Your Estate Planning Checklist for 2021 – Annapolis and Towson Estate Planning

If you reviewed or created your estate plan in 2020, you are ahead of most Americans, but you are not done yet. If you created a trust, gave gifts of real estate, business interest or other assets, you need to address the loose ends and do the follow up work to ensure that your planning goals will be met. That is the advice from a recent article “Checklist 2020 Planning Follow Through: You Have More Work To Do” from Forbes.

Here are few to consider:

Did you loan money to heirs? If you made any loans to heirs or had any other loan transactions, you will need to calendar the interest payment dates and amounts and be sure that interest is paid promptly as described in the promissory notes. Correct interest payments are necessary for the IRS or creditors to treat the transaction as a real loan, otherwise you risk having the loan recharacterized or worse, being disregarded completely.

Did you create an irrevocable trust? If so, you need to be sure that gifts are made to the trust each year to fund insurance premiums. If the trust includes annual demand powers (known as “Crummey powers”) to allow gifts to qualify for the gift tax annual exclusion, written notices for 2020 gifts will need to be issued. This can be much more complicated than you expect: if you have transfers made to multiple trusts and outright gifts made directly to heirs, those gifts may need to be prioritized, based on the terms of the trusts and the dates of the gifts to determine which gifts qualify for the annual exclusion and which do not.

If you made gifts to a trust that is exempt from the generation skipping transfer tax (GST), you may have to file a gift tax return to allocate the GST exemption, so the trust remains GST exempt. Talk to your estate planning attorney to avoid any expensive mistakes.

Do you own life insurance? Or does a trust own life insurance for you? Either way, do not ignore your coverage after you have purchased a policy or policies. Your broker should review policy performance, the appropriateness of coverage for your plan, etc., every few years. If you did not do this in 2020, make it a priority for 2021. Many people create SLATS—Spousal Lifetime Access Trusts—so that their spouse benefits from the trusts. However, if your spouse dies prematurely, the SLAT no longer works.

Paying trustee fees. If you have institutional trustees, their fees need to be paid annually. If you pay the fees directly, the fee becomes an additional gift to the trust, requiring the filing of a gift tax for that year. If the trust pays the fee directly, there might not be a tax implication. Again, check with your estate planning attorney.

Did you make transfers to a trust with a disclaimer mechanism? If you made transfers to a trust that has a disclaimer mechanism and you want to reconsider the planning, it may be possible for beneficiaries or a trustee to disclaim gifts made to the trust within nine months of the transfer, thereby unwinding the planning.

Did you create any GRATs in 2020? If you created a Grantor Retained Annuity Trust, be certain that the trustee calendars the required annuity payments and that they are paid on a timely basis. Missing payments could put the GRAT status in jeopardy. You should also confirm also how the payment is calculated, which should be in the GRAT itself.

The best estate plan is one that is reviewed on a regular basis to ensure that it works, throughout changes that occur in law and life.

Reference: Forbes (Dec. 27, 2020) “Checklist 2020 Planning Follow Through: You Have More Work To Do”

 

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Estate Planning Is Best When Personalized – Annapolis and Towson Estate Planning

Just as a custom-tailored suit fits better than one off the rack, a custom-tailored estate plan works better for families. Making sure assets pass to the right person is more likely to occur when documents are created just for you, advises the article “Tailoring estate to specific needs leads to better plans” from the Cleveland Jewish News.

The most obvious example is a family with a special needs member. Generic estate planning documents typically will not suit that family’s estate planning.

Every state has its own laws about distributing property and money owned by a person at their death, in cases where people don’t have a will. Relying on state law instead of a will is a risky move that can lead to people you may not even know inheriting your entire estate.

In the absence of an estate plan, the probate court makes decisions about who will administer the estate and the distribution of property. Without a named executor, the court will appoint a local attorney to take on this responsibility. An appointed attorney who has never met the decedent and does not know the family will not have the insights to follow the decedent’s wishes.

The same risks can occur with online will templates. Their use often results in families needing to retain an estate planning attorney to fix the mistakes caused by their use. Online wills may not be valid in your state or may lead to unintended consequences. Saving a few dollars now could end up costing your family thousands to clean up the mess.

Estate plans are different for each person because every person and every family are different. Estate plan templates may not account for any of your wishes.

Generic plans are very limited. An estate plan custom created for you takes into consideration your family dynamics, how your individual beneficiaries will be treated and expresses your wishes for your family after you have passed.

