Estate Planning Blog Articles

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

Can a Daughter Help Parents by Buying Home?

A daughter who has free cash from selling her own home and wants to protect her parents from the worry of dying with mortgage debt, asks if buying the family home outright, before the parents die, is the best solution. It’s a common situation, reports The Washington Post in the article “Daughter seeks to help parents with mortgage, credit card debt by buying their house.” Is there a right answer?

Lenders generally don’t demand the repayment of a residential mortgage loan immediately after the death of the owner. They will, however, call the loan if the borrower’s heirs fail to make mortgage payments. As long as the mortgage payments are made in a timely manner, the loan remains in good standing. If the daughter and her siblings are making these payments, this won’t be a problem.

Depending on how the home is owned, when one of the parents dies, the surviving parent will become the sole owner of the home, if they hold title as joint tenants with right of survivorship. The surviving parent also does not have to worry about the lender, as long as they continue to make the mortgage payments. When the surviving parent dies, then the three daughters inherit the home.

In 1982, the federal government passed the Garn-St. Germain Depository Institutions Act to protect spouses and children, when the owner of a home adds them to the property’s title. This law also prevents a lender from calling the loan due, when the owner puts the title into a living trust.

As long as the mortgage can continue to be paid, there’s no need to pay it off in full or to purchase the home so parents are debt-free. When they die, the daughter can pay off the remaining loan, if she can and wishes to do so.

The daughter also notes that her parents have credit card debt. If they die and cannot pay the debt, it will die with them. However, if they own a home when they die and there is equity in the property, the creditor will expect the estate to liquidate the asset and pay off the debt.

If one of the siblings wants to stay in the home, she could take over the property, making the monthly mortgage payments and find a way to pay off the credit card debt separately. Or, if the daughter who is asking about buying the home wants to, she can pay off the credit card debts.

From a tax perspective, buying the property from the parents while they are living doesn’t afford any advantages. Extra cash could be used to pay off the mortgage and the credit card debt, but again, there are no advantages to doing so, except for giving the parent’s some peace of mind. The cost of doing so, however, will be the daughter losing the ability to use the money for anything else.

One estate planning attorney recommends that the daughters inherit the home. When they die, tax law allows them to pass down a large amount of wealth—$11.7 million for an individual and $23.4 million for a married couple. The home would also get a stepped-up basis. The siblings would inherit the home with its value at the time of death of the surviving parent resetting the basis.

If the parents bought the home for $25,000 years ago and it’s now worth $250,000, the siblings would inherit the home at the increased value. The parents’ estate would not pay tax on the home, and if the sisters sold the house for $250,000 around the time of their death, there would be no capital gains tax due.

As the law currently stands, it’s a win-win for the siblings. When the parents die, they can decide how to divide the estate, if there are no clear instructions in a last will from the parents. They can use any extra cash, if there is any, to pay the mortgage and credit card debt, and split what’s leftover. If one sibling wants to own the home, the other two could get cash instead of the home.

The sibling who wants to keep the home should refinance the loan and use those proceeds to buy out the other two sisters. The siblings should sit down with their parents and discuss what the parents have in mind for the property. An estate planning attorney will help the family determine what is best from a tax advantage. Planning is essential when it comes to death, taxes and real estate.

Reference: The Washington Post (May 10, 2021) “Daughter seeks to help parents with mortgage, credit card debt by buying their house”

Tackling Estate Plan Quarter by Quarter

Most of us know that a tax bill is typically due on April 15, and we know that our paychecks will include deductions for taxes, Social Security, and IRA or 401(k) contributions. If we are self-employed or retired, we make quarterly estimated tax payments. We plan throughout the year to be better prepared when April 15 comes around. The preparation takes place routinely over time, and the same can be done for estate planning and updating, says a recent article “Make quarterly payments to estate plan” from Victoria Advocate. It’s simple and sensible.

If we can make our plans today to make our eventual passing easier for loved ones and friends, why not divide and conquer, in a quarterly manner? Consider these quarterly “payments” to your estate plan and your family:

First Quarter: Review current estate plans with your estate planning attorney. Don’t have an estate plan? Get started. An estate plan includes a Will, Durable Power of Attorney, Medical Power of Attorney, Directive to Physicians document and any trusts you might need.

The Will, aka Last Will and Testament, is the only one of these documents to be used post-mortem. The will is used to designate an executor to carry out your wishes and designate a person or persons to serve as legal guardians for minor children.

Second Quarter: Let your family know your wishes. Open communication with family members is a gift, so they are not left guessing during critical times. Finding the right words is not always easy, so try writing out your thoughts as you prepare your estate plan. Document your wishes for burial arrangements, information they’ll need for a death certificate or obituary. Do you want to donate your organs, or will your pet need special care? Where are your important papers located? Once you’ve had all the necessary documents created and have thought through these wishes and written a memo about them, let your future executor know what your wishes are, and where they can find the information that they’ll need.

Third Quarter: Do some easy but important estate planning tasks. Review the beneficiaries listed on your accounts. Assets and accounts that pass through beneficiary designations are not controlled by the will, so this is extremely important if it’s been more than a few years since you last reviewed these documents. Your IRA, SEP, 401(k), life insurance and any accounts titled Transfer or Payable on Death probably have beneficiaries listed.

