Estate Planning Blog Articles

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Get These Estate and Tax Items Done Before It’s too Late

This year, tax day falls on April 18 because of the weekend and because the District of Columbia’s Emancipation Day holiday takes place on April 17. Don’t let these extra days go to waste, says a recent article from Investment News, “Top things for estate planners to do before Tax Day 2023.”

Now that the SECURE 2.0 Act has taken effect, there’s much to do before the April 18 deadline. Taxpayers should review their wills and trusts to confirm that their wishes are effectively stated. However, there’s more this year. Asset valuations, family circumstances and changed laws are all reasons to review these documents. While you’re preparing taxes and reviewing net worth statements is also an excellent time to review IRA Required Minimum Distributions (RMDs), and beneficiary designations and make an appointment to review your estate plan in light of current estate planning laws.

Current federal estate, gift and generation-skipping transfer tax exemptions are currently $12,920,000, while the current federal generation-skipping transfer tax exemption is also $12,920,000. This changes dramatically on January 1, 2026, when both numbers will be cut in half. Therefore, planning needs to be done well before the dates when these exemptions shrink.

Wealthy married couples may consider using the Spousal Lifetime Access Trust. This allows the couple to gift their increased exemptions before the reduction in 2026. If the trust is drafted properly, spouses will remain in a similar economic position as long as both spouses are alive and married to each other. The SLAT benefits the donor’s spouse, while also taking advantage of these high exemptions. For example, Betty creates and gifts assets to a SLAT. Depending on the terms of the SLAT, her husband Barney will receive income and possibly principal. While Barney is still alive and married to Betty, their lifestyle remains intact.

When Barney dies, all amounts payable to Barney end and the trust assets pass to the following or remainder beneficiaries named in the document. They may receive the trust assets outright or in further trusts. For example, the assets are held in trust for Betty’s children for their lives, and Betty’s GST is allocated to the SLAT. If the trust is created in this way, the children receive income and principal during their lives, and the trust may continue for Betty’s grandchildren without being taxed in their respective estates.

The IRS has issued guidance stating that, with certain exceptions, most completed gifts made now will not be subject to a clawback if the taxpayer dies after exemptions are reduced.

Various states have their own additional estate, gift and/or inheritance taxes and exemptions.  Your estate planning attorney will be able to explain what state-specific laws apply to your situation.

For families whose wealth is tied up in real estate property, assets can be titled differently to lower taxable estates. For example, transferring a home to a Qualified Personal Residence Trust can remove the asset from the taxpayer’s estate, while only a fraction of the home is counted as a gift. However, after the QPRT term, the grantor must pay rent to keep the home outside their estate.

For commercial property, contributing the property to an entity and then making gifts of partial interests in the entity may be helpful. However, the gifts of a portion of the entity may qualify for discounts for lack of control and marketability.

These are just a few steps to be taken before tax day 2023 and before the high exemption levels revert to pre-JCTA levels. Your estate planning attorney will know which steps are more effective for your family.

Reference: Investment News (Feb. 27, 2023) “Top things for estate planners to do before Tax Day 2023”

What Is an Estate Planning Checkup?

The start of the year is the time to review and revisit your estate plan. Just like going to the doctor and dentist for regular exams, it’s basic self-care. A recent article from Kiplinger, “Need an Estate Planning Checkup? Now is the Perfect Time,” advises having an annual checkup with your estate planning attorney before anything goes wrong.

Estate planning is about people. It ensures that loved ones will be protected when we are no longer here. It names someone we trust to administer our estate and follow our wishes. It also ensures that no one is left out or no one is wrongfully included.

After the holiday season of family gatherings is a good time to review the family situation. Children have grown into adulthood. Perhaps they’ve married and had children. What we planned to leave for them as minors may be different now. If your family suffered a loss last year, it may be time to reallocate funds or change beneficiaries.

This is the time to evaluate who you have named as an executor or entrusted with powers of attorney. They may have had their own health issues, suffered memory loss, or undergone their own life changes. These should also be reviewed when creating a new will or trust.

Property values have probably changed over the years. Real estate acquired decades ago may have appreciated far more than anticipated. If the intent is to leave equal shares of assets to beneficiaries, the new value of the property needs to be considered.

Depending on your assets, you may need to engage an expert to provide current valuations for real property, artwork and any other high-value assets. If you expect to see significant changes in the coming year, from selling property or making other adjustments, don’t wait until next year to order a new valuation. The more current your numbers, the better your estate plan.

