Category: Heirs

Topics You need to Address before a Mid-Life Marriage

Topics You need to Address before a Mid-Life Marriage

Today’s wedding couple is as likely to be 30 or 50 years old as they are to be in their twenties. This trend underscores the importance of having open discussions about finances and retirement before exchanging vows. A recent article from Next Avenue, “The Talk Over-50s Should Have Before Tying the Knot.” Whether you’re getting married for the first time or the second, being closer to retirement has major financial implications. There are topics you need to address before a mid-life marriage.

The most important thing is to disclose each person’s financial situation completely. For some people, this includes their retirement goals and lifestyle choices. What are the potential healthcare issues? Is there debt to be considered? How are each managing their investments?

If both people own homes, a plan for going forward needs to ask a simple question: where will the couple live? Will one sell their home or turn it into a rental property? If it is sold, will the seller retain all the income, or will they buy into ownership of the joint residence? Emotional attachments to homes can make this a difficult discussion, but it needs to be addressed.

Getting married changes each spouse’s legal status, meaning estate plans must be updated. If both have an existing estate plan, it needs to be reviewed. Powers of Attorney, Healthcare Proxy, and other estate planning documents must also be updated.

While reviewing and revising estate plans, don’t neglect to check on any accounts with named beneficiaries. More than a few ex-spouses have received insurance proceeds or accounts because someone neglected to update these accounts. The named beneficiary overrides anything in your will, which is critical to updating the estate plan.

If you both have children from prior marriages, meeting with an estate planning attorney to determine how to manage property distribution is another critical step before getting married. You may wish to create and fund trusts before marriage, so assets remain separate property. There are as many different types of trusts as there are family situations, from keeping assets separate to providing for a surviving spouse while ensuring biological children receive their inheritance (SLAT), or family trusts where assets are moved into the trust for the surviving spouse to allocate assets to heirs based on their needs.

Social Security planning should also be part of the discussion. If one spouse is a widow who was receiving survivor benefits, they could lose those benefits when they get married.

Talk with an estate planning attorney to address these topics before a mid-life marriage. That way you fully understand your situation and ensure you and your spouse are ready for the changes and challenges of your senior years together. If you would like to learn more about mid-life or second marriages and estate planning, please visit our previous posts. 

Reference: Next Avenue (March 14, 2024) “The Talk Over-50s Should Have Before Tying the Knot”

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New IRS Tax Rule affects Irrevocable Trusts in Estate Planning

New IRS Tax Rule affects Irrevocable Trusts in Estate Planning

Trusts have been foundational estate planning strategies for decades and are becoming more popular as economic shifts and the aging population highlight unique estate planning goals. An irrevocable trust is one practical estate planning strategy for excluding assets from an estate’s taxable value, safeguarding wealth and helping to meet asset threshold limits for government benefits like Medicaid. The Tax Advisor details how the 2023-2 IRS tax rule has significantly impacted estate planning strategies, particularly irrevocable trusts. We look at how this new IRS tax rule affects irrevocable trusts in your estate planning.

Capital gains taxes are the heart of the IRS Rule 2023-2 changes. Individuals pay taxes on the difference between an asset’s purchase price and a higher sell price as that asset’s value grows over time. The original purchase price is their cost basis or non-taxed value. Amounts over the cost basis are taxed as a capital gain. Assets include property, investments, cars and anything providing income or profit. If you create or update an estate plan, the IRS rule may change your estate planning or updates in 2024. Work with an experienced estate planning attorney to find the right type of trust for your goals and structure it accordingly.

The cost basis for an asset’s beneficiaries significantly impacts capital gains taxes once they sell. Capital gains from the deceased’s date of purchase will be much higher than fair market value on the date of death. An irrevocable trust typically gave heirs a break by calculating an inherited asset’s capital gains from the fair market value at the owner’s death. That tax break has changed.

The IRS issued Rule 2023-2 in early 2023, which impacts an inherited asset’s cost basis for capital gains taxes. The cost basis was calculated on the fair market value on the date of death but is based on the deceased’s date of purchase as of March 2023. Calculating taxes from the date of purchase is considered a “step-down,” meaning a lower cost base and higher capital gains. Conversely, the date of death means fair market value at a higher cost basis and less capital gains.

The main differentiator with an irrevocable trust is its ability to exclude assets from an estate’s valuation. The person establishing an irrevocable trust technically no longer owns the assets. This type of trust is a strategy that helps older adults applying for Medicaid benefits meet maximum thresholds.