Fourth Quarter: Does your estate plan include a legacy to future generations or charities? Speak with your estate planning attorney about how to pass your estate to children or grandchildren. If you have a unique goal, trusts can be as individual as you are.

As systematically as you pay taxes and bills, work through your estate plan so that you are prepared for the two things we know will occur, regardless of how we feel about them—taxes and death.

Reference: Victoria Advocate (May 8, 2021) “Make quarterly payments to estate plan”

Does My State have Inheritance Tax?

There are several states with an inheritance tax. They include Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. Maryland is the only state to impose both an inheritance tax and a state estate tax.

Forbes’s recent article entitled “Is There a California Estate Tax?” says that even if you live outside these states, it does not necessarily mean that your inheritance will be tax-free.

Twelve states and DC impose estate taxes. These include Hawaii, Washington, Massachusetts, Oregon, New York, Minnesota, Illinois, Vermont, Maine, Rhode Island, Connecticut and Maryland.

There may be other taxes due at the state level for those inheriting assets, investments, retirement accounts, or real estate.

The estate tax is a tax levied on the estate, when a person dies before the estate is passed on to the heirs and beneficiaries. Federal estate tax only applies to large estates, regardless of which state you live in. Estate taxes vary from state to state.

There is one state that imposes a gift tax: Connecticut. That state’s Department of Revenue Services says that all transfers of real or personal property by gift, whether tangible (like a car or jewelry) or intangible (such as cash) that are made by you (the donor) to someone else (the donee) are subject to tax, if the fair market value of the property exceeds the amount received for the property.

The federal gift tax applies to all states. For 2021, the annual gift-tax exclusion is $15,000 per donor, per recipient. A giver can give anyone else—such as a relative, friend, or even a stranger—up to $15,000 in assets a year, free of federal gift taxes.

Even if your state doesn’t have a state estate tax, there’s still a federal estate tax. This goes into effect for estates valued at $11.7 million and up, in 2021, for singles. The estate tax exemption is $23.4 million per couple in 2021.

With proper tax planning and estate planning, you have the ability to pass an estate much larger than this without being subject to the federal estate tax. The estate tax starts at 18% and goes up to 40% for those anything over the $23.4 million threshold.

Talk to an experienced estate planning attorney for questions about taxes and estate planning.

Reference: Forbes (May 4, 2021) “Is There a California Estate Tax?”

Should You Get Medical Power of Attorney?

The pandemic has created awareness that being suddenly incapacitated by an illness or injury is no longer a hypothetical. The last year has reminded us that health is a fragile gift, regardless of age or any medical conditions, explains the article “Now Is the Time to Protect Your Health Care Decision Making Rights” from Kiplinger. Along with this awareness, comes an understanding that having control over our medical decisions is not assured, unless we have a well-considered health care decision-making plan created by an estate planning attorney, while we are well and healthy.

Without such a plan, in the event of incapacity, you will not have the opportunity to convey your wishes or to ensure they will be carried out. This also leaves the family in a terrible situation, where siblings may end up in court fighting against each other to determine what kind of end-of-life care you will receive.

The best way to exercise your medical decision rights will vary to some degree by your state’s laws, but three are three basic solutions to protect you. An estate planning attorney will be needed to prepare these properly, to reflect your wishes and align with your state’s law. Do-it-yourself documents may lead to more problems than they solve.

Living Will. This document is used when you are in an end-stage medical condition or permanently unconscious. It provides clear and written instructions as to the type of treatments you do or do not want to receive, or the treatment you always want to receive in case of incapacity.

Health Care Durable Power of Attorney. The health care durable POA is broader than a living will. It covers health care decisions in all situations, when you are not able to communicate your wishes. You may appoint one or more agents to make health care decisions, which they will base on their personal knowledge of what your decisions would be if you were able to speak. Just realize that if two people are named and they do not agree on the interpretation of your decision, you may have created a problem for yourself and your family. Discuss this with your estate planning attorney.

Health Care Representative Laws. There are laws in place for what occurs if you have not signed a Health Care Durable Power of Attorney or a Living Will before becoming incompetent. They are intended to fill in the gap, by authorizing certain family members to act on your behalf and make health care decisions for you. They are a solution of last resort, and not the equal of your having had the living will and/or health care durable power of attorney created for you.

If the statute names multiple people, like all of your children, there may be a difference of opinion and the children may “vote” on what’s to happen to you. Otherwise, they’ll end up in court.

The more detailed your documents, the better prepared your loved ones will be when decisions need to be made. Share your choices about specific treatments. For instance, would you want to be taken off a ventilator, if you were in a coma with limited brain function and with no hope of recovery? What if there was a slim chance of recovery? The decisions are not easy. Neither is considering such life or death matters.

Regardless of the emotional discomfort, planning for health-care decisions can provide peace of mind for yourself and loved ones.

Reference: Kiplinger (April 29, 2021) “Now Is the Time to Protect Your Health Care Decision Making Rights”

What Is a Holistic Estate Plan?

