Estate planning is increasingly popular with millennials. It is far from the stereotype of being only of interest to older, affluent couples nearing retirement or dealing with health concerns. These younger generations have unique attributes, including pragmatic financial views and humanitarian concerns, according to a recent article, “Six Estate Planning Tips for Younger Generations,” from Kiplinger. Here are tips to make this process easier for any generation.
Start with a basic will, which guides how assets and possessions are distributed after one’s passing. Prepared by an experienced estate planning attorney, the will should minimize potential disputes, include a clear delineation of assets and beneficiaries and name an executor to manage the estate and guardianship for any surviving dependents.
Appoint a power of attorney and draft medical directives. Power of Attorney and Medical Directives are basic documents that state your preferences during incapacity. A POA grants a named individual the legal authority to act on your behalf for legal and financial matters, if you cannot do so. Medical directives establish your wishes regarding medical treatment and end-of-life care. While taking care of these matters, you may also want to consider becoming an organ donor.
Determine who you want to be your children’s guardian. Naming a guardian of your minor children isn’t pleasant. However, it ensures that you and your partner make this decision, not the court.
Consider a living trust. Living trusts offer a strategic means of managing assets and helping to ensure that your surviving loved ones maintain control of your assets after you have passed. The trust, established with the help of an estate planning attorney, grants ownership of certain assets or properties into the trust, which becomes their owner. A trustee is named to manage and distribute these assets in accordance with your wishes. In some instances, it makes sense to hire a professional trustee, especially if the trust will need to be managed for decades.
By taking assets out of your estate and placing them into a trust, these assets won’t go through the probate process. Probate involves your executor filing your will with a court after you die. The court reviews the will to validate it and grants the named executor the power to execute your final instructions. Probate can be lengthy, expensive and emotionally charged for the family. Your will is entered into the public record, so anyone who wants to can see your will and know your final wishes.
Don’t forget your digital assets. Younger generations are more aware of the value and footprint of their digital assets. They often name a specific digital executor in their estate plans to ensure that their many accounts and digital assets are managed after their passing.
Seek professional advice and update documents. Despite a plethora of online sites and apps, estate planning documents require the skillful handling of an experienced estate planning attorney. Estate laws are state-specific, so wills and trust documents must be created with local laws in mind. Your estate plan documents, from wills to insurance policies, should be reviewed every three to five years. Every time there’s a significant change in your life, like getting married, buying a home, having a child, or getting divorced, this should also be done.
As estate planning becomes increasingly popular with Millennials, it is wise to consult with an experienced attorney familiar with the lifestyle and concerns of younger generations. If you would like to read more about estate planning for younger generations, please visit our previous posts.
Since 2017, there have been several major tax changes, including the Tax Cuts and Jobs Act, the pandemic-era Cares Act and the climate and healthcare package known as the Inflation Reduction Act. Those are just three—there’s been more. Unless you’re a tax expert, chances are you won’t know about the possibilities. However, these four could be very helpful for seniors, especially those living on fixed incomes.
The IRS does offer a community-based program, Tax Counseling for the Elderly. This community-based program includes free tax return preparation for seniors aged 60 and over in low to moderate-income brackets. However, not everyone knows about this program or feels comfortable with an IRS-run tax program.
Here are four overlooked tax deductions for seniors:
Extra standard deduction. Millions of Americans take the standard deduction—a flat dollar amount determined by the IRS, which reduces taxable income—instead of itemizing deductions like mortgage interest and charitable deductions on the 1040 tax form.
In the 2023 tax year, seniors who are 65 or over or blind and meet certain qualifications are eligible for an extra standard deduction in addition to the regular deduction.
The extra standard deduction for seniors for 2023 is $1,850 for single filers or those who file as head of household and $3,000 for married couples, if each spouse is 65 or over filing jointly. This boosts the total standard deduction for single filers and married filing jointly to $15,700 and $30,700, respectively.