Generic estate plans also do not reflect the complicated families of today. Some people have family members they do not want to inherit anything. Disinheriting someone successfully is not as easy as leaving them out of the will or leaving them a small token amount.

Ensuring that your wishes are followed and that your will is not easily challenged takes the special skills of an experienced estate planning attorney.

Reference: Cleveland Jewish News (Dec. 9, 2020) “Tailoring estate to specific needs leads to better plans”

 

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SECURE Act has Changed Special Needs Planning – Annapolis and Towson Estate Planning

The SECURE Act eliminated the life expectancy payout for inherited IRAs for most people, but it also preserved the life expectancy option for five classes of eligible beneficiaries, referred to as “EDBs” in a recent article from Morningstar.com titled “Providing for Disabled Beneficiaries After the SECURE Act.” Two categories that are considered EDBs are disabled individuals and chronically ill individuals. Estate planning needs to be structured to take advantage of this option.

The first step is to determine if the individual would be considered disabled or chronically ill within the specific definition of the SECURE Act, which uses almost the same definition as that used by the Social Security Administration to determine eligibility for SS disability benefits.

A person is deemed to be “chronically ill” if they are unable to perform at least two activities of daily living or if they require substantial supervision because of cognitive impairment. A licensed healthcare practitioner certifies this status, typically used when a person enters a nursing home and files a long-term health insurance claim.

However, if the disabled or ill person receives any kind of medical care, subsidized housing or benefits under Medicaid or any government programs that are means-tested, an inheritance will disqualify them from receiving these benefits. They will typically need to spend down the inheritance (or have a court authorized trust created to hold the inheritance), which is likely not what the IRA owner had in mind.

Typically, a family member wishing to leave an inheritance to a disabled person leaves the inheritance to a Supplemental Needs Trust or SNT. This allows the individual to continue to receive benefits but can pay for things not covered by the programs, like eyeglasses, dental care, or vacations. However, does the SNT receive the same life expectancy payout treatment as an IRA?

Thanks to a special provision in the SECURE Act that applies only to the disabled and the chronically ill, a SNT that pays nothing to anyone other than the EDB can use the life expectancy payout. The SECURE Act calls this trust an “Applicable Multi-Beneficiary Trust,” or AMBT.

For other types of EDB, like a surviving spouse, the individual must be named either as the sole beneficiary or, if a trust is used, must be the sole beneficiary of a conduit trust to qualify for the life expectancy payout. Under a conduit trust, all distributions from the inherited IRA or other retirement plan must be paid out to the individual more or less as received during their lifetime. However, the SECURE Act removes that requirement for trusts created for the disabled or chronically ill.

However, not all of the SECURE Act’s impact on special needs planning is smooth sailing. The AMBT must provide that nothing may be paid from the trust to anyone but the disabled individual while they are living. What if the required minimum distribution from the inheritance is higher than what the beneficiary needs for any given year? Let us say the trustee must withdraw an RMD of $60,000, but the disabled person’s needs are only $20,000? The trust is left with $40,000 of gross income, and there is nowhere for the balance of the gross income to go.

In the past, SNTs included a provision that allowed the trustee to pass excess income to other family members and deduct the amount as distributable net income, shifting the tax liability to family members who might be in a lower tax bracket than the trust.

Special Needs Planning under the SECURE Act has raised this and other issues, which can be addressed by an experienced estate planning attorney.

Reference: Morningstar.com (Dec. 9, 2020) “Providing for Disabled Beneficiaries After the SECURE Act”

 

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What is a GRAT and Does Your Family Need One? – Annapolis and Towson Estate Planning

As a result of the low interest rate environment, some families may have a federal estate tax problem and need planning to reduce their tax liability. A Grantor Retained Annuity Trust, known as a GRAT, is one type of planning strategy, as described in the article “Estate planning with grantor retained annuity trust” from This Week Community News.

What is a GRAT? It is a technique where an individual creates an irrevocable trust and transfers assets into the trust to benefit children or other beneficiaries. However, unlike other irrevocable trusts, the grantor retains an annuity interest for a number of years.

Here is an example. Let us say a person owns a stock of a closely held business worth $800,000. Their estate planning attorney creates a ten-year GRAT for them. The person transfers preferably non-voting stock in the closely held business to the GRAT, in exchange for the GRAT paying the person an annuity amount to the individual who established the GRAT for ten years.

