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A properly created will is used to distribute assets, name the executor of the estate, provide details for the powers you want the executor to have and more, depending on what you want the will to accomplish. Most importantly, you want to be sure your will is valid, as explained in a recent article “Estate Planning: A valid will” from Lake Country News.
There are times when an unhappy heir receives less than expected, or for whatever reason, the heir feels they have been shortchanged. If this results in litigation, the will must not only be valid, but strong enough to withstand a legal challenge.
A will may only be executed by a person who is of sound mind at the time they sign the will, and who is signing the will without any kind of duress, menace, or undue influence. The law sometimes presumes the signature has been made under duress in certain situations, such as when a paid caregiver is the recipient of an unusually large gift. Incapacity or duress is a common reason for wills to be challenged.
A will may be valid if it satisfies the estate laws of your state of residence. While there are instances when a holographic will—one that has been handwritten, may be accepted—it is more easily challenged than a will created and executed with an estate planning attorney.
The will must be signed by the person making the will, i.e., the testator, and depending upon the state, must be witnessed by one or two people at the same time. Your estate planning attorney will be familiar with the laws of your state. Those two witnesses must see the testator either signing the will or acknowledging the will in their presence. If you have a will in a state that requires one witness, but move to a state requiring two witnesses, your will may be deemed invalid.
Different states also have different requirements for accepting wills prepared in another state. Some states have reciprocity, whereas as long as the will aligns with the state’s law at the time it was executed, it is acceptable. Others are not so flexible.
As a result of the Covid pandemic, some states now permit witnessing documents to take place remotely, usually through a video platform like Zoom or Facetime. These rules vary from state to state, with some states ending the practice in 2021 and others restarting this method in 2022. Check with your estate planning attorney to learn if a will may be witnessed remotely.
When the will is filed with the court to begin the probate process, the court will examine the will to be sure it complies with the state’s law. Any assets outside of the will—i.e., trusts—are not subject to probate and are not considered part of the taxable estate. One of the reasons to have trusts is to remove the asset from the estate for tax purposes, but also to keep the asset private. Only the grantor, trustee and estate planning attorney know the trusts exist and what they contain.
Heirs who feel they have been shortchanged may not know about assets in trust, which is likely the reason the grantor had the trusts created in the first place.
Reference: Lake County News (Dec. 31,2021) “Estate Planning: A valid will”
“Last year, the Social Security Administration announced that seniors would be getting their largest cost-of-living adjustment, or COLA, in decades. Fueled by rampant inflation, Social Security benefits are in line for a 5.9% boost this year.”
The COLA increase in Social Security is welcomed by seniors depending upon their benefits but the timing varies, says the article “Social Security Benefits Get a 5.9% Raise This Year—Here's When You Should See That Extra Money” from the Lincoln Journal Star. Here’s what you can expect.
The first benefit check or automatic deposit should arrive with the 5.9% COLA. However, the timing depends upon your date of birth. If your birthday falls between the first and the 10th of the month, those benefits should arrive on the second Wednesday of the month, so by January 12, you’ve should have received your first Social Security benefit with the COLA.
What if your birthday is between the 11th and 20th of the month? Benefits should arrive by the third Wednesday of the month. That’s a raise on January 19.
And if your birthday is late in the month, between the 21st and 31st, expect your benefits on the fourth Wednesday of the month—that would be January 26.
A caveat—if you’re collecting Social Security but have not yet enrolled in Medicare, then you’ll see a monthly increase of 5.9%. However, if you’ve enrolled in Medicare Part B and pay premiums directly from your benefits, your increase will be less. This is the push me—pull you of Social Security COLAs.
Medicare Part B premiums have increased, from $148.50 in 2021 to $171.10 in 2022, a total increase of $21.60. So, while you may have hoped for a true 5.9% increase, subtract the COLA from your premium hike to see what monthly benefit you’ll really get.
The annual deductible for all Medicare Part B beneficiaries is $233 in 2022. That’s a $30 increase from the $203 annual deductible in 2021.
Yes, this is the biggest COLA increase in a long time, as we have been in a low inflation environment for a very long time. If possible, it would be wise to take your COLA increase and set it aside to create or enhance a financial cushion. However, when living costs for everything from food to gas keep going up, it’s simply not possible for most people to save.