Tax laws have changed a great deal in recent years. An experienced estate planning attorney will allow you to maximize the estate that you leave. Estate tax and gift taxes have been adjusted for inflation, so you may be able to leave larger gifts to children and grandchildren.

Your estate plan checkup should include a review of recent tax law changes, and a look at the legal environment for the coming year. Discuss how aggressive you want to be with your estate planning. The same goes for life changes which may have legal consequences. All of this needs to be discussed in a candid manner with your estate planning attorney.

You may leave your meeting with a to-do list, or you may find your estate plan still works. Either way, you’ll feel better after your estate plan checkup.

Reference: Kiplinger (Jan. 30, 2023) “Need an Estate Planning Checkup? Now is the Perfect Time”

Can a Vacation Home Be Kept in the Family for Generations?

Many family traditions include gatherings at vacation homes. However, leaving these properties to the next generation is not always in the best interest of the family. Some people try to make a simple solution work for a complex problem, leading to more challenges, as explained in the article “Succession planning for the family lakehouse” from NH Business Review.

Joint ownership among siblings can lead to disputes about how the home is used, operated and maintained. Some children want to continue using the house, while others may see it as an income stream for a rental property. There may be siblings who cannot afford to participate in the house’s upkeep and need the cash more than the tradition. When joint ownership is presented as a surprise in a will, the adult children may find themselves fighting about the vacation home, with no parent around to tell them to knock it off.

Making matters more complicated, if the siblings live in different states and the house is in a neighboring state, ownership of the real estate at death may subject the decedent’s estate to estate taxes where the property is located. As a result, the property may need to go through probate in an additional state. Every state has its own tax rules, so the transfer of joint property will have to be analyzed by an estate planning attorney knowledgeable about the laws in each state involved.

A sensible alternative is creating a Limited Liability Corporation, ideally while the original owners—the parents—are still living. The organizational documents include a certificate of organization to file with the Secretary of State and an operating agreement. The LLC will need its own taxpayer identification number, or EIN.

The operating agreement governs the management of the property and addresses the operating expenses and maintenance of the property. It should also address the process for a child to cash in on their ownership to other children. LLC operating agreements often include these items:

  • Responsibilities for operating expenses
  • Process to transfer member units or interests
  • Duties for regular maintenance, budgeting and approval of property improvements
  • Development of a property use schedule
  • Establishing rules for the home’s use

There are some costs associated with creating an LLC, including annual filing requirements. However, these will be small, when compared to the cost of family fights and untangling joint ownership.

An LLC can also offer personal liability protection from lawsuits brought by renters, creditors, or any litigants. If there is an accident resulting from work being done on the property, the owners may be shielded from the liability because they do not personally own the property, the LLC does.

In the case of divorce, bankruptcy filing, or a large judgement being filed against one of the children, the LLC will protect their interest in the property.

The real estate owned by the LLC is not part of the owner’s probate estate. This avoids the need for a second probate in the state where the property is located. Some states have adopted the Uniform Transfer on Death Security Registration Act, and the LLC membership interest can be assigned along to the terms of the beneficiary designation.

Planning for what will happen to a vacation home after death provides peace of mind for all in the family. Speak with an experienced estate planning attorney to ensure that the property and the family’s peace is preserved.

Reference: NH Business Review (March 23, 2022) “Succession planning for the family lakehouse”

Is Prince’s Estate Settled Yet?

The long-running estate battle over Prince’s estate may be coming to a close, according to a recent article from Yahoo! News, “Minnesota probate court set to discuss ‘final distribution’ of Prince estate in February.” The Carver County probate court has set a date to start talking about Prince’s assets with heirs and beneficiaries.

Prince died of a fentanyl overdose in April 2016, with no estate plan. Administering the estate and coming up with a plan for its distribution among heirs has cost tens of millions of dollars, in an estate estimated at more than $100 million. One of many obstacles in settling the estate: a complicated dispute with the IRS over the value of Prince’s assets.

The estate will be almost evenly split between a music company—Primary Wave—and the three oldest of the pop icon’s eldest six heirs or their families.

Primary Wave bought out all or most of the interests of Prince’s three youngest siblings, one of whom died in August 2019. Three older siblings, including one who died in September 2021, rejected the offers from Primary Wave.

Comerica Bank & Trust, the administrator of the estate, settled with the IRS over the value of the estate, according to a late November filing in the U.S. Tax Court. The Carver County probate court has to approve this agreement.

Another tax dispute, this one between Prince’s estate and the state of Minnesota, has not yet been resolved.

