Where Do You Score on Estate Planning Checklist?

Make sure that you review your estate plan at least once every few years to be certain that all the information is accurate and updated. It’s even more necessary if you experienced a significant change, such as marriage, divorce, children, a move, or a new child or grandchild. If laws have changed, or if your wishes have changed and you need to make substantial changes to the documents, you should visit an experienced estate planning attorney.

Kiplinger’s recent article “2021 Estate Planning Checkup: Is Your Estate Plan Up to Date?” gives us a few things to keep in mind when updating your estate plan:

Moving to Another State. Note that if you’ve recently moved to a new state, the estate laws vary in different states. Therefore, it’s wise to review your estate plan to make sure it complies with local laws and regulations.

Changes in Probate or Tax Laws. Review your estate plan with an experienced estate planning attorney to see if it’s been impacted by changes to any state or federal laws.

Powers of Attorney. A power of attorney is a document in which you authorize an agent to act on your behalf to make business, personal, legal, or financial decisions, if you become incapacitated.  It must be accurate and up to date. You should also review and update your health care power of attorney. Make your wishes clear about do-not-resuscitate (DNR) provisions and tell your health care providers about your decisions. It is also important to affirm any clearly expressed wishes as to your end-of-life treatment options.

A Will. Review the details of your will, including your executor, the allocation of your estate and the potential estate tax burden. If you have minor children, you should also designate guardians for them.

Trusts. If you have a revocable living trust, look at the trustee and successor appointments. You should also check your estate and inheritance tax burden with an estate planning attorney. If you have an irrevocable trust, confirm that the trustee properly carries out the trustee duties like administration, management and annual tax returns.

Gifting Opportunities. The laws concerning gifts can change over time, so you should review any gifts and update them accordingly. You may also want to change specific gifts or recipients.

Regularly updating your estate plan can help you to avoid simple estate planning mistakes. You can also ensure that your estate plan is entirely up to date and in compliance with any state and federal laws.

Reference: Kiplinger (July 28, 2021) “2021 Estate Planning Checkup: Is Your Estate Plan Up to Date?”

What Kind of Trust Is Right for You?

Everyone wins when estate planning attorneys, financial advisors and accounting professionals work together on a comprehensive estate plan. Each of these professionals can provide their insights when helping you make decisions in their area. Guiding you to the best possible options tends to happen when everyone is on the same page, says a recent article “Choosing Between Revocable and Irrevocable Trusts” from U.S. News & World Report.

What is a trust and what do trusts accomplish? Trusts are not just for the wealthy. Many families use trusts to serve different goals, from controlling distributions of assets over generations to protecting family wealth from estate and inheritance taxes.

There are two basic kinds of trust. There are also many specialized trusts in each of the two categories: the revocable trust and the irrevocable trust. The first can be revoked or changed by the trust’s creator, known as the “grantor.” The second is difficult and in some instances and impossible to change, without the complete consent of the trust’s beneficiaries.

There are pros and cons for each type of trust.

Let’s start with the revocable trust, which is also referred to as a living trust. The grantor can make changes to the trust at any time, from removing assets or beneficiaries to shutting down the trust entirely. When the grantor dies, the trust becomes irrevocable. Revocable trusts are often used to pass assets to adult children, with a trustee named to manage the trust’s assets until the trust documents direct the trustee to distribute assets. Some people use a revocable trust to prevent their children from accessing wealth too early in their lives, or to protect assets from spendthrift children with creditor problems.

Irrevocable trusts are just as they sound: they can’t be amended once established. The terms of the trust cannot be changed, and the grantor gives up any control or legal right to the assets, which are owned by the trust.

Giving up control comes with the benefit that assets placed in the trust are no longer part of the grantor’s estate and are not subject to estate taxes. Creditors, including nursing homes and Medicaid, are also prevented from accessing assets in an irrevocable trust.

Irrevocable trusts were once used by people in high-risk professions to protect their assets from lawsuits. Irrevocable trusts are used to divest assets from estates, so people can become eligible for Medicaid or veteran benefits.

