Take care when Gifting to an Heir

November 23, 2021

Many people want to provide gifts to loved ones in their will. It is prudent to take care when gifting to an heir. Research shows that getting a lot of money can have harmful consequences. According to MarketWatch, a study found that a third of people who received an inheritance had negative savings within two years of the event.

Watertown Public Opinion’s recent article “How to make sure you leave inheritances that are helpful, not harmful” says that, on average, an inheritance is gone in about five years because of careless debts and bad investment behaviors.

However, a minority of heirs don’t mishandle their inheritances. Nonetheless, it’s good to explore exactly what you intend the gift to accomplish, prior to leaving money or property to someone. It’s also important to consider the possible negative consequences of a gift.

Determine if the gift will actually cost the recipient time or money. As an example, leaving the family home, vacation property, land, or a ranch to someone can often cost them money they may not have in maintenance or taxes.

You should also consider if it results in causing difficult emotional issues between siblings, and whether it might encourage bad financial behavior. If a beneficiary hasn’t developed healthy financial behaviors, a significant inheritance might actually create new financial troubles instead of addressing existing ones.

A good way to make certain that your bequests are helpful is to explore your own intentions. Ask yourself if you want to leave enough money for the beneficiary to become financially independent and if you’d you like your bequest used in a specific way, like to pay off debt or fund education.

Do you care how they spend the money?

Another way to provide for thoughtful, conscious inheritances, is to speak with the intended recipients.

Ask them directly whether someone would want a bequest, such as a valuable art or coin collection or perhaps an expensive vacation home. Discuss the options and possibilities and don’t simply take for granted what your heirs might want or what they might do with an inheritance.

Leaving a family member an inheritance can be helpful in some instances, but may be exceedingly destructive in others. Take care when providing gifts to an heir. No two situations are alike, and if you want to increase the chances that your bequests will be helpful, explore and improve your own relationship with money. Examining that relationship can help make sure that what you leave to heirs will be a benefit not a burden. If you would like to learn more about gifting in your estate planning, please visit our previous posts.

Reference: Watertown Public Opinion (Nov. 1, 2021) “How to make sure you leave inheritances that are helpful, not harmful”

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How to file Taxes after your Spouse Dies

November 22, 2021

Losing a spouse is crushing blow for anyone. A question that quickly comes up is how to file taxes after your spouse dies? About two-thirds of surviving spouses are women. While some are able to avoid major mistakes, taxes are a source of frustration, rife with potential problems. Deadlines are especially challenging, according to the article “The Death of a Spouse is Hard. Taxes Makes It Harder” from The Wall Street Journal.

The combination of emotional upheaval and needing to make complex decisions is overwhelming. Some widows need cash and are forced to sell the family home within two years to get an exemption of $500,000 on the sale proceeds. If you miss the deadline, the exemption shrinks to $250,000.

Others will convert traditional IRAs to Roth IRAs in the year their spouse dies, to capture lowered taxes on the conversion.

However, in all cases, spouses need to check withholding or estimated taxes, especially if the spouse who died was the one who made payments to the IRS. Underpayment penalties add up fast.

Here are some key things to watch for:

Filing an estate tax return. The current estate and gift-tax exemption is $11.7 million per person, so most people don’t need to pay federal estate tax. Executors don’t need to file a return if the decedent’s estate is below exemption levels. However, they should. Here’s why: filing an estate tax return will allow the surviving spouse to have the partner’s unused exemption and add it to their own. Claiming the unused exemption could have larger implications in the future when exemptions change.

Estate taxes are normally due nine months after the date of death. The IRS allows executors to claim the unused exemption for the spouse up to two years after the date of death, but the estate tax must be filed within the time period.

The year a spouse dies is the last year a couple may file jointly. Afterwards, the survivor files as a single person or if there are dependent children, as a surviving widow or widower. Be careful about the shift from joint to single filer. The surviving spouse’s tax rate may stay the same or rise when their income drops. There’s an expression for this, as it occurs so often: the widow’s penalty.

