What Is the Best Way to Make Sure Children Can Handle an Inheritance? – Annapolis and Towson Estate Planning

One strategy to get your children prepared to handle the assets they will eventually inherit, is to have them meet with your professional advisors. They can explain what you have been doing.

FedWeek’s recent article entitled “Preparing Your Heirs for Their Inheritance” suggests that your children should meet with your accountant for an explanation of any tax planning tactics that you have been implementing. That way those tactics can be continued after your death. If you have a broker or a financial planner, your heirs should meet with this adviser for a review of your portfolio strategies.

Know that if you hold investment property, it might pose special problems.

While your investment portfolio can be split between your children, who can follow their individual inclinations, it is tough to divide physical property. Your kids might disagree on how the property should be managed.

With any assets—but especially rental property—you have to be realistic. Ask yourself if your children can work together to manage the real estate.

If they cannot, you may be better off leaving your investment property to the one child who really can manage real estate and leave your other children non-real estate assets instead. You might also provide that some of your children can buy out the others at a price set by an independent appraisal.

Another way you can help is by proper handling of appreciated assets, such as stocks.

If you purchased $20,000 worth of XYZ Corp. shares many years ago, those shares are worth $50,000. If you sell those shares to raise $50,000 in cash for retirement spending, you will have a $30,000 long-term capital gain.

You might raise retirement cash, by selling other securities where there has been little or no appreciation.

That will allow you to keep the shares and leave them to your children. At your death, your shares may be worth $50,000, and that value becomes the new basis (cost for tax purposes) in those shares. If your children sell them for $50,000, they will not owe capital gains tax.

All of the appreciation in those shares during your lifetime will not be taxed.

Reference: FedWeek (March 31, 2021) “Preparing Your Heirs for Their Inheritance”

 

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Does Your State Have an Estate or Inheritance Tax? – Annapolis and Towson Estate Planning

Did you know that Hawaii and the State of Washington have the highest estate tax rates in the nation at 20%? There are 8 states and DC that are next with a top rate of 16%. Massachusetts and Oregon have the lowest exemption levels at $1 million, and Connecticut has the highest exemption level at $7.1 million.

The Tax Foundation’s recent article entitled “Does Your State Have an Estate or Inheritance Tax?” says that of the six states with inheritance taxes, Nebraska has the highest top rate at 18%, and Maryland has the lowest top rate at 10%. All six of these states exempt spouses, and some fully or partially exempt immediate relatives.

Estate taxes are paid by the decedent’s estate, prior to asset distribution to the heirs. The tax is imposed on the overall value of the estate. Inheritance taxes are due from the recipient of a bequest and are based on the amount distributed to each beneficiary.

Most states have been steering away from estate or inheritance taxes or have upped their exemption levels because estate taxes without the federal exemption hurt a state’s competitiveness. Delaware repealed its estate tax at the start of 2018, and New Jersey finished its phase out of its estate tax at the same time. The Garden State now only imposes an inheritance tax.

Connecticut still is phasing in an increase to its estate exemption. They plan to mirror the federal exemption by 2023. However, as the exemption increases, the minimum tax rate also increases. In 2020, rates started at 10%, while the lowest rate in 2021 is 10.8%. Connecticut’s estate tax will have a flat rate of 12% by 2023.

In Vermont, they’re still phasing in an estate exemption increase. They are upping the exemption to $5 million on January 1, compared to $4.5 million in 2020.

DC has gone in the opposite direction. The District has dropped its estate tax exemption from $5.8 million to $4 million in 2021, but at the same time decreased its bottom rate from 12% to 11.2%.

Remember that the Tax Cuts and Jobs Act of 2017 raised the estate tax exclusion from $5.49 million to $11.2 million per person. This expires December 31, 2025, unless reduced sooner!

Talk to an experienced estate planning attorney about estate and inheritance taxes, and see if you need to know about either, in your state.

Reference: The Tax Foundation (Feb. 24, 2021) “Does Your State Have an Estate or Inheritance Tax?”

 

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

What Should I Do when Spouse Dies? – Annapolis and Towson Estate Planning

Mourning the loss of a spouse can be one of the hardest experiences one can face. The emotional aspects of grief can also be difficult enough without having to concern yourself whether you are financially unprepared.

Nj.com’s recent article entitled “Financial planning considerations after the loss of a spouse” says that when a spouse passes away, there can be many impacts to the financial picture. These can include changes in income, estate planning and dealing with IRA and insurance distributions. The first step, however, is understanding and quantifying the financial changes that may happen when your spouse dies.

