Should You have a GRAT? – Annapolis and Towson Estate Planning

Estate planning includes using various methods to reduce gift and estate taxes, as described in a recent article titled “Grantor Retained Annuity Trust Questions Answered” from Entrepreneur. GRATs are one type of irrevocable annuity trust used by estate planning attorneys to reduce taxes.

An annuity is a financial product, often sold by insurance companies, where you contribute funds or assets to an account, referred to as premiums. The trust distributes payments to a beneficiary on a regular basis. If you have a Grantor-Retained Annuity Trust (GRAT), the person establishing the trust is the Grantor, who receives the annuities from the trust.

The GRAT payments are typically made annually or near the anniversary of the funding date. However, they can be made any time within 105 days after the annuity date. Payments to the GRAT may not be made in advance, so consider your cash flow before determining how to fund a GRAT. For this to work, the grantor must receive assets equal in value to what they put into the GRAT. If the assets appreciate at a rate higher than the interest rate, it is a win. At the end of the GRAT term, all appreciation in the assets is gifted to the named remainder beneficiaries, with no gift or estate tax.

Here is a step-by-step look at how a GRAT is set up.

  • First, an individual transfers assets into an irrevocable trust for a certain amount of time. It is best if those assets have a high appreciation potential.
  • Two parts of the GRAT value are the annuity stream and the remainder interest. An estate planning attorney will know how to calculate these values.
  • Annuity payments are received by the grantor. The trust must produce a minimum return at least equal to the IRS Section 7520 interest rate, or the trust will use the principal to pay the annuity. In this case, the GRAT has failed, reverting the trust assets back to the grantor.
  • Once the final annuity payment is made, all remaining assets and asset growth are gifted to beneficiaries, if the GRAT returns meet the IRS Section 7520 interest rate requirements.

The best candidates for GRATS are those who face significant estate tax liabilities at death. An estate freeze can be achieved by shifting all or some of the appreciation to heirs through a GRAT.

A GRAT can also be used to permit an S-Corporation owner to preserve control of the business, while freezing the asset’s value and taking it out of the owner’s taxable estate. Caution is required here, because if the owner of the business dies during the term of the GRAT, the current stock value is returned to the owner’s estate and becomes taxable.

GRATs are most beneficial in transferring large amounts of money to beneficiaries, while paying little or no gift tax. A GRAT allows you to give a beneficiary more than $16,000 without triggering a gift tax, which is especially useful for wealthy individuals with healthy estates.

There are some downsides to GRATs. When the trust term is over, remaining assets become the property of the beneficiaries. Setting a term must be done mindfully. If you have a long-term GRAT of 20 years, it is more likely that you may experience serious health challenges as you age, and possibly die before the term is over. If the assets in the GRAT depreciate below the IRS’s assumed return rate, any benefits of the GRAT are lost.

Reference: Entrepreneur (March 17, 2022) “Grantor Retained Annuity Trust Questions Answered”

 

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Can I Plan My Estate to Avoid Leaving Residual Assets? – Annapolis and Towson Estate Planning

When looking into your estate plan, you see the term “residuary estate.” This is any part of your estate that has not been distributed to your heirs through a will. It is also called estate residue or residual estate. However, it simply means assets that are left over once your will has been read, the assets have been distributed to your heirs and any final expenses have been paid.

Proper estate planning can help you avoid leaving residual assets behind, says Yahoo Finance’s recent article entitled “Residuary Estate Definition and Example.” An experienced estate planning attorney can help you select a structure for your estate that accomplishes your objectives.

A will lets you state how you want your assets to be divided among your heirs when you pass away. However, it is possible that not all of your assets will make it into your will for some reason. Any assets that are not included in your will or distributed through a trust automatically becomes part of your residuary estate when you pass away.

Residual estates can be created without advance planning. For example, your heirs may be left to deal with a residuary estate if:

  • You neglected to include certain assets in your will;
  • You acquired new assets after drafting your will and failed to amend the document for the distribution of these assets; or
  • Someone you named in your will dies before you or is unable to receive their inheritance for some other reason.

