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Is an Estate Plan Battle Looming?

Some people don’t create an estate plan before they die. Or, if they do, they failed to have an estate plan created with an experienced estate planning attorney and their will is unclear, or even invalid. They might die with debts conflicting with their wishes. These and other situations can lead to a long and expensive probate period, as described in the article “In-fighting Families, Wills, Laws & Other Things That Could Hold Up Probate” from yahoo!.

How long does it take for an estate to move through the probate process? It depends upon the complexity of the estate and how well—or poorly—the estate plan was created.

What is probate? Probate is the process where the court oversees the settlement of an estate after the owner dies. If there is a will, the court authenticates the will and accepts or denies the executor named in the will to carry out its instructions. The executor is usually the decedent’s spouse or closest living relative.

How does probate work? Probate is governed by state law, so different states have slightly different processes. The first thing is authenticating the will and appointing an executor. The court then locates and accesses all of the property owned by the decedent. If there are any debts, the estate must first pay off the debts. When the debts have been paid, the court can distribute the remaining assets in the estate to heirs.

If there is no will, the person is said to have died intestate. The court may then appoint an administrator to carry out the necessary tasks of paying debts and distributing assets. The administrator is paid from the estate.

How long does it take? It depends. If the decedent had placed most of their assets in trust, those assets are not subject to probate and are distributed according to the terms of the trust. If there are multiple properties in multiple states, probate has to be conducted in all states where property is owned. In other words, probate could be six months or three years.

Estate size matters. Certain states use the total value of the estate to determine its size, rather than examine individual properties. Possessions subject to probate usually include personal property, cash and cash accounts, transferable accounts with no named beneficiaries, assets with shared ownership or tenancy in common and real estate.

Possessions not typically subject to probate include insurance proceeds, accounts owned as Joint Tenant with Rights of Survivorship, accounts with a beneficiary designation and assets owned in trusts.

Probate varies from state to state. Probate is not nationally regulated, and state-level laws vary. An estate could be swiftly completed in one state and take a few months in another. Some states have adopted the Uniform Probate Code (UPC), designed to streamline the probate process by creating standardized laws. However, only 18 states have adopted this code to date.

Fighting among heirs makes probate take longer. Even small disputes can extend the probate process. If there are estranged family members, or someone feels they deserve a larger share of the estate, conflicts can lead to probate coming to a full stop.

An experienced estate planning attorney can help structure an estate plan to minimize the amount of assets passing through probate, while ensuring that your wishes are followed and loved ones are protected.

Reference: yahoo! (Nov. 21, 2022) “In-fighting Families, Wills, Laws & Other Things That Could Hold Up Probate”

The Basics of Estate Planning

No matter how BIG or small your net worth is, estate planning is a process that ensures your assets are handed down the way you want after you die.

Forbes’ recent article entitled “Estate Planning Basics” explains that everybody has an estate.

An estate is nothing more or less than the sum total of your assets and possessions of value. This includes:

  • Your car
  • Your home
  • Financial accounts
  • Investments; and
  • Personal property.

Estate planning is the process of deciding which people or organizations are to get your possessions or assets after you’ve died.

It’s also how you leave directions for managing your care and assets if you are incapacitated and unable to make financial or medical decisions. That is done with powers of attorney, a healthcare directive and a living will.

Your estate plan details who gets your assets. It also designates who can make critical healthcare and financial decisions on your behalf should you become incapacitated. If you have minor children, your estate plan also lets you designate their legal guardians, in case you die before they reach 18. It also allows you to name adults to safeguard their financial interests.

Your estate plan directs assets to specific entities or people in a legally binding manner. If you want your daughter to have your coin collection or your favorite animal rescue organization to get $500, it’s all mapped out in your estate plan.

You can also create a trust to safeguard a minor child’s assets until they reach a certain age. You can also keep assets out of probate. That way, your beneficiaries can easily access things like your home or bank accounts.

All estate plans should include documents that cover three main areas: asset transfer, medical needs and financial decisions. Ask an experienced estate planning attorney to help you create your estate plan.

Reference: Forbes (Nov. 16, 2022) “Estate Planning Basics”

Can You Prevent Family Fights over Inheritance?

