Do Heirs Have to Pay Debts from an Estate? – Annapolis and Towson Estate Planning

Part of estate planning is considering how future repayment of debts, both owed to the person and debts they are responsible for, will impact inheritances received by beneficiaries. A recent article from Lake County News, “Estate Planning: Debts and Estate Planning,” explains how the process works.

Assets passing to a beneficiary directly, outside of probate, are not typically subject to paying a decedent’s debts. These are life insurance proceeds, joint tenancy assets, Payable on Death (POD) and Transfer on Death (TOD), to name a few.

The estate plan must consider how much debt exists and how it might be paid. One approach is to purchase life insurance made payable to the trust estate.

A person may specifically gift real property, which would be subject to repaying an outstanding debt, like a mortgage.

If the beneficiary who would otherwise receive the residence takes it subject to repaying the secured debt, other assets in the estate would need to be reduced to pay the debt.

This should be addressed when the estate plan is created and must be expressly documented. If not addressed, the default rule is that any secured debt goes with the gift. It’s not likely to have been the plan. However, this is how the law works.

Third, parents and children may loan money between themselves. This is usually between parent and child.

Such family debts merit attention during estate planning. For example, parents may wish to loan money to a child to pay higher education costs, to buy a home, or to launch a business.

Upon the death of the parent, should any unpaid balance be repaid by the child to the parent’s estate, or should the child’s debt be forgiven? This must also be clearly stated in the will or trust, whatever is relevant.

If the parent wishes the child to pay the unpaid balance, the debt obligation and its payment history must be in writing and updated. The debt may be assigned to the parent’s trust and enforced by the successor trustee.

At death, the unpaid balance would need to be added back into the estate’s value to arrive at the correct gross value necessary to assess each share of the total estate.

The unpaid balance is usually subtracted from the debtor’s share.

Children might also be owed money from a parent. For example, the adult child might provide at-home personal care services to their parent, or money may be lent to help with the parent’s cost of living. The debt and repayment history also needs to be in writing and updated regularly.

Debt must be acknowledged, and the means of repaying the debt must be made clear. An estate planning attorney will help document and build repayment into the estate plan.

Contact us to review your estate plan with one of our experienced estate planning attorneys.

Reference: Lake Country News (April 29, 2023) “Estate Planning: Debts and Estate Planning”

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Do Joint Accounts With Rights of Survivorship Work?- Annapolis & Towson Estate Planning

A common request from seniors is to add their children to their bank accounts, in case something unexpected should occur. Their goal is admirable—to give their children access to funds in case of an emergency, says a recent article from Kiplinger, “Joint Account With Rights of Survivorship and Alternatives Explained.” However, making a child joint owner of a bank account, investment account or even a safe deposit box, can have unintended consequences.

Most couple’s bank accounts are set up by default as “Joint With Rights of Survivorship” or JWROS, automatically. Assets transfer to the surviving owner upon the death of the first spouse. This can lead to several problems. If the intent was for remaining assets not spent during a crisis to be distributed via the terms of a will, this will not happen. The assets will transfer to the surviving owner, regardless of directions in the will.

Adding anyone other than a spouse could also trigger a federal gift tax issue. For example, in 2023, anyone can gift up to $17,000 per year tax-free to anyone they want. However, if the gift exceeds $17,000 and the beneficiary is not a spouse, the recipient may need to file a gift tax return.

If a parent adds a child to a savings account and the child predeceases the parent, a portion of the account value could be includable in the child’s estate for state inheritance/estate tax purposes. The assets would transfer back to the parents, and depending upon the deceased’s state of residence, the estate could be levied on as much as 50% or more of the account value.

There are alternatives if the goal of adding a joint owner to an account is to give them access to assets upon death. For example, most financial institutions allow accounts to be structured as “Transfer on Death” or TOD. This adds beneficiaries to the account with several benefits.

Nothing happens with a TOD if the beneficiary dies before the account owner. The potential for state inheritance tax on any portion of the account value is avoided.

When the account owner dies, the beneficiary needs only to supply a death certificate to gain access to the account. Because assets transfer to a named beneficiary, the account is not part of the probate estate, since named beneficiaries always supersede a will.

Setting up an account as a TOD doesn’t give any access to the beneficiary until the death of the owner. This avoids the transfer of assets being considered a gift, eliminating the potential federal gift tax issue.

Planning for incapacity includes more than TOD accounts. All adults should have a Financial Power of Attorney, which allows one or more individuals to perform financial transactions on their behalf in case of incapacity. This is a better alternative than retitling accounts.

