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What Does a Last Will and Testament Do?

Your will is the foundation of an estate plan, used to instruct your executor on distributing property, naming a guardian for minor children, creating a legacy and ensuring that your beneficiaries receive what you want. The will can also serve to disinherit a family member, as explained in the recent article “Last will can both include and exclude heirs” from The Record-Courier.

The process of cutting someone out of a will is known as “disinheriting.” Hurt feelings and tension among family members are inevitable when someone is disinherited. However, if the goal is to avoid litigation between family members, an experienced estate planning attorney will be needed. It takes careful planning to avoid creating a will contest. Disinheriting adult children increases the likelihood of them contesting the validity of the will.

Laws concerning inheritance rights vary. In Nevada, for instance, unless there is a prenuptial agreement, you cannot completely disinherit a spouse. Even if your will attempts to disinherit a spouse, in some cases the law will actually override the instructions in the will or trust and award a portion of the estate, known as the elective share, to a surviving spouse. If this is a concern, check with your estate planning attorney.

Adult children can be disinherited. However, minor children are often protected against disinheritance.

Parents can be disinherited if they outlive the decedent, since they are not always legally entitled to a share of their children’s estate.

Extended relatives can also be disinherited. Some estate planning attorneys will conduct a search for missing heirs or beneficiaries while preparing an estate plan to be sure there are no unknown legal heirs who might make themselves known to a decedent’s surviving spouse or other heirs.

Estranged biological children can be disinherited. However, the last will and testament must be properly prepared.

The reasons for disinheritance very from estrangement to the decedent believing their family member is financially secure and doesn’t need the inheritance. It is not necessary for the last will and testament to explain the reason for the disinheritance. However, it is advised to use a disinheritance clause to ensure the heir or beneficiary is removed and will not inherit under the will.

To protect the integrity of the will, it is also advised to include a no-contest clause in the will. This is a provision expressing a directive to eliminate the share allocated to any beneficiary who takes action to contest the testator’s intents as expressed in the will.

The last will and testament is the person’s last communication with loved ones. There is no further opportunity for clarification once they have passed. This is why it’s so important to have a will and for the will to explicitly state the names of the beneficiaries and the names of any disinherited persons.

When you meet with your estate planning attorney to create or update your last will and testament, be prepared to tell them if there are any family members who you want to disinherit, so they can create a last will and testament and an estate plan designed to withstand challenges.

Reference: The Record-Courier (Dec. 17, 2022) “Last will can both include and exclude heirs”

What Is a QTIP Trust?

A Qualified Terminable Interest Property Trust, or QTIP, is a trust allowing the person who makes the trust (the grantor) to provide for a surviving spouse while maintaining control of how the trust’s assets are distributed once the surviving spouse passes, as explained in the article “QTIP Trusts” from Investopedia.

QTIPs are irrevocable trusts, commonly used by people who have children from prior marriages. The QTIP allows the grantor to take care of their spouse and ensure assets in the trust are eventually passed to beneficiaries of their own choosing. Beneficiaries could be the grantor’s offspring from a prior marriage, grandchildren, other family members or friends.

In addition to providing the surviving spouse with income, the QTIP also limits applicable estate and gift taxes. The property within the QTIP trust provides income to the surviving spouse and qualifies as a marital deduction, meaning the value of the trust is not taxable after the death of the first spouse. Rather, the property in the QTIP trust will be included in the estate of the surviving spouse and subject to estate taxes depending on the value of their own assets and the estate tax exemption in effect at the time of death.

The QTIP can also assert control over how assets are handled when the surviving spouse dies, as the spouse never assumes the power of appointment over the principal. This is especially important when there is more than one marriage and children from more than one family. This prevents those assets from being transferred to the living spouse’s new spouse if they should re-marry.

A minimum of one trustee must be appointed to manage the trust, although there may be multiple trustees named. The trustee is responsible for controlling the trust and has full authority over assets under management. The surviving spouse, a financial institution, an estate planning attorney or other family member or friend may serve as a trustee.

The surviving spouse named in a QTIP trust usually receives income from the trust based on the trust’s income, similar to stock dividends. Payments may only be made from the principal if the grantor allows it when the trust was created, so it must be created to suit the couple’s needs.

Payments are made to the spouse as long as they live. Upon their death, the payments end, and they are not transferable to another person. The assets in the trust then become the property of the listed beneficiaries.

