The Basics of Estate Planning

No matter how BIG or small your net worth is, estate planning is a process that ensures your assets are handed down the way you want after you die.

Forbes’ recent article entitled “Estate Planning Basics” explains that everybody has an estate.

An estate is nothing more or less than the sum total of your assets and possessions of value. This includes:

  • Your car
  • Your home
  • Financial accounts
  • Investments; and
  • Personal property.

Estate planning is the process of deciding which people or organizations are to get your possessions or assets after you’ve died.

It’s also how you leave directions for managing your care and assets if you are incapacitated and unable to make financial or medical decisions. That is done with powers of attorney, a healthcare directive and a living will.

Your estate plan details who gets your assets. It also designates who can make critical healthcare and financial decisions on your behalf should you become incapacitated. If you have minor children, it also lets you designate their legal guardians, in case you die before they reach 18. It also allows you to name adults to safeguard their financial interests.

Your estate plan directs assets to specific entities or people in a legally binding manner. If you want your daughter to have your coin collection or your favorite animal rescue organization to get $500, it’s all mapped out in your plan.

You can also create a trust to safeguard a minor child’s assets until they reach a certain age. You can also keep assets out of probate. That way, your beneficiaries can easily access things like your home or bank accounts.

All estate plans should include documents that cover three main areas: asset transfer, medical needs and financial decisions. Ask an experienced estate planning attorney to help you create your  plan.

Reference: Forbes (Nov. 16, 2022) “Estate Planning Basics”

Do I Need a Trust, or a Last Will and Testament?

Whether to have a will or a trust or both is often discussed when embarking on the estate planning process. Arriving at the answer, as discussed in a recent article, “Personal needs, preferences drive estate planning,” from The News-Enterprise, requires a closer look at each individual’s situation.

The last will and testament doesn’t take effect until two events occur: the person who created the will, the testator, has died, and the will has been filed with the local court. The will is used to distribute assets owned solely by the testator. Jointly owned property, property with a named beneficiary and trust-owned property passes to new owners outside of the will.

After the probate case is opened in the court, the will becomes a public record and is accessible in person and online. Other documents from the estate, which might include inventories of assets and information about property values, is also available to the public.

If it’s unsettling to think about strangers and scammers looking at these documents after you die, remember your estate planning attorney can explain your options, including trusts and beneficiary designations.

The executor is the person named in the will to distribute the estate. There are certain time restrictions to be aware of, depending on your state. All the necessary tasks, from distributing assets to selling a home and whatever instructions are in the will, need to be accomplished by a certain time. An estate planning attorney will help you map out a timeline.

A revocable will is not a purely testamentary document. It takes effect once it is established. A revocable trust can be thought of as in-between a will and a power of attorney. Trusts are not filed with the court, during life or after death, so their contents remain private.

The trustee—the person named to manage the trust—follows the directions in the trust documents to manage the property. If the trust directs that property be distributed immediately after death, the trustee does not have to wait for the will to be probated. The beneficiaries receive their inheritance as per the terms of the trust.

A grantor who is leaving property to children may find the advantages of a trust make it a better tool than a will. Funds can be allocated solely for college expenses or distributed only when certain milestones are reached. Note, however, that an inheritance trust can be created under a will, too. It is known as a “testamentary trust” in that case.

Estate planning is not a one-size-fits-all process. The best approach for one person may be completely wrong for another. An experienced estate planning attorney walks clients through the process, so they are able to make informed decisions and create an estate plan to work best for themselves and their loved ones.

Reference: The News-Enterprise (Nov. 12, 2022) “Personal needs, preferences drive estate planning”

Can You Prevent Will from Being Contested?

The best planning doesn’t preclude disappointed family members and hangers-on from trying to get what they consider their “fair share” of an estate or will.

There are some steps you can take to avoid this happening to your estate, says a recent article, “Counterattack: Tips for Thwarting a Will Contest,” from Kiplinger.

Traditionally, an in terrorem provision is added, known as a “no-contest” clause to a will or a revocable trust to discourage attacks. If triggered, it can cause an heir to lose their entire inheritance if the person is excluded from a will or trust, or if the person challenges the appointment of the personal representative or trustee or claims to be a creditor when the probate court has denied this status.

However, the no-contest provision isn’t always permitted. They are unenforceable in Florida and Indiana. In some courts, states may refuse to enforce them under certain fact scenarios. There are other ways to achieve the goal of excluding an heir or maintaining a firm grip on the estate.

