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Blog Articles

What Does Recent Legislation Mean for the Generation-Skipping Transfer Tax (GSTT) Exemption?

Congress has made some significant changes through the planned sunset of the Tax Cuts and Jobs Act (TCJA) increased exemptions and through the recent changes to retirement planning in the Secure Act.

Think Advisor’s recent article entitled, “Estate Planning Tips and Updates,” looks at some of the most notable of these.

  1. Increased Estate Tax Exemption Amounts. The current applicable exemption amount of $11.58 million each (or $23.16 million for a married couple) lets many people totally avoid transfer taxes. However, the applicable exclusion amount reverts to its prior inflation adjusted amount in 2026. Therefore, if you have a gross estate of $11 million and previously made, say, $7 million of gifts, the rules eliminate any claw back of those gifts, if death occurs in 2026. However, you have no applicable exclusion amount remaining, says the IRS. As a result, after the sunset, you have a gross estate of $4 million and no remaining exemption. With this example, you’d be wise to consider implementing one or more strategies, including gifts and sales to grantor trusts, before the end of 2025 to be certain you fully use the disappearing exemption.
  2. The Increased Generation-Skipping Transfer Tax (GSTT) Exemption. The TCJA also upped the GSTT exemption to $11.58 million each. This allows many people to exempt transfers for several generations, if not in perpetuity, under the laws of certain states. However, they must intentionally draft trusts to establish legal situs in states like Nevada to leverage longer perpetuities periods. This will result in avoiding additional estate, gift and GSTT taxes for longer periods, normally a net positive.
  3. Annual Exclusion Gifts. Regardless of the increased exemption amounts, continued annual exclusion gifts (currently $15,000) are still going to be a crucial component of most estate tax reduction planning, removing the amount of the gift and its future appreciation. The tax-exclusive nature of the gift tax makes gifts more tax-efficient.
  4. Basis Harvesting. The increased exemption amounts often will result in some people with previous trust planning no longer having estate tax issues. These people could look at reforming, amending, or decanting an existing trust to add older generations in a manner to cause inclusion in their estates. This inclusion triggers the basis step-up rules in the code and may dramatically reduce taxes upon a liquidity event, like the sale of a business interest previously gifted or sold over to the trust.
  5. Secure Act Age Changes. For those born after July 1, 1949, the Act raises the beginning age for minimum distributions (RMDs) to 72.
  6. Employer Inducements. The Act increases the current $500 credit for setting up a retirement plan to $5,000 in some situations and provides a $500 credit for three years to encourage the use of auto-enrollment.
  7. Inherited IRAs. The Act substantially restricts the use of “stretch” IRAs. For deaths after December 31, 2019, a recipient of an IRA from the deceased must generally take distributions from the IRA over no more than a 10-year period. However, the new rules exempt accounts inherited by a spouse, a minor child, a disabled or chronically ill person, or anyone less than 10 years younger than the deceased account owner.
  8. Annuities. The “stretch” IRA provisions also apply to annuities with one important exception. Annuities making payments before January 1, 2020, may still pay out over two lives. The new law encourages greater investment in annuities through 401(k) plans, and especially plans offered by smaller businesses, by decreasing the risk associated with offering annuities. As a result, employers offering annuities as investments won’t have fiduciary duties as to those potential annuity investments, assuming they choose an issuer in good standing with the applicable state insurance commission. The Secure Act also offers portability for annuities, if you change jobs. This is a direct transfer between retirement plans.

Reference: Think Advisor (March 25, 2020) “Estate Planning Tips and Updates

Update Your Estate Plan to Protect Spouse and Children

Without an updated estate plan, a surviving spouse is left with a world of trouble, as described in the article “Protect Your Spouse and Children by Updating Your Estate Plan” from The National Law Review.

The documents that need to be updated beginning with the will. In one example, a will from a prior marriage left all of a person’s assets to their prior spouse and siblings. Under New York and New Jersey state law, gifts to prior spouses are automatically revoked by law. What does that mean? All assets pass to the alternate beneficiary, who is named in the first will. For this particular spouse, that means that all the deceased spouse’s assets went to the siblings and not the new spouse.

