What Exactly Is the Estate Tax? – Annapolis and Towson Estate Planning

In the U.S., we treat the estate tax and gift tax as a single tax system with unified limits and tax rates—but it is not very well understood by many people. The Motley Fool’s recent article entitled “What Is the Estate Tax in the United States?” gives us an overview of the U.S. estate and gift tax, including what assets are included, tax rates and exemptions in 2020.

The U.S. estate tax only impacts the wealthiest households. Let us look at why that is the case. Americans can exempt a certain amount of assets from their taxable estate—the lifetime exemption. This amount is modified every year to keep pace with inflation and according to policy modifications. This year, the lifetime exemption is $11.58 million per person. Therefore, if you are married, you and your spouse can collectively exclude twice this amount from taxation ($23.16 million). To say it another way, if you are single and die in 2020 with assets worth a total of $13 million, just $1.42 million of your estate would be taxable.

However, most Americans don’t have more than $11.58 million worth of assets when they pass away. This is why the estate tax only impacts the wealthiest households in the country. It is estimated that less than 0.1% of all estates are taxable. Therefore, 99.9% of us do not owe any federal estate taxes whatsoever at death. You should also be aware that the lifetime exemption includes taxable gifts as well. If you give $1 million to your children, for example, that counts toward your lifetime exemption. As a result, the amount of assets that could be excluded from estate taxes would be then decreased by this amount at your death.

You do not have to pay any estate or gift tax until after your death, or until you have used up your entire lifetime exemption. However, if you give any major gifts throughout the year, you might have to file a gift tax return with the IRS to monitor your giving. There is also an annual gift exclusion that lets you give up to $15,000 in gifts each year without touching your lifetime exemption. There are two key points to remember:

  • The exclusion amount is per recipient. Therefore, you can give $15,000 to as many people as you want every year, and they do not even need to be a relative; and
  • The exclusion is per donor. This means that you and your spouse (if applicable) can give $15,000 apiece to as many people as you want. If you give $30,000 to your child to help her buy their first home and you’re married, you can consider half of the gift from each spouse.

The annual gift exclusion is an effective way for you to reduce or even eliminate estate tax liability. The estate tax rate is effectively 40% on all taxable estate assets.

Finally, the following kinds of assets aren’t considered part of your taxable estate:

  • Anything left to a surviving spouse, called “the unlimited marital deduction”;
  • Any amount of money or property you leave to a charity;
  • Gifts you have given that are less than the annual exclusion for the year in which they were given; and
  • Some types of trust assets.

Reference: The Motley Fool (Jan. 25, 2020) “What Is the Estate Tax in the United States?”

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

Estate Planning Checklist, Especially for Procrastinators – Annapolis and Towson Estate Planning

Many people do not think of themselves as having an “estate.” However, a house, car, savings account, life insurance, and all the possessions you own are an estate. If, after years of procrastinating, you finally did the right thing and had an estate plan created with an experienced estate planning attorney, is there anything else you need to do? Yes, says Federal News Network in the article “Good at putting things off? Here’s the last checklist you’ll ever need!”

Where should you keep your estate planning documents? These documents need to be kept in a secure location that is known to the people who will need access to them. A will might be kept at home in a fire and waterproof safe, or at your attorney’s office. Each estate planning attorney has his or her own process and can make recommendations. A will placed in a safe deposit box may create huge headaches, if the box is sealed upon death. Remember that people will need easy access to some documents, like a Do Not Resuscitate, or Medical Health Care Proxy, so they could be stored somewhere in the home where they can be grabbed in an emergency.

Who should have a copy of my estate plan? This is a personal preference. Some people give a copy to all heirs and their executor. Others prefer to keep it private. It is essential that the person who will be your executor knows where your will is and can get access to it quickly.

Update beneficiary designations. Many assets are governed not by the will, but by the beneficiary designations on the accounts. That may include retirement accounts, annuities, IRAs, life insurance, and possibly bank accounts and investment accounts. Check them every few years, especially if there have been divorces, marriages and new members added to the family.

Review how your assets are titled. If there are assets owned as “joint with right of survivorship,” they will not pass through probate and will become owned by the joint owner upon death. Sometimes this works well for large accounts, but sometimes it backfires. Talk with your estate planning lawyer.

How long does my estate plan last? An estate plan does not have an expiration date.

