What’s the Difference between Per Stirpes vs. Per Capita in Estate Planning?

When creating an estate plan, one of the basic documents you need is a will. In estate planning, it’s important to distinguish between per stirpes and per capita distributions. These are two terms you are likely to come across when creating your estate plan, says Yahoo Finance’s recent article entitled “Per Stirpes vs. Per Capita in Estate Planning.”

Per stirpes is Latin and means “by branch” or “by class.” When this term is used in estate planning, it refers to the equal distribution of assets among the different branches of a family and their surviving descendants. This lets the descendants of a beneficiary keep inherited assets within that branch of their family, even if the original beneficiary passes away. The assets would be equally divided between the survivors. Per stirpes distributions essentially create a “trickle-down” effect: assets can be passed on to future generations if a primary beneficiary passes away.

In contrast, “per capita” is also a Latin term that means “by head.” When you use a per capita distribution method for estate planning, any assets you have would pass equally to the beneficiaries who are still living when you pass. The share portions would adjust accordingly, if one of your children or grandchildren were to die before you.

Whether it makes sense to use a per stirpes or per capita distribution in your estate plan can depend for the most part, the way in which you want your assets to be distributed after you’re gone.

Per stirpes allows you to keep asset distributions within the same branch of the family and eliminates the need to amend or update wills and trusts when a child is born to one of your beneficiaries or a beneficiary passes away. This method can also help to minimize the potential for infighting among beneficiaries, since asset distribution takes a linear approach. However, an unwanted person could take control of your assets.

With per capita, you can state precisely who you want to name as beneficiaries and receive part of your estate. The assets are distributed equally among beneficiaries, based on the value of your estate at the time you pass away.

Per stirpes and per capita distribution rules can help you determine how your assets are distributed after you die.

Talk with an experienced estate planning attorney to fully understand the implications of each one for your beneficiaries, including how they may be affected from a tax perspective.

Reference: Yahoo Finance (Jan. 7, 2021) “Per Stirpes vs. Per Capita in Estate Planning”

Can You Be Forced to Inherit a Timeshare?

Ask anyone who ever purchased a timeshare and changed their mind about it. Getting rid of a timeshare can be problematic. However, imagine if your parents purchased a timeshare and left it to you, with all the financial obligations? Some timeshare companies are now trying to make people continue to pay after they have died, warns a cautionary article “How to Avoid Inheriting a TImeshare You Don’t Want” from KSL-TV

One woman’s parents loved their timeshare. They travelled to one for skiing, another to relax in the sun, and others according to availability and their travel plans. The entire family went on trips and all enjoyed the flexibility. However, when both parents passed away just a few months apart, the timeshare company started sending letters demanding payment. The siblings didn’t want any part of it.

There had not been any discussions with their parents about what would happen to the timeshare. One of the daughters decided to put the monthly fee onto her credit card to be paid automatically, thinking this would be a short-term issue. When the timeshare company did not respond to the children’s attempt to contact the company to shut down the account, she had the automatic payments stopped. A collection notice showed up and demanded payment immediately.

However, is the family legally obligated to pay for the parental timeshare?

If you die owning a timeshare, it does become part of your estate and obligations are indeed passed onto the next-of-kin or the estate’s beneficiaries. However, they do not have to accept it, in the same way that anyone has the right to refuse any part of an inheritance. No one is legally obligated to accept something just because it was bequeathed to them. This is known as the right to disclaim, but it’s not automatic.

A local estate planning attorney will know how your state governs the right to disclaim. Generally speaking, a disclaimer of interest must be filed with the probate court, stating that you reject the timeshare. There are time limits–in some states, you have only nine months after the death of a loved one to file.

When the next-of-kin rejects the timeshare, it may go to the next heir, and the next, and the next, etc. Every family member must file their own disclaimer. If the timeshare is disclaimed by all heirs, it is likely that the timeshare company will foreclose on the timeshare. There may be leftover debts for unpaid fees, and the estate may have to fork over those payments.