In New Jersey and New York, spouses can elect against a will to claim a share of the deceased spouse’s assets, but this only applies to a third of their assets. That’s far short of what a spouse usually wants for their surviving spouse and children.

The only thing worse than an out-of-date will is no will at all. In another case, a spouse died without having a will. The law in New Jersey provides that in this situation, most assets will go to the surviving spouse, but almost a quarter will go to the deceased’s parents, if they are still living. If there are children from a prior marriage, then a little more than half of the estate will go to the surviving spouse.

The other bad part of having an out-of-date will almost always means that beneficiaries have not been updated. Here’s where things can get even worse.

Assets that have designated beneficiaries do not pass through probate and go directly to the beneficiaries. How bad this can be, depends upon what assets are owned with a designated beneficiary, and how long ago the beneficiaries were named. In some states, prior spouses are removed as beneficiaries by the operation of law, but that is not always the case. An estate planning attorney will be able to explain your state’s laws.

Here’s one more case where a failure to update estate plans caused real hardship for a family. A niece, and not the new spouse, was named as the beneficiary of the deceased’s IRA, which was a large asset. Several hundred thousand dollars went to the niece, instead of going to the man’s new wife and child. He simply never updated his beneficiary designation.

While 401(k)s are always left to the spouse under ERISA, unless spousal consent is given for another beneficiary to receive the 401(k), IRAs are given to whoever is named as a beneficiary. The same goes for life insurance policies, investment accounts, bank accounts and any asset with a named beneficiary.

Speak with your estate planning attorney now to be sure that your current will still reflects your estate planning goals. If you have remarried, welcomed a new child to the family, or had any other major life events, your estate plan needs to be updated. Don’t wait until it’s too late.

Reference: The National Law Review (March 16, 2020) “Protect Your Spouse and Children by Updating Your Estate Plan”

 

Massive Changes to RMDs from Stimulus Plan

Several of the provisions that were signed into law in the relief bill can taken advantage of immediately, reports Financial Planning in the article “Major changes in RMDs and retirement contributions in $2T stimulus plan.” Here are some highlights.

Extended deadline for 2019 IRA contributions. With the tax return filing date extended to July 15, 2020 from April 16, the date for making 2019 contributions to IRA and Roth IRA contributions has also been extended to the same date. Those contributions normally must be made by April 15 of the following year, but this is no normal year. There have never been extensions to the April 15 deadline, even when taxpayers filed for extensions.

When this tax return deadline was extended, most financial professionals doubted the extension would only apply to IRA contributions, but the IRS responded in a timely manner, issuing guidance titled “Filing and Payment Deadlines Questions and Answers.” These changes give taxpayers more time to decide if they still want to contribute, and how much. Job losses and market downturns that accompanied the COVID-19 outbreak have changed the retirement savings priorities for many Americans. Just be sure when you do make a contribution to your account, note that it is for 2019 because financial custodians may just automatically consider it for 2020. A phone call to confirm will likely be in order.

RMDs are waived for 2020. As a result of the Coronavirus Aid, Relief and Economic Security Act (CARE Act), Required Minimum Distributions from IRAs are waived. Prior to the law’s passage, 2020 RMDs would be very high, as they would be based on the substantially higher account values of December 31, 2019. If not for this relief, IRA owners would have to withdraw and pay tax on a much larger percentage of their IRA balances. By eliminating the RMD for 2020, tax bills will be lower for those who don’t need to take the money from their accounts. For 2019 RMDs not yet taken, the waiver still applies. It also applies to IRA owners who turned 70 ½ in 2019. This was a surprise, as the SECURE Act just increased the RMD age to 72 for those who turn 70 ½ in 2020 or later.