When should I amend my estate plan? Anytime there is a large change in the law, as has recently occurred with the passage of the SECURE Act, the estate plan should be reviewed. The SECURE Act has changed the rules about IRA distributions for heirs. Anyone with a sizable IRA should review their plan.

Any time there is a large event in your life, is another time when your estate plan should be reviewed. Those events include a death, birth, marriage, or divorce. If the person you had named as your executor or who had been given Power of Attorney or Health Care Proxy is no longer in your life or is no longer trusted, you also want to review and change these documents.

Reference: Federal News Network (Feb. 5, 2020) “Good at putting things off? Here’s the last checklist you’ll ever need!”

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Am I Better Off Investing Earlier in My IRA? – Annapolis and Towson Estate Planning

Remember that you are able to make an IRA contribution for a given year anytime between January 1 and the tax-filing deadline of the following year (usually April 15). That means that you can make a 2020 IRA contribution between Jan’ 1, 2020, and April 15, 2021. However, do not wait. Why not?

Vanguard’s recent article entitled “IRA contributions: The earlier, the better” notes that you invest to earn money, and the amount of money you earn depends primarily on three factors—two you can control.

  1. Investment performance. There is no way to control investment performance and all investing involves risk. The main cause of risk is market movement, which impacts your investment earnings.
  2. The amount you invest. You earn your money with compounding, when your investment earnings make their own earnings. If you contribute more, you have more money to generate earnings. That means you have more earnings to generate additional earnings. You can control the amount you invest, provided you keep within the annual IRA contribution limit.
  3. Your investment timing. If you wait until April to make an IRA contribution, you have missed 15 months of compounding, so if you have the financial flexibility to decide when you contribute to your IRA, do it ASAP.

As an illustration, let us imagine that you invest $5,500 in your IRA each year for 30 years, and your average annual return is 4%. In Situation A, you make a lump-sum investment every January, and your end balance is $323,967. That includes $158,967 in earnings. In Situation B, you make a lump-sum investment every April and your end balance is $308,467. That includes $143,467 in earnings, which is $15,500 less than you would earn in the first scenario. In each situation, you are contributing a total of $165,000 to your IRA over the span of 30 years.

This illustration shows some what-if scenarios that are not always possible to do in real life. For instance, you may not be able to invest the same amount each year or have to skip a few years. However, you should make small steps toward saving 12%–15% of your gross income (including employer contributions) every year. If you do not have the financial flexibility to make a lump-sum investment in your IRA—in January or April (or in any other month as a matter of fact), try to set up recurring automatic bank transfers. If you make bi-weekly contributions over the course of 30 years (for a total contribution of $165,000) and earn a 4% average annual return, the end balance is smaller than Situation A but larger than Situation B.

However, remember that you can’t contribute more than you’ve earned for the year.

Reference: Vanguard (Jan. 21, 2020) “IRA contributions: The earlier, the better”

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

An Estate Plan Is Necessary for the Unthinkable – Annapolis and Towson Estate Planning

The death of basketball legend Kobe Bryant, his daughter and seven others reminded us that we never know what fate has in store for us. A recent article from The Press Enterprise titled “Yes, you must go there: Think about the unthinkable, plan for the worst” explains the steps.

Put an appointment in your schedule. Make an appointment with a qualified estate planning attorney. If you make the call and have an actual appointment, you have a deadline and that is a start. The attorney may have a planning worksheet or organizer that he or she can send to you to guide you.

Start getting organized. If this seems overwhelming, break it out into separate parts. Begin with the easy part: a list of names, addresses, phone numbers, and email addresses for family members. Include any other people who you intend to include in your estate plan.

Next, list your assets and an estimated value of each. It does not have to be to the penny. Include the account numbers, name of the institution, phone number and, if you have a personal contact, a name. Include bank accounts, real estate holdings, timeshares, stocks, bonds, personal property, vehicles, RVs, any collectibles of value (attach appraisals if you have them), life insurance and retirement accounts.

List the professionals who you rely on—your estate planning lawyer, CPA, financial advisor, etc.

If you own a firearm, include your license and make sure that both your spouse and your estate planning attorney are aware of the information. In certain states, having possession of a firearm without being the licensed owner is against the law. Speak with your estate planning attorney about the law in your state and how to prepare for a situation if the firearm needs to be safely and properly dealt with.

Name an executor or personal representative. Estate planning is not just for death. It is also for incapacity. Who will act on your behalf, if you are not able to do so? Many people name their spouse, a long-time trusted friend or a family member. Be certain that person will be willing to act on your behalf. Have a second person also named, in case something occurs, and your first choice cannot serve.

