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Balancing retirement with special needs planning

GRAT Assets Included in Taxable Estate

The 9th U.S. Circuit Court of Appeals addressed whether a Grantor Retained Annuity Trust, or GRAT, should be included as a taxable asset in an estate, where the decedent died during the annuity period. The case, Badgley v. United States, was discussed in an article from Wealth Management titled “A String of Bad Luck: GRAT Assets Included in Taxable Estate.”

In 1988, Patricia Yoder created a GRAT, retaining the right to receive an annual annuity for a 15-year term. On the earlier of the term’s expiration and her death, the remainder interest would transfer to Patricia’s daughters under the terms of the GRAT. She funded the GRAT with a partnership interest valued at approximately $2.4 million. A gift tax return reporting the gift of the GRAT’s remainder interest was filed. She died in November 2012, just before the end of the GRAT term.

The family filed an estate tax return, and the entire date-of-death value of the GRAT was included in the gross estate. The executor of the estate then filed an action for a tax refund, claiming that only the present value of the unpaid annuity payments should have been included. A district court rejected that argument, stating that Patricia’s annuity interest was both a retained right to income and the continued enjoyment of the property, as defined in IRC Section 2036 and, therefore, was wholly includable.

The executor argued that it was not includible, as there is no explicit mention of annuities in Section 2036. The court disagreed, stating that “if the taxpayer does not let the property go, neither will the taxman.”

The court held that Section 2036 includes purportedly transferred property that the taxpayer continues to retain possession and enjoyment of, or a right to income. If there is enough of a connection from the owner to the transferred property, the property is included in the taxable estate.

In this case, the owner of the annuity received a substantial economic benefit from the GRAT, in the form of a 15-year annuity, so it was properly included in her estate.

When planning to minimize taxes during life and death, GRATs are frequently used to transfer appreciation from a person’s taxable estate with minimal or no gift tax, by reducing or zeroing out the value of the remainder interest, through fine-tuning the trust term and annuity amount.

However, there is a risk: there’s no way to know when a person will die. The successful use of the GRAT is predicated on avoiding the estate tax, in addition to the gift tax, and the GRAT success requires the person to survive the GRAT’s term.

An estate planning attorney working closely with the family and their financial professionals will need to explain how the GRAT works to ensure that it works to their estate’s benefit.

Reference: Wealth Management (May 13, 2020) “A String of Bad Luck: GRAT Assets Included in Taxable Estate”

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Balancing retirement with special needs planning

What Happens when Mom Refuses to Create an Estate Plan?

This is a tough scenario. It happens more often than you’d think. Someone owns a home, investment accounts and an inheritance, but doesn’t want to have an estate plan. They know they need to do something, but keep putting it off—until they die, and the family is left with an expensive and stressful mess. A recent article titled “How to Get a Loved One to Visit an Estate Planning Attorney Before It’s Too Late” from Kiplinger, explains how to help make things right.

Most people put off seeing an estate planning attorney, because they are afraid of death. They may also be overwhelmed by the thought of how much work is involved. They are also worried about what it all might cost. owever, if there is no estate plan, the costs will be far higher for the family.

How do you get the person to understand that they need to move forward?

Talk with the financial professionals the person already uses and trusts, like a CPA or financial advisor. Ask them for a referral to an estate planning attorney they think would be a good fit with the person who doesn’t have an estate plan. It may be easier to hear this message from a CPA, than from an adult child.

Work with that professional to promote the person, usually an older family member, to get comfortable with the idea to talk about their wishes and values with the estate planning attorney. Offer to attend the meeting, or to facilitate the video conference, to make the person feel more comfortable.

An experienced estate planning attorney will have worked with reluctant people before. They’ll know how to put the older person at ease and explore their concerns. When the conversation is pleasant and productive, the person may understand that the process will not be as challenging and that there will be a lot of help along the way.

If there is no trusted team of professionals, then offer to be a part of any conversations with the estate planning attorney to make the introductory discussion easier. Share your own experience in estate planning, and tread lightly.

Trying to force a person to engage in estate planning with a heavy hand, almost always ends up in a stubborn refusal. A gentle approach will always be more successful. Explain how part of the estate plan includes planning for medical decisions while the person is living and is not just about distributing their assets. You should be firm, consistent and kind.

