What Is Income in Respect of Decedent?

November 8, 2021

What Is Income in Respect of Decedent? One of the tasks required after a person’s death is to pay taxes on their entire estate and often for the last year of their life. Most people know this, but not everyone knows taxes are also due on any income received after a person has died. Known as Income In Respect Of A Decedent or IRD, this kind of income has its own tax rules and they may be complex, says Yahoo! Finance in a recent article simply titled “Income in Respect of a Decedent (IRD).”

Income in respect of a decedent is any income received after a person has dies but not included in their final tax return. When the executor begins working on a decedent’s personal finances, things could become challenging, especially if the person owned a business, had many bank and investment accounts, or if they were unorganized.

What kinds of funds are considered IRDs?

Uncollected salary, wages, bonuses, commissions and vacation or sick pay.
Stock options exercised
Taxable distributions from retirement accounts
Distributions from deferred compensation
Bank account interest
Dividends and capital gains from investments
Accounts receivable paid to a small business owned by the decedent (cash basis only)

As a side note, this should serve as a reminder of how important it is to create and update a detailed list of financial accounts, investments and income streams for executors to work with to prevent possible losses.

How is IRD taxed? IRD is income that would have been included in the decedent’s tax returns, if they were still living but wasn’t included in the final tax return. Where the IRD is reported depends upon who receives the income. If it is paid to the estate, it needs to be included on the fiduciary return. However, if IRD is paid directly to a beneficiary, then the beneficiary needs to include it in their own tax return.

If estate taxes are paid on the IRD, tax law does allow for an income tax deduction for estate taxes paid on the income. If the executor or beneficiaries missed the IRD, an estate planning attorney will be able to help amend tax returns to claim it.

Retirement accounts are also impacted by IRD. Required Minimum Distributions (RMDs) must be taken from IRA, 401(k) and similar accounts as owners age. The RMDs for the year a person passes are also included in their estate. The combination of estate taxes and income taxes on taxable retirement accounts can reduce the size of the estate, and therefore, inheritances. Tax law allows for the deduction of estate taxes related to amounts reported as IRD to reduce the impact of this “double taxation.” Understanding Income in Respect of Decedent can prevent some major headaches for your loved ones after you pass. If you would like to learn more about IRDs, and other aspects of probate and trust administration, please visit our previous posts.

Reference: Yahoo! Finance (Oct. 6, 2021) “Income in Respect of a Decedent (IRD)”

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Trusts and Wills have some Key Differences

November 4, 2021

Trusts and wills are two different ways to distribute and control your assets after your death. Trusts and wills have some key differences. Family trusts and wills are both worthwhile estate planning tools that can make sure your assets are protected and will pass to heirs the way you intended, says MSN’s recent article entitled “Family Trusts vs. Wills: What Are the Differences Between These Estate-Planning Options?”

This article tells you what you need to know about the differences between family trusts and wills to help you avoid estate planning mistakes.

Remember that without a will, the state probate laws will determine what happens to your assets. It may or may not be what you want. In contrast, a will lets you state to whom you want to distribute your assets.

Note that a trust permits the grantor (the person making the trust) to do what he or she wants with the assets. A trust also avoids probate.

A family trust is a wise choice for those who want to provide for the management of their assets if they become incapacitated, people interested in keeping information about their assets and who inherits those assets private and those who have a significant number of assets or a large estate. Here are some other situations in which a family trust would be appropriate to use:

Asset protection from creditors and divorce
For disabled beneficiaries who need to qualify for government benefits
For tax-planning; and
For cost and time efficiency over a lengthy probate process.

Everyone should have a will. It’s a way to leave bequests, nominate guardians for a minor child and an executor.

If you have a family trust, you still need a will. There may be some assets not owned by the trust, such as vehicles and other personal property. There may also be payments due you at your death. Those assets must go through probate, if not arranged to avoid probate.

Once that process is complete, the assets are distributed to the family trust and are governed by its provisions. This is what is known as a “pour-over will” because the assets “pour over” to the family trust.

Trusts and wills have some key differences, so it is important to contact an experienced estate planning attorney to discuss the estate planning options available for you and your situation.

If you would like to read more about the differences between wills and trusts, and which is right for you, please visit our previous posts.

Reference: MSN (Aug. 27, 2021) “Family Trusts vs. Wills: What Are the Differences Between These Estate-Planning Options?”

