Some Assets Better Left Outside of Will – Annapolis and Towson Estate Planning

A will is a document of last resort to transfer assets. There are many ways to transfer assets that would preempt the terms of a will. AARP’s recent article entitled “The Legal Limits of Your Will” provides a list of some major assets that often fall outside a will’s scope, along with tips for getting them to the people or organizations you want.

Retirement accounts. Those named as beneficiaries will get those assets, no matter what the will says. That’s because a beneficiary designation already informed the plan administrator how to handle the asset after your death. There’s no need for probate court involvement.

Life insurance policies. A life insurance policy’s beneficiary listing, not the will, determines who gets the proceeds. However, some states automatically revoke the beneficiary designation of an ex-spouse on a life insurance policy.

Bank accounts. If an account is titled as transfer on death (TOD), payable on death (POD) or joint tenancy with right of survivorship (JTWROS), those designations generally override the will. The account’s signature card would show if any of these designations applies. Ask the bank to look up your card if you aren’t sure. For individual accounts titled TOD or POD, the beneficiary can go to the bank with a death certificate (or death certificates) and proof of identity to transfer or collect the funds. JTWROS accounts become the property of the surviving account holder, who will need to show the bank a death certificate for the other account holder.

Real estate. If two spouses own a home jointly with right of survivorship or as tenants by the entirety, the property automatically is transferred to the remaining spouse without a court’s involvement. Real estate can also be transferred outside a will in certain states through a TOD deed, in which you name the beneficiary on the property.

Trusts. Any asset in a trust isn’t governed by a will. Therefore, trusts are another tool for distributing assets outside of probate court. However, after a trust is created, you must retitle accounts, change beneficiaries, or take other measures so that each asset you want to put into the trust will actually end up there.

Reference: AARP (September 29, 2022) “The Legal Limits of Your Will”

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

Don’t Miss Out on Estate Planning Opportunities – Annapolis and Towson Estate Planning

The recent article, “Rooting Out Estate Planning Opportunities,” from Financial Advisor offers a number of frequently missed opportunities in estate planning. Chief among them is failing to update estate plans, as changes to tax laws could mean that strategies used when your estate plan was initially created may no longer be relevant.

Before these opportunities can be discovered, it’s important to have a clear accounting of all of your assets, including a balance sheet of each “bucket” of resources: personal assets, trust assets, qualified plan assets, etc. The secret to success: meeting with your estate planning attorney every few years to review this entire picture to identify potential opportunities.

Once you have a sense of the whole picture, it’s easier to spot opportunities. For instance:

A Spousal Lifetime Access Trust, or SLAT, is an irrevocable trust used when a grantor wants to transfer part of their spousal exclusion into a SLAT to provide for their spouse and descendants. The SLAT keeps assets out of the donor’s estate and authorizes the trustee to make distributions to the grantor’s spouse, while at the same time it allows children or other heirs to be named as beneficiaries. Many couples use these trusts to protect assets from lawsuits.

There are some drawbacks to keep in mind. If one spouse is the beneficiary of the other spouse, all is well while both are living. However, if one spouse dies or becomes incapacitated and all assets are in the trust, the other may lose access to the trust created for the now deceased spouse.

The loss of access and the restrictions on SLAT distribution could be addressed by having both spouses purchase life insurance policies to fill the gap. At the same time, the couple would be well advised to look into disability and long-term care insurance.

Another situation is the use of a credit shelter trust, often called a bypass trust because it bypasses the surviving spouse’s estate. They are not as advantageous as they used to be because of today’s high estate tax exemption. They were also popular when the surviving spouse wasn’t able to use their deceased spouse’s estate tax exemption.

With the federal estate tax exemption up to more than $12 million, many who still have credit shelter trusts may find they don’t make sense in the short term. However, for now the federal estate exemption is set to drop down to $6 million when the Jobs and Tax Act sunsets. Depending upon your circumstances, it may be worthwhile to maintain this trust. Your estate planning attorney will be able to guide you.

Merging old trusts into new ones, or “decanting” them, makes sense in some situations. A new trust can be better crafted to align with the latest in tax laws and serve the same beneficiaries for as long as your state’s laws permit.

The two important takeaways here:

  • Estate planning requires a complete look at all of your assets and liabilities to make the best decisions on how to structure any estate and tax strategies; and
  • Estate plans need to be reviewed on a regular basis—every three to five years at a minimum—to ensure the strategies still work, despite any changes in tax laws and your situation.

