Do Estate Planning before Golden Age Ends

Unfortunately, the changes that may be coming to estate planning are likely to be felt by not just ultra-high-net-worth families, but by upper middle-class families whose net worth is comfortable, but not in the stratosphere. Estate planning lawyers are talking with their clients now about how to plan for transferring assets to families without overly aggressive tax avoidance strategies, according to the article “Are We Leaving a ‘Golden Age’ For Estate Planning?” from Financial Advisor Magazine.

The lifetime gift and estate tax exemption is $11.7 million per person and $23.4 million for couples for 2021, which touched only the extremely wealthiest Americans. However, new tax policies are being debated in Congress, including the possible rollback of those estate tax exemptions. Tax-aware estate planning has already gotten underway for many Americans who are not in the top 1%.

There are two proposed changes that may push more families into using trusts and other planning strategies. The first is a proposed increase in the capital gains tax rate for high earners to bring it more in line with their income tax bracket. That would mean they might lose the advantage of deriving income from investments versus a salary.

The second is the possible elimination of step-up in cost basis for assets upon death. Other changes under discussion have been the elimination or decrease of valuation discounting within an estate.

The rush to change estate plans has begun. Estate plans are being revised, trusts are being created and giving strategies are being planned to remove assets from the grantor generations’ estates and take advantage of the current high tax exemption.

Congress is still figuring out what changes will be made. In addition, no one knows if these changes will be retroactive to 2021 if they are made in the third quarter of 2021, or if they will be enacted on January 1, 2022.

Without knowing what the final changes will be, any planning now should be made with a long-term framework for the family.

Estate planning can be considered in three steps:

The grantor generation needs to consider the purpose of their wealth. Do they want to continue a family business, give the majority of their wealth to a charitable organization, or pass it all to their children and grandchildren?

What does it mean to treat beneficiaries fairly? If one child is teacher, while the other has built and grown a highly successful business, do both children inherit the same amount? What if one of the children has a child with Special Needs?

The grantor generation needs to communicate with their heirs. Heirs often don’t learn about their parent’s intentions, tax planning or charitable giving, until after they have passed. It’s far better to talk about the parent’s wishes and their reasoning while they are living. Without these conversations, families suffering from loss must add sibling quarrels and sometimes, estate litigation, to an already difficult time. Contact an experienced estate planning attorney who can directly you.

Financial Advisor Magazine (May 20, 2021) “Are We Leaving a ‘Golden Age’ For Estate Planning”

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Can Family Members Contest a Will?

Estate planning documents, like wills and trusts, are enforceable legal documents, but when the grantor who created them passes, they can’t speak for themselves. When a loved one dies is often when the family first learns what the estate plans contain. That is a terrible time for everyone. It can lead to people contesting a will. However, not everyone can contest a will, explains the article “Challenges to wills and trusts” from The Record Courier.

A person must have what is called “standing,” or the legal right to challenge an estate planning document. A person who receives property from the decedent, and was designated in their will as a beneficiary, may file a written opposition to the probate of the will at any time before the hearing of the petition for probate. An “interested person” may also challenge the will, including an heir, child, spouse, creditor, settlor, beneficiary, or any person who has a legal property right in or a claim against the estate of the decedent.

Wills and trusts can be challenged by making a claim that the person lacked mental capacity to make the document. If they were sick or so impaired that they did not know what they were signing, or they did not fully understand the contents of the documents, they may be considered incapacitated, and the will or trust may be successfully challenged.

Fraud is also used as a reason to challenge a will or trust. Fraud occurs when the person signs a document that didn’t express their wishes, or if they were fooled into signing a document and were deceived as to what the document was. Fraud is also when the document is destroyed by someone other than the decedent once it has been created, or if someone other than the creator adds pages to the document or forges the person’s signature.

Alleging undue influence is another reason to challenge a will. This is considered to have occurred if one person overpowers the free will of the document creator, so the document creator does what the other person wants, instead of what the document creator wants. Putting a gun to the head of a person to demand that they sign a will is a dramatic example. Coercion, threats to other family members and threats of physical harm to the person are more common occurrences.

