Category: Estate Planning

how to distribute Inheritance to disabled child

How to Distribute Inheritance to Disabled Child

A father who owns a home and has a healthy $300,000 IRA has two adult children. The youngest, who is disabled, takes care of his father and needs money to live on. The second son is successful and has five children. The younger son has no pension plan and no IRA. The father wants help deciding how to distribute 300 shares of Microsoft, worth about $72,000. The question from a recent article in nj.com is “What’s the best way to split my estate for my kids?” The answer is more complicated than simply how to transfer the stock. How do you distribute an inheritance to a disabled child?

Before the father makes any kind of gift or bequest to his son, he needs to consider whether the son will be eligible for governmental assistance based on his disability and assets. If so, or if the son is already receiving government benefits, any kind of gift or inheritance could make him ineligible. A Third-Party Special Needs Trust may be the best way to maintain the son’s eligibility, while allowing assets to be given to him.

Inherited assets and gifts—but not an IRA or annuities—receive a step-up in basis. The gain on the stock from the time it was purchased and the value at the time of the father’s death will not be taxed. If, however, the stock is gifted to a grandchild, the grandchild will take the grandfather’s basis and upon the sale of the stock, they’ll have to pay the tax on the difference between the sales price and the original price.

You should also consider the impact on Medicaid. If funds are gifted to the son, Medicaid will have a gift-year lookback period and the gifting could make the father ineligible for Medicaid coverage for five years.

An IRA must be initially funded with cash. Once funded, stocks held in one IRA may be transferred to another IRA owned by the same person, and upon death they can go to an inherited IRA for a beneficiary. However, in this case, if the son doesn’t have any earned income and doesn’t have an IRA, the stock can’t be moved into an IRA.

Gifting may be an option. A person may give up to $15,000 per year, per person, without having to file a gift tax return with the IRS. Larger amounts may also be given but a gift tax return must be filed. Each taxpayer has a $11.7 million total over the course of their lifetime to gift with no tax or to leave at death. (Either way, it is a total of $11.7 million, whether given with warm hands or left at death.) When you reach that point, which most don’t, then you’ll need to pay gift taxes.

Medical expenses and educational expenses may be paid for another person, as long as they are paid directly to the educational institution or health care provider. This is not considered a taxable gift.

This person would benefit from sitting down with an estate planning attorney and exploring how best to distribute an inheritance to his disabled child after he passes, rather than worrying about the Microsoft stock. There are bigger issues to deal with here.

If you would like to read more about inheritance and related topics, please visit our previous posts.

Reference: nj.com (June 24, 2021) “What’s the best way to split my estate for my kids?”

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New Episode of The Estate of The Union Podcast

 

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more pluses than minuses in 529 plans

More Pluses than Minuses in 529 Plans

There are two basic types of 529 plans, says Texas News Today’s recent article entitled “What you need to know about the “529” Education Savings Account.” The more common type is the 529 College Savings Plan. This allows parents, grandparents and others to invest money to cover eligible education for beneficiaries. The less common type is the 529 prepaid tuition program, in which tuition is paid at a set price. Overall, there are more pluses than minuses in a 529 college savings plan. Here is how it works.

Contributions to the 529 Plan aren’t tax deductible at the federal level. However, many states offer state income tax deductions or credits. Your money grows tax-free and withdrawals to pay tuition and other eligible expenses are free of federal taxes and, in many instances, state income taxes.

529 plans can be used to pay for various college fees like tuition, room, food, books, and technology. You can pay up to $10,000 a year for K-12 tuition. You can also transfer the money in your account to other recipients. There are more pluses than minuses in a 529 college savings plan. However, you should note that you may face tax impacts and penalties for withdrawals that aren’t considered eligible costs. Your child’s college needs financial assistance may also be reduced, and you cannot purchase individual stocks within the 529 plan. However, you can select a number of investment options. Even so, you have fewer options than if you were designing your own portfolio.

You can transfer some or all of the existing funds in your account to another investment option twice in a calendar year or after changing beneficiaries. You can also select a different investment option whenever you join the plan. You can switch to another state’s plan once every 12 months. However, there are a few states that exclude such shifts from their plans.

