How Should you Handle an Inheritance?

November 1, 2023

Let’s say you are a family member who has just been informed that a cherished loved one has passed and you will be receiving an inheritance. Many people are still suffering from grief and may feel overwhelmed with the sudden financial increase – and responsibility. A common question arises for most people. How should you handle an inheritance? As financial advisor Suze Orman said in a recent episode of her podcast, “I think it’s really important that we think about how we invest money today to make the most out of the situation that we have.”

Go Banking Rates’ recent article entitled, “Suze Orman: 3 Things You Must Do If You Receive an Inheritance,” says that the financial guru outlines the next steps to take if you’re receiving an inheritance for the first time and need help figuring out what to do with the money.

Take an Inventory of Your Debt. As tempting as it may be to make a big purchase like going on a trip or buying a big ticket item you’ve been putting off right away, it’s crucial to examine your finances thoroughly. Orman recommends writing down everything that you have, beginning with your debt. Write down credit card debt, student loans, car loans and personal and mortgage debt. Once you’ve categorized all these, write down the average interest rate you are paying on them. This will let you create a plan for paying these off. If it’s a large inheritance, immediately consider eliminating all your debt.
Build Up Your Emergency Savings. After you’ve reviewed and analyzed your debt situation, Orman says having a solid emergency savings account for true emergencies is crucial. These are especially important if your car breaks down or your fridge goes out, and you must pay $400 for repairs. She says you want to rely on something other than a credit card for these scenarios. Therefore, she recommends having a minimum of $1,000 to $2,000 in that account.
Establish your “Must Pay Now Savings Account.” “What must you pay every single month?” Orman asks. “You must pay your mortgage, your rent, your car payment, your insurance premiums, things like that.” She says this is critical to create, particularly if you’ve been living paycheck to paycheck. Allocate eight months of must-pay expenses in a must-pay savings account.

Receiving an inheritance can be an unexpected blessing in many ways, but begs the question of how you should handle the inheritance. Pausing and carefully analyzing the above three situations with a level head is essential.

Keeping up with debt (or slashing it altogether), creating an emergency savings fund and covering your immediate monthly expenses–will all set you on the right track for a healthy financial trajectory. If you would like to learn more about inheritance planning, please read our previous posts.

Reference: Go Banking Rates (Oct. 7, 2023) “Suze Orman: 3 Things You Must Do If You Receive an Inheritance”

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How Does an Inheritance Trust Work?

October 30, 2023

How does an inheritance trust work? Don’t let the term “inheritance trust” intimidate you. It’s basically a way to safeguard assets, while managing their distribution efficiently. Trusts are also used to provide potential tax benefits, which can add significantly to a family’s financial security, according to a recent article from yahoo! finance, “How to Keep Money in the Family With an Inheritance Trust.” An estate planning attorney can guide you in establishing an inheritance trust, securing assets and protecting your family’s financial health. An inheritance or a family or testamentary trust is a legal arrangement to manage and protect assets for the benefit of heirs or beneficiaries after the grantor’s passing. Its key function is to ensure an efficient and controlled distribution of assets. These can be financial, real estate, or personal property of value.

Many types of trusts offer different levels of control, tax benefits and asset protection. For instance, a revocable trust lets the person who set up the trust or the trustee maintain control over the assets while living and make changes as they want to the terms of the trust.

In an irrevocable trust, the terms can’t be changed easily, which offers greater protection against creditors or legal disputes.

There’s also something called a “Generation Skipping Trust,” designed to transfer wealth directly to outright beneficiaries, typically grandchildren, to avoid repeated estate taxes on a family’s assets.

The inheritance trust provides a strong shield of protection for assets. By placing assets in a trust, they are safeguarded from creditors, lawsuits and even certain tax liabilities. This layer of protection ensures that assets go directly to beneficiaries without the risk of erosion by unexpected challenges.

Another reason for a trust—control of the distribution of assets. You establish the specific conditions and timelines for when and how assets are to be passed on to heirs. You may want to wait until they have reached a certain age, protect against reckless spending, or have the trust used solely for the long-term care of a loved one.

Inheritance trusts are also used to minimize estate taxes. Working with an experienced estate planning attorney, you can plan for assets within the trust to potentially reduce the tax burden on your estate, allowing heirs to inherit more of the family’s earned wealth.