A few tips: if you are planning on refusing a timeshare, you cannot use it. Don’t try it out, let a friend use it or go one last time. If you wish to disclaim something, you cannot receive any benefit of the thing you are disclaiming. Once you receive a benefit, the opportunity to disclaim it is gone.

Unwanted timeshares usually sell for far less than the original purchase price. Selling a timeshare involves a market loaded with scammers who promise a quick sale, while charging thousands of dollars upfront.

If possible, speak with your parents and their estate planning attorney to head the problem off in advance.

Reference: KSL-TV (Jan. 25, 2021) “How to Avoid Inheriting a TImeshare You Don’t Want”

Can You Amend a Power of Attorney?

The situation facing one family is all too common. An aunt is now incapacitated with severe Alzheimer’s disease. Her brother has been her agent with a durable power of attorney in place for many years. In the course of preparing his own estate plan, he decided it’s time for one of his own children to take on the responsibility for his sister, in addition to naming his son as executor of his estate. The aunt has no spouse or children of her own.

The answers, as explained in a recent article “Changing the agent under a durable power of attorney” from My San Antonio Life, all hinge on the language used in the aunt’s current durable power of attorney. If she used a form from the internet, the document is probably not going to make the transfer of agency easy. If she worked with an experienced estate planning attorney, chances are better the document includes language that addresses this common situation.

If the durable power of attorney included naming successor agents, then an attorney can prepare a resignation document that is attached to the durable power of attorney. The power of attorney document might read like this: “I appoint my brother Charles as agent. If Charles dies or is incapacitated or resigns, I hereby appoint my nephew, Phillip, to serve as a successor agent.”

If the aunt would make her wishes clear in the actual signed durable power of attorney, the nephew could relatively easily assume authority, when the father resigns the responsibility because the aunt pre-selected him for the role.

If there is a clause that appointed a successor agent, but the successor agent was not the nephew, the nephew does not become the agent and the aunt’s brother can’t transfer the POA. If there is no clause at all, the nephew and the father can’t make any changes.

In September 2017, there was a change to the law that required durable power of attorney documents to specifically grant such power to delegate the role to someone else. The law varies from state to state, so a local estate planning attorney needs to be asked about this issue.

If there is no provision allowing an agent to name a successor agent, the nephew and father cannot make the change.

Another avenue to consider: did the aunt’s estate planning attorney include a provision that allows the durable power of attorney to establish a living trust to benefit the aunt and to transfer assets into the trust? Part of creating a trust is determining who will serve as a trustee, or manager, of the trust. If such a clause exists in the durable power of attorney and the father uses it to establish and fund a trust, he can then name his son, the nephew, as the trustee.

Taking this step would place all of the aunt’s assets under the nephew’s control. He would still not be the aunt’s agent under her power of attorney. Responsibility for certain tasks, like filing the aunt’s income taxes, will still be the responsibility of the durable power of attorney.

If her durable power of attorney does not include establishing a living trust, the most likely course is the father will need to resign as agent and the nephew will need to file in court to become the aunt’s guardian. This is a time-consuming and slow-paced process, where the court will become heavily involved with supervision and regular reporting. It is the worst possible option, but it may also be the only option.

If your family is facing this type of situation, begin by speaking with an experienced estate planning attorney to find out what options exist in your state, and it might be resolved.

Reference: My San Antonio Life (Jan. 25, 2021) “Changing the agent under a durable power of attorney”

How Do You Plan for the Death of a Spouse?

The COVID pandemic has become a painful lesson in how important it is to having estate plans in order, especially when a spouse becomes sick, incapacitated, or dies unexpectedly. With more than 400,000 Americans dead from the coronavirus, not every one of them had an estate plan and a financial plan in place, leaving loved ones to make sense of their estate while grieving. This recent article from Market Watch titled “How to get your affairs in order if your spouse is dying” offers five things to do before the worst occurs.

