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”

 

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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”

 

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How Do I Protect an Inheritance from the Tax Man? – Annapolis and Towson Estate Planning Attorneys

Inheritances are not income for federal tax purposes, whether you inherit cash, investments or property. However, any subsequent earnings on the inherited assets are taxable, unless it comes from a tax-free source. Therefore, you must include the interest income in your reported income.

The Street’s recent article entitled “4 Ways to Protect Your Inheritance from Taxes” explains that any gains when you sell inherited investments or property are usually taxable. However, you can also claim losses on these sales. State taxes on inheritances vary, so ask a qualified estate planning attorney about how it works in your state.

The basis of property in a decedent’s estate is usually the fair market value (FMV) of the property on the date of death. In some cases, however, the executor might choose the alternate valuation date, which is six months after the date of death—this is only available if it will decrease both the gross amount of the estate and the estate tax liability. It may mean a larger inheritance to the beneficiaries.

Any property disposed of or sold within that six-month period is valued on the date of the sale. If the estate is not subject to estate tax, the valuation date is the date of death.

If you are getting an inheritance, you might ask that they create a trust to deal with their assets. A trust lets them pass assets to beneficiaries after death without probate. With a revocable trust, the grantor can remove the assets from the trust, if necessary. However, in an irrevocable trust, the assets are commonly tied up until the grantor dies.

Let us look at some other ideas on the subject of inheritance:

You should also try to minimize retirement account distributions. Inherited retirement assets are not taxable, until they are distributed. Some rules may apply to when the distributions must occur, if the beneficiary is not the surviving spouse. Therefore, if one spouse dies, the surviving spouse usually can take over the IRA as their own. RMDs would start at age 72, just as they would for the surviving spouse’s own IRA. However, if you inherit a retirement account from a person other than your spouse, you can transfer the funds to an inherited IRA in your name. You then have to start taking RMDs the year of or the year after the inheritance, even if you’re not age 72.

You can also give away some of the money. Sometimes it is wise to give some of your inheritance to others. It can assist those in need, and you may offset the taxable gains on your inheritance with the tax deduction you get for donating to a charitable organization. You can also give annual gifts to your beneficiaries, while you are still living. The limit is $15,000 without being subject to gift taxes. This will provide an immediate benefit to your recipients and also reduce the size of your estate. Speak with an estate planning attorney to be sure that you are up to date with the frequent changes to estate tax laws.

Reference: The Street (May 11, 2020) “4 Ways to Protect Your Inheritance from Taxes”

 

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Should I Create an LLC for Estate Planning? – Annapolis and Towson Estate Planning

If you want to transfer assets to your children, grandchildren or other family members but are worried about gift taxes or the weight of estate taxes your beneficiaries will owe upon your death, a LLC can help you control and protect assets during your lifetime, keep assets in the family and lessen taxes owed by you or your family members.

Investopedia’s article entitled “Using an LLC for Estate Planning” explains that a LLC is a legal entity in which its owners (called members) are protected from personal liability in case of debt, lawsuit, or other claims. This shields a member’s personal assets, like a home, automobile, personal bank account or investments.

Creating a family LLC with your children lets you effectively reduce the estate taxes your children would be required to pay on their inheritance. A LLC also lets you distribute that inheritance to your children during your lifetime, without as much in gift taxes. You can also have the ability to maintain control over your assets.

In a family LLC, the parents maintain management of the LLC, and the children or grandchildren hold shares in the LLC’s assets. However, they do not have management or voting rights. This lets the parents purchase, sell, trade, or distribute the LLC’s assets, while the other members are restricted in their ability to sell their LLC shares, withdraw from the company, or transfer their membership in the company. Therefore, the parents keep control over the assets and can protect them from financial decisions made by younger members. Gifts of shares to younger members do come with gift taxes. However, there are significant tax benefits that let you give more, and lower the value of your estate.

