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”

Key Health Document Most Americans Don’t Have but Should

You may not like the idea of contemplating your own mortality, or that of a loved one. You may procrastinate all year long about putting your final wishes in place. However, this one document is important for yourself, your loved ones and your life. You shouldn’t put it off any longer. Forbes’ recent article titled “Two-Thirds of All Americans Are Missing This Estate Planning Document” explains why.

A health care directive is a legal document that an individual will use to give specific directions for caregivers, in case of dementia or illness. It directs end of life decisions. It also gives directions for how the person wishes their body to be cared for after their death.

This document is known by several different names: living wills, durable health care powers of attorney or medical directives. However, the purpose is the same: to give guidance and direction on making medical and end-of-life decisions.

This document itself is a relatively new one. The first was created in California in 1976, and by 1992, all fifty states had similar laws. The fact that the law was accepted so fast across the country, indicates how important it is. The document provides control when a person is impaired and after their death. That is at the heart of all estate planning.

Yet just as so many Americans don’t have wills, only a third have a health care directive. That’s a surprise, since both estate planning attorneys and health care professionals regularly encourage people to have these documents in place.

A key part of a health care directive is selecting an agent. This is a person who will act as the proxy to make decisions for another person, consistent with their wishes. They will also have to advocate for the person with respect to having treatment continue or shifting to pain management and palliative care. The spouse is often the first choice for this role. An adult child or other close and trusted family or friends can also serve.

The agent’s role does not end at death but continues to ensure that post-mortem wishes are carried out. The agent takes control of the person’s body, making sure that any organ donations are made, if it was the person’s wish.

Once any donation wishes are carried out, the agent also makes sure that funeral wishes are done according to the person’s wishes. Burial is an ancient tradition, but there are many different choices to be made. The health care directive can have as many details as possible, or simply state burial or cremation.

Having a health care directive in place permits an individual to state his or her wishes clearly. Talk with your estate planning attorney about creating a health care directive as part of your comprehensive estate plan.

Reference: Forbes (December 13, 2019) “Two-Thirds of All Americans Are Missing This Estate Planning Document”

How Business Owners Undo Their Years of Hard Work

When it comes to preparing for retirement, transitioning their business and putting a succession plan in place, many small business owners simply aren’t realistic, says the article “Business Owners Dream (Wrongly) of an Easy Retirement Transition” from Plan Advisor. While it’s great that they believe in their businesses, by putting every last dollar they have into the business, thinking they will reap the rewards when it’s time to sell, they put themselves in a risky position.

Many small business owners treat their business as their nest egg. That may not be wrong, but if there is no other estate planning or retirement planning, there are a number of ways this could go wrong.

For one thing, it’s not likely that the value of the business at the time of the sale can be guaranteed. What if the value of the business is not as strong as the owner thinks it is? It’s better to have more than a few eggs in a retirement basket, including savings in retirement accounts that provide tax advantages.

The business owner can open a 401(k), SEP-IRA, SIMPLE or a pension plan. Because these types of accounts are tax deferred, the investments can grow while avoiding taxation. The best retirement plan for any small business owner depends upon how much income the business generates, how stable earnings are, how many employees there are and how generous the business owner wishes to be with the full-time employees.

This last factor matters because the law requires most tax-deferred plans to be fair to all employees. A business owner cannot open a 401(k) for themselves and exclude full-time employees. However, the appreciation of employees for having a 401(k) plan should be considered. By investing in an employee retirement plan, and perhaps a matching program, the business becomes more attractive to current and future employees.

Estate planning is a critical piece of the succession plan. A true family legacy plan needs to go beyond defining who will be in charge of the business and estate if the owner dies, and how the business and any other assets will be divided. If there is no will, the state’s laws will govern how assets are divided.

An estate planning attorney who routinely works with business owners will be able to help with the formation of a succession plan, with an eye to fulfilling the owner’s goals for themselves and their family. It should be understood that any succession plan needs to work in conjunction with the overall estate plan, so that both can achieve their respective goals.

For a succession plan to work, it needs to be put into place five to ten years in advance. If a sale of the business is at the heart of the plan, it can take five years to value the businesses’ profitability, formalize the management structure, identify a solid buyer, determine how the transition will be made, etc.

