What Is an Ethical Will and Do You Need One?

When an estate planning attorney suggests that clients create ethical wills, they aren’t asking the clients to create another last will and testament. Instead, it is to create something that can explain their intentions to their loved ones. According to the article “How to create an ethical will” from Herald Net, a ethical will is also known as a legacy letter.

This can be a kind and loving gift to your family, since it allows you to express your feelings and thoughts. If you’re not accustomed to sharing your feelings, that will make it even more special to your loved ones. It’s an opportunity to say all the things you never felt comfortable saying. You may want to express your wishes, regrets and gratitude. You may also want to pass long the life lessons that have been valuable for you.

An ethical will also provides an opportunity for you to explain how you came to the decisions you did about your will and the money and possessions you are passing along. You might want to explain why a certain child is being given a piece of artwork or why another is being left assets in a trust and not an outright gift.

If you are more comfortable with making a video, you can also do that. An audio or video recording often becomes a treasured piece of family history, since it allows generations who may have never met you to see and hear you.

Start by writing down some notes about what matters to you and what you think you might want to share with the family. Take your time. Remember you aren’t writing the Great American Novel but creating a gift of love.

Once you’ve gathered your thoughts, move on to the next draft. Once it’s complete, to keep this document safe and in a secure location. If you have a waterproof and fireproof safe where you keep important papers in the home, the ethical will should also go in there. Remember that safe deposit boxes are sealed at death, so if you want your loved ones to read this, it should not go in the safe deposit box.

One last thought—some people like to share their ethical will with family and friends, while they are still living. This allows them to enjoy their reactions and have a discussion about whatever they have shared in the document. Others prefer to wait until after they have passed. It’s a very personal decision.

Talk with your estate planning attorney about how the ethical will works with your estate plan.  Make sure there’s nothing in the ethical will that contradicts your last will and testament. That could create problems for the family.

Reference: Herald Net (Nov. 6, 2029) “How to create an ethical will”

Protect the Family Farm with Advance Planning

Have you figured out who will take over the family farm? Are you or your parents prepared to transition the farm or ranch to the next generation? How will family members be part of the transitions? Do you have a plan to minimize tax exposure?

These are just a few of the questions that must be addressed about the future of the family farm or ranch, reports the article “Don’t be a failed family-business statistic: Plan for your farm’s future” from High Plains Drifter. It’s one of the hardest parts of the agriculture business. Decades of hard work and assets are at stake, and the statistics are not great. Only 30% of any kind of family businesses survive to the second generation.

You need a long-term strategy and planning that needs to be started long before any member of the family begins thinking about retirement. You’ll also need good advisors, including an estate planning attorney, accountant and possibly a banker.

What is a succession plan? A succession plan is a forward-looking strategy that prepares the individual and their family for the change in ownership, including development of leadership to avoid family disputes, manage tax consequences and ensure that the farm or ranch smoothly transitions to the next generation of owners.

The estate plan provides the mechanics to implement the succession plan. It can be complicated, so an experienced estate planning attorney who has worked with farm or ranch owners will be invaluable.

Here are three key areas where guidance is critical:

On-farm and off-farm heirs. How do you balance the inheritance of children who remain on the farm and those who chose to pursue other occupations? An objective viewpoint is needed, and a calm head. There are different ownership structures that can be used to define the roles and expectations for both on-farm and off- farm heirs.

Smooth financial transition. It is important to lessen tax liability and maximize benefits. Cash will be needed to pay estate taxes. This is where many family businesses are lost: a key asset must be sold to pay the tax bill, and it dampens the chances of success for the future.

Address financial needs of current and future generations. Can the business support multiple generations? What does everyone need to continue living on the farm, and how will the income be generated?

Family farms and ranches that survive to the second or third generations don’t happen by accident. Succession plans need to be created and then they need to be reviewed every few years. If you have a will or an estate plan, if you haven’t updated it in five years, it’s time to review it or create one.

Reference: High Plains Journal (Nov. 8, 2019) “Don’t be a failed family-business statistic: Plan for your farm’s future”

Will My Heirs Need to Be Ready to Pay Estate Taxes?

Estate taxes all depend on how on much a person is planning to give to heirs.

