What Happens When Property Is Owned Jointly and an Owner Dies?

When property is owned jointly, the property may pass automatically to the other owner, passing without going through probate, according to a recent article titled “Everything you need to know about jointly owned property and wills” from TBR News Media

Your will only concerns assets in your name alone without a designated beneficiary. Let’s say you have a joint checking account with another person. On your death, the account automatically becomes the property of the surviving owner. This is outside of probate, and any directions in your will won’t apply.

Real estate is most commonly owned jointly, in several different ways and each with its own set of laws.

Joint Tenancy or Joint Tenancy with Rights of Survivorship. On the death of a joint owner, the owner’s share goes to the surviving joint owner. Simple. The main advantage is the avoidance of probate, which can be costly and take months to complete.

Tenancy by the Entirety. This type of joint ownership is only available between spouses and is not used in all states. A local estate planning attorney will be able to tell you if you have this option. As with Joint Tenancy, when the first spouse passes, their interest automatically passes to the surviving spouse outside of probate.

There are additional protections in Tenancy by the Entirety making it an attractive means of ownership. One spouse may not mortgage or sell the property without the consent of the other spouse, and the creditor of one spouse can’t place a lien or enforce a judgment against property held as tenants by the entirety.

Tenancy in Common. This form of ownership has no right of survivorship and each owner’s share of the property passes to their chosen beneficiary upon the owner’s death. Tenants in Common may have unequal interests in the property, and when one owner dies, their beneficiaries will inherit their share and become co-owners with other Tenants.

The Tenant in Common share passes the persons designated according to their will, assuming they have one. This means the decedent’s executor must “probate” the will and file a petition with the court. However, a Tenant in Common may be able to avoid probate if their share of the property is held in trust, in which case the terms of the trust and not their will controls how the property passes at death. In this case, there’s no need for any court involvement.

There may be capital gains consequences when transferring ownership interests during and after life. Such gifts should never be made without speaking with an estate planning attorney. One of the more common errors occurs when the testator fails to account for the different types of ownership and how assets pass through the will. A comprehensive estate plan, created by an experienced estate planning attorney, ensures that both probate and non-probate assets work together.

Reference: TBR News Media (Dec. 27, 2022) “Everything you need to know about jointly owned property and wills”

Some Expenses are Paid by Estate and Some by Beneficiary

Settling an estate can be complex and time-consuming—it all depends on how much “estate planning” was done. According to a recent article from yahoo! Finance titled “What Expenses Are Paid by the Estate vs. Beneficiary?,” the executor is the person who creates an inventory of assets, determines which expenses need to be paid and distributes the remainder of the estate to the deceased’s beneficiaries. How does the executor know which monies are paid by the estate and which by the beneficiaries?

First, let’s establish what kind of expenses an estate pays. The main expenses of an estate include:

Outstanding debts. The executor has to notify creditors of the decedent’s death and the creditors then may make a claim against the estate. Because a person dies doesn’t mean their debts disappear—they become the debts of the estate.

Taxes. There are many different taxes to be paid when a person dies, including estate, inheritance and income tax. The federal estate tax is not an issue, unless the estate value exceed the exemption limit of $12.92 million for 2023. Not all states have inheritance taxes, so check with a local estate planning attorney to learn if the beneficiaries will need to pay this tax. If the decedent has an outstanding property tax bill for real estate property, the estate will need to pay it to avoid a lien being placed on the property.

Fees. There are court fees to file documents including a will to start the probate process, to serve notice to creditors or record transfer of property with the local register of deeds. The executor is also entitled to collect a fee for their services.

Maintaining real estate property. If the estate includes real estate, it is likely there will be expenses for maintenance and upkeep until the property is either distributed to heirs or sold. There may also be costs involved in transporting property to heirs.

Final expenses. Unless the person has pre-paid for all of their funeral, burial, cremation, or internment costs, these are considered part of estate expenses. They are often paid out of the death benefit associated with the deceased person’s life insurance policy.