The annuity amount payment means the GRAT pays the individual a set percentage of the amount of the initial assets contributed to the GRAT over the course of the ten-year period.

Let us say the percentage is a straight ten percent payout every year. The amount paid to the individual would be $80,000. At the end of the five-year period, the grantor would have already received an amount back equal to the entire amount of the initial transfer of assets to the GRAT, plus interest.

At the end of the ten-year term, the asset in the trust transfers to the individual’s beneficiaries. If the GRAT has grown greater than 1%, then the beneficiaries also receive the growth. The GRAT makes the annuity payment with the distribution of earnings received from the closely held business, which is likely to be an S-Corp or a limited liability company taxed as a partnership. Assuming the distribution received is greater than the annuity payment, the GRAT uses cash assets to make the annuity payment. For the planning to work, the business must make enough distributions to the GRAT for it to make the annuity payment, or the GRAT has to return stock to the individual who established the GRAT.

There are pitfalls. If the individual dies before the term of the GRAT ends, the entire value of the assets is includable in the estate’s assets and the technique will not have achieved any tax benefits.

If the plan works, however, the stock and all of the growth of the stock will have been successfully removed out of the individual’s estate and the family could save as much as 40% of the value of the stock, or $320,000, using the example above.

It is possible to structure the entire transaction, so there is no gift tax consequence to the grantor. If the person is concerned about estate taxes or the possible change in the federal estate tax exemption, which is due to sunset in 2026, then a GRAT could be an excellent part of an estate plan. When the current estate tax exemption ends, it may return from $11.58 million to $5 or $6 million. It could even be lower than that, depending on political and financial circumstances. Planning now for changes in the future is something to consider and discuss with your estate planning attorney.

Reference: This Week Community News (Sep. 6, 2020) “Estate planning with grantor retained annuity trust”

 

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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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Estate Planning Basics You Need to Know – Annapolis and Towson Estate Planning

The key reason for estate planning is to create a plan directing where your assets will go after you die. The ultimate goal is for wealth and real property to be given to the people or organizations you wish, while minimizing taxes, so beneficiaries can keep more of your wealth. However, good estate planning also reduces family arguments, protects minor children and provides a roadmap for end-of-life decisions, says the article “What is estate planning?” from Bankrate.

Whenever you have opened a checking and savings account, retirement account or purchased life insurance, you have been asked to provide the name of a beneficiary for the account. This person (or persons) will receive these assets directly upon your passing. You can have multiple beneficiaries, but you should always have contingent beneficiaries, in case something happens to your primary beneficiaries. Named beneficiaries always supersede any declarations in your will, so you want to make sure any account that permits a beneficiary has at least one and update them as you go through the inevitable changes of life.

A Last Will and Testament is a key document in your estate plan. It directs the distribution of assets that are not distributed through otherwise designated beneficiaries. Property you own jointly, typically but not always with a spouse, passes to the surviving owner(s). An executor you name in your will is appointed by the court to take care of carrying out your instructions in the will. Choose the executor carefully—he or she will have a lot to take care of, including the probate of your will.

Probate is the process of having a court review your estate plan and approve it. It can be challenging and depending upon where you live and how complicated your estate is, could take six months to two years to complete. It can also be expensive, with court fees determined by the size of the estate.

Many people use trusts to minimize how much of their estate goes through probate and to minimize estate taxes. Assets that are distributed through trusts are also private, unlike probate documents, which become public documents and can be seen by anyone from nosy relatives to salespeople to thieves and scammers.

Trusts can be complex, but they do not have to be. Trusts can also offer a much greater level of control over how assets are distributed. For instance, a spendthrift trust is used when an heir is not good with handling money. A trustee distributes assets, and a timeframe or specific requirements can be set before any funds are distributed.

Living wills are also part of an estate plan. These are documents used to give another person the ability to make decisions on your behalf, if you become incapacitated or if decisions need to be made concerning end-of-life care.

An estate plan can help prevent family fights over who gets what. Arguments over sentimental items, or someone wanting to make a grab for cash can create fractures that last for generations. A properly prepared estate plan makes your wishes clear, lessening the reasons for squabbles during a difficult period.

Protecting minor children and heirs is another important reason to have a well thought out estate plan. Your Last Will and Testament is used to nominate a guardian for minor children and can also be used to direct who will be in charge of any assets left for the children’s care.

