Estate Planning Blog Articles

Estate & Business Planning Law Firm Serving the Providence & Cranston, RI Areas

Caregiving and Estate Planning Provides Peace of Mind for All Generations

If your goal is to keep the farm, ranch, or small business in the family, planning, including estate planning and caregiving, is the number one strategy to making it happen. Families may dissolve the farm or business without advance planning to pay for long-term care expenses. A recent article from AgWeek, “Caregiving plans can provide peace of mind for farming and ranching families,” explains what needs to be done.

Part of the issue is that most ranchers and business owners won’t qualify for Medicaid because they own a significant asset. Having to sell off something they’ve worked their entire lives to build is often a result of no planning.

If you have a long-term care insurance policy, it needs to be carefully reviewed to determine what conditions need to be met for benefits to be paid. For example, most policies have a “waiting period,” so you’ll need to plan how to pay for caregiving during the months before the policy kicks in.

There’s also confusion about the difference between Medicare and Medicaid. Medicare is health insurance for medical expenses, while Medicaid is usually used for long-term care and caregiving needs. However, Medicaid is a needs-based program. An estate planning attorney can help the family determine what needs to happen in advance, whether the goal is to protect the farm, ranch, or small business while helping the aging parent become eligible for Medicaid.

Estate planning includes planning for incapacity, which can occur at any time but is more likely as we age. Suppose the individual hasn’t completed a power of attorney, healthcare power of attorney, and other medical directives. In that case, the family will need to go to court to obtain conservatorship or guardianship to take over the person’s financial matters and make healthcare decisions on their behalf. An estate planning attorney can help the family prepare the documents and create a plan.

Having an estate plan in place is also another means of protecting the family’s assets from elder abuse. Everything needs to be documented, and records need to be well-organized so every family member knows where documents are, where assets are and the plan for the inevitable events of aging.

Meeting with an estate planning attorney to create the last will and testament, power of attorney and all other planning documents can minimize the stress and costs involved. Without planning, everything becomes far more complicated, costly and stressful for all concerned.

Reference: AgWeek (May 14, 2024) “Caregiving plans can provide peace of mind for farming and ranching families”

Crafting Your Legacy: Exploring the Charitable Remainder Trust as a Stretch IRA Alternative

The Stretch IRA was once a popular estate planning tool. Not only could beneficiaries receive inherited IRA funds, but they’d also keep tax benefits. However, recent changes brought about by the SECURE Act have ended this strategy. As a result, those whose retirement plans included a Stretch IRA now need to find an alternative. If you were planning to use a Stretch IRA, Kiplinger makes the case that you should consider a Charitable Remainder Trust (CRT) instead.

What Happened to the Stretch IRA?

A Stretch IRA allowed non-spouse beneficiaries to withdraw slowly from inherited retirement accounts. This minimized taxes, maximized growth and provided long-term security. However, the SECURE Act now requires beneficiaries to empty inherited IRAs within ten years. This increases exposure to taxes and eliminates the Stretch IRA as a long-term option for asset growth and inherited income.

If this change impacts you, there are alternatives available. One of the best options may be the Charitable Remainder Trust, which offers a combination of tax benefits and long-term income.

How can a Charitable Remainder Trust Help?

A Charitable Remainder Trust (CRT) offers a new path to those who want to give long-term income to their beneficiaries. With a CRT, assets are transferred to the trust, providing beneficiaries with a steady income stream for a set period. Once this term ends or the beneficiary dies, any remaining assets are donated to the chosen charity. The benefits of a Charitable Remainder Trust include:

  • Reduced taxes: A CRT reduces the deceased’s taxable estate and provides tax deductions for the charitable gift.
  • Long-term income: Beneficiaries receive a steady payout. It lasts for a set number of years or their lifetime.
  • A philanthropic legacy: When your CRT is done supporting heirs, it will leave you with a final philanthropic legacy.

Are there Caveats to CRTs?

While CRTs provide an alternative to the Stretch IRA, they have limitations. Administration can be complex, and not all asset types are suitable for inclusion in a CRT.  Beneficiaries might also receive less total income than other estate planning options. Before you open a CRT, you’ll need to consider whether it’s the right choice for your family.