The marital trust is similar to the QTIP, but the is a difference in how the assets are controlled. A QTIP allows the grantor to dictate how assets within the trust are distributed and requires at least annual distributions. A marital trust allows the surviving spouse to dictate how assets are distributed, regular distributions are not required, and new beneficiaries can be added. The marital trust is more flexible and, accordingly, more common in first marriages and not in blended families.

Your estate planning attorney will explain further how else these two trusts are different and which one is best for your situation. There are other ways to create trusts to control how assets are distributed, how taxes are minimized and to set conditions on benefits. Each person’s situation is different, and there are trusts and strategies to meet almost every need imaginable.

Reference: Investopedia (Aug. 14, 2022) “QTIP Trusts”

Does Marriage have an Impact on a Will?

It is very difficult to challenge a marriage once it has occurred, since the capacity needed to marry is relatively low. Even a person who is under conservatorship because they are severely incapacitated may marry, unless there is a court order stating otherwise, says the article “Estate Planning: On Being Married, estate planning and administration” from Lake Country News. This unfortunate fact allows scammers to woo and wed their victims.

What about individuals who think they are married when they are not? A “putative” spouse is someone who genuinely believed they were married, although the marriage is invalid, void, or voidable because of a legal defect. An example of a legal defect is bigamy, if the person is already married when they marry another person.

Once a couple is married, they owe each other a duty to treat each other fairly. In certain states, they are prohibited from taking unfair advantage of each other. Depending on the state of residence, property is also owned in different ways. In a community property state, such as California, marital earnings and anything acquired while married is presumed to be community property.

In a community property state, debts incurred before or during the marriage are also shared. In a number of states, marriage is sufficient reason for a creditor to come after the assets of a spouse, if they married someone with pre-marital debts.

There are exceptions. If a married person puts their earnings during marriage into a separate bank account their spouse is not able to access, then those deposited earnings are not available for debtor spouse’s debts incurred before the marriage took place.

If a married person dies without a will, also known as “intestate,” the surviving spouse is the next of kin.  In most cases, they will inherit the assets of the decedent. If the decedent had children from a prior marriage, they may end up with nothing.

These are all reasons why couples should have frank discussions about finances, including assets and debts, before marrying. Coming into the marriage with debt may not be a problem for some people, but they should be advised beforehand.

A pre-nuptial agreement can state the terms of the couple’s financial health as individuals and declare their intentions. An experienced estate planning attorney can create a pre-nuptial to align with the couple’s estate plan, so the estate plan and the pre-nuptial work together.

Marriage brings rights and responsibilities which impact life and death for a couple. Starting a marriage based on full disclosure and proper planning clears the way for a focus on togetherness, and not solely the business side of marriage.

Reference: Lake Country News (Feb. 12, 2022) “Estate Planning: On Being Married, estate planning and administration”

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 a Trust Be Reviewed?

Life changes, and laws change too. The great trust created two decades ago may not be a good idea today and may no longer be suitable for you or your beneficiaries. As a general rule, you should review your estate plan and trust every other year, according to the article “Revisit trust on a regular basis” from the Santa Cruz Sentinel.

Start with the Table of Contents, if there is one. There should be language concerning “Successor Trustees.” Are the trustees you named still alive? Are they still part of your life, and do you still trust them? How are their money skills? If they don’t get along with the rest of the family, or if they have been embroiled in a series of petty disputes, they may not be appropriate to manage your trust. Don’t be afraid to make changes. Your estate planning attorney will know how to do this smoothly and properly.

Next, find the paragraph that discusses “Disposition on Death” or “Disposition on Death of Surviving Spouse.” Does it still make sense for your loved ones? Have any children or family members who are listed as receiving benefits died? Are any heirs disabled and receiving government benefits? Have any of your children developed addictions, problems handling money, married people you don’t trust, or are preparing to divorce their spouses? Changes can be made to protect your children from themselves and from others in their lives.

Look for a “Schedule of Trust Assets.” When was the last time this was updated? If you’ve moved and the trust still lists your last residence, you need to change it. Is your new home in the trust? Are retirement accounts correctly listed? Do you have new assets you’ve never placed in the trust? This is a common, and costly, oversight.

If married, how does the trust address what occurs between the death of the first spouse and the surviving spouse? Do you have an A/B trust to divide everything between a Survivor’s Trust and a Bypass Trust or Exemption Trust? Maybe you don’t need or want an A/B trust anymore. Talk with your estate planning attorney to be sure this is structured properly for your life right now.

How is your health? If you or a spouse are in a nursing home or if one of you is ill and likely to needs nursing home care, it may be time to start planning for a Medicaid Asset Protection Trust.