The reason this year’s COLA was so large is because of the high inflation rates from the third quarter of 2021. If inflation had been less, so would have been the increase. We don’t know what the future of Social Security will be, or what future COLAs will be. However, if at all possible, building in a little security of your own is the best recommendation.
Reference: Lincoln Journal Star (Jan. 7, 2022) “Social Security Benefits Get a 5.9% Raise This Year—Here's When You Should See That Extra Money”
It’s possible that some of these proposals may be enacted in 2022, but for now, they are moot. In the meantime, exemptions have increased for inflation, giving taxpayers a chance to lock in rates and exemptions before the federal estate tax sunsets to $5 million and some “change” for inflation. That’s the advice from a recent article, “2022 Transfer Tax Update,” from Forbes.
For now, the increased transfer tax exemptions are:
The IRS and the Treasury Department have both stated they will not attempt any claw-backs from gifts given between 2018—2025 for a taxpayer who dies in 2026 or beyond, when the exemptions return to the $5 million mark under the 2012 Act.
The opportunity to take advantage of these exemptions is now. A variety of estate planning techniques are still available. Shifting income-producing assets to individuals in lower income tax brackets or who live in states with no or lower income taxes may be appropriate.
Anyone who may have used all or most of their prior exemptions may want to consider making additional lifetime gifts in 2022. Let’s say you used all of your $11.7 million exemption in 2021. You may now gift an additional $360,000 in 2022.
Does this mean your estate plan needs to be revised? If you’re like most people, your estate plan is relatively flexible. However, if you haven’t reviewed or revised your estate plan in two or three years, it’s time to make an appointment with your estate planning attorney. There have been many changes in the law in recent years, and chances are, changes in your life since the last time your plan was reviewed.
The GST tax is not portable on the death of a spouse. Certain states (including New York, Connecticut, and Massachusetts) don’t permit estate tax exemption portability. A bypass trust may be the solution.
The gift tax annual exclusion amount has increased to $16,000 for individuals ($32,000 by married couples). It may be better to gift securities of interests in privately held companies or other family entities. Assets gifted now may be worth less than they were previously, and if they increase in the future, you’ve created a built-in discount.
Talk with your estate planning attorney to make the most out of these tax situations before they go away.
Reference: Forbes (Jan. 4, 2022) “2022 Transfer Tax Update”
“The rise in the stock market over the past several years, teamed with the passage of the SECURE Act two years ago and the scheduled 50% reduction in the size of the federal estate tax exemption four years from now, has resulted in a renewed interest in estate planning for IRA and 401(k) accounts owned by married couples.”
For married couples who own large IRA and 401(k) accounts, the question is often whether the couple should consider paying all or a portion of their accounts to a bypass trust to benefit the surviving spouse. This takes the designated portion of the IRA or 401(k) proceeds out of the surviving spouse’s taxable estate and helps with asset distribution, according to the article “Estate Planning for Married Couples’ IRAs And 401(k)s” from Financial Advisor.
In 2013, the portability election became law. Portability allows the surviving spouse to use the unused federal estate tax exemption of the deceased spouse, thereby capturing not one but two estate tax exemptions. Why would a couple need a bypass trust?
The portability election does not remove appreciation in the value of the assets moved from the surviving spouse’s taxable estate. A bypass trust removes all appreciation. An estate planning attorney will review your entire situation to determine the optimal path.
There are also situations when the portability election does not apply. One is if the surviving spouse remarries and then the new spouse predeceases them. With a bypass trust, remarriage does not matter (although estate planning documents do need to be updated).
The portability election also does not apply for federal generation-skipping transfer tax purposes. In other words, the amount that could have passed to an estate and generation-skipping transfer tax-exempt bypass trust, including appreciated value, could now be subject to federal transfer tax in the heir’s estate.
If you use the portability election, those assets are subject to potential lawsuits against the surviving spouse and, if remarriage occurs, to any potential claims of a new spouse. A bypass trust provides better protection from lawsuits and claims.
Using the portability election may result in the first spouse to die losing the option to control where those assets go upon the death of the surviving spouse. A bypass trust provides more control for asset distribution.