Start by gathering information. Make all of your accounts known and put together paperwork about each and every account. Look for documents that will become crucial, including a durable power of attorney, an advanced health care directive and a last will. Gather paperwork for life insurance policies, investment portfolios and retirement accounts. Create a list of contact information for your estate planning attorney, accountant, insurance agent, doctors and financial advisors and share it with the people who will be responsible for managing your life. In addition, call these people, so they have as much information as possible—this could make things easier for a surviving spouse. Consider making introductions, via phone or a video call, especially if you have been the key point person for these matters.

Create a hard copy binder for all of this information or a file, so your loved ones do not have to conduct a scavenger hunt.

If there is an estate plan in place, discuss it with your spouse and family members so everyone is clear about what is going to happen. If your estate plan has not been updated in several years, that needs to be done. There have been many big changes to tax law, and you may be missing important opportunities that will benefit those left behind.

If there is no estate plan, something is better than nothing. A trust can be done to transfer assets, as long as the trust is funded properly and promptly.

Confirm beneficiary designations. Check everything for accuracy. If ex-spouses, girlfriends, or boyfriends are named on accounts that have not been reviewed for decades, there will be a problem for the family. Problems also arise when no one is listed as a beneficiary. Beneficiary designations are used in many different accounts, including retirement accounts, life insurance policies, annuities, stock options, restricted stock and deferred compensation plans.

Many Americans die without a will, known as “intestate.” With no will, the court must rely on the state’s estate laws, which does not always result in the people you wanted receiving your property. Any immediate family or next of kin may become heirs, even if they were people you with whom you were not close or from whom you may even have been estranged. Having no will can lead to estate battles or having strangers claim part of your estate.

If there are minor children and no will to declare who their guardian should be, the court will decide that also. If you have minor children, you must have a will to protect them and a plan for their financial support.

Create a master list of digital assets. These assets range from photographs to financial accounts, utility bills and phone bills to URLs for websites. What would happen to your social media accounts, if you died and no one could access them? Some platforms provide for a legacy contact, but many do not. Prepare what information you can to avoid the loss of digital assets that have financial and sentimental value.

Gathering these materials and having these conversations is difficult, but they are a necessity if a family member receives a serious diagnosis. If there is no estate plan in place, have a conversation with an estate planning attorney who can advise what can be done, even in a limited amount of time.

Reference: Market Watch (Jan. 22, 2021) “How to get your affairs in order if your spouse is dying”

Every Adult Needs a Will and a Health Care Power of Attorney
An concept Image of a power of attorney

Every Adult Needs a Will and a Health Care Power of Attorney

A serious illness can happen at any age, but just 18% of those 55 and older have a living will, power of attorney for health care and a last will and testament, according to a 2019 study by Merrill Lynch Wealth Management.

AZ Central’s recent article entitled “What to know about wills and health care power of attorney in Arizona” says that every adult should have these documents, including young professionals, single people and those without children.

These documents make it easier for an individual and their family during a stressful time. They make your wishes clear.

They also help give directions to family members and allow you to name a person you believe is the most responsible and able to fulfill your wishes.

Note that a power of attorney, living will and last will each has its own purpose.

A power of attorney for health care lets your named agent make medical decisions on your behalf if you are incapacitated, while you are still alive. Without a health care power of attorney or living will, it can complicate and delay matters.

A living will or “advance directive” is used when a person needs end-of-life care. This document can provide instructions on how the person wants to be treated, like not wanting a feeding tube or wanting as much medical help as possible.

In contrast, a last will and testament states what happens to a person’s estate or assets after they pass away. A last will can also designate a guardian for minor children.

A last will can state who will be in charge of the person’s estate, known as an executor or a personal representative.

You should name a primary representative and an alternate to serve and provide copies of the documents to the people chosen for these roles.

Reference: AZ Central (Jan. 14, 2021) “What to know about wills and health care power of attorney in Arizona”

How Much Tax Do You Pay on Inheritance?

