What Estate Planning Do I Need with a New Baby? – Annapolis and Towson Estate Planning

Congratulations, you’re a new mom or dad. There’s a lot to think about, but there is a vital task that should be a priority. That is making an estate plan.

People usually don’t worry about estate planning when they’re young, healthy and starting a new family. However, your new baby is depending on you to make decisions that will set him or her up for a secure future.

Motley Fool’s recent article, “If You’re a New Parent, Take These 4 Estate Planning Steps” says there are a few key estate planning steps that every parent should take to make certain they’ve protected their child no matter what the future holds.

  1. Purchase Life Insurance. If a parent dies, life insurance will make sure there are funds available for the other spouse to keep providing for the children. If both parents die, life insurance can be used to raise the child or to fund the cost of college. For most parents, term life insurance is used because the premiums are affordable, and the coverage will be in effect long enough for your child to grow to an adult.
  2. Draft a Will and Name a Guardian for your Children. For parents, the most important reason to make a will is to name a guardian for your children. If you designate a guardian, you will select the person you think shares your values and who will do a good job raising your children. This way, it’s not left to a judge to make that selection. Do this as soon as your children are born.
  3. Update Beneficiaries. Your will should say what happens to most of your assets, but you probably have some accounts with a designated beneficiary, like a 401(k), and IRA, or life insurance. When you have children, you’ll need to update the beneficiaries on these accounts for your children to inherit these assets as secondary beneficiaries, so they will inherit them in the event of your and your spouse’s death.
  4. Look at a Trust. If you die prior to your children turning 18, they can’t directly take control of any inheritance you leave for them. This means that a judge may need to appoint someone to manage assets that you leave to your child. Your child could also wind up inheriting a lot of money and property free and clear at age 18. To have more control, like who will manage assets, how your money and property should be used for your children and when your children should directly receive a transfer of wealth, ask your estate planning attorney about creating a trust. With a trust, you can designate an individual who will manage money on behalf of your children and provide instructions for how the trustee can use the money to help care for your children as they age. You can also create conditions on your children receiving a direct transfer of assets, such as requiring your children to reach age 21 or requiring them to use the money to cover college costs. Trusts are for anyone who wants more control over how their property will help their children after they’ve passed away.

When you have a new baby, working on your estate planning probably isn’t a big priority. However, it’s worth taking the time to talk to an attorney for the security of knowing your bundle of joy can still be provided for in the event that the worst happens to you.

Reference: Motley Fool (September 28, 2019) “If You’re a New Parent, Take These 4 Estate Planning Steps”

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

Do I Need Life Insurance After I Get Divorced? – Annapolis and Towson Estate Planning

One of the messy tasks in a divorce is working through life insurance and it’s frequently forgotten.

Investopedia’s article, “How Life Insurance Works in a Divorce,” explains that addressing life insurance is a critical issue in the divorce process, especially for divorcing couples with children. Maintaining life insurance protects the financial interests of both parties and their dependent children. This involves making the necessary beneficiary changes, accounting for the cash value in whole or universal life policies, protecting child support and alimony income, and—most importantly—making certain that any children involved are financially protected.

Most married couples with life insurance list their spouse as the primary beneficiary. Life insurance protects a family from financial devastation if you die and your income is lost. For a married person, naming your spouse as your beneficiary makes certain that he or she can continue to pay the mortgage, put food on the table and possibly bring up the children without your income. Life insurance is especially critical if you provide the majority of the income.

In a divorce, especially an acrimonious one, odds are good that you’ll no longer want your ex-spouse profiting from your death. If there are no children are involved, most life insurance policies let you change the beneficiary at any time.

Some life insurance policies, such as many whole life and universal life policies, accumulate cash value over time. Each month when you make your premium payment, some of the money is deposited into a fund that grows with interest. This is the policy’s cash value and it’s your money. Any time while the policy is active, you can forgo the death benefit and take the cash value. This is called “cashing out” your life insurance policy.

Since the cash value from a life insurance policy is part of your net worth, you should list the policy, including its cash value, as a marital asset to be divided. Frequently, when marital assets are divided evenly, half the cash value from the policy goes to each spouse.

