What are Biggest Mistakes in Estate Planning? – Annapolis and Towson Estate Planning

Bankrate’s recent article entitled “Estate planning checklist: 3 key steps to making a successful plan” talks about five things to watch out for with an estate plan. Therefore, as you are making your estate plan, carefully consider everything, and that means it may take some time to complete your plan.  Let us look at five things to watch out for in that process:

  1. Plan your estate now. Of course, it is not just the old and infirm who need an estate plan. Everyone needs a last will so that their last wishes are respected, knowing that the unexpected can happen at any time.
  2. Say who will take care of your minor children. While last wills may typically focus on what happens to your financial assets, you will also want to specify what happens to any minor children on your passing, namely who takes care of them. If you have underage children, you must state who would be a guardian for that child and where that child will live. Without a last will, a judge will decide who will take care of your children. That could be a family member or a state-appointed guardian.
  3. 3. Ask executors if they are willing and able to take on the task. An executor carries out the instructions in your last will. This may be a complicated and time-consuming task. It involves distributing money in accordance with the stipulations of the document and ensuring that the estate is moved properly through the legal system. Make sure you designate an executor who is up to the task. That means you will need to speak with them and make certain that he or she is willing and able to act.
  4. Consider if you want to leave it all to your children. Many young families simply give all their assets to their children when they die. However, if the parents pass away when the children are young, and they do not establish a trust, they have access to all of the money when they reach the age of majority. This could be a great sum of money for a young adult to inherit with no rules on how to use it.
  5. Keep your estate plan up to date. You should review your estate plan regularly, at least every five years to be sure that everything is still how you intend it and that tax laws have not changed in the interim. Your plan could be vastly out of date, depending on changes since you first drafted it.

Estate planning can be a process where you demonstrate to your friends and family how much you care about them and how you have remembered them with certain assets or property.

It is a way to ensure that your loved ones do not have months of work trying to handle your estate.

Reference: Bankrate (July 23, 2021) “Estate planning checklist: 3 key steps to making a successful plan”

 

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Checklist for Estate Plan’s Success – Annapolis and Towson Estate Planning

We know why estate planning for your assets, family and legacy falls through the cracks.  It is not the thing a new parent wants to think about while cuddling a newborn, or a grandparent wants to think about as they prepare for a family get-together. However, this is an important thing to take care of, advises a recent article from Kiplinger titled “2021 Estate Planning Checkup: Is Your Estate Plan Up to Date?

Every four years, or every time a trigger event occurs—birth, death, marriage, divorce, relocation—the estate plan needs to be reviewed. Reviewing an estate plan is a relatively straightforward matter and neglecting it could lead to undoing strategic tax plans and unnecessary costs.

Moving to a new state? Estate laws are different from state to state, so what works in one state may not be considered valid in another. You will also want to update your address, and make sure that family and advisors know where your last will can be found in your new home.

Changes in the law. The last five years have seen an inordinate number of changes to laws that impact retirement accounts and taxes. One big example is the SECURE Act, which eliminated the Stretch IRA, requiring heirs to empty inherited IRA accounts in ten years, instead of over their lifetimes. A strategy that worked great a few years ago no longer works. However, there are other means of protecting your heirs and retirement accounts.

Do you have a Power of Attorney? A Power of Attorney (“POA”) gives a person you authorize the ability to manage your financial, business, personal and legal affairs, if you become incapacitated. If the POA is old, a bank or investment company may balk at allowing your representative to act on your behalf. If you have one, make sure it is up to date and the person you named is still the person you want. If you need to make a change, it is very important that you put it in writing and notify the proper parties.

Health Care Power of Attorney needs to be updated as well. Marriage does not automatically authorize your spouse to speak with doctors, obtain medical records or make medical decisions on your behalf. If you have strong opinions about what procedures you do and do not want, the Health Care POA can document your wishes.

