How Bad Can a Do-It-Yourself Estate Plan Be? Very!

Here’s a real world example of why what seems like a good idea backfires, as reported in The National Law Review’s article “Unintended Consequences of a Do-It-Yourself Estate Plan.”

Mrs. Ann Aldrich wrote her own will, using a preprinted legal form. She listed her property, including account numbers for her financial accounts. She left each item of property to her sister, Mary Jane Eaton. If Mary Jane Eaton did not survive, then Mr. James Aldrich, Ann’s brother, was the designated beneficiary.

A few things that you don’t find on forms: wills and trusts need to contain a residuary, and other clauses so that assets are properly distributed. Ms. Aldrich, not being an experienced estate planning attorney, did not include such clauses. This one omission became a costly problem for her heir that led to litigation.

Mary Jane Eaton predeceased Ms. Aldrich. As Mary Jane Eaton had named Ms. Aldrich as her beneficiary, Ms. Aldrich then created a new account to receive her inheritance from Ms. Eaton. She also, as was appropriate, took title to Ms. Eaton’s real estate.

However, Ms. Aldrich never updated her will to include the new account and the new real estate property.

After Ms. Aldrich’s death, James Aldrich became enmeshed in litigation with two of Ms. Aldrich’s nieces over the assets that were not included in Ms. Aldrich’s will. The case went to court.

The Florida Supreme Court ruled that Ms. Aldrich’s will only addressed the property specifically listed to be distributed to Mr. James Aldrich. Those assets passed to Ms. Aldrich’s nieces.

Ms. Aldrich did not name those nieces anywhere in her will, and likely had no intention for them to receive any property. However, the intent could not be inferred by the court, which could only follow the will.

This is a real example of two basic problems that can result from do-it-yourself estate planning: unintended heirs and costly litigation.

More complex problems can arise when there are blended family or other family structure issues, incomplete tax planning or wills that are not prepared properly and that are deemed invalid by the court.

Even ‘simple’ estate plans that are not prepared by an estate planning lawyer can lead to unintended consequences. Not only was the cost of litigation far more than the cost of having an estate plan prepared, but the relationship between Ms. Aldrich’s brother and her nieces was likely damaged beyond repair.

Reference: The National Law Review (Feb. 10, 2020) “Unintended Consequences of a Do-It-Yourself Estate Plan”

Gray Divorces Changing the Future for Many Senior Americans

Add “gray divorce” to the factors leading to strife in estate planning. Minimizing discord among beneficiaries is one of the top three reasons people decide to have estate plans created, but with more gray divorces, things become complicated.

A survey at the 54th Annual Heckerling Institute on Estate Planning conducted by TD Bank asked elder law attorneys, insurance advisors, wealth managers and other professionals on the biggest challenge to estate planning. An article in the Clare County Review titled “Rising Gray Divorce Rates Are Making Estate Planning Problems More Complicated” explains the problem, and presents some solutions.

Gray divorce, blended families, naming heirs and changing family structures are making it more complicated—and more necessary—to create an estate plan and review it with an estate planning attorney on a regular basis.

More than a third of the 112 professionals participating in the survey said that gray divorce has the biggest impact on retirement planning and funding. It also impacts naming who becomes a person’s power of attorney and how Social Security benefits are determined.

The biggest way to help avoid family conflict in a gray divorce is the same as in any other divorce: regular communication. The family members need to know what is being planned, including who will be the designated beneficiaries and who will be named as executor.

The divorce process is complicated at any age, but after 50, there are usually more assets involved. The spouse is usually listed as the beneficiary on most, if not all, assets. Each asset document must be changed to reflect the new beneficiaries. Dividing pension plans, IRAs, and other retirement funds entails more work than simply changing names on bank accounts (although that also has to happen).

Wills, trusts, life insurance, and titles on real estate must also be changed. Institutions and companies that have accounts must be contacted, with information updated and verified.

Trusts are growing in popularity as a means of leaving assets to heirs, since they can minimize costs and delays when property is transferred. Trusts make it easier to pass assets, if family conflict is expected.

Even when beneficiaries aren’t expecting any cash assets to be left to them, controversies can still erupt over other assets. Adult children may not care about IRAs or trusts, but often the family home has great sentimental value. Deciding what to do with it can lead to fighting among siblings.