IRA beneficiaries subject to the five- year rule. Another group benefitting from these the rules are beneficiaries who inherited in 2015 or later and are subject to the 5-year payout rule. Those beneficiaries may have inherited through a will or were beneficiaries of a trust that didn’t qualify as a designated beneficiary. They now have one more year—until December 31, 2021—to withdraw the entire amount in the account. Beneficiaries who inherited from 2015-2020 now have six years, instead of five.

Additional relief for retirement accounts. The new act also waives the early 10% early distribution penalty on up to $100,000 of 2020 distributions from IRAs and company plans for ‘affected individuals.’ The tax will still be due, but it can be spread over three years and the funds may be repaid over the three-year period.

Many changes have been implemented from the new legislation. Speak with your estate planning attorney to be sure that you are taking full advantage of the changes and not running afoul of any new or old laws regarding retirement accounts.

Reference: Financial Planning (March 27, 2020) “Major changes in RMDs and retirement contributions in $2T stimulus plan”

 

You Can Complete Your Estate Plan During the Coronavirus Quarantine

The coronavirus lockdown is happening in many states, following the lead of California, Illinois, Florida and New York. Kiplinger’s recent article entitled “How to Get Your Estate Plan Done While Under Coronavirus Quarantine” says that these isolation orders create unique issues with your ability to effectively establish or modify your estate plan.

The core documents for an estate plan are intended to oversee the management and distribution of your assets, after you pass or in the event you are incapacitated. Each document has requirements that must be met to be legally effective. Let’s look at some of these documents. Note that there’s proposed federal legislation that would permit remote online notarization, and Illinois and New York have passed orders to allow notarization utilizing audio visual technology.

Will. Every state has its own legal requirements for a will to be valid, and most require disinterested witnesses. Some states, like California, permit a will, otherwise requiring the signature of witnesses, to be valid with clear and convincing evidence of your intent for the will to be valid. An affidavit indicating that the will was signed as a result of the emergency conditions caused by the COVID-19 virus should satisfy this requirement.

Power of Attorney. This document designates an individual to make financial decisions regarding your assets and financial responsibilities, if you’re unable to do so. This can include issues regarding retirement benefits, life and medical insurance and the ability to continue payments to persons financially dependent on you. The durable general power of attorney is typically notarized.

Advance Health Care Directive. This document states whether you want your life extended by life support systems and if you want extraordinary measures to be taken. It may state that you wish to have a DNR (Do Not resuscitate) in place.

HIPAA Authorization. Some states have their own medical privacy laws with separate requirements, and most powers of attorney provide that the designated persons can act, if you’re unable to do so. Financial institutions typically require confirming letters from your doctor that you’re unable to act on your own behalf. To be certain that this agent can act on your behalf if needed, they should be given written access to see your medical information.

With the pandemic, these requirements can be fluid and may change quickly. Be sure to work with an experienced estate planning attorney.

Reference: Kiplinger (March 30, 2020) “How to Get Your Estate Plan Done While Under Coronavirus Quarantine”

 

Nursing Home Care Costs and Applying for Medicaid

Medicaid provides several programs funded through a state-federal agreement, explains the article “Planning a must: Medicaid and paying for nursing homes” from The Dallas Morning News. One of the programs provides long-term nursing home care benefits to pay for nursing home or approved residential care facilities. However, requirements to qualify for Medicaid vary widely from state to state. It’s best to speak with an elder law attorney, who will be able to help you plan in advance.

Let’s take Texas as our example. To qualify in the Lone Star state, you must have a medical need and fall under the income and asset caps, which change yearly. In 2020, the income limit for an individual is $2,349 and the asset (resource) amount is $2,000. For a married person, your spouse can have income and resources that are protected, $25,728 is the minimum SPRA (the minimum resource protected amount) and the maximum is $128,640. The monthly maintenance needs allowance for a spouse is $3,216.50. If they sound like low levels, they are. However, there are some assets that Texas does not count. The well spouse may continue to maintain the family home, as long as its value is less than $595,000. A car, burial plots and prepaid funeral arrangements are also permitted.

