What Is Federal Estate Tax Exemption, and Does It Matter?

Why should most of us be worried about losing an estate tax exemption, when most people’s estates are nowhere near $12.06 million? This recent article, “Don’t Throw Away a $12.06M Estate Tax Exemption By Accident” from Kiplinger explains it all.

Despite the Congressional gridlock over many estate tax issues, whether Congress moves forward or not, on January 1, 2026, the federal estate tax exemption will sink from $12.06 million to approximately $6 million. There was a Democrat proposal during the presidential campaign to reduce it even less, to $3.5 million.

Suddenly, the federal estate tax exemption will matter again to a lot more people. However, don’t wait for that 2026 date, since you could miss a big exemption.

If you are married and your spouse passes, you could take advantage of the current $12.06 million estate tax exemption, even if your estate is nowhere near this value. The exemption is a “use it or lose it” tax planning alternative. Use it.

In most estate plans, one partner leaves most or all of their estate to the surviving spouse. Assets left to a surviving spouse qualify for what is known as “an unlimited marital deduction.” If there is no taxable estate on the death of the first spouse because all assets have gone to the surviving spouse, who qualifies for the marital deduction, the deceased spouse’s unused exemption does not have to be lost.

A deceased spouse may transfer any unused portion of their exemption to the surviving spouse, known as “portability.” Many families may find themselves with an unnecessary tax burden in the near future, if they fail to take advantage of this because they think it won’t apply to them.

Consider a family with a $10 million estate, owned as community property, where each spouse owns one half. If one spouse dies tomorrow, the family probably thinks they don’t need to worry about the federal estate tax, as there’s $12.06 million exemption for the wife and $12.06 million exemption for the husband. However, this would be an expensive mistake.

If the family files a portability election on the timely—filed estate tax return for the first spouse to die, the second spouse’s lifetime exemption of $12.06 million goes to the second to die spouse’s estate.

If the second spouse lives to at least January 1, 2026, and the estate is worth $10 million, the taxable estate after the exemption is $4 million. With an estate tax of 40%, the estate tax liability is $1.6 million, which needs to be paid in full nine months after the date of death. The portability exemption could have prevented this tax liability.

A portability-only estate tax return can be filed up to two years from the date of death, which your estate planning attorney will be able to help you with. There is a fee for the filing, but the savings to be had make this a worthwhile fee to pay. Consider this a form of tax insurance. Any families with a net worth of $2 million or more should be talking now with their estate planning attorney about how to manage the changing estate tax exemption.

Reference: Kiplinger (April 14, 2022) “Don’t Throw Away a $12.06M Estate Tax Exemption By Accident”

Is Bitcoin Part of an Estate?

Few bitcoin owners have seriously considered what will happen to their bitcoin when they die. A recent article titled “The Importance of Having an Estate Plan for Your Bitcoin” from Bitcoin Magazine, strongly urges owners to create a legally sound plan of action ensuring both the sovereignty and privacy of these holdings. However, many owners don’t expect to die very soon, and even those who have an estate plan haven’t considered the nuances of estate planning for digital assets. Among all digital assets, there’s no asset requiring more planning for custody and conveyance as bitcoin.

Can you use an irrevocable trust for bitcoin? This type of trust is an excellent tool for your estate plan and beneficiaries. However, for bitcoin, a revocable trust may be the better alternative. The revocable trust does not protect your assets from creditors, but it provides complete control to the grantor, the person creating the trust.

Bitcoin cannot be treated like dollars in your estate plan. If your crypto is held on an exchange like Coinbase or Gemini, your executor may not have as much of a battle to uncover and access your money. However, what if they are not? Would your executor know what to do with the seed phrases buried in the backyard, or “how to interpret BIP39 punched into steel?” These are things known only to bitcoin owners.

Digital asset estate planning requires a level of technical competence and understanding.