Surviving spouses may roll over inherited retirement accounts into their own names. However, if there is a significant age difference, this may not be the best strategy. New widows and widowers should consider their options carefully.

Filers must send the IRS 90% of their total tax for the year by December 31. This amount is often divided unequally between spouses. If the partner who died paid most of the withholding for estimated taxes, the survivor may need to make changes or risk underpayment penalties when taxes are paid in April. This is especially likely to occur if the spouse died early in the year. Sit down with an experienced estate planning attorney who can help you file taxes after your spouse dies. If you would like to learn more about probate, please visit our previous posts.

Reference: The Wall Street Journal (Oct. 29, 2021) “The Death of a Spouse is Hard. Taxes Makes It Harder”

The Estate of The Union Season 3|Episode 9

Estate of The Union Episode 11-Millennials’ Mysteries Uncovered!

November 19, 2021

The Estate of The Union episode 11-Millennials’ Mysteries Uncovered is out now!

Millennials are often seen as a mysterious generation that frustrates those from older groups with their unique thoughts and habits. This generation is made up of people born between 1981 and 1996, and grew up at a time of tremendous change and advancement in technology and culture. They see the world very differently than their parents; and that is reflected in how they live, how they love and how they vote. As Millennials advance into adulthood, and begin to take a larger role in shaping society, it is time to take a look at how they tick.

In this episode of The Estate of the Union, Brad Wiewel interviews his son, Sam Wiewel, who is 31 years old and a confirmed Millennial. They discuss many of the differences between Brad’s Boomer generation and Sam’s Millennials, everything from communication issues to courting!

It proves to be a lively – and at times hilarious – conversation. If you Listen, you will Learn.

In each episode of The Estate of The Union podcast, host and lawyer Brad Wiewel will give valuable insights into the confusing world of estate planning, making an often daunting subject easier to understand.

It is Estate Planning Made Simple!

The Estate of The Union episode 11-Millennials’ mysteries uncovered can be found on Spotify, Apple podcasts, or anywhere you get your podcasts. Please click on the link below to listen to the new installment of The Estate of The Union podcast. The Estate of The Union Episode 11 out now. We hope you enjoy it.

Texas Trust Law/Texas Trust Law focuses its practice exclusively in the area of wills, probate, estate planning, asset protection, and special needs planning. Brad Wiewel is Board Certified in Estate Planning and Probate Law by the Texas Board of Legal Specialization. We provide estate planning services, asset protection planning, business planning, and retirement exit strategies.

What a Will Can and Cannot Do

November 18, 2021

Everyone needs a will. A last will and testament is how an executor is named to manage your estate, how a guardian is named to care for any minor children and how you give directions for distribution of property. However, not all property passes via your will. You’ll want to know what a will can and cannot do, as well as how assets are distributed outside of a will. This was the topic of “The Legal Limits of Your Will” from AARP Magazine.

Retirement and Pension Accounts

The beneficiaries named on retirement accounts, including 401(k)s, pensions, and IRAs, receive these assets directly. Some states have laws about requiring spouses to receive some or all assets. However, if you don’t keep these beneficiary names updated, the wrong person may receive the asset, like it or not. Don’t expect anyone to willingly give up a surprise windfall. If a primary beneficiary has died and no contingency beneficiary was named, the recipient may also be determined by default terms, which may not be what you have in mind.

Life Insurance Policies.

The beneficiary designations on an insurance policy determine who will receive proceeds upon your death. Laws vary by state, so check with an estate planning attorney to learn what would happen if you died without updating life insurance policies. A simpler strategy is to create a list of all of your financial accounts, determine how they are distributed and update names as necessary.

Note there are exceptions to all rules. If your divorce agreement includes a provision naming your ex as the sole beneficiary, you may not have an option to make a change.

Financial Accounts

Adding another person to your bank account through various means—Payable on Death (POD), Transfer on Death (TOD), or Joint Tenancy with Right of Survivorship (JTWROS)—may generally override a will, but may not be acceptable for all accounts, or to all financial institutions. There are unanticipated consequences of transferring assets this way, including the simplest: once transferred, assets are immediately vulnerable to creditors, divorce proceedings, etc.