The revocable trust protects the grantor’s wishes, if the grantor becomes incapacitated. It also avoids probate, since the trust becomes irrevocable upon death and assets are outside of the probated estate. The revocable trust may include qualified assets, like IRAs, 401(k)s and 403(b)s.

However, there are drawbacks. The revocable trust does not provide tax benefits or creditor protection while the grantor is living.

Your estate planning attorney will know which type of trust is best for your situation, and working with your financial advisor and accountant, will be able to create the plan that minimizes taxes and maximizes wealth transfers for your heirs.

Reference: U.S. News & World Report (Aug. 26, 2021) “Choosing Between Revocable and Irrevocable Trusts”

How Do I Sell a Home in an Irrevocable Trust?
Home For Sale Real Estate Sign and Beautiful New House.

How Do I Sell a Home in an Irrevocable Trust?

A trustee who sells a home in irrevocable trust for a parent who died should know that generally, assets transferred to an irrevocable trust will be deemed a completed gift and will not be included in an estate for estate tax purposes.

Lehigh Valley Live’s recent article entitled “What happens to tax on a home sold from a trust?” explains that this means there wouldn’t be a step-up in basis to the fair market value upon the decedent’s death.

Remember that an irrevocable trust is a type of trust in which its terms can’t be modified, amended, or terminated without the permission of the grantor’s named beneficiary or beneficiaries.

Irrevocable trusts have tax-shelter benefits that revocable trusts to don’t.

However, an irrevocable trust can be created so that the settlor (the creator) of the trust keeps certain rights and powers, so that gifts to the trust are incomplete.

In that instance, the assets are included in the settlor’s estate upon death and obtain a step-up in basis upon the decedent’s death.

If the trust sells the asset in the trust, the trust may need to file Form 1041, U.S. Income Tax Return for Estates and Trusts, and the trust may be required to pay a tax.

If the trust distributes any income to the beneficiaries in the same tax year it receives that income, the income is passed through to the beneficiaries, and the beneficiaries must report it on the beneficiaries’ individual tax returns (Form 1040) and pay any tax due.

It’s generally a good idea to report and pay tax at the individual rate instead of at the trust or estate level.

That’s because the trust or estate will begin to pay tax at the highest rate at only $13,150. In comparison, an individual doesn’t pay tax at the highest rate until his or her income exceeds over $440,000.

Note that an irrevocable trust is a more complex legal arrangement than a revocable trust. As a result, there might be current income tax and future estate tax implications when using this type of trust. It’s wise to seek the assistance of an experienced estate planning attorney.

Reference: Lehigh Valley Live (Aug. 16, 2021) “What happens to tax on a home sold from a trust?”

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” 

If I Buy a House, Should I have an Estate Plan?

There’s been an unprecedented surge in home sales during the pandemic. A recent National Association of Realtors report revealed that since July, existing home sales have increased year over year reaching a pandemic high of over 25% in October. Forbes’s recent article entitled “Pandemic Home Buyers: Have You Set Up Your Estate Plan?” asks the important question: How has this past year’s surge in home sales impacted estate planning?

Estate planning is a way to protect your assets and your loved ones, no matter your age or income level. If you place your home into a trust, you ensure that the ownership of your home will be properly and efficiently transferred to a loved one, if anything happens to you unexpectedly. If your home isn’t included in your estate plan, it will go through probate. However, consider the potential pitfalls of a trust:

  1. Creating a trust, when you really only need a will. If you have less than $150,000 in assets and you don’t own a home, a trust likely isn’t really needed.
  2. Thinking that you automatically have asset protection. A trust can help to avoid probate. So, an irrevocable trust may be the right option for people who really need true asset protection.
  3. Not taking trust administration into account. The trustee must do many tasks when the creator of the trust dies. These aren’t much different from what an executor does, but it can be extra work.

If you already have an estate plan, you should review your estate planning documents every three to five years. Moreover, purchasing a home should also make you revisit your documents. When doing a review, take a look at the terms of the trust. Make certain that you have your house referenced by address and that you transfer the house to your spouse by name.