It is also possible for the personal representative or trustee’s administration of a will or trust to be challenged. If the personal representative or trustee fails to follow the instructions in the will or the trust, or does not report their actions as required, the court may invalidate some of the actions. In extreme cases, a personal representative or a trustee can be removed from their position by the court.

An estate plan created by an experienced estate planning lawyer should be prepared with an eye to the family situation. If there are individuals who are likely to challenge the will, a “no-contest” clause may be necessary. Open and candid conversations with family members about the estate plan may head off any surprises that could lead to the estate plan being challenged.

One last note: just because a family member is dissatisfied with their inheritance does not give them the right to bring a frivolous claim, and the court may not look kindly on such a case.

Reference: The Record-Courier (May 16, 2021) “Challenges to wills and trusts”

 

How to Simplify Estate Planning

For most people, estate planning and preparation doesn’t rank very high on their “to do” list. There are a number of reasons, but frequently it comes down these three: (i) cost; (ii) they believe it’s just for the rich; and (iii) it’s too complicated.

Fort Worth’s recent article entitled “3 Tips to Help Simplify Estate Planning,” explains that an estate plan really is not about you. It’s about taking care of your loved ones and charities.

Without an estate plan or last will, state intestacy law determines who gets your assets. You lose control of how your wealth will be distributed.

Let’s look at three tips to make it easier and to help you prepare for the future:

  1. Work with an experienced estate planning attorney. Estate planning is not something you ask your buddy to do. “Hey, Jimmy, help me write my will.” No way. Partner with an experienced estate planning attorney, so you are confident your documents comply with state law and that the plan’s language clearly details how your wealth should be managed.
  2. Review your estate planning documents regularly. We all have planned and unexpected events in our lives, like new grandchildren, illnesses, or significant increases or decreases in your net worth that could impact wealth and how it should be distributed. Meet regularly with your estate planning attorney and review your plan to make sure it still meets your needs and intentions.
  3. Organize important documents. Make certain important documents have been created and can be located quickly, if something happens to you. Here is a list of documents you should have on file that can be accessed by your spouse or family members in case of an emergency:
  • Wills, trusts, and other important estate planning documents
  • A list of tangible and intangible property
  • A list of financial accounts and insurance policies; and
  • Email accounts, logins, or other log-in information to your PC and phone.

Estate planning is not a DIY project. You need the expertise of an experienced estate planning attorney to make certain that your wishes are carried out and that your estate plan can withstand any legal challenge.

Reference: Fort Worth (May 6, 2021) “3 Tips To Help Simplify Estate Planning”

 

How to Protect Loved Ones from Elder Abuse

Predators had an open season on the elderly during the pandemic, as isolation necessitated by COVID severely limited family member’s ability to visit in person. In some instances, caregivers themselves were the predators, and manipulation on important legal documents, including durable power of attorney, trusts, wills and ownership of homes has occurred. All this was reported the article “Warning: Isolation Of Your Aging Parent May Be A Red Flag” from Forbes. The enforced isolation has created worrisome situations for all concerned.

If you haven’t seen your parents or grandparents for a year or more, and are all fully vaccinated, one expert strongly encourages visitation, as soon as is possible. Use the visit to review all of their legal matters and talk about how to increase engagement and end the isolation.

Consider the following a checklist of what needs to be done at that first visit:

Look for any signs that anyone who had access to loved ones may have taken advantage of their isolation during the past year. Don’t assume the best behavior of everyone around them. It’s not how we like to think, but caution needs to be exercised in this situation.

Check on their will and trusts. The pandemic has reminded everyone that life is fragile, and it’s important to go over legal documents or, if they don’t exist, create them. Find out if anyone has pressured family members to change legal documents—if they have been changed in the last year and you weren’t told about it, find out what happened.

