What Parts of Estate Plan Should Be Reviewed in the Pandemic?

Forbes’ April article entitled “6 Parts Of Your Estate Plan You Should Review Now” discusses several items in your plan that should be examined, in light of the coronavirus pandemic.

In this pandemic, who will make important financial and medical decisions for you, if you’re unable to make them for yourself?

Make certain that you’ve designated a person who is trustworthy and reliable. Don’t forget to name a back-up for your power of attorney and health care proxy.

Look at your will. Make sure the person you’ve named as the executor of your estate is current. This is the individual who’ll attend to your affairs after you die and take care of probating your will, if necessary. She will also file income and tax returns on behalf of the estate. If you have minor children, name a guardian for them in the will.

Review your trust. Your revocable living trust usually benefits you while you’re alive. It can also be used to benefit others, such as a spouse and children. Name those who will receive the assets at your death. If your beneficiaries are minors or not mature enough to handle a sizeable sum, you might hold assets for them in trust, until they’re old enough to handle the money themselves. Review your decision regarding your trustee and see that this is the right person to administer the trust, based on your wishes.

Be sure to fund the trust. This will avoid probate of the assets on your death and lets the successor trustee control the assets for your benefit, if you’re incapacitated. If you fail to do so, it will create a host of problems after you’re gone. Your heirs will need court authority to access your assets, which can be an expensive and time-consuming endeavor.

Update your beneficiary designations. This includes the beneficiary designations on your life insurance policies, retirement accounts and any brokerage accounts that are payable on death to a beneficiary.

Ask your estate planning attorney about taking advantage of estate tax opportunities. It is important to have everything in order in the pandemic.

Reference: Forbes (April 15, 2020) “6 Parts Of Your Estate Plan You Should Review Now”

Elder Financial Abuse Fraud Occurs, When No One’s Watching

The case of Nice vs. U.S. is a dramatic example of what can happen when there are no professionals involved in an elderly person’s finances and one person has the power to make transactions without supervision. In the article “Tax case reveals possible intrafamily fraud” from Financial Planning, a trusted son allegedly decimated his mother’s IRA and left her estate with $500,000 tax bill.

Mrs. Nice and her husband had been married for more than 60 years. Before he died in 2002, her husband arranged to leave significant assets for his wife’s care. Their son Chip was named executor of the husband’s estate and moved in with his mother. In 2007, she was diagnosed with dementia. As her condition deteriorated, Chip allegedly began fraudulent activities. He gained access to her IRAs, causing distributions to be made from the IRAs and then allegedly taking the funds for his own use.

Chip also filed federal income tax returns for his mother, causing her to execute a fraudulent power of attorney. The federal tax returns treated the IRA distributions as taxable income to Mrs. Nice. She not only lost the money in her IRA but got hit with a whopping tax bill.

In 2014, Mrs. Nice’s daughter Julianne applied for and received a temporary injunction against Chip, removing him from her mother’s home and taking away control of her finances. Chip died in 2015. A court found that Mrs. Nice was not able to manage her own affairs and Mary Ellen was appointed as a guardian. Julianne filed amended tax returns on behalf of her mother, claiming a refund for tax years 2006-07 and 2009-13. The IRS accepted the claim for 2009 but denied the claims for 2006 and 2010-2013. The appeal for 2009 was accepted, but the IRS never responded to the claim for 2007. Julianne appealed the denials, but each appeal was denied.

By then, Mrs. Nice had died. Julianne brought a lawsuit against the IRS seeking a refund of $519,502 in federal income taxes plus interest and penalties. The suit contended that because of her brother’s alleged fraudulent acts, Mrs. Nice never received the IRA distributions. Her tax returns for 2011-2014 overstated her actual income, the suit maintained, and she was owed a refund for overpayment. The court did not agree, stating that Julianne failed to show that her mother did not receive the IRA funds and denied the claim.

There are a number of harsh lessons to be learned from this family’s unhappy saga.

When IRA funds are mishandled or misappropriated, it may be possible for the amounts taken to be rolled over to an IRA, if a lawsuit to recover the losses occurs in a timely manner. In 2004, the IRS issued 11 private-letter rulings that allow lawsuit settlements to be rolled over to IRAs. The IRS allowed the rollovers and gave owners 60 days from the receipt of settlement money to complete the rollover.