Reference: Plan Advisor (December 12, 2019) “Business Owners Dream (Wrongly) of an Easy Retirement Transition”

From Gentle Persuasion to a No-Nonsense Approach, Talking About Estate Plans

Sometimes the first attempt is a flop. Imaging this exchange: “So, do you want to talk about what happens when you die?” Answer: “Nope.” That’s what can happen, but it doesn’t have to, says The Wall Street Journal’s recent article “Readers Offer Their Advice on Talking to Aging Parents About Estate Plans.”

Many people have successfully begun this conversation with their aging parents. The gentle persuasion method is deemed to be the most successful. Treating elderly parents as adults, which they are, and asking about their fears and concerns is one way to start. Educating, not lecturing, is a respectful way to move the conversation forward.

Instead of asking a series of rapid-fire questions, provide information. One family assembled a notebook with articles about how to find an estate planning attorney, when people might need a trust, or why naming someone as power of attorney is so important.

Others begin by first talking about less important matters than bank accounts and bequests. Asking a parent for a list of utility companies with the account number, phone number and if they are paying bills online, their password, is an easy entry to thinking about next steps. Sometimes a gentle nudge, is all it takes to unlock the doors.

For some families, a more direct, less gentle approach gets the job done. That includes being willing to tell parents that not having an estate plan or not being willing to talk about their estate plan is going to lead to disaster for everyone. Warn them about taxes or remind them that the state will disburse all of their hard-earned assets, if they don’t have a plan in place.

One son tapped into his father’s strong dislike of paying taxes. He asked a tax attorney to figure out how much the family would have to pay in estate taxes, if there were no estate plan in place. It was an eye-opener, and the father became immediately receptive to sitting down with an estate planning attorney.

A daughter had tried repeatedly to get her father to speak with an estate planning attorney. His response was the same for several decades: he didn’t believe that his estate was big enough to warrant doing any kind of planning. One evening the daughter simply threw up her hands in frustration and told him, “Fine, if your favorite charity is the federal government, do nothing…but if you’d rather benefit the church or a university, do something and make your desires known.”

For months after seeing an estate attorney and putting a plan in place, he repeated the same phrase to her: “I had no idea we were worth so much.”

Between the extremes is a third option: letting someone else handle the conversation. Aging parents may be more receptive to listening to a trusted individual, who is of their same generation. One adult daughter contacted her wealthy mother’s estate planning attorney and financial advisor. The mother would not listen to the daughter, but she did listen to her estate planning attorney and her financial advisor, when they both reminded her that her estate plan had not been reviewed in years.

Reference: The Wall Street Journal (December 16, 2019) “Readers Offer Their Advice on Talking to Aging Parents About Estate Plans”

The Many Responsibilities of Inheriting a Home

When you inherit a home, there are three key factors to consider: the financial and legal responsibilities of the home, the tax liabilities of the home and what you’ll eventually do with the home. All of these different things relate to each other, explains Million Acres in “A Guide to What Happens When You Inherit a House.”

Let’s look at taxes first. There’s no federal tax associated with inheriting a house, but some states have inheritance taxes. For most situations, this inheritance does not lead to an immediate tax liability. When a property is inherited, the IRS establishes a fair market value for the property, which is the new basis for the property. This is a step-up basis. It is the valuation that is used to set future taxes, when the property is sold.

Capital gains are a tax relating to the profits generated from selling an asset, in this case, a house. The step up in basis means the heir only has to pay capital gains taxes, if the home is sold. The taxes will be the difference between the fair market value set at the time of the inheritance and the selling price.

If the property has a mortgage, heirs will need to know what type of mortgage it is and if it is assumable or due on sale. Most mortgage companies allow heirs to take over the payments, according to the original loan terms. However, if there is a reverse mortgage on the home, the unpaid balance is due when the person who took out the reverse mortgage dies. This usually requires the heirs to sell the home to settle the debt.

The condition of the inherited home often determines what heirs decide to do with the house. If it hasn’t been maintained and needs major work, it may be easier to sell it as-is, rather than undertake renovations. Heirs are responsible for taxes, insurance and maintenance. However, if the house is in good shape, it may make sense to keep it.