Unfortunately, unless the person you love has an estate plan and has spoken with you about it, the time you are grieving will also be the time you have to get up to speed about both death and taxes. The tax questions are explored in an article from the Delaware Bulletin Review titled “What Taxes Do You Have to Pay on an Inheritance?”

First, there is no federal estate tax on property. Federal law does not impose inheritance taxes on the heir directly. This is similar to gifts, as gift recipients don’t pay federal gift taxes either. However, that does not mean heirs don’t pay taxes. It is actually the opposite. That’s why it’s good to have these conversations before a loved one passes.

Estate taxes apply at the federal level, and they are paid by the estate. The executor uses cash from the estate or sells estate assets to pay the tax.

Unless there is specific language in the will or trust staying otherwise, federal estate tax liability does not usually impact specific bequests of cash or property to beneficiaries. The heirs may receive less of an inheritance because taxes are being paid by the estate. As of this writing, the federal tax exemption is very high–$11.7 million—so very few Americans actually pay federal estate tax.

However, exemptions on state estate taxes are considerably lower. Some states also have inheritance taxes, which are paid by heirs, usually out of their inheritances.

Note: if the estate fails to pay any estate taxes, the IRS is empowered to collect taxes from heirs.

Six states have inheritance taxes. If you are a resident of Iowa, Kentucky, Maryland, Nebraska, New Jersey, or Pennsylvania and expect to receive an inheritance, be mindful that there will be taxes taken from your inheritance. Each state has its own rules, so work with a local estate planning attorney to be certain that you are paying the correct amount to the correct governmental taxing agency.

There is no way for an heir to prevent this tax liability. The only person who can have an impact on inheritance taxes is for the person who is leaving the bequest to plan in advance for the taxes. This is usually done through the use of a trust or gifting while they are still living. Some states have rules that frown on gifting assets immediately before death. If gifts are given regularly for a number of years in advance of the death, they are less likely to be considered as being given “in contemplation of death” and, therefore, potentially subject to estate tax.

An experienced estate planning attorney will know the inheritance, federal estate and gift tax rules and can help guide the family, pre- and post-mortem, in managing the tax liabilities of an inheritance. If your aging parents live in one state and you live in another, you may owe estate taxes in their state and inheritance taxes in your state.

Reference: Delaware Bulletin Review (Jan. 19, 2021) “What Taxes Do You Have to Pay on an Inheritance?”

When Did You Last Review Beneficiary Designation Forms?

For many people, naming beneficiaries occurs when they first set up an account, and it’s rarely given much thought after that. The Street’s recent article entitled “Secure your IRA – Review Your Beneficiary Forms Now” says that many account holders aren’t aware of how important the beneficiary document is or what the consequences would be if the information is incorrect or is misplaced. Many people are also surprised to hear that wills don’t cover these accounts because they pass outside the will and are distributed pursuant to the beneficiary designation form.

If one of these accounts does not have a designated beneficiary, it may be paid to your estate. If so, the IRS says that the account has to be fully distributed within five years if the account owner passes before their required beginning date (April 1 of the year after they turn age 72). This may create a massive tax bill for your heirs.

Get a copy of your listed beneficiaries from every institution where you have your accounts, and don’t assume they have the correct information. Review the forms and make sure all beneficiaries are named and designated not just the primary beneficiary but secondary or contingent beneficiary. It is also important tomake certain that the form states clearly their percentage of the share and that it adds up to 100%. You should review these forms at any life change, like a marriage, divorce, birth or adoption of a child, or the death of a loved one.