Last year, the IRS set a value of $163.2 million on Prince’s estate. Comerica valued the estate at $82.3 million—nearly half of the IRS value. The value was so low the IRS penalized the estate with a $6.4 million “accuracy-related penalty.” Comerica followed by suing the IRS in U.S. Tax Court, saying the IRS calculations were loaded with mistakes. With the settlement now underway, the tax trial has been cancelled. The estate and the IRS have been ordered to file a status report on the case in February 2022.

The IRS and Comerica agreed on the value of Prince’s real estate holdings at $33 million. The harder task was to place a value on intangible assets, like Prince’s music rights.

The full IRS settlement most likely led to the probate court setting a date for a hearing. With the settlement, certain parts of the estate may move forward.

However, don’t expect it to be quick. It may be months before the court approves any distributions.

The lesson from Prince’s estate: everyone needs an estate plan, whether the estate is modest or includes multi-million assets and multiple heirs. Tens of millions in legal fees plus a $6.4 million penalty from the IRS adds up, even when the estate is this big.

Reference: Yahoo! News (Dec. 22, 2021) “Minnesota probate court set to discuss ‘final distribution’ of Prince estate in February”

Can Cryptocurrency Be Inherited?

Cryptocurrency accounts are not like any traditional investment accounts. However, their growing prevalence and value means they need to be considered for more and more estate plans, especially when they take an enormous leap in value. These accounts are more vulnerable, according to the recent article “Millennial Money: What happens to your crypto if you die?” from The Indiana Gazette, and in most cases, there’s no way to name a beneficiary for your crypto accounts.

If you store your cryptocurrency on a physical device at home and a few friends know your key—the crypto password that grants access to a crypto wallet—one of those friends could very easily wander into your home and steal your crypto without you even noticing.

On the flip side, if you don’t share your key with anyone and become incapacitated or die, your crypto assets could be lost forever. Knowing how to store these assets safely and communicate your wishes for loved ones is extremely important, more so than for traditional assets.

How is crypto stored? Crypto “wallets” are digital wallets, managed on an app or a website, or kept on a thumb drive (also known as a memory stick). How you store crypto depends in part on how you intend to use it.

A “Hot Wallet” is used to buy and sell crypto. They are usually free and convenient but may not be as secure as other methods because they are always connected to the internet.

“Cold Wallets” are used to store crypto for a longer period of time, like a deep freezer.

The Hot Wallet is more like a checking account, with money moving in and out. The Cold Wallet is like a savings account, where money is kept for a longer period of time. You can have both, just as you probably have both a checking and savings account.

Whoever holds the “keys” to the wallets—whoever has custody of the password, which is a series of randomly generated numbers and letters—has access to your cryptocurrency. It might be just you, a third-party crypto exchange, or a hybrid of the two. Consider the third-party exchange a temporary and risky solution, as you don’t have control of the keys and exchanges do get hacked.

Naming a beneficiary in your will and adding a document to your estate plan containing an inventory of cryptocurrency and any passwords, PINs, keys and instructions to find your cold wallet is part of an estate plan addressing this new digital asset class.

Do not under any circumstances include any of the crypto information in your will. This document becomes part of the public record when filed in court and giving this information is the same as sharing your checking, saving and investment account information with the general public.

Some platforms, like Coinbase, have a process in place for next of kin, when an owner dies. Others do not, so it’s up to the crypto owner to make plans, if they want assets to be preserved and passed to another family member.

Preparing for cryptocurrency is much the same as preparing for the rest of your estate plan. Keep the plan updated, especially after big life events, like marriage, divorce, birth, or death. Keep instructions up to date, so the executor and beneficiaries know what to do. Bear in mind that crypto wallets need occasional updates, like every other kind of digital platform.

Reference: The Indiana Gazette (Nov. 7, 2021) “Millennial Money: What happens to your crypto if you die?”

How Does Cryptocurrency Work in an Estate Plan?

Crypto-assets, including cryptocurrencies and non-currency blockchain tokens, hold significant family wealth today and present challenges to securing, transferring, protecting and gifting, as explained in the article “What Holding Crypto Means for Your Estate Plan” from U.S. News & World Report.

Traditional estate planning is evolving to include this new asset class, as digital asset investors embrace a market worth more than $1 trillion. Experienced investors who use digital assets to expand their asset diversification are more likely to understand the importance of protecting their investment through estate planning. However, first time investors who own a small amount of cryptocurrency or the early adapters who bought Bitcoins at the very start and now are worth millions, may not be as aware of the importance of digital asset estate planning.