Explaining what their family members will need to go through if there is no will, may or may not have an impact. Some people don’t care, and may simply shrug and say, “It’ll be their problem, not mine.” Consider what or who matters to the person. What if they could leave assets for a favorite grandchild to go to college? That might be more motivating.

One other thing to consider: if the person has an estate plan and it is out of date, that may be just as bad as not having an estate plan at all, especially when the person has been divorced and remarried. Just as many people refuse to have an estate plan, many people fail to update important documents, when they remarry. More than a few spouses come to estate planning attorney’s offices, when a loved one’s life insurance policy is going to their prior spouse. It’s too late to make any changes. A health care directive could also name a former brother-in-law to make important medical decisions. During a time of great duress, it is a bad time to learn that the formerly close in-law, who is now a sworn enemy, is the only one who can speak with doctors. Don’t procrastinate, if any of these issues are present.

Reference: Kiplinger (May 11, 2020) “How to Get a Loved One to Visit an Estate Planning Attorney Before It’s Too Late”

 

Balancing retirement with special needs planning

Alzheimer’s and other Brain Diseases Require Special Estate Planning Steps

There are certain steps that can be taken by individuals, loved ones and family members to make this challenging time safer and smarter, advises an article “Financial And Estate Planning Steps To Take Now: Special Considerations For Those With Brain Disease” from Forbes.

Anyone living with a neurologic condition needs to be sure their planning reflects not only their condition but their personal experience of the condition. The variability of each person’s experience of a brain disease, from symptoms and severity to the progression rate and future prognosis to the possibility of any recovery, affects how they need to plan.

For an Alzheimer’s patient, in early stages there may be no problems in signing legal documents and putting legal safeguards in place to protect finances. Most people are not aware that the degree of competency to sign legal documents varies, depending upon the complexity of the documents to be signed and the circumstances. A relatively low level of competency is required to sign a will. This is known as “testamentary capacity.” A higher level of competency is required to sign something like a revocable trust, investment policy statement, etc. Therefore, a person who may be legally able to sign a will may not have the legal capacity to sign other documents. Alzheimer’s patients need to get their entire estate plan in order, as soon as a diagnosis is received. Safeguards are extremely important, including having an independent person, like a CPA or trusted family member, receive copies of all monthly bank and brokerage statements, in case abilities decline faster than anticipated.

Patients living with peripheral neuropathy may experience issues with balance, burning sensations, dizziness, hypersensitive skin and pain that make wearing socks or shoes impossible. If the condition becomes so severe that the person becomes homebound, they need to make changes: set up accounts, so bills can be paid online, have income streams set to automatic deposit and simplify and consolidate accounts. It is important to have a Power of Attorney (POA) that is effective immediately or a revocable living trust with a co-trustee. In this way, you do not have to leave home to conduct your business.

Parkinson’s disease may not be well understood by professional advisors. You’ll need to explain that your facial expression—Parkinsonian masked face—does not mean that you are not responding to a conversation. They need to know that your handwriting may change, becoming small and cramped. This can result in a bank or other financial institution refusing to accept your signature on documents. Your attorney can prepare a document that confirms you are living with Parkinson’s disease and that micrographia is one of your symptoms. The document should include three or four different signatures to reflect the variations. Have each signature witnessed and notarized.

People living with MS (multiple sclerosis) face the possibility of an exacerbation that could leave them incapacitated at any time. A revocable trust to coordinate financial management, with trusted individuals as co-trustees should be in place.

For people with these and other brain illnesses, an emergency financial and legal road map needs to be prepared. It should include monthly recurring bills, non-recurring bills like life insurance, property taxes, etc. Contact information for key advisors, your estate planning attorney, CPA, financial advisor, banker, insurance agent, etc., needs to be shared. Your estate plan should be updated, if you haven’t reviewed it in three or four years. If you don’t have an estate plan in place, now is the time to have one created.

Reference: Forbes (May 17, 2020) “Financial And Estate Planning Steps To Take Now: Special Considerations For Those With Brain Disease”

 

Balancing retirement with special needs planning

How Does a Spendthrift Trust Protect Heirs from Themselves?