Last Will and Testament is Essential. Your last will needs regular review throughout your lifetime. Has the person you named as an executor four years ago remained in your life, or moved to another state? A last will also names an executor for your property and a guardian for minor children. It also needs to have trust provisions to pay for your children’s upbringing and to protect their inheritance.

Speaking of Trusts. If your estate plan includes trusts, review trustee and successor appointments to be sure they are still appropriate. You should also check on estate and inheritance taxes to ensure that the estate will be able to cover these costs. If you have an irrevocable trust, confirm that the trustee is still ready and able to carry out the duties, including administration, management and tax returns.

Gifting in the Estate Plan. Laws concerning charitable giving also change, so be sure your gifting strategies are still appropriate for your estate. An estate plan review is also a good time to review the organizations you wish to support.

Reference: Kiplinger (July 28, 2021) “2021 Estate Planning Checkup: Is Your Estate Plan Up to Date?

 

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Does a Married Couple without Children Need a Will? – Annapolis and Towson Estate Planning

While estate planning for couples with no children seems like it would be very simple, the opposite is almost always the case, according to this informative article titled “Three keys to estate planning for couples without children” from The News-Enterprise.

If there is no last will, intestate succession laws dictate who will receive property.

There are three relatively simple ways for couples to be sure their wishes will be followed, and property distributed as they want.

A secondary level of beneficiaries. Couples do not always die at the same time, although it does happen. For the most part, upon one spouse’s death, assets owned together, including Payable on Death, or POD accounts, remain in the possession of the surviving spouse. If all of the assets are owned jointly, the surviving spouse may be able to avoid probate altogether. However, they should check with an estate planning attorney to be sure their state will accept this.

There should be provisions in the last will, in case of a simultaneous death. This lets the more important provisions focus on the beneficiaries. While property may pass easily outside of probate to the survivor, the same will not be true if property is to pass to beneficiaries. The estate will go through probate.

If at all possible, couples should have the same designated beneficiaries. If the couple intends to leave everything to the surviving spouse, they will need to decide who will receive joint property after both have died.

Last wills for each spouse must be created to work together. Designating separate lists of beneficiaries in each spouse’s last will and testament ultimately results in the marital property being left only to one spouse’s loved ones. The result: the other spouse’s family can end up being disinherited.

One way to address this is to create marital shares of property. Couples generally divide marital property in equal shares, although couples in blended families may choose to use a different fractional share.

For each fractional share, each spouse should write out their own list of beneficiaries, being sure that the total ends up being 100%.

Another point to be determined: will survivors within the group receive a larger share pro rata, or will children of the deceased beneficiaries receive their shares? This needs to be clarified when the estate plan is created to avoid potential problems for beneficiaries.

Beneficiaries could potentially be changed after the death of the first spouse, so if the couple wants to prevent anyone from being disinherited, they can use a revocable living trust. This can lock up the deceased spouse’s shares in a manner to allow the property to remain available for the survivor, but the survivor cannot change beneficiaries for the deceased spouse’s share.

Estate planning for couples with no children can have its own pitfalls, so consult with an experienced estate planning attorney, who will know how to protect all members of the family.

Reference: The News-Enterprise (July 27, 2021) “Three keys to estate planning for couples without children”

 

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Do You Pay Income Tax when You Sell Inherited Property? – Annapolis and Towson Estate Planning

From the description above, it is clear the family had a plan for their land. However, from the question posed in a recent article titled “I inherited land that recently sold. What will I owe in taxes?” from The Washington Post, it is clear the plan ended with the sale of the property.

For an heir who is expecting to receive a share of the proceeds, as directed in the mother’s last will, the question of taxes is a good one. What value of the land is used to determine the heir’s tax liability?

The good news: when the great grandfather died, the land passed to the mother and her siblings. To keep this example simple, let’s assume the great-grandfather’s estate was well under the federal estate tax limits of his time and there were no federal estate taxes due.

