Five Top Reasons to Add Beneficiaries to Investment Accounts – Annapolis and Towson Estate Planning

One way to show loved ones that you care, is by having an estate plan and communicating your wishes to them clearly, notes the article “Why You Should Add Beneficiaries to Your Investment Accounts Now” from The Street. That includes adding beneficiaries to your retirement and investment accounts. This simple step will help save heirs time, money and emotional stress at a time when they are likely to be overwhelmed with grief and paperwork.

They will retain more of your estate and get it faster too. When beneficiaries are assigned to investment and retirement accounts, the assets pass directly to them. If there are no beneficiaries, the asset may have to go through probate, the legal process of settling an estate when someone dies.

Probating an estate usually involves going to court, which is something your beneficiaries would probably prefer not to deal with during a challenging time. A typical probate case could last a year, sometimes longer, depending on where you live. During this time, your beneficiaries are not able to access their inheritance. Going to court also means court fees, attorney fees, lost time, and additional stress.

Let us not leave out how much of a bite probate can take out of your estate. Depending on its complexity, probate can consume anywhere from 0.5% to 5% of the estate.

Removes one stress for loved ones. Having assets transfer directly to beneficiaries lessens what can be an intense burden for heirs, while they are grieving. Once the account provider is notified of the death of the account holder, the provider typically notifies beneficiaries. The beneficiaries have to provide the correct documentation, like a death certificate, but that is a whole lot easier than going through probate. Obtaining death certificates is usually part of the executor’s responsibility and does not cost very much.

Beneficiary designations override your last will and testament. By law, a beneficiary designation determines who receives assets, regardless of what is in your will. That is why it is so important to make sure your beneficiary designations are up to date. What happens if you neglect to update your beneficiaries on a life insurance policy purchased when your children were young? For instance, what if you are divorced from their father, but you forget to replace him as the policy beneficiary? In that case, your ex-spouse will receive the policy proceeds, no matter how many years you have been divorced.

It is easy and relatively painless. Updating or establishing beneficiaries is one of the easiest parts of estate planning. Start by making a list of your accounts, which you should have anyway and contact the account custodian to find out who is listed as a beneficiary. If no one has been named, get directions on how to establish the beneficiary designation and if possible, name a secondary beneficiary.

If you have an IRA or a 401(k), your account will typically offer a beneficiary form within the account. If you have investment accounts, you will need to request a form from the custodian.

Special rules for retirement account beneficiaries. There are rules about leaving retirement plan assets to a spouse, so if you want to leave those assets to children or grandchildren, your spouse will have to sign off on that, with a waiver. Depending upon where you live, a spouse may be entitled to have of the assets in an IRA, even if other beneficiaries are listed, unless there is written consent.

Reference: The Street (June 12, 2020) “Why You Should Add Beneficiaries to Your Investment Accounts Now”

 

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How Do I Avoid the Three Biggest Estate Planning Mistakes? – Annapolis and Towson Estate Planning

After you die, your last will and testament must be approved by the local probate court. The judge will determine if the document is the last will of the deceased, review the inventory of the estate and confirm who will administer the estate proceeds. It is known as “executing” a will.

Wealth Advisor’s recent article entitled “Avoid these 3 estate-planning mistakes and make probate cheaper and easier for your loved ones” discusses some mistakes that people make and how to avoid them.

  1. You do not have a will, or you have a will that was written in another state. You also should have a current will. Life changes, and you need a will for where you live in now. Residency is defined differently in each state, and an out-of-state will delays the probate process, because it fails to satisfy state requirements. Worse yet, it may even be declared invalid.

If there is no will, the deceased is said to have died “intestate,” and his estate must go through probate. However, an administrator will be named by the judge to distribute assets, according to state law. It can be a lengthy and often costly process.

Some people do not want to hire an attorney to create their estate plan or write a will, because they believe it is too expense or they never get around to doing it. However, if you die without a will, the legal costs will be even more and that will be paid by your estate—that decreases what’s left to give to your heirs.

  1. Mixing up estate taxes with probate. Your estate may be too small to be subject to federal tax, if it is less than the $11.58 million exemption. However, you still will be subject to probate and possibly a state estate tax. Therefore, you still need an estate plan.
  2. Disregarding easy things to keep some assets from probate. Most states have a “mini-probate” that is expedited for small estates. With this process, heirs may have fewer fees, less paperwork and shorter waiting.