Protecting child support or alimony income is really important for the spouse who takes primary custody of the children after the divorce. These child support funds are for feeding and clothing the children and saving for college. If the noncustodial parent isn’t around anymore, this income goes away and it could put the custodial parent in a bind. If you have custody of the children, the best way to protect yourself from this situation is to keep a life insurance policy on your ex-spouse with a benefit amount high enough to replace your child support or alimony income at least until the last child is 18. Being the custodial parent, if your ex is irresponsible or untrustworthy, you may just purchase the policy and pay the premium yourself since coverage stops if payments lapse.

If your ex-spouse is no longer in the picture (whether by death or lack of responsibility) and your children rely only on you for financial support, if you die, they’d have nothing. Without your income, your children have no way to support themselves or save for college. A guardian, either a relative or someone appointed by a judge, will take care of your children, but there are still many unknowns in this situation. If divorce makes you a single parent, you need enough life insurance on yourself to protect your children to see them through until they reach 21.

Reference: Investopedia (June 25, 2019) “How Life Insurance Works in a Divorce”

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What Happens When There’s No Will or the Will Is Invalid? – Annapolis and Towson Estate Planning

The Queen of Soul’s lack of a properly executed estate plan isn’t the first time a celebrity died without a will, and it surely will not be the last, says The Bulletin in the article “Aretha Franklin and other celebrities died without an estate plan. Will you?”

The Rev. Dr. Martin Luther King Jr., Howard Hughes, and Prince all died without a valid will and estate plan. When actor Heath Ledger died, his will left everything to his parents and three sisters. The will had been written before his daughter was born and left nothing to his daughter or her mother. Ledger’s family later gave all the money from the estate to his daughter.

Getting started on a will is not that challenging if you work with an experienced estate planning attorney. They often start clients out with a simple information gathering form, sometimes in an online process or on paper. They’ll ask a lot of questions, like if you have life insurance, a prenup, who you want to be your executor and who should be guardian of your children.

Don’t overlook your online presence. If you die without a plan for your digital assets, you have a problem known as “cyber intestacy.” Plan for who will be able to access and manage your social media, online properties, etc., as well as your tangible assets, like investment accounts and real property.

Automatic bill payments and electronic bank withdrawals continue after death and heirs may struggle to access photographs and email. When including digital estate plans in your will, provide a name for the person who should have access to your online accounts.

Check with your estate planning attorney to see if they are familiar with digital assets. Do a complete inventory, including frequent flyer miles, PayPal and other accounts.

Remember that if you don’t make out a will, the state where you live will decide for you. Each state has different statutes determining who gets your assets. They may not be the people you wanted, so that’s another reason why you need to have a will.

Life insurance policies, IRAs, and other accounts that have beneficiaries are handled separately from the will. Beneficiaries receive assets directly and that bypasses anything written in a will. This is especially important for unmarried millennials, Gen Xers, divorced people, singles, widows and widowers, who may not have specified a beneficiary.

Don’t forget your pets. Your heirs may not want your furry family members, and they could end up in a shelter and euthanized if there’s no plan for them. You can sign a “pet protection” agreement or set up a pre-funded pet trust. Some states allow them; others do not. Your estate planning attorney will be able to help protect your beloved pets as well as your family.

Reference: The Bulletin (Sep. 14, 2019) “Aretha Franklin and other celebrities died without an estate plan. Will you?”

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

How Can I Plan for Medical Expenses in Retirement? – Annapolis and Towson Estate Planning

Healthcare can be one of the biggest expenses in retirement.

Fidelity Investments found that a 65-year-old newly retired couple will need $285,000 for medical expenses in retirement. That doesn’t include the annual cost of long-term care. In 2018, that expense ran from $18,720 for adult day care services to $100,375 for a private room in a nursing home, according to Investopedia’s recent article, “How to Plan for Medical Expenses in Retirement.”

Despite saving and preparing for retirement their entire lives, many retirees aren’t mentally or financially prepared for these types of expenses. A survey by HSA Bank found that 67% of adults 65 and older thought that they’d need less than $100,000 for healthcare. However, Fidelity calculated that males 65 and older will need $133,000—and females, $147,000—to pay for healthcare in retirement.

