Why Is It Important to have an Estate Plan?

Right now, the federal estate tax exemption is so high as to be a non-issue for most taxpayers, but this will not always be the case, and there are also state estate taxes to consider. Regardless of taxes, there are other reasons why everyone needs to have an estate plan, affirms a recent article from mondaq titled “Do I Really Need an Estate Plan?” The short answer is yes, you definitely do.

The first thing a will does is distribute your assets according to your directions. If you have grandchildren, there are ways for you to gift them assets and minimize taxes, but you’ll need to plan for generation skipping taxes.

If you own a business, you will need a succession plan to align with your estate plan. Will family members become owners, or will the business be sold?

Does the family include a disabled or individual with special needs? A special needs trust can add an extra layer of resources. Guardianship planning needs to be done for the parents and guardians be named for when the parents are no longer able to care for the person.

The will is also used to name an executor, the person to handle all the decisions you express in the will and carry them out.

Gifting is another part of your estate plan. If you have any charitable organizations or individuals outside of your family who you’d like to make a gift to, this can be done through your will or through a number of gifting strategies.

The current federal estate tax exemption is set to end in 2025 and revert back to 2017 levels. Tax planning should be done well in advance to protect your estate and heirs.

A review of life insurance should be part of your estate plan. Do you know who your named beneficiary is on your life insurance policies? If your estate is the beneficiary, your estate’s value may exceed the federal or state estate tax limits.

Many people today create an ethical will. This is not a legally binding document; instead, it is used to express your values and your wishes for heir’s futures. It may also be used to give them insight into how your will was structured and why. If there is controversy in the family, an ethical will or statement of intentions may help bolster your will if there are any legal challenges.

Your retirement benefits and any workplace benefits have beneficiaries named in the event of your death. Do you know who they are, and do you still wish for those named to be your beneficiaries?

Estate planning includes addressing incapacity and illness. You’ll want a Power of Attorney for someone to act on your behalf if you are sick or injured and cannot handle your personal finances. You’ll also need a Health Care Proxy for someone who will be empowered to speak with healthcare personnel and make care decisions for you if you cannot.

Without a comprehensive estate plan, the difficulties facing your loved ones upon your illness and upon your death will be magnified. Yes, you need an estate plan. The sooner, the better. Speak with an estate planning attorney to get the process started.

Reference: mondaq (Aug. 24, 2022) “Do I Really Need an Estate Plan?”

Can Unequal Inheritances Be Fair?

Estate planning attorneys aren’t often asked to create estate plans treating heirs unfairly. However, when they do it, it is usually because a parent is estranged from one child and wishes to leave him or her nothing. When it comes to estate planning, equal isn’t the same as fair, explains the article “Are Unequal Inheritances Fair?” from Advisor Perspectives.

An example of this can be seen in the case of a widow with four adult children who asked an estate planning attorney how to approach distributing her assets. Three of her children were high-income earners, already building substantial net worth. A fourth child had mental health issues, limited education, had been in and out of jail and was unable to hold a job.

She understood that her fourth child needed the financial stability the others did not. She wanted to provide some support for him, but knew any money left directly to him would be gone quickly. She was considering leaving money for him in a trust to provide a monthly income stream, but also wanted to be fair to the other three children.

The trust would be the best option. However, there were problems to consider. If the estate were to be divided in four equal parts, the fourth child’s share of the estate would be small, so trustee fees would take a significant amount of the trust. If she left her entire estate for him, it would be more likely he’d have funding for most, if not all, of his adult life.

The worst thing the mother could do was to leave all the funds for the fourth child in a trust without discussing it with the other three siblings. Unequal inheritances can lead to battles between siblings, sometimes bad enough to lead them into a court battle. This is often the case where one child is believed by others to have unduly influenced a parent, when they have inherited all or the lion’s share of the estate.

