Have You Considered Estate Planning for Fido?

In Montana, a pet is “any domesticated animal normally maintained in or near the household of its owner.” In Kansas, the statutes define an “animal” as “any live dog, cat, rabbit, rodent, nonhuman primate, bird or other warm blooded vertebrate or any fish, snake, or other cold-blooded vertebrate.”

Wealth Advisor’s recent article entitled “Estate Planning For Pets” explains that a pet is tangible personal property—just like guns, cars, or jewelry. When a pet owner passes away, pets pass to beneficiaries by provisions in an owner’s will, by directives in an owner’s trust document, or by a priority list of heirs contained in the state probate laws, if an owner does not have a will or a trust.

Pet owners should select a willing care giver and make a care plan for their pet that will lower the pet’s stress in the first days after you are gone. Writing down your wishes can help your heirs avoid potential problems, if there is a need to cover expenses for food, medical requirements and transportation of the pet to the beneficiary.

For example, in Montana, an honorary trust for pets is valid for only 21 years, no matter if a pet owner writes a longer term in the trust document. As a result, the trust terminates the earlier of 21 years or when the pet dies. Unless indicated in the trust document, the trustee may not use any portion of the principal or income from the trust for any other use than for the pet’s care.

Pet owners have options, when funding a pet trust. Funds could come from a payable on death (POD) designation on financial accounts to the pet trust. Another option is a transfer on death (TOD) registration with the pet trust as beneficiary for stocks, bonds, mutual funds and annuities. The pet owner could also direct the trustee in the pet trust document to sell assets, like a vehicle, house, or  boat, and place those funds in the trust for the care of the pet.

Life insurance is perhaps another option for funding for a pet’s care. States typically do not consider a pet to be a “person,” so Puffball cannot be a beneficiary of a life insurance policy. A pet owner can fund a living or testamentary pet trust, by naming the trustee of the trust as the beneficiary of a life insurance policy. As an alternative, a pet owner may have a certain percentage of an existing policy payable to the pet trust.

Pet owners should talk to an experienced estate planning attorney about the best way of naming the trustee of a pet trust as a beneficiary of a life insurance policy.

Reference: Wealth Advisor (June 14, 2021) “Estate Planning For Pets”

 

What Do I Need to Know about Second Marriage Estate Planning?

AARP’s recent article entitled “Remarried with Children? 5 Estate Planning Mistakes to Avoid” says that most  mean well and want their spouse to inherit their possessions when they die, then want their heirs to split what’s left when the spouse dies. Here are five mistakes to avoid and to prevent fighting and hard feelings after you are gone.

Mistake #1: Failing to change beneficiaries. This is one of the most common mistakes. An advantage of changing the name of the beneficiary, is that the money will go directly to the intended person, typically the surviving spouse, bypassing the probate process. Review all of your financial accounts to be certain that your spouse is designated the beneficiary, if that is your intention. You should also check all life insurance beneficiaries because these payouts also do not go through probate.

Mistake #2: Failing to change your will. A will states who gets the rest of the assets that you and your spouse accumulated during your lifetimes. Update your will to avoid handing your home to your ex-spouse. People on their second marriage usually decide that the surviving spouse gets all the assets, and upon the death of the second spouse, the remaining assets will be divided evenly among the children. However, this assumes that everyone will still be getting along in the future, and that your spouse, upon your death, will not write a new will that removes your side of the family from the estate. You should also plan in advance who will get important family items, no matter if their value is sentimental or otherwise. You do this with a codicil to your will or a letter of instruction to your executor.

Mistake #3: Treating all heirs equally. There is no law that says all children must be treated equally. There are many reasons why parents do not treat children equally, such as when there is a child with special needs. In that instance, you should talk to your spouse about how to ensure that child is protected, perhaps through an ABLE (Achieving a Better Life Experience) account or a trust. In some situations, a child may have an addiction or a gambling problem. Some parents will create a “spendthrift trust” which disburses money at regular intervals to the beneficiary and deters creditors from getting the money in the trust.

Mistake #4: Waiting until you are gone to give. If you are planning to leave money to your children, you might think about giving it to them now, rather than in your will. The IRS allows you to give up to $15,000 per person without having to pay the federal gift tax or deal with the IRS. Your spouse may also give the same amount.