Assets that are designed to have a named beneficiary but do not have one, can also be included in the residuary estate.

When a residuary estate exists, it can complicate the probate process for your family. Any unclaimed or otherwise overlooked assets would be distributed according to the state’s inheritance laws, after any estate taxes, outstanding debts or final expenses have been paid.

You should also know that it is possible to have a residuary beneficiary of a living trust. This person would receive any property or assets transferred to the trust that were not designated for specific beneficiaries. If you create a trust properly, there should be a provision for each beneficiary you want to be included and which assets they should receive. However, you could still run into issues if a named beneficiary dies, and you haven’t named anyone as a residuary beneficiary.

A residuary estate is something you may need to plan for when creating a will or trust. Fortunately, it is pretty easy to do so by including the proper wording in your will and trust documents. Ask an estate planning attorney to eliminate confusion and to plan your estate properly.

Reference: Yahoo Finance (Dec. 30, 2021) “Residuary Estate Definition and Example”

 

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What are the Current Gift Tax Limits? – Annapolis and Towson Estate Planning

The expanded estate and gift tax exemptions expire at the end of 2025, which is not as far away as it seemed in 2017. For 2021, the lifetime exemption for both gift and estate taxes was $11.7 million per individual, and in 2022, an inflation adjustment boosted it to $12.06 million per person. The increase is set to lapse in 2025, according to the article “Estate and Gift Taxes 2021—2022: What’s New This Year and What You Need to Know” from The Wall Street Journal.

However, in 2019 the Treasury Department and the IRS issued “grandfather” regulations to allow the increased exemption to apply to earlier gifts, if Congress reduces the exemption in the future.

Let’s say Josh gives assets of $11 million to a trust to benefit heirs in 2020. The transfer had no gift tax because it was under the $11.58 million for 2020. If Congress lowers the exemption to $5 million per person and Josh dies in 2023, when the lower exemption is in effect, as the law now stands, the estate will not owe tax on any portion of his gift to the trust, even if $6 million is above the $5 million lifetime limit in effect at the time of his death.

Current law also has investment assets held at the time of death exempt from capital gains tax, known as the “step up in basis.” If Robin dies owning shares of stock worth $100 each, originally purchased for $5 each and held in a taxable account, the estate will not owe capital gains tax on the $95 growth of each share. The shares will go into Robin’s estate at their full market value of $100 each. Heirs who receive the shares have a cost basis of $100 as the starting point for measuring taxable gains or losses when they sell.

The annual gift tax exemption has risen to $16,000 per donor, per recipient, for 2022. A generous person can give someone else assets up to the limit every year, free of federal gift taxes. A married couple with two married children and six grandchildren could give away as much as $320,000 to their ten family members, plus $32,000 to other individuals, if they wished.

Annual gifts are not deductible for income tax purposes. They also do not count as income for the recipient. Gifts above the exclusion are subtracted from the giver’s lifetime gift and estate tax exemption. However, a married couple could use “gift splitting” to let one spouse make up to $32,000 of tax-free gifts per recipient on behalf of both partners. A gift tax return must be filed in this case to document the transaction for the IRS.

If the gift is not cash, the giver’s cost basis carries over to the recipient. If someone gives a family member a share of stock worth $1,000 originally acquired for $200, neither the giver nor the recipient owes tax on the gift. However, if the recipient sells, the starting point for measuring taxable gain will be $200. If the share is sold for $1,200, for instance, the recipient’s taxable gain would be $1,000.

For some families, “bunching” gifts for five years of annual $16,000 gifts to a 529 education account makes good sense. A gift tax return should also be filed in this case. Your estate planning attorney will be able to guide you in creating a gifting strategy to align with your estate plan and minimize taxes.

Reference: The Wall Street Journal (March 10, 2022) “Estate and Gift Taxes 2021—2022: What’s New This Year and What You Need to Know.”

 

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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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Taking Care of Dying Parent’s Financial Affairs Can Be Challenging – Annapolis and Towson Estate Planning

It is not uncommon for adult children to have to face a parent’s decline and a stay in hospice at the end of their life. The children are tasked with trying to prepare for his passing. This includes how to handle his financial matters.

