What Should I Know About Being an Executor?

You’re named executor because someone thinks you’d be good at collecting assets, settling debts, filing estate tax returns where necessary, distributing assets and closing the estate.

However, Investopedia’s article from last summer, “5 Surprising Hazards of Being an Executor,” explains that the person named as an executor isn’t required to accept the appointment. Prior to agreeing to act as an executor, you should know some of the hazards that can result, as well as how you can address some of these potential issues, so that being an executor can run smoothly.

  1. Conflicts with Co-Executors. Parents will frequently name more than one adult child as co-executor, so they don’t show favoritism. However, for those who are named, this may not work well because some children may live far way, making it difficult to coordinate the hands-on activities, like securing assets and selling a home. Some adult children may also not have the financial ability to deal with creditors, understand estate tax matters and perform effective accounting to satisfy beneficiaries that things have been properly handled. In addition, multiple executors mean additional paperwork. Instead, see if co-executors can agree to allow only one to serve, and the others will waive their appointment. Another option is for all of the children to decline and allow a bank’s trust department to handle the task. Employing a bank to serve instead of an individual as executor can alleviate conflicts among the children and relieves them from what could be a very difficult job.
  2. Conflicts with Heirs. It’s an executor’s job to gather the estate assets and distribute them according to the deceased person’s wishes. In some cases, heirs will land on a decedent’s home even before the funeral, taking mementos, heirlooms and other valuables. It’s best to secure the home and other assets as quickly as possible. Tell the heirs that this is the law and share information about the decedent’s wishes, which may be described in a will or listed in a separate document. This Letter of Last Instruction isn’t binding on the executor but can be a good guide for asset disbursements.
  3. Time-Consuming Responsibilities. One of the major drawbacks to be an executor is the amount of time it takes to handle responsibilities. For example, imagine the time involved in contacting various government agencies. This can include the Social Security Administration to stop Social Security benefits and, in the case of a surviving spouse, claim the $255 death benefit. However, an executor can permit an estate attorney to handle many of these matters.
  4. Personal Liability Exposure. The executor must pay taxes owed, before disbursing inheritances to heirs. However, if you pay heirs first and don’t have enough funds in the estate’s checking account to pay taxes, you’re personally liable for the taxes. Explain to heirs who are chomping at the bit to receive their inheritances that you’re not allowed to give them their share, until you’ve settled with creditors, the IRS and others with a claim against the estate. You should also be sure that you understand the extent of the funds needed to pay what’s owed.
  5. Out-of-Pocket Expenses. An executor can receive a commission for handling his duties. The amount of the commission is typically determined by the size of the estate (e.g., a percentage of assets). However, with many cases, particularly smaller estates and among families, an executor may waive any commission. You should pay the expenses of the estate from an estate checking account and record all out-of-pocket expenses, because some of these expenses may be reimbursable by the estate.

Being an executor can be a challenge, but somebody must do it. If that person’s you, be sure to know what you’re getting into before you agree to act as an executor.

Reference: Investopedia (June 25, 2019) “5 Surprising Hazards of Being an Executor”

Disinheriting Loved Ones is A Common Mistake

It happens way more often than you’d ever expect. The account owner dies, the assets go directly to the beneficiaries on the account, and the heirs learn for the first time that whatever is in the will doesn’t override the beneficiary designation. They can argue and even go to court, but it won’t do them much good, says the recent article “Don’t accidentally leave your estate to the wrong person” from The News-Enterprise.

One of many examples, is the widower who remarries after his first wife passes away. He neglects to change his IRA beneficiary form, so when he dies, his second wife does not receive any funds. The case of what happens to the funds has to go to court, because the assets obviously cannot go to his deceased first wife.

Many different kinds of accounts now have beneficiary designations. They include:

  • S. Savings Bonds
  • Bank Accounts
  • Certificates of Deposits
  • Investment Accounts
  • Life Insurance
  • Annuities
  • Retirement Accounts

Some of these accounts can be titled “Payable on Death” or “Transferable on Death,” so that they can more easily be distributed to heirs without going through probate.