IRA contributions by a spouse. Did you know you can contribute earned income to a nonworking or low-earning spouse’s IRA if you file a joint tax return as a married couple? These are known as spousal IRAs and are treated just like traditional IRAs, reducing pretax income. They are not joint accounts—the individual spouse owns each IRA, and you can’t do this with a Roth IRA. There are specific guidelines, such as the working spouse must earn at least as much money as they contributed to both of the couple’s IRAs.
Qualified charitable distributions. Seniors who make charitable donations by taking money from their bank account or traditional IRA and then writing a check from their bank account is a common tax mistake. It is better to use a qualified charitable deduction, or QCD, which lets seniors age 70 ½ and older transfer up to $100,000 directly from a traditional IRA to a charity tax-free. Married couples filing jointly can donate $200,000 annually, and neither can contribute more than $100,000.
The contributions must be made to a qualified 501(c)(3) charity. The donation can’t be from Donor-Advised Funds. This is a great option when you need to take the annual withdrawal, known as a Required Minimum Distribution or RMD, and don’t need the money.
Medicare premium deduction. A self-employed retiree can deduct Medicare premiums even if they don’t itemize. This includes Medicare Part B and D, plus the cost of supplemental Medigap policies or a Medicare Advantage plan. The IRS considers self-employed people who own a business as a sole proprietor (Schedule C), partner (Schedule E), limited liability company member, or S corporation shareholder with at least 2% of the company stock.
Remember, you must have business income to qualify, since you can deduct premiums by only as much as you earn from your business. You also can’t claim the deduction if your health insurance is covered by a retiree medical plan hosted by a former employer or your spouse’s employer’s medical plan.
Seniors should consult with an estate planning attorney make sure they are not missing out on possible tax deductions. If you would like to learn more about tax planning, please visit our previous posts.
If you’ve ever read an article about what someone dies with a financial windfall, it’s probably been about a truly life-changing amount of money. A recent article from CNBC, “Receiving an inheritance? Here’s how experts say to handle any windfall,” says the average American inheritance across all age groups and incomes between 2001 and 2019 was just over $12,000. These numbers are from the University of Pennsylvania’s analysis of data from the Federal Reserve’s Survey of Consumer Finances. Whether it is a large sum or more modest, there are wise strategies to manage an inheritance.
The number is skewed down by the vast majority of Americans who don’t receive any inheritance. Looking just at those who did receive an inheritance, the average amount was about $184,000—a healthy amount, but not enough to retire.
You’ll likely fold that money into your current financial plan if you receive an inheritance. Inheritances usually come in three different forms: cash, real estate and investments.
A cash investment is the easiest to handle if you’re not receiving an enormous amount. In 2023, you won’t owe any federal taxes on inherited cash up to $12.92 million. However, depending on where you live, there may be state estate or state inheritance taxes.
Unless you grew up in a palace, it’s not likely you’ll need to deal with the insurance tax limit on a real estate inheritance. With the rule known as “step-up in basis,” you likely won’t owe any tax on property you inherit—not initially, anyway.
The value of an inherited home resets when the owners die. If your parents paid $100,000 for a house and gave it to you when its fair market value is $500,000, and you sold it the next day, you’d owe tax on the $400,000 gain. However, if they die and leave the house to you, the value of the house, known as your basis, is the fair market value of the house—$500,000. If you sold it for this amount, as far as the IRS is concerned, you would not realize a gain. However, there are time limits. There’s a step-up in basis at the time of death, but the estate settlement process can drag on for six or twelve months.
A house can’t be divided up as neatly as cash. If you have siblings, one may want to sell the home for cash. Another might want to rent it out. Another might want to move in.
Get the property appraised as soon as possible and get at least two appraisals. This will make life easier for everyone. If one sibling wants to buy the other’s share of the home, you’ll all know exactly what the shares will be. It also gives you the number when determining when or if to sell it.
Remember, real estate requires maintenance, so until the house is sold, there is an obligation to pay the mortgage, property taxes and upkeep.
