If I Buy a House, Should I have an Estate Plan?

There’s been an unprecedented surge in home sales during the pandemic. A recent National Association of Realtors report revealed that since July, existing home sales have increased year over year reaching a pandemic high of over 25% in October. Forbes’s recent article entitled “Pandemic Home Buyers: Have You Set Up Your Estate Plan?” asks the important question: How has this past year’s surge in home sales impacted estate planning?

Estate planning is a way to protect your assets and your loved ones, no matter your age or income level. If you place your home into a trust, you ensure that the ownership of your home will be properly and efficiently transferred to a loved one, if anything happens to you unexpectedly. If your home isn’t included in your estate plan, it will go through probate. However, consider the potential pitfalls of a trust:

Creating a trust, when you really only need a will. If you have less than $150,000 in assets and you don’t own a home, a trust likely isn’t really needed.
Thinking that you automatically have asset protection. A trust can help to avoid probate. So, an irrevocable trust may be the right option for people who really need true asset protection.
Not taking trust administration into account. The trustee must do many tasks when the creator of the trust dies. These aren’t much different from what an executor does, but it can be extra work.

If you already have an estate plan, you should review your estate planning documents every three to five years. Moreover, purchasing a home should also make you revisit your documents. When doing a review, take a look at the terms of the trust. Make certain that you have your house referenced by address and that you transfer the house to your spouse by name.

Most mortgages have a “due on sale” clause. This means if you terminate your ownership of your home, you have to immediately pay back the mortgage proceeds to the bank. If you place your home in a revocable trust, it lets you smoothly transfer ownership to your beneficiary. This prevents the bank from demanding payment, and your beneficiary would keep making the mortgage payments after you’re gone. However, it may be prudent to contact the lender in advance of the transfer, if you want to be sure.

If you bought a home in the pandemic and have not placed it in a trust yet, talk to an experienced estate planning attorney sooner rather than later.

Reference: Forbes (June 2, 2021) “Pandemic Home Buyers: Have You Set Up Your Estate Plan?”

What to Leave In, What to Leave Out with Retirement Assets

Depending on your intentions for retirement accounts, they may need to be managed and used in distinctly different ways to reach the dual goals of enjoying retirement and leaving a legacy. It’s all explained in a helpful article from Kiplinger, “Planning for Retirement Assets in Your Estate Plan”.

Start by identifying goals and dig into the details. Do you want to leave most assets to your children or grandchildren? Has philanthropy always been important for you, and do you plan to leave large contributions to organizations or causes?

This is not a one-and-done matter. If your intentions, beneficiaries, or tax rules change, you’ll need to review everything to make sure your plan still works.

How accounts are titled and how assets will be passed can create efficient tax results or create tax liabilities. This needs to be aligned with your estate plan. Check on beneficiary designations, asset titles and other documents to make sure they all work together.

Review investments and income. If you’ve retired, pensions, annuities, Social Security and other steady sources of income may be supplemented from your taxable investments. Required minimum distributions (RMDs) from tax deferred accounts are also part of the mix. Make sure you have enough income to cover regular and unanticipated medical, long term care or other expenses.

Once your core income has been determined, it may be wise to segregate any excess capital you intend to use for wealth transfer or charitable giving. Without being set apart from other accounts, these assets may not be managed as effectively for taxes and long-term goals.

Establish a plan for taxable assets. Children or individuals can be better off inheriting highly appreciable taxable investment accounts, rather than traditional IRAs. These types of accounts currently qualify for a step-up in cost basis. This step-up allows the beneficiary to sell the appreciated assets they receive as inheritance, without incurring capital gains.

Here’s an example: an heir receives 1,000 shares of a stock with a $20 per share cost basis valued at $120 per share at the time of the owner’s death. They will pay no capital gains taxes on the gain of $100 per share. However, if the same stock was sold while the retiree owner was living, the $100,000 gain in total would have been taxed. The post-death appreciation, if any, on such inherited assets, would be subject to capital gains taxes.

Retirees often try to preserve traditional IRAs and qualified accounts, while spending taxable accounts to take advantage of lower capital gains taxes as they take distributions. However, this sets heirs up for a big tax bill. Another strategy is to convert a portion of those assets to a Roth IRA and pay taxes now, allowing the assets to grow tax free for you and your heirs.