Trusts provide privacy. Unlike wills, trusts don’t become public documents. Trusts bypass the probate process, which can become a protracted and expensive public court proceeding. By placing assets in trust, the transfer of wealth is prompt and confidential.

For blended families or those with complex dynamics, inheritance trusts can help prevent disputes and ensure that assets are distributed according to your specific directions. For instance, if you want to leave assets to your children but protect them from their spouses in case of divorce, a trust can be created to address this issue. You might also wish your wealth to be distributed directly to grandchildren, not a son or daughter-in-law.

Start by working with an experienced estate planning attorney to create a comprehensive estate plan. He or she will help you understand how a inheritance trust works. This includes drafting a will, establishing trusts and assigning beneficiaries. Communicate with heirs, so they understand your intentions and expectations. Regularly review and update your plan every three to five years to be sure that it remains current and aligned with your goals. If you would like to learn more about various types of trusts, please visit our previous posts.

Reference: yahoo! finance (Oct. 3, 2023) “How to Keep Money in the Family With an Inheritance Trust”

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Estate Planning can help address Nursing Homes Costs

October 26, 2023

Estate planning can help address nursing home costs. Figures from a Bureau of Labor Statistics (BLS) report published recently showed that the growth in the price of nursing homes and adult care has been especially volatile this year, reports Kiplinger’s recent article entitled, “Nursing Home Costs Soared in July.”

The national average cost of nursing homes rarely declines. The cost declined for just five months in the last quarter century (the months between 1997 and 2022). Therefore, it’s surprising to see three months of decline in 2023 (April, May, and June). Nonetheless, the total 1.2% percent dip in those three months was more than offset by the 2.4% cost increase in July.

It’s hard to determine if the July price jump was an aberration or indicative of future price increases. This unusual volatility likely shows an industry struggling to regroup after the disruptions of the pandemic, which severely impacted nursing.

Nursing home and adult care is very expensive. Most people spend over $7,000 in out-of-pocket costs yearly.

This high cost is likely due to several factors, and the increased demand from a rapidly aging population, inflation and a shortage of qualified nurses top the list.

However, there is some good news: the U.S. Government plans to direct more funding to support the nursing workforce, though the effect of the program will take time to show up in the preparedness and availability of nurses.

For most active, middle-aged people, it’s hard to imagine that you might need significant nursing care one day. However, research shows that 70% of adults who survive to age 65 need at least some long-term support before they die, and 48% receive some paid care, according to a study by The Urban Institute.

The key is to pay attention to financial planning. A senior’s thoughtfulness will let her family move them to a high-quality nursing home and likely be covered financially for a long time.

Could your family say the same thing? Do you know the range of costs in your area?

For example, the typical annual cost of a nursing home ranges from $59,495 for a shared room in Louisiana to a yearly cost of $380,000 in parts of Alaska.

While Medicare may cover some expenses, partnering with a professional is wise to get your long-term care planning on the right track. Estate planning can help address nursing home costs. If you have children, you’ll be doing them an enormous favor. If you would like to learn more about elder care, please visit our previous posts.

Reference: Kiplinger (Aug. 16, 2023) “Nursing Home Costs Soared in July”

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Strategies to minimize Taxes on Trusts

October 25, 2023

Dealing with trusts and the tax implications for those who create them, and their beneficiaries can seem confusing. Nevertheless, with the help of an experienced estate planning attorney, those issues can be managed, according to a recent article, “5 Taxes You Might Owe If You Have a Trust,” from Yahoo! Finance. There are strategies to minimize taxes on trusts.

Trusts are legal entities used for various estate planning and financial purposes. There are three key roles: the grantor, or the person establishing the trust; the trustee, who manages the trust assets; and the beneficiary, the person or persons who receive assets from the trust.

Trusts work by transferring ownership of assets from the grantor to the trust. By separating the legal ownership, specific instructions in the trust documents can be created regarding using and distributing the assets. The trustee’s job is to manage and administer the trust according to the grantor’s wishes, as written in the trust document.

Trusts offer control, privacy, and tax benefits, so they are widely used in estate planning.

