What Is a Testamentary Trust and Do You Need One? – Annapolis and Towson Estate Planning

A couple doing some retirement planning has an updated will and a medical power of attorney in place, prepared with the help of an estate planning attorney. They own some rental property, a small business and life insurance, but their estate is not large enough for them to worry about the federal estate tax.

Do they need or want a trust to be part of their estate plan? That is a question from a recent article titled “It’s the law: Testamentary trusts provide protection for assets” from the Post Register.

First, there are many different types of trusts. A living trust, also known as a revocable trust, irrevocable trusts and testamentary trusts are just three types. The testamentary trust only comes into effect at death under a last will and testament, and in some cases, depending on how they are structured, they may never come into effect, because they are designed for certain circumstances.

If you leave everything to your spouse in a will or through a revocable trust, your spouse will receive everything with no limitations. The problem is, those assets are subject to claims by your spouse’s creditors, such as business issues, a car accident, or bankruptcy. The surviving spouse may use the money any way he or she wishes, during their lifetime or through a will at death.

Consider if your spouse remarried after your death. What happens if they leave assets that they have inherited from you to a new spouse? If the new spouse dies, do the new spouses’ children inherit assets?

By using a trust, assets are available for the surviving spouse. At the death of the surviving spouse, assets in the trust must be distributed as directed in the language of the trust. This is especially important in blended families, where there may be children from other marriages.

Trusts are also valuable to distribute assets, if there are beneficiaries with an inability to manage money, undue spousal interference or a substance abuse problem.

Note that the trust only protects the decedent’s assets, that is, their separate property and half of the community property, if they live in a community property state.

The best solution to the issue of how to distribute assets, is to meet with an estate planning attorney and determine the goal of each spouse and the couple’s situation. People who own businesses need to protect their assets from litigation. It may make sense to have significant assets placed in trust to control how they pass to family members and shield them from possible lawsuits.

Reference: Post Register (April 26, 2020) “It’s the law: Testamentary trusts provide protection for assets”

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

How Bad Will Your Estate’s Taxes Be? – Annapolis and Towson Estate Planning

The federal estate tax has been a small but steady source of federal revenue for nearly 100 years. The tax was first imposed on wealthy families in America in 1916. They were paid by families whose assets were previously passed down through multiple generations completely and utterly untaxed, says the article “Will the government tax your estate when you die, seizing home and assets?” from The Orange County Register.

The words “Death Tax” do not actually appear anywhere in the federal tax code, but was the expression used to create a sympathetic image of the grieving families of farmers and small business owners who were burdened by big tax bills at a time of personal loss, i.e., the death of a parent. The term was made popular in the 1990s by proponents of tax reform, who believed that estate and inheritance taxes were unfair and should be repealed.

Fast forward to today—2020. Will the federal government tax your estate when you die, seize your home and everything you had hoped to hand down to your children? Not likely. Most Americans do not have to worry about estate or death taxes. With the new federal exemptions at a record high of $11,580,000 for singles and twice that much for married couples, only very big estates are subject to a federal estate tax. Add to that, the 100% marital deduction means that a surviving spouse can inherit from a deceased spouse and is not required to pay any estate tax, no matter how big the estate.

However, what about state estate taxes? To date, thirteen states still impose an estate tax, and many of these have exemptions that are considerably lower than the federal tax levels. Six states add to that with an inheritance tax. That is a tax that is levied on the beneficiaries of the estate, usually based upon their relationship to the deceased.

Many estates will still be subject to state estate taxes and income taxes.

The personal representative or executor is responsible and legally authorized to file returns on a deceased person’s behalf. They are usually identified in a person’s will as the executor of the estate. If a family trust holds the assets, the trust document will name a trustee. If there was no will or trust, the probate court will appoint an administrator. This person may be a professional administrator and likely someone who never knew the person whose estate they are now in charge of. This can be very difficult for family members.

If the executor fails to file a return or files an inaccurate or incomplete return, the IRS may assess penalties and interest payments.

The final individual income tax return is filed in just the same way as it would be when the deceased was living. All income up to the date of death must be reported, and all credits and deductions that the person is entitled to can be claimed. The final 1040 should only include income earned from the start of the calendar year to the date of their death. The filing for the final 1040 is the same as for living taxpayers: April 15.