Note that the SECURE Act changed the rules for anyone who dies after 2019. If you don’t heed these changes, it could result in 87% of your hard-earned money to go towards taxes. For retirement accounts that are inherited after December 31, 2019, there are new rules that necessitate review of beneficiary designations:

  1. The new law created multiple “classes” of beneficiaries, and each has its own set of complex distribution rules. Make sure you understand the definition of each class of beneficiary and the effect the new rules will have on your family.
  2. Some trusts that were named as beneficiaries of IRAs or retirement plans will no longer serve their original purpose. Ask an experienced estate planning attorney to review this.
  3. The stretch IRA has been eliminated for most non-spouse beneficiaries. As such, most non-spouse beneficiaries will need to “empty” the IRA or retirement account within 10 years and they can’t “stretch” out their distributions over their lifetimes. Failure to comply is a 50% penalty of the amount not distributed and taxes due.

For many, the beneficiary form is their most important estate planning document but the most overlooked.

Reference: The Street (Dec. 28, 2020) “Secure your IRA – Review Your Beneficiary Forms Now”

Should You Gift Stocks as Part of Your Estate Plan?

There are a number of ways to gift stock to family members, during your lifetime or after you die, according to a recent article from Think Advisor titled “Gifting Stock to Family Members: What You Need to Know.” The idea is simple, but how the gifting is done and what taxes may or may not need to be paid (and by whom) requires a closer look.

A gift of stock today is made through an electronic transfer from your account to the investment account of the recipient of the shares. The rules for gifting shares of stocks also apply to gifting ETFs and mutual funds.

Lifetime gifts. Stock gifts can be made in place of giving cash. The annual gift limit of $15,000 per person or $30,000 for a joint gift with your spouse, applies, and the value of the stock on the day of the transfer constitutes the amount of the gift.

If you gift in excess of the annual gifting limits, this takes a bite out of your lifetime gift and tax exemption, which as of this writing is $11.7 million per person for federal estate taxes. That’s something to keep in mind when deciding on your gifting strategy.

Using a trust for gifting. Instead of giving cash to a family member, you could use a trust and transfer your shares into the trust, with the family member as a beneficiary of the trust. The treatment of tax and cost basis issues will depend upon the type of trust used. Your estate planning attorney will be able to help you determine what type of trust to use.

Transfer on death. You can also gift stocks to others through your will, through a transfer on death designation in a brokerage account, through a beneficiary designation in a trust if the securities are held there, or through an inherited IRA. Taxes and cost basis will vary, depending upon your circumstances.

Taxes and gifting stock. There are no taxes and no tax implications at the time stocks are gifted to someone, but there are some issues to know before making the gift.

When stocks are given to a relative, there is no tax impact for the donor or the person receiving the stock, and as long as the value of the stock is within the annual gifting limits, the donor does not have to do anything. If the gift value exceeds the limit, the person has to file a gift tax return.

The recipient of the stock shares doesn’t owe capital gains taxes, until the stocks are sold. At that time, the cost basis and holding period of the person who gifted the shares will need to be known in order to determine the tax liability.

If the stock is gifted at a price below the donor’s cost basis and sold at a loss, the recipient’s cost basis and holding period is determined by the fair market value of the stock on the date of the gift. However, if the price of the shares increases above the donor’s original cost basis, their cost basis and holding period need to be known to calculate the recipient’s capital gain.

Gifting to children or grandchildren. Gifting shares of appreciated stock to children and grandchildren can make sense for the donors, since they are taking the value of the stock out of their estate and gifting it to a child or grandchild in a lower tax bracket. The recipient or their parents could sell the shares and pay a lower capital gains rate, or even no capital gains taxes. However, if the recipient is a current or future college student, or the student’s parent, the gift could reduce eligibility for need-based financial aid. The stock may need to be reported as an asset belonging to the student or the parent, increasing their income when they are received and/or when they are sold.

Speak with your estate planning attorney before gifting stock or cash to family members. There will be sensible ways to be generous without creating any issues for recipients.

Reference: Think Advisor (Jan. 25, 2021) “Gifting Stock to Family Members: What You Need to Know”

Can Unmarried Couples have an Estate Plan?

For unmarried couples, having an estate plan might be even more important than for married couples, especially if there are children in the family. The unmarried couple does not enjoy all of the legal protection afforded by marriage, but many of these protections can be had through a well-prepared estate plan.

