Estate Planning is critical for Blended Families

September 13, 2022

Today, a blended family is more common than ever, with stepfamily members, half-siblings, former spouses, new spouses and every combination of parents, children and partners imaginable. Traditional estate planning, including wills and non-probate tools like transfer on death (TOD) documents, as valuable as they are, may not be enough for the blended family, advises a recent article titled “Legal-Ease: Hers, his and ours—blended family estate planning” from limaohio.com. Estate planning is critical for blended families.

Not too long ago, when most people didn’t take advantage of the power of trusts, couples often went for estate plans with “mirror” wills, even those with children from prior marriages. Their wills basically said each spouse would leave the other spouse everything. This will would be accompanied by a contract stating neither would change their will for the rest of their lives. If there was a subsequent marriage after one spouse passed, this led to problems for the new couple, since the surviving spouse was legally bound not to change their will.

As an illustration, Bob has three children from his first marriage and Sue has two kids from her first marriage. They marry and have two children of their own. Their wills stipulate they’ll leave each other everything when the first one dies. There may have been some specific language about what would happen to the children from the first marriages, but just as likely this would not have been addressed.

It sounds practical enough, but in this situation, the children from the first spouse to die were at risk of being disinherited, unless plans were made for them to inherit from their biological parent.

Todays’ blended family benefits from the use of trusts, which are designed to protect each spouse, their children and any child or children they have together. There are a number of different kinds of trusts for use by spouses only to protect children and surviving spouses.

Trust law requires the trustee—the person who is in charge of administering the trust—to give a copy of the trust to each beneficiary. The trustee is also required to provide updates to beneficiaries about the assets in the trust.

A surviving spouse will most likely serve as the trustee when the first spouse passes and will have a legal responsibility to honor the shared wishes of the first spouse to pass.

If you and your new spouse have created a blended family, it is critical to evaluate your estate planning. Your estate planning attorney will be able to explain the many different types of spousal trusts, and which is best for your situation. If you would like to learn more about estate planning for blended families, please visit our previous posts.

Reference: limaohio.com (Aug. 20, 2022) “Legal-Ease: Hers, his and ours—blended family estate planning”

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The Risks of Creating Your Own Estate Plan

September 7, 2022

Everyone should have an estate plan and it is wise to consult an estate planning attorney to create your plan. But not everyone wants to take the time. Some even feel they can do it just fine themselves. We call it the brother-in-law syndrome: your brother-in-law knows everything, even though he doesn’t. He tells anyone who’ll listen how much money he’s saved by doing things himself. Sadly, it’s the family who has to make things right after the do-it-yourself estate plan fails. This is the message from a recent article titled “Dangers of Do-It-Yourself Estate Planning” from Coastal Breeze News. It is vital that you understand the risks of creating your own estate plan.

Online estate planning documents are dangerous for what they leave out. An estate plan prepared by an experienced estate planning attorney takes care of the individual while they are living, as well as taking care of distributing assets after they die. Many online forms are available. However, they are often limited to wills, and an estate plan is far more than a last will and testament.

An estate planning attorney knows you need a will, power of attorney, health care power of attorney, a living will and possibly trusts. These are essential protections needed but often overlooked by the do-it-yourselfer.

A Power of Attorney allows you to name a person to manage your personal affairs, if you are incapacitated. It allows your agent to handle your banking, investments, pay bills and take care of your property. There is no one-size-fits-all Power of Attorney. You may wish to give a spouse the power to take over most of your accounts. However, you might also want someone else to be in charge of selling your shares in a business. A Power of Attorney drafted by an estate planning attorney will be created to suit your unique needs. POAs also vary by state, so one purchased online may not be valid in your jurisdiction.

You also need a Health Care Power of Attorney or a Health Care Surrogate. This is a person named to make medical decisions for you, if you are too sick or injured to do so. These documents also vary by state,. There’s no guarantee that a general form will be accepted by a healthcare provider. An estate planning attorney will create a valid document.