If you’ve changed jobs, remember that beneficiary designations do not transfer over, when you roll your 401(k) over to a new plan or IRA.

Here’s another thing most people don’t know about beneficiary designations: they don’t have to be individuals. Beneficiaries can be trusts, charities, organizations, your estate, or, no one at all (although that’s not recommended). Be careful, though, if you are thinking about being creative, like saying “All of my living grandchildren.” What if someone who your family has never met, comes forward and claims to be a grandchild? It’s best to discuss this with an estate planning lawyer.

There are situations where you don’t want to name someone as a beneficiary. You don’t want to leave assets outright to minors, since they cannot inherit property. A court-appointed guardian would have to be named to care for the assets, until the child reaches age 18. Then the 18 year old inherits everything at once and goes on a wild spending spree, and the money is gone. A better approach is to set up a trust, so the trust is the beneficiary of the assets and the trust pays money to heirs over an extended period of time.

Caution must be taken, when considering Special Needs Individuals. If they are receiving government benefits, an inheritance could cause them to lose all benefits. Instead, speak with your estate planning attorney about the use of a Special Needs Trust or Supplemental Needs Trust.

Updating the beneficiary form is simple. Contact the financial company that holds the accounts, ask for a copy of your current beneficiary form, and a blank copy so that you can make changes, if needed. Keep a copy of all current beneficiary forms. You should also speak with your estate planning attorney to make sure that your estate plan and your beneficiary designations work together.

Reference: The News-Enterprise (November 30, 2019) “Don’t accidentally leave your estate to the wrong person”

What Do I Need to Know About Owning Property with Someone Other than My Spouse?

Have you ever considered owning property jointly with a family member, friend, or a business associate? Inside Indiana Business’ recent article, “Risky: Property Owned with a Non-Spouse,” says that you should think about the negatives, such as loss of control, unknown creditor issues and tax consequences.

Loss of Control. When you choose to co-own an asset with another person, you can enter into a legal ownership agreement known as “joint tenants with rights of survivorship” or “JTWROS.” When one of the owners dies, the surviving owner automatically becomes sole owner of the property. However, you give up some control of ownership, when you own property in this way. For example, you can’t direct your portion to go to a spouse or a child after your death in your will or other estate planning documents. OK, you can, but your co-owner’s ownership title takes precedence over your estate documents. As a result, she will become the sole owner. You can also lose some control over the property, if the non-spouse co-owner transfers her interest in the property to another individual without your consent. It’s also tough to remove a co-owner from the property title without his or her full cooperation.

Creditors. Another issue with jointly held property is that it’s subject to creditors’ claims against both owners. If your brother, as a co-owner of your cabin, has financial troubles and files for bankruptcy, his ownership in the cabin could possibly be claimed by a creditor. He could also be forced to sell it to pay off his debts. So, unless you can buy out his ownership in the cabin, you may now own the property with a stranger.

Potentially Higher Taxes. Adding a non-spouse as co-owner of an asset, allows for a simple property transfer at your passing. However, it could also mean both a gift tax to you and an increased capital gain tax for your heir. By adding a non-spouse to the property title, you’re making a gift to the new joint owner. Therefore, based on the current value of the property being gifted, you could be liable for gift tax. In addition, the heir of the property may have to pay increased capital gain taxes. Property transferred at death receives a step-up in basis. This means the heir’s cost basis is equal to the fair market value of the property at your death, instead of your cost basis (the amount you paid for the property). Receiving a step-up in basis reduces the heir’s capital gain on the appreciation of the property when it’s sold. However, if you add a co-owner, only your interest in the asset has the benefit of stepped-up basis at your death, not the entire property. When the property is sold, this may mean a higher capital gain tax.

JTWROS vs. Tenants in Common. When deciding to co-own an asset with another person, you can also enter into an ownership agreement known as “tenants in common.” Here’s a key difference: holding property JTWROS with another person means that when one owner dies, the other owner receives the property outright and automatically. When owning property as tenants in common with another person, when one owner dies, the owner’s heirs receive his share in the property. A co-owner can again transfer his interest in the property without approval as the other co-owner. This loss of control may place you in a difficult position.