Most states have adopted the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA) or plan to in the near future. RUFADAA, in most instances, empowers the executor of your estate with the authority to request access to most digital assets, taking into account your privacy interests and the terms of service agreements with big tech companies. However, when it comes to decentralized money like bitcoin, RUFADAA will be of little use.

In many cases, a living or revocable trust is the best choice. This will allow you to maintain access to your assets in the same way you do while living, but if the unexpected occurs, like death or incapacity, the assets won’t be lost, forgotten or misused.

With a revocable trust, you may act as the trustee of your digital assets. As both the grantor and trustee, you can make as many changes as you want to the trust. The property is not protected from creditors and does not receive any special tax treatment while you are living. However, the revocable living trust can be created to convey bitcoin to your heirs without limiting your own use of the assets while you are living.

How you store bitcoin during your lifetime is your choice. Many use a non-custodial cold storage solution, which provides great privacy but requires technical competency to manage. The bitcoin you wish to pass to your heirs needs to be documented correctly legally and technically. Talk with your estate planning attorney to be sure your digital assets are as protected as your traditional assets.

Reference: Bitcoin Magazine (April 17, 2022) “The Importance of Having an Estate Plan for Your Bitcoin”

What Estate Planning Documents are Used to Plan for Incapacity?
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What Estate Planning Documents are Used to Plan for Incapacity?

The chief reason for a Power of Attorney (POA) is to appoint an agent who can make decisions about business and financial matters if you become incapacitated, according to an article “Estate planning in case of incapacity” from The Sentinel-Record. For most people, the POA becomes effective at a later date, when the person signs a written authorization to act under the document, or when the person is determined to be incapacitated. This often involves having the person’s treating physician sign a notarized statement declaring the person to be incapacitated. This type of POA is referred to as a “Springing POA,” since it springs from a future event.

The challenge with a springing POA is that it requires reaching a point in the person’s life where it is clinically clear they are incapacitated. If the person has not yet been diagnosed with Alzheimer’s disease or another form of dementia, but it is making poor decisions or not able to care for themselves, it becomes necessary to go through the process of documenting their incapacity and going through the state’s process to activate the POA.

For a more immediate POA, your estate planning attorney may recommend creating and signing a Durable Power of Attorney. This allows you to appoint someone to manage personal and business affairs immediately. For this reason, it is extremely important that the person you name be 100% trustworthy, since they will have instant legal access to all of your property.

A Power of Attorney can be customized to include broad powers or limited to a specific transaction, like selling your home.

This is not the only way to allow another person to take over your affairs in the event of incapacity.  However, it is easier than seeking guardianship or conservatorship. Another method is to place assets in a revocable trust, which allows you to maintain control of the assets while alive and of legal capacity. The trust includes a successor trustee, who takes over in the event you become incapacitated or die.

The successor trustee only has control of the assets owned by the trust, so if the purpose of the trust is planning for incapacity, many, if not all, of your assets will need to be retitled and put into the trust.

A properly created estate plan will often use both the Durable Power of Attorney and a Revocable Living Trust, when preparing for incapacity.

Sadly, many people fail to have these legal tools created. As a result, when they are incapacitated, the family must go to court to have a person appointed to manage their affairs. This is usually referred to as a “legal guardianship.” The proceeding to obtain a guardianship is lengthy and complicated. Once the guardianship is established, the guardian must file annual accountings with the court documenting how all of the funds are used. The guardian must also post a surety bond, designed to protect assets in case of improper use.

Guardianship and its costs and time-consuming tasks can all be avoided with a properly prepared estate plan, including planning for incapacity.

Reference: The Sentinel-Record (March 27, 2022) “Estate planning in case of incapacity”

When are You Required to File a Gift Tax Return?

The IRS wants to know how much you’re gifting over the course of your lifetime. This is because while gifts may be based on generosity, they are also a strategy for avoiding taxes, including estate taxes, reports The Street in a recent article “Do I Need to File a Gift Tax Return?”

