Advisor (Jan. 21, 2020) “Estate planning for those 40 and under”

 

Not a Billionaire? Trusts Can Still Be Beneficial

You don’t have to be wealthy to benefit from the use of a trust. A trust is a legal arrangement by which one person transfers his or her assets to a trustee who will hold those assets in trust for third parties, explains the Stamford Advocate’s article “Trusts are not for the wealthy only.” As the person who created the trust, referred to as “the settlor,” you determine who the trustee is, as well as naming the beneficiaries.

There are many different types of trusts which serve different purposes. However, the two basic categories of trusts are revocable (also known as “living” trusts) and irrevocable trusts. Their names reflect two chief characteristics: the revocable trust can be changed and controlled by the settlor. The irrevocable trust cannot be changed, and the settlor gives up the control of the trust. However, it should be noted that the irrevocable trust has certain tax and other benefits not offered by the revocable trust.

A will is definitely necessary to pass assets on according to your wishes, but a trust can serve other purposes. Here’s a look at some common reasons why people use trusts:

  • Protect assets from creditors
  • Allow heirs to avoid probate of assets in the trusts
  • Avoid, minimize or delay estate taxes, transfer taxes or income taxes
  • Control how assets are disbursed or invested
  • Facilitate business succession planning and manage business assets
  • Shelter assets for descendants, if a spouse remarries
  • Establish a family tradition of philanthropy

Trusts allow assets to be passed on quickly and privately, while eliminating some expenses for heirs. They also permit closer management of who will benefit from your assets.

The cost of setting up a trust depends on the complexity of the trust and the estate, as well as other factors, like the number of beneficiaries and how many generations are being planned for. Bear in mind that the cost of setting up a trust should be measured against the future cost of not just taxes, but any litigation that might occur if the estate is probated and becomes public knowledge, or if family members are dissatisfied with the distribution of assets.

Speak with an estate planning attorney to first determine what kind of trusts are needed for your estate plan to achieve your wishes. Discuss the role of a Special Needs trust, if any family members have mental or physical needs that make them eligible for public assistance. An experienced estate planning attorney will know which planning strategies are best in your unique circumstances.

Reference: Stamford Advocate (Jan. 19, 2020) “Trusts are not for the wealthy only”

 

Do You Want to Decide or Do You Want the State to Decide?

A will allows you to direct your assets to the people you want to receive them, rather than the alternative, which is relying on the laws of your state to direct who receives your assets, says the article “Will you plan now or pay later?” from the Chron.com.

A will is also the document used to name an independent executor with successors, in the unlikely chance that the first executor fails, refuses or becomes unable to serve. Your estate planning attorney will discuss the use of special trusts to provide for family members who are disabled, trusts for minors or special needs family members or even adult children.

There are three big considerations you may not have even considered that would require you to have an estate plan created in recent years to be reviewed or revised. Years ago, the federal tax exemption, which allows a person to leave a certain amount of money to beneficiaries, was much smaller than it is now.

This was a “use it or lose it” exemption. Here’s an example of how things have changed. In 1987, when the exemption was $600,000 per taxpayer, a couple would use a by-pass trust to shelter the first $600,000 upon the first to die to take advantage of the exemption. In 2020, the exemption is $11.58 million. The “use it or lose it” law is different. Therefore, if your will still has a by-pass trust for this reason, it may be best to discuss it with your estate planning attorney. It is likely that you don’t need it anymore.

You also want a will to have some control over what happens to your assets when you die. Let’s say Betty and Bob have three children. Bob dies, leaving his assets to Betty, then Betty dies and leaves all of her assets to her three children. One of the children, Bea, dies shortly after Betty dies. Bea’s will leaves all of her assets to her husband Bruce.

Bruce remarries. When Bruce dies, the share of the family’s assets that Bruce inherited from his wife Bea may be left to Bruce’s second wife or the couple may spend them all during their marriage. If Bruce divorces his second wife, she may win those assets in a divorce settlement. Would Betty and Bob have wanted their assets to go to their grandchildren, instead of their son-in-law’s second wife and children?  An estate plan can be created to protect those assets, so they remain within the family, going to grandchildren or to the children of Betty and Bob.