When considering property ownership with another party, look at the pros and cons of both JTWROS and tenants in common. The cons usually outweigh the pros. However, if owning property with a non-spouse is what you want, discuss this with a qualified estate planning attorney.

Reference: Inside Indiana Business (December 1, 2019) “Risky: Property Owned with a Non-Spouse”

What Should I Keep in Mind, When I Remarry?

Before you remarry, discuss any past financial issues with your fiancé, and plan for success, by considering some important ideas.

U.S. News & World Report’s recent article, “6 Financial Considerations for Remarriage,” lists six financial considerations and crucial steps to take before you remarry:

  1. Revise Your Budget. Whether this is your first, second, or third marriage, couples need to create a budget for daily spending, monthly expenses and big-ticket purchases. You should also talk about your household expenses and costs related to children from a prior marriage. If you have to pay alimony, let your new spouse know. It’s also a good time to talk about credit card debt, past investments you’ve made and retirement accounts. You may want to draft a prenuptial agreement.
  2. Inform your Fiancé of Any Financial Obligations, Including Child Support. Before getting married, review the laws to see how child support may be impacted by marriage to a new person. While it’s unlikely that you would lose your child support if you remarry, the family court may reduce the amount. If a person paying the child support is remarrying, they should talk to their partner prior to the marriage to make certain they understand the amount of the payments.
  3. Check Insurance and Benefits. A frequent mistake when remarrying, is not updating the beneficiaries of life insurance policies. You also may have to look at other updates to your coverage, like who will be on your health plan, and you may need to modify your homeowner’s insurance with a spouse and children in residence. Understand that if you get government benefits, like Medicaid or Social Security, you could forfeit your Medicaid eligibility when you remarry if your spouse’s income is too high to be eligible. You might also discover that your Social Security benefits from an ex-spouse will stop, after you remarry.

A second marriage may also increase a parent’s income for federal financial aid purposes for college. If a parent is the custodial parent for the FAFSA (Free Application for Federal Student Aid), their income now may include their new spouse’s income. It is important to discuss saving for college and tuition costs, as well as if either partner has children from a prior marriage, whether each spouse will save money for tuition costs.

  1. Estate Planning Is Critical. Check your estate planning before remarrying. That includes a will, medical powers of attorney, do not resuscitate orders, durable powers of attorney, designations of guardianship or consent to adoption and various trusts, including trusts for special needs children. If you have children from a prior relationship, hire a qualified estate planning attorney.
  2. Create an Inheritance Plan. If you have children from a prior relationship, you need to put the right estate planning documents in place to protect them from being disinherited. In some states, a last will and testament may be enough, but in others it may make sense to also have a revocable living trust.

The biggest mistake that couples commit when entering their second marriage, is thinking that their own children will inherit any of their estate, if they die first. Perhaps the adult children will inherit some of the estate, but you should speak to an estate attorney to create a customized strategic plan. In many instances, the living spouse will change the plan and leave everything to their children and nothing to yours.

Reference: U.S. News & World Report (November 18, 2019) “6 Financial Considerations for Remarriage”

What are the Biggest Estate Planning Errors to Avoid?

Nobody likes to plan for events like aging, incapacity, or death. However, failing to do so can cause families burdens and grief, thousands of dollars and hundreds of hours.

Fox Business’ recent article, “Here are the top estate planning mistakes to avoid,” says that planning for life’s unexpected events is critical. However, it can often be a hard process to navigate. Let’s look at the top estate planning mistakes to avoid, according to industry experts:

  1. Failing to sign a will (or one that can be located). The biggest mistake is simply not having a will. Estate planning is critically important to protect you, your family and your hard-earned assets—during your lifetime, in the event of your incapacity, and upon your death. We all need estate planning, no matter the amount of assets you have. In addition to having a will, it needs to be findable. The Wall Street Journal says that the biggest estate planning error is simply losing a will. Make sure your family has access to your estate planning documents.
  2. Failing to name and update beneficiaries. An asset with a beneficiary designation supersedes any terms in a will. Review your 401(k), IRA, life insurance, and any other accounts with beneficiaries after any significant life event. If you don’t have the proper beneficiary designations, income tax on retirement accounts may have to be paid sooner. This may lead to increased income tax liability, and the designation of a beneficiary on a life insurance policy can affect whether the proceeds are subject to creditors’ claims.

