How Do You Stop Family Fights Over an Inheritance?

More than two-thirds of all advisors surveyed by Key Private Bank said the hardest part of estate planning is navigating family dynamics, according to a 2019 survey. The sensitivities of simply talking about estate planning often present emotional challenges to putting a plan in place, especially when the family includes multiple marriages and blended families.

Advice is offered in a recent news article from CNBC, “Executor of a Family Estate? Here’s How to Avoid Infighting Over Inherited Wealth.”

Much of the problem, experts say, stems from poor communication. A dialogue needs to be open between generations that is a two-way conversation. In most instances, the older generation needs to invite the younger generation to get the ball rolling.

A lack of clarity and transparency can lead to problems. One example is a father leaving the family farm to his children, with a plan that also included money to help run the farm and legal documents to help the transition go smoothly. However, the children didn’t want the farm. They wanted to sell. Disagreements broke out between siblings, and the family was bogged down in a big fight.

Clearly Dad needed to talk with the children, while his estate plan was being created. The children needed to be upfront and honest about their plans for the future, and the issue could have been solved before the father’s death. The lesson: talk about your wishes and your children’s wishes while you are living.

After someone dies, they may leave behind an entire estate, with a lifetime of personal items that they want to gift to family members. However, if these items are not listed in the will, the heirs have to decide amongst themselves who gets what. This is asking for trouble, whether the items have sentimental or financial value. In fact, sentimental items often generate the most controversy.

When conflicts arise, the presence of a third party who doesn’t have emotional attachments and is not embroiled in the family dynamics can be helpful.

If the issue is not addressed before death, there are a few ways to move forward. An estate planning attorney who has seen many families go through this process can offer suggestions while the will is being prepared. There are facilitators or mediators who can help, if things get really rocky.

Heirs may wish to create a list of items that they would like to be reviewed by the executor. This option works best, if the executor is not a sibling, otherwise charges of favoritism and “Mom always liked you best” can spiral into family spats.

Some families group items into buckets of equal value, others set up a lottery to determine who picks first, second, etc., and some families literally roll the dice to make decisions.

Reference: CNBC (Nov. 12, 2020) “Executor of a Family Estate? Here’s How to Avoid Infighting Over Inherited Wealth”

Homeownership and Medicaid Can Be Problem

The challenges begin when homeowners don’t do any Medicaid planning and decide the best answer is simply to gift their home to their children. It doesn’t always work out well for the homeowners or their children, warns the article “Owning real estate without jeopardizing Medicaid paying for nursing home” from limaohio.com.

A key tax avoidance opportunity is usually missed, when real property is gifted outright. The IRS says that if someone owns real estate, when that person passes, the heirs may eliminate a large portion of the taxable gains, if the real estate ends up being sold by an heir for more than the original owner paid for the property.

Let’s walk through an example of how this works. Let’s say Terry buys a farm for $1,000. The cost to buy the farm is referred to as a “tax basis.”

If the family is planning for the possibility of nursing home costs, Terry might want to give that farm away to her children Ted and Zach. She needs to do it at least five years before she thinks she’ll need Medicaid to pay for long-term nursing care, because of a five-year lookback.

When Terry gifts the farm to Ted and Zach, the two children acquire Terry’s tax basis of $1,000. Ted gets $500 of the tax basic credit, and so does Zach.

The years go by and Ted wants to buy out Zach’s half of the farm. The farm is now worth $5,000. So, Ted pays Zach $2,500 for Zach’s half of the farm. Zach now has a tax basis of $500, which is not subject to tax. And Ted receives $2,000 more than his $500 tax basis, and Ted will need to pay capital gains on that $2,000 gain.

It could be handled smarter from a tax perspective. If Terry owns the farm when she dies, then Ted and Zach get the farm through her will, trust or whatever estate planning method is used. If the farm is worth $3,000 when Terry dies, then Ted and Zach will get a higher tax basis: $3,000 in total, or $1,500 each. By owning the farm when Terry dies, she gives them the opportunity to have their tax basis (and amount that won’t be taxed if they sell to each other or to anyone else) adjusted to the value of the property when Terry dies. In most cases, the value of real estate property is higher at the time of death than when it was purchased initially.