Mistake #5: Not Using an Experienced Estate Planning Attorney. If you are older and on your second marriage, chances are that your life is not uncomplicated. Ex-spouses, blended families and comingled assets create complexity, as well as having a child with special needs or an aging parent. It is smart to invest the time and money in creating a comprehensive estate plan with the help of an experienced estate planning attorney.

Reference: AARP (July 9, 2021) “Remarried with Children? 5 Estate Planning Mistakes to Avoid”

 

What are the Estate Planning Essentials?

There are eight estate planning documents that can help you get your affairs in order. According to msn.com’s recent article entitled “8 Documents That Are Essential to Planning Your Estate,” if that sounds like a lot of work, know that you may not need every document. Ask an experienced estate planning attorney about what is wise for your situation.

  1. Will. A will states what will happen to your assets and designates an executor who will be in charge of following your directions. Your will can also nominate guardians for those under your care, including minor children. When it comes to pets, many states allow you to provide assets for their care. Without a will, a probate court will name an executor for your estate.
  2. Revocable Living Trust. A living trust is another tool for passing assets to heirs, while avoiding potentially expensive and time-consuming probate proceedings. You designate a trustee who will manage the property placed in the trust. Unlike a will, a trust can be used to distribute property now or after your death.
  3. Up-to-Date Beneficiary Designations. When you purchase life insurance or open a retirement plan or bank account, you typically must name a beneficiary, who is the person you want to inherit the proceeds when you die. These designations take precedence over instructions in a will. Be sure to review and update these designations, when your life changes.
  4. Durable Power of Attorney. A power of attorney lets you to appoint an individual to act on your behalf, financially and legally, if you are unable to make decisions.
  5. Health Care Power of Attorney and a Living Will. To be certain that someone can make medical decisions for you if you become incapacitated, ask an experienced estate planning attorney to help you draft a health care power of attorney, which is also known as a durable health care power of attorney or health care proxy. This is unlike a durable power of attorney discussed above for financial and legal affairs. A living will enables you to explain in advance of death what types of care you do and do not want if you cannot communicate your wishes. This document states your health care preferences and is totally different from a conventional will or living trust, which deals with property.
  6. Digital Asset Trust. You can use a digital asset trust to determine what to do with your electronic property, including your computer hard drive, digital photos, information stored in the cloud and online accounts. Create a separate list of your passwords.
  7. Letter of Intent. If you want to leave any instructions, requests, or important personal or financial information that does not belong in your will, write a letter of intent or a letter of last instruction. This letter can state your wishes for things you hope will be done, such as instructions about how you want your funeral or memorial service to be performed. This letter does not have the legal weight of a will.
  8. A List of Important Documents. Make certain your family can locate everything that you have prepared. Make a list of documents, including where each is stored. This should include the following:
  • Birth and adoption certificates
  • Life insurance policies
  • Annuities, pension or retirement accounts
  • Bank accounts
  • Real estate deeds; and
  • Stocks, bonds and mutual funds.

It is also helpful for your heirs to include a list of bills and accounts, including contact information and account numbers for each one, so your executor can settle and close these accounts.

Reference: msn.com (June 18, 2021) “8 Documents That Are Essential to Planning Your Estate”

 

Succession Planning for Farm Transition and Estate Planning

If you think it’s bad that 60% of farmers don’t have a will, here’s what’s even worse: 89% don’t have a farm transfer plan, as reported in the recent article “10 Farm Transition and Estate Planning Mistakes from Farm Journal’s Pork Business. Here are the ten most commonly made mistakes farmers make. Substitute the word “family-owned business” for farm and the problems created are identical.

Procrastination. Just as production methods have to be updated, so does estate planning. People wait until the perfect time to create the perfect plan, but life doesn’t work that way. Having a plan of some kind is better than none at all. If you die with no plan, your family gets to clean up the mess.

Failing to plan for substitute decision-making and health care directives. Everyone should have power of attorney and health care directive planning. A business or farm that requires your day-in-day-out supervision and decision making could die with you. Name a power of attorney, name an alternate POA and have every detail of operations spelled out. You can have a different person to act as your agent for running the farm and another to make health care decisions, or the same person can take on these responsibilities. Consult with an estate planning attorney to be sure your documents reflect your wishes and speak with family members.

