Estate Planning complicated by Property in Two States

April 12, 2022

Estate planning can be complicated by property in two states. Cleveland Jewish News’ recent article titled “Use attorney when considering multi-state estate plan” says that if a person owns real estate or other tangible property (like a boat) in another state, they should think about creating a trust that can hold all their real estate. You don’t need one for each state. You can assign or deed their property to the trust, no matter where the property is located.

Some inherited assets require taxes be paid by the inheritors. Those taxes are determined by the laws of the state in which the asset is located.

A big mistake that people frequently make is not creating a trust. When a person fails to do this, their assets will go to probate. Some other common errors include improperly titling the property in their trust or failing to fund the trust. When those things occur, ancillary probate is required. This means a probate estate needs to be opened in the other state. As a result, there may be two probate estates going on in two different states, which can mean twice the work and expense, as well as twice the stress.

Having two estates going through probate simultaneously in two different states can delay the time it takes to close the probate estate.

There are some other options besides using a trust to avoid filing an ancillary estate. Most states let an estate holder file a “transfer on death affidavit,” also known as a “transfer on death deed” or “beneficiary deed” when the asset is real estate. This permits property to go directly to a beneficiary without needing to go through probate.

A real estate owner may also avoid probate by appointing a co-owner with survivorship rights on the deed. Do not attempt this without consulting an attorney.

If you have real estate, like a second home, in another state (and) you die owning that individually, you’re going to have to probate that in the state where it’s located. It is usually best to avoid probate in multiple jurisdictions, and also to avoid probate altogether.

A co-owner with survivorship is an option for avoiding probate. If there’s no surviving spouse, or after the first one dies, you could transfer the estate to their revocable trust.

Estate planning can be complicated by property in two states. Each state has different requirements. If you’re going to move to another state or have property in another state, you should consult with a local estate planning attorney. If you would like to learn more about managing real estate in your estate planning, please visit our previous posts.

Reference: Cleveland Jewish News (March 21, 2022) “Use attorney when considering multi-state estate plan”

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Addressing Financial Issues in a Remarriage

April 7, 2022

When it comes to addressing financial issues in a remarriage, couples should look at the past. This should include the way in which each person handled finances, and their pre-marital liabilities and assets, along with the present (e.g., new benefit options) and the future. This means how they’ll handle finances as a unit or protect themselves and loved ones in case of death or divorce.

CNBC’s recent article entitled “Remarrying? Here are financial considerations to keep in mind before saying ‘I do’” says that it’s important to release any financial skeletons from the closet. Here are some smart financial moves for new parents:

It’s critical that blended families have similar talks with their children. The children were most likely brought up in different financial circumstances, so it’s important to talk as a family about new financial expectations.

After the prospective spouses identify their collective financial situation, there are a few topics to consider. For instance, if you were previously married for more than 10 years and collecting Social Security benefits on your ex-spouse’s account, you may forfeit those payments if you remarry. Your new combined income may also result in a higher tax bill. This is sometimes called a “marriage penalty.”

Moreover, financial communication is a crucial best practice to achieve financial success in a relationship. After you remarry, look at the impact on benefits.

Marriage is a recognized life event, so you may be allowed to change your insurance options outside the regular autumn time window.

You should also be aware that if you were previously divorced and getting substantially discounted insurance via the healthcare.gov exchange, when you remarry, your insurance costs may go up if your joint income goes up.

It’s also smart to consider protecting pre-marital assets that were in your name only. You should consult an experienced estate planning attorney prior to addressing financial issues in a remarriage. They may advise against commingling some or all assets, and suggest a trust, segregating pre-marital assets from marital assets, to protect you in the event of divorce.

Estate planning is vitally important, if you have a new family with children. These are the documents that will take care of the people you love. If you would like to learn more about remarriage issues in estate planning, please visit our previous posts.

Reference: CNBC (March 7, 2022) “Remarrying? Here are financial considerations to keep in mind before saying ‘I do’”

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Trusts are Best for Gifting to Minors

April 6, 2022

How gifts are made could have major impacts on heirs, especially if the recipient is a minor. There are many drawbacks to gifting outright, including limited control over gifts, exposure to creditors, divorce and litigation. Trusts are the best strategy for gifting to minors, as discussed in the article “The Annual Exclusion For Gift Taxes Has Increased to $16,000—What Issues Should I Consider” from Mondaq.

When gifting directly to minors, a custodial account (ITMA) offers some structure. However, if the account terminates when the minor becomes of age, you then have a young person with no control and a lot of money. This is usually a bad combination.

