Is There Estate Tax on the Property I Inherited? – Annapolis and Towson Estate Planning

The vast majority of those who inherit real estate don’t end up paying any taxes on the property. However, there are some instances where estate or inheritance taxes could be assessed on inherited real estate. Motley Fool’s recent article, “Do You Have to Pay Estate Tax on Real Estate You Inherit?” provides a rundown of how estate taxes work in the U.S. and what it means to you if you inherit or are gifted real estate assets.

An estate tax is a tax applied on property transfers at death. A gift tax is a tax levied on property transfers while both parties are alive. An inheritance tax is assessed on the individual who inherits the property. For real estate purposes, you should also know that this includes money and property, and real estate is valued based on the fair market value at the time of the decedent’s death.

Most Americans don’t have to worry about estate taxes because we’re allowed to exclude a certain amount of assets from our taxable estates, which is called the lifetime exemption. This amount is adjusted for inflation over time and is $11.58 million per person for 2020. Note that estate taxes aren’t paid by people who inherit the property but are paid directly by the estate before it is distributed to the heirs.

The estate and gift taxes in the U.S. are part of a unified system. The IRS allows an annual exclusion amount that exempts many gifts from any potential transfer tax taxation. In 2020, it’s $15,000 per donor, per recipient. Although money (or assets) exceeding this amount in a given year is reported as a taxable gift, doesn’t mean you’ll need to pay tax on them. However, taxable gifts do accumulate from year to year and count toward your lifetime exclusion. If you passed away in 2020, your lifetime exclusion will be $11.58 million for estate tax purposes.

If you’d given $3 million in taxable gifts during your lifetime, you’ll only be able to exclude $8.58 million of your assets from estate taxation. You’d only be required to pay any gift taxes while you’re alive, if you use up your entire lifetime exemption. If you have given away $11 million prior to 2020 and you give away another $1 million, it would trigger a taxable gift to the extent that your new gift exceeds the $11.58 million threshold.

There are a few special rules to understand, such as the fact that you can give any amount to your spouse in most cases, without any gift or estate tax. Any amount given to charity is also free of gift tax and doesn’t count toward your lifetime exemption. Higher education expenses are free of gift and estate tax consequences provided the payment is made directly to the school. Medical expense payments are free of gift and estate tax consequences, if the payment is made directly to the health care provider.

Remember that some states also have their own estate and/or inheritance taxes that you might need to consider.

States that have an estate tax include Connecticut, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont and Washington. The states with an inheritance tax are Iowa, Kentucky, Nebraska, New Jersey and Pennsylvania. Maryland has both an estate and an inheritance tax. However, there are very few situations when you would personally have to pay tax on inherited real estate.

Estate tax can be a complex issue, so speak with a qualified estate planning attorney.

Reference: Motley Fool (December 11, 2019) “Do You Have to Pay Estate Tax on Real Estate You Inherit?”

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

What Should I Know About Being an Executor? – Annapolis and Towson Estate Planning

You’re named executor because someone thinks you’d be good at collecting assets, settling debts, filing estate tax returns where necessary, distributing assets and closing the estate.

However, Investopedia’s article from last summer, “5 Surprising Hazards of Being an Executor,” explains that the person named as an executor isn’t required to accept the appointment. Prior to agreeing to act as an executor, you should know some of the hazards that can result, as well as how you can address some of these potential issues, so that being an executor can run smoothly.