Failing to communicate, early and often. There’s no room for secrecy, if you want your farm or family business to transfer successfully to the next generation. Schedule family meetings on a regular basis, establish agendas, take minutes and consider having an outsider serve as a meeting facilitator.

Treating everyone equally does not fit every situation. If some family members work and live on the farm and others work and live elsewhere, their roles in the future of the farm will be different. An estate planning attorney familiar with farm families will be able to give you suggestions on how to address this.

Not inventorying assets and liabilities. Real property includes land, buildings, fencing, livestock, equipment and bank accounts. Succession planning requires a complete inventory and valuation of all assets. Check on how property is titled to be sure land you intend to leave to children is not owned by someone else. Don’t neglect liabilities. When you pass down the farm, will your children also inherit debt? Everyone needs to know what is owned and what is owed.

Making decisions based on incorrect information. If you aren’t familiar with your state’s estate tax laws, you might be handing down a different sized estate than you think. Here’s an example: in Iowa, there is no inheritance tax due on shares left to a surviving spouse, lineal descendants or charitable, religious, or educational institutions. If you live in Iowa, do you have an estate plan that takes this into consideration? Do you know what taxes will be owed, and how they will be paid?

Lack of liquidity. Death is expensive. Cash may be needed to keep the business going between the date of death and the settling of the estate. It is also important to consider who will pay for the funeral, and how? Life insurance is one option.

Disorganization. Making your loved ones go through a post-mortem scavenger hunt is unkind. Business records should be well-organized. Tell the appropriate people where important records can be found. Walk them through everything, including online accounts. Consider using an old-fashioned three-ring binder system. In times of great stress, organization is appreciated.

No team of professionals to provide experience and expertise. The saying “it takes a village” applies to estate planning and farm succession. An accountant, estate planning attorney and financial advisor will more than pay for their services. Without them, your family may be left guessing about the future of the farm and the family.

Thinking your plan is done at any point in time. Like estate planning, succession planning is never really finished. Laws change, relationships change and family farms go through changes. An estate plan is not a one-and-done event. It needs to be reviewed and refreshed every few years.

Reference: Farm Journal’s Pork Business (June 28, 2021) “10 Farm Transition and Estate Planning Mistakes

 

Aging Parents and Blended Families Create Estate Planning Challenges

Law school teaches about estate planning and inheritance, but experience teaches about family dynamics, especially when it comes to blended families with aging parents and step siblings. Not recognizing the realities of stepsibling relationships can put an estate plan at risk, advises the article “Could Your Aging Parents’ Estate Plan Create A Nightmare For Step-Siblings?” from Forbes. The estate plan has to be designed with realistic family dynamics in mind.

Trouble often begins when one parent loses the ability to make decisions. That’s when trusts are reviewed for language addressing what should happen, if one of the trustees becomes incapacitated. This also occurs in powers of attorney, health care directives and wills. If the elderly person has been married more than once and there are step siblings, it’s important to have candid discussions. Putting all of the adult children into the mix because the parents want them to have equal involvement could be a recipe for disaster.

Here’s an example: a father develops dementia at age 86 and can no longer care for himself. His younger wife has become abusive and neglectful, so much so that she has to be removed from the home. The father has two children from a prior marriage and the wife has one from a first marriage. The step siblings have only met a few times, and do not know each other. The father’s trust listed all three children as successors, and the same for the healthcare directive. When the wife is removed from the home, the battle begins.

The same thing can occur with a nuclear family but is more likely to occur with blended families. Here are some steps adult children can take to protect the whole family:

While parents are still competent, ask who they would want to take over, if they became disabled and cannot manage their finances. If it’s multiple children and they don’t get along, address the issue and create the necessary documents with an estate planning attorney.

Plan for the possibility that one or both parents may lose the ability to make decisions about money and health in the future.

If possible, review all the legal documents, so you have a complete understanding of what is going to happen in the case of incapacity or death. What are the directions in the trust, and who are the successor trustees? Who will have to take on these tasks, and how will they be accomplished?

If there are any questions, a family meeting with the estate planning attorney is in order. Most experienced estate planning attorneys have seen just about every situation you can imagine and many that you can’t. They should be able to give your family guidance, even connecting you with a social worker who has experience in blended families, if the problems seem unresolvable.

