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?”

 

When Does a Power of Attorney Fail to Do Its Job?

A power of attorney is an essential component of a comprehensive estate plan. However, there are at least two important situations when the power of attorney (POA) will not be recognized and followed.

The IRS and Social Security Administration don’t recognize traditional POAs, explains Forbes’ recent article entitled “Two Times When Your Power Of Attorney Isn’t Going To Work.”

The IRS requires the use of its Form 2848, “Power of Attorney and Declaration of Representative” before it will let anyone act on your behalf. This form is required when an agent, even a relative, tries to handle your tax matters, when you are not able to so.

One of the requirements of Form 2848 is that it requires you to state the tax matters and years for which the agent is authorized to act. Form 2848 also requires you to list the type of tax, the IRS form number and the year or periods involved. That is different from a traditional POA to handle financial matters, which frequently has a blanket statement allowing the agent to take a broad range of actions on your behalf in certain matters.

For a married couple that files joint tax returns, each spouse must also separately complete and sign a form. They cannot simply execute a joint form.

Technically, the IRS could accept other POAs, as indicated by the instructions to Form 2848. However, as you can see a POA must meet all the IRS’ requirements to be accepted.

The Social Security Administration is much the same. When you need someone to manage your Social Security benefits, you contact the Social Security Administration and make an advance designation of a representative payee.

This lets you name one or more people to manage your Social Security benefits. The Social Security Administration then is required to work with the named individual or individuals, in most cases.

A person who already is receiving Social Security benefits may name an advance designee at any time. A first-time claimer can also name the designee during the claiming process.

This designee can be changed at any time.

If you do not name any representatives, the Social Security Administration will designate a representative payee on your behalf, if it determines that you need help managing your money. Relatives or friends can apply to be representative payees, or the Social Security Administration can select someone. Contact an experienced estate planning attorney to assist you.

Reference: Forbes (Jan. 28, 2021) “Two Times When Your Power of Attorney Isn’t Going to Work”

 

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”

 

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 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”

 

When Do We Need an Elder Law Attorney?

Kiplinger’s article “When Elder Care Requires Legal Advice” explains that this is when a lot of panicked calls are made to elder law attorneys. These attorneys specialize in planning for the legal complications that can arise in old age. However, seldom do people think to consult one preemptively to avoid making that panicked phone call in the first place.

Elder care lawyers work in the best interests of the older person, although how that is accomplished may differ. If the senior is competent and contacts the attorney it can be fairly straightforward. However, if an adult family member or friend is an agent or has power of attorney for an elderly person—and asks for help, the attorney is representing the agent. In any event, anyone who has power of attorney has a fiduciary responsibility to do what is best for the elderly person granting them that authority.

If a power of attorney isn’t in place and the elderly parent is incapable of giving it, the family is required to go to court to have someone appointed as a guardian which can be a time-consuming option. If a parent is cognitively capable and doesn’t want help there’s nothing an attorney can do about it.

Although state laws vary, elder law primarily concerns these topics:

  • The client’s wishes and health
  • Family dynamics; and
  • The client’s financial assets and income.

An elder care attorney will also make sure that all important documents are in place and up-to-date according to state laws. This may include a will, a trust, a power of attorney and an advance directive that includes a health care proxy.

Elder law attorneys also help moderate tough decisions, like when family members can’t agree about how a loved one wanted to be buried.  In addition, elder care lawyers understand the complex laws for Medicaid and VA benefits. An elder care lawyer can speak to many other issues ranging from long-term care insurance to capital gains taxes.

A key when meeting with an elder law attorney is that you feel comfortable, that you’re not rushed and that your questions are answered.

Reference: Kiplinger (Sep. 15, 2020) “When Elder Care Requires Legal Advice”

 

How Do I Find a Good Estate Planning Attorney?

About 68% of Americans don’t have a will. With the threat of the coronavirus on everyone’s mind, people are in urgent need of an estate plan. To make sure your plan is proper and legal, consult an experienced estate planning attorney. Work with a lawyer who understands your needs, has years of experience and knows the law in your state.

EconoTimes’ recent article entitled “Top 3 Estate Planning Tips When Seeing An Attorney” provides several tips for estate planning when seeing an attorney.