Segregate assets earmarked for charitable donations. If a charity is named as a beneficiary for a traditional IRA, the charity receives the assets tax free and the estate may be eligible for an estate deduction for federal and state estate taxes.

Your estate planning attorney can help you understand how to structure your assets to meet goals for retirement and to create a legacy. Saving your heirs from estate tax bills that could have been avoided with prior planning will add to their memories of you as someone who took care of the family.

Reference: Kiplinger (May 21, 2021) “Planning for Retirement Assets in Your Estate Plan”

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”

Can Family Members Contest a Will?

Estate planning documents, like wills and trusts, are enforceable legal documents, but when the grantor who created them passes, they can’t speak for themselves. When a loved one dies is often when the family first learns what the estate plans contain. That is a terrible time for everyone. It can lead to people contesting a will. However, not everyone can contest a will, explains the article “Challenges to wills and trusts” from The Record Courier.

A person must have what is called “standing,” or the legal right to challenge an estate planning document. A person who receives property from the decedent, and was designated in their will as a beneficiary, may file a written opposition to the probate of the will at any time before the hearing of the petition for probate. An “interested person” may also challenge the will, including an heir, child, spouse, creditor, settlor, beneficiary, or any person who has a legal property right in or a claim against the estate of the decedent.

Wills and trusts can be challenged by making a claim that the person lacked mental capacity to make the document. If they were sick or so impaired that they did not know what they were signing, or they did not fully understand the contents of the documents, they may be considered incapacitated, and the will or trust may be successfully challenged.

Fraud is also used as a reason to challenge a will or trust. Fraud occurs when the person signs a document that didn’t express their wishes, or if they were fooled into signing a document and were deceived as to what the document was. Fraud is also when the document is destroyed by someone other than the decedent once it has been created, or if someone other than the creator adds pages to the document or forges the person’s signature.

Alleging undue influence is another reason to challenge a will. This is considered to have occurred if one person overpowers the free will of the document creator, so the document creator does what the other person wants, instead of what the document creator wants. Putting a gun to the head of a person to demand that they sign a will is a dramatic example. Coercion, threats to other family members and threats of physical harm to the person are more common occurrences.

It is also possible for the personal representative or trustee’s administration of a will or trust to be challenged. If the personal representative or trustee fails to follow the instructions in the will or the trust, or does not report their actions as required, the court may invalidate some of the actions. In extreme cases, a personal representative or a trustee can be removed from their position by the court.

An estate plan created by an experienced estate planning lawyer should be prepared with an eye to the family situation. If there are individuals who are likely to challenge the will, a “no-contest” clause may be necessary. Open and candid conversations with family members about the estate plan may head off any surprises that could lead to the estate plan being challenged.

One last note: just because a family member is dissatisfied with their inheritance does not give them the right to bring a frivolous claim, and the court may not look kindly on such a case.

Reference: The Record-Courier (May 16, 2021) “Challenges to wills and trusts”

How to Simplify Estate Planning

For most people, estate planning and preparation doesn’t rank very high on their “to do” list. There are a number of reasons, but frequently it comes down these three: (i) cost; (ii) they believe it’s just for the rich; and (iii) it’s too complicated.

Fort Worth’s recent article entitled “3 Tips to Help Simplify Estate Planning,” explains that an estate plan really is not about you. It’s about taking care of your loved ones and charities.

Without an estate plan or last will, state intestacy law determines who gets your assets. You lose control of how your wealth will be distributed.

Let’s look at three tips to make it easier and to help you prepare for the future:

Work with an experienced estate planning attorney. Estate planning is not something you ask your buddy to do. “Hey, Jimmy, help me write my will.” No way. Partner with an experienced estate planning attorney, so you are confident your documents comply with state law and that the plan’s language clearly details how your wealth should be managed.
Review your estate planning documents regularly. We all have planned and unexpected events in our lives, like new grandchildren, illnesses, or significant increases or decreases in your net worth that could impact wealth and how it should be distributed. Meet regularly with your estate planning attorney and review your plan to make sure it still meets your needs and intentions.
Organize important documents. Make certain important documents have been created and can be located quickly, if something happens to you. Here is a list of documents you should have on file that can be accessed by your spouse or family members in case of an emergency:

Wills, trusts, and other important estate planning documents
A list of tangible and intangible property
A list of financial accounts and insurance policies; and
Email accounts, logins, or other log-in information to your PC and phone.

