What are My Best Estate Planning Moves?

Tickertape’s recent article “5 Estate Planning Tips That Aren’t Just for the Wealthy” explains that a common misconception is that estate planning isn’t necessary if your estate assets amount to less than the 2021 federal estate tax exemption of $11.7 million per individual.

But most of us can benefit from estate planning. This can help protect your assets for your heirs. Estate planning includes creating a last will or revocable living trust, making certain that you have the right beneficiaries, and creating a health care directive. Creating a solid estate plan can decrease the odds that your family will have to deal with a problematic probate and reduce the amount of money because of unneeded taxes.

Create a Will. A last will is one way to let people know how you want your assets taken care of after you die. Plus, a last will should include information about who should act as guardians for minor children and care for any pets. Talk to an estate planning attorney about the specific laws for probate to make sure you do it correctly.

Name Your Beneficiaries. Review your beneficiary designations and make sure they’re up to date. When there’s a major life change, you should look at your beneficiary designations (e.g., life insurance and retirement funds), update your last will, and make sure everything matches. This includes charities as well as individuals. There are estate planning strategies designed to help you pass your assets on, but none of these will help if you don’t have your beneficiaries properly designated and assets aligned with your estate plan.

Ask Your Attorney About a Trust. A fully funded revocable living trust can be great tool to pass your assets on while potentially helping your heirs avoid probate. There are many different types of trusts that can be used to provide a variety of benefits. Much depends on your situation, so work with an experienced estate planning attorney.

Power of Attorney. Estate planning also includes documents in the event you become incapacitated. Signing a power of attorney allows an agent to make decisions on your behalf if you’re incapacitated. Find a person you trust to handle these decisions and have an estate planning attorney prepare the legal documents to ensure that everything is correct.

Think About Giving Now. You don’t need to wait until you’re gone to provide resources to your family. In 2021, you can give up to $15,000 to each recipient without paying the gift tax. If you’re married, each spouse can give $15,000. When you give to charity now, instead of waiting until you pass, you may claim a tax deduction, whether you donate directly, give stock, or set up a donor-advised fund. This allows you to benefit now—along with your beneficiaries.

Reference: Tickertape (June 25, 2021) “5 Estate Planning Tips That Aren’t Just for the Wealthy” 

What Paperwork Is Required to Transfer the Ownership of Home to Children?

Some seniors may ask if they would need to draft a new deed with their name on it and attach an affidavit and have it notarized. Or should the home be fully gifted to the children in life?

And for a partial gift to the children in life, where they’re co-owners, would the parent be required to complete the same paperwork as a full gift? Is there a way to change the owner of a property without having to pay taxes?

The reason for considering the transfer of a full or partial ownership in your home makes a difference in how you should proceed, says nj.com’s recent article entitled “What taxes are owed if I add my children to my deed?”

If the objective is to avoid probate when you pass away, adding children as joint tenants with rights of survivorship will accomplish this. However, there may also be some drawbacks that should be considered.

If the home has unrealized capital gains when you die, only your ownership share receives a step-up in basis. With a step-up in basis, the cost of the home is increased to its fair market value on the date of death. This eliminates any capital gains that accrued from the purchase date.

There’s the home-sale tax exclusion. If you sell the home during your lifetime, you’re eligible to exclude up to $500,000 of capital gains if you’re married, or $250,000 for taxpayers filing single, if the home was your primary residence for two of the last five years. However, if you add your children as owners, and they own other primary residences, they won’t be eligible for this tax exclusion when they sell your home.

In addition, your co-owner(s) could file for bankruptcy or become subject to a creditor or divorce claim. Depending on state law, a creditor may be able to attach a lien on the co-owner’s share of the property.

Finally, if you transfer your entire interest, the new owners will be given total control over the home, allowing them to sell, rent, or use the home as collateral against which to borrow money. If you transfer a partial interest, you may need the co-owner’s consent to take certain actions, like refinancing the mortgage.

If you decide to transfer ownership, talk to an experienced estate planning attorney to prepare the legal documents and to discuss your goals and the implications of the transfer. The attorney would draft the new deed and record the deed with the county office where the property resides.