  1. Conflicts with Co-Executors. Parents will frequently name more than one adult child as co-executor, so they don’t show favoritism. However, for those who are named, this may not work well because some children may live far way, making it difficult to coordinate the hands-on activities, like securing assets and selling a home. Some adult children may also not have the financial ability to deal with creditors, understand estate tax matters and perform effective accounting to satisfy beneficiaries that things have been properly handled. In addition, multiple executors mean additional paperwork. Instead, see if co-executors can agree to allow only one to serve, and the others will waive their appointment. Another option is for all of the children to decline and allow a bank’s trust department to handle the task. Employing a bank to serve instead of an individual as executor can alleviate conflicts among the children and relieves them from what could be a very difficult job.
  2. Conflicts with Heirs. It’s an executor’s job to gather the estate assets and distribute them according to the deceased person’s wishes. In some cases, heirs will land on a decedent’s home even before the funeral, taking mementos, heirlooms and other valuables. It’s best to secure the home and other assets as quickly as possible. Tell the heirs that this is the law and share information about the decedent’s wishes, which may be described in a will or listed in a separate document. This Letter of Last Instruction isn’t binding on the executor but can be a good guide for asset disbursements.
  3. Time-Consuming Responsibilities. One of the major drawbacks to be an executor is the amount of time it takes to handle responsibilities. For example, imagine the time involved in contacting various government agencies. This can include the Social Security Administration to stop Social Security benefits and, in the case of a surviving spouse, claim the $255 death benefit. However, an executor can permit an estate attorney to handle many of these matters.
  4. Personal Liability Exposure. The executor must pay taxes owed, before disbursing inheritances to heirs. However, if you pay heirs first and don’t have enough funds in the estate’s checking account to pay taxes, you’re personally liable for the taxes. Explain to heirs who are chomping at the bit to receive their inheritances that you’re not allowed to give them their share, until you’ve settled with creditors, the IRS and others with a claim against the estate. You should also be sure that you understand the extent of the funds needed to pay what’s owed.
  5. Out-of-Pocket Expenses. An executor can receive a commission for handling his duties. The amount of the commission is typically determined by the size of the estate (e.g., a percentage of assets). However, with many cases, particularly smaller estates and among families, an executor may waive any commission. You should pay the expenses of the estate from an estate checking account and record all out-of-pocket expenses, because some of these expenses may be reimbursable by the estate.

Being an executor can be a challenge, but somebody must do it. If that person’s you, be sure to know what you’re getting into before you agree to act as an executor.

Reference: Investopedia (June 25, 2019) “5 Surprising Hazards of Being an Executor”

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

What Does an Estate Planning Attorney Really Do? – Annapolis and Towson Estate Planning

Vents Magazine’s recent article, “Understanding What an Estate Planning Attorney Does,” explains that estate planning is a legal set of instructions for your family about how to distribute your wealth and property after you die. Estate planning attorneys make sure the distribution of property happens according to the decedent’s will.

An estate planning attorney can provide legal advice on how to prepare your will after you pass away or in the event that you experience mental incapacity. She will have all the information and education on all the legal processes, beginning with your will and moving on to other important estate planning documents. She will also help you to understand estate taxes.

An estate planning attorney will also help to make certain that all of your savings and property are safe and distributed through the proper legal processes.

Estate planning attorneys can also assist with the power of attorney and health care directives. These documents allow you to designate an individual to decide issues on your behalf, in the event that you become mentally incapable of making decisions for yourself. They can also help you with a guardian who will look after your estate.

It’s important that you select the right estate planning attorney to execute the legal process, as you’ve instructed in your estate plan. You should only retain an attorney with experience in this field of law because other legal counsel won’t be able to help you with these issues—or at least, they may say they can, only to find out later that they’re not experienced in this area.

You also want to feel comfortable with your estate planning attorney because you must disclose all your life details, plans and estate issues, so she can create an estate plan that’s customized to your circumstances.

If you choose the right attorney, it will save you money in the long run. She will help you save from all the estate taxes and make all the processes smooth and easy for you and your loved ones.

Reference: Vents Magazine (December 12, 2019) “Understanding What an Estate Planning Attorney Does”

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

How Do I Reduce My Blended Family Fighting Concerning My Estate Plan? – Annapolis and Towson Estate Planning

The IRS recently announced that in 2020, the first $11.58 million of a taxable estate is free from federal estate taxes. Therefore, a vast majority of estates won’t have to pay federal estate taxes. However, a TD Wealth survey at the 53rd Annual Heckerling Institute on Estate Planning found that family conflict was identified as the leading threat to estate planning.

Investment News’ recent article, “Reducing potential family conflicts,” explains that a blended family can result from multiple marriages, children from a current or former marriage, or children involved in multiple marriages. There are more “blended families” in the U.S. than ever before. More fighting over estate planning occurs in blended families.

