Estate Planning Blog Articles

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What Should I Know about Estate Planning before ‘I Do’?

Romance is in the air. Spring is the time for marriages, and with America coming out of the pandemic, wedding calendars will be filled.

AZ Big Media’s recent article entitled “5 estate planning tips for newlyweds” gives those ready to walk down the aisle a few things to consider.

  1. Prenuptial Agreement. Commonly referred to as a prenup, this is a written contract that you and your spouse enter into before getting legally married. It provides details on what happens to finances and assets during your marriage and, of course, in the event of divorce. A prenup is particularly important if one of the spouses already has significant assets and earnings and wishes to protect them in the event of divorce or death.
  2. Review you restate plan. Even if you come into a marriage with an existing plan, it’s out of date as soon as you’re wed.
  3. Update your beneficiary designations. Much of an individual’s estate plan takes place by beneficiary designations. Decide if you want your future spouse to be a beneficiary of life insurance, IRAs, or other pay on death accounts.
  4. Consider real estate. A married couple frequently opts to live in the residence of one of the spouses. This should be covered in the prenup. However, in a greater picture, decide in the event of the death of the owner, if you’d want this real estate to pass to the survivor, or would you want the survivor simply to have the right to live in the property for a specified period of time.
  5. Life insurance. You want to be sure that one spouse is taken care of in the event of your death. A married couple often relies on the incomes of both spouses, but death will wreck that plan. Think about life insurance as a substitute for a spouse’s earning capacity.

If you are soon-to-be-married or recently married and want to discuss it with an expert, make an appointment with a skilled estate planning attorney.

Reference:  AZ Big Media (March 23, 2022) “5 estate planning tips for newlyweds”

Why Is Communication Important in Estate Planning?

Successful transition of wealth from generation to generation is best accomplished when family members have a shared understanding of the overall use of the family wealth. While the initial wealth creators have final say about how their assets are distributed, awareness and agreement on the part of the receiving family members regarding how the wealth is used can help preserve assets as they move to the next generation.

Forbes’ recent article entitled “Communication Can Be The Key To Creating Harmony In Multi-Generational Estate Planning” says that coming to an agreement can sometimes be difficult, especially if family members bring their own perspectives and values to the estate planning process. However, good communication can help head off potential multi-generational conflicts before they happen.

One of the most significant challenges in achieving multi-generational wealth preservation is that each individual and generation has a different outlook on wealth. Today’s families could include four or even five generations. This big gap in ages could mean differing perspectives on many topics, including:

  • Personal values. Family members may have different belief systems and values, including how they view work, social and political systems, relationships, and other topics.
  • Investing priorities. Some generations may give greater importance to socially conscious investing than others. This could create a conflict when it comes to how and where to invest.
  • Shifting economic environments. Older generations who have lived through various economic scenarios may have very different perspectives than younger generations, particularly those just coming of age in a time of high inflation and a slowing economy.
  • Communication. Not every generation or family member is comfortable talking openly about money, especially when it comes to sharing how much is involved and how to spend it.
  • View of the role of a financial advisor. Some family members may see a financial advisor as a trusted partner, and others may be more skeptical.

While these differences can create challenges in the estate planning process, you can resolve them and reach an agreement about how to best manage the family’s wealth. Begin with a plan designed for the long-term, spanning current and future generations that’s flexible to meet the family’s changing needs and shifting economic environments.

Reference: Forbes (April 18, 2022) “Communication Can Be The Key To Creating Harmony In Multi-Generational Estate Planning”

Should an Estate Plan Include a Cabin on the Lake?

If you don’t plan appropriately and thoughtfully, problems may arise with respect to this property and your family when you are gone, says Kiplinger’s recent article entitled “Your Vacation Home Needs an Estate Plan!”

Speaking with your spouse and children is a good first step to help determine interest in retaining the property for the next generation and financial ability to maintain it. Let’s look at three ways you can plan for your vacation home.

Leave a Vacation Home to Children Outright During Life or at Death. An outright transfer of the home via a deed to children is the easiest way to transfer a vacation home.

However, if your children all own the property equally, they all have an equal say as to its use and management.

As a result, all decisions require unanimous agreement, which can prove challenging and be ripe for disagreement. Suggest that they create a Use and Maintenance Agreement to determine the terms and rules for the property usage. The contract would require all children to agree.

