Choose Wisely and Protect Yourself When Naming a Power of Attorney

Deciding who to name as your power of attorney, or “agent” is not an easy decision. However, it is a necessary appointment, says this article “Ways to protect yourself when appointing a power of attorney” from The Mercury. Disaster and disability strike without advance notice, so it’s important to make this decision while you are well and can think it through.

If you don’t have a power of attorney in place and the unexpected occurs, the only way for your family to obtain legal authority to act on your behalf is through a guardianship procedure. Even when not contested, guardianship is expensive, time consuming and can limit personal freedom. Not every court will award guardianship to a family member, so the end result could be a stranger taking control of your decisions and property.

Having a power of attorney is a far better alternative, but there are seniors who are concerned about the power of a POA and how it might be abused. Here are some tips to keep you in control of your life even with a POA:

Choose wisely when you are well. Choose your agent when you are of sound mind and body. A common “test” is the checkbook test: could you, right now, hand this person your checkbook without a second thought? Do you believe this person would act responsibly, in your own best interest, follow through in paying bills, ask for help in areas they may not understand, record transactions and be scrupulously honest? If you hesitate to give them your checkbook today, you aren’t likely to trust them to run your life in the future.

Many people choose an agent based on whether the person is the oldest child or if there would be hurt feelings if the person was named. These are not good reasons. A person who has problems managing money, for whatever reason, is not a good candidate. Their own stress might make access to your funds too great to resist.

Name a secondary Power of Attorney. There should always be a back-up person named, if the person you name is not able to serve. The same goes for trustees and beneficiaries. Discuss these alternatives with your estate planning attorney to ensure the attorney knows the identities of the primary and secondary choices.

Have a Power of Attorney customized to your personal needs. Not all Powers of Attorney are the same, and one that is great for a friend may be a disaster for you. Limited powers, unlimited powers, powers to gift or powers only for a specific task or period of time are all options when creating a Power of Attorney. You may have a business to run or a partnership to dissolve. Gifting might be permitted to limit estate taxes, if that is your wish. Limited gifting generally means $15,000 a year, although your estate planning attorney can provide guidance on how to best structure gifting for you. If you own life insurance policies, you may want to permit your agent to cash in insurance policies but not allow the agent to change the named beneficiaries.

Two agents or one agent? Not all banks or investment companies will accept two agents. If they do, will the two people you select be able to work together? If not, naming two could create a financial and legal firestorm.

Financial Power of Attorney and Health Care Power of Attorney can be two separate roles. One person might be terrific with managing money, while another could be better at understanding and managing healthcare providers. Naming different people for each task will allow both to participate in caring for you and draw on their unique skillsets.

Fire when necessary. You always have the right to remove someone from their role as your agent. Your attorney will know how to do this properly to protect you and other agents.

Reference: The Mercury (Aug. 3, 2021) “Ways to protect yourself when appointing a power of attorney”

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 Split Estate in a Blended Family?

When it comes to blended families and estate planning, there are no guarantees, especially concerning estate planning. However, there are some classic mistakes to avoid, reports this recent article from AARP titled “Remarried With Children? 5 Estate Planning Mistakes to Avoid.”

Most people mean well. They want to protect their spouses and hope that their heirs will share in any proceeds when the second spouse dies. They want all the children to be happy. They also hope that the step siblings will still regard each other as “siblings” after the parents are passed. However, there are situations where children get shut out of their inheritance or an ex-spouse inherits it all, even if that wasn’t the plan. Here are five mistakes to avoid:

#1: Not changing named beneficiaries. People neglect to update their wills and beneficiary designations. This is something to do immediately, before or after the wedding. By changing the name of the beneficiary on your 401(k), for instance, it passes directly to the surviving spouse without probate. All financial accounts should be checked, as should life insurance beneficiaries. You can designate children as secondary beneficiaries, so they receive assets, in the event that both parents die.

While you’re doing that, update legal directives: including the medical power of attorney and the power of attorney. That is, unless you’d like your ex to make medical and financial decisions for you!

#2 Not updating your will. Most assets pass through the will, unless you have planned otherwise. In many second marriages, estate planning is done hoping the spouse inherits all the assets and upon their death, the remaining assets are divided among all of the children. There is nothing stopping a surviving spouse from re-writing their will and for the late spouses’ children to be left without anything from their biological parent. An estate planning attorney can explore different options to avoid this from occurring.

#3 Treating all heirs equally. Yes, this is a mistake. If one person came to the marriage with significantly more assets than another, care must be taken if the goal is to have those assets remain in the bloodline. If one person owned the house, for instance, and a second spouse and children moved into the house, the wish might be to have only the original homeowner’s children inherit the proceeds of the sale of the house. The same goes for pension and retirement accounts.