What happens when siblings inherit a house together? That can get complicated, if each person has a different idea about what to do with the house. One may want to sell now for cash, while another may want to rent it out for income. What ultimately happens to the property, may depend on how well the siblings communicate and make decisions together.

Often the best option is to simply sell the home, especially if multiple heirs are involved. Note that there are costs associated with the sale of the house. This includes any outstanding debts, like a mortgage, the cost of fixing up the home to prepare it for sale, closing costs and fees and real estate agent commissions. If there is a profit on the sale of the home from the tax basis at the time of inheritance, the heirs may need to pay short-term or long-term capital gains tax, depending on how long they held the property.

Talk with an estate planning attorney about managing the sale of the family home. They will be able to guide you, advise you about taxes and keep the family moving through the process of settling the estate.

Reference: Million Acres (December 4, 2019) “A Guide to What Happens When You Inherit a House”

How Can Life Insurance Help My Estate Plan?

In the 1990s, it wasn’t unusual for people to buy second-to-die life insurance policies to help pay federal estate taxes. However, in 2019, with estate tax exclusions up to $11,400,000 (and rising with the cost-of-living adjustments), fewer people would owe much for estate taxes.

However, IRAs, 401(k)s, and other accounts are still 100% taxable to the individuals, spouses and their children. The stretch IRA options still exist, but they may go away, as Congress may limit stretch IRAs to a maximum of 10 years.

Forbes’ recent article, “3 Ways Life Insurance Can Help Your Estate Plan,” explains that as the IRA is giving income from the RMDs, it may also be added, after tax, to the life insurance policy. If this occurs, it’s even possible that the death benefits could grow in the future, giving a cost-of-living benefit to children. This is one way how life insurance can be used creatively to help your estate plan.

For married couples, one strategy is to consider how life insurance on one individual could be used to pay “conversion tax” at death, using tax-free benefits. When the retiree dies, the spouse beneficiary can then convert all the IRA (taxable money) to a Roth IRA, which is tax-exempt with new, lower income tax rates (37% in 2018-2025 versus 39.6% in 2017 or earlier).

This tax-free death benefit money can be used to pay the taxes on the conversion, letting the surviving beneficiary have a lifetime of tax-exempt income without RMD issues from the Roth IRA. The Social Security income could also be tax-exempt, because Roth withdrawals don’t count as “income” in the calculation to see how much of your Social Security is taxed. However, you’d have to be within the threshold for any other combined income.

Life insurance for both individuals (if married) may also be a good idea. If the spouse of the IRA owner dies, the money from the life insurance can be used once again. If this is done in the tax year of the death for married individuals, the tax conversion could be done under “married filing status” before the next year, when the individual must use single tax filing status.

Another benefit of the IRA-to-Roth conversion is the passing of Roth IRAs to heirs, which could create a lasting legacy, if planned well. New life insurance policies that add long-term care features with chronic care and critical care benefits can also provide an extra degree of benefits, if one of the insureds has health issues prior to death.

Be sure to watch the tax rates and possible changes. With today’s lower tax rates, this could be very beneficial. Remember that there are usually individual state taxes as well. However, considering all the tax-optimized benefits to spouses and beneficiaries, the long-term tax benefits outweigh the lifetime tax liabilities, especially when you also consider SSI tax benefits for the surviving spouse and no RMD issues.

Life insurance in retirement can help protect, build and transfer wealth in one of the easiest ways possible. If you’re not certain about where to start with your life insurance needs, speak with an experienced estate planning attorney.

Reference: Forbes (November 15, 2019) “3 Ways Life Insurance Can Help Your Estate Plan”

How Estate Planning Keeps the Peace for Blended Families

With the IRS’s announcement that the first $11.58 million (in 2020) of a taxable estate is free from estate taxes, most people won’t have to worry about paying estate taxes. Therefore, what’s the biggest reason to have an estate plan?

Earlier this year, a survey was conducted at the 53rd annual Heckerling Institute of Estate Planning, a prestigious legal and financial conference that attracts leaders in the field of estate planning. For the second year in a row, family conflict was identified as the biggest threat to estate planning, reports Investment News in the article Reducing potential family conflicts.”

Statistics show that there are more blended families in the U.S. than ever before.