Form a Limited Liability Company (LLC). This is a tool often used by families, where each family member has a certain amount of membership interests in a home or to give away a home in a controlled manner. The operating agreement states the rules for governing the use and management of the property.

Put the Vacation Home in a Trust. A trust is another way to help with the ownership and transfer of vacation homes. Ask an experienced estate planning attorney about how this might work for your family.

Planning for your family’s vacation property is important to help avoid litigation and maintain family peace.

Addressing how the property will be paid for and setting aside money for it—as well as selecting the right structure for your family to use and enjoy the property—will help avoid issues in the future.

Reference: Kiplinger (Feb. 1, 2022) “Your Vacation Home Needs an Estate Plan!”

When Should I Think About Business Succession?

The pandemic has made many business owners rethink their business succession and retirement planning. Insurance News Net’s recent article entitled “Succession Planning For Business Owners: More Important Than Ever” reports that according to PwC’s 2021 US Family Business Survey, only a third of US family businesses have a robust, documented and communicated succession plan in place.

If you wait too long, you may not have the right people in place to run the business. It also restricts the tax planning options for the business and your personal estate. Either error can cause a business to fail, when it passes from one generation to the next.

An exit that is too sudden or without direction can leave a vacuum at the top and damage relationships with existing clients and customers. With clear objectives, a sense of urgency and an experienced estate planning attorney, you can help ensure that your business, and your future, are secure.

There are a number of areas of transition that should be addressed:

  1. Founder Transition: Determine how long you plan to stay with the business, and what your retirement plans are;
  2. Family Transition: If you plan to leave your business to your children, determine the way in which the roles and power relationships will change;
  3. Business Transition: How will the company’s operations and customer relations be maintained through other transitions;
  4. Management Transition: Decide who will make up the new management team, such as family, non-family, or both, and how new leadership will be evaluated. You should also map out the schedule for transferring control of day to day decisions;
  5. Ownership Transition: Determine how ownership is to be transferred; and
  6. Estate Transition: see how you will coordinate your estate plan to ensure that the other transitions above occur as planned.

Many of these transitions will be accomplished through formal documentation, such as an operating agreement, buy-sell agreements and trusts. Sit down with an attorney soon rather than later to sort this out.

Reference: Insurance News Net (December 30, 2021) “Succession Planning For Business Owners: More Important Than Ever”

Should I have a Charitable Trust in My Estate Plan?

Charitable trusts can be created to provide a reliable income stream to you and your beneficiaries for a set period of time, says Bankrate’s recent article entitled “What is a charitable trust?”

Establishing a charitable trust can be a critical component of your estate plan and a rewarding way to make an impact for a cause you care deeply about. There are a few kinds of charitable trusts to consider based on your situation and what you may be looking to accomplish.

Charitable lead trust. This is an irrevocable trust that is created to distribute an income stream to a designated charity or nonprofit organization for a set number of years. It can be established with a gift of cash or securities made to the trust. Depending on the structure, the donor can benefit from a stream of income during the life of the trust, deductions for gift and estate taxes, as well as current year income tax deductions when the assets are donated to the trust.

If the charitable lead trust is funded with a donation of cash, the donor can claim a deduction of up to 60% of their adjusted gross income (AGI), and any unused deductions can generally be carried over into subsequent tax years. The deduction limit for appreciated securities or other assets is limited to no more than 30% of AGI in the year of the donation.

At the expiration of the charitable lead trust, the assets that remain in the trust revert back to the donor, their heirs, or designated beneficiaries—not the charity.

Charitable remainder trust. This trust is different from a charitable lead trust. It’s an irrevocable trust that’s funded with cash or securities. A CRT gives the donor or other beneficiaries an income stream with the remaining assets in the trust reverting to the charity upon death or the expiration of the trust period. There are two types of CRTs:

  1. A charitable remainder annuity trust or CRAT distributes a fixed amount as an annuity each year, and there are no additional contributions can be made to a CRAT.
  2. A charitable remainder unitrust or CRUT distributes a fixed percentage of the value of the trust, which is recalculated every year. Additional contributions can be made to a CRUT.