There’s another mistake that impacts people with minor children, which is naming a guardian for minor children and then naming that person as beneficiary of their life insurance, instead of leaving it to a trust for the child. A minor child can’t receive that money. It also exposes the money to the beneficiary’s creditors and spouse.

  1. Failing to consider powers of attorney for adult children. When your children reach age 18, they’re adults in the eyes of the law. If something unfortunate happens to them, you may be left without any say in their treatment. In the event that an 18-year-old becomes ill or has an accident, a hospital won’t consult with their parents if a power of attorney for health care isn’t in place. Unless a power of attorney for property is signed, a parent may not be able to take care of bills, make investment decisions and pay taxes without the child’s signature. This could create an issue when your child is in college—especially if he or she is attending school abroad. It is very important that when your child turns 18 that you have powers of attorney put into place.

Reference: Fox Business (October 15, 2019) “Here are the top estate planning mistakes to avoid”

Do Name Changes Need to Be Reflected in Estate Planning Documents?

When names change, executing documents with the person’s prior name can become problematic. For example, what about a daughter who was named as a health care representative by her parents several years ago, who marries and changes her name? Then, to make matters more complicated, add the fact that the couple’s daughter-in-law has the same first name, but a different middle name. That’s the situation presented in the article “Estate Planning: Name changes and the estate plan” from nwi.com.

When a person’s name changes, many documents need to be changed, including items like driver’s licenses, passports, insurance policies, etc. The change of a name isn’t just about the person who created the estate plan but also to their executors, heirs, beneficiaries and those who have been named with certain legal powers through power of attorney (POA) and health care power of attorney.

It’s not an unusual situation, but it does have to be addressed. It’s pretty common to include additional identifiers in the documents. For example, let’s say the will says I leave my house to my daughter Samantha Roberts. If Samantha gets married and changes her last name, it can be reasonably assumed that she can be identified. In some cases, the document may be able to stay the same.

In other instances, the difference will be incorporated through the use of the acronym AKA—Also Known As. That is used when a person’s name is different for some reason. If the deed to a home says Mary Green, but the person’s real name is Mary G. Jones, the term used will be Mary Green A/K/A Mary G. Jones.

Sometimes when a person’s name has changed completely, another acronym is use: N/K/A, or Now Known As. For example, if Jessica A. Gordon marries or divorces and changes her name to Jessica A. Jones, the phrase Jessica A. Gordon N/K/A Jessica A. Jones would be used.

However, in the situation noted above, most attorneys to want to have the documents changed to reflect the name change. First, there are two people in the family with similar names. It is possible that someone could claim that the person wished to name the other person. It may not be a strong case, but challenges have been made over smaller matters.

Second is that the document being discussed is a healthcare designation. Usually when a health care power of attorney form is being used, it’s in an emergency. Would a doctor make a daughter prove that she is who she says she is? It seems unlikely, but the risk of something like that happening is too great. It is much easier to simply have the document updated.

In most matters, when there is a name change, it’s not a big deal. However, in estate planning documents, where there are risks about being able to make decisions in a timely manner or to mitigate the possibility of an estate challenge, a name change to update documents is an ounce of prevention worth a pound of trouble in the future.

Reference: nwi.com (October 20, 2019) “Estate Planning: Name changes and the estate plan”

How Do I Calculate My Executor’s Fee?

An executor’s fee is the amount of money that’s charged by the individual who’s been named or appointed as the executor of the probate estate for handling all of the necessary tasks in the probate administration.

If you’ve been appointed an executor of someone’s estate, you may be entitled to a fee for your services.

The executor or personal representative fee could be based upon a variety of factors. Some of these factors may be dependent upon the law in your state, says nj.com’s recent article, “Both of my parents died. How do I calculate the executor fee?”

In most states, the executor fee is set by statute. For example, in New Jersey, it is 5% of the first $200,000 of assets taken in by the executor, 3.5% of the next $800,000 of assets, and 2% on anything in excess of $1 million. Likewise, California has a sliding scale based on the amount of the estate.