With the new IRS rule, assets in an irrevocable trust are not part of the owner’s taxable estate at their death and are not eligible for the fair market valuation when transferred to an heir. The 2023-2 rule doesn’t give an heir the higher cost basis or fair market value of the inherited asset. Once they sell that asset, capital gains taxes are calculated using the value when the deceased purchased it.

Families increasingly use irrevocable trusts to safeguard assets from spend-down for government benefits, like Medicaid and VA Aid and Attendance.

Future considerations must include reevaluating how irrevocable trusts are structured to navigate the evolving tax landscape effectively. Planning strategies need to adapt to ensure that assets are protected, and taxes are minimized for the benefit of future generations.

This new IRS tax rule raises important considerations about how it might affect irrevocable trust estate planning. While it may seem like irrevocable trust planning could lead to additional taxes for beneficiaries, the reality is more nuanced. Future considerations in estate planning involve setting up irrevocable trusts that align with new IRS rules. If you would like to learn more about irrevocable trusts, please visit our previous posts.

Reference: The Tax Advisor (Nov. 1, 2023) “Rev. Rul. 2023-2’s Impact on Estate Plans.”

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Protect Family Wealth from Third Generation Curse

Have you heard of the “Great Wealth Transfer?” It’s the period when Baby Boomers are projected to pass trillions of dollars to the next generation. Creating or updating an estate plan to protect family wealth from the third-generation curse requires communication between generations centered on the values leading to wealth creation and a financial education on how to preserve and grow wealth.

The anticipated $84 trillion expected to be bequeathed to Generation X, Millennials, and Gen Z beneficiaries sounds enormous, but the third-generation curse may leave heirs with far less than expected. Often, wealth is earned by one generation, grown by the second generation who witnessed firsthand how hard their parents worked to maintain their wealth, and mismanaged or wasted by the third generation members, who are too far from the original wealth creation to respect it.

Many estate plans are structured to address tax planning, but that’s only one aspect of estate planning. Communicating the “why” of the estate plan, including where the money came from, how it has been stewarded over the years, and what needs to happen to protect it, will help beneficiaries have a deeper regard for their inheritance.

Boomer values may differ from their heir’s values, but they may also be similar, as they use different language to describe the same thing. Clarifying these values and communicating with heirs may help to give context to their inheritance and its importance.

Understanding your priorities and values should ideally lead to an estate plan reflecting your wishes. For instance, if the family prizes education, your estate planning attorney may advise you to create a trust to fund advanced education. Such a trust should be accompanied by a letter of intent explaining your wishes and values to both trustees and heirs.

If you’re unsure about mandating the use of funds, you may have your estate planning attorney create a discretionary trust with a similar letter explaining what you’d like them to use the funds for and why it’s important to you. Because circumstances change, the trustee will have the flexibility to distribute the funds as they see fit.

Creating or updating an estate plan to protect your family wealth from the third-generation curse will give everyone the peace of mind they crave. When the estate plan is completed, have a series of conversations with family members about what’s in the plan and why. They don’t need to know every detail, but broad strokes will go a long way in letting them know what you’ve done, your wishes, and your hopes for their future. If you would like to learn more about planning for future generations, please visit our previous posts.

Reference: Kiplinger (March 12, 2024) “How Estate Planning Can Thwart the ‘Third-Generation Curse’”

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Cognitive Decline is Overlooked in Estate Planning

Cognitive Decline is Overlooked in Estate Planning

Estate planning is a roadmap for transferring a person’s assets upon their death. It preserves their value and lays out the distribution of assets to the beneficiaries. One overlooked but essential aspect of estate planning is a strategy to manage and maintain an estate’s assets if the owner loses cognitive functioning and cannot make rational or mentally sound decisions. Planning for cognitive decline is often overlooked in estate planning.

A recent case highlighted by Alan Feigenbaum in J.D. Supra’s article “Confronting Cognitive Abilities in Well-Rounded Estate Planning” reminds us of the complexities and challenges that can arise when cognitive decline is not adequately addressed in estate planning.

The case involves an 80-year-old retired advertising executive, referred to as K.K., who suffered from severe delusions. Influenced by a fraudulent business associate, K.K.’s delusions led to misguided investments that resulted in a significant financial loss. Despite the clear signs of cognitive impairment, K.K. continued to engage in financial decisions that jeopardized his estate’s financial well-being.

K.K.’s son filed a petition to appoint him guardian of his father’s estate to prevent further loss. This situation underscores the need for an estate plan that includes managing the assets and protecting the estate’s value, if the individual is cognitively or mentally impaired.