There’s another way to transfer ownership of the farm that works even better for everyone concerned. In this method, Terry continues to own the farm, helping Zach and Ted avoid taxes, and keeps the property out of her countable assets for Medicaid. The solution is for Terry to keep a specific type of life estate in the farm. This needs to be prepared by an experienced estate planning attorney, so that Terry won’t have to sell the farm if she eventually needs to apply for Medicaid for long term care.

Your estate planning attorney will be able to help you and your family navigate protecting your home and other assets, while benefiting from smart tax strategies.

Reference: limaohio.com (Nov. 7, 2020) “Owning real estate without jeopardizing Medicaid paying for nursing home”

Despite Pandemic, Many Still Don’t Have an Estate Plan

It’s true—many people still believe that they don’t have enough assets so they don’t need a will, or that their money will automatically go to a next of kin. Both of these beliefs are wrong. While the title of this CNBC article is “More people are creating wills amid the pandemic,” the story’s focus is on the fact that most Americans don’t have a will. If you belong to this group, here’s what happens when you die.

The state you live in has laws about who will receive your assets if you die without a will, known as intestacy. Let’s say you live in New York. Your surviving spouse and children will receive your assets. However, in Texas, your assets will be entered into the state’s intestacy probate process, and your relatives will divide up your assets. Want to be in charge of who inherits your property? Have a will created with an experienced estate attorney.

Young adults think they don’t need a will, but Covid-19 has taken the lives of many healthy, young people. Every adult over age 18 needs a will. If you don’t have one, your loved ones—even if it’s your parents—will inherit a legal mess that will take time and money to fix.

If you have children and no will, there’s no way to be sure who will raise your children. The court will decide. Choose your guardians, name them in your will and be sure to name additional choices just in case the first guardian can’t or won’t serve. You should also appoint someone to be in charge of your children’s money.

What if you had a will created 10 or twenty years ago? That’s another big mistake. Your life changes, the law changes, and so do relationships. Life insurance policies, retirement plans, and transfer-on-death instruments are all legally binding contracts. The last will you made will be used, and if you haven’t updated your will or other documents, then the old decisions will stand. Remember that contracts supersede wills, so no matter how much you don’t want your ex to receive your life insurance proceeds, failing to change that designation won’t help your second spouse. You should review and update all documents.

Doing it yourself is risky. You won’t know if your will is valid and enforceable, if you do it from an online template. Your heirs will have to fix things, which can be expensive. The cost of an estate plan depends on the complexity of your situation. You may only need a will, power of attorney and advance directive. You may also need trusts to pass property along with minimal taxes. An estate planning attorney will be able to give you an idea of how much your estate plan will cost.

Talking about death and planning for it is a difficult topic for everyone, but a well-planned estate plan is one of the most thoughtful gifts you can give to your loved ones.

Reference: CNBC (Oct. 5, 2020) “More people are creating wills amid the pandemic”

Act Quickly to Protect an Estate

For most families, the process of estate administration or the probate of a will starts weeks after the death of a loved one. However, before that time, there are certain steps that need to be taken immediately after death, according to a recent article “Protecting an estate requires swift action” from The Record-Courier. It is not always easy to keep a clear head and stay on top of these tasks but pushing them aside could lead to serious losses and possible liability.

The first step is to secure the deceased’s home, cars and personal property. The residence needs to be locked to prevent unauthorized access. It may be wise to bring in a locksmith, so that anyone who had been given keys in the past will not be able to go into the house. Cars should be parked inside garages and any personal property needs to be securely stored in the home. Nothing should be moved until the trust administration or probate has been completed. Access to the deceased’s digital assets and devices also need to be secured.

Mail needs to be collected and retrieved to prevent the risk of unauthorized removal of mail and identity theft. If there is no easy access to the mailbox, the post office needs to be notified, so mail can be forwarded to an authorized person’s address.

Estate planning documents need to be located and kept in a safe place. The person who has been named as the executor in the will needs to have those documents. If there are no estate planning documents or if they cannot be located, the family will need to work with an estate planning attorney. The estate may be subjected to a probate proceeding.

One of the responsibilities that most executors don’t know about, is that when a person dies, their will needs to be admitted to the court, regardless whether they had trusts. If the deceased left a will, the executor or the person who has possession of the will must deliver it to the court clerk. Failing to do so could result in large civil liability.