While most people think of an estate plan as a plan for death, it’s also a plan for illness and incapacity. A perfectly healthy person is injured in a car accident or suffers a stroke. Without having documents like a power of attorney, power of attorney for health care, living will and medical privacy documents, the family will spend a great deal of time and money trying to establish legal control over the estate.

Speak with an experienced estate planning attorney today to update your current will or create a will and the necessary documents to protect yourself and your family.

Reference: Chron.com (January 16, 2020) “Will you plan now or pay later?”

 

Dad’s Will and Trust at Odds?

A revocable trust, commonly called a living trust, is created during the lifetime of the grantor. This type of trust can be changed at any time, while the grantor is still alive. Because revocable trusts become operative before the will takes effect at death, the trust takes priority over the will, if there is any discrepancy between the two when it comes to assets titled in the name of the trust or that designate the trust as the beneficiary (e.g., life insurance).

A recent Investopedia article asks “What Happens When a Will and a Revocable Trust Conflict?” The article explains that a trust is a separate entity from an individual. When the grantor or creator of a revocable trust dies, the assets in the trust are not part of the decedent grantor’s probate process.

Probate is designed to distribute the deceased individual’s property pursuant to the instructions in his will. However, probate doesn’t apply to property held in a living trust, because those assets are not legally owned by the deceased person. They’re owned by the trust. As a result, the will has no authority over a trust’s assets.

Let’s say that Bernie (who is the grandfather) has two children named Pat and Junior.  Bernie places the old family home into a living trust that says Pat and Junior are to inherit that house. Twelve years later, Bernie remarries. Right before his death, he executes a new will that says is the house is to go to his new wife, Andrea.

In this case, for the home to go to his new wife, Bernie would’ve had to amend the trust to make the house transfer to his wife effective. Thus, the home goes to the two children, Pat and Junior.

Sound confusing? It can be. Work with an experienced estate planning attorney, so that your intentions can be carried out without any issues. As mentioned, a revocable trust is a separate entity and doesn’t follow the terms of a person’s will when they die.

Make sure everything is legally binding and the way you intend it with the advice of a trust and estate planning attorney.

It’s important to note that while a revocable trust supersedes a will, the trust only controls those assets that have been placed into it. Therefore, if a revocable trust is formed, but assets aren’t moved into it, the trust provisions have no effect on those assets at the time of the grantor’s death.

Reference: Investopedia (Aug. 5, 2019) “What Happens When a Will and a Revocable Trust Conflict?”

 

Seriously, Why Do I Need a Will?

The Times Herald-Record’s article “55 Plus: Four Reasons to Create a Will” provides some tips and important reasons for why you should make a will.

When you create a will with the help of an estate planning attorney, you are able to decide who will execute your estate.

Creating a will and appointing a trusted executor will help make certain that your estate is managed in accordance with your wishes and instructions. If you have a will, you help the people you leave behind. A legally valid will can avoid added costs of legal dealings. If you pass away without a will, the state will decide how your estate is divided.

Creating a will allows you to determine who inherits your estate. Your estate will include your home, motor vehicles, financial accounts and any other personal property you want to pass on to your loved ones. The great thing about a will is that it clearly states the persons or organizations that will receive all or part of your estate after your death.

Consulting with an experienced estate planning attorney to help understand your state laws and probate procedures is a wise move.

In your will, you can also decide and designate the person(s) who will care for your minor children. Creating a will gives you the opportunity to appoint a guardian for your minor children, in the event of your death. If you don’t have a will stating a guardianship, a court can make the issue its own and appoint a guardian in your absence. It could be someone you don’t like or someone you hardly know.

By creating a will, you provide several benefits for yourself and your family. A will offers peace of mind that your loved ones will be cared for as you intend, after you’re no longer around.