Like real estate, any investments inherited in taxable accounts come with a step-up in basis. If your parents paid $10 for Apple stock, you’re inheriting it at its current market value. You can sell it at its basis, and it’s cash. If you decide not to sell it and hang onto the investments, the rules apply as if you bought the stocks at market value, and you’ll owe tax on any gains realized.
The rules are tricky when it comes to inheriting retirement accounts. Plans funded with pre-tax dollars, like 401(k)s and traditional IRAs, are taxable when money comes out for the owners. For heirs, the IRS now gives a ten-year window to empty some of these accounts. If you’re in your peak earning years when you inherit, this can significantly affect your income tax liability.
It is wise of heirs and their benefactors to sit down with an estate planning attorney to map out the best strategies to manage an inheritance. Both benefactors and heirs would benefit in terms of taxes and a smooth transition of assets passing from one generation to the next. It’s something to consider. If you would like to learn more about managing an inheritance, please visit our previous posts.
Qualified charitable distributions use the federal tax code to benefit older taxpayers and must take Required Minimum Distributions (RMDs). Recent changes in federal law under the SECURE Act 2.0 present even more opportunities to use QCDs, according to a recent article, “Planning Ahead: Expanding on year-end tax strategies for Qualified Charitable Distributions,” from The Mercury. How does it work?
Required Minimum Distributions for seniors can become a problem since taxpayers above a given age must withdraw specific amounts based on their age from traditional retirement accounts and pay taxes on the withdrawals, regardless of whether they need the money. The reason is obvious: if people weren’t required to take funds out of their accounts, the government would never have the opportunity to generate tax revenue. The QCD lessens the blow of the additional year-end taxes by providing some relief through donations to qualified charities.
Used correctly, the QCD serves two purposes: saving on taxes and benefiting a favorite charity. Charities include any 501(c)(3) entities under the federal tax code. Before using a QCD, ensure the charity you choose is a qualified 501(c)(3). Otherwise, you’ll lose any tax benefits.
Your estate planning attorney can help you understand the process of making a QCD. You’ll need to coordinate with the custodian of the IRA. While some may provide step-by-step information, others require you to coordinate with your estate planning attorney and financial advisor. A reminder—the point of the QCD is that the distribution does not appear in your adjusted gross income and goes directly to the charity.
Usually, taking RMDs adds funds to your taxable income, which can, unfortunately, push you into a higher income tax bracket. It could also limit or eliminate some tax deductions, such as personal exemptions and itemized deductions. There may be increases in taxes on Social Security benefits as well. Whether you want or need to take the RMD, you must take it and include it as taxable income.
Qualified charitable distributions benefit older taxpayers by allowing individuals required to take RMDs to donate up to $100,000 to one or more qualified charities directly from a taxable IRA, without the funds being counted as income.
The RMD age has increased to 73, but the $100,000 will be indexed for inflation. Under SECURE Act 2.0, individuals will be allowed to make a one-time election of up to $50,000 inflation-indexed for QCDs to certain entities, including Charitable Remainder Annuity Trusts, Charitable Remainder Unitrusts and Charitable Gift Annuities.
QCDs cannot be made to donor-advised funds, private foundations and supporting organizations, even though these are often categorized as charities.
It must be noted that the rules concerning QCD are detailed and strict—you’ll want the help of an experienced estate planning attorney.
The QCD must be made by December 31 of the tax year in question. If you would like to learn more about charitable planning, please visit our previous posts.
Marital trusts help protect blended families from complicated family dynamics. Understanding marital trusts is crucial for couples looking to secure their financial future and provide for the surviving spouse tax-efficiently. This article is a guide to marital trusts, how they work and their advantages and disadvantages. With the potential to safeguard assets and ensure that they reach the intended beneficiaries, marital trusts can be an effective part of a comprehensive estate plan, particularly for those in a second marriage or a blended family.