What expenses does the estate pay?

The estate pays outstanding debts, including credit cards, medical bills, or liens.

  • Appraisals needed to establish values of estate assets
  • Repairs or maintenance for real estate
  • Fees paid to professionals associated with settling the estate, including executor, estate planning attorney, accountant, or real estate agent
  • Taxes, including income tax, estate tax and property tax
  • Fees to obtain copies of death certificates

The executor must keep detailed records of any expenses paid out of estate assets. The executor is the only person entitled by law to see the decedent’s financial records. However, beneficiaries have the right to review financial estate account records.

What does the beneficiary pay?

This depends on how the estate was structured and if any special provisions are included in the person’s will or trust. Generally, expect to pay:

  • Final expenses not covered by the estate
  • Personal travel expenses
  • Legal expenses, if you decide to contest the will
  • Property maintenance or transportation costs not covered by the estate

Some of the expenses are deductible, and the executor must use IRS Form 1041 on any estate earning more than $600 in income or which has a nonresident alien as a beneficiary.

An estate planning attorney is needed to create a comprehensive estate plan addressing these and other issues in advance. If little or no planning was done before the decedent’s death, an estate planning attorney will also be an important resource in navigating through the estate’s settlement.

Reference: yahoo! finance (Dec. 29, 2022) “What Expenses Are Paid by the Estate vs. Beneficiary?”

These Celebrities Didn’t have Wills…But You Should

Rapper Coolio died at age 59 after being found unresponsive on the floor at a friend’s house. His real name was Artis Leon Ivey Jr., and his former manager, Jared Posey, recently filed a probate case to appraise the value of his estate, according to a recent article “What Coolio, Prince and Picasso didn’t have that you should” from MarketWatch.

The filing names Coolio’s seven adult children, who are reported to wear his ashes in necklaces, as his next of kin and likely beneficiaries of his estate. There are also three other children who are under legal age.

The estimated value of the estate is more than $300,000, including personal property, demand deposit accounts, financial accounts, insurance policies and royalties.

Coolio is far from alone in failing to have a will. A 2021 Gallup poll revealed that fewer than half adults in the U.S. have a will outlining how they want their estate to be handed upon their death. It’s a recipe for disaster for their families.

Dying without a will—known as dying intestate—means a local probate court has to decide how to distribute property according to state law, which can take months or even years. What finally occurs may not be what you intended. However, it will be too late.

A will is only one of many tools in the estate planning toolbox. You also need an updated Medical Power of Attorney, a Financial Power of Attorney and to have beneficiary designations on all of your accounts. The beneficiary designations override your will, which is often news to loved ones.

If you have a beneficiary listed on your 401(k) plan, the person listed will receive the assets in the 401(k), regardless of what is in your will. You want to make sure beneficiaries and secondary beneficiaries are all up to date on all of your accounts.

Another important consideration: if a spouse is cut out of a will who would normally receive an inheritance, they have legal standing to challenge the will in court.

For a complete estate plan, you need a Durable Power of Attorney, which states who can make financial decisions on your behalf if you are incapacitated. A Medical Power of Attorney names a person to make medical decisions for you if you are unable to make them yourself, and guardianship designations if you have minor children.

Every few years or after any big life changes, these documents, including beneficiary designations, need to be reviewed and updated with your estate planning attorney.

Other accounts, like brokerage accounts or bank accounts, may have “Pay on Death” or “Transfer on Death” designations which would immediately put the assets into the named person’s hands upon your death.

Another item to consider is a letter of intent, in which you describe for the executor of your estate your final wishes regarding burial or funeral. This document is not legally binding but can be used to share your wishes. The will may not be reviewed until after the funeral, so final directions for funerals, cremations, memorial services, etc., should not be in the will.

