Estate Planning Blog Articles

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Aging Parents and Blended Families Create Estate Planning Challenges

Law school teaches about estate planning and inheritance, but experience teaches about family dynamics, especially when it comes to blended families with aging parents and step siblings. Not recognizing the realities of stepsibling relationships can put an estate plan at risk, advises the article “Could Your Aging Parents’ Estate Plan Create A Nightmare For Step-Siblings?” from Forbes. The estate plan has to be designed with realistic family dynamics in mind.

Trouble often begins when one parent loses the ability to make decisions. That’s when trusts are reviewed for language addressing what should happen, if one of the trustees becomes incapacitated. This also occurs in powers of attorney, health care directives and wills. If the elderly person has been married more than once and there are step siblings, it’s important to have candid discussions. Putting all of the adult children into the mix because the parents want them to have equal involvement could be a recipe for disaster.

Here’s an example: a father develops dementia at age 86 and can no longer care for himself. His younger wife has become abusive and neglectful, so much so that she has to be removed from the home. The father has two children from a prior marriage and the wife has one from a first marriage. The step siblings have only met a few times, and do not know each other. The father’s trust listed all three children as successors, and the same for the healthcare directive. When the wife is removed from the home, the battle begins.

The same thing can occur with a nuclear family but is more likely to occur with blended families. Here are some steps adult children can take to protect the whole family:

While parents are still competent, ask who they would want to take over, if they became disabled and cannot manage their finances. If it’s multiple children and they don’t get along, address the issue and create the necessary documents with an estate planning attorney.

Plan for the possibility that one or both parents may lose the ability to make decisions about money and health in the future.

If possible, review all the legal documents, so you have a complete understanding of what is going to happen in the case of incapacity or death. What are the directions in the trust, and who are the successor trustees? Who will have to take on these tasks, and how will they be accomplished?

If there are any questions, a family meeting with the estate planning attorney is in order. Most experienced estate planning attorneys have seen just about every situation you can imagine and many that you can’t. They should be able to give your family guidance, even connecting you with a social worker who has experience in blended families, if the problems seem unresolvable.

Reference: Forbes (June 28, 2021) “Could Your Aging Parents’ Estate Plan Create A Nightmare For Step-Siblings?”

How to Prepare for Higher Taxes

Taxing the appreciation of property on gifting or at death as capital gains or ordinary income is under scrutiny as a means of raising significant revenue for the federal government. The Biden administration has proposed this but proposing and passing into law are two very different things, observes Financial Advisor in the article “How Rich Clients Should Prepare For A Biden Estate Tax Regime.”

The tax hikes are being considered as a means of paying for the American Jobs Act and the American Families Act. Paired with the COVID-19 relief bill, the government will need a total of $6.4 trillion over the course of a decade to cover those costs. Reportedly, both Republicans and Democrats are pushing back on this proposal.

A step-up in basis recalculates the value of appreciated assets for tax purposes when they are inherited, which is when the asset’s value usually is higher than when it was originally purchased. For the beneficiary, the step-up in basis at the death of the original owner reduces the capital gains tax on the asset. Taxes are reduced significantly, or in some cases, completely eliminated.

For now, taxpayers pay an estate tax on the value of the assets and the basis of appreciated assets is stepped up to fair market value. The plan under consideration would treat appreciated assets owned at the time of death as sold, which would trigger income tax and subject those assets to estate tax.

Biden’s proposal would also subject many families to the estate tax, which they would not otherwise face, since the federal estate tax exclusion is still historically high—$11.7 million for individuals and $23.4 million for married couples. Let’s say a widowed mother dies with a $3 million estate. Most of the value of the estate is the home she lived in with her spouse for the last four decades. Her estate would not owe any federal tax, but the deemed sale of a highly appreciated home would generate income tax liability.

The proposal allows a $1 million per individual and $2 million per married couple exclusion from gain recognition on property transferred by gift or owned at death. The $1 million per person exclusion is in addition to exclusions for property transfers of tangible personal property, transfers to a spouse, transfers to charity, capital gains on certain business stock and the current exclusion of $250,000 for capital gain on a personal residence.

How should people prepare for what sounds like an unsettling proposal but may end up at a completely different place?

For some, the right move is transferring properties now, if it makes sense with their overall estate plan. Regardless of what Congress does with this proposal, the estate tax exemption will sunset to just north of $5 million (due to inflation adjustments) from the current $11.7 million. However, the likelihood of the proposal passing in its present state is low. The best option may be to make any revisions focused on the change to the estate tax exemption levels.