Here are the steps when using a CRT:

  1. Make a partially tax-deductible donation of cash, stocks, ETFs, mutual funds or non-publicly traded assets, such as real estate, to the trust. The amount of the tax deduction is a function of the type of CRT, the term of the trust, the projected annual payments (usually stated as a percentage) and the IRS interest rates that determine the projected growth in the asset that’s in effect at the time.
  2. Receive an income stream for you or your beneficiaries based on how the trust is created. The minimum percentage is 5% based on current IRS rules. Payments can be made monthly, quarterly or annually.
  3. After a designated time or after the death of the last remaining income beneficiary, the remaining assets in the CRT revert to the designated charity or charities.

There are a number of benefits of a charitable trust that make them attractive for estate planning and other purposes. It’s a tax-efficient way to donate to the charities or nonprofit organizations of your choosing. The charitable trust provides benefits to the charity and the donor. The trust also provides upfront income tax benefits to the donor, when the contribution to the trust is made.

Donating highly appreciated assets, such as stocks, ETFs, and mutual funds, to the charitable trust can help avoid paying capital gains taxes that would be due if these assets were sold outright.  Donations to a charitable trust can also help to reduce the value of your estate and reduce estate taxes on larger estates.

However, charitable trusts do have some disadvantages. First, they’re irrevocable, so you can’t undo the trust if your situation changes, and you were to need the money or assets donated to the trust. When you establish and fund the trust, the money’s no longer under your control and the trust can’t be revoked.

A charitable trust may be a good option if you have a desire to create a legacy with some of your assets. Talk with an experienced estate planning attorney about your specific situation.

Reference: Bankrate (Dec. 14, 2021) “What is a charitable trust?”

What’s Elder Law and Do I Need It?

Yahoo News  says in its recent article entitled “What Is Elder Law?” that the growing number of elderly in the U.S. has created a need for lawyers trained to serve clients with the distinct needs of seniors.

The National Elder Law Foundation defines elder law as “the legal practice of counseling and representing older persons and persons with special needs, their representatives about the legal aspects of health and long-term care planning, public benefits, surrogate decision-making, legal capacity, the conservation, disposition and administration of estates and the implementation of their decisions concerning such matters, giving due consideration to the applicable tax consequences of the action, or the need for more sophisticated tax expertise.”

The goal of elder law is to ensure that the elderly client’s wishes are honored. It also seeks to protect an elderly client from abuse, neglect and any illegal or unethical violation of their plans and preferences.

Baby boomers, the largest generation in history, have entered retirement age in recent years.  Roughly 17% of the country is now over the age of 65. The Census estimates that about one out of every five Americans will be elderly by 2040.

Today’s asset management concerns are much sophisticated and consequential than those of the past. Medical care has not only managed to extend life and physical ability but has itself also grown more sophisticated. Let’s look at some of the most common elder law topics:

Estate Planning. This is an area of law that governs how to manage your assets after death. The term “estate” refers to all of your assets and debts, once you have passed. When a person dies, their estate is everything they own and owe. The estate’s debts are then paid from its assets and anything remaining is distributed among your heirs.

Another part of estate planning in elder law concerns powers of attorney. This may arise as a voluntary form of conservatorship. This power can be limited, such as assigning your accountant the authority to file your taxes on your behalf. It can also be very broad, such as assigning a family member the authority to make medical decisions on your behalf while you are unconscious. A power of attorney can also allow a trusted agent to purchase and sell property, sign contracts and other tasks on your behalf.

Disability and Conservatorship. As you grow older, your body or mind may fail. It is a condition known as incapacitation and legally defined as when an individual is either physically unable to express their wishes (such as being unconscious) or mentally unable to understand the nature and quality of their actions. If this happens, you need someone to help you with activities of daily living. Declaring someone mentally unfit, or mentally incapacitated, is a complicated legal and medical issue. If a physician and the court agree that a person cannot take care of themselves, a third party is placed in charge of their affairs. This is known as a conservatorship or guardianship. In most cases, the conservator will have broad authority over the adult’s financial, medical and personal life.

Government programs. Everyone over 65 will, most likely, interact with Medicare. This program provides no- or low-cost healthcare. Social Security is the retirement benefits program. For seniors, understanding how these programs work is critical.

Healthcare. As we get older, health care is an increasingly important part of our financial and personal life. Elder law can entail helping a senior understand their rights and responsibilities when it comes to healthcare, such as long-term care planning and transitioning to a long-term care facility.

Reference: Yahoo News (Jan. 26, 2020) “What Is Elder Law?”

Should I Withdraw more than RMD?