Retirement accounts cannot have any joint ownership. This includes IRAs, 401(k)s, annuities, and similar accounts.

Power of attorney documents should be prepared to suit each individual situation. In some cases, parents want adult children to be able to make real estate decisions and access financial accounts. Others only want children to manage money and not get involved in the sale of their home while they are incapacitated. A custom-designed Power of Attorney allows as much or as little control as desired.

Your estate planning attorney can help you plan for incapacity and for passing assets upon your passing. Ideally, it will be a long time before anything unexpected occurs. However, it’s best to plan proactively.’

Contact us to review your estate plan with one of our experienced estate planning attorneys.

Reference: Kiplinger (March 30, 2023) “Joint Account With Rights of Survivorship and Alternatives Explained”

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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”

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How Can I Minimize My Probate Estate? – Annapolis and Towson Estate Planning

Having a properly prepared estate plan is especially important if you have minor children who would need a guardian, are part of a blended family, are unmarried in a committed relationship or have complicated family dynamics—especially those with drama. There are things you can do to protect yourself and your loved ones, as described in the article “Try these steps to minimize your probate estate” from the Indianapolis Business Journal.

Probate is the process through which debts are paid and assets are divided after a person passes away. There will be probate of an estate whether or not a will and estate plan was done, but with no careful planning, there will be added emotional strain, costs and challenges left to your family.

Dying with no will, known as “intestacy,” means the state’s laws will determine who inherits your possessions subject to probate. Depending on where you live, your spouse could inherit everything, or half of everything, with the rest equally divided among your children. If you have no children and no spouse, your parents may inherit everything. If you have no children, spouse or living parents, the next of kin might be your heir. An estate planning attorney can make sure your will directs the distribution of your property.

Probate is the process of giving someone you designate in your will—the executor—the authority to inventory your assets, pay debts and taxes and eventually transfer assets to heirs. In an estate, there are two types of assets—probate and non-probate. Only assets subject to the probate process need go through probate. All other assets pass directly to new owners, without involvement of the court or becoming part of the public record.

Many people embark on estate planning to avoid having their assets pass through probate. This may be because they don’t want anyone to know what they own, they don’t want creditors or estranged family members to know what they own, or they simply want to enhance their privacy. An estate plan is used to take assets out of the estate and place them under ownership to retain privacy.

Some of the ways to remove assets from the probate process are:

Living trusts. Assets are moved into the trust, which means the title of ownership must change. There are pros and cons to using a living trust, which your estate planning attorney can review with you.

Beneficiary designations. Retirement accounts, investment accounts and insurance policies are among the assets with a named beneficiary. These assets can go directly to beneficiaries upon your death. Make sure your named beneficiaries are current.

Payable on Death (POD) or Transferable on Death (TOD) accounts. It sounds like a simple solution to own many accounts and assets jointly. However, it has its own challenges. If you wished any of the assets in a POD or TOD account to go to anyone else but the co-owner, there’s no way to enforce your wishes.

Contact us to speak with one of our experienced estate planning attorneys.  An experienced, local estate planning attorney will be the best resource to prepare your estate for probate. If there is no estate plan, an administrator may be appointed by the court and the entire distribution of your assets will be done under court supervision. This takes longer and will include higher court costs.

Reference: Indianapolis Business Journal (Aug. 26,2022) “Try these steps to minimize your probate estate”

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

Estate Planning for Blended Families – Annapolis and Towson Estate Planning

Today, a blended family is more common than ever, with stepfamily members, half-siblings, former spouses, new spouses and every combination of parents, children and partners imaginable. Traditional estate planning, including wills and non-probate tools like transfer on death (TOD) documents, as valuable as they are, may not be enough for the blended family, advises a recent article titled “Legal-Ease: Hers, his and ours—blended family estate planning” from limaohio.com.

Not too long ago, when most people didn’t take advantage of the power of trusts, couples often went for estate plans with “mirror” wills, even those with children from prior marriages. Their wills basically said each spouse would leave the other spouse everything. This will would be accompanied by a contract stating neither would change their will for the rest of their lives. If there was a subsequent marriage after one spouse passed, this led to problems for the new couple, since the surviving spouse was legally bound not to change their will.

As an illustration, Bob has three children from his first marriage and Sue has two kids from her first marriage. They marry and have two children of their own. Their wills stipulate they’ll leave each other everything when the first one dies. There may have been some specific language about what would happen to the children from the first marriages, but just as likely this would not have been addressed.