For those considering a gray divorce, talking with an estate planning attorney, in addition to a matrimonial attorney, could make this large life change less stressful. The estate planning attorney will be able to work with the matrimonial attorney, to ensure that estate issues are handled properly.

Reference: Clare County Review (February 10, 2020) “Rising Gray Divorce Rates Are Making Estate Planning Problems More Complicated”

Alternatives for Stretch IRA Strategies

The majority of many people’s wealth is in their IRAs, that is saved from a lifetime of work. Their goal is to leave their IRAs to their children, says a recent article from Think Advisor titled “Three Replacements for Stretch IRAs.” The ability to distribute IRA wealth over years, and even decades, was eliminated with the passage of the SECURE Act.

The purpose of the law was to add an estimated $428 million to the federal budget over the next 10 years. Of the $16.2 billion in revenue provisions, some $15.7 billion is accounted for by eliminating the stretch IRA.

Existing beneficiaries of stretch IRAs will not be affected by the change in the law. But going forward, most IRA heirs—with a few exceptions, including spousal heirs—will have to take their withdrawals within a ten year period of time.

The estate planning legal and financial community is currently scrutinizing the law and looking for strategies will protect these large accounts from taxes. Here are three estate planning approaches that are emerging as front runners.

Roth conversions. Traditional IRA owners who wished to leave their retirement assets to children may be passing on big tax burdens now that the stretch is gone, especially if beneficiaries themselves are high earners. An alternative is to convert regular IRAs to Roth IRAs and take the tax hit at the time of the conversion.

There is no guarantee that the Roth IRA will never be taxed, but tax rates right now are relatively low. If tax rates go up, it might make converting the Roth IRAs too expensive.

This needs to be balanced with state inheritance taxes. Converting to a Roth could reduce the size of the estate and thereby reduce tax exposure for the state as well.

Life insurance. This is being widely touted as the answer to the loss of the stretch, but like all other methods, it needs to be viewed as part of the entire estate plan. Using distributions from an IRA to pay for a life insurance policy is not a new strategy.

Charitable Remainder Trusts (CRT). The IRA could be used to fund a charitable remainder trust. This allows the benefactor to establish an income stream for heirs with part of the IRA assets, with the remainder going to a named charity. The trust can grow assets tax free. There are two different ways to do this: a charitable remainder annuity trust, which distributes a fixed annual annuity and does not allow continued contributions, or a charitable remainder unitrust, which distributes a fixed percentage of the initial assets and does allow continued contributions.

Speak with your estate planning lawyer about what options may work best in your unique situation.

Reference: Think Advisor (Jan. 24, 2020) “Three Replacements for Stretch IRAs”

Estate Planning for Unmarried Couples

For some couples, getting married just doesn’t feel necessary. However, they don’t enjoy the automatic legal rights and protections that legally wed spouses do, especially when it comes to death. There are many spousal rights that come with a marriage certificate, reports CNBC in the article “Here’s what happens to your partner if you’re not married and you die.” Without the benefit of marriage, extra planning is necessary to protect each other.

Taxes are a non-starter. There’s no federal or state income tax form that will permit a non-married couple to file jointly. If one of the couple’s employers is the source of health insurance for both, the amount that the company contributes is taxable to the employee. A spouse doesn’t have to pay taxes on health insurance.

More important, however, is what happens when one of the partners dies or becomes incapacitated. A number of documents need to be created, so should one become incapacitated, the other is able to act on their behalf. Preparations also need to be made, so the surviving partner is protected and can manage the deceased’s estate.

In order to be prepared, an estate plan is necessary. Creating a plan for what happens to you and your estate is critical for unmarried couples who want their commitment to each other to be protected at death. The general default for a married couple is that everything goes to the surviving spouse. However, for unmarried couples, the default may be a sibling, children, parents or other relatives. It won’t be the unmarried partner.

This is especially true, if a person dies with no will. The courts in the state of residence will decide who gets what, depending upon the law of that state. If there are multiple heirs who have conflicting interests, it could become nasty—and expensive.

However, a will isn’t all that is needed.