Leaving one family member in charge of family wealth with no oversight from anyone else—a trustee, an estate planning attorney, or a financial planner—is a recipe for elder financial abuse. Even if the funds had remained in the IRA, a fiduciary would have kept an eye on the funds and any distributions that seemed out of order.

One of the goals of an estate plan is to protect the family’s assets, even from members of their own family. An estate plan can be devised to arrange for the care of a loved one, at the same time it protects their financial interests.

Reference: Financial Planning (March 6, 2020) “Tax case reveals possible intrafamily fraud”

How Do I Avoid the Three Biggest Estate Planning Mistakes?

After you die, your last will and testament must be approved by the local probate court. The judge will determine if the document is the last will of the deceased, review the inventory of the estate and confirm who will administer the estate proceeds. It’s known as “executing” a will.

Wealth Advisor’s recent article entitled “Avoid these 3 estate-planning mistakes and make probate cheaper and easier for your loved ones” discusses some mistakes that people make and how to avoid them.

  1. You don’t have a will, or you have a will that was written in another state. You also should have a current will. Life changes, and you need a will for where you live in now. Residency is defined differently in each state, and an out-of-state will delays the probate process, because it fails to satisfy state requirements. Worse yet, it may even be declared invalid.

If there is no will, the deceased is said to have died “intestate,” and his estate must go through probate. However, an administrator will be named by the judge to distribute assets, according to state law. It can be a lengthy and often costly process.

Some people don’t want to hire an attorney to create their estate plan or write a will, because they believe it’s too expense or they never get around to doing it. However, if you die without a will, the legal costs will be even more and that will be paid by your estate—that decreases what’s left to give to your heirs.

  1. Mixing up estate taxes with probate. Your estate may be too small to be subject to federal tax, if it is less than the $11.58 million exemption. However, you still will be subject to probate and possibly a state estate tax. Therefore, you still need an estate plan.
  2. Disregarding easy things to keep some assets from probate. Most states have a “mini-probate” that is expedited for small estates. With this process, heirs may have fewer fees, less paperwork and shorter waiting.

You can also create a living trust (revocable trust) to avoid probate altogether, if done correctly. This is a legal vehicle to which all of your assets pass upon your death. Ask an estate planning lawyer to help you create a trust, because they can be complicated. Whether you need a trust, a will, or both, an experienced estate planning attorney has worked through a variety of situations and will have sound and creative ideas. Investing time and money with an attorney makes life easier for you now and for your family later.

Reference: Wealth Advisor (Feb. 18, 2020) “Avoid these 3 estate-planning mistakes and make probate cheaper and easier for your loved ones”

Update Will at These 12 Times in Your Life

Estate planning lawyers hear it all the time—people meaning to update their will, but somehow never getting around to actually getting it done. The only group larger than the ones who mean to “someday,” are the ones who don’t think they ever need to update their documents, says the article “12 Different Times When You Should Update Your Will” from Kiplinger. The problems become abundantly clear when people die, and survivors learn that their will is so out-of-date that it creates a world of problems for a grieving family.

There are some wills that do stand the test of time, but they are far and few between. Families undergo all kinds of changes, and those changes should be reflected in the will. Here are one dozen times in life when wills need to be reviewed:

Welcoming a child to the family. The focus is on naming a guardian and a trustee to oversee their finances. The will should be flexible to accommodate additional children in the future.

Divorce is a possibility. Don’t wait until the divorce is underway to make changes. Do it beforehand. If you die before the divorce is finalized, your spouse will have marital rights to your property. Once you file for divorce, in many states you are not permitted to change your will, until the divorce is finalized. Make no moves here, however, without the advice of your attorney.

Your divorce has been finalized. If you didn’t do it before, update your will now. Don’t neglect updating beneficiaries on life insurance and any other accounts that may have named your ex as a beneficiary.

When your child(ren) marry. You may be able to mitigate the lack of a prenuptial agreement, by creating trusts in your will, so anything you leave your child won’t be considered a marital asset, if his or her marriage goes south.

Your beneficiary has problems with drugs or money. Money left directly to a beneficiary is at risk of being attached by creditors or dissolving into a drug habit. Updating your will to includes trusts that allow a trustee to only distribute funds under optimal circumstances protects your beneficiary and their inheritance.