The increase in blended families has led to an increase in family conflicts. While open and honest communication is the key to any kind of conflict resolution, it’s particularly sticky when it comes to blended families. For most families, it’s a good idea to talk openly about estate plans, rather than waiting until one of the spouses has passed and explaining to the biological and stepchildren how the assets are being distributed. Discussing the estate plan before anyone dies, at the very least gives everyone a chance to voice their opinions, even if no changes to the spouse’s plans are made.

How do you minimize conflicts within blended families? One way is with a prenuptial agreement, which is executed before marriage and clarifies the financial rights of each spouse, in the event of divorce or death. This is especially useful, when there is a disparity in wealth or age between the couple.

However, not everyone is willing to have a prenup. And even if they do, family conflicts can still crop up. Let’s say Gary and Helen are married, each with children from a previous marriage. Gary wants to give his entire estate to Helen when he dies. If Gary dies first, there’s no legal reason for Helen to give any of Gary’s assets to his biological children.

There are any number of solutions. If Gary really wants to cut his children out of his will, he can talk with them and explain his thinking. He can also have an estate planning attorney include a “no contest” clause in his will. If any named beneficiary challenges the will, they will lose any inheritance and are treated legally, as if they have predeceased the decedent. Gary could also use a revocable living trust, which would avoid the estate being probated and deny the children an opportunity to challenge his will.

A better solution would be to craft an estate plan that benefits both Gary and Helen’s children. Harry’s children could receive a partial outright distribution when Gary dies, with the remaining estate passing to Helen. A trust could be created for Helen’s benefit, but the remaining trust assets could go to Gary’s children when Helen dies.

There are many different ways to resolve this issue with an eye to minimizing conflict among children in blended families. If the parents are truly invested in keeping their children together as a family, it is worth the effort to create an estate plan that cares for the spouses and all of the children. An estate planning attorney can create a plan to accomplish your goals for the entire blended family.

Reference: Investment News (December 9, 2019) Reducing potential family conflicts

Succession Planning for Family Owned Farms

Succession planning is not thought of as fun, simple, or quick. That’s true. A recent article from Ag Web puts it clearly: “Succession Planning Takes Leadership.” It also takes time, knowledge and the guidance from smart professionals, including estate planning attorneys, financial advisors and accountants. Let’s look at these four important elements.

Clarity. Transitioning leaders need to answer a few questions. What do they want for themselves, for their operation and what do stakeholders want? Developing a successful plan by guessing what other family members want, rather than asking them directly can undo good planning. Having private conversations with individual members of the family will lead to more honest answers.

Certainty. Many times, families are not in perfect harmony about what succession looks like, which can lead to some uncertainty. Family leaders must step up and be decisive, and their decisions may not be popular with everyone. However, if a leader lets someone else make decisions, the situation becomes murky and confusing.

Continuity. It can take two or five years to create a succession plan, depending on the complexity of the operation and the number of family members involved. The actual succession itself can take ten years to unwind, depending on the time horizon for the transitioning leadership. A big problem for any process that takes so long, is the loss of focus and momentum. Your team of professionals should be able to help mitigate this challenge.

Communication. A strategy for communication needs to be built into the succession plan, although it is often overlooked. Develop a timeline and establish when you will communicate progress and/or milestones to stakeholders. Your professional team may be needed to help with both the timeline and the communication strategy. Family members need to know what is happening, even when it seems like nothing big is occurring.

With strong leadership in each of these four factors, the succession plan is more likely to succeed. With less stress and an increased level of trust and clear communication, the family will work together to achieve the leader’s goals.

Reference: Ag Web (December 5, 2019) “Succession Planning Takes Leadership”

Disinheriting Loved Ones is A Common Mistake

It happens way more often than you’d ever expect. The account owner dies, the assets go directly to the beneficiaries on the account, and the heirs learn for the first time that whatever is in the will doesn’t override the beneficiary designation. They can argue and even go to court, but it won’t do them much good, says the recent article “Don’t accidentally leave your estate to the wrong person” from The News-Enterprise.

One of many examples, is the widower who remarries after his first wife passes away. He neglects to change his IRA beneficiary form, so when he dies, his second wife does not receive any funds. The case of what happens to the funds has to go to court, because the assets obviously cannot go to his deceased first wife.