Most tax-advantaged accounts—Roth IRAs, traditional IRAs, 401(k) plans, etc.—have beneficiaries named. That person receives the assets upon death of the owner. The same is true for investment accounts, annuities, life insurance and any financial product that has a beneficiary named. The beneficiary receives the asset, regardless of what is in the will. Therefore, checking beneficiaries need to be part of the estate plan.

Checking, savings and investment accounts that are in both partner’s names will become the property of the surviving person, but accounts with only one person’s name on them will not. A Transfer on Death (TOD) or Payable on Death (POD) designation should be added to any single-name accounts.

Unmarried couples who own a home together need to check how the deed is titled, regardless who is on the mortgage. The legal owner is the person whose name is on the deed. If the house is only in one person’s name, it won’t become part of the estate. Change the deed so both names are on the deed with rights of survivorship, so both are entitled to assume full ownership upon the death of the other.

To prepare for incapacity, an estate planning attorney can help create a durable power of attorney for health care, so partners will be able to make medical decisions on each other’s behalf. A living will should also be created for both people, which states wishes for end of life decisions. For financial matters, a durable power of attorney will allow each partner to have control over each other’s financial affairs.

It takes a little extra planning for unmarried couples, but the peace of mind that comes from knowing that you have prepared to care for each other, until death do you part, is priceless.

Reference: CNBC (Dec. 16, 2019) “Here’s what happens to your partner if you’re not married and you die”

Not a Billionaire? Trusts Can Still Be Beneficial

You don’t have to be wealthy to benefit from the use of a trust. A trust is a legal arrangement by which one person transfers his or her assets to a trustee who will hold those assets in trust for third parties, explains the Stamford Advocate’s article “Trusts are not for the wealthy only.” As the person who created the trust, referred to as “the settlor,” you determine who the trustee is, as well as naming the beneficiaries.

There are many different types of trusts which serve different purposes. However, the two basic categories of trusts are revocable (also known as “living” trusts) and irrevocable trusts. Their names reflect two chief characteristics: the revocable trust can be changed and controlled by the settlor. The irrevocable trust cannot be changed, and the settlor gives up the control of the trust. However, it should be noted that the irrevocable trust has certain tax and other benefits not offered by the revocable trust.

A will is definitely necessary to pass assets on according to your wishes, but a trust can serve other purposes. Here’s a look at some common reasons why people use trusts:

  • Protect assets from creditors
  • Allow heirs to avoid probate of assets in the trusts
  • Avoid, minimize or delay estate taxes, transfer taxes or income taxes
  • Control how assets are disbursed or invested
  • Facilitate business succession planning and manage business assets
  • Shelter assets for descendants, if a spouse remarries
  • Establish a family tradition of philanthropy

Trusts allow assets to be passed on quickly and privately, while eliminating some expenses for heirs. They also permit closer management of who will benefit from your assets.

The cost of setting up a trust depends on the complexity of the trust and the estate, as well as other factors, like the number of beneficiaries and how many generations are being planned for. Bear in mind that the cost of setting up a trust should be measured against the future cost of not just taxes, but any litigation that might occur if the estate is probated and becomes public knowledge, or if family members are dissatisfied with the distribution of assets.

Speak with an estate planning attorney to first determine what kind of trusts are needed for your estate plan to achieve your wishes. Discuss the role of a Special Needs trust, if any family members have mental or physical needs that make them eligible for public assistance. An experienced estate planning attorney will know which planning strategies are best in your unique circumstances.

Reference: Stamford Advocate (Jan. 19, 2020) “Trusts are not for the wealthy only”

Start the New Year with Estate Planning To-Do’s

Families who wish their loved ones had not created an estate plan are far and few between. However, the number of families who have had to experience extra pain, unnecessary expenses and even family battles because of a lack of estate planning are many. While there are a number of aspects to an estate plan that take some time to accomplish, The Daily Sentinel recommends that readers tackle these tasks in the article “Consider These Items As Part of Your Year-End Plan.”

Review and update any beneficiary designations. This is one of the simplest parts of any estate plan to fix. Most people think that what’s in their will controls how all of their assets are distributed, but this is not true. Accounts with beneficiary designations—like life insurance policies, retirement accounts, and some bank accounts—are controlled by the beneficiary designation and not the will.