Reference: Financial Advisor (June 28, 2021) “How Rich Clients Should Prepare For A Biden Estate Tax Regime”

What are the 411 on 529 College Savings Plans?

There are two basic types of 529 plans, says Texas News Today’s recent article entitled “What you need to know about the “529” Education Savings Account.” The more common type is the 529 College Savings Plan. This allows parents, grandparents and others to invest money to cover eligible education for beneficiaries. The less common type is the 529 prepaid tuition program, in which tuition is paid at a set price.

Contributions to the 529 Plan aren’t tax deductible at the federal level. However, many states offer state income tax deductions or credits. Your money grows tax-free and withdrawals to pay tuition and other eligible expenses are free of federal taxes and, in many instances, state income taxes.

529 plans can be used to pay for various college fees like tuition, room, food, books, and technology. You can pay up to $10,000 a year for K-12 tuition. You can also transfer the money in your account to other recipients. There are more pluses than minuses. However, you should note that you may face tax impacts and penalties for withdrawals that aren’t considered eligible costs. Your child’s college needs financial assistance may also be reduced, and you cannot purchase individual stocks within the 529 plan. However, you can select a number of investment options. Even so, you have fewer options than if you were designing your own portfolio.

You can transfer some or all of the existing funds in your account to another investment option twice in a calendar year or after changing beneficiaries. You can also select a different investment option whenever you join the plan. You can switch to another state’s plan once every 12 months. However, there are a few states that exclude such shifts from their plans.

Each state has set a total contribution limit of $235,000 to $542,000 per beneficiary. When an account hits the limit, you will not be able to make any more donations. However, revenue will continue to accumulate. There’s no annual donation limit, but donations are considered gifts for federal tax purposes. Therefore, this year, you could donate $15,000 per donor and per recipient with no federal gift tax. You can also make a $75,000 tax-exempt 529 plan donation and evenly distribute it to your tax return for the next five years, which is an option that some grandparents use as a tool for real estate planning.

The benefits of saving for college through the 529 plan are likely to outweigh the potential impact on financial assistance. Assets in an account owned by either a student or their parents are considered parental assets for federal financial assistance purposes, and typically only 5.64% of accounts are considered annually in the FAFSA (Federal Student Assistance Free Application) calculation. This is an advantage over being counted as a student asset because distribution under this ownership structure doesn’t disqualify the university for financial assistance. The assets of the grandparents’ account don’t impact the student’s FAFSA, but the distribution counts as the student’s income and affects aid.

Reference: Texas News Today (June 8, 2021) “What you need to know about the “529” Education Savings Account”

What Happens to My Home If I Go to a Nursing Home?

An aging parent who does not have any other assets and believes she would end up on Medicaid sooner rather than later, may not know what would happen to the house that is in both her name and the name of her son.

Nj.com’s recent article entitled “What happens to my house if I go into a nursing home?” says that timing is everything, and the answer may depend on when and how the son obtained his interest in the parent’s house.

If the parent owned the house and put her son’s name on the deed along with hers, the parent made a gift of an interest in the house to her son.

Medicaid has a five-year look back period when a senior applies for Medicaid.

If an applicant made any gifts during this look back period, a penalty period will apply. During that time, an applicant isn’t eligible for Medicaid. However, if the gift was made prior to the five-year period, the penalty period is inapplicable.

If the son bought the interest in the parent’s house, the Medicaid lookback rules don’t apply.

However, in any event, Medicaid requires an applicant to “spend down” her assets to $2,000 (in most states, but the amount may vary) to qualify for the program.

A home the parent or a spouse or disabled child are living in will be considered exempt. However, it won’t be exempt if the parent, spouse, or disabled child, aren’t living in it and have no expectation of returning to it.

If the parent will not be living in or returning to her home, the parent will need to sell her interest in the home before she qualifies for Medicaid.

Alternatively, the parent and her son will have to sell the home, and she will have to use her share of the proceeds before she can qualify for Medicaid.

In addition, if the son is also providing a level of care for the parent for a period of at least two years, the parent has allowed you to stay in her home and not have to relocate to a nursing facility sooner. This exception has a complex set of rules.

Medicaid is complicated and the above information is only general in nature. Medicaid rules sometimes change and can even be applied differently based on where you live. You should consult with an estate planning or elder law attorney to make certain you take the steps that will be most beneficial to your specific set of circumstances.

Reference: nj.com (June 4, 2021) “What happens to my house if I go into a nursing home?”