Build an Estate Plan Tailored to Your Needs

All estate planning strategies have cases where they’re suitable and cases where they aren’t. Doing right by your family means understanding the options available, weighing them and choosing correctly. Estate planning is complex. However, that’s what we’re here for. Contact our estate planning team to determine if a Charitable Remainder Trust suits you. We’ll walk you through the pros and cons, provide alternatives and help you develop a customized estate plan.

Schedule a consultation today and take the first step toward a legacy that reflects your values and supports your loved ones.

Key Takeaways

  • The SECURE Act: With new limitations on the Stretch IRA, elderly Americans should consider alternatives.
  • Charitable Remainder Trusts: Secure tax benefits on long-term income to loved ones while benefiting charities.
  • Tax Advantages: CRTs allow donors to cut their taxable estate.

Reference: Kiplinger (April 2024) “Charitable Remainder Trust: The Stretch IRA Alternative | Kiplinger”

Estate Planning Checklist to Keep You Focused

The estate tax exemption many taxpayers enjoy is scheduled to sunset at the end of 2025. According to a recent article from Kiplinger, “13 Smart Estate Planning Moves,” this large exemption had many people thinking they didn’t need to worry about estate taxes or other ways their legacies could be threatened.

Here are steps to discuss with your estate planning attorney:

Rethink your IRA investment strategy. With limited exceptions, inherited accounts must be emptied within ten years of the original owner’s death.

The age for RMDs (Required Minimum Distributions) rose to 73 in 2023 and will increase to 75 in 2033. You could take a voluntary distribution and convert it to a Roth IRA if you’re younger. Taxes are paid when you make a contribution, grow tax-free and there are no taxes on withdrawals. It’s a good deal, depending on your circumstances.

Use the annual gift tax exclusion to make gifts to as many people as you wish, up to $18,000 per person in 2024. A recent change to the 529 College Savings Account rules lets a gift giver fund five years of gifting into one account.

Pay medical or education expenses for someone else. Just remember to make checks out directly to the educational institution or care provider, not to the person.

Set up an irrevocable trust for a spouse, specifically a Spousal Lifetime Access Trust (SLAT), which lets you name a spouse as the beneficiary and children or grandchildren as remainder beneficiaries. Your spouse can tap it for health, education and living expenses.

Preserve assets with a bypass trust, funded at the first spouse’s death. The surviving spouse has access to the funds, with expenses for health, education, maintenance and support generally approved.

If you need to protect assets from creditors or litigation, a domestic asset protection trust allows you to keep funds out of your estate while you can be a beneficiary.

Use a revocable trust to manage assets. You won’t get any estate tax breaks. However, it’s easier for a successor trustee to take charge in case of incapacity.

Plan for Medicaid by transferring assets to a Medicaid Asset Protection Trust. MAPTs are state-specific, so consult with an experienced estate planning attorney.

Get your assets organized. If possible, consolidate accounts with one institution. This will keep your estate settlement less complicated and, therefore, less costly.

Reference: Kiplinger (May 9, 2024) “13 Smart Estate Planning Moves”

Estate Planning and Your Second Home: What Should You Know?

Many people dream of owning a cabin or a sunny beach house away from their homes. While these dreams are beautiful, buying a second home isn’t as simple as picking a new getaway. Your second home can increase your tax burden more than your first. There are also unique tax implications to keep in mind. According to Central Trust, understanding the strings attached to a second home is a must.

Will You Pay More Property Tax and Mortgage Interest?

If you already own one home, purchasing a second means doubling up on property tax bills. Your deductions for state and local taxes are also capped at $10,000. State taxes on your primary home often reach that limit on their own. As a result, a second home may increase your tax liability much more than you’d expect. While you can deduct mortgage payments on your second home, it’s limited to a combined total of $750,000 for both residences.

Does Renting Affect Your Taxes?

There are tax benefits if you plan to rent and limit personal use to 14 days or 10% of rental days. Doing so allows you to deduct utilities, maintenance and improvement costs as you would for any other rental property. However, be careful – renting to relatives at market rate still counts as personal use.