A gift tax return, Form 709, should be filed, but there shouldn’t be any federal gift tax on the transfer, unless the cumulative lifetime gifts exceed the threshold of $11.7 million or $23.4 million for a married couple.

Reference: nj.com (June 15, 2021) “What taxes are owed if I add my children to my deed?”

Are 529 Plans Part of Your Estate?

Estate planning attorneys, accountants and CPAs say that 529s are more than good ways to save for college. They’re also highly flexible estate planning tools, useful far beyond education spending, that cost practically nothing to set up. In the very near future, the role of 529s could expand greatly, according to the article “A Loophole Makes ‘529’ Plans Good Wealth Transfer Tools. Here’s How to Use Them” from Barron’s.

Most tactics to reduce the size of an estate are irrevocable and cannot be undone, but the 529 allows you to change the beneficiaries of a 529 account. Even the owners can be changed multiple times. Here’s how they work, and why they deserve more attention.

The 529 is funded with after tax dollars, and all money taken out of the account, including investment gains, is tax fre,e as long as it is spent on qualified education expenses. That includes tuition, room and board and books. What about money used for non-qualified expenses? Income taxes are due, plus a 10% penalty. Only the original contribution is not taxed, if used for non-qualified expenses.

Most states have their own 529 plans, but you can use a plan from any state. Check to see if there are tax advantages from using your state’s plan and know the details before you open an account and start making contributions.

Each 529 account owner must designate a single beneficiary, but money can be moved between beneficiaries, as long as they are in the same family. You can move money that was in a child’s account into their own child’s account, with no taxes, as long as you don’t hit gift tax exclusion levels.

In most states, you can contribute up to $15,000 per beneficiary to a 529 plan. However, each account owner can also pay up to five years’ worth of contributions without triggering gift taxes. A couple together may contribute up to $150,000 per beneficiary, and they can do it for multiple people.

There are no limits to the number of 529s a person may own. If you’re blessed with ten grandchildren, you can open a 529 account for each one of them.

For one family with eight grandchildren, plus one child in graduate school, contributions were made of $1.35 million to various 529 plans. By doing this, their estate, valued at $13 million, was reduced below the federal tax exclusion limit of $11.7 million per person.

Think of the money as a family education endowment. If it’s needed for a crisis, it can be accessed, even though taxes will need to be paid.

To create a 529 that will last for multiple generations, provisions need to be made to transfer ownership. Funding 529 plans for grandchildren’s education must be accompanied by designating their parents—the adult children—as successor owners, when the grandparents die or become incapacitated.

The use of 529s has changed over the years. Originally only for college tuition, room and board, today they can be used for private elementary school or high school. They can also be used to take cooking classes, language classes or career training at accredited institutions. Be mindful that some expenses will not qualify—including transportation costs, healthcare and personal expenses.

Reference: Barron’s (May 29, 2021) “A Loophole Makes ‘529’ Plans Good Wealth Transfer Tools. Here’s How to Use Them”

What Is the Tax-Law Exception for 529 College Plans in 2021?

Grandparents might use this tactic to dramatically reduce their estate, without using any of their lifetime exemption if they meet some conditions, explains Financial Advisor’s recent article entitled “Tax Break Adds Perk To 529 College Plans.” That’s five years’ worth of the standard $15,000 annual exclusion that normally applies to 2021 gifts. Your spouse can also make the same gift.

You could give a five-year gift of $150,000 per couple and report it on a gift tax return. This uses none of your exemption. You should fund the educations of grandchildren or children, while they are young. If they end up being academic stars or athletes, scholarships can be adjusted against the 529 plan. If they choose not to go to college, you can select a new beneficiary. It is a smart way to frontload the 529 and take advantage of the tax-free growth.

Income earned in any qualified distributions from a 529 are typically not taxed, except under some states’ special rules. Non-qualified distributions are taxed and subject to a 10% penalty. Note that a 529 withdrawal to pay for health insurance or other medical expenses is a non-qualified distribution.

Many people get befuddled by filing a gift tax return. They think a tax is due. However, in fact, it is just a letter to the IRS informing them that you are using some of your lifetime exemption now.