As far as tax benefits, if you are the manager of the LLC, and your children are non-managing members, the value of units transferred to them can be discounted quite steeply—frequently up to 40% of their market value—based on the fact that without management rights, LLC units become less marketable.

Your children can now get an advance on their inheritance, but at a lower tax burden than they otherwise would have had to pay on their personal income taxes. The overall value of your estate is reduced, which means that there is an eventual lower estate tax when you die. The ability to discount the value of units transferred to your children, also permits you to give them gifts of discounted LLC units. That lets you to gift beyond the current $15,000 gift limit, without having to pay a gift tax.

You can give significant gifts without gift taxes, and at the same time reduce the value of your estate and lower the eventual estate tax your heirs will face.

Speak to an experienced estate planning attorney about a family LLC, since estate planning is already complex. LLC planning can be even more complex and subject you to heightened IRS scrutiny. The regulations governing LLCs vary from state to state and evolve over time. In short, a family LLC is certainly not for everyone and it appropriately should be vetted thoroughly before creating one.

Reference: Investopedia (Oct. 25, 2019) “Using an LLC for Estate Planning”

 

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How Do the Children Divide Up Mom’s Tangible Property? – Annapolis and Towson Estate Planning

What should you do if you have been given the task to be in charge of divvying up a parent’s estate that includes assorted tangible items?

Minneapolis Tribune’s article entitled “A clever way to divvy up items after a parent’s death” says that some families do it by taking turns selecting which items each will keep.

The article discusses how a family decided to divide things up their mom’s grand estate and how the method the family used to divvy up the tangible items could be one that other families with much smaller estates could use.

After their mom’s death at 93, the brother and sister co-executors created an inventory of 724 items in her estate that had monetary or sentimental value. These included things like furniture, artwork, oriental rugs, cutlery, china, a piano and a car. They did not include their mom’s jewelry, books or linens, or her silver, gold and collectible coins. The four siblings all agreed to sell the coins and to deal with the many books, linens, and jewelry more informally, after the more significant items had been distributed.

The family did not use the common way of disbursing tangible items of an estate, in which family members take turns choosing items. With over 700 items, that could take a while. They felt that system would not maximize the value received by the four children and seven grandchildren. Instead, their process for dividing the intangible items used the following steps:

  1. The inventory was given to all four siblings and asked each one to state the items that they were interested in. This divided the 724 items into three groups: (a) items in which no one had an interest; (b) items in which only one person had an interest; and (c) those in which two or more were interested. Things in which no one had an interest were set aside to be sold or given away, and those who were the only siblings to want certain items got them.
  2. They then made lists of items in which more than one sibling expressed an interest. Each received a list of those items. They were not given information on ones in which they were not interested—one of two ways the system was not transparent.
  3. Each person was then “given” 500 virtual poker chips that he or she could use to bid for contested items. However, prior to the bidding deadline, they could talk with one another about their intentions. The result was that many had bid for several similar items, like family pictures, bookcases and oriental rugs — when they really only wanted one from each category. Thus, they agreed among themselves who would receive each one, without wasting too many chips. This also avoided two siblings using a lot of tokens to bid for a particular item, and no one bidding on another similar one.
  4. After the bids were in, the co-executors announced the results without revealing the bids, to avoid a silent auction where bidders can see what others are bidding and readjust their bids up to the deadline. This was the second part of the system that was not transparent.
  5. Finally, when all the allocations were determined, the co-executors tabulated the monetary value of all the items and readjusted the estate monetary distributions to ensure that everyone came out at the same place financially. The most valuable items were a 1919 Steinway drawing room grand piano valued at $25,000; a 2005 Toyota Camry valued at $4,500; and some oriental rugs with a total value of $13,975. Those who got the big-ticket items had to pay their siblings something for them, with a total of $17,500 trading hands.

It was time-consuming and took several months, but the siblings thought that their system was very fair and the process, unlike what is done in some other family estates, relieved tensions and brought the siblings closer together.

