Estate Planning Blog Articles

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Is Prince’s Estate Settled Yet?

The long-running estate battle over Prince’s estate may be coming to a close, according to a recent article from Yahoo! News, “Minnesota probate court set to discuss ‘final distribution’ of Prince estate in February.” The Carver County probate court has set a date to start talking about Prince’s assets with heirs and beneficiaries.

Prince died of a fentanyl overdose in April 2016, with no estate plan. Administering the estate and coming up with a plan for its distribution among heirs has cost tens of millions of dollars, in an estate estimated at more than $100 million. One of many obstacles in settling the estate: a complicated dispute with the IRS over the value of Prince’s assets.

The estate will be almost evenly split between a music company—Primary Wave—and the three oldest of the pop icon’s eldest six heirs or their families.

Primary Wave bought out all or most of the interests of Prince’s three youngest siblings, one of whom died in August 2019. Three older siblings, including one who died in September 2021, rejected the offers from Primary Wave.

Comerica Bank & Trust, the administrator of the estate, settled with the IRS over the value of the estate, according to a late November filing in the U.S. Tax Court. The Carver County probate court has to approve this agreement.

Another tax dispute, this one between Prince’s estate and the state of Minnesota, has not yet been resolved.

Last year, the IRS set a value of $163.2 million on Prince’s estate. Comerica valued the estate at $82.3 million—nearly half of the IRS value. The value was so low the IRS penalized the estate with a $6.4 million “accuracy-related penalty.” Comerica followed by suing the IRS in U.S. Tax Court, saying the IRS calculations were loaded with mistakes. With the settlement now underway, the tax trial has been cancelled. The estate and the IRS have been ordered to file a status report on the case in February 2022.

The IRS and Comerica agreed on the value of Prince’s real estate holdings at $33 million. The harder task was to place a value on intangible assets, like Prince’s music rights.

The full IRS settlement most likely led to the probate court setting a date for a hearing. With the settlement, certain parts of the estate may move forward.

However, don’t expect it to be quick. It may be months before the court approves any distributions.

The lesson from Prince’s estate: everyone needs an estate plan, whether the estate is modest or includes multi-million assets and multiple heirs. Tens of millions in legal fees plus a $6.4 million penalty from the IRS adds up, even when the estate is this big.

Reference: Yahoo! News (Dec. 22, 2021) “Minnesota probate court set to discuss ‘final distribution’ of Prince estate in February”

Why Naming Beneficiaries Is Important to Your Estate Plan

For the loved ones of people who neglect to update the beneficiaries on their estate plan and assets with the option of naming beneficiaries, the cost in time, money and emotional stress is quite high, says the recent article “Five Mistakes To Avoid When Naming Beneficiaries” from The Chattanoogan.

The biggest mistake is failing to name a beneficiary on all of your accounts, including retirement, investment and bank accounts as well as insurance policies. What happens if you fail to name a beneficiary? Assets in the accounts and proceeds from life insurance policies will automatically become part of your estate.

Any planning you’ve done with your estate planning attorney to avoid probate will be undercut by having all of these assets go through probate. Beneficiaries may not see their inheritance for months, versus receiving access to the assets much sooner. It’s even worse for retirement accounts like IRAs. Any ability your heir might have had to withdraw assets over time will be lost.

Next is forgetting to name a contingency beneficiary. Most people name their spouse, an adult child, or a sibling as their primary beneficiary. However, if the primary beneficiary should predecease you and there is no contingency beneficiary, it is as if you didn’t have a beneficiary at all.

Having a contingency beneficiary has another benefit: the primary beneficiary has the option to execute a qualified disclaimer, so some assets may be passed along to the next-in-line heir. Let’s say your spouse doesn’t need the money or doesn’t want to take it because of tax implications. Someone else in the family can more easily receive the assets.

Naming beneficiaries without taking care to use their proper legal name or identify the person with specificity has led to more surprises than you can imagine. If there are three generations of Geoffrey Paddingtons in the family and the only name on the document is Geoffrey Paddington, who will receive the inheritance? Use the person’s full name, their relationship to you (“child,” “cousin,” etc.) and if the document requires a Social Security number for identification, use it.