You can also create a living trust (revocable trust) to avoid probate altogether, if done correctly. This is a legal vehicle to which all of your assets pass upon your death. Ask an estate planning lawyer to help you create a trust, because they can be complicated. Whether you need a trust, a will, or both, an experienced estate planning attorney has worked through a variety of situations and will have sound and creative ideas. Investing time and money with an attorney makes life easier for you now and for your family later.

Reference: Wealth Advisor (Feb. 18, 2020) “Avoid these 3 estate-planning mistakes and make probate cheaper and easier for your loved ones”

 

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What You Need to Know about Drafting Your Will – Annapolis and Towson Estate Planning

A last will and testament is just one of the legal documents that you should have in place to help your loved ones know what your wishes are, if you cannot say so yourself, advises CNBC’s recent article entitled, “Here’s what you need to know about creating a will.” In this pandemic, the coronavirus may have you thinking more about your mortality.

Despite COVID-19, it is important to ponder what would happen to your bank accounts, your home, your belongings or even your minor children, if you are no longer here. You should prepare a will, if you do not already have one. It is also important to update your will, if it is been written.

If you do not have a valid will, your property will pass on to your heirs by law. These individuals may or may not be who you would have provided for in a will. If you pass away with no will —dying intestate — a state court decides who gets your assets and, if you have children, a judge says who will care for them. As a result, if you have an unmarried partner or a favorite charity but have no legal no will, your assets may not go to them.

The courts will typically pass on assets to your closest blood relatives, despite the fact that it would not have been your first choice.

Your will is just one part of a complete estate plan. Putting a plan in place for your assets helps ensure that at your death, your wishes will be carried out and that family fights and hurt feelings do not make for destroyed relationships.

There are some assets that pass outside of the will, such as retirement accounts, 401(k) plans, pensions, IRAs and life insurance policies.

Therefore, the individual designated as beneficiary on those accounts will receive the money, despite any directions to the contrary in your will. If there is no beneficiary listed on those accounts, or the beneficiary has already passed away, the assets automatically go into probate—the process by which all of your debt is paid off and then the remaining assets are distributed to heirs.

If you own a home, be certain that you know the way in which it should be titled. This will help it end up with those you intend, since laws vary from state to state.

Ask an estate planning attorney in your area — to ensure familiarity with state laws—for help with your will and the rest of your estate plan.

Reference: CNBC (June 1, 2020) “Here’s what you need to know about creating a will”

 

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How Can You Disinherit Someone and Be Sure it Sticks? – Annapolis and Towson Estate Planning

Let us say you want to leave everything you own to your children, but you cannot stand and do not trust their spouses. That might make you want to delay making an estate plan, because it is a hard thing to come to terms with, says a recent article “Dealing with disinheritance, spouses” from the Times Herald-Record. There are options, but make the right choice, or your estate could face challenges.

Some people choose to leave nothing at all for their child in the will, so that if there is a divorce or if the child dies, their assets will not end up in the daughter or son-in-law’s pocket. For some parents, particularly those who are estranged from their children, this can create more problems than it solves.

Disinheriting a child with a will is not always a good idea. If you die with assets in your name only, they go through the court proceeding called probate, when the will is used to guide asset distribution. The law requires that all children, even disinherited ones, are notified that you have died, and that probate is going to occur. The disinherited child can object to the provisions in the will, which can lead to a will contest. Most families engaged in litigation over a will become estranged—even those that were not beforehand. The cost of litigation will also take a bite out of the value of your estate.

A common tactic is to leave a small amount of money to the disinherited child in the will and add a no-contest clause in the will. The no-contest clause expressly states that anyone who contests the will loses any right to their inheritance. Here is the problem: the disgruntled child may still object, despite the no contest clause, and invalidate the will by claiming undue influence or incapacity or that the will was not executed properly. If their claims are valid, then they will have great satisfaction of undoing your planning.

How can you disinherit a child, and be sure that your plan is going to stand up to challenge?

A trust is better in this case than a will. Not only do trusts avoid probate, but (unless state law requires otherwise at death) the children do not receive notice of the creation of a trust. An inheritance trust, where you leave money to your child, names a trustee to be in charge of the trust and the child is the only beneficiary of the trust. The child might be a co-trustee, but they do not have complete control over the trust. The spouse has no control over the inheritance, and you can also name what happens to the assets in the trust, if the child dies.

This kind of planning is called “controlling from the grave,” but it is better than not knowing if your child will be able to protect their inheritance from a divorce or from creditors.

