State Laws Have an Impact on Your Estate – Annapolis and Towson Estate Planning

Nj.com’s recent article entitled “Will N.J. or Florida’s tax laws affect this inheritance?” notes that first, the fact that the individual from Florida is not legally married is important.

However, if she is a Florida resident, Florida rules will matter in this scenario about the vacation condo.

Florida does not have an inheritance tax, and it does not matter where the beneficiary lives. For example, the state of New Jersey will not tax a Florida inheritance.

Although New Jersey does have an inheritance tax, the state cannot tax inheritances for New Jersey residents, if the assets come from an out-of-state estate.

If she did live in New Jersey, there is no inheritance tax on “Class A” beneficiaries, which include spouses, children, grandchildren and stepchildren.

However, the issue in this case is the fact that her “daughter” is not legally her daughter. Her friend’s daughter would be treated by the tax rules as a friend.

You can call it what you want. However, legally, if she is not married to her friend, she does not have a legal relationship with her daughter.

As a result, the courts and taxing authorities will treat both persons as non-family.

The smart thing to do with this type of issue is to talk with an experienced estate planning attorney who is well-versed in both states’ laws to determine whether there are any protections available.

Reference: nj.com (July 23, 2020) “Will N.J. or Florida’s tax laws affect this inheritance?”

 

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Trusts: The Swiss Army Knife of Estate Planning – Annapolis and Towson Estate Planning

Trusts serve many different purposes in estate planning. They all have the intent to protect the assets placed within the trust. The type of trust determines what the protection is, and from whom it is protected, says the article “Trusts are powerful tools which can come in many forms,” from The News Enterprise. To understand how trusts protect, start with the roles involved in a trust.

The person who creates the trust is called a “grantor” or “settlor.” The individuals or organizations receiving the benefit of the property or assets in the trust are the “beneficiaries.” There are two basic types of beneficiaries: present interest beneficiaries and “future interest” beneficiaries. The beneficiary, by the way, can be the same person as the grantor, for their lifetime, or it can be other people or entities.

The person who is responsible for the property within the trust is the “trustee.” This person is responsible for caring for the assets in the trust and following the instructions of the trust. The trustee can be the same person as the grantor, as long as a successor is in place when the grantor/initial trustee dies or becomes incapacitated. However, a grantor cannot gain asset protection through a trust, where the grantor controls the trust and is the principal recipient of the trust.

One way to establish asset protection during the lifetime of the grantor is with an irrevocable trust. Someone other than the grantor must be the trustee, and the grantor should not have any control over the trust. The less power a grantor retains, the greater the asset protection.

One additional example is if a grantor seeks lifetime asset protection but also wishes to retain the right to income from the trust property and provide a protected home for an adult child upon the grantor’s death. Very specific provisions within the trust document can be drafted to accomplish this particular task.

There are many other options that can be created to accomplish the specific goals of the grantor.

Some trusts are used to protect assets from taxes, while others ensure that an individual with special needs will be able to continue to receive needs-tested government benefits and still have access to funds for costs not covered by government benefits.

An estate planning attorney will have a thorough understanding of the many different types of trusts and which one would best suit each individual situation and goal.

Reference: The News Enterprise (July 25, 2020) “Trusts are powerful tools which can come in many forms”

 

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How Do I Handle Inheritance? – Annapolis and Towson Estate Planning

The loss of a close loved one can make it very hard to think clearly and function effectively. Add to that the fact that you may have to make important decisions about an inheritance, and it can be an overwhelming time.

Motley Fool’s recent article entitled “5 Considerations for Managing an Inheritance” discusses some ways to be a responsible steward of the money you have received and how to best integrate new funds into your larger financial plan.