Even if taxes are not due on the 1040, a tax return must be filed for the deceased if a refund is due. To do so, use the Form 1310, Statement of a Person Claiming Refund Due to a Deceased Taxpayer. Anyone who files the final tax return on a decedent’s behalf must complete IRS Form 56, Notice Concerning Fiduciary Relationship, and attach it to the final Form 1040.

If the decedent was married, the widow or widower can file a joint return for the year of death, claiming the full standard deduction and using joint-return rates, as long as they did not remarry in that same year.

An estate planning attorney can help with these and the many other details that must be taken care of, before the estate can be finalized.

Reference: The Orange County Register (March 1, 2020) “Will the government tax your estate when you die, seizing home and assets?”

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

Preparing for the Inevitable: The Loss of a Spouse – Annapolis and Towson Estate Planning

Becoming a widow at a relatively young age, puts many people in a tough financial position, says the article “Preparing for the Unexpected Death of a Spouse” from Next Avenue. At this point in their lives, they are too young to draw Social Security benefits. There is no best time, but this is a hard time to lose the prime breadwinner in the household.

Women are more likely than men to lose a spouse. They are typically left in a worse financial position if their spouse dies before they are old enough to take retirement benefits.

One of the best ways to plan for this event, is for both spouses to have life insurance. This can replace income, and term life insurance, if purchased early in life, can be relatively affordable. The earlier a policy is purchased, the better. This can become a safety net to pay bills and maintain a lifestyle.

Another key component for surviving early widowhood, is being sure that both members of the couple understand the couple’s finances, including how household bills are paid. Usually what happens is that one person takes over the finances, and the other is left hoping that things are being done properly. That also includes knowing the accounts, the log in and password information, and what bills need to be paid at what dates.

Having that conversation with a spouse is not easy, but necessary. There are costs that you may not be aware of, without a thorough knowledge of how the household works. For instance, if the husband has done all of the repairs around the house, maintaining the yard and taking care of the cars, those tasks still need to be done. Either the widow will become proficient or will have to pay others.

Couples should work with an estate planning attorney and a financial advisor, as well as an accountant, to be sure that they are prepared for the unexpected. What survivor’s benefits might the surviving spouse be eligible to receive? If there are children at home age 16 or under, there may be Social Security benefits available for the child’s support.

Discuss what debt, if any, either spouse has taken on without the other’s knowledge. Any outstanding medical bills should also be discussed. The last thing a loved one should have to cope with when a spouse passes, is a tangle of debt. However, this often happens.

If the spouse was a veteran, the surviving spouse might be eligible for benefits from the Veterans Administration. Find out what information will be needed to apply for benefits.

Talk with your estate planning attorney to make sure that all proper documents have been prepared. This includes a last will and testament, power of attorney, health care proxy and any trusts.

Reference: Next Avenue (Dec. 18, 2019) “Preparing for the Unexpected Death of a Spouse”

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

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

How Blended Families Can Address Finances and Inheritance Issues – Annapolis and Towson Estate Planning

The holiday season is a popular time for people to get engaged, including people who have been married before. If that’s you, understand that blending families means you’ll need to deal with inheritance and finance issues, says U.S. News & World Report’s article “6 Financial Considerations for Remarriage.” The best time to have these conversations is before you walk down the aisle, not afterwards.

Look at your budget and talk about how things will work. That includes day-to-day expenses, monthly expenses and large purchases, like houses, vacations, and cars. Talk about a game plan for going forward. Will you merge your credit card accounts or bank accounts? What about investment accounts?

Financial obligations outside of the marriage. Two things to check before you wed: your divorce papers and the state’s laws. Does anything change regarding your spousal support (alimony) or child support, if you remarry? It’s unlikely that you would lose child support, but the court may determine it can be reduced. The person who is paying child support or alimony also needs to be transparent about their financial obligations.