  • Plan Early and Consider Cognitive Decline: Begin estate planning early and include provisions to carry out plan directives, if cognitive functioning is impaired.
  • Incorporate Safeguards: Estate plans should have safeguards, such as durable powers of attorney and trusts, which empower trusted individuals to manage your affairs if you become incapacitated.
  • Regular Reviews and Updates: Review and update your estate plan regularly to reflect changes in circumstances, including health status.
  • Professional Guidance is Key: Navigate the complexities of estate planning with an experienced estate planning attorney. An attorney will structure your estate plan to address potential cognitive decline.

K.K.’s court case underscores why cognitive decline is overlooked in estate planning. A well-rounded estate plan includes a strategy to protect and manage assets when an individual lacks the cognitive capacity to make decisions. Proactive strategies prevent financial loss and reduce the emotional turmoil when caring for a cognitively impaired loved one. Estate planning gives you the peace of mind that your wishes will be honored, even in mental decline. If you would like to learn more about planning for cognitive decline, please visit our previous posts.

Reference: JD Supra, (March 2024), Confronting Cognitive Abilities in Well-Rounded Estate Planning

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The Estate of The Union Season 3|Episode 5

The Estate of The Union Season 3|Episode 3 is out now!

The Estate of The Union Season 3|Episode 3 is out now! Taxes come in all favors. Sales taxes, excise taxes, capital gains taxes, etc. We are all concerned about our income taxes as we approach April 15th. Many of us will believe we pay way too much, and nobody will feel like they should pay more! But there’s another tax to be concerned about: The Death Tax.

 In this edition of The Estate of the Union, Brad Wiewel dissects the Death tax and it’s first cousin, the Gift Tax and explains them in a way that everyone can understand. He also sheds like on what is going to happen on January 1, 2026 – unless Congress changes the law; so, stand by!

 

In each episode of The Estate of The Union podcast, host and lawyer Brad Wiewel will give valuable insights into the confusing world of estate planning, making an often daunting subject easier to understand. It is Estate Planning Made Simple! The Estate of The Union Season 3|Episode 3 is out now! The episode can be found on Spotify, Apple podcasts, or anywhere you get your podcasts. If you would prefer to watch the video version, please visit our YouTube page. Please click on the links to listen to or watch the new installment of The Estate of The Union podcast. We hope you enjoy it.

The Estate of The Union Season |Episode 3

 

Texas Trust Law 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. We provide estate planning services, asset protection planning, business planning, and retirement exit strategies.

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Crummey Trusts are an Option to Gift to Minors

Crummey Trusts are an Option to Gift to Minors

If you’re looking for ways to pass wealth on to children or grandchildren, one valuable tool to consider may be the Crummey Trust. Crummey Trusts represent a strategic option for those looking to gift assets to minors. Named after the first individual to utilize this approach, the Crummey Trust offers a way to gift money to minors while enjoying significant tax advantages and maintaining control over the funds’ distribution.

A Crummey Trust allows you to gift assets to minors without those gifts being subject to gift tax up to a certain amount annually. As of 2024, you can give up to $18,000 annually to a minor through a Crummey Trust without incurring gift tax or affecting your lifetime gift tax exemption. This type of trust is particularly appealing because it prevents the minor from gaining direct access to the funds until they reach an age where they can manage the money responsibly.

A Crummey Trust operates on the concept of “present interest” gifts. For a gift to qualify for the annual gift tax exclusion, the recipient must have the right to use, possess, or enjoy the gift immediately. Crummey Trusts meet this requirement by allowing the beneficiary a temporary right to withdraw the gifted amount, typically within a 30-day window after the gift is made. If the withdrawal right is not exercised, the funds remain in the trust, subject to the terms set by the grantor.

While Crummey Trusts offer many advantages, they also require diligent record-keeping and clear communication with beneficiaries about their rights. Additionally, as beneficiaries age, they may choose to exercise their withdrawal rights, which could impact the grantor’s willingness to continue making gifts to the trust.

Crummey Trusts represent a strategic option for those looking to gift assets to minors while maintaining control over the distribution of those assets and optimizing tax benefits. By understanding the unique features and requirements of Crummey Trusts, you can make informed decisions that align with your estate planning goals and provide for your loved ones’ futures. If you would like to learn more about gifting, please visit our previous posts.

Reference: ElderLawAnswers “Crummey Trust: A Safe Way to Give Financial Gifts to Minors”

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Business Owners needs Succession Planning

Business Owners needs Succession Planning

Business owners typically have a high percentage of their net worth tied up in the business and sometimes the real estate where it operates. What’s surprising is how little attention is often given to the succession plan. Business owners need succession planning, says an article from Accounting Today, “The two sides to succession plans for private businesses.”

