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When Should You Update Your Estate Plan?

We know we need to see our doctor for annual checkups and see the dentist every six months, not to mention getting a good night’s sleep, brushing and flossing our teeth. In the same way, your estate plan needs regular maintenance, according to an article from The Street, which asks, “When Is It Time to Update Your Estate Plan?”

Far too often, estate plans are created with the best intentions and then lie dormant, in many cases, for decades. Provisions no longer make sense, or people in key roles, like executors, either move away or die.

Failing to update an estate plan can lead to a beloved child being disinherited or an animal companion ending up in a shelter.

This is an easy problem to solve. However, it requires taking action. Scanning your estate plan once a year won’t take long. However, when certain events occur, it’s time to bring all your estate planning documents to an estate planning attorney’s office.

Here are a few trigger events when you may want to make changes:

Welcoming a new child into the family. Wills and trusts often contemplate future children. However, when the children arrive, you’ll need to update wills, trusts and beneficiary designations. Life insurance policies, investment accounts and retirement accounts allow you to name a beneficiary, and the proceeds from these accounts go directly to the beneficiaries, bypassing probate.

If no beneficiary is named or cannot be located, the asset usually goes back into the estate, meaning it goes through probate and there may be tax liabilities.

Charitable giving goals often change over time. An organization with great personal meaning in your twenties may be less important or may have closed. If you’ve become involved with a charitable mission and want to leave assets to the organization, you’ll want to create a charitable bequest in your will or trust. Those changes need to be reflected in your estate plan.

People’s ability to serve in fiduciary roles may have changed. If the people you assigned certain roles to—like trustees, executors, agents, or the guardian named for minor children—may no longer be suitable for the role. The person you selected to serve as a guardian for minor children may not be available or willing to manage adolescents. If your trustees are over 70, you may want to name an adult child to serve in this role.

Reviewing insurance policies needs to be done regularly. In some cases, the value of life insurance proceeds may be subject to estate tax. Proper planning should be able to avoid this by making certain the policy is not included in your taxable estate.

If you are considering taking out a new life insurance policy, revisit your existing plans with your estate planning attorney. It may make sense for you to create an insurance trust, which allows you to exempt certain assets from your taxable estate.

Are pets an important part of your life? If so, you may want to make plans for who should take care of your pet if you pass away. In many cases, a pet trust works to name a trustee to manage funds for the pet’s care and formally outlines how you want your pet to be cared for.

Reviewing your estate plan every three to five years with your estate planning attorney or whenever a significant life event occurs will ensure that your wishes are followed.

Reference: The Street (Oct. 30, 2023) “When Is It Time to Update Your Estate Plan?”

Does Your State Have an Inheritance Tax?

Most Americans aren’t concerned with the $12.92 million threshold for the federal estate tax. However, some states are not as generous with estate tax exemptions, and others impose inheritance taxes on heirs, reports the article “States That Won’t Tax Your Death” from Kiplinger. State death taxes can become expensive for loved ones.

Death taxes are tax liabilities incurred by heirs when you die. In some states, heirs pay death taxes on even small inheritances. For example, heirs in Nebraska pay a death tax rate of 15% on inheritances over $25,000. The good news is that if you live in a state with no estate or inheritance tax, you don’t have to worry about a state death tax.

If taxes are a big consideration for where you live, consider the pros and cons before making any big decisions. Not every state is as tax-friendly regarding other taxes, fees, or the overall cost of living.