You can create a list to be appended to your will listing who will receive certain tangible items, like the family silver or your mother’s pearls. One good thing about having such a list is that it gives you an opportunity to update beneficiaries of your tangible personal property without needing to update your will itself. Be sure the list doesn’t contradict anything in your will and describe the items with great detail. You might also want to include contact information, so your executor can easily locate the person and make sure the items find their desired home.

Better yet—give the items away before you die. You won’t have to worry if they won’t get to the right person, and you’ll get to share the person’s enjoyment when they receive the gifts.

Reference: MarketWatch (Dec. 31, 2022) “What Coolio, Prince and Picasso didn’t have that you should”

Can I Protect My Family after Death?

Estate planning involves a close look at personal and financial goals while you are living and after you have died, as explained in a recent article titled “Professional Advice: Secure your future with estate planning” from Northwest Indiana Business Magazine. Having a comprehensive estate plan ensures that your wishes will be carried out and loved ones protected.

Your last will and testament identifies the people who should receive an inheritance—heirs—who will manage your estate—executor—and who will take care of your minor children—guardian. Without a valid will, the state will rely on its own laws to distribute assets and assign a guardian to minor children. The state laws may not follow your wishes. However, there won’t be anything your family can do if you didn’t prepare a will.

Assets with beneficiary designations can be passed to heirs without going through probate. Certain assets, like life insurance policies and retirement accounts, allow a primary and secondary beneficiary to be named. These assets can be transferred to the intended beneficiaries swiftly and efficiently.

Many people use trusts to pass assets for a variety of reasons. For example, a trust can be created for a family member with special needs, protecting their eligibility to receive government benefits. Depending on the type of trust you create, you might be able to eliminate estate taxes. Certain trusts are also useful in protecting assets from creditors and lawsuits, and ensure that assets are distributed according to your wishes.

Revocable living trusts provide protection in case of incapacity, avoid probate and ancillary probate and may provide asset protection for beneficiaries. If you are the creator of a trust—grantor—you will need to appoint a successor trustee to manage the trust if you are the original trustee and become incapacitated. Upon death, a revocable trust usually becomes irrevocable. Assets placed in the trust avoid probate, the court proceeding used to settle an estate, which can be both time-consuming and costly.

A Power of Attorney allows you to name a person who will handle your financial affairs and protect assets in the event of incapacity. That person—your agent—may pay bills, sell assets and work with an elder law estate planning attorney on Medicaid planning. The POA should be customized to your personal situation. you may give the agent broad or narrow powers.

Everyone should also have a Health Care Proxy, which gives the person named the legal right to make health care decisions on your behalf if you are unable to. You’ll also want to have a HIPAA Release Form (Health Insurance Portability and Accountability Act), so your agent can speak with all health care providers, access medical records and speak with the health insurance company on your behalf.

A Living Will is the document used to convey your wishes regarding end-of-life care if you are unable to do so yourself. It is certainly not pleasant to contemplate. However, it should be thought of as a kindness to your loved ones. Without knowing your wishes, they may be forced to make a decision and will never know if it was what you wanted. A Living Will also avoids conflicts between health care providers and family members and makes a stressful time a little less so.

Having a comprehensive estate plan provides protection for the individual and their family members. It avoids costly and stressful problems arising from the complex events accompanying illness and death. Every three to five years (or when life or financial circumstances warrant), meet with an estate planning attorney to keep your estate plan on track.

Reference: Northwest Indiana Business Magazine (Dec. 27, 2022) “Professional Advice: Secure your future with estate planning”

How Does My Co-op Fit into My Estate Planning?

Parents bought a studio apartment in a New York City co-op for their adult son with special needs. He’s able to live independently with the support of an agency.

The couple asked the co-op board to let them transfer the property to an irrevocable trust, so when they die, the son will still have a place to live. However, the board denied their request.

An individual with special needs can’t inherit property directly, or he’ll no longer be able to receive the government benefits that support him. What should the parents do?

The New York Times’ recent article entitled “Can I Leave My Co-op to My Heirs?” explains that parents can leave a co-op apartment to their children in their will or in a trust. However, that doesn’t mean their heirs will necessarily wind up with the right to own or live in that apartment.