There are two primary types of trusts: revocable and irrevocable. Revocable trusts are adjustable trusts that allow the grantor to make changes or even cancel during their lifetime. They avoid the probate process, which can be time-consuming and expensive, especially if assets are owned in different states. However, the revocable trust doesn’t offer as many tax benefits as the irrevocable trust.

Think of irrevocable trusts as a “locked box.” Once assets are placed in the trust, the trust can’t be changed or ended without the beneficiary’s consent. In some states, irrevocable trusts can be “decanted” or moved into another irrevocable trust, requiring the help of an experienced estate planning attorney. However, irrevocable trusts are not treated as part of the grantor’s taxable estate, making them an ideal strategy for reducing tax liabilities and shielding assets from creditors.

Trust distributions are the assets or income passed from the trust to beneficiaries. They can be in the form of cash, stocks, real estate, or other assets. For instance, if a trust owns a rental property, the monthly rental property generated by the property could be distributed to the trust’s beneficiaries.

Do beneficiaries pay taxes on distributions from the principal of the trust? Not generally. If you receive a distribution from the trust principal, it is not usually considered taxable. However, the trust itself may owe taxes on any income it generates, including interest, dividends, or rental income. The trust typically pays these before distributions are made to beneficiaries.

It gets a little complicated when beneficiaries receive distributions of trust income. In many cases, the income is taxable to the beneficiaries at their own individual tax rates. This can create a sizable tax wallop if you are in your peak earnings years.

There are strategies to minimize taxes on your trust. One approach is to structure trust distribution with a Charitable Remainder Trust, where income goes to a charity for a set number of years, and the remaining assets are then distributed to beneficiaries. An estate planning attorney will be a valuable resource, so grantors can achieve their goals and beneficiaries aren’t subject to overly burdensome taxes. If you would like to learn more about tax planning, please visit our previous posts.

Reference: Yahoo! Finance (Sep. 27, 2023) “5 Taxes You Might Owe If You Have a Trust”

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Tax Strategies combined with Estate Planning can Safeguard Assets

October 23, 2023

Business owners who want long-term financial success must navigate an intricate web of taxes, estate planning and asset protection. Pre-and post-transactional tax strategies, combined with estate planning, can safeguard assets, optimize tax positions and help strategically pass wealth along to future generations or charitable organizations, as reported in a recent article from Forbes, “Strategic Tax and Estate Planning For Business Owners.”

Pre-transactional tax planning includes reviewing the business entity structure to align it with tax objectives. For example, converting to a Limited Liability Company (LLC) may be a better structure if it is currently a solo proprietorship.

Implementing qualified retirement plans, like 401(k)s and defined benefit plans, gives tax advantages for owners and is attractive to employees. Contributions are typically tax-deductible, offering immediate tax savings.

There are federal, state, and local tax credits and incentives to reduce tax liability, all requiring careful research to be sure they are legitimate tax planning strategies. Overly aggressive practices can lead to audits, penalties, and reputational damage.

After a transaction, shielding assets becomes even more critical. Establishing a limited liability entity, like a Family Limited Partnership (FLP), may be helpful to protect assets.

Remember to keep personal and business assets separate to avoid putting asset protection efforts at risk. Review and update asset protection strategies when there are changes in your personal or business life or new laws that may provide new opportunities.

Developing a succession plan is critical to ensure that the transition of a family business from one to the next. Be honest about family dynamics and individual capabilities. Start early and work with an experienced estate planning attorney to align the succession and tax plan with your overall estate plan.

Philanthropy positively impacts, establishes, or builds on an existing legacy and creates tax advantages. Donating appreciated assets, using charitable trusts, or creating a private foundation can all achieve personal goals while attaining tax benefits.

Estate taxes can erode the value of wealth when transferring it to the next generation. Gifting, trusts, or life insurance are all means of minimizing estate taxes and preserving wealth. Your estate planning attorney will know about estate tax exemption limits and changes coming soon. They will advise you about gifting assets during your lifetime, using annual gift exclusions, and determine if lifetime gifts should be used to generate estate tax benefits. Smart tax strategies combined with estate planning can safeguard assets for generations. If you would like to read more about tax and estate planning, please visit our previous posts.