Attorney Experience. An estate planning attorney will have the experience and specialized knowledge to help you, compared to a general practitioner. Look for an attorney who specializes in estate planning.

Inventory. List everything you have. Once you start the list, you may be surprised with the tangible and intangible assets you possess.

Tangible assets may include:

  • Cars and boats
  • Homes, land, and other real estate
  • Collectibles like art, coins, or antiques; and
  • Other personal possessions.

Your intangible assets may include:

  • Mutual funds, bonds, stocks
  • Savings accounts and certificates of deposit
  • Retirement plans
  • Health saving accounts; and
  • Business ownership.

Create Your Estate Planning Documents. Prior to seeing an experienced estate planning attorney, he or she will have you fill out a questionnaire and to bring a list of documents to the appointment. In every estate plan, the core documents often include a creating a last will and powers of attorney, as well as coordinating your Beneficiary Designations on life insurance and investment accounts. You may also want to ask about a trust and if you have minor children selecting a guardian for their care if you should pass away. You should also ask about estate taxes with the attorney.

Reference: EconoTimes (July 30, 2020) “Top 3 Estate Planning Tips When Seeing An Attorney”

 

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”

 

When Exactly Do I Need to Update My Will?

Many people say that they’ve been meaning to update their last will and testament for years but never got around to doing it.

Kiplinger’s article entitled “12 Different Times When You Should Update Your Will” gives us a dozen times you should think about changing your last will:

  1. You’re expecting your first child. The birth or adoption of a first child is typically when many people draft their first last will. Designate a guardian for your child and who will be the trustee for any trust created for that child by the last will.
  2. You may divorce. Update your last will before you file for divorce because once you file for divorce, you may not be permitted to modify your last will until the divorce is finalized. Doing this before you file for divorce ensures that your spouse won’t get all of your money, if you die before the divorce is final.
  3. You just divorced. After your divorce, your ex no longer has any rights to your estate (unless it’s part of the terms of the divorce). However, even if you don’t change your last will, most states have laws that invalidate any distributive provisions to your ex-spouse in that old last will. Nonetheless, update your last will as soon as you can so your new beneficiaries are clearly identified.
  4. Your child gets married. Your current last will may speak to issues that applied when your child was a minor so it may not address your child’s possible divorce. You may be able to ease the lack of a prenuptial agreement, by creating a trust in your last will and including post-nuptial requirements before you child can receive any estate assets.
  5. A beneficiary has issues. Last wills frequently leave money directly to a beneficiary. However, if that person has an addiction or credit issues, update your last will to include a trust that allows a trustee to only distribute funds under specific circumstances.
  6. Your executor or a beneficiary die. If your estate plan named individuals to manage your estate or receive any remaining funds, but they’re no longer alive, you should update your last will.
  7. Your child turns 18. Your current last will may designate your spouse or a parent as your executor, but years later, these people may be gone. Consider naming a younger family member to handle your estate affairs.
  8. A new tax or probate law is enacted. Congress may pass a bill that wrecks your estate plan. Review your plan with an experienced estate planning attorney every few years to see if there have been any new laws relevant to your estate planning.
  9. You come into a chunk of change. If you finally get a big lottery win or inherit money from a distant relative update your last will so you can address the right tax planning. You also may want to change when and the amount of money you leave to certain individuals or charities.
  10. You can’t find your original last will. If you can’t locate your last will, be sure that you replace the last will with a new, original one that explicitly states it invalidated all prior last wills. Contact an experienced estate planning attorney to assist you.
  11. You purchase property in another country or move overseas. Many countries have treaties with the U.S. that permit reciprocity of last wills. However, transferring property in one country may be delayed, if the last will must be probated in the other country first. Ask your estate planning attorney about having a different last will for each country in which you own property.
  12. Your feelings change for a family member. If there’s animosity between people named in your last will, you may want to disinherit someone. You might ask your estate planning attorney about a No Contest Clause that will disinherit the aggressive family member, if he or she attempts to question your intentions in the last will.

Reference: Kiplinger (May 26, 2020) “12 Different Times When You Should Update Your Will”

 

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”