Seniors Matter’s recent article entitled “How do I handle my father’s financial matters now that he’s in hospice?” says that caring for a sick family member is a challenging and emotional time. Because of this major task, it is easy to put financial considerations on the back burner. Nonetheless, it is important to address a few key issues.

If a family member is terminally ill or admitted to hospice – and you are able to do so – it may be a good idea to start by helping to take inventory of your family member’s assets and liabilities. A clear idea of where their assets are and what they have is a great starting point to help you prepare and be in a better position to manage the estate.

An inventory may include any and all of the following:

  • Real estate
  • Bank accounts
  • Cars, boats and other vehicles
  • Stocks and bonds
  • Life insurance
  • Retirement plans (such as a 401(k), a traditional IRA, a Roth IRA and a SEP IRA);
  • Wages and other income
  • Business interests
  • Intellectual property; and
  • Any debts, liabilities and judgments.

Next, find out what, if any, estate planning documents may be in place. This includes a will, powers of attorney, trusts, a healthcare directive and a living will. You will need to find copies.

This is hard to do while a loved on is dying, but it can make the aftermath easier and less stressful.

Reference: Seniors Matter (Feb. 22, 2022) “How do I handle my father’s financial matters now that he’s in hospice?”

 

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Can I Add Children’s Names to my House Deed? – Annapolis and Towson Estate Planning

There are many ways that this simple strategy can go very wrong, very quickly. If one of the joint owners is sued, or files for bankruptcy, the home is vulnerable, reports a recent article titled “Naming a child on your deed to avoid probate? Here’s why you may want to reconsider” from St George News.

That is just the beginning.

As any estate planning attorney will tell you, things change when significant assets are involved. Your son or his new wife may decide they do not want you to rent, sell or refinance your home. They have the power as co-owners to stop you from doing anything with the house. All they have to do is refuse to sign the paperwork.

If one child is on the deed and you and your spouse both die, the one child owns the house outright. If there are other siblings, no matter what your will says, the siblings have no legal right of ownership. Your other children will need to go to court and will likely not win.

If all of your children are named as joint tenants with you and your spouse on a deed, only the surviving children will own the home after the death of the surviving spouse. If one of your children predeceases, then the share belonging to any such sibling will disappear, and their children (your grandchildren) will not receive anything.

Naming multiple children as joint owners on a deed also opens you up to more exposure. Even if your children are model citizens, things happen, including divorces, auto accidents, bankruptcies and other unexpected events. Business owners who run into problems can spell disaster for a family-owned asset of any kind. The more siblings with ownership interests in the home, the more risk.

It gets even more complicated if you and a joint tenant child die in a common accident. Determining who died first will determine who is entitled to the home. If you live longer than your child, even by a few minutes, your estate may then own the home.

As is often the case, when people decide they have found a simple solution, complex problems follow. The lawsuits resulting from the situations described above are common, expensive and can cause families to break apart. Your estate planning attorney can explain how an estate plan, with proper ownership, possibly a trust and other legal strategies, will achieve the desired goals without putting the estate and the family’s relationships at risk.

Reference: St George News (Jan. 30, 2022) “Naming a child on your deed to avoid probate? Here’s why you may want to reconsider”

 

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Is Life insurance a Good Idea? – Annapolis and Towson Estate Planning

Nasdaq’s recent article entitled “Having a Child? Now Is the Time to Get Life Insurance” explains that parents usually want to make certain that their children are provided for — even in a worst-case scenario where that parent does not survive until the child’s adulthood. That is the big reason why it is so important to get life insurance when a child is born, if the parent does not have it already.

Parents must make sure they are as financially prepared as possible if they die suddenly, and purchasing term life insurance is frequently the best way to do that. A term life insurance policy is one in effect for a limited period of time, like 20 years or so. Parents can buy a policy that will cover their life for as long as they expect their child to be dependent on them for financial support.

Parents who get term life insurance can be sure there is money available to provide for a child into adulthood, as well as to cover that child’s education.

