What are Three Areas of Giving Not to Skip?

June 5, 2020

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”

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

June 4, 2020

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:

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.
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).
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.
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.
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.
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?”

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

June 3, 2020

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”

What Is a Testamentary Trust and Do You Need One?

May 26, 2020

A couple doing some retirement planning has an updated will and a medical power of attorney in place, prepared with the help of an estate planning attorney. They own some rental property, a small business and life insurance, but their estate is not large enough for them to worry about the federal estate tax.

Do they need or want a trust to be part of their estate plan? That’s question from a recent article titled “It’s the law: Testamentary trusts provide protection for assets” from the Post Register.

First, there are many different types of trusts. A living trust, also known as a revocable trust, irrevocable trusts and testamentary trusts are just three types. The testamentary trust only comes into effect at death under a last will and testament, and in some cases, depending on how they are structured, they may never come into effect, because they are designed for certain circumstances.

If you leave everything to your spouse in a will or through a revocable trust, your spouse will receive everything with no limitations. The problem is, those assets are subject to claims by your spouse’s creditors, such as business issues, a car accident, or bankruptcy. The surviving spouse may use the money any way he or she wishes, during their lifetime or through a will at death.

Consider if your spouse remarried after your death. What happens if they leave assets that they have inherited from you to a new spouse? If the new spouse dies, do the new spouses’ children inherit assets?

By using a trust, assets are available for the surviving spouse. At the death of the surviving spouse, assets in the trust must be distributed as directed in the language of the trust. This is especially important in blended families, where there may be children from other marriages.

Trusts are also valuable to distribute assets, if there are beneficiaries with an inability to manage money, undue spousal interference or a substance abuse problem.

Note that the trust only protects the decedent’s assets, that is, their separate property and half of the community property, if they live in a community property state.

The best solution to the issue of how to distribute assets, is to meet with an estate planning attorney and determine the goal of each spouse and the couple’s situation. People who own businesses need to protect their assets from litigation. It may make sense to have significant assets placed in trust to control how they pass to family members and shield them from possible lawsuits.

Reference: Post Register (April 26, 2020) “It’s the law: Testamentary trusts provide protection for assets”

Do I Need an Estate Plan with a New Child in the Family?

May 21, 2020

When a child is born or adopted, the parents are excited to think about what lies ahead. However, in addition to all the other new-parent tasks on the list, parents must also address a more depressing task: making an estate plan.

When a child comes into the picture, it’s important for new parents to take the responsible step of making a plan, says Motley Fool’s recent article entitled “As a New Parent, I Took These 3 Estate Planning Steps.”

Life insurance. To be certain that there’s money available for your child’s care and to fund a college education, parents can buy life insurance. You can purchase a term life insurance policy that’s less expensive than a whole-life policy and you’ll only need the coverage until the child is grown.

Create a will. A will does more than just let you direct who should inherit if you die. It gives you control over what happens to the money you leave to your child. If you were to pass and he wasn’t yet an adult, someone would need to manage the money left to him or her. If you don’t have a will, the court may name a guardian for the funds, and the child might inherit with no strings attached at 18. How many 18-year-olds are capable of managing money that’s designed to help them in the future?

Speak to an experienced lawyer to get help making sure your will is valid and that you’re taking a smart approach to protecting your child’s inheritance.

Designate a guardian. If you don’t name an individual to serve as your child’s guardian, a custody fight could happen. As a result, a judge may decide who will raise your children. Be sure that you name someone, so your child is cared for by people you’ve selected, not someone a judge assigns. Have your attorney make provisions in your will to name a guardian, in case something should happen. This is one step as a new parent that’s critical. Be sure to speak with whomever you’re asking to be your child’s guardian and make sure he or she is okay with raising your children if you can’t.

Estate planning may not be exciting, but it’s essential for parents.

Contact a qualified estate planning attorney to create a complete estate plan to help your new family.

Reference: Motley Fool (Feb. 23, 2020) “As a New Parent, I Took These 3 Estate Planning Steps”

How Family Businesses Can Prepare Now for Future Tax Changes

May 20, 2020

The upcoming presidential election is giving small to mid-sized business owners concerns regarding changes in their business and the legacy they leave to family members. The recent article “How family businesses can come out on top in presidential election uncertainty,” from the St. Louis Business Journal looks at what’s at stake.

Tax breaks. The current estate tax threshold of $11.58 million is scheduled to sunset at the end of 2025, when it will revert to the pre-2018 exemption level of $5 million (as indexed for inflation) for individuals. If that law is changed after the election, it’s possible that the exemption could be phased out before the current levels end.

Increased tax liability. These possible changes present a problem for business owners. Making gifts now can use the full exemption, but future gifts may not enjoy such a generous tax exemption. Some transfers, if the exemption changes, could be subject to gift taxes as high as 40%.

Missed opportunity with lower valuations. Properly structured gifts to family members, which benefit from lower valuations (that is, before value appreciation due to capital gains) and current allowable valuation discounts give families an opportunity to pass a great amount of their businesses to heirs tax free.

Here’s what this might look like: a family business owner gifts $1 million in the business to one heir, but at the time of the owner’s passing, that share appreciates to $10 million. Because the gift was made early, the business owner only uses up $1 million of the estate tax exemption. That’s a $9 million savings at 40%; saving the estate from paying $3.6 million in taxes. If the laws change, that’s a costly missed opportunity.

It’s better to protect a business from the “Three D’s”—death, divorce, disability or a serious health issue, by preparing in advance. That means the appropriate estate protection, prepared with the help of an estate planning attorney who understands the needs of business owners.