Knowing whether you need to file a gift tax return is relatively straightforward. The IRS has guidelines about who needs to file and who does not. Your estate planning attorney will also be able to guide you, since gifting is part of your estate and tax planning.

If you give a gift worth more than $16,000, it is likely you need to file a gift tax return. Let’s say you gave your son your old car. The value of used cars today is higher than ever because of limited supply. Therefore, you probably need to file a gift tax return. If the car title is held by you and your spouse, then the car is considered a gift from both of you. The threshold for a gift from a married couple is $32,000. Make sure that you have the right information on how the car is titled.

What if you added a significant amount of cash to an adult child’s down payment on a new home? If you as a member of a married couple gave more than $32,000, then you will need to file a gift tax return. If you are single, anything over $16,000 requires a gift tax return.

529 contributions also fall into the gift tax return category. Gifts to 529 plans are treated like any other kind of gift and follow the same rules: $16,000 for individuals, $32,000 for married couples.

What about college costs? It depends. If you made payments directly to the educational institution, no gift tax return is required. The same goes for paying medical costs directly to a hospital or other healthcare provider. However, any kind of educational expense not paid directly to the provider is treated like any other gift.

Do trusts count as gifts? Good question. This depends upon the type of trust. A conversation with your estate planning attorney is definitely recommended in this situation. If the trust is a “Crummey” trust, which gives the beneficiary a right to immediately withdraw the gift put into the trust, then you may not need to file a gift tax return.

A Crummey trust is not intended to give the beneficiary the ability to make an immediate withdrawal. However, the withdrawal right makes the gift in the trust a “current gift” and it qualifies for the annual exclusion limit. Recategorizing the gift can potentially exempt the person giving the gift from certain tax obligations. Check with your estate planning attorney.

Even when filing a gift tax return, the amount of tax being paid is usually zero. This is because the gifts are offset by each person’s lifetime exemption. The IRS wants these returns filed to keep track of how much each individual has gifted over time. Unless you are very wealthy and making gift transfers from a family trust or to family members, it is not likely you will ever end up paying a tax. You are, however, required to keep the IRS informed.

Reference: The Street (March 31, 2022) “Do I Need to File a Gift Tax Return?”

What Needs to Be Reviewed in Estate Plan?

When it comes to drafting a will and other estate planning documents, note that you probably should revisit them many times before they actually are needed, advises, CNBC’s recent article entitled “Be sure to keep your will or estate plan updated. Here are 3 key reasons why.”

You should give these end-of-life legal papers a review at least every few years, unless there are reasons to do it more often. Things like marriage, divorce, birth or adoption of a child should necessitate a review. Coming into a lot of money (i.e., inheritance, lottery win, etc.) or moving to another state where estate laws differ from the one where your will was drawn up, mean that you should review your plan with an experienced estate planning attorney.

About 46% of U.S. adults have a will, according to a 2021 Gallup poll. If you are among those who have a will or full-blown estate plan, here are some things to review and why.

Even though your will is all about you, there are other people you need to rely on to carry out your wishes. This makes it important to review who you have named to be executor. He or she must liquidate accounts, ensure your assets go to the proper beneficiaries, pay any debts not discharged (i.e., taxes owed), and sell your home. You should also be sure that the guardian you have named to care for your children is still the person you would want in that position.

As part of estate planning, you may create other documents related to end-of-life issues, such as powers of attorney. The person who is given this responsibility for decisions related to your health care is frequently different from whom you would name to handle your financial affairs. You should look at both of those choices.

Even if you have experienced no major life events, those you previously chose to handle certain duties may no longer be your best option.

Remember that some assets pass outside of the will, including retirement accounts like a 401(k) plan, IRAs and life insurance policies. This means the person named as a beneficiary on those accounts will generally receive the money no matter what your will states. Bank accounts can have beneficiaries listed on a pay-on-death form, which your bank can supply.