The calculations for each situation must be considered, but the bypass trust can help reduce the taxable estate for children, after the surviving spouse has passed. It may also make sense for a portion of the IRA or 401(k) plan proceeds to go to the bypass trust and another portion to the surviving spouse outright. The use of the beneficiary designation may allow for a full or partial disclaimer by the surviving spouse. However, the bypass trust could provide more flexibility than keeping assets in the original accounts.
Reference: Financial Advisor (Jan. 7, 2022) “Estate Planning for Married Couples’ IRAs And 401(k)s”
One of the goals of estate planning is to care for loved ones, particularly those who depend on us for care after we have passed on. Wills, trusts, life insurance and beneficiary designations are all used to provide support to people—but what about pets? There is something you can do to protect your furry companions, says a recent article from The Sentinel, “Elder Care: Estate planning for your furry friends.”
We love our pets, to the tune of $103.6 billion in expenditures in 2020, including everything from pet food, toys, bedding, veterinary care, grooming, training and even Renaissance style portraits of pets. Scientific studies have proven the emotional and physical advantages pet ownership confers, not to mention the unconditional love pets bring to the household. So why not protect your pets, as well as other family members?
Many people rely on informal agreements with good friends or family members to take care of Fluffy or Spice, if the owner dies or becomes sick to take care of their pet. Here’s the problem: these informal agreements are not binding. Even if you’ve left a certain sum of money to a person in your will and ask it to be used solely for the care and well-being of your pet, it’s not enforceable.
We know all things change. What if your chosen pet caretaker has a child or a new romance with someone with a deathly allergy to pet dander? Or if their pet, who always used to play well during your visits, won’t tolerate your beloved pet as a housemate?
The informal agreement won’t hold the person accountable, and the funds may be spent elsewhere.
A better option is to use a pet trust. These have been recognized in all fifty states as a lawful way to provide for your animal companion’s needs. A pet trust can be created to provide for your pet during your lifetime, as well as after you have passed, allowing for continuity of care if you become incapacitated and need someone else to have the resources and guidance to care for your pet.
A pet trust is a legal document, prepared by an estate planning attorney and usually includes financial accounts in the name of the trust. Note the pet does not own the trust (animals may not own property), nor do you as the creator of the trust (the grantor). The trust is a legal entity, managed by the trustee.
A few of the things you’ll need to consider before having a pet trust created:
Who is to be the pet’s guardian? Have more than one person in mind, in case the primary pet guardian cannot serve or changes their mind.
If all of your guardians end up unable or unwilling to serve, name a no-kill animal shelter or rescue organization to take your pet. They may require you to plan in advance to cover the cost of caring for your pet. Larger organizations may have a process for a charitable remainder trust (CRT) as part of this type of arrangement.
Give details about pet preferences. If they are AKC registered, use their formal name as well as their regular name. People often fail to use the correct name in legal documents, even for humans, which can lead to legal challenges.
Do you want the same person to serve as trustee, managing funds for the pet, as the guardian? This is a similar decision for naming a guardian for minor children. Sometimes the person who is wonderful with care is not so skilled at handling finances.
Finally, include instructions about what should happen to the money left after the pet passes. It may be used as a thank you to the person who cared for your beloved companion, or a gift to an animal organization.
Reference: The Sentinel (Jan. 7, 2022) “Elder Care: Estate planning for your furry friends.”
Estate planning attorneys are often asked if a particular asset will be included in an estate, from life insurance and real estate to employment contracts and Health Savings Accounts. The answer is explored in the aptly-titled article, “Will It (My Home, My Life Insurance, Etc.) Be in My Estate?” from Kiplinger.
When you die, your estate is defined in different ways for different planning purposes. You have a gross estate for federal estate taxes. However, there’s also the probate estate. You may also be thinking of whether an asset is part of your estate to be passed onto heirs. It depends on which part of your estate you’re focusing on.
Let’s start with life insurance. You’ve purchased a policy for $500,000, with your son as the designated beneficiary. If you own the policy, the entire $500,000 death benefit will be included in your gross estate for federal estate tax purposes. If your estate is big enough ($12.06 million in 2022), the entire death benefit above the exemption is subject to a 40% federal estate tax.
