There is a line from John Lennon that states, “Life is what happens to you while you’re busy making other plans.” This is especially true when reviewing your estate planning. Maybe your estate plan was created when you were single, and there have been some significant changes in your life. Perhaps you got married or divorced. You also may now be on better terms with children with whom you were once estranged. This is why you should periodically review your estate planning to ensure they are accurate and up-to-date.
Tax and estate laws can also change over time, requiring further updates to your planning documents.
WMUR’s recent article entitled “The ‘final’ estate-planning step” reminds us that change is a constant thing. With that in mind, here are some key indicators that a review is in order.
The value of your estate has changed dramatically
You or your spouse changed jobs
Changes to your income level or income needs
You are retiring and no longer working
There is a divorce or marriage in your family
There is a new child or grandchild
There is a death in the family
You (or a close family member) have become ill or incapacitated
Your parents have become dependent on you
You have formed, purchased, or sold a business;
You make significant financial transactions, such as substantial gifts, borrowing or lending money, or purchasing, leasing, or selling assets or investments
You have moved
You have purchased a vacation home or other property in another state
A designated trustee, executor, or guardian dies or changes his or her mind about serving; and
You are making changes in your insurance coverage.
Your should review your estate planning after every major change of life. Sit down with your estate planning attorney and take the time to review your planning. If you would like to read more about making changes to your estate planning, please visit our previous posts.
There are two common myths about what happens when parents die in debt, says a recent article “How your parents’ debt could outlive them” from the Greenfield Reporter. One is the adult child will be liable for the debt. The second is that the adult child won’t. Debt doesn’t disappear when someone dies.
If your parents have significant debts and you are concerned about what the future may bring, talk with an estate planning attorney for guidance. Here’s some of what you need to know.
Creditors file claims against the estate, and in most instances, those debts must be paid before assets are distributed to heirs. Surprisingly to heirs, creditors are allowed to contact relatives about the debts, even if those family members don’t have any legal obligation to pay the debts. Collection agencies in many states are required to affirmatively state that the family members are not obligated to pay the debt, but they may not always comply.
Some family members feel they need to dig into their own pockets and pay the debt. Speak with an estate planning lawyer before taking this action, because the estate may not have any obligation to reimburse you.
For the most part, family members don’t have to use their own money to pay a loved one’s debts, unless they co-signed a loan, are a joint-account holder or agreed to be held responsible for the debt. Other reasons someone may be obligated include living in a state requiring surviving spouses to pay medical bills or other outstanding debts. If you live in a community property state, a spouse may be liable for a spouse’s debts.
Executors are required to distribute money to creditors first. Therefore, if you distributed all the assets and then planned on “getting around” to paying creditors and ran out of funds, you could be sued for the outstanding debts.
More than half of the states still have “filial responsibility” laws to require adult children to pay parents’ bills. These are old laws left over from when America had debtors’ prisons. They are rarely enforced, but there was a case in 2012 when a nursing home used Pennsylvania’s law and successfully sued a son for his mother’s $93,0000 nursing home bill. An estate planning attorney practicing in the state of your parents’ residence is your best source of the state’s law and enforcement.
If a person dies with more debts than assets, their estate is considered insolvent. The state’s law determines the order of bill payment. Legal and estate administration fees are paid first, followed by funeral and burial expenses. If there are dependent children or spouses, there may be a temporary living allowance left for them. Secured debt, like a home mortgage or car loan, must be repaid or refinanced. Otherwise, the lender may reclaim the property. Federal taxes and any federal debts get top priority for repayment, followed by any debts owed to state taxes.
If the person was receiving Medicaid for nursing home care, the state may file a claim against the estate or file a lien against the home. These laws and procedures all vary from state to state, so you’ll need to talk with an elder law attorney.
Many creditors won’t bother filing a claim against an insolvent estate, but they may go after family members. Debt collection agencies are legally permitted to contact a surviving spouse or executor, or to contact relatives to ask how to reach the spouse or executor.