Reference: Forbes (Sep. 28, 2023) “Strategic Tax and Estate Planning For Business Owners”

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Life Insurance should be Major component of Estate Plan

October 19, 2023

We never know what the future may bring, and waiting too long to investigate life insurance could leave loved ones in a financial bind, according to a recent article from Money, “What Is Joint Life Insurance and How Does It Work?” There are plans ranging from term and whole to individual and joint, and you’ll want to understand how each works before determining which policy best fits your needs. Life insurance should be a major component of your estate plan.

Joint life insurance is a single plan covering the lives of two people with one premium, with the policyholders becoming each other’s beneficiaries or passing benefits to their heirs. Depending on your coverage, these types of life insurance pay out death benefits when one or both of the policyholders dies.

This eliminates the need for separate policies for spouses or partners and minimizes paperwork and the underwriting and administrative costs associated with life insurance policies. This type of plan is often used for business partners, who can use the death benefit to fund the company if one of them dies unexpectedly.

Joint life insurance plans are usually permanent or whole-life policies and stay in effect as long as premiums continue to be paid or until the policy pays out. Investing in joint whole life insurance has certain advantages because it provides long-term certainty.

There are two kinds of joint life insurance-first to die and second to die.

A first-to-die life insurance policy pays a death benefit to the surviving policyholder when the other party dies. This ensures the living policyholder receives a payout, which can be used for living costs if the family’s primary income source is the first to die.

Situations where one spouse doesn’t qualify for life insurance may also make first-to-die life insurance a good idea. Insurance companies may be more willing to insure someone with pre-existing health conditions because there’s only one payout between two policyholders. However, the healthier spouse will most likely incur higher cost premiums with a joint policy than an individual plan.

The first-to-die joint policy terminates once the payout occurs, leaving the surviving spouse or partner without life insurance unless they have an additional individual plan. If the surviving party doesn’t have their own policy, they must purchase a separate policy to ensure their beneficiaries receive a death benefit.

Second-to-die life insurance, or survivorship life insurance, doesn’t pay out until both policyholders die. These plans are often used to leave money for beneficiaries or pay for funeral expenses. A second-to-die policy can be helpful with estate planning because heirs don’t pay estate tax on the death benefits unless they exceed estate tax thresholds.

Determining which policy best suits your family depends on several factors, including how you expect beneficiaries to use the proceeds. Life insurance policies should be a major component of the discussion with your estate planning attorney, and align with your overall estate plan. If you would like to read more about life insurance, please visit our previous posts.

Reference: Money (Sep. 15, 2023) “What Is Joint Life Insurance and How Does It Work?”

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Where Should You Store Your Will?

October 17, 2023

When you fail to plan for your demise, your heirs may end up fighting. With Aretha Franklin, three of her sons were battling in court over handwritten wills. The Queen of Soul, who died in 2018, had a few wills: one was dated and signed in 2010, which was found in a locked cabinet. Another, signed in 2014, was discovered in a spiral notebook under the cushions of a couch in her suburban Detroit home. This begs the question: Where should you store your will and other estate planning documents?

The Herald-Ledger’s recent article, “Aretha Franklin’s will was in her couch. Here’s where to keep yours,” says that a jury recently decided the couch-kept will is valid. However, Aretha didn’t clarify her final wishes. Her handwritten wills had notations that were hard to decipher, and she didn’t properly store the will she may have wanted to be executed upon her death.

The Herald-Ledger’s article gives some options for storing your will. First, don’t store your will in the couch.

You should keep your will where it is secure but easily located. Here are some options:

Safe-deposit box: The downside is that the box might be initially inaccessible when you die. If your will is in the box, that’s an issue. The executor may need a copy of the will to access the box. If so, and a court order is required, it could take some time before the executor can get the will from the safe deposit box. If you do this, include your executor or the person designated to handle your estate on the safe deposit box contract.
At home: Keep a copy of your will in a fireproof and waterproof safe, but make sure there’s a duplicate key, or you give the combination code to your executor or some other trusted person.
With an attorney: You could have a spare set of original documents and leave one with your attorney. But be sure your family knows the attorney’s name with the will.
Local court: Check with the local probate court about storing your will and tell someone that you’ve placed your will in the care of the court. For instance, in Maryland, you can keep your original last will and testament with an office called the Register of Wills. The will can then be released only to you or to a person you authorize in writing to retrieve it.
Electronic storage: You could store it online to keep your will safe. However, most states don’t yet recognize electronic wills. As a result, you’ll need to have the originally signed copy of your will even if you store a digital copy.