Term life insurance can be a cheaper way to obtain this type of protection than whole life insurance and is usually all that is necessary. This is because children eventually become financially independent after several decades. However, parents whose children are disabled and who will require lifelong care may wish to buy a whole life policy, so a death benefit will always be paid out.

When purchasing term life insurance to protect a child, parents should consider who to name as the beneficiary. Typically, naming the child directly can create some legal complications because children under the age of 18 cannot legally manage the life insurance proceeds — and giving a large lump sum of money to a child who is just 18 could create problems with wise money management.

It may be wise for the parent purchasing coverage to name the other parent of the child as the beneficiary of the death benefit. That parent can use the money to provide financial support. However, in instances where the person purchasing coverage does not necessarily trust the other parent to use it wisely, there are other approaches such as creating a trust, appointing a trustee to manage the funds on behalf of the child and naming the trust as the beneficiary.

Parents should speak with an experienced estate planning attorney, if they have a more complex situation.

Reference: Nasdaq (Dec. 12, 2021) “Having a Child? Now Is the Time to Get Life Insurance”

 

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What Is the HEMS Standard? – Annapolis and Towson Estate Planning

The HEMS standard is used to inform trustees as to how and when funds should be released to a beneficiary, according to a recent article from Yahoo! News, “What is the HEMS Standard in Estate Planning.” Using HEMS language in a trust gives the trustee more control over how assets are distributed and spent. If a beneficiary is young and not financial savvy, this becomes extremely important to protecting both the beneficiary and the assets in the trust. Your estate planning attorney can set up a trust to include this feature.

When a trust includes HEMS language, the assets may only be used for specific needs. Health, education or living expenses can include college tuition, mortgage, and rent payments, medical care and health insurance premiums.

Medical treatment may include eye exams, dental care, health insurance, prescription drugs and some elective procedures.

Education may include college housing, tuition, technology needed for college, studying abroad and career training.

Maintenance and Support includes reasonable comforts, like paying for a gym membership, vacations and gifts for family members.

The HEMS language provides guidance for the trustee. However, ultimately the trustee is vested with the discretionary power to decide whether the assets are being used according to the directions of the trust.

Sometimes beneficiary requests are straightforward, like college tuition or health insurance bills. However, maintenance and support need to be considered in the context of the family’s wealth. If the family and the beneficiary are used to a lifestyle that includes three or four luxurious vacations every year, a request for funds used for a ski trip to Spain may not be out of line. For another family and trust, this would be a ludicrous request.

Having HEMS language in the trust limits distribution. It has greater value, if the trustee is also a beneficiary, lessening the chances of the trust diminishing for non-essentials or to fund a lavish lifestyle.

Giving the trustee HEMS language narrows their discretionary authority enough to help them do a better job of managing assets and may limit challenges by beneficiaries.

HEMS language can be as broad or narrow as the grantor wishes. Just as a trust is crafted to meet the specific directions of the grantor for beneficiaries, the HEMS language can be created to establish a trust where the assets may only be used to pay for college tuition or career training.

Reference: Yahoo! News (Jan. 7, 2022) “What is the HEMS Standard in Estate Planning”

 

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Can I Restructure Assets to Qualify for Medicaid? – Annapolis and Towson Estate Planning

Some people believe that Medicaid is only for poor and low-income seniors. However, with proper and thoughtful estate planning and the help of an attorney who specializes in Medicaid planning, all but the very wealthiest people can often qualify for program benefits.

Kiplinger’s recent article entitled “How to Restructure Your Assets to Qualify for Medicaid says that unlike Medicare, Medicaid is not a federally run program. Operating within broad federal guidelines, each state determines its own Medicaid eligibility criteria, eligible coverage groups, services covered, administrative and operating procedures and payment levels.

The Medicaid program covers long-term nursing home care costs and many home health care costs, which are not covered by Medicare. If your income exceeds your state’s Medicaid eligibility threshold, there are two commonly used trusts that can be used to divert excess income to maintain your program eligibility.