What About Capital Gains Tax?

When selling your primary residence, you can usually exclude a portion of the gains from taxes. However, this isn’t the case with a second home. Your vacation house is taxed as an investment property, which means capital gains can go up to 23.8%.

However, there’s a way to avoid paying capital gains tax on your second home. You may avoid capital gains tax if you live in it as your primary residence for at least two of the five years before you sell. Considering the average home price in America today, a lower tax rate can amount to impressive savings.

On the other hand, lost rental revenue or an increased cost of living could detract from these savings. Weigh the costs and benefits before choosing your tax management strategy.

How Important Is Record Keeping?

Maintaining solid records is crucial if you’re renting out a second home. If the IRS audits your return and you can’t provide evidence, you could face extra taxes and penalties. Keep receipts, bills and documents detailing any expenses related to the property. If you plan to avoid capital gains tax by living in the home, keep proof of your residence and travel during the time in question.

Be Real-Estate Smart with Our Help

The thrill of buying a second home should not overshadow the importance of thorough estate planning. Consult a tax professional or financial advisor to avoid costly mistakes.

Our law firm is dedicated to helping you plan your estate and minimize taxes, especially when second homes are involved. Schedule a consultation with us today to build a strategy tailored to you.

Key Takeaways

  • Double the Taxes: Owning a second home brings a second set of property tax and mortgage interest bills.
  • Rental Benefits: Renting out your vacation home could offer tax deductions.
  • Capital Gains Tax: Selling a second home could subject you to up to 23.8% capital gains tax. Living there for two of five years before selling can help avoid this.
  • Record Keeping is Essential: Proper documentation of expenses and rental income is crucial to avoid penalties in case of an IRS audit.
  • Consult an Advisor: Seek guidance from tax or estate planning professionals to create a sound plan and minimize tax implications.

Reference: Centraltrust (March 2024) “Second Homes & Tax Implications – Central Trust Company”

What Do You Do If Elderly Family Member Is Being Financially Abused?

Financial elder abuse is when a family member, caregiver, or another individual illegally or improperly uses an elderly person’s assets for their own personal gain without the knowledge or understanding of the elderly person. A recent article from The Sun Times News, “Elder Financial Abuse Can Be A Family Affair,” notes the coming “Great Wealth Transfer” of Baby Boomer assets could lead to a dramatic increase in elder financial abuse.

Even minor memory loss can be exploited by scammers and, sadly, family members. With nearly seven million Americans having moderate cognitive issues, the possibility of financial abuse is growing. Boomers live longer than any previous generation, translating into huge healthcare costs in post-retirement years. At the same time, their children and grandchildren face challenges, including student debt and high homebuying costs. The combination of these issues isn’t pretty.

A contributing factor is the increased misinformation about Medicaid, wills, trusts, guardianship and power of attorney. When seniors make their wishes known and formalize them through an estate plan and trusts to protect their assets, the chances of them becoming victims of exploitation can be minimized.

In many cases, isolation leads to vulnerability. One woman allowed her son’s ex-wife to move into her Colorado home to live with her elderly mother. The ex-wife fell victim to scammers herself and convinced the elderly mother to send two checks totaling $70,000 to two scammers, one claiming to be running a children’s mission in Nigeria and another rescuing animals in Malaysia. The elderly woman’s bank didn’t question the large checks, which it should have. The ex-wife also forged checks worth more than $10,000 on the elderly woman’s account. The promised caregiving never happened, and while the woman was arrested and prosecuted, the family will never recover the money as the ex-wife is unemployable—she was a bookkeeper.

The National Center on Elder Abuse suggests only one in 24 cases of elder abuse is reported to authorities. If abuse of any kind is suspected, it should be reported immediately to the police in the jurisdiction where the senior lives. Financial statements, bank statements, credit card bills, canceled checks and evidence must be provided. Even if you don’t have evidence, suspected abuse should be reported.

