Estate Planning Blog Articles

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

What Is a Holistic Estate Plan?

Estate planning is more than a tax strategy. It’s about creating a legacy and protecting your family for the short and long term, explains the article Create A Holistic Estate Plan Now For Bigger Payoffs In The Future” from Forbes. The process begins with as much disclosure as possible. That means talking with your estate planning attorney about the challenges your family faces, as well as the assets to be left for loved ones.

One change to the tax code can disrupt decades of careful planning and leave people scrambling to protect loved ones. Market tumult can require assets to be sold to meet cash flow needs. Charitable contributions may also need to be reviewed and possibly changed, if the family’s asset level changes.

There are three aspects to consider when creating an estate plan: a lifetime spending strategy, a charitable legacy and bequests. All of these are impacted by taxes and need to be reviewed as a whole.

Lifetime spending strategy. These questions are centered on your goals and plans. Where do you want to live during retirement and how do you wish to live, travel and entertain? Will you stay in place and focus on charitable organizations, or travel throughout the year? It’s good to set a budget and stress-test it to see what different outcomes may arise.

A family that owns businesses or large real estate holdings may benefit from strategies, like family limited partnerships. A sale of the business to an outsider or a family member could create many different options, and all should be considered.

Charitable gift planning. Estate planning offers a way to clarify charitable giving goals and create a road map for how gifting can be transformed into a legacy. A well-planned charitable gift strategy can also minimize estate taxes and maximize the future of the gift, for both the family and the charities you favor.

A Charitable Remainder Trust is used to provide an income stream during your lifetime and reach gifting goals at the same time. One way to accomplish this is to transfer an asset, like highly appreciated stocks or bonds, into an irrevocable trust, thereby removing the asset from your taxable estate. The trustee may then sell the asset at market value and reinvest, creating a lifelong income stream for you or a beneficiary.

Leaving assets, not estate tax bills, for heirs. Families who own multiple properties in their own names or in a single LLC can lead to a lot of administrative headaches when the owners die. One simple fix is to place each property into a separate LLC, which increases the availability of strategic tax savings.

Another way to minimize estate taxes is through the use of life insurance. This is a strategy to do while you are still relatively healthy, as it becomes increasing difficult to obtain once you turn 60 or 70.

All of these strategies take knowledge and time to set up, so creating an estate plan and working through the many different strategies is best done with an experienced estate planning attorney and before any trigger events occur.

Reference: Forbes (April 6, 2021) Create A Holistic Estate Plan Now For Bigger Payoffs In The Future”

Link Possible between Diabetes, Dementia and Age

New research says those people who had type 2 diabetes for more than 10 years had more than twice the risk for developing dementia, as compared with those who were diabetes-free at age 70, according to Archana Singh-Manoux, PhD, of the Université de Paris in France.

MedPage Today’s recent article entitled “Diabetes, Dementia, and Age: What’s the Link?” reports that at age 70, every additional five years younger that a person was diagnosed with diabetes was linked to a 24% increased risk of incident dementia, even after adjustment for sociodemographic, health-related and clinical factors including cardiovascular disease, hypertension, body mass index and use of antidepressant or cardiovascular medications, among others.

This is equal to a dementia rate of 8.9 per 1,000 person-years among patients age 70 without diabetes versus a rate of 10 to 18.3 for those with diabetes, depending on age at onset:

  • Diabetes onset 5 years earlier: 10.0 per 1,000 person-years
  • Diabetes onset 6-10 years earlier: 13.0 per 1,000 person-years
  • Diabetes onset 10+ years earlier: 18.3 per 1,000 person-years

The strongest connection with incident dementia appeared to be younger age at onset of type 2 diabetes. Patients at age 55 who were diagnosed with diabetes within the past five years saw a twofold increased risk for incident dementia; those age 60 who were diagnosed with diabetes six to 10 years prior saw a similar twofold increased risk. However, late-onset diabetes wasn’t found to be tied to incident dementia. Prediabetes (fasting blood glucose of 110-125 mg/dL) also was not linked to risk of subsequent dementia. Singh-Manoux said this finding suggested that “a certain threshold of high glucose” might be needed to ultimately see hyperglycemia-induced brain injury.

However, cardiovascular comorbidities played into this link. Patients with diabetes who also had a stroke had a dramatically higher risk for dementia. Those with three heart conditions — stroke, coronary heart disease and heart failure – were at five times increased risk for subsequent dementia. Thus, these findings emphasize the importance of age at diabetes onset and cardiovascular comorbidities, when determining risk for dementia, the study authors said.