Motley Fool’s recent article asks “If I Leave My Retirement Savings to My Heirs, Will They Pay Estate Tax?” The article tells us that retirement accounts like 401(k)s, 403(b)s, traditional and Roth IRAs and others are a part of your taxable estate.

However, unless the total assets of your estate plus any taxable gifts you’ve already given are more than the lifetime exclusion amount, your estate won’t owe estate taxes.

For 2019, this is $11,400,000, and in 2020, the exclusion will be raised to $11,580,000. If you total all of your assets’ value, only the amount in excess of the exclusion will be taxable. Therefore, if you have a $12,000,000 estate and die in 2020, only $420,000 of your assets would be subject to estate taxes.

Let’s look at another example: if your assets, including your retirement savings, total up to $5 million, your heirs won’t be required to pay any estate tax whatsoever.

However, while they may not have to pay estate taxes, remember that withdrawals from most retirement accounts (except Roth IRA accounts) will be deemed to be taxable income. Thus, estate tax or no estate tax, if your heirs are in a pretty high tax bracket, inheriting your retirement savings may increase their tax liability.

Don’t neglect to check with an estate planning attorney about your state’s estate and inheritance taxes. There are a handful of states that have their own estate taxes, and their thresholds may be lower than the IRS’s.

There are now six states with an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania.

Each state sets its own inheritance tax exemption, and inheritance tax rates. However, these rates are subject to change at any time with changes to the laws in those states.

Reference: Motley Fool (November 8, 2019) “If I Leave My Retirement Savings to My Heirs, Will They Pay Estate Tax?”

Strategies for the “Sandwich” Generation

If you are taking care of your aging parents and still helping your own children, you are part of the “sandwich” generation. If you feel as if you will never be able to go off duty because of all the people who make demands on your time and money, here are some strategies for the “sandwich” generation.

Quite a few people start having children when they are in their forties. Your parents could already be in their sixties and seventies, when you have toddlers. By the time your children are in high school, you will be in your fifties with parents in their seventies or eighties. You should be focused on plowing lots of money into your retirement account. However, instead you find yourself pulled in many different directions, without the energy or resources you need for yourself.

How People with Adult Children Can Get Pulled at Both Ends

You do not have to be raising young children to be in the sandwich generation. Your children might be adults but need financial help because of student loans or other financial pressures. Additional reasons you might need to assist your adult children include things like:

  • You have a child with a disability.
  • One of your children struggles with substance abuse.
  • You might have a child who does not manage his money well.
  • You have a twenty-something or older child, who is in graduate school.
  • You provide much of the childcare for or you raise one of your grandchildren.

These are only a few examples of the reasons you might find yourself having to lend a helping hand to your parents and your adult children.

The Financial Impact of Taking Care of Two Generations

Any of these situations can put demands on your time, energy and finances. People who take care of their older parents and their own children often suffer as a result. For example, these caregivers drive everyone else to their medical appointments but do not have to time to go for routine checkups. There are not enough hours in the day to go for a walk to de-stress or get physical exercise. Sleep deprivation is common among “sandwichers.”

The financial impact of dual caregiving can be both short-term and long-term. If you are constantly picking up medications and groceries for your elderly parents and helping your children financially, you might find yourself having a cash flow strain. The time the double caregiving takes from your schedule can also make it impossible for you to engage in the amount of gainful employment you would like, so you can increase your retirement savings.

How to Handle the Stress and Exhaustion of Dual Caregiving

You are not alone. Many people have walked this path before you. They offer these suggestions:

  • Contact your local government agencies, community groups, senior organizations and charitable entities to find as many resources as possible to take some of the weight off of your shoulders. Adult day programs, respite care and other services can be a godsend.
  • Find sources of funding to ease your financial strain. Your aging parents might qualify for more benefits than they currently receive. You can use the website Benefit Finder to locate additional financial help, like Medicare, Medicaid, veterans benefits and many other programs.
  • Change your expectations. Your house does not have to be perfect. Your teens can get rides with friends, or you can set up a carpool.
  • Set a daily sleep goal of at least seven hours and stick to it. You cannot help anyone, if you get so exhausted that your health deteriorates.
  • Try to find the humor in daily situations.

Remember, this stage is temporary. You are creating memories that you will treasure.