If aging parents do not have a will or trusts, or these documents were altered in your absence, speak with an estate planning attorney who can create a new estate plan. Make sure all copies of older wills are destroyed. At the same time, this would be a good time to have their powers of attorney, healthcare proxy and living wills updated.

If your parent or grandparent lives on their own, find out if they are now in need of any caregiving. A year is a long time, and elderly people who started out fine during the epidemic may have had changes in their health or ability to live independently. Go see for yourself how they are managing. Is the house clean? Are the stairs too steep to be managed?  Not everyone will be able to return to “normal” without some help. Senior centers, gyms and recreational facilities have been shut down for a long time. They may need some help getting back into a routine of socializing and exercising.  The end of enforced isolation can also mean the end of an easy cover for anyone who was using isolation as a protection for financial elder abuse or any other type of abuse.

Isolation itself is a form of abuse, including not allowing others to visit in person or speak with a parent alone. You can overcome this by being engaged with family members on a regular basis, by phone, video visits or, if you are able to, more frequent in person visits.

Reference: Forbes (April 23, 2021) “Warning: Isolation Of Your Aging Parent May Be A Red Flag”

 

How to Avoid Probate

Avoiding probate and minimizing estate taxes are sound estate planning goals, but they shouldn’t be the only focus of an estate plan.

Nj.com’s recent article entitled “How can we avoid probate and avoid taxes for our children?” says that proper estate planning is a much broader discussion you should have with a qualified estate attorney. However, the article offers some topics to discuss with an attorney, who can review all the specifics of your situation.

Probate is the legal process for settling the debts, taxes and last expenses of a deceased person and distributing the remaining assets to his or her heirs. The costs and time needed to settle an estate can be burdensome in some states. However, steps can be taken to significantly limit probate.

Without any special planning, there are a few types of assets that can be transferred outside of probate. Items owned jointly with rights of survivorship (JTWROS) automatically become the sole property of the survivor at the first joint owner’s death. This property doesn’t go through probate.   Accounts with beneficiary designations, like retirement accounts, annuities, and life insurance policies also pass outside probate. There is a payable on death (POD) feature that provides for a beneficiary designation on non-retirement accounts (like a bank account), so POD accounts can also be transferred outside of probate.

You can also create a living trust and transfer assets into the trust during your lifetime to avoid probate. Since the trust document dictates the way in which assets are distributed upon the death of the grantor rather than the will, probate is not needed here either.  In addition, ancillary probate is a second, simultaneous process that is needed when real estate is owned in a state outside the decedent’s state of residence.

Placing out-of-state real estate in a living trust is a useful way to avoid ancillary probate. You can also place the out-of-state real estate in a Limited Liability Company (LLC), so the estate owns an interest in an LLC rather than real property. That way, the entire probate process can be handled in the decedent’s state of residence. However, talk to an experienced estate planning attorney to review which of these options — or perhaps another option — would be best for your unique situation and goals.

Other types of trusts, whether created during your lifetime or at your death, can provide creditor protection and ensure that an inheritance stays in the family, as well as help minimize estate taxes.

Under current law, federal estate tax is only due if your estate is worth more than $11.7 million (double that if you are married). A few states also have an estate tax. Other states also have an inheritance tax, but in many instances it does not apply to amounts left to the decedent’s closest relatives, including their children.

Speak with an estate planning attorney if you need assistance.

Reference: nj.com (March 24, 2021) “How can we avoid probate and avoid taxes for our children?”

 

Should Young Families have an Estate Plan?

Young families are always on the go. New parents are busy with diapers, feeding schedules and trying to get a good night’s sleep. As a result, it’s hard to think about the future when you’re so focused on the present. Even so, young parents should think about estate planning.

Wealth Advisor’s recent article entitled, “Why Young Families Should Consider an Estate Plan,” explains that the word “estate” might sound upscale, but estate planning isn’t just for the wealthy. Your estate is simply all the assets you have when you die. This includes bank accounts, 401(k) plan, a home and cars. An estate plan helps to make certain that your property goes to the right people, that your debts are paid and your family is cared for. Without an estate plan, your estate must go through probate, which is a potentially lengthy court process that settles the debts and distributes the assets of the decedent.