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A lot of Flexibility in 529 Education Plans

November 3, 2021

Statecollege.com’s recent article entitled “Did You Know 529s Are Powerful Estate Planning Tools?” explains that specialized savings accounts, informally referred to as 529s, could be at the top of your list. There is a lot of flexibility in 529 education plans. These accounts have a number of advantages for beneficiaries. There are also benefits for the donors in the high maximum contribution limits and tax advantages.

Special tax rules governing these accounts let you decrease your taxable estate. That might minimize future federal gift and estate taxes. In 2021, the lifetime exclusion is now $11.7 million per person, so most of us don’t have to concern ourselves with our estates exceeding that limit. However, remember that the threshold will revert back to just over $5 million per person in 2026.

Under the rules that govern 529s, you can make a lump-sum contribution to a 529 plan up to five times the annual limit of $15,000. As a result, you can give $75,000 per recipient ($150,000 for married couples), provided you document your five-year gift on your federal gift tax return and don’t make any more gifts to the same recipient during that five-year period. You can, however, go ahead and give another lump sum after those five years are through. The $150,000 gift per beneficiary won’t have a gift tax, as long as you and your spouse follow the rules.

Many people think that gifting a big chunk of money in a 529 means they’ll irrevocably give up control of those assets. However, a lot of the flexibility in 529 education plans is allowing you to have considerable control—especially if you title the account in your name. At any time, you can get your money back, but it will be part of your taxable estate again subject to your nominal federal tax rate. There’s also a 10% penalty on the earnings portion of the withdrawal, if you don’t use the money for your designated beneficiary’s qualified education expenses.

If your chosen beneficiary doesn’t need some or all of the money you’ve put in a 529, you can earmark the money for other types of education, like graduate school. You can also change the beneficiary to another member of the family as many times as you like. This is nice if your original beneficiary chooses not to go to college at all.

In addition, you can take the money and pay the taxes on any gains. Normally, you’d also expect to pay a penalty on the earnings but not for scholarships. The penalty is waived on amounts equal to the scholarship, provided they’re withdrawn the same year the scholarship is received, effectively turning your tax-free 529 into a tax-deferred investment. You can always use the money to pay for other qualified education expenses, like room and board, books and supplies. If you are interested in learning more about 529 education plans, please visit our previous posts.

Reference: statecollege.com (Aug. 29, 2021) “Did You Know 529s Are Powerful Estate Planning Tools?”

Creating a Legacy Plan

November 2, 2021

Creating a legacy plan is a vital part of the financial planning process, ensuring the assets you have spent your entire life accumulating will transfer to the people and organizations you want, and that family members are prepared to inherit and execute your wishes.

Kiplinger’s recent article entitled “4 Reasons Families Fail When Transferring Wealth” gives us four common errors that can cause individuals and families to veer off track.

Failure to create a plan. It’s hard for people to think about their own death. This can make us delay our estate planning. If you die before a comprehensive estate plan is in place, your goals and wishes can’t be carried out. You should establish a legacy plan as soon as possible. A legacy plan can evolve over time. You should be creating a legacy plan that is grounded in what your or your family envisions today, but with the flexibility to be amended for changes in the future.

Poor communication and a lack of trust. Failing to communicate a plan early can create issues between generations, especially if it is different than adult children might expect or incorporates other people and organizations that come as a surprise to heirs. Bring adult children into the conversation to establish the communication early on. You can focus on the overall, high-level strategy. This includes reviewing timing, familial values and planning objectives. Open communication can mitigate negative feelings, such as distrust or confusion among family members, and make for a more successful transfer.

Poor preparation. The ability to get individual family members on board with defined roles can be difficult, but it can alleviate a lot of potential headaches and obstacles in the future.

Overlooked essentials. Consider hiring a team of specialists, such as a financial adviser, tax professional and estate planning attorney, who can work in together to ensure the legacy plan you have created will meet its intended objectives.

Whether creating a legacy plan today, or as part of the millions of households in the Great Wealth Transfer that will establish plans soon if they haven’t already, preparation and flexibility are uber important to wealth transfer success.

Create a legacy plan early on, have open communication with your family and review philosophies and values to make certain that everyone’s on the same page. As a result, your loved ones will have the ability to understand, respect and meaningfully execute the legacy plan’s objectives. If you would like to learn more about legacy planning, please visit our previous posts.