The Tax Cuts and Jobs Act of 2017 also permitted 529 money to be used for tuition for grades K-12. Therefore, frontloading the contribution makes for potentially faster accumulation of assets in the plan, which could be helpful due to the shorter timeframe between funding and use.

There are some conditions to note in the current political climate. If a donor funds a plan with $75,000 for the benefit of an individual, that donor could not give that person any additional gifts over the five years without using their lifetime exemption (now $11.7 million per person). If that exemption amount were to be reduced, it is possible that a person will have used up their lifetime exemption and would not be able to give additional gifts above the annual exclusion without paying gift tax.

This tax break comes with another catch: if the donor dies within the five years, the balance reverts back to the deceased donor’s estate.

You should know that the downside is limited investment options. Plans are generally conservative, so you do not lose your principal. There also may be high fees and costs. The plans often impede students who apply for financial aid, though not as much as some other investment holdings.

Reference: Financial Advisor (May 3, 2021) “Tax Break Adds Perk To 529 College Plans”

What Paperwork Is Needed after Someone Dies?

Tax return issues, family matters, business associates, partners, trustees, bankers, investment advisors and tax collectors from the IRS to state and local taxing authorities all require attention after someone has died. There is a lot of work, and often a grieving family member finds it helpful to enlist the aid of a professional to lighten the load. A recent article, “Checklist for Working With a Decedent’s Estate” from Accounting Web, contains a list of the tasks to be completed.

General administration and legal tasks. At the very earliest, the executor should create a timetable with the known tasks. If you’ve never done this before, there’s no shame in enlisting help from a qualified professional. Be realistic about your familiarity with tax and legal issues and your organizational skills.

Determine with your estate planning attorney whether probate is necessary. Is the estate small enough for your state’s laws to allow you to expedite the process? Some jurisdictions can do this, others do not.

If an estate plan was created and executed properly, many assets may not need to go through probate. Assets like IRAs, joint tenancies, accounts that are POD, or Payable on Death and any assets with named beneficiaries do not require probate.

Gather information about family owners or others who may have a claim to the estate and who may have useful information about the assets. You’ll need to locate and notify heirs of the decedent’s passing.

Others who need to be notified, include charities named in the will. You’ll need to identify prior transfers to charities that were partial transfers, such as Charitable Remainder Trusts. If there is a charitable remainder trust with a retained lifetime income interest, it will need to be in the estate tax return, albeit with an offsetting estate tax charitable deduction.

Locate the important documents, including the will, any correspondence relating to the will, any letters explaining the decedent’s wishes, deeds, trusts, bank and brokerage statements, partnership agreements, prior tax returns, federal and state tax forms and any gift tax returns.

An estate planning attorney will be able to help determine ownership issues, including identifying assets and liabilities. This includes deeds, vehicle titles, club memberships, personal possessions and business assets, including copyrights and patents.

Social Security will need to be notified, as will Medicare, pension administrators, Department of Veteran Affairs, the post office, trustees, and any service providers.

Filing taxes for the last year of the person’s life and their estate tax filing needs to happen on a timely basis. Even if an estate tax return may not be required, it is useful to file to establish date of death values for assets. It is important to resolve income tax statute of limitation issues and any IRS or state examination issues.

Estate administration is a big job, especially if you’ve never done it before. Having the help of an experienced estate lawyer can alleviate much of the worry that comes with settling an estate.

Reference: Accounting Web (March 19, 2021) “Checklist for Working With a Decedent’s Estate”

What Is Family Business Succession Planning?

The importance of the family business in the U.S. can’t be overstated. Neither can the problems that occur as a direct result of a failure to plan for succession. Business succession planning is the development of a plan for determining when an owner will retire, what position in the company they will hold when they retire, who the eventual owners of the company will be and under what rules the new owners will operate, instructs a recent article, “Succession planning for family businesses” from The Times Reporter. An estate planning attorney plays a pivotal role in creating the plan, as the sale of the business will be a major factor in the family’s wealth and legacy.

