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 Add that to My Will?

In general, a last will and testament is an easy and straightforward way to state who gets what when you die and designate a guardian for your minor children, if you (and your spouse) die unexpectedly.

MSN’s recent article entitled “Things you should never put in your will” explains that you can be specific about who receives what. However, attaching strings or conditions may not work because there’s no one to legally enforce the terms. If you have specific details about how a person should use their inheritance, whether they are a spendthrift or someone with special needs, a trust may be a better option because you’ll have more control, even from beyond the grave.

Keeping some assets out of your will can actually benefit your future heirs because they’ll get their inheritance faster. When you pass on, your will must be “proven” and validated in a probate court prior to distribution of your property. This process takes some time and effort, if there are issues—including something in your will that doesn’t need to be there. For example, property in a trust and payable-on-death accounts are two types of assets that can be distributed to your beneficiaries without a will.

Don’t put anything in a will that you don’t own outright. If you jointly own assets with someone, they will likely become the new owner. For example, this applies to a property acquired by married couples in community property states.

Property in a revocable living trust. This is a separate entity that you can use to distribute your assets which avoids probate. When you title property into the trust, it is subject to the trust’s rules.  Because a trust operates independently, you must avoid inconsistencies and not include anything in your will that the trust addresses. Contact an experienced estate planning attorney to discuss.

Assets with named beneficiaries. Some financial accounts are payable-on-death or transferable-on-death. They are distributed or paid out directly to the named beneficiaries. That makes putting them in a will unnecessary (and potentially troublesome, if you’re inconsistent). However, you can add information about these assets in your letter of instruction (see below). As far as bank accounts, brokerage or investment accounts, retirement accounts and pension plans and life insurance policies, assign a beneficiary rather than putting these assets in your will.

Jointly owned property. Property you jointly own with someone else will almost always directly pass to the co-owner when you die, so do not put it in your will. A common arrangement is joint tenancy with rights of survivorship.

Other things you may not want to put in a will. Businesses can be given away in a will, but it’s not the best plan. Wills must be probated in court and that can create a rough transition after you die. Instead, work with an experienced estate planning attorney on a succession plan for your business and discuss any estate tax issues you may have as a business owner.

Adding your funeral instructions in your will isn’t optimal. This is because the family may not be able to read the will before making arrangements. Instead, leave a letter of instruction with any personal wishes and desires.

Reference: MSN (Dec. 8, 2020) “Things you should never put in your will”

 

How Can I Easily Pass My Home to My Only Child?

This estate planning issue concerns a single retired parent of an only adult daughter and how to transfer the home to the daughter. Should the daughter simply sell the house when her mother dies, or should the daughter be added to the deed now while her mother is alive?

Also, is there a court hearing?

In many states, there is no reason or requirement to go before a judge to probate your estate, says nj.com in its recent article “Should I add my daughter’s name to my home’s deed?”

In estate planning, there are two primary questions to answer about the transfer of the home. First, there would possibly be some significant capital gains if the mom adds her daughter to the deed prior to death.

Also, if the mother winds up requiring Medicaid, Medicaid might put a lien against the home after she dies for the value of the services it provided.

Generally, when a home has been owned for a long time, the mother should try to preserve the step-up in basis for tax purposes that happens, if the real estate is still in the mom’s name at her passing.

Whether that step up is preserved, depends on how the daughter is added to the deed.  Adding the daughter as a joint tenant or tenant in common won’t preserve the step-up basis for taxes. Ask an elder law attorney what this means in your specific situation.  A better option may be to transfer the remainder interest in the property to the daughter in this scenario and withhold a life estate for the mom.

That will preserve the step-up in basis at death.

This can also get complicated when there’s an outstanding mortgage, so speak to an experienced elder law attorney or estate planning attorney.

Reference: nj.com (Dec. 15, 2020) “Should I add my daughter’s name to my home’s deed?”

 

What Do I Need to Know about Creating a Will?

A simple or basic will allows you to specifically say the way in which you want your assets to be distributed among your beneficiaries after your death. This can be a good starting point for creating a comprehensive estate plan because you may need more than just a basic will.