How Do You Divide Inheritance among Children?

A father who owns a home and has a healthy $300,000 IRA has two adult children. The youngest, who is disabled, takes care of his father and needs money to live on. The second son is successful and has five children. The younger son has no pension plan and no IRA. The father wants help deciding how to distribute 300 shares of Microsoft, worth about $72,000. The question from a recent article in nj.com is “What’s the best way to split my estate for my kids?” The answer is more complicated than simply how to transfer the stock.

Before the father makes any kind of gift or bequest to his son, he needs to consider whether the son will be eligible for governmental assistance based on his disability and assets. If so, or if the son is already receiving government benefits, any kind of gift or inheritance could make him ineligible. A Third-Party Special Needs Trust may be the best way to maintain the son’s eligibility, while allowing assets to be given to him.

Inherited assets and gifts—but not an IRA or annuities—receive a step-up in basis. The gain on the stock from the time it was purchased and the value at the time of the father’s death will not be taxed. If, however, the stock is gifted to a grandchild, the grandchild will take the grandfather’s basis and upon the sale of the stock, they’ll have to pay the tax on the difference between the sales price and the original price.

You should also consider the impact on Medicaid. If funds are gifted to the son, Medicaid will have a gift-year lookback period and the gifting could make the father ineligible for Medicaid coverage for five years.

An IRA must be initially funded with cash. Once funded, stocks held in one IRA may be transferred to another IRA owned by the same person, and upon death they can go to an inherited IRA for a beneficiary. However, in this case, if the son doesn’t have any earned income and doesn’t have an IRA, the stock can’t be moved into an IRA.

Gifting may be an option. A person may give up to $15,000 per year, per person, without having to file a gift tax return with the IRS. Larger amounts may also be given but a gift tax return must be filed. Each taxpayer has a $11.7 million total over the course of their lifetime to gift with no tax or to leave at death. (Either way, it is a total of $11.7 million, whether given with warm hands or left at death.) When you reach that point, which most don’t, then you’ll need to pay gift taxes.

Medical expenses and educational expenses may be paid for another person, as long as they are paid directly to the educational institution or health care provider. This is not considered a taxable gift.

This person would benefit from sitting down with an estate planning attorney and exploring how to best prepare for his youngest son’s future after the father passes, rather than worrying about the Microsoft stock. There are bigger issues to deal with here.

Reference: nj.com (June 24, 2021) “What’s the best way to split my estate for my kids?”

Can I Write a Perfect Will?

The Good Men Project’s recent article entitled “10 Tips to Writing the Perfect Will” says that writing a perfect will is hard but not impossible. The article provides some tips to keep in mind:

  1. Include Everything. If you have items that are very important to you, make sure they are in the right hands after your death.
  2. Consult an Experienced Estate Planning Attorney. It is a challenge to write a will, especially when you do not know all the legal processes that will take place after your death. An estate planning lawyer can educate you on how your estate is being distributed after your death and how to address specific circumstances.
  3. Name an Executor. An executor will manage and distribute your assets after you die. Select a trustworthy person and be sure it is someone who will respect you and your will.
  4. Name the Beneficiaries. These people will get your assets after you pass away. Name them all and include their full names, so there is no confusion.
  5. Say Where Everything Can Be Found. Your executor should know where all of your property and assets can be found. If there is any safe place where you keep things, add it to your will.
  6. Describe Residual Legacies. This is what remains in your estate, once all the other legacies and bequests are completed. If you fail to do this, it will be a partial intestacy. No matter that the legacies would be distributed according to the will, the intestacy laws will control the residue, which may not be to your liking.
  7. Name Guardians for Your Minor Children. Appoint a guardian to take care of any minor children or the court will appoint their guardians, again this may not be to your liking.
  8. Be Specific. An ambiguous will creates issues for the executor and may require court intervention. Be specific and include heirs’ full names. Account numbers, security boxes and anything of the sort should also be included in your will for easy access.
  9. Keep it Updated. If you experience a major life event, update your will accordingly.
  10. Get Signatures from Witnesses. Once your will is completed, you need witnesses who are at least 18 and are not beneficiaries. Sign and date the will in front of these witnesses, and then ask them to date and sign it too.

If you have any questions about wills, speak to an experienced estate planning attorney.

Reference: The Good Men Project (May 28, 2021) “10 Tips to Writing the Perfect Will”

Medicare Surprises Do Exist

CNBC’s recent article entitled “Here are 3 Medicare surprises that can cost you thousands every year” reports that about 62.6 million people—most of whom are age 65+— are enrolled in Medicare. Most pay no premium for Part A (hospital coverage) because they have at least a 10-year work history of paying into the system via payroll taxes.