Speak with an estate planning attorney about where you should store your will. He or she may suggest an option you and your family had not considered. All options to store your will have pros and cons. Whatever you do, tell the person designated to handle your estate where to find your will. If you would like to learn more about storing and handling your estate planning documents, please visit our previous posts.

Reference: The Herald-Ledger (July 19, 2023) “Aretha Franklin’s will was in her couch. Here’s where to keep yours.”

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What You Should Know about Inherited IRAs

October 16, 2023

Here’s what you should know about inherited IRAs. Inheriting an Inherited IRA can be even more complicated than the already complex world of inherited Individual Retirement Accounts (IRAs). Understanding the rules and regulations about inheriting an inherited IRA is critical to avoid major tax pitfalls, according to a recent article from yahoo! finance, “What Happens When I inherit an Annuity?”

After the passage of the SECURE Act, the rules concerning inherited IRAs became quite restrictive. Working with an estate planning attorney knowledgeable about IRAs can be the difference between a healthy inheritance or an unexpected huge tax liability.

An inherited IRA is an IRA left to a beneficiary following the death of the original account owner. The beneficiary who inherits the IRA can pass it to a successor beneficiary upon death. This creates the “inheriting an inherited IRA” scenario.

If the line of succession is not set up correctly, there is the potential for inherited assets to go through probate for a judge to rule on the rightful owner.

The original beneficiary is the first person to inherit the IRA. Once they have inherited the account, they may name their successor beneficiary. There are rules for the original beneficiary and the successor beneficiary.

The SECURE Act changed the timeline for inherited IRAs. It eliminated the “stretch” IRA strategy, which allowed beneficiaries to take distributions over their lifetime, stretching out the tax-deferred growth of the IRA over decades. Now, most non-spouse beneficiaries must withdraw all assets from an inherited IRA within ten (10) years of the original account holder’s death. This change presents new implications with regard to taxes, especially if the beneficiary is in their peak earning years.

Inheriting an inherited IRA can involve complex tax rules and pitfalls. There are timelines for taking required withdrawals and zero flexibility for mistakes.

You’ll also need to be sure the inheritance is documented correctly to avoid potential probate.

The rules differ for spouses inheriting an IRA since they shared assets with their deceased spouse. The SECURE Act allows spouses to treat the IRA as their own, providing more flexibility in distributions and potential tax implications.

Understanding the concept of Year of Death Required Distributions is essential. Let’s say the original owner was over a certain age at death. In this situation, a Required Minimum Distribution (RMD) may need to be taken in the year of death, which could impact the heir’s taxes for that year.

Knowing potential tax breaks related to inherited IRAs will also help with financial management. Non-spouse beneficiaries can deduct the estate tax paid on IRA assets when calculating their income tax.

These are complex issues requiring the help of an experienced estate planning attorney. Ideally, the attorney will help you understand what you should know about inherited IRAs. This conversation should occur while creating or revising your estate plan. If you would like to learn more about IRAs, please visit our previous posts.

Reference: yahoo! finance (Sep. 5, 2023) “What Happens When I inherit an Annuity?”

Immediate Annuity might be a useful Option for Retirees

October 12, 2023

An immediate annuity might be a useful option for retirees who want to add funds for ongoing expenses or are concerned about outliving their savings. They can provide a sense of security during volatile markets. However, the downsides must be considered.

An immediate annuity is, in simplest terms, an insurance plan created with a lump sum payment designed to pay a guaranteed amount for a set period. In the first quarter of 2023, sales hit $3.3 billion in the first quarter of 2023, as reported in a recent article from U.S. News & World Report, “The Pros and Cons of Immediate Annuities.” This figure, representing single premium annuities, increased by 120% for this segment from the first quarter of 2022.