Reference: Kiplinger (Aug. 29, 2021) “4 Reasons Families Fail When Transferring Wealth”

How Does Medicaid Count Assets?

November 1, 2021

How does Medicaid count assets? For seniors and their families, figuring out how Medicaid works usually happens when an emergency occurs, and things have to be done in a hurry. This is when expensive mistakes happen. Understanding how Medicaid counts assets, which determines eligibility, is better done in advance, says the article “It’s important to understand how Medicaid counts your resources” from The News-Enterprise.

Medicaid is available to people with limited income and assets and is used most commonly to pay for long-term care in nursing homes. This is different from Medicare, which pays for some rehabilitation services, but not for long-term care.

Eligibility is based on income and assets. If you are unable to pay for care in full, you will need to pay nearly all of your income towards care and only then will Medicaid cover the rest. Assets are counted to determine whether you have non-income sources to pay for care.

Married people are treated differently than individuals. A married couple’s assets are counted in total, regardless of whether the couple owns assets jointly or individually. The assets are then split, with each spouse considered to own half of the assets for counting purposes only. Married couples have some additional asset exemptions as well.

Not all resources are considered countable. Prepaid funeral expenses, a car used to transport the person in the care family and qualified retirement accounts may be exempt from Medicaid’s countable asset limits.

For married couples, their residence for a “Community Spouse”—the spouse still living at home, and a large sum of liquid assets, are also excluded. Many non-countable assets are very specific to the individual situation or current events. For example, stimulus checks were exempt assets, but only for a limited time.

Medicaid sets a “snapshot” date to determine asset balances because some assets change daily. For unmarried individuals, all asset protections and spend-downs must happen prior to submitting the application to Medicaid. A detailed explanation must be included, especially if any assets were transferred within five years of the application.

For married couples, a Resource Assessment Request should be submitted to Medicaid before any action is taken. This document details all resources Medicaid will count and specifies exactly how much of these resources must be “spent down” by the institutionalized spouse for eligibility.

In many cases, assets are preserved by turning the countable asset into a non-countable income stream to the spouse remaining at home.

Medicaid application is a complicated process and should be started as soon as it becomes clear that a person will need to enter a facility. Understanding how Medicaid counts assets early in the process makes it more likely that property and assets can be preserved, especially for the spouse who remains at home. If you would like to learn more about Medicaid planning, please visit our previous posts.

Reference: The News-Enterprise (Oct. 5, 2021) “It’s important to understand how Medicaid counts your resources”

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Consider delaying Social Security Benefits

October 29, 2021

You might want to consider delaying Social Security benefits. Kiplinger’s recent article entitled “3 Reasons to Wait Until 70 to Start Taking Your Social Security Benefits” provides three reasons why delaying taking your Social Security benefit to age 70 is a decision you may want to consider.

You’ll Receive a Larger Monthly Social Security Check If You Wait Until 70. Claiming Social Security prior to full retirement age (FRA) means a reduction in benefits — as much as 25% to 30% less than you would have received if you had waited. This is permanent.

However, if you wait to take your benefits until after your FRA, Social Security will add an 8% delayed retirement credit to your eventual monthly payout each year you hold off, up until age 70.

You May Be Receiving these Benefits for a Long, Long Time. Life expectancy is a significant factor in Social Security planning. While you can’t predict how long you’ll live, the CDC’s most recent figures say the average American who makes it to age 65 can expect to live another 19 years. Note that if your Social Security benefit at 70 is more than 75% higher than your benefit at 62, you’re going to have a lot more money to take care of your needs as you age.

If you’re married, the lower Social Security payment will go away when one of you dies. If the spouse with the greater Social Security wage history delays as long as possible to file for benefits, he or she will leave behind a bigger benefit for the surviving spouse.

You Could Help Lower Your Taxes. Many people don’t realize that they could wind up paying federal income taxes on as much as 85% of their Social Security benefits. If you don’t have much taxable income in retirement, you may not have to pay any federal taxes on your Social Security benefits.

However, if you’re like many Baby Boomers — you may have a sizeable amount of your retirement savings in tax-deferred IRAs or 401(k)s — and the federal income taxes on those savings could be hefty. Therefore, it might be best to consider delaying Social Security benefits.