Unlike traditional bank accounts, controlled through a centralized banking system and a legacy system of reporting, digital assets are by their very nature decentralized. An owner has access through a private key, usually a series of numbers and letters known only to the asset’s owner and stored in a digital wallet. Unless an executor knows about digital wallets and what a private key is and how to use them, the assets can and often do evaporate.

It can be challenging for executors to obtain access to traditional accounts, like 401(k)s or brokerage accounts. Mistakes are made and documents go astray, even in straightforward estates. In a new asset class, with new words like private keys, seed phrases, hardware wallets and more, the likelihood of a catastrophic loss increases.

A last will and testament is necessary for every estate. It’s needed to name an executor, a guardian for minor children and to set forth wishes for wealth distribution. However, a will becomes part of the public record during court proceedings after death, so it should never include detailed information, like bank account numbers. The same goes for information about cryptocurrency. Specific information in a will can be used to steal digital assets.

Loved ones need to know the crypto-assets exist, where to find them and what to do with them. Depending on the amount of the assets and what kind of assets are held, such information needs to be included and addressed in the estate plan.

If the assets are relatively small and owned through an exchange (Coinbase, Biance, or Kraken are a few examples), it is possible to list the crypto asset on a schedule of trust assets and ensure that the trustee has all the login information and knows how to access them.

For complex cases with significant wealth in digital assets, establishing a custodian and trustee may be necessary. A plan must be created that establishes both a custodian and trustee of digital assets. Steps include sharing private keys with a family member or trusted friend or splintering the private keys among multiple trusted individuals, so no one person has complete control.

This new asset class is here for the foreseeable future, and as more investors get involved with cryptocurrency, their estate plan needs to address and protect it.

Reference: U.S. News & World Report (Oct. 5, 2021) “What Holding Crypto Means for Your Estate Plan”

You Need a Buy-Sell Agreement for Your Business

Every business should have a buy-sell agreement to protect the owners, their families, employees and the company. Without a buy-sell agreement or succession plan, any company is at risk, notes a recent article titled “Why does your business need a buy-sell agreement?” from the Philadelphia Business Journal.

Many business owners are reluctant to recognize the possibility of their becoming disabled or dying, so they put off creating a buy sell agreement. However, as we all know, unexpected events happen and it’s always better to be prepared.

A buy-sell agreement offers protection first by establishing what type of triggering events could happen and defining the terms and conditions for how shareholders will enter and exit their ownership of the business.

Companies often have a buy-sell agreement stuck in a file drawer from ten or twenty years ago. Chances are that big changes have taken place in the business and the old agreement is no longer relevant. The day-to-day operations of a business are pressing, and there’s never enough time to get around to it. However, when the unexpected occurs, shareholders are left to negotiate among themselves during the worst possible time.

A well-drafted buy-sell agreement should address the most common events: death, disability, divorce, personal bankruptcy, voluntary termination, retirement and involuntary separation. The agreement should clearly state the percentage and type of ownership, how shares are valued and how any insurance proceeds are to be handled. Without knowledge of the value and terms of payment, there’s no way to provide protection for a triggering event.

Once the value of the company and its shareholders is defined, it may become clear that a business needs to close a valuation gap.

The intentions for the future of the business can also be clarified through this process. Some provisions to consider are:

  • How to notify other shareholders, in the event of a voluntary termination.
  • Trailer provisions to protect exiting shareholders, in the event of a subsequent liquidity event.
  • Discounts on value or extended payment terms for non-compliance of notification provisions.
  • Insurance portability provisions to allow existing shareholders to reassign beneficiary designations (once payments owed to the exiting shareholder have been made).

Businesses are dynamic entities with frequent changes, so buy-sell agreements should be reviewed and updated in the same way that an estate plan needs to be updated—every three or four years.

Reference: Philadelphia Business Journal (Sep. 1, 2021) “Why does your business need a buy-sell agreement?”

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”

When Should an Estate Plan Be Reviewed?

If your parents don’t remember when they last reviewed their estate plan, then chances are it’s time for a review. Over the years, wishes, relationships and circumstances change, advises the recent article, “5 Reasons To Have Your Parents’ Estate Plan Reviewed,” from Forbes. An out-of-date estate plan may not achieve your parent’s wishes, or be declared invalid by the court. Having an estate planning attorney review the estate plan may save you money in the long run, not to mention the stress and worry created by an estate disaster. If you need reasons, here are five to consider.