Next, the mother and her siblings inherit the land. When a person inherits an asset, they usually inherit both the asset and the step-up in the value of the asset at the time of the person’s death. If the great-grandfather bought the land for $10,000 and when he died the land was worth $100,000, the mother and her siblings inherited it at that value.

When the uncles sold the land after the death of their sister, the mother, her heirs inherited her interest in the land. If the person asking about taxes is an only child and an only beneficiary, then he should receive his mother’s one-third share of the land or one-third share in the proceeds. With the stepped-up basis rules, the son inherits the land at its value at the time of the mother’s death.

Assuming the land was worth $300,000 at the time of her death, the son’s share of the land would be worth $100,000. That is his cost or basis in the land. If he sold the land around the time she died or up to a year after her death, receiving his share of $100,000, he would not have any federal income or capital gains to pay.

If the family sold the land for $390,000 recently, the son’s basis in the land is $100,000 and his sales proceeds would be $130,000, or a $30,000 profit. He would be responsible for paying taxes on the $30,000.

If the land was sold within a year of the mother’s death, there would be no tax to pay. However, after one year, any profit is taxed at the capital gains rate.

There will also be state taxes due on the profit and there is an additional 3.8 percent tax on the sale of investment property. If the son used the home on the land as a primary residence, there would not be an investment property sales tax.

In this kind of situation where there are multiple heirs, it is best to consult with an estate planning attorney to ensure that the transaction and taxes are handled correctly.

Reference: The Washington Post (July 26, 2021) “I inherited land that recently sold. What will I owe in taxes?”

 

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Aging Parents and Blended Families Create Estate Planning Challenges – Annapolis and Towson Estate Planning

Law school teaches about estate planning and inheritance, but experience teaches about family dynamics, especially when it comes to blended families with aging parents and step-siblings. Not recognizing the realities of step-sibling relationships can put an estate plan at risk, advises the article “Could Your Aging Parents’ Estate Plan Create A Nightmare For Step-Siblings?” from Forbes. The estate plan has to be designed with realistic family dynamics in mind.

Trouble often begins when one parent loses the ability to make decisions. That is when trusts are reviewed for language addressing what should happen, if one of the trustees becomes incapacitated. This also occurs in powers of attorney, health care directives and wills. If the elderly person has been married more than once and there are step-siblings, it is important to have candid discussions. Putting all of the adult children into the mix because the parents want them to have equal involvement could be a recipe for disaster.

Here is an example: a father develops dementia at age 86 and can no longer care for himself. His younger wife has become abusive and neglectful, so much so that she has to be removed from the home. The father has two children from a prior marriage and the wife has one from a first marriage. The step-siblings have only met a few times, and do not know each other. The father’s trust listed all three children as successors, and the same for the healthcare directive. When the wife is removed from the home, the battle begins.

The same thing can occur with a nuclear family but is more likely to occur with blended families. Here are some steps adult children can take to protect the whole family:

While parents are still competent, ask who they would want to take over, if they became disabled and cannot manage their finances. If it is multiple children and they do not get along, address the issue and create the necessary documents with an estate planning attorney.

Plan for the possibility that one or both parents may lose the ability to make decisions about money and health in the future.

If possible, review all the legal documents, so you have a complete understanding of what is going to happen in the case of incapacity or death. What are the directions in the trust, and who are the successor trustees? Who will have to take on these tasks, and how will they be accomplished?

If there are any questions, a family meeting with the estate planning attorney is in order. Most experienced estate planning attorneys have seen just about every situation you can imagine and many that you cannot. They should be able to give your family guidance, even connecting you with a social worker who has experience in blended families, if the problems seem unresolvable.

Reference: Forbes (June 28, 2021) “Could Your Aging Parents’ Estate Plan Create A Nightmare For Step-Siblings?”