The key element in any conflict resolution is open and honest communication. It’s especially the case, when it involves a blended family. In many instances, it’s best to explain a proposed estate plan to the family in advance.

If anyone objects, listen to their point of view and try to be empathetic to their position. You may wind up with a compromise, or, if no changes are made, at least the family member had an opportunity to air their grievances.

One potential solution to minimize conflicts within a blended family may be a prenuptial agreement. The agreement is signed prior to the marriage and outlines the financial rights of each spouse, in the event of a divorce or death. Prenups are particularly useful in second marriages, especially when there is a disparity in age and wealth between the parties.

However, not every married couple in a blended family has a prenuptial agreement. Even if they do, blended families can still have family conflicts in estate planning.

It is important to remember communication, reducing the chances of a will contest with a “no-contest” clause, asking your attorney about a revocable living trust and compromise.

Estate planning can be particularly difficult for blended families. Talk with an experienced estate planning attorney about the techniques that can help reduce potential family conflicts.

Reference: Investment News (December 9, 2019) “Reducing potential family conflicts”

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

What’s the Best Way to Take My Required Minimum Distribution? – Annapolis and Towson Estate Planning

CNBC’s recent article, “These tips can help retirees make required minimum distributions easy and tax penalty free,” gives the steps to follow, so we don’t leave money on the table.

RMDs or required minimum distributions, are the minimum amount people age 70½ and older must withdraw from their retirement funds. If you’ve inherited a retirement account, you may also have to make a withdrawal. The amount you need to withdraw varies from year to year and is based on specific calculations, including what your account values were as of December 31 the prior year and your age.

The time to get started on your RMD for this year is right now, because the paperwork may take some time. You have until April 1, if you just turned 70½ this year. Let’s look at a few tips:

Get your paperwork organized. In order to know how much you have to withdraw, you have to have an accurate picture of what you own. Create a list of accounts and take an inventory first, so you know where all your retirement accounts are located.

Know what you can take from what account. If you have multiple IRAs, you can take your total RMD from any one of those accounts because of the aggregation rule. However, with multiple IRAs, you still must calculate the amount you take out based on the value of all of them. It’s that same with multiple 403(b) retirement accounts. The rule doesn’t apply to 401(k) plans. If you have multiple 401(k) accounts, you must take money from each one, and you can’t take an RMD from an IRA to satisfy a 401(k), or vice versa.

Understand the rules, if you’re still working. If you’re 70½ and still employed, you could get a break from taking your RMD in certain circumstances. Generally, 401(k) plans have a still-working rule, which stipulates that you don’t have to take the RMD until you retire. However, you can only delay the RMDs, if the plan is attached to the company where you’re currently employed. Other accounts from a previous employer are excluded, so you must still take distributions from those.

Keep an eye on any inherited accounts. If you’ve inherited a retirement account, you may have to take an RMD by the end of this year. That generally doesn’t apply if you inherited the money from your spouse, because spouses can do a rollover and keep postponing the distributions. However, if you’re a non-spouse beneficiary, you probably must take a distribution by the end of 2019. If you inherited the account in 2018, you’ll need to take your first RMD in 2019.

RMDs from a Roth IRA will likely be tax-free. However, if you’ve inherited one of these accounts and you didn’t take that money out, you’ll have to pay a 50% penalty on the funds you should’ve withdrawn.

Consider giving to charity. A good way to avoid paying taxes on your RMD, is to give the money to charity. A qualified charitable distribution lets you make donations to a charity directly from your IRA, instead of taking the RMD yourself. Therefore, if your RMD is $5,000, and you typically give $5,000 to charity each year, you can donate that money directly and not pay tax on it.

Reference: CNBC (November 29, 2019) “These tips can help retirees make required minimum distributions easy and tax penalty free”

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

Why Even “Regular Folks” Can Benefit from Trust Funds – Annapolis and Towson Estate Planning

A trust is a useful tool, even if you’re not a wealthy person. There are many different types of trusts, but the most basic types are revocable and irrevocable. A recent article from Business Insider “A trust fund gives you control over your money after you’re gone, and it’s not just for the super rich” clarifies when and how to use a trust fund.