Named executor or beneficiary dies. Your old will may have a contingency plan for what should happen if a beneficiary or executor dies, but you should probably revisit the plan. If a named executor dies and you don’t update the will, then what happens if the second executor dies?

A young family member grows up. Most people name a parent as their executor, then a spouse or trusted sibling. Two or three decades go by. An adult child may now be ready to take on the task of handling your estate.

New laws go into effect. In recent months, there have been many big changes to the law that impact estate planning, from the SECURE Act to the CARES act. Ask your estate planning attorney every few years, if there have been new laws that are relevant to your estate plan.

An inheritance or a windfall. If you come into a significant amount of money, your tax liability changes. You’ll want to update your will, so you can do efficient tax planning as part of your estate plan.

Can’t find your will? If you can’t find the original will, then you need a new will. Your estate planning attorney will make sure that your new will has language that states revokes all prior wills.

Buying property in another country or moving to another country. Some countries have reciprocity with America. However, transferring property to an heir in one country may be delayed, if the will needs to be probated in another country. Ask your estate planning attorney, if you need wills for each country in which you own property.

Family and friends are enemies. Friends have no rights when it comes to your estate plan. Therefore, if families and friends are fighting, the family member will win. If you suspect that your family may push back to any bequests to friends, consider adding a “No Contest” clause to disinherit family members who try to elbow your friends out of the estate.

Reference: Kiplinger (May 26, 2020) “12 Different Times When You Should Update Your Will”

What Should I Keep in My Safety Deposit Box?

A safe deposit box isn’t a smart choice for everything. Kiplinger’s recent article entitled “9 Things You’ll Regret Keeping in a Safe Deposit Box” advises that there are some items you might not want to lock up in your bank, which isn’t open nights, holidays, or weekends. zin this pandemic, hours of operation for many businesses are reduced. In fact, some financial institutions, like Bank of America, have temporarily closed some locations. There are other banks that require an appointment for in-branch services, like accessing your safe deposit box. This would create a headache for you in your attempt to retrieve important documents or items when you need them.

Here are some important items you should store elsewhere, because you’ll need to access more often or on short notice. Maybe they should be in a fireproof safe that’s secured to the floor in your home.

Cash. Keeping a wad of cash in a safe deposit box, isn’t a good idea because if you need it in a pinch and the bank is closed, you’re out of luck. In addition, that cash will lose its buying power over time because of inflation and some banks don’t allow cash in a safe deposit box. Finally, cash in a safe deposit box isn’t protected by the FDIC. To have FDIC insurance (covering up to $250,000 per depositor per insured bank), your cash needs to be deposited in a qualifying deposit account, such as a checking account, savings account, or CD.

Your Passport. OK, most of us don’t need your passport in hand at a moment’s notice. However, you may need to take an emergency trip, which will happen during non-banking hours. Without your passport handy, there’s not much you can do about those calls in the middle of the night requiring you to dash.

The Original Copy of Your Will. You may want to keep a copy of your own will, your spouse’s and any in which you’re named the executor in a safe deposit box. However, don’t store the original copy of your will there, particularly if you’re the only owner of the safe deposit box. That’s because after your death, the bank will seal the safe deposit box, until your executor can prove she has the legal right to access it. This could mean a long and potentially expensive delay before your will is executed and your assets can be disbursed to the intended heirs. Keep the original copy of your will with your estate planning attorney or in a location where your executor can get to it without any legal hassles.

Letters of Instruction. Many people write a letter of instruction to accompany their will. This letter can describe whether you want to be buried or cremated and the type of service you want. This letter can include details on specific bequests of sentimental items, but it’s no help if its’ locked in your safe deposit box.

Durable Power of Attorney (POA). This document gives a trusted friend, family member, or professional adviser the authority to financial make decisions on your behalf. However, if your POA is in a safe deposit box that no one can access, the person you’re depending on to protect you at your time of need could find her hands tied. Keep the original POA with the original copy of your will and give copies to those who may need it one day.

Advance Directives. A living will and a health care proxy are sometimes collectively known as advance directives, but each has a unique purpose. A living will states your wishes for end-of-life care, and a health care proxy (also known as a health care power of attorney) names a person to make medical decisions for you, if you can’t make them yourself. Neither is any good locked away in an inaccessible safe deposit box.