In most cases, a co-op board has wide discretion to approve or deny the transfer of the shares and the proprietary lease.

If the board denied the request, the apartment will be sold and the children receive the equity. Just because the will says, ‘I’m leaving it to my children,’ that doesn’t give the children the absolute right to acquire the shares or live there.

In some instances, the lease says a board won’t unreasonably withhold consent to transfer the apartment to a financially responsible family member. However, few, if any, leases extend that concept to include trusts.

The parents here could wait to have the situation resolved after their deaths, leaving clear directives to the executor of their estate about what to do should the board reject a request to transfer the property into a trust for their son. However, that leaves everyone in a precarious position, with years of uncertainty.

Another option is to sell the co-op now, put the proceeds in a special-needs trust and buy a condo through that trust. The son would then live there.

Unlike co-ops, condos generally allow transfers within estate planning, without requiring approval.

While this route would involve significant upheaval, the parents would have more peace of mind.

However, before buying the condo, an experienced estate planning attorney should review the building’s rules on transferring the unit.

Reference: New York Times (Oct. 1, 2022) “Can I Leave My Co-op to My Heirs?”

How Does Guardianship Work?

For family members of the estimated 6.5 million dementia patients in the U.S., it is crucial to understand whether guardianship may be an option for their loved one. A recent article from Next Avenue titled “Thinking of Becoming a Guardian?” explains how the guardianship process works and what factors go into the decision-making process.

Guardianship is the position of being responsible for someone else. State courts usually appoint a guardian to make decisions for a person, if the court finds that person to be incapacitated or unable to make safe and reasonable decisions for themselves. People who are placed under guardianship, known as “wards,” often lose their independence in making financial, legal and health care decisions.

If full guardianship is awarded, the person cannot make decisions about whether they may vote, marry, where they live, or make their own end-of-life decisions.

Two tasks that are evaluated when considering guardianship are a person’s ability to manage personal finances and to take medications as prescribed.

The court may call on a geriatrician or psychiatrist to evaluate the person’s functional behavior, cognitive function, disabling conditions and ability to meet their essential needs.

There are benefits to guardianship for someone who is not able to care for themselves. It ideally creates a safety net for a person who cannot make informed decisions for themselves.

this, of course, assumes that the guardian is honest and accountable, which is not always the case. The inconsistencies plaguing the guardianship system include minimum standards for guardians, lack of regular independent reviews of the need for guardianship and lack of educational requirements for guardians.

Once guardianship is assigned, there is a tendency for the person to become lost when no follow-up is done. The very same person who lacks capacity to care for themselves is not going to be able to advocate for themselves, contact an attorney or access funds for court proceedings.

There is also a tendency to assign full guardianship for a person, rather than less restrictive alternatives.

There are alternatives, but they require planning and discussion. More than 40% of Americans have not discussed their wishes for end-of-life care with their loved ones, according to an article in the Journal of the American Geriatrics Society. Families should have a conversation at the first sign of memory loss or when preparing for retirement regarding wishes for end-of-life care and write them down as part of an Advanced Directive—also known as a Living Will and Health Care Power of Attorney—when preparing their estate plan.

Another important document, although not legally binding, is a “Value History,” where you share your values and beliefs as they may impact care choices.

Designate a Power of Attorney and list two or even three back-up candidates. This person will be responsible for financial, legal and personal matters, avoiding the need for guardianship.

Appointing a family member or friend as a guardian is the ideal solution. However, there are instances when the best person to be a guardian is not a family member, but a court-appointed outsider. This relieves the family of being the ones who need to inform a person suffering from dementia with the news of having to move into a nursing home facility or sifting through financial records to learn that the family home is in foreclosure. The family can focus on being supportive and loving, while the guardian deals with the sometimes harsh realities of the person’s life.

Speak with your estate planning attorney to learn about how guardianship works, and whether it may be the right move for your family.