Reference: Bankrate (Aug. 3, 2020) “What is estate planning?”

 

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Estate Planning Different for Business Owners and Top-Level Executives – Annapolis and Towson Estate Planning

Do you need an estate plan? If you have children, ownership shares in a business, or even in more than one business, a desire to protect your family and business if you became disabled, or charitable giving goals, then you need an estate plan. The recent article “Estate planning for business owners and executives” from The Wealth Advisor explains why business owners, parents and executives need estate plans.

An estate plan is more than a way to distribute wealth. It can also:

  • Establish a Power of Attorney, if you cannot make decisions due to an illness or injury.
  • Identify a guardianship plan for minor children, naming a caregiver of your choice.
  • Ensure that assets are controlled through beneficiary designations rather than simply through a will and pass privately when owned through trusts. This includes retirement plans, life insurance, annuities and some jointly owned property.
  • Create trusts for beneficiaries who are younger, disabled, or others you feel need some kind of protection.
  • Identify professional management for assets in those trusts.
  • Minimize taxes and maximize privacy through the use of planning techniques.
  • Create a structure for your philanthropic goals.

An estate plan ensures that fiduciaries are identified to oversee and distribute assets as you want. Business owners, in particular, need estate plans to manage ownership assets, which requires more sophisticated planning. Ideally, you have a management and ownership succession plan for your business, and both should be well-documented and integrated with your overall estate plan.

Some business owners choose to separate their Power of Attorney documents, so one person or more who know their business well, as well as the POA holder or co-POA, are able to make decisions about the business, while family members are appointed POA for non-business decisions.

Depending on how your business is structured, the post-death transfer of the business may need to be a part of your estate plan. A current buy-sell agreement may be needed, especially if there are more than two owners of the business.

An estate plan, like a succession plan, is not a set-it-and-forget it document. Regular reviews will ensure that any changes are documented, from the size of your overall estate to the people you choose to make key decisions.

Reference: The Wealth Advisor (July 28, 2020) “Estate planning for business owners and executives”

 

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What Happens When a Will Is Challenged? – Annapolis and Towson Estate Planning

What happens when estate planning does not go according to plan? A last will and testament is a legally binding contract that determines who will get a person’s assets. However, according to the article “Can you prevent someone from challenging your will?” in the Augusta Free Press, it is possible for someone to bring a legal challenge.

Most will contests are centered around five key reasons:

  • The deceased had a more recent will.
  • The will was not signed voluntarily.
  • The deceased was incapacitated, when she signed the will.
  • The will was not signed in front of the right number of witnesses.
  • The will was signed under some kind of duress or mental impairment.

What is the best way to lessen the chances of someone challenging your will? Take certain steps when the will is created, including:

Be sure your will is created by an estate planning attorney. Just writing your wishes on a piece of paper and signing and dating the paper is not the way to go. Certain qualifications must be met, which they vary by state. In some states, one witness is enough for a will to be properly executed. In others, there must be two and they can’t be beneficiaries.

The will must state the names of the intended beneficiaries. If you want someone specific to be excluded, you will have to state their name and that you want them to be excluded. A will should also name a guardian, if your children are minors.  It should also contain the name of an alternate executor, in case the primary executor predeceases you or cannot serve.

What about video wills? First, make a proper paper will. If you feel the need to be creative, make a video. In many states, a video will is not considered to be valid. A video can also become confusing, especially if what you say in the paper will is not exactly the same as what is in the video. Discrepancies can lead to will contests.

Do not count on those free templates. Downloading a form from a website seems like a simple solution, but some of the templates online are not up to date. They also might not reflect the laws in your state. If you own property, or your estate is complex, a downloaded form could create confusion and lead to family battles.

Tell your executor where your will is kept. If no one can find your will, people you may have wanted to exclude from your estate will have a better chance of succeeding in a will challenge. You should also tell your executor about any trusts, insurance policies and any assets that are not listed in the will.

Don’t expect that everything will go as you planned. Prepare for things to go sideways, to protect your loved ones. It is costly, time-consuming and stressful to bring an estate challenge, but the same is true on the receiving end. If you want your beneficiaries to receive the assets you intend for them, a good estate planning attorney is the right way to go.

Reference: Augusta Free Press (July 12, 2020) “Can you prevent someone from challenging your will?”

