Tell Me again Why Estate Planning Is So Important

The Legal Reader’s recent article entitled “The Importance of Estate Planning” explains that estate planning is not just for the rich.

If you don’t have a comprehensive estate plan, it could mean headaches for your family left to manage things after you die, and it can be expensive and have long-lasting impact.

Here are four reasons why estate planning is critical, and you need the help of an experienced estate planning attorney.

Estate plan beneficiaries. Middle-class families must plan in the event something happens to the bread earner. You might be only leaving behind one second home, but if you don’t decide who is to receive it, things might become complicated. The main purpose of estate planning is to allocate heirs to the assets. If you have no estate plan when you die, the court decides who gets the assets.

Protection for minor children. If you have small children, you must prepare for the worst. To be certain that your children receive proper care if they are orphaned, you must name their guardians in your last will. If you don’t, the court will do it!

It can save on taxes. Estate planning can protect your loved ones from the IRS. A critical aspect of estate planning is the process of transferring assets to the heirs to generate the smallest tax burden for them. Estate planning can minimize estate taxes and state inheritance taxes.

Avoid fighting and headaches in the family. No one wants fighting when a loved one dies. There might be siblings who might think they deserve much more than the other children. The other siblings might also believe that they should be given the charge for financial matters, despite the fact that they aren’t good with debts and finances. These types of disagreements can get ugly and lead to court. Estate planning will help in creating individualized plans.

Work with an experienced estate planning attorney and see how estate planning can help your specific situation.

Reference: The Legal Reader (May 10, 2021) “The Importance of Estate Planning”

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?”

Does Living Trust Help with Probate and Inheritance Taxes?

A living trust is a trust that’s created during a person’s lifetime, explains nj.com’s recent article entitled “Will a living trust help with probate and inheritance taxes?”

For example, New Jersey’s Uniform Trust Code governs the creation and validity of trusts. A real benefit of a trust is that its assets aren’t subject to the probate process. However, the New Jersey probate process is simple, so most people in the Garden State don’t have a need for a living trust.

In Kansas, a living trust can be created if the “settlor” or creator of the trust:

Resides in Kansas
The trustee lives or works in Kansas; or
The trust property is located in the state.

Under Florida law, a revocable living trust is governed by Florida Statute § 736.0402. To create a valid revocable trust in Florida, these elements are required:

The settlor must have capacity to create the trust
The settlor must indicate an intent to create a trust
The trust must have a definite beneficiary
The trustee must have duties to perform; and
The same person can’t be the sole trustee and sole beneficiary.

Ask an experienced estate planning attorney and he or she will tell you that no matter where you’re residing, the element that most estate planning attorneys concentrate on is the first—the capacity to create the trust. In most states, the capacity to create a revocable trust is the same capacity required to create a last will and testament.

Ask an experienced estate planning attorney about the mental capacity required to make a will in your state. Some state laws say that it’s a significantly lower threshold than the legal standards for other capacity requirements, like making a contract.

However, if a person lacks capacity when making a will, then the validity of the will can be questioned. The person contesting the will has the burden to prove that the testator’s mental capacity impacted the creation of the will.

Note that the assets in a trust may be subject to income tax and may be includable in the grantor’s estate for purposes of determining whether estate or inheritance taxes are owed. State laws differ on this. There are many different types of living trusts that have different tax consequences, so you should talk to an experienced estate planning attorney to see if a living trust is right for your specific situation.

Reference: nj.com (Jan. 11, 2021) “Will a living trust help with probate and inheritance taxes?”

Do I Really Need a Will?

No one enjoys pondering their own mortality, but we can all help unburden our loved ones after we’ve gone, by creating a will.

Bankrate’s recent article entitled “Why it’s important for every adult to get a will” explains why you need a will and how to protect what you most cherish after you pass away.

Many people think that a will must be a complicated document full of confusing legal jargon. However, the purpose of a will is really very simple despite its importance. A will is a legal document that disposes of your property at your death. In addition, wills address several issues required to be resolved after death, such as who will care for your children, who will make decisions about your estate and who will receive your assets? Every adult should have a will that speaks to these issues.

There are several types of wills which are customized based on your property and assets. Some people have specific instructions regarding special bequests at their death, and others pass everything to a surviving spouse and children.

Testamentary will. This will is prepared in advance and is signed in front of witnesses. This is the most common type of will.