References:

HuffPost. “This Is What No One Told Me About Suddenly Joining The Sandwich Generation.” (accessed November 8, 2019) https://www.huffpost.com/entry/sandwich-generation-caring-for-kids-parents_n_5d24c00ee4b07e698c418fc9

Benefits.gov. “Benefit Finder.” (accessed November 14, 2019) https://www.benefits.gov/benefit-finder

What Should I Do If I Strike it Rich?

There’s nothing quite like getting an unexpected sum of money. That happiness can be magnified when the amounts are six, seven, eight digits or more.

However, the greater the amount you receive, the greater your stress.

Investopedia’s recent article, “Tips For Handling Sudden Wealth” reports that there’s even a stress-related disorder called “Sudden Wealth Syndrome.”

This stress results in the recipients doing things that will threaten their good fortune and may leave them worse off than before they got the money.

Let’s look at few ideas to help you hang onto that new wealth:

  1. Tally your money. Take the time to carefully review all the documentation associated with the windfall. Note the areas you don’t understand and talk with your attorney.
  2. Create a comprehensive financial and life plan. Don’t settle for a cookie-cutter solution. Look for customization that takes into account your circumstances, your goals and your desired legacy.
  3. Be wary of friends and family. A downside of sudden new wealth is that new friends and estranged family members may come out of the woodwork. One idea is to pay yourself a salary, which can put some distance between you and these people.
  4. Don’t buy big ticket items, until you’re comfortable with the advice and understand your new financial position. You should address your taxes on the gain, pay down debts or take a small vacation. However, don’t make too many changes all at once. Talk to your advisors.

More money can mean more problems. Use these tips and consult with your attorney, when deciding what to do with your newfound riches.

Reference: Investopedia (June 25, 2019) “Tips For Handling Sudden Wealth”

As a Trust Beneficiary, Am I Required to Pay Taxes?

When an irrevocable trust makes a distribution, it deducts the income distributed on its own tax return and issues the beneficiary a tax form called a K-1. This form shows the amount of the beneficiary’s distribution that’s interest income, as opposed to principal. With that information, the beneficiary know how much she’s required to claim as taxable income when filing taxes.

Investopedia’s recent article on this subject asks “Do Trust Beneficiaries Pay Taxes?” The article explains that when trust beneficiaries receive distributions from the trust’s principal balance, they don’t have to pay taxes on the distribution. The IRS assumes this money was already taxed before it was put into the trust. After money is placed into the trust, the interest it accumulates is taxable as income—either to the beneficiary or the trust. The trust is required to pay taxes on any interest income it holds and doesn’t distribute past year-end. Interest income the trust distributes is taxable to the beneficiary who gets it.

The money given to the beneficiary is considered to be from the current-year income first, then from the accumulated principal. This is usually the original contribution with any subsequent deposits. It’s income in excess of the amount distributed. Capital gains from this amount may be taxable to either the trust or the beneficiary. All the amount distributed to and for the benefit of the beneficiary is taxable to her to the extent of the distribution deduction of the trust.

If the income or deduction is part of a change in the principal or part of the estate’s distributable income, then the income tax is paid by the trust and not passed on to the beneficiary. An irrevocable trust that has discretion in the distribution of amounts and retains earnings pays trust tax that is $3,011.50 plus 37% of the excess over $12,500.

The two critical IRS forms for trusts are the 1041 and the K-1. IRS Form 1041 is like a Form 1040. This is used to show that the trust is deducting any interest it distributes to beneficiaries from its own taxable income.

The trust will also issue a K-1. This IRS form details the distribution, or how much of the distributed money came from principal and how much is interest. The K-1 is the form that allows the beneficiary to see her tax liability from trust distributions.

The K-1 schedule for taxing distributed amounts is generated by the trust and given to the IRS. The IRS will deliver this schedule to the beneficiary, so that she can pay the tax. The trust will fill out a Form 1041 to determine the income distribution deduction that’s conferred to the distributed amount. Your estate planning attorney will be able to help you work through this process.

Reference: Investopedia (July 15, 2019) “Do Trust Beneficiaries Pay Taxes?”