Each state has set a total contribution limit of $235,000 to $542,000 per beneficiary. When an account hits the limit, you will not be able to make any more donations. However, revenue will continue to accumulate. There’s no annual donation limit, but donations are considered gifts for federal tax purposes. Therefore, this year, you could donate $15,000 per donor and per recipient with no federal gift tax. You can also make a $75,000 tax-exempt 529 plan donation and evenly distribute it to your tax return for the next five years, which is an option that some grandparents use as a tool for real estate planning.

The benefits of saving for college through the 529 plan are likely to outweigh the potential impact on financial assistance. Assets in an account owned by either a student or their parents are considered parental assets for federal financial assistance purposes, and typically only 5.64% of accounts are considered annually in the FAFSA (Federal Student Assistance Free Application) calculation. This is an advantage over being counted as a student asset because distribution under this ownership structure doesn’t disqualify the university for financial assistance. The assets of the grandparents’ account don’t impact the student’s FAFSA, but the distribution counts as the student’s income and affects aid.

If you would like to learn more about 529s and other types of investment programs, please visit our previous posts.

Reference: Texas News Today (June 8, 2021) “What you need to know about the “529” Education Savings Account”

New Episode of The Estate of The Union Podcast

 

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celebrity estate planning mistakes

Celebrity Estate Planning Mistakes

The size and scope of the mistakes made by celebrities may be enormous, but many of the mistakes are common for, well, us common people. Learning lessons from celebrity estate planning mistakes is a good way to prevent yourself from making those same errors, says the recent article  “Lessons to be Learned From Failed Celebrity Estates” from Forbes.

Let’s start with James Gandolfini, famed for his role in The Sopranos and many movies and television shows. Strangely, he left only 20% of his estate to his wife. Had he left the entire estate to his wife, the family would not have gotten stuck with a huge tax bill. Instead, 55% of his total estate, including a significant art collection, had to be sold to pay estate taxes.

James Brown, the godfather of soul, left copyrights to his music to an educational foundation, tangible assets to his children and $2 million for his children’s education. That sounds like smart thinking, but his estate planning documents contained a great deal of ambiguous language. His girlfriend and her children challenged the estate. Six years and millions in estate taxes later, his estate was settled.

Michael Jackson’s estate fail is a classic error. He had a trust created but failed to fund it. The battle in the California Probate Court over control of his sizable estate could have been avoided.

Howard Hughes, famed entrepreneur, aviator and engineer wanted his $2.5 billion fortune to go towards medical research, but no valid will was found. Instead, his assets were divided among 22 cousins. Before he died, he did take the step of gifting Hughes Aircraft Co. to the Hughes Medical Institute. The company was not included in his estate, but everything else was.

Author Michael Crichton was survived by his pregnant fifth wife, and a son was born after his death. Crichton failed to update his will to include the future offspring. His daughter from a previous marriage fought to exclude his son from the estate. His will included language that specifically overrode a California statute that would have included his son in the estate. All heirs not otherwise mentioned in his will were to be excluded.

Doris Duke inherited a tobacco fortune. When she died, she left a $1.2 billion estate to her foundation, with her butler in charge of the foundation. The result was a series of lawsuits claiming that the foundation was being mismanaged, and cost millions in legal fees. Foundations of that size need a strong management team to avoid legal challenges.

Few estate failures are as graphic as that of Casey Kasem. The famed radio personality’s estate battle after his death included kidnapping and the theft of his corpse. His wife and children from a prior marriage fought over his care, his end-of-life care and the disposition of his remains.

Iconic artist Prince died without a will. The Queen of Soul, Aretha Franklin, died without a will, then handwritten wills were found in her home weeks after she died. For both families, lawsuits, court proceedings and huge estate tax bills could have been avoided. So many of these estate planning mistakes by celebrities and other very wealthy people could have been avoided with some basic planning.

If you don’t have an estate plan, get it started. If you haven’t looked at your estate plan in a while, have it reviewed. Make provisions for your family, take a close look at potential tax liabilities and if you have been married more than once, make sure to have a rock-solid estate plan that will withstand challenges.