Holographic will. This is a will that is written by hand and is frequently a last resort in emergency situations. It is not valid in all states.

Oral will. This is a verbal will that’s spoken in front of witnesses. However, most courts prefer instructions in writing. As a result, an oral will isn’t a form that is widely recognized or recommended.

Mutual will. A couple can create a joint will, so that when one spouse dies, the other remains bound by the existing will’s terms.

Pour-over will. This type of will is used when you plan to “pour” your assets into a previously established trust at your death.

There are many reasons why you should have a will. A will can:

Clearly identify ownership of your property
Name a legal guardian for your children
Shorten the legal process of assigning your assets
Make donations of assets to charitable organizations
Make specific gifts; and
Save on estate tax.

Speak to an experienced estate planning attorney about the right will for your situation.

Reference: Bankrate (Nov. 6, 2020) “Why it’s important for every adult to get a will”

Is Transferring House to Children a Good Idea?

Transferring your house to your children while you’re alive may avoid probate. However, gifting a home also can mean a rather large and unnecessary tax bill. It also may place your house at risk, if your children get sued or file for bankruptcy.

You also could be making a mistake, if you hope it will help keep the house from being consumed by nursing home bills.

There are better ways to transfer a house to your children, as well as a little-known potential fix that may help even if the giver has since died, says Considerable’s recent article entitled “Should you transfer your house to your adult kids?”

If a parent signs a quitclaim to give her son the house and then dies, it can potentially mean a tax bill of thousands of dollars for the son.

Families who see this error in time can undo the damage, by gifting the house back to the parent.

People will also transfer a home to try to qualify for Medicaid, but any gifts or transfers made within five years of applying for Medicaid can result in a penalty period when seniors are disqualified from receiving benefits.

In addition, transferring your home to another person can expose you to their financial problems because their creditors could file liens on your home and, depending on state law, take some or most of its value. If the child divorces, the house could become an asset that must be divided as part of the marital estate.

Section 2036 of the Internal Revenue Code says that if the parent were to retain a “life interest” in the property, which includes the right to continue living there, the home would remain in her estate rather than be considered a completed gift. However, there are rules for what constitutes a life interest, including the power to determine what happens to the property and liability for its bills.

There are other ways to avoid probate. Many states and DC permit “transfer on death” deeds that let homeowners transfer their homes at death without probate.

Another option is a living trust, which can ensure that all assets avoid probate.

Many states also have simplified probate procedures for smaller estates.

Reference: Considerable (Sep. 18) “Should you transfer your house to your adult kids?”

What If a Sole Beneficiary Wants to Share?

That doesn’t sound like a bad idea, right?

However, Morningstar’s recent article entitled “3 Strategies to Consider When Sole Beneficiaries Want to Share the Wealth” says that there are a few hurdles to clear, such as the IRA administrator’s policies, income tax consequences, transfer tax consequences and the terms of the decedent’s will.

Here’s a scenario: Uncle Buck dies and leaves his IRA to his niece, Hope. Buck’s will leaves all his other assets equally to all three of his nieces: sisters Hope, Faith and Charity. However, the three agree that Buck’s IRA should be shared equally, like the rest of the estate. What do they do?

The Easy Way. Hope keeps the IRA, withdraws from it when she wants (and as required by the minimum distribution rules), pays the income tax on her withdrawals and makes cash gifts to Faith and Charity (either now or as she withdraws from the IRA) in an agreed upon the amount. It would mean giving her two sisters ⅓ of the after-tax value of the IRA. There is no court proceeding or issue with the IRA provider. There are no income tax consequences because Hope will pay the other girls only the after-tax value of the IRA distributions she receives. However, there’s a transfer tax consequence: Hope’s transfers would be considered as gifts for gift tax purposes because she has no legal obligation to share the IRA with the other nieces. Any gift over the annual exclusion amount in any year ($15,000 as of 2020) will be using up some of Hope’s lifetime gift and estate tax exemption. This easy answer may work well for a not-too-large inherited IRA.