Estate planning is valuable for young families, even if they don’t have extensive assets. Consider these key estate planning actions that every parent needs to take to make certain they’ve protected their child, no matter what the future has in store.

Purchase Life Insurance. Raising children is costly, and if a parent dies, life insurance provides funds to continue providing for surviving children. For most, term life insurance is a good move because the premiums are affordable, and the coverage will be in effect until the children grow to adulthood and are no longer financially dependent.

Make a Will and Name a Guardian for your Children. For parents, the most important reason to make a will is to designate a guardian for your children. If you fail to do this, the courts will decide and may place your children with a relative with whom you have not spoken in years. However, if you name a guardian, you choose a person or couple you know has the same values and who will raise your kids as you would have.

Review Your Beneficiaries. You probably already have a 401(k) or IRA that makes you identify who will inherit it if you die. You’ll need to update these accounts, if you want your children to inherit these assets.

Consider a Trust. If you die before your children turn 18, your children can’t directly assume control of an inheritance, which can be an issue. The probate court could name an individual to manage the assets you leave to your child. However, if you want to specify who will manage assets, how your money and property should be used for your children and when your children should directly receive a transfer of wealth, consider asking an experienced estate planning attorney about a trust. With a trust, you can name a designated person to manage money on behalf of your children and provide direction regarding how the trustee can use the money to help care for your children as they grow. Trusts aren’t just for the very well-to-do. Anyone may be able to benefit from a trust. Contact an experienced estate planning attorney to assist you.

Reference: Wealth Advisor (April 13, 2021) “Why Young Families Should Consider an Estate Plan”

 

Can a Charity Be a Beneficiary of an Estate?

The interest in charitable giving increased in 2020 for two reasons. One was a dramatic increase in need as a result of the COVID pandemic, reports The Tax Advisor’s article “Charitable income tax deductions for trusts and estates.” The other was more pragmatic from a tax planning perspective. The CARES Act increased the amounts of charitable contributions that may be deducted from taxes by individuals and corporations.

What if a person wishes to make a donation from the assets that are held in trust? Is that still an income tax deduction? It depends.

The rules for donations from trusts are substantially different than those for charitable contribution deductions for individuals and corporations. The IRS code allows an estate or nongrantor trust to make a deduction which, if pursuant to the terms of the governing instrument, is paid for a purpose specified in Section 170(c). For trusts created on or before October 9, 1969, the IRS code expands the scope of the deduction to allow for a deduction of the gross income set aside permanently for charitable purposes.

If the trust or estate allows for payments to be made for charity, then donations from a trust are allowed and may be tax deductions. Otherwise, they cannot be deducted.  If the trust or estate allows distributions for charity, the type of asset contributed and how it was acquired by the trust or estate determines whether a tax deduction for a charitable donation is permitted. Here are some basic rules, but every situation is different and requires the guidance of an experienced estate planning attorney.

Cash donations. A trust or estate making cash donations may deduct to the extent of the lesser of the taxable income for the year or the amount of the contribution.

Noncash assets purchased by the trust/estate: If the trust or estate purchased marketable securities with income, the cost basis of the asset is considered the amount contributed from gross income. The trust or estate cannot avoid recognizing capital gain on a noncash asset that is donated, while also deducting the full value of the asset contributed. The trust or estate’s deduction is limited to the asset’s cost basis.

Noncash assets contributed to the trust/estate: If the trust or estate acquired an asset it wants to donate to charity as part of the funding of the fiduciary arrangement, no charity deduction is permitted. The asset that is part of the trust or estate’s corpus, the principal of the estate, is not gross income.

The order of charitable deductions, compared to distribution deductions, can cause a great deal of complexity in tax planning and reporting. Required distributions to noncharitable beneficiaries must be accounted for first, and the charitable deduction is not taken into account in calculating distributable net income. The recipients of the distributions do not get the benefit of the deduction. The trust or the estate does.