Reference: Forbes (June 28, 2021) “Could Your Aging Parents’ Estate Plan Create A Nightmare For Step-Siblings?”

 

Why Would I Need a Will or a Trust?

Say that some time ago– when your family was still young, and the estate tax limit was $600,000—you created a revocable and an irrevocable life insurance trust (ILIT). This was designed to take care of your family after your death. However, at this point, everyone is financially independent, and the value of your estate is far less than the taxable threshold of $11.7 million.

If the trust is terminated, the beneficiaries will get a step-up basis at your death and pay taxes at their own rates, rather than the trust rate. Would you need a will, if all the accounts have your children as beneficiaries? The ILIT was also funded with a term life insurance policy that is going to expire soon.

Nj.com’s recent article entitled “Should I terminate this trust and do I need a will?” says that there are number of issues to address. The purpose of an irrevocable life insurance trust (ILIT) is to own and control term or permanent life insurance policies, so that the policy proceeds aren’t included in the insured’s taxable estate upon his or her death.

While the current federal estate tax exemption amount is $11.7 million per person, the law is scheduled to expire at the end of 2025, when it will return to an exemption of $5 million, adjusted for inflation. It’s unknown if Congress will change the proposed exemption amount when the law sunsets.

If the ILIT is funded with a term policy that is set to expire soon, it may be easier to let the policy owned by the ILIT expire, which would render the ILIT immaterial. The terms of the ILIT will govern the procedure for the termination of the trust, which may be simple or onerous. Consult with an experienced estate planning attorney to who can look more closely at the trust’s language.

A revocable living trust lets the person creating the trust control the assets in the trust and avoid probate. It also can be used to manage the trust assets by a successor trustee, in the event the grantor who created the trust becomes incapacitated.

For example, New Jersey banks may freeze 50% of the assets in an estate at the owner’s death to be certain that any estate or inheritance taxes that may be due are paid. A tax waiver must be obtained to lift the freeze. However, any assets in a trust, aren’t subject to a similar freeze.

At the grantor’s death, a trustee must pay income tax, if the gross income of the trust is $600 or more. Depending on the amount of assets in the trust, the trust may not accumulate gross income of $600, if the assets are distributed outright to the beneficiaries right after the death of the grantor.

Lastly, it’s wise to have a will, even if the majority of assets are in a living trust or are in IRAs and other retirement accounts. That is because there may be some assets that are outside the trust or retirement account or there may be a need for a personal representative of the estate to handle tax or other types of refunds.

Reference: nj.com (June 15, 2021) “Should I terminate this trust and do I need a will?”

 

Can I Be Certain My Estate Plan Is Successful?

Forbes’ recent article entitled“7 Steps to Ensure a Successful Estate Plan” listed seven actions to take for a good estate plan:

  1. Educate and communicate. A big reason estate plans aren’t successful, is that the next generation isn’t ready and they waste or mismanage the assets. You can reduce those risks and put your estate in a trust to allows children limited access. In addition, you can ensure that the children have a basic knowledge of and are comfortable with wealth. Children also benefit from understanding their parents’ philosophy about managing, accumulating, spending and giving money.
  2. Anticipate family conflicts. Family conflicts can come to a head when one or both parents pass, and frequently the details of the estate plan itself cause or exacerbate family conflicts or resentments. Many people just think that “the kids will work it out,” or they create conflicts by committing classic mistakes, like having siblings with different personalities or philosophies jointly inherit property or a business.
  3. Plan before making gifts. In many cases, gift giving is a primary component of an estate plan, and gifts can be a good way for the next generation to become comfortable handling wealth. Rather than just automatically writing checks, the older generation should develop a strategy that will maximize the impact of their gifts. Cash gifts can be spent quickly, but property gifts are more apt to be kept and held for the future.
  4. Understand the basics of the plan. Few people understand the basics of their estate plans, so ask questions and get comfortable with what your estate planning attorney is saying and recommending.
  5. Organize, simplify, and prepare. A major reason it takes a lot of time and expense in settling an estate, is that the owner didn’t make it easy for the executor. The owner may have failed to make information easy to locate. An executor must understand the details of the estate.
  6. Have a business succession plan. Most business owners don’t have a real succession plan. This is the primary reason why few businesses survive the second generation of owners. The value of a small business rapidly declines, when the owner leaves with no succession plan in place. A succession plan designates the individual who’ll run the business and who will own it, as well as when the transitions will happen. If no one in your family wants to run the business, the succession plan should provide that the company is to be sold when you retire or die. A business must be managed and structured, so it’s ready for a sale or inheritance, which frequently entails improving accounting and other information systems.
  7. Fund living trusts. A frequent estate planning error is the failure to fund a revocable living trust. The trust is created to avoid probate and establish a process under which trust assets will be managed. However, a living trust has no impact, unless it’s given legal title to assets. Be sure to transfer legal ownership of assets to the trust.
  8. Contact an experienced estate planning attorney to set up an estate plan.