With a national divorce rate around fifty percent, it is hard to tell if the in-law you welcome with an open heart, will one day become a predatory enemy in the future, even after you are gone. The use of trusts can ensure that assets remain in the bloodline and protect your hard work from divorces, lawsuits, creditors and other unexpected events.

Reference: Times Herald-Record (June 6, 2020) “Dealing with disinheritance, spouses”

 

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What You Need to Do after a Loved One Dies – Annapolis and Towson Estate Planning

The Dallas Morning News’ recent article entitled “Three things to do on the death of a loved one” explains the steps you should take, if you are responsible for a family member’s assets after they die.

Be sure the property is secured. A deceased person’s property becomes a risk in some instances. Friends and family will help themselves to what they think they should get, including the deceased’s personal property. Once it is gone, it is hard to get it back and into the hands of the individual who is legally entitled to receive it.

Criminals also look at the obituaries, and while everyone is at the funeral or otherwise unoccupied, burglars can break into the house and steal property. Assign security or ask someone to stay at the house to protect the property. You can also change the locks. Credit cards, debit cards, and checks need to be protected. The deceased’s mail must be collected, and cars should be locked up.

Make funeral plans. If you are lucky, the deceased left a written Appointment of Burial Agent with detailed instructions, which can make your job much easier.

For example, Texas law lets a person appoint an agent to be in charge of funeral arrangements and to describe the arrangements. An estate planning attorney can draft this document as part of an estate plan. You should see if this document was included. If you are listed as the agent, present the paper to the funeral home and follow the instructions. If there are no written instructions, the law will say who has the authority to make arrangements for the disposition of the body and to plan the funeral.

Talk to an experienced attorney. When a person dies, there is often a lapse in authority. The decedent’s power of attorney is no longer in effect, and the executor designated in the will does not have any authority to act, until the will is admitted to probate and the executor is appointed by the probate judge and qualifies by taking the oath of office and filing a bond, if required. Direction is needed earlier rather than later, on what you are permitted to do. The probate of a will takes time.

It is best to get started promptly, so that there is an executor in place with power to handle the affairs of the decedent.

Reference: Dallas Morning News (April 10, 2020) “Three things to do on the death of a loved one”

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Your Children Wish You Had an Estate Plan – Annapolis and Towson Estate Planning

It is the adult children who are in charge of aging parents when they need long-term care. They are also the ones who settle estates when parents die. Even if they cannot always come out and tell you, the recent article, “Why your children wish you had an Elder Law Estate Plan” from the Times Herald-Record spells out exactly why an elder law estate plan is so important for your loved ones.

Avoid court proceedings while living. In a perfect world, everyone over age 18 will have an advance directive, including a power of attorney, a health care proxy, and a living will. These documents appoint others to make financial, legal, and medical decisions, in case of incapacity. Without them, the children will have to get involved with time-consuming, expensive guardianship proceedings, where a judge appoints a legal guardian to make these decisions. Your life is turned over to a court-appointed guardian, instead of your children or another person of your choosing.

Avoid court proceedings after you die. If you die and assets are in your name alone, then your estate will go through probate, a court proceeding that can be time consuming and costly. Not having any assets in trusts leaves your kids open to the possibility of wills being challenged, disputes among family members and litigation that can drag on for years.

Wills in probate court are public documents. Trusts are private documents. Do you really want a stranger to access your will and learn about your assets?

An elder law estate plan also plans for the possibility of long-term care and costs. Nursing home care costs can run between $12,000—$18,000 per month. If you do not have long-term care insurance, you can create a Medicaid Asset Protection Trust (MAPT) that protects assets in the trust from nursing home costs, once the assets are in the trust for five years. The MAPT also protects assets from homecare provided by Medicaid, called “community” Medicaid, once the assets are in the trust for 30 months under a new rule that starts on October 1, 2020.

The “elder law power of attorney” has unlimited gifting powers that could save about half of a single person’s assets from the cost of nursing homes. This can be done on the eve of needing nursing home care, but it is always better to do this planning in advance.

Having a plan in place decreases stress and anxiety for adult children. They are likely busy with their own lives, working, caring for their children and coping in a challenging world. When a plan is in place, they do not have to start learning about Medicaid law, navigating their way through the court system, or wondering why their parents did not take advantage of the time they had to plan properly.

You probably do not want your children remembering you as the parents who left a financial and legal mess behind for the them to clean up. Speak with an elder law estate planning attorney to create a plan for your future. Your children will appreciate it.

