What Is Considered an Asset in an Estate?

Estate planning attorneys are often asked if a particular asset will be included in an estate, from life insurance and real estate to employment contracts and Health Savings Accounts. The answer is explored in the aptly-titled article, “Will It (My Home, My Life Insurance, Etc.) Be in My Estate?” from Kiplinger.

When you die, your estate is defined in different ways for different planning purposes. You have a gross estate for federal estate taxes. However, there’s also the probate estate. You may also be thinking of whether an asset is part of your estate to be passed onto heirs. It depends on which part of your estate you’re focusing on.

Let’s start with life insurance. You’ve purchased a policy for $500,000, with your son as the designated beneficiary. If you own the policy, the entire $500,000 death benefit will be included in your gross estate for federal estate tax purposes. If your estate is big enough ($12.06 million in 2022), the entire death benefit above the exemption is subject to a 40% federal estate tax.

However, if you want to know if the policy will be included in your probate estate, the answer is no. Proceeds from life insurance policies are not subject to probate, since the death benefit passes by contract directly to the beneficiaries.

Next, is the policy an estate asset available for heirs, creditors, taxing authorities, etc.? The answer is a little less clear. Since your son was named the designated beneficiary, your estate can’t use the proceeds to fulfill bequests made to others through your will. Even if you disowned your son since naming him on the policy and changed your will to pass your estate to other children, the life insurance policy is a contract. Therefore, the money is going to your son, unless you change this while you are still living.

However, there’s a little wrinkle here. Can the proceeds of the life insurance policy be diverted to pay creditors, taxes, or other estate obligations? Here the answer is, it depends. An example is if your son receives the money from the insurance company but your will directs that his share of the probate estate be reduced to reflect his share of costs associated with probate. If the estate doesn’t have enough assets to cover the cost of probate, he may need to tap the proceeds to pay his share.

Another aspect of figuring out what’s included in your estate depends upon where you live. In community property states—Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and Wisconsin—assets are treated differently for estate tax purposes than in states with what’s known as “common law” for married couples. Also, in most states, real estate owned on a fee simple basis is simply transferred on death through the probate estate, while in other states, an alternative exists where a Transfer on Death (TOD) deed is used.

This legal jargon may be confusing, but it’s important to know, because if property is in your probate estate, expenses may vary from 2% to 6%, versus assets outside of probate, which have no expenses.

Speak with an experienced estate planning attorney in your state of residence to know what assets are included in your federal estate, what are part of your probate estate and what taxes will be levied on your estate from the state or federal governments and don’t forget, some states have inheritance taxes your heirs will need to pay.

Reference: Kiplinger (Dec. 13, 2021) “Will It (My Home, My Life Insurance, Etc.) Be in My Estate?”

How to Protect an Estate from a Rotten Son-in-Law

If you’ve been working for a while, you have an estate. If you’ve been working for a long time, you may even have a sizable estate, and between your home, insurance and growing retirement funds, your estate may reach the million dollar mark. That’s the good news. But the bad news might be an adult child with a drug or drinking problem, or a child who married a person who doesn’t deserve to inherit any part of your estate. Not to mention an ex-spouse or two. What will happen when you aren’t there to protect your estate?

There are steps to protect your estate and your family members, as described in the recent article “Is your son-in-law a jerk? Armor plate your estate” from Federal News Network.

Don’t overlook beneficiary designations. Most employer-sponsored retirement and savings accounts have beneficiary designations to identify the people you wish to receive these assets when you die. Here’s an important fact to know: the beneficiary designation overrides any language in your last will and testament. If your beneficiary designation on an account names a child but your will gives your estate to your spouse, your child will receive assets in the account, and your spouse will not receive any proceeds from the account.

Don’t try to sell a property for below-market value. The same goes for trying to remove assets from your ownership to qualify for Medicaid to cover long-term care costs. Selling your home to an adult child for $1 will not pass unnoticed. Estate taxes, gift taxes, income taxes and eligibility for government benefits can’t be avoided by this tactic.

A common estate planning mistake is to name specific investments in a will. A will becomes part of the public record when it is probated. Providing details in a will is asking for trouble, especially if a nefarious family member is looking for assets. And if the sale or other disposition of the named asset before your death impacts bequests, your estate may be vulnerable to litigation.

How will you leave real estate assets to heirs? Real estate assets can be problematic and need special consideration. Are you leaving shares to a vacation home or the family home? If kids or their spouses don’t get along, or one person wants to live in the home while others want to sell it, this could cause years of family fights.

Making a bequest to a grandchild instead of to a troubled adult child. Minor children may not legally inherit property, so leaving assets to a grandchild does not avoid giving assets to an adult child. The most likely guardian will be their parent, undoing the attempt to keep assets out of the parent’s control.

Include a residuary clause in a will or trust. Residuary clauses are used to dispose of assets not specifically mentioned in a will or trust. Your estate planning attorney will create the residuary clauses most appropriate for your unique situations.