Trust funds are often used to avoid having assets pass through the probate process. They allow for a tax-efficient means of transferring wealth, avoid or defer estate taxes and help with charitable giving. An experienced estate planning attorney can help clarify what type of trust is needed, and how it can work with an overall estate plan.

Trust funds have a bad reputation for creating badly-behaved young adults, but they are a good planning tool for anyone. Some trusts are more expensive to maintain than others, which is why they are often associated with wealthy people. However, they have the same purpose: to ensure that a person’s money goes where they want it to go. The directions can be as specific as you wish.

There are three people involved in any trust: the grantor, who puts their assets in the trust fund; the beneficiary or beneficiaries, who receive those assets according to the terms of the trust; and the trustee, the person or group of advisors or the organization that is responsible for managing the trust when the trust is created and after the grantor has died. A grantor can put almost any kind of asset into a trust, but most people use them for real estate, bank accounts, investment accounts, business interests and life insurance policies.

If a trust is revocable, it means the grantor may make changes at any time and can generate income through the assets in the trust. The assets are included in the grantor’s estate and the grantor may pay taxes on the assets now and upon their death. Creditors can access the assets for any unpaid debts. Once the grantor of a revocable trust dies, the trust becomes irrevocable.

An irrevocable trust cannot be changed, once it is created. It can only be accessed after the death of the grantor. The assets are not included in the grantor’s estate and they do not have to pay taxes during their lifetime or at death. The taxes are the responsibility of the trust and beneficiaries. Depending on how the trust is designed, creditors may not access the trust.

If you are considering setting up a trust, meet with an estate planning lawyer to discuss your unique situation and determine which type of trust works best for you and your family.

Reference: Business Insider (December 2, 2019) “A trust fund gives you control over your money after you’re gone, and it’s not just for the super rich”

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

Simple Mistakes to Avoid in Estate Planning – Annapolis and Towson Estate Planning

There’s so much information available today, good and bad, that it is not always easy to know which is which. Just as we should not perform surgery on ourselves, we are asking for problems if we try to manage our estate planning without professional help. That’s the good advice from the article “Examining three common mistakes of estate planning” from The News-Enterprise.

For one thing, the roles of power of attorney agent and executor are often confused. The power of attorney agent acts in accordance with a document that is used when a person is living. The power of attorney appointment is made by you for someone to act on your behalf, when you cannot do so. The power of attorney expires upon your death.

The executor is a person who you name to handle matters for your estate after your death, as instructed in your last will and testament. The executor is nominated by you but is not in effect, until that person is appointed through a court order. Therefore, the executor cannot act on your behalf, until you have died and a court has reviewed your will and appointed them to handle your estate.

Too many people opt for the easy way out, when it comes to estate planning. We hear that someone wants a “simple will.” This is planning based on a document, rather than planning for someone’s goals. Every estate plan needs to be prepared with the consideration of a person’s health, family relationships, and finances.

Many problems that arise in the probate process could have been prevented, had good estate planning been done.

Another mistake is not addressing change. This can lead to big problems while you are living and after you die. If you are healthy, that’s great—but you may not always enjoy good health. Your health and the health of your loved ones may change.

Family dynamics also change over time. If you only plan for your current circumstances, without planning for change, then you may need to make many updates to your will.

The other thing that will occur, is that your estate plan may fail. Be realistic, and work with your estate planning attorney to plan for the many changes that life brings. Plan for incapacity and for long-term care. Make sure that your documents include secondary beneficiaries, disability provisions, and successor fiduciaries.

Create an estate plan that works with today’s circumstances, but also anticipates what the future may bring.

Reference: The News-Enterprise (Nov. 18, 2019) “Examining three common mistakes of estate planning”

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

I’ve Inherited an IRA – Now, What about Taxes? – Annapolis and Towson Estate Planning

Inheriting an IRA comes with several constraints. As a result, it can be tricky to navigate. You are at an intersection of tax planning, financial planning and estate planning, says Bankrate’s article “7 inherited IRA rules all beneficiaries must know.” There are a number of choices for you to make, depending upon your situation. How can you figure out what to do?