Debt doesn’t disappear when someone dies. Planning in advance is the best route. However, if parents are resistant to talking about money, or incapacitated, speak with an estate planning attorney to learn how to protect your parents and yourself. If you would like to learn more about managing debt and property after a loved one passes, please visit our previous posts.
If a married couple is creating its estate plan, then how does the couple leave the estate to non-adult grandchildren? What if something were to happen to them before the grandchildren become adults? Can this couple make sure the minor grandchildren do not get control of any inheritance until they’re adults? There are options to give assets to minor grandchildren.
Nj.com’s recent article entitled “How can I leave my money to my minor grandchildren when I die?” says that one way to solve these issues is to create a testamentary trust to provide for young beneficiaries whether they’re children, grandchildren, step-children, or unrelated beneficiaries. The terms of a testamentary trust are in your will. It is only established and funded after you pass away.
The terms of the trust generally provide instructions to the trustee about the ages at which distributions must be made, if any. These instructions also allow the trustee to make discretionary distributions of income and principal to the beneficiaries.
Beneficiaries do not need to be identified by name or need to be born at the time the will is written. However, they must be able to be identified upon your death. As a result, you can provide a bequest to all of your grandchildren, whether or not they are born yet.
It doesn’t matter where your grandchildren live as far as estate planning is concerned. However, if they live outside the United States and the bequest is considerable, the laws of their home country should be addressed. This is because a big gift may cause adverse tax implications to the recipient.
For children, some states’ laws allow you to add a term in your will that penalizes any interested person — like an heir or beneficiary — for contesting the will.
However, if there’s probable cause initiating a proceeding concerning the estate, then the clause will not be enforced.
When a person names another as primary beneficiary, they should also name one or more contingent beneficiaries, so that if the first person predeceases him or her, they will not have to revise the will.
If you do not designate a contingent beneficiary, and an heir predeceases, the assets pass according to the state’s intestacy statute rather than according to the will. You have options to ensure assets you give to minor grandchildren are honored after you pass. An experienced estate planning attorney will help you draft a testamentary trust that is right for you. If you would like to learn more about testamentary trusts, please visit our previous posts.
Whether you have a will or not, assets may go through the probate process when you die. People use trusts to take assets out of their probate estate, but they don’t always understand the relationship between wills and trusts. Carefully consider which assets to place in a trust. This is explored in a recent article “What Assets Should be Included in Your Trust?” from Kiplinger.
Probate can be a long and expensive process for heirs, taking from a few months to a few years, depending on the size and complexity of the estate. Many people ask their estate planning attorney about using trusts to protect and preserve assets, while minimizing the amount of assets going through probate.
Revocable trusts are used to pass assets directly to beneficiaries, under the directions you determine as the “grantor,” or person making the trust. You can set certain parameters for assets to be distributed, like achieving goals or milestones. A trust provides privacy: the trust documents do not become part of the public record, as wills do, so the information about assets in the trust is known only to the trustees. If you become incapacitated, the trust is already in place, protecting assets and fulfilling your wishes.
Estate planning attorneys know there’s no way to completely avoid probate. Some assets cannot go into trusts. However, removing as many assets as possible (i.e., permitted by law) can minimize probate.
Once trust documents are signed and the trusts are created, the work of moving assets begins. If this is overlooked, the assets remain in the probate estate and the trust is useless. Assets are transferred to the trust by retitling or renaming the trust as the owner.
Assets placed in a trust include real estate, investment accounts, life insurance, annuity certificates, business interests, shareholders stock from privately owned businesses, money market accounts and safe deposit boxes.
Funding the trust with accounts held by financial institutions is a time-consuming process. However, it is necessary for the estate plan to achieve its goals. It often requires new account paperwork and signed authorizations to retitle or transfer the assets. Bond and stock certificates require a change of ownership, done through a stock transfer agent or bond issuer.