Families can be torn apart when heirs battle over inheritances. Two means of prevention are creating an estate plan by an experienced estate planning attorney, with trusted family members or professionals to serve as Power of Attorney and executor. The second is to maintain ongoing contact with the senior, if possible, in person and, if not, via phone calls, video calls and visits. The more involved you are with an aging person’s life, the better your chances of uncovering or preventing financial elder abuse.

Reference: The Sun Times News (May 8, 2024) “Elder Financial Abuse Can Be A Family Affair”

Elvis Presley’s Estate Planning Mistakes: Lessons for Us All

Even the King of Rock ‘n’ Roll wasn’t immune to estate planning mistakes. Elvis Presley passed away in 1977 with a net worth of around $5 million. Nevertheless, poor estate planning resulted in significant financial challenges for his daughter, Lisa Marie Presley, who inherited the estate at age 25. Unfortunately, the saga of estate mismanagement continued with Lisa Marie’s untimely death in January 2023. This article examines the lessons we can learn from these oversights.

Why Did Elvis’s Estate Plan Fail?

Over-Reliance on a Will

Elvis relied on a basic will instead of a more comprehensive estate plan, such as a trust. While wills provide instructions for asset distribution, they don’t protect beneficiaries from probate. This led to significant legal costs and delays, reducing the estate’s value. Furthermore, only a fraction of his estate remained after creditors, unscrupulous business partners and the IRS took their share. Kiplinger details how these mistakes haunted his daughter, Lisa Marie Presley.

Excessive Spending

Elvis was generous and free spending. However, his estate planning didn’t account for this. As a result, much of his inheritance went to creditors rather than his daughter. However, creditors weren’t the only ones claiming what Elvis left behind. The most significant loss was to the IRS, which claimed that the estate tax was worth double the value of Elvis’ estate.

Trusting the Wrong People

Elvis trusted Thomas Parker, better known as Colonel Parker, with business management.  However, Parker was a Dutch illegal immigrant with a history of mental instability. The Army discharged him following a “psychotic breakdown,” and he had only served as a private. Parker’s business deal entitled him to 50% of Elvis’ profits and enabled him to sell Elvis’ song catalog. He kept most of the profits, depriving the family of any royalties.

Lack of Estate Planning

Between the IRS, creditors and Parker, the woes Elvis left his loved ones have one thing in common: They were avoidable estate planning mistakes. While few people trust their will to Colonel Parker, many leave behind a will that doesn’t protect their loved ones. Advanced estate planning strategies, such as the creation of trusts, are much more reliable than a simple will.

Can You Avoid Similar Estate Planning Mistakes?

A will is better than nothing, but it’s only the start. Develop a comprehensive estate plan that includes a trust and a power of attorney, and follow these steps:

  • Plan for Estate Taxes: Many ways exist to reduce estate taxes. Consider strategies like gifting assets and establishing trusts.
  • Maintain Liquidity: Set aside liquid assets to cover immediate family needs and creditor expenses.
  • Regularly Review and Update Plans: Life changes, and your estate plan should too. Ensure that your estate is set up to provide your loved ones with what you wish for them.
  • Consult with a Reputable Estate Advisor: Estate law is complex. Consulting with an estate planning professional can help you avoid Elvis’ mistakes.

Take Action to Avoid Estate Planning Mistakes

Don’t let your loved ones face unnecessary financial difficulties. Develop a comprehensive estate plan with the help of our estate planning attorneys.

Key Takeaways

  • Elvis Presley’s Estate Planning Mistakes: Elvis relied on a basic will and trusted people he shouldn’t. Consequently, his wife Priscilla and his daughter Lisa Marie Presley only received a fraction of his estate. If the King of Rock ‘N Roll needed a thorough estate plan, we all do.
  • Avoid Estate Planning Pitfalls: A comprehensive plan centered on trusts to protect your loved ones avoids many common mistakes.
  • Contact a Trustworthy Professional: Elvis’ business partners sold many of his assets for personal benefit. Rely on a reputable estate planning attorney to give your family the best opportunities.