However, if you want to know if the policy will be included in your probate estate, the answer is no. Proceeds from life insurance policies are not subject to probate, since the death benefit passes by contract directly to the beneficiaries.
Next, is the policy an estate asset available for heirs, creditors, taxing authorities, etc.? The answer is a little less clear. Since your son was named the designated beneficiary, your estate can’t use the proceeds to fulfill bequests made to others through your will. Even if you disowned your son since naming him on the policy and changed your will to pass your estate to other children, the life insurance policy is a contract. Therefore, the money is going to your son, unless you change this while you are still living.
However, there’s a little wrinkle here. Can the proceeds of the life insurance policy be diverted to pay creditors, taxes, or other estate obligations? Here the answer is, it depends. An example is if your son receives the money from the insurance company but your will directs that his share of the probate estate be reduced to reflect his share of costs associated with probate. If the estate doesn’t have enough assets to cover the cost of probate, he may need to tap the proceeds to pay his share.
Another aspect of figuring out what’s included in your estate depends upon where you live. In community property states—Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and Wisconsin—assets are treated differently for estate tax purposes than in states with what’s known as “common law” for married couples. Also, in most states, real estate owned on a fee simple basis is simply transferred on death through the probate estate, while in other states, an alternative exists where a Transfer on Death (TOD) deed is used.
This legal jargon may be confusing, but it’s important to know, because if property is in your probate estate, expenses may vary from 2% to 6%, versus assets outside of probate, which may have little to no expenses.
Speak with an experienced estate planning attorney in your state of residence to know what assets are included in your federal estate, what are part of your probate estate and what taxes will be levied on your estate from the state or federal governments and don’t forget, some states have inheritance taxes your heirs will need to pay.
Reference: Kiplinger (Dec. 13, 2021) “Will It (My Home, My Life Insurance, Etc.) Be in My Estate?”
Being asked to serve as an executor is a big compliment with potential pitfalls, advises the recent article “How to Prepare to Be an Executor of an Estate” from U.S. News & World Report. You are being asked because you are considered trustworthy and able to handle complex tasks. That’s flattering, of course, but there’s a lot to know before making a final decision about taking on the job.
An executor of an estate helps file paperwork, close accounts, distribute assets of the deceased, deal with probate and any court filings and navigate family dynamics. Some of the tasks include:
If you are asked to become the executor of an estate for a loved one, it’s a good idea to gather as much information as possible while the person is still living. It will be far easier to tackle the tasks, if you have been set up to succeed. Find out where their estate planning documents are and read the documents to make sure you understand them. If you don’t understand, ask, and keep asking until you do. Similarly, obtain information about all assets, including joint assets. Find out if there are any family members who may pose a challenge to the estate.
Today’s assets include digital assets. Ask for a complete list of the person’s online accounts, usernames and passwords. You will also need access to their devices: desktop computer, laptop, tablet, phone and smart watch. Discuss what they want to happen to each account and see if there is an option for you to become a co-owner of the account or a legacy contact.
Many opt to have an estate planning attorney manage some or all of these tasks as they may be required to help with court filings anyway, and estate administration can be very overwhelming. Frankly, it’s hard to administer an estate at the same time you’re grieving the loss of a loved one.
As executor, you are a fiduciary, meaning you’re legally required to put the deceased’s interests above your own. This includes managing the estate’s assets. If the person owned a home, you would need to secure the property, pay the mortgage and/or property taxes and maintain the property until it is sold or transferred to an heir. Financial accounts need to be managed, including investment accounts.
The amount of time this process will take, depends on the complexity and size of the estate. Most estates take at least twelve months to complete all of the administrative work. It is a big commitment and can feel like a second job.
A few things vary by state. Convicted felons are never permitted to serve as executors, regardless of what the will says. A sole executor must be a U.S. citizen, although a non-citizen can be a co-executor, if the other co-executor is a citizen. Rules also vary from state to state regarding being paid for your time. Most states permit a percentage of the size of the estate, which must be considered earned income and reported on tax returns.
Be very thorough and careful in documenting every decision made as the executor to protect yourself from any future challenges. This is one job where trying to do it on your own could have long-term effects on your relationship with the family and financial liability, so take it seriously. If it’s too much, an estate planning attorney can help.