Reference: Minneapolis Tribune (Feb. 25, 2020) “A clever way to divvy up items after a parent’s death”

 

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What Can a Strong Estate Planning Attorney Help Me Accomplish? – Annapolis and Towson Estate Planning

The Legal Reader’s recent article entitled “When Should I Start My Estate Planning?” explains that, as we settle down, we should start considering how we will provide for and protect those you love.

Talk to an experienced estate planning attorney—one with the knowledge and skill to help you design a workable, legally binding estate plan that will keep your assets safe as they accumulate, protect your spouse and children and consider the possibility that you may become incapacitated when you least expect it.

No matter what your age, the estate planning attorney you hire should have outstanding credentials and testimonials to his/her efficiency and personal concern.

This legal professional must be able to:

  • Listen, understand, and address your individual needs
  • Clarify your options
  • Draft, review, and file all necessary estate planning documents
  • Make certain your estate plan covers all contingencies; and
  • Is prepared to modify your documents as your life circumstances change.

When you see that the future is unpredictable, you realize that estate planning can help you make that future as secure as possible.

Estate planning can be as complicated as it is essential. Accordingly, regardless of our age, speak with a highly competent estate planning attorney as soon as possible.

As the COVID-19 pandemic has dramatically shown us, planning for the unexpected can never be addressed too soon.

Reference: Legal Reader (June 23, 2020) “When Should I Start My Estate Planning?”

 

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Does a Beneficiary of a Trust Have to Pay a Tax? – Annapolis and Towson Estate Planning

When a trust makes a distribution, it deducts the income distributed on its own tax return and issues the beneficiary a tax form called a K-1. That form shows what part of the beneficiary’s distribution is interest income and principal. This tells beneficiaries what they must claim as taxable income, when filing taxes.

A recent Investopedia article asks “Do Trust Beneficiaries Pay Taxes?” The article explains that a trust is a fiduciary relationship, whereby the trustor or grantor gives another party–the trustee–the right to hold assets for the benefit of a beneficiary. Trusts are established to provide legal protection and to safeguard assets as part of estate planning.

When trust beneficiaries get distributions from the trust’s principal balance, they do not have to pay taxes on the distribution. The IRS assumes this money was already taxed before it was placed into the trust. Once money is placed into the trust, the interest it accumulates is taxable as income—either to the beneficiary or the trust itself. The trust is required to pay taxes on any interest income it holds and doesn’t distribute past year-end. Interest income the trust distributes is taxable to the beneficiary.

The amount distributed to the beneficiary is thought to be from the current-year income first, then from the accumulated principal. This is usually the original contribution plus subsequent ones. It is income in excess of the amount distributed.

Capital gains from this amount may be taxable to either the trust or the beneficiary. The entire amount distributed to and for the benefit of the beneficiary is taxable to that person to the extent of the distribution deduction of the trust.

The two most significant tax forms for trusts are the 1041 and the K-1. Form 1041 is similar to Form 1040. The trust deducts from its own taxable income any interest it distributes to beneficiaries in Form 1041. At the same time, the trust issues a K-1. That form details the distribution, or how much of the distributed money came from principal versus interest.

The K-1 schedule for taxing distributed amounts is generated by the trust and given to the IRS.

The IRS will then send the document to the beneficiary to pay the tax.

The trust then fills out a Form 1041 to determine the income distribution deduction that is accorded to the distributed amount.

Reference: Investopedia (Feb. 8, 2020). “Do Trust Beneficiaries Pay Taxes?”

 

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What You Need to Know about Drafting Your Will – Annapolis and Towson Estate Planning

A last will and testament is just one of the legal documents that you should have in place to help your loved ones know what your wishes are, if you cannot say so yourself, advises CNBC’s recent article entitled, “Here’s what you need to know about creating a will.” In this pandemic, the coronavirus may have you thinking more about your mortality.