Inheritance battles can create new conflicts, inflame long-standing resentments and squander assets intended to make heir’s lives better. What can families do to prevent estate battles when a loved one’s intentions aren’t accepted is the question asked by the recent article, “Warning Signs Of Estate Disputes—And Ways to Avoid Them,” from mondaq.com.

Here are the more common scenarios leading to family estate battles:

  • Siblings who are always fighting over something
  • Second or third marriages
  • Disparate treatment of children, whether real or perceived
  • Mental illness or additional issues
  • Isolation or estrangement
  • Economic hardship

There are steps to take to minimize, if not eliminate the likelihood of estate battles. The most important is to have an estate plan in place, including all the necessary documents to clearly indicate your wishes. You may want to include a letter of intent, which is not a legally enforceable document. However, it can support the wishes expressed in estate planning documents.

Update the Estate Plan. Does your estate plan still achieve the desired outcome? This is especially important if the family has experienced big changes to finances or relationships. An estate plan from ten years ago may not reflect current circumstances.

Make Distributions Now. For some families, giving with “warm hands” is a gratifying experience and can remove wealth from the estate to avoid battles as everything’s already been given away. The pleasure of seeing families enjoy the fruits of your labor is not to be underestimated, like a granddaughter who is able to buy a home of her own or an entrepreneurial loved one getting help in a business venture.

Appoint a Non-Family Member as a Trustee. Warring factions within a family are not likely to resolve things on their own, especially when cash is at stake. Appointing a family member as a trustee could cause them to become a lightning rod for all of the family’s tensions. Without the confidence of beneficiaries, accusations of self-dealing or an innocent mistake could lead to litigation. Removing the emotions by having a non-family member serve as a professional trustee can lessen suspicion and decrease the chances of legal disputes.

Communicate, with a facilitator, if necessary. Families with a history of disputes often do better when a professional is involved. Depending on the severity of the dynamics, this could range from annual meetings with an estate planning attorney to explain how the estate plan works and have discussions about the parent’s wishes to monthly meetings with a family counselor.

A No-Contest Clause. For some families, a no-contest clause in the will can head off any issues from the start. If people are especially litigious, however, this may not be enough to stop them from pursuing a case. An experienced estate planning attorney will be able to recommend the use of this provision, based on knowing the family and how much wealth is involved.

Addressing the problem now. The biggest mistake is to sweep the issue under the proverbial rug and “let them fight over it when I’m gone.” A better legacy is to address the problem of the family squabbles and know you’ve done the right thing.

As we head into the holiday season, efforts to bring families together and prepare for the future will allow parents, children and grandchildren to enjoy their time together.

Reference: mondaq.com (Nov. 4, 2022) “Warning Signs Of Estate Disputes—And Ways to Avoid Them”

There are Ways to Transfer Home to Your Children

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

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

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

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

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

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

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

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

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

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

The Benefits of a Good Estate Plan

If you don’t have a comprehensive estate plan, state law will control. That’s unlikely to coincide with what you would choose to do. MSN’s recent article entitled “What is estate planning?” discusses the benefits of estate planning.

Minimizes taxes. Clever structuring of flexible retirement accounts, such as a Roth IRA, can help funnel more tax-free money to your heirs, while other tax-planning strategies like strategic charitable giving can help you mitigate estate taxes.

Prevents family disputes. The possibility of a fight about who gets what of value or even a sentimental treasure can arise without proper planning.

Clarifies your directives. Although you may have always intended for your niece to get a certain heirloom, unless it’s written out in your estate plan, it may not get into her hands. If you clearly spell out your wishes with the help of an experienced estate planning attorney, you can help your loved ones remember you fondly or at least get what you intended.

Avoids the time and expense of probate court. Done correctly, a trust can help your family avoid the hassles of probate court. Because of the ease of using a trust, more people are doing an end-run around probate and setting up their assets this way. You don’t need as much wealth as you might think to make it worthwhile.

Keeps your family assets together. Trusts can be a good way to make sure your money stays in the family. With the help of an estate planning attorney, a trust can keep a beneficiary from blowing your lifetime of hard work in a few years.

Protects your heirs. If you have minor children, a will can instruct who will take care of them. A living will can help heirs avoid some difficult health decisions during a parent’s end of life.