#4 Waiting to give until you’ve passed. If you are able to, it may be worth gifting to your heirs while you are still living, rather than gifting through a will. You may give up to $15,000 per person or $30,000 to a couple without having to pay a federal gift tax. Recipients don’t pay tax on most gifts. Let’s say you and your spouse have four children and they are all married. You may give each child and their spouse $30,000, without triggering any taxes for you or for them. It gets better: your spouse can also make the same size gift. Therefore, you and your spouse can give $60,000 to each couple, a total of $240,000 per year for all eight people and no taxes need be paid by anyone. This takes assets out of your estate and is not considered income to the recipients.

#5 Doing it yourself. If you’re older with a second marriage, ex-spouses, blended families and comingled assets, your estate planning will be complicated. Add a child with special needs or an aging parent and it becomes even more complex. Trying to create your own estate plan without a current and thorough knowledge of the law (including tax law) is looking for trouble, which is what you will leave to your children. The services of an estate planning attorney are a worthwhile investment, especially for blended families.

Reference: AARP (July 9, 2021) “Remarried With Children? 5 Estate Planning Mistakes to Avoid”

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?”

Can I Be Sure My Estate Plan Works?

Most estate planning attorneys will tell you that the same mistakes recur with frequency whether the estate is worth a billion dollars, several hundred thousand dollars or anywhere in-between. Of course, the biggest mistake of all, reports the article “7 Steps To Ensure A Successful Estate Plan” from Forbes, is not having an estate plan at all. Having an outdated estate plan can be just as bad.

Everyone should have a complete estate plan and it should be reviewed every few years and revised as life and laws change. The estate plan should include a will, trusts, power of attorney, advance medical directives and other planning elements. However, there’s more to an estate plan success than documents.

Education and communication. If the next generation isn’t prepared for the contents of the estate plan, it’s going to be challenging for them to carry out your wishes. They may mismanage assets, or even lose them to scammers. At any age and stage, people who are not ready for an inheritance may easily go through their entire inheritance and find themselves at a loss for what happened.

One solution is to leave the estate in trusts and limit access. A better solution is to ensure your heirs are prepared and understand how to handle money. Children benefit from their parent’s teaching them about managing, accumulating and donating money.

Prepare for family conflict. Sometimes tensions are out in the open, but other times they hide below the surface until one or both parents die, or learning the details of the estate plan leads to family conflicts. Thinking the children will work things out on their own is asking for trouble. Siblings with very different economic situations or lifestyles respond differently to their parent’s estate plan. Don’t ignore these potential problems. Talk with your estate planning attorney. It’s likely that your estate planning attorney has seen just about every situation and will have good ideas for preserving family harmony.

Plan ahead for gifting. Gifting is often a large part of an estate plan. Gifts are a good way to get the next generation comfortable with inherited wealth. However, don’t just write checks. Create and execute a strategy. Know that cash gifts are definitely spent faster, while property gifts tend to be kept and held for the future.

Make sure you understand the plan. You’d be surprised how many smart and sophisticated people don’t actually understand their own estate plans. Meet with your estate planning attorney on a regular basis and ask questions – and keep asking until you understand everything. Take notes during your meeting, so you can go back and review to see if you have any other questions.

Get organized and prepare. The best estate plan in the world is at risk, if the executor doesn’t know where documents are located. Make sure the information is written down and the person you chose to serve as executor knows where things are. We should all be simplifying our lives and records as we age, both to make our lives easier as the inevitable cognitive decline occurs and to make the settlement process faster.

Create a business succession plan. Most business owners fail to do this. It makes it all but impossible for the next generation to keep the business going. The value of a small business declines rapidly and sometimes evaporates, when there is no plan for succession. If the intent is to sell or pass the business on, a succession plan needs to be prepared, long before it is needed.

Fund trusts. The most common mistake in estate planning is creating trusts and then failing to fund them. If the trust is created but assets are not retitled, the estate plan will fail. Real estate, vehicles, boats and financial accounts that are intended to be put into the trust need to be retitled.

Reference: Forbes (May 27, 2021) “7 Steps To Ensure A Successful Estate Plan”

Can Estate Taxes Be Avoided with a Trust?

If the federal estate tax exemption is lowered, as is expected, it could go as low as $3 million, reports the article “How Trusts Can Be Used To Counter Tougher Estate Taxes” from Financial Advisor. For Americans who own a home and robust retirement accounts, this change presents an estate planning challenge—but one with several solutions. Trusts, giving and updating estate plans or creating wholly new estate plans should be addressed in the near future.

Not that these topics aren’t challenging for most people. Confronting the future, including death and incapacity, is difficult. Adult children and their parents may find it hard to talk about these matters; emotions, death and money are tough to talk about on their own, but estate planning includes conversations around all three.