Despite COVID-19, it is important to ponder what would happen to your bank accounts, your home, your belongings or even your minor children, if you are no longer here. You should prepare a will, if you do not already have one. It is also important to update your will, if it is been written.

If you do not have a valid will, your property will pass on to your heirs by law. These individuals may or may not be who you would have provided for in a will. If you pass away with no will —dying intestate — a state court decides who gets your assets and, if you have children, a judge says who will care for them. As a result, if you have an unmarried partner or a favorite charity but have no legal no will, your assets may not go to them.

The courts will typically pass on assets to your closest blood relatives, despite the fact that it would not have been your first choice.

Your will is just one part of a complete estate plan. Putting a plan in place for your assets helps ensure that at your death, your wishes will be carried out and that family fights and hurt feelings do not make for destroyed relationships.

There are some assets that pass outside of the will, such as retirement accounts, 401(k) plans, pensions, IRAs and life insurance policies.

Therefore, the individual designated as beneficiary on those accounts will receive the money, despite any directions to the contrary in your will. If there is no beneficiary listed on those accounts, or the beneficiary has already passed away, the assets automatically go into probate—the process by which all of your debt is paid off and then the remaining assets are distributed to heirs.

If you own a home, be certain that you know the way in which it should be titled. This will help it end up with those you intend, since laws vary from state to state.

Ask an estate planning attorney in your area — to ensure familiarity with state laws—for help with your will and the rest of your estate plan.

Reference: CNBC (June 1, 2020) “Here’s what you need to know about creating a will”

 

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What You Need to Know about Trusts – Annapolis and Towson Estate Planning

Some people still think that trusts and estate planning are just for wealthy people. However, that is simply not true. Many people are good candidates for trusts, used to protect their assets and their families. Trusts can also be used to avoid probate, says the article “Common misconceptions about trusts” from the Rome Sentinel.

Who controls my property? The grantor, or the person setting up the trust, has the option of being a trustee, if they are setting up a revocable trust or an irrevocable trust. There are tax differences, so you will want to do this with an estate planning attorney. The grantor names co-trustees, if you wish. They are usually a spouse, adult child, or trusted adult. Successor trustees, that is, people who will take over the trust if the primary trustee becomes incapacitated or dies.

Only rich people need trusts. Anyone who owns a home, has life insurance and other assets worth more than $150,000 can benefit from the protection that a trust provides. The type of trust depends the grantor’s age, health status, and the amount, variety, and location of assets. A healthy person who owns a lot of life insurance or other assets would probably want either a Revocable Living Trust or a Will that includes a Testamentary Trust. However, a person who is over 55 and is planning for nursing home care, is more likely to have an Irrevocable Medicaid Trust to protect assets, avoid probate and minimize tax liability.

Can I access assets in a trust? A properly prepared trust takes your lifestyle and spending into account. Certain types of trusts are more flexible than others, and an estate planning attorney will be able to make an appropriate recommendation.

For instance, if you have an Irrevocable Medicaid Trust, you will be restricted from taking the principal asset back directly. The assets in this type of trust can be used to fund costs and expenses of real property, including mortgage payments, taxes, furnace and roof repairs. An IMT needs to be set up with enough assets outside of it, so you can have an active retirement and enjoy your life. Assets outside of the trust are your spendable money.

Can my children or any others take assets from the trust? No, and that is also the point of trusts. Unless you name someone as a Trustee with the power to take assets out of the trust, they cannot access the funds. The grantor retains control over what assets may be gifted during their lifetime. They can also impose restrictions on how assets are restricted after death. Some trusts are created to set specific ages or milestones, when beneficiaries receive all or some of the assets in the trust.

Trusts are not one size-fits all. Trusts need to be created to serve each family’s unique situation. An experienced estate planning attorney will work with the family to determine their overall goals, and then determine how trusts can be used as part of their estate plan to achieve goals.

Reference: Rome Sentinel (May 31, 2020) “Common misconceptions about trusts”

 

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