Reference: Kiplinger (May 17, 2023) “Five Estate Planning Lessons We Can Learn From Elvis’ Mistakes”

Inheriting a House? Navigate Your Options and Responsibilities

Inheriting a house can be a life-changing event with emotional and financial implications. Understanding your options and obligations is critical, whether you sell it, keep it, or rent it out. Insights from LendingTree show you how to make the most of your inheritance.

What’s the Legal Process of Inheriting a House?

When inheriting a house, you don’t immediately receive the title in your name. The inheritance process involves probate, where a judge reviews the will and appoints an executor to carry out the deceased’s will. The executor handles responsibilities like insurance, identifying debts or liens and paying utilities. They also distribute belongings and manage property taxes. This ensures that the estate’s assets settle any outstanding debts before you receive ownership.

What Should You Do when Inheriting a Home?

When you’re in line to inherit a home, there are five steps you should take immediately.

  1. Communicate with the Executor: Establish a clear line of communication with the executor. This will help you learn the necessary information and simplify the transfer process.
  2. Coordinate with Co-Heirs: Work with the others if you are one of several heirs. Avoid costly disputes by deciding whether to sell, keep, or rent the property.
  3. Get an Appraisal: An appraisal calculates the property’s value. This informs your decision to keep, sell, or rent the home while informing you of tax liabilities.
  4. Evaluate Debts: Identify any liens or debts tied to the property and compare them against the house’s value. Understand the financial implications and incorporate that into your decision.
  5. Seek Professional Advice: Consult estate planning attorneys, accountants and financial advisors. These professionals can clarify ownership-related problems, such as debt obligations and inheritance taxes.

What Should You Do with the House?

Moving Into an Inherited House

Moving into the inherited house can provide a new residence or vacation home. However, this option can be costly due to mortgages, taxes, repairs and insurance.

Renting Out an Inherited Home

Renting out the property can provide passive income, while keeping it in the family. Buy out other heirs or work with them to share costs and rental income.

Selling Your Newly Inherited Home

Selling the house is a straightforward way to obtain immediate cash. The proceeds can help pay off debts tied to the house, and the remaining proceeds will go to the heirs.

How Can You Finance an Inherited House?

If debts and taxes are associated with the house, that doesn’t mean you need to sell. There are many ways to finance the home and keep your inheritance.

  • Mortgage Assumption: Take over the existing mortgage if its terms are better than what you’d get with a new loan. The lender must approve the assumption.
  • New Purchase or Refinance Mortgage: You can obtain a new mortgage or refinance to put the house in your name. This option is particularly useful when the property has a reverse mortgage.
  • Cash-Out Refinance: Refinance the mortgage with a cash-out option to tap into the home’s equity to cover expenses, like buying out heirs or making repairs.
  • Investment Property Loan: Mortgage an investment property if you plan to rent the house.

Inheriting a House? Schedule a Consultation Today

Navigating the process of inheriting a house requires legal, financial and practical knowledge. You can get this knowledge by scheduling a consultation with our estate planning attorneys. We’ll listen to you and provide tailored advice about handling your inheritance.

Key Takeaways

  • Inheriting a House: The probate court oversees the inheritance process, and the executor handles legal and financial responsibilities.
  • Options: Move in, rent out, or sell the property based on financial goals and agreements with co-heirs.
  • Financing: Explore mortgage assumptions, new or refinanced mortgages and other financing options.

Reference: LendingTree (Nov. 16, 2021) “Inheriting a House? Here’s What to Expect”

Britney Spears Conservatorship Teaches Importance of Safeguarding Your Autonomy and Assets

The case of singer and performer Britney Spears has thrust the issue of conservatorships into the spotlight, revealing the complexities and potential pitfalls of these legal tools meant to protect individuals. As an elder law firm, our goal is to work with both the family and aging, disabled, or special needs loved ones to set up frameworks for decision-making that respect the individuals’ rights and apply the appropriate safeguards based on the individual’s capacity. Outlined in Kiplinger’s recent article, Lessons Learned From Britney Spears’ Financial Conservatorship, are key lessons from Spears’ experience with an involuntary conservatorship that can inform how we approach and manage such legal arrangements. This article examines how conservatorships can be problematic and details proactive steps you can take to protect yourself from the same issues that Spears experienced.