While you’re reviewing your trusts, trustees and beneficiaries, don’t forget to review the people named as beneficiaries for your retirement accounts and life insurance policies. These should be reviewed regularly as well.

Reviewing your trust and estate plan on a regular basis is just as necessary as an annual physical. Leaving your accumulated assets unprotected is easily fixed, while you are alive and well.

Reference: Santa Cruz Sentinel (Nov. 20, 2021) “Revisit trust on a regular basis”

How Much can You Inherit and Not Pay Taxes?

Even with the new proposed rules from Biden’s lowered exception, estates under $6 million won’t have to worry about federal estate taxes for a few years—although state estate tax exemptions may be lower. However, what about inheritances and what about inherited IRAs? This is explored in a recent article titled “Minimizing Taxes When You Inherit Money” from Kiplinger.

If you inherit an IRA from a parent, taxes on required withdrawals could leave you with a far smaller legacy than you anticipated. For many couples, IRAs are the largest assets passed to the next generation. In some cases they may be worth more than the family home. Americans held more than $13 trillion in IRAs in the second quarter of 2021. Many of you reading this are likely to inherit an IRA.

Before the SECURE Act changed how IRAs are distributed, people who inherited IRAs and other tax-deferred accounts transferred their assets into a beneficiary IRA account and took withdrawals over their life expectancy. This allowed money to continue to grow tax free for decades. Withdrawals were taxed as ordinary income.

The SECURE Act made it mandatory for anyone who inherited an IRA (with some exceptions) to decide between two options: take the money in a lump sum and lose a huge part of it to taxes or transfer the money to an inherited or beneficiary IRA and deplete it within ten years of the date of death of the original owner.

The exceptions are a surviving spouse, who may roll the money into their own IRA and allow it to grow, tax deferred, until they reach age 72, when they need to start taking Required Minimum Distributions (RMDs). If the IRA was a Roth, there are no RMDs, and any withdrawals are tax free. The surviving spouse can also transfer money into an inherited IRA and take distributions on their life expectancy.

If you’re not eligible for the exceptions, any IRA you inherit will come with a big tax bill. If the inherited IRA is a Roth, you still have to empty it out in ten years. However, there are no taxes due as long as the Roth was funded at least five years before the original owner died.

Rushing to cash out an inherited IRA will slash the value of the IRA significantly because of the taxes due on the IRA. You might find yourself bumped up into a higher tax bracket. It’s generally better to transfer the money to an inherited IRA to spread distributions out over a ten-year period.

The rules don’t require you to empty the account in any particular order. Therefore, you could conceivably wait ten years and then empty the account. However, you will then have a huge tax bill.

Other assets are less constrained, at least as far as taxes go. Real estate and investment accounts benefit from the step-up in cost basis. Let’s say your mother paid $50 for a share of stock and it was worth $250 on the day she died. Your “basis” would be $250. If you sell the stock immediately, you won’t owe any taxes. If you hold onto to it, you’ll only owe taxes (or claim a loss) on the difference between $250 and the sale price. Proposals to curb the step-up have been bandied about for years. However, to date they have not succeeded.

The step-up in basis also applies to the family home and other inherited property. If you keep inherited investments or property, you’ll owe taxes on the difference between the value of the assets on the day of the original owner’s death and the day you sell.

Estate planning and tax planning should go hand-in-hand. If you are expecting a significant inheritance, a conversation with aging parents may be helpful to protect the family’s assets and preclude any expensive surprises.

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

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?”

Can You Increase Your Social Security Benefits?

The desire to get the largest possible benefits from Social Security is a relatively new phenomenon. For decades, people received their monthly benefit check and that was it. However, in the late 1990s, a new law let seniors over age 66 work without any reduction in benefits, says the article “Social Security & You: Seniors obsess over ‘maximizing’ their Social Security” from Tuscon.com. The law led to loopholes that became known as “file and suspend” and “file and restrict.” In a nutshell, they allowed retirees to collect dependent spousal benefits on a spouse’s Social Security record, while delaying their own benefits until age 70.

Congress eventually realized that these loopholes violated the basic concept of the program. Benefits to spouses were always known as “dependent” benefits. To claim benefits as a spouse, you had to prove that you were financially dependent upon the other spouse to collect benefits on their record. However, the loophole let people who were the primary wage earner in the family claim benefits as a “dependent” of the other spouse. Five years ago, Congress closed that loophole.

More specifically, Congress closed the ability to file-and-suspend. It also put file-and-restrict on notice. If you turned 66 before January 2020, you could still wiggle through that loophole, and there are some people who are still eligible. That’s where the term “maximizing your benefits” originated.