Proceeds from these assets are based on the instructions you have given to the institution, and not what your will or a trust directs. This is also true for real estate that is held in JTWROS (Joint Tenancy with Right of Survivorship) and any real property transferred through the use of a beneficiary deed. The start of a new year is the time to make sure that any assets with a beneficiary designation are aligned with your estate plan.

Take some time to speak with the people you have named as your agent, personal representative or successor trustee. These people will be managing all or a portion of your estate. Make sure they remember that they agreed to take on this responsibility. Make sure they have a copy of any relevant documents and ask if they have any questions.

Locate your original estate planning documents. When was the last time they were reviewed? New laws, and most recently the SECURE Act, may require a revision of many wills, especially if you own a large IRA. You’ll also want to let your executor know where your original will can be found. The probate court, which will review your will, prefers an original. A will can be probated without the original, but there will be more costs involved and it may require a few additional steps. Your will should be kept in a secure, fire and water-safe location. If you keep copies at home, make a note on the document as to where the original can be found.

Create an inventory of your online accounts and login data for each one. Most people open a new account practically every month, so keep track. That should include email, personal photos, social media and any financial accounts. This information also needs to be stored in a safe place. Your estate planning document file would be the logical place for this information but remember to update it when changing any information, like your password.

If you have a medical power of attorney and advance directive, ask your primary care physician if they have a means of keeping these documents, and explain how you wish the instructions on the documents to be carried out. If you don’t have these documents, make them part of your estate plan review process.

A cover letter to your executor and family that contains complete contact information for the various professionals—legal, financial, and medical—will be a help in the case of an unexpected event.

Remember that life is always changing, and the same estate plan that worked so well ten years ago, may be out of date now. Speak with an experienced estate planning attorney in your state who can help you create a plan to protect yourself and your loved ones.

Reference: The Daily Sentinel (Dec. 28, 2019) “Consider These Items As Part of Your Year-End Plan”

I’ve Inherited an IRA – Now, What about Taxes?

Inheriting an IRA comes with several constraints. As a result, it can be tricky to navigate. You are at an intersection of tax planning, financial planning and estate planning, says Bankrate’s article “7 inherited IRA rules all beneficiaries must know.” There are a number of choices for you to make, depending upon your situation. How can you figure out what to do?

Whatever your situation, do NOT cash out the IRA, or roll it into a non-IRA account. Doing this could make the entire IRA taxable as regular income. Do nothing until you have the right advisors in place. For most people, the best step is to find an estate planning attorney who is experienced with inherited IRAs.

Here’s what you need to know:

The rules are different for spouses. A spouse heir of an IRA can do one of three things:

  • Name himself as the owner and treat the IRA as if it was theirs;
  • Treat the IRA as if it was his, by rolling it into another IRA or a qualified employer plan, including 403(b) plans;
  • Treat himself as the beneficiary of the plan.

Each of these actions may create additional choices for the spousal heir. For example, if a spouse inherits the IRA and treats it as his own, he may have to start taking required minimum distributions, depending on his age.

“Stretch” or choose the 5-year rule. Non-spouse heirs have two options:

  • Take distributions over their life expectancy, known as the “stretch” option, which leaves the funds in the IRA for as long as possible, or
  • Liquidate the entire account within five years of the original owner’s death. That comes with a hefty tax burden.

Congress is considering legislation that may eliminate the stretch option, but the proposed law has not been passed as of this writing. The stretch option is the golden ticket for heirs, letting the IRA grow for years without being liquidated and having to pay taxes. If the IRA is a Roth IRA, taxes were paid before the money went into the account.

Non-spouse beneficiaries need to act promptly, if they want to take the stretch option. There is a cutoff date for taking the first withdrawal, depending upon whether the original account owner was over or under 70 ½ years old.

There are year-of-death distribution requirements. If the original owner has taken his or her RMD in the year that they died, the beneficiary needs to make sure the minimum distribution has been taken.

There might be a tax break. For estates subject to the federal estate tax, inheritors of an IRA may get an income-tax deduction for the estate taxes paid on the account. The taxable income earned (but not received by the deceased individual) is “income in respect of a decedent.”