As most know, once a person hits 72, the IRS require you to take a certain minimum amount from your IRA each year. Many do take only the minimum, believing that this will leave more assets to grow tax deferred. However, recent tax changes are a reason to revisit one’s IRA distribution strategy.

MSN’s article entitled “Should You Take an Extra Big RMD This Year?” says that although some people are worried about paying more in taxes this year than they need to may want stay to the bare minimum of their required minimum distribution (RMD), others seek to find a broader tax strategy.

Those people may want to consider going big with their RMDs. Let’s look the wisdom of taking more than the required minimum distribution from your IRA.

The article gives us four considerations to help with your RMD decision about possibly taking more than the IRA RMD in any year:

  1. Your tax bracket. Determine the amount of additional income you can recognize this year, while still staying within your current tax bracket. Taxpayers in the 10% and 12% tax brackets should be especially cognizant of maximizing ordinary income in these relatively low tax brackets.
  2. Your income. See what your income’s projected to be next year and consider whether you (or you and your spouse) will have other sources of income in future years, such as an inherited IRA, spouse’s IRA RMD or annuity income to add to the mix.
  3. Your beneficiaries. Look at the way in which your current tax rate compares with the tax rates of your IRA beneficiaries. If you have a large IRA and children with high incomes of their own, your heirs could be pushed into a much higher tax bracket when they start their inherited IRA distributions.
  4. Your Medicare premiums. An increase in income can also result in higher Medicare Part B & D premiums in coming years. As a result, consider this in the context of total savings.

Reference: MSN (Nov. 23, 2021) “Should You Take an Extra Big RMD This Year?”

 

Will Moving to a New State Impact My Estate Planning?

Since the coronavirus pandemic hit the U.S., baby boomers have been speeding up their retirement plans. Many Americans have also been moving to new states. For retirees, the non-financial considerations often revolve around weather, proximity to grandchildren and access to quality healthcare and other services.

Forbes’ recent article entitled “Thinking of Retiring and Moving? Consider the Financial Implications First” provides some considerations for retirees who may set off on a move.

  1. Income tax rates. Before moving to a new state, you should know how much income you’re likely to be generating in retirement. It’s equally essential to understand what type of income you’re going to generate. Your income as well as the type of income you receive could significantly influence your economic health as a retiree, after you make your move. Before moving to a new state, look into the tax code of your prospective new state. Many states have flat income tax rates, such as Massachusetts at 5%. The states that have no income tax include Alaska, Florida, Nevada, Texas, Washington, South Dakota and Wyoming. Other states that don’t have flat income tax rates may be attractive or unattractive, based on your level of income. Another important consideration is the tax treatment of Social Security income, pension income and retirement plan income. Some states treat this income just like any other source of income, while others offer preferential treatment to the income that retirees typically enjoy.
  2. Housing costs. The cost of housing varies dramatically from state to state and from city to city, so understand how your housing costs are likely to change. You should also consider the cost of buying a home, maintenance costs, insurance and property taxes. Property taxes may vary by state and also by county. Insurance costs can also vary.
  3. Sales taxes. Some states (New Hampshire, Oregon, Montana, Delaware and Alaska) have no sales taxes. However, most states have a sales tax of some kind, which generally adds to the cost of living. California has the highest sales tax, currently at 7.5%, then comes Tennessee, Rhode Island, New Jersey, Mississippi and Indiana, each with a sales tax of 7%. Many other places also have a county sales tax and a city sales tax. You should also research those taxes.
  4. The state’s financial health. Examine the health of the state pension systems where you are thinking about moving. The states with the highest level of unfunded pension debts include Connecticut, Illinois, Alaska, New Jersey and Hawaii. They each have unfunded state pensions at a level of more than 20% of their state GDP. If you’re thinking about moving to one of those states, you’re more apt to see tax increases in the future because of the huge financial obligations of these states.
  5. The overall cost of living. Examine your budget to see the extent to which your annual living expenses might increase or decrease in your new location because food, healthcare and transportation costs can vary by location. If your costs are going to go up, that should be all right, provided you have the financial resources to fund a larger expense budget. Be sure that you’ve accounted for the differences before you move.
  6. Estate planning considerations. If this is going to be your last move, it’s likely that the laws of your new state will apply to your estate after you die. Many states don’t have an estate or gift tax, which means your estate and gifts will only be subject to federal tax laws. However, a number of states, such as Maryland and Iowa, have a state estate tax.

You should talk to an experienced estate planning attorney about the estate and gift tax implications of your move.