Trusts

Trusts are used in estate planning to remove assets from a personal estate and place them in safekeeping for beneficiaries. Once the assets are properly transferred into the trust, their distribution and use are defined by the trust document. The flexibility and variety of trusts makes this a key estate planning tool, regardless of the value of the assets in the estate.

Take the time to sit down with an experienced estate planning attorney who help you understand the limitations of what a will can and cannot do. If you would like to read more about wills and how they are structured, please visit our previous posts.

Reference: AARP Magazine (Sep. 29, 2021) “The Legal Limits of Your Will”

Update Estate Plan after Divorce

November 17, 2021

Don’t forget to update your estate plan after a divorce, or you risk your assets being distributed to your ex-spouse when you pass away.

Investopedia’s recent article “Here’s what you need to remove and add to your will when your marriage is over,” says that many states have laws that, after a divorce, automatically revoke gifts to a former spouse listed in a will. There are states that also revoke gifts to family members of a former spouse. If you’re in a state that has such a law, gifts to former stepchildren would also be revoked after your divorce.

Most married people leave everything in their will to their surviving spouse. If that’s the way that your will currently reads, be certain that you change your ex as a beneficiary and add a new beneficiary. Remember that many types of assets are passed outside of a will, such as life insurance, 401k’s and other investments. Therefore, you must change the beneficiary designation on those documents.

Property Transfers. Update your will for any property gained or lost during the divorce. If you have assets that are specifically identified in your will, be sure to update them for any changes that may have happened because of the divorce.

The Executor of your Will. If your ex-spouse is named in your will as your executor, you should change this.

A Guardian for Minor Children. If you have children with your ex-spouse, you will want to update your will to appoint a guardian, if you and your ex-spouse pass suddenly at the same time. If you die, your children will likely be raised by your ex-spouse.

The Best Way to Change Your Will After Divorce. It’s easy: tear up your old will (literally) and begin again because you probably left everything or almost everything to your spouse in your original will. Just because you’re legally married until a judge signs a divorce decree, you can still modify your will or estate plan at any time. Ask an estate planning attorney because there some actions you can’t take until the divorce is final.

Can an Ex Challenge Your Will? An ex-spouse or even ex-de facto partner can challenge the will of a former spouse or partner. Whether the challenge will be successful will depend on the court’s interpretation of a number of factors.

A divorce is one of those times in life when you cannot forget to update your estate plan. There could be significant consequences to your inaction. Sit down with an estate planning attorney right away to review your plans. If you would like to learn more about estate planning and divorce, please visit our previous posts.

Reference: Investopedia (Sep. 14, 2021) “Here’s what you need to remove and add to your will when your marriage is over”

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Include Special Needs Child in Retirement Planning

November 16, 2021

Neglecting to update an estate plan is always problematic. However, failing to update an estate plan when the family includes a special needs child can lead to disaster. An article from Barron’s titled “Retirement Planning? Don’t Forget to Review Plans for Special Needs Children” explains how this can be prevented before problems arise. So how do you include a special needs child in retirement planning?

Decisions made in the past may no longer be appropriate, or even permitted. A grandparent may have been named as a guardian ten years ago and may have moved to another part of the country or died. A retirement plan based on selling the family home and downsizing to a small apartment may no longer be feasible. Healthcare insurance choices may be limited after retirement. In other words, life changes and estate plans need to change also.

Children with special needs who receive Supplemental Security Income (SSI) and Medicaid may not have more than $2,000 of assets in their name. If they are listed as beneficiaries on retirement plans or life insurance proceeds, they will become ineligible for these benefits. Money should never be left directly to a child with special needs, but it can be left through a Special Needs Trust. Parents may not realize how critical this is, or they may overlook changing beneficiary designations. Either way, the results can be financially devastating.

Talk with grandparents and any relatives who might want to leave something to a special needs child. Chances are they have no idea how an inheritance can impact a special needs family member.