Income Changes – Social Security. A drop in income is frequently an unforeseen reality for many surviving spouses, especially those who are on Social Security benefits. For retirees without dependents that have reached full retirement age, the surviving spouse will typically get the greater of their social security or their deceased spouse’s benefits – but not both. For example, let’s assume Dirk and Melinda are receiving $2,000 and $1,500 per month in Social Security benefits, respectively. In the event Dirk dies, Melinda will no longer receive her benefit and will only receive Dirk’s $2,000 benefit. That is a 42% reduction in total social security income received.

Social Security benefits typically start at 62, but a widow’s benefit can be available at age 60 for the survivor or at 50 if the survivor is disabled within seven years of the spouse’s death. Moreover, unmarried children under 18 (up to age 19 if attending elementary or secondary school full time) of a worker who passes away may also be eligible to get Social Security survivor benefits.

Income Changes – Pension Benefits. This is another type of income that may be decreased because of a spouse’s death. Those eligible to receive a pension often choose little or no survivorship benefits, which results in a sudden drop in income. Therefore, a single life annuity pension payment will end at the worker’s death leaving the survivor with no additional benefits. However, a 50% survivor option will pay 50% of the worker’s benefit to the surviving spouse at their death. A surviving spouse needs to understand what, if any pension benefits will continue and the financial effect of these changes.

Spousal IRA Benefits. Spouses must understand their options for inherited retirement accounts. A spousal beneficiary can roll the funds to their own IRA account, which lets the spousal beneficiary delay Required Minimum Distributions (RMDs) until age 72. In this case, the spousal beneficiary’s life expectancy is used to calculate future RMDs. This may be appropriate for those over 59½, but spousal beneficiaries under that age that require retirement account distributions may subject themselves to early withdrawal penalties, including a tax and a 10% early withdrawal penalty, even on inherited funds. Spouses younger than 59½ may consider rolling the account to a beneficial or inherited IRA for more flexibility. In this case, RMDs will be taken annually based upon the life expectancy of the beneficiary, with distributions avoiding the 10% penalty. Distributions greater than the RMD may also be taken, while still avoiding early withdrawal penalties. Inherited IRAs can be a great tool for spousal beneficiaries who need income now to help support their lifestyle but have not reached 59½.

Updating the Estate Plan of the Surviving Spouse. It is easy to forget to review your estate plan drafted before your spouse passed away. Check on this with an experienced estate planning attorney.

Updating Financial Planning Projections. You do not want to make any major decisions after the loss of a loved one, you can still review the numbers. Create a new financial plan to help provide clarity.

Reference: nj.com (Jan. 9, 2021) “Financial planning considerations after the loss of a spouse”

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

How Do You Plan for the Death of a Spouse? – Annapolis and Towson Estate Planning

The COVID pandemic has become a painful lesson in how important it is to having estate plans in order, especially when a spouse becomes sick, incapacitated, or dies unexpectedly. With more than 400,000 Americans dead from the coronavirus, not every one of them had an estate plan and a financial plan in place, leaving loved ones to make sense of their estate while grieving. This recent article from Market Watch titled “How to get your affairs in order if your spouse is dying” offers five things to do before the worst occurs.

Start by gathering information. Make all of your accounts known and put together paperwork about each and every account. Look for documents that will become crucial, including a durable power of attorney, an advanced health care directive and a last will. Gather paperwork for life insurance policies, investment portfolios and retirement accounts. Create a list of contact information for your estate planning attorney, accountant, insurance agent, doctors and financial advisors and share it with the people who will be responsible for managing your life. In addition, call these people, so they have as much information as possible—this could make things easier for a surviving spouse. Consider making introductions, via phone or a video call, especially if you have been the key point person for these matters.

Create a hard copy binder for all of this information or a file, so your loved ones do not have to conduct a scavenger hunt.

If there is an estate plan in place, discuss it with your spouse and family members so everyone is clear about what is going to happen. If your estate plan has not been updated in several years, that needs to be done. There have been many big changes to tax law, and you may be missing important opportunities that will benefit those left behind.

If there is no estate plan, something is better than nothing. A trust can be done to transfer assets, as long as the trust is funded properly and promptly.

Confirm beneficiary designations. Check everything for accuracy. If ex-spouses, girlfriends, or boyfriends are named on accounts that have not been reviewed for decades, there will be a problem for the family. Problems also arise when no one is listed as a beneficiary. Beneficiary designations are used in many different accounts, including retirement accounts, life insurance policies, annuities, stock options, restricted stock and deferred compensation plans.