Reference: Times Herald-Record (May 23, 2020) “Why your children wish you had an Elder Law Estate Plan”

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What Exactly Does an Executor Do? – Annapolis and Towson Estate Planning

The job of the executor is an important one. The executor has a fiduciary responsibility to manage the assets and debts of the decedent and carry out instructions documented in his last will and testament. The executor is also responsible for distributing assets, explains the article “A Step-by-Step Guide to Being an Executor” from Kiplinger. If there are any claims against the estate, the executor might be facing personal responsibility, if funds are not handled properly.

The learning curve could be steep, especially if the executor does not know a lot about the person’s finances and possessions, or is new to the tasks of managing money, corralling heirs or the legal processes that occur after someone dies. If the decedent didn’t tell the executor where his records and important papers are kept, things can get even more challenging.

Here is what an executor needs to know, preferably before her services are needed:

Get informed and up to speed. Read the will and see if the decedent’s intentions are clear. That is not always the case. When one man became executor of his mother’s will, he and his sister had two different interpretations about what their mother wanted to happen to the family home. While they wrangled out the issue, there were property taxes to be paid and maintenance costs. A letter of direction explaining things clearly would have prevented many problems.

Sit down and talk about it. It is a kindness to heirs to share information and intentions, while you are still alive. Discuss the will with the immediate family to avoid any surprises or misunderstandings. Consider having an annual conference with children to ensure that they understand the estate, the will and what to expect. If you have an argumentative family, doing this in advance will not guarantee smooth sailing, but it may lessen the fighting.

Make an inventory. Managing an estate can be a long process, with many curves along the way. You will make it easier, if you create a list of all assets, accounts, debts and liabilities. Make a note of where tax records and insurance policies can be found. Include a list of all online accounts and digital assets, plus the names of your professional advisors, including the estate planning lawyer and CPA. Ideally, review the list with your executor.

Should the executor change the locks? In a word, yes. Two kinds of theft happen while people are attending funeral and memorial services. Some family members will outright take items and thieves may break into empty homes. Remove anything of value and have a reputable locksmith install good locks. If the executor is technically inclined, an inexpensive videocam system would be a good idea.

Get copies of the death certificate. Request multiple copies. Some institutions will require originals with a raised seal, while others will work with a copy or a scanned document. Better to have a few more than you need, so you do not have to keep buying new ones.

Speak with an estate planning attorney. There are legal forms and tax forms that will need to be prepared. In some states, probate is straightforward. In other states, it is a complex and time consuming process. You do not need to go it alone.

Open an estate account. The estate is a legal entity and requires a separate tax ID. The executor needs to apply for a separate tax ID, and then can use that to open a bank account. The estate funds the bank account, which is used to pay bills and deposit proceeds from assets.

Distribute assets. The executor is responsible for keeping heirs updated. Heirs receive assets, as designated in the will. If there are collections or a home, they will need to be professionally assessed, before they can be sold.

Reference: Kiplinger (May 12, 2020) “A Step-by-Step Guide to Being an Executor”

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What’s the Difference between Revocable and Irrevocable Trusts? – Annapolis and Towson Estate Planning

A trust is an estate planning tool that you might discuss with an experienced estate planning attorney, beyond drafting a last will and testament.

KAKE.com’s recent article entitled “Revocable vs. Irrevocable Trusts” explains that a living trust can be revocable or irrevocable.

You can act as your own trustee or designate another person. The trustee has the fiduciary responsibility to act in the best interests of the trust beneficiaries. These are the people you name to benefit from the trust.

There are three main benefits to including a trust as part of an estate plan.

  1. Avoiding probate. Assets held in a trust can avoid probate. This can save your heirs both time and money.
  2. Creditor protection. Creditors can try to attach assets held outside an irrevocable trust to satisfy a debt. However, those assets titled in the name of the irrevocable trust may avoid being accessed to pay outstanding debts.
  3. Minimize estate taxes. Estate taxes can take a large portion from the wealth you may be planning to leave to others. Placing assets in a trust may help to lessen the effect of estate and inheritance taxes, preserving more of your wealth for future generations.

What’s the Difference Between Revocable and Irrevocable Trusts?

A revocable trust is a trust that can be changed or terminated at any time during the lifetime of the person making the trust. When the grantor dies, a revocable trust automatically becomes irrevocable, so no other changes can be made to its terms.

An irrevocable trust is essentially permanent. Therefore, if you create an irrevocable trust during your lifetime, any assets you place in the trust must stay in the trust. That is a big difference from a revocable trust: flexibility.