Set up as an insurance plan, an immediate annuity is funded with an initial amount, and payouts begin. The funds might come from savings accounts, a 401(k) or an IRA. The tradeoffs are in the form of fees and growth limitations on the total assets if you decide to cancel the payments and retain the account balance.

Other types of annuities may be more appropriate, including deferred annuities, where the money is invested, and payouts begin later. These are useful for individuals who want market protection and have only an occasional or reasonable need for cash.

When purchasing an immediate annuity, the insurer will look at factors including the annuitant’s age and how long the payments will last. From an income perspective, you can calculate your fixed expenses and use this amount to determine your needed income.

Some annuities include a rising income stream to keep pace with inflation.

An immediate annuity might be a useful option for retirees. Payouts depend on the timeline and details of each annuity. In many cases, you can start getting payouts within a month of the deposit. However, usually you have to take it within the first 12 months. You can also ask to have payments made monthly, quarterly, or annually. You’ll also select a payout period, which may consist of a certain number of years or for the rest of your life. Many people prefer the lifetime annuity plan, meaning their payments will continue for as long as they live. If you would like to learn more about annuities in estate planning, please visit our previous posts.

Reference: U.S. News & World Report (Sep. 5, 2023) “The Pros and Cons of Immediate Annuities”

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Estate Planning can be a Powerful Part of a Financial Strategy

October 10, 2023

Estate planning can be a powerful part of a financial strategy to ensure the smooth transfer of assets to the next generation while yielding significant tax savings, as explained in a recent article, “Maximizing wealth: The power of strategic estate planning in tax savings” from Thomasville Times-Enterprise.

Estate planning generally involves arranging assets and personal affairs to facilitate an efficient transfer to beneficiaries. However, there’s a tax angle to consider. Estates are subject to various taxes, including estate, inheritance and capital gains taxes. Without a good estate plan, taxes can take a big bite out of any inheritance.

Using tax-free thresholds and deductions effectively is one way to save on taxes. Depending upon your jurisdiction, there may be a state estate tax exemption in addition to the federal estate tax exemption. By strategically distributing assets to beneficiaries or using trusts, individuals can keep the value of their estate below these thresholds, leading to reduced or eliminated estate taxes.

Equally important is planning to take advantage of allowable deductions, further decreasing the tax burden facing heirs.

Trusts are valuable tools for estate and tax planning. They offer a legal framework to hold and manage assets to benefit individuals or organizations and provide asset protection and tax advantages. A revocable living trust transfers assets seamlessly to beneficiaries without passing through probate. Irrevocable trusts shield assets from estate taxes while allowing the person who created the trust—the grantor—to direct their distribution when the trust is established.

Strategic gifting during one’s lifetime is another way wealth is transferred. Using the annual gift tax exclusion, you may gift a certain amount per person yearly without triggering gift taxes. This allows for the gradual transfer of assets, reducing the taxable estate while helping loved ones. Gifting appreciated assets can result in significant capital gains tax savings for both the person making the gift and the recipient.

Estate planning is necessary for business owners to protect a family business from being stripped of capital because of hefty estate taxes. Different ownership structures, including a Family Limited Partnership (FLP) or a Limited Liability Company (LLC) can facilitate the smooth transition of the business to the next generation, while using valuation discounts to reduce estate tax liabilities further.

Estate planning can be a powerful part of a financial strategy. Given the complexity of estate and tax laws, working with an experienced estate planning attorney, accountant, and financial advisor is essential to ensure that all aspects of an estate plan meet legal requirements. Every situation and every family is different, so the estate plan needs to be designed to meet the unique needs of the individual and their family. If you would like to learn more about tax planning, please visit our previous posts.

Reference: Thomasville Times-Enterprise (Sep. 3, 2023) “Maximizing wealth: The power of strategic estate planning in tax savings”

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Blog Articles

How Should you Handle an Inheritance?

How Does an Inheritance Trust Work?

Estate Planning can help address Nursing Homes Costs

Strategies to minimize Taxes on Trusts

Tax Strategies combined with Estate Planning can Safeguard Assets

Life Insurance should be Major component of Estate Plan

Where Should You Store Your Will?

What You Should Know about Inherited IRAs

Immediate Annuity might be a useful Option for Retirees

Estate Planning can be a Powerful Part of a Financial Strategy

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