KAKE’s recent article entitled “What Is a Simple Will and How Do You Make One?” explains that a last will and testament is a legal document that states what you want to happen to your property and “worldly goods” when you die. A simple will can be used to designate an executor for the will and a legal guardian for minor children and specify who (or which organizations) should inherit your assets when you die. You should contact an estate planning  attorney to assist you.

A will must be approved in the probate process when you pass away. After the probate court reviews the will to make sure it’s valid, your executor will take care of the collection and distribution of assets listed in the will. Your executor would also be responsible for paying any debts owed by your estate.  Whether you need a basic will or something more complex, usually depends on a few factors, including your age, the size of your estate and if you have children (and their ages).

Having a will in place can be a good starting point for estate planning. However, deciding if it should be simple or complex can depend on a number of factors, such as:

  • The size of your estate
  • The amount of estate tax you expect to owe
  • The type of assets and property you own
  • Whether you own a business
  • The number of beneficiaries you want to name
  • Whether the beneficiaries are individuals or organizations (like charities)
  • Any significant life changes you anticipate, like marriages, divorces, or having more children; and
  • Whether any of your children or beneficiaries have special needs.

With these situations, you may need a more detailed will to plan how you want your assets to be distributed. In any event, work with an experienced estate planning attorney. With life or financial changes, you may need to create a more complex will or consider a trust. It is smart to speak with an estate planning attorney, who can help you determine which components to include in your plan and help you keep it updated.

Reference: KAKE (Nov. 23, 2020) “What Is a Simple Will and How Do You Make One?”

 

What Questions Keep Pre-Retirees Awake at Night?

As we get to the final part of our careers, thoughts of how retirement will look can create mixed emotions. For many, it will be a time to dream about doing those things on their bucket list, such as traveling abroad, learning a hobby, making memories with grandchildren, or pursuing a new business venture.

However, for others, it may be a time of stress and uncertainly because of the extent to which our identity has been tied to our career success and advancement. The routines and structures we’ve followed for years will end, and we face a new reality.

Kiplinger’s recent article entitled “4 Questions That Keep Most Pre-Retirees Awake at Night” explains that for many people coming to this next phase of life, there are four questions that will keep them awake at night. Knowing the answers to these four questions, can give confidence to those who are prepared to make this a smooth transition.

Exactly When Can I Retire? With the traditional pension becoming a thing of the past, the answer may not be so obvious. We also can’t overlook the emotional piece of retirement. Research shows that the happiest people in retirement will be retiring to something, instead of retiring from something. Several pursuits in retirement can bring purpose and meaning to daily life. As you near retirement, consider what pursuits you may enjoy and allow yourself to look forward to getting started.

Will I Have Enough Money? What’s the “magic number” that makes it appropriate to retire? However, more importantly, what is your “magic number.” This may be tied emotionally to a vision you’ve had your entire career, like accumulating $1 million or paying off your mortgage. However, there’s no one-size-fits-all answer to this question. Start by creating a retirement budget and understand what percentage of your monthly expenses can be covered by fixed sources of income, like your Social Security, pension and investments. The closer this percentage is to 100, the better. You should also be certain that you parse out the purpose of your money and specifically dedicate it to things, like creating monthly income, covering future health care costs and growth to outpace inflation. If you do this, you’ll be better able to allocate your portfolio appropriately among various tools, such as savings, investments, annuities and life insurance, etc..

Will My Nest Egg Last Throughout Retirement? A major issue for retirees is having negative returns in their investment portfolio during their early years of retirement. Unlike your working years, when you may have been contributing money to your retirement plan on a regular basis, the opposite may now happen. Monthly withdrawals may be needed to generate needed income. This is referred to as a Sequence of Returns Risk, where the order in which the annual returns hit a portfolio matters significantly. The best way to manage this risk is to avoid taking systematic distributions from a fluctuating account. Earmark a portion of your portfolio to create the monthly income needed to cover fixed expenses that are beyond what your Social Security and your pension will provide. Once you have this, you’re ready to see what combination of investments and insurance tools are right for you.