Reference: U.S. News & World Report (Dec. 22, 2021) “How to Prepare to Be an Executor of an Estate”
Elder financial abuse is always upsetting, but it’s even worse when a parent is in a long-term care facility and adult children aren’t there to prevent it or stop it. This is especially true during the pandemic, when restrictions meant to keep residents safe from COVID make them more vulnerable to scammers.
The federal Consumer Financial Protection Bureau recently released a guide to prevent this very same problem, as reported in the article “Preventing Elder Financial Abuse When Your Parent Is In Long-Term Care” from next avenue.
The goal is to help professionals who work with the facilities to recognize red flags, develop policies and protocols and use technology to prevent residents from becoming victims. There’s also a lot of good information in the guide for the children of residents.
One reason elder financial abuse occurs so easily in long-term care facilities is because members of care teams can easily get access to financial records as well as medical records. Putting protections in place before financial abuse happens is the best strategy.
Banking and credit card accounts should be monitored regularly, and fraud alerts should be set up to be sent to the individual and a designated, trusted contact. An outside professional may also be hired to watch over the person’s finances.
Experts recommend listening to their loved ones during visits, online or in person. When a senior complains about money or personal belongings going missing, don’t assume these are part of cognitive issues. Take steps to investigate and document findings.
If an aging parent mentions a strange phone call or an unusual request by a staff member, immediately check their accounts, even if they insist no personal information was shared. Scammers are very good at what they do and can easily convince a victim nothing wrong has occurred. Even if something didn’t occur this time, a single phone call or conversation may be a warning of the parent being on someone’s radar as a possible victim.
Pay attention if small amounts of cash are missing from accounts. Scammers typically begin small, testing the waters to see if the person, their family, or the financial institution is paying attention. Banks cannot discuss your parent’s finances with their investment advisor, due to privacy rules, so the designated family member needs to be in touch with any institutions handling their money.
If no family member has been given Power of Attorney over financial accounts, this is a must-do, as long as the parent has legal capacity to grant this power. The POA gives the person the legal ability to manage financial accounts. If the person is incapacitated, it may be necessary for the child to be named guardian. An estate planning attorney will be able to discuss the situation and recommend the best way forward for the individual and their family.
Reference: next avenue (Dec. 17, 2021) “Preventing Elder Financial Abuse When Your Parent Is In Long-Term Care”
When Matthew Mellon died suddenly in 2018, he was worth almost $200 million. He owned nine sports cars, a watch worth more than most American’s annual income and left one daughter the priceless collection of Mellon family silver. However, he also left an estate mess for heirs, according to a recent article “How a cryptocurrency fortune crippled a deceased billionaire’s estate” from the daily dot.
Aside from the sports cars, watch and the family silver, most of Mellon’s assets, estimated at more than $193 million, were in a cryptocurrency known as XRP, managed by the company Ripple. One court document noted the cryptocurrency made up 97% of the entire estate. Mellon’s estate disaster was unlike most situations when assets can’t be accounted for. His multi-million cryptocurrency assets were secured by digital keys in a digital wallet. No one in the family knew where any of this was.
The online community and attorneys assumed the XRP assets were lost forever. However, there were a few twists to the story.
Matthew Mellon was a member of two powerful banking families, the Mellons and the Drexels. He reportedly inherited $25 million as a young man and served as chair of the New York Republican Party Finance Committee, to which he’d made a six-figure donation. He was married to Tamara Mellon, founder of the Jimmy Choo shoe brand. The marriage was one of two, both ending in divorce.
His investment in cryptocurrency began with a $2 million investment in XRP in late 2017, after testing the cryptocurrency concept with Bitcoin. He became a global “ambassador” for XRP. According to Forbes, at one point his investment was worth nearly $1 billion, but the rally ended, and the currency depreciated rapidly during 2018.
The family was doubtful about his involvement in XRP because Mellon struggled with substance abuse. The day he died of a heart attack, was the day he was scheduled to check into a drug rehabilitation facility to treat an OxyContin addition.