When was the last time you reviewed beneficiary documents? The only time many people look at these documents is when they open the account, start a new job, or buy an insurance policy. Every few years, around the same time you review your estate plan, you should gather all of your financial and insurance documents and make sure the same people named two decades ago are still the ones you want to receive your assets on death.

Finally, talk with loved ones about your legacy and your wishes. Let them know that an estate plan exists and you’ve given time and thought to what you want to happen when you die. There’s no need to give exact amounts. However, a bird’s eye view of your plan will help establish expectations.

If naming beneficiaries is challenging because of a complex situation, your estate planning attorney will be able to help as a sounding board or with estate planning strategies to accomplish your goals.

Reference: The Chattanoogan (Dec. 6, 2021) “Five Mistakes To Avoid When Naming Beneficiaries”

What Taxes Have to Be Paid When Someone Dies?

The last thing families want to think about after a loved one has passed are taxes, but they must be dealt with, deadlines must be met and challenges along the way need to be addressed. The article “Elder Care: Death and taxes, Part 1: Tax guidance for administering a loved one’s estate” from The Sentinel offers a useful overview, and recommends speaking with an estate planning attorney to be sure all tasks are completed in a timely manner.

Final income tax returns must be filed after a person passes. This is the tax return on income received during their last year of life, up to the date of death. When a final return is filed, this alerts federal and state taxing authorities to close out the decedent’s tax accounts. If a final return is not filed, these agencies will expect to receive annual tax payments and may audit the deceased. Even if the person didn’t have enough income to need to pay taxes, a final return still needs to be filed so tax accounts are closed out. The surviving spouse or executor typically files the final tax return. If there is a surviving spouse, the final income tax return is the last joint return.

Any tax liabilities should be paid by the estate, not by the executor. If a refund is due, the IRS will only release it to the personal representative of the estate. An estate planning attorney will know the required IRS form, which is to be sent with an original of the order appointing the person to represent the estate.

Depending on the decedent’s state of residence, heirs may have to pay an Inheritance Tax Return. This is usually based on the relationship of the heirs. The estate planning attorney will know who needs to pay this tax, how much needs to be paid and how it is done.

Income received by the estate after the decedent’s death may be taxable. This may be minimal, depending upon how much income the estate has earned after the date of death. In complex cases, there may be significant income and complex tax filings may be required.

If a Fiduciary Return needs to be filed, there will be strict filing deadline, often based on the date when the executor applied for the EIN, or the tax identification number for the estate.

The estate’s executor needs to know of any trusts that exist, even though they pass outside of probate. Currently existing trusts need to be administered. If there is a trust provision in the will, a new trust may need to be started after the date of death. Depending on how they are structured, trust income and distributions need to be reported to the IRS. The estate planning attorney will be able to help with making sure this is managed correctly, as long as they have access to the information.

The decedent’s tax returns may have a lot of information, but probably don’t include trust information. If the person had a Grantor Trust, you’ll need an experienced estate planning attorney to help. During the Grantor’s lifetime, the trust income is reported on the Grantor’s 1040 personal income tax return, as if there was no trust. However, when the Grantor dies, the tax treatment of the trust changes. The Trustee is now required to file Fiduciary Returns for the trust each year it exists and generates income.

An experienced estate planning attorney can analyze the trust and understand reporting and taxes that need to be paid, avoiding any unnecessary additional stress on the family.

Reference: The Sentinel (Dec. 3, 2021) “Elder Care: Death and taxes, Part 1: Tax guidance for administering a loved one’s estate”

When Should You Update Your Estate Plan?

Updating an estate plan is not usually the first thing on one’s mind when large life events occur. However, if you fail to update your estate plan, over time the plan may not work—for you or your loved ones. Reviewing estate plans at least once every three or four years will help to reach your goals and protect your family, explains the article “Do I Need to Update My Estate Plan?” from Arkansas Business.

Two key documents are used to distribute your assets: your last will and testament and trusts. As your children and other family members mature, those documents should change as may be needed.

If you have a revocable trust, you need to review the dispositive provisions and the trust funding. One of the biggest mistakes in estate planning, after failing to have an estate plan, is failing to fund or manage the funds in a trust.

Trusts are created to avoid probate and establish a process for distributing assets in case of disability or death. However, if assets are not retitled to be owned by the trust, or if the assets don’t have an appropriate beneficiary designation to transfer assets to the trust at the time of your death, they won’t perform as intended. As new assets are purchased, they also need to be incorporated into your estate plan.