Estate planning is not a DIY project. You need the expertise of an experienced estate planning attorney to make certain that your wishes are carried out and that your estate plan can withstand any legal challenge.

Reference: Fort Worth (May 6, 2021) “3 Tips To Help Simplify Estate Planning”

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”

Should Parent Transfer House to Kid?

Let us say the parent is 90 and has a will bequeathing a home to a child, a son. The house was purchased 20 years ago for $300,000 and is now worth about $400,000.

The child stays there occasionally to help care for the parent, but he doesn’t live there. The parents’ estate is otherwise worth less than $1 million.

Nj.com’s recent article entitled “What are the pros and cons of transferring a home’s title?” explains that there are two primary reasons why parents want to transfer their home to their children.

First, they think they will be able to protect the house, in the event the parent needs to move to a nursing home. Second, they want to avoid probate.

Because many states now have a simple probate process for smaller estates, probate avoidance alone isn’t a worthwhile rationale to transfer the house to a child.

The transfer of the house to a child who doesn’t live there will be subject to the look-back rule for Medicaid, which in most states is now five years. As a result, if a parent transfers the house to the child within five years of applying for Medicaid, the transfer will trigger a penalty which will begin when the Medicaid application is submitted. The length of the penalty period depends on the value of the house. Therefore, if the parent might require nursing home care in the next five years, the parent should have enough other assets to cover the penalty period or wait five years before applying for Medicaid.

In addition, the transfer of the house may also cause a significant capital gains tax liability to the child when the house is sold. That’s because the child will receive the house with the carryover basis of the parent. However, if the child inherits the house, the child will get a step-up in basis—the basis will be the value of the house at the date of the parent’s death.

If the parent transferring the house retains a life estate—the right to live in the house until he or she passes away—the property will get a step-up in basis to the value of the house at the date of death. In the event that the house is sold while the parent is still alive, the value of the life estate interest will be excluded from income tax but the value of the child’s remainder interest in the house may be subject to capital gain taxes.

Last, if the house is transferred to a child who has financial troubles, the child’s creditors may be able to force the child to sell the house to pay his debts.

Reference: nj.com (April 20, 2021) “What are the pros and cons of transferring a home’s title?”

What Emergency Documents Do I Need in Pandemic?

With the threat of COVID-19, we’ve all come face-to-face with our mortality. However, are you prepared for the worst?, asks KSAT in its January 23 article entitled, “Important documents you need to have handy in case of an emergency.”

A consumer report recently found that just 7% of those ages 19 to 29 have an advance directive for health care emergencies, and even fewer have a will. Estate planning is one of the most worthwhile things we could do for ourselves or our loved ones.

The article explains that your estate is everything you own, and if it’s not protected, it could be taken away from your loved ones.

An extremely important document to have, in addition to a will, is a living will and a healthcare proxy or power of attorney. These documents let you designate the individual who will make decisions on your behalf, if you cannot speak for yourself.

In addition, a HIPAA authorization permits an individual you trust to speak with your healthcare staff and receive your personal medical information.

Another key document is a financial power of attorney. This empowers you to designate an agent to handle your debts, contracts and assets. A financial power of attorney must be signed and notarized.

You should also consider payable on death and transfer on death designations, which transfer assets to designated beneficiaries without probate.

It is important to conduct a digital asset inventory to list your entire online presence and include all accounts, logins, passwords, social media, and professional profiles, and most importantly, a list of everything you have on autopay.

Last, you need a last will and testament. This lets you to name an executor or personal representative to handle your postmortem affairs. However, a last will does not keep assets out of probate.

One last note: you can prepare a personal property memorandum to list the beneficiaries of any sentimental, non-monetary items.

Reference: KSAT (San Antonio) (Jan. 23, 2021) “Important documents you need to have handy in case of an emergency”

Should Young Families have an Estate Plan?