If a beneficiary is not listed on those non-will items or the named person has already passed away (and there is no contingent beneficiary listed), the assets automatically go into probate.

Reference: CNBC (Jan. 27, 2022) “Be sure to keep your will or estate plan updated. Here are 3 key reasons why”

Special Needs Planning
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Special Needs Planning

When a family includes a disabled individual, sometimes referred to as a “person with special needs,” estate planning needs to address the complexities, as described in a recent article titled “Customize estate plan to account for disabled beneficiaries” from The News-Enterprise. Failing to do so can have life-long repercussions for the individual.

This often occurs because the testator, the person creating the estate plan, does not know the implications of failing to take the disabled person’s situation into consideration, or when there is no will.

The most common error is leaving the disabled beneficiary receiving an outright inheritance. With a simple will, or no will, the beneficiary receives the inheritance and becomes ineligible for public benefits they may be receiving. The disruption can impact their medical care, housing, work and social programs. It may also lead to the loss of their inheritance.

If the disabled beneficiary does not currently receive benefits, it does not mean they will never need them. After the death of a parent, for instance, they may become completely reliant on public benefits. An inheritance will put them in jeopardy.

A second common error is naming the caregiver as the beneficiary, rather than the disabled individual. This causes numerous problems. The caregiver has the right to do whatever they want with the assets. If they no longer wish to care for the beneficiary, they are under no legal obligation to do so.

If the caregiver has any liabilities of their own, or when the caregiver becomes incapacitated or dies, the assets intended for the disabled individual will be subject to any estate taxes or creditors of the caregiver. If the caregiver has any children of their own, they will inherit the assets and not the disabled person.

The caregiver does not enjoy any kind of estate tax protection, so the estate may end up paying taxes on assets intended for the beneficiary.

The third major planning mistake is using a will instead of a trust as the primary planning method. A Special Needs Trust is designed to benefit a disabled individual to protect the assets and protect the individual’s public benefits. The trust assets can be used for continuity of care, while maintaining privacy for the individual and the family.

Planning for individuals with special needs requires great care, specifically for the testator and their beneficiaries. Families who appear to be similar on the outside may have very different needs, making a personalized estate plan vital to ensure that beneficiaries have the protection they deserve and need.

Reference: The News-Enterprise (March 15, 2022) “Customize estate plan to account for disabled beneficiaries”

Just What Is in an Estate Plan?

Getting your affairs in order may not be on anyone’s top ten fun list for a weekend. However, once it is done, you can relax, knowing your loved ones will be cared for. Is estate planning more or less painful than doing taxes once a year? The answer depends on who you ask, but a recent article titled “Estate Planning Checklist: 12 Things to Get in Order” from South Florida Reporter breaks it down into easy-to-manage steps.

A last will and testament outlines how your assets will be distributed after your death. They include personal property, real estate, bank accounts, etc. You can name a guardian for minor children, and name an executor, the person who will be in charge of managing your estate.

Proof of identity. Your executor will need information including a valid birth certificate, Social Security card, marriage or divorce certificates, a prenuptial agreement, or military service discharge papers.

Digital asset information. With so much of our lives lived online, everyone needs a digital vault, an integrated password manager or some kind of system for managing your digital assets. Without this, your traditional and digital assets are vulnerable to identity theft and fraud.

Property deeds and titles. You have titles for cars, homes, or real estate property. They need to be gathered and kept in a safe place, then one or two highly trusted individuals need to be told where these documents are located.

Revocable living trust. Creating a trust with an experienced estate planning attorney can help loved ones avoid the time and cost of having your estate go through probate. The trust creates a legal entity allowing you to control property while you are alive but preparing for the future. If you are living and become incapacitated, the successor trustee controls the assets owned by the trust.