Most mortgages have a “due on sale” clause. This means if you terminate your ownership of your home, you have to immediately pay back the mortgage proceeds to the bank. If you place your home in a revocable trust, it lets you smoothly transfer ownership to your beneficiary. This prevents the bank from demanding payment, and your beneficiary would keep making the mortgage payments after you’re gone. However, it may be prudent to contact the lender in advance of the transfer, if you want to be sure.

If you bought a home in the pandemic and have not placed it in a trust yet, talk to an experienced estate planning attorney sooner rather than later.

Reference: Forbes (June 2, 2021) “Pandemic Home Buyers: Have You Set Up Your Estate Plan?”

Estate Planning Matters for Singles

If you’re not married and you have relatives or friends to whom you would like to pass certain assets, then you need an estate plan, says the article “Estate planning important even if you’re not married” from Rocky Mountain Telegram.

If you die without a last will and testament or other estate planning documents in place, a probate court will make the decisions about how to distribute assets according to the laws of your state. That may not be what you wanted, but it will be too bad—and too late.

If you want to leave assets to family members or close friends, you’ll need to plan for this with a last will and testament. The same goes for any donations you may wish to leave to one or more charitable organizations. You could just name organizations in your will, but there are many different ways to give to charity and some have tax benefits for you and your heirs.

One way to leave assets to charity is a Charitable Remainder Trust. Your estate planning attorney will help guide you through the steps. Appreciated assets, like stocks, mutual funds, or other investment securities, are transferred into an irrevocable trust. You get to name the trustee—you could be the trustee, if you prefer—and then you can sell the assets at full market value, avoiding any capital gains taxes that you’d pay if you sold them as an individual.

If you itemize your income taxes, you might be able to claim a charitable deduction on taxes. With the proceeds, the trust can purchase income-producing assets and provide an income stream for the rest of your life. When you die, the assets remaining in the trust will go to the charity or charities that you have named.

Family members and charities aren’t the only ones to consider in an estate plan for a single person. You need to prepare to protect yourself. With the absence of an immediate family, being protective of your financial and health care decisions requires a durable power of attorney and a health care proxy, among other documents.

The durable power of attorney authorizes a person of your choice to manage finances, if you were to become incapacitated. This is especially important when there is no spouse to take on this role. Your health care proxy, also known as a medical power of attorney, authorizes someone you name to make health care decisions on your behalf, if you are unable.

Estate planning can be complex. An experienced estate planning attorney will be an invaluable resource as you go through the process. Who will be the best candidate to select as your power of attorney? What other documents do you need to ensure that your assets go to the people or charities you want? Once this is done, you’ll be prepared for the future—and protected.

Reference: Rocky Mountain Telegram (June 6, 2021) “Estate planning important even if you’re not married”

How can I Revoke an Irrevocable Trust?

Is there a way to get a house deed out of the trust?

Nj.com’s recent article entitled “Can I dissolve an irrevocable trust to get my house out?” says that prior to finalizing legal documents, it is important to know the purpose and consequences of the plan.

An experienced estate planning attorney will tell you there are a variety of trust types that are used to achieve different objectives.

There are revocable trusts that can be created to avoid probate, and others trusts placed in a will to provide for minor children or loved ones with special needs.

Irrevocable trusts are often created to shield assets, including the home, in the event long-term nursing care is required.

Conveying assets to an irrevocable trust typically starts the five-year “look back” period for Medicaid purposes, if the trust is restricted from using the assets for, or returning assets to, the individual who created the trust (known as the “grantor”).

When you transfer assets to a trust, control of the assets is given to another person (the ‘trustee”).

This arrangement may protect assets in the event long-term care is required. However it comes with the risk that the trustee may not always act how the grantor intended.

For instance, the grantor can’t independently sell the house owned by the trust or compel the trustee to purchase a replacement residence, which may cause a conflict between the grantor and trustee. Because the trust is irrevocable, it could be difficult and expensive to unwind.

In light of this, it’s important to designate a trustee who will work with and honor the wishes of the grantor.

An experienced estate planning attorney retained for estate and asset planning should provide clear, understandable and thoughtful advice, so the client has the information needed to make an informed decision how to proceed.

Reference: nj.com (April 6, 2021) “Can I dissolve an irrevocable trust to get my house out?”

What Is the Main Purpose of a Trust?

There are advantages and disadvantages of an irrevocable trust, and you’ll want to be fully informed before taking steps that may be costly to undo, explains the article “Understanding your trust” from The Sentinel. Once your home is deeded to an irrevocable trust, you won’t be able to make any changes without getting permission from the beneficiary or beneficiaries named in the trust. Your rights of ownership are transferred to the trust, when you deed it to the trust.

A separate legal agreement with the trustee, the person in charge of the trust, will be needed to give you a legal right to occupy the home also. Any changes could be made but will take time and could be costly. Changes can also only be made, if the beneficiaries agree.

There was a time when lenders inserted clauses into mortgages that any time a sale or transfer of the deed occurred, full payment of the mortgage would be due. This changed, and today the mortgage is not due just because of a change in the deed. However, it may be a challenge to refinance, if the home is held in an irrevocable trust.

For most people, the reason to put a home into an irrevocable trust is to prevent the home from being lost to a creditor, including protecting the home’s equity from the cost of nursing home care, during life or after death. In some states, like Pennsylvania, the state will initiate a collection action against the estate to recover the amount paid for the deceased homeowner’s nursing care costs.

The move to put a home into an irrevocable trust can work as long as the trust remains intact, and the homeowner does not apply for financial assistance for nursing home care for at least five years from the date that the deed was transferred as recorded in the courthouse.

If long-term care needs arise before that time, putting the home into an irrevocable trust may not serve its intended purpose.

There are some tax benefits from an irrevocable trust. If the homeowner lives at least one year after the home is deeded to the trust, in some states no inheritance taxes will be due on the home. Check with a local estate planning attorney to learn what the rules are in your state.

If the trust is prepared by an experienced elder law attorney, it is likely that the capital gain on the sale of the home by the trust after the homeowner’s death will be taxed based on the home’s value at the time of sale, rather than the value at the time it is placed into the trust or on the day of death.

If the home is the only asset in the trust, the taxpayer ID of the trust will be the homeowner’s Social Security number, and no annual tax return is required. If, however, other assets, particularly income-producing assets, are placed in the trust, then the trust needs to have its own EIN (a federal tax identification number) and annual tax returns will need to be paid. Taxes on a trust are normally at a higher rate than individual income rates.

Your estate planning attorney will explain the numerous strategies that can be used to protect your assets and your home from the high cost of long-term care. There are many Medicaid compliant techniques and tools, depending upon the situation of the individual and the family.

Reference: The Sentinel (April 23, 2021) “Understanding your trust”

Trusts can Work for ‘Regular’ People

A trust fund is an estate planning tool that can be used by anyone who wishes to pass their property to individuals, family members or nonprofits. They are used by wealthy people because they solve a number of wealth transfer problems and are equally applicable to people who aren’t mega-rich, explains this recent article from Forbes titled “Trust Funds: They’re Not Just For The Wealthy.”

A trust is a legal entity in the same way that a corporation is a legal entity. A trust is used in estate planning to own assets, as instructed by the terms of the trust. Terms commonly used in discussing trusts include:

  • Grantor—the person who creates the trust and places assets into the trust.
  • Beneficiary—the person or organization who will receive the assets, as directed by the trust documents.
  • Trustee—the person who ensures that the assets in the trust are properly managed and distributed to beneficiaries.

Trusts may contain a variety of property, from real estate to personal property, stocks, bonds and even entire businesses.

Certain assets should not be placed in a trust, and an estate planning attorney will know how and why to make these decisions. Retirement accounts and other accounts with named beneficiaries don’t need to be placed inside a trust, since the asset will go to the named beneficiaries upon death. They do not pass through probate, which is the process of the court validating the will and how assets are passed as directed by the will. However, there may be reasons to designate such accounts to pass to the trust and your attorney will advise you accordingly.

Assets are transferred into trusts in two main ways: the grantor transfers assets into the trust while living, often by retitling the asset, or by using their estate plan to stipulate that a trust will be created and retain certain assets upon their death.