It sounds practical enough, but in this situation, the children from the first spouse to die were at risk of being disinherited, unless plans were made for them to inherit from their biological parent.

Todays’ blended family benefits from the use of trusts, which are designed to protect each spouse, their children and any child or children they have together. There are a number of different kinds of trusts for use by spouses only to protect children and surviving spouses.

Trust law requires the trustee—the person who is in charge of administering the trust—to give a copy of the trust to each beneficiary. The trustee is also required to provide updates to beneficiaries about the assets in the trust.

A surviving spouse will most likely serve as the trustee when the first spouse passes and will have a legal responsibility to honor the shared wishes of the first spouse to pass.

If you would like to learn more about the many different types of spousal trusts, and which is best for your situation, contact us and schedule a time to speak with one of our experienced estate planning attorneys.

Reference: limaohio.com (Aug. 20, 2022) “Legal-Ease: Hers, his and ours—blended family estate planning”

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

Is Estate Planning Affected by Property in Two States? – Annapolis and Towson Estate Planning

Cleveland Jewish News’ recent article titled “Use attorney when considering multi-state estate plan says that if a person owns real estate or other tangible property (like a boat) in another state, they should think about creating a trust that can hold all their real estate. You do not need one for each state. You can assign or deed their property to the trust, no matter where the property is located.

Some inherited assets require taxes be paid by the inheritors. Those taxes are determined by the laws of the state in which the asset is located.

A big mistake that people frequently make is not creating a trust. When a person fails to do this, their assets will go to probate. Some other common errors include improperly titling the property in their trust or failing to fund the trust. When those things occur, ancillary probate is required.  This means a probate estate needs to be opened in the other state. As a result, there may be two probate estates going on in two different states, which can mean twice the work and expense, as well as twice the stress.

Having two estates going through probate simultaneously in two different states can delay the time it takes to close the probate estate.

There are some other options besides using a trust to avoid filing an ancillary estate. Most states let an estate holder file a “transfer on death affidavit,” also known as a “transfer on death deed” or “beneficiary deed” when the asset is real estate. This permits property to go directly to a beneficiary without needing to go through probate.

A real estate owner may also avoid probate by appointing a co-owner with survivorship rights on the deed. Do not attempt this without consulting an attorney.

If you have real estate, like a second home, in another state (and) you die owning that individually, you are going to have to probate that in the state where it is located. It is usually best to avoid probate in multiple jurisdictions, and also to avoid probate altogether.

A co-owner with survivorship is an option for avoiding probate. If there is no surviving spouse, or after the first one dies, you could transfer the estate to their revocable trust.

Each state has different requirements. If you are going to move to another state or have property in another state, you should consult with a local estate planning attorney.

Reference: Cleveland Jewish News (March 21, 2022) “Use attorney when considering multi-state estate plan”

 

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What a Will Won’t Accomplish – Annapolis and Towson Estate Planning

Everyone needs a will. A last will and testament is how an executor is named to manage your estate, how a guardian is named to care for any minor children and how you give directions for distribution of property. However, not all property passes via your will. You will want to know what a will can and cannot do, as well as how assets are distributed outside of a will. This was the topic of “The Legal Limits of Your Will” from AARP Magazine.

Retirement and Pension Accounts

The beneficiaries named on retirement accounts, including 401(k)s, pensions, and IRAs, receive these assets directly. Some states have laws about requiring spouses to receive some or all assets. However, if you do not keep these beneficiary names updated, the wrong person may receive the asset, like it or not. Do not expect anyone to willingly give up a surprise windfall. If a primary beneficiary has died and no contingency beneficiary was named, the recipient may also be determined by default terms, which may not be what you have in mind.

Life Insurance Policies.

The beneficiary designations on an insurance policy determine who will receive proceeds upon your death. Laws vary by state, so check with an estate planning attorney to learn what would happen if you died without updating life insurance policies. A simpler strategy is to create a list of all of your financial accounts, determine how they are distributed and update names as necessary.

Note there are exceptions to all rules. If your divorce agreement includes a provision naming your ex as the sole beneficiary, you may not have an option to make a change.

Financial Accounts

Adding another person to your bank account through various means—Payable on Death (POD), Transfer on Death (TOD), or Joint Tenancy with Right of Survivorship (JTWROS)—may generally override a will, but may not be acceptable for all accounts, or to all financial institutions. There are unanticipated consequences of transferring assets this way, including the simplest: once transferred, assets are immediately vulnerable to creditors, divorce proceedings, etc.