Reference: Forbes (May 21, 2021) “7 Steps to Ensure a Successful Estate Plan”

 

Powers of Attorney and Advance Directives

A medical crisis only gets worse, when you learn you don’t have legal authority to make medical decisions for a loved one, or find out after a loved one is incapacitated that you can’t gain access to assets in their trust. You need to have certain estate planning legal documents already in place, according to the article “Tips you should know for Powers of Attorney and Advance Directives” from seacoastonline.com.

Power of Attorney. The power of attorney (POA) allows one person, the “principal” to appoint another person as their “agent” (also known as an “attorney in fact”). The agent has the authority to act on behalf of the principal, depending on the powers described in the document. Each state has its own laws about who can be an agent, if more than one person can be appointed as agent and if there are any limits to what power can be given to an agent. Your estate planning attorney will be able to create a POA to suit your situation.

A POA can be created to give extremely broad powers to an agent. This is sometimes called a “general” POA, where agents can do everything that you would do, from accessing and managing bank accounts, applying for Social Security, to filing tax returns. A POA can also be limited in scope, known as “limited” POA. You could permit an agent to only sign a tax return or conduct a specific transaction.

In most estate planning scenarios, the POA is “durable,” meaning the named agent can continue to have authority to act, even if the principal is incapacitated after the documents have been executed. This makes sense: a durable POA generally avoids having to go to court and have a guardian appointed. The person you have selected will be the POA, not a court-appointed person.

Advance Directive. The advance directive allows a person to appoint another person to make medical decisions on their behalf if incapacitated. In some states, this is called a durable power of attorney for health care, and in others it is referred to as a health care proxy.

In most cases, the advance directive becomes effective when one or more treating physicians determine the person no longer has capacity to make or communicate health care decisions. Having this document in place avoids having to go to court to have a guardian appointed. If time is of the essence, any delay in decision-making could lead to a poor outcome. If there is no advance directive and physicians have decided you are unable to make these decisions, they go by a hierarchy of relatives to make the decisions for you. If you have an estranged adult child, for instance, but they are your next-of-kin, they could be the one making decisions for you.

If you have children who recently became legal adults (usually age 18), these documents will protect them as well, since just being their parent does not provide you with the right to make these decisions.

Contact an experienced estate planning attorney to prepare these documents should a medical crisis arise.

Reference: Seacoastonline.com (June 27, 2021) “Tips you should know for Powers of Attorney and Advance Directives”

 

Why Is It Important to have a Will?

A Gallup poll released in June showed that slightly less than half of all Americans have a will to tell loved ones what they want to happen with their estate after they die. What’s surprising is that the results of this survey have been almost the same since 1990, explains the article “6 Reasons You Need to Make a Will Now” from Real Simple. The survey also showed that upper-income Americans are more likely than lower-income Americans to have a will, and the younger people are, the less likely they are to have a will.

One of the lessons from the pandemic, is how fragile our lives are. It’s never too early to start planning and properly document your wishes. If you need more reasons to begin estate planning, here are six:

No will often leads to unwanted consequences. A major misconception is the idea that you don’t need a will because everything you own will go to your family. Not necessarily. Each state has its own laws about what happens if you have no will, and those laws are usually based on bloodlines or kinship. Most states leave two-thirds of your assets to your children and one-third to your spouse. Will your spouse be able to maintain the same standard of living, or even remain in the family home if this is how assets are distributed? A no-will situation is a no-win situation and can fracture even the best families.