A Living Will is, and should be, a very personalized document to reflect your wishes for end-of-life care. Some people don’t want any measures taken to keep them alive if they are in a vegetative state, for instance, while others want to be kept alive as long as there is evidence of brain activity. Using a standard form negates your ability to make your wishes known.

If the Power of Attorney, Health Care Power of Attorney or Living Will documents are not prepared properly, declared invalid or are missing, the family will need to go to court to obtain a guardianship, which is the legal right to make decisions on your behalf. Guardianships are expensive and intrusive. If your incapacity is temporary, you’ll need to undo the guardianship when you are recovered. Otherwise, you have no legal rights to conduct your own life.

DIYers are also fond of setting up property and accounts so they are Payable on Death (POD) or Transfer on Death (TOD) accounts. This only works if the beneficiaries outlive the original owner. If the beneficiary dies first, then the asset goes to the beneficiary’s children. Many financial institutions won’t actually allow certain accounts to be set up this way.

Another risk of creating your own estate plan: real estate. Putting children on the title as owners with rights of survivorship sounds like a reasonable solution. However, if the children predecease the original owner, their children will be rightful owners. If one grandchild doesn’t want to sell the property and another grandchild does, things can turn ugly and expensive. If heirs of any generation have creditors, liens may be placed on the property and no sale can happen until the liens are satisfied.

With all of these sleight of hand attempts at DIY estate planning comes the end all of all problems: taxes.

When children are added to a title, it is considered a gift and the children’s ownership interest is taxed as if they bought into the property for what the parent spent. When the parent dies and the estate is settled, the children have to pay income taxes on the difference between their basis and what the property sells for. It is better if the children inherit the property, as they’d get a step-up in basis and avoid the income tax problem.

Finally, there’s the business of putting all the assets into one child’s name, with the handshake agreement they’ll do the right thing when the time comes. There’s no legal recourse if the child decides not to share according to the parent’s verbal agreement.

Don’t take the risk of creating your own estate plan. A far easier, less complicated answer is to make an appointment with an estate planning attorney, have the correct documents created properly and walk away when your brother-in-law starts talking. If you would like to learn more about the risks of DIY planning, please visit our previous posts.

Reference: Coastal Breeze News (Aug. 4, 2022) “Dangers of Do-It-Yourself Estate Planning”

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Protecting the Community Spouse is Necessary

August 30, 2022

Despite the intent of the law, allowing one spouse to remain in the family home and having enough income to live on when the other spouse needs Medicaid to pay for nursing home care does not happen automatically. According to the article “What a ‘Community’ spouse can keep” from The Bristol Press, protecting the community spouse is necessary if they are to maintain their prior standard of living.

The community spouse is entitled to have a minimum monthly maintenance needs allowance (MMNA), which changes every year. If the MMNA is $2,288.00, and the healthy spouse has an income of $1,000.00, Medicaid allows a diversion of the sick spouse’s income of the difference, or $1,288.00 per month to the healthy spouse. In most situations, this is not enough to maintain a home, pay bills and enjoy a well-deserved retirement.

An elder law lawyer can help protect assets for the community spouse. The family home is exempt, if it is in the name of the healthy spouse, although most states have a limit to the allowed value. If the sick spouse is approved for Medicaid, the healthy spouse may choose to sell the home and keep the proceeds or downsize to a smaller home.

The community spouse may keep up to $137,400.00 in investment assets in 2022. That’s considered one half of the couple’s total “countable” assets. If the couple’s investment exceeds this amount, there are a number of strategies used to protect the life savings, as long as they stay within the “spend down” rules. Money may be spent on house expenses or improvements. A new car could replace an old model.

Another method is the use of a Single Premium Immediate Annuity, sometimes referred to as a Medicaid Annuity Trust. The well spouse can purchase this and protect their life savings. However, if the well spouse dies before the sick spouse, the balance of the annuity will need to be paid to Medicaid to reimburse it for expenses paid for the care of the sick spouse.