What Is a Marital Trust?
A marital trust is a type of irrevocable trust and is crafted to benefit the surviving spouse. It allows for the managed distribution of assets, potentially safeguarding against financial imprudence or external influences.
Consider that while many couples are just fine with everything going to the surviving spouse directly and outright after one spouse dies, in some cases, there may be concerns related to the surviving spouse not being able to manage the money effectively. What would happen to the money if the surviving spouse is not good with money or is vulnerable to financial predators? Perhaps giving the entire estate outright to the spouse would run the risk that all of the money would be spent irresponsibly. A marital trust allows for both tax benefits and protections for the couple’s estate to prevent these issues from happening.
How Do Marital Trusts Work?
There are three parties involved in setting up, maintaining and ultimately passing along the trust, including a grantor, who is the person who establishes the trust; the trustee, who’s the person or organization that manages the trust and its assets; and the beneficiary. That person will eventually receive the assets in the trust once the grantor dies. The surviving spouse must be the sole beneficiary of a marital trust. Once the surviving spouse dies, the assets in the trust typically pass to surviving children. A marital trust also involves the principal, which are assets initially put into the trust.
How Do Marital Trusts Assist Blended Families?
For blended families, using a marital trust is becoming more popular as a means to help protect assets to a surviving spouse, and the inheritance of children from previous marriages. If one or both spouses in a second marriage have children from a prior marriage, both spouses typically want to ensure that their kids get an inheritance at some point in the future. While most married couples prioritize their spouse as the primary beneficiary, after the surviving spouse passes away, if the couple’s estate plan gives everything directly to the surviving spouse, that arrangement would run the risk that the children from a prior marriage of the deceased spouse would be cut off from receiving an inheritance.
While couples want to assume that a surviving spouse will protect the rights of children from their spouse’s previous marriage, without legal safeguards, the estate of the surviving spouse can be changed to cut out individuals named as beneficiaries after their spouse’s death. Having a marital trust for the surviving spouse ensures that this change can’t happen.
What Are Other Situations in Which a Couple Should Consider Using a Marital Trust?
Additional situations in which a couple might consider using a marital trust include wanting to prevent undue influence of an outside person or party over the surviving spouse. This usually is a concern for older couples when the surviving spouse is in declining health or may have early onset of dementia, and there’s a concern they may be vulnerable to being taken advantage of financially. Another motivation for a marital trust includes a spouse who has an addiction that prevents them from making sound financial choices.
Did Actor Tony Curtis Disinherit His Children Due to Undue Influence?
In 2010, when Actor Tony Curtis died, his five children were left out of their father’s inheritance in a last-minute decision shortly before his death, notes MoneyWise article, “Hollywood legend Tony Curtis cut his kids out of his will and $60 million fortune when he died. Here’s how to avoid leaving behind messy inheritance disputes.” While Curtis did have a will, he decided to leave the majority of his assets to his fifth wife, Jill, and intentionally disinherit his children. The change to his estate plan came only a few months before his death, which raised suspicions within the family. Some of the Curtis children opened estate disputes in the years following his death to challenge the disinheritance, causing additional pain and separation within their family. If Curtis were subject to the undue influence of his fifth wife, Jill, as some of the Curtis children claimed, then a trust could have protected them from being disinherited.
What Are the Benefits of Having a Marital Trust?
Marital trusts are significant in estate planning for high-net-worth individuals, serving as a tool to minimize the estate tax burden by taking advantage of estate tax exemptions. A married couple can significantly reduce or eliminate estate taxes by utilizing a marital trust.
The surviving spouse can receive income and financial stability from the trust.
Assets are kept in the family, and the inheritance intended for children from previous marriages is protected.
Estate Tax Exemptions with a Marital Trust
One of the most significant benefits of a marital trust is its impact on estate taxes. A marital trust effectively doubles the estate tax exemption for a married couple, ensuring that a more significant portion of their wealth can be transferred tax-free. In the context of the federal estate tax, this can result in substantial tax savings and financial security for the surviving spouse and any other designated beneficiaries.