Charitable distributions are considered next, which may offset any remaining taxable income. Last are discretionary distributions to noncharitable beneficiaries, so these beneficiaries may receive the largest benefit from any charitable deduction.  If the trust claims a charitable deduction, it must file form 1041A for the relevant tax year, unless it meets any of the exceptions noted in the instructions in the form.

These are complex estate and tax matters, requiring the guidance of an experienced estate planning attorney for optimal results.

Reference: The Tax Advisor (March 1, 2021) “Charitable income tax deductions for trusts and estates”

 

What are the Stages of Probate?

Probate is a court-supervised process occurring after your death. It takes place in the state where you were a resident at the time of your death and addresses your estate—all of your financial assets, real estate, personal belongings, debts and unpaid taxes. If you have an estate plan, your last will names an executor, the person who takes charge of your estate and settles your affairs, explains the article “Understanding Probate” from Pike County Courier. How exactly does the probate process work?

If your estate is subject to probate, your estate planning attorney files an application for the probate of your last will with the local court. The application, known as a petition, is brought to the probate court, along with the last will. That is also usually when the petitioner files an application for the appointment of the executor of your estate.

First, the court must rule on the validity of the last will. Does it meet all of the state’s requirements? Was it witnessed properly? If the last will meets the state’s requirements, then the court deems it valid and addresses the application for the executor. That person must also meet the legal requirements of your state. If the court agrees that the person is fit to serve, it approves the application.

The executor plays a very important role in settling your estate. The executor is usually a spouse or a close family member. However, there are situations when naming an estate planning attorney or a bank is a better option. The person needs to be completely trustworthy. Your fiduciary will have a legal responsibility to be honest, impartial and put your estate’s well-being above the fiduciary’s own. If they do not have a good grasp of financial matters, the fiduciary must have the common sense to ask for expert help when needed.

Here are some of the tasks the fiduciary must address:

  • Finding and gathering assets and liabilities
  • Inventorying and appraising assets
  • Filing the estate tax return and your last tax return
  • Paying debts, managing creditors and paying taxes
  • Distributing assets
  • Providing a detailed report of the estate settlement to the court and any other parties

What is the probate court’s role in this part of the process? It depends upon the state. The probate court is more involved in some states than in others. If the state allows for a less formal process, it’s simpler and faster. If the estate is complicated with multiple properties, significant assets and multiple heirs, probate can take years.

If there is no executor named in your last will, the court will appoint an administrator. If you do not have a last will, the court will also appoint an administrator to settle your estate following the laws of the state. This is the worst possible scenario, since your assets may be distributed in ways you never wished.

Does all of your estate go through the probate process? With proper estate planning, many assets can be taken out of your probate estate, allowing them to be distributed faster and easier. How assets are titled determines whether they go through probate. Any assets with named beneficiaries pass directly to those beneficiaries and are outside of the estate. That includes life insurance policies and retirement plans with named beneficiaries. It also includes assets titled “jointly with rights of survivorship,” which is how most people own their homes.

Your estate planning attorney will discuss how the probate process works in your state and how to prepare a last will and any needed trusts to distribute your assets as efficiently as possible.

Reference: Pike County Courier (March 4, 2021) “Understanding Probate”

Suggested Key Terms: Probate, Estate Planning Attorney, Executor, Petition, Assets, Beneficiaries, Fiduciary, Will, Administrator, Jointly With Rights of Survivorship, Real Estate, Trusts,

What Should I Do with My Valuable Beanie Baby Collection?

The Wealth Advisor’s recent article entitled “Estate Planning for Your Collections May Be a Smart Decision to Make” explains that the legacy we leave isn’t always a lot of money or real estate. Artifacts and collections have a value that goes beyond dollars and cents. The importance of hobbies and collections in a person’s estate plan should be noted.