As far as Part B (outpatient care) and Part D (prescription drug coverage), a senior may see some surprise premium costs, no matter if you stay with original Medicare (Parts A and B) or choose to get your benefits through an Advantage Plan (Part C).

  1. Higher premiums for higher income. About 7% (4.3 million) of Medicare enrollees pay more than the standard premiums for Parts B and D for income-related monthly adjustment amounts, or IRMAAs, according to the Centers for Medicare and Medicaid Services. This starts at modified adjusted gross income of more than $88,000. It goes up at higher income thresholds. For example, a single taxpayer with income between $88,000 and $111,000 would pay an extra $59.40 per month for Part B on top of the standard premium of $148.50, or $207.90 total. Note that these IRMAAs don’t gently phase in within each income bracket. If you earn a dollar above the income thresholds, the surcharge applies in full force. Generally, these extra charges are calculated by your tax return from two years earlier. You can also request that the Social Security Administration reconsider the surcharges, if your income has dropped since that you filed that tax return.
  2. Your spouse’s income counts against you. The IRMAAs aren’t based on your own income. For example, if you have retired but your spouse is still working, and your joint tax return is a modified adjusted gross income of $176,000 or higher, you would be subject to IRMAAs.
  3. If you sign up late, you’ll pay a penalty. Sign up for Medicare during a seven-month window that starts three months before your 65th birthday month and ends three months after it. However, if you meet an exception — i.e., you or your spouse have qualifying group insurance at a company with 20 or more employees — you can put off enrolling. Workers at big employers often sign up for Part A and wait on Part B until they lose their other coverage. When this happens, they generally get eight months to enroll. Note that the rules are different for companies with fewer than 20 employees, whose workers must sign up when first eligible. For each full year that you should have been enrolled in Part B but were not, you could face paying 10% of the monthly Part B standard premium ($148.50 for 2021). The amount is added to your monthly premium for as long as you are enrolled in Medicare.

For Part D prescription drug coverage, the late-enrollment penalty is 1% of the monthly national base premium ($33.06 in 2021) for each full month that you should have had coverage but didn’t. This Part B penalty also lasts as long as you have drug coverage.

Reference: CNBC (June 21, 2021) “Here are 3 Medicare surprises that can cost you thousands every year”

Should You Add Someone to Your Bank Account?

Adding another person to your bank account provides both of you with complete access to the account. A person can be a power of attorney and a joint account holder, but the two are very different roles, explains the article “What are my rights when someone adds me to a bank account?” from Lehigh Valley Live.

A joint account is a bank or investment account shared by two individuals, although more than two people may be on an account. They have equal access to funds, as well as equal responsibilities for any fees or expenses associated with the account. If there are transactions, depending upon the rules of the institution, all owners may be required to sign documents. The key is how the account is titled. That’s the controlling factor in determining how the assets in the account are divided, if one of the owners dies. There are several different types of joint ownership.

One is “Joint Tenants with Rights of Survivorship,” or JTWROS. If one of the account owners should die, the assets in the account go directly to the surviving account holder. These assets do not go through probate.

Then there’s “Tenants in Common,” or TIC. With TIC, each individual account owner has the right to designate a beneficiary for their portion of the assets upon their death. The assets might not be split 50/50. How the account is titled lets the account owners divide ownership however they want.

Another one: “Joint Tenants by the Entirety.” This describes a married couple who own real estate or a financial account as a legal entity with equal ownership. Neither person may transfer their half of the property during their lifetime or through a will or a trust. When one spouse dies, the entire account goes to the surviving spouse and it transfers without passing through probate.

In the example given at the start of the article, the establishment of a joint account gives both the father and son equal access to the account. If the father is unable to handle the account at any time in the future, for whatever reason, the son will be able to step in.

Power of Attorney or POA is a completely different thing. A POA is a legal document giving a person the authority to act on behalf of another person for a specific transaction or general legal and financial matters. Just as there are numerous types of joint ownership, there are numerous types of POA.

A general POA gives a person the power to act on behalf of the principal for all legal, property and financial matters, as long as the principal’s mental capacity is sound. The Durable POA gives authority to a person to act on behalf of the principal, even after the principal becomes mentally incapacitated. Special or limited power of attorney gives authority to act only for specific matters or transactions. A Springing Durable POA provides authority to act only under certain events or levels of incapacitation, which is defined in detail in the document.