Annuities already have preferential tax treatment, so placing them in a trust may not be necessary. Read the fine print, since it’s possible that placing an annuity in a trust may void tax benefits.
Certificates of Deposit (CDs) are usually transferred to a trust by opening a new CD but be mindful of any early termination penalties.
Life insurance is protected if it is placed in a trust. However, there are risks to naming the living trust as a beneficiary of the insurance policy. If you are the trustee of your revocable trust, all assets in the trust are considered to be your property. Life insurance proceeds are included in the estate’s worth and could create a taxable situation, if you reach the IRS threshold. Speak with your estate planning attorney to determine the best strategy for your trust and your insurance policy.
Should you put a business into a trust? Transferring a small business during probate presents many challenges, including having your executor run the business under court supervision. For a sole proprietor, transfers to a trust behave the same as transferring any other personal asset. With partnerships, shares may be transferred to a living trust. However, if you hold an ownership certificate, it will need to be modified to show the trust as the shareowner instead of yourself. Some partnership agreements also prohibit transferring assets to living trusts.
Retirement accounts may not be placed in a trust. Doing so would require a withdrawal, which would trigger income taxes and possibly, extreme penalties. It is better to name the trust as a primary or secondary beneficiary of the account. Funds will transfer upon your death. Health or medical savings accounts cannot be transferred to a living trust, but they can be named as a primary or secondary beneficiary.
Carefully consider which assets to place in a trust and which should remain as part of your probate estate. Your estate planning attorney will know what is permitted in your state and what best suits your situation. If you would like to learn more about funding a trust, please visit our previous posts.
Having a working understanding of the legal terms used in estate planning is the first step in working successfully with an estate planning attorney, says a recent article, “Learn lingo of estate planning to help ensure best outcome” from The News-Enterprise. Two of those key words:
Principal—the individual on whose behalf documents are prepared, and
Fiduciary—the person who signs some of these documents and who is responsible for making decisions in the best interest of the principal and the estate.
In estate planning and in business, the fiduciary is the person or business who must act responsibly and in good faith towards the person and their property. You’ll see this term in almost every estate planning or financial document.
Within a last will and testament, there are more: beneficiary, conservator, executor, grantor, guardian, testator, and trustee are some of the more commonly used terms for the roles people take.
The testator is the principal, the person who signs the will and on whose behalf the will was drafted.
Beneficiaries are individuals who receive property from the estate after death. Contingent beneficiaries are “back-up” beneficiaries, in case the beneficiaries are unable to receive the inheritance. In most wills, the beneficiaries are listed “or to descendants, per stirpes.” This means if the beneficiary dies before the testator, the beneficiary’s children receive the original beneficiary’s share.
In most cases, specific distributions are made first, where a specific asset or amount of money goes to a specific person. This includes charitable donations. After all specific distributions are made, the rest of the estate, referred to as the “residuary estate,” is distributed. This includes everything else in the probate estate.
The administrator or executor is the fiduciary charged with gathering assets, paying bills and making the distribution to beneficiaries. The executor is the term used when there is a will. If there is no will, the person in the role is referred to as the administrator and may be appointed by the court.
If a beneficiary is unable to take the inheritance because they are a minor or incapacitated, the court will appoint a conservator to act as fiduciary on behalf of the beneficiary.
A guardian is the person who takes care of the beneficiary, or minor children, and is named in the will. If there is no guardian named in the will, or if there is no will, a court will appoint a person to be the guardian. Judges do not always select family members to serve as guardians, so there should always be a secondary guardian, in case the first cannot serve. If the first guardian does not wish to serve or is unable to, naming a secondary guardian is better than a child being sent to foster care.
Finally, the trustee is the person in charge of a trust. The person who creates the trust is the grantor or settlor. It’s important to note the executor has no control or input over the trust. Only the trustee or successor trustee may make distributions and they are the trust’s fiduciary.
Having firm understanding of legal terms will make you feel more comfortable in your estate planning. It will make the process easier and help you understand the different roles and responsibilities involved. If you would like to learn more about estate planning, please visit our previous posts.