Once those hurdles are overcome, an unemotional approach to the business of estate planning can accomplish a great deal, especially when guided by an experienced estate planning attorney. Here are a few suggestions for families to consider.

Estate and gift planning techniques include Grantor Retained Annuity Trusts (GRATs) and Spousal Limited Access Trusts (SLATs). A SLAT is an irrevocable trust created when one spouse (the donor spouse) makes a gift into a trust to benefit their spouse (the beneficiary spouse), while retaining limited access to the assets at the same time they remove the asset from their combined estate. One spouse is permitted to indirectly benefit, as long as the couple remains married.

The indirect access disappears, if the spouses divorce or if the beneficiary spouse dies before the donor spouse. Be careful about creating SLATs for both spouses; the IRS does not like to see SLATs with the same date of origin and the same amount for both spouses.

The GRAT and sales to an Intentionally Defective Trust (IDGT) are useful tools in a low-interest rate environment. For a GRAT, property is transferred to a trust in exchange for an annual fixed payment. A sale to an IDGT is where property is sold to a trust in exchange for a balloon note.

Gifting is an important part of estate planning at any asset level. For 2020 and 2021, the annual gift-tax exclusion is $15,000 per donor, per recipient. The simple strategy of aggressive lifetime gifting using that $15,000 exclusion is a good way to get money out of a taxable estate.

Protect the estate plan by reviewing it every four or five years, and sooner if there are large changes to the tax law—which is coming soon—and changes in the family’s circumstances.

Thoughtful use of trusts and gifting strategies can avoid the probate of the will and ensure that assets go directly to heirs. Reviewing the estate plan regularly with an eye to changes in tax law will protect the legacy.

Reference: Financial Advisor (April 19, 2021) “How Trusts Can Be Used To Counter Tougher Estate Taxes”

Should You Gift Stocks as Part of Your Estate Plan?

There are a number of ways to gift stock to family members, during your lifetime or after you die, according to a recent article from Think Advisor titled “Gifting Stock to Family Members: What You Need to Know.” The idea is simple, but how the gifting is done and what taxes may or may not need to be paid (and by whom) requires a closer look.

A gift of stock today is made through an electronic transfer from your account to the investment account of the recipient of the shares. The rules for gifting shares of stocks also apply to gifting ETFs and mutual funds.

Lifetime gifts. Stock gifts can be made in place of giving cash. The annual gift limit of $15,000 per person or $30,000 for a joint gift with your spouse, applies, and the value of the stock on the day of the transfer constitutes the amount of the gift.

If you gift in excess of the annual gifting limits, this takes a bite out of your lifetime gift and tax exemption, which as of this writing is $11.7 million per person for federal estate taxes. That’s something to keep in mind when deciding on your gifting strategy.

Using a trust for gifting. Instead of giving cash to a family member, you could use a trust and transfer your shares into the trust, with the family member as a beneficiary of the trust. The treatment of tax and cost basis issues will depend upon the type of trust used. Your estate planning attorney will be able to help you determine what type of trust to use.

Transfer on death. You can also gift stocks to others through your will, through a transfer on death designation in a brokerage account, through a beneficiary designation in a trust if the securities are held there, or through an inherited IRA. Taxes and cost basis will vary, depending upon your circumstances.

Taxes and gifting stock. There are no taxes and no tax implications at the time stocks are gifted to someone, but there are some issues to know before making the gift.

When stocks are given to a relative, there is no tax impact for the donor or the person receiving the stock, and as long as the value of the stock is within the annual gifting limits, the donor does not have to do anything. If the gift value exceeds the limit, the person has to file a gift tax return.

The recipient of the stock shares doesn’t owe capital gains taxes, until the stocks are sold. At that time, the cost basis and holding period of the person who gifted the shares will need to be known in order to determine the tax liability.

If the stock is gifted at a price below the donor’s cost basis and sold at a loss, the recipient’s cost basis and holding period is determined by the fair market value of the stock on the date of the gift. However, if the price of the shares increases above the donor’s original cost basis, their cost basis and holding period need to be known to calculate the recipient’s capital gain.

Gifting to children or grandchildren. Gifting shares of appreciated stock to children and grandchildren can make sense for the donors, since they are taking the value of the stock out of their estate and gifting it to a child or grandchild in a lower tax bracket. The recipient or their parents could sell the shares and pay a lower capital gains rate, or even no capital gains taxes. However, if the recipient is a current or future college student, or the student’s parent, the gift could reduce eligibility for need-based financial aid. The stock may need to be reported as an asset belonging to the student or the parent, increasing their income when they are received and/or when they are sold.

Speak with your estate planning attorney before gifting stock or cash to family members. There will be sensible ways to be generous without creating any issues for recipients.