There are two important numbers for healthcare expenses in retirement: how much money is coming in and how much is going out. A typical person in their 60s has an estimated median savings of $172,000. On average, those 65 and older spend $3,800 per month, but Social Security only replaces about 40% of their working-life income.

Medicare can pay for some healthcare spending in retirement. However, there are some limitations. If a senior doesn’t have a Part D prescription drug policy, Medicare won’t cover medications. Medicare Parts A and B won’t cover dental and vision care, but Medicare Advantage plans typically do. Medicare also doesn’t offer coverage for long-term care. Medicare Advantage plans are offered through private insurers.

There are two ways pre-retirees can create a safety net for healthcare spending when they retire. One way is with a Health Savings Account (HSA). HSAs are available with high-deductible health plans and offer three tax advantages: (i) deductible contributions; (ii) tax-deferred growth; and (iii) tax-free withdrawals for qualified medical expenses. HSA funds can be used to pay for certain medical premiums, like Medicare premiums and long-term care insurance premiums. If you’re in your 50s, you can still maximize these plans by taking advantage of catch-up contributions and employer contributions. However, those already enrolled in Medicare can’t make new contributions to an HSA.

You can also buy long-term care insurance to fill the gap left by Medicare. This policy can pay a monthly benefit toward long-term care for a two-to three-year period.

Healthcare spending can easily take a big bite out of a retirement budget. Estimate your costs and design a strategy for spending to help preserve more retirement assets for other expenses.

Reference: Investopedia (June 25, 2019) “How to Plan for Medical Expenses in Retirement”

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

Planning for the Unexpected – Annapolis and Towson Estate Planning

A woman was not notified when her elderly mother had fallen and hurt herself.  Sadly, this is not an unusual situation.

The daughter spoke with her mother once or twice a week, and the fall happened just after their last conversation. She dropped what she was doing and drove to the hospital, according to the article “Parents” in BusinessWest.com. At the hospital, she was worried that her mother was suffering from more than fractures, as her mother was disoriented because of the pain medications.

The conversation with her brother and mother about why she wasn’t notified immediately was frustrating. They “didn’t want to worry her.” She was worried, and not just about her mother’s well-being, but about her finances, and whether any plans were in place for this situation.

Her brother was a retired comptroller, and she thought that as a former financial professional, he would have taken care of everything. That was not the case.

Despite his professional career, the brother had never had “the talk” with his mother about money. No one knew if she had an estate plan, and if she did, where the documents were located.

All too often, families discover that no planning has taken place during an emergency.

The conversation took place in the hospital, when the siblings learned that documents had never been updated after their father had passed—more than 20 years earlier! The attorney who prepared the documents had retired long ago. The originals? Mom had no idea. The names of her banks and financial institutions had changed so many times over the years, that she wasn’t even sure where her money was.

For this family, the story had a happy ending. Once the mother got out of the hospital, the family made an appointment to meet with an estate planning attorney to get all of her estate planning and elder law planning completed. In addition, the family updated beneficiaries on life insurance and retirement accounts, which are now set to avoid probate.

Both siblings have a list of their mother’s assets, account numbers, credit card information and what’s more, they are tracking the accounts to ensure that any sort of questionable transactions are reviewed quickly. They finally have a clear picture of their mother’s expenses, assets and income.

If your family’s situation is closer to the start of the story than the end, it’s time to contact a qualified estate planning attorney who is licensed to practice in your state and have all the necessary preparation done. Don’t wait until you’re uncovering family mysteries in the hospital.

Reference: BusinessWest.com (Aug. 1, 2019) “Parents”

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

Why Estate Planning is Essential for Small Business Owners – Annapolis and Towson Estate Planning

For the entrepreneurial-minded person, nothing beats the excitement of having a vision for a business, and then making that dream come true. However, have you ever wondered what will happen to that business after you are gone?

A comprehensive estate plan, says Bakersfield.com, in the recent article “Estate planning tips for small business owners,” provides a plan that can protect your life’s work.