Finally, a reminder for those with wills and estate plans: review these documents every year or three to be certain that everything is up to date. You want to be sure that your estate plan includes any new spouse, birth or adoption of a child or grandchild, death of a relative and change in your financial situation.

Reference: Times Herald-Record (Jan. 6, 2020) “55 Plus: Four Reasons to Create a Will”

 

A 2020 Checklist for an Estate Plan

The beginning of a new year is a perfect time for those who haven’t started the process of getting an estate plan started. For those who already have a plan in place, now is a great time to review these documents to make changes that will reflect the changes in one’s life or family dynamics, as well as changes to state and federal law.

Houston Business Journal’s recent article entitled “An estate planning checklist should be a top New Year’s resolution” says that by partnering with a trusted estate planning attorney, you can check off these four boxes on your list to be certain your current estate plan is optimized for the future.

  1. Compute your financial situation. No matter what your net worth is, nearly everyone has an estate that’s worth protecting. An estate plan formalizes an individual’s wishes and decreases the chances of family fighting and stress.
  2. Get your affairs in order. A will is the heart of the estate plan, and the document that designates beneficiaries beyond the property and accounts that already name them, like life insurance. A will details who gets what and can help simplify the probate process, when the will is administered after your death. Medical questions, provisions for incapacity and end-of-life decisions can also be memorialized in a living will and a medical power of attorney. A financial power of attorney also gives a trusted person the legal authority to act on your behalf, if you become incapacitated.
  3. Know the 2020 estate and gift tax exemptions. The exemption for 2020 is $11.58 million, an increase from $11.4 million in 2019. The exemption eliminates federal estate taxes on amounts under that limit gifted to family members during a person’s lifetime or left to them upon a person’s passing.
  4. Understand when the exemption may decrease. The exemption amount will go up each year until 2025. There was a bit of uncertainty about what would happen to someone who uses the $11.58 million exemption in 2020 and then dies in 2026—when the exemption reverts to the $5 million range. However, the IRS has issued final regulations that will protect individuals who take advantage of the exemption limits through 2025. Gifts will be sheltered by the increased exemption limits, when the gifts are actually made.

It’s a great idea to have a resolution every January to check in with your estate planning attorney to be certain that your plan is set for the year ahead.

Reference: Houston Business Journal (Jan. 1, 2020) “An estate planning checklist should be a top New Year’s resolution”

 

Am I Too Young to Remain in House Inherited from Mom?

Can the house be listed to the deceased on a deed forever? What if the deceased was 70 years old and living in a 55-and-over community with his 40-year-old son?

Her will left everything, including the house, to her adult son. The son is now wondering if and for how long he can stay in his home in the senior community. Can he stay put, or will he have to sell the house and move?

lehighvalleyhigh.com recently published an article entitled “Can son remain in 55-and-over community after parent dies?” The article explains that the deceased individual’s name can stay on the deed indefinitely. However, when the mother dies, the property passes “by operation of law,” regardless of what the deed says.

For example, if the deed was titled as husband and wife, the surviving spouse would become the sole owner by operation of law at the death of the first spouse, no matter if there was a new deed filed.

Another important issue with this scenario involves the details in the by-laws of the 55-and over community.

It would be rare that the 40-year-old son could stay in the home in the 55-and-over senior community.

It is doubtful that the decedent owned the right to convey his/her property interest to a non-senior.

In addition, the mother’s will also should be reviewed thoroughly to determine whether the will leaves the residuary estate to the son, or if it specifically leaves the home to the son.

If the son inherits the residuary estate, then the home will be liquidated, and the proceeds are inherited by the son. If the mom’s will specifically leaves the home to the son, the bequest will most likely fail. In that case, the home would be liquidated, and the proceeds would pass as part of the residuary estate.

Finally, there’s also a good chance that the son may not have been living there with the approval of the by-laws, but there could be an exception to the by-laws for someone who is disabled. Speak with your estate planning attorney if you have questions or concerns.

Reference: lehighvalleyhigh.com (Jan. 13, 2020) “Can son remain in 55-and-over community after parent dies?”