Read more about the article Giving to My Favorite Charity in Estate Plan

Giving to My Favorite Charity in Estate Plan

If you’d like to leave some or all of your money to a charity, Go Banking Rates’ recent article entitled “How To Leave Your Inheritance to an Organization” provides what you need to know about a charitable donation as part of your estate plan.

  1. Make Sure the Organization Accepts Donations. Unless you have a formal agreement with the charity stating they’ll accept the inheritance, the confirmation isn’t a binding commitment. As a result, you should ask the organization if there’s any form language that they may want you to add to your will or trust as part of a specific bequest. If the charity isn’t currently able to accept this kind of donation, look at what they will accept or if other charities with a similar mission will accept it.
  2. Set the Amount You Want the Charity To Receive. Some people want to leave the estate tax exemption — the maximum amount that can pass without tax — to individuals and leave the rest to charity. Because the estate tax exemption is subject to change and the value of your assets will change, the amount the charity will get will probably change from when the planning is completed.
  3. Have a Plan B in the Event that the Charity Doesn’t Exist After Your Death. Meet with your estate planning attorney and decide what happens to the bequest if the organization you’re donating to no longer exists. You may plan ahead to pass along the inheritance to another organization and make sure it receives the funds. You could also have the inheritance go back into the general distributions in your will.
  4. State How You Want Your Gift to Be Used. If there is a certain way that you’d like the charity to use the inheritance, you can certainly inquire with the organization and learn more. Find out if the charity accepts this type of restriction, how long it may last and what happens if the charity no longer uses it for this purpose.

As you draft charitable planning provisions, make sure you do so alongside an experienced estate planning attorney.

The provisions in your will should be specific about your desires and provide enough flexibility to your personal representative, executor, or trustee to be modified based on the conditions at the time of your death.

Reference: Go Banking Rates (August 26, 2022) “How To Leave Your Inheritance to an Organization”

There are Ways to Transfer Home to Your Children

There are Ways to Transfer Home to Your Children

Kiplinger’s recent article entitled “2 Clever Ways to Gift Your Home to Your Kids” explains that the most common way to transfer a property is for the children to inherit it when the parent passes away. An outright gift of the home to their child may mean higher property taxes in states that treat the gift as a sale. It’s also possible to finance the child’s purchase of the home or sell the property at a discount, known as a bargain sale.

These last two options might appear to be good solutions because many adult children struggle to buy a home at today’s soaring prices. However, crunch the numbers first.

If you sell your home to your child for less than what it’s worth, the IRS considers the difference between the fair market value and the sale price a gift. Therefore, if you sell a $1 million house to your child for $600,000, that $400,000 discount is deemed a gift. You won’t owe federal gift tax on the $400,000 unless your total lifetime gifts exceed the federal estate and gift tax exemption of $12.06 million in 2022, however, you must still file a federal gift tax return on IRS Form 709.

Using the same example, let’s look at the federal income tax consequences. If the parents are married, bought the home years ago and have a $200,000 tax basis in it, when they sell the house at a bargain price to the child, the tax basis gets split proportionately. Here, 40% of the basis ($80,000) is allocated to the gift and 60% ($120,000) to the sale. To determine the gain or loss from the sale, the sale-allocated tax basis is subtracted from the sale proceeds.

In our illustration, the parent’s $480,000 gain ($600,000 minus $120,000) is non-taxable because of the home sale exclusion. Homeowners who owned and used their principal residence for at least two of the five years before the sale can exclude up to $250,000 of the gain ($500,000 if married) from their income.

The child isn’t taxed on the gift portion. However, unlike inherited property, gifted property doesn’t get a stepped-up tax basis. In a bargain sale, the child gets a lower tax basis in the home, in this case $680,000 ($600,000 plus $80,000). If the child were to buy the home at its full $1 million value, the child’s tax basis would be $1 million.

Another option is to combine your bargain sale with a loan to your child, by issuing an installment note for the sale portion. This helps a child who can’t otherwise get third-party financing and allows the parents to charge lower interest rates than a lender, while generating some monthly income.