It makes sense. You’ve likely spent decades building your business throughout your working life. You’re proud of what you have accomplished, and you should be. You should then protect it with a well-thought-out plan. Your estate planning attorney will be able to help you design a two-pronged plan for your business and your personal life. For business owners, these two are intertwined.

Can you avoid taxes? Reviewing your personal and business assets, as part of an estate plan, is the best way to minimize the tax exposure of your estate and facilitate an organized sale or succession plan for your business. You can’t completely avoid taxes, but good planning will help them from being excessive.

There are a number of IRS sections that can help, and your estate planning attorney will know them. For example, Section 6166 gives your loved ones more time to pay the tax, by paying in ten annual installments. Another Section, 303, lets your family redeem stock with few tax penalties. Talk with your attorney and CPA to find out if your business is eligible for either of these strategies. Create a plan and talk about it in detail with survivors to help them navigate the transition.

Do you have a buy-sell agreement in place? This is critical if more than one person owns the business. The buy-sell agreement dictates how the partnership or LLC is distributed upon the death or incapacity of one of the owners. Without one, family members may be stuck owning a company they don’t want or don’t know anything about. Alternatively, your former partners may find themselves partnered with people with whom they never intended to go into business.

The buy-sell agreement creates a plan so, when an owner passes, the shares of the company must be bought out by the other owners at a fair market price. The agreement can even establish a sale price, so family members will know exactly what they can expect to receive from the sale. In addition, a buy-sell agreement can be used to block certain individuals from taking a role in the business. For many family businesses, that’s enough of a reason to make sure to have a buy-sell agreement.

How are life insurance policies used by small business owners? Maybe you want the business to die with you. Some small businesses provide a stable income for the owner, but there’s no plan for the business to be passed to another family member or to survive the passing of the owner. If that is your situation, and you want your family to have income, you’ll need a life insurance policy.

A life insurance policy can also be used to help partners with the capital they’ll need to purchase your shares if that is how your buy-sell agreement has been set up.

As a small business owner and a family breadwinner, you want to be sure your family and your business are prepared for your passing. Talk with your estate planning attorney to make sure both are protected, in the event of your passing.

Reference: Bakersfield.com (July 15, 2019) “Estate planning tips for small business owners”

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

Estate Planning a Necessity for Small Business Owners – Annapolis and Towson Estate Planning

Just as the small business owner must plan for their own personal estate to be passed onto the next generation, they must also plan for the future of their business. This is why you need a comprehensive estate plan that addresses both you personal life and the business, says grbj.com’s recent article “Estate planning for small businesses.” Here are the basic strategies you’ll need as a small business owner:

A will. A last will and testament allows you to name someone who will receive your assets, including your business, when you die. If you don’t have a will, you leave your heirs a series of problems, expenses and stress. In the absence of a will, everything you’ve worked to attain will be distributed depending on the laws of the state. That includes your assets and your business. It’s far better to have a will, so you make these decisions.

A Living Trust. A living trust is similar to a will, in that it allows you to name who will receive your assets when you die. However, there are certain advantages to having a trust. For one thing, a trust is a private document, and assets controlled by the trust can bypass probate. Assets controlled by a will must first go through probate, which is a public proceeding. If you’ve ever had a family member die and wonder why all those companies seemed to know that your loved one had passed, it’s because they get the information that is available to the public.

If your business is owned by a trust, the transition of ownership to your intended beneficiaries can be a much smoother process.

A financial durable power of attorney. This document lets you appoint an agent to act on your behalf, if you are incapacitated by illness or injury. This is a powerful legal document, so take the time to consider who you want to give this power to. Your agent can manage your finances, pay your bills and manage the day-to-day operations of your business.

A succession plan. Here is where many small business owners fall short in their planning. It takes a long time to create a succession plan for a business. Sometimes a buy-out agreement is part of a succession plan, or a partner in the business or key employee wishes to become the new owner. If a family member wishes to take over the business, will they inherit your entire ownership interest, or will there be a payment required? Will more than one family member take over the business? If a non-family member is going to take over the business, you’ll need an agreement documenting the obligation to purchase the business and the terms of the purchase.