A recent article “Planning for unmarried couples” from nwi.com explains that in states that do not recognize common law marriages, like Indiana, the state will not recognize the couple as being married. However, even if you learn that your state does recognize a common law marriage, you still want to have an estate plan.

A will is the starting point of an estate plan, and for an unmarried couple, having it professionally prepared by an experienced estate planning attorney is very important. An agreement between two people as to how they want their assets distributed after death sounds simple, but there are many laws. Each state has its own laws, and if the document is not prepared correctly, it could very easily be invalid. That would make the couple’s agreement useless.

There are also things that need to be prepared, so an unmarried couple can take care of each other while they are living, which they cannot legally do without being married.

A cohabitating couple has no right to direct medical care for each other, including speaking with the healthcare provider or even seeing their partner as a visitor in a healthcare facility. If a decision needs to be made by one partner because the other partner is incapacitated, their partner will not have the legal right to make any medical decisions or even speak with a healthcare provider.

If the couple owns vehicles separately, the vehicles have their own titles (i.e., the legal document establishing ownership). If they want to add their partner’s name to the vehicle, the title needs to be reissued by the state to reflect that change.

If the couple owns a home together, they need to confirm how the home is titled. If they are joint tenants with rights of survivorship or tenants in common, that might be appropriate for their circumstances. However, if one person bought the home before they lived together or was solely responsible for paying the mortgage and for upkeep, they will need to make sure the title and their will establishes ownership and what the owner wants to happen with they die.

If the wish is for the surviving partner to remain in the home, that needs to be properly and legally documented. An estate planning attorney will help the couple create a plan that addresses this large asset and reflect the couple’s wishes for the future.

Unmarried cohabitating adults need to protect each other while they are living and after they pass. A local estate planning attorney will be able to help accomplish this.

Reference: nwi.com (Jan. 24, 2021) “Planning for unmarried couples”

Does a Trust Have to Be Funded to Be Valid?

Thinking you have divided assets equally between children by creating a trust that names all as equal heirs, while placing only one child’s name on other assets is not an equally divided estate plan. Instead, as described in the article “Estate Planning: Fund the trust” from nwi.com, this arrangement is likely to lead to an estate battle.

One father did just that. He set up a trust with explicit instructions to divide everything equally among his heirs. However, only one brother was made a joint owner on his savings and checking accounts and the title of the family home.

Upon his death, ownership of the savings and checking accounts and the home would go directly to the brother. Assets in the trust, if there are any, will be divided equally between the children. That’s probably not what the father had in mind, but legally the other siblings will have no right to the non-trust assets.

This is an example of why creating a trust is only one part of an estate plan. If it is not funded, that is if assets are not retitled, it will not work.

Many estate plans include what is called a “pour-over will” usually executed just after the trust is executed. It is a safety net that “catches” any assets not funded into the trust and transfers them into it. However, this transfer requires probate, and since probate avoidance is a goal of having a trust, it is not the best solution.

The situation as described above is confusing. Why would one brother be a joint owner of assets, if the father means for all of the children to share equally in the inheritance? When the father passes, the brother will own the assets. If the matter went to court, the court would very likely decide that the father’s intention was for the brother to inherit them. Whatever language is in the trust will be immaterial.

If the father’s intention is for the siblings to share the estate equally, the changes need to be made while he is living. The brother’s name needs to come off the accounts and the title to the home, and they all need to be re-titled in the name of the trust. The brother will need to sign off on removing his name. If he does not wish to do so, it’s going to be a legal challenge.

The family needs to address the situation as soon as possible with an experienced estate planning attorney. Even if the brother won’t sign off on changing the names of the assets, as long as the father is living there are options. Once he has passed, the family’s options will be limited. Estate battles can consume a fair amount of the estate’s value and destroy the family’s relationships.

Reference: nwi.com (Jan. 17, 2021) “Estate Planning: Fund the trust”