For most people, this presents a bad situation. Their assets are too high to qualify for Medicaid, but they don’t have enough money to pay for nursing home care. That’s where Medicaid planning with an elder law attorney comes in. The attorney will know where assets can be shielded to protect the well spouse and how to work within the Medicaid requirements.

A word of advice: Don’t start giving away assets because you think that you can do this yourself. The first rule: there is a five-year lookback period, and if assets have been distributed within a five year period of the person applying for Medicaid, their eligibility will be delayed. The rules about gifting assets are complicated and mistakes are non-negotiable.

Be careful of elder exploitation. Planning for Medicaid is one thing, being convinced to impoverish yourself so someone else can have a luxurious lifestyle is another. There’s a fine line between the two. Be aware of the difference. An attorney can play an important role here, since they have a legal and ethical responsibility to protect their client’s interests.

Be certain that you have a Durable Power of Attorney in place. Why? If you become incapacitated during the process of Medicaid planning, your agent will be able to help with Medicaid planning and file for the Medicaid application.

Don’t sell your home. In most states, the primary residence is a protected asset for Medicaid. Once it is sold, however, the proceeds of the sale are considered a personal asset and will be counted.

It’s also important to understand that Medicaid does not pay for all nursing home stays. Medicaid pays for a nursing-home designated “Medicaid bed” in a semi-private room. Depending on where you live, there may not be as many Medicaid beds as there are people who need them.

An elder lawyer will be able to help you and your family with planning for Medicaid, and with an application. You’ll be better off relying on the help of an experienced attorney.

Reference: The Dallas Morning News (March 15, 2020) “Planning a must: Medicaid and paying for nursing homes”

 

If Not Now, When? It is the Time for Estate Planning

What else could possibly go wrong? You might not want to ask that question, given recent events. A global pandemic, markets in what feels like free fall, schools closed for an extended period of time—these are just a few of the challenges facing our communities, our nation and our world. The time is now, in other words, to be sure that everyone has their estate planning completed, advises Kiplinger in the article “Coronavirus Legal Advice: Get Your Business and Estate in Order Now.”

Business owners from large and small sized companies are contacting estate planning attorney’s offices to get their plans done. People who have delayed having their estate plans done or never finalized their plans are now getting their affairs in order. What would happen if multiple family members got sick, and a family business was left unprotected?

Because the virus is recognized as being especially dangerous for people who are over age 60 or have underlying medical issues, which includes many business owners and CEOs, the question of “What if I get it?” needs to be addressed. Not having a succession plan or an estate plan, could lead to havoc for the company and the family.

Establishing a Power of Attorney is a key part of the estate plan, in case key decision makers are incapacitated, or if the head of the household can’t take care of paying bills, taxes or taking care of family or business matters. For that, you need a Durable Power of Attorney.

Another document needed now, more than ever: is an Advance Health Care Directive. This explains how you want medical decisions to be made, if you are too sick to make these decisions on your own behalf. It tells your health care team and family members what kind of care you want, what kind of care you don’t want and who should make these decisions for you.

This is especially important for people who are living together without the legal protection that being married provides. While some states may recognize registered domestic partners, in other states, medical personnel will not permit someone who is not legally married to another person to be involved in their health care decisions.

Personal information that lives only online is also at risk. Most bills today don’t arrive in the mail, but in your email inbox. What happens if the person who pays the bill is in a hospital, on a ventilator? Just as you make sure that your spouse or children know where your estate plan documents are, they also need to know who your estate planning attorney is, where your insurance policies, financial records and legal documents are and your contact list of key friends and family members.

Right now, estate planning attorneys are talking with clients about a “Plan C”—a plan for what would happen if heirs, beneficiaries and contingent beneficiaries are wiped out. They are adding language that states which beneficiaries or charities should receive their assets, if all of the people named in the estate plan have died. This is to maintain control over the distribution of assets, even in a worst-case scenario, rather than having assets pass via the rules of intestate succession. Without a Plan C, an entire estate could go to a distant relative, regardless of whether you wanted that to happen.

Reference: Kiplinger (March 16, 2020) “Coronavirus Legal Advice: Get Your Business and Estate in Order Now.”