Wills are used to name guardians for minor children. No parent, especially young parents, thinks that anything will happen to them, or even more unlikely, to both parents. However, it does. Creating a will offers the opportunity to name guardians to care for your children after death. If you don’t designate a guardian, a judge will. The judge will have never met your children, nor understand your family’s dynamics, and might even determine that the children should be raised by strangers.

Wills and pet trusts can protect pets after your demise. If you have beloved animal companions, it’s important to understand what can happen to them after you die. The law considers pets to be property, so you can’t leave money to your pet. However, you can create a pet trust and name a person to be the caregiver for your pet, if it survives you. The trust is enforceable, and the pet’s care can be detailed. Otherwise, there is no guarantee your pet will avoid being euthanized.

Taxes are part of death. Creating an estate plan with an experienced estate planning attorney who is knowledgeable about estate taxes, could save your heirs from losing a significant part of their inheritance. There are many tools and strategies to minimize taxes, including making charitable gifts. Plans for large estates can be structured in a way to avoid as much as 40% of tax exposure. It’s even more important to protect a smaller estate from being lost to taxes.

Peace of mind. Remember, wills and estate plans are not just for the benefit of the person who creates them. They are for the family, the surviving spouse, children, and grandchildren. If you did not take the time and make the effort to create an estate plan, they are the ones who will live with the consequences. In many cases, it could change their lives—and not for the better.

Putting it off never ends well. When you’re young and healthy, it seems like nothing can ever go wrong. However, live long enough, and you learn life has ups and downs and unexpected events—like death and serious illness—happen to everyone. Creating an estate plan won’t make you die sooner but having one can provide you and your loved ones with security, so you can focus on living.

If you need a will created, contact an experienced estate planning attorney who can help you.

Reference: Real Simple (June 25, 2021) “6 Reasons You Need to Make a Will Now”

 

How Do You Divide Inheritance among Children?

A father who owns a home and has a healthy $300,000 IRA has two adult children. The youngest, who is disabled, takes care of his father and needs money to live on. The second son is successful and has five children. The younger son has no pension plan and no IRA. The father wants help deciding how to distribute 300 shares of Microsoft, worth about $72,000. The question from a recent article in nj.com is “What’s the best way to split my estate for my kids?” The answer is more complicated than simply how to transfer the stock.

Before the father makes any kind of gift or bequest to his son, he needs to consider whether the son will be eligible for governmental assistance based on his disability and assets. If so, or if the son is already receiving government benefits, any kind of gift or inheritance could make him ineligible. A Third-Party Special Needs Trust may be the best way to maintain the son’s eligibility, while allowing assets to be given to him.

Inherited assets and gifts—but not an IRA or annuities—receive a step-up in basis. The gain on the stock from the time it was purchased and the value at the time of the father’s death will not be taxed. If, however, the stock is gifted to a grandchild, the grandchild will take the grandfather’s basis and upon the sale of the stock, they’ll have to pay the tax on the difference between the sales price and the original price.

You should also consider the impact on Medicaid. If funds are gifted to the son, Medicaid will have a gift-year lookback period and the gifting could make the father ineligible for Medicaid coverage for five years.

An IRA must be initially funded with cash. Once funded, stocks held in one IRA may be transferred to another IRA owned by the same person, and upon death they can go to an inherited IRA for a beneficiary. However, in this case, if the son doesn’t have any earned income and doesn’t have an IRA, the stock can’t be moved into an IRA.

Gifting may be an option. A person may give up to $15,000 per year, per person, without having to file a gift tax return with the IRS. Larger amounts may also be given but a gift tax return must be filed. Each taxpayer has a $11.7 million total over the course of their lifetime to gift with no tax or to leave at death. (Either way, it is a total of $11.7 million, whether given with warm hands or left at death.) When you reach that point, which most don’t, then you’ll need to pay gift taxes.

Medical expenses and educational expenses may be paid for another person, as long as they are paid directly to the educational institution or health care provider. This is not considered a taxable gift.

This person would benefit from sitting down with an estate planning attorney and exploring how to best prepare for his youngest son’s future after the father passes, rather than worrying about the Microsoft stock. There are bigger issues to deal with here.  Contact an experienced estate planning or elder law attorney to discuss these items.

Reference: nj.com (June 24, 2021) “What’s the best way to split my estate for my kids?”