A few possible explanations could explain the connection between diabetes and dementia. “One hypothesis is that brain metabolic dysfunction is the primary driver of Alzheimer disease, highlighting the role of decreased transport of insulin through the blood-brain barrier, impairments in insulin signaling and consequently decreased cerebral glucose utilization,” they wrote. This idea was supported by findings from the 2019 SNIFF trial, which found some benefit with 40 IU of daily intranasal insulin for Alzheimer’s disease patients. The group also suggested that episodes of hypoglycemia, more often experienced by those with a longer diabetes duration, may increase the risk for dementia.

Reference: MedPage Today (April 27, 2021) “Diabetes, Dementia, and Age: What’s the Link?”

How Do I File Taxes on a CARES 401(k) Withdrawal?

Several bills were passed by Congress to ease financial challenges for Americans during the pandemic. One of the provisions of the CARES Act was to allow workers to withdraw up to $100,000 from their company sponsored 401(k) plan or IRA account in 2020. This is a big departure from the usual rules, says an article from U.S. News & World Report titled “How to Avoid Taxes on Your CARES Act Retirement Withdrawal.”

Normally, a withdrawal from either of these accounts would incur a 10% early withdrawal penalty, but the CARES Act waives the penalty for 2020. However, income tax still needs to be paid on the withdrawal. There are a few options for delaying or minimizing the resulting tax bill.

Here are three key rules you need to know:

  • The penalties on early withdrawals were waived, but not the taxes.
  • The taxes may be paid out over a period of three years.
  • If the taxes are paid and then the taxpayer is able to put the funds back into the account, they can file an amended tax return.

It’s wise to take advantage of that three-year repayment window. If you can put the money back within that three-year time period, you might be able to avoid paying taxes on it altogether. If you are in a cash crunch, you can take the full amount of time and repay the money next year, or the year after.

For instance, if you took out $30,000, you could repay $10,000 a year for 2020, 2021, and 2022. You could also repay all $30,000 by year three. Any repayment schedule can be used, as long as all of the taxes have been paid or all of the money is returned to your retirement account by the end of the third year period.

If you pay taxes on the withdrawal and return the money to your account later, there is also the option to file an amended tax return, as long as you put the money back into the same account by 2022. The best option, if you can manage it, is to put the money back into your retirement account as soon as possible, so your retirement savings has more time to grow. Eliminating the tax bill and re-building retirement savings is the best of all possible options, if your situation permits it.

If you lost your job or had a steep income reduction, it may be best to take the tax hit in the year that your income tax levels are lower. Let’s say your annual salary is $60,000, but you were furloughed in March and didn’t receive any salary for the rest of the year. It’s likely that you are in a lower income tax bracket. If you took $15,000 from your 401(k), you might need to pay a 12% tax rate, instead of the 22% you might owe in a higher income year.

Reference: U.S. News & World Report (April 23, 2021) “How to Avoid Taxes on Your CARES Act Retirement Withdrawal”

Should Parent Transfer House to Kid?

Let us say the parent is 90 and has a will bequeathing a home to a child, a son. The house was purchased 20 years ago for $300,000 and is now worth about $400,000.

The child stays there occasionally to help care for the parent, but he doesn’t live there. The parents’ estate is otherwise worth less than $1 million.

Nj.com’s recent article entitled “What are the pros and cons of transferring a home’s title?” explains that there are two primary reasons why parents want to transfer their home to their children.

First, they think they will be able to protect the house, in the event the parent needs to move to a nursing home. Second, they want to avoid probate.

Because many states now have a simple probate process for smaller estates, probate avoidance alone isn’t a worthwhile rationale to transfer the house to a child.

The transfer of the house to a child who doesn’t live there will be subject to the look-back rule for Medicaid, which in most states is now five years. As a result, if a parent transfers the house to the child within five years of applying for Medicaid, the transfer will trigger a penalty which will begin when the Medicaid application is submitted. The length of the penalty period depends on the value of the house. Therefore, if the parent might require nursing home care in the next five years, the parent should have enough other assets to cover the penalty period or wait five years before applying for Medicaid.

In addition, the transfer of the house may also cause a significant capital gains tax liability to the child when the house is sold. That’s because the child will receive the house with the carryover basis of the parent. However, if the child inherits the house, the child will get a step-up in basis—the basis will be the value of the house at the date of the parent’s death.

If the parent transferring the house retains a life estate—the right to live in the house until he or she passes away—the property will get a step-up in basis to the value of the house at the date of death.  In the event that the house is sold while the parent is still alive, the value of the life estate interest will be excluded from income tax but the value of the child’s remainder interest in the house may be subject to capital gain taxes.