 

Should I Use Life Insurance in My Estate Planning?

With proper planning, insurance money can pay expenses like estate taxes. It will help keep other assets intact.

For example, Hector passes away and leaves his rather large estate to his daughter, Isabella. Because of the size of the estate, there’s a hefty estate tax due. However, unfortunately, most of Hector’s assets are tied up in real estate and an IRA. Isabella may not be keen on a quick forced sale of the real estate to free up some cash for the taxes. If Isabella taps the inherited IRA to raise cash, she’ll have to pay income tax on the withdrawal and lose a valuable opportunity for extended tax deferral.

FedWeek’s recent article entitled “Using Life Insurance to Protect Your Estate” that in this scenario, Hector could plan ahead. Anticipating such a result, he could buy insurance on his own life. The proceeds of that policy could be used to pay the estate tax bill. Isabella can then keep the real estate, while taking only the Required Minimum Distributions (RMD) that are warranted by law from the inherited IRA. If the insurance policy is owned by Isabella or by a trust, the proceeds most likely won’t be included in Hector’s estate, and the money won’t increase the estate tax liability she has.

However, some common life insurance mistakes can sabotage your estate plan:

  • Designating your estate as the beneficiary. This will place the policy proceeds in your estate, which exposes the funds to estate tax and your creditors. Your executor will also have more paperwork, if your estate is the beneficiary. Instead, name the appropriate people, trust or charities.
  • Naming just a single beneficiary. Name at least two “backup” beneficiaries to decrease confusion, in the event the main beneficiary should die before you.
  • Placing your policy in the “file and forget” drawer. Review your policies at least once every three years, make the appropriate changes and get a confirmation, in writing, from the insurance company.
  • Inadequate insurance. In the event of your untimely death, if you have a young child, in all likelihood it will take hundreds of thousands of dollars to pay all her expenses, such as college tuition. Failing to purchase adequate insurance coverage may hurt your family. This also shouldn’t be a hardship with term insurance costs so low.

Reference: FedWeek (Feb. 6, 2020) “Using Life Insurance to Protect Your Estate”

 

How Do I Revoke a Trust on My Home?

There are a number of issues to consider, says nj.com’s recent article entitled “I want to revoke a trust on my house. What do I do?” To revoke a trust on a house, will require the assistance of an experienced estate planning attorney.

The answer to a question about how to get out of a trust on a home is going to be in the terms of the trust itself. However, if the terms of the trust are silent, the answer may be found in the trust laws in the state statutes.

However, if answering the question in general terms, the primary concern is whether the trust is revocable or irrevocable. If the trust is irrevocable, it means that the house can’t be removed from the trust. The exception to this rule is with a court order. Obtaining court approval can be very expensive and time consuming. In addition, there’s no guarantee you’ll get that approval, because courts frequently deny the requests depending on the facts of the case.

The first step is to determine whether the trust is revocable. You will then need to see who you are in relation to the trust.

Without a court order, the only person (or entity) who the trustee can sign a deed transferring a house that’s owned by a trust is the trustee.

The trust is set up to be managed by the trustee, rather than by any of the beneficiaries of the trust. Thus, for any change in the status of the house to occur, the trustee has to be in agreement that this should be done.

Next, let’s look at the reason why the home was initially put in a trust.

If the purpose was to lower estate taxes, it may make sense to remove the house from trust. This is especially the case, if the state no longer has an estate tax, like New Jersey which just got rid of theirs a few years ago, or there was never any state estate tax. An estate rarely meets the threshold for federal estate taxes.

However, if the house was put in the trust for purposes of asset protection as part of a long-term care plan, there aren’t many good reasons to take the house out of trust. The trust can sell the house and hold onto the proceeds or purchase another house without jeopardizing the asset protection plan.

Reference: nj.com (Feb. 4, 2020) “I want to revoke a trust on my house. What do I do?”

 

What I Need to Know about Caring for a Loved One with Dementia

Family caregivers of dementia patients must be more prepared for immediate changes in temperament. They need more support and respite care, and they need a better idea of what to expect in the days and months ahead.