Uninsured Jewelry and Collectibles. Heirloom jewelry and your valuable stamp collection and rare coins are good candidates for a safe deposit box, but they must be properly insured. The FDIC doesn’t insure safe deposit box contents, and neither does the bank, unless it’s stated in your agreement.

Any Illegal or Dangerous Items. Your bank should provide you with a list of items that are not permissible to keep in a safe deposit box. This will include things like firearms, illegal drugs and hazardous materials.

Reference: Kiplinger (June 1, 2020) “9 Things You’ll Regret Keeping in a Safe Deposit Box”

What Should My Estate Plan Include?

The Huffington Post’s recent article entitled “A Guide To Estate Planning During The Coronavirus Pandemic” says that almost everyone should have an estate plan—even if there’s no major health threat. If you don’t have one, right now is a great time to put it together.

In the COVID-19 pandemic, the two most critical documents to have are medical and financial powers of attorney. You should name someone to do your banking or make your medical decisions, if you are quarantined in your home, admitted to the hospital, or become incapacitated. When you have those in place, you need to create a comprehensive estate plan. Let’s look at the documents you should have and what they mean.

  1. A Financial Power of Attorney. This is a legal document that gives your agent authority to take care of your financial affairs and protect your assets by acting on your behalf. For example, your agent can pay bills, write checks, make deposits, sell or purchase assets, or file your tax returns. Without an FPOA, there’s no one who can act on your behalf. Family members will have to petition the probate court to appoint a guardian to have these powers, and this can be a time-consuming and expensive process.
  2. A Health Care Power of Attorney. Like a financial power of attorney, this legal document gives an agent the power to make health care decisions on your behalf, if you become incompetent or incapacitated. If you’re over the age of 18 and don’t have an HCPOA, your family members will have to ask the probate court to again appoint a guardian with these powers.
  3. A Living Will (Advance Health Care Directive). This allows you to legally determine the type of end-of-life treatment you want to receive, in the event you become terminally ill or permanently unconscious and cannot survive without life support. Without a living will, the decision to remove life support is thrust upon your health care agent or family members, and it can be an extremely stressful decision. If you draft a living will, you detail your wishes and take that decision out of their hands.
  4. A HIPAA Waiver. An advance health care directive will likely contain language that allows your agent to access your medical records, but frequently hospitals will refuse access to medical information without a separate HIPAA waiver. This lets your agents and family members access your medical data so they can speak freely with your physicians, if there is a medical emergency or you become incapacitated.
  5. A Will. A last will and testament is a legal document through which you direct how you want your assets disbursed when you pass away. It also allows you to name an executor to oversee the distribution of your assets. Without a will, the distribution of your assets will be dictated by state law, and the court will name someone to oversee the administration of your estate. A will also lets you name a guardian to take care of your minor children.
  6. A Living Trust. A revocable living trust is a legal tool whereby you create an entity to hold title to your assets. You can change your trust at any time, and you can set it up to outlive you. In the event you become incapacitated or are unable to manage your estate, your trust will bypass a court-appointed conservatorship. A trust also gives you privacy concerning the details of your estate, because it avoids probate, which is a public process. A living trust can also help provide for the care, support, and education of your children, by releasing funds or assets to them at an age you set. A living trust can also leave your assets to your children in a way that will lessen the ability of their creditors or ex-spouses to take your children’s inheritance from them.

Reference: The Huffington Post (April 7, 2020) “A Guide To Estate Planning During The Coronavirus Pandemic”

Estate Planning Options to Consider in Uncertain Times

Now is a good time to reach out to an estate planning attorney to review and update beneficiaries, named executors, financial and healthcare powers of attorney, wills and trusts, advises the article “Planning Strategies During Market Uncertainty & Volatility: Estate Planning and Debt Usage” from Traders Magazine. There are also some strategic estate planning tools to consider in the current environment.

Intentionally Defective Grantor Trusts (IDGTs): These are irrevocable trusts that are structured to be “intentionally defective.” They are gifts to grantor trusts for non-grantor beneficiaries that allow contributed assets to appreciate outside of the grantor’s estate, while the income produced by the trust is taxed to the grantor, and not the trust. The external appreciation requires the grantor to use non-trust assets to pay the trust’s income taxes, which equals a tax-free gift to the beneficiaries of the trust, while reducing the grantor’s estate. Trust assets can grow tax-free, which creates additional appreciation opportunities for trust beneficiaries. IDGTs are especially useful to owners of real estate, closely held businesses or highly-appreciating assets that are or will likely be exposed to estate tax.