  • Start by determining who will buy the business. Will it be a long-standing employee, partners, or family members?
  • Next, develop an advisory team of internal employees, your estate planning attorney, CPA, financial advisor and insurance agent.
  • Have a financial evaluation of the business prepared by a qualified and accredited valuation professional.
  • Consider taxes (income, estate and gift taxes) and income requirements to sustain the owner’s current lifestyle, if the business is being sold outright.
  • Review estate planning strategies to reduce income and estate tax liabilities.
  • Examine the financial impact of the sale on the family member, if a non-family member buys the business.
  • Develop the structure of the sale.
  • Create a timeline.
  • Get started on all of the legal and financial documents.
  • Meet with the family and/or the new owner on a regular basis to ensure a smooth transition.

Selling a business to the next generation or a new owner is an emotional decision, which is at the heart of most business owner’s utter failure to create a plan. The sale forces them to confront the end of their role in the business, which they likely consider their life’s work. It also requires making decisions that involve family members that may be painful to confront.

The alternative is far worse for all concerned. If there is no plan, chances are the business will not survive. Without leadership and a clear path to the future, the owner may witness the destruction of their life’s work and a squandered legacy.

Speak with your estate planning attorney and your accountant, who will have had experience helping business owners create and execute a succession plan. Talking about such a plan with family members can often create an emotional response. Working with professionals who benefit from a lack of emotional connection to the business will help the process be less about feelings and more about business.

Reference: The Times Reporter (March 7, 2021) “Succession planning for family businesses”

How Does the Generation-Skipping Transfer Tax Work in Estate Planning?

The generation-skipping transfer tax, also called the generation-skipping tax, can apply when a grandparent leaves assets to a grandchild—skipping over their parents in the line of inheritance. It can also be triggered, when leaving assets to someone who’s at least 37½ years younger than you. If you are thinking about “skipping” any of your heirs when passing on assets, it is important to know what that may mean tax-wise and how to fill out the requisite form. An experienced estate planning attorney can help you and counsel you on the best way to pass along your estate to your beneficiaries.

KAKE.com’s recent article entitled “What Is the Generation-Skipping Transfer Tax?” says the tax code imposes both gift and estate taxes on transfers of assets above certain limits. For 2020, you can exclude gifts of up to $15,000 per person from the gift tax, with the limit twice as much for married couples who file a joint return. Estate tax applies to estates larger than $11,580,000 for 2020, increased to $11,700,000 in 2021.

The gift tax rate can be as high as 40%, and the estate tax is also 40% at the top end. The IRS uses the generation-skipping transfer tax to collect its portion of any wealth that is transferred across families, when not passed directly from parent to child. Assets subject to the generation-skipping tax are taxed at a flat 40% rate.

Note that the GSTT can apply to both direct transfers of assets to your beneficiaries and to assets passing through a trust. A trust can be subject to the GSTT, if all trust beneficiaries are considered to be skip persons who have a direct interest in the trust.

The generation-skipping tax is a separate tax from the estate tax, but it applies alongside it. Similar to the estate tax, this tax begins when an estate’s value exceeds the annual exemption limits. The 40% GSTT would be applied to any transfers of assets above the exempt amount, in addition to the regular 40% estate tax.

That is the way the IRS gets its money on wealth, as it moves from one person to another. If you passed your estate to your child, who then passes it to their child then no GSTT would apply. The IRS would just collect estate taxes from each successive generation. However, if you skip your child and leave assets to your grandchild, it eliminates a link from the taxation chain, and the GSTT lets the IRS replace that link.

You can use your lifetime estate and gift tax exemption limits, which can help to offset how much is owed for the generation-skipping tax. However, any unused portion of the exemption counted toward the generation-skipping tax is lost when you pass away.

If you’d like to minimize estate and gift taxes as much as possible, there are several options. Your experienced estate planning attorney might suggest giving assets to your grandchildren or another generation-skipping person annually, rather than at the end of your life. That’s because you can give up to $15,000 per person each year without incurring gift tax, or up to $30,000 per person if you’re married and file a joint return. Just keep the lifetime exemption limits in mind when planning gifts.