At least five and as many as ten original death certificates should be obtained. The executor will need them when closing accounts. As soon as possible, banks, financial institutions, credit card companies, pension plans, insurance companies and others need to be notified of the person’s passing. The Social Security Administration needs to be notified, so direct deposits are not sent to the person’s bank account. Depending on the timing of the death, these deposits may need to be returned. The same is true if the deceased was a veteran—the Veteran’s Affairs (VA) need to be notified. There may be funeral benefits or survivor benefits available.

It is necessary, even in a time of grief, to protect a loved one’s estate in a timely and thorough manner. Your estate planning attorney will be able to help through this process.

Reference: The Record-Courier (Oct. 17, 2020) “Protecting an estate requires swift action”

Estate Planning Actions to Consider before 2020 Ends

When it comes to estate planning, there’s no such thing as a “one-size-fits-all” solution. That is especially true before a presidential election. However, there are several factors that should be considered and discussed with your estate planning attorney, as recommended in this recent article from The National Law Review “Top Ten Estate Planning Recommendations before the End of 2020.”

The estate, gift and generational-skipping transfer tax exemption is now $11.58 million per person. It’s scheduled to increase every year by an inflationary indexed amount through 2025 and in 2026 will revert to $5 million. If Biden wins the election, don’t be surprised if changes are made earlier. The IRS has already said that if the exemption is used this year, there will be no claw back. This is a “use it or lose it” scenario. If you are planning on using it, now is the time to do so.

It is possible that Discounts, GRATS, Grantor Trusts and other estate planning techniques may go away, depending upon who wins the election and control of Congress. Consider taking advantage of commonly used estate planning tools before it is too late.

Married couples who are not ready to gift significant amounts to their children or to put assets into trusts for their children should consider the SLAT–Spousal Lifetime Access Trust. They can create and gift the exemption amount to a SLAT and still maintain access to the assets.

Single individuals who similarly are not ready to make large gifts and give up access to assets may also create and gift an exemption amount to a trust in a jurisdiction based on “domestic asset protection trust” legislation. They can be a beneficiary of such a trust.

Interest rates are at an all-time low, and that is when tools like intra family loans, GRATs and GLATs are at their best.

Moving to Florida, Nevada, Texas and other low- or no-income tax states has become very popular, especially for people who can work remotely. Be aware that high tax states like New York and California are not going to let your tax revenue leave easily. Check with your estate planning attorney to make sure you’re following the rules in giving up your domicile in a high-income tax state.

Reference: The National Law Review (Oct. 6, 2020) “Top Ten Estate Planning Recommendations before the End of 2020”

Protect Your Estate with Five Facts

It is true that a single person who dies in 2020 could have up to $11.58 million in personal assets and their heirs would not have to pay any federal estate tax. However, that doesn’t mean that regular people don’t need to worry about estate taxes—their heirs might have to pay state estate taxes, inheritance taxes or the estate may shrink because of other tax issues. That’s why U.S. News & World Report’s recent article “5 Estate Planning Tips to Keep Your Money in the Family” is worth reading.

Without proper planning, any number of factors could take a bite out of your children’s inheritance. They may be responsible for paying federal income taxes on retirement accounts, for instance. You want to be sure that a lifetime of hard work and savings doesn’t end up going to the wrong people.

The best way to protect your family and your legacy, is by meeting with an estate planning attorney and sorting through all of the complex issues of estate planning. Here are five areas you definitely need to address:

Creating a last will and testament
Checking that beneficiaries are correct
Creating a trust
Converting traditional IRA accounts to Roth accounts
Giving assets while you are living

A last will and testament. Only 32% of Americans have a will, according to a survey that asked 2,400 Americans that question. Of those who don’t have a will, 30% says they don’t think they have enough assets to warrant having a will. However, not having a will means that your entire estate goes through probate, which could become very expensive for your heirs. Having no will also makes it more likely that your family will challenge the distribution of assets. As a result, someone you may have never met could inherit your money and your home. It happens more often than you can imagine.

Checking beneficiaries. Once you die, beneficiaries cannot be changed. That could mean an ex-spouse gets the proceeds of your life insurance policy, retirement funds or any other account that has a named beneficiary. Over time, relationships change—make sure to check the beneficiaries named on any of your documents to ensure that your wishes are fulfilled. Your will does not control this distribution and is superseded by the named beneficiaries.