Whatever your situation, do NOT cash out the IRA, or roll it into a non-IRA account. Doing this could make the entire IRA taxable as regular income. Do nothing until you have the right advisors in place. For most people, the best step is to find an estate planning attorney who is experienced with inherited IRAs.

Here’s what you need to know:

The rules are different for spouses. A spouse heir of an IRA can do one of three things:

  • Name himself as the owner and treat the IRA as if it was theirs;
  • Treat the IRA as if it was his, by rolling it into another IRA or a qualified employer plan, including 403(b) plans;
  • Treat himself as the beneficiary of the plan.

Each of these actions may create additional choices for the spousal heir. For example, if a spouse inherits the IRA and treats it as his own, he may have to start taking required minimum distributions, depending on his age.

“Stretch” or choose the 5-year rule. Non-spouse heirs have two options:

  • Take distributions over their life expectancy, known as the “stretch” option, which leaves the funds in the IRA for as long as possible, or
  • Liquidate the entire account within five years of the original owner’s death. That comes with a hefty tax burden.

Congress is considering legislation that may eliminate the stretch option, but the proposed law has not been passed as of this writing. The stretch option is the golden ticket for heirs, letting the IRA grow for years without being liquidated and having to pay taxes. If the IRA is a Roth IRA, taxes were paid before the money went into the account.

Non-spouse beneficiaries need to act promptly, if they want to take the stretch option. There is a cutoff date for taking the first withdrawal, depending upon whether the original account owner was over or under 70 ½ years old.

There are year-of-death distribution requirements. If the original owner has taken his or her RMD in the year that they died, the beneficiary needs to make sure the minimum distribution has been taken.

There might be a tax break. For estates subject to the federal estate tax, inheritors of an IRA may get an income-tax deduction for the estate taxes paid on the account. The taxable income earned (but not received by the deceased individual) is “income in respect of a decedent.”

Make sure the beneficiary forms are properly filled out. This is for the IRA owners. If a form is incomplete, doesn’t name a beneficiary or is not on record with the custodian, the beneficiary may be stuck with no option but the five-year distribution of the IRA.

A poorly drafted trust can sink the IRA. If a trust is listed as a primary beneficiary of an IRA, it must be done correctly. If not, some custodians won’t be able to determine who the qualified beneficiaries are, in which case the IRS’s accelerated distribution rules for IRAs will be required. Work with an estate planning attorney who is experienced with the rules for leaving IRAs to trusts.

Reference: Bankrate (Nov. 19, 2019) “7 inherited IRA rules all beneficiaries must know.”

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

Should I Use a Bank as My Executor Instead of a Family Member? – Annapolis and Towson Estate Planning

You can choose anybody you like to be the executor of your will but consider who will do the best job.

Executors are legally responsible for several tasks, including identifying everything in the estate, collecting all the assets and paying the debts and liabilities. Finally, the executor makes distributions to beneficiaries, in accordance with the terms of the will.

nj.com’s recent article on this topic asks “Should I choose a bank to be the executor of my will?” The article explains that there are a few advantages to designating a bank as an executor.

Banks are in the business of managing money and are experienced in administering estates.

This typically means they may be able to settle the estate more quickly and efficiently than a family member.

Banks have policies and procedures in place to make certain that the assets are protected from mismanagement and theft.

Banks are impartial parties that cannot be influenced by beneficiaries. This can be a big headache for a family member asked to be executor. Relationships can deteriorate over the enforcement of the terms of a will, especially when one sibling is named executor and has the authority over the administration of the estate—perhaps to the detriment of her brothers and sisters.

One distinction from using a family member is that while an executor is entitled to compensation, family members frequently waive this. However, banks charge fees for serving as executors, and these fees may be higher than you’d expect.

For example, the bank’s fee might be up to 4% of the first $100,000, then decrease incrementally until it’s just 0.5% of values over $9 million.

One other note to keep in mind is that many banks won’t serve as executor, unless the estate is substantial enough to meet the minimum fees charged by the bank to serve as the executor.

Reference: nj.com (November 5, 2019) “Should I choose a bank to be the executor of my will?”