This is not an unusual question for most estate planning lawyers—and in most cases, the children aren’t bad. They just lack self-control or have a history of making poor decisions. Fortunately, there are solutions, as described in a recent article titled “Estate Planning: What to do to protect trusts from a spendthrift” from NWI.com.

What needs to happen? Plan to provide for the child’s well-being but keep the actual assets out of their control. The best answer is the use of a trust. By leaving money to an heir in a trust, a responsible party can be in charge of the money. That person is known as the “trustee.”

People sometimes get nervous when they hear the word trust, because they think that a trust is only for wealthy people or that creating a trust must be very expensive. Not necessarily. In many states, a trust can be created to benefit an heir in the last will and testament. The will may be a little longer, but a trust can be created without the expense of an additional document. Your estate planning attorney will know how to create a trust, in accordance with the laws of your state.

In this scenario, the trust is created in the will, known as a testamentary trust. Instead of leaving money to Joe Smith directly, the money (or other asset) is left to the John Smith Testamentary Trust for the benefit of Joe Smith.

The terms of the trust are defined in the appropriate article in the will and can be created to suit your wishes. For instance, you can decide to distribute the money over a three or a thirty-year period. Funds could be distributed monthly, to create an income stream. They could also be distributed only when certain benchmarks are reached, such after a full year of employment has occurred. This is known as an incentive trust.

The opposite can be true: distributions can be withheld, if the heir is engaged in behavior you want to discourage, like gambling or using drugs.

If the funding for the trust will come from proceeds from a life insurance policy, it may be necessary to have your estate planning attorney contact the insurance company to be sure that the insurance company will permit a testamentary trust to be the beneficiary of the life insurance and avoid probate altogether.

Not all insurance companies will permit this. There may be some other changes that need to occur for this to work and be in compliance with your state’s laws. However, your estate planning attorney will be able to resolve the issue for you.

Reference: NWI.com (May 17, 2020) “Estate Planning: What to do to protect trusts from a spendthrift”

 

Balancing retirement with special needs planning

What are Three Areas of Giving Not to Skip?

It may be important to you that your family and the charities in which you believe, benefit from your success. Giving lets you practice your core values. However, for your giving to be meaningful, you need a plan to maximize your generosity.

Kiplinger’s recent article entitled “Gifting: 3 Areas You Shouldn’t Overlook” advises that there are many things to think about before gifting, and although there are benefits to estate planning, there are other issues to consider.

Think about your gifting goals. Any amount given to a family member, friend, or organization will no doubt be treasured, but ask yourself if the recipient really wants or values the gift, or it only satisfies your personal goals.

As far as giving to a charity, you should be certain that your donation is going to the right organization and will be used for your intended purpose. Your giving goals, objectives and motivations should match the recipient’s best interests.

If gifting straight to a family member is not a goal for you now, but you want to engage your family in your giving strategy and decision making, there are several gifting vehicles you can employ, like annual gifts, estate plans and trusts. Whichever one you elect to use, it will let you place an official process in the works for your strategy. Family engagement and a formalized structure can help your gift make the greatest impact.

There is more to gifting than just determining who and how much. It’s critical to be educated on the numbers, in order to maximize your gift value and decrease your tax exposure.

You can now gift up to $11.58 million to others ($23.16 million for a married couple) while alive, without any federal gift taxes. The amount of gift tax exemption used during your life also decreases your federal estate tax exemption. You should also be aware that this amount will fall back to $5 million (and $10 million for a married couple) indexed for inflation after 2025, unless renewed.

If you transfer your wealth to heirs and beneficiaries early and letting it compound over time, you can avoid significant estate taxes. In addition, note the annual gift exemption because with it, you can gift up to $15,000 ($30,000 as a married couple) to anyone or any kind of trust every year without taxes.

An experienced estate planning attorney can help you create a giving strategy to achieve success for you and those you are benefiting.

Reference: Kiplinger (March 19, 2020) “Gifting: 3 Areas You Shouldn’t Overlook”

 

Balancing retirement with special needs planning

What Do I Do If I’m Named Financial Power of Attorney?

A financial power of attorney (POA) is a document whereby the “principal” appoints a trusted someone known as the “attorney-in-fact” or “agent” to act on behalf of the principal, especially when the principal is incapacitated. It typically permits the attorney-in-fact to pay the principal’s bills, access his accounts, pay his taxes and buy and sell investments or even real estate. In effect, the attorney-in-fact steps into the shoes of the principal and is able to act for him in all matters, as described in the POA document.