Many Americans die without a will, known as “intestate.” With no will, the court must rely on the state’s estate laws, which does not always result in the people you wanted receiving your property. Any immediate family or next of kin may become heirs, even if they were people you with whom you were not close or from whom you may even have been estranged. Having no will can lead to estate battles or having strangers claim part of your estate.

If there are minor children and no will to declare who their guardian should be, the court will decide that also. If you have minor children, you must have a will to protect them and a plan for their financial support.

Create a master list of digital assets. These assets range from photographs to financial accounts, utility bills and phone bills to URLs for websites. What would happen to your social media accounts, if you died and no one could access them? Some platforms provide for a legacy contact, but many do not. Prepare what information you can to avoid the loss of digital assets that have financial and sentimental value.

Gathering these materials and having these conversations is difficult, but they are a necessity if a family member receives a serious diagnosis. If there is no estate plan in place, have a conversation with an estate planning attorney who can advise what can be done, even in a limited amount of time.

Reference: Market Watch (Jan. 22, 2021) “How to get your affairs in order if your spouse is dying”

 

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What Happens If Trust Not Funded – Annapolis and Towson Estate Planning Attorneys

Revocable trusts can be an effective way to avoid probate and provide for asset management, in case you become incapacitated. These revocable trusts — also known as “living” trusts — are very flexible and can achieve many other goals.

Point Verda Recorder’s recent article entitled “Don’t forget to fund your revocable trust” explains that you cannot take advantage of what the trust has to offer, if you do not place assets in it. Failing to fund the trust means that your assets may be required to go through a costly probate proceeding or be distributed to unintended recipients. This mistake can ruin your entire estate plan.

Transferring assets to the trust—which can be anything like real estate, bank accounts, or investment accounts—requires you to retitle the assets in the name of the trust.

If you place bank and investment accounts into your trust, you need to retitle them with words similar to the following: “[your name and co-trustee’s name] as Trustees of [trust name] Revocable Trust created by agreement dated [date].” An experienced estate planning attorney should be consulted.

Depending on the institution, you might be able to change the name on an existing account. If not, you will need to create a new account in the name of the trust, and then transfer the funds. The financial institution will probably require a copy of the trust, or at least of the first page and the signature page, as well as the signatures of all the trustees.

Provided you are serving as your own trustee or co-trustee, you can use your Social Security number for the trust. If you are not a trustee, the trust will have to obtain a separate tax identification number and file a separate 1041 tax return each year. You will still be taxed on all of the income, and the trust will pay no separate tax.

If you are placing real estate in a trust, ask an experienced estate planning attorney to make certain this is done correctly.

You should also consult with an attorney before placing life insurance or annuities into a revocable trust and talk with an experienced estate planning attorney, before naming the trust as the beneficiary of your IRAs or 401(k). This may impact your taxes.

Reference: Point Verda Recorder (Nov. 19, 2020) “Don’t forget to fund your revocable trust”

 

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

Changes to Estate Tax Laws? – Annapolis and Towson Estate Planning

This New York Times Article from January 2021 is a good summary of the potential changes to the estate tax laws under President Biden.  In addition to the possibility of a reduction in the federal estate tax exemption to $5 million or $3.5 million, the article also summarizes the possible increase in the estate tax rate from 40% to 55%, as well as significant changes to the capital gains tax rules.

Reference: NYTimes.com (Jan. 15, 2021) “The Estate Tax May Change Under Biden, Affecting Far More People”

 

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

How Can I Easily Pass My Home to My Only Child? – Annapolis and Towson Estate Planning

This estate planning issue concerns a single retired parent of an only adult daughter and how to transfer the home to the daughter. Should the daughter simply sell the house when her mother dies, or should the daughter be added to the deed now while her mother is alive?

Also, is there a court hearing?

In many states, there is no reason or requirement to go before a judge to probate your estate, says nj.com in its recent article “Should I add my daughter’s name to my home’s deed?”

In estate planning, there are two primary questions to answer about the transfer of the home. First, there would possibly be some significant capital gains if the mom adds her daughter to the deed prior to death.

Also, if the mother winds up requiring Medicaid, Medicaid might put a lien against the home after she dies for the value of the services it provided.

Generally, when a home has been owned for a long time, the mother should try to preserve the step-up in basis for tax purposes that happens, if the real estate is still in the mom’s name at her passing.