If you believe your estate plan may need to be updated, contact us to schedule an appointment to review your current estate plan with one of our experienced estate planning attorneys.

Reference: Financial Advisor (Nov. 1, 2022) “Rooting Out Estate Planning Opportunities”

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

Is Your Business Included in Estate Plan? – Annapolis and Towson Estate Planning

Forbes’ recent article entitled “The Importance of Estate Planning When Building Your Business” says that every business that’s expected to survive must have a clear answer to this question. The plan needs to be shared with the current owners and management as well as the future owners.

The common things business owners use to put some protection in place are buy-sell agreements, key-person insurance and a succession plan. These are used to make certain that, when the time comes, there’s both certainty around what needs to happen, as well as the funding to make sure that it happens.

If your estate plan hasn’t considered your business interests or hasn’t been updated as the business has developed, it may be that this plan falls apart when it matters the most.

Buy-sell insurance policies that don’t state the current business values could result in your interests being sold far below fair value or may see the interests being bought by an external party that threatens the business itself.

If your agreements are not in place, or are challenged by the IRS, your estate may find itself with a far greater burden than anticipated.

Your estate plan should be reviewed regularly to account for changes in your situation, the value of your assets, the status of your (intended) beneficiaries and new tax laws and regulations.

There are a range of thresholds, exemptions and rules that apply. Adapting the plan to make best use of these given your current situation is well worth the effort. Contact us to talk to one of our experienced estate planning attorneys about your plan.

Including your estate planning as part of your general financial planning and management will frequently provide a valuable guidance in terms of how best to set up and manage your broader financial affairs.

Financial awareness can not only inform how you grow your wealth now but also ensure that it gets passed on effectively. The same is also true of your business.

A tough conversation about what happens in these situations can be a reminder to management that over dependence on any key person is not something to take for granted.

Reference: Forbes (Sep. July 12, 2019) “The Importance of Estate Planning When Building Your Business”

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

Ask Mom if She has a Will – Annapolis and Towson Estate Planning

The family was baffled. Not only was the will out of date, but it was also unsigned, and the person named as executor had died a decade before their mother died. Grandchildren born after the will was created were not mentioned and personal possessions left to some people in the will had been given away years ago.

This scenario, as described in the article “Mom, Do You Have a Will?” from Next Avenue, is not unusual because many older adults and their children are equally reticent to discuss death. It’s a hard topic to address, but without these conversations, how can you make sure the transition after they pass is smooth?

Who needs a will? Pretty much everyone does. If your parents don’t have a will, here are some talking points to remind them of why it matters:

  • If you are part of a blended family, estate planning avoids either a full or partial disinheritance of a surviving spouse or their children.
  • If there are minor children or adult children with special needs, a will is used to appoint guardians. With no will, the court makes decisions about who raises children or cares for a special needs individual.
  • If yours is a fighting family (you know who you are), and if you want certain things to go to certain people, there needs to be an updated will.

Single people need a plan for their assets, especially if they are in a committed relationship but not married. Many state inheritance laws make no provision for a domestic partner. If a relationship is recognized before a loved one dies the remaining partner can access their right to property or benefits.

When someone dies without a will or a living trust, known as intestate succession, assets may be distributed according to rules set out in state law, which vary state to state and may not be what they would have wanted.

When asked if there is a will, some may say they are prepared. However, as in the example, this may or may not be true. Their will may be old, no longer relevant to their situation or may not have been signed.

Clarifying the status of an older adult’s will is important to a smoother transition of assets and needs to be addressed when they are of sound mind and able to make their own decision about their estate.

When preparing to have a discussion with someone who is active and healthy, the conversation is easier. Ask if they have a will and what their wishes are after they have passed. You can explain how these steps are essential to creating their legacy and protect their family from estate taxes and expensive court oversight.

When a person is seriously ill, this is admittedly a harder conversation. Acknowledge the difficulty and let them know they can stop the discussion if necessary. It may take more than a few conversations to get to everything. Discuss these issues with respect and empathy. Offer ideas and options and steer clear of any ultimatums.

Contact us to talk with one of our experienced estate planning attorneys who will explain what you need for your specific family.

Reference: Next Avenue (Sep. 14, 2022) “Mom, Do You Have a Will?”