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

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

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

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

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

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

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

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

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

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

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

What Is the Purpose of an Estate Plan?

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

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

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

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

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

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

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

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

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

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

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

Will Inheritance and Gift Taxes Change in 2021?

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

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

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

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

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

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

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

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

Can a Person with Alzheimer’s Sign Legal Documents?

If a loved one has been diagnosed with Alzheimer’s disease or any other form of dementia, it is necessary to address legal and financial issues as soon as possible. The person’s ability to sign documents and take other actions to protect themselves and their assets will be limited as the disease progresses, so there’s no time to wait. This recent article “Financial steps to take when dealing with Alzheimer’s” from Statesville Record & Landmark explains the steps to take.

Watch for Unusual Financial Activity

Someone who has been sensible about money for most of his life may start to behave differently with his finances. This is often an early sign of cognitive decline. If bills are piling up, or unusual purchases are being made, you may need to prepare to take over his finances. It should be noted that unusual financial activity can also be a sign of elder financial abuse.

Designate a Power of Attorney

The best time to designate a person to take care of finances is before she shows signs of dementia. It’s not an easy conversation, but it is very important. Someone needs to be identified who can be trusted to manage day-to-day money matters, who can sign checks, pay bills and supervise finances. If possible, it may be easier if the POA gradually eases into the role, only taking full control when the person with dementia can no longer manage on her own.

An individual needs to be legally competent to complete or update legal documents including wills, trusts, an advanced health care directive and other estate planning documents. Once such individual is not legally competent, the court must be petitioned to name a family member as a guardian, or a guardian will be appointed by the court. It is far easier for the family and the individual to have this handled by an estate planning attorney in advance of incompetency.

An often-overlooked detail in cases of Alzheimer’s is the beneficiary designations on retirement, financial and life insurance policies. Check with an estate planning attorney for help, if there is any question that changes may be challenged by the financial institution or by heirs.

Cost of Care and How It Will Be Paid

At a certain point, people with dementia cannot live on their own. Even those who love them cannot care for them safely. Determining how care will be provided, which nursing facility has the correct resources for a person with cognitive illness and how to pay for this care, must be addressed. An elder law estate planning attorney can help the family navigate through the process, including helping to protect family assets through the use of trusts and other planning strategies.

If the family has a strong history of Alzheimer’s disease or other cognitive diseases, it makes sense to do this sort of preparation far in advance. The sooner it can be addressed, even long before dementia symptoms appear, the better the outcome will be.

Reference: Statesville Record & Landmark (April 11, 2021) “Financial steps to take when dealing with Alzheimer’s”

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?”

What Paperwork Is Needed after Someone Dies?

Tax return issues, family matters, business associates, partners, trustees, bankers, investment advisors and tax collectors from the IRS to state and local taxing authorities all require attention after someone has died. There is a lot of work, and often a grieving family member finds it helpful to enlist the aid of a professional to lighten the load. A recent article, “Checklist for Working With a Decedent’s Estate” from Accounting Web, contains a list of the tasks to be completed.

General administration and legal tasks. At the very earliest, the executor should create a timetable with the known tasks. If you’ve never done this before, there’s no shame in enlisting help from a qualified professional. Be realistic about your familiarity with tax and legal issues and your organizational skills.

Determine with your estate planning attorney whether probate is necessary. Is the estate small enough for your state’s laws to allow you to expedite the process? Some jurisdictions can do this, others do not.

If an estate plan was created and executed properly, many assets may not need to go through probate. Assets like IRAs, joint tenancies, accounts that are POD, or Payable on Death and any assets with named beneficiaries do not require probate.

Gather information about family owners or others who may have a claim to the estate and who may have useful information about the assets. You’ll need to locate and notify heirs of the decedent’s passing.

Others who need to be notified, include charities named in the will. You’ll need to identify prior transfers to charities that were partial transfers, such as Charitable Remainder Trusts. If there is a charitable remainder trust with a retained lifetime income interest, it will need to be in the estate tax return, albeit with an offsetting estate tax charitable deduction.

Locate the important documents, including the will, any correspondence relating to the will, any letters explaining the decedent’s wishes, deeds, trusts, bank and brokerage statements, partnership agreements, prior tax returns, federal and state tax forms and any gift tax returns.

An estate planning attorney will be able to help determine ownership issues, including identifying assets and liabilities. This includes deeds, vehicle titles, club memberships, personal possessions and business assets, including copyrights and patents.

Social Security will need to be notified, as will Medicare, pension administrators, Department of Veteran Affairs, the post office, trustees, and any service providers.

Filing taxes for the last year of the person’s life and their estate tax filing needs to happen on a timely basis. Even if an estate tax return may not be required, it is useful to file to establish date of death values for assets. It is important to resolve income tax statute of limitation issues and any IRS or state examination issues.

Estate administration is a big job, especially if you’ve never done it before. Having the help of an experienced estate lawyer can alleviate much of the worry that comes with settling an estate.

Reference: Accounting Web (March 19, 2021) “Checklist for Working With a Decedent’s Estate”