One positive note: personal property is not considered a countable asset. Things like home furnishings, decorations, jewelry, etc., and any personal property will not be counted. Embarking on a spending spree with an eye to reselling personal property to raise cash is not a good idea, since few items maintain their value after the initial purchase.

Planning should be done in advance, when both spouses are well and healthy, because Medicaid strictly enforces the five-year look back rule. Protecting the community spouse is necessary if they are to maintain their prior standard of living. Any assets transferred within five years of a Medicaid application will make the sick spouse ineligible for Medicaid coverage, and healthcare expenses will have to be paid out of pocket. If you would like to learn more about Medicaid planning, please visit our previous posts.

Reference: The Bristol Press (July 29, 2022) “What a ‘Community’ spouse can keep”

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How to Separate Business and Marital Assets

August 29, 2022

High-profile cases like the Bezos or the Gates should cause many people to consider how to separate their business and marital assets that are tied together. You need to have plans in place from the beginning. No one thinks their partnership will end. However, it’s necessary to have a plan in place, just in case.

The Dallas Business Journal’s recent article entitled “Does your business need a prenup?” explains that there are three typical outcomes when married couples working as business partners decide to end their relationship:

One individual buys out the other partner’s shares and continues running the business;
The partners sell the business and divide the proceeds; or
The couple continues working as partners after the divorce.

Safeguards can be put in place on the first day of the relationship to protect your personal and business assets in the event of a divorce. A way to do this is through a prenuptial agreement, which states what will happen if a split happens. A pre-nup should:

Establish the value of the business as of the date of marriage or the date the agreement is signed;
Detail a course of action with the appreciation or depreciation of the business from the date of the marriage;
Say how business value will be measured; and
Specify the allocation of business interests to be awarded to each spouse in the event of a divorce.

In addition to a prenuptial agreement, any privately held company should have a shareholder agreement (or “operating agreement” for non-corporations). The shareholder agreement is one of the most important documents owners of a closely held business will ever sign.

It controls the transfer of ownership when certain events occur, like divorce and states the following:

Which party will buy out the other’s shares of the company if a buyout occurs; or
If either party has the right to sell, how the ownership interest will be valued and the terms and conditions concerning the acquisition.

Because there are some tax implications involved in a buyout, it’s best to bring in experienced estate planning attorney for this process. In addition, life events like divorce or changes in a business partnership are an appropriate time to update your will, estate plans and any necessary insurance policies. Remember, it is important to consider how to separate business and marital assets before there is conflict. If you would like to learn more about pre-nups and other business and marital agreements, please visit our previous posts.

Reference: Dallas Business Journal (Aug. 1, 2022) “Does your business need a prenup?”

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Way you Title Assets has an Impact on your Estate

August 22, 2022

The way you title your assets has an impact on your estate plan. FedWeek’s recent article entitled “How Assets Are Titled Can Make a Big Difference” discusses the different ways property may be titled, and the significance of each one.

The way in which you take title to assets can affect your estate, taxes and perhaps the disposition of the asset if a couple divorces. Many couples want assets to be titled simply in the event something happens to one, so the other spouse can take possession immediately without taxes or complications. Joint ownership may be the simplest way to meet most of these objectives. However, this can get complicated if any number of things happen, such as divorce, second marriage, children from multiple marriages, adoption and blended families of all types.

It’s critical to be educated on the different types of ownership, so you know when a change may be needed. Here are the main options:

Holding Assets in Your Own Name is simple and inexpensive. However, if you become incompetent, those assets might be mismanaged. At your death, individually owned assets may have to go through probate.

Joint Tenants with Right of Survivorship is when one co-owner dies, all assets held this way automatically pass to the survivor. One joint owner can take over if the other is incapacitated, and jointly held assets don’t go through probate.

Tenants in Common means there’s a divided interest, although none of the owners may claim to own a specific part of the property. At the death of one of the joint owners, the share owned by the deceased must pass through their will to determine ownership. The surviving joint owner doesn’t automatically own the entirety of assets.