Whether that step up is preserved, depends on how the daughter is added to the deed.

Adding the daughter as a joint tenant or tenant in common will not preserve the step-up basis for taxes. Ask an elder law attorney what this means in your specific situation.

A better option may be to transfer the remainder interest in the property to the daughter in this scenario and withhold a life estate for the mom.

That will preserve the step-up in basis at death.

This can also get complicated when there is an outstanding mortgage, so speak to an experienced elder law or estate planning attorney.

Reference: nj.com (Dec. 15, 2020) “Should I add my daughter’s name to my home’s deed?”

 

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

Is there a Better Plan than a Reverse Mortgage? – Annapolis and Towson Estate Planning

If you are 62 or older, one way to get a bit more cash, is to use the equity in your home in a reverse mortgage. It is a type of loan that allows you to borrow against the equity in your home and receive a set monthly payment or line of credit (or a combination of the two). The repayment is deferred until you move out, sell the home, become delinquent on property taxes or insurance, the home falls into disrepair, or you pass away. At that point, the house is sold and any excess funds after repayment belong to you or your heirs.

Investopedia’s recent article entitled “Alternatives to a Reverse Mortgage” explains that reverse mortgages can be troublesome, if you do not set it up right. They also require careful consideration for the rights of the surviving spouse, if you are married. Ultimately, with a reverse mortgage, you or your heirs give up your home, unless you are able to buy it back from the bank. There are some less than stellar reverse mortgage companies out there, so it can be risky.

There are a few other ways to generate cash for your living expenses in retirement.

Refinance Your Mortgage. You may be able to refinance your existing mortgage to lower your monthly payments and free up some cash. It is wise to lower the interest rate on your mortgage, which can save you money over the life of the loan, decrease the size of your monthly payments and help you build equity in your home more quickly. If you refinance rather than going with a reverse mortgage, your home remains as an asset for you and your heirs.

Get a Home-Equity Loan. This loan or second mortgage allows you to borrow money against the equity in your home. Note that the new Tax Cuts and Jobs Act restricted the eligibility for a home-equity loan interest deduction. For tax years 2018 through 2025, you will not be able to deduct home-equity loan interest, unless the loan is used specifically for qualified purposes. Like refinancing, your home remains an asset for you and your heirs. Remember that because your home is collateral, there is a risk of foreclosure, if you default on the loan.

Use a Home Equity Line of Credit. A home-equity line of credit (HELOC) lets you borrow up to your approved credit limit on an as-needed basis. Unlike a home-equity loan, where you pay interest on the entire loan amount whether you are using the money or not, with a HELOC you pay interest only on the amount of money you actually take out. These are adjustable loans, so your monthly payment will change with fluctuating interest rates.

Downsize. The options previously discussed let you keep your existing home. However, if you are willing and able to move, selling your home allows you to tap into your equity. Many people downsize, because they are in a home that is much larger than they need without children around. Your current home also may be too difficult or costly to maintain. When you sell, you can use the proceeds to purchase a smaller, more affordable home or you might just rent, and you will have extra money to save, invest or spend as you want.

Sell Your Home to Your Children. Another alternative to a reverse mortgage, is to sell your home to your children. You might think about a sale-leaseback. In this situation, you would sell the house, then rent it back using the cash from the sale. As landlords, your children get rental income and can take deductions for depreciation, real estate taxes and maintenance. You could also consider a private reverse mortgage. This works like a reverse mortgage, except the interest and fees stay in the family: your children make regular payments to you, and when it is time to sell the house, they recoup their contributions (and interest).

Reverse mortgages may be a decent option for people who are house rich and cash poor, with lots of home equity but not enough income for retirement. However, this article lays out some other options, that let you to tap into the equity you have built up in your home. Before making any decisions, do some research on your options, shop around for the best rates (where applicable) and speak with an experienced elder law attorney.

Reference: Investopedia (June 25, 2020) “Alternatives to a Reverse Mortgage”

 

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

Should I Borrow from my 401(k) during the Pandemic? – Annapolis and Towson Estate Planning

The major advantage of saving in a 401(k), is that you can have tax-deferred growth on your investments. When you are saving money for the long term, you typically want to leave it alone. However, there are some situations, in which withdrawing money from your 401(k) is acceptable.

Investopedia’s recent article entitled “Hardship Withdrawal vs. 401(k) Loan: What’s the Difference?” says that prior to making a move, you need to understand the financial implications of using your retirement plan early. There are two basic ways to take money out before reaching retirement age.