Left behind after his death were two ex-wives, three young children and an outdated will. There was no mention of the estimated $193 million in XRP. The keys to the cryptocurrency were allegedly kept on devices under other people’s names in locations across the country. This secrecy led estate lawyers scrambling to gain control of his XRP, which fluctuated up and down by as much as 30% in the weeks after his death. Every day they did not have the ability to sell, increased the risk of not being able to liquidate his biggest asset.
Based on his relationship with Ripple, his attorneys were able to get in contact with the right people at the company and gain access to his XRP. However, this does not happen for regular people, no matter how much the cryptocurrency is worth.
Gaining access to the digital currency was just the start. Mellon had an agreement with Ripple that he could only sell off a small amount of XRP daily. The attorneys were able to negotiate a slightly higher number but could not move fast enough to generate the cash needed to pay off the estate’s debts. This made sense for Ripple—a big sell-off would have an extremely negative impact on XRP’s value, just as wide-scale dumping of a stock would cut its value.
Mellon was also years behind on income tax returns, and the IRS wanted a piece of his multi-million dollar estate. In addition, two dozen entities, mostly private individuals, claimed he owed them money, ranging from a few hundred to nearly six million. There was a posthumous sexual harassment claim filed against him by a housekeeper. The estate paid $60 million in federal estate tax, and debts were settled in January 2021, almost three years after his death because of the inability to sell the cryptocurrency.
Most people don’t lead such a complicated personal or financial life. However, in this case, an updated will would have spared the family all the drama and stress of a high-stakes estate disaster. Proper estate planning could have protected the estate from a big tax bite and kept the Mellon’s family business private.
Reference: daily dot (Dec. 23, 2021) “How a cryptocurrency fortune crippled a deceased billionaire’s estate”
Simply put, a charitable trust holds assets and distributes assets to charitable organizations. The person who creates the trust, the grantor, decides how the trust will manage and invest assets, as well as how and when donations are made, as described in the article “How a Charitable Trust Works” from yahoo! finance. An experienced estate planning attorney can help you create a charitable trust to achieve your estate planning goals and create tax-savings opportunities.
Any trust is a legal entity, legally separate from you, even if you are the grantor and a trustee. The trust owns its assets, pays taxes and requires management. The charitable trust is created with the specific goal of charitable giving, during and after your lifetime. Many people use charitable trusts to create ongoing gifts, since this type of trust grows and continues to make donations over extended periods of time.
Sometimes charitable trusts are used to manage real estate or other types of property. Let’s say you have a home you’d like to see used as a community resource after you die. A charitable trust would be set up and the home placed in it. Upon your death, the home would transfer to the charitable organization you’ve named in the trust. The terms of the trust will direct how the home is to be used. Bear in mind while this is possible, most charities prefer to receive cash or stock assets, rather than real estate.
The IRS defines a charitable trust as a non-exempt trust, where all of the unexpired interests are dedicated to one or more charitable purposes, and for which a charitable contribution deduction is allowed under a specific section of the Internal Revenue Code. The charitable trust is treated like a private foundation, unless it meets the requirements for one of the exclusions making it a public charity.
There are two main kinds of charitable trusts. One is a Charitable Remainder Trust, used mostly to make distributions to the grantor or other beneficiaries. After distributions are made, any remaining funds are donated to charity. The CRT may distribute its principal, income, or both. You could also set up a CRT to invest and manage money and distribute only earnings from the investments. A CRT can also be set up to distribute all holdings over time, eventually emptying all accounts. The CRT is typically used to distribute proceeds of investments to named beneficiaries, then distribute its principal to charity after a certain number of years.
The Charitable Lead Trust (CLT) distributes assets to charity for a defined amount of time, and at the end of the term, any remaining assets are distributed to beneficiaries. The grantor may be included as one of the trust’s beneficiaries, known as a “Reversionary Trust.”
All Charitable Trusts are irrevocable, so assets may not be taken back by the grantor. To qualify, the trust may only donate to charities recognized by the IRS.
An estate planning attorney will know how to structure the charitable trust to maximize its tax-savings potential. Depending upon how it is structured, a CT can also impact capital gains taxes.
Reference: yahoo! finance (Dec. 16, 2021) “How a Charitable Trust Works”
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