The Expensive Method: Reformation. If there is evidence that Buck made a mistake in filling out the beneficiary form, a court-ordered reformation of the document may be appropriate. Therefore, if Hope, Faith, and Charity have witnesses who would testify that the decedent told them shortly before he died, “I’m leaving all my assets equally to my three nieces,” it could be evidence that he made a mistake in completing the beneficiary designation form for the IRA. The court could order the IRA provider to pay the IRA to all three girls, and the IRS would probably accept the result. By accepting the result, the IRS would agree that the nieces should be equally responsible for their respective shares of income tax on the IRA and for taking the required distributions, and that no taxable gift occurred. However, as you might expect, the IRS isn’t legally bound by a lower state court’s order. If the reformation is based on evidence, the parties may want the tax results confirmed by an IRS private letter ruling, which is an expensive and time-consuming task.

The In-Between. The final possible solution is a qualified disclaimer. Hope would “disclaim” two thirds of the IRA (and keep a third). A qualified disclaimer (made within nine months after Buck’s death) would be effective to move two thirds of the IRA (and the income taxes) from Hope without gift taxes. A qualified disclaimer involves a legal fee but no court or IRS involvement. As a result, it can be fairly simple and cost-effective. However, there may be an issue: when Hope disclaims two thirds of the IRA, that doesn’t mean the disclaimed share of the IRA automatically goes to the other nieces. Instead, the disclaimed portion of the IRA will pass to the contingent beneficiary of the IRA. Hope needs to see where it goes next, prior to signing the disclaimer. If there’s no contingent beneficiary named by Buck, the disclaimed portion will pass to the default beneficiary named in the IRA provider’s plan documents. That’s typically the decedent’s probate estate. If the disclaimed portion of the IRA passes to the uncle’s estate, and Hope is a one-third beneficiary of the estate, she will also need to disclaim her estate-derived share of the IRA. A “simple disclaimer” can be complicated, so ask an experienced estate planning attorney to help.

Even if Hope disclaims two thirds of the IRA, so that it passes to Faith and Charity through the estate, the other girls won’t receive as favorable income tax treatment as Hope. Hope inherits her share as designated beneficiary, while an estate (the assumed default beneficiary), which isn’t a designated beneficiary, can’t qualify for that.

Reference: Morningstar (Aug. 13, 2020) “3 Strategies to Consider When Sole Beneficiaries Want to Share the Wealth”

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”

State Laws Have an Impact on Your Estate

Nj.com’s recent article entitled “Will N.J. or Florida’s tax laws affect this inheritance?” notes that first, the fact that the individual from Florida isn’t legally married is important.

However, if she’s a Florida resident, Florida rules will matter in this scenario about the vacation condo.

Florida doesn’t have an inheritance tax, and it doesn’t matter where the beneficiary lives. For example, the state of New Jersey won’t tax a Florida inheritance.

Although New Jersey does have an inheritance tax, the state can’t tax inheritances for New Jersey residents, if the assets come from an out-of-state estate.

If she did live in New Jersey, there is no inheritance tax on “Class A” beneficiaries, which include spouses, children, grandchildren and stepchildren.

However, the issue in this case is the fact that her “daughter” isn’t legally her daughter. Her friend’s daughter would be treated by the tax rules as a friend.

You can call it what you want. However, legally, if she’s not married to her friend, she doesn’t have a legal relationship with her daughter.

As a result, the courts and taxing authorities will treat both persons as non-family.

The smart thing to do with this type of issue is to talk with an experienced estate planning attorney who is well-versed in both states’ laws to determine whether there are any protections available.

Reference: nj.com (July 23, 2020) “Will N.J. or Florida’s tax laws affect this inheritance?”

Which Stars Made the Biggest Estate Planning Blunders?

Mistakes in the estate planning of high-profile celebrities are one very good way to learn the lessons of what not to do.

Forbes’ recent article entitled “Eight Lessons From Celebrity Estates” discussed some late celebrities who made some serious experienced estate planning blunders. Hopefully, we can learn from their errors.

James Gandolfini. The “Sopranos” actor left just 20% of his estate to his wife. If he’d left more of his estate to her, the estate tax on that gift would have been avoided in his estate. But the result of not maximizing the tax savings in his estate was that 55% of his total estate went to pay estate taxes.

James Brown. One of the hardest working men in show business left the copyrights to his music to an educational foundation, his tangible assets to his children and $2 million to educate his grandchildren. Because of ambiguous language in his estate planning documents, his girlfriend and her children sued and, years later and after the payment of millions in estate taxes, his estate was finally settled.