Make sure the beneficiary forms are properly filled out. This is for the IRA owners. If a form is incomplete, doesn’t name a beneficiary or is not on record with the custodian, the beneficiary may be stuck with no option but the five-year distribution of the IRA.

A poorly drafted trust can sink the IRA. If a trust is listed as a primary beneficiary of an IRA, it must be done correctly. If not, some custodians won’t be able to determine who the qualified beneficiaries are, in which case the IRS’s accelerated distribution rules for IRAs will be required. Work with an estate planning attorney who is experienced with the rules for leaving IRAs to trusts.

Reference: Bankrate (Nov. 19, 2019) “7 inherited IRA rules all beneficiaries must know.”

What If Only One Parent Is Willing to Plan?

Making matters much worse for one family, is the fact that while the mother is willing to speak with an estate planning attorney and make a plan for the future, the father won’t even discuss it. What should this family do, asks the article from nwi.com titled “Estate Planning: Can one spouse plan?”

Planning for your eventual demise and distribution of your worldly goods isn’t as much fun as planning a vacation or buying a new car. For some people, it’s too painful, even when they know that it needs to be done. There’s nothing pleasant about the idea that one day you won’t be with your loved ones.

Although contemplating the reality is unpleasant, this is a task that creates all kinds of problems for those who are left behind, if it is not done.

Unfortunately, it is not unusual for one parent to recognize the importance of having an estate plan and the other parent does not consider it to be an important task or simply refuses. In that case, the estate planning attorney can work with the spouse who is willing to go forward.

Some attorneys prefer to represent only one of the spouses, especially in a case like this. Spouses’ interests aren’t always identical, and there are situations where conflicts can arise. When a couple goes to the estate planning attorney’s office and wishes the attorney to represent both of them, sometimes the lawyer will ask for an acknowledgment that the lawyer is representing both of them as a couple. In the event that a disagreement arises or if their interests are very different, some attorneys will withdraw their representation. This is not common, but it does happen.

The estate planning lawyer usually prefers, however, to represent both spouses. Married couple’s estates tend to be intertwined, with real property jointly owned as husband and wife, or husband and husband or wife and wife. Spouses are usually named beneficiaries of life insurance and retirement accounts. Even in blended family situations, this holds true.

If the father in the situation above won’t budge, the mother should meet with the attorney and create an estate plan. The problem is, she may not be able to plan effectively for the two most common and usually the most valuable assets: their jointly owned home and retirement accounts.

If the home is owned by the spouses as “entireties property,” that is, by the couple, she can’t make changes to the title, without her spouse’s consent. One spouse cannot sever entireties property, without both spouses agreeing. Some retirement plans are also subject to the federal law ERISA, which requires a spouse’s consent to change beneficiaries to someone other than the spouse.

Even with these issues, having a plan for one spouse is better than not having any plan at all.

The only last argument that may be made to the father, is that if he does not make a plan, the laws of the state will be used, and few people actually like the idea of the state taking care of their estate.

Reference: nwi.com (Nov. 17, 2019) “Estate Planning: Can one spouse plan?”

Don’t Ask Heirs to Guess What You Wanted—Have an Estate Plan
Table with wooden houses, calculator, magnifying glass with the word Estate planning. Property insurance. Mortgage. Investing. Living trust. Write a will. Woman sits at the table and writes plans

Don’t Ask Heirs to Guess What You Wanted—Have an Estate Plan

With an estate plan, you can distribute your assets according to your own wishes. Without one, your heirs may spend years and a good deal of money trying to settle your estate, reports U.S. News & World Report in the article “5 Reasons to Make an Estate Plan.”

If there is no estate plan in place, including a will, living trust, advance directives and other documents, people you love will be put in a position of guessing what you wanted for any number of things, from what your final wishes would be in a medical crisis, to what kind of a funeral would like to have. That guessing can cause strife between family members and worry, for a lifetime, that they didn’t do what you wanted.

Think of your estate plan as a love letter, showing that you care enough about those you love to do right by them.

What is estate planning? Estate planning is the process of legally documenting what you want to happen when you die. It also includes planning for your wishes in case of incapacity, that is, when you are not legally competent to make decisions for yourself because of illness or an injury. This is done through the use of wills, trusts, advance directives and beneficiary designations on accounts and life insurance policies.