Will My Family Be OK? If you die, will your spouse be OK and able to carry on? It’s essential to be sure that both spouses are comfortable with the finances and how decisions on investing and retirement have been made. Contact an experienced estate planning attorney if you have not created an estate plan yet.

Reference: Kiplinger (Oct. 29, 2020) “4 Questions That Keep Most Pre-Retirees Awake at Night”

 

What are the Biggest Estate Planning Mistakes?

One of the largest wealth transfers our nation has ever seen is about to occur, in the next 25 years, roughly $68 trillion of wealth will be passed to succeeding generations. This event has unique planning opportunities for those who are prepared, and also big challenges due to the ever-changing legal and tax world of estate planning.

Fox Business’ article “5 estate planning disasters you’ll want to avoid,” discusses the biggest estate planning errors to avoid.

Failing to properly name beneficiaries. This common estate planning mistake is easily overlooked, when setting up a retirement plan for the first time or when switching investment companies. A big advantage of adding a beneficiary to your account, is that the account will avoid probate and pass directly to your beneficiaries.

Any account with a properly listed beneficiary designation will override what is written in your will or revocable living trust. Therefore, you should review your investment and bank accounts to make certain that your beneficiaries are accurate and match your intentions.

Naming a minor as a beneficiary. This can be a problem, if they are still minors when you die. A minor won’t have the legal authority to take control of inheritance or investment accounts until they reach the age of 18 or 21 (depending on state law). When a minor receives an asset as a beneficiary, a court-appointed guardianship will be created to supervise and manage the assets on behalf of the minor. To avoid this mistake, you can name a guardian for the minor child in your will.

Forgetting to fund a trust. Creating a trust is the first step, but many people don’t properly fund their trust after it’s established. Contact an estate planning attorney to assist you with this.

Making a tax mess for your heirs. A significant advantages of passing on real estate or other highly appreciated investments or property, is that your beneficiaries receive what is known as a “step-up” in basis, so that they aren’t responsible for any income taxes on the appreciated assets when they are received. The exception is when inheriting retirement accounts, such as 401k’s and traditional IRAs. Except for a surviving spouse, inheriting a traditional IRA or 401k means that you are now responsible for the taxes owed. With the recent passage of the SECURE Act, most non-spouse beneficiaries must totally withdraw a 401k or IRA within 10 years. It is deemed to be ordinary income for beneficiaries, which could result in a huge tax bill for your heirs. To avoid this, you can convert some or all of your retirement account assets to a Roth IRA during your lifetime, which lets you to pay the conversion taxes at your current income tax rate—a rate that may be much lower than your children or grandchildren’s tax rate. When you pass away, any money that is passed inside a Roth IRA goes tax-free to your heirs.

Failing to create a comprehensive estate plan. Properly establishing your estate plan now, will care for your loved ones financially, and can also save them a lot of emotional stress after you’re gone.

Talk to an experienced estate planning attorney about planning now. It can really affect your family for generations. It is one of the best gifts that you can leave your family.

Reference: Fox Business (Nov. 12, 2020) “5 estate planning disasters you’ll want to avoid”

 

What Do I Need to Do When my Spouse Dies?

Investment News’ recent article entitled “When a spouse passes away” provides some thoughts on how to prioritize the essential responsibilities, so grieving spouses aren’t overwhelmed with the number of tasks involved when your spouse dies. This can include contacting insurance companies, Social Security, Medicare and banks, along with the funeral planning and dealing with family needs.

  1. Don’t go it alone. Get some help from your siblings, children, or friends. It is a stressful time, so don’t be afraid to recognize when you need help and assign some of the jobs. In most cases, family members will want the opportunity to help. This lets them participate in honoring the person you’ve lost and ensure that all responsibilities are fulfilled. It can include contacting family and friends and helping prepare for the funeral.
  2. Don’t rush. There are just a few things you need to accomplish within the first week like planning for funeral services, looking into veteran benefits, if applicable, notifying friends and family and requesting 10 to 15 death certificates from the funeral home. That is because each financial institution or insurer will want an original death certificate. You should also be contacting your estate planning attorney for guidance, if there are any special things that need to be done according to your spouse’s will.