Set up a trust. Trusts are used to accomplish different goals. If a child is unable to manage money, for instance, a trust can be created, a trustee named and the account funded. The trust will include specific directions as to when the child receives funds or if any benchmarks need to be met, like completing college or staying sober. With an irrevocable trust, the money is taken out of your estate and cannot be subject to estate taxes. Money in a trust does not pass through probate, which is another benefit.

Convert traditional IRAs to Roth retirement accounts. When children inherit traditional IRAs, they come with many restrictions and heirs get the income tax liability of the IRA. Regular income tax must be paid on all distributions, and the account has to be emptied within ten years of the owner’s death, with limited exceptions. If the account balance is large, it could be consumed by taxes. By gradually converting traditional retirement accounts to Roth accounts, you pay the taxes as the accounts are converted. You want to do this in a controlled fashion, so as not to burden yourself. However, this means your heirs receive the accounts tax-free.

Gift with warm hands, wisely. Perhaps the best way to ensure that money stays in the family, is to give it to heirs while you are living. As of 2020, you may gift up to $15,000 per person, per year in gifts. The money is tax free for recipients. Just be careful when gifting assets that appreciate in value, like stocks or a house. When appreciating assets are inherited, the heirs receive a step-up in basis, meaning that the taxable amount of the assets are adjusted upon death, so some assets should only be passed down after you pass.

Reference: U.S. News & World Report (Sep. 30, 2020) “5 Estate Planning Tips to Keep Your Money in the Family”

Pre-Election Estate Planning Includes a Vast Variety of Trusts

You might remember a flurry of activity in advance of the 2016 presidential election, when concerns about changes to the estate tax propelled many people to review their estate plans. In 2020, COVID-19 concerns have added to pre-presidential election worries. A recent article from Kiplinger, “Pre-Election Estate Planning Moves for High Net-Worth Families,” describes an extensive selection of trusts that can are used to protect wealth, and despite the title, not all of these trusts are just for the wealthy.

The time to make these changes is now, since there have been many instances where tax changes are made retroactively—something to keep in mind. The biggest opportunity is the ability to gift up to $11.58 million to another person free of transfer tax. However, there are many more.

Spousal Lifetime Access Trust (SLAT) The SLAT is an irrevocable trust created to benefit a spouse funded by a gift of assets, while the grantor-spouse is still living. The goal is to move assets out of the grantor spouse’s name into a trust to provide financial assistance to the spouse, while sheltering property from the spouse’s future creditors and taxable estate.

Beneficiary Defective Inheritor’s Trust (BDIT) The BDIT is an irrevocable trust structured so the beneficiary can manage and use assets but the assets are not included in their taxable estate.

Grantor Retained Annuity Trust (GRAT) The GRAT is also an irrevocable trust. The GRAT lets the grantor freeze the value of appreciating assets and transfer the growth at a discount for federal gift tax purposes. The grantor contributes assets in the trust and retains the right to receive an annuity from the trust, while earning a rate of return as specified by the IRS. GRATs are best in a low interest-rate environment because the appreciation of assets over the rate goes to the beneficiaries and at the end of the term of the trust, any leftover assets pass to the designated beneficiaries with little or no tax impact.

Gift or Sale of Interest in Family Partnerships. Family Limited Partnerships are used to transfer assets through partnership interests from one generation to the next. Retaining control of the property is part of the appeal. The partnerships may also be transferred at a discount to net asset value, which can reduce gift and estate tax liability.

Charitable Lead Trust (CLT). The CLT lets a grantor make a gift to a charitable organization while they are alive, while creating tax benefits for the grantor or their heirs. An annuity is paid to a charity for a set term, and when the term expires, the balance of the trust is available for the trust beneficiary.

Charitable Remainder Trust (CRT) The CRT is kind of like a reverse CLT. In a CRT, the grantor receives an income stream from the trust for a certain number of years. At the end of the trust term, the charitable organization receives the remaining assets. The grantor gets an immediate income tax charitable deduction when the CRT is funded, based on the present value of the estimated assets remaining after the end of the term.