The Unlimited Marital Deduction in Action
The unlimited marital deduction is a cornerstone of marital trust planning. It allows the first spouse to pass assets to the surviving spouse without incurring estate taxes at the time of the first spouse’s death. This deduction is a critical aspect of marital trusts, ensuring that the income to the surviving spouse provides the necessary financial support without an immediate tax burden.
Are There Disadvantages of Using a Marital Trust?
While a marital trust offers many benefits, it’s essential to consider any limitations or drawbacks, such as loss of flexibility once established.
Once established, an irrevocable trust cannot be easily altered or terminated.
Estate tax exemption is limited based on the federal estate tax threshold.
Marital trusts, like other types of trusts, require that assets be moved into the trust, a process that can be lengthy or overlooked.
Establishing a Marital Trust with an Experienced Estate Planning Attorney
Setting up a marital trust is a complicated form of estate planning that involves several steps, including choosing a trustee to manage the trust assets, determining the terms under which the trust assets will be managed and distributed and ensuring that the couple’s property is held in trust. When couples have complex family situations, including blended families or a spouse with vulnerabilities, a marital trust provides for the financial well-being of the surviving spouse. It also ensures that assets are preserved for future generations.
An experienced estate planning attorney can help a couple assess if a marital trust is the right instrument to help protect their blended family as a part of a comprehensive estate plan. If you would like to learn more about planning for blended families, please visit our previous posts.
A last will is the document most people think of when considering estate planning. Often called simply a “will,” this is the estate planning document used to give instructions about what should happen to your assets and possessions when you die and who you want to carry out your wishes in the document.
The will is only effective after you have died.
The person managing your estate after you pass is known as a “Personal Representative” or executor or executrix. Some states only use the phrase personal representative. However, the tasks are the same. Your executor (or your estate planning attorney) files your last will with the county probate court for review, ensuring that the will complies with your state’s laws and getting approval to serve as the executor. This is called “probating the will.”
There are ways to avoid having your entire estate go through probate. An experienced estate planning attorney may recommend trusts and other strategies.
The last will is also used to name a guardian for minor children, which is why every young family needs a last will, even if they don’t have a large estate. Doing so guides the court system and the family about your wishes for your children.
How is the last will different from a living will? It’s a completely different document, serving an entirely different purpose.
A living will is used while you are still alive and serves a very narrow set of circumstances. A living will is used to state what medical treatments you do or don’t want to be administered if you are terminally ill and death is imminent or if you are in what is called a “persistent vegetative state.” This means your body is alive, but your brain is no longer functioning.
In the living will, you can state whether or not you will receive CPR, artificial or natural hydration and nutrition, mechanical respiration and any other means used to keep your body alive. The Living Will is often used with another document, known as a Physician’s Order for Scope of Treatment, or POST, regarding options for medical treatments.
Understanding that a last will and testament and a living will are different is good starting point for your planning. An estate planning attorney can prepare a living will and other documents, including a Power of Attorney and a Health Care Power of Attorney, all of which are needed to protect you while you are living and a last will. If you would like to learn more about a will and living will, please visit our previous posts.
Elder law attorneys see firsthand the complexities and potential pitfalls of guardianship arrangements. The recent investigation into guardianship practices in Florida, as reported by the Washington Post, underscores the urgent need for vigilance and reform in this area. While guardianships are designed to protect the vulnerable, they can sometimes lead to significant abuses, including forced isolation and financial exploitation. This article aims to shed light on the complexities of the guardianship system, expose issues related to guardian-inflicted elder abuse. It will also provide practical tips to protect seniors from guardianship abuse by planning before becoming incapacitated.
What Is Guardianship?