One of the first, big questions that comes up after a loved one passes is how executors manage financial accounts after death. Executors administering probate assets usually have to deal with several different financial institutions. If good planning has been done by the decedent, the executor has a list of assets, account numbers, website addresses and phone numbers. Otherwise, the personal representative or successor trustee starts by gathering information and identifying the accounts, as described in a recent article “Dealing with the back offices of banks and brokerages” from Lake Country News.
The accounts must be identified, retitled to become part of the estate, or liquidated and moved into the estate account.
If the decedent had a financial advisor who handled all of their investments, the process may be easier, since there will only be one person to deal with.
If there is no financial advisor who can or will personally manage the assets, the executor starts by contacting the back office department of the institution, often referred to as the “estates department.” The contact info can usually be found on the institutions’ website or on the paper statements, if there are any.
Expect to spend a lot of time on hold, especially in the beginning of the week. It may be better to call on a Wednesday or Thursday.
The first call is to introduce the executor, advise of the death of the decedent and learn about the company’s procedures for transferring, retitling, or otherwise gaining control of the account. The bank usually assigns a case number, to be used on all future communications.
If possible, obtain their name, direct dial, and direct email of whoever you speak with. It may only be with one assigned representative, or a different person every time. It depends upon the organization. Take careful notes on every interaction. You may need them.
Some of the documents needed to complete these transactions include an original death certificate, a court certified letter of administration or trustee’s certification of trust and a letter of authorization signed by the client to allow the institution to communicate with the executor or successor trustee.
Financial institutions will often only accept their own forms, which then need to be prepared for completion and signature. Expect to be asked to notarize some documents. In many cases, the institution will require a new account be opened and the assets transferred to the new account.
Be organized—you may find yourself needing to submit the documents multiple times, depending on the financial institution. If hard copy documents are sent, use registered or express mail requiring a signature on delivery. If documents are sent by email, they should only be sent via an encrypted portal to protect both estate and executor.
For an executor, managing financial accounts after death is not a quick process and requires diligent follow up, with multiple emails and phone calls. If the value of the estate is large and the assets are complex, it may be better to have the estate planning attorney handle the process. If you are interested in reading more about the role of the executor, please visit our previous posts.
A letter of intent is frequently recommended for parents of disabled children to share information for when the parent dies. However, a letter of intent, or a letter of instruction, is also a helpful resource for executors, says the article “Planning Ahead: For detailed instructions consider a letter of instruction” from The Mercury. This is especially valuable, if the executor doesn’t know the decedent or their family members very well.
For disabled children, legal documents address specific issues and aren’t necessarily the right place to include personal information about the child or the parent’s desires for the child’s future. Estate plans need more information, especially for a minor child.
The goal is to create a document to make clear what the parents want for the child after they pass, whether that occurs early or late in the child’s life.
For a disabled child, the first questions to be addressed in the estate plan concern who will care for the child if the parent dies or becomes incapacitated, where will the child live and what funds will be available for their care. Once those matters are resolved, however, there are more questions about the child’s wants and needs.
The letter of intent can answer questions about the special information only a parent knows and is helpful in future decisions about their care and living situation.
The letter of intent concerning an estate should also include information about wishes for a funeral or burial and contain everything from directions for the music list for a ceremony to the writing on the headstone.
Once the letter of intent is created, the next question is, where should you put it so it is secure and can be accessed when it is needed?
Don’t put it in a bank safe deposit box. This is a common error for estate planning documents as well. The executor may only access the contents of the safe deposit box after letters of administration have been issued. This happens after the funeral, and sometimes long after the funeral. By then, it will be too late for any instructions.
Keeping estate planning documents in a safe deposit box presents other problems. If the bank seals the safe deposit box on notification of the owner’s death, the executor won’t be able to proceed. This can sometimes be prevented by having additional owners on the safe deposit box, if permitted by the bank . Any additional owners will also need to know where the key is located and be able get access to it.