Be sure that the note is written, signed by the parents and child, includes the amounts and dates of monthly payments along with a maturity date and charges an interest rate that equals or exceeds the IRS’s set interest rate for the month in which the loan is made. Go through the legal steps of securing the note with the home, so your child can deduct interest payments made to you on Schedule A of Form 1040. You’ll have to pay tax on the interest income you receive from your child.

You can also make annual gifts by taking advantage of your annual $16,000 per person gift tax exclusion. If you do this, keep the gifts to your child separate from the note payments you get. With the annual per-person limit, you won’t have to file a gift tax return for these gifts.

Reference: Kiplinger (Dec. 23, 2021) “2 Clever Ways to Gift Your Home to Your Kids”

What Jackie Kennedy Knew about CLATs and Estate Planning

What Jackie Kennedy Knew about CLATs and Estate Planning

What most people don’t know about Jackie Kennedy was her role as an innovative steward of her family’s wealth and philanthropic legacy, reports a recent article from Forbes titled “Elevating Your Estate And Legacy: A Lesson From Jackie Kennedy.” After her husband’s assassination, she was in charge of a $44 million plus estate and her actions spoke volumes about her values and view for the future.  Jackie Kennedy initiated a Charitable Lead Annuity Trust (CLAT), which today many refer to as the Jackie Onassis Trust.

She created a CLAT receptacle through her will, so her children could elect to transfer some or all of their inherited assets in exchange for significant charitable, tax and non-tax benefits. They were not required to do this. However, it was an option for assets including stock, real estate and other capital. The CLAT offered her children three possible benefits: avoiding federal estate tax on all and any assets transferred to the CLAT, tax-efficient philanthropic giving for a limited number of years and continued investment of CLAT assets, which could be ultimately returned to the child or gifted to future generations at the end of the CLAT’s charitable period.

In addition, during the charitable term, the annual payments required to be distributed via the CLAT to charities would have created income tax deductions against the CLAT’s taxable income.

Despite their mother’s recommendations, the first lady’s children opted against funding the CLAT.

According to an article from The New York Times in 1996, if the Jackie Onassis Trust was worth $100 million and if the beneficiaries had executed the CLAT, the family would have inherited approximately $98 million tax-free in 2018, with charities receiving $192 million.

Instead, the children paid $23 million in estate taxes, leaving the estate with $18 million.

Besides the clear adage of “Mother knows best,” this is an example of the potential power of a CLAT to satisfy the charitable and family wealth transfer of the trust creator and individual beneficiaries. Since the 1960s, more sophisticated trust variants have been created to improve on the original CLAT.

One of these is the Optimized CLAT, a tax-planning trust which accomplishes four goals. It generates a dollar-for-dollar tax deduction in the year of funding, returns an expected 1x-5x of the initial contribution back to the contributor, immediately exempts contributed assets from the 40% federal gift and estate tax and exempts the transferred assets from the contributor’s personal creditors.

These complex estate planning strategies will become increasingly popular as federal estate taxes return to lower levels in near future. Your estate planning attorney will guide you as to which type of trust works best for you and your family, for now and for generations to follow.

Reference: Forbes (Aug. 19, 2022) “Elevating Your Estate And Legacy: A Lesson From Jackie Kennedy”

When Should I Hire an Estate Planning Attorney?

When Should I Hire an Estate Planning Attorney?

Kiplinger’s recent article entitled “Should I Hire an Estate Planning Attorney Now That I Am a Widow?” describes some situations where an experienced estate planning attorney is really required:

Estates with many types of complicated assets. Hiring an experienced estate planning attorney is a must for more complicated estates. These are estates with multiple investments, numerous assets, cryptocurrency, hedge funds, private equity, or a business. Some estates also include significant real estate, including vacation homes, commercial properties and timeshares. Managing, appraising and selling a business, real estate and complex investments are all jobs that require some expertise and experience. In addition, valuing private equity investments and certain hedge funds is also not straightforward and can require the services of an expert.