You could also make payments on behalf of a beneficiary to avoid tax. For instance, to help your granddaughter with college costs, any direct payments you make to the school to cover tuition would generally be tax-free. The same is true for direct payments made to healthcare providers, if you’re paying medical expenses on behalf of another.

Another option may be a generation-skipping trust that lets you transfer assets to the trust and pay estate taxes at the time of the transfer. The assets you put into the trust must stay there during the skipped generation’s lifetime. Once they die, the trust assets can be passed on tax-free to the next generation.

There’s also a dynasty trust. This trust can let you pass assets to future generations without triggering estate, gift, or generation-skipping taxes. However, they are meant to be long-term trusts. You can name your children, grandchildren, great-grandchildren and subsequent generations as beneficiaries and the transfer of assets to the trust is irrevocable. Therefore, when you place the assets in the trust, you will not be able to take them back out again. You can see why it’s so important to understand the implications, before creating this type of trust.

The generation-skipping tax can make a big impact on the assets you’re able to leave to heirs. If you’re considering using this type of trust to pass on assets or you’re interested in exploring other ways to transfer assets while minimizing taxes, speak to an experienced estate planning attorney.

Reference: KAKE.com (Feb. 6, 2021) “What Is the Generation-Skipping Transfer Tax?”

Every Adult Needs a Will and a Health Care Power of Attorney
An concept Image of a power of attorney

Every Adult Needs a Will and a Health Care Power of Attorney

A serious illness can happen at any age, but just 18% of those 55 and older have a living will, power of attorney for health care and a last will and testament, according to a 2019 study by Merrill Lynch Wealth Management.

AZ Central’s recent article entitled “What to know about wills and health care power of attorney in Arizona” says that every adult should have these documents, including young professionals, single people and those without children.

These documents make it easier for an individual and their family during a stressful time. They make your wishes clear.

They also help give directions to family members and allow you to name a person you believe is the most responsible and able to fulfill your wishes.

Note that a power of attorney, living will and last will each has its own purpose.

A power of attorney for health care lets your named agent make medical decisions on your behalf if you are incapacitated, while you are still alive. Without a health care power of attorney or living will, it can complicate and delay matters.

A living will or “advance directive” is used when a person needs end-of-life care. This document can provide instructions on how the person wants to be treated, like not wanting a feeding tube or wanting as much medical help as possible.

In contrast, a last will and testament states what happens to a person’s estate or assets after they pass away. A last will can also designate a guardian for minor children.

A last will can state who will be in charge of the person’s estate, known as an executor or a personal representative.

You should name a primary representative and an alternate to serve and provide copies of the documents to the people chosen for these roles.

Reference: AZ Central (Jan. 14, 2021) “What to know about wills and health care power of attorney in Arizona”

Your Estate Planning Checklist for 2021

If you reviewed or created your estate plan in 2020, you are ahead of most Americans, but you’re not done yet. If you created a trust, gave gifts of real estate, business interest or other assets, you need to address the loose ends and do the follow up work to ensure that your planning goals will be met. That’s the advice from a recent article “Checklist 2020 Planning Follow Through: You Have More Work To Do” from Forbes.

Here are few to consider:

Did you loan money to heirs? If you made any loans to heirs or had any other loan transactions, you’ll need to calendar the interest payment dates and amounts and be sure that interest is paid promptly as described in the promissory notes. Correct interest payments are necessary for the IRS or creditors to treat the transaction as a real loan, otherwise you risk having the loan recharacterized or worse, being disregarded completely.

Did you create an irrevocable trust? If so, you need to be sure that gifts are made to the trust each year to fund insurance premiums. If the trust includes annual demand powers (known as “Crummey powers”) to allow gifts to qualify for the gift tax annual exclusion, written notices for 2020 gifts will need to be issued. This can be way more complicated than you expect: if you have transfers made to multiple trusts and outright gifts made directly to heirs, those gifts may need to be prioritized, based on the terms of the trusts and the dates of the gifts to determine which gifts qualify for the annual exclusion and which do not.

If you made gifts to a trust that is exempt from the generation skipping transfer tax (GST), you may have to file a gift tax return to allocate the GST exemption, so the trust remains GST exempt. Talk to your estate planning attorney to avoid any expensive mistakes.