Conservatorships can Limit or Eliminate Personal Autonomy

The Britney Spears conservatorship painfully highlighted how such arrangements sometimes deprive individuals of autonomy. Despite intentions to protect, conservatorships can create a rigid and protective environment, often overzealously limiting personal freedom. As observed by New York attorney Jill H. Teitel, courts may remain inflexible to the unique capabilities of wards, ironically eroding personal independence.

To avoid such pitfalls, it’s critical to:

  • Ensure that estate planning documents explicitly define the conditions under which you want your affairs managed.
  • Use tools, such as a Power of Attorney, to choose trusted individuals known as agents to handle your affairs, ensuring that they respect and promote your autonomy.

Taking these steps helps maintain personal dignity and control, even when you might need assistance.

Conservatorships can Become a Vehicle for Financial Abuse or Exploitation

The Spears case underscored the potential for abuse in financial conservatorships. With significant control over an individual’s assets, conservators might exploit their position for personal gain. This risk of financial abuse highlights the necessity of having a clear and comprehensive care plan set up in advance with a team of trustworthy professionals.

Here are strategies to protect yourself from financial abuse:

  • Specify who can manage your affairs and under what conditions.
  • Define permissible conservator fees to prevent financial exploitation.
  • Review your estate plans with your attorney regularly to adapt to changes in your life or the legal landscape.

By working with an elder law attorney to create boundaries for how your financial affairs should be managed in the event of your incapacity, you establish safeguards that preserve your interests and prevent misuse of your assets.

Conservators Often Lack Accountability and Oversight

Lack of oversight is a critical flaw in many conservatorship arrangements. The Spears narrative highlighted the need for robust oversight mechanisms to ensure transparency and accountability within conservatorships. The conservatee’s welfare and financial security could be compromised without adequate checks.

To create boundaries for a conservator or agent’s accountability and oversight:

  • Ensure that your estate planning includes provisions for regular reviews and audits of your conservatorship.
  • Set up mechanisms allowing grievances to be addressed promptly and fairly.

Incorporating these elements into your comprehensive estate planning ensures that if you need assistance managing your finances, your rights are safeguarded and your estate is handled in accordance with your wishes.

Key Takeaways

  • Autonomy: Plan carefully to maintain as much personal independence as possible.
  • Protection: Establish clear, enforceable guidelines to safeguard against abuse.
  • Oversight: Demand transparency and regular oversight to ensure that your interests are always prioritized.

In conclusion, while conservatorships serve an essential purpose in protecting individuals who cannot manage their affairs, the lessons from the Britney Spears experience teach us the importance of approaching these legal tools with caution, thorough planning, and an emphasis on preserving personal rights. Remember that good planning not only protects your assets but also your fundamental freedoms. Contact our elder law firm today to ensure that your estate plan establishes clear guidance for managing your financial affairs when you cannot.

Reference: Kiplinger (March 27, 2024) Lessons Learned From Britney Spears’ Financial Conservatorship

Does Your Retirement Plan Include Moving to a Lower Tax State?

People have long moved from high-tax to low-tax states. However, this movement increased during the pandemic and continues today. The response from high-tax states has become aggressive, especially in cases where people maintain a home in two states and try to pay taxes only in the less costly state. A recent Forbes article issues a clear warning: “Beware The Tax Traps Spring On Those Who Move In Retirement.”

These states levy a tax on income, estate and sales taxes based on where people make their legal domicile. However, determining where you live isn’t quite as cut-and-dried as people think. Tax departments in high-tax states have amped up their residency audits. When the system sees someone who once filed an income tax return as a full-time resident begins filing as a part-time resident or doesn’t file, the state wants to ensure that it’s not missing out on any revenue.

A residency audit is conducted. It may consist of a questionnaire asking about where the person lives, asking them to provide information about their lifestyle and providing details about the property they own in both states.

An aggressive state will search property records and other public records for evidence of ongoing connections to the state. Social media has become part of this information gathering, no matter how private people may set their profiles.

