Estate Planning Can Solve Problems Before They Happen – Annapolis and Towson Estate Planning

Creating an estate plan, with the help of an experienced estate planning attorney, can help people gain clarity on larger issues like who should inherit the family home, and small details like what to do with the personal items that none of the children want.

Until you go through the process of mapping out a plan, these questions can remain unanswered. However, according the East Idaho Business Journal, “Estate plans can help you answer questions about the future.”

Let’s look at some of these questions:

What will happen to my children when I die? You hope that you’ll live a long and happy life and that you’ll get to see your children grow up and have families of their own. However, what if you don’t? A will is used to name a guardian to take care of your children if their parents are not alive. Some people also use their wills to name a “conservator.” That’s the person who is responsible for the assets that any minor children might inherit.

Will my family fight over their inheritance? Without an estate plan, that’s a distinct possibility. When an estate goes through probate, it is a public process. Relatives and creditors can both gain access to your records and could challenge your will. Many people use and “fund” revocable living trusts to place assets outside of the will and to avoid the probate process entirely.

Who will take care of my finances, if I’m too sick? Estate planning includes documents like a durable power of attorney, which allows a person you name (before becoming incapacitated) to take charge of your financial affairs. Speak with your estate planning attorney about also having a medical power of attorney. This lets someone else handle health care decisions on your behalf.

Should I be generous to charities or leave all my assets to my family? That’s a very personal question. Unless you have significant wealth, chances are you will leave most of your assets to family members. However, giving to charity could be a part of your legacy, whether you are giving a large or small amount. It may give your children a valuable lesson about what should happen to a lifetime of work and saving.

One way of giving, is to establish a charitable lead trust. This provides financial support to a charity (or charities) of choice for a period of time with the remaining assets eventually going to family members. There is also the charitable remainder trust, which provides a steady stream of income for family members for a certain term of the trust. The remaining assets are then transferred to one or more charitable organizations.

Careful estate planning can help answer many worrisome questions. Just keep in mind that these are complex issues that are best addressed with the help of an experienced estate planning attorney.

Reference: East Idaho Business Journal (June 25, 2019) “Estate plans can help you answer questions about the future.”

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

What Happens When Real Estate Is Inherited? – Annapolis and Towson Estate Planning

The number one question on most people’s minds when they inherit real estate is whether they have to pay taxes on it.

For the most part, people don’t have to pay taxes on what they inherit, unless they live in a state with an inheritance tax. There are tax forms to be filed, says the Petoskey News-Review in the article “The pros and cons of inheriting real estate,” but not every estate has to pay taxes.

The estate has to pay taxes on any gains or losses after the death of the decedent, if and when they sell the property. The seller will have either capital gains or capital losses, depending upon what the house was purchased for and what it sold for.

Let’s say that Mom purchased the house for $100,000, gave it to her children and then they sold it for $120,000. They have to pay capital gains on the $20,000. When someone dies, heirs get the step-up in basis, so they get the value of the property at the date of the decedent’s death. If mom bought the house for $100,000 and when she died it had jumped in value to $220,000 the children sold it for $220,000, there would be no capital gain.

People who inherit property should have it appraised by an experienced real estate appraiser to determine the actual value at the date of death. An estate planning attorney will be able to recommend an appraiser.

One of the biggest disagreements that families face after the death of a loved one centers on selling real estate property. Some families actually break up over it, which is a shame. It would be far better for the family to talk about the property before the parents die and work out a plan.

The sticking point often centers on a summer home being passed down to multiple heirs. One wants to sell it, another wants to rent it out for summers and use it during winters and the third wants to move in. If they can resolve these issues with their parents, it’s less likely to come up as a divisive factor when the parents die and emotions are running high. This gives the parents or grandparents a chance to talk about what they want after they have passed and why.

Conflicts can also arise when it’s time to clean up the house after someone inherits the property. Mom’s old lemon juicer or Dad’s favorite barbecue fork seem like small items until they become part of family history.

The best thing for families that are able to pass a house down to the next generation is to start the discussion early and make a plan.

An estate planning attorney can help the family work through the issues, including creating a plan for how the real estate property should be handled. The attorney will also be able to help the family  plan for any taxes that might be due, so there are no big surprises.

Reference: Petoskey News-Review (June 25, 2019) “The pros and cons of inheriting real estate”

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

You’ve Received an Inheritance. Now What? – Annapolis and Towson Estate Planning

Inheriting money puts a whole new spin on your outlook on money, says The Kansas City Star in its article “Coming into some money? Be wise with it.”