Relationships you have with people who have responsibilities for your estate plan may change over time. Those need to be updated, including the following:

Trustee—The person or institution administering and managing a revocable trust, when you can no longer do so.

Guardian—The individual who will have legal authority and responsibility to raise your minor child(ren).

Executor—The person who is in charge of administering and managing your estate.

Health Care Agent—The person you authorize to make medical decisions in the event of incapacity.

Another common point of failure for estate plans: neglecting to update beneficiary designations for assets like life insurance, retirement plans and any asset that customarily passes to an heir through a beneficiary designation.

A regular review of your estate plan with your estate planning attorney also allows your plan to incorporate changes in tax laws. The last few years have seen many significant changes in tax laws, and more changes are likely in the future. Strategies that may have been extremely effective five or ten years ago are probably outdated and might create costs for your heirs. A review with an experienced estate planning attorney can prevent unnecessary tax liabilities, unexpected inheritances and family feuds.

Reference: Arkansas Business (Sep. 2021) “Do I Need to Update My Estate Plan?”

When Should You Fund a Trust?

If your estate plan includes a revocable trust, sometimes called a “living trust,” you need to be certain the trust is funded. When created by an experienced estate planning attorney, revocable trusts provide many benefits, from avoiding having assets owned by the trust pass through probate to facilitating asset management in case of incapacity. However, it doesn’t happen automatically, according to a recent article from mondaq.com, “Is Your Revocable Trust Fully Funded?”

For the trust to work, it must be funded. Assets must be transferred to the trust, or beneficiary accounts must have the trust named as the designated beneficiary. The SECURE Act changed many rules concerning distribution of retirement account to trusts and not all beneficiary accounts permit a trust to be the owner, so you’ll need to verify this.

The revocable trust works well to avoid probate, and as the “grantor,” or creator of the trust, you may instruct trustees how and when to distribute trust assets. You may also revoke the trust at any time. However, to effectively avoid probate, you must transfer title to virtually all your assets. It includes those you own now and in the future. Any assets owned by you and not the trust will be subject to probate. This may include life insurance, annuities and retirement plans, if you have not designated a beneficiary or secondary beneficiary for each account.

What happens when the trust is not funded? The assets are subject to probate, and they will not be subject to any of the controls in the trust, if you become incapacitated. One way to avoid this is to take inventory of your assets and ensure they are properly titled on a regular basis.

Another reason to fund a trust: maximizing protection from the Federal Deposit Insurance Corporation (FDIC) insurance coverage. Most of us enjoy this protection in our bank accounts on deposits up to $250,000. However, a properly structured revocable trust account can increase protection up to $250,000 per beneficiary, up to five beneficiaries, regardless of the dollar amount or percentage.

If your revocable trust names five beneficiaries, a bank account in the name of the trust is eligible for FDIC insurance coverage up to $250,000 per beneficiary, or $1.25 million (or $2.5 million for jointlyowned accounts). For informal revocable trust accounts, the bank’s records (although not the account name) must include all beneficiaries who are to be covered. FDIC insurance is on a per-institution basis, so coverage can be multiplied by opening similarly structured accounts at several different banks.

One last note: FDIC rules regarding revocable trust accounts are complex, especially if a revocable trust has multiple beneficiaries. Speak with your estate planning attorney to maximize insurance coverage.

Reference: mondaq.com (Sep. 10, 2021) “Is Your Revocable Trust Fully Funded?”

How Does Probate Work?

Having a good understanding of how wills are used, how probate works and what other documents are needed to protect yourself and loved ones is key to creating an effective estate plan, explains the article “Understanding probate helps when drafting will” from The News Enterprise.

A last will and testament expresses wishes for property distribution after death. It’s different from a living will, which formalizes choices for end-of-life decisions. The last will and testament also includes provisions for care of minor children, disabled dependents and sometimes, for animal companions.

The will does not become effective until after death. However, before death, it is a useful tool in helping family members understand your goals and wishes, if you are ever incapacitated by illness or injury.

The will has roles for specific people. The “testator” is the person creating the will. “Beneficiaries” are heirs receiving assets after the testator has died. The “executor” is the person who oversees the estate, ensuring that directions in the will are followed.