Consider reorganizing the business. If you own an S-corporation, you know how complicated estate planning can be. One strategy is to reorganize your business, so you have both voting and non-voting shares. Gifting non-voting shares might provide some relief to business owners, who are not yet ready to give up complete control of their business.

Preparing for future ownership alternatives. What kind of planning will offer the most flexibility for future cash flow and, if necessary, being able to use principal? Grantor Retained Annuity Trusts (GRATs), entity freezes, and sales are three ways the owner might retain access to cash flow, while transferring future appreciation of assets out of the estate.

Know your gifting options. Your estate planning attorney will help determine what gifting scenario may work best. Some business owners establish irrevocable trusts, providing asset protection for the family and allowing the trust to have control of distributions.

Reference: St. Louis Business Journal (April 3, 2020) “How family businesses can come out on top in presidential election uncertainty”

Which Takes Priority in a Conflict: a Will or a Trust?

May 15, 2020

A will and a trust are separate legal documents that usually have a common goal of coordinating a comprehensive estate plan. The two documents ideally work in tandem, but because they’re separate and distinct documents, they sometimes can conflict with one another. This conflict can be accidental or on purpose.

A revocable trust is a living trust established during the life of the grantor. It can be changed at any time, while the grantor is still alive. Since revocable trusts become operative before the will takes effect at death, the trust takes precedence over the will, in the event that there are issues between the two.

An Investopedia article from 2019, “What Happens When a Will and a Revocable Trust Conflict?” reminds us that a will has no power to decide who receives a living trust’s assets, such as cash, equities, bonds, real estate and jewelry because a trust is a separate entity. It’s a separate entity from an individual. When the grantor dies, the assets in the trust don’t go into the probate process with a decedent’s personal assets. They remain trust property.

When a person dies, their will must be probated, and the deceased individual’s property is distributed according to the terms in the will. However, probate doesn’t apply to property held in a living trust, because those assets are not legally owned by the deceased. As such, the will has no authority over a trust’s assets, which may include cash, real estate, cars, jewelry, collectibles and other tangible items.

Let’s say that the family patriarch named Christopher Robin has two children named Pooh and Roo. Let’s also assume that Chris places his home into a living trust, which states that Pooh and Roo are to inherit the home. Several years later, Chris remarries and just before he dies, he executes a new will that purports to leave his house to his new wife, Kanga. In such an illustration, Chris would have needed to amend the trust to make the transfer to Kanga effective, because the house is trust property, and Chris no longer owns it to give away. That home becomes the property of the children, Pooh and Roo.

This can be a complex and confusing area, so work with an experienced estate planning attorney to be sure you don’t end up like Kanga with nowhere to live.

Remember a revocable trust is a separate entity and doesn’t follow the provisions of a person’s will upon his or her death. It is wise to seek the advice of a trust and estate planning attorney to make sure proceedings go as you intend.

While a revocable trust supersedes a will, the trust only controls those assets that have been placed into it. Therefore, if a revocable trust is formed, but assets aren’t moved into it, the trust provisions have no effect on those assets, at the time of the grantor’s death. If Christopher Robin created the trust but he failed to retitle the home as a trust asset, Kanga would have been able to take possession under the will. Oh bother!

Reference: Investopedia (August 5, 2019) “What Happens When a Will and a Revocable Trust Conflict?”

How a Letter to Your Executor Conveys Your Wishes

May 8, 2020

A detailed, informative letter can be invaluable to your executor to make your wishes known, says the article “Why You Should Write a Letter to Your Executor—and What to Say in It” from The Wall Street Journal. Your last will and testament does have many directions. However, there may be things you want your executor to know that may not be included in your will. This is especially important if death is sudden. The letter, which you should sign and date, can help prevent potential disputes, by minimizing any confusion around your intentions, priorities and goals.

Here are some things to consider when drafting a letter to your executor.

Your thoughts about wealth. Share your story about how you came to the assets that you are leaving in your will. How was your wealth created, what do you value and what are your long-term goals for your wealth? Do you want family members to invest the assets, so they grow over generations, or do you want them used for college education costs for grandchildren?

Describe key players in the family. It is best if your executor knows the members of your family. However, they may not know the family dynamics or history. Giving them your insights, may help them anticipate issues. Does one child tend to take over and speak for everyone, without being asked? Are there substance abuse issues in the family that need to be considered? Present your executor with your concerns, so they can be mindful of how the family works (or doesn’t) as a unit.

What matters to you? This is especially important, if you don’t want your heirs to be dependent upon their inheritance, instead of becoming self-reliant. Share your values to encourage their earned success. Make it clear if you want to protect the family wealth, so it can be used to empower future generations and for family members to be responsible for their own financial well-being.

Give your executor the power to made decisions, even when that means saying no. Considering the size of your wealth and the family members who are your heirs, you probably have a good idea of who would do what with their inheritance. If you don’t want your wealth to be used for a start-up by a son who always bets on the wrong horse, say so in the letter to your executor. If you are hopeful that a daughter will use her inheritance for a down payment on a home for her family, you should also express that.

Some wishes for your wealth can be expressed through the use of trusts and other wealth planning tools. Your estate planning attorney will help create a plan that incorporates asset protection, tax planning and tools to distribute wealth in the way that you wish. An experienced estate planning attorney has worked with many families and understands the challenges and pitfalls that are presented any time wealth is transferred from one generation to the next.

Reference: The Wall Street Journal (April 8, 2020) “Why You Should Write a Letter to Your Executor—and What to Say in It”

Should I Use Life Insurance in My Estate Planning?

April 15, 2020

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?

April 14, 2020

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?”

Category: Asset Protection