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

What Penalties Hurt Retirement Accounts? – Annapolis and Towson Estate Planning

Money Talks News’ recent article entitled “3 Tax Penalties That Can Ding Your Retirement Accounts” says make one wrong move, and Uncle Sam may ask for some explanations. Let’s review the three biggest mistakes people make.

Excess IRA contribution penalty. Contributing too much to an individual retirement account (IRA) can mean a penalty from the IRS. You can do this if you contribute more than the applicable annual contribution limit for your IRA or improperly rolling over money into an IRA. The IRS states, “Excess contributions are taxed at 6% per year as long as the excess amounts remain in the IRA. The tax can’t be more than 6% of the combined value of all your IRAs as of the end of the tax year.”

The IRS lets you remedy your mistake before any penalties will be applied. You must withdraw the excess contributions — and any income earned on those contributions — by the due date of your federal income tax return for that year.

Taking money out too soon from a retirement account. If you withdraw funds from your IRA before the age of 59½, you might be subject to paying income taxes on the money, plus an additional 10% penalty. However, there are several exceptions when you’re permitted to take early IRA withdrawals without penalties: if you lose your employment, you’re allowed to tap your IRA early to pay for health insurance premiums.

The same penalties apply to early withdrawals from retirement plans like 401(k)s, but again, there are exceptions to the rule that allow you to make early withdrawals without penalty. The exceptions that let you make early retirement plan withdrawals without penalty may differ from the exceptions that allow you to make early IRA withdrawals without penalty.

Missed RMD penalty. Taxpayers were previously obligated to take required minimum distributions — also known as RMDs — from most types of retirement accounts beginning the year they turn 70½. However, the Secure Act of 2019 bumped up that age to 72.

The consequences of not making these mandatory withdrawals still apply. If you fail to take your RMDs starting the year you turn 72, you face harsh penalties. The IRS says that if you don’t take any distributions, or if the distributions aren’t large enough, you may have to pay a 50% excise tax on the amount not distributed as required.

Reference: Money Talks News (March 1, 2022) “3 Tax Penalties That Can Ding Your Retirement Accounts”

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

What Is a QTIP Trust? – Annapolis and Towson Estate Planning

A Qualified Terminable Interest Property Trust, or QTIP, is a trust allowing the person who makes the trust (the grantor) to provide for a surviving spouse while maintaining control of how the trust’s assets are distributed once the surviving spouse passes, as explained in the article “QTIP Trusts” from Investopedia.

QTIPs are irrevocable trusts, commonly used by people who have children from prior marriages. The QTIP allows the grantor to take care of their spouse and ensure assets in the trust are eventually passed to beneficiaries of their own choosing. Beneficiaries could be the grantor’s offspring from a prior marriage, grandchildren, other family members or friends.

In addition to providing the surviving spouse with income, the QTIP also limits applicable estate and gift taxes. The property within the QTIP trust provides income to the surviving spouse and qualifies as a marital deduction, meaning the value of the trust is not taxable after the death of the first spouse. Rather, the property in the QTIP trust will be included in the estate of the surviving spouse and subject to estate taxes depending on the value of their own assets and the estate tax exemption in effect at the time of death.

The QTIP can also assert control over how assets are handled when the surviving spouse dies, as the spouse never assumes the power of appointment over the principal. This is especially important when there is more than one marriage and children from more than one family. This prevents those assets from being transferred to the living spouse’s new spouse if they should re-marry.

A minimum of one trustee must be appointed to manage the trust, although there may be multiple trustees named. The trustee is responsible for controlling the trust and has full authority over assets under management. The surviving spouse, a financial institution, an estate planning attorney or other family member or friend may serve as a trustee.

The surviving spouse named in a QTIP trust usually receives income from the trust based on the trust’s income, similar to stock dividends. Payments may only be made from the principal if the grantor allows it when the trust was created, so it must be created to suit the couple’s needs.

Payments are made to the spouse as long as they live. Upon their death, the payments end, and they are not transferable to another person. The assets in the trust then become the property of the listed beneficiaries.

The marital trust is similar to the QTIP, but there is a difference in how the assets are controlled. A QTIP allows the grantor to dictate how assets within the trust are distributed and requires at least annual distributions. A marital trust allows the surviving spouse to dictate how assets are distributed, regular distributions are not required, and new beneficiaries can be added. The marital trust is more flexible and, accordingly, more common in first marriages and not in blended families.