If you would like to learn more about estate planning mistakes, please visit our previous posts. 

Reference: Forbes (June 18, 2021) “Lessons to be Learned From Failed Celebrity Estates”

New Episode of The Estate of The Union Podcast

 

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what is the process of conservatorship

What Is the Process of Conservatorship?

The headlines surrounding Britney Spears’ fight against her father’s conservatorship have kept the issue in the public eye. It has prompted many to ask what is the process of conservatorship? It’s how her father controls her finances and her life, dating back to 2008 when she suffered a very public mental health crisis. Her $60 million fortune is controlled by her father Jamie Spears, according to the article “Britney Spears Is Under Conservatorship. Here’s How That’s Supposed to Work” from npr.com. In this case, only her father has the ability to negotiate business opportunities and other financial arrangements.

Britney made a passionate plea before a Los Angeles Superior Court judge to end the conservatorship, saying she is exploited, unable to sleep, depressed and cries daily.

Her process of her conservatorship was set up because of the court’s agreement in 2008 with her father that she was no longer able to manage her own affairs. The judge appointed Jamie Spears, known as the “conservator” to care for another adult (the “conservatee”), who is deemed to be unable to care for themselves.

The conservatee does not lose all rights. They may still take part in important decisions affecting their property and way of life. They have a right to be treated with understanding and respect, and they have basic human rights. However, the court is saying that decisions about where to live and how to support the person need to be made by someone else. This is an extreme situation and is usually done only as a last resort. Once the court has appointed a conservatorship, only a court can lift it.

Conservatorships are usually used for people with a severe cognitive impairment or older people with severe dementia. Guardianships are also appointed for individuals with severe developmental disabilities. Spears is not the typical person under conservatorship. In the last 13 years, she has released albums, judged on The X Factor and earned an estimated $148 million performing in Las Vegas. Spears told the court she should not be in a conservatorship, if she can work and provide money and pay other people.

Many reforms to guardianship laws have taken place, including one principle that guardianship should only extend to the areas of the person’s life they are not able to manage. However, the Spears’ conservatorship includes every aspect of her personal affairs, as well as her property management.

Individuals under guardianship don’t select their guardian, but they may in some instances make recommendations and requests. The court is supposed to give serious consideration to their requests. The court does not seem to be recognizing this or other changes in Britney Spears’ case. She has been asking since 2014 for her father to be removed from his prime role in the conservatorship, and in 2020 she asked the court to suspend her father from his role entirely.

Family members are usually named as guardians, but there can be bankers, or professional guardians named. A wealth management company was added to Spears’ conservatorship in recent months as a co-conservator, but her father remains in charge of all aspects of her life.

Ending a guardianship is difficult, unless the guardianship has been set up for a specific length of time. If there’s a lot of money involved, things can get complicated. The guardian may not agree to steps to modify the guardianship because they will lose income. There’s a real conflict of interest in this case, as Spears’ father is also her business manager. The process of conservatorship is complicated.

There is a trend towards avoiding guardianship and having a person or a handful of people who can help with decision making, while permitting the person to be involved in some way. However, the Britney Spears case is unlike any conservatorship case.

If you would like to learn more about conservatorship and elder law, please visit our previous posts. 

Reference: npr.com (June 24, 2021) “Britney Spears Is Under Conservatorship. Here’s How That’s Supposed to Work”

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You can be a POA and a joint account owner

You can be POA and Joint Account Owner

Adding another person to your bank account provides both of you with complete access to the account. You can be POA and joint account owner, but the two are very different roles, explains the article “What are my rights when someone adds me to a bank account?” from Lehigh Valley Live.

A joint account is a bank or investment account shared by two individuals, although more than two people may be on an account. They have equal access to funds, as well as equal responsibilities for any fees or expenses associated with the account. If there are transactions, depending upon the rules of the institution, all owners may be required to sign documents. The key is how the account is titled. That’s the controlling factor in determining how the assets in the account are divided, if one of the owners dies. There are several different types of joint ownership.