  1. Stop and organize your thoughts. After the funeral or memorial service, take time to grieve and reflect on the loss of your loved one. You should also not make any sudden, large changes to your life, if you have inherited a considerable amount of money or a valuable asset. After some time has passed, you should speak with the estate’s executor or court-appointed administrator about next steps.
  2. Create a plan and act on it. While the executor is tasked with winding up the deceased’s affairs, you might ask if you can help with an inventory of his or her assets in the estate. This should include both probate (assets without a named beneficiary) and non-probate (assets with a named beneficiary). It is helpful to make sure that you verify and then cancel your loved one’s subscription services and recurring household expenses (i.e., cable and electric). The executor will make that decision, but you may be able to help with some phone calls or emails to these companies. After the estate’s final expenses are paid, you should create an action plan and assign responsibilities. You’ll then be ready when the executor distributes the estate assets to heirs.
  3. Integrate to avoid mental accounting. After time has passed and you have received your inheritance, any new funds should be integrated into your own financial plan, as if it were earned income. If you do not yet have a written financial plan, talk to a fee-only financial planner who charges by the hour or on a fixed-rate.
  4. Make certain that your financial priorities are met. Your inheritance creates a critical chance to possibly change the trajectory of your net worth. You might use it to pay off or reduce long-standing debts, like student loans. Build your emergency fund — at least six months’ worth of living expenses — that will cushion you from unforeseen circumstances (like this pandemic!). You should also make sure that Roth contributions are made for the year.
  5. Get creative! If you have inherited non-financial assets, like a car, artwork or antiques, you should make sure you know their value and decide whether you will keep or sell them. You might also swap an item with another heir, or if you are not ready to absolutely part with an inherited item, you might offer them to other family or friends. It can be nice to know that an unused item is being put to good use by people you know. Another option is to repurpose the item or donate it.

Losing a close loved one is difficult enough, but the need to wisely manage your inheritance will be a big task. Follow these steps to help with that process.

Reference: Motley Fool (Aug. 8, 20020) “5 Considerations for Managing an Inheritance”

 

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What Does Pandemic Estate Planning Look Like? – Annapolis and Towson Estate Planning

In the pandemic, it is a good idea to know your affairs are in order. If you already have an estate plan, it may be time to review it with an experienced estate planning attorney, especially if your family has had a marriage, divorce, remarriage, new children or grandchildren, or other changes in personal or financial circumstances. The Pointe Vedra Recorder’s article entitled “Estate planning during a pandemic: steps to take” explains some of the most commonly used documents in an estate plan:

Will: This basic estate planning document is what you use to state how you want your assets to be distributed after your death. You name an executor to coordinate the distribution and name a guardian to take care of minor children.

Financial power of attorney: This legal document allows you to name an agent with the authority to conduct your financial affairs, if you are unable. You let them pay your bills, write checks, make deposits and sell or purchase assets.

Living trust: This lets you leave assets to your heirs, without going through the probate process. A living trust also gives you considerable flexibility in dispersing your estate. You can instruct your trustee to pass your assets to your beneficiaries immediately upon your death or set up more elaborate directions to distribute the assets over time and in amounts you specify.

Health care proxy: This is also called a health care power of attorney. It is a legal document that designates an individual to act for you, if you become incapacitated. Similar to the financial power of attorney, your agent has the power to speak with your doctors, manage your medical care and make medical decisions for you, if you cannot.

Living will: This is also known as an advance health care directive. It provides information about the types of end-of-life treatment you do or do not want, if you become terminally ill or permanently unconscious.

These are the basics. However, there may be other things to look at, based on your specific circumstances. Consult with an experienced estate planning attorney about tax issues, titling property correctly and a host of other things that may need to be addressed to take care of your family. Pandemic estate planning may sound morbid in these tough times, but it is a good time to get this accomplished.

Reference: Pointe Vedra (Beach, FL) Recorder (July 16, 2020) “Estate planning during a pandemic: steps to take”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

How Do I Incorporate Cryptocurrency into My Estate Planning? – Annapolis and Towson Estate Planning

Planning for cryptocurrency has been neglected. It means that, in some cases, the cryptocurrency has been lost. There have been people who tossed their computer hard drives with thousands of bitcoins (now worth millions). They then spend days sifting through tons of garbage. To save your family from this trouble and embarrassment after you die, add your cryptocurrency into your estate plan to preserve the benefits and avoid the risks of cryptocurrency.