Should you pay off your debts first, if you have any? Make a list of your debt balances and their interest rates. If the interest rate is high, you may want to pay it off. If it’s low, you may be better off investing the funds.

Next, check on your emergency fund. If you don’t have three to six months’ worth of living expenses on hand, you can use your inheritance to ramp up that fund. Yes, you can use credit cards sometimes. However, having at least two months’ worth of living expenses in cash is worthwhile.

Another option is to contribute some money to a health savings account (HSA), if your employer does not contribute to it and if you have a qualifying health plan. That’s $3,500 if you are single, $7,000 for families and add $1,000, if you are over 55. This gets you a nice tax deduction and withdrawals are tax-free, as long as they are used for qualified medical expenses.

If you’re still working, and depending upon the size of the inheritance, it might be time to “tax-shift” your portfolio.

Let’s say you regularly contribute $3,000 to a 401(k). You can increase that amount by $22,000, to the maximum, if you’re 50 and older. Since your paycheck decreases, so does your tax. If your tax rate is currently 22%, you’ll only need to add $17,160 from your inherited account to reach the same spendable dollars. The tax-deferred account in your portfolio will grow faster while the taxable account shrinks.

Think about whether to commingle funds with your significant other or not. Let’s say you and your spouse have a retirement portfolio. You both can spend it now, maybe on your house. The inheritance may also help you to retire earlier. If you save the inheritance, keeping it in a separate account with only your name on it, it remains your asset, in case of a divorce. Most states will consider this money a non-marital asset, and not subject to division between divorcing parties.

Consider using the inheritance as a way to avoiding tapping into retirement accounts. Withdrawals from IRAs are taxable. If you’re not worried about commingling funds or investment gains, then you can use the inherited account to minimize the tax losses from retirement accounts.

Most people don’t have enough saved to keep spending during retirement as they did while working. Skip the spending spree that often follows an inheritance and enjoy the money over an extended period of time.

Receiving an inheritance is one of the times when a review of your estate plan becomes a wise move. A new financial position may require more tax planning and more legacy planning.

Reference: The Kansas City Star (June 27, 2019) “Coming into some money? Be wise with it”

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

Why Would I Need to Revise My Will? – Annapolis and Towson Estate Planning

OK, great!! You’ve created your will! Now you can it stow away and check off a very important item on your to-do list. Well, not entirely.

Thrive Global’s recent article, “7 Reasons Why You Need to Review your Will Right Now,” says it’s extremely important that you regularly update your will to avoid any potential confusion and extra stress for your family at a very emotional time. As circumstances change, you need to have your will reflect changes in your life. As time passes and your situation changes, your will may become invalid, obsolete or even create added confusion when the time comes for your will to be administered.

New people in your life. If you do have more children after you’ve created your will, review your estate plan to make certain that the wording is still correct. You may also marry or re-marry, and grandchildren may be born that you want to include. Make a formal update to your estate plan to include the new people who play an important part in your life and to remove those with whom you lose touch.

A beneficiary or other person dies. If a person you had designated as a beneficiary or executor of your will has died, you must make a change or it could result in confusion when the time comes for your estate to be distributed. You need to update your will if an individual named in your estate passes away before you.

Divorce. If your will was created prior to a divorce and you want to remove your ex from your estate plan, talk to an estate planning attorney about the changes you need to make.

Your spouse dies. Wills should be written in such a way as to always have a backup plan in place. For example, if your husband or wife dies before you, their portion of your estate might go to another family member or another named individual. If this happens, you may want to redistribute your assets to other people.

A child becomes an adult. When a child turns 18 and comes of age, she is no longer a dependent.  Therefore, you may need to update your will in any areas that provided additional funds for any dependents.

You experience a change in your financial situation. This is a great opportunity to update your will to protect your new financial situation.

You change your mind. It’s your will and you can change your mind whenever you like.

Reference: Thrive Global (June 17, 2019) “7 Reasons Why You Need to Review your Will Right Now”

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

What Happens When the Family Fights over Personal Items or Artwork? – Annapolis and Towson Estate Planning

A few years after her death in 2014, Joan Rivers’ family put hundreds of her personal items up for auction at Christie’s in New York.  As The Financial Times reported in “Why an art collector’s estate needs tight planning,” a silver Tiffany bowl engraved with her dog’s name, Spike, made headlines when it sold for thirty times its estimated price.