The estate might owe federal or state estate tax. In some estates, there are time-sensitive decisions that require somewhat immediate attention. Even if all assets were held jointly and court involvement is unnecessary, hiring a knowledgeable trust and estate lawyer may have real tax benefits. There are many planning strategies from which testators and their heirs can benefit. For example, the will or an estate tax return may need to be filed to transfer the deceased spouse’s unused Federal Estate Unified Tax Credit to the surviving spouse. The decision whether to transfer to an unused unified tax credit to the surviving spouse is not obvious and requires guidance from an experienced estate planning attorney.

Many states also impose their own estate taxes, and many of these states impose taxes on an estate valued at $1 million or more. Therefore, when you add the value of a home, investments and life insurance proceeds, many Americans will find themselves on the wrong side of the state exemption and owe estate taxes.

The family is fighting. Family disputes often emerge after the death of a parent. It’s stressful, and emotions run high. No one is really operating at their best. If unhappy family members want to contest the will or are threatening a lawsuit, you’ll also need guidance from an experienced estate planning attorney. These fights can result in time-intensive and costly lawsuits. The sooner you get legal advice from a probate attorney, the better chance you have of avoiding this.

Complicated beneficiary plans. Some wills have tricky beneficiary designations that leave assets to one child but nothing to another. Others could include charitable bequests or leave assets to many beneficiaries.

Talk to an experienced attorney, whose primary focus is estate and trust law.

Reference: Kiplinger (July 5, 2022) “Should I Hire an Estate Planning Attorney Now That I Am a Widow?”

What’s Involved with Being a Trustee?

What’s Involved with Being a Trustee?

There’s an old saying that the two best days in a boat owner’s life are the day they buy their boat and the day they sell it.

Forbes’ recent article entitled “How To Be An Effective Trustee” says that a similar notion applies to being a trustee – it’s an honor to be named and then a huge relief when it’s over. That’s because being a trustee is difficult.

Remember that a trust is a fiduciary relationship in which one party (the trustor) gives another party (the trustee) the right to hold title to property or assets for the benefit of a third party (the beneficiary). Trusts are created to provide legal protection for the trustor’s assets, to make certain those assets are distributed according to the wishes of the trustor, and to save time, reduce paperwork and, in some cases, avoid or reduce inheritance or estate taxes.

Being a trustee requires knowledge about a wide range of topics, including:

  • The trustee’s fiduciary duties, which include loyalty, impartiality, duty of care, protection of trust property, enforcement of claims and the duty to inform and account to beneficiaries, among others (violation of these duties exposes the trustee to liability).
  • Understanding the details of the trust, like the specifics of the distribution instructions.
  • Investments and the ability to engage and monitor investment managers.
  • Administrative matters, such as record keeping and principal and income accounting.
  • Estate planning, trusts and the basics of the estate, gift and generation skipping taxes.
  • Income tax, including how trusts are taxed both by the federal government and the state.

A trustee must also be able to productively communicate and work with the beneficiaries on their financial wellness and distribution needs, which is an area that can be full of conflict.

It’s a daunting list. Talk with an experienced estate planning attorney to discussion your situation in detail.

Reference: Forbes (May 31, 2022) “How To Be An Effective Trustee”

Is Putting a Home in Trust a Good Estate Planning Move?

Is Putting a Home in Trust a Good Estate Planning Move?

A typical estate at death will include a personal residence. It’s common for a large estate to also include a vacation home, or family retreat. Leaving real property in trust is common.

Estate plans that include a revocable trust will fund the trust by a pour-over, says Kiplinger’s recent article entitled “Should You Own Your Home in Your Trust?”

A settlor (the person establishing a trust) often will title their home to the revocable trust, which becomes irrevocable at death.

Another option is a Qualified Personal Residence Trust, which is irrevocable, to gift a valuable home to a trust for the settlor’s children. With a QPRT, the house is passed over a term of years while the original owner continues to live there, so the gift passes with little or no gift or estate tax.