Kiplinger’s recent article entitled “What Are the Duties for Financial Powers of Attorney?” says these responsibilities may sound overwhelming, and it’s only natural to feel this way initially. Let’s look at the steps to take to do this important job:

  1. Don’t panic but begin reading. Review the POA document and determine what the principal has given you power to do on his behalf. A POA will typically include information addressed to the agent that explains the legal duties he or she owes to the principal.
  2. See what you have to handle for the principal. Create a list of the principal’s assets and liabilities. If the principle is organized, it’ll be easy. If not, you will need to find their brokerage and bank accounts, 401(k)s/IRAs/403(b)s, the mortgage, taxes, insurance and other bills (utilities, phone, cable and internet).
  3. Protect the principal’s property. Be sure the principal’s home is secure and make a video inventory of the home. If it looks like your principal will be incapacitated for an extended period of time, you may cancel the phone and newspaper subscriptions. You may need to change the locks on the principal’s home. If you have control of the principal’s investments and their incapacitation may continue for a long time, review their brokerage statements for high-risk positions that you don’t understand, like options, puts and calls, or commodities. Get advice on liquidating positions you don’t have the know-how to handle.
  4. Pay all bills, as necessary. Look at your principal’s bills and credit card statements for potential fraud. Perhaps you should suspend their credit cards that you won’t be using on the principal’s behalf. Note that they may have bills automatically paid by credit card and plan accordingly.
  5. Pay the taxes. Many powers of attorney give the agent the power to pay the principal’s taxes. If so, you’ll be responsible for filing and paying taxes during the principal’s lifetime. If the principal passes away, the executor of the principal’s last will is responsible for preparing any final taxes.
  6. Keep meticulous records. Track every expenditure you make and every action you take on the principal’s behalf. You’ll be asked to demonstrate that you have upheld your duties and acted in the principal’s best interests. It will also be important for you to receive reimbursement for expenses, and (if the power of attorney provides for it) the time you spent acting as agent.

Finally, you must always act in the principal’s best interest.

Reference: Kiplinger (April 22, 2020) “What Are the Duties for Financial Powers of Attorney?”

 

Balancing retirement with special needs planning

Should I Give My Kid the House Now or Leave It to Him in My Will?

Transferring your house to your children while you’re alive may avoid probate, the court process that otherwise follows death. However, gifting a home also can result in a big, unnecessary tax burden and put your house at risk, if your children are sued or file for bankruptcy.

Further, you also could be making a big mistake, if you hope it will help keep the house from being used for your nursing home bills.

MarketWatch’s recent article entitled “Why you shouldn’t give your house to your adult children” advises that there are better ways to transfer a house to your children, as well as a little-known potential fix that may help even if the giver has since passed away.

If you bequeath a house to your children so that they get it after your death, they get a “step-up in tax basis.” All the appreciation that occurred while the parent owned the house is never taxed. However, when a parent gives an adult child a house, it can be a tax nightmare for the recipient. For example, if the mother paid $16,000 for her home in 1976, and the current market value is $200,000, none of that gain would be taxable, if the son inherited the house.

Families who see this mistake in time can undo the damage, by gifting the house back to the parent.

Sometimes people transfer a home to try to qualify for Medicaid, the government program that pays health care and nursing home bills for the poor. However, any gifts or transfers made within five years of applying for the program can result in a penalty period, when seniors are disqualified from receiving benefits.

In addition, giving your home to someone else also can expose you to their financial problems. Their creditors could file liens on your home and, depending on state law, get some or most of its value. In a divorce, the house could become an asset that must be sold and divided in a property settlement.

However, Tax Code says that if the parent retains a “life interest” or “life estate” in the property, which includes the right to continue living there, the home would remain in her estate rather than be considered a completed gift.

There are specific rules for what qualifies as a life interest, including the power to determine what happens to the property and liability for its bills. To make certain, a child, as executor of his mother’s estate, could file a gift tax return on her behalf to show that he was given a “remainder interest,” or the right to inherit when his mother’s life interest expired at her death.