Wealth Advisor’s recent article entitled “Estate Planning When You Own Cryptocurrency” says, first, you must preserve the benefits of your cryptocurrency.

Cryptocurrency is highly secure. However, that security is in danger, if the private key is carelessly recorded or discarded. With the private key, anyone can access the cryptocurrency. As a result, your planning and procedures must address how to secure this information. Just like cash, cryptocurrency is not traceable. In fact, there is no electronic or paper trail connecting the parties in a transaction involving cryptocurrency. Therefore, in order to preserve that privacy, you will need to plan so the other documentation in the transaction does not reveal these identities, or at least keep that information privileged. Remember that transferring cryptocurrency takes only seconds.

Because cryptocurrency, like precious metals and other commodities, can fluctuate wildly in value even during the course of a day, it must be treated like stock in a private company and other assets that are volatile in nature. Cryptocurrency also is not subject to government regulation, so no government is responsible for losses from fraud, theft or other malfeasance.

Trusts and other planning devices have a tough time with cryptocurrency, especially if the Prudent Investor Rule applies. Without specific language, the trust will not be capable of holding cryptocurrency. If that language is written too broadly, the trustee may be exempt from damages due to willful neglect.

Cryptocurrency is also taxed as property not as currency by the IRS, which means that the fair market value is set by conversion into U.S. dollars at “a reasonable exchange rate” and transactions involving cryptocurrency are subject to the capital gains tax regulations. As a result, you must have specific tax provisions in trusts, partnerships, LLCs, and other entities. Therefore, if you, or your business, own bitcoin or any other cryptocurrency, your estate, business succession, and financial plans need to address it specifically. Ask an experienced estate planning attorney for help.

Reference:  Wealth Advisor (August 4, 2020) “Estate Planning When You Own Cryptocurrency”

 

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Is It Easy to Change My Home’s Title from Tenants in Common to Joint Tenants? – Annapolis and Towson Estate Planning

Many couples may have purchased a home years ago with the original deed titled as “William Smith and Wilhelmina Smith”. In some states, like Georgia, this defaults to tenants in common. With Wilhelmina being William’s wife for decades, they thought it was time to think about changing the title to William Smith and Wilhelmina Smith, joint tenants with right of survivorship.

The Washington Post’s recent article entitled “Changing a home title from ‘tenants in common’ to ‘joint tenants’” looks at whether this would result in any adverse consequences, such as issues with the title insurance or taxes issues.

When you own a home in joint tenancy, should either of the owners die, that owner’s interest automatically goes to the surviving joint tenant. However, when people own a home as tenants in common, each person owns a specific share of that home. Therefore, our hypothetical couple William Smith and Wilhelmina Smith each owns a 50% interest in the home. If either of them were to die, his or her 50% interest in the home would be distributed, as provided in his or her will or as provided by state probate statute.

If people purchase a home but do not specify how they want to own the property, in most situations, the state law will say how the parties take title to the property when the deed is silent.

You can typically record a new document that puts both William Smith and Wilhelmina Smith on the title to the home, as joint tenants with rights of survivorship. When it is a simple change in the title from tenants in common to joint tenants, most state tax authorities will ignore that change.

To be sure you should ask an experienced estate planning attorney or the office that collects or assesses values in your location for more information. However, it is a pretty safe bet that the change will not affect a home’s value.

As far as the title insurance policy, after so many years, it would be doubtful there would be any problems. That is because the original title insurance policy named William Smith and Wilhelmina Smith as the insured. If they change the ownership from tenants in common to joint tenants, the Smiths are still the owners of the home and still named on that policy.

