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”

 

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?”

 

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”

 

How Do I Incorporate My Business into My Estate Planning?

When people think about estate planning, many just think about their personal property and their children’s future. If you have a successful business, you may want to think about having it continue after you retire or pass away.

Forbes’ recent article entitled “Why Business Owners Should Think About Estate Planning Sooner Than Later” says that many business owners believe that estate planning and getting their affairs in order happens when they’re older. While that’s true for the most part, it’s only because that’s the stage of life when many people begin pondering their mortality and worrying about what will happen next or what will happen when they’re gone. The day-to-day concerns and running of a business is also more than enough to worry about, let alone adding one’s mortality to the worry list at the earlier stages in your life.

Business continuity is the biggest concern for entrepreneurs. This can be a touchy subject, both personally and professionally, so it’s better to have this addressed while you’re in charge rather than leaving the company’s future in the hands of others who are emotionally invested in you or in your work. One option is to create a living trust and will to put in place parameters that a trustee can carry out. With these names and decisions in place, you’ll avoid a lot of stress and conflict for those you leave behind.

Let them be upset with you, rather than with each other. This will give them a higher probability of working things out amicably at your death. The smart move is to create a business succession plan that names successor trustees to be in charge of operating the business, if you become incapacitated or die.

A power of attorney document will nominate a fiduciary agent to act on your behalf, if you become incapacitated, but you should also ask your estate planning attorney about creating a trust to provide for the seamless transition of your business at your death to your successor trustees. The transfer of the company to your trust will avoid the hassle of probate and will ensure that your business assets are passed on to your chosen beneficiaries. Timely planning will also preserve your business assets, as advanced tax planning strategies might be implemented to establish specific trusts to minimize the estate tax.

Estate planning may not be on tomorrow’s to do list for young entrepreneurs and business owners. Nonetheless, it’s vital to plan for all that life may bring.

Reference: Forbes (Dec. 30, 2019) “Why Business Owners Should Think About Estate Planning Sooner Than Later”

Mistakes to Avoid when Planning Estates

Because estate planning has plenty of legal jargon, it can make some people think twice about planning their estates, especially people who believe that they have too little property to bother with this important task.

Comstock’s Magazine’s recent article entitled “Five Mistakes to Avoid When Planning Your Estate” warns that without planning, even small estates under a certain dollar amount (which can pass without probate, according the probate laws in some states) may cause headaches for heirs and family members. Here are five mistakes you can avoid with the help of an experienced estate planning attorney:

Getting Bad Advice. If you want to plan an estate, start with a qualified estate planning attorney. There are plenty of other “experts” out there ready to take your money who don’t know how to apply the law and strategies to your specific situation.

Naming Yourself as a Sole Trustee. You might think that the most trustworthy trustee is yourself, the testator. However, the estate plans can break down, if dementia and Alzheimer’s disease leave a senior susceptible to outside influences. In California, the law requires a certificate of independent review for some changes to trusts, like adding a nurse or an attorney as a beneficiary. However, this also allows family members to take advantage of the situation. It’s wise to designate a co-trustee who must sign off on any changes — like a trusted adult child, financial adviser, or licensed professional trustee, providing an extra layer of oversight.

Misplacing Assets. It’s not uncommon for some assets to be lost in a will or trust. Some assets, such as 401(k) plans, IRAs, and life insurance plans have designated beneficiaries which are outside of a last will and testament or trust document. Stocks and securities accounts may pass differently than other assets, based upon the names on the account, and sometimes people forget to change the beneficiaries on these accounts, like keeping a divorced spouse on a life insurance policy. When updating your will or trust, make certain to also update the beneficiaries of these types of assets.

Committing to a Plan Without Thinking of Others. When it comes to estate planning, there’s no one-size-fits-all solution. For example, for entitlement or tax reasons, it may make sense to transfer assets to beneficiaries, while the testator is still living. This might also be a terrible idea depending on the beneficiaries’ situation and ability to handle a sum of money. He or she may have poor spending habits. Remember that estate planning is a personal process that depends on each family’s assets, needs and values. Work with an experienced estate planning attorney to be sure to consider all the angles.

Reference: Comstock’s Magazine “Five Mistakes to Avoid When Planning Your Estate”

 

How Can Life Insurance Help My Estate Plan?

In the 1990s, it wasn’t unusual for people to buy second-to-die life insurance policies to help pay federal estate taxes. However, in 2019, with estate tax exclusions up to $11,400,000 (and rising with the cost-of-living adjustments), fewer people would owe much for estate taxes.  However, IRAs, 401(k)s, and other accounts are still 100% taxable to the individuals, spouses and their children. The stretch IRA options still exist, but they may go away, as Congress may limit stretch IRAs to a maximum of 10 years.