Tenancy by the Entirety is a type of joint ownership similar to rights of survivorship for married couples. It lets spouses own property together as a single legal entity. Ownership can’t be separated, which means creditors of an individual spouse may not attach and sell the property. Only creditors of the couple may make claims against the property.

With Entity Ownership, you might create a trust, a partnership (such as a family limited partnership), or a limited liability company (LLC) to hold assets. These entities may provide protection from creditors and tax benefits.

Community Property may only be used by married couples in community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin). Each person owns an undivided interest in the entire property. When a spouse dies, the survivor automatically receives the entire interest, so there’s no need for probate. Community property can’t be controlled by a person’s will or trust.

Remember, the way you title your assets has an impact on your overall estate plan. Ask an experienced estate planning attorney to review your estate plan and how assets are titled. If you would like to learn more about titling your assets, please visit our previous posts.

Reference: FedWeek (July 27, 2022) “How Assets Are Titled Can Make a Big Difference”

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IRS Extending Time to File Portability Exemption

August 9, 2022

When a spouse dies, the surviving spouse has the option of taking the unused federal estate tax exclusion and applying it to their own estate. This is known as electing portability for the DSUE, Deceased Spousal Unused Exemption, according to a recent article “Estates can now request late portability election relief for 5 years” from the Journal of Accountancy. The IRS is extending the time it takes to file a portability exemption.

The portability exemption has grown in use, and the scheduled decrease in the estate tax exemption starting on January 1, 2026, will no doubt dramatically expand the number of people who will be even more eager to adopt this process.

The IRS has extended the amount of time a surviving spouse may elect to take the Deceased Spousal Unused Exclusion (DSUE) from two to five years. The expanded timeframe is a reflection of the number of requests for letter rulings from estates missing the deadline for what had been a two-year relief period. The overly burdened and underfunded agency needed to find a solution to an avalanche of estates seeking this relief. Most of the requests were from estates missing the deadline between two years and under five years from the decedent’s date of death.

To reduce the number of letter ruling requests, the IRS has updated the requirement by extending the period within which the estate of a decedent may make the portability election under the simplified method to on or before the fifth anniversary of the decedent’s death.

There are some requirements to use the simplified method. The decedent must have been a citizen or U.S. resident at the date of death and the executor must not have been otherwise required to file an estate tax return based on the value of the gross estate and any adjusted taxable gifts. The executor must also not have timely filed the estate’s tax return within nine months after the date of death or date of extended file deadline.

If it is determined later that the estate was in fact required to file an estate tax return, the grant of relief will be voided.

Note that this change doesn’t extend the period during which the surviving spouse can claim a credit or a refund of any overpaid gift or estate taxes on the surviving spouse’s own gift or estate return.

The decision by the IRS extending the time to file a portability exemption will become even more popular after December 31, 2025, when the federal exemption changes from $12.6 million per person to $5 million (adjusted for inflation). Given the rise in housing prices, even people with modest estates may find themselves coming close or exceeding the federal estate tax level. If you would like to learn more about the portability exemption, please visit our previous posts.

Reference: Journal of Accountancy (July 11, 2022) “Estates can now request late portability election relief for 5 years”

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How are Capital Gains in Irrevocable Trust Taxed?

August 4, 2022

Putting a home in an irrevocable trust may be done to protect the house from estate taxes, explains a recent article from Yahoo! Life titled “Do Irrevocable Trusts Pay the Capital Gains Tax?” How are capital gains in a irrevocable trust taxed?

An irrevocable trust is used to protect assets. Unlike a revocable trust, once an asset is placed within the trust, it’s difficult to have the asset returned to the original owner. The trust is a separate legal entity and has its own taxpayer identification number.

Assets moved into a trust are permanently owned by the trust, until the trustee distributes assets to named beneficiaries or their heirs. Irrevocable trusts are often used to protect assets from litigation.

Capital gains taxes are the tax liabilities created when assets are sold. Typical assets subject to capital gains taxes include stocks, homes, businesses and collectibles. Capital gains taxes are usually lower than earned income taxes. For example, the top federal income tax rate is 37%, and the top capital gains tax rate is 20%. A single investor might pay no capital gains taxes if their taxable income is $41,675 or less (in 2022). Married copies filing joining also pay 0% capital gains if their taxable income is $83,350 or less.