This shows how an auction house can generate a buzz around the estate of a late collector, creating demand for items that, had they been sold separately, might have failed to attract as much attention.

A problem for some art and collectible owners is that their heirs may feel much less passionately about the works than the person who collected them.

A collector can either gift, donate or sell in their lifetime. He or she can also wait until they pass away and then gift, donate, or sell posthumously.

The way a collector can make certain his or her wishes are carried out or eliminate family conflicts after their death is to take the decision out of the hands of the family by placing an art collection in trust.

The trust will have the collector’s wishes added into the agreement and the trustees are appointed from the family and from independent advisers with no interest in a transaction taking place.

Many collectors like to seal their legacy by making a permanent loan or gift of art works to a museum.  However, their children can renege on these agreements if they’re not adequately protected by trusts or other legal safeguards after a collector’s death.

Even with a trust or other legal structure put in place to preserve a legacy, the key to avoiding a fight over a valuable collection after the death of the collector is to have frank discussions about estate planning with the family well before the reading of the will. This can ensure that their wishes are respected.

Reference: Financial Times (June 20, 2019) “Why an art collector’s estate needs tight planning”

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

Leaving a Legacy Is Not Just about Money – Annapolis and Towson Estate Planning

A legacy is not necessarily about money, says a survey that was conducted by Bank of America/Merrill Lynch Ave Wave. More than 3,000 adults (2,600 of them were 50 and older) were surveyed and focus groups were asked about end-of-life planning and leaving a legacy.

The article, “How to leave a legacy no matter how much money you have” from The Voice, shared a number of the participant’s responses.

A total of 94% of those surveyed said that a life well-lived, is about “having friends and family that love me.” 75% said that a life well-lived is about having a positive impact on society. A mere 10% said that a life well-lived is about accumulating a lot of wealth.

People want to be remembered for how they lived, not what they did at work or how much money they saved. Nearly 70% said they most wanted to be remembered for the memories they shared with loved ones. And only nine percent said career success was something they wanted to be remembered for.

While everyone needs to have their affairs in order, especially people over age 55, only 55% of those surveyed reported having a will. Only 18% have what are considered the three key essentials for legacy planning: a will, a health care directive and a durable power of attorney.

The will addresses how property is to be distributed, names an executor of the estate and, if there are minor children, names who should be their guardian. The health care directive gives specific directions as to end-of-life preferences and designates someone to make health care decisions for you if you can’t. A power of attorney designates someone to make financial decisions on your behalf when you can’t do so because of illness or incapacity.

An estate plan is often only considered when a trigger event occurs, like a loved one dying without an estate plan. That is a wake-up call for the family once they see how difficult it is when there is no estate plan.

Parents age 55 and older had interesting views on leaving inheritances and who should receive their estate. Only about a third of boomers surveyed and 44% of Gen Xers said that it’s a parent’s duty to leave some kind of inheritance to their children. A higher percentage of millennials surveyed—55%–said that this was a duty of parents to their children.

The biggest surprise of the survey: 65% of people 55 and older reported that they would prefer to give away some of their money while they are still alive. A mere 8% wanted to give away all their assets before they died. Only 27% wanted to give away all their money after they died.

Reference: The Voice (June 16, 2019) “How to leave a legacy no matter how much money you have”

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

Is My Irrevocable Trust Revocable? – Annapolis and Towson Estate Planning

Irrevocable trusts aren’t as irrevocable as their name implies, according to Barron’s recent article, “Are Irrevocable Trusts True to Their Name?” The article says that for both new and existing trusts, there are ways to build in flexibility to make changes to a grantor’s wishes if terms are no longer appropriate or desirable for beneficiaries.

However, there are strict rules that apply. These rules vary between states. One of the main reasons for an irrevocable trust is to remove assets from an estate for estate tax purposes. If the rules aren’t followed carefully, a trust can be rendered unlawful. If that happens, the assets may be returned to the grantor’s estate and estate taxes may apply.

If you want to be certain that beneficiaries have some discretion in the future if circumstances change, grantors should build flexibility into the trust when it’s established. This can be accomplished by giving a power of appointment to beneficiaries. However, if the beneficiaries are looking to change the terms or the structure of an existing trust, the trust must be modified according to state law.