Forbes’ recent article, “3 Ways Life Insurance Can Help Your Estate Plan,” explains that as the IRA is giving income from the RMDs, it may also be added, after tax, to the life insurance policy. If this occurs, it’s even possible that the death benefits could grow in the future, giving a cost-of-living benefit to children. This is one way how life insurance can be used creatively to help your estate plan.

For married couples, one strategy is to consider how life insurance on one individual could be used to pay “conversion tax” at death, using tax-free benefits. When the retiree dies, the spouse beneficiary can then convert all the IRA (taxable money) to a Roth IRA, which is tax-exempt with new, lower income tax rates (37% in 2018-2025 versus 39.6% in 2017 or earlier).

This tax-free death benefit money can be used to pay the taxes on the conversion, letting the surviving beneficiary have a lifetime of tax-exempt income without RMD issues from the Roth IRA. The Social Security income could also be tax-exempt, because Roth withdrawals don’t count as “income” in the calculation to see how much of your Social Security is taxed. However, you’d have to be within the threshold for any other combined income.

Life insurance for both individuals (if married) may also be a good idea. If the spouse of the IRA owner dies, the money from the life insurance can be used once again. If this is done in the tax year of the death for married individuals, the tax conversion could be done under “married filing status” before the next year, when the individual must use single tax filing status.

Another benefit of the IRA-to-Roth conversion is the passing of Roth IRAs to heirs, which could create a lasting legacy, if planned well. New life insurance policies that add long-term care features with chronic care and critical care benefits can also provide an extra degree of benefits, if one of the insureds has health issues prior to death.

Be sure to watch the tax rates and possible changes. With today’s lower tax rates, this could be very beneficial. Remember that there are usually individual state taxes as well. However, considering all the tax-optimized benefits to spouses and beneficiaries, the long-term tax benefits outweigh the lifetime tax liabilities, especially when you also consider SSI tax benefits for the surviving spouse and no RMD issues.

Life insurance in retirement can help protect, build and transfer wealth in one of the easiest ways possible. If you’re not certain about where to start with your life insurance needs, speak with an experienced estate planning attorney.

Reference: Forbes (November 15, 2019) “3 Ways Life Insurance Can Help Your Estate Plan”

 

Can I Place My IRA in a Trust?

Unfortunately, you can’t place an individual retirement account (IRA) in a trust while you’re alive. This rule applies to all types of IRAs including traditional, Roth, SEP, and SIMPLE IRAs says Investopedia’s article, “How Can I Put My IRA In a Trust?”

However, if you establish a trust as part of your estate plan and want to include your IRA assets, you need to look at the characteristics of an IRA and tax consequences concerning certain transactions.

IRA accounts were designed to achieve two goals. First, they provided tax-deferred retirement savings for individuals not covered under an employer-sponsored plan. For those who were covered, IRAs provided a spot for retirement-plan assets to continue to grow, when and if the account holder changed jobs via an IRA rollover.

IRA accounts can only be owned by an individual. They can’t be held in joint name and can’t be titled to an entity, like a trust or small business. Contributions can also only be made, if certain criteria are met, such as the owner must have taxable earned income to support the contributions. A non-working spouse can own an IRA but must receive contributions from the working spouse and the working spouse’s income must satisfy the criteria.

No matter the source of the contributions, the IRA owner must remain constant. Only certain ownership transfers are permitted to avoid being categorized as a taxable distribution. If transferred to a trust, IRA assets become taxable, because this transfer is seen as a distribution by the IRS. In addition, if the owner is under age 59½ at the time of distribution, there’s an early withdrawal penalty. The trust can accept IRA assets of a deceased owner, however, and establish an inherited IRA.

Naming a trust as the beneficiary to an IRA can be a good idea, because owners can instruct the beneficiaries on how to use their savings. A trust can be created, so that special provisions for inheritance apply to specific beneficiaries. This can be a helpful option, if the beneficiaries vary greatly in age, or if some of them have special needs to be addressed.

Planning should consider how beneficiaries will take possession of IRA assets and over what time period. Get professional advice from a trust and estate planning lawyer. Ask the attorney about getting the maximum stretch option for the distribution of the account. The trust will need to have specific terms, such as “pass-through” and “designated beneficiary.” If it doesn’t have terms for inheriting an IRA, it should be rewritten, or specific people should instead be named as beneficiaries.

While moving all assets into the name of a trust and designating it as the beneficiary on retirement accounts is common, it is not always a good decision. Trusts, like other non-individuals that inherit IRA assets, are subject to accelerated withdrawal requirements. Most of the time, these must take place within five years from the original IRA owner’s death. Without the proper “pass-through” terms, stretching the withdrawals over a lifetime isn’t an option. Depending on the size of the account, this could place a major burden on the beneficiaries. It’s especially detrimental to eliminate the spousal inheritance provisions by designating a trust, instead of a spouse as the beneficiary.