Reference: Think Advisor (Jan. 25, 2021) “Gifting Stock to Family Members: What You Need to Know”

Share Your Estate Plan Now to Protect Your Family When You Are Gone

If one child will receive more than his siblings, even though his need is obviously greater, will that shared info create fighting between the children? And should children even have advance knowledge that they are going to receive an inheritance? These are some of the questions examined in the article “Disclosing estate plans in advance can save strife later” from The Indiana Lawyer. In most situations, advance discussions between family members are better to ensure family harmony.

Many estate planning attorneys have the “fair does not always mean equal” discussion with their clients. For some families, there is one child who is in dire need, while the others have prospered and don’t really need help. Maybe one child has special needs, or just hasn’t been as successful in life. In other cases, one child has already received substantial property from the parents, so no portion of the estate will be left to them. Regardless of the circumstances, which vary widely, having a frank discussion with all of the children is better than a series of surprises.

Research from the Federal Reserve Board shows that more than half of any given inheritance equals $50,000 or less, and more than 80% of all inheritances are less than $250,000.

With only half of what most people inherit being generally used to invest or pay down debt, most of these inheritances are spent, invested, or donated.

Regardless of the size of the inheritance, most parents expect that the beneficiaries of their estate will protect and preserve their legacy and use the money wisely. That is not always the case. If the parents want heirs to be careful with inheritances, they need to have a plan that will prepare heirs to act as stewards of their inheritances. The plan may be as simple as a series of conversations about saving and investing, or making charitable donations. It might also be complex, like meeting with the parent’s financial advisor and estate planning attorney and discussing wealth transfer and the potential to grow the wealth for another generation.

Families with larger estates often involve their children in annual gifting to get them used to the experience of receiving significant assets and learning how to manage these gifts. This has the added impact of allowing the parents to see how their children will respond to windfalls, which may guide how they distribute wealth in their estate plan. If one child is a repeat spendthrift, for instance, a trust may be a better way to pass the wealth to the child, with a trustee who can determine when they receive assets.

Families who have worked hard to leave their children with an inheritance, regardless of the size, should prepare their children by teaching them, through the parent’s actions, how their values impact their wealth, and how to manage it for themselves and future generations.

Reference: The Indiana Lawyer (October 16, 2019) “Disclosing estate plans in advance can save strife later”

Still Waiting to Update Your Estate Plan?

If you are wondering if Franklin’s handwritten wills are valid, join the club. With an estate valued at least $80 million, it’s good news that some kind of will was found to divide up her assets. However, says Daily Reckoning in the article “Urgent: Your Will May Need Updates,” there’s no guarantee that those wills are going to hold up in court.

The problem with Aretha’s family? It proves how important it is to have a properly executed will and one that is also up to date. It’s different for every family and every person, but if you’ve done any of the following, you need to update your will.

Moved to a different state. The laws that govern estate law are set by each state, so if you move to a different state, your entire will or parts of it may not work. If your estate is deemed invalid, then your wishes won’t necessarily be followed. Your family will suffer the consequences. For example, if your old state required only one witness for a will to be valid and you move to a state that requires two witnesses, then your executor is going to have an uphill battle. Some states also allow self-written wills but have very specific rules about what is and is not permitted.

Bought new property. People make this mistake all the time. They assume that because their will says they are gifting their home to their children, updating the new address doesn’t matter. However, it does. Your will must specify exactly what home and what address you are gifting. If you have a second property or a new property, update the information on your will.

Downsized your stuff. Sometimes people get excited about getting rid of their possessions and accidentally discard or donate something they had promised to someone in their will. If your will doesn’t reflect your new, more minimal lifestyle, your heirs won’t get what you promised to them. Instead, they may get nothing. Therefore, review your will and distribute the possessions you do have.

Gifting something early and forgetting what was in your will. If your will specifies that your oldest son gets your mother’s mahogany desk, but you gave it to your niece two months ago, you may create some awkward moments for your family. Whenever gifting something with great sentimental or financial value, be sure to review your will.

Having a boom or a bust. If your finances take a dramatic turn, for better or worse, you may create problems for heirs, if your will is not revised to reflect the changes. Let’s say one account has grown with the market, but another has taken a nosedive. Did you give your two children a 50/50 split, or does one child now stand to inherit a jumbo-sized pension, while the other is going to get little or nothing?

Had a change of heart. Has your charity of choice changed? Or did a charity you dedicated years to change its mission or close? Again, review your will.

Had a death in the family. If a spouse dies before you, your will may list alternative recipients. However, you probably want to review your will. You may want to make changes regarding how certain assets are titled. If a family member who was a beneficiary or executor dies, then you’ll need to update your will.

Your estate planning attorney will review your will and talk about the various changes in your life. Life changes over the course of time, and your will needs to reflect those changes.

Reference: Daily Reckoning (Sep. 12, 2019) “Urgent: Your Will May Need Updates”