Sound estate planning can help avoid several potentially troubling problems.

Reference: MSN (Oct. 13, 2022) “What is estate planning?”

What Happens When Inheritances are Unequal?

In this case, one brother left New York and had nothing to do with his brother for the rest of their lives. Uneven inheritances almost always lead to poor feelings between siblings, says a recent article “Where There’s a Will, There Can Be a War” from Next Avenue.

Wills have a way of frustrating a basic desire for equal treatment among siblings. If an older sibling works in the family business and receives full control of it in the will, siblings who inherit non-voting stock are likely to feel slighted, even if they never set foot in the business. Can this be avoided?

There are a few ways to avoid this kind of outcome. One option is to name each child as a beneficiary of a life insurance policy equal to the value of the stock passed to the oldest child. In this way, all children will feel they have been fairly treated.

If one child lives closest to the parents and takes on their care in their later years, the parents often leave this child the majority of their estate. It would be helpful for parents to explain this to the other siblings, so they understand why this has been done. A family meeting in person or online to explain the parent’s decision may be helpful. This gives the children time to process the information. Learning it for the first time after the parents die can be a surprise. Combining the surprise with grief is never a good idea.

For some families, an estate planning attorney can be helpful to serve as a mediator and/or buffer when this news is shared.

In some states, wills and trusts can include no-contest clauses. These forbid beneficiaries to receive any inheritance, if they challenge the will after the death of the parent. If one child receives more than another child, the other child could lose the smaller amount if they contest the will. Some attorneys recommend leaving the children enough to make it worth their while not to engage in litigation.

When unequal is fair. There are times when uneven inheritances are entirely fair. One child may have a substance abuse issue, or one may earn a six-figure salary while the other is eking out a living in a low-paying position. The parents may wish to leave more to a struggling family member and the other child may actually be relieved because the sibling will not need their financial assistance. A conversation with the family may eliminate confusion and clarify intent.

In all cases, the heirs and those who expect to be heirs must remember the estate planning attorney who creates the will or trust works for the parent and not for them. It’s the estate planning attorney’s role to counsel their clients, which they can do best if they have the complete picture of how the family dynamics operate.

Reference: Next Avenue (Oct. 13, 2022) “Where There’s a Will, There Can Be a War”

Are You Ready for 2026?

You may not be thinking about Jan. 1, 2026. Any New Year’s Eve celebrations being planned now are more likely to concern Jan. 1, 2023. However, if your estate is worth $5 million or more when the first day of 2026 arrives, your estate planning should begin now. According to a recent article from Forbes, “Is 2026 An Important Year For Your Wealth?,” the reduction in the estate tax exemption will revert to the 2010 level of $5 million adjusted for inflation. It could go even lower. With federal tax rates on estates over the exemption level set at 40%, plus any state estate or inheritance taxes, planning needs to be done in advance.

Considering the record levels of national debt and government spending, it’s unlikely these exemptions will remain the same. Now is the time to maximize today’s high estate tax exemption levels to minimize federal estate taxes and maximize what will be left to heirs.

Your estate planning attorney will have many different strategies and tools to achieve these goals. One is the Spousal Lifetime Access Trust (SLAT). This is an irrevocable trust created by each spouse, known as the grantors, for the benefit of the other spouse. Important note: to avoid scrutiny, the trusts must not be identical.

Each trust is funded by the grantor in an amount up to the current available tax exemption. Today, this is $12.06 million each (or a total of $24.12 million) without incurring a gift tax.

This serves several purposes. One is removing the gifted assets from the grantor’s estate. The assets and their future growth are protected from estate taxes.

The spousal beneficiary has access to the trust income and/or principal, depending upon how the trust is created, if they need to tap the trust.

The trust income may be taxed back to the grantor instead of the trust. This allows the assets in the trust to grow tax-free.

Remainder beneficiaries, who are typically the grantor’s children, receive the assets at the termination of the SLAT, usually when the beneficiary spouse passes away.

The SLAT can be used as a generation-skipping trust, if this is the goal.

The SLAT is a useful tool for blended families to avoid accidentally disinheriting children from first (or subsequent) marriage. Reminder assets can be distributed to named beneficiaries upon the death of the spouse.