There are smarter ways to transfer a house. There are other ways around probate. Many states and DC permit “transfer on death” deeds that let people leave their homes to beneficiaries without having to go through probate. Another option is a living trust.

Reference: MarketWatch (April 16, 2020) “Why you shouldn’t give your house to your adult children”

 

Balancing retirement with special needs planning

Do Beneficiaries of a Will Get Notified?

In most instances, a will is required to go through probate to prove its validity.

Investopedia’s recent article entitled “When the Beneficiaries of a Will Are Notified” explains that there are exceptions to the requirement for probate, if the assets of the diseased are below a set dollar amount. This dollar amount depends on state law.

For example, in Alabama, the threshold is $3,000, and in California, the cut-off is an estate with assets valued at less than $150,000. If the assets are valued below those limits, the family can divide any property as they want with court approval.

The beneficiaries of a will must be notified after the will is filed in the probate court, and in addition, probated wills are placed in the public record. As a result, anyone who wants to look, can find out the details. When the will is proved to be valid, anyone can look at the will at the courthouse where it was filed, including anyone who expects to be a beneficiary.

However, if the will is structured to avoid probate, there are no specific notification requirements.  This is pretty uncommon.

As a reminder, probate is a legal process that establishes the validity of a will. After examining the will, the probate judge collects the decedent’s assets with the help of the executor. When all of the assets and property are inventoried, they are then distributed to the heirs, as instructed in the will.

Once the probate court declares the will to be valid, all beneficiaries are required to be notified within a certain period established by state probate law.

There are devices to avoid probate, such as setting up joint tenancy or making an asset payable upon death. In these circumstances, there are no formal notification requirements, unless specifically stated in the terms of the will.

In addition, some types of assets are not required to go through probate. These assets include accounts, such as pension assets, life insurance proceeds and individual retirement accounts (IRAs).

The county courthouse will file its probated wills in a department, often called the Register of Wills.

A will is a wise plan for everyone. Ask a qualified estate planning attorney to help you draft yours today.

Reference: Investopedia (Nov. 21, 2019) “When the Beneficiaries of a Will Are Notified”

 

Balancing retirement with special needs planning

Prevent Estate Administration Problems Before They Occur

Estate administration, that is, when the executor gets busy with paying debts, taxes and distributing assets, is often the time when any missing steps in an estate plan are revealed. The best legal problems are the ones that don’t happen, advises the article “Practical tips for estate administration, pre-planning advice, and a Coronavirus update” from the Winston-Salem Journal. Here are tips to avoid problems:

Do you need a trust to avoid probate fees and simplify estate administration?

Think of a trust as a secret box or bank account. If you own property in another state, want adult heirs to receive their inheritance over a period of time, have a beneficiary with special needs, or simply don’t want the public to learn about your assets, then a stand-alone trust that works in conjunction with your will is something to consider. However, you may be able to achieve some of these goals through beneficiary designations. A big advantage of a trust is that it is not subject to probate; assets in a probate estate become public record. If privacy is an issue, you’ll want a trust.

Is your estate plan out of date?

If your estate plan has not been updated in the last three or four years, it is likely that you have extra expenses that are no longer necessary. It’s also likely that you are missing out on tax savings opportunities. There have recently been a huge number of changes to estate and tax laws. If your will was signed before 2013, it is time to simplify your will.

Did you inherit real estate with your siblings?

If the sale of the property is still pending, get it wrapped up as soon as possible. If one of your siblings dies, or moves away, managing the disposition of real estate can become complicated and expensive.

When was the last time you reviewed Power of Attorney documents?

If you are not competent and critical steps need to be taken for your care, your agents may find themselves unable to act on your behalf, if your POA and related documents are “outdated.” They may need court intervention to make even simple decisions.

How has coronavirus impacted choices in long-term planning documents?

If your will, POA, medical power of attorney and HIPAA release forms have not been updated recently, decisions may be made without any discussion with the people you trust most.

Speak with an estate planning attorney now to get your legal and financial affairs in order. Many states have granted attorneys the ability to have documents executed and witnessed remotely, so there is no reason not to go forward now.

Reference: Winston-Salem Journal (May 3, 2020) “Practical tips for estate administration, pre-planning advice, and a Coronavirus update”