  • Alabama has no death taxes and low grocery taxes.
  • Alaska has no death taxes, and Alaska pays residents to live in the state through the Permanent Fund Dividend. In 2023, the payment was $1,312.
  • Arizona has no death tax, low-income taxes and a flat income rate of 2.5%.
  • Arkansas has no estate or death taxes, and a recent tax cut bill reduced income taxes.
  • California is generally a high-tax state with high costs of living, but there is no death tax.
  • Colorado has no death tax and the highest EV credit of any state.
  • Delaware is known to be very business friendly. However, it’s also a state with no sales tax, no state estate tax and no inheritance tax.
  • Florida has no death taxes, and what appeals to many new arrivals is no state income tax.
  • Georgia has no estate or inheritance tax.
  • Idaho doesn’t have an inheritance tax, but some types of retirement income, including pensions, are taxable.
  • Indiana has no inheritance tax and a fairly low flat-income tax rate of 3.15% (although some counties impose income taxes of their own).
  • Kansas has no inheritance tax or estate tax.
  • Louisiana has no death taxes and some of the lowest property taxes in the country.
  • Michigan has no estate tax or inheritance tax.
  • Mississippi taxes groceries but has no death tax or estate tax.
  • Missouri has no state death tax.
  • Montana has no state death tax.
  • Nevada has no inheritance taxes and no income tax.
  • New Hampshire doesn’t have a death tax, and there’s no personal income tax, but there is a tax on interest in dividends.
  • New Mexico has no estate or inheritance tax.
  • North Carolina has no death taxes and low property taxes.
  • North Dakota has no estate or inheritance tax, and the highest income tax rate is 2.5%.
  • Ohio has no death taxes but does have high property taxes.
  • Oklahoma has no death tax; low property and income tax rates never reach 5%.
  • South Carolina has no death tax or inheritance tax.
  • South Dakota has no inheritance tax and no state income taxes.
  • Tennessee has no estate, inheritance, or income tax.
  • Texas has no income tax and no inheritance tax.
  • Utah has no death tax but is one of 11 states that taxes Social Security retirement benefits.
  • Virginia has high income tax rates but no inheritance or state estate taxes.
  • West Virginia has no death tax.
  • Wisconsin has no death or state estate taxes. However, property and income tax rates are high.
  • Kiplinger ranks Wyoming as one of the best states for middle-class families because of the state’s overall low tax burden. There’s also no inheritance tax.

Reference: Kiplinger (Oct. 12, 2023) “States That Won’t Tax Your Death”

Estate Planning and Tax Planning for Business Owners

Business owners who want long-term financial success must navigate an intricate web of taxes, estate planning and asset protection. Pre- and post-transactional tax strategies, combined with estate planning, can safeguard assets, optimize tax positions and help strategically pass wealth along to future generations or charitable organizations, as reported in a recent article from Forbes, “Strategic Tax and Estate Planning For Business Owners.”

Pre-transactional tax planning includes reviewing the business entity structure to align it with tax objectives. For example, converting to a Limited Liability Company (LLC) may be a better structure if it is currently a solo proprietorship.

Implementing qualified retirement plans, like 401(k)s and defined benefit plans, gives tax advantages for owners and is attractive to employees. Contributions are typically tax-deductible, offering immediate tax savings.

There are federal, state, and local tax credits and incentives to reduce tax liability, all requiring careful research to be sure they are legitimate tax planning strategies. Overly aggressive practices can lead to audits, penalties, and reputational damage.

After a transaction, shielding assets becomes even more critical. Establishing a limited liability entity, like a Family Limited Partnership (FLP), may be helpful to protect assets.

Remember to keep personal and business assets separate to avoid putting asset protection efforts at risk. Review and update asset protection strategies when there are changes in your personal or business life or new laws that may provide new opportunities.

Developing a succession plan is critical to ensure that the transition of a family business from one to the next. Be honest about family dynamics and individual capabilities. Start early and work with an experienced estate planning attorney to align the succession and tax plan with your overall estate plan.

Philanthropy positively impacts, establishes, or builds on an existing legacy and creates tax advantages. Donating appreciated assets, using charitable trusts, or creating a private foundation can all achieve personal goals while attaining tax benefits.

Estate taxes can erode the value of wealth when transferring it to the next generation. Gifting, trusts, or life insurance are all means of minimizing estate taxes and preserving wealth. Your estate planning attorney will know about estate tax exemption limits and changes coming soon. They will advise you about gifting assets during your lifetime, using annual gift exclusions, and determine if lifetime gifts should be used to generate estate tax benefits.

Reference: Forbes (Sep. 28, 2023) “Strategic Tax and Estate Planning For Business Owners”

Why You Need to Include Digital Assets in Your Estate Plan

A new form of wealth, with different ownership, storage, and transferability terms, has created a new challenge for estate planning from traditional forms of wealth. These are digital assets, electronic records in which an individual has a right or interest, as explained in a recent article, “Planning for Digital Assets 101,” from Wealth Management.

Digital assets can be divided into two groups: sentimental digital assets and investment digital assets.

Sentimental digital assets are those with an emotional tie, like photos, videos, social media accounts, etc. For these assets, the goal is to provide access to loved ones after a person’s death. Some platforms allow settings to name a legacy contact. A list of accounts, usernames and passwords will be helpful for family members.

The IRS defines investment digital assets as “any digital representation of value which is recorded on a cryptographically secured distributed ledger, like a blockchain, or any similar technology as specified by the Secretary.” This type of asset includes cryptocurrency, stablecoins and non-fungible tokens.