For example, what if the annual exclusion gift of $16,000 is placed into a custodial account when the heir is nine and ends when the heir celebrates their 18^th birthday? Even if the account earns no interest, by the time the heir reaches age 18, they will have complete access to $160,000 with no restrictions.

If there is a change to the custodian before the minor comes of legal age, the UTMA allows a primary custodian to name a successor. However, if this does not happen, the process of naming a successor custodian is generally burdensome and expensive.

Trust options or a transfer to a 529 plan are better options offering a lot more control by a trustee. Trusts allow assets to be used for a variety of needs, while the 529 plan limits withdrawals to be used for educational needs. The trustee may also continue to manage the account long after the heir has reached legal age, which to most people makes good sense.

Another option is a Section 2503(c) Minors Trust, which can be used for annual exclusion gifts to minors. They require that assets of the trust be applied for the minor who is a beneficiary of the trust. However, there are limited exceptions. There can only be one beneficiary and they must be under age 21. When the beneficiary turns twenty-one, they must be given the ability to withdraw the assets. However, any assets remaining in the trust can be kept in the trust and the trust itself can be converted into another form of irrevocable trust, allowing for continued annual exclusion gifts to be made for the beneficiary.

For more control, consider an irrevocable gift trust. The IGT can be used for the annual exclusion gift and is a smart choice for gifts greater than the annual exclusion when a Gift Tax Return is required. The person creating the irrevocable gifting trust appoints the trustees and should name alternates, if the primary trustee is unable to serve. The trustee then has discretion to manage the assets, including over distributions. Unlike a 2503(c) Minor Trust, the irrevocable gifting trust does not have to terminate or permit unrestricted access to income or principal. Wanting to make sure your loved ones receive those special gifts is a wonderful thing. Trusts are the best option to consider for gifting to minors. If you would like to learn more about gifting in estate planning, please visit our previous posts.

Reference: Mondaq (March 2022) “The Annual Exclusion For Gift Taxes Has Increased to $16,000—What Issues Should I Consider”

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Several Advantages in a Discretionary Trust

April 5, 2022

There are several advantages in establishing a discretionary trust. The trustee who oversees a discretionary trust can use their discretion in determining when and how trust assets should be distributed to beneficiaries. The Facts’ recent article entitled “Your Estate Plan Could Improve with This Type of Trust” explains that a trust is a legal arrangement in which assets are managed by a trustee on behalf of one or more beneficiaries. In a typical trust arrangement, assets are managed according to the directions and wishes of the grantor (also known as the trustmaker, settlor, or trustor).

However, with a discretionary trust, the trust lets the trustee have full discretion when overseeing the distribution of trust assets to beneficiaries. This is a type of irrevocable trust, which means that the transfer of assets is permanent. The grantor can provide direction about when trust assets should be distributed and how much each trust beneficiary should receive. However, it is up to the trustee to decide what choices are made with regard to distributions of principal and interest from trust assets.

A discretionary trust can help to prevent mismanagement of assets on the part of beneficiaries. It can also offer protection against creditor lawsuits. The assets in a discretionary trust are protected because the trustee technically owns those assets, not the trust beneficiaries.

A discretionary trust can also be used in other situations where you may have concerns over how trust assets will be used, such as in the event a beneficiary divorces.

An experienced estate planning attorney can create a discretionary trust. When establishing the trust, you’ll need to decide:

Who to name as trustee and successor trustees
Which assets will be transferred to the trust
Who to name as trust beneficiaries; and
Under what situations you’d like assets to be distributed to beneficiaries.

It is an irrevocable trust. As a result, the transfer of assets is permanent. Therefore, be sure beforehand that this type of trust is appropriate for your estate planning needs.

One of several advantages in a discretionary trust is the ability to protect your beneficiaries from their own poor money habits, while preserving a legacy of wealth for future generations.

A properly structured discretionary trust can also have some estate tax planning benefits. Ask your attorney to explain this to you when you meet. If you would like to read more about discretionary trusts, please visit our previous posts.