Within the first few weeks after the passing of your spouse, contact their health insurance provider and Medicare to tell them of your spouse’s death, so you can stop paying premiums. Call your spouse’s employer (if applicable, to ask if there were death benefits or other benefits or eligible pensions). Contact your financial adviser to review your financial accounts and confirm any automatic distributions that might be set up. Call life insurance companies, if your spouse had life insurance policies, as well as other insurance companies with which you have policies for property and casualty (home and auto), long-term care and disability coverage. Review bank accounts, bills and credit cards to confirm all expenses are either set up to be paid automatically or will be paid on time. You also need to have access to your spouse’s phone and email accounts to confirm that you are seeing and reviewing all financial notifications.

3.Work with an experienced estate planning attorney. Your lawyer can help guide you through the most difficult time of your life. He or she will be able to advise on the issues you need to prioritize, especially to ensure that your finances are still in line, not only for you but for future generations. Make certain to include a family member or friend on your phone calls or meetings to help take notes and guide the conversation. That way, you don’t have to remember everything. Ask that these meetings are memorialized in a follow up email.

4.Things will be different. After the services and the initial mourning period are over, you may be alone for some time. That’s a big change for many people who lose a spouse. Keep regular communication with friends and family. Consider grief counseling and make regular plans to get yourself out of the house.

5.There can be a ton of paperwork. There will be busy work, like changing the name on car titles, utility bills, insurance policies, investment accounts, bank accounts and phone bills, as well as administering your family trusts and making updates to your own estate planning documents by contacting your estate planning attorney.

You need to give yourself plenty of time and space to grieve, rest and remember your loved one.

Reference: Investment News (Aug. 11, 2020) “When a spouse passes away”

 

Do I Need More Than a Will?

If you die without a will (i.e., intestate), a court will determine who inherits your assets and who would care for any surviving children as a guardian.  CNBC’s recent article entitled “A will doesn’t cover all your bases when it comes to end-of-life decisions. Here’s what else you need” explains that some assets pass outside of the will including retirement accounts and life insurance.

Start your estate planning with a will which is just one piece of an “estate plan.” Creating a plan for your assets helps make certain that your wishes will be carried out upon your death and that family grumbling doesn’t escalate into destroyed relationships. Here are some additional things about estate planning you should know.

What passes via your will. A will is a document that allows you to say who gets what when you die. However, there are some assets that pass outside of the will, such as retirement accounts like 401(k) plans and individual retirement accounts (IRAs), and life insurance policies. As a result, the person named as a beneficiary on those accounts will get the money, no matter what your will says. Regular bank accounts also can have beneficiaries listed on a payable-on-death form, also known as a POD. If you own a home, check how it’s titled to ensure it ends up passing as you wish upon your death.

Executor. As part of the will-making process, you’ll need to name an executor of your will (sometimes called a personal representative). This entails making sure that assets are liquidated, the assets go to the proper beneficiaries, paying any debts not discharged and selling your home.

To prepare a will, you can hire an estate planning attorney in your local area, who knows state law. If use an online option, note that not all of the web-based alternatives will necessarily reflect the specifics of your state’s law. Online forms or software may not be compliant with your local law.

Living Will. An estate plan will typically include a few other legal documents, such as an advance health-care directive, also known as a living will. This document states your wishes, if you become incapacitated due to illness or injury, like whether you want to be kept on life support if there’s no hope of recovery.

Powers of Attorney. If you become incapacitated, your designated attorney-at-fact or agent will handle your medical and financial affairs. Similar to selecting an executor, be certain that he or she is trustworthy and smart, with the ability, skill set, time and desire to make such decisions and do these tasks.

Make a list of critical documents. Create an organized list of information your executor will need to settle your estate and include passwords, so your online accounts can be accessed.

Look at a trust. If you want your children or loved ones to receive money but don’t want to give a young adult or someone with poor money management free access to a lot of cash, you can create a trust for your beneficiaries. A trust holds assets on behalf of your beneficiaries, so they can only receive money according to how (or when) you’ve stated in the trust documents.