However, in Minnesota and Nebraska, the law states that the fee should be “reasonable.”

The amount of work involved is determined by the specific estate. The executor is generally responsible for collecting the estate assets, paying the debts and taxes (if any) and then giving what’s remaining to the heirs.

If you elect to take the commission, it’s taxable income which must be shown on your personal income tax return.

In New Jersey, if there are co-executors, the statute says that an additional 1% can be included to the commission. However, any one executor cannot receive more than the amount to which a sole executor is entitled.

Note that the executor only receives a commission on what he or she takes control of as executor.

This means that the executor doesn’t get a commission on assets that have beneficiary designations on death or that are jointly owned with right of survivorship. These assets pass outside of the will and the executor doesn’t take possession of these assets.

In many instances, the probate estate of the first spouse to die is less than the second. That’s because many of the assets were held jointly with right of survivorship. As a result, they aren’t probate assets and are not subject to the commission.

If that’s the case, the commission on the first spouse’s estate would be much less than the commission on the second estate.

Reference: nj.com (October 10, 2019) “Both of my parents died. How do I calculate the executor fee?”

How Can Beneficiary Designations Wreck My Estate Plan?

It’s not uncommon for the intent of an individual’s will and trust to be overridden by beneficiary designations that weren’t chosen carefully.

Some people think that naming a beneficiary should be a simple job, and they try to do it themselves. Others don’t want to bother their attorney with what seems like a straightforward issue. A well-intentioned financial advisor could also complete the change of beneficiary form incorrectly.

Beneficiary designations are often used for life insurance and retirement benefits, but more frequently, they’re also being used for brokerage and bank accounts. People trying to avoid probate may name a “payable on death” beneficiary of an account. However, they don’t know that doing this may undermine their existing estate plan. It’s best to consult with your attorney to make certain that your named beneficiaries are consistent with your estate planning documents.

Wealth Advisor’s “7 Ways That Beneficiary Designations Can Mess Up Your Estate Plan” lists seven issues you need to think about, when making your beneficiary designations.

Cash. If your will leaves cash to various people or charities, you need to make certain that sufficient money comes into your estate, so your executor can pay these gifts.

Estate tax liability. If assets do pass outside your estate to a named beneficiary, make certain there will be sufficient money in your estate and trust to pay your estate tax lability. If all your assets pass by beneficiary designation, your executor may not have enough money to pay the estate taxes that may be due at your death.

Protect your tax savings. If you have created trusts for estate tax purposes, make sure that sufficient assets flow into your trusts to maximize the estate tax savings. Designating individuals as beneficiaries instead of your trusts may defeat the purpose of your estate tax planning. If there aren’t enough assets in your trust, the estate tax provisions may not work. As a result, your heirs may eventually end up paying more in taxes.

Accurate records. Be sure the information you have on the change of beneficiary form is accurate. This is particularly important if the beneficiary is a trust—the trust name, trustee information and tax identification number all need to be right.

Spouses as beneficiaries. Many people name their spouse as the primary beneficiary of their life insurance policy, followed by their trust as the secondary beneficiary. However, this may defeat your estate planning, especially if you have children from a first marriage, or if you don’t want your spouse to control the assets. If your trust provides for your surviving spouse on your death, he or she will be taken care of from the trust.

No last minute changes. Some people change their beneficiary designations at the last minute, because they’re nervous about assets flowing into a trust. This could lead to increased estate tax payments and litigation from heirs who were left out.

Qualified accounts. Don’t name a trust as the beneficiary of qualified accounts, like an IRA, without consulting with your attorney. Trusts that receive such qualified money need to contain special provisions for income tax purposes.

Be sure that your beneficiary designations work with your estate planning, rather than against it.

Reference: Wealth Advisor (October 8, 2019) “7 Ways That Beneficiary Designations Can Mess Up Your Estate Plan”

How Can I Make Amendments to an Estate Plan?