Last, if the house is transferred to a child who has financial troubles, the child’s creditors may be able to force the child to sell the house to pay his debts.

Reference: nj.com (April 20, 2021) “What are the pros and cons of transferring a home’s title?”

What Is the Purpose of an Estate Plan?

No one wants to think about becoming seriously ill or dying, but scrambling to get an estate plan and healthcare documents done while in the hospital or nursing home is a bad alternative, says a recent article titled “The Essentials You Need for an Estate Plan” from Kiplinger. Not having an estate plan in place can create enormous costs for the estate, including taxes, and delay the transfer of assets to heirs.

If you would like to avoid the cost, stress and possibility of your spouse or children having to go to court to get all of this done while you are incapacitated, it is time to have an estate plan created. Here are the basics:

A Will, a Living Will, Power of Attorney and a Beneficiary Check-Up. People think of a will when they think of an estate plan, but that’s only part of the plan. The will gives instructions for what you want to happen to assets, who will be in charge of your estate—the executor—and who will be in charge of any minor children—the guardian. No will? This is known as dying intestate, and probate courts will make all of these decisions for you, based on state law.

However, a will is not enough. Beneficiary designations determine who receives assets from certain types of property. This includes life insurance policies, qualified retirement accounts, annuities, and any account that provides the opportunity to name a beneficiary. These instructions supersede the will, so make sure that they are up to date. If you fail to name a beneficiary, then the asset is considered part of your estate. If you fail to update your beneficiaries, then the person you may have wanted to receive the assets forty years ago will receive it.

Some banks and brokerage accounts may have an option of a Transfer on Death (TOD) agreement. This allows you to plan out asset distribution outside of the will, speeding the distribution of assets.

A Living Will or Advance Directive is used to communicate in advance what you would want to happen if you are alive but unable to make decisions for yourself. It names an agent to make serious medical decisions on your behalf, like being kept on life support or having surgery. Not having the right to make medical decisions for a loved one requires petitioning the court.

Financial Power of Attorney names an attorney in fact to manage finances, paying bills and overseeing investments. Without a POA, your family can’t take action on your financial matters, like paying bills, overseeing the maintenance of your home, etc. If the court appoints a non-family member to manage this task, the family may see the estate evaporate.

Creating a trust is part of most people’s estate plan. A trust is a means of leaving assets for a minor child, or someone who cannot be trusted to manage money. The trust is a legal entity that inherits money when you pass, and a trustee, who you name in the trust documents, manages everything, according to the terms of the trust.

Today’s estate plan needs to include digital assets. You need to give someone legal authority to manage social media accounts, websites, email and any other digital property you own.

The time to create an estate plan, or review and update an existing estate plan, is now. COVID has awakened many people to the inevitability of severe illness and death. Planning for the future today protects the ones you love tomorrow.

Reference: Kiplinger (April 21, 2021) “The Essentials You Need for an Estate Plan”

Does Sleeping Too Little Increase Risk of Dementia?

Researchers have looked at the issue of a lack of sleep and a link to developing dementia for many years, as well as other questions about how sleep relates to cognitive decline. The answers have been tough to find because it is hard to know if insufficient sleep is a symptom of the brain changes that underlie dementia — or if it can actually help cause those changes.

The New York Times’ recent article entitled “Sleeping Too Little in Middle Age May Increase Dementia Risk, Study Finds” reports that a large new study found some of the most persuasive findings to date that suggest that people who don’t get enough sleep in their 50s and 60s may be more apt to develop dementia when they are older.

The research, published recently in the journal Nature Communications, has limitations but also several strengths. Researchers monitored 8,000 people in Britain for about 25 years, starting when they were 50. They found that those who consistently reported sleeping six hours or less on an average weeknight were about 30% more likely than those who regularly got seven hours sleep (defined as “normal” sleep in the study) to be diagnosed with dementia nearly three decades later.

Drawing on medical records and other data from a prominent study of British civil servants called “Whitehall II,” which began in the mid-1980s, the researchers logged the number of hours that 7,959 participants said they slept in reports filed six times between 1985 and 2016. By the end of the study, 521 people had been diagnosed with dementia at an average age of 77.

The team was able to adjust for several behaviors and characteristics that might influence people’s sleep patterns or dementia risk, like smoking, alcohol consumption, how physically active people were, body mass index, fruit and vegetable consumption, education level, marital status and conditions like hypertension, diabetes and cardiovascular disease.