Laws concerning funding a Special Needs Trust have changed. The ten-year rule on required distributions no longer applies to beneficiaries of qualifying Special Needs Trusts, so the SNT may be a beneficiary of a qualified retirement plan. A Roth IRA may be the best way to leave assets to an SNT, as there are no taxes due on withdrawals.

Life insurance is often used to care for a special needs family member. A second-to-die life insurance policy can be used to insure both parents and pay to the SNT on the death of the second parent, when the money is needed most. If one parent doesn’t qualify because of health issues, their underwriting may be balanced by the good health of another parent, which may keep premiums reasonable. Make sure the laws of your state and financial institution permit the proceeds to be directed to an SNT.

An ABLE account is a tax-advantaged savings plan for individuals with disabilities. The account can be opened for an individual at any age, as long as the disability onset occurred before age 26. Talk with an estate planning attorney to ensure the individual will qualify for this type of account. The 2021 annual contribution limit is $15,000. However, there are many exceptions, so don’t do this without professional help. For instance, SSI may be suspended, if the account balance rises about $100,000. Be sure the amount in the ABLE account won’t put means-tested programs at risk.

It need not be overwhelming to Include a special needs child in your retirement planning. Consult closely with an Elder Law attorney as well as your financial advisor to ensure you have a solid plan. If you would like to learn more about special needs or retirement planning, please visit our previous posts.

Reference: Barron’s (Oct. 23, 2021) “Retirement Planning? Don’t Forget to Review Plans for Special Needs Children”

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You should Consider a Prenup over 60

November 12, 2021

If you are planning to get married, you should consider a prenup over 60 years of age. A “prenup” can spell out which expenses will belong to each individual and which will be for the couple. In addition, a prenup can state where marital assets will go in case of death or divorce, says FedWeek’s recent article entitled “A Prenup May Be Prudent for Later-Life Marriages.”

In some states, a prenuptial agreement is called an “antenuptial agreement” or a “premarital agreement.”

Sometimes the word “contract” is used rather than “agreement,” as in “prenuptial contract.”

An agreement made during marriage, rather than before, is known as a “postnuptial,” “post-marital,” or “marital” agreement.

For a prenup to be valid, each party should seek the advice of an attorney. These attorneys should be independent of each other, so one attorney shouldn’t represent both parties. The agreement should fully disclose each spouse-to-be assets and liabilities.

Here are some reasons that some people want a prenup:

Pass separate property to children from your prior marriages. A marrying couple with children from prior marriages may sign a prenup to state what will occur to their assets when they die, so that they can pass on separate property to their children and still provide for each other, if necessary. Without a prenup, a surviving spouse may have the right to claim a large piece of the other spouse’s property, resulting in much less for the stepchildren.
Clarify financial rights. Couples with or without children may just want to clarify their financial rights and responsibilities during marriage.
Avoid disagreements in a divorce. A couple may want to avoid potential arguments if they divorce, by stating in advance the way in which their property will be divided, and whether or not either spouse will receive alimony (some states won’t allow a spouse to give up the right to alimony).
Protection from debts. These agreements can also be used to protect spouses from each other’s debts, and they may also speak to a number of other issues.

Some prenups have been ruled invalid by the courts, when one spouse appears to have pressured the other to sign the contract right before the wedding. To implement a prenup, don’t wait until the last minute. Before making marriage plans, consider creating a prenup if you are over 60. If you would like to read more about second marriages, or marriage later in life, please visit our previous posts.

Reference: FedWeek (Aug. 25, 2021) “A Prenup May Be Prudent for Later-Life Marriages”

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Providing Financial Security to your Heirs

November 11, 2021

AARP’s recent article “6 Ways to Pass Wealth to Your Heirs” says that providing financial security to your heirs after you’re gone is a goal you can reach in a number of ways.