Reference: Next Avenue (Dec. 23, 2022) “Thinking of Becoming a Guardian?”

Beneficiary Mistakes to Avoid

Planning for one’s eventual death can be a somber task. However, consider what would occur if you failed to plan: loved ones trying to figure out your intentions, a long and expensive legal battle with unintended heirs and instead of grieving your loss, wondering why you didn’t take care of business while you were living. Planning suddenly becomes far more appealing, doesn’t it?

A recent article from yahoo! finance, “5 Retirement Plan Beneficiary Mistakes to Avoid,” explains how to avoid some of the issues regarding beneficiaries.

You haven’t named a beneficiary for your retirement accounts. This is a common estate planning mistake, even though it seems so obvious. A beneficiary can be a person, a charity, a trust, or your estate. Your estate planning attorney will be able to help you identify likely beneficiaries and ensure they are eligible.

You forgot to review your beneficiary designations for many years. Most people have changes in relationships as they move through the stages of life. The same person who was your best friend in your twenties might not even be in your life in your sixties. However, if you don’t check on beneficiary designations on a regular basis, you may be leaving your retirement accounts to people who haven’t heard from you in decades and disinheriting loved ones. Every time you update your estate plan, which should be every three to five years, check your beneficiary designations.

You didn’t name your spouse as a primary beneficiary for a retirement account. When Congress passed the 2019 SECURE Act, the bill removed a provision allowing non-spousal beneficiaries to stretch out disbursements from IRAs over their lifetimes, also known as the “Stretch IRA.” A non-spouse beneficiary must empty any inherited IRA within ten years from the death of the account holder. If a minor child is the beneficiary, once they reach the age of legal majority, they are required to follow the rules of a Required Minimum Distribution. Having a spouse named as beneficiary allows them to move the inherited IRA funds into their own IRA and take out assets as they wish.

You named an estate as a beneficiary. You can name your estate as a beneficiary. However, it creates a significant tangle for the family who has to set things right. For instance, if you have any debt, your estate could be attached by creditors. Your estate may also go through probate court, a court-supervised process to validate your will, have your final assets identified and have debts paid before any remaining assets are distributed to heirs.

You didn’t create a retirement plan until late in your career. Retirement seems very far away during your twenties, thirties and even forties. However, the years pass and suddenly you’re looking at retirement without enough money set aside. Creating an estate plan early in your working life shifts your focus, so you understand how important it is to have a retirement plan.

An experienced estate planning attorney can help square away your beneficiary designations as part of your overall estate plan. The best time to start? How about today?

Reference: yahoo! finance (Dec. 19, 2022) “5 Retirement Plan Beneficiary Mistakes to Avoid”

How Does a Trust Work?

You’ve worked hard to accumulate financial assets. You’ll need them to support your retirement. However, what if you also want to pass them on to loved ones? Trusts are used to pass assets to the next generation and have many benefits, says a recent article titled “Passing assets through a trust—What to know” from the Daily Bulldog.

“Funded” trusts don’t go through probate, which can be time-consuming, costly, and public. Your last will and testament becomes a public document when it is filed in the courthouse. Anyone can see it, from people wanting to sell your home to thieves looking for victims. Trust documents are not public, so no one outside of the grantor and the trustee knows what is in the trust and when distributions will be made. A trust also gives you the ability to be very specific about who will inherit assets in the trust, and when.

An estate planning attorney will help establish trusts, ensuring they are compliant with state law. There are three key questions to address during the trust creation process.

Who will serve as a trustee? There are several key roles in trusts. The person who creates the trust is the grantor of the trust. They name the trustee—the person or company charged with managing the trust’s assets and carrying out the instructions in the trust. You might choose a loved one. However, if they don’t have the knowledge or experience to manage the responsibilities, you could also name a corporate fiduciary, such as a bank or trust company. These entities charge for their services and usually require a minimum.