Starting with the operational side, who will take over the business owner’s work when they die, become incapacitated, or retire? If a business founder is in the weeds of the business, this is a big issue. The owner must have extensive conversations with key employees to discuss the details.

Multigenerational family ownership isn’t always the cure for a succession plan. Second- or third-generational roles must be planned, so capable people fill them. Bloodline succession doesn’t always work for running a business.

These conversations regarding roles, compensation and equity incentives must be very detailed. Not all employee leaders are willing to pour their lives into a privately owned business for the benefit of heirs without an incentive plan.

On the financial side of succession, who will become the owners of the deceased’s shares, and what financial arrangements will be made for that transfer? Businesses with the least amount of animosity and grief are those who have done the hard work: they have the business evaluated by an outside professional and having clear plans for how the successor owners will own and operate the business.

How will the transfer of the business take place in the future? An estate planning attorney should work with the business’ accountants, financial advisors, insurance brokers and other professionals to develop a clear plan for the business and the family.

If the owner is contemplating retirement, will they count on the income from the business operations to fund their retirement, or will they sell their shares to family members or outsiders? Who will oversee this transfer if the business owner becomes incapacitated?

Business owners needs succession planning for a privately held business. It is a lengthy process requiring input from skilled professionals, and ideally, it should begin the moment the business is well-established. There’s always time to tweak an existing plan, but never time to plan in an emergency. If you would like to learn more about business succession planning, please visit our previous posts. 

Reference: Accounting Today (Feb. 13, 2024) “The two sides to succession plans for private businesses”

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Use Qualified Disclaimer to avoid Inheriting IRA

Use Qualified Disclaimer to Avoid Inheriting IRA

The rules governing inherited Individual Retirement Accounts (IRAs) have changed over the years. They have become even more complex since the passage of the original SECURE Act. The inheritor of an IRA may be required to empty the account and pay taxes on the resulting income within 10 years. In some situations, beneficiaries might choose to use a Qualified Disclaimer to avoid inheriting the IRA, according to a recent article, “How to Opt Out of Inheriting an IRA” from Think Advisor.

Paying taxes on the distributions could put a beneficiary into a higher tax bracket. In some situations, beneficiaries may want to execute a Qualified Disclaimer and avoid inheriting both the account and the tax consequences associated with the inheritance.

Individuals who use a Qualified Disclaimer are treated as if they never received the property at all. Of course, you don’t enjoy the benefits of the inheritance but don’t receive the tax bill.

Suppose the decedent’s estate is large enough to trigger the federal estate tax. In that case, generation-skipping transfer tax issues may come into play, depending on whether there are any contingent beneficiaries.

An experienced estate planning attorney is needed to ensure that the disclaimer satisfies all requirements and is treated as a Qualified Disclaimer. It must be in writing, and it must be irrevocable. It also needs to align with any state law requirements.

The person who wishes to disclaim the IRA must provide the IRA custodian or the plan administrator with written notice within nine months after the latter of two events: the original account owner’s death or the date the disclaiming party turns 21 years old. The disclaiming person must also execute the disclaimer before receiving the inherited IRA or any of the benefits associated with the property.

Once you use the qualified disclaimer to avoid inheriting the IRA, it must pass to the remaining beneficiaries without the disclaiming party’s involvement. The disclaiming party cannot directly decide who will receive their interests, such as directing the inherited IRA to go to their child. If the disclaiming party’s child is already named as a beneficiary, their interest will be received as intended by that child.

The person inheriting the account must execute the disclaimer before receiving any benefits from the account. Even electing to take distributions will prevent the disclaimer from being effective, even if the person has not received any funds.

In some cases, you may be able to disclaim a portion of the inherited IRA. However, these are specific cases requiring the experience of an estate planning attorney. If you would like to learn more about inherited IRAs, please visit our previous posts. 

Reference: Think Advisor (Feb. 8, 2024) “How to Opt Out of Inheriting an IRA”

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Bypass Trust is a pivotal Estate Planning Tool

Bypass Trust is a pivotal Estate Planning Tool

A bypass trust, also known as a credit shelter trust or B trust, is a pivotal estate planning tool. It’s designed to help minimize estate taxes and ensure that a larger portion of your assets reaches your intended beneficiaries. A bypass trust works by allowing a surviving spouse to benefit from the trust assets during their lifetime, while preserving the trust principal for the next generation.