Whether a trust is right for your estate plan, depends on your situation. Discuss this with a qualified estate planning attorney. This has been a very simple introduction to a very complex subject.

Reference: KAKE.com (March 31, 2020) “Revocable vs. Irrevocable Trusts”

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How Does a Spendthrift Trust Protect Heirs from Themselves? – Annapolis and Towson Estate Planning

This is not an unusual question for most estate planning lawyers—and in most cases, the children are not bad. They just lack self-control or have a history of making poor decisions. Fortunately, there are solutions, as described in a recent article titled “Estate Planning: What to do to protect trusts from a spendthrift” from NWI.com.

What needs to happen? Plan to provide for the child’s well-being but keep the actual assets out of their control. The best answer is the use of a trust. By leaving money to an heir in a trust, a responsible party can be in charge of the money. That person is known as the “trustee.”

People sometimes get nervous when they hear the word trust, because they think that a trust is only for wealthy people or that creating a trust must be very expensive. Not necessarily. In many states, a trust can be created to benefit an heir in the last will and testament. The will may be a little longer, but a trust can be created without the expense of an additional document. Your estate planning attorney will know how to create a trust, in accordance with the laws of your state.

In this scenario, the trust is created in the will, known as a testamentary trust. Instead of leaving money to Joe Smith directly, the money (or other asset) is left to the John Smith Testamentary Trust for the benefit of Joe Smith.

The terms of the trust are defined in the appropriate article in the will and can be created to suit your wishes. For instance, you can decide to distribute the money over a three or a thirty-year period. Funds could be distributed monthly, to create an income stream. They could also be distributed only when certain benchmarks are reached, such after a full year of employment has occurred. This is known as an incentive trust.

The opposite can be true: distributions can be withheld, if the heir is engaged in behavior you want to discourage, like gambling or using drugs.

If the funding for the trust will come from proceeds from a life insurance policy, it may be necessary to have your estate planning attorney contact the insurance company to be sure that the insurance company will permit a testamentary trust to be the beneficiary of the life insurance and avoid probate altogether.

Not all insurance companies will permit this. There may be some other changes that need to occur for this to work and be in compliance with your state’s laws. However, your estate planning attorney will be able to resolve the issue for you.

Reference: NWI.com (May 17, 2020) “Estate Planning: What to do to protect trusts from a spendthrift”

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Should I Give My Kid the House Now or Leave It to Him in My Will? – Annapolis and Towson Estate Planning

Transferring your house to your children while you are alive may avoid probate, the court process that otherwise follows death. However, gifting a home also can result in a big, unnecessary tax burden and put your house at risk, if your children are sued or file for bankruptcy.

Further, you also could be making a big mistake, if you hope it will help keep the house from being used for your nursing home bills.

MarketWatch’s recent article entitled “Why you shouldn’t give your house to your adult children” advises that there are better ways to transfer a house to your children, as well as a little-known potential fix that may help even if the giver has since passed away.

If you bequeath a house to your children so that they get it after your death, they get a “step-up in tax basis.” All the appreciation that occurred while the parent owned the house is never taxed. However, when a parent gives an adult child a house, it can be a tax nightmare for the recipient. For example, if the mother paid $16,000 for her home in 1976, and the current market value is $200,000, none of that gain would be taxable, if the son inherited the house.

Families who see this mistake in time can undo the damage, by gifting the house back to the parent.

Sometimes people transfer a home to try to qualify for Medicaid, the government program that pays health care and nursing home bills for the poor. However, any gifts or transfers made within five years of applying for the program can result in a penalty period, when seniors are disqualified from receiving benefits.

In addition, giving your home to someone else also can expose you to their financial problems. Their creditors could file liens on your home and, depending on state law, get some or most of its value. In a divorce, the house could become an asset that must be sold and divided in a property settlement.

However, Tax Code says that if the parent retains a “life interest” or “life estate” in the property, which includes the right to continue living there, the home would remain in her estate rather than be considered a completed gift.

There are specific rules for what qualifies as a life interest, including the power to determine what happens to the property and liability for its bills. To make certain, a child, as executor of his mother’s estate, could file a gift tax return on her behalf to show that he was given a “remainder interest,” or the right to inherit when his mother’s life interest expired at her death.

There are smarter ways to transfer a house. There are other ways around probate. Many states and DC permit “transfer on death” deeds that let people leave their homes to beneficiaries without having to go through probate. Another option is a living trust.

Reference: MarketWatch (April 16, 2020) “Why you shouldn’t give your house to your adult children”

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