Trusts

Trusts are used in estate planning to remove assets from a personal estate and place them in safekeeping for beneficiaries. Once the assets are properly transferred into the trust, their distribution and use are defined by the trust document. The flexibility and variety of trusts makes this a key estate planning tool, regardless of the value of the assets in the estate.

Reference: AARP Magazine (Sep. 29, 2021) “The Legal Limits of Your Will”

 

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What is not Covered by a Will? – Annapolis and Towson Estate Planning

A Last Will and Testament is one part of a holistic estate plan used to direct the distribution of property after a person has died.  A recent article titled “What you can’t do with a will” from Ponte Vedra Recorder explains how Wills work, and the types of property not distributed through a Will.

Wills are used to inform the probate court regarding your choice of Guardians for any minor children and the Executor of your estate. Without a Will, both of those decisions will be made by the court.  It is better to make those decisions yourself and to make them legally binding with a will.

Lacking a Will, an estate will be distributed according to the laws of the state, which creates extra expenses and sometimes, leads to life-long fights between family members.

Property distributed through a Will necessarily must be processed through a probate, a formal process involving a court.  However, some assets do not pass through probate.  Here is how non-probate assets are distributed:

Jointly Held Property. When one of the “joint tenants” dies, their interest in the property ends and the other joint tenant owns the entire property.

Property in Trust. Assets owned by a trust pass to the beneficiaries under the terms of the trust, with the guidance of the Trustee.

Life Insurance. Proceeds from life insurance policies are distributed directly to the named beneficiaries.  Whatever a Will says about life insurance proceeds does not matter—the beneficiary designation is what controls this distribution, unless there is no beneficiary designated.

Retirement Accounts. IRAs, 401(k) and similar assets pass to named beneficiaries.  In most cases, under federal law, the surviving spouse is the automatic beneficiary of a 401(k), although there are always exceptions.  The owner of an IRA may name a preferred beneficiary.

Transfer on Death (TOD) Accounts. Some investment accounts have the ability to name a designated beneficiary who receives the assets upon the death of the original owner.  They transfer outside of probate.

Here are some things that should NOT be included in your Will:

Funeral instructions might not be read until days or even weeks after death. Create a separate letter of instructions and make sure family members know where it is.

Provisions for a special needs family member need to be made separately from a Will.  A special needs trust is used to ensure that the family member can inherit assets but does not become ineligible for government benefits.  Talk to an elder law estate planning attorney about how this is best handled.

Conditions on gifts should not be addressed in a will. Certain conditions are not permitted by law.  If you want to control how and when assets are distributed, you want to create a trust. The trust can set conditions, like reaching a certain age or being fully employed, etc., for a Trustee to release funds.

Reference: Ponte Vedra Recorder (April 15, 2021) “What you can’t do with a will”

 

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Can I Add Real Estate Investments in My Will? – Annapolis and Towson Estate Planning

Motley Fool’s recent article entitled “How to Include Real Estate Investments in Your Will” details some options that might make sense for you and your intended beneficiaries.

A living trust. A revocable living trust allows you to transfer any deeds into the trust’s name. While you are still living, you would be the trustee and be able to change the trust in whatever way you wanted. Trusts are a little more costly and time consuming to set up than wills, so you will need to hire an experienced estate planning attorney to help. Once it is done, the trust will let your trustee transfer any trust assets quickly and easily, while avoiding the probate process.

A beneficiary deed. This is also known as a “transfer-on-death deed.” It is a process that involves getting a second deed to each property that you own. The beneficiary deed will not impact your ownership of the property while you are alive, but it will let you to make a specific beneficiary designation for each property in your portfolio. After your death, the individual executing your estate plan will be able to transfer ownership of each asset to its designated beneficiary. However, not all states allow for this method of transferring ownership. Talk to an experienced estate planning attorney about the laws in your state.

Co-ownership. You can also pass along real estate assets without probate, if you co-own the property with your designated beneficiary. You would change the title for the property to list your beneficiary as a joint tenant with right of survivorship. The property will then automatically by law pass directly to your beneficiary when you die. Note that any intended beneficiaries will have an ownership interest in the property from the day you put them on the deed. This means that you will have to consult with them, if you want to sell the property.

Wills and estate plans can feel like a ghoulish topic that requires considerable effort. However, it is worth doing the work now to avoid having your estate go through the probate process once you die. The probate process can be expensive and lengthy. It is even more so, when real estate is involved.

Reference: Motley Fool (June 22, 2020) “How to Include Real Estate Investments in Your Will”

 

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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”

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