To further clarify the sleep-dementia relationship, researchers culled out those who had mental illnesses before age 65. Depression is considered a risk factor for dementia and mental health disorders are strongly connected to sleep disturbances. The study’s analysis of participants without mental illnesses found a similar association between short-sleepers and increased risk of dementia.

The link also held whether people were taking sleep medication and whether they had a mutation called ApoE4 that makes people more apt to develop Alzheimer’s.

Experts seem to agree that researching the sleep-and-dementia connection is challenging and that previous studies have sometimes produced confusing findings. In some studies, those who sleep too long (usually measured as nine hours or more) seem to have greater dementia risk, but several of those studies were smaller or had older participants. In the new study, results intimated increased risk for long sleepers (defined as eight hours or more because there weren’t enough nine-hour sleepers), but the association was not statistically significant.

The new study also looked at whether people’s sleep changed over time. There appeared to be slightly increased dementia risk in people who shifted from short to normal sleep—a pattern thought to reflect that they slept too little at age 50 and needed more sleep later because of developing dementia.

Reference: New York Times (April 20, 2021) “Sleeping Too Little in Middle Age May Increase Dementia Risk, Study Finds”

Do I Need to Pay Taxes on Life Insurance Proceeds?

Life insurance is designed to pay out a death benefit to your beneficiaries, if you die while the policy is in effect, usually in a lump sum. Fox 6’s recent article entitled “Is life insurance taxable?” explains that when large amounts of money change hands, taxes are usually a given. However, that’s not the case with most life insurance.

There are some special situations that may involve taxes, like inheriting a large estate or electing to receive policy benefits in installments. However, there are strategies you can leverage to avoid paying taxes on life insurance.

Beneficiaries don’t usually have to pay taxes on money received from a life insurance policy because the IRS doesn’t consider life insurance proceeds as taxable income. If you have an accelerated death benefit rider and need to access your own policy’s proceeds due to a terminal illness, that also won’t be taxed.

While you most likely won’t have to worry about taxes on a life insurance payout, there a couple of exceptions:

  • If all the policyholder’s assets meet the IRS’ federal estate tax threshold ($11.7 million in 2021), the policy’s proceeds could be taxable
  • If you elect to get the policy benefits in incremental installments instead of a one-time life insurance payout, you’ll have to pay taxes on any interest that accrues
  • If a person takes out a life insurance policy on someone other than himself – or herself, then policy’s benefits are considered a gift, and any monetary gifts above $15,000 are taxable; and
  • If the policyholder dies with an outstanding cash value loan, the policy’s death benefit could be used to settle it. Any amount the policyholder borrows beyond what they’ve paid into the policy is taxable.

These situations usually concern beneficiaries, but there are a few situations that could leave the policyholder responsible for taxes. In addition to taking out a policy loan, when you sell or surrender your policy and the cash value exceeds the amount you’ve contributed through premiums, the excess is taxable.

There are strategies for getting around this situation:

  • To avoid taxes, you can work with your life insurance company to legally transfer the policy to a new owner, such as the beneficiary so the policy’s proceeds aren’t included in the estate. However, this will place the responsibility for making premium payments and the ability to change the policy in the new owner’s hands.
  • An irrevocable life insurance trust or ILIT irreversibly transfers ownership of the policy to the trust, removing it from the taxable estate.
  • Installment payouts accrue interest and may be taxed, but a lump sum payment isn’t.

Talk to an experienced estate planning or elder law attorney about life insurance and how it can fit into your estate planning strategy.

Reference: Fox 6 (April 14, 2021) “Is life insurance taxable?”

How Long has Medicare Sequestration Holiday Been Extended?

The U.S. House of Representatives has overwhelmingly voted by a 384-38 margin in favor of a continued sequestration delay.

The bill was one of two measures introduced since early March designed to delay the return of Medicare sequestration, which is an automatic 2% cut for all health care providers paid through Medicare.

Home Healthcare News’s recent article entitled “Biden, Congress Extend Medicare Sequestration Holiday Through 2021” reports that recently President Joe Biden officially signed the legislation. Because the U.S. Centers for Medicare & Medicaid Services (CMS) has been expecting Congress to pass this type of law, it hasn’t been enforcing the 2% cut, despite the holiday’s expiration coming earlier in April.

Organizations, such as the Partnership for Quality Home Healthcare (PQHH) and others have supported the legislation. CMS has been cutting Medicare reimbursements to home health providers by 2%, as directed by Congress, since 2014. Under the law, payments that exceed Medicare’s cap must be returned to CMS.