These are a sampling of the types of trusts used to protect family’s assets. Your estate planning attorney will be able to determine if a trust is right for you and your family, and which one will be most advantageous for your situation.

Reference: Kiplinger (Aug. 16, 2020) “Pre-Election Estate Planning Moves for High Net-Worth Families”

How to Protect Your Estate from Unintended Heirs

Disinheriting a child as an heir happens for a variety of reasons. There may have been a long-running dispute, estrangement over a lifestyle choice, or not wanting to give assets to a child who squanders money. What happens when a will or trust has left a child without an inheritance is examined in an article from Lake County News, “Estate Planning: Disinherited and omitted children.”

Circumstances matter. Was the child born or adopted after the decedent’s estate planning documents were already created and executed? In certain states, like California, a child who was born or adopted after documents were executed, is by law entitled to a share in the estate. There are exceptions. Was it the decedent’s intent to omit the child, and is there language in the will making that clear? Did the decedent give most or all of the estate to the other parent? Did the decedent otherwise provide for the omitted child and was there language to that effect in the will? For example, if a child was the named beneficiary of a $1 million life insurance policy, it is likely this was the desired outcome.

Another question is whether the decedent knew of the existence of the child, or if they thought the child was deceased. In certain states, the law is more likely to grant the child a share of the estate.

Actor Hugh O’Brien did not provide for his children, who were living when his trust was executed. His children argued that he did not know of their existence, and had he known, he would have provided for them. His will included a general disinheritance provision that read “I am intentionally not providing for … any other person who claims to be a descendant or heir of mine under any circumstances and without regard to the nature of any evidence which may indicate status as a descendant or heir.”

The Appellate Court ruled against the children’s appeal for two reasons. One, the decedent must have been unaware of the child’s birth or mistaken about the child’s death, and two, must have failed to have provided for the unknown child solely because of a lack of awareness. The court found that his reason to omit them from his will was not “solely” because he did not know of their existence, but because he had no intention of giving them a share of his estate.

In this case, the general disinheritance provision defeated the claim by the children, since their claim did not meet the two standards that would have supported their claim.

This is another example of how an experienced estate planning attorney creates documents to withstand challenges from unintended outcomes. A last will and testament is created to defend the estate and the decedent’s wishes.

Reference: Lake County News (Aug. 22, 2020) “Estate Planning: Disinherited and omitted children”

Suggested Key Terms: Estate Planning Attorney, Disinheritance, Omitted, Decedent, Will, Trust, Appellate Court, Unknown Child, Last Will and Testament, Appeal

Digital Asset Law Passes in Pennsylvania, Joining Most States

More and more of our lives are lived online. However, what happens when we become disabled or die and our executor or a fiduciary needs to access these accounts? Pennsylvania recently joined many states that have passed a law intended to make accessing these accounts easier, reports the Pittsburgh Post-Gazette in the article “New Pa. law recognizes digital assets in estates.”

The official name of the law is the Revised Uniform Fiduciary Access to Digital Assets Act, or RUFADAA. Pennsylvania is one of the last states in the nation—48^th—to adopt this type of legislation, with the passage of Act 72 of 2020. Until now, the Keystone state didn’t allow concrete authority to access digital information to fiduciaries. The problem: the ability to access the information is still subject to the agreement that the user has with the online provider. That’s the “yes” we give automatically, when presented with terms of service agreement every time we open a new app on our phones.

Online service providers give deference to “legacy” contacts that a user can name, if authority to a third party to access their accounts is given. However, most people don’t name a successor to have access, and most apps don’t have a way to do this.

It’s worse than dying without a will. If you die with no will, the state has a process to identify legal heirs and distribute your estate. However, with digital assets, first you have to locate the person’s digital assets (and chances are good you’ll miss a few). There’s no shoebox of old receipts, or letters and bills coming in the mail to identify digital property. The custodians of the online information (Facebook, Instagram, TikTok, Google, etc.) still rely on those contracts between the user and the digital platform.

However, with the adoption of the new law, if the user does not make use of the online tool to name a successor, or if one is not offered, then the user can dictate the terms of access or non-access to the online accounts through estate planning documents, including a will, trust or power of attorney.

Here are some tips to clarify your wishes to disclose (or not) digital assets:

Make a list of all your online accounts, their URL address, usernames and passwords. Share the list only with someone you trust. You will be surprised at just how many you have.