Guardianship is a legal process where a court appoints an individual (the guardian) to make decisions for someone deemed unable to make decisions for themselves (the ward). This arrangement is often necessary for seniors who can no longer manage their affairs due to health issues like dementia or stroke. It’s estimated that more than one million Americans are in a guardianship, a number that will only grow as the U.S. population ages and elderly people no longer have family living nearby to provide the care and protections they need.
A Cautionary Guardianship Case
Douglas Hulse, a former pilot from Florida, was hospitalized due to a stroke. After his recovery period ended and his condition did not improve, Orlando Health South Seminole Hospital could not discharge him without having an assigned caretaker. Therefore, the hospital petitioned the court to assign him a guardian due to the inability to locate his family. His loss of control over his assets and personal decisions to a court-appointed guardian is a stark reminder of guardianship risks. His guardian, responsible for 19 other wards, made questionable decisions like selling his home without seeking to locate his family.
What Role Do Hospitals have in Guardianship Appointments?
Hospitals often play a significant role in initiating guardianship proceedings. Cases like Hulse’s in which the hospital petitions for a court-appointed guardian are becoming more common nationwide, especially when elderly patients have no known family or friends to care for them. While this process is meant to ensure the patient’s well-being, it can inadvertently lead to the appointment of guardians who may not act in the best interest of the ward or, worse, will exploit the senior ward through financial abuse or other ways.
Why Is the Adult Guardianship System Allowing Abuse and Exploitation of Wards?
The discrepancies in the guardianship appointment and training process further complicate this issue. There is often a lack of standardized procedures for appointing and monitoring guardians, leading to inconsistent practices and an increased risk of abuse. This situation calls for a more rigorous and standardized approach to guardianship appointments at the state level, ensuring that only qualified and ethical individuals are entrusted with such significant responsibilities.
How Do Guardianships Put Seniors at Risk of Abuse?
The Hulse case highlights several risks associated with guardianship:
Loss of Personal Freedom and Fundamental Rights: Once under guardianship, individuals may lose basic rights, such as voting, consenting to medical treatment, managing their finances, or deciding where to live.
Financial Exploitation: Guardians have significant control over the ward’s assets, allowing them to access financial accounts directly and conduct financial transactions without oversight. This access can lead to mismanagement or outright theft.
Lack of Oversight: Guardianships often lack sufficient legal or administrative oversight, allowing unscrupulous guardians to take advantage of their wards. Because a judge appoints guardians, they often do not face punishment or legal recourse for abusive behavior.
How to Protect Yourself From Court-Ordered Guardianship
Advance Planning: The best defense against guardianship abuse is advance planning. This includes setting up durable powers of attorney for health care and finances, which allow you to designate someone you trust to make decisions on your behalf if you become incapacitated.
Regular Monitoring: If guardianship is unavoidable, family members should stay involved and monitor the guardian’s actions. Regularly reviewing financial statements and staying in close contact with the ward can help detect any irregularities.
Choosing the Right Guardian: If a guardian is necessary, choose someone trustworthy and capable. This could be a family member or a professional with a good reputation and credentials.
Legal Oversight: Courts should have robust systems to monitor guardianships. This includes regular reporting by guardians and audits of their financial management.
Awareness and Education: Seniors and their families should be educated about the risks of guardianship and the importance of advance planning. Community programs and legal clinics can provide valuable information and resources.
Advocacy and Reform: Advocacy for better laws and policies around guardianship is crucial. This includes pushing for reforms that increase transparency, accountability and oversight in the guardianship process.
Key Takeaways:
Guardianship can lead to significant abuses, including loss of autonomy and financial exploitation.
Hospitals often initiate guardianship proceedings for incapacitated patients without family, which can lead to inappropriate guardian appointments.
Advance planning, such as establishing durable powers of attorney, helps prevent guardianship abuses.
There is a need for increased legal oversight and reform in the guardianship system to protect the rights and well-being of the elderly.