How a Charitable Remainder Trust Works
Charity Savings Jar

How a Charitable Remainder Trust Works

A couple lives well on their incomes, but the biggest asset they own is a tract of unimproved real estate that the wife received from her parents many years ago. The land was part of the family’s farm and is located in prime area that is growing in value. The couple is looking for ways to supplement their retirement income, which is based solely on their retirement accounts.

What can they do to generate retirement income and not have to pay a significant proportion of their profit in capital gains? The solution is presented in the article “Using Charitable Trusts in Your Retirement Planning” from Richardland Source.

One strategy would be to establish a Charitable Remainder Trust or CRT. The wife would transfer the land to an irrevocable trust created to provide lifetime payments to her and her husband. At the death of the surviving spouse, the trust property would be transferred to a charitable organization named in the wife’s trust agreement.

Using the CRT, the trustee can sell the trust property and reinvest the proceeds, without have to pay any immediate tax on the gain. The couple would have more money for retirement, than if they simply sold the land and invested the proceeds. They also have the option of investing their tax savings outside of the trust to produce additional income.

The CRT can be either an annuity trust or a unitrust. The type of CRT used will determine how payments from the trust are calculated. If a Charitable Remainder Annuity Trust (CRAT) is chosen, the couple will receive annual payments of a set percentage of the trust’s initial fair market value. The percentage will need to be at least 5% and may not be more than 50%.

If they choose a Charitable Remainder Unitrust (CRUT), they would receive an annual income based on the fair market value of the trust property, which is revalued each year. That percentage must be at least 5% and not more than 50%.

These are complex legal strategies that need to be considered in tandem with an overall estate and tax plan. Speak with an experienced estate planning attorney to learn if using CRTs would be a good strategy for you and your family.

Reference: Richardland Source (October 28, 2019) “Using Charitable Trusts in Your Retirement Planning”

 

Blended Families Need More Thoughtful Estate Plans

Estate planning for blended families is like playing chess in three dimensions: even those who are very good at chess can struggle with so many moving parts in so many dimensions. Preparing an estate plan requires careful consideration of family dynamics, and those are multiplied in blended families. This is another reason why estate plans need to be tailored for each family’s circumstances, as described in the article “Blended families have unique considerations in estate planning” from The News Enterprise.

The last will and testament is often considered the key document in an estate plan. But while the will is very important, it has certain limitations and a few commonly used estate planning strategies can result in unpleasant endings, if this is the only document used.

Spouses often leave everything to each other as the primary beneficiary on death, with all of their children as contingent beneficiaries. This is based on the assumption that the second spouse will remain in the family home, then will distribute any proceeds equally between the children, if and when they move or die. However, the will can be changed at any time before death, as long as the person making the will has mental capacity. If when the first spouse dies, the relationship with the surviving children is not strong, it is possible that the surviving spouse may have their will changed.

If stepchildren don’t have a strong connection with the surviving spouse, which occurs frequently when the second marriage occurs after the children are adults, things can go wrong. Their mutual grief at the passing of the first spouse does not always draw stepchildren and stepparents together. Often, it divides them.

The couple may also select different successor beneficiaries. The husband may name his wife first, then only his children in his will, while the wife may name her husband and then her children in her will. This creates a “survival race.” The surviving spouse receives the property and the children of the spouse who passed won’t know when or if they will receive any assets.

Some couples plan on using trusts for property distribution upon death. This can be more successful, if planned properly. It can also be just as bad as a will.

Trust provisions can be categorized according to the level of control the surviving spouse has after the death of the first spouse. A trust can be structured to lock down half of the trust assets on the death of the first spouse. The surviving spouse remains as a beneficiary but does not have the ability to change the ultimate distribution of the decedent’s portion. This allows the survivor the financial support they need, giving flexibility for the survivor to change their beneficiaries for their remaining share.

Not all blended families actually “blend,” but for those who do, a candid discussion with all, possibly in the office of the estate planning attorney, to plan for the future, is one way to ensure that the family remains a family, when both parents are gone.

Reference: The News Enterprise (November 4, 2019) “Blended families have unique considerations in estate planning”

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A Good Estate Plan Equals Peace of Mind and Peace in the Family

The problems aren’t always evident when the first parent passes. Often, it’s when the second parent becomes gravely ill, that lapses in estate planning become evident. For one family, everyone thought estate plans were all in place after their father died. When their mother suffered a stroke, the adult children learned that they had no access to her financial accounts or her health care directives. No one had thought to update the estate plan.