Lets’ look at a few common options, along with their pluses and minuses:

401(k)s and IRAs. These grow tax-free while you’re alive and will continue tax-free growth after your beneficiaries inherit them. Certain heirs, such as spouses and people with disabilities, can hold these accounts over their lifetime. Withdrawals from Roth IRAs and Roth 401(k)s are nearly always tax-free. However, other heirs not in those categories have to empty these accounts within 10 years.
Taxable accounts. Heirs now get a nice tax break on investments that have grown in value over time. Say that years ago you bought stock for $300 that now trades for $3,000. If you sold it now, you’d owe taxes on $2,700 in capital gains. However, if your son inherited the stock when it was trading at $3,000 and sold it at that price, he’d owe no taxes on the sale. However, note that the Biden administration has proposed limiting the amount of investment capital gains free from taxes in this situation, which could impact wealthier families.
Your home. If you own a home, it’ll typically be the most valuable non-financial asset in your estate. Heirs might not have to pay capital gains tax on it, if they sell it. However, use caution: whoever inherits the home will have to cover large expenses, such as upkeep and taxes.
Term life insurance. This can be a great tool for loved ones who depend on your income or rely on your unpaid caregiving. You can get a lot of coverage for very little money. However, if you purchase plain-vanilla term insurance and don’t die while the policy is in force, you don’t get the money back.
Whole life insurance. These policies provide a guaranteed death benefit for heirs and a cash-value component you can access for emergencies, long-term care, or other needs. However, these policies are more expensive than term insurance.
Annuities. A joint-and-survivor annuity guarantees the survivor (your spouse, perhaps) a steady stream of income for life. Annuities with a death benefit can provide a lump sum for a beneficiary. However, while you’re alive, annual fees for variable annuities can be high, limiting potential returns. Moreover, cashing in your annuity for a lump sum may be expensive or impossible.

Bonus Tip. Discuss your plans with your children sooner rather than later, especially if you are leaving them different amounts or giving a large sum to a favorite cause, so you have time to explain your rationale. Work with an estate planning attorney who can help structure your planning to ensure you are providing financial security to your heirs. If you would like to learn more about estate planning and managing generational wealth, please visit our previous posts.

Reference: AARP (Sep. 9, 2021) “6 Ways to Pass Wealth to Your Heirs”

Understanding how Irrevocable Trusts work

November 10, 2021

However, below the surface of estate planning and the world of trusts, things get complicated. Revocable trusts become irrevocable trusts, when the grantor becomes incapacitated or dies. It is just one of the many twists and turns in trusts, as reported in the article “What’s the difference between a revocable and irrevocable trust” from Market Watch. If you are considering trusts as an option in your planning, understanding how irrevocable trusts work is vital.

For starters, the person who creates the trust is known as the “grantor.” The grantor can change the trust while living, or while the grantor has legal capacity. If the grantor becomes incapacitated, the grantor can’t change the trust. An agent or Power of Attorney for the grantor can make changes, if specifically authorized in the trust, as could a court-appointed conservator.

Despite the name, irrevocable trusts can be changed—more so now than ever before. Irrevocable trusts created for asset protection, tax planning or Medicaid planning purposes are treated differently than those becoming irrevocable upon the death of the grantor.

When an irrevocable trust is created, the grantor may still retain certain powers, including the right to change trustees and the right to re-direct who will receive the trust property, when the grantor dies or when the trust terminates (these don’t always occur at the same time). A “testamentary power of appointment” refers to the retained power to appoint or distribute assets to anyone, or within limitations.

When the trust becomes irrevocable, the grantor can give the right to change trustees or to change ultimate beneficiaries to other people, including the beneficiaries. A trust could say that a majority of the grantor’s children may hire and fire trustees, and each child has the right to say where his or her share will go, in the event he or she dies before receiving their share.

Asset protection and special needs trusts also appoint people in the role of trust protectors. They are empowered to change trustees and, in some cases, to amend the trust completely. The trust is irrevocable for the grantor, but not the trust protector. Another trust might have language to limit this power, typically if it is a special needs trust. This allows a trust protector to make necessary changes, if rules regarding government benefits change regarding trusts.

Irrevocable trusts have become less irrevocable over the years, as more states have passed laws concerning “decanting” trusts, reformation and non-judicial settlement of trusts. Decanting a trust refers to “pouring” assets from one trust into another trust—allowing assets to be transferred to other trusts. Depending on the state’s laws, there needs to be a reason for the trust to be decanted and all beneficiaries must agree to the change.