Again, it is important that you contact an experienced estate planning attorney to help you.

Reference: CNBC (July 27, 2020) “A will doesn’t cover all your bases when it comes to end-of-life decisions. Here’s what else you need”

 

How Can We Do Estate Planning in the Pandemic?

We can see the devastating impact the coronavirus has had on families and the country. However, if we let ourselves dwell on only a few areas of our lives that we can control, the pandemic has given us some estate and financial planning opportunities worth evaluating, says The New Hampshire Business Review’s recent article entitled “Estate planning in a crisis.”

Unified Credit. The unified credit against estate and gift tax is still a valuable estate-reduction tool that will probably be phased out. This credit is the amount that a person can pass to others during life or at death, without generating any estate or gift tax. It is currently $11,580,000 per person. Unless it’s extended, on January 1, 2026, this credit will be reduced to about 50% of what it is today (with adjustments for inflation). It may be wise for a married couple to use at least one available unified credit for a current gift. By leveraging a unified credit with advanced planning discount techniques and potentially reduced asset values, it may provide a very valuable “once in a lifetime” opportunity to reduce future estate tax.

Reduced Valuations. For owners of closely-held companies who’d like to pass their business to the next generation, there’s an opportunity to gift all or part of your business now at a value much less than what it would’ve been before the pandemic. A lower valuation is a big plus when trying to transfer a business to the next generation with the minimum gift and estate taxes.

Taking Advantage of Low Interest Rates. Today’s low rates make several advanced estate planning “discount” techniques more attractive. This includes grantor retained annuity trusts, charitable lead annuity trusts, intra-family loans and intentionally defective grantor trusts. The discount element that many of these techniques use, is tied to the government’s § 7520 rate, which is linked to the one-month average of the market yields from marketable obligations, like T-bills with maturities of three to nine years. For many of these, the lower the Sect. 7520 rate, the better the discount the technique provides.

Estate Planning. Now is the time to contact an experienced estate planning attorney to get your affairs organized

Bargain Price Transfers. The reduced value of stock portfolios and other assets, like real estate, may give you a chance to give at reduced value. Gifting at today’s lower values does present an opportunity to efficiently transfer assets from your estate, and also preserve estate tax credits and exclusions.

 

Reference: New Hampshire Business Review (May 21, 2020) “Estate planning in a crisis”

 

What Can I Do to Plan for Incapacity?

Smart advance planning can help preserve family assets, provide for your own well-being and eliminate the stress and publicity of a guardianship hearing, which might be needed if you do nothing. These are just some thoughts to ponder when you are planning for incapacity.

A guardianship or conservatorship for an elderly individual is a legal relationship created when a judge appoints a person to care for an elderly person, who’s no longer able to care for herself.   The guardian has specific duties and responsibilities to the elderly person.

FEDweek’s recent article entitled “Guarding Against the Possibility of Your Incapacity” discusses several possible strategies.

Revocable (“living”) trust. Even after you transfer assets into the trust, you still have the ability to control those assets and collect any income they earn. If you no longer possess the ability to manage your own affairs, a co-trustee or successor trustee can assume management of trust assets on your behalf.

Durable power of attorney. A power of attorney (POA) document names an individual to manage your assets that aren’t held in trust. Another option is to have your estate planning attorney draft powers of attorney for financial institutions that hold assets, like a pension or IRA. Note that many financial firms are reticent to recognize powers of attorney that are not on their own forms.

Joint accounts. You can also establish a joint checking account with a trusted child or other relative. With her name on the account, your daughter can then pay your bills, if necessary. However, note that the assets held in the joint account will pass to the co-owner (daughter) at your death even if you name other heirs in your will.

There may also be health care expenses accompanying incompetency.  This would include your health insurance and also potentially disability insurance in the event your incapacity should happen when you are still be working, and long-term care insurance, to pay providers of custodial care, at home or in a specialized facility, such as a nursing home.

Contact an experienced estate planning attorney to review the do’s and dont’s of estate planning.

Reference: FEDweek (March 5, 2020) “Guarding Against the Possibility of Your Incapacity”