Michael Jackson. Jackson created a trust but never funded the trust during his lifetime. This has led to a long and costly battle in the California Probate Court over control of his estate.

Howard Hughes. Although he wanted to give his $2.5 billion fortune to medical research, there was no valid written will found at his death. His fortune was instead divided among 22 cousins. The Hughes Aircraft Co. was bequeathed to the Hughes Medical Institute before his death and wasn’t included in his estate.

Michael Crichton. The author was survived by his pregnant second wife, so his son was born after his death. However, because his will and trust didn’t address a child being born after his death, his daughter from a previous marriage tried to cut out the baby boy from his estate.

Doris Duke. The heir to a tobacco fortune left her $1.2 billion fortune to her foundation at her death. Her butler was designated as the one in charge of the foundation. This led to a number of lawsuits claiming mismanagement over the next four years, and millions in legal fees.

Casey Kasem. The famous DJ’s wife and the children of his prior marriage fought over his end-of-life care and even the disposition of his body. It was an embarrassing scene that included the kidnapping and theft of his corpse.

Prince and Aretha Franklin. Both music legends died without a will or intestate. This has led to a very public, and in the case of Prince, a very contentious and protracted settlement of their estates.

So, what did we learn? Even the most famous (and the richest) people fail to carefully plan and draft a complete estate plan. They make mistakes with tax savings (Gandolfini), charities (Brown and Hughes), providing for family (Crichton), whom to name as the manager of the estate (Duke) and failing to prevent family disputes, especially in mixed marriages (Kasem).

If you have an estate plan, be sure to review your existing documents to make certain that they still accomplish your wishes. Get the help of an experienced estate planning attorney.

Reference: Forbes (July 16, 2020) “Eight Lessons From Celebrity Estates”

Take Advantage of Tax Laws Now

The pundits are saying that the if Democrats win the White House and possibly Congress, expect changes to income, gift generation skipping transfer and estate taxes. This recent article from Forbes, “Use It Or Lose It: Locking In the $11.58 Million Unified Credit” says that the time to act is now.

Since 2000, the estate and gift tax exemption has taken a leap from $675,000 and a top marginal rate of 55% to an exemption of $11.58 million and a top marginal rate of 40%. However, it’s not permanent. If Congress does nothing, the tax laws go back in 2026 to a $5.6 million exemption and a top marginal rate of 55%. The expectation is that if Biden wins in November, and if Congress enacts the changes published in his tax plan, the exemption will fall to $3.5 million, and the top marginal rate will jump to 70%.

The current exemption and tax rate may be as good as it gets.

If you make a taxable gift today, you can effectively make the current tax laws permanent for you and your family. The gift will be reported in the year it is made, and the tax laws that are in effect when the gift is made will permanently applicable. Even if the tax laws change in the future, which is always a possibility, there have been proposed regulations published by the IRS that say the new tax laws will not be imposed on taxable gifts made in prior years.

Let’s say you make an outright taxable gift today of $11.58 million, or $23.16 million for a married couple. That gift amount, and any income and appreciation from the date of the gift to the date of death will not be taxed later in your estate. The higher $11.58 million exemption from the Generation Skipping Transfer Tax (GSTT) can also be applied to these gifts.

Of course, you’ll need to have enough assets to make a gift and still be financially secure. Don’t give a gift, if it means you won’t be able to support your spouse and family. To take advantage of the current exemption amount, you’ll need to make a gift that exceeds the reversionary exemption of $3.5 million. One way to do this is to have each spouse make a gift of the exemption amount to a Spousal Lifetime Access Trust (SLAT), a trust for the benefit of the other spouse for that spouse’s lifetime.

Be mindful that such a trust may draw attention from the IRS, because when two people make gifts to trusts for each other, which leaves each of them in the same economic position, the gifts are ignored and the assets in the trusts are included in their estate. The courts have ruled, however, that if the trusts are different from each other, based on the provisions in the trusts, state laws and even the timing of the creation and funding of the trusts may be acceptable.

These types of trusts need to be properly administered and aligned with the overall estate plan. Who will inherit the assets, and under what terms?

A word of caution: these are complex trusts and take time to create. Time may be running out. Speak with a skilled estate planning attorney with knowledge of tax law.

Reference: Forbes (July 17, 2020) “Use It Or Lose It: Locking In the $11.58 Million Unified Credit”

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