Reference: Washington Post (July 6, 2020) “Changing a home title from ‘tenants in common’ to ‘joint tenants’”

 

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How Can I Protect Assets from Creditors? – Annapolis and Towson Estate Planning

Forbes’ recent article entitled “Three Estate Planning Techniques That Protect Your Assets From Creditors” explains that the key to knowing if your assets might be susceptible to attachment in litigation is the fraudulent conveyance laws. These laws make a transfer void, if there is explicit or constructive fraud during the transfer. Explicit fraud is when you know that it is likely an existing creditor will try to attach your assets. Constructive fraud is when you transfer an asset, without receiving reasonably equivalent consideration. Since these laws void the transfer, a future creditor can attach your assets.

Getting reasonably equivalent consideration for a transfer of assets will eliminate the transfer being treated as constructive fraud. Reasonably equivalent consideration includes:

  • Funding a protective trust at death to provide for your spouse or children
  • Asset transfer in return for interest in an LLC or LLP; or
  • A transfer that exchanges for an annuity (or other interest) that protects the principal from claims of creditors.

Limited Liability Companies (LLCs) can be an asset protection entity, because when assets are transferred into the LLC, your creditors have limited rights to get their hands on them. Like a corporation, your interest in the LLC can be attached. However, you can place restrictions on the sale or transfer of interests that can decrease its value and define the term by which sale proceeds must be paid out. An LLC must be treated as a business for the courts to treat them as a business. Thus, if you use the LLC as if it were your personal property, courts will disregard the LLC and treat it as personal property.

Annuities are created when you exchange assets for the right to get payment over time. Unlike annuities sold by insurance companies, these annuities are private. These annuities are similar to insurance company annuities, in that they have some income tax consequences, but protect the principal against attachment.

You can also ask an experienced estate planning attorney about trusts that use annuities, which are called split interest trusts. There is a trust where you (the Grantor) give assets but keep the right to receive payments, which can be a fixed amount annually with a Grantor Retained Annuity Trust (or GRAT.)

Another trust allows you to get a variable amount, based on the value of the assets in the trust each year. This is a Grantor Retained Uni-Trust or GRUT. If the assets are vacant land or other tangible property, or being gifted to someone who is not your sibling, parent, child, or other descendant, you can keep the income from the assets by using a Grantor Retained Income Trust (or GRIT).

Along with a trust where you make a gift to an individual, you can protect the trust assets and get a charitable deduction, if you make a gift to charity through trusts. There are two types of trust for this purpose: a Charitable Remainder Trust (CRT) lets you keep an annuity or a variable payment annually, with the remainder of the trust assets going to charity at the end of the term; and a Charitable Lead Trust (CLT) where you give a fixed of variable annuity to charity for a term and the remainder either back to you or to others.

To get the most from your asset protection, work with an experienced estate planning attorney

Reference: Forbes (June 25, 2020) “Three Estate Planning Techniques That Protect Your Assets From Creditors”

 

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What Does My Estate Plan Look Like after Divorce? – Annapolis and Towson Estate Planning

Planning an estate after a divorce involves adopting a different type of arithmetic. Without a spouse to anchor an estate plan, the executors, trustees, guardians or agents under a power of attorney and health care proxies will have to be chosen from a more diverse pool of those that are connected to you.

Wealth Advisor’s recent article entitled “How to Revise Your Estate Plan After Divorce” explains that beneficiary forms tied to an IRA, 401(k), 403(b) and life insurance will need to be updated to show the dissolution of the marriage.

There are usually estate planning terms that are included in agreements created during the separation and divorce. These may call for the removal of both spouses from each other’s estate planning documents and retirement accounts. For example, in New York, bequests to an ex-spouse in a will prepared during the marriage are voided after the divorce. Even though the old will is still valid, a new will has the benefit of realigning the estate assets with the intended recipients.

However, any trust created while married is treated differently. Revocable trusts can be revoked, and the assets held by those trusts can be part of the divorce. Irrevocable trusts involving marital property are less likely to be dissolved, and after the death of the grantor, distributions may be made to an ex-spouse as directed by the trust.

A big task in the post-divorce estate planning process is changing beneficiaries. Ask for a change of beneficiary forms for all retirement accounts. Without a stipulation in the divorce decree ending their interest, an ex-spouse still listed as beneficiary of an IRA or life insurance policy may still receive the proceeds at your death.