Some trusts arising from a decedent estate will hold the home belonging to the settlor without any instructions for its disposal or retention. Outside of very large trusts, a requirement to actually purchase homes for beneficiaries in the trust is far less common.

It is more common in a large trust to have terms that let the trustee buy a home for a beneficiary outside the trust or keep the settlor’s home in the trust for a beneficiary’s use, including purchasing a replacement home when requested.

The trustee will hopefully propose a plan that will satisfy the beneficiary without undue risk to the trust estate or exceeding the trustee’s powers. The most relevant considerations for homeownership in a trust are:

  • The competing needs of other trust beneficiaries
  • The purchase price and costs of maintaining the home
  • The size of the trust as compared to those costs
  • Other sources of income and resources available to the beneficiary; and
  • The interests of the remaindermen (beneficiaries who will take from the trust when the current beneficiaries’ interests terminate).

The terms of the trust may require the trustee to ignore some of these considerations.

Each situation requires a number of decisions that could expose the trustee to a charge that it has acted imprudently.

Those who want to create a trust should work with an experienced estate planning attorney to avoid any issues.

Reference: Kiplinger (Feb. 8, 2022) “Should You Own Your Home in Your Trust?”

What Can a Trust Do for Me and My Family?

What Can a Trust Do for Me and My Family?

A trust is defined as a legal contract that lets an individual or entity (the trustee) hold assets on behalf of another person (the beneficiary). The assets in the trust can be cash, investments, physical assets like real estate, business interests and digital assets. There is no minimum amount of money needed to establish a trust.

US News’ recent article entitled “Trusts Explained” explains that trusts can be structured in a number of ways to instruct the way in which the assets are handled both during and after your lifetime. Trusts can reduce estate taxes and provide many other benefits.

Placing assets in a trust lets you know that they will be managed through your instructions, even if you’re unable to manage them yourself. Trusts also bypass the probate process. This lets your heirs get the trust assets faster than if they were transferred through a will.

The two main types of trusts are revocable (known as “living trusts”) and irrevocable trusts. A revocable trust allows the grantor to change the terms of the trust or dissolve the trust at any time. Revocable trusts avoid probate, but the assets in them are generally still considered part of your estate. That is because you retain control over them during your lifetime.

To totally remove the assets from your estate, you need an irrevocable trust. An irrevocable trust cannot be altered by the grantor after it’s been created. Therefore, if you’re the grantor, you can’t change the terms of the trust, such as the beneficiaries, or dissolve the trust after it has been established.

You also lose control over the assets you put into an irrevocable trust.

Trusts give you more say about your assets than a will does. With a trust, you can set more particular terms as to when your beneficiaries receive those assets. Another type of trust is created under a last will and testament and is known as a testamentary trust. Although the last will must be probated to create the testamentary trust, this trust can protect an inheritance from and for your heirs as you design.

Trusts are not a do-it-yourself proposition: ask for the expertise of an experienced estate planning attorney.

Reference: US News (Feb. 7, 2022) “Trusts Explained”

Will Moving to a New State Impact My Estate Planning?

Will Moving to a New State Impact My Estate Planning?

Since the coronavirus pandemic hit the U.S., baby boomers have been speeding up their retirement plans. Many Americans have also been moving to new states. For retirees, the non-financial considerations often revolve around weather, proximity to grandchildren and access to quality healthcare and other services.

Forbes’ recent article entitled “Thinking of Retiring and Moving? Consider the Financial Implications First” provides some considerations for retirees who may set off on a move.