One of the primary benefits of a bypass trust is its ability to shield assets from estate taxes. This trust type strategically utilizes the federal estate tax exemption, allowing couples to effectively double the amount exempted from estate taxes. When one spouse passes away, the assets up to the estate tax exemption amount can be transferred into the bypass trust, thus reducing the taxable estate of the surviving spouse.

In the bypass trust arrangement, the trust is split into two separate trusts when the first spouse dies. The survivor’s trust is revocable and contains the surviving spouse’s share of the estate, while the deceased spouse’s share is transferred into the bypass trust, which becomes irrevocable. This separation allows for efficient estate tax management.

The surviving spouse plays a crucial role in a bypass trust. They have access to the trust income and, in some cases, the principal for certain needs. However, the trust assets remain in the trust and are not considered part of the surviving spouse’s estate, thus avoiding estate taxes upon their death.

Selecting a trustee for a bypass trust is an essential decision. The trustee manages the trust assets and ensures that they are used according to the terms of the trust. It’s essential to choose someone who is trustworthy and understands the financial and legal responsibilities involved.

Setting up a bypass trust requires careful planning and drafting by an experienced estate planning attorney. The trust document must outline the terms of the trust, including how the assets will be managed and distributed. This process also involves making decisions about beneficiaries and trustees.

Bypass trusts are closely tied to tax law, particularly federal estate tax laws. How a bypass trust is structured can significantly impact the estate taxes owed. Understanding current tax laws and how they affect your estate plan is crucial.

A bypass trust is most beneficial for couples with substantial assets that exceed the federal estate tax exemption amount. It’s an effective way to reduce estate taxes and ensure that more of your estate goes to your beneficiaries rather than to tax payments.

The landscape of estate planning and tax law is constantly evolving. It’s important to stay informed about changes in the law and how they may impact your estate plan. A bypass trust remains a relevant and pivotal tool in many estate planning strategies.

If you’re considering a bypass trust as part of your estate plan, consulting with an experienced estate planning attorney is essential. They can help you understand if a bypass trust is the right option for your situation and guide you through the process of setting one up. If you would like to learn more about bypass trusts and estate taxes, please visit our previous posts. 

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Divorce Impacts your Estate Plan

Divorce Impacts your Estate Plan

Divorce is a life-altering event that significantly impacts various aspects of life, including your estate plan. Clients either going through a divorce or have recently finalized one often feel uncertain about how the divorce will affect their estate. This article shares crucial aspects of revising your estate plan after a divorce, ensuring that your assets and loved ones are protected according to your current wishes.

When you get divorced, updating your estate plan is imperative, as your ex-spouse may still be entitled to certain benefits. Your estate, which includes all assets owned, might still be accessible to your ex-spouse unless changes are made. Revising your estate plan ensures that your assets are distributed according to your updated preferences. Updating your will is essential after a divorce. Your ex-spouse may still be named as the executor or beneficiary. By revising your will, you can ensure that your estate is administered by someone you trust and that your assets are distributed according to your latest intentions.

Revoking your power of attorney is a critical step post-divorce. Your ex-spouse may be able to make financial and care decisions on your behalf. It’s advisable to appoint someone you trust to handle these matters, ensuring that your affairs are managed according to your current preferences.

Beneficiary designations are often overlooked during estate planning after divorce. It’s crucial to revise these as your ex-spouse might still be listed as a beneficiary on life insurance policies, retirement accounts and other financial instruments. Updating these designations is a simple yet essential step in ensuring that your estate is distributed according to your current wishes. Your ex-spouse is likely named as a trustee or beneficiary if you have a living trust. Post-divorce, you need to revise this document to reflect your current wishes. This might include appointing a new trustee or changing the beneficiaries.

If you have minor children, your estate plan probably includes guardianship designations. Post-divorce, reassess these choices. You might want to name someone other than your ex-spouse as the guardian, ensuring that your children’s care aligns with your current wishes.

State law and the terms of your divorce decree can impact your estate plan. Understanding these implications and ensuring that your estate plan complies with legal requirements is important. An experienced estate planning attorney can provide valuable insights and guidance.

Don’t wait until the divorce is finalized. Start updating your estate plan as soon as the divorce is pending. This proactive approach ensures that your interests are protected throughout the divorce process.

Divorce significantly affects your estate plan, and it’s crucial to take timely action to revise it. Remember, updating your estate plan post-divorce is not just a legal necessity; ensuring that your assets and loved ones are protected according to your current wishes is crucial. Don’t hesitate to seek professional assistance to navigate this complex process. If you would like to read more about estate planning post divorce, please visit our previous posts. 

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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 Texas Trust Law to schedule a complimentary consultation.
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