Grantor Retained Annuity Trusts (GRATs): GRATs allow asset owners to put assets irrevocably into trusts to benefit others, while receiving fixed annuity payments for a period of time. GRATs are especially effective in situations where low asset values and/or interest rates are present, because the “hurdle rate” of the annuity payment will be lower, while the price appreciation is potentially greater. GRATs are often used by asset owners with estate tax exposure who want to transfer assets out of their estate and retain access to cash flow from those assets, while they are living.

Debt strategies: Debt repayment represents an absolute and/or risk-adjusted rate of return that is often the same or better than savings rates or bond yields. Some debt strategies that are now useful include:

Mortgage refinancing: Interest rates are likely to be low for the foreseeable future. People with long-term debt may find refinancing right now an advantageous option.

Opportunistic lines of credit: The low interest rates may make tapping available lines of credit or opening new lines of credit attractive for investment opportunities, wealth transfer, or additional liquidity.

Low-rate intra-family loans: When structured properly, loans between family members can be made at below-interest, IRS-sanctioned interest rates. An estate planning attorney will be able to help structure the intra-family loan, so that it will be considered an arms-length transaction that does not impose gift tax consequences for the lender.

High-rate intra-family or -entity loans: This sounds counter-intuitive, but if structured properly, a high-rate intra-family or -entity loan can charge a higher but tax-appropriate rate that increases a fixed income cash flow for the borrower, while avoiding gift and income tax.

All of these techniques should be examined with the help of an experienced estate planning attorney to ensure that they align with the overall estate plan for the individual and the family.

Reference: Traders Magazine (May 6, 2020) “Planning Strategies During Market Uncertainty & Volatility: Estate Planning and Debt Usage”

Distributing Inherited Assets in Many Accounts

This generous individual may be facing a number of legal and logistical hurdles, before assets in eight separate accounts can be passed to three relatives, says the article “Sorting through multiple inheritance accounts” from the Houston Chronicle. Does the heir need to speak with each of the investment companies? Would it make sense to combine all the assets into one account for the estate and then divide and distribute them from that one account?

If all the accounts were payable to this person upon the death of the brother, then the first thing is for the heir to contact each company and have all funds transferred to one account. It might be an already existing account in their name, or it may need to be a new account opened just for this purpose. The account could be at any of the brother’s investment firms, or it could be with a different firm.

If the accounts are not payable to the heir, but they are to be inherited as part of the brother’s estate, the estate must be probated before the funds can be claimed. In this case, it would be very helpful if the sole beneficiary is also the executor. This would put one person in charge of all of the work that needs to be done.

However, the person eventually will become the owner of all eight accounts. Once everything is in the heir’s name, then the assets can be distributed to the three relatives. There are some tax issues that must be addressed.

First, if the estate is large enough, it may owe federal estate taxes, which will diminish the size of the estate. The limit, if the brother died in 2020, is $11.58 million. If he died in an earlier year, the exemption will be considerably lower, and the estate and the executor may already be late in making federal tax payments. Penalties may apply, so a conversation with an estate planning attorney should take place as soon as possible.

If the brother lived in another state, there may be state estate or inheritance taxes owed to that state. While Texas does not have a state estate or inheritance tax, other states, like Pennsylvania, do. A consultation with an estate planning attorney can also answer this question.

When gifts are ultimately made to the three relatives, the first $15,000 given to each of them during a calendar year will be treated as a non-taxable gift. However, if any of the gifts exceed $15,000, the person will be using up their own $11.58 million exemption from gift and estate taxes. A gift tax return will need to be filed to report the gifts. If the heir is married, those numbers will likely double.

It may be possible to disclaim the inheritance, with the assets passing to the three relatives to whom the heir wishes to make these gifts. An experienced estate planning attorney will be able to work through the details to determine the best way to proceed with receiving and distributing the assets. Depending upon the size of the estate, there will be tax consequences that must be considered.

Reference: Houston Chronicle (March 24, 2020) “Sorting through multiple inheritance accounts”