The better solution is to keep all important documents including wills, financial power of attorney, health care powers, letter of intent, living wills, or health care directives, insurance forms, cemetery deeds, information for the family’s estate planning attorney, financial advisor, and CPA, etc., in one location known to the trusted person who will need access to the documents. That person will need a set of keys to the house. If they are kept in a fire and waterproof safe in the house; they will also need the keys to the safe.
If the parents move or move the documents, they’ll need to remember to tell the trusted person where these documents have moved., Otherwise, a lot of work will have been for naught. A letter of instruction can be an enormous resource for executors looking to fulfill your wishes. Work with an experienced estate planning attorney to include one in your planning. If you would like to learn more about letters of instruction, please visit our previous posts.
As more and more aspects of our lives become digital, storing passwords in case of death becomes even more urgent. Despite having the resources to hire IT forensic experts to help access accounts, including her husband’s IRA, it’s been three years and Deborah Placet still hasn’t been able to gain access to her husband’s Bitcoin account. Placet and her late husband were financial planners and should have known better. However, they didn’t have a digital estate plan. Her situation, according to the Barron’s article “How to Ensure Heirs Avoid a Password-Protected Nightmare” offers cautionary tale.
Our digital footprint keeps expanding. As a result, there’s no paper trail to follow when a loved one dies. In the past, an executor or estate administrator could simply have mail forwarded and figure out accounts, assets and values. Not only don’t we have a paper trail, but digital accounts are protected by passwords, multifactor authentication processes, fingerprints, facial recognition systems and federal data privacy laws.
The starting point is to create a list of digital accounts. Instructions on how to gain access to the accounts must be very specific, because a password alone may not be enough information. Explain what you want to happen to the account: should ownership be transferred to someone else, who has permission to retrieve and save the data and whether you want the account to be shut down and no data saved, etc.
The account list should include:
Social media platforms
Traditional bank, retirement and investment accounts
Home and utilities accounts, like mortgage, electric, gas, cable, internet
Insurance, including home, auto, flood, health, life, disability, long-term care.
Smart phone accounts
Online storage accounts
Photo, music and video accounts
Subscription services
Loyalty/rewards programs
Gaming accounts
Some digital accounts may be accessed by using a username and password. However, others are more secure and require biometric protection. This information should all be included in a document, but the document should not be included in the Last Will, since the Last Will becomes public information through probate and is accessible to anyone who wants to see it.
Certain platforms have created a process to allow heirs to access assets. Typically, death certificates, a Last Will or probate documents, a valid photo ID of the deceased and a letter signed by those named in the probate records outlining what is to be done with assets are required. However, not every platform has addressed this issue.
Storing a list of digital assets, such as passwords, in case of death is about as much fun as preparing for tax season. However, without a plan, digital assets are likely to be lost. Identity theft and fraud occurs when assets are unprotected and unused.
Just as a traditional estate plan protects heirs to avoid further stress and expense, a digital estate plan helps to protect the family and loved ones. Speak with your estate planning attorney as you are working on your estate plan to create a digital estate plan. If you would like to learn more about managing digital assets, please visit our previous posts.
Many people incorporate a TOD, or “Transfer on Death” into their financial plan, thinking it will be easier for their loved ones than creating a trust. However, a trust provides more protection than a TOD. The article “TOD Accounts Versus Revocable Trusts—Which Is Better?” from Kiplinger explains how it really works.
The TOD account allows the account owner to name a beneficiary on an account who receives funds when the account owner dies. The TOD is often used for stocks, brokerage accounts, bonds and other non-retirement accounts. A POD, or “Payable on Death,” account is usually used for bank assets—cash.
The chief goal of a TOD or POD is to avoid probate. The beneficiaries receive assets directly, bypassing probate, keeping the assets out of the estate and transferring them faster than through probate. The beneficiary contacts the financial institution with an original death certificate and proof of identity. The assets are then distributed to the beneficiary. Banks and financial institutions can be a bit exacting about determining identity, but most people have the needed documents.