If you aren’t sure which Social Security claiming strategy is the best fit for your needs and goals, talk to an experienced estate planning attorney who is knowledgeable about retirement income planning and, specifically, Social Security benefits. If you would like to learn more about social security benefits, please visit our previous posts.

Reference: Kiplinger (Sep. 9, 2021) “3 Reasons to Wait Until 70 to Start Taking Your Social Security Benefits”

Small Business Owners need Estate Planning

October 28, 2021

Small business owners need estate planning. Not having an estate plan can place business owners and entrepreneurs in jeopardy because they may face difficulties in keeping the business running, if they have to withdraw from the business at any point in time.

Legal Reader’s recent article entitled “What Small Business Owners Should Know about Doing Estate Planning” explains that estate planning is necessary to ensure business continuity. Think about who can take control when you’re no longer around to have the business continue according to your wishes contained in your estate plan. An experienced attorney can help create a comprehensive estate plan, so things do not become chaotic for their family in the event of premature death or any permanent disability. Consider these steps when it comes to good estate planning for business owners.

Create an estate plan if you haven’t got one. A will is designed to detail your wishes about how you want the business to run and the manner of sharing your property at your death. A power of attorney allows an entrusted individual to undertake your business transactions and manage your finances, if you are incapacitated by injury or illness. A healthcare directive permits a trusted agent to make medical decisions on your behalf when you can’t do so yourself.

Plan for taxes. Tax planning is a major component of estate planning. Our tax laws keep changing frequently, so you have to stay in constant touch with your attorney to develop strategies for decreasing your tax liability, as well as creating a strategy for minimizing inheritance/estate taxes.

Buy life and disability insurance. Small business owners should think about purchasing life insurance, so their families can have a source of income after their death.

Create a succession plan. In addition to estate planning, a business owner should have a succession plan that specifies exactly how your company, and your family will prepare for a transition of ownership. The purpose of a well thought out succession plan is to keep the business operating or to take steps to sell it. This plan also includes the organizational structure of the business in case of maintaining business continuity.

Small business owners need to consider their employees as well as their family when drafting their estate planning. You should keep everyone impacted by your decisions apprised of your estate plan and your business succession plan. If you would like to learn more about estate planning for business owners, please visit our previous posts.

Reference: Legal Reader (Aug. 26, 2021) “What Small Business Owners Should Know about Doing Estate Planning”

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What type of Documents need a Notary ?

October 27, 2021

After the coronavirus pandemic hit, and the virus spread continued to surge throughout 2021, the methods of getting a document quickly and safely notarized evolved, reports WTOP’s article entitled “What Is a Notarized Document — and Where Can I Get Something Notarized?” So what types of documents need a notary?

“Notaries have bent over backwards to accommodate the varying needs during the pandemic,” says Bill Anderson, vice president of government affairs at the National Notary Association. “The pandemic didn’t stop business. Even though we’ve been working from home, and it’s been harder than usual to get work done, the types of documents that required notarization before the pandemic continue to require notarization during the pandemic.”

A notary is appointed by the state to serve as an impartial witness to protect against fraud. They act as gatekeepers during the signing of important documents. Moreover, they’re required to follow specific rules in accordance with state laws and regulations. Notarization is an official process in which the parties of a transaction make certain that a document is authentic and legitimate.

Notarization entails the verification of a signer’s identity, their willingness to sign without duress or intimidation, along with their awareness of the document’s contents.

Notarizations can also be called “notarial acts.”

There are three common types of notarial acts:

Acknowledgments, where a signer declares the signature on the document is his or her own, made willingly, for documents, such as real property deeds, powers of attorney, and trusts.
Jurats which verifies that paperwork is truthful. This typically involves documents associated with criminal or civil justice systems.
Certified copies include certifying the copying or reproduction of certain papers.

A notary will ask to see a current ID that has a photo, physical description and signature. He or she will also record the details of the notarization in a chronological journal of notarial acts.

If a document fails any of the criteria, the notary will refuse to validate the document.

The process is complete when the notary affixes his or her signature and seal of office on a notarial certificate. Talk with your estate planning attorney to make sure you have a full understanding of what type of documents need a notary and how the process works in your state.

If you would like to read more about estate planning documents and the process of signing, please visit our previous posts.