Authorize personal representative or trustee to pay the cost of a potential contest. In some states, personal representatives and trustees are authorized to litigate on behalf of an estate or trust or retain attorneys to do so. Even when a potential heir is omitted from a will or trust, knowing the assets of the estate will be used for litigation expenses and will shrink the size of the estate is enough to deter some litigious people.

Require mediation for any disputes. Some states allow the use of mediation, arbitration, or alternative dispute resolutions to resolve issues. A will could require a potential challenger to use an alternative to litigation and provide guidelines for dispute mediation, from determining how mediators will be selected, whether the process should be adjudicatory or collaborative and the scope, timing and nature of mediation.

Establish a “litigation holdback fund.” Instead of forfeiting the entire interest in the estate by filing a lawsuit, the beneficiary’s interest in the estate could be escrowed, with access restricted during a will contest. When eventually paid to the beneficiary, the interest would be reduced by the cost of litigation.

Create a separate trust for a contentious beneficiary. The law requires beneficiaries the right to request a complete copy of the trust agreement created for their benefit. By creating revocable trusts for each beneficiary, the beneficiary named in one trust will not see the contents of the trust for other beneficiaries. This could prevent a disgruntled person from comparing their trust to another, but there is a risk of a beneficiary alleging a fraudulent transfer in creating separate trusts.

What else can you do to prevent a will contest?

  • Have the testator/settlor undergo an examination by two physicians to eliminate any charges of incapacity and provide the physician’s signed statements as scheduled to the will or trust.
  • Include a statement of intent from the testator/settlor about the estate plan to demonstrate their intentions.
  • Video the execution of the will or trust. Explain the dispositive scheme and inclusion of beneficiaries and obtain a signed statement from each witness and notary. Have a third party certify the video’s authenticity.

If you are concerned about protecting your estate plan, it’s best to meet with an experienced estate planning attorney to review your estate plan for any potential vulnerabilities. A plan in advance could save all concerned from the headache and expense of an estate battle.

Reference: Kiplinger (Nov. 10, 2022) “Counterattack: Tips for Thwarting a Will Contest”

Can You Plan for Probate?

What can you do to help heirs have a smooth transition and avoid probate when settling your estate? A recent article from The Community Voice, “Managing probate when setting up your estate,” provides some recommendations.

Joint accounts. Married couples can own property as joint tenancy, which includes a right of survivorship. When one of the spouses dies, the other becomes the owner and the asset doesn’t have to go through probate. In some states, this is called tenancy by the entirety, in which married spouses each own an undivided interest in the whole property with the right of survivorship. They need content from the other spouse to transfer their ownership interest in the property. Some states allow community property with right of survivorship.

There are some vulnerabilities to joint ownership. A potential heir could claim the account is not a “true” joint account, but a “convenience” account whereby the second account owner was added solely for financial expediency. The joint account arrangement with right of survivorship may also not align with the estate plan.

Payment on Death (POD) and Transfer on Death (TOD) accounts. These types of accounts allow for easy transfer of bank accounts and securities. If the original owner lives, the named beneficiary has no right to claim account funds. When the original owner dies, all the named beneficiary need do is bring proper identification and proof of the owner’s death to claim the assets. This also needs to align with the estate plan to ensure that it achieves the testator’s wishes.

Gifting strategies. In 2022, taxpayers may gift up to $16,000 to as many people as you wish before owing taxes. This is a straight-forward way to reduce the taxable estate. Gifts over $ 16,000 may be subject to federal gift tax and count against your lifetime gift tax exclusion. The lifetime individual gift tax exemption is currently at $12.06 million, although few Americans need worry about this level.

Revocable living trusts. Trusts are used to take assets out of the taxable estate and place them in a separate legal entity having specific directions for asset distributions. A living trust, established during your lifetime, can hold whatever assets you want. A “pour-over will” may be used to add additional assets to the trust at death, although the assets “poured over” into the trust at death are still subject to probate.

The trust owns the assets. However, with a revocable living trust, the grantor (the person who created the trust) has full control of the assets. When the grantor dies, the trust becomes an irrevocable trust and assets are distributed by a successor trustee without being probated. This provides privacy and saves on court costs.

Trusts are not for do-it-yourselfers. An experienced estate planning attorney is needed to create the trust and ensure that it follows complex tax rules and regulations.

Reference: The Community Voice (Nov. 11, 2022) “Managing probate when setting up your estate”

Is Guardianship a Good Idea?
Judge Gavel And Striking Block Over Law Book With Guardianship Law Text On Wooden Desk

Is Guardianship a Good Idea?