Debts. These do not disappear when you die. Your executor will need to know what debts exist because they will need to address them. Compile a list of your debts, which may include mortgages, auto loans, credit cards, personal loans and student loans. Add contact information for the lender, account number, login information and approximate amount of the debt. If you have credit cards you rarely use, include those also, so they can be closed out before identity theft occurs.

Non-Probate Assets and Beneficiaries. Assets with named beneficiary designations can be transferred directly to beneficiaries. However, this does not happen automatically. Your executor will need to provide beneficiaries with the information for the assets, including the name of the insurance company or financial institution, the location of policies, account numbers and the value of the asset. The beneficiary may need to provide a death certificate and identification information before the assets are released.

Financial information. Let your executor skip the scavenger hunt. Create a detailed list information including bank accounts, car insurance, credit cards, health, home and life insurance, pension plans, retirement plans and tax returns.

Advanced Health Care Directive. This document is an opportunity for you to tell health care providers how you want medical decisions to be made, if you cannot communicate your wishes. The AHCD typically has two parts: Health Care Power of Attorney (also known as a health care proxy) and a living will.

The Living Will outlines your wishes, if you are unable to communicate. It describes your preferences for end-of-life requests, medications, resuscitation, surgeries, or other invasive procedures.

Power of Attorney is a document to give someone else the power to act on your behalf regarding financial and legal affairs. The scope of power can be as broad as managing everything or limited to selling your classic car collection. Your estate planning attorney will help you clarify what responsibilities you wish to give in a POA.

Funeral Wishes. If you want to save your family a lot of stress during a very difficult time, outline what you would want to happen. Do you want a cremation or embalming and burial? Should it be a full-on faith-based memorial service, or a few poems read at graveside? Make sure that your wishes are communicated and shared with loved ones, so everyone knows what you want.

Meet with an Estate Planning Attorney. Make an appointment to meet with an estate planning attorney to put all of this information in the appropriate legal documents. They may have recommendations for options that you may not know about.

Reference: South Florida Reporter (April 2, 2022) “Estate Planning Checklist: 12 Things to Get in Order”

Does an Elder Orphan Need an Estate Plan?

Estate planning for the future is even more important for elder orphans than for those with a spouse or family members, according to this recent article “Savvy Senior: How to get help as an elder orphan” from The Virginia Gazette. There is no one single solution, but there are steps to take to protect your estate, health and provide for long-term care.

Start with the essential estate planning documents. These documents will protect you and ensure that your wishes are followed, if you become seriously ill or when you die. These documents include:

A durable Power of Attorney to designate someone to handle financial matters in the event of incapacity.

An Advanced Health Care Directive, including a Living Will, to tell your health care provider what kind of care you want if you become incapacitated.

A Health Care Power of Attorney, naming a person of your choice to make medical decisions on your behalf, if you are unable to do so.

A Will to direct how you want your property and assets to be distributed upon your death and to name an Executor who will be in charge of your estate.

Your best option to prepare these documents is an experienced estate planning attorney. Trying to do it yourself is risky. Each state has its own laws for these documents to be valid. If the documents are not accepted, the court could declare your will invalid and your directions will not be followed.

People with families typically name a responsible adult child as their power of attorney for finances, as executor or for health care decisions. If you do not have adult children, you may ask a trusted friend or colleague. Name a person who is younger than you, organized and responsible and who will likely be available and willing to service.

If the person you name as executor lives in another state, you will need to check with your estate planning attorney to see if there are any special requirements.

If you do not have a friend or even a distant relative you feel comfortable assigning this role to, your estate planning attorney may be able to suggest alternatives, such as an aging life care manager. These professionals are trained in geriatric care and often have backgrounds in social work or nursing.

If you are reluctant to complete the legal documents mentioned above or start having them prepared and then fail to complete them, you may face some unpleasant consequences. A judge may appoint a guardian to make decisions on your behalf. This guardian is likely to be a complete stranger to you. They will be legally empowered to make all decisions for you regarding your health care, end-of-life care and even your burial and funeral services.