Reference: Forbes (Nov. 30, 2021) “Thinking of Retiring and Moving? Consider the Financial Implications First”

How Should I Plan to Sell My Business?

For many business owners, between 70% and 80% of their wealth is tied up in their business. Research also shows that just 20% to 30% of businesses that go to market actually sell. That leaves 80% of business owners with limited options to monetize the value of their business and wealth for future financial security.

The Tampa Bay Business Journal’s recent article entitled “Selling a family business: Plan to maximize value and preserve wealth” explains that there are several factors facing Boomer business owners, as they consider selling their businesses:

  • They may be worried about forfeiting their income stream.
  • They may feel trapped because the business funds a certain lifestyle.
  • They could be worried about what they’ll do in the next chapter of life after leaving.
  • They may not have a sense of urgency or plan for an unexpected life event, such as an illness or death; and
  • They could be misinformed about options for a strategic exit to capitalize on the business’ value.

It’s critical to start business exit planning now.

It’s not uncommon that when businesses are passed on from one generation to the next, family conflicts can occur. With about three-quarters (70%) of family businesses failing after being passed to the next generation, there’s good reason to reconsider leaving your business to your children in the traditional sense.

More business owner children either can’t afford to buy the family business or would prefer to not be saddled with it. In fact, UBS Global Wealth Management found that 82% of the next generation would prefer the money from the sale of the business. Half of family business owners also don’t know their exit options and have no transition team or transition plan.

About half of all exits from a family business aren’t voluntary. The five Ds — death, disabilities, divorce, distress, and disagreements — can derail a sound business exit strategy. Instead of holding on too long and focusing on just income generation, business owners should look at growing the enterprise value of the business, thus making it more attractive and transferrable to new ownership.

Business owners should have secure contracts, an experienced management team and a sound succession plan to keep the business operating and demonstrate its market value.

You should aim to exit your business when it’s at peak enterprise value and while you have control to depart on your terms.

Simply gifting a family business to the next generation may not be the right decision. Ask an experienced estate planning attorney about other options to consider.

Reference: Tampa Bay Business Journal (Nov. 29, 2021) “Selling a family business: Plan to maximize value and preserve wealth”

Can I Avoid Taxes when I Inherit?

Kiplinger’s recent article entitled “Minimizing Taxes When You Inherit Money” says that if you inherit an IRA from a parent, the taxes on mandatory withdrawals could mean you will have a smaller inheritance than you anticipated.

Prior to 2020, beneficiaries of inherited IRAs or other tax-deferred accounts, like 401(k)s, could transfer the money into an account known as an inherited (or “stretch”) IRA. From there, you could take withdrawals over your life expectancy, allowing you to minimize withdrawals taxed at ordinary income tax rates. This lets the funds in the account to grow.

However, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 stopped this tax-saving strategy. Most adult children and other non-spouse heirs who inherit an IRA after January 1, 2020, now have two options: (i) take a lump sum; or (ii) transfer the money to an inherited IRA that must be depleted within 10 years after the death of the original owner. This 10-year rule doesn’t apply to surviving spouses, who can roll the money into their own IRA and allow the account to grow, tax-deferred, until they must take required minimum distributions (RMDs) at 72.  Spouses can also transfer the money into an inherited IRA and take distributions based on their life expectancy. The SECURE Act also created exceptions for non-spouse beneficiaries for those who are minors, disabled, chronically ill, or less than 10 years younger than the original IRA owner.

As a result, IRA beneficiaries who aren’t eligible for the exceptions could wind up with a big tax bill, especially if the 10-year withdrawal period is when they have a lot of other taxable income.

The 10-year rule also applies to inherited Roth IRAs. However, although you must still deplete the account in 10 years, the distributions are tax-free, provided the Roth was funded at least five years before the original owner died. If you don’t need the money, delay in taking the distributions until you’re required to empty the account. That will give you up to 10 years of tax-free growth.

Many heirs cash out their parents’ IRAs. However, if you take a lump sum from a traditional IRA, you’ll owe taxes on the whole amount, which might move you into a higher tax bracket.

Transferring the money to an inherited IRA lets you allocate the tax bill, although it’s for a shorter period than the law previously allowed. Since the new rules don’t require annual distributions, there’s a bit of flexibility.

Reference: Kiplinger (Oct. 29, 2021) “Minimizing Taxes When You Inherit Money”