Review the terms of service for each account to see if you have the ability to provide a name for a person who is authorized to access the account on your behalf.

Make sure your estate planning documents are aligned with your service contract preferences. Does your Power of Attorney mention access to your digital accounts? Depending on the potential value, sentimental and otherwise, of your digital assets, you may need to revise your estate plan.

Remember to never put anything in your will, like account numbers, URLs, usernames or passwords, since your will becomes a public document once it is probated. Your estate planning attorney will know how to best accomplish documenting your digital assets, while protecting them.

Reference: Pittsburgh Post-Gazette (Aug. 24, 2020) “New Pa. law recognizes digital assets in estates.”

Searching for Lower Taxes? Check State Laws

If you are among the many Americans making a move because of economics, a recent article from MarketWatch titled “Thinking about moving to a state with lower taxes? These are the mistake to avoid” has the information you need about the tax impact of your prospective new home state.

Moving to a state with no personal income tax is not the quick and easy answer it seems. You’ve got to look at ALL the taxes that apply to residents, from property taxes to estate and inheritance taxes.

Here’s a good example: Texas has no personal state income tax. Colorado has a flat 4.63% personal state income tax. Therefore, if you are working and have a good income, it makes sense that Texas would be your best option, right? Wrong.

The property tax rate on a home in some Colorado Springs neighborhoods is about 0.49% of the property’s actual value. Let’s say you move to one of these areas and buy a home for $500,000. Your annual property tax bill: $2,450. Let’s say your taxable income is $200,000. Your Colorado state income tax bill would be $9,260, and with the property tax, your tax bill would be $11,710. For that same $500,000 home in Dallas—your property tax would be $21,200 or about $17,800 if you are over age 65 or a surviving spouse. The higher property tax means that your annual tax bill is lower in Colorado.

What about after you die? Seventeen states and the District of Columbia impose their own estate tax or inheritance tax, and Maryland imposes both. Exemptions from the state estate tax are way below the current federal estate tax exemption. However, if you move to the wrong state, your estate could shrink dramatically from the state’s death taxes.

To clarify, an estate tax is charged against the entire taxable estate, regardless of who inherits from the estate. An inheritance tax is charged against people who receive inheritance. The rate usually depends upon their relationship to you.

Here are a few state estate taxes to consider:

Connecticut’s top estate tax rate is 12%, with a $5.1 million exemption allowed for 2020. The exemption increases to $7.1 million in 2021, and $9.1 million in 2022. Above $15 million of the estate tax value, the tax rate drops to 0%.
Hawaii’s top estate tax rate is 20%, and in 2020, there is a $5.49 million exemption.
In Illinois, the top tax rate is 16%, with a $4 million exemption in 2020.

Review the entire tax picture, before making this important decision. You should also confer with your estate planning attorney to learn how your estate’s structure—trusts and other estate planning tools—would work in a different state. Keep in mind that all of these tax exemptions, including the federal one, are likely to change as local, state and federal governments respond to the increased costs and lowered revenues brought about by the COVID-19 pandemic.

Reference: MarketWatch (Aug. 30, 2020) “Thinking about moving to a state with lower taxes? These are the mistake to avoid”

Estate Planning Blog Articles

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

How Do You Stop Family Fights Over an Inheritance?

Homeownership and Medicaid Can Be Problem

Despite Pandemic, Many Still Don’t Have an Estate Plan

Estate Planning Actions to Consider before 2020 Ends

Protect Your Estate with Five Facts

Pre-Election Estate Planning Includes a Vast Variety of Trusts

How to Protect Your Estate from Unintended Heirs

Digital Asset Law Passes in Pennsylvania, Joining Most States

Searching for Lower Taxes? Check State Laws

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How Do You Stop Family Fights Over an Inheritance?

Homeownership and Medicaid Can Be Problem

Despite Pandemic, Many Still Don’t Have an Estate Plan

Estate Planning Actions to Consider before 2020 Ends

Protect Your Estate with Five Facts

Pre-Election Estate Planning Includes a Vast Variety of Trusts

How to Protect Your Estate from Unintended Heirs

Digital Asset Law Passes in Pennsylvania, Joining Most States

Searching for Lower Taxes? Check State Laws

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