If there is no will, the court will appoint someone to manage the estate, usually referred to as the “administrator.” There is no guarantee the court will appoint a family member or relative, even if there are willing and qualified candidates in the family. Having a will precludes a court appointing a stranger to make serious decisions about a treasured possession and the future of your loved ones.

A will is usually not filed with the court until after the testator dies and the executor takes the will to the court in the county where the testator lived to open a probate case. If the person owned real estate in other counties or states, probate must take place in all other such locations. The will is recorded by the county clerk’s office and becomes part of the public record for anyone to see.

Assets with named beneficiaries, like life insurance proceeds, retirement funds and property owned jointly are distributed to beneficiaries outside of probate. However, any property owned solely by the decedent is part of the probate action and is vulnerable to creditors and anyone who wishes to make a claim against the estate.

The best way to protect your family and your assets is to have a complete estate plan that includes a will and a thorough review of how assets are titled so they can, if possible, go directly to beneficiaries and not be subject to probate.

Reference: The News Enterprise (Aug. 17, 2021) “Understanding probate helps when drafting will”

Do You Need a Revocable Trust or Irrevocable Trust?

There are important differences between revocable and irrevocable trusts. One of the biggest differences is the amount of control you have over assets, as explained in the article “What to Consider When Deciding Between a Revocable and Irrevocable Trust” from Kiplinger. A revocable trust is often referred to as the Swiss Army knife of estate planning because it has so many different uses. The irrevocable trust is also a multi-use tool, only different.

Trusts are legal entities that own assets like real estate, investment accounts, cars, life insurance and high value personal belongings, like jewelry or art. Ownership of the asset is transferred to the trust, typically by changing the title of ownership. The trust documents also contain directions regarding what should happen to the asset when you die.

There are three key parties to any trust: the grantor, the person creating and depositing assets into the trust; the beneficiary, who will receive the trust assets and income; and the trustee, who is in charge of the trust, files tax returns as needed and distributes assets according to the terms of the trust. One person can hold different roles. The grantor could set up a trust and also be a trustee and even the beneficiary while living. The executor of a will can also be a trustee or a successor trustee.

If the trust is revocable, the grantor has the option of amending or revoking the trust at any time. A different trustee or beneficiary can be named, and the terms of the trust may be changed. Assets can also be taken back from a revocable trust. Pre-tax retirement funds, like a 401(k) cannot be placed inside a trust, since the transfer would require the trust to become the owner of these accounts. The IRS would consider that to be a taxable withdrawal.

There isn’t much difference between owning the assets yourself and a revocable trust. Assets still count as part of your estate and are not sheltered from estate taxes or creditors. However, you have complete control of the assets and the trust. So why have one? The transition of ownership if something happens to you is easier. If you become incapacitated, a successor trustee can take over management of trust assets. This may be easier than relying on a Power of Attorney form and some believe it offers more legal authority, allowing family members to manage assets and pay bills.

In addition, assets in a trust don’t go through probate, so the transfer of property after you die to heirs is easier. If you own homes in multiple states, heirs will receive their inheritance faster than if the homes must go through probate in multiple states. Any property in your revocable trust is not in your will, so ownership and transfer status remain private.

An irrevocable trust is harder to change, as befits its name. To change an irrevocable trust while you are living takes a little more effort but is not impossible. Consent of all parties involved, including the beneficiary and trustee, must be obtained. The benefits from the irrevocable trust make the effort worthwhile. By giving up control, assets in the irrevocable trust may not be part of your taxable estate. While today’s federal estate exemption is historically high right now, it’s expected to go much lower in the future.

Reference: Kiplinger (July 14, 2021) “What to Consider When Deciding Between a Revocable and Irrevocable Trust”

Should You Add Someone to Your Bank Account?

Adding another person to your bank account provides both of you with complete access to the account. A person can be a power of attorney and a joint account holder, but the two are very different roles, explains the article “What are my rights when someone adds me to a bank account?” from Lehigh Valley Live.

A joint account is a bank or investment account shared by two individuals, although more than two people may be on an account. They have equal access to funds, as well as equal responsibilities for any fees or expenses associated with the account. If there are transactions, depending upon the rules of the institution, all owners may be required to sign documents. The key is how the account is titled. That’s the controlling factor in determining how the assets in the account are divided, if one of the owners dies. There are several different types of joint ownership.