Qualified Income Trusts (QITs): Also known as a “Miller trust,” this is an irrevocable trust into which your income is placed and then controlled by a trustee. The restrictions are tight on what the income placed in the trust can be used for (e.g., both a personal and if applicable a spousal “needs allowance,” as well as any medical care costs, including the cost of private health insurance premiums). However, due to the fact that the funds are legally owned by the trust (not you individually), they no longer count against your Medicaid income eligibility.

Pooled Income Trusts: Like a QIT, these are irrevocable trusts into which your “surplus income” can be placed to maintain Medicaid eligibility. To take advantage of this type of trust, you must qualify as disabled. Your income is pooled together with the income of others and managed by a non-profit charitable organization that acts as trustee and makes monthly disbursements to pay expenses on behalf of the individuals for whom the trust was made. Any funds remaining in the trust at your death are used to help other disabled individuals in the trust.

These income trusts are designed to create a legal pathway to Medicaid eligibility for those with too much income to qualify for assistance, but not enough wealth to pay for the rising cost of much-needed care. Like income limitations, the Medicaid “asset test” is complicated and varies from state to state. Generally, your home’s value (up to a maximum amount) is exempt, provided you still live there or intend to return. Otherwise, most states require you to spend down other assets to around $2,000/person ($4,000/married couple) to qualify.

Reference: Kiplinger (Nov. 7, 2021) “How to Restructure Your Assets to Qualify for Medicaid”

 

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Any Ideas How to Pay for Long-Term Care? – Annapolis and Towson Estate Planning

SGE’s recent article entitled “How to Pay for Long-Term Care” explains that although long-term care insurance can be a good way to pay for long-term care costs, not everyone can buy a policy. Insurance companies will not sell coverage to people already in long-term care or having trouble with activities of daily living. They may also refuse coverage, if you have had a stroke or been diagnosed with dementia, cancer, AIDS or Parkinson’s Disease. Even healthy people over 85 may not be able to get long-term care coverage.

The potential costs of long-term care be challenging for even a relatively prosperous patient if they are forced to stay for some time in a nursing home. However, there are a number of options for covering these expenses, including the following:

  • Federal and state governments. While the federal government’s health insurance plan does not cover most long-term care costs, it would pay for up to 100 days in a nursing home if patients required skilled services and rehabilitative care. Skilled home health or other skilled in-home service may also be covered by Medicare. State programs will also pay for long-term care services for people whose incomes are below a certain level and meet other requirements.
  • Private health insurance. Employer-sponsored health plans and other private health insurance will cover some long-term care costs, such as shorter-term, medically necessary skilled care.
  • Long-term care insurance. Private long-term care insurance policies can cover many of the costs of long-term care.
  • Private savings. Older adults who require long-term care that is not covered by government programs and who do not have long-term care insurance can use money from their retirement accounts, personal savings, brokerage accounts and other sources.
  • Health savings accounts. Money in these tax-advantaged savings can be withdrawn tax-free to pay for qualifying medical expenses, such as long-term care. However, only those in high-deductible health plans can put money into health savings accounts.
  • Home equity loans. Many older adults have paid off their mortgages or have a lot of equity in their homes. A home equity loan is a way to tap this value to pay for long-term care.
  • Reverse mortgage. This allows a homeowner to get what amounts to a home equity loan without paying interest or principal on the loans while they are alive. When the homeowner dies or moves out, the entire balance of the loan becomes due. The lender usually takes ownership.
  • Life insurance. Asset-based long-term care insurance is a whole life insurance policy that permits the policyholder to use the death benefits to pay for long-term care. Life insurance policies can also be purchased with a long-term care rider as a secondary benefit.
  • Hybrid insurance policies. Some long-term care insurance policies are designed annuities. With a single premium payment, the insurer provides benefits that can be used for long-term care. You can also buy a deferred long-term care annuity that is specially designed to cover these costs. Some permanent life insurance policies also have long-term care riders.

While long-term care can be costly, most people will not face extremely burdensome long-term care costs because nursing home stays tend to be short, since statistics show that most people died within six months of entering a nursing home. Moreover, the vast majority of elder adults are not in nursing homes, and many never go into them.

Reference: SGE (Dec. 4, 2021) “How to Pay for Long-Term Care”

 

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