 

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What are Top ‘To-Dos’ in Estate Planning? – Annapolis and Towson Estate Planning

Spotlight News’ recent article entitled “Estate Planning To-Dos” says that with the potential for substantial changes to estate and gift tax rules under the Biden administration, this may be an opportune time to create or review our estate plan. If you are not sure where to begin, look at these to-dos for an estate plan.

See an experienced estate planning attorney to discuss your plans. The biggest estate planning mistake is having no plan whatsoever. The top triggers for estate planning conversations can be life-altering events, such as a car accident or health crisis. If you already have a plan in place, visit your estate planning attorney and keep it up to date with the changes in your life.

Draft financial and healthcare powers of attorney. Estate plans contain multiple pieces that may overlap, including long-term care plans and powers of attorney. These say who has decision-making power in the event of a medical emergency.

Draft a healthcare directive. Living wills and other advance directives are written to provide legal instructions describing your preferences for medical care, if you are unable to make decisions for yourself. Advance care planning is a process that includes quality of life decisions and palliative and hospice care.

Make a will. A will is one of the foundational aspects of estate planning, However, this is frequently the only thing people do when estate planning. A huge misconception about estate planning is that a will can oversee the distribution of all assets. A will is a necessity, but you should think about estate plans holistically—as more than just a will. For example, a modern aspect of financial planning that can be overlooked in wills and estate plans is digital assets.  It is also recommended that you ask an experienced estate planning attorney about whether a trust fits into your circumstances, and to help you with the other parts of a complete estate plan.

Review beneficiary designations. Retirement plans, life insurance, pensions and annuities are independent of the will and require beneficiary designations. One of the biggest estate planning mistakes is having outdated beneficiary designations, which only supports the need to review estate plans and designated beneficiaries with an experienced estate planning attorney on a regular basis.

Reference: Spotlight News (May 19, 2021) “Estate Planning To-Dos”

 

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Do QTIP Trusts Help avoid Estate Taxes? – Annapolis and Towson Estate Planning

Using a QTIP trust allows one spouse to create a trust to benefit the surviving spouse, while providing the surviving spouse with up to nine months to decide how to treat the gift for tax purposes, explains a recent article “How Certain Trusts Soften The Blow Of Estate Tax Increases” from Financial Advisor. This flexibility is just one reason for this trust’s popularity. However, while the QTIP election can be made on the 2021 gift tax return, which is filed in 2022, the choice as to how much of the transfer will be subject to tax can be made in 2022.

The current estate and gift tax exemption of $11.7 per individual is slated to sunset in 2025, but the current legislative mood may curtail that legislation sooner. Right now, flexibility is paramount.

The surviving spouse is named as the primary beneficiary of the trust and must be the only beneficiary of the trust during the lifetime of the surviving spouse, in terms of both receiving income or principal from the trust.

If the decision is made to treat the trust as a QTIP trust, a gift to the trust is eligible for the marital deduction and is not taxable. It does not use up any of the donor’s gift tax exclusion. That flexibility to make a transfer today and decide later whether it uses any lifetime exemption is something most people don’t know about. A QTIP can also protect the recipient spouse and the principal from any creditors.

There are conditions and limitations to this strategy. If the QTIP election is not made, all net trust income must be distributed to the beneficiary spouse. There is also no flexibility for the trust income to be accumulated or distributed directly to descendants.

The property over which the QTIP election is made is included in the estate of the surviving spouse.

The election can be made over the entire asset or only a portion of the asset transferred to the trust. The option to apply only a portion of the transfer makes it more tax efficient. For generation skipping-trust purposes, an election can be made to use the transferor spouse’s GST exemption when the decision about the QTIP election is made.

QTIPs are not the solution for everyone, but they may be the best option for many people while the people in Washington, D.C. determine the immediate future of the estate tax.

There are many Americans who are moving forward with making gifts using the current gift tax exclusion, using spousal lifetime access trusts (SLATs). However, the QTIP elections remain a way to hedge against the risk of being on the hook for a substantial gift tax, if there is a reduction in the federal estate tax exemptions.