Review insurance and beneficiaries. One of the biggest mistakes people make, is failing to update beneficiaries on numerous accounts. If your divorce papers do not require life insurance to be left for your spouse on behalf of your children (and some do), then you probably want to make your new spouse the beneficiary of life insurance policies. Investment accounts, bank account, and any other assets where a beneficiary can be named should be reviewed and updated. It’s a simple task, but overlooking it creates all kinds of havoc and frustration for survivors.

What will remarriage do to college financing options? A second marriage may increase a parent’s income for college purposes and make children ineligible for college loans or needs-based scholarships. Even if the newly married couple has not blended their finances, FAFSA looks at total household income. Talk about how each member of the couple plans on managing college expenses.

A new estate plan should be addressed, even before the wedding takes place. Remember, an estate plan is for more than distributing assets. It includes planning for incapacity, including Do Not Resuscitate Orders (DNR), powers of attorney for finances and for health care, designations of guardianship or consent to adoption, various trusts and if needed, Special Needs planning.

Create a plan for inheritance. If either spouse has children from a prior marriage, an estate plan is critical to protect the children’s inheritance. If one spouse dies and the surviving spouse inherits everything, there is no legal requirement for the surviving spouse to pass any of the deceased’s assets to their children. Even if you are in mid-life and death seems far away, you need to take care of this.

Speak with an estate planning attorney who can help you create the necessary documents. You should also talk with your children, at the age appropriate level, about your plans, so they understand that they are being planned for and will be taken care of in the new family.

Reference: U.S. News & World Report (Nov. 18, 2019) “6 Financial Considerations for Remarriage”

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

Your Spouse Just Died … Now What? – Annapolis and Towson Estate Planning

There are several steps to take while both spouses are alive and well, to help reduce the chance of the surviving spouse finding themselves in a “financial deadlock” situation, or worse. The preparations require the non-financially dominant partner to be involved as much as possible, says Barron’s in the article “How to Avoid Financial Deadlock—or Worse—After One Spouse Dies”

Step one is to prepare the financial equivalent of a “go-bag,” like the ones people are supposed to have when they must leave their home in a crisis. That means a list of all financial contacts, advisors, estate planning attorney, accountants, insurance professionals and copies of all beneficiary designations. There should also be a list or a spreadsheet of all the couple’s assets and liabilities, including digital assets and passwords to these accounts. The spouse should also note the location of financial records, including insurance policies, wills, trusts and any other critical legal documents.

Each partner must have access to checking and cash independently of the other and the spouses need to review together how assets and accounts are titled.

It is especially important for both spouses to be on the deed to their home with right of survivorship, so that the surviving spouse can easily prove that they are the sole owner of the home after the spouse dies. Otherwise, they may not be able to communicate with the mortgage company. If a surviving spouse must go to court and file probate in order to deal with the home, it can become costly and more stressful.

It’s not emotionally easy to go through all this information but it is critical for the surviving spouse’s financial security.

Any information that will be needed by the surviving spouse should be documented in a way that is easily accessible and understandable for the spouse. Even if someone is very organized and has a well-developed description of their assets and estate plan, it may not be as easily understood for someone whose mind works differently. This is especially true, if the couple has had years where the non-financial spouse was not involved with the family’s assets and is suddenly digesting a lot of new information.

It is wise for the non-financial spouse to meet with key advisors and take on some of the tasks like bill paying, reviewing insurance policies and reconciling accounts well before either spouse experiences any kind of cognitive decline. Ideally, the financially dominant partner takes the time to train the other spouse and then lets them take the lead, until they are both comfortable managing all the details.

Each spouse needs to understand how the death of the other will impact the household income. If one spouse has a pension without survivor benefits and that spouse is the first to die, the surviving spouse may find themselves struggling to replace that income. They also need to consider daily aspects of their lives, like if one spouse is highly dependent upon the other for caregiving.

Spouses are advised not to make any big financial or life decisions within a year or so of a spouse’s death. The surviving spouse is often not in a good emotional state to make smart decisions and this is the time that they are most at risk for senior financial abuse.

Both spouses should sit down with their estate planning attorney and discuss what will happen when they are widowed. It is a difficult topic but planning ahead will make the transition less traumatic from a financial and legal perspective.

Reference: Barron’s (Sep. 15, 2019) “How to Avoid Financial Deadlock—or Worse—After One Spouse Dies”

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