Irrevocable trusts are the owners of assets in the trust until those assets are distributed, including any earned income. While it would seem that the irrevocable trust should pay taxes on earned income, this is not necessarily the case. If irrevocable trusts are required to distribute income to beneficiaries every year, then that makes the trust a pass-through entity. Beneficiaries pay taxes on the income they receive from the trust.

Capital gains are not considered income to such an irrevocable trust. Instead, any capital gains are treated as contributions to principal. Therefore, when a trust sells an asset and realizes a gain, and the gain is not distributed to beneficiaries, the trust pays capital gains taxes.

One of the tax benefits of home ownership is the ability to avoid the first $250,000 in capital gains profits on the sale of the home. For married couples filing jointly, the exemption is $500,000. The home must be a primary residence for two of the last five years.

What happens if you transfer your home to an irrevocable trust as part of your estate planning? Who pays the capital gains tax on the sale of a home in an irrevocable trust? Remember, the trust is a legal entity and not a person. The trust does not receive the $250,000 exemption.

Placing a home into an irrevocable trust can protect it from creditors and litigation, but when the home is sold, someone will have to pay the capital gains taxed on the sale. Although irrevocable trusts are great for distributing assets to beneficiaries, they are also responsible for paying capital gains taxes.

An experienced estate planning attorney will help you to determine which is more important for your unique situation: protecting the home through the use of an irrevocable trust or getting the tax exemption benefit if the home sells. If you would like to learn more about irrevocable trusts, please visit our previous posts.

Reference: Yahoo! Life (July 7, 2022) “Do Irrevocable Trusts Pay the Capital Gains Tax?”

Photo by Nataliya Vaitkevich

Burial Insurance can give you Peace of Mind

July 28, 2022

Burial insurance can give you peace of mind when you are already emotionally fragile after the death of a loved one. Burial insurance—also called end-of-life insurance, final expense, or funeral insurance—is a whole life insurance policy that’s designed to pay for the costs of your burial. These costs may include a memorial service, cremation costs, a headstone for your grave or other expenses associated with end-of-life arrangements.

Bankrate’s recent article entitled “Burial insurance” explains that if you have your affairs in order, your family already knows what will happen when you die. You may have given instructions for how you’d like your body to be treated, as well as ideas for your memorial service or what you want written on a tombstone.

However, all of these things cost money. If you don’t want your family to be stuck paying those costs, you may want to consider a burial policy.

Because the payout for burial insurance is small compared to many regular life insurance policies, the premiums can also be quite affordable. The policies are easy to purchase and don’t require a medical exam. However, there may be a waiting period and the policy may offer only limited benefits in the first two years.

Burial insurance policies cover all the normal costs incurred by someone’s death, such as:

Embalming
Memorial Service
A casket
Flowers
Cremation costs
A burial plot
The cost of transporting the body and/or remains
A headstone; and
Payment to clergy.

One type of burial policy, called a guaranteed issue life insurance policy, is available without any medical or health questions. It’s designed for those who are seriously ill and can’t get a policy any other way.

If all the appropriate arrangements have been made, the process of filing a burial insurance claim should be fairly smooth. Allow burial insurance to give you that peace of mind at an extremely difficult time. If you would like to read more about funeral expenses, and other issues related to probate, please visit our previous posts.

Reference: Bankrate (March 5, 2021) “Burial insurance”

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Marital Trusts have multiple Benefits

July 25, 2022

Marital trusts have multiple benefits for beneficiaries, including asset allocation and tax benefits. They are worth looking at in your estate plan.

Forbes’ recent article entitled “Guide To Marital Trusts” says that a marital trust is an irrevocable trust that allows you to transfer a deceased spouse’s assets to the surviving spouse without paying any taxes. The trust also protects assets from creditors and future spouses that the surviving spouse may encounter.