If you’ve moved for retirement or enjoy the benefits of living in two or more states, you’ll need to choose a state and prove your legally established residence in that state. Ideally, you’ll do this long before the residency audit arrives.

Did you already receive a letter from a state tax authority asking questions? Chances are the state has already begun investigating your status. The letter might include a questionnaire, an interview request, or both.

If you haven’t yet moved, consider how you’ll respond to these questions:

  • Where do you vote?
  • Where are your cars, boats, or other vehicles registered?
  • Do you belong to a house of worship, and if so, where is it located?
  • Do you have an estate plan, and what address does it show?
  • Where do you own property, and how much time do you spend at each location?
  • Do you belong to any social clubs – country clubs, bowling leagues, gyms, or community groups?
  • If you own a business or are an employee, where is your business or employer located?

You’ll need to demonstrate where you live and whether you’ve truly cut ties with your prior state of residence. A final word of advice: don’t go into a residency audit unprepared or unrepresented. The possibility of paying taxes in two states should motivate you to make any necessary changes.

Another detail to consider when moving to retirement is that an estate plan made in one state may not be valid in another state. A local estate planning attorney in your new domicile should be consulted to review your will, power of attorney, healthcare directives and other state-specific documents to ensure they will be effective in your retirement home.

Reference: Forbes (April 23, 2024) “Beware The Tax Traps Spring On Those Who Move In Retirement”

Prepare Now for Coming Changes to Estate Taxes

Anyone who wants to leave their estate to heirs needs to plan now so their wishes will be followed and, equally importantly, to minimize their estate’s tax liability. A recent article from The San Diego Union-Tribune asks, “Are you prepared for changes to estate tax laws? Here’s what you need to know.”

Because of the Tax Cuts and Job Acts of 2017, taxpayers who die in 2024 can pass up to $13.61 million federal tax-free to their heirs. In 2025, this amount will be adjusted for inflation. On January 1, 2026, the federal basic exclusion amount reverts to $5 million indexed for inflation. Many experts expect this to adjust to $6.5 to $7 million.

When calculating the total value of one’s estate, the IRS looks at all taxable gifts made while you are living, and all assets transferred upon your death. This includes the value of your home and its contents, retirement and investment accounts, life insurance not owned by an irrevocable trust, cash, annuities, boats, vehicles and bank accounts.

Estate planning must include tax planning. With the right planning, preserving the 2024 and 2025 higher exclusions may be possible through a lifetime gifting program. Let’s say the exclusion amount in 2026 is $7 million. You’d have to gift more than $7 million before January 1, 2026, to preserve the current exclusion amount.

Two years ago, in April 2022, the Treasury and IRS published Proposed Regulation Section 20.2010-1(c)(3) to limit certain types of gifts from qualifying for the current exclusion and restrict benefits of certain types of gifts if they were made within 18 months of the date of death. This regulation is still proposed and not final. However, you and your estate planning attorney must remember it during the estate planning process.

If making large, multi-million-dollar gifts is not possible without constraining the taxpayer’s lifestyle, there are other gifting strategies to use to take appreciating assets out of the estate over time. One way to do this is to make annual exclusion gifts every year. These are gifts that pass entirely tax-free. In 2024, a taxpayer could gift up to $18,000 per person to an unlimited number of people without paying any gift taxes.

Gifts to 501(c)(3) charities of any amount can be made tax-free with no gift or estate tax. This includes gifts made while you are living or after you have passed.

It is also permissible to pay an unlimited amount for tuition for an unlimited number of people, if the payment is made directly to the educational institution. These gifts may not include room, board, or fees. Similarly, one person can pay for another person’s medical expenses if the payment is made directly to the healthcare provider.

There are many ways to prepare for the coming changes to tax laws. What is right for one person may not be right for another, as everyone’s circumstances are unique. Discussing how to prepare for these changes with your estate planning attorney should take place soon, as it takes time to work out the details of a new estate plan and you can be sure estate planning attorneys will be very busy in 2025.

Reference: The San Diego Union-Tribune (April 30, 2024) “Are you prepared for changes to estate tax laws? Here’s what you need to know”

Join Our eNewsletter

Recent Posts