Your estate planning attorney will explain further how else these two trusts are different and which one is best for your situation. There are other ways to create trusts to control how assets are distributed, how taxes are minimized and to set conditions on benefits. Each person’s situation is different, and there are trusts and strategies to meet almost every need imaginable.

Contact us to determine which trust is best for your family and situation with one of our experienced estate planning attorneys.

Reference: Investopedia (Aug. 14, 2022) “QTIP Trusts”

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

How Does a Business Owner Create an Exit Strategy? – Annapolis and Towson Estate Planning

Letting go of a business is not easy, says a recent article titled “Estate Planning Strategies for Business Owners Planning an Exit” from CEOWorld Magazine. Where the exit is to sell the business or retire, or the result of an unexpected events, its crucial to have an estate and succession plan.

When should you establish a plan? It should be early, perhaps even when you become a CEO. A long-term strategy is as important as short-term decisions. Not having an estate plan could mean your interest in the business goes through probate, which is both public and time consuming. The business may never recover from the distribution of assets and the exposure. No estate plan also means missed changes to leverage discount gifting or any other tax-reduction strategies.

Consider the following when talking with your estate planning attorney:

What is the exit strategy—to sell, be acquired or merged, have a family member take over, or sell to key employees?

How much money to do you need and want at the exit? Do you want to create a stream of income or a lump sum?

Do you have a charitable giving plan to reap tax advantages and support an organization with meaning to you? Structuring a gift far in advance avoids using a reduced fair market value and have it deemed as a cash gift.

Transferring the business to family members instead of selling to outside parties creates many different planning opportunities. With family members, emotions come into play, even though this is not always productive. If some offspring are not involved in the business, will they receive a share of the business? Do you want to equalize your inheritance? Assets can be divided by the use of trusts, for example.

You will want to work with an estate planning attorney with experience in creating a succession plan with a tax model. This is often overlooked in succession planning and can cause significant cash flow management issues as well as lost tax benefits.

Determine if you want to make gifts using business interests or sales proceeds early on and whether these gifts will go to family members or charities. The earlier the planning occurs, the more you can maximize the income and estate tax benefits.

Clarify your own retirement needs and goals. Business owners often fail to correctly calculate the expected investment income on after-tax proceeds from the sale of the business. Will it be sustainable enough for the lifestyle you want in retirement? If not, is there a way to structure the sale of the business to achieve your financial goal?

It’s never too late to plan for an exit strategy, and the earlier the planning, the higher the likelihood of a successful transition.  Please contact us to schedule a time to speak with one of our experienced estate planning attorneys to develop an exit strategy and successful transition for your business.

Reference: CEOWorld Magazine (Aug. 16, 2022) “Estate Planning Strategies for Business Owners Planning an Exit”

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

Does a Beneficiary have to Pay Taxes on 401(k)? – Annapolis and Towson Estate Planning

There are many complicated rules for inheriting assets in the form of retirement plans, workplace plans and Individual Retirement Accounts (IRAs), says a recent article titled “How Much 401(k) Inheritance Taxes Will Really Cost You” from The Madison Leader-Gazette. Any assets passed from one person to another in the form of a 401(k) are taxable. You’ll want to be prepared.

How are Inherited 401(k)s Taxed?

The inheritance rule for 401(k) tax usually follows the same path as the rules used when making contributions or withdrawals to tax deferred retirement plans. When a person dies, their 401(k) becomes part of their taxable estate.

This means that any taxes due on earnings not paid during the person’s lifetime need to be paid.

Traditional 401(k) plans are funded with pre-tax dollars. This is great for the saver, who gets to defer paying taxes while they are working. When they retire, withdrawals are taxed at their ordinary income tax rate, which is typically lower than when they are working.

There is an exception with Roth 401(k)s, where contributions are made with after-tax dollars and qualified withdrawals are tax free.

How the IRS taxes an inherited 401(k) depends on three factors:

  • The relationship between the account owner and the heir
  • The age of the heir
  • How old the account owner was at the time of death.

Who Pays Taxes on an inherited 401(k)?

The beneficiary who inherits the 40(k) is responsible for paying the tax. They are taxed at the heir’s ordinary income tax rate. This could push the heir into a higher tax bracket.

What Should I Do with an Inherited 401(k)?

If your spouse was the original owner, you may leave the money in the plan and take regular distributions, paying income tax on the withdrawals. You may also roll it over into your own 401(k) or to an IRA. This allows the money to continue to grow tax free, until withdrawals are taken.

Can I Avoid Taxes on an Inherited 401(k)?