Guardianship is usually an act of last resort, embarked upon when there is no lesser restrictive means of protecting a person. There are steps to be taken to avoid being placed under guardianship, including signing a durable financial power of attorney and a medical power of attorney to allow someone of your choosing to make important decisions for you.

If you have these documents and later become incapacitated, there won’t be a need for guardianship because you’ll have an agent or agents in place to act on your behalf.

It is when there has been no advance planning and you develop a significant cognitive impairment when guardianship becomes necessary, according to a recent article, “Guardianship gone good: Protections afforded by guardianship may be necessary,” from The Dallas Morning News.

What if the powers of attorney you had so diligently prepared became invalid? It is possible but can be easily avoided if you take the right preventive steps.

First, make sure to review these documents every now and then. If someone you named to serve in one of these roles has moved far away, they may not be able to serve. Do you have a second person named for financial or medical POA? The same could occur if the person named became incapacitated, died, or declined to serve.

Second, you could have an agent who does not act in your best interest, often referred to as a “rogue” agent. This could be worse than having no agent.

Third, if you are acting against your own best interest, there’s not much a power of attorney can do to protect you from yourself. If your incapacity leads you to making bad decisions which jeopardize your own welfare, a court may create a guardianship to protect you from yourself.

This is why guardianships are nuanced, with every situation requiring a different solution.

For example, levels of incapacity vary. If the cognitive impairment is mild, you may not need someone to act for you. If your impairment is severe and leads to self-harm, violent outbursts or harm to others, a guardianship may become necessary.

Another concern for families whose loved ones have become incapacitated is their vulnerability to scammers.

While guardianship receives a lot of negative coverage in the media, it is, in many instances, a useful and valuable tool used to protect loved ones.

Reference: The Dallas Morning News (Nov. 13, 2022) “Guardianship gone good: Protections afforded by guardianship may be necessary”

What Is Wife of Chrysler Building Billionaire Owner Entitled to Under Prenup?

Sixty-two-year-old Michael Fuchs and 47-year-old Alvina Collardeau-Fuchs, who are in the process of divorcing, lived the “billionaire lifestyle” during their marriage with a string of luxury properties around the world, reports The Digital Journal’s recent article entitled “French wife of Chrysler Building billionaire owner entitled to £37 mn under prenup.”

Money was “never a concern” and the couple enjoyed “fully staffed homes” in fashionable locations such as the Hamptons, New York City, Paris, Miami, Cap d’Antibes, Capri and London.

Fuchs is originally from Germany but moved to the U.S. in the 1990s. He and former journalist Collardeau-Fuchs married in New York in 2012 and went on to have two children. However, they separated in 2020, and the High Court in London was asked to rule on the amount to which Collardeau-Fuchs was entitled. Fuchs’ lawyers argued his estranged wife should get about $36 million, but she claimed it should be more than $53 million.

Despite the two having signed a prenuptial agreement, accusations have been lobbed both ways, including Collardeau-Fuchs’ alleging that Fuchs tried to control her spending and made her daily life “intolerable.”

At one hearing, the court heard that Fuchs had enjoyed an “extraordinarily successful career” and owned a “very significant amount of prime mid-town Manhattan real estate”. In fact, the Art Deco Chrysler Building on the East Side of Manhattan, one of New York’s most distinctive landmarks, is owned by Fuchs’ company. However, Fuchs said the value of his fortune had plummeted recently due to the turbulent economic climate.

Such litigation is usually avoided with a properly drafted prenuptial agreement.

A prenuptial agreement is a legal agreement between two partners engaged to be married and is effective upon marriage.

A prenup [also known as an antenuptial agreement or premarital agreement] can set out the property rights and financial arrangements upon which the engaged couple has agreed.

It also allows the couple to contract for themselves–how they want their property, assets, income and inheritance to be viewed or considered in their marriage.

Reference: Digital Journal (Nov. 14, 2022) “French wife of Chrysler Building billionaire owner entitled to £37 mn under prenup”

How to Transfer Business to the Next Generation

The reality and finality of death is uncomfortable to think about. However, people need to plan for death, unless they want to leave their families a mess instead of a blessing. In a family-owned business, this is especially vital, according to a recent article, “All in the Family—Transition Strategies for Family Businesses” from Bloomberg Law.

The family business is often the family’s largest financial asset. The business owner typically doesn’t have much liquidity outside of the business itself. Federal estate taxes upon death need special consideration. Every person has an estate, gift, and generation-skipping transfer tax exemption of $12.06 million, although these historically high levels may revert to prior levels in 2026. The amount exceeding the exemption may be taxed at 40%, making planning critical.

Assuming an estate tax liability is created upon the death of the business owner, how will the family pay the tax? If the spouse survives the business owner, they can use the unlimited marital deduction to defer federal estate tax liabilities, until the survivor dies. If no advance planning has been done prior to the death of the first spouse to die, it would be wise to address it while the surviving spouse is still living.

Certain provisions in the tax code may mitigate or prevent the need to sell the business to raise funds to pay the estate tax. One law allows the executor to pay part or all of the estate tax due over 15 years (Section 6166), provided certain conditions are met. This may be appropriate. However, it is a weighty burden for an extended period of time. Planning in advance would be better.

Business owners with a charitable inclination could use charitable trusts or entities as part of a tax-efficient business transition plan. This includes the Charitable Remainder Trust, or CRT. If the business owner transfers equity interest in the business to a CRT before a liquidity event, no capital gains would be generated on the sale of the business, since the CRT is generally exempt from federal income tax. Income from the sale would be deferred and recognized, since the CRT made distributions to the business owner according to the terms of the trust.

At the end of the term, the CRT’s remaining assets would pass to the selected charitable remainderman, which might be a family-established and managed private foundation.

Family businesses usually appreciate over time, so owners need to plan to shift equity out of the taxable estate. One option is to use a combination of gifting and selling business interests to an intentionally defective grantor trust. Any appreciation after the date of transfer may be excluded from the taxable estate upon death for purposes of determining federal estate tax liabilities.

For some business owners, establishing their business as a family limited partnership or limited liability company makes the most sense. Over time, they may sell or gift part of the interest to the next generation, subject to the discounts available for a transfer. An appraiser will need to be hired to issue a valuation report on the transferred interests in order to claim any possible discounts after recapitalizing the ownership interest.

The ultimate disposition of the family business is one of the biggest decisions a business owner must make, and there’s only one chance to get it right. Consult with an experienced estate planning attorney and don’t procrastinate. Succession planning takes time, so the sooner the process begins, the better.

Reference: Bloomberg Law (Nov. 9, 2022) “All in the Family—Transition Strategies for Family Businesses”

Should I Need a Trust in My Estate Plan?

Fed Week’s recent article entitled “Considerations for Including a Trust in Your Estate Plan” describes what a trust can offer. This includes the following:

  • Protection against possible incompetency. To protect yourself, you can create a trust and move your assets into it. You can be the trustee, so you’ll control the assets and enjoy the income.
  • Probate avoidance. Assets held in trust also avoid probate. In the documents, you can state how the trust assets will be distributed at your death.
  • Protection for your heirs. After your death, a trustee can keep trust assets from being squandered or lost in a divorce.

If your heirs are young, you can set up a trust to stay in effect until they are older and can handle their own finances. Another option is to keep the trust in effect for the lives of the beneficiaries.

A trust can be revocable or irrevocable. A revocable trust must be created during your lifetime. If you change your mind, you can revoke the trust and reclaim the assets as your own.

A revocable trust can offer incapacity protection and probate avoidance but not tax reduction.

An irrevocable trust can be created while you’re alive or at your death. A revocable trust may become irrevocable at your death.

Assets transferred into an irrevocable trust during your lifetime will be beyond the reach of creditors and divorce settlements. The same is true of assets going into an irrevocable trust at your death.

Your family members can be the beneficiaries of an irrevocable trust, while a trustee or co-trustees you’ve named will be responsible for distributing funds to those trust beneficiaries.

The trustee will be responsible for protecting assets.

Reference:  Fed Week (Oct. 5, 2022) “Considerations for Including a Trust in Your Estate Plan”

Can a 529 Plan Help with Estate Planning?

Parents and grandparents use 529 education savings plans to help with the cost of college expenses. However, they are also a good tool for estate planning, according to a recent article, “Reap The Recently-Created Planning Advantages Of 529 Plans” from Forbes.

There’s no federal income tax deduction for contributions to a 529 account. However, 35 states provide a state income tax benefit—a credit or deduction—for contributions, as long as the account is in the state’s plan. Six of those 35 states provide income tax benefits for contributions to any 529 plan, regardless of the state it’s based in.

Contributions also receive federal estate and gift tax benefits. A contribution qualifies for the annual gift tax exclusion, which is $16,000 per beneficiary for gifts made in 2022. Making a contribution up to this amount avoids gift taxes and, even better, doesn’t reduce your lifetime estate and gift tax exemption amount.

Benefits don’t stop there. If it works with the rest of your estate and tax planning, in one year, you can use up to five years’ worth of annual gift tax exclusions with 529 contributions. You may contribute up to $80,000 per beneficiary without triggering gift taxes or reducing your lifetime exemption.

You can, of course, make smaller amounts without incurring gift taxes. However, if this size gift works with your estate plan, you can choose to use the annual exclusion for a grandchild for the next five years. Making this move can remove a significant amount from your estate for federal estate tax purposes.

While the money is out of your estate, you still maintain some control over it. You choose among the investment options offered by the 529 plan. You also have the ability to change the beneficiary of the account to another family member or even to yourself, if it will be used for qualified educational purposes.

The money can be withdrawn from a 529 account if it is needed or if it becomes clear the beneficiary won’t use it for educational purposes. The accumulated income and gains will be taxed and subject to a 10% penalty but the original contribution is not taxed or penalized. It may be better to change the beneficiary if another family member is more likely to need it.

As long as they remain in the account, investment income and gains earned compound tax free. Distributions are also tax free, as long as they are used to pay for qualified education expenses.

In recent years, the definition of qualified educational expenses has changed. When these accounts were first created, many did not permit money to be spent on computers and internet fees. Today, they can be used for computers, room, and board, required books and supplies, tuition and most fees.

The most recent expansion is that 529 accounts can be used to pay for a certain amount of student debt. However, if it is used to pay interest on a loan, the interest is not tax deductible.

Finally, a 2021 law made it possible for a grandparent to set up a 529 account for a grandchild and distributions from the 529 account are not counted as income to the grandchild. This is important when students are applying for financial aid; before this law changed, the funds in the 529 accounts would reduce the student’s likelihood of getting financial aid.

Two factors to consider: which state’s 529 is most advantageous to you and how it can be used as part of your estate plan.

Reference: Forbes (Oct. 27, 2022) “Reap The Recently-Created Planning Advantages Of 529 Plans”

Planning for Crypto and NFT Assets in Estate Plan

People generally don’t like to deal with their own mortality. However, assets need the protection of an estate plan. If they are digital assets, planning is even more important. According to a recent article from nft.now titled “What Happens to Your Crypto and NFTs When You Die?”, Bitcoin’s total circulation is unlikely to reach its stated limit of 21 million due to early adopters who either died without an estate plan or lost their private keys and access to their bitcoin permanently.

The challenge of digital asset distributions is built into the decentralized nature of the blockchain. The core of the Web3 security is not to give away private keys, even to friends or loved ones, since there’s no centralized authority to address any wrongdoing. Striking a balance between security and accessibility about crypto asset management and inheritance is still an evolving process.

Estate planning attorneys know doing nothing is the worst thing to do. While state laws account for intestacy (what happens when there’s no will), and state law will be applied by the court to distribute assets if there’s no will, one option is to put digital assets into a will. However, there are potential pitfalls.

A will becomes a public document during probate. If the purpose of owning crypto is to keep the existence of the crypto wealth private, a will is not the best option. Wills are useful for many assets, but in the eyes of many, trusts are the preferred means of transferring crypto assets.

Managing digital inheritances with trusts offers many benefits, since the trusts bypass the courts and do not become public documents. Trusts are managed by a trustee, during life and after death.  Therefore, the trustee can act quickly if managing NFTs or crypto. The volatile nature of cryptocurrencies makes speed and easy access a necessity to protect digital fortunes.

When setting up a trust to manage cryptocurrency or NTFs, be sure that the trustee is well-versed in digital assets. If they don’t know how to manage your wallet, the assets could be lost. One means of overcoming this is to add a provision in the trust to allow the trustee to hire someone who has expertise with cryptocurrency and NFTs, so they will be properly managed.

Trusts do have some vulnerabilities. Estate planning for crypto requires some sharing of private keys or transferring digital assets. However, the typical crypto investor is usually loathe to hand over this information. It may be more acceptable for them to leave behind instructions on where the trustee can find the information. However, this creates another layer of vulnerability.

Solutions to the issue of digital asset dispersal in the event of incapacity or death are still evolving. There are a number of commercial solutions, some of which are as technical to the layperson as cryptocurrency is to the non-user.

An experienced estate planning attorney will be able to guide you in planning for digital and traditional assets, so they are not lost in the real world or in cyberspace. Prior planning is needed to protect wealth, whatever form it takes.

Reference: ntf.now (Oct. 27,2022) “What Happens to Your Crypto and NFTs When You Die?”