The challenge of digital investment assets in estate planning centers on how they are owned and stored.

Digital assets are stored in digital wallets, web-based or hardware-based. “Hot wallets” are web-based and run on smartphones or computers. Many investors use them for small amounts of cryptocurrency and frequent trading. “Cold wallets” are hardware-based wallets stored on devices not connected to the internet, reducing the risk of unauthorized access. A cold wallet can only communicate with an internet-connected device when plugged in. An investor will have a seed phrase or backup code to access the cold wallet, which the owner must store in a secure place.

Understanding the storage system is essential for estate planning for two main reasons:

Beneficiary Access. The recipient of a gift or bequest of the digital asset must have access to the relevant storage device to access the actual investment. Sharing this information comes with an element of risk, as access is inherently tied to value.

Fiduciary Access. If only the owner has access, heirs will have no way to gain access to the digital assets when the owner dies. Digital exchanges don’t allow users to name a contact to access the investment information upon death. Most exchanges don’t have centralized entities to record information. If access is denied to the heir, the investment could be lost.

Transferring digital assets requires providing access to beneficiaries and/or fiduciaries. There are several ways to structure such a transfer while minimizing the risk of theft or loss.

Digital assets can be transferred to a Limited Liability Company, and subject to certain limitations, retain control of the digital assets’ management by serving as LLC manager. Transferred LLC interests can also provide a mechanism to discount the value of the transferred interest. In addition, LLCs can provide asset protection since, in most states, LLCs protect a member’s personal assets from an LLC’s liabilities.

A directed trust is another way to transfer digital assets, while maintaining control and decision-making with the owner. In some states, a directed trust can have an “investment trustee” or “investment trust director” to exclusively handle investment responsibilities, including managing and storing digital assets.

Even using these two methods, someone other than the original owner must be granted access to the digital assets. One way to do this is by naming a “digital fiduciary”—someone tasked with managing the digital assets.

Estate plans involving digital assets must clearly outline heirs for the digital investment and its tangible storage devices. The assets can pass with the residuary, and complexities can arise if the residuary beneficiaries differ from tangible property beneficiaries who will receive the storage device. Speak with an experienced estate planning attorney to be sure that your digital assets are included in your estate plan.

Reference: Wealth Management (Sep. 19, 2023) “Planning for Digital Assets 101”

Do I Pay Taxes When I Inherit?

Capital gains taxes are then calculated, so you pay taxes only on appreciation that occurs after you inherit the property. Yahoo Finance’s recent article entitled, “Do I Pay Taxes Automatically If I Inherit Property?” says there are three main types of taxes that cover inheritances:

  1. Inheritance taxes are taxes that an heir pays on the value of an estate that they inherit. There are no federal inheritance taxes. However, six states have an inheritance tax.
  2. Estate taxes are taxes paid out of the estate before anyone inherits. The estate tax has a minimum threshold, and as with all other tax brackets, the government only taxes the amount that exceeds this minimum threshold, which is $12.92 million ($25.84 million per married couple).
  3. Capital gains taxes are taxes paid on the appreciation of any assets an heir inherits through an estate. They’re only levied when you sell the assets for gain, not when you inherit.

The cash you inherit is taxed through either inheritance taxes (when applicable) or estate taxes. With inheritance taxes, you must file and pay this tax.

With an estate tax, the IRS taxes the estate directly.

Therefore, it’s uncommon for an heir to owe any taxes, including income tax, on inherited cash.

The IRS does not automatically tax any other forms of property that you might inherit. However, you’ll owe capital gains taxes if you choose to sell this property.

When you inherit property, whether real estate, securities, or almost anything else, the IRS applies a stepped-up basis to that asset. This means that for tax purposes, the base price of the asset is reset to its value on the day that you inherited it. If you inherit property and immediately sell it, you’d owe no taxes on those assets.

Two prices are involved in establishing a capital gain tax: the sale price (how much you sold the asset for) and the original cost basis (how much you bought it for).

Reference: Yahoo Finance (Aug. 27, 2023) “Do I Pay Taxes Automatically If I Inherit Property?”

How Much Money to Give Away with Upcoming Tax Changes?

With inflation, the current federal estate tax exemption amount, which you can have when you die without paying federal estate tax, increased to $12.92 million for individuals for 2023. That’s up from $12.06 million in 2022. It will jump to $25.84 million for couples in 2025, up from $24.12 million in 2024. However, those rates sunset at the end of 2025. Without action from Congress, the exemptions will revert to the levels in place before the 2018 Tax Cuts and Jobs Act increased them. That’s about half the amount the exemption has grown to by then due to inflation, says Microsoft’s recent article entitled, “If I have $10 million, how much should I give away while I’m alive?”