Many different kinds of accounts now have beneficiary designations. They include:

  • S. Savings Bonds
  • Bank Accounts
  • Certificates of Deposits
  • Investment Accounts
  • Life Insurance
  • Annuities
  • Retirement Accounts

Some of these accounts can be titled “Payable on Death” or “Transferable on Death,” so that they can more easily be distributed to heirs without going through probate.

If you’ve changed jobs, remember that beneficiary designations do not transfer over, when you roll your 401(k) over to a new plan or IRA.

Here’s another thing most people don’t know about beneficiary designations: they don’t have to be individuals. Beneficiaries can be trusts, charities, organizations, your estate, or, no one at all (although that’s not recommended). Be careful, though, if you are thinking about being creative, like saying “All of my living grandchildren.” What if someone who your family has never met, comes forward and claims to be a grandchild? It’s best to discuss this with an estate planning lawyer.

There are situations where you don’t want to name someone as a beneficiary. You don’t want to leave assets outright to minors, since they cannot inherit property. A court-appointed guardian would have to be named to care for the assets, until the child reaches age 18. Then the 18 year old inherits everything at once and goes on a wild spending spree, and the money is gone. A better approach is to set up a trust, so the trust is the beneficiary of the assets and the trust pays money to heirs over an extended period of time.

Caution must be taken, when considering Special Needs Individuals. If they are receiving government benefits, an inheritance could cause them to lose all benefits. Instead, speak with your estate planning attorney about the use of a Special Needs Trust or Supplemental Needs Trust.

Updating the beneficiary form is simple. Contact the financial company that holds the accounts, ask for a copy of your current beneficiary form, and a blank copy so that you can make changes, if needed. Keep a copy of all current beneficiary forms. You should also speak with your estate planning attorney to make sure that your estate plan and your beneficiary designations work together.

Reference: The News-Enterprise (November 30, 2019) “Don’t accidentally leave your estate to the wrong person”

How Much Control from the Grave Can Parents Have?

Parents who want to protect their home from being sold by heirs can do so by way of a dynasty trust, but it gets complicated, explains the Santa Cruz Sentinel’s article “Not a good idea to keep home in ‘dynasty trust.’” Every situation is different, so every family considering this strategy should meet with an estate planning attorney to learn if this is a solution or an added complication.

Why would the parents want to make their children’s lives complicated? Perhaps they think the children are likely to end up in a bad situation, and they are attempting to provide a safe landing for what they believe is inevitable. Or they simply cannot manage the idea, that one day the house won’t be part of the family.

The house can be protected from a sale, through the use of a revocable trust. Instead of distributing the home in equal shares among their children, along with all of their other assets, the house can be put in the trust and their trust can continue after their deaths. The trust can include any restrictions they want, with respect to how they want the home to be maintained after their deaths.

They can even put their home into a dynasty trust. Done correctly, a dynasty trust can hold the property for the children, grandchildren and great-grandchildren. However, there are some issues.

First, if the home is held in trust, it means that the trust must be funded, since there will be expenses for the home, including maintenance and upkeep. Unless the home is used as a rental property, there won’t be any income to pay for these expenses. The parents will need to leave a significant amount of assets in the trust, so that big and small items can be paid for, or the children may be charged with paying for the expenses.

Next is the problem of capital gains taxes. When the parents pass, the home receives a stepped-up cost basis. That means that when the property is eventually sold, the amount of capital gains tax and in this case, California income tax due, will be based on the increase of the value of the property since the surviving spouses’ date of death.

If the home is held in trust until all of the siblings have died, the value of the house will likely have increased dramatically. Where is the money to pay the taxes coming from? Will the house need to be sold to pay the tax?

What if one of the children decides to move into the house and lets it get run down? The other two siblings may never receive their inheritance. There are so many different ways that this could lead to an endless series of family disputes.

Keeping a “spare” house may not be realistic. It may force the children to become rental property managers when they don’t want to. It may exhaust their finances. In other words, it may become a family burden, and not a place of refuge.

Talk with an estate planning attorney. It may be far better to distribute the home outright to the children along with other assets and let them decide what the best way forward will be.

Reference: Santa Cruz Sentinel (December 1, 2019) “Not a good idea to keep home in ‘dynasty trust.’”

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