Reference: The Facts (March 7, 2022) “Your Estate Plan Could Improve with This Type of Trust”

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Take care managing ABLE Account Expenses

April 4, 2022

An ABLE account can be a life saver for individuals with disabilities. Those establishing one need to take care managing ABLE account expenses. An ABLE Account (Achieving a Better Life Experience Account) is a tax-advantaged savings account available to individuals diagnosed with disabilities. It lets them save without putting their public benefits at risk. Contributions to the ABLE account may be made by the account owner, family members, friends, trusts or any other person, as explained in the article “What Qualifies as Eligible Expenses for an ABLE Account?” from Investopedia. The money can be maintained in the account tax-free or spent on certain expenses, which are called “eligible expenses” or “Qualified Disability Expenses” (QDEs) and cover a broad range of goods and services. In some cases, figuring out if an expense meets the criteria is easy. However, in others, it is not so clear.

Typical QDEs include education, employment training, food, shelter, transportation, assistive technology, health, prevention and wellness, financial management of the ABLE account, including oversight and monitoring, legal fees, funeral and burial expenses. In all cases, keep detailed records of how ABLE funds are spent, just in case there is a dispute about whether an expense qualifies.

The law governing ABLE accounts does not spell out every single QDE. Sometimes the IRS or Social Security Administration will issue guidance to clarify whether an item is a QDE. The law says the term should be “broadly constructed to permit the inclusion of basic living expenses and should not be limited to items for which there is a medical necessity, or which provides no benefits to others in addition to the benefit to the eligible individual.”

Note that ABLE account funds may be used for a vacation, if it helps maintain or improve the health, independence, or quality of life for the disabled individual. The food category includes more than groceries: food delivery and restaurant meals are included.

A few tips:

If in doubt, use non-ABLE money and save the ABLE funds for eligible purchases.
Use public funds when possible. For instance, Medicaid may pay for transportation to a health care provider or educational programs.
Keep extensive records, especially for items you are not sure about.

It is great for the disabled individual to have this much flexibility. However, it can also be confusing. That is why you must take care in managing ABLE account expenses. An elder law estate planning attorney will be familiar with the guidelines and help ensure that the funds are used properly. If you would like to learn more about ABLE accounts, please visit our previous posts.

Reference: Investopedia (Feb. 25, 2022) “What Qualifies as Eligible Expenses for an ABLE Account?”

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how to obtain a power of attorney for your parent

How to Obtain Power of Attorney for your Parent?

March 31, 2022

Since the beginning of the COVID 19 pandemic, people have become more aware of the need for a power of attorney should one become incapacitated. But it begs the question: how to obtain a power of attorney for your parent? Tyron Daily Bulletin’s recent article entitled “How to get power of attorney for a loved one” says the person granting you that power, known as the “principal,” must designate you as the agent (also known as attorney in fact) to have the powers specified in the POA document. it must be signed by the principal while he or she is sound of mind.

Talk to an elder law attorney so understand what your state laws say about powers of attorney. Note that you cannot get a POA if someone is already incapacitated because the principal of the POA must be able to sufficiently comprehend what a POA document represents and the effects of signing it. He or she must clearly communicate their intentions.

The agent of a POA must always act in the best interests of the principal. This can include managing the principal’s financial interests or overseeing the principal’s healthcare and may make decisions about their care and treatment.

There are several things as POA that you cannot do:

Create a contract to get paid for personal services provided to the principal
Vote in place of the principal
Create or alter the principal’s will
Designate another as the agent on behalf of the principal; and
Do anything that is not in the principal’s best interests.

Even if the principal is in good health now, it is smart to plan for potential challenges. You never know when an injury or illness may take away that person’s capacity to manage finances or make important decisions about medical care. The most opportune time to start considering power of attorney is before a parent or loved one requires any caregiving.

Talk with an elder law attorney about how to obtain a power of attorney for your parent. Remember, the principal must be part of the conversation and cannot be mentally incapacitated. If you would like to read more about powers of attorney, please visit our previous posts.

Reference: Tyron Daily Bulletin (March 7, 2022) “How to get power of attorney for a loved one”

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Gifting to your Loved Ones can reduce Taxes

March 30, 2022

For wealthier Americans, gifting to your loved ones now can help you reduce or even avoid estate taxes when you die, say Kiplinger’s recent article entitled “Give Cash Now, Cut Your Estate Tax Later.”

Any gift may be subject to the federal gift tax, but you can give up to $16,000 per person during the year without having to file a gift tax return. If you are married, your spouse can also give $16,000 to the same people, upping the annual tax-free gift up to $32,000 per person.

Whatever you give away this year, up to the $16,000-per-recipient limit, will not be counted for estate tax purposes when you die.

If the current value of your estate is above the federal estate tax exclusion amount ($12.06 million for 2022), giving away money now could drop the value below the exclusion amount. The result would be no federal estate tax when you pass away.