Do you own life insurance? Or does a trust own life insurance for you? Either way, do not ignore your coverage after you’ve purchased a policy or policies. Your broker should review policy performance, the appropriateness of coverage for your plan, etc., every few years. If you didn’t do this in 2020, make it a priority for 2021. Many people create SLATS—Spousal Lifetime Access Trusts—so that their spouse benefits from the trusts. However, if your spouse dies prematurely, the SLAT no longer works.

Paying trustee fees. If you have institutional trustees, their fees need to be paid annually. If you pay the fees directly, the fee becomes an additional gift to the trust, requiring the filing of a gift tax for that year. If the trust pays the fee directly, there might not be a tax implication. Again, check with your estate planning attorney.

Did you make transfers to a trust with a disclaimer mechanism? If you made transfers to a trust that has a disclaimer mechanism and you want to reconsider the planning, it may be possible for beneficiaries or a trustee to disclaim gifts made to the trust within nine months of the transfer, thereby unwinding the planning.

Did you create any GRATs in 2020? If you created a Grantor Retained Annuity Trust, be certain that the trustee calendars the required annuity payments and that they are paid on a timely basis. Missing payments could put the GRAT status in jeopardy. You should also confirm also how the payment is calculated, which should be in the GRAT itself.

The best estate plan is one that is reviewed on a regular basis to ensure that it works, throughout changes that occur in law and life.

Reference: Forbes (Dec. 27, 2020) “Checklist 2020 Planning Follow Through: You Have More Work To Do”

What Do I Need to Know about Gift-Giving with the Biden Administration?

After the election, many people are wondering what will happen to the federal gift and estate tax exemption. Kiplinger’s recent article entitled “Making a Gift This Year? Some Key Questions to Consider,” explains that the Tax Cuts and Jobs Act dramatically upped the lifetime gift, estate and generation-skipping tax exemption to $11.58 million per individual ($23.16 million per couple). This exemption, however, is set to expire at the end of 2025. Some observers say that Democrats could significantly shorten the time frame, ending it as early as 2021.

Some families may face the possibility of losing an opportunity to transfer wealth out of their estate and save on future estate taxes sooner than anticipated. No matter when the gift is made, here are some important issues to consider.

Can I afford to give? For couples who have a significant taxable estate, gifting assets and removing future appreciation could result in some substantial tax savings for their heirs. However, just because someone has the means to make a large gift, doesn’t necessarily mean it’s the right move. Some are so eager to take advantage of the tax benefits that they underestimate their own cost of living down the road. Look at whether the grantor has enough assets to maintain their desired lifestyle. Then, think about what can be transferred without negatively impacting goals and lifestyle choices.

How Do I Structure a Gift? There are many ways of distributing assets. Remember that any transfer is gift tax-free up to the annual exclusion amount ($15,000 per person per donor for 2020). Any gift over this will count against the donor’s lifetime exemption amount. Once that’s exhausted, the gift will be subject to gift tax.

Outright Cash Gifts. This may be the most uncomplicated way of gifting, but for families with significant wealth, this could have some drawbacks. Some recipients may not be prepared to manage money, and it may demotivate them to live off their inheritance rather than becoming productive on their own.

Trusts. These are frequently used for bigger gifts to provide for beneficiaries, while using some restrictions by the grantor to protect the assets from being squandered. One plan is to distribute the trust assets in stages, when the beneficiary reaches a certain age or achieves a specific goal. Another option is to leave assets in a discretionary lifetime trust, which would maintain the assets in a trust for the beneficiary’s entire lifetime. Drafted properly by an experienced estate planning attorney, this offers a high level of protection from divorcing spouses, lawsuits, bad decisions and outside influences. It also lets grantors create a lasting family legacy for many generations.

Gifts for Education Expenses. You can also make direct payments for education or for medical expenses with no gift tax consequences.

Uniform Trust to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA). These custodial accounts are usually less restrictive than trusts and allow minor beneficiaries access to funds at age a specific age, depending on state law.

Reference: Kiplinger (Oct. 30, 2020) “Making a Gift This Year? Some Key Questions to Consider”