The SLAT is an irrevocable trust, so some control needs to be given up when the SLATs are created. Couples using this strategy need to have enough assets to live comfortably after funding the SLATS.

Why do this now, when 2026 is so far away? The SLAT strategy takes time to implement, and it also takes time for people to get comfortable with the idea of taking a significant amount of wealth out of their control to place in an irrevocable trust. For a large SLAT, estate planning attorneys, CPAs and financial advisors generally need to work together to create the proper structure. Executing this estate planning strategy takes time and should not be left for the year before this large change in federal estate taxes occurs.

Reference: Forbes (Oct. 4, 2022) “Is 2026 An Important Year For Your Wealth?”

What Is Upstream Planning?

Estate planning with an eye to a future inheritance, known as “upstream planning,” can be especially important where families pass significant wealth from generation to generation. Knowing these details in advance can have a big impact on deciding on how to manage the heir’s own assets, as explained in the article “Expecting an Inheritance? Consider Coordinating Your Estate Plan with Your Parents’” from Kiplinger.

What happens when information is kept private? In one example, a patriarch refused to share any details, despite having children who had succeeded on their own and didn’t really need their inheritances. The family was left with an eight figure estate tax bill.

Clear and open discussions make sense. If a person has an estate large enough to need to pay federal estate taxes, inheriting more will add to their heir’s tax burdens. Parents may choose to leave assets to heirs through a trust. Money in a trust belongs to the trust, so in addition to tax benefits, the trust is a good way to protect assets from creditors, litigation, or divorce.

Trusts are also used to take advantage of the GST—generation skipping tax exemption. The executor of the parents’ estates can apply their GST exemption to the trust, which will not be taxed when they are distributed or passed to grandchildren, even if the grandchild is a beneficiary of the trust.

Business considerations also come into play. If a couple built and grew a business now being run by their granddaughter, and the grandsons have had little or no involvement, their wishes should be clarified: do they want their granddaughter to be the sole heir? Or do they want the grandsons to receive cash or other assets or any shares of the business?

Talking about multigenerational wealth early and often provides benefits to all concerned. The more money a family has, the more it makes sense to have those conversations and not only from an estate tax perspective. Those who created the wealth can use upstream planning as a way to start conversations about their success, family values and hopes for how heirs and future generations will benefit.

In some families, these conversations won’t happen because they think it’s too private or don’t want their children and grandchildren to feel they don’t need to work hard to become responsible citizens.

Communicating and coordinating are vital to success. Your estate planning attorney will be able to provide guidance, having seen what happens when upstream planning occurs and when it does not.

Reference: Kiplinger (Oct. 4, 2022) “Expecting an Inheritance? Consider Coordinating Your Estate Plan with Your Parents’”

Top 10 Success Tips for Estate Planning

Unless you’ve done the planning, assets may not be distributed according to your wishes and loved ones may not be taken care of after your death. These are just two reasons to make sure you have an estate plan, according to the recent article titled “Estate Planning 101: 10 Tips for Success” from the Maryland Reporter.

Create a list of your assets. This should include all of your property, real estate, liquid assets, investments and personal possessions. With this list, consider what you would like to happen to each item after your death. If you have many assets, this process will take longer—consider this a good thing. Don’t neglect digital assets. The goal of a careful detailed list is to avoid any room for interpretation—or misinterpretation—by the courts or by heirs.

Meet with an estate planning attorney to create wills and trusts. These documents dictate how your assets are distributed after your death. Without them, the laws of your state may be used to distribute assets. You also need a will to name an executor, the person responsible for carrying out your instructions.

Your will is also used to name a guardian, the person who will raise your children if they are orphaned minors.

Who is the named beneficiary on your life insurance policy? This is the person who will receive the death benefit from your policy upon your death. Will this person be the guardian of your minor children? Do you prefer to have the proceeds from the policy used to fund a trust for the benefit of your children? These are important decisions to be made and memorialized in your estate plan.

Make your wishes crystal clear. Legal documents are often challenged if they are not prepared by an experienced estate planning attorney or if they are vaguely worded. You want to be sure there are no ambiguities in your will or trust documents. Consider the use of “if, then” statements. For example, “If my husband predeceases me, then I leave my house to my children.”