Forbes’s recent article entitled “When Your Loved One Has Dementia: 3 Questions For Family Caregivers” provided three important questions to ask if your aging parent or family member has been diagnosed with a form of dementia.

What training must I have? When a parent, friend, or other loved one in your care is has dementia, you should look to local healthcare resources for education and training.

The temperament of people suffering from a form of dementia can change swiftly. It can rapidly turn hurtful or even violent. However, there are things a caregiver can do to interact with them to help keep them calm. Ask their healthcare provider for suggestions or referrals.

As a caregiver, do I have the legal standing to take care of this person? You should determine if your loved one has a will or living will in place, along with a healthcare power of attorney. These are documents that must be drafted and signed, before their dementia progresses to the point where it totally distorts your loved one’s thought process.

The documents provide instructions as how to care for them, according to their original wishes and avoid stress in the family, if disagreements arise. Contact an elder law attorney as soon as possible to create these documents.

How do I get help when I need it? Caring for an aging loved one can be a very tiring task. Tending to the needs of an aging loved one with a form of dementia is an even greater challenge. Begin planning now for self-care.

You can’t take care of a loved one with dementia, if your physical and mental health is wiped out and you are exhausted. Look at respite care options to give yourself the rest you’re going to need.

Getting these measures ready now can ensure that you are prepared for the tough future.

Reference:  Forbes (March 23, 2020) “When Your Loved One Has Dementia: 3 Questions For Family Caregivers”

 

The Coronavirus and Estate Planning

As Americans adjust to a changing public health landscape and historical changes to the economy, certain opportunities in wealth planning are becoming more valuable, according to the article “Impact of COVID-19 on Estate Planning” from The National Law Review. Here is a look at some strategies for estate plans:

Basic estate planning. Now is the time to review current estate planning documents to be sure they are all up to date. That includes wills, trusts, revocable trusts, powers of attorney, beneficiary designations and health care directives. Also be sure that you and family members know where they are located.

Wealth Transfer Strategies. The extreme volatility of financial markets, depressed asset values,and historically low interest rates present opportunities to transfer wealth to intended beneficiaries. Here are a few to consider:

Intra-Family Transactions. In a low interest rate environment, planning techniques involve intra-family transactions where the senior members of the family lend or sell assets to younger family members. The loaned or sold assets only need to appreciate at a rate greater than the interest rate charged. In these cases, the value of the assets remaining in senior family member’s estate will be frozen at the loan/purchase price. The value of the loaned or sold assets will be based on a fair market value valuation, which may include discounts for certain factors. The fair market value of many assets will be extremely depressed and discounted. When asset values rebound, all that appreciation will be outside of the taxable estate and will be held by or for the benefit of your intended beneficiaries, tax free.

Grantor Retained Annuity Trusts (GRATS). The use of a GRAT allows the Grantor to contribute assets into a trust while retaining a right to receive, over a term of years, an annuity steam from the Trust. When the term of years expires, the balance of the Trust’s assets passes to the beneficiaries. The IRS values the ultimate transfer of assets to your intended beneficiaries, based on the value of the annuity stream you retain and an assumed rate of return. The assumed rate of return, known as the 7520 rate comes from the IRS and is currently 1.8%. So, if you retain the right to receive an annuity stream from the trust equal to the value of the assets plus a 1.8% rate of return, assets left in the trust at the end of the term pass to your beneficiaries transfer-tax free.

Charitable Lead Annuity Trusts. Known as “CLATs,” they are similar to a GRAT, where the Grantor transfers assets to a trust and a named charity gets an annuity stream for a set term of years. At the end of that term, the assets in the trust pass to the beneficiaries. You can structure this so the balance of the assets passes to heirs transfer-tax free.

Speak with your estate planning attorney about these and other wealth transfer strategies to learn if they are right for you and your family. And stay well!

Reference: The National Law Journal (March 13, 2020) “Impact of COVID-19 on Estate Planning”