Let’s face it, people don’t like to think about their passing, so they postpone making an appointment with an estate planning attorney. There’s also the fear of the unknown: will they have to share a lot of information with the attorney? Will it become complicated? Will they have to make decisions that they are not sure they can make?

Estate planning attorneys are experienced with the issues that come with planning for incapacity and death, and they are able to guide clients through the process.

The power of putting wishes down on paper can provide a great deal of relief to the people who are making the plan and to their family members. Here are five reasons why everyone should have an estate plan:

Avoid Probate. Without a will, the probate court decides how to distribute your estate. In some states, it can take at least seven months to allow creditors to put through claims. The estate is also public, with your information available to the public. Probate can also be expensive.

Minimize Taxes. There are a number of strategies that can be used to minimize taxes being imposed on your heirs. While the federal estate tax exemption is $11.4 million per individual, states have estate taxes and some states impose an inheritance taxes. An estate planning attorney can help you minimize the tax impact of your estate.

Care for Minor Children. Families with minor children need a plan for care, if both parents should pass away. Without a will that names a guardian for young children, the court will appoint a guardian to raise a child. With a will, you can prevent the scenario of relatives squabbling over who should get custody of minor children.

Distributing Assets. If you have a will, you can say who you want to get what assets. If you don’t, the laws of your state will determine who gets what. You can also use trusts to control how and when assets are distributed, in case there are heirs who are unable to manage money.

Plan for Pets. In many states, you can create a Pet Trust and name a trustee to manage the money, while naming someone in your will who will be in charge of caring for your pet. Seniors are often reluctant to get a pet, because they are concerned that they will die before the pet. However, with an estate plan that includes a pet trust, you can protect your pet.

Reference: U.S. News & World Report (October 18, 2019) “5 Reasons to Make an Estate Plan”

Do Name Changes Need to Be Reflected in Estate Planning Documents?

When names change, executing documents with the person’s prior name can become problematic. For example, what about a daughter who was named as a health care representative by her parents several years ago, who marries and changes her name? Then, to make matters more complicated, add the fact that the couple’s daughter-in-law has the same first name, but a different middle name. That’s the situation presented in the article “Estate Planning: Name changes and the estate plan” from nwi.com.

When a person’s name changes, many documents need to be changed, including items like driver’s licenses, passports, insurance policies, etc. The change of a name isn’t just about the person who created the estate plan but also to their executors, heirs, beneficiaries and those who have been named with certain legal powers through power of attorney (POA) and health care power of attorney.

It’s not an unusual situation, but it does have to be addressed. It’s pretty common to include additional identifiers in the documents. For example, let’s say the will says I leave my house to my daughter Samantha Roberts. If Samantha gets married and changes her last name, it can be reasonably assumed that she can be identified. In some cases, the document may be able to stay the same.

In other instances, the difference will be incorporated through the use of the acronym AKA—Also Known As. That is used when a person’s name is different for some reason. If the deed to a home says Mary Green, but the person’s real name is Mary G. Jones, the term used will be Mary Green A/K/A Mary G. Jones.

Sometimes when a person’s name has changed completely, another acronym is use: N/K/A, or Now Known As. For example, if Jessica A. Gordon marries or divorces and changes her name to Jessica A. Jones, the phrase Jessica A. Gordon N/K/A Jessica A. Jones would be used.

However, in the situation noted above, most attorneys to want to have the documents changed to reflect the name change. First, there are two people in the family with similar names. It is possible that someone could claim that the person wished to name the other person. It may not be a strong case, but challenges have been made over smaller matters.

Second is that the document being discussed is a healthcare designation. Usually when a health care power of attorney form is being used, it’s in an emergency. Would a doctor make a daughter prove that she is who she says she is? It seems unlikely, but the risk of something like that happening is too great. It is much easier to simply have the document updated.

In most matters, when there is a name change, it’s not a big deal. However, in estate planning documents, where there are risks about being able to make decisions in a timely manner or to mitigate the possibility of an estate challenge, a name change to update documents is an ounce of prevention worth a pound of trouble in the future.

Reference: nwi.com (October 20, 2019) “Estate Planning: Name changes and the estate plan”

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