If you have minor children, your estate plan will include a guardian, who will be responsible for raising them. Talk about that with your spouse and that person to make sure they are willing to serve. You can also name a second person to be in charge of finances for the children. Your estate planning lawyer will talk with you about the role of trusts to provide for the children.

Think about your overall goals. How do you see your legacy? Do you want to leave some funds for a charity that has meaning to you and your family? Do you want your children to receive equal shares of your entire estate? Does one child require special needs planning, or are you concerned that one of your children may not be able to manage an inheritance? These are all topics to discuss with your estate planning attorney. Their experience will help clarify your goals and create a plan.

Reference: The Press Enterprise (Feb. 2, 2020) “Yes, you must go there: Think about the unthinkable, plan for the worst”

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

Why Would I Need a Power of Attorney? – Annapolis and Towson Estate Planning

Recently Heard’s article entitled “6 Reasons to Choose a Power of Attorney” provides us with several reasons why you want to have one drafted.

  1. Choose Who Can Make the Decisions on Your Behalf. If you have a signed power of attorney and later you become incapacitated and are unable to make decisions, the agent you named in your POA can step in on your behalf. Without a power of attorney, loved ones will need to go to court to request a conservatorship or guardianship, and that can be expensive.
  2. Guardianship Not Needed. If you fail to sign a comprehensive power of attorney before you become incapacitated, you and your family have few options.

Someone will have to petition the court to appoint a guardian or a conservator. The judge will decide who will manage your financial and health affairs. The court will also monitor the situation. This can be expensive, and you will have no say regarding who will be chosen to serve.

  1. Lets You Discuss Your Wishes. An important decision is who your agent will be. When a parent or loved one decides to sign a power of attorney, it offers the chance to discuss the wishes and the expectation with the family and the person who is named as an agent in a power of attorney.
  2. Comprehensive Power of Attorney is Preferred. When you age, your needs change. Your POA should reflect it.
  3. Your Intent is Clear. If you become incapacitated, relatives may need to go to court to determine your intent. However, a well-drafted power of attorney provides a healthcare directive, which can eliminate the need for the family members to have arguments or disagree over your wishes.
  4. Avoid Delays. With a comprehensive power of attorney, all the powers required to do effective asset protection planning are included. Note: if a power of attorney does not include the specific power, it can reduce the ability of the agent and may lead to significant setbacks.

Want to write a power of attorney? Contact a qualified estate planning attorney.

Reference: Recently Heard (Jan. 30, 2020) “6 Reasons to Choose a Power of Attorney”

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

Be Aware of Probate – Annapolis and Towson Estate Planning

Probate is the legal process that happens after a person dies. The court accepts the deceased’s last will, and then the executor can carry out the instructions for the deceased’s estate. However, first he or she must pay any debts and sell assets before distributing any remaining property to the heirs.

If the deceased does not have a will, the probate court will appoint an administrator to manage the probate process, and the court will supervise the process. The Million Acres article entitled asks, “Probate Explained: What Is Probate, and How Does It Work?”

When the will is proven to be legal, the probate judge will grant the executor legal rights to carry out the instructions in the will.

When there is no will, the probate process can be complicated, because there is no paper trail that shows what assets belong to what heirs. Tracking down heirs can also be challenging, especially if there is no surviving spouse and the next of kin is located in a different state or outside the U.S.

Many executors will partner with a probate attorney to help them through the probate process, as well as to assist in filing the required paperwork, notifying creditors, filing taxes and distributing assets. The deceased’s assets must first be located and then formally appraised to determine their value.  Creditors must also be notified after death within a specified period of time.

After the creditors, taxes and fees have been paid on behalf of the estate, any leftover money or assets are distributed to the heirs.

The probate process can be lengthy. Things that can lengthen the process include the state when the deceased was a resident, whether there is a will and whether it is contested by the heirs. The more detailed the will, the simpler the probate process.

The probate process can be expensive, because of court filing fees, creditor notice fees, appraisal fees, tax preparation and filing fees and attorney fees. All of these fees are subtracted from the proceeds of the estate.

Estate planning with a qualified estate planning or elder law attorney involves taking the proper actions to avoid probate. This can reduce the burden for the surviving heir(s) and reduce costs, fees and taxes. Ask your attorney about some of the steps you can take before death to avoid probate.