One is “Joint Tenants with Rights of Survivorship,” or JTWROS. If one of the account owners should die, the assets in the account go directly to the surviving account holder. These assets do not go through probate.

Then there’s “Tenants in Common,” or TIC. With TIC, each individual account owner has the right to designate a beneficiary for their portion of the assets upon their death. The assets might not be split 50/50. How the account is titled lets the account owners divide ownership however they want.

Another one: “Joint Tenants by the Entirety.” This describes a married couple who own real estate or a financial account as a legal entity with equal ownership. Neither person may transfer their half of the property during their lifetime or through a will or a trust. When one spouse dies, the entire account goes to the surviving spouse and it transfers without passing through probate.

In the example given at the start of the article, the establishment of a joint account gives both the father and son equal access to the account. If the father is unable to handle the account at any time in the future, for whatever reason, the son will be able to step in.

Power of Attorney or POA is a completely different thing. A POA is a legal document giving a person the authority to act on behalf of another person for a specific transaction or general legal and financial matters. Just as there are numerous types of joint ownership, there are numerous types of POA.

A general POA gives a person the power to act on behalf of the principal for all legal, property and financial matters, as long as the principal’s mental capacity is sound. The Durable POA gives authority to a person to act on behalf of the principal, even after the principal becomes mentally incapacitated. Special or limited power of attorney gives authority to act only for specific matters or transactions. A Springing Durable POA provides authority to act only under certain events or levels of incapacitation, which is defined in detail in the document.

You can be POA and joint account owner. These are two different ways to help a parent with financial and legal activities. An estate planning attorney can help create the POA that best fits the situation.

If you would like to read more about Powers of Attorney, please visit our previous posts.

Reference: Lehigh Valley Live (June 10, 2021) “What are my rights when someone adds me to a bank account?”

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Who inherits IRA if the Beneficiary passes?

Who Inherits IRA if the Beneficiary Passes?

Retirement accounts need to have beneficiary designations to determine who inherits the funds when you pass. But who inherits an IRA if the beneficiary passes? Which estate would get the IRA when a non-spouse beneficiary inherits an IRA account but dies before the money is put in her name with no contingent beneficiaries can be complicated, says nj.com in the recent article entitled “Who gets this inherited IRA after the beneficiary dies?”

IRAs are usually transferred by a decedent through a beneficiary designation form.

As a review, a designated beneficiary is an individual who inherits an asset like the balance of an IRA after the death of the asset’s owner. The Setting Every Community Up for Retirement Enhancement (SECURE) Act has restricted the rules for designated beneficiaries for required withdrawals from inherited retirement accounts.

Under the SECURE Act, a designated beneficiary is a person named as a beneficiary on a retirement account and who does not fall into one of five categories of individuals classified as an eligible designated beneficiary. The designated beneficiary must be a living person. While estates, most trusts, and charities can inherit retirement assets, they are considered to be a non-designated beneficiary for the purposes of determining required withdrawals.

Provided there is a named beneficiary, and the named beneficiary survived the owner of the IRA account, the named beneficiary inherits the account.

The executor or administrator of the beneficiary’s estate would be entitled to open an inherited IRA for the beneficiary because the beneficiary did not have the opportunity to open it before he or she passed away.

Next is the question of who inherits the IRA from the named beneficiary if she passes before naming her own beneficiary.

In that instance, the financial institution’s IRA plan documents would determine the beneficiary when no one is named. These rules usually say that it goes to the spouse or the estate of the deceased beneficiary.

If you are interested in learning more about beneficiary designations, please visit our previous posts.

Reference: nj.com (June 1, 2021) “Who gets this inherited IRA after the beneficiary dies?”

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Aspects of Medicare that may surprise you

Aspects of Medicare that may Surprise You

If you are over 65, then you are aware of how complicated Medicare can be. There are aspects of Medicare that may surprise you. CNBC’s recent article entitled “Here are 3 Medicare surprises that can cost you thousands every year” reports that about 62.6 million people—most of whom are age 65+— are enrolled in Medicare. Most pay no premium for Part A (hospital coverage) because they have at least a 10-year work history of paying into the system via payroll taxes.