However, when one parent passes, the family needs to take action. That’s the lesson from the article “Avoid heartache and anxiety with estate planning” from Post Independent. In this case, the family never thought to modify or add anyone’s name to the financial accounts, power of attorney documents, medical power of attorney documents, or HIPAA consent forms. What often happens in these cases, is that family members start bickering about who was supposed to do what.

For those who have not taken the time to learn about estate planning, planning for end-of-life legal, financial and medical matters, the quarrels may be inevitable.

Estate planning is not just for wealthy families. If your aging loved one own property, stocks, bonds or any other assets, they need to have a will, advance directives, powers of attorney and possibly some trusts. Take the time to understand these documents now, before an urgent crisis occurs.

There are few formal courses that teach people about these matters, unless they go to law school. Nearly half of Americans age 55 and over don’t have a will, according to an article appearing in Forbes. Fewer than 20% of these people have health care directives and the proper types of powers of attorney in place.

When it comes to preparing for these matters, the laws are very specific about who can participate in health care and financial conversations and decisions.

Here are some of the documents needed for an estate plan:

  • Last Will and Testament
  • General, Limited and/or Durable Power of Attorney
  • Health Care Power of Attorney
  • Living Will
  • Advance Care Directive
  • HIPAA Consent Form

Preplanning will greatly assist family members and loved ones, so they know what medical and financial efforts you or your parents would want. Having the documents in order will also provide the family with the legal means of carrying out these wishes.

The legal documents won’t solve all problems. Your brother-in-law will still be a pain in the neck and your oldest sister may still make unrealistic demands. However, having these documents in place, will make the best of a bad situation.

Speak with an estate planning attorney to ensure that your estate plan, or your parent’s estate plan, is properly prepared. If someone has moved to another state, their estate plan needs to be updated to align with their new state’s laws.

Reference: Post Independent (November 3, 2019) “Avoid heartache and anxiety with estate planning”

What Are the Rules About an Inheritance Received During Marriage?

A good add-on to that sentence is something like, “provided that it is kept separate from marital assets.” To say it another way, when an inheritance or any other exempt asset (like a premarital asset) is “commingled” with marital assets, it can lose its exempt status.

Trust Advisor’s recent article asks, “Do I Have To Divide The Inheritance I Received During My Marriage?” As the article explains, this is the basic rule, but it’s not iron-clad.

A few courts say that an inheritance was exempt, even when it was left for only a short time in a joint account. This can happen after a parent’s death. The proceeds of a life insurance policy that an adult child beneficiary receives, are put into the family account to save time in a stressful situation. You may be too distraught to deal with this issue when the insurance check arrives, so you or your spouse might deposit it into a joint account. However, in one case, the wife took the check and opened an investment account with the money. That insurance money deposited in the investment account was never touched, but the wife still wanted half of it when the couple divorced a few years later. However, in that case, the judge ruled that the proceeds from the insurance policy were the husband’s separate property.

The law generally says that assets exempt from equitable distribution (like insurance proceeds) may become subject to equitable distribution, if the recipient intends them to become marital assets. The comingling of these assets with marital assets may make them subject to a division in a divorce. However, if there’s no intent for the assets to become martial property, the assets may remain the recipient spouse’s property.

Courts will look at “donative intent,” which asks if the spouse had the intent to gift the inheritance to the marriage, making it a marital asset. Courts may look at a commingled inheritance for donative intent, but also examine other factors. This can include the proximity in time between the inheritance and the divorce. Therefore, if a spouse deposited an inheritance into a joint account a year before the divorce, she could argue that there should be a disproportionate distribution in her favor or that she should get back the whole amount. Of course, the longer amount of time between the inheritance and the divorce, the more difficult this argument becomes.

Be sure to speak with your estate planning attorney about the specific laws in your state. If there is a hint of trouble in the marriage, it might be wiser to simply open a new account for the inheritance.

Reference: Trust Advisor (October 29, 2019) “Do I Have To Divide The Inheritance I Received During My Marriage?”

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