Divorce makes children assume responsibility at an earlier age. Adult children in their 20s or early 30s typically assume the place of the ex-spouse as fiduciaries and health care proxies, as well as agents under powers of attorney, executors and trustees.

If the divorcing parents have minor children, they must choose a guardian in their wills to care for the children, in the event that both parents pass away.

Ask an experienced estate planning attorney to help you with the issues that are involved in estate planning after a divorce.

Reference: Wealth Advisor (July 7, 2020) “How to Revise Your Estate Plan After Divorce”

 

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Why Is Trust Funding Important in Estate Planning? – Annapolis and Towson Estate Planning

Trust funding is a crucial part of estate planning that many people forget to do. If done properly with the help of an experienced estate planning attorney, trust funding will avoid probate, provide for you in the event of your incapacity and save on estate taxes, says Forbes’ recent article entitled “Don’t Overlook Your Trust Funding.”

If you have a revocable trust, you have control over the trust and can modify it during your lifetime. You can also fund the trust while you are alive. This will save your family time and aggravation after your death.

You can also protect yourself and your family, if you become incapacitated. Your revocable trust likely provides for you and your family during your lifetime. You are able to manage your assets yourself, while you are alive and in good health. However, who will manage the assets in your place, if your health declines or if you are incapacitated?

If you go ahead and fund the trust now, your successor trustee will be able to manage the assets for you and your family if you are not able. However, if a successor trustee does not have access to the assets to manage on your behalf, a conservator may need to be appointed by the court to oversee your assets, which can be expensive and time consuming.

If you are married, you may have created a trust that has terms for estate tax savings. These provisions will often defer estate taxes until the death of the second spouse, by providing income to the surviving spouse and access to principal during her lifetime. The ultimate beneficiaries are your children.

You will need to fund your trust to make certain that these estate tax provisions work properly.

Any asset transfer will need to be consistent with your estate plan. Ask an experienced estate planning attorney about transferring taxable brokerage accounts, bank accounts and real estate to the trust.

You may also want to think about transferring tangible items to the trust and a closely held business interests, like stock in a family business or an interest in a limited liability company (LLC).

Reference: Forbes (July 13, 2020) “Don’t Overlook Your Trust Funding”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Can I Add Real Estate Investments in My Will? – Annapolis and Towson Estate Planning

Motley Fool’s recent article entitled “How to Include Real Estate Investments in Your Will” details some options that might make sense for you and your intended beneficiaries.

A living trust. A revocable living trust allows you to transfer any deeds into the trust’s name. While you are still living, you would be the trustee and be able to change the trust in whatever way you wanted. Trusts are a little more costly and time consuming to set up than wills, so you will need to hire an experienced estate planning attorney to help. Once it is done, the trust will let your trustee transfer any trust assets quickly and easily, while avoiding the probate process.

A beneficiary deed. This is also known as a “transfer-on-death deed.” It is a process that involves getting a second deed to each property that you own. The beneficiary deed will not impact your ownership of the property while you are alive, but it will let you to make a specific beneficiary designation for each property in your portfolio. After your death, the individual executing your estate plan will be able to transfer ownership of each asset to its designated beneficiary. However, not all states allow for this method of transferring ownership. Talk to an experienced estate planning attorney about the laws in your state.

Co-ownership. You can also pass along real estate assets without probate, if you co-own the property with your designated beneficiary. You would change the title for the property to list your beneficiary as a joint tenant with right of survivorship. The property will then automatically by law pass directly to your beneficiary when you die. Note that any intended beneficiaries will have an ownership interest in the property from the day you put them on the deed. This means that you will have to consult with them, if you want to sell the property.

Wills and estate plans can feel like a ghoulish topic that requires considerable effort. However, it is worth doing the work now to avoid having your estate go through the probate process once you die. The probate process can be expensive and lengthy. It is even more so, when real estate is involved.

Reference: Motley Fool (June 22, 2020) “How to Include Real Estate Investments in Your Will”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys