Does Your State Have an Estate or Inheritance Tax?

Did you know that Hawaii and the State of Washington have the highest estate tax rates in the nation at 20%? There are 8 states and DC that are next with a top rate of 16%. Massachusetts and Oregon have the lowest exemption levels at $1 million, and Connecticut has the highest exemption level at $7.1 million.

The Tax Foundation’s recent article entitled “Does Your State Have an Estate or Inheritance Tax?” says that of the six states with inheritance taxes, Nebraska has the highest top rate at 18%, and Maryland has the lowest top rate at 10%. All six of these states exempt spouses, and some fully or partially exempt immediate relatives.

Estate taxes are paid by the decedent’s estate, prior to asset distribution to the heirs. The tax is imposed on the overall value of the estate. Inheritance taxes are due from the recipient of a bequest and are based on the amount distributed to each beneficiary.

Most states have been steering away from estate or inheritance taxes or have upped their exemption levels because estate taxes without the federal exemption hurt a state’s competitiveness. Delaware repealed its estate tax at the start of 2018, and New Jersey finished its phase out of its estate tax at the same time. The Garden State now only imposes an inheritance tax.

Connecticut still is phasing in an increase to its estate exemption. They plan to mirror the federal exemption by 2023. However, as the exemption increases, the minimum tax rate also increases. In 2020, rates started at 10%, while the lowest rate in 2021 is 10.8%. Connecticut’s estate tax will have a flat rate of 12% by 2023.

In Vermont, they’re still phasing in an estate exemption increase. They are upping the exemption to $5 million on January 1, compared to $4.5 million in 2020.

DC has gone in the opposite direction. The District has dropped its estate tax exemption from $5.8 million to $4 million in 2021, but at the same time decreased its bottom rate from 12% to 11.2%.

Remember that the Tax Cuts and Jobs Act of 2017 raised the estate tax exclusion from $5.49 million to $11.2 million per person. This expires December 31, 2025, unless reduced sooner!

Talk to an experienced estate planning attorney about estate and inheritance taxes, and see if you need to know about either, in your state.

Reference: The Tax Foundation (Feb. 24, 2021) “Does Your State Have an Estate or Inheritance Tax?”

If My Estate Is the Beneficiary of My IRA, How Is It Taxed?

The named beneficiary of an IRA can have important tax consequences, says nj.com’s recent article entitled “How is tax paid when an estate is the beneficiary of an IRA?”

If an estate is named the beneficiary of an IRA, or if there’s no designated beneficiary, the estate is usually designated beneficiary by default. In that case, the IRA must be paid to the estate. As a result, the account owner’s will or the state law (if there was no will and the owner died intestate) would determine who’d inherit the IRA.

An individual retirement account or “IRA” is a tax-advantaged account that people can use to save and invest for retirement.

There are several types of IRAs—Traditional IRAs, Roth IRAs, SEP IRAs and SIMPLE IRAs. Each one of these has its own distinct rules regarding eligibility, taxation and withdrawals. However, with any, if you withdraw money from an IRA before age 59½, you’re usually subject to an early-withdrawal penalty of 10%.

A designated beneficiary is an individual who inherits the balance of an individual retirement account (IRA) or after the death of the asset’s owner.

However, if a “non-individual” is the beneficiary of an IRA, the funds must be distributed within five years, if the account owner died before his/her required beginning date for distributions, which was changed to age 72 last year when Congress passed the SECURE Act.

If the owner dies after his/her required beginning date, the account must then be distributed over his/her remaining single life expectancy.

The income tax on these distributions is payable by the estate. A compressed tax bracket is used.

As such, the highest tax rate of 37% is paid on this income when total income of the estate reaches $12,950.

For individuals, the 37% tax bracket isn’t reached until income is above $518,400 or $622,050 if filing as married.

Therefore, you can see why it’s not wise to leave your IRA to your estate. It’s not tax-efficient and generally should be avoided.

Reference: nj.com (Feb. 26, 2021) “How is tax paid when an estate is the beneficiary of an IRA?”

When Do I File a Tax Return for an Estate?

In this example, Mom’s entire estate is valued at less than $20,000. This includes a mobile home worth about $12,000, which the children plan to sell.

Would the estate need to report income tax?

Nj.com’s recent article entitled “We are settling an estate. What tax returns do we have to file?” says that there are a few issues to consider.

One is the mother’s Social Security income for 2020. There shouldn’t be any income tax filing requirement, if she didn’t have any other reportable income during that year.

An individual taxpayer with income under $34,000 must recognize up to 50% of the Social Security income. Therefore, in this example, since the mother’s Social Security income was only $20,000, she would have to recognize $10,000 of income.

However, that amount of taxable income is below the individual federal standard deduction of $12,000. As a result, there’d be no requirement to file a federal income tax return for her.

There may be a tax on the Social Security at the state level.

Note that Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia impose state income tax on Social Security payments to at least some beneficiaries.

However, there is income on capital gains recognized on the sale of the mobile home, which must be reported on federal and state income tax returns.

The basis of the mobile home would be adjusted to the value of that property as of the mom’s date of death, if she was the sole owner of that asset.

If the mobile home is sold for more than its adjusted basis, the gain would have to be recognized and reported on that excess amount.

However, if the mobile home is sold for an amount equal to its date of death value, then there would be no gain. Used mobile homes are not high demand, so it is likely there would be no gain on the sale.

Reference: nj.com (Feb. 18, 2021) “We are settling an estate. What tax returns do we have to file?”

How Do I Use a Charitable Remainder Trust with a Large IRA?

Since the mid-1970s, saving in a tax-deferred employer-sponsored retirement plan has been a great way to save for retirement, while also deferring current income tax. Many workers put some of their paychecks into 401(k)s, which can later be transferred to a traditional Individual Retirement Account (IRA). Others save directly in IRAs.

Kiplinger’s recent article entitled “Worried about Passing Down a Big IRA? Consider a CRT” says that taking lifetime IRA distributions can give a retiree a comfortable standard of living long after he or she gets their last paycheck. Another benefit of saving in an IRA is that the investor’s children can continue to take distributions taxed as ordinary income after his or her death, until the IRA is depleted.

Saving in a tax-deferred plan and letting a non-spouse beneficiary take an extended stretch payout using a beneficiary IRA has been a significant component of leaving a legacy for families. However, the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act), which went into effect on Jan. 1, 2020, eliminated this.

Under the new law (with a few exceptions for minors, disabled beneficiaries, or the chronically ill), a beneficiary who isn’t the IRA owner’s spouse is required to withdraw all funds from a beneficiary IRA within 10 years. Therefore, the “stretch IRA” has been eliminated.

However, there is an option for extending IRA distributions to a child beyond the 10-year limit imposed by the SECURE Act: it’s a Charitable Remainder Trust (CRT). This trust provides for distributions of a fixed percentage or fixed amount to one or more beneficiaries for life or a term of less than 20 years. The remainder of the assets will then be paid to one or more charities at the end of the trust term.

Charitable Remainder Trusts can provide that a fixed percentage of the trust assets at the time of creation will be given to the current individual beneficiaries, with the remainder being given to charity, in the case of a Charitable Remainder Annuity Trust (CRAT). There is also a Charitable Remainder Unitrust (CRUT), where the amount distributed to the individual beneficiaries will vary from year to year, based on the changing value of the trust. With both trusts, the amount of the charity’s remainder interest must be at least 10% of the value of the trust at its inception.

Implementing a CRT to extend distributions from a traditional IRA can have tax advantages and can complement the rest of a comprehensive estate plan. It can be very effective when your current beneficiary has taxable income from other sources and resources, in addition to the beneficiary IRA.  It can also be effective in protecting the IRA assets from a beneficiary’s creditors or for planning with potential marital property, while providing the beneficiary a lengthy predictable income stream.

Ask an experienced estate planning attorney, if one of these trusts might fit into your comprehensive estate plan.

Reference: Kiplinger (Feb. 8, 2021) “Worried about Passing Down a Big IRA? Consider a CRT”

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?”

Who Can Witness Wills?

For a will to be binding, there are a number of requirements that must be met. While state laws on wills vary, most require you to be of legal adult age to make a will and have testamentary capacity (i.e., that you be “of sound mind”).

Yahoo Finance’s recent article entitled “Who Can and Cannot Witness a Will?” explains that you usually must have your will witnessed.

Witnesses to your will are significant in the event that someone disputes its validity later or if there is a will contest. If one of your heirs challenges the terms of your will, a witness may be asked by the probate court to attest that they watched you sign the will and that you appeared to be of sound mind when you did so. Witnesses provide you with another layer of validity to a will, and it makes it more difficult for someone to dispute its legality.

When drafting a will, it’s important to understand several requirements, including who can serve as a witness. Generally, but depending on applicable state law, anyone can witness a will, as long as they meet two requirements: (i) they are of legal adult age; and (ii) they do not have a direct interest in the will. Therefore, the types of people who could witness a will for you include your friends who aren’t to receive anything from your estate, a neighbor, co-workers and any of your relatives who aren’t included in your will.

If you’ve hired an experienced estate planning attorney to help you draft your will, he or she can also act as a witness, provided they’re not named as a beneficiary. An attorney who’s also acting as the executor of the will (the person who oversees the process of distributing your assets and paying off any outstanding debts owed by your estate) can also witness a will.

Most states don’t allow you to select individuals who will benefit from your will as witnesses. If you are drafting a will that leaves assets to your spouse, children, siblings, or parents, then none of those individuals can serve as witnesses to the will’s signing because they all have an interest in the will’s terms. The same is true for relatives or spouses of any of the beneficiaries.

The witnesses to your will do not need to review the entire will document in order to sign it. They only need to be able to verify that the document exists, that you have signed it in their presence and that they have signed it in front of you.

When you sign the will, get both witnesses together at the same time. You’ll need to sign, initial and date the will in ink, then have your witnesses do the same. Some states require you to attach a self-proving affidavit or have the will notarized in front of the witnesses.

Reference: Yahoo Finance (Dec. 28, 2020) “Who Can and Cannot Witness a Will?”

Do I Assume My Parents’ Timeshare when They Die?

Ridding yourself of a timeshare can be difficult. Frequently, heirs of a timeshare owner don’t want to take on the liability and the responsibility.

Nj.com’s recent article entitled “Can I leave a timeshare to the timeshare company in my will?” explains that as a general rule, unless it’s in an attempt to defraud creditors, a beneficiary may always renounce or disclaim a bequest made to him or her in a will.

However, if you write a provision in your will, it doesn’t mean that it’s legal, needs to be followed, or can be carried out.

As an example, a beneficiary designation on a bank account or certificate of deposit (CD) to your brother Dirk would take precedence over a specific bequest in your will that the same account or CD goes to your brother Chris. In that instant, the bank will pay the bank account or CD to your brother Dirk—no matter what your will says.

Likewise, with shares in a closely held business. If there is a contract between the shareholders dictating what happens to shares of the business if someone dies, that agreement will also override a provision in your will.

A timeshare is a contract. That means the terms of that contract control what happens. Your will doesn’t.

If the will doesn’t contradict the contract, like bequeathing the timeshare to a third-party who will continue to pay the contract obligations, both documents can co-exist.

A timeshare owner can’t avoid contractual obligations by just giving back the unit back to the corporation, unless that’s permitted in the contract.

The timeshare corporation isn’t required to take back a timeshare unit whether it is returned by the terms of the will or by the executor in administrating the estate, unless the signed timeshare agreement provides for this, or terms of the return are negotiated.

Reference: nj.com (Dec. 24, 2020) “Can I leave a timeshare to the timeshare company in my will?”

What Estate Planning Documents Should I Have when I Retire?

Research shows that most retirees (53%) have a last will and testament. However, they don’t have six other crucial legal documents.

Money Talks News’ recent article entitled “6 Legal Documents Retirees Need — but Don’t Have” says in fact, in this pandemic, 30% of retirees have none of these crucial documents — not even a will — according to the 20th annual Transamerica Retirement Survey of Retirees.

In addition, the Transamerica survey found the following among retirees:

  • 32% have a power of attorney or medical proxy, which allows a designated agent to make medical decisions on their behalf
  • 30% have an advance directive or living will, which states their end-of-life medical preferences to health care providers
  • 28% have designated a power of attorney to make financial decisions in their stead
  • 19% have written funeral and burial arrangements
  • 18% have filled out a Health Insurance Portability and Accountability Act (HIPAA) waiver, which allows designated people to talk to their health care and insurance providers on their behalf; and
  • 11% have created a trust.

The study shows there is a big gap that retirees need to fill, if they want to be properly prepared for the end of their lives.

The coronavirus pandemic has created an even more challenging situation. Retirees can and should be taking more actions to protect their health and financial well-being. However, they may find it hard while sheltering in place.

Now more than ever, seniors may need extra motivation and support from their families and friends.

The Transamerica results shouldn’t shock anyone. That is because we have a long history of disregarding death, and very important estate planning questions. No one really wants to ponder their ultimate demise, when they can be out enjoying themselves.

However, planning your estate now will give you peace of mind. More importantly, this planning can save your heirs and loved ones a lot of headaches and stress, when you pass away.

Talk to an experienced estate planning attorney today to get your plan going.

Reference: Money Talks News (Dec. 16, 2020) “6 Legal Documents Retirees Need — but Don’t Have”

What Happens If Trust Not Funded

Revocable trusts can be an effective way to avoid probate and provide for asset management, in case you become incapacitated. These revocable trusts — also known as “living” trusts — are very flexible and can achieve many other goals.

Point Verda Recorder’s recent article entitled “Don’t forget to fund your revocable trust” explains that you cannot take advantage of what the trust has to offer, if you do not place assets in it. Failing to fund the trust means that your assets may be required to go through a costly probate proceeding or be distributed to unintended recipients. This mistake can ruin your entire estate plan.

Transferring assets to the trust—which can be anything like real estate, bank accounts, or investment accounts—requires you to retitle the assets in the name of the trust.

If you place bank and investment accounts into your trust, you need to retitle them with words similar to the following: “[your name and co-trustee’s name] as Trustees of [trust name] Revocable Trust created by agreement dated [date].” An experienced estate planning attorney should be consulted.

Depending on the institution, you might be able to change the name on an existing account. If not, you’ll need to create a new account in the name of the trust, and then transfer the funds. The financial institution will probably require a copy of the trust, or at least of the first page and the signature page, as well as the signatures of all the trustees.

Provided you’re serving as your own trustee or co-trustee, you can use your Social Security number for the trust. If you’re not a trustee, the trust will have to obtain a separate tax identification number and file a separate 1041 tax return each year. You will still be taxed on all of the income, and the trust will pay no separate tax.

If you’re placing real estate in a trust, ask an experienced estate planning attorney to make certain this is done correctly.

You should also consult with an attorney before placing life insurance or annuities into a revocable trust and talk with an experienced estate planning attorney, before naming the trust as the beneficiary of your IRAs or 401(k). This may impact your taxes.

Reference: Point Verda Recorder (Nov. 19, 2020) “Don’t forget to fund your revocable trust”

What are Options for Powers of Attorney?

Power of attorney (POA) documents are an important component of an estate plan. There are four types. You should review each carefully to see which one will work best for you in your situation. What is required for a power of attorney, depends upon what power you want to authorize, says Carmel’s Hamlet Hub in a recent article titled “4 Types of Power of Attorney.”

Limited Power of Attorney. If you need someone to act on your behalf for a limited purpose, use a limited power of attorney. This will specify the date/time after which the power no longer is in effect.

General Power of Attorney. This is an all-encompassing power of attorney, in which you assign every power and right you possess as an individual to a certain party. It’s typically used where the principal is incapacitated. It is also used with those who don’t have the time, skills, knowledge, or energy to handle all of their financial matters. The power you assign is in effect for your lifetime, or until you are incapacitated (unless it is also “durable”). However, you can elect to rescind it before then.

Durable Power of Attorney. The key distinction with a durable power of attorney is that it stays in effect, even after you’ve become incapacitated. Therefore, you want to sign a durable power of attorney if: (i) you want to give the designated agent authority ONLY if you’re unable to act for yourself; or (ii) you want to give the agent immediate authority that continues after you’re unable to act for yourself.

Note that a limited or general power of attorney ends when you become incapacitated. At that point, a court will appoint a guardian or conservator to handle your matters. You can rescind a durable power of attorney at any time prior to becoming incapacitated.

Springing Power of Attorney. This document serves the same purpose as a durable power of attorney, but it’s effective only upon your becoming incapacitated. When drafting this, your experienced estate planning attorney will help you make clear your definition of “incapacitated.”

Remember that you’ll need to state in your power of attorney document which powers and duties you are assigning to the attorney-in-fact.

Regardless of the type of power of attorney you implement, the attorney-in-fact has the power to do only what your POA indicates.

Reference: Carmel’s Hamlet Hub (Dec. 16, 2020) “4 Types of Power of Attorney”