Can you get a bigger Social Security check, if you don’t fit into the exception noted above? The only real strategy to maximizing your benefits is simply to wait. The equation is pretty simple. If you wait until your Full Retirement Age (FRA), you will receive 100% of your benefit rate. If you can wait until age 70, you’ll receive 132% of your benefit.

In some households, the higher income earner waits until age 70 to file for retirement, so that the surviving spouse will one day receive higher surviving spouse benefits.

But that’s not the best advice for everyone. If you or your spouse suffer from a chronic illness, it may not make sense to wait.

If you or your spouse have lost your jobs, as so many have because of the pandemic, then Social Security may be the safety net that you need, until you are able to return to some kind of paid employment.

There may be other reasons why you might need to take your benefits earlier, even earlier than your FRA. Some households start taking their Social Security benefits at age 62, as a way to augment other income.

If you don’t already have a “My Social Security” account set up on the Social Security Administration’s portal, now is the time to do so. The Social Security Administration stopped sending annual statements years ago, but you can go into your account and download the statements yourself and start planning for your future.

Reference: Tuscon.com (Feb. 10, 2021) “Social Security & You: Seniors obsess over ‘maximizing’ their Social Security”

Some States Have No Estate or Inheritance Taxes

The District of Columbia already moved to reduce its exemption from $5.67 million in 2020 to $4 million for individuals who die on or after Jan. 1, 2021. A resident with a taxable estate of $10 million living in the District of Columbia will owe nearly $1 million in state estate tax, says the article “State Death Tax Hikes Loom: Where Not To Die In 2021” from Forbes. It won’t be the last change in state death taxes.

Seventeen states and D.C. levy their own inheritance or estate taxes in addition to the federal estate tax, which as of this writing is so high that it effects very few Americans. In 2021, the federal estate tax exemption is $11.7 million per person. In 2026, it will drop back to $5 million per person, with adjustments for inflation. However, that is only if nothing changes.

President Joseph Biden has already called for the federal estate tax to return to the 2009 level of $3.5 million per person. The increased tax revenue purportedly would be used to pay for the costs of fighting the “pandemic” and the “infrastructure improvements” he plans, but many believe such a move would potentially destroy family businesses, farms and ranches that drive and feed the economy in the first place. If that were not troubling enough, President Biden has threatened to eliminate the step up in basis on appreciated assets at death.

This change at the federal level is likely to push changes at the state level. States that don’t have a death tax may look at adding one as a means of increasing revenue, meaning that tax planning as a part of estate planning will become important in the near future.

States with high estate tax exemptions could reduce their state exemptions to the federal exemption, adding to the state’s income and making things simpler. Right now, there is a disconnect between the federal and the state tax exemptions, which leads to considerable confusion.

Five states have made changes in 2021, in a variety of forms. Vermont has increased the estate tax exemption from $4.25 million in 2020 to $5 million in 2021, after sitting at $2.75 million from 2011 to 2019.

Connecticut’s estate tax exemption had been $2 million for more than ten years, but in 2021 it will be $7.1 million. Connecticut has many millionaires that the state does not wish to scare away, so the Nutmeg state is keeping a $15 million cap, which would be the tax due on an estate of about $129 million.

Three states increased their exemptions because of inflation. Maine has slightly increased its exemption because of inflation to $5.9 million, up from $5.8 million in 2020. Rhode Island is at $1,595.156 in 2021, up from $1,579,922 in 2020. In New York, the exemption amount increased to $5.93 million in 2021, from $5.85 million in 2020.

The overall trend in the recent past had been towards reducing or eliminating state estate taxes. In 2018, New Jersey dropped the estate tax, but kept an inheritance tax. In 2019, Maryland added a portability provision to its estate tax, so a surviving spouse may carry over the unused predeceased spouse’s exemption amount. Most states do not have a portability provision.

Another way to grab revenue is targeting the richest estate with rate hikes, which is what Hawaii did. As of January 1, 2020, Hawaii boosted its state estate tax on estates valued at more than $10 million to 20%.

If you live in or plan to move to a state where there are state death taxes, talk with your estate planner to create a flexible estate plan that will address the current and future changes in the federal or state exemptions. Some strategies could include the use of disclaimer trusts or other estate planning techniques. While you’re at it, keep an eye on the state’s legislature for what they’re planning.

Reference: Forbes (Jan. 15, 2021) “State Death Tax Hikes Loom: Where Not To Die In 2021”

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