There could also be state estate taxes to worry about. A dozen states and the District of Columbia have their own estate tax. Each currently has an exclusion amount that is far below the current federal standard (like just $1 million in Massachusetts and Oregon).

What happens if you are feeling extra generous and want to give more than $16,000 (or $32,000 per couple) to your fantastic 30-year-old niece this year?

You will be required to file a gift tax return (IRS Form 709), and the amount over $16,000 is potentially a taxable gift.

However, gifting to your loved ones can still reduce gift and estate taxes, if the total amount of taxable gifts so far over your lifetime is less than $12.06 million.

Therefore, if you are thinking of dropping a very large amount of cash in the hands of your niece (or whomever), it does not necessarily mean you will have to pay taxes on the gift.

For strategies about gift giving, speak with an experienced estate planning attorney. If you would like to learn more about reducing your tax burden, please visit our previous posts.

Reference: Kiplinger (Dec. 2, 2021) “Give Cash Now, Cut Your Estate Tax Later”

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A second marriage can complicated estate planning

A Second Marriage can complicate Estate Planning

March 29, 2022

In first marriages, working together to raise children can solidify a marriage. However, in a second marriage, the adult children are in a different position altogether. If important estate planning issues are not addressed, the relationship between the siblings and the new spouses can have serious consequences, according to a recent article titled “Into the Breach; Getting Married Again?” from the Pittsburgh Post-Gazette. A second marriage can complicated estate planning.

Chief among the issues center on inheritances and financial matters, especially if one of the parties has the bulk of the income and the assets. How will the household expenses be shared? Should they be divided equally, even if one spouse has a significantly higher income than the other?

Other concerns involve real estate. If both parties own their own homes, in which house will they live? Will the other home be used for rental income or sold? Will both names be on the title for the primary residence?

Planning for incapacity also becomes more complex. If a 90-year-old man marries a 79-year-old woman, will his children or his spouse be named as agents (i.e., attorneys in fact) under his Power of Attorney if he is incapacitated? Who will make healthcare decisions for the 79-year-old spouse—her children or her 90-year-old husband?

There are so many different situations and family dynamics to consider. Will a stepdaughter end up making the decision to withdraw artificial feeding for an elderly stepmother, if the stepmother’s own children cannot be reached in a timely manner? If stepsiblings do not get along and critical decisions need to be made, can they set aside their differences to act in their collective parent’s best interests?

The matter of inheritances for second and subsequent marriages often becomes the pivot point for family discord. If the family has not had an estate plan created with an experienced estate planning attorney who understands the complexities of multiple marriages, then the battles between stepchildren can become nasty and expensive.

Do not discount the impact of the spouses of adult children. If you have a stepchild whose partner feels they have been wronged by the parent, they could bring a world of trouble to an otherwise amicable group.

The attorney may recommend the use of trusts to ensure the assets of the first spouse to die eventually make their way to their own children, while ensuring the surviving spouse has income during their lifetime. There are several trusts designed to accomplish this exact scenario, including one known as SLAT—Spousal Lifetime Access Trust.

Discussions about health care proxies and power of attorney should take place well before they are needed. Ideally, all members of the family can gather peacefully for discussions while their parents are living, to avoid surprises. If the relationships are rocky, a group discussion may not be possible and parents and adult children may need to meet for one-on-one discussions. However, the conversations still need to take place.

A second marriage can complicated estate planning. Second marriages at any age and stage need to have a prenuptial and an estate plan in place before the couple walks down the aisle to say, “I do…again.” If you would like to learn more about blended families and estate planning, please visit our previous posts.

Reference: Pittsburgh Post-Gazette (March 1, 2022) “Into the Breach; Getting Married Again?”

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Alternatives to replace Stretch IRA

March 28, 2022

The idea of leaving a large inheritance to loved ones is a dream for some parents. However, without careful planning, heirs may end up with a large tax bill. When Congress passed the SECURE Act in December 2019, one of the changes was the end of the stretch IRA, as reported by Kiplinger in a recent article titled “Getting Around the Stretch IRA Block.” There are alternatives to replace a stretch IRA.

Before the SECURE Act, people who inherited traditional IRAs needed to only take a minimum distribution annually, based on their own life expectancy. The money could grow tax-deferred for the rest of their lives. The tax impact was mild, because withdrawals could be spread out over many years, giving the new owner control over their taxable income. The rules were the same for an inherited Roth IRA. Distributions were based on the heirs’ life expectancy. Roth IRA heirs had the added benefit of not having to pay taxes on withdrawals, since Roth IRAs are funded with post-tax dollars.