As far as Part B (outpatient care) and Part D (prescription drug coverage), a senior may see some surprise premium costs, no matter if you stay with original Medicare (Parts A and B) or choose to get your benefits through an Advantage Plan (Part C).

  1. Higher premiums for higher income. About 7% (4.3 million) of Medicare enrollees pay more than the standard premiums for Parts B and D for income-related monthly adjustment amounts, or IRMAAs, according to the Centers for Medicare and Medicaid Services. This starts at modified adjusted gross income of more than $88,000. It goes up at higher income thresholds. For example, a single taxpayer with income between $88,000 and $111,000 would pay an extra $59.40 per month for Part B on top of the standard premium of $148.50, or $207.90 total. Note that these IRMAAs don’t gently phase in within each income bracket. If you earn a dollar above the income thresholds, the surcharge applies in full force. Generally, these extra charges are calculated by your tax return from two years earlier. You can also request that the Social Security Administration reconsider the surcharges, if your income has dropped since that you filed that tax return.
  2. Your spouse’s income counts against you. The IRMAAs aren’t based on your own income. For example, if you have retired but your spouse is still working, and your joint tax return is a modified adjusted gross income of $176,000 or higher, you would be subject to IRMAAs.
  3. If you sign up late, you’ll pay a penalty. Sign up for Medicare during a seven-month window that starts three months before your 65th birthday month and ends three months after it. However, if you meet an exception — i.e., you or your spouse have qualifying group insurance at a company with 20 or more employees — you can put off enrolling. Workers at big employers often sign up for Part A and wait on Part B until they lose their other coverage. When this happens, they generally get eight months to enroll. Note that the rules are different for companies with fewer than 20 employees, whose workers must sign up when first eligible. For each full year that you should have been enrolled in Part B but were not, you could face paying 10% of the monthly Part B standard premium ($148.50 for 2021). The amount is added to your monthly premium for as long as you are enrolled in Medicare.

For Part D prescription drug coverage, the late-enrollment penalty is 1% of the monthly national base premium ($33.06 in 2021) for each full month that you should have had coverage but didn’t. This Part B penalty also lasts as long as you have drug coverage. Don’t let these parts of Medicare surprise you.

If you would like to learn more about Medicare, please visit our previous posts.

Reference: CNBC (June 21, 2021) “Here are 3 Medicare surprises that can cost you thousands every year”

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consider taking RMDs at regular intervals

Consider taking RMDs at regular Intervals

There have been a number of changes to the requirements for RMDs—Required Minimum Distributions—from traditional retirement accounts, says a recent article titled “2 Essential Strategies for Taking Your RMDs” from Kiplinger. In 2019, the age for RMDs was raised from 70½ to 72. In 2020, they were waived altogether because of the pandemic. Now they’re back, and you want to know how to make good decisions about them. You might consider taking RMDs at regular intervals.

Most people take the default approach, taking a lump sum of cash at the start or the end of the year. This is not the best approach. Investment markets and your own need for income are better indicators for how and when to take your RMD. If you can at all avoid it, never take an RMD from a declining market.

You can take your RMD anytime during the calendar year, from January 1 to December 31. If it’s the first time you’ve taken an RMD, you get a bonus: you can wait until April 1 of the year after your 72nd birthday. The RMD is calculated, by dividing the account balance on December 31 of the preceding year by your life expectancy factor, based on your age. You can find it in the IRS’s Uniform Lifetime Table.

2021 distributions will be bigger, and not just because of the market’s 2020 performance. Instead, distributions will be bigger because of how the accounts are designed, with RMDs becoming a larger percentage over time. It starts as a small percentage and eventually becomes the entire account, which is then depleted. Remember, the sole purpose of the RMD is to force retirees to take money out of their retirement accounts and pay taxes on the money.

Many retirees take RMDs because they need the money to live on. Here’s where money management gets tricky. It’s far easier to take smaller amounts of money at regular intervals, kind of like a paycheck, than taking a big amount once a year. We’re creatures of habit and are used to receiving income and managing it that way.

Distributions on a regular basis also fosters a better sense of how much money you have to live on, encouraging you to create and adhere to a budget.