Reference: Million Acres (Jan. 17, 2020) “Probate Explained: What Is Probate, and How Does It Work?”

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

How is a Guardianship Determined? – Annapolis and Towson Estate Planning

Because the courts call guardianship “a massive curtailment of liberty,” it is important that guardianship be used only when necessary.

The Pauls Valley Democrat’s recent article asks, “Guardianship – What is sufficient incapacity?” As the article explains, courts must be certain that an individual is truly “incapacitated.”

For example, Oklahoma law defines an incapacitated person as a person 18 years or older, who is impaired by reason of:

  1. Mental illness;
  2. Intellectual or developmental disability;
  3. Physical illness or disability; or
  4. Drug or alcohol dependency.

In addition, an incapacitated person’s ability to receive and evaluate information or to communicate decisions is impaired to such a level that the person (i) lacks capacity to maintain health and safety; or (ii) is unable to manage financial resources.

A person who is requesting to be appointed guardian by the court must show evidence to prove the person’s incapacity. This evidence is typically presented with the professional opinion of medical, psychological, or administrative bodies.

In some instances, a court may initiate its own investigation with known medical experts. In these cases, the type of professional chosen to provide an opinion should match the needs of the person (the “ward”), who will be subject to guardianship.

The court will receive this evidence and if it is acceptable, in many cases, require that the experts provide a plan for the care and administration of the ward and his assets. This plan will become a control measure, as well as guidance for the guardian who is appointed.

These controls will include regular monitoring and reports of performance back to the court.

Reference: Pauls Valley Democrat (Jan. 23, 2020) “Guardianship – What is sufficient incapacity?”

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

Avoiding Probate with a Trust – Annapolis and Towson Estate Planning

Privacy is just one of the benefits of having a trust created as part of an estate plan. That is because assets that are placed in a trust are no longer in the person’s name, and as a result do not need to go through probate when the person dies. An article from The Daily Sentinel asks, “When is a trust worth the cost and effort?” The article explains why a trust can be so advantageous, even when the assets are not necessarily large.

Let us say a person owns a piece of property. They can put the property in a trust, by signing a deed that will transfer the title to the trust. That property is now owned by the trust and can only be transferred when the trustee signs a deed. Because the trust is the owner of the property, there is no need to involve probate or the court when the original owner dies.

Establishing a trust is even more useful for those who own property in more than one state. If you own property in a state, the property must go through probate to be distributed from your estate to another person’s ownership. Therefore, if you own property in three states, your executor will need to manage three probate processes.

Privacy is often a problem when estates pass from one generation to the next. In most states, heirs and family members must be notified that you have died and that your estate is being probated. The probate process often requires the executor, or personal representative, to create a list of assets that are shared with certain family members. When the will is probated, that information is available to the public through the courts.

Family members who were not included in the will but were close enough kin to be notified of your death and your assets, may not respond well to being left out. This can create problems for the executor and heirs.

Having greater control over how and when assets are distributed is another benefit of using a trust rather than a will. Not all young adults are prepared or capable of managing large inheritances. With a trust, the inheritance can be distributed in portions: a third at age 28, a third at age 38, and a fourth at age 45, for instance. This kind of control is not always necessary, but when it is, a trust can provide the comfort of knowing that your children are less likely to be irresponsible about an inheritance.

There are other circumstances when a trust is necessary. If the family includes a member who has special needs and is receiving government benefits, an inheritance could make them ineligible for those benefits. In this circumstance, a special needs trust is created to serve their needs.

Another type of trust growing in popularity is the pet trust. Check with a local estate planning lawyer to learn if your state allows this type of trust. A pet trust allows you to set aside a certain amount of money that is only to be used for your pet’s care, by a person you name to be their caretaker. In many instances, any money left in the trust after the pet passes can be donated to a charitable organization, usually one that cares for animals.

Finally, trusts can be drafted that are permanent, or “irrevocable,” or that can be changed by the person who wants to create it, a “revocable” trust. Once an irrevocable trust is created, it cannot be changed. Trusts should be created with the help of an experienced trusts and estate planning attorney, who will know how to create the trust and what type of trust will best suit your needs.

Reference: The Daily Sentinel (Jan. 23, 2020) “When is a trust worth the cost and effort?”