Utilize these tips to protect the seniors you love from guardianship abuse. Work with an experienced elder law or estate planning attorney to ensure that someone you love does not fall prey to abuse but has a legally documented estate plan to protect them and their financial well-being. If you would like to learn more about guardianship issues, please visit our previous posts.
Those with large estates should always consider gifting during their lifetime to reduce taxes by using the annual gift and lifetime gift and estate tax exemptions. Right now, you may give an unlimited number of people up to $17,000 each in a single year without taxes. However, in 2024, this increases to $18,000 per person. For married couples starting in 2024, a gift of $36,000 can be made to any number of people, tax-free.
More good news: the IRS announced that the lifetime estate and gift tax exemption will increase to $13.61 million in 2024. A gift exceeding the annual limits won’t automatically prompt a gift tax. The difference is taken from the person’s lifetime exemption limit, and no taxes are owed. Your estate planning attorney will create a long-term strategy to use these exemptions to manage your estate tax liabilities.
Let’s say you were feeling generous and bought a friend a car for $20,000 in 2023. You would have exceeded the annual limit of $17,000 but wouldn’t owe any additional taxes. You’d use IRS Form 709 to report the gift and deduct $3,000 from your lifetime exemption of $12.92 million for this year. If you instead make the gift in 2024, you’d subtract $2,000 from your $13.61 million limit.
Gifts between American spouses are virtually unlimited. Couples have $24.84 million in estate tax exemptions, and going over this limit is only taxed upon the surviving spouse’s death.
However, a gift to a non-U.S. citizen, regardless of whether or not they are a U.S. resident, falls under different rules and is subject to an annual tax exclusion amount. The annual amount one may give to a spouse who is not a U.S. citizen increases to $185,000 in 2024 from $175,000 in 2023.
Something else to keep in mind—unless Congress acts, the lifetime estate and gift tax exemption is due to return to the pre-2017 Tax Cuts and Jobs Act level of $5.49 million on December 31, 2025. Your wisest move is to speak with your estate planning attorney about a strategic plan for gift-giving and planning to minimize estate tax liability before the change occurs. To take advantage of the gift and estate tax exemption limits increase for 2024, consult with you estate planning attorney. He or she will make sure you are reaping the benefits. If you would like to learn more about the gift tax, please visit our previous posts.
When you consider the average credit card balance in 2023 was $6,365, chances are many Americans will leave an unpaid credit card balance if they die suddenly. Credit card debt must be paid after death. A recent article from yahoo! finance asks and answers the question, “What happens to credit card debt when you die?”
Many people think death leads to debt forgiveness. However, this isn’t the case. Some forms of debt, like federal student loans, may be discharged if the borrower dies. However, this is the exception and not the rule.
Credit card debt doesn’t evaporate when the cardholder goes away. It generally must be paid by the estate, which means the amount of debt will reduce your loved one’s inheritance. In some cases, credit card debt might mean they don’t receive an inheritance at all.
Outstanding credit card debt is paid by your estate, which means your individual assets owned at the time of death, including real estate, bank accounts, or any other valuables acquired during your life.
Upon death, your will is submitted to the court for probate, the legal process of reviewing the transfer of assets. It ensures that all debts and taxes are paid before issuing the remaining assets to your designated heirs.
If you have a will, you likely have an executor—the person you named responsible for carrying out your wishes. They are responsible for settling any outstanding debts of the estate. If there’s no will, the court will appoint an administrator or a personal representative to manage the assets.
In most cases, your heirs won’t have to pay off your credit card debt with their own funds. However, you may be surprised to learn there are exceptions:
Married people living in community property states. In a community property state, the deceased spouse is responsible for repaying credit card debt incurred by their spouse. In 2023, those states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
Credit cards with joint owners. If you had a joint credit card shared with a partner or relative, the surviving joint owner is responsible for the full outstanding balance. Only joint users are responsible for repaying credit card debt. If your partner was an authorized user and not an owner, they aren’t legally responsible for the debt.