After the SECURE Act, inherited traditional and Roth IRAs need to be emptied within ten years. Heirs can wait until the 10th year and empty the account all at once—and end up with a whopping tax bill—or take it out incrementally. However, it has to be emptied within ten years.

There are some exceptions: spouses, disabled or chronically ill individuals, or those who are not more than ten years younger than the original owner can stretch out the distribution of the IRA funds. If an underage minor inherits a traditional IRA, they can stretch it until they reach legal age. At that point, they have to withdraw all the funds in ten years—from age 18 to 28. This may not be the best time for a young person to have access to a large inheritance.

These changes have left many IRA owners looking for alternative ways to leave inheritances and find a work-around for their IRAs to protect their heirs from losing their inheritance to taxes or getting their inheritance at a young age.

For many, the solution is converting their traditional IRA to a Roth, where the IRA owner pays the taxes for their heirs. The strategy is generous and may be more tax efficient if the conversion is done during a time in retirement when the IRA owner’s income is lower, and they may be in a lower tax bracket. The average person receiving an IRA inheritance is around 50, typically peak earning years and the worst time to inherit a taxable asset.

Another alternative to replace the stretch IRA is life insurance. Distributions from the IRA can be used to pay premiums on a life insurance policy, with beneficiaries receiving death benefits. The proceeds from the policy are tax-free, although the proceeds are considered part of the policy owner’s estate. With the current federal exemption at $12.06 million for individuals, the state estate tax is the only thing most people will need to worry about.

A Charitable Remainder Trust can also be used to mimic a stretch IRA. A CRT is an irrevocable split-interest trust, providing income to the grantor and designated beneficiaries for up to twenty years or the lifetime of the beneficiaries. Any remaining assets are donated to charity, which must receive at least 10% of the trust’s initial value. If the CRT is named as the IRA beneficiary, the IRA funds are distributed to the CRT upon the owner’s death and the estate gets a charitable estate tax deduction (and not an income tax deduction) for the portion expected to go to the charity. Assets grow within the charitable trust, which pays out a set percentage to beneficiaries each year. The distributions are taxable income for the beneficiaries. There are two types of CRTs: Charitable Remainder Unitrust and a Charitable Remainder Annuity Trust. An estate planning attorney will know which one is best suited for your family. If you would like to read more about managing retirement accounts, please visit our previous posts.

Reference: Kiplinger (March 3, 2022) “Getting Around the Stretch IRA Block”

Caring for sick Parent can be Challenging

March 24, 2022

Caring for a sick parent can be challenging and emotional time. It’s not uncommon for adult children to have to face a parent’s decline and a stay in hospice at the end of their life. The children are tasked with trying to prepare for his passing. This includes how to handle his financial matters.

Seniors Matter’s recent article entitled “How do I handle my father’s financial matters now that he’s in hospice?” says that because of this major task, it is easy to put financial considerations on the back burner. Nonetheless, it is important to address a few key issues with your family.

If a family member is terminally ill or admitted to hospice – and you are able to do so – it may be a good idea to start by helping to take inventory of your family member’s assets and liabilities. A clear idea of where their assets are and what they have is a great starting point to help you prepare and be in a better position to manage the estate.

An inventory may include any and all of the following:

Real estate
Bank accounts
Cars, boats and other vehicles
Stocks and bonds
Life insurance
Retirement plans (such as a 401(k), a traditional IRA, a Roth IRA and a SEP IRA);
Wages and other income
Business interests
Intellectual property; and
Any debts, liabilities and judgments.

Next, find out what, if any, estate planning documents may be in place. This includes a will, powers of attorney, trusts, a healthcare directive and a living will. You will need to find copies.

Caring for a sick parent while also managing their financial affairs can be challenging, but it can make the aftermath easier and less stressful for you and your family. If you are interested in reading more about elder care issues, please visit our previous posts.

Reference: Seniors Matter (Feb. 22, 2022) “How do I handle my father’s financial matters now that he’s in hospice?”

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Blog Articles

Estate Planning complicated by Property in Two States

Trusts are Best for Gifting to Minors

Several Advantages in a Discretionary Trust

How to Obtain Power of Attorney for your Parent?

Gifting to your Loved Ones can reduce Taxes

A Second Marriage can complicate Estate Planning

Alternatives to replace Stretch IRA

Caring for sick Parent can be Challenging

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