If you don’t need the income, consider taking RMDs at regular intervals. It’s like the opposite of dollar-cost averaging. Instead of putting money into the market in small increments over time to even out market ups and downs, you’re taking money out of the market at regular intervals. You’re not cashing out at the market’s lowest point, or at the highest. And if you’re reinvesting RMDs in a taxable account, this strategy works especially well.

If you would like to learn more about RMDs and other topics related to retirement accounts, please visit our previous posts. 

Reference: Kiplinger (June 10, 2021) “2 Essential Strategies for Taking Your RMDs”

New Episode of The Estate of The Union Podcast

 

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Episode 6 of The Estate of The Union podcast is out now

New Episode of The Estate of The Union Podcast!

The new episode of The Estate of The Union podcast is out now. In Episode 5 Brad Wiewel is joined by attorney Ann Lumley, Director of Probate and Estate Administration with The Wiewel Law Firm, to discuss the often confusing and complicated world of Probate. Many people have heard horror stories of contested wills and families struggling for years to probate the estate of a loved one.

Brad and Ann cover the most common mistakes made by families during the probate process and provide the listeners with tips to help avoid some of those pitfalls. They focus special attention on the role of the executor, how to properly name beneficiaries, and how trust administration works.

In each episode of The Estate of The Union podcast, host and lawyer Brad Wiewel will give valuable insight into estate planning, making an often daunting subject easier to understand.

It is Estate Planning Made Simple!

The Estate of The Union can be found on Spotify, Apple podcasts, or anywhere you get your podcasts. Please click on the link below to listen. We hope you enjoy it.

The Wiewel Law Firm focuses its practice exclusively in the area of wills, probate, estate planning, asset protection, and special needs planning. Brad Wiewel is Board Certified in Estate Planning and Probate Law by the Texas Board of Legal Specialization. 

A trust is a good option when your children are minors

A Trust is an Option when Children are Minors

Let’s say that there’s a young father with a wife and young son, who owns a home and a Roth IRA account, with a few stock investments. On the stock investments, he’s filled out the beneficiary designation forms passing all his assets to his wife and son, should anything happen to him. This father owns his home is joint tenancy with right of survivorship with his wife. Does he need to set up a separate trust, if most of his assets pass through beneficiary designations? A trust is a good option when your children are minors.

Nj.com’s recent article entitled “Do I need a trust in case something happens to me?” says that leaving assets outright to a minor is typically a bad move. The son’s guardian and/or the court would take custody of the assets, both of which require significant court oversight and involvement.

The minor would also receive the assets upon attaining the age of majority, which in most states is age 18.

No one can tell what a young child will be like at the age of 18, especially after suffering the loss of their parents. Even if there are no significant issues, such as drug addiction or special needs, parents should think about what they’d have done with that much money at that age.

The best option is to leave assets in trust for the benefit of the minor son.

The trustee can manage and use the assets for the benefit of the young boy with limited court involvement.

The terms of the trust can also delay the point at which the assets can be distributed and ultimately paid over to the beneficiary, if at all.

For example, it’s not uncommon for a trust to stipulate that the beneficiary gets a third of the assets at 25, half of the remaining assets at 30 and the rest at age 35. However, other trusts don’t provide for such mandatory distributions and can hold the assets for the beneficiary’s lifetime, which has its advantages.

In some instances, the terms of the trust are included in a will. This creates a trust account after death, which is also called a testamentary trust.

If you have minor children, it is a good option to create a Trust. Talk to an experienced estate planning attorney, who can assess your specific situation and provide guidance in creating an estate plan. The attorney can also make certain that trust assets are correctly titled and that beneficiary designations of retirement accounts and life insurance are correctly prepared, so the trust under the will receives those assets and not the minor individually.

If you are interested in learning more about trusts and minor children, please visit our previous posts.

Reference: nj.com (June 14, 2021) “Do I need a trust in case something happens to me?”

 

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Information in our blogs is very general in nature and should not be acted upon without first consulting with an attorney. Please feel free to contact The Wiewel Law Firm to schedule a complimentary consultation.
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