 

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Estate Planning and Probate Planning – Annapolis and Towson Estate Planning

The nature of the probate process varies from state to state, and even varies from county to county. However, the nature of the process is the same. A court has to validate a will to ensure that it meets the legal requirements of the state before assets can be distributed, explains the article “Probate workarounds can save heirs time, money” from the Baker City Herald. A typical will in some states can take nine to twelve months, and court shutdowns related to COVID-19 means that the wait could be longer. Probate is also expensive.

When does probate make sense? When a person dies with a lot of debt, probate can be helpful by limiting the amount of time creditors have to make their claims against the estate. If there is not enough to pay everyone, the probate court makes the decision about how much each creditor gets. Without probate, creditors may surface long after assets have been distributed, and depending upon the amount owed, may sue heirs or the executor.

The court supervision provided by probate can be helpful, if there are any concerns about the instructions in the will not being carried out. However, the will and the details of the estate become public, which is bad not just for privacy reasons. If there are any greedy or litigation-happy family members, they will be able to see how assets were distributed. All assets, debts and costs paid by the estate are disclosed, and the court approves each distribution. This much oversight can be protective in some situations.

What is the alternative? Some states have simplified probate for smaller estates, which can reduce the time and cost of probate. However, it varies by state. In Delaware, it is estates worth no more than $30,000, but in Seattle, small means estates valued at $275,000 or less.

These limits do not include assets that go directly to heirs, like accounts with beneficiaries or jointly owned assets. Most retirement funds and life insurance policies have named beneficiaries. The same is often true for bank and investment accounts. Just remember not to name your estate as a beneficiary, which defeats the purpose of having a beneficiary.

Are there any other ways to avoid probate? Here is where trusts come in. Trusts are legal documents that allow you to place your assets into ownership by the trust. A living trust takes effect while you are still alive, and you can be a trustee. Once created, property needs to be transferred into the trust, which requires managing details: changing titles and deeds and account names. This type of trust is revocable, which means you can change it any time. As a trustee, you have complete control over the property. A successor trustee is named to take over, if you die or become incapacitated.

An estate planning attorney will know other legal strategies to avoid probate for part or all of your estate.

Reference: Baker City Herald (July 16, 2020) “Probate workarounds can save heirs time, money”

 

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That Last Step: Trust Funding – Annapolis and Towson Estate Planning

Neglecting to fund trusts is a surprisingly common mistake, and one that can undo the best estate and tax plans. Many people put it on the back burner, then forget about it, says the article “Don’t Overlook Your Trust Funding” from Forbes.

Done properly, trust funding helps avoid probate, provides for you and your family in the event of incapacity and helps save on estate taxes.

Creating a revocable trust gives you control. With a revocable trust, you can make changes to the trust while you are living, including funding. Think of a trust like an empty box—you can put assets in it now, or after you pass. If you transfer assets to the trust now, however, your executor will not have to do it when you die.

Note that if you do not put assets in the trust while you are living, those assets will go through the probate process. While the executor will have the authority to transfer assets, they will have to get court approval. That takes time and costs money. It is best to do it while you are living.

A trust helps if you become incapacitated. You may be managing the trust while you are living, but what happens if you die or become too sick to manage your own affairs? If the trust is funded and a successor trustee has been named, the successor trustee will be able to manage your assets and take care of you and your family. If the successor trustee has control of an empty, unfunded trust, a conservatorship may need to be appointed by the court to oversee assets.

There is a tax benefit to trusts. For married people, trusts are often created that contain provisions for estate tax savings that defer estate taxes until the death of the second spouse. Income is provided to the surviving spouse and access to the principal during their lifetime. The children are usually the ultimate beneficiaries. However, the trust will not work if it is empty.

Depending on where you live, a trust may benefit you with regard to state estate taxes. Putting money in the trust takes it out of your taxable estate. You will need to work with an estate planning attorney to ensure that the assets are properly structured. For instance, if your assets are owned jointly with your spouse, they will not pass into a trust at your death and will not be outside of your taxable estate.

Move the right assets to the right trust. It is very important that any assets you transfer to the trust are aligned with your estate plan. Taxable brokerage accounts, bank accounts and real estate are usually transferred into a trust. Some tangible assets may be transferred into the trust, as well as any stocks from a family business or interests in a limited liability company. Your estate planning attorney, financial advisor and insurance broker should be consulted to avoid making expensive mistakes.

You have worked hard to accumulate assets and protecting them with a trust is a good idea. Just do not forget the final step of funding the trust.

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

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