Trusts are used extensively because they work. Some benefits of using a trust as part of an estate plan include:

Avoiding probate. Assets placed in a trust pass to beneficiaries outside of the probate process.

Protecting beneficiaries from themselves. Young adults may be legally able to inherit but that doesn’t mean they are capable of handling large amounts of money or property. Trusts can be structured to pass along assets at certain ages or when they reach particular milestones in life.

Protecting assets. Trusts can be created to protect inheritances for beneficiaries from creditors and divorces. A trust can be created to ensure a former spouse has no legal claim to the assets in the trust.

Tax liabilities. Transferring assets into an irrevocable trust means they are owned and controlled by the trust. For example, with a non-grantor irrevocable trust, the former owner of the assets does not pay taxes on assets in the trust during his or her life, and they are not part of the taxable estate upon death.

Caring for a Special Needs beneficiary. Disabled individuals who receive government benefits may lose those benefits, if they inherit directly. If you want to provide income to someone with special needs when you have passed, a Special Needs Trust (sometimes known as a Supplemental Needs trust) can be created. An experienced estate planning attorney will know how to do this properly.

Reference: Forbes (March 15, 2021) “Trust Funds: They’re Not Just For The Wealthy”

Tax Planning Strategies for 2021

The uncertainty surrounding the election and possibility of changes to the tax law led many families to make substantial wealth transfers in 2020, especially as the historically high gift and generation-skipping transfer (GST) tax exemptions were so advantageous. This recent article from Financial Advisor, “No More Gift Tax Exemption? Additional Planning Strategies To Consider for 2021,” discusses the options that are still available for 2021.

Gifting is Still a Good Strategy. Even if you used your gift and GST tax exemptions, you may still make additional gifts outright or in trust using the 2021 inflation adjusted amount. The gift and GST tax exemptions are indexed for inflation, so this year the exemptions went from $11.58 million in 2020 to $11.7 million for 2021. Annual exclusion gifts allow individuals to make gifts up to $15,000 per person, and $30,000 for married couples, which do not count towards the gift and estate tax exemptions.

Direct payments for medical and tuition payment are still good options that won’t deplete the annual exclusion or gift and GST tax exemption. Just be sure to make the payment directly to the qualified educational institution or medical provider.

Grantor Retained Annuity Trusts (GRATS) still work. A GRAT is a special type of irrevocable trust. The grantor makes a gift of property in trust, retaining the right to an annual payment (annuity) from the trust for a specified amount of time. They can be used for a number of different assets, including assets expected to appreciate significantly. Check with your estate planning attorney to be sure this is a good option for you. If the grantor dies within the annuity term, the entire value of the trust generally will be included in the estate, as if it had never been created.

Sale to Grantor Trust. This strategy takes advantage of the differences between the income and transfer tax treatment of irrevocable trusts. The goal is to transfer anticipated appreciated assets at a reduced gift tax cost. In return for the transfer of property, the trust gives the grantor a note, which carries a market rate of interest and usually requires a balloon payment of principal at the end of the note’s term. In most cases, when the trust is a grantor trust, the grantor and the trust are treated as the same taxpayer for income tax purposes, but as two separate entities for transfer tax purposes. Because of this, neither the sale nor the note payments trigger income taxation.

Intra-Family Loans. These loans can be made at lower rates than by commercial lenders without the loan being deemed a gift. This lets an individual help their family members financially, without triggering additional gift tax. Wealth may be shifted, if the loan assets are invested by the borrower and earn a higher return than the required interest rate. Interest is to be paid within the family, and not to a third-party lender.

The intra-family loan establishes both a bona fide creditor relationship and the payment of interest. Family loans can be financially advantageous and emotionally tricky, so navigate with care. Your estate planning attorney will create the proper documents and all parties need to be clear on the details.

These strategies will work best when integrated into your estate plan. Discuss with your estate planning attorney to ensure that they will align with your long-term goals, as well as your tax planning.

Reference: Financial Advisor (Feb. 24, 2021) “No More Gift Tax Exemption? Additional Planning Strategies To Consider for 2021”