  1. Income tax rates. Before moving to a new state, you should know how much income you’re likely to be generating in retirement. It’s equally essential to understand what type of income you’re going to generate. Your income as well as the type of income you receive could significantly influence your economic health as a retiree, after you make your move. Before moving to a new state, look into the tax code of your prospective new state. Many states have flat income tax rates, such as Massachusetts at 5%. The states that have no income tax include Alaska, Florida, Nevada, Texas, Washington, South Dakota and Wyoming. Other states that don’t have flat income tax rates may be attractive or unattractive, based on your level of income. Another important consideration is the tax treatment of Social Security income, pension income and retirement plan income. Some states treat this income just like any other source of income, while others offer preferential treatment to the income that retirees typically enjoy.
  2. Housing costs. The cost of housing varies dramatically from state to state and from city to city, so understand how your housing costs are likely to change. You should also consider the cost of buying a home, maintenance costs, insurance and property taxes. Property taxes may vary by state and also by county. Insurance costs can also vary.
  3. Sales taxes. Some states (New Hampshire, Oregon, Montana, Delaware and Alaska) have no sales taxes. However, most states have a sales tax of some kind, which generally adds to the cost of living. California has the highest sales tax, currently at 7.5%, then comes Tennessee, Rhode Island, New Jersey, Mississippi and Indiana, each with a sales tax of 7%. Many other places also have a county sales tax and a city sales tax. You should also research those taxes.
  4. The state’s financial health. Examine the health of the state pension systems where you are thinking about moving. The states with the highest level of unfunded pension debts include Connecticut, Illinois, Alaska, New Jersey and Hawaii. They each have unfunded state pensions at a level of more than 20% of their state GDP. If you’re thinking about moving to one of those states, you’re more apt to see tax increases in the future because of the huge financial obligations of these states.
  5. The overall cost of living. Examine your budget to see the extent to which your annual living expenses might increase or decrease in your new location because food, healthcare and transportation costs can vary by location. If your costs are going to go up, that should be all right, provided you have the financial resources to fund a larger expense budget. Be sure that you’ve accounted for the differences before you move.
  6. Estate planning considerations. If this is going to be your last move, it’s likely that the laws of your new state will apply to your estate after you die. Many states don’t have an estate or gift tax, which means your estate and gifts will only be subject to federal tax laws. However, a number of states, such as Maryland and Iowa, have a state estate tax.

You should talk to an experienced estate planning attorney about the estate and gift tax implications of your move.

Reference: Forbes (Nov. 30, 2021) “Thinking of Retiring and Moving? Consider the Financial Implications First”

What’s the First Step in Estate Planning?

What’s the First Step in Estate Planning?

 

Forbes’ recent article entitled “A Love Letter to Your Heirs” explains that not having an estate plan is risky, almost like riding in a speeding car on the freeway without wearing a seatbelt. However, it’s never too late — or too early — to put one together.

The first step is to create a vision of your future. Consider the most important people in your life or your charitable goals. This should help with the distribution of your assets. Then, plan who gets what, both when and how.

Remember that you can modify your estate plan over time. You should also develop and implement a financial plan to provide ongoing guidance for your long-term wealth accumulation goals. This means reviewing your will regularly, especially if your investment portfolio becomes more complex and when your family situation changes, such as the birth of a child or even a divorce.

Work with an experienced estate planning attorney to implement tax mitigation strategies to reduce or eliminate taxes. Keep in mind that different types of assets can and should get different treatment. For instance, you should handle assets you own outright with care. Consider assigning ownership for each treasured heirloom, even as that can seem tedious. Another option is to allow heirs to place bids on items, using money allocated to them from the estate.

Based on the asset and how liquid it is, the executor could either sell it to raise cash or retain it and then distribute it to heirs under the terms of the will. Other assets, such as those held jointly, will go directly to the surviving joint tenant, while qualified retirement plan assets — like IRAs, 401(k)s, 403(b)s, profit-sharing plans, and pension plans will go directly to a named beneficiary. Similarly, life insurance proceeds pass directly to a named beneficiary.

In addition any assets subject to a lien can be sold to pay off outstanding debt, or your executor can use cash from the estate to pay off the debt and retain the asset.

Bequeathing your estate to your chosen beneficiary or contingent beneficiary can be one of the most important life decisions you can make for their future.

Even singles without children should have a will, so that you can pass your wealth to a relative or someone else about whom you care deeply.

Reference: Forbes (Jan. 10, 2022) “A Love Letter to Your Heirs”