Young families are always on the go. New parents are busy with diapers, feeding schedules and trying to get a good night’s sleep. As a result, it’s hard to think about the future when you’re so focused on the present. Even so, young parents should think about estate planning.

Wealth Advisor’s recent article entitled, “Why Young Families Should Consider an Estate Plan,” explains that the word “estate” might sound upscale, but estate planning isn’t just for the wealthy. Your estate is simply all the assets you have when you die. This includes bank accounts, 401(k) plan, a home and cars. An estate plan helps to make certain that your property goes to the right people, that your debts are paid and your family is cared for. Without an estate plan, your estate must go through probate, which is a potentially lengthy court process that settles the debts and distributes the assets of the decedent.

Estate planning is valuable for young families, even if they don’t have extensive assets. Consider these key estate planning actions that every parent needs to take to make certain they’ve protected their child, no matter what the future has in store.

Purchase Life Insurance. Raising children is costly, and if a parent dies, life insurance provides funds to continue providing for surviving children. For most, term life insurance is a good move because the premiums are affordable, and the coverage will be in effect until the children grow to adulthood and are no longer financially dependent.

Make a Will and Name a Guardian for your Children. For parents, the most important reason to make a will is to designate a guardian for your children. If you fail to do this, the courts will decide and may place your children with a relative with whom you have not spoken in years. However, if you name a guardian, you choose a person or couple you know has the same values and who will raise your kids as you would have.

Review Your Beneficiaries. You probably already have a 401(k) or IRA that makes you identify who will inherit it if you die. You’ll need to update these accounts, if you want your children to inherit these assets.

Consider a Trust. If you die before your children turn 18, your children can’t directly assume control of an inheritance, which can be an issue. The probate court could name an individual to manage the assets you leave to your child. However, if you want to specify who will manage assets, how your money and property should be used for your children and when your children should directly receive a transfer of wealth, consider asking an experienced estate planning attorney about a trust. With a trust, you can name a designated person to manage money on behalf of your children and provide direction regarding how the trustee can use the money to help care for your children as they grow. Trusts aren’t just for the very well-to-do. Anyone may be able to benefit from a trust.

Reference: Wealth Advisor (April 13, 2021) “Why Young Families Should Consider an Estate Plan”

Should I Discuss Estate Planning with My Children?

US News & World Report’s recent article entitled “Discuss Your Estate Plan With Your Children” says that staying up-to-date with your estate plan and sharing your plans with your children could make a big impact on your legacy and what you’ll pay in estate taxes. Let’s look at why you should consider talking to your children about estate planning.

People frequently create an estate plan and name their child as the trustee or executor. However, they fail to discuss the role and what’s involved with them. Ask your kids if they’re comfortable acting as the executor, trustee, or power of attorney. Review what each of the roles involves and explain the responsibilities. The estate documents state some critical responsibilities but don’t provide all the details. Having your children involved in the process and getting their buy-in will be a big benefit in the future.

Share information about valuables stored in a fireproof safe or add their name to the safety deposit box. Tell them about your accounts at financial institutions and the titling of the various accounts, so that these accounts aren’t forgotten, and bills get paid when you’re not around.

Parents can get children involved with a meeting with their estate planning attorney to review the estate plan and pertinent duties of each child. If they have questions, an experienced estate planning attorney can answer them in the context of the overall estate plan.

If children are minors, invite the successor trustee to also be part of the meeting.

Explain what you own, what type of accounts you have and how they’re treated from a tax perspective.

Discussing your estate plan with your children provides a valuable opportunity to connect with your loved ones, even after you are gone. An individual’s attitudes about money says much about his or her values.

Sharing with your children what your money means to you, and why you are speaking with them about it, will help guide them in honoring your memory.

There are many personal reasons to discuss your estate plans with your children. While it’s a simple step, it’s not easy to have this conversation. However, the pandemic emphasized the need to not procrastinate when it comes to estate planning. It’s also provided an opportunity to discuss these estate plans with your children.

Reference: US News & World Report (Feb. 17, 2021) “Discuss Your Estate Plan With Your Children”

Estate Planning Blog Articles

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

If I Buy a House, Should I have an Estate Plan?

What to Leave In, What to Leave Out with Retirement Assets