The only way to avoid taxes on inherited 401(k) would be to disclaim the inheritance, at which point the 401(k) would be passed to the contingent beneficiary. If you don’t need the money, don’t want the tax headaches, or would rather see it go to another family member, this is an option. Most people pay the taxes.

Planning For Taxes When Creating an Estate Plan

Talk with one of our experienced estate planning attorneys about your taxable assets and how to manage the tax liabilities to your heirs. There are numerous tools to address these and related issues. Your heirs will be grateful for your foresight and care.

Reference: The Madison Leader Gazette (July 29, 2022) “How Much 401(k) Inheritance Taxes Will Really Cost You”

 

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

What’s the Most Important Step in Farm Succession? – Annapolis and Towson Estate Planning

There are countless horror stories about grandchildren in tears, as they watch family farmland auctioned off because their grandparents had to liquidate assets to satisfy the taxes.

Another tale is siblings who were once in business together and now do not talk to each other after one felt slighted because they did not receive the family’s antique tractor.

Ag Web’s recent article entitled “Who Gets What? Take This Important Estate Planning Step” says that no matter where you are in the process, you can always take another step.

First, decide what you are going to do with your assets. Each farmer operating today needs to be considering what happens, if he or she passes away tonight. Think about what would happen to your spouse or your children, and who will manage the operation.

The asset part is important because you can assign heirs to each or a plan to sell them. From a management perspective, farmers should then reflect on the wishes of your potential heirs.

Children who grew up on the farm will no longer have an interest in it. That is because they are successful in business in the city, or they just do not have an interest or the management ability to continue the operation.

After a farmer takes an honest assessment, he or she can look at several options, such as renting out the farmland or enlisting the service of a farmland management company.

Just remember to work out that first decision: What happens to the farm if I am dead?

Once you work with an experienced estate planning attorney to create this basic framework, make a habit of reviewing it regularly.

You should, at a minimum, review the plan every two to three years and make changes based on tax or circumstance changes.

Reference: Ag Web (August 1, 2022) “Who Gets What? Take This Important Estate Planning Step”

 

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

Pay Attention to Income Tax when Creating Estate Plans – Annapolis and Towson Estate Planning

While estate taxes may only be of concern for mega-rich Americans now, in a relatively short time, the federal exemption rate is scheduled to drop precipitously. Estate planning underway now should include consideration of income tax issues, especially basis, according to a recent article titled “Be Mindful of Income Tax in Estate Planning, Particularly Basis” from National Law Journal.

Because of these upcoming changes, plans and trusts put into effect under current law may no longer efficiently work for income tax and tax basis issues.

Planning to avoid taxes has become less critical in recent years, when the federal estate tax exemption is $10 million per taxpayer indexed to inflation. However, the new tax laws have changed the focus from estate tax planning to coming tax planning and more specifically, to “basis” planning. Ignore this at your peril—or your heirs may inherit a tax disaster.

“Basis” is an often-misunderstood concept used to determine the amount of taxable income resulting when an asset is sold. The amount of taxable income realized is equal to the difference between the value you received at the sale of the asset minus your basis in the asset.

There are three key rules for how basis is determined:

Purchased assets: the buyer’s basis is the investment in the asset—the amount paid at the time of purchase. Here is where the term “cost basis” comes from.

Gifts: The recipient’s basis in the gift property is generally equal to the donor’s basis in the property. The giver’s basis is viewed as carrying over to the recipient. This is where the term “carry over basis” comes from, when referring to the basis of an asset received by gift.

Inherited Assets: The basis in inherited property is usually set to the fair market value of the asset on the date of the decedent’s death. Any gains or losses after this date are not realized. The heir could conceivably sell the asset immediately and not pay income taxes on the sale.

The adjustment to basis for inherited assets is usually called “stepped up basis.”

Basis planning requires you to review each asset on its own, to consider the expected future appreciation of the asset and anticipated timeline for disposing the asset. Tax rates imposed on income realized when an asset is sold vary based on the type of asset. There is an easy one-size-fits-all rule when it comes to basis planning.

Estate planning requires adjustments over time, especially in light of tax law changes. Speak with your estate planning attorney, if your estate plan was created more than five years ago. Many of those strategies and tools may or may not work in light of the current and near-future tax environment.

Reference: National Law Review (July 22, 2022) “Be Mindful of Income Tax in Estate Planning, Particularly Basis”

 

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