You can be both a joint owner of an account and a power of attorney. These are two different ways to help a parent with financial and legal activities. An estate planning attorney can help create the POA that best fits the situation.

Reference: Lehigh Valley Live (June 10, 2021) “What are my rights when someone adds me to a bank account?”

What’s the Right Age to Start Estate Planning?

Okay, you just hit 40 and you’re thinking about what your life will be like now that you are middle-aged. You better start thinking about retirement.  Your children will need money to go to college one day.

So, you’re not even considering the possibility of estate planning because that’s something that you do when you’re old, like in your 60s, right?

Wrong, says Reality Biz News’ recent article entitled “When is the right time to consider estate planning?” While the life expectancy for the average American might be between 80 and 85, stuff happens, and so does death. You should be certain that your family is provided for, if you pass away unexpectedly.

It’s much easier to plan for the inevitable when you are young and healthy.  However, many people wait until they’re in the hospital to begin considering estate planning. Let’s look at some signs you should begin estate planning:

If you are in your twenties and living from paycheck to paycheck, it might not make much sense to plan for the distribution of your estate. Your bestie knows she’s getting your Beats, and your vintage records are going to your significant other. However, you should start planning your estate, when you begin saving money and making investments. Talk to an experienced estate planning attorney, if you fall into one of these categories:

You have a savings account. If you have a savings account with a few thousand dollars, you might want to think about who you want the money to go to if you pass away.

Have you recently been married? If you recently wed (or divorced), you and your spouse will want to start making a plan for who will get your joint assets when you’re no longer around. If you’re divorced, you should remove your ex from your will.  If you don’t have a will, your property will go directly to your spouse when you die. However, there are a few exceptions, including the fact that you can leave a bank account to a payable on death beneficiary. This will avoid probate and have the funds in that account go directly to that designated beneficiary.

You have assets of over $100,000. If you have some significant savings, you should ask an experienced estate planning attorney about creating a trust for anyone who may be dependent upon you.

You want to travel. Before you plan your ascent of Mount Everest, update your will. If you have minor children, you will want to nominate a guardian for them, in the event that you fall off the mountain and do not return.

You own property. If you own a house, a car, a boat, or other real estate but aren’t married and have no children, make a will. That way you can leave those assets to whomever you want.

Reference: Reality Biz News (April 23, 2021) “When is the right time to consider estate planning?”

What are the Most Popular Estate Planning Scams?

The Wealth Advisor’s recent article entitled “Beware of These Common Estate Planning Scams” advises you to avoid these common estate planning scams.

  1. Cold Calls Offering to Prepare Estate Plans. Scammers call and email purporting to be long lost relatives who’ve had their wallets stolen and are stranded in a foreign country. Seniors fall prey to this and will pay for estate planning documents. Any cold call from someone asking that money be wired to a bank account, in exchange for estate planning documents should be approached with great skepticism.
  2. Paying for Estate Planning Templates. For a one-time fee, some scammers will offer estate planning documents that may be downloaded and modified by an individual. While this may look like a great deal, avoid using these pro forma templates to draft individual estate plans. Such templates are rarely tailored to meet state-specific requirements and often fail to incorporate contingencies that are necessary for a comprehensive and complete estate plan. Instead, work with an experienced estate planning attorney.
  3. Not Requiring an Estate Plan. Although less of a scheme, somepeople think they do not need an estate plan. However, proper estate planning entails deciding who can make health care and financial decisions during life, in the event of incapacity. These documents help to minimize the need for family members to petition the Probate Court in certain situations.
  4. Paying High Legal Fees. Like many things in life, with an estate plan, you may get what you pay for. Paying money upfront to have your intentions memorialized in writing can minimize the expense. Heirs should be on guard if an attorney hired to administer an estate is charging exorbitant fees for what looks to be a well-prepared estate plan. Don’t be afraid to get a second opinion in these situations.
  5. Signing Estate Planning Documents You Don’t Understand. Estate planning documents are designed to prepare for potential incapacity and for death. It is critical that your estate planning documents represent your intentions. However, if you don’t read them or don’t understand what you’ve read, you will have no idea if your goals are accomplished. Make certain that you understand what you’re signing. An experienced estate planning attorney will be able to explain these documents to you clearly and will make sure that you understand each of them before you sign.

You can avoid these common scams, by establishing a relationship with an experienced attorney you trust.

Reference: The Wealth Advisor (June 7, 2021) “Beware of These Common Estate Planning Scams”