Reference: Investopedia (November 26, 2019) “How Can I Put My IRA In a Trust?”

 

When Can Parent Legally Make an End-Of-Life Decision?

Twenty-one-year-old Damaire was brought to Erie County Medical Center in the early morning hours. Damaire’s father was told that the person found Gordon on the side of the road, wrapped in a blanket and dropped him off at the hospital. He was brain dead. He had no gunshot or stab wounds and there were no signs of blunt-force trauma.

“I thought I would be seeing my son hurt some type of way that was very bad,” said Gordon’s father Mister Sommerville. “But, when I got there I saw my son had no trauma…and they can’t explain to me why he’s lifeless.”

Sommerville was told by his son’s mother Regina Gordon-Sayles that their boy was brain-dead at the hospital.

WKBW’s recent article, “A man was found brain-dead, but neither parent could legally make an end-of-life decision” reports that Gordon-Sayles said that she was a single mother of five and said that Sommerville had not been involved in Damaire’s life. However, he became very involved when it came time to make a decision about his passing.  Damaire’s mother was set to remove her son off the respirator, but his father refused to consent. “I was so confused about why I needed another consent,” said Gordon-Sayles.

The problem is that neither parent could give legal consent to take their son off life support because Damaire hadn’t designated either parent as his health care proxy. Under Article 81 of the New York State Mental Hygiene Law, the matter would have to go to a judge who would start the process to appoint the best person to handle end-of-life decisions.

A medical power of attorney, also called an “Advance Directive” or “Health Care Proxy,” is a document that allows a person to provide someone with the authority to address health care decisions on their behalf, if they’re not able to do so themselves. You should contact an experienced estate planning attorney to prepare a Health Care Proxy.

Unfortunately, these situations occur more frequently than we would wish. Making a bad situation more heartbreaking is traumatic for the family.

The situation is a matter of liability for the hospital. Every person has the right to due process, when it comes to making decisions for themselves, even in death. However, if that person can’t make a decision for herself, a judge must intervene and appoint an appropriate party.

Damaire’s father didn’t like the care his son was getting at ECMC and wanted more of an investigation into why the young man was in a brain-dead state, when doctors found only marijuana in his system. Doctors told both parents that they were restricted in the type of drugs for which they could screen, without an autopsy.

Damaire’s case went before a judge to appoint a proxy. The judge decided to continue his investigation into the case and didn’t take any action for more than a week. Damaire’s heart stopped beating the next day. His mom said a friend of his told her the truth about what happened to him, days later.

“He got ahold of some fentanyl, and I don’t know if my baby was laced…I don’t know if he took it himself, but it had something to do with fentanyl.”

“I was told when it happened, my son went into attack mode, he dropped, and they put him on the porch because they didn’t want to be charged with it.”

Reference: WKBW (November 5, 2019) “A man was found brain-dead, but neither parent could legally make an end-of-life decision”

 

Why Shouldn’t I Delay Making Big Gifts?

The unified federal estate and gift tax exemption for 2020 will jump up to $11.58 million or effectively $23.160 million for married couples.

Market Watch’s recent article, “Get your estate plan in order (this means you),”says that, despite these huge big exemptions and the fact you’re not currently exposed to the federal estate tax, your estate plan may still need updating to reflect the current tax rules.

You may be exposed to the federal estate tax in the future, even though you’re okay right now.

Let’s look at some issues, regardless of whether or you’re “rich” enough to be worried about exposure to the federal estate tax. Year-end is a good time to conduct your estate planning self-check, so let’s get started.

Update beneficiary designations. A will or living trust doesn’t override the beneficiary designations for life insurance policies, retirement accounts and other types of investment accounts. This includes accounts, such as life insurance policies, annuities, IRAs, other tax-favored retirement accounts and employer-sponsored benefit plans. The person(s) named on the most-recent beneficiary form will get the money automatically if you die, regardless of what your will or living trust document might state.

Designate secondary beneficiaries. Designate one or more secondary (contingent) beneficiaries to inherit, if the primary beneficiary dies before you do. Consider this possibility.

Update property titles. If you’re married and own property with your spouse as joint tenants with right of survivorship (JTWROS), the surviving spouse will automatically get sole ownership of the property when the other spouse dies. The major advantage of JTWROS ownership is that it avoids probate. The property automatically goes to the surviving joint tenant.

Name guardians. One of the main purposes of a will, is to designate a guardian for your minor children (if any). The guardians must care for your children, until they reach adulthood.

Any life event could require changes in your estate plan. In addition, the federal and estate and gift tax rules have been unpredictable in the past, along with the state death tax rules. Talk with your estate planning attorney today.

Reference: Market Watch (November 11, 2019) “Get your estate plan in order (this means you)”