Sibling fights can occur even when the children know about and understand the need for the unequal distribution. The children may suppress their emotions while the parent is living. However, after the parent dies and the reality sets in, emotions may fire at full throttle. Logically, in this case the three successful siblings may well understand why their troubled sibling needs the funds. However, grief is a powerful emotion and can lead to illogical responses.

In this case, the woman made the decision to leave her estate in equal shares to each child and giving the three successful siblings the options to share part of their inheritance with their brother. She did this by having her estate planning attorney add language in the will stating if any child wanted to disclaim or refuse any of their inheritance, it would pass to a trust set up for the troubled sibling. This gave each child the opportunity to help or not.

Was it a perfect solution? Perhaps not, but it was the best possible solution given the specific circumstances for this family.

Reference: Advisor Perspectives (Aug. 22, 2022) “Are Unequal Inheritances Fair?”

Do You Want to Be an Executor?

Taking on the role of executor should be considered carefully before accepting or refusing. These decisions are usually made based on relationships and willingness to help the family after a loved one has died. Knowing certain processes are in place and many are standard procedures may make the decision easier, according to the useful article “Planning Ahead: Should you agree to serve as an executor?” from Daily Local News.

A family member or friend is very often asked to serve as executor when the surviving spouse is the only or primary beneficiary and not able to manage the necessary tasks. In other instances, estates are complex, involving multiple beneficiaries, charities and real estate in several states. The size of the estate is actually less of a factor when it comes to complexity. Small estates with debt can be more challenging than well-planned large estates, where planning has been done and there are abundant resources to address any problems.

Prepare while the person is alive. This is the time to learn as much as you can. Ask to get a copy of the will and read it. Who are the beneficiaries? Speak with the person about the relationships between beneficiaries and other family members. Do they get along, and if not, why? Be prepared for conflict.

Find out what the person wants for their funeral. Do they want a traditional memorial service, and have they paid for the funeral already? Any information they can provide will make this difficult time a little easier.

What are your responsibilities as executor? Depending on how the will is prepared, you may be responsible for everything, or your responsibilities may be limited. At the very least, the executor is responsible for:

  • Locating and preparing an inventory of assets
  • Getting a tax ID number and establishing an estate account
  • Paying final bills, including funeral and related bills
  • Notifying beneficiaries
  • Preparing tax returns, including estate and/or inheritance tax returns
  • Distributing assets and submitting a final accounting

If the person has an estate planning attorney, financial advisor and CPA, meeting with them while the person is alive and learning what you can about the plans for assets will be helpful. These three professional advisors will be able to provide help as you move forward with the estate.

These tasks may sound daunting but being asked to serve as a person’s executor demonstrates the complete trust they have in your abilities and judgment. Yes, you will breathe a sigh of relief when you complete the task. However, you’ll also have the satisfaction of knowing you did a great service to someone who matters to you.

Reference: Daily Local News (June19, 2022) “Planning Ahead: Should you agree to serve as an executor?”

What Happens to Investment Accounts when Someone Dies?

Taking responsibility for a decedent’s probate or trust estate often involves managing significant amounts of wealth, whether they are brokerage accounts or cash assets. Today’s volatile markets add another level of complexity to this responsibility. The article “Estate Planning: Investments during administration of decedent’s estate” from Lake County News explains what estate administrators, executors and trustees need to know as they take on these tasks.

Investment account values are in a constant state of change and may include assets now considered too risky because they are owned by the estate and not the individual. The administrator will need to evaluate the accounts in light of debts owed by the decedent, the costs in administering the estate and any gifts to be made before the estate will be closed.

At the same time, too much cash on hand could mean unproductive assets earning less than they could, losing value to inflation. If there is a long time between the death of the owner and the date of distribution, depending on markets and interest rates, having too much cash could be detrimental to the beneficiaries.

The personal representative or trustee, as relevant, may determine that the cash should be invested, shift how existing investments are managed, or decide to sell investments to generate cash needed for debts, expenses and distributions to beneficiaries.

A personal representative is not expected or required to be a stock market expert. Their duties are to manage estate assets as a person making prudent decisions for the betterment of the estate and heirs. They must put the interest of the estate above their own and not make any speculative investments. With the exception of checking accounts, the expectation is for estate accounts to earn something, even if it is only interest.

If the personal representative has the authority to do so, they may invest in very low-risk debt assets. If the will includes investment powers and if certain conditions safeguarding payment of the decedent’s debts and expenses are satisfied, the personal representatives may invest using those powers. In some instances, a court order may be needed. An estate planning attorney will be able to advise based on the laws of the state in which the decedent resided.

For a trust, the trustee has a fiduciary duty to invest and manage trust assets for beneficiaries. Assets should be made productive, unless the trust includes specific directions for the use of assets prior to distribution. The longer the trust administration takes and the larger the value of the trust, the more important this becomes.

In all scenarios, investment decisions, including balancing risk and reward, must be made in the context of an overall investment strategy for the benefit of heirs. Investments may be delegated to a professional investment advisor, but the selection of the advisor must be made cautiously. The advisor must be selected prudently and the scope and terms of the selection of the advisor must be consistent with the purposes and terms of the trust. The trustee or executor must personally monitor the advisor’s performance and compliance with the overall strategy.

Reference: Lake County News (June 11, 2022) “Estate Planning: Investments during administration of decedent’s estate”

How Do I Plan for Taxes after Death?

Let’s get this out of the way: preparing for death doesn’t mean it will come sooner. Quite the opposite is true. Most people find preparing and completing their estate plan leads to a sense of relief. They know if and when any of life’s unexpected events occur, like incapacity or death, they have done what was necessary to prepare, for themselves and their loved ones.

It’s a worthwhile task, says the recent article titled “Preparing for the certainties in life: death and taxes” from Cleveland Jewish News and doesn’t need to be overwhelming. Some attorneys use questionnaires to gather information to be brought into the office for the first meeting, while others use secure online portals to gather information. Then, the estate planning attorney and you will have a friendly, candid discussion of your wishes and what decisions need to be made.

Several roles need to be filled. The executor carries out the instructions in the will. A guardian is in charge of minor children, in the event both parents die. A person named as your attorney in fact (or agent) in your Power of Attorney (POA) will be in charge of the business side of your life. A POA can be as broad or limited as you wish, from managing one bank account to pay household expenses to handling everything. A Health Care Proxy is used to appoint your health care agent to have access to your medical information and speak with your health care providers, if you are unable to.

Your estate plan can be designed to minimize probate. Probate is the process where the court reviews your will to ensure its validity, approves the person you appoint to be executor and allows the administration of your estate to go forward.

Depending on your jurisdiction, probate can be a long, costly and stressful process. In Ohio, the law requires probate to be open for at least six months after the date of death, even if your estate dots every “i” and crosses every “t.”

Part of the estate planning process is reviewing assets to see how and if they might be taken out of your probate estate. This may involve creating trusts, legal entities to own property and allow for easier distribution to heirs. Charitable donations might become part of your plan, using other types of trusts to make donations, while preserving assets or creating an income stream for loved ones.

Minimizing taxes should be a part of your estate plan. While the federal estate tax exemption right now is historically high $12.06 million per person, on January 1, 2025, it drops to $5.49 million adjusted for inflation. While 2025 may seem like a long way off, if your estate plan is being done now, you might not see it again for three or five years. Planning for this lowered number makes sense.

Reviewing an estate plan should take place every three to five years to keep up with changes in the law, including the lowered estate tax. Large events in your family also need to prompt a review—trigger events like marriage, death, birth, divorce and the sale of a business or a home.

Reference: Cleveland Jewish News (May 13, 2022) “Preparing for the certainties in life: death and taxes”

The Most Common Estate Planning Mistakes

Estate administration is the process of managing the estate when a loved one has passed. For the inexperienced executor, there are pitfalls to be avoided, warns the article “Top 5 Probate and Estate Administration Mistakes” from Long Island Press.

The biggest mistake is creating an estate plan from generic documents on the internet. Wills must meet many technical legal requirements to be valid. All wills are admitted to probate and the court scrutinizes wills carefully to be certain the wishes of the person who died (the testator) have been followed. A will created without the guidance of a skilled estate planning attorney is more likely to be found invalid and more easily challenged.

Neglecting to deal with Medicaid liens before distributing an inheritance can create huge financial problems for family members. Medicaid is required by law to attempt to clawback assets to recover the cost of care. Some states are more aggressive than others. Medicaid may attach a lien to any real estate owned by the Medicaid recipient and collect it at the time of their death.

The value of asset protection planning, including the use of a Medicaid Asset Protection Trust (MAPT), in a timely manner, cannot be understated.

Leaving heirs and beneficiaries in the dark about the estate plan and distribution wishes often creates a sense of something bad being planned. Surprise revelations about the estate are only good in movies. In real life, this can lead to litigation and family fights. Litigation can take the form of a will contest, a trust contest, a contested accounting, or an action to remove the executor.

Talk with the family about your plans, so there is less tension created over the future of your estate.

Taxes can undermine your wishes, if your estate plan does not include tax planning. There are numerous methods used to minimize tax liabilities. However, they must be put into place in advance.

The executor has to file a final income tax return on behalf of the decedent for the year of death and also file an estate tax return. The executor is also responsible to obtain an estate tax identification number (EIN) from the IRS and open an estate bank account used to pay taxes and debts.

Will your executor, spouse or heirs be able to locate your critical information? If your legal, financial and online information is not organized, your executor may spend a long time digging through old paperwork, most of which is likely to be out of date and irrelevant. Spare your executor the time and emotional impact of wasted hours reviewing old records. No one needs your checking accounts from the 1970s!

Information on everything from assets, tax returns, funeral and burial arrangements, life insurance policies, Social Security and Medicaid or Medicare cards, deed for home and title for your cars, should all be organized to help your family find the information they need.

While you are alive, your family will need access to documents like your Power of Attorney, Health Care Power of Attorney, and Advance Health Care Directives.

By planning and making an effort in advance to manage your affairs, you enhance your legacy. Leaving a mess behind will be remembered, perhaps more so than organized documents.

Reference: Long Island Press (May 4, 2022) “Top 5 Probate and Estate Administration Mistakes”

What If You Don’t have a Will?

A will is a written document stating wishes and directions for dealing with the property you own after your death, also known as your “estate,” explains a recent article “Placing the puzzle pieces of long-term care and planning a will” from Pittsburgh Post-Gazette. The COVID pandemic has reinforced the importance of having an estate plan in place. With almost one million deaths attributed to COVID to date, many families have learned this lesson in the hardest possible way.

When someone dies without a will, property is distributed according to their state’s intestacy laws. If your next of kin is someone you loathe, or even just dislike, they may become an heir, whether you or the rest of your family likes it or not. If you are part of an unmarried couple, your partner has no legal rights, unless you’ve created a will and an estate plan to provide for them.

In general, intestacy laws distribute property to a surviving spouse or certain descendants. A much better solution: speak with an experienced estate planning attorney to have a will and other estate planning documents prepared to protect yourself and those you love.

Start by determining your goals and speaking with family members. You may be surprised to learn an adult child doesn’t need or want what you want to leave them. If you have a vacation home you want to leave to the next generation, ask to see if they want it.

A family meeting, attended by an objective person, like an estate planning attorney, may be helpful in clarifying your intentions and setting expectations for heirs. It may reveal new information about your family and change how you distribute your estate. A grandchild who has already picked out a Ferrari, for instance, might make you consider setting up a trust with distributions over time, so they can’t blow their inheritance in one purchase.

Determining who will be your executor is another important decision for your will. The executor is like the business manager of your estate after you have passed. They are a fiduciary, with a legal obligation to put the estate’s interest above their own. They need to be able to manage money, make sound decisions and equally important, stick to your wishes, even when your surviving loved ones have other opinions about “what you would have wanted.”

You’ll need to speak with this person to make sure they are willing to take on the task. If there is no one suitable or willing, your estate planning attorney will have some suggestions. Depending on the size of the estate, a bank or trust company may be able to serve as executor.

The will is just the first step. An estate plan includes planning for incapacity. With a Will, a Power of Attorney, Health Care Proxy, and Living Will (also known as an Advance Directive), you and your loved ones will be better positioned to address the inevitable events of life.

Reference: Pittsburgh Post-Gazette (April 24, 2022) “Placing the puzzle pieces of long-term care and planning a will”

Should I Have a Roth IRA?

Roth IRAs are powerful retirement savings tools. Account owners are allowed to take tax-free distributions in retirement and can avoid paying taxes on investment growth. There’s little downside to a Roth IRA, according to a recent article “10 Reasons to Save for Retirement in a Roth IRA” from U.S. News & World Report.

Taxes are paid in advance on a Roth IRA. Therefore, if you are in a low tax bracket now and may be in a higher bracket later, or if tax rates increase, you’ve already paid those taxes. Another plus: all your Roth IRA funds are available to you in retirement, unlike a traditional IRA when you have to pay income tax on every withdrawal.

Roth IRA distributions taken after age 59 ½ from accounts at least five years old are tax free. Every withdrawal taken from a traditional IRA is treated like income and, like income, is subject to taxes.

When comparing the two, compare your current tax rate to what you expect your tax rate to be once you’ve retired. You can also save in both types of accounts in the same year, if you’re not sure about future tax rates.

Roth IRA accounts also let you keep investment gains, because you don’t pay income tax on investment gains or earned interest.

Roth IRAs have greater flexibility. Traditional IRA account owners are required to take Required Minimum Distributions (RMDs) from an IRA every year after age 72. If you forget to take a distribution, there’s a 50% tax penalty. You also have to pay taxes on the withdrawal. Roth IRAs have no withdrawal requirements during the lifetime of the original owner. Take what you need, when you need, if you need.

Roth IRAs are also more flexible before retirement. If you’re under age 59 ½ and take an early withdrawal, it’ll cost you a 10% early withdrawal penalty plus income tax. Roth early withdrawals also trigger a 10% penalty and income tax, but only on the portion of the withdrawal from investment earnings.

If your goal is to leave IRA money for heirs, Roth IRAs also have advantages. A traditional IRA account requires beneficiaries to pay taxes on any money left to them in a traditional 401(k) or IRA. However, those who inherit a Roth IRA can take tax-free withdrawals. Heirs have to take withdrawals. However, the distributions are less likely to create expensive tax situations.

Retirement savers can contribute up to $6,000 in a Roth IRA in 2022. Age 50 and up? You can make an additional $1,000 catch up contribution for a total Roth IRA contribution of $7,000.

If this sounds attractive but you’ve been using a traditional IRA, a Roth conversion is your next step. However, you will have to pay the income taxes on the amount converted. Try to make the conversion in a year when you’re in a lower tax bracket. You could also convert a small amount every year to maintain control over taxes.

Reference: U.S. News & World Report (April 11, 2022) “10 Reasons to Save for Retirement in a Roth IRA”

Can You Inherit a House with a Mortgage?

Inheriting a home with a mortgage adds another layer of complexity to settling the estate, as explained in a recent article from Investopedia titled “Inheriting a House With a Mortgage.” The lender needs to be notified right away of the owner’s passing and the estate must continue to make regular payments on the existing mortgage. Depending on how the estate was set up, it may be a struggle to make monthly payments, especially if the estate must first go through probate.

Probate is the process where the court reviews the will to ensure that it is valid and establish the executor as the person empowered to manage the estate. The executor will need to provide the mortgage holder with a copy of the death certificate and a document affirming their role as executor to be able to speak with the lending company on behalf of the estate.

If multiple people have inherited a portion of the house, some tough decisions will need to be made. The simplest solution is often to sell the home, pay off the mortgage and split the proceeds evenly.

If some of the heirs wish to keep the home as a residence or a rental property, those who wish to keep the home need to buy out the interest of those who don’t want the house. When the house has a mortgage, the math can get complicated. An estate planning attorney will be able to map out a way forward to keep the sale of the shares from getting tangled up in the emotions of grieving family members.

If one heir has invested time and resources into the property and others have not, it gets even more complex. Family members may take the position that the person who invested so much in the property was also living there rent free, and things can get ugly. The involvement of an estate planning attorney can keep the transfer focused as a business transaction.

What if the house has a reverse mortgage? In this case, the reverse mortgage company needs to be notified. You’ll need to find out the existing balance due on the reverse mortgage. If the estate does not have the funds to pay the balance, there is the option of refinancing the property to pay off the balance due, if the wish is to keep the house. If there’s not enough equity or the heirs can’t refinance, they typically sell the house to pay off the reverse mortgage.

Can heirs take over the existing loan? Your estate planning attorney will be able to advise the family of their rights, which are different than rights of homeowners. Lenders in some circumstances may allow heirs to be added to the existing mortgage without going through a full loan application and verifying credit history, income, etc. However, if you chose to refinance or take out a home equity loan, you’ll have to go through the usual process.

Inheriting a house with a mortgage or a reverse mortgage can be a stressful process during an already difficult time. An experienced estate planning attorney will be able to guide the family through their options and help with the rest of the estate.

Reference: Investopedia (April 12, 2022) “Inheriting a House With a Mortgage”

What are the Pitfalls of a Charitable Remainder Trust?

If you have discretionary funds and are philanthropically minded, a charitable trust can serve you well, giving money to an organization you want to support, while passing assets to beneficiaries without burdening them with estate or gift taxes, but is it right for you? Some of the answers can be found in a recent article from U.S. News & World Report titled “Should you Set Up A Charitable Trust?”

Some basics to consider about charitable trusts are:

  • There are a number of different types.
  • Consider all disadvantages and alternatives.
  • Make sure it works with your estate plan and your long-term financial plan.

The most common types of charitable trusts are the Charitable Remainder Trust (CRT) and the Charitable Lead Trust. For the CRT, funding begins with cash or other assets, like stocks. The trust pays an income stream to family members or beneficiaries while they are living or for a set period of time. When they die, or when the time period ends, the remaining assets in the trust go directly to the charity.

For a Charitable Lead Trust (CLT), payments first go to the charity and then the remainder transfers to the beneficiary at the end of the trust term. One of the benefits of the CLT is to reduce the beneficiary’s tax liability, while giving the estate a charitable deduction.

An estate planning attorney will help refine these choices to the ones best suited for each individual. The CLT and CRT let you support a cause you believe in, while alleviating the tax burden to loved ones.

Charitable trusts are also useful when wishing to sell an asset. If an asset with a large capital gain is to be sold, like real estate, individual stock or a business, the asset may be moved into the charitable trust. The trust becomes the owner of the asset, and then the asset can be sold, avoiding the capital gain. Speak with your estate planning attorney to ensure that this is done correctly.

What about the disadvantages? There are fees to establish and maintain a trust. Charitable trusts are usually irrevocable, so if your financial situation changes, you may not be able to gain access to the funds. There may also be some pushback from heirs or family members who would rather see your money being given directly to them and not a charity.

Make sure that the benefits you and your heirs seek to gain from establishing a charitable trust, whichever type you use, outweigh the management costs. Do not create a trust with money you may need in the future. Charitable trusts are feasible only if you have already paid off all debts and are confident you will not need any of the assets in the future.

The exact amount to put in the trust should be carefully considered, with an eye to future expenses and your overall financial status. Your estate planning attorney may wish to meet with you and senior officers from the charity to ensure a clear understanding of your wishes and make sure that this is the best solution for all.

Reference: U.S. News & World Report (Feb. 23, 2022) “Should you Set Up A Charitable Trust?”