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

Alternatives for Stretch IRA Strategies – Annapolis and Towson Estate Planning

The majority of many people’s wealth is in their IRAs, that is saved from a lifetime of work. Their goal is to leave their IRAs to their children, says a recent article from Think Advisor titled “Three Replacements for Stretch IRAs.” The ability to distribute IRA wealth over years, and even decades, was eliminated with the passage of the SECURE Act.

The purpose of the law was to add an estimated $428 million to the federal budget over the next 10 years. Of the $16.2 billion in revenue provisions, some $15.7 billion is accounted for by eliminating the stretch IRA.

Existing beneficiaries of stretch IRAs will not be affected by the change in the law. But going forward, most IRA heirs—with a few exceptions, including spousal heirs—will have to take their withdrawals within a ten year period of time.

The estate planning legal and financial community is currently scrutinizing the law and looking for strategies that will protect these large accounts from taxes. Here are three estate planning approaches that are emerging as front runners.

Roth conversions. Traditional IRA owners who wished to leave their retirement assets to children may be passing on big tax burdens now that the stretch is gone, especially if beneficiaries themselves are high earners. An alternative is to convert regular IRAs to Roth IRAs and take the tax hit at the time of the conversion.

There is no guarantee that the Roth IRA will never be taxed, but tax rates right now are relatively low. If tax rates go up, it might make converting the Roth IRAs too expensive.

This needs to be balanced with state inheritance taxes. Converting to a Roth could reduce the size of the estate and thereby reduce tax exposure for the state as well.

Life insurance. This is being widely touted as the answer to the loss of the stretch, but like all other methods, it needs to be viewed as part of the entire estate plan. Using distributions from an IRA to pay for a life insurance policy is not a new strategy.

Charitable Remainder Trusts (CRT). The IRA could be used to fund a charitable remainder trust. This allows the benefactor to establish an income stream for heirs with part of the IRA assets, with the remainder going to a named charity. The trust can grow assets tax free. There are two different ways to do this: a charitable remainder annuity trust, which distributes a fixed annual annuity and does not allow continued contributions, or a charitable remainder unitrust, which distributes a fixed percentage of the initial assets and does allow continued contributions.

Speak with your estate planning lawyer about what options may work best in your unique situation.

Reference: Think Advisor (Jan. 24, 2020) “Three Replacements for Stretch IRAs”

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

Fixing an Estate Plan Mistake – Annapolis and Towson Estate Planning

When an issue arises, you need to seek the assistance of a qualified and experienced estate planning attorney, who knows to fix the problems or find the strategy moving forward.

For example, an irrevocable trust can not be revoked. However, in some circumstances it can be modified. The trust may have been drafted to allow its trustees and beneficiaries the authority to make certain changes in specific circumstances, like a change in the tax law.

Those kinds of changes usually require the signatures from all trustees and beneficiaries, explains The Wilmington Business Journal’s recent article entitled “Repairing Estate Planning Mistakes: There Are Ways To Clean Up A Mess.”

Another change to an irrevocable trust may be contemplated, if the trust’s purpose may have become outdated or its administration is too expensive. An estate planning attorney can petition a judge to modify the trust in these circumstances when the trust’s purposes can not be achieved without the requested change. Remember that trusts are complex, and you really need the advice of an experienced trust attorney.

Another option is to create the trust to allow for a “trust protector.” This is a third party who is appointed by the trustees, the beneficiaries, or a judge. The trust protector can decide if the proposed change to the trust is warranted. However, this is only available if the original trust was written to specify the trust protector.

A term can also be added to the trust to provide “power of appointment” to trustees or beneficiaries. This makes it easier to change the trust for the benefit of current or future beneficiaries.

There is also decanting, in which the assets of an existing trust are “poured” into a new trust with different terms. This can include extending the trust’s life, changing trustees, fixing errors or ambiguities in the original language, and changing the legal jurisdiction. State trust laws vary, and some allow much more flexibility in how trusts are structured and administered.

The most drastic option is to end the trust. The assets would be distributed to the beneficiaries, and the trust would be dissolved. Approval must be obtained from all trustees and all beneficiaries. A frequent reason for “premature termination” is that a trust’s assets have diminished in value to the extent that administering it is not feasible or economical.

Again, be sure your estate plan is in solid shape from the start. Anticipating problems with the help of your lawyer, instead of trying to solve issues later is the best plan.

Reference: Wilmington Business Journal (Jan. 3, 2020) “Repairing Estate Planning Mistakes: There Are Ways To Clean Up A Mess”

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