Unless you are comfortable with a court-appointed person making health care and other decisions for you, call an estate planning attorney and start making plans for the future.

Reference: The Virginia Gazette (April 1, 2022) “Savvy Senior: How to get help as an elder orphan”

Can My Ex Get Some of My Estate?

For many people, their will is their final communication to the world.

A will states how their property should be distributed upon their death. CNBC’s recent article entitled “Your ex-spouse could inherit your money. How to avoid this and other estate-planning mistakes” says that depending on how you plan, it may have a few some surprises for those who are close to you.

There are a couple of situations where you could inadvertently leave money to people you no longer intend as heirs, much to the surprise of other heirs.

An ex-spouse could get some of your money when you die, if you do not update your beneficiaries under a retirement plan.

Divorce does not automatically change a beneficiary designation, unless the divorce decree includes a stipulation to change it. IRAs are the same, so it is not uncommon for an IRA owner to die without having changed the beneficiary designation after a divorce. It’s usually just a simple oversight.

However, most state laws provide that once a married couple is divorced, ex-spouses lose all property rights.

However, pensions are governed by federal law, formally known as ERISA or the Employee Retirement Income Security Act of 1974. As a result, state rules do not apply.

Pensions are not the only accounts that people tend to forget to update. Bank account beneficiary designations are often hard to find, and circumstances may change from when you first set them up.

While it may be tempting to disinherit someone to whom you are no longer close, it can be a bad idea. That is because it can invite all kinds of issues, like a will challenge.

There is always the chance you may reconcile, even on your death bed, at which point it will be too late to update your will and estate plan. Therefore, leave something less to them and do not say anything bad.

To ensure your wishes are carried out the way you want, work with an experienced estate planning attorney.

Reference: CNBC (Jan. 9, 2022) “Your ex-spouse could inherit your money. How to avoid this and other estate-planning mistakes”

Can I Avoid Probate?

If you have life insurance, lifetime survivor benefits, a home or other investments, who gets them and when depends on what you have done or should do: have an estate plan. This is how you legally protect your family and friends to be sure that they receive what you want after you die, says the article “How (and why) to avoid probate: A slap at your family!” from Federal News Network.

A common goal is to simplify your estate plan to make administering it as easy as possible for your loved ones. This usually involves structuring an estate plan to avoid probate, which can be time-consuming and, depending on where you live, add a considerable cost to settle your estate.

There are a number of ways to accomplish this through an estate plan, including jointly owned property, beneficiary designations and the use of trusts.

Many individuals hold property in joint names, also known as “tenant by the entirety” with a spouse. When one spouse dies, the other becomes the owner without probate. It should be noted that this supersedes the terms of a will or a trust.

Another type of joint ownership is “tenancy in common,” However, property held as tenants in common does not avoid probate. The distribution of property titled this way is governed by the will. If there is no will, the state’s estate laws will govern who receives the property on death of one of the owners.

Beware: property owned jointly is subject to any litigation or creditor issues of a joint owner. It can be risky.

Beneficiary designations are a seamless way to transfer property. This can take the form of a POD (payable on death) or TOD (transfer on death) account. Pensions, insurance policies and certain types of retirement accounts provide owners with the opportunity to name a beneficiary. Upon the death of the owner, the assets pass directly to the beneficiary. The asset is not subject to probate and the designations supersede the terms of a will or trust.

Review beneficiary designations every time you review your estate plan. If you opened a 401(k) account at your first job and have not reviewed the beneficiary designation in many years, you may be unwittingly giving someone you have not seen for years a nice surprise upon your passing.

If you own assets other than joint property or assets without beneficiary designation, an estate planning attorney can structure your estate plan to include trusts. A trust is a legal entity owning any property transferred into it. A trust can avoid probate and provide a great deal of control by the grantor as to what they want to happen to the property.

Reference: Federal News Network (March 30, 2022) “How (and why) to avoid probate: A slap at your family!”