When will distributions be made? As the grantor, you get to decide when assets will be distributed and the amount of the distribution. You might want to keep the assets in the trust until the beneficiary reaches legal age. You could also structure the trust to make distributions at specific ages, i.e., at 30, 35 and 40. The trust could even hold the assets for the lifetime of the beneficiary and only distribute earned income. A large part of this decision has to do with how responsible you feel the beneficiaries will be with their inheritance.

What is the purpose of the trust? The grantor also gets to decide how trust assets should be used. The trust could designate broad categories, such as health, education, maintenance and support. The trust can be structured so the beneficiary needs to ask the trustee for a certain amount of assets. Other options are to structure the trust to provide mandatory income, once or twice a year, or tie distributions to incentives, such as finishing a college degree or purchasing a first home.

An estate planning attorney will explain the different types of trusts and which one is best for your unique situation. There are many different types of trusts. You’ll want to be sure to choose the right one to protect yourself and your loved ones.

Reference: Daily Bulldog (Dec. 24, 202) “Passing assets through a trust—What to know”

High Interest Rates Have an Impact on Estate Planning

The Section 7520 rate has been low for the past 15 years and presented many opportunities for good planning. What happens when inflation has returned and rates are moving up, asks a recent article titled “Estate Planning Techniques in a High—Interest—Rate Environment” from Bloomberg Tax.

The Section 7520 rate is the interest rate for a particular month as determined by the IRS. It is 120 percent of the applicable federal midterm rate (compounded annually) for the month in which the valuation date falls and rounded to the nearest two-tenths of a percent. It is used for actuarial planning, to discount the value of annuities, life estates and remainders to present value, and is revised monthly.

In January 2022, the 7520 rate was at 1.6%, but as interest rates increased, it shot up and in December 2022 was 5.2%. This was a 225% increase—unprecedented in the history of the 7520 rate. However, there are four key planning concepts which may make 2023 a little brighter for estate planning attorneys and their clients.

Higher inflation equals higher exemptions. Certain inflation adjusted exemptions and exclusions increased on January 1, 2023. The federal transfer tax exemption rose by $860,000 to $12.92 million, and the annual gift tax exclusion increased to $17,000 from $16,000 in 2022.

These increases give wealthy families the opportunity to make generous new gifts to family members without triggering any transfer taxes. Those who have fully used transfer tax exemptions may wish to consider making additional transfers.

Shift charitable giving to CRTs for higher interest rates. People who might have started Charitable Lead Trusts should instead look at Charitable Remainder Trusts. With both CLTs and CRTs, the value of the income and remainder interests are calculated using the 7520 rate. The key difference, for estate planning purposes, is the impact of a rising rate on the amount of the available charitable deduction.

The return of the QPRT. Qualified Personal Residence Trusts have been hibernating for years because of low interest rates. However, the time has come to return them to use for wealth transfer. A QPRT lets a person transfer a residence at a discounted value, while retaining the right to occupy the residence for a number of years. The 7520 rate is used to determine the value of the owner’s retained interest. The higher the rate, the more value retained by the owner and the smaller the amount of the taxable gift to the remainder beneficiaries, usually the owner’s children.

GRATs still have value. A Grantor Remainder Trust should still be considered in estate planning. A GRAT is more appealing in a low interest environment. However, a GRAT can still be useful when rates are rising. The success or failure of the GRAT usually depends on whether the assets transferred to the GRAT appreciate in value at a rate exceeding the 7520 rate, since the excess appreciation is transferred to the remainder beneficiaries gift tax-free. A GRAT can also be structured as a zeroed-out GRAT. This means that the transfer of assets to the GRAT doesn’t use any of the grantor’s transfer tax exemption or result in any gift tax due. This is still of value to a person who owns assets with significant growth potential, like securities likely to rebound quickly from depressed 2022 values.

Reference: Bloomberg Tax (Dec. 23, 2022) “Estate Planning Techniques in a High—Interest—Rate Environment”