Consider creating a letter of intent or instruction to supplement your will and trusts. Use this document to give more detailed information about your wishes, from funeral arrangements to who you want to receive a specific item. Note this document is not legally binding, but it may avoid confusion and can be used to support the instructions in your will.

Trusts may be more important than you think in estate planning. Trusts allow you to take assets out of your probate estate and have these assets managed by a trustee of your choice, who distributes assets directly to beneficiaries. You don’t have to have millions to benefit from a trust.

List your debts. This is not as much fun as listing assets, but still important for your executor and heirs. Mortgage payments, car payments, credit cards and personal loans are to be paid first out of estate accounts before funds can be distributed to heirs. Having this information will make your executor’s tasks easier.

Plan for digital assets. If you want your social media accounts to be deleted or emails available to a designated person after you die, you’ll need to start with a list of the accounts, usernames, passwords, whether the platform allows you to designate another person to have access to your accounts and how you want your digital assets handled after death. This plan should be in place in case of incapacity as well.

How will estate taxes be paid? Without tax planning properly done, your legacy could shrink considerably. In addition to federal estate taxes, some states have state estate taxes and inheritance taxes. Talk with your estate planning attorney to find out what your estate tax obligations will be and how to plan strategically to pay the taxes.

Plan for Long Term Care. The Department of Health and Human Services estimates that about 70% of Americans will need some type of long-term care during their lifetimes. Some options are private LTC insurance, government programs and self-funding.

The more planning done in advance, the more likely your loved ones will know what to do if you become incapacitated and know what you wanted when you die.

Resource: Maryland Reporter (Sep. 27, 2022) “Estate Planning 101: 10 Tips for Success”

Estate Planning Considerations for Minor Children

Creating an estate plan with minor children in mind has a host of variables quite different than one where all heirs are adults. If the intention is for the minor children to be beneficiaries, or if there is a remote chance a minor child might become an unintended beneficiary, different provisions will be needed. A recent article titled “Children need special attention in estate planning” from The News-Enterprise explains how these situations might be addressed.

Does the person creating the will—aka, the testator—want property to be distributed to a minor child? If so, how is the distribution is to occur, tax consequences and safeguards need to be put into place. Much depends upon the relationship of the testator to the minor child. An older individual may want to leave specific dollar bequests for minor children or great-grandchildren, while people with younger children generally leave their entire estate in fractional shares to their own minor children as primary beneficiaries.

While minor children and grandchildren beneficiaries are excluded from inheritance taxes in certain states, great- grandchildren are not. Your estate planning attorney will be able to provide details on who is subject to inheritance, federal and state estate taxes. This needs to be part of your estate plan.

If minor children are the intended beneficiaries of a fractional share of the estate in its entirety, distributions may be held in a common trust or divided into separate share for each minor child. A common trust is used to hold all property to benefit all of the children, until the youngest child reaches a determined age. When this occurs, the trust is split into separate shares according to the trust directions, when each share is managed for the individual beneficiary.

Instructions to the trustee as to how much of the income and principal each beneficiary is to receive and when, at what age or intervals each beneficiary may exercise full control over the assets and what purposes the trust property is intended for until the beneficiary reaches a certain age are details which need to be clearly explained in the trust.

Trusts for minor children are often specifically to be used for health, education, maintenance, or support needs of the beneficiary, within the discretion of the trustee. This has to be outlined in the trust document.

Even if the intention is not to make minor children beneficiaries, care must be taken to include provisions if they are family members. The will or trust must be clear on how property passed to minor child beneficiaries is to be distributed. This may be done through a requirement to put distributions into a trust or may leave a list of options for the executor.

Testators need to keep in mind the public nature of probate. Whatever is left to a minor child will be a matter of public record, which could make the child vulnerable to scammers or predatory family members. Consider using a revocable living trust as an alternative to safeguard the child and the assets.

Regardless of whether a will or trust is used, there should be a person named to act as the child’s guardian and their conservator or trustee, who manages their finances. The money manager does not have to be a parent or relative but must be a trustworthy person.

Review your specific situation with your estate planning attorney to create a plan to protect your minor children, ensuing their financial and lifestyle stability.

Reference: The News-Enterprise (Sep. 10, 2022) “Children need special attention in estate planning”

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