One option is to take a hardship withdrawal. The IRS says that hardship withdrawals are okay, only when there is an immediate and great financial need. These withdrawals are usually limited to the amount required to satisfy that need. These withdrawals are subject to ordinary income tax and, if you are not yet 59½, there is a 10% early withdrawal penalty, except if you are impacted by the COVID-19 pandemic. The CARES Act lets you make a penalty-free COVID-19 related withdrawal or take out a loan from your 401(k) in 2020, with special repayment provisions and tax treatment.

The IRS has a safe harbor exception that lets you automatically meet the heavy-need standard in certain situations, such as for those who must take a hardship withdrawal to pay for medical expenses for themselves, a spouse, or dependents. A hardship withdrawal could also be helpful, if you are in a long period of unemployment and do not have an emergency fund. The IRS waives the penalty if you are unemployed and need to buy health insurance, but you would still owe taxes on the withdrawal. Other situations that are covered by the safe harbor exception include:

  • Tuition, education fees, and room-and-board expenses for the next 12 months of post-secondary school for the employee or the employee’s spouse, children, dependents, or beneficiary.
  • Payments that are required to prevent the eviction of the employee from his or her principal residence or foreclosure on the mortgage on that residence.
  • Funeral expenses for the employee, the employee’s spouse, children, dependents, or beneficiary.
  • Certain expenses to repair damage to the employee’s principal residence.

If you qualify for a Coronavirus-Related Distribution (CRD) from your 401(k) plan during 2020, that distribution will be treated as a safe-harbor distribution that is not subject to a 10% early withdrawal penalty if you are under 59½ but subject to regular income taxes. Some other unique stipulations to this special distribution say that:

  • You can withdraw up to $100,000 or your account balance, whichever is less.
  • You can spread out any taxes over three years.
  • If you pay the funds back into your account within three years, it will be considered a rollover and not taxed.

The IRS has expanded the eligibility for a hardship withdrawal to include having a job start date delayed or a job offer rescinded because of COVID-19 and allow a spouse of an impacted person to make a hardship withdrawal—even if the spouse is still working.

If you are not in such a financial state but still want to take cash from your plan, a 401(k) loan is the other way to go. The IRS says that you can borrow 50% of your vested account balance or $50,000, whichever is less. However, a loan has both pros and cons. You are in effect paying back the money to yourself. That means you are returning it to your retirement account, and that is good. However, if you leave your job and do not repay the loan within a specified period (which was recently extended to the due date of your federal income tax return, instead of the previous 60-to-90 day window, under the Tax Cuts and Jobs Act), it is treated as a regular distribution. Therefore, income tax and the early withdrawal penalty would apply.

However, there may be situations in which you might consider a loan. New rules also let you withdraw a loan of up to $100,000 or the amount in your employer-sponsored retirement plan (whichever is less) anytime until September 23, 2020, and delay payments on the loan for up to a year (but the interest will accrue.) If you already have an outstanding loan, the payments can also be deferred for a year.

Consolidating debt. You could use the loan to consolidate high-interest debt, if your credit doesn’t qualify you for a low rate on a personal loan or a debt consolidation loan.

Purchasing a home. It could help when you are planning to buy a home. You could use the money to cover closing costs or hold it in your down-payment savings account for a few months before buying. A 401(k) loan typically must be repaid within five years with at least quarterly payments, but the IRS allows provisions for plan administrators to extend the repayment period longer for those buying a home.

Making an Investment. You could make an investment, like a home as an investment property when you plan to renovate the home and flip it for a profit but need capital to make the purchase.

When You Have A Comfortable Retirement Cushion. If you have been saving regularly for many years with solid investments, you may be ahead of schedule when it comes to hitting your retirement goal. If so, and your job is stable, taking a loan from your 401(k) may not be too bad for your retirement.

There is also an option for 2020 only for taking a 401(k) loan. If you qualify for a CRD, the CARES Act lets you to take a loan of up to $100,000 or the amount in your employer-sponsored retirement plan (whichever is less) until September 23, 2020. You can postpone the payments for up to a year, but interest will accrue. If you already have an outstanding loan, those payments can also be deferred for a year.

If you decide to take a loan or a hardship withdrawal, be certain that you understand the potential tax consequences of doing so.

Reference: Investopedia (June 23, 2020) “Hardship Withdrawal vs. 401(k) Loan: What’s the Difference?”

 

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

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”

 

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