Speak with an estate planning attorney to learn if a QTIP or another type of trust is appropriate for you. Note that these are complex planning strategies, and they must work in tandem with the rest of your estate plan.

Reference: Financial Advisor (May 24, 2021) “How Certain Trusts Soften The Blow Of Estate Tax Increases”

 

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Your Will and Estate Planning Checklist – Annapolis and Towson Estate Planning

Dying without a Last Will and Testament creates additional costs and eliminates any chance your wishes for loved ones will be followed after your death. Typically, people think about Wills when they marry or have children, and then do not think about Wills or estate plans until they retire. While a Will is important, there are other estate planning documents that are just as important, says the recent article “10 Steps to Writing a Will” from U.S. News & World Report.

Most assets, including retirement accounts and insurance policy proceeds, can be transferred to heirs outside of a Will, if they have designated beneficiaries. However, the outcome of an estate may be more impacted by Power of Attorney for financial matters and Medical Power of Attorney documents.

Here are ten specific tasks that need to be completed for your Will to be effective. Remember, if the Will does not comply with your state’s estate law, it can be declared invalid.

  1. Find an estate planning attorney who is experienced with the laws of your state.
  2. Select beneficiaries for your Will.
  3. Check beneficiaries on non-probate assets to make sure they are current.
  4. Decide who will be the executor of your Will.
  5. Name a guardian for minor children, if yours are still young.
  6. Make a letter describing possessions and who you want to receive them. Be very specific.

There are also tasks for your own care while you are living, in case of incapacity:

  1. Name a person for the Power of Attorney role. They will be your representative for legal and financial matters, but only while you are living.
  2. Name a person for the Medical Power of Attorney to make decisions on your behalf, if you cannot.
  3. Create an Advance Directive, also known as a Living Will, to explain your wishes for medical care, particularly concerning end-of-life care.
  4. Discuss these roles and their responsibilities with the people you have chosen, and make sure they are willing to serve.

Be realistic about the people you are naming to receive your property. If you have a child who is not good with managing money, a trust can be set up to distribute assets according to your wishes: by age or accomplishments, like finishing college, going to rehab, or maintaining a steady work history.

Do not forget to tell family members where they can find your Will and other estate documents. You should also talk with them about your digital assets. If accounts are protected by passwords or facial recognition, find out if the digital platform has a process for your executor to legally obtain access to your digital assets.

Finally, do not neglect updating your Will every three to four years or anytime you have a major life event. An estate plan is like a house: it needs regular maintenance. Old Wills can disinherit family members or lead to the wrong person being in charge of your estate. An experienced estate planning attorney will make the process easier and straightforward for you and your loved ones.

Reference: U.S. News & World Report (May 13, 2021) “10 Steps to Writing a Will”

 

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A Trust can Protect Inheritance from Relatives – Annapolis and Towson Estate Planning Attorneys

It is always exciting to watch adult children build their lives and select spouses.  However, even if we adore the person they love, it is wise to prepare to protect our children, says a recent article titled “Worried about Your Child’s Inheritance If They Divorce? A Trust Can Be Your Answer” from Kiplinger.

After all, why would you want the assets and money that you accumulated over a lifetime to pass to any ex-spouse, if a divorce happens?

With the current federal estate tax exemptions still historically high (although that may change in the near future), setting up a trust to protect wealth from federal estate taxes is not the driving force in many estate plans. The bigger concern is how well your children will do, if and when they receive their inheritance.

Some people recognize that their children are simply not up to the task. They worry about potential divorces, or a spendthrift spouse. The answer is estate planning in general, and more specifically, a well-designed trust. By establishing a trust as part of an estate plan, these assets can be protected.

If an adult child receives an inheritance and commingles it with assets owned jointly with their spouse—like a joint bank account—depending upon the state where they live, the inheritance may become a marital asset and subject to marital property division, if the couple divorces.