Learning a foreign language, making wine and crafting are popular stay-at-home activities, there’s a new trend: childhood collections of baseball cards, comic books, video games, sneakers, model trains, and Barbie dolls are being uncovered and re-examined.

A collector should catalog their collection because an heir might have no idea what he’s holding. Is it a three-buck toy from the local department store or is it a Devi Kroell Barbie from 2010 that sells now for at least $1,100?  One way to start a catalog is to take photos on a smart phone and save them in a shared file called “My Collectible Barbies.”

Next, get an idea what your collection is worth. You can get some idea by looking at prices for similar items on eBay prices. You also should be aware of the “grade” of your pieces. Is your Devi Kroell Barbie still in its original packaging in pristine condition, or has your niece chewed on it for a few years as a baby? Of course, the condition makes a huge difference in the price.

You can gift a collection to a trust through a gift memorandum and specifically listed it on a trust’s Schedule A. If the collectible has its own title, like your 1954 Chevrolet Corvette Convertible, the title can be transferred to the trust. When it’s part of a trust, a collectible can be distributed or maintained the way other trust assets are governed.  Trusts avoid probate and let a collector have more flexibility to control how her collection is handled, appreciated and sold. Contact an estate planning attorney to discuss preparing a trust.

Without a specific bequest in a last will, something like a Beanie Baby collection worth thousands of dollars may only be mentioned as “personal property” in a catch-all category for non-financial accounts or real estate belonging to the decedent. As a result, it’s lumped in with clothing, furniture and household items. An executor who is unfamiliar with Beanie Babies or Barbies may not know enough to maximize the collection’s value.

Some collectors dispose of an unwanted collection while they’re still alive. That is because the owner is the one who understands the market for the collectibles. Obtaining the best prices and letting your heirs  use the windfall for their individual plans may be a win-win.

Contact an experienced estate planning attorney to prepare estate planning documents.

Reference: The Wealth Advisor (Feb. 2, 2021) “Estate Planning for Your Collections May Be a Smart Decision to Make”

 

Estate Planning and a Second Marriage

In California, a community property state, a resident can bequeath (leave) 100% of their separate property assets and half of their community property assets. A resident may only bequeath the entirety of a community property asset to someone other than their spouse with their spouse’s consent or acquiescence. This can be extremely important to those in second marriages with prior children.

Wealth Advisor’s recent article entitled “Estate planning for second marriages” asks, first, does the individual’s (the testator) spouse even need support? If they don’t, a testator typically leaves his or her separate property assets directly to his or her own children. However, because the surviving spouse is an heir of the testator, his or her will and/or trust must acknowledge the marriage and say that the spouse is not inheriting. Otherwise, the surviving spouse as heir may be entitled either to a one-half or one-third share in the testator’s separate property, along with all of the couple’s community property assets. The surviving spouse would inherit, if the testator died intestate (with no will) or he or she passed with an outdated will he or she signed before this marriage that left out the current spouse.

If the spouse needs support, consider the assets and family relationships. Determine if the assets are the surviving spouse’s separate property from prior to marriage or from inheritance while married. It is also important to know if the testator’s spouse and children get along and whether it’s possible for the beneficiaries to inherit separate assets. If the testator’s surviving spouse and children aren’t on good terms and/or are close in age, and if it’s possible for separate assets to go to each party, perhaps they should inherit separate assets outright and part company. If not, it can get heated and complicated quickly. For example, the testator’s house could be left to his or her children and a retirement plan goes to the testator’s spouse.

If that type of set-up doesn’t work, a testator might consider making the spouse a lifetime beneficiary of a trust that owns some or all of an individual’s assets. A trust requires careful drafting, so work with an experienced estate planning attorney.

Next, determine if the children need support, and if so, what kind of support, such as Supplemental Security Income. Also think about whether the children can manage an outright inheritance or if a special needs or a support trust is required.

This just scratches the surface of this complex topic. Talk to an experienced estate planning attorney about your specific situation.

Reference: Wealth Advisor (Feb. 23, 2021) “Estate planning for second marriages”