If you want to make changes to your estate plan, don’t think you can just scratch out a line or two and add your initials. For most people, it’s not that simple, says the Lake County Record-Bee’s recent article “Amending estate planning documents.” If documents are not amended correctly, the resulting disappointment and costs can add up quickly.

If you live in California, for example, a trust can be amended using the method that is stated in the trust, or alternatively by using a document—but not the will—that is signed both by the settlor or the other person holding the power to revoke the trust and then delivered to the trustee. If the trust states that this method is not acceptable, then it cannot be used.

In a recent case, the deceased settlor made handwritten notes—he crossed out existing trust language and hand wrote his revisions to a recently executive amendment to his trust. Then he mailed this document, along with a signed post-it note stuck on the top of the document, to his attorney, requesting that his attorney draft an amendment.

Unfortunately, he died before the new revision could be signed. His close friend, the one he wanted to be the beneficiary of the change, argued that his handwritten comments, known as “interlineations,” were as effective as if his attorney had actually completed the revision and the document had been signed properly. He further argued that the post-it note that had a signature on it, satisfied the requirement for a signature.

The court did not agree, not surprisingly. A trust document may not be changed, just by scribbling out a few lines and adding a few new lines without a signature. A post-it note signature is also not a legal document.

Had he signed and dated an attachment affirming each of his specific changes made to the trust, that might have been considered a legally binding amendment to his trust.

A better option would be going to the attorney’s office and having the documents prepared and executed.

What about changes to a will? Changing a will is done either through executing a codicil or creating and executing a new will that revokes the old will. A codicil is executed just the same way as a will: it is signed by the testator with at least two witnesses, although this varies from state to state. Your estate planning attorney will make sure that the law of your state is taken into consideration, when preparing your estate plan.

If you live in a state where handwritten or holographic wills are accepted, no witnesses are required and changes to the will can be made by the testator directly onto the original without a new signature or date. Be careful about a will like this. Even if legal, it can lead to estate challenges and family battles.

Speak with an experienced estate planning attorney, if you decide that your will needs to be changed. Having the documents properly executed in a timely manner ensures that your wishes will be followed.

Reference: Lake County Record-Bee (October 5, 2019) “Amending estate planning documents.”

Do It Yourself Wills Go Wrong–Fast

What happens when a well-meaning person decides to create a will, after reading information from various sources on the internet? There’s no end of problems, as described in the Glen Rose Reporter’s article “Do-it-yourself estate plan goes awry.”

The woman started her plan by deeding her home to her three children, retaining a life estate for herself.

By doing so, she has eliminated the possibility of either selling the house or taking out a reverse mortgage on the home, if she ever needs to tap its equity.

Since she is neither an estate planning attorney nor an accountant, she missed the tax issue completely.

By deeding the house, the transfer has caused a taxable transaction. Therefore, she needs to file a gift tax return because of it. At the same time, her life estate diminishes the value of the gift, and her estate is not large enough to require her to actually pay any tax.

She was puzzled to learn this, since there wasn’t any tax when her husband died and left his share of the house to her. That’s because the transfer of community property between spouses is not a taxable event.

However, that wasn’t the only tax issue to consider. When the house passed to her from her husband, she got a stepped-up basis, meaning that since the house had appreciated in value since she bought it, she only had to pay taxes on the difference in the increased value at the time of her husband’s death and what she sold the property for.

By transferring the house to the children, they don’t get a stepped-up basis. This doesn’t apply to a gift made during one’s lifetime. When the children get ready to sell the home, the basis will be the value that was established at the time of her husband’s death, even if the property increased in value by the time of the mother’s death. The children will have to pay tax on the difference between that value, which is likely to be quite lower, and the sale price of the house.

There are many overlapping issues that go into creating an estate plan. The average person who doesn’t handle estate planning on a regular basis (and even an attorney who does not handle estate planning on a regular basis), doesn’t know how one fact can impact another.

Sitting down with an estate planning attorney, who understands the tax issues surrounding estate planning, gifting, real estate, and inheritances, will protect the value of the assets being passed to the next generation and protect the family. It’s money well spent.

Reference: Glen Rose Reporter (September 17, 2019) “Do-it-yourself estate plan goes awry”

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