Reference: WTOP (Aug. 26, 2021) “What Is a Notarized Document — and Where Can I Get Something Notarized?”

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What Is a Dynasty Trust?

October 26, 2021

What is a dynasty trust? Don’t be put off by the term “dynasty.” Just as every person has an estate, even if they don’t live in a million-dollar home, every person who owns assets could potentially have a dynasty trust, even if they don’t rule a continent. If you have assets that you wish to pass to others, you need an estate plan and you may also benefit from a dynasty trust, says this recent article from Kiplinger, “A Smart Option for Transferring Wealth Through Generations: The Dynasty Trust.”

When parents die, assets are typically transferred to their descendants. In most cases, the assets are transferred directly to the heirs, unless a trust has been created. Estate taxes must be paid, usually from the assets in the estate. Inheritances are divided according to the will, after the taxes have been paid, and go directly to the beneficiary, who does what they want with the assets.

If you leave assets outright to heirs, when the beneficiary dies, the assets are subject to estate taxes again. If assets are left to grandchildren, they are likely to incur another type of taxes, called Generation Skipping Transfer Taxes (GSTT). If you want your children to have an inheritance, you’ll need to do estate planning to minimize estate tax liability.

If you own a Family Limited Partnership (FLP) or a Limited Liability Company (LLC), own real estate or have a large equity portfolio, you may have the ability to use gifting and wealth transfer plans to provide for your family in the future. You may be able to do this without losing control of the assets.

The “dynasty trust,” named because it was once used by families like the DuPont’s and Fords, is created to transfer wealth from generation to generation without being subject to various gift, estate and/or GSTT taxes for as long as the assets remain in the trust, depending upon appliable state laws. A dynasty trust can also be used to protect assets from creditors, divorcing spouses and others seeking to make a claim against the assets.

Many people use an Irrevocable Life Insurance Trust (ILIT) and transfer the assets free of the trust upon death. Most living trusts are transferred without benefit of being held within trusts.

A dynasty trust is usually created by the parents and can include any kind of asset—life insurance, securities, limited partnership interests, etc.—other than qualified retirement plans. The assets are held within the trust and when the grantor dies, the trust automatically subdivides into as many new trusts as the number of beneficiaries named in the trust. It’s also known as a “bloodline” trust.

Let’s say you have three children. The dynasty trust divides into three new trusts, dividing assets among the three. When those children die, the trust subdivides again for their children (grandchildren) in their own respective trusts and again, assets are divided into equal shares.

A dynasty trust offers broad powers for health, welfare, maintenance and support. The children can use the money as they wish, investing or taking it out. When created properly, the assets and growth are both protected from estate taxes. Speak with an estate planning attorney to make sure you fully understand what a dynasty trust is, and if it is right for you. You’ll need a trustee and a co-trustee and an experienced estate planning attorney to draft and execute this plan.

If you would like to learn more about a dynasty trust, and other types of multi-generational planning vehicles, please visit our previous posts.

Reference: Kiplinger (Oct. 2, 2021) “A Smart Option for Transferring Wealth Through Generations: The Dynasty Trust”

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The Estate of The Union Season 3|Episode 9

The Estate of The Union Episode 10

October 25, 2021

The Estate of The Union episode 10 is live!

In the newest installment of The Estate of The Union podcast, Brad Wiewel is joined by Melissa Donovan, Certified Elder Law Attorney and Director of Elder Law and Special Needs Planning to discuss ABLE accounts and how they work to protect the financial well-being of your special needs family member.

Families with loved ones with Special Needs have stresses and challenges that are difficult to measure. ABLE Accounts are a relatively new and innovative tool to use that can provide Special Needs loved ones with additional resources and help maximize their life style. The accounts allow eligible individuals to save money without putting their eligibility for government benefits at risk. The income from the account is not used for means testing for Social Security Income or Medicaid.

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

It is Estate Planning Made Simple!

The Estate of The Union episode 10 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 9 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.

Blog Articles

What Is Income in Respect of Decedent?

Trusts and Wills have some Key Differences

A lot of Flexibility in 529 Education Plans

Creating a Legacy Plan

How Does Medicaid Count Assets?

Small Business Owners need Estate Planning

What type of Documents need a Notary ?

What Is a Dynasty Trust?

The Estate of The Union Episode 10

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