In 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act stopped the automatic 2% cut to all Medicare providers. In December, this temporary moratorium was extended through March 2021.

This was intended to let home health providers have the resources to provide care during the COVID-19 emergency, while staying afloat financially.

The legislation will defer $36 billion in previously scheduled Medicare cuts in 2021.

In March, the House passed different sequestration legislation. However, the key difference between the two laws is, in addition to extending the sequestration delay, the previously introduced bill also dispensed with statutory pay-as-you-go (PAYGO) budget enforcement measures.

The PAYGO rule requires new legislation not to raise the federal budget deficit or lower the surplus.

The bill passed last week in the House and signed by the president doesn’t address the PAYGO issue.

Reference: Home Healthcare News (April 14, 2020) “Biden, Congress Extend Medicare Sequestration Holiday Through 2021”

Will Inheritance and Gift Taxes Change in 2021?

Uncertainty is driving many wealth transfers, with gifting taking the lead for many wealthy families, reports the article “No More Gift Tax Exemption?” from Financial Advisor. For families who have already used up a large amount or even all of their exemptions, there are other strategies to consider.

Making gifts outright or through a trust is still possible, even if an individual or couple used all of their gift and generation skipping transfer tax exemptions. Gifts and generation skipping transfer tax exemption amounts are indexed for inflation, increasing to $11.7 million in 2021 from $11.58 million in 2020. Individuals have $120,000 additional gift and generation-skipping transfer tax exemptions that can be used this year.

Annual exclusion gifts—individuals can make certain gifts up to $15,000 per recipient, and couples can give up to $30,000 per person. This does not count towards gift and estate tax exemptions.

Don’t forget about Grantor Retained Annuity Trust (GRAT) options. The GRAT is an irrevocable trust, where the grantor makes a gift of property to it, while retaining a right to an annual payment from the trust for a specific number of years. GRATS can also be used for concentrated positions and assets expected to appreciate that significantly reap a number of advantages.

A Sale to a Grantor Trust takes advantage of the differences between the income and transfer tax treatment of irrevocable trusts. The goal is to transfer anticipated appreciation of assets at a reduced gift tax cost. This may be timely for those who have funded a trust using their gift tax exemption, as this strategy usually requires funding of a trust before a sale.

Intra-family loans permit individuals to make loans to family members at lower rates than commercial lenders, without the loan being considered a gift. A family member can help another family member financially, without incurring additional gift tax. A bona fide creditor relationship, including interest payments, must be established.

It’s extremely important to work with a qualified estate planning attorney when implementing tax planning strategies, especially this year. Tax reform is on the horizon, but knowing exactly what the final changes will be, and whether they will be retroactive, is impossible to know. There are many additional techniques, from disclaimers, QTIPs and formula gifts, that an experienced estate planning attorney may consider when planning to protect a family legacy.

Reference: Financial Advisor (April 1, 2021) “No More Gift Tax Exemption?”

What Emergency Documents Do I Need in Pandemic?

With the threat of COVID-19, we’ve all come face-to-face with our mortality. However, are you prepared for the worst?, asks KSAT in its January 23 article entitled, “Important documents you need to have handy in case of an emergency.”

A consumer report recently found that just 7% of those ages 19 to 29 have an advance directive for health care emergencies, and even fewer have a will. Estate planning is one of the most worthwhile things we could do for ourselves or our loved ones.

The article explains that your estate is everything you own, and if it’s not protected, it could be taken away from your loved ones.

An extremely important document to have, in addition to a will, is a living will and a healthcare proxy or power of attorney. These documents let you designate the individual who will make decisions on your behalf, if you cannot speak for yourself.

In addition, a HIPAA authorization permits an individual you trust to speak with your healthcare staff and receive your personal medical information.

Another key document is a financial power of attorney. This empowers you to designate an agent to handle your debts, contracts and assets. A financial power of attorney must be signed and notarized.

You should also consider payable on death and transfer on death designations, which transfer assets to designated beneficiaries without probate.

It is important to conduct a digital asset inventory to list your entire online presence and include all accounts, logins, passwords, social media, and professional profiles, and most importantly, a list of everything you have on autopay.

Last, you need a last will and testament. This lets you to name an executor or personal representative to handle your postmortem affairs. However, a last will does not keep assets out of probate.

One last note: you can prepare a personal property memorandum to list the beneficiaries of any sentimental, non-monetary items.

Reference: KSAT (San Antonio) (Jan. 23, 2021) “Important documents you need to have handy in case of an emergency”