If you would prefer to have the business sold upon your death, you’ll need to plan for that in advance so that family members will be able to receive the best possible price.

A buy-sell agreement. If you are not the sole owner, it’s important that you have a buy-sell agreement with your partners. This agreement requires your ownership interest to be purchased by the business or other owners, if and when a triggering event occurs, like death or disability. This document must set forth how the value of ownership interest is to be determined and how it is to be paid to your family. Without this kind of document, your ownership interest in the business will pass to your spouse or other family members. If that is not your intention, you’ll need to do prior planning.

The right type of life insurance. This is an important part of planning for the future for the small business owner. The death benefit may be needed to provide income to the family, until a business is sold, if that is the ultimate goal. If a family member takes over the business, proceeds from the life insurance policy may be needed to cover payroll or other expenses, until the business gets going under new leadership. Life insurance proceeds may also be used to buy out the other partners in the business.

Failing to plan through the use of basic estate planning and succession planning can create significant costs and stress. An experienced estate planning attorney can review the strategies and documents that are appropriate for your situation. You’ll want to ensure a smooth transition for your business and your family, as that too will be part of your legacy.

Reference: grbj.com (Grand Rapids Business Journal) (July 19, 2019) “Estate planning for small businesses”

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

What Do I Need to Know About Long-Term Care Insurance? – Annapolis and Towson Estate Planning

Long-term care policies are available from insurance companies. Federal employees can also obtain them through the federal FLTCIP program. LTC (long-term care) policies offer a wide variety of features.

Some policies may pay for care not only in a nursing home but also in an assisted living facility or at the home of the person who requires care.

Policies may also include cost-of-living adjustments, which will increase future benefit payments.

Some companies also offer LTC policies that cover both spouses at a discounted rate, rather than having to purchase two separate policies.

Fed Week’s recent article, “Selecting among Long-Term Care Options to Hold Down Costs,” explains that there also are life insurance policies that double as LTC insurance.

Therefore, if these policies cover long-term care expenses; the policy’s death benefit will be reduced.

However, if long-term care is not needed, the insured individual’s beneficiary eventually can receive the full death benefit.

Remember also that the ongoing premiums will be lower, compared with policies bought when a person is older.

When you’re shopping for LTC insurance, there are some tactics that can reduce your policy cost. Here are just a few:

  • Reduce benefits. A policy that pays benefits as long as you need long-term care can be very expensive. However, a policy with a five-year maximum payout will be less expensive. There are not many people who will need more than five years of long-term care.
  • Wait longer. You can reduce costs, by extending the period before you collect benefits. A policy with a 90-day waiting period will be less expensive than an LTC policy with a 20-day wait. Of course, this is only a bargain, if you can afford to pay for 90 days from your own resources.
  • Avoid automatic inflation increases. A policy that increases your benefit each year from $100 a day to $105 to $110, etc., will be very costly. You can go with a “future purchase option.” This will let you to buy more coverage, if you need it, even if your health has declined.

Reference: Fed Week (June 27, 2019) “Selecting among Long-Term Care Options to Hold Down Costs”

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

Business Owners Need Estate Plan and a Succession Plan – Annapolis and Towson Estate Planning

Business owners get so caught up in working in their business, that they don’t take the time to consider their future—and that of the business—when sometime in the future they’ll want to retire. Many business owners insist they’ll never retire, but that time does eventually come. The question The Gardner News article asks of business owners is this:

“Do you have a business succession strategy?”

It takes a very long time to create a succession plan that works. Therefore, planning for such a plan should begin long before retirement is on the horizon. That’s because there are as many different ways to map out a succession plan as there are types of business. A business owner could sell the business to a family member, an outsider, a key employee or to all the employees. The plan could be implemented while the business owner is still alive and well and working, or it could be set up to take effect only after the owner passes.

The decision of how to handle a succession plan needs to be made with a number of issues in mind: family dynamics and interest in the business (or lack of interest), the nature of the business, the success of the business and the owner’s overall financial situation.

Here are a few of the more popular strategies:

Selling the business outright. There are business owners who don’t need the money and feel that no one else will care as much as they do about their business. Therefore, they sell it. There needs to be a lot of planning to minimize tax liability when this is the choice.