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

What Is Probate and How to Prepare for It? – Annapolis and Towson Estate Planning

The word probate is from the Latin word, meaning “to prove.” It is the court-supervised process of authenticating the last will and testament of a person who has died and then taking a series of steps to administer their estate. The typical situation, according to the article “Some helpful hints to aid in navigating the probate process” from The Westerly Sun, is that someone passes away and their heirs must go to the Probate Court to obtain the authority to handle their final business and settle their affairs.

Many families work with an estate planning attorney to help them go through the probate process.

Regardless of whether there is a will, someone, usually a spouse or adult child, asks the court to be appointed as the executor of the estate. This person must accomplish a number of tasks to make sure the decedent’s wishes are followed, as documented by their will.

People often think that just being the legally married spouse or child of the deceased person is all anyone needs to be empowered to handle their estate, but that’s not how it works. There must be an appointment by the court to manage the assets and deal with the IRS, the state, creditors and all of the person’s outstanding personal affairs.

If there is a will, once it is validated by the court, the executor begins the process of identifying and valuing the assets, which must be reported to the court. The last bills and funeral costs must be paid, the IRS must be contacted to obtain an estate taxpayer identification number and other financial matters will need to be addressed. Estate taxes may need to be paid, at the state or federal level. Final tax returns, from the last year the person was alive, must be paid.

It takes several months and sometimes more than a year to settle an estate. That includes distributing the assets and making gifts of tangible personal property to the heirs. Once this task is completed, the executor (or their legal representative) contacts the court. When everything has been done and the judge is satisfied that all business on behalf of the decedent has been completed, the executor is released from their duty and the estate is officially closed.

When there is no will, the process is different. The laws of the state where the deceased lived will be used to guide the distribution of assets. Kinship, or how people are related, will be used, regardless of the relationship between the decedent and family members. This can often lead to fractures within a family, or to people receiving inheritances that were intended for other people.

Reference: The Westerly Sun (Nov. 16, 2019) “Some helpful hints to aid in navigating the probate process”

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

For Immediate Release

Contact: Jane Frankel Sims

410-828-7775

Contact: Frank Campbell

410-263-1667

Sims & Campbell Estates and Trusts

Frankel Sims Law and Holden & Campbell
Merge to Form Sims & Campbell

Firm will offer comprehensive Trusts & Estates services through offices in Towson and Annapolis

TOWSON, Md. (April 26,2019)  Frankel Sims Law and Holden & Campbell have jointly announced the merger of their firms to create a boutique Trusts & Estates law firm providing comprehensive services in the fields of Estate Planning, Estate Administration, Trust Administration and Charitable Giving. The combined firm will be named Sims & Campbell and have offices in Towson, Md. and Annapolis, Md.  Jane Frankel Sims and Frank Campbell will lead and hold equal ownership stakes in the firm.

Sims & Campbell will have 9 attorneys and 15 legal professionals that handle every facet of estate and wealth transfer planning, including wills, revocable living trusts, irrevocable trusts, estate and gift tax advice, and charitable giving strategies.  The firm will focus solely on Trusts & Estates but will serve a wide range of clients, from young families with modest resources to ultra-high net worth individuals.  This allows clients to remain with the firm as their level of wealth and the complexity of related estate and tax implications change over time. 

“By joining forces, we have expanded our footprint to conveniently serve clients in Maryland, D.C. and Virginia” said Jane Frankel Sims.  We are seeing some of the greatest wealth transfer in our country’s history, and we want to continue to be on the leading edge of helping our clients maintain and enhance their family’s wealth.  In addition, we aim to serve our clients for years to come, and the new firm structure will allow Sims & Campbell to thrive even after Frank and I have retired.”    

“Jane and I have always admired each other’s firms and recognized the need to provide even greater depth and breadth of focused expertise to help families amass and protect their wealth from generation to generation,” said Frank Campbell.  “Now we have even greater capabilities to make a real difference for our clients.” 

The Sims & Campbell Towson office is located at 500 York Road, on the corner of York Road and Pennsylvania Avenue in the heart of Towson.  The Annapolis office is currently located at 716 Melvin Avenue, and is moving to 181 Truman Parkway in August, 2019.  For more information, visit www.simscampbell.law.