There are pitfalls. For one thing, the executor of the estate may be empowered by law to seek contributions from POD and TOD beneficiaries to pay for the expenses of administering an estate, estate and final income taxes and any debts or liabilities of the estate. If the beneficiaries do not contribute voluntarily, the executor (or estate administrator) may file a lawsuit against them, holding them personally responsible, to get their contributions.
If the beneficiary has already spent the money, or they are involved in a lawsuit or divorce, turning over the TOD or POD assets may get complicated. Other personal assets may be attached to make up for a shortfall.
If the beneficiary is receiving means-tested government benefits, as in the case of an individual with special needs, the TOD or POD assets may put their eligibility for those benefits at risk.
These and other complications make using a POD or TOD arrangement riskier than expected.
A trust provides a great deal more protection for the person creating the trust (grantor) and their beneficiaries than a TOD. If the grantor becomes incapacitated, trustees will be in place to manage assets for the grantor’s benefit. With a TOD or POD, a Power of Attorney would be needed to allow the other person to control of the assets. The same banks reluctant to hand over a POD/TOD are even more strict about Powers of Attorney, even denying POAs, if they feel the forms are out-of-date or don’t have the state’s required language.
Creating a trust with an experienced estate planning attorney allows you to plan for yourself and your beneficiaries. You can plan for incapacity and plan for the assets in your trust to be used as you wish. If you want your adult children to receive a certain amount of money at certain ages or stages of their lives, a trust can be created to do so. You can also leave money for multiple generations, protecting it from probate and taxes, while building a legacy. If you would like to read more about a TOD or POD, and how they work, please visit our previous posts.
Kiplinger’s recent article entitled “Someone Needs to Know Where Your Money Is” recommends that families talk about money with an elderly parent. The holidays are a good time for a family meeting. If it’s really too late, you should know where to find the following:
Get the most recent tax return. This will have the name and contact information of the accountant who prepared the tax return. The tax return will also document income. If you find the income, you can find the assets. The reason is that earned interest, dividends, pension income and withdrawals from retirement accounts will be reported on the tax return. You should also call his or her employer’s human resources department to see if there’s a company life insurance benefit or 401(k) balance.
When a senior is admitted to the hospital, their health can sometimes deteriorate quickly. It’s one example of how everyone needs to have their estate plan updated and make sure their financial affairs are in order at all times. Someone must know all of the financial details and how to access the money, life insurance and other important documents. Here are some actions to consider taking now to ensure this situation doesn’t occur with you or a family member.
Collect key financial documents. During the family meeting, ask your parents to collect copies of the following documents:
Their wills;
Any trusts;
Their financial power of attorney;
All bank and brokerage account information;
Social Security statements;
Their website log-ins for any financial assets and insurance policies;
A list of beneficiaries for IRAs, annuities and life insurance policies;
A list of any other assets and debts; and
Their most recent tax returns.
As you begin gathering these documents, the most crucial one to help uncover current assets is the tax return. It can help describe the parent’s assets and the income they have from pensions, annuities, real estate investments, business interests and Social Security. A Schedule B is filed to report the interest and dividends received each tax year. If you’re unable to locate any paper statements or log-in information to financial websites to track down an asset, ask the tax preparer for a copy of the 1099 form for each asset, so you will know which company to contact.
Make certain key documents are signed. These are a will, financial power of attorney, health care power of attorney and any trust documents. Put these in a safe place, along with a copy of the Social Security card, birth and marriage certificates. You should also provide copies and access to files to people who serve as professional advisers, such as attorneys, accountants, financial planners and insurance agents. In addition, share contents of this collection with your parent’s executor, financial and health care agent and/or another relative who lives nearby. With everyone gathered together, the holidays are a good time to have a family meeting and make sure everyone is on the same page. If you would like to learn more about planning for elderly loved ones, please visit our previous posts.
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.