Using a buy-sell arrangement to transfer the business. This can be structured in whatever way works best for both parties. It allows a slower transition to new ownership. Some families use the proceeds of a life insurance policy to fund the buy-sell agreement so surviving owners could use the death benefit to buy the deceased owner’s stake.

Buying a private annuity. This permits the owner to transfer the business to family members or someone else, who then makes payments to the owner for the rest of their life, or maybe their life and another person’s life, like a surviving spouse. It has the potential to provide a lifetime stream of income and removes assets from the owner’s estate without triggering gift or estate taxes.

The plan for succession needs to align with the business owner’s estate plan. This is something that many estate planning attorneys who work with business owners have experience with. They can help facilitate the succession planning process. Talk with your estate planning attorney when you have your regular meeting to review your estate plan about what the future holds for your business.

Reference: The Gardener News (June 4, 2019) “Do you have a business succession strategy?”

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

Are Inheritances Taxable? – Annapolis and Towson Estate Planning

Inheritances come in all sizes and shapes. People inherit financial accounts, real estate, jewelry and personal items. However, whatever kind of inheritance you have, you’ll want to understand exactly what, if any, taxes might be due, advises the article “Will I Pay Taxes on My Inheritance” from Orange Town News. An inheritance might have an impact on Medicare premiums, or financial aid eligibility for a college age child. Let’s look at the different assets and how they may impact a family’s tax liability.

Bank Savings Accounts or CDs. As long as the cash inherited is not from a retirement account, there are no federal taxes due. The IRS does not impose a federal inheritance tax. However, there are some states, including Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania, that do have an inheritance tax. Speak with an estate planning attorney about this tax.

Primary Residence or Other Real Estate. Inheriting a home is not a taxable event. However, once you take ownership and sell the home or other property, there will be taxes due on any gains. The value of the home or property is established on the day of death. If you inherit a home valued at death at $250,000 and you sell it a year later for $275,000, you’ll have to declare a long-term capital gain and pay taxes on the $25,000 gain. The cost-basis is determined when you take ownership.

Life Insurance Proceeds. Life insurance proceeds are not taxable, nor are they reported as income by the beneficiaries. There are exceptions: if interest is earned, which can happen when receipt of the proceeds is delayed, that is reportable. The beneficiary will receive a Form 1099-INT and that interest is taxable by the state and federal tax agencies. If the proceeds from the life insurance policy are transferred to an individual as part of an arrangement before the insured’s death, they are also fully taxable.

Retirement Accounts: 401(k) and IRA. Distributions from an inherited traditional IRA are taxable, just as they are for non-inherited IRAs. Distributions from an inherited Roth IRA are not taxable, unless the Roth was established within the past five years.

There are some changes coming to retirement accounts because of pending legislation, so it will be important to check on this with your estate planning attorney. Inherited 401(k) plans are or eventually will be taxable, but the tax rate depends upon the rules of the 401(k) plan. Many 401(k) plans require a lump-sum distribution upon the death of the owner. The surviving spouse is permitted to roll the 401(k) into an IRA, but if the beneficiary is not a spouse, they may have to take the lump-sum payment and pay the resulting taxes.

Stocks. Generally, when stocks or funds are sold, capital gains taxes are paid on any gains that occurred during the period of ownership. When stock is inherited, the cost basis is based on the fair market value of the stock or fund at the date of death.

Artwork and Jewelry. Collectibles, artwork, or jewelry that is inherited and sold will incur a tax on the net gain of the sale. There is a 28% capital gains tax rate, compared to a 15% to 20% capital gains tax rate that applies to most capital assets. The value is based on the value at the date of death or the alternate valuation date. This asset class includes anything that is considered an item worth collecting: rare stamps, books, fine art, antiques and coin collections fall into this category.

Speak with an estate planning attorney before signing and accepting an inheritance, so you’ll know what kind of tax liability comes with the inheritance. Take your time. Most people are advised to wait about a year before making any big financial decisions after a loss.

Reference: Orange Town News (May 29, 2019) “Will I Pay Taxes on My Inheritance”

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