Prepare for the unexpected. Your estate plan can be designed to address the unexpected. If a primary beneficiary like a daughter or son divorces their spouse, a trust could prevent the ex from gaining access to your assets.

An effective estate plan, prepared with an experienced estate planning attorney, can plan for all of the “what ifs” to protect loved ones after you have passed.

Reference: Federal News Network (Sep. 1, 2021) “Is your son-in-law a jerk? Armor plate your estate”

How Do You Divide Inheritance among Children?

A father who owns a home and has a healthy $300,000 IRA has two adult children. The youngest, who is disabled, takes care of his father and needs money to live on. The second son is successful and has five children. The younger son has no pension plan and no IRA. The father wants help deciding how to distribute 300 shares of Microsoft, worth about $72,000. The question from a recent article in nj.com is “What’s the best way to split my estate for my kids?” The answer is more complicated than simply how to transfer the stock.

Before the father makes any kind of gift or bequest to his son, he needs to consider whether the son will be eligible for governmental assistance based on his disability and assets. If so, or if the son is already receiving government benefits, any kind of gift or inheritance could make him ineligible. A Third-Party Special Needs Trust may be the best way to maintain the son’s eligibility, while allowing assets to be given to him.

Inherited assets and gifts—but not an IRA or annuities—receive a step-up in basis. The gain on the stock from the time it was purchased and the value at the time of the father’s death will not be taxed. If, however, the stock is gifted to a grandchild, the grandchild will take the grandfather’s basis and upon the sale of the stock, they’ll have to pay the tax on the difference between the sales price and the original price.

You should also consider the impact on Medicaid. If funds are gifted to the son, Medicaid will have a gift-year lookback period and the gifting could make the father ineligible for Medicaid coverage for five years.

An IRA must be initially funded with cash. Once funded, stocks held in one IRA may be transferred to another IRA owned by the same person, and upon death they can go to an inherited IRA for a beneficiary. However, in this case, if the son doesn’t have any earned income and doesn’t have an IRA, the stock can’t be moved into an IRA.

Gifting may be an option. A person may give up to $15,000 per year, per person, without having to file a gift tax return with the IRS. Larger amounts may also be given but a gift tax return must be filed. Each taxpayer has a $11.7 million total over the course of their lifetime to gift with no tax or to leave at death. (Either way, it is a total of $11.7 million, whether given with warm hands or left at death.) When you reach that point, which most don’t, then you’ll need to pay gift taxes.

Medical expenses and educational expenses may be paid for another person, as long as they are paid directly to the educational institution or health care provider. This is not considered a taxable gift.

This person would benefit from sitting down with an estate planning attorney and exploring how to best prepare for his youngest son’s future after the father passes, rather than worrying about the Microsoft stock. There are bigger issues to deal with here.

Reference: nj.com (June 24, 2021) “What’s the best way to split my estate for my kids?”

What is not Covered by a Will?

A last will and testament is one part of a holistic estate plan used to direct the distribution of property after a person has died. A recent article titled “What you can’t do with a will” from Ponte Vedra Recorder explains how wills work, and the types of property not distributed through a will.

Wills are used to inform the probate court regarding your choice of guardians for any minor children and the executor of your estate. Without a will, both of those decisions will be made by the court. It’s better to make those decisions yourself and to make them legally binding with a will.

Lacking a will, an estate will be distributed according to the laws of the state, which creates extra expenses and sometimes, leads to life-long fights between family members.

Property distributed through a will necessarily must be processed through a probate, a formal process involving a court. However, some assets do not pass through probate. Here’s how non-probate assets are distributed:

Jointly Held Property. When one of the “joint tenants” dies, their interest in the property ends and the other joint tenant owns the entire property.

Property in Trust. Assets owned by a trust pass to the beneficiaries under the terms of the trust, with the guidance of the trustee.

Life Insurance. Proceeds from life insurance policies are distributed directly to the named beneficiaries. Whatever a will says about life insurance proceeds does not matter—the beneficiary designation is what controls this distribution, unless there is no beneficiary designated.

Retirement Accounts. IRAs, 401(k) and similar assets pass to named beneficiaries. In most cases, under federal law, the surviving spouse is the automatic beneficiary of a 401(k), although there are always exceptions. The owner of an IRA may name a preferred beneficiary.

Transfer on Death (TOD) Accounts. Some investment accounts have the ability to name a designated beneficiary who receives the assets upon the death of the original owner. They transfer outside of probate.

Here are some things that should NOT be included in your will:

Funeral instructions might not be read until days or even weeks after death. Create a separate letter of instructions and make sure family members know where it is.

Provisions for a special needs family member need to be made separately from a will. A special needs trust is used to ensure that the family member can inherit assets but does not become ineligible for government benefits. Talk to an elder law estate planning attorney about how this is best handled.

Conditions on gifts should not be addressed in a will. Certain conditions are not permitted by law. If you want to control how and when assets are distributed, you want to create a trust. The trust can set conditions, like reaching a certain age or being fully employed, etc., for a trustee to release funds.

Reference: Ponte Vedra Recorder (April 15, 2021) “What you can’t do with a will”