Few families have faced federal estate taxes in the last few years, as the IRS has seen about 1200 taxable-estate returns in 2020. However, more families would have to look at the effect of estate taxes if the exemption went back down to $6.5 million per individual. A total of 17 states and the District of Columbia also have their own estate tax and inheritance thresholds. While a number like $6.5 million sounds big, it’s really now just a healthy 401(k) and a nice house in a big city

If you have something like $10 million, and you decide that giving away $3.5 M is the best tax scenario for your estate, you probably aren’t going to write a check. You’ll be looking into trusts and other advanced estate planning techniques that require the help of an experienced estate planning attorney. Those take time, and there’s no way to push them to a December 31, 2025 deadline.

One reason you’d want to give money away while you’re alive is to lower the size of your estate when you die, which would minimize taxes. If you have assets above the exemption limit set by the IRS, the federal tax will likely be 40% on the amount over that limit. There are a number of ways to give away a significant amount of money to lower the value of your estate. People hesitate because most of those options are irrevocable, so you can’t change your mind later.

An issue is using up your exemption by giving away money. If you have $10 million and pass away after the exemption goes down, you’d owe federal estate tax on the $3.5 million difference. If you had given away that $3.5 million before the end of 2025, you’d have a $3 million exemption remaining, and you could have made a wise tax move — at least as long as you stayed under the new threshold. If you gave away more than $6.5 million between 2018 and 2025 — up to the limit during that time — the IRS says you won’t be penalized.

However, if the exemption stays the same after 2026, at nearly $13 million, if you gave away $3.5 million, you’d have essentially $9.5 million left in lifetime exemption. However, be careful not to use up your entire exemption. If you give everything away while living, you won’t have any exemption left. The annual gift-giving limit without losing any of your lifetime exemptions is $17,000 per recipient in 2023.

Reference: Microsoft (Aug. 7, 2023) “If I have $10 million, how much should I give away while I’m alive?”

What Should We Do with an Inherited Home?

Inheriting a house with siblings can raise some financial issues about what it means for each of you. Let’s look at some options for handling this situation and possible responses to any differences of opinion that may emerge.

NASDAQ’s recent article, “What to Do When Inheriting a House With Siblings,” says that consulting with an estate planning attorney can help untangle some of the sticky issues that can arise when a home is left to multiple people.

Several siblings can inherit the same piece of property, and when siblings inherit a home, everyone’s typically entitled to an equal share of the property. So, there are a few essential things you might need to do, including:

  • Putting the utility services in your or your siblings’ names;
  • Contacting the post office to have your parents’ mail forwarded to your address;
  • Going through your parents’ belongings;
  • Taking care of any necessary maintenance or repairs;
  • Updating payment information for the home’s insurance policy; and
  • Paying any outstanding charges associated with the home, such as HOA fees or property taxes.

After that, here’s what you might consider doing with the inherited property.

Sell. Selling is an obvious choice if neither you nor your siblings plan to live in it. Sell the home and divide the proceeds.

Buyout. If a sibling is reluctant to sell or your parents’ wills bar you from selling, you could try to work out a buyout. In that scenario, one sibling would maintain ownership of the home and pay the others an amount equal to what their share of the home is worth. Getting the home professionally appraised to determine its value is a good idea.

Renting. A third option is to rent out the home. The upside of this option is collectively sharing in the rental income from the property. This might make sense if you think you might revisit the issue of selling or a buyout in the future or if you’re obligated to keep the home in the family. If you go this route, you and your siblings will need to decide how maintenance and rent collection will be handled, and it might make sense to agree to hire a property management company to help.

Reference: NASDAQ (April 12, 2023) “What to Do When Inheriting a House With Siblings”

Who Pays Taxes, the Estate or Heirs?

If you needed another reason to prepare an estate plan besides saving your family the time and trouble of guessing your wishes for the distribution of property, avoiding litigation among family members and maintaining control of your estate by the family and not the court, perhaps a legacy of leaving heirs an expensive tax bill could get you to make an appointment with an estate planning attorney.

According to a recent article from Forbes, “Heirs Can Be Personally Liable For Estate’s Taxes,” a recent court case involving the estate of the founder of Gulfstream, the aircraft manufacturer, presents an example of why an estate plan and a knowledgeable executor are so important.