Most states allow trusts to be decanted. When you decant a trust, you pour its terms into a new trust and leave out the parts that are no longer wanted. Just like decanting a bottle of wine, it’s like the sediment left in the wine bottle.

In a state that doesn’t permit decanting, a trustee can ask a judge to allow it. You should be careful with decanting because you don’t want to do anything that would adversely affect the original tax attributes of the trust.

The power of appointment in a trust or the ability to decant can’t be given to the person who set up the trust. Thus, grantors can’t have a “re-do” or rescind the terms. It’s only trustees and the beneficiaries that can do that.

If you and your attorney create a trust with a lot of flexibility for the trustee, you may want to appoint an institutional trustee from a bank, trust, or other financial services company.

They can be either the sole trustee or serve as co-trustees with a personal, non-institutional trustee, like a family member. This can help to eliminate future conflicts.

Reference: Barron’s (June 18, 2019) “Are Irrevocable Trusts True to Their Name?”

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

Stretch IRA May be Disappearing Soon – Annapolis and Towson Estate Planning

Short of calling your representatives in Congress and hollering, there’s not much any of us can do about a proposed change to the rules that govern IRAs, reports nj.com in the article “Your kid’s inheritance could take a giant tax hit if these bills become law. Thanks, Congress.”

For years, non-spouse beneficiaries who inherit IRAs have had the ability to stretch out required distributions over their lifetimes. That meant that inherited IRAs could stay safe and sound out of the IRS’s reach, except for annual distributions that were quite small. If a grandchild inherited the IRA, the wealth stretched even further.

Depending on the final details of the legislation, the only people who will be able stretch an IRA will be spouses.

Current rules require non-spouse beneficiaries to take required minimum distributions (RMDs) every year over the course of their life expectancy, as per the IRS life expectancy tables. Because they are taken over the lifetime of a younger beneficiary, they can be small. This means the impact of the distribution on the individual’s income taxes are minimal and the IRA can grow tax deferred over a long period of time.

Congress is looking for revenue and the wealth of Americans in IRA accounts is in their sight lines.

First, the House passed the SECURE Act, which says that beneficiaries must completely empty their inherited IRAs within 10 years of ownership. The Senate then passed the RESA Act, which is a little different. It would allow a stretch for the first $450,000 of aggregated IRAs, then anything over that would have to be distributed within five years.

Both bills call for changes to apply to inherited IRAs and inherited Roth IRAs for deaths after December 31, 2019. What’s the bottom line? The Joint Committee on Taxation expects that these changes, if they become law, will yield $15.7 billion—with a “B”—in additional tax revenue through 2029.

The government would eventually get this money anyway, but this speeds things up considerably.

Let’s compare and contrast. An 80-year old woman has a traditional IRA worth $1 million. She dies and her 55-year-old daughter is the primary beneficiary. Under the current rules, the daughter’s first RMD is roughly $35,000. If the 25-year-old granddaughter was the beneficiary, the RMD would be roughly $18,000.

If the account earns an average of 5% annually, under the current rule, the granddaughter would have distributions of some $220,000 over ten years. If she had ten years to take the money out, she’d have about $1.3 million in distribution. Under the current rule, the account would have a $1.3 million balance after ten years, since the principal would continue to appreciate. Under the proposed rules, after ten years, it would be zeroed out.

The forced larger distributions will push heirs into higher income tax brackets. That will be followed by increased Medicare premiums, as heirs retire with higher income. Add to that: higher capital gains rate, from as low as zero to as high as 20%. If that’s not bad enough, it could also trigger the 3.8% net Investment Income tax.

One option is to move funds from a regular IRA to a Roth IRA, assuming the investor meets all the requirements to do so. The Roth IRA distributions would not be taxable (unless those laws change) but that also requires the current owner to pay taxes on funds moved to the Roth IRA.

Another option is to consider a Charitable Remainder Trust (CRT) that names a charity as the IRA beneficiary. Upon the death of the owner, the IRA is distributed to the CRT, and the IRA owner’s heir would receive a fixed percentage of the CRT’s value for the remainder of their lives. When the heir dies, the money in the CRT goes to a charity or charities designated by the IRA owner, when the trust was created.

For now, these are proposed pieces of legislation, but chances are good they will be passed soon. Now is a good time to meet with your estate planning attorney to do what you can to protect your IRA and your children’s inheritance.