When the surviving spouse dies, the assets in the trust aren’t included as part of their estate. That will keep the taxes on their estate lower.

There are three parties involved in setting up, maintaining and ultimately passing along the trust, including a grantor, who is the person who establishes the trust; the trustee, who’s the person or organization that manages the trust and its assets; and the beneficiary. That’s the person who will eventually receive the assets in the trust, once the grantor dies.

A marital trust also involves the principal, which are assets initially put into the trust.

A marital trust doubles the couple’s estate tax exemption limit, especially when almost all assets are owned by one spouse. Estate tax refers to the federal tax that must be paid on someone’s estate after they die. The estate tax limit is how much of an estate will be tax-free. In 2022, the estate tax limit is $12.06 million, which means utilizing a marital trust would essentially double that amount to $24.12 million. Therefore, about $24 million of a couple’s net worth would be shielded from estate taxes by taking advantage of a marital trust.

A marital trust is also beneficial because it can provide income to the surviving spouse, tax-free.

Only a surviving spouse can be a beneficiary of a marital trust. When the surviving spouse dies, the trust will then be passed on to whomever the first spouse’s will or trust governs.

If keeping wealth within your family after you die is important, then a marital trust is an estate planning tool that will make certain that individuals outside of your family don’t have access to the wealth. You can put a variety of assets into a marital trust, including property, retirement accounts and investment accounts.

Marital trusts have multiple benefits for your heirs and is a legal tool to consider using when planning for a blended family. If you would like to learn more about marital trusts, please visit our previous posts.

Reference: Forbes (June 30, 2022) “Guide To Marital Trusts”

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Managing Finances in a Blended Family

July 21, 2022

Family finances can be a big issue in any circumstances. Managing finances in a blended family is even more significant, where two sets of often well-established financial histories and philosophies try to merge into one.

Kiplinger’s recent article entitled “Yours, Mine and Ours: A Checklist for Blended Family Finances” says that a blended family is one where people have remarried, either after a divorce or the death of a spouse. Sometimes it’s older couples already in retirement. In other cases, it’s a younger couple still trying to raise children.

However, regardless of the specifics of any individual situation, when families blend, so do their finances. That is when things can get problematic, if careful planning and communication don’t occur.

Here are a few things to consider:

Money habits. People are raised with different ideas about financial issues. They’re influenced by their parents or by the circumstances of their formative years. Some people are exceptionally frugal and save every penny and seldom, if ever, splurge on something just for fun. Others spend with reckless abandon, unconcerned about the unexpected expenses that life can throw at them at any moment.

Many people are somewhere in between these extremes. If you are entering a serious relationship, you should speak to your new partner about how each of you approaches spending money.

Financial accounts and bills. Once you learn each other’s financial philosophy, you will have decisions to make. These include whether to blend your financial accounts or keep them separate. If the two of you are closely aligned with your finances and how you approach spending, you may want to simply combine everything. If you’re older, have adult children from prior relationships and are more financially established, you may decide to keep things separate.

For many, a hybrid approach may be best — keep some things separate, but have common savings, investments and household accounts to reach your blended goals.

Family. When there are children from a prior marriage — especially young children — additional financial situations will need to be addressed. Issues of child support and how it fits into the overall budget is one concern, as is the status of college funding for the children.

Talk to an experienced estate planning attorney to make sure you managing the finances of your blended family the way you wish. If you would like to learn more about blended families and estate planning, please visit our previous posts.

Reference: Kiplinger (June 27, 2022) “Yours, Mine and Ours: A Checklist for Blended Family Finances”

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Category: Family

Estate Planning is critical for Blended Families

The Risks of Creating Your Own Estate Plan

Protecting the Community Spouse is Necessary

How to Separate Business and Marital Assets

Way you Title Assets has an Impact on your Estate

IRS Extending Time to File Portability Exemption

How are Capital Gains in Irrevocable Trust Taxed?

Burial Insurance can give you Peace of Mind

Marital Trusts have multiple Benefits

Managing Finances in a Blended Family

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