The founder died in 2000 in an estate worth about $200 million, primarily held in a living trust. His widow and surviving children were beneficiaries of the estate and trust. Each of them had, at one time or another, acted as a trustee or executor.

The estate tax return was filed, and an election was made to pay the $4.4 million in taxes over 15 years. The estate was able to do this in installments because the main asset of the estate was a business.

The IRS said the estate was worth more than stated on the estate tax return and took the estate to court, where it won the case. The estate now owed an additional $6.7 million in estate taxes, which it also elected to pay over the course of 15 years.

Here’s where things went south. Long before the court decision, the estate was fully distributed to beneficiaries. The estate and trust no longer owned any assets. Several estate tax payments were missed. The IRS sought to collect—from the heirs. The heirs took the matter to court.

A district court sided with the heirs, saying they were not responsible for the estate’s tax obligations. However, a federal appeals court recently reversed the decision. The appeals court ruled that the tax code imposes personal liability for unpaid estate taxes on successor trustees and beneficiaries of a living trust.

The beneficiaries argued they were liable only if they received property from the trust before its creator passed or if they had control of it on the date of death. The court disagreed and said the law places liability on anyone who received or had an interest in the estate’s property, either on the date the estate owner died or at any time after that. The heirs were found personally liable for the unpaid taxes of the estate.

Trustees and estate executors should be extremely cautious about final asset distributions. Great care must be taken in assessing the potential for the IRS or state tax authorities to claim additional estate or income taxes. Until the statute of limitations passes, executors may want to retain enough assets to pay any potential additional taxes, and beneficiaries who receive final distributions from trusts or estates must be aware that they may find themselves personally liable for additional taxes.

Reference: Forbes (June 21, 2023) “Heirs Can Be Personally Liable For Estate’s Taxes”

Ever Wonder How the Very, Very Rich Pass Wealth to Their Children?

When making plans to pass assets on to family members, it’s important to consider how estate planning can help manage the taxes associated with inheritances, says a recent article, “Here’s How the Ultra Rich Pass Wealth Tax Free to Their Heirs” from yahoo! finance. The very rich have used many strategies to pass on wealth with limited or no taxes owed, and some of these strategies can be used by regular people too.

The annual gift tax exclusion. Transferring wealth during your lifetime, rather than after your death, allows you to gift any number of people up to $17,000 each in a single year without incurring a taxable gift and having no impact on your estate and gift tax exemption. Married couples may give up to $34,000. People often use this annual exclusion for cash gifts and deposits into 529 education savings plans. These plans permit “frontloading” of up to five years’ worth of gifts into one year, which results in longer and more significant compounded growth.

Paying directly for medical care or tuition. If you wish to help a loved one pay for healthcare needs or education costs, the way to do this is to pay the institution directly. You may make unlimited payments to medical providers or educational institutions on behalf of others for qualified expenses without incurring a taxable gift or impacting your $17,000 individual gift exclusion. In addition, qualified medical expenses would be considered deductible for income tax purposes. Educational expenses are tuition, not living expenses or dorm fees. However, educational expenses aren’t limited to college and could be for a private school at the primary or high school level. Even certain daycare and afterschool activities might qualify.

Using the lifetime gift and estate tax exemption. One of the best estate planning tax strategies is to gift assets you expect to have significant appreciation in the future. For example, you have a $100,000 investment in a tech start-up you believe will appreciate ten times over the next five years. Of course, gifting the $100,000 investment today makes you eat slightly into your gift and estate tax exemption. All the future appreciation of the investment is still out of your taxable estate and into the hands of your heirs—estate and gift-tax free.

Converting IRAs to Roth IRAs. The SECURE Act’s 10-year rule eliminated the ability to ‘stretch’ inherited IRAs over most beneficiary’s lifetimes. A way to preclude the tax burden on your heirs from an inherited IRA is to convert it to a Roth IRA. You’ll pay the taxes at the time of conversion, but they won’t have to pay taxes upon inheriting the IRA or any future appreciation in the account.

Implementing discount strategies. This is a complex strategy used for transferring family businesses or real estate. Discount strategies reduce the value of an interest before its transfer to its value for gift tax purposes is reduced. You maintain some control or benefit from the asset after the transfer. Examples are FLPs (Family Limited Partnerships), Limited Liability Companies (LLPs) and Qualified Personal Residence Trusts (QPRTs).

Reference: yahoo! Finance (May 25, 2023) “Here’s How the Ultra Rich Pass Wealth Tax Free to Their Heirs”

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