Trust reformation requires court approval and must show that the reformation is needed if the trust is to achieve its original purpose. Notice must be given to all current and future beneficiaries, but they don’t need to agree on the change.

The Uniform Trust Code permits trust reformation without court involvement, known as non-judicial settlement agreements, where all parties are in agreement. The law has been adopted in 34 states and the District of Columbia. Any change that doesn’t violate a material purpose of the trust is permitted, as long as all parties are in agreement. An experienced estate planning attorney can ensure you have a firm understanding of how irrevocable trusts work. If you would like to learn more about the different types of trusts, please visit our previous posts.

Reference: Market Watch (Oct. 8, 2021) “What’s the difference between a revocable and irrevocable trust”

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Talking to Parents about Estate Planning

November 9, 2021

Talking to your parents about estate planning can be a daunting task. If you don’t have this conversation when they are able to share information and provide you with instructions, helping with their care if they become incapacitated or dealing with their estate after they pass will be far more difficult. None of this is easy, but there are some practical strategies shared in the article “How to Talk to Your Parents About Estate Planning” from The Balance.

Parents worry about children fighting over estates after they pass, but not having a “family meeting” to speak about estate planning increases the chance of this happening. In many cases, family conflicts lead to litigation, and everyone loses.

Start by including siblings. Including everyone creates an awareness of fairness because no one is being left out. A frank, open conversation including all of the heirs with parents can prevent or at least lessen the chances for arguments over what parents would have wanted. Distrust grows with secrets, so get everything out in the open.

When is the right time to have the conversation? There is no time like the present. Don’t wait for an emergency to occur—what most people do—but by then, it’s too late.

Estate planning includes preparing for issues of aging as well as property distribution after death. Health care power of attorney and financial power of attorney need to be prepared, so family members can be involved when a parent is incapacitated. An estate planning attorney will draft these documents as part of creating an estate plan.

The unpredictable events of 2020 and 2021 have made life’s fragile nature clear. Now is the time to sit down with family members and talk about the plans for the future. Do your parents have an estate plan? Are there plans for incapacity, including Long-Term Care insurance? If they needed to be moved to a long-term facility, how would the cost be covered?

Another reason to have this conversation with family now is your own retirement planning. The cost of caring for an ailing parent can derail even the best retirement plan in a matter of months.

Define roles among siblings. Who will serve as power of attorney and manage mom’s finances? Who will be the executor after death? Where are all of the necessary documents? If the last will and testament is locked in a safe deposit box and no one can gain access to it, how will the family manage to follow their parent’s wishes?

Find any old wills and see If trusts were established when children were young. If an estate plan was created years ago and the children are now adults, it’s likely all of the documents need to be revised. Review any trusts with an estate planning attorney. Those children who were protected by trusts so many years ago may now be ready to serve as executor, trustees, power of attorney or health care surrogate.

Talking to your parents about estate planning does not have to be huge event. Usually, a complete understanding of the parent’s wishes and reasons behind their estate plan takes more than a single conversation. Some of the issues may require detailed discussion, or family members may need time to process the information. However, as long as the parents are living, the conversation should continue. Scheduling an annual family meeting, often with the family’s estate planning attorney present, can help everyone set long-term goals and foster healthy family relationships for multiple generations. If you would like to learn more about family meetings, and other difficult conversations about estate planning, please visit our previous posts.

Reference: The Balance (Oct. 15, 2021) “How to Talk to Your Parents About Estate Planning”

Blog Articles

Take care when Gifting to an Heir

How to file Taxes after your Spouse Dies

Estate of The Union Episode 11-Millennials’ Mysteries Uncovered!

What a Will Can and Cannot Do

Update Estate Plan after Divorce

Include Special Needs Child in Retirement Planning

You should Consider a Prenup over 60

Providing Financial Security to your Heirs

Understanding how Irrevocable Trusts work

Talking to Parents about Estate Planning

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