Debt collectors may try to collect from family members, even though the family members are not responsible for paying credit card debts. The debt collector may not state or imply that the family member is personally responsible for the debt, unless they are the spouse in a community property state or a joint account owner.
If a debt collector claims you personally owe money, request a debt validation letter showing your legal responsibility for the debt. Otherwise, you have no legal obligation to pay for it yourself.
When someone dies, their estate is responsible for paying debts, including credit card debt. However, debt is repaid in a certain order. In general, unsecured debt like credit card balances are the lowest priority and paid last.
Some accounts are exempt from debt payment:
Money in a 401(k) or IRA with a designated beneficiary goes directly to the beneficiary and is exempt from any debt repayment.
Life insurance death benefits go directly to the named beneficiary and go directly to the beneficiaries.
If a loved one has died and they had credit cards, stop using any of their cards, even if you are an authorized user or joint owner. Review the deceased’s credit report to learn what accounts are open in their name and the balance on each account. Notify credit card issuers and alert credit bureaus—Equifax, Experian, and TransUnion. You may need to submit a written notification, a copy of the death certificate and proof of your being an authorized person to act on behalf of the estate.
The bottom line is this: credit card debt must be paid at your death. Talk with an estate planning attorney to find out how your state’s laws treat the outstanding debt of a deceased person, as these laws vary by state. If you would like to learn more about managing debt as an executor of an estate, please visit our previous posts.
It is generally wise to avoid adding adult children as joint owners of your accounts. The conversation may concern a checking or savings account or both. Unsolicited advice usually goes something like this: “If you want to have your children to be able to pay your bills if something happens to you, you need to add them to the account.” While the intentions are good, a recent Spokane Journal of Business article advises otherwise:“Adding adult children to accounts can be problematic.”
People are made to worry even more when they are told that if there is no second name on the account, it will be frozen upon death and no one can access it until a lengthy and costly probate process has occurred.
To do the right thing, many people respond by adding their most responsible adult child to the account. They don’t realize they are creating more problems than they are solving. A better solution exists, and it should be something taken care of when preparing or revising your estate plan.
Why wouldn’t you want to add an adult child to your accounts? Simply put, your last will and testament doesn’t apply to a bank account if it is a joint account. Most bank accounts are owned with a “joint tenancy with right of survivorship.” This means if the primary owner, the parent, should die, the adult child becomes the sole owner of assets in the account, regardless of what your will says.
Assuming that your intention is to split the assets in the account among several beneficiaries, this may or may not happen. The new account owner is under no legal obligation to share the assets, as they are solely and legally entitled to these funds.
Another problem: if the child decides to split the funds and transfer them to siblings, the IRS may see this as a gift subject to the requirement to fill out a gift tax return.
By having a joint owner, you may also expose these assets to creditor claims. What if the child named on the bank account causes a car accident and is sued? Those assets are considered owned by the child and could be attached by a creditor. If your child gets divorced, those assets may also be part of a divorce settlement.
Estate tax reporting gets more complicated. The IRS places an additional burden on accounts held as joint tenants with the right of survivorship. If the child unexpectedly dies first, the law places the burden on the estate to prove the child did not own the asset.
Is there a solution? Yes, a power of attorney.
A power of attorney is a legal document allowing an agent to act on behalf of the parent, providing authorization without ownership. The parent’s goal is almost always to provide authorization and access, but not ownership.
The POA can be made effective immediately upon signing to allow the child immediate access to the account for bill paying. It can apply not only to bank accounts but to all assets. Alternatively, it can also be limited to specific assets.
Avoid adding adult children as joint owners of your financial accounts. Your estate planning attorney can create a POA to authorize an agent to give them as much or as little control as you want. You’ll be able to determine precisely what you do and do not wish your agent to do. If you would like to learn more about managing financial and retirement accounts, please visit our previous posts.
Information in our blogs is very general in nature and should not be acted upon without first consulting with an attorney. Please feel free to contact Texas Trust Law to schedule a complimentary consultation.