One is “Joint Tenants with Rights of Survivorship,” or JTWROS. If one of the account owners should die, the assets in the account go directly to the surviving account holder. These assets do not go through probate.

Then there’s “Tenants in Common,” or TIC. With TIC, each individual account owner has the right to designate a beneficiary for their portion of the assets upon their death. The assets might not be split 50/50. How the account is titled lets the account owners divide ownership however they want.

Another one: “Joint Tenants by the Entirety.” This describes a married couple who own real estate or a financial account as a legal entity with equal ownership. Neither person may transfer their half of the property during their lifetime or through a will or a trust. When one spouse dies, the entire account goes to the surviving spouse and it transfers without passing through probate.

In the example given at the start of the article, the establishment of a joint account gives both the father and son equal access to the account. If the father is unable to handle the account at any time in the future, for whatever reason, the son will be able to step in.

Power of Attorney or POA is a completely different thing. A POA is a legal document giving a person the authority to act on behalf of another person for a specific transaction or general legal and financial matters. Just as there are numerous types of joint ownership, there are numerous types of POA.

A general POA gives a person the power to act on behalf of the principal for all legal, property and financial matters, as long as the principal’s mental capacity is sound. The Durable POA gives authority to a person to act on behalf of the principal, even after the principal becomes mentally incapacitated. Special or limited power of attorney gives authority to act only for specific matters or transactions. A Springing Durable POA provides authority to act only under certain events or levels of incapacitation, which is defined in detail in the document.

You can be both a joint owner of an account and a power of attorney. These are two different ways to help a parent with financial and legal activities. An estate planning attorney can help create the POA that best fits the situation.

Reference: Lehigh Valley Live (June 10, 2021) “What are my rights when someone adds me to a bank account?”

How to Protect Digital Property

When people built wealth, assets were usually tangible: real estate, investments, cash, or jewelry. However, the last year has seen a huge jump in digital assets, which includes cryptocurrency and NFTs (Non-Fungible Tokens). Combine this growing asset class with the coming biggest wealth transfer in history, says the article “What happens to your NFTs and crypto assets after you die?” from Tech Crunch, and the problems of inheriting assets will take more than a complete search of the family attic.

One survey found only one in four consumers have someone in their life who knows the details of their digital assets, from the location of the online accounts to passwords. However, digital assets that require two factor authentication or biometrics to gain access may make even this information useless.

There are many reports about people who purchased digital assets like Bitcoin and then lost their passwords or threw away their computers. More than $250 million in client assets vanished when a cryptocurrency exchange founder died and private keys to these accounts could not be found.

Digital assets need to be a part of anyone’s estate plan. A last will and testament is used to dictate how assets are to be distributed. If there is no will, the state’s estate law will distribute assets. A complete list of accounts and assets should not be part of a will, since it becomes a public document when it goes through probate. However, a complete list of assets and accounts needs to be prepared and shared with a trusted person.

Even traditional assets, like bank accounts and investment accounts, are lost when no one knows of their existence. If a family or executor doesn’t know about accounts, and if there are no paper statements mailed to the decedent’s home, it’s not likely that the assets will be found.

Things get more complicated with digital assets. By their nature, digital assets are decentralized.  This is part of their attraction for many people. Knowing that the accounts or digital property exists is only part one. Knowing how to access them after death is difficult. Account names, private keys to digital assets and passwords need to be gathered and protected. Directives or directions for what you want to happen to the accounts after you die need to be created, but not every platform has policies to do this.

Password sharing is explicitly prohibited by most website and app owners. Privacy laws also prohibit using someone else’s password, which is technically “account holder impersonation.” Digital accounts that require two factor authentication or use biometrics, like facial recognition, make it impossible for an executor to gain access to the data.

Some platforms have created a means of identifying a person who may be in charge of your digital assets, including Facebook and more recently, LinkedIn. Some exchanges, like Ethereum, have procedures for death-management. Some will require a copy of the will as part of their process to release funds to an estate, so you will need to name the asset (although not the account number).

A digital wallet can be used to store access information for digital assets, if the family is reasonably comfortable using one. A complete list of assets should include tangible and digital assets. It needs to be updated annually or whenever you add new assets.

Reference: Tech Crunch (April 5, 2021) “What happens to your NFTs and crypto assets after you die?”