Financial institutions are wary of dated documents. Banks and other financial institutions look twice at documents that are not recent. Trying to use a Power of Attorney that was created twenty years ago is bound to create problems. One person tried to use a document, but the bank insisted on getting an affidavit from the attorney who prepared it to be certain it was valid. While the son was trying to solve this, his mother died, and the account had to be probated. A “fresh” power of attorney would have solved the problem.

State laws change. Things that seem small become burdensome in a hurry. For example, if someone wants to leave a variety of personal effects to many different people, each and every one of the people listed would need to be located and notified. Many states now allow a separate writing to dispose of personal items, making the process far easier. However, if the will is out of date, you may be stuck with a house-sized task.

Legal document language changes. The SECURE Act changed many aspects of estate planning, particularly with regard to retirement accounts. If your parents have retirement accounts that are payable to a trust, the trust language must be changed to comply with the law. Not having these updates in the estate plan could result in an increase in income taxes or costly fees to fix the situation.

Estate tax laws change. In recent years, there have been many changes to federal tax laws. If your parents have not updated their estate plan within the last five years, they have missed many changes and many opportunities. It is likely that your parents’ assets have also changed over the years, and the documents need to reflect how the estate taxes will be paid. Are their assets titled so that there are enough funds in the estate or trust to cover the cost of any liability? Here’s another one—if all of the assets pass directly to beneficiaries via beneficiary designations, who is going to pay for the tax bills –and with what funds?

Older estate plans may contain wishes from decades ago. For one family, an old will led to a situation where a son did not inherit his father’s entire estate. His late sister’s children, who had been estranged from him for decades, received their mother’s share. If the father and son had reviewed the will earlier, a new will could have been created and signed that would have given the son what the father intended.

These types of problems are seen daily in your estate planning attorney’s office. Take the time to get a proper review of your parent’s estate plan, to prevent stress and unnecessary costs in the future.

Reference: Forbes (May 25, 2021) “5 Reasons To Have Your Parents’ Estate Plan Reviewed”

What Happens when Homeowner Dies without Will?

When parents die suddenly, in this case due to COVID-19, and there is no will and no discussions have taken place, siblings are placed in an awkward, expensive and emotionally fraught situation. The article titled “My parents died of COVID-19 and left no will. My brother lives rent-free in their home and borrowed $35,000. What now?” from MarketWatch sums up the situation, but the answer is complicated.

When there is no will, or “intestacy,” there aren’t a lot of choices.

These parents had a few bank accounts, owned their home outright and left no debts. They had six adult children, including one that died and is survived by two living sons. None of the siblings agrees upon anything, so nothing has been done.

One of the siblings lives in the house rent free. Another brother was loaned $35,000 for a down payment on a mobile home. He now claims that the loan was a gift and does not have to pay it back. There are receipts, but the money was paid directly to the escrow company from the mother’s bank account.

How do you determine if this brother received a loan or a gift? What do you do about the brother who lives rent-free in the family home? How does the family now move the estate into probate without losing the house and the bank accounts, while maintaining a sense of family?

For starters, an administrator needs to be appointed to begin the probate process and act as a mediator among the siblings. In some states, the administrator also requires a family tree, so they can know who the descendants are. Barring some huge change of heart among the siblings, this is the only option.

If the parents failed to name a personal representative and the siblings cannot agree on who should serve, an estate administration lawyer is the sensible choice. The court may name someone, if there is concern about possible conflicts of interests or the rights of creditors or other beneficiaries.

A warning to all concerned about how the appointment of an administrator works, or sometimes, does not work. Working with an estate planning attorney that the siblings can agree upon is better, as the attorney has a fiduciary and ethical obligation to the estate. While state laws usually hold the administrator responsible to the standard of care of a “reasonable, prudent” individual, not all will agree what is reasonable and prudent.

One note about the loan/gift: if the mother helped a brother to qualify for a mortgage, it is possible that a “Gift Letter” was created to satisfy the bank or the resident’s association. Assuming this was not a notarized loan agreement, the administrator may rule that the $35,000 was a gift. Personal loans should always be recorded in a notarized agreement.

This family’s disaster serves as a good lesson for anyone who does not have an estate plan. Siblings rarely agree, and a properly prepared estate plan protects more than your assets. It also protects your children from losing each other in a fight over your property.

Reference: MarketWatch (April 4, 2021) “My parents died of COVID-19 and left no will. My brother lives rent-free in their home and borrowed $35,000. What now?”