If the inheritance remains in a trust account, or if the trust funds are used to pay for assets that are only owned in the child’s name, the inherited wealth can be protected. This permits the child to have assets as a financial cushion, if a divorce should happen.

Placing an inheritance in a trust is often done after a first divorce, when the family learns the hard way how combined assets are treated. Wiser still is to have a trust created when the child marries. In that way, there is less of a learning curve (not to mention more assets to preserve).

Here are three typical situations:

Minor children. Children who are 18 or younger cannot inherit assets. However, when they reach the age of majority, they can. A sudden and large inheritance is best placed in the hands of a Trustee, who can guide them to make smart decisions and has the ability to deny requests that may seem entirely reasonable to an 18-year-old, but ridiculous to a more mature adult.

Newlyweds. Most couples are divinely happy in the early years of a marriage. However, when life becomes more complicated, as it inevitably does, the marriage may be tested and might not work out. Setting up a trust after the couple has been together for five or ten years is an option.

Marriage moves into the middle years. After five or ten years, it is likely you will have a clearer understanding of your child’s spouse and how their marriage is faring. If you have any doubts, talk with an estate planning attorney, and set up a trust for your child.

Estate plans should be reviewed every four or five years, as circumstances, relationships and tax laws change. A periodic review with your estate planning attorney allows you to ensure that your estate plan reflects your wishes.

Reference: Kiplinger (April 16, 2021) “Worried about Your Child’s Inheritance If They Divorce? A Trust Can Be Your Answer”

 

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I am Concerned That My Son-in-Law will get My Estate – Annapolis and Towson Estate Planning

A frequent question people have when updating their wills with an experienced estate planning attorney, is whether they still need a trust for an adult child.  The child has graduated college, is on her second well-paying job, is married and has children of her own.  The child is a responsible young adult.  However, an issue may arise with the adult child’s spouse and the potential for divorce.

Kiplinger’s recent article entitled “Worried about Your Child’s Inheritance If They Divorce? A Trust Can Be Your Answer” says that people do not want money they have worked hard for to be directed to their son’s or daughter’s ex-spouse, if a divorce occurs.

The current federal estate tax exemption in 2021 is $11.7 million per person or $23.4 million for married couples, so creating a trust to save taxes upon death is not as big a factor as it used to be.  The larger question is how well we think our children will handle receiving a large sum of money.  Some parents want a trust because they worry about their adult child losing thousands of dollars of their inheritance as a result of a failed marriage.  By creating a trust as part of their estate plan, these parents can help protect their child’s assets in a divorce settlement.

In many situations, if a child receives an inheritance and combines it with assets they own jointly with their spouse, like a bank account, car or house, depending on where they live, the inheritance may become subject to marital property division, if the adult child and spouse later divorce.  However, if the child’s inheritance is in a trust account, or they use trust funds to pay for assets only in their name, the inherited wealth can further be protected from a divorce.

Trusts can be complicated and require more administrative work and costs, which may cost more than just leaving assets outright to your children.  This is worth it for those who want to protect their child’s wealth.  If your child is under 18, you are not thinking about divorce, but because of their youth, leaving assets in trust for them is often a good idea.  A trustee will oversee the child’s assets and will be able to guide them to make sound decisions with any inherited funds.  If your child is newly married, rather than creating a trust right after your child’s marriage, see how the marriage goes over the next five to 10 years.  Then ask yourself how comfortable you are with your child’s relationship and how you feel about your son-in-law or daughter-in-law.

Consider your estate plan as a five-year plan.  Review your will, trust and other estate planning documents every five years.  This can help you carefully evaluate relationships, finances and the emotional dynamics of your family.  An experienced estate planning attorney can also adjust or cancel the trust during your life, as your family situation changes.

Reference: Kiplinger (April 16, 2021) “Worried about Your Child’s Inheritance If They Divorce? A Trust Can Be Your Answer”

 

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