Reference: nj.com (June 10, 2019) “Your kid’s inheritance could take a giant tax hit if these bills become law. Thanks, Congress”

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

What Should I Look for in a Trustee? – Annapolis and Towson Estate Planning

Selecting a trustee to manage your estate after you pass away is an important decision. Depending on the type of trust you’re creating, the trustee will be in charge of overseeing your assets and the assets of your family. It’s common for people to choose either a friend or family member, a professional trustee or a trust company or corporate trustee for this critical role.

Forbes’s recent article, “How To Choose A Trustee,” helps you identify what you should look for in a trustee.

If you go with a family member or friend, she should be financially savvy and good with money. You want someone who is knows something about investing, and preferably someone who has assets of their own that they are investing with an investment advisor.

A good thing about selecting a friend or family member as trustee, is that they’re going to be most familiar with you and your family. They will also understand your family’s dynamics.  Family members also usually don’t charge a trustee fee (although they are entitled to do so).

However, your family may be better off with a professional trustee or trust company that has expertise with trust administration. This may eliminate some potentially hard feelings in the family. Another negative is that your family member may be too close to the family and may get caught up in the drama.  They may also have a power trip and like having total control of your beneficiary’s finances.

The advantage of an attorney serving as a trustee is that they have familiarity with your family if you’ve worked together for some time. There will, however, be a charge for their time spent serving as trustee.

Trust companies will have more structure and oversight to the trust administration, including a trust department that oversees the administration. This will be more expensive, but it may be money well spent. A trust company can make the tough decisions and tell beneficiaries “no” when needed. It’s common to use a trust company, when the beneficiaries don’t get along, when there is a problem beneficiary or when it’s a large sum of money. A drawback is that a trust company may be difficult to remove or become inflexible. They also may be stingy about distributions, if it will reduce the assets under management that they’re investing. You can solve this by giving a neutral third party, like a trusted family member, the ability to remove and replace the trustee.

Talk to your estate planning attorney and go through your concerns to find a solution that works for you and your family.

Reference: Forbes (May 31, 2019) “How To Choose A Trustee”

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

Protecting Kids from Too Much, Too Fast, Too Soon – Annapolis and Towson Estate Planning

Protecting your children from frittering away an inheritance is often done through a spendthrift trust but that trust can also be used to protect them from divorce and other problems that can come their way, according to Kiplinger in “How to Keep Your Heirs from Blowing Their Inheritance.”

We all want the best for our kids, and if we’ve been fortunate, we are happy to leave them with a nice inheritance that makes for a better life. However, regardless of how old they are, we know our  children best and what they are capable of. Some adults are simply not prepared to handle a significant inheritance. They may have never learned how to manage money or may be involved with a significant other who you fear may not have their best interests in mind. If there’s a problem with drug or alcohol use, or if they are not ready for the responsibility that comes with a big inheritance, there are steps you can take to help them.

Don’t feel bad if your children aren’t ready for an inheritance. How many stories do we read about lottery winners who go through all their winnings and end up filing for bankruptcy?

An inheritance of any size needs to be managed with care.

A spendthrift trust protects heirs by providing a trustee with the authority to control how the beneficiary can use the funds. A trust becomes a spendthrift trust, when the estate planning attorney who creates it uses specific language indicating that the trust qualifies as such, and by including limitations to the beneficiary’s control of the funds.

A spendthrift trust also protects assets from creditors, because the heir does not own the assets. The trust owns the assets. This also protects the assets from divorces, lawsuits and bankruptcies. It’s a good way to keep the money out of the hands of manipulative partners, family members and friends.

Once the money is paid from the trust, the protections are gone. However, while the money is in the trust, it enjoys protection.

The trustee in a spendthrift trust has a level of control that is granted by you, the grantor of the trust. You can stipulate that the trustee is to make a set payment to the beneficiary every month, or that the trustee decides how much money the beneficiary receives.

For instance, if the money is to be used to pay college tuition, the trustee can write a check for tuition payments every semester, or they can put conditions on the heir’s academic performance and only pay the tuition, if those conditions are met.

For a spendthrift trust, carefully consider who might be able to take on this task. Be realistic about the family dynamics. A professional firm, bank, or investment company may be a better, less emotionally involved trustee than an aunt or uncle.

An estate planning attorney can advise you on creating an estate plan that fits your unique circumstances.

Reference: Kiplinger (June 5, 2019) “How to Keep Your Heirs from Blowing Their Inheritance.”

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