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Estate Planning Blog

Monday, November 21, 2016

Testamentary Substitutes

In states that have “elective share statutes,” a surviving spouse is legally entitled to a certain percentage of the deceased's estate, even if that spouse has attempted to disinherit or to provide a lesser bequest, or gift, under the will.  In “separate property” states, an elective share statute is likely to be in effect.  If the estate in question is valued at $50,000 or less, the elective share is likely to be the actual amount of the net estate.  

“Testamentary substitutes” are removed from particular assets that would otherwise pass to the surviving spouse.  Assets passing by will or through intestacy could cause a reduction in the elective share amount as well.  Totten trusts, such as Payable-On-Death Bank Accounts (PODs), Retirement or joint bank accounts, gifts causa mortis ("gifts made by the decedent in contemplation of death,”) U.S. savings bonds, jointly held property, and gifts or transfers that were made approximately one year prior to death, are some examples of testamentary substitutes. 

If a gift was made about one year prior to death, yet involves medical or educational expenses, then the gift may not qualify as a true testamentary substitute.  With regard to PODs, the spouse, offspring, or grandchildren will be named as beneficiaries.  The funds of a POD are only distributed upon the decedent’s death.   Testamentary Trusts are listed in the will until the designated property passes to the trust upon the testator’s death.  

Generally, a gift causa mortis is only active upon the decedent’s expected death and is typically revocable.  Moreover, certain elements must exist to create a valid gift causa mortis.  These include an intent to create “an immediate transfer of ownership,” valid delivery, acceptance of the gift by the donee, and the donor’s “anticipation of imminent death.”  There are also certain circumstances by which gifts causa mortis are not valid.  For example, if the donee passes away before the donor, it is unlikely that a property interest was transferred.  Gifts causa mortis are also taxed as if the testator had listed the gifts in his or her will. 

In such cases, testamentary substitutes are generally put back into the net estate total to determine the elective share amount that the surviving spouse will collect.  The aforementioned may vary if property is held jointly, as joint tenants or otherwise, because the spouse may have a right of survivorship in the property.  Estate planning attorneys are aware of all the ins and outs of testamentary substitutes and how they may affect the distribution of your assets.  It is useful, if not essential, to consult with a knowledgeable attorney when making arrangements regarding testamentary substitutes.


Monday, October 17, 2016

Disinheritance

Inheritance laws involve legal rights to property after a death and such laws differ from state-to-state.   Heirs usually consist of close family members and exclude estranged relatives.  Depending on the wording of a will, an individual can be intentionally, or even unintentionally, disinherited.

In most cases, spouses may not be legally disinherited.  Certain contracts, however, allow for a legitimate disinheritance, such as prenuptial agreements or postnuptial agreements.  These contracts are typically valid methods of disinheritance because the presumed-to-be inheriting spouse has agreed to the arrangement by signing the document.  

If there is no prenuptial arrangement, then the state’s elective share statute or “equitable distribution” laws protect the surviving spouse.  Pursuant to the elective share statute, he or she may collect a certain percentage of the estate. 

In states that follow “community property” or “common law” rules, however, the outcome may be different.   An attorney should be consulted for clarification of the differences in the law.  Divorces affect spousal inheritance rights.  Post-divorce, it is prudent to consult an attorney to draft a fresh will, in order to prevent confusion and unintentional dissemination of assets.

If the will is unambiguous, it is usually possible for a child to be disinherited.   It should be noted, however, that it is highly likely that close relatives will challenge or contest a will in which they have been disinherited.  Fighting such a lawsuit may put a great financial strain on the estate's assets.  Depending on how time-consuming and expensive it is to defend the will, less money may be available for distribution to the intended beneficiaries. 

There are ways to protect estate assets from such problems, for example through trusts.  It is essential for an individual to receive the counsel of a licensed lawyer in order to effectively protect his or her estate as inexpensively as possible.


Monday, September 12, 2016

Preventing Will Contests

So, you have a will, but is it valid?  A will can be contested for a multitude of reasons after it is presented to a probate court.  It is in your best interest to have an attorney draft the will to prevent any ambiguity in the provisions of the document that others could dispute later. 

A will may be targeted on grounds of fraud, mental incapacity, validity, duress, or undue influence.  These objections can draw out the probate process and make it very time consuming and expensive.  More importantly, an attorney can help ensure that your property is put into the right hands, rather than distributed to unfamiliar people or organizations that you did not intend to provide for. 

At the time you executed the will, you must have been mentally competent, or of “sound mind.”  A court will inquire as to whether you had full awareness of what you were doing.   There will also be an inquiry into your understanding and knowledge of the assets in your name.  If, at the moment you executed the will, you were pressured or influenced by another individual to sign the document, it may be invalidated. 

If the document was signed under duress or undue influence, the provisions are likely to be against your intentions or requests.  Moreover, if you are trying to nullify a will on your own behalf, you are likely to need an attorney because it is very difficult and complicated to demonstrate the existence of duress, fraud, or undue influence.   If drafting a new will, counsel can ensure that your document abides by all of the validity requirements, so the will’s provisions can successfully carry out your intentions after your death.

For example, the will creator or “testator,” is usually required to sign the document before several witnesses who are over the age of eighteen, during a certain period of time.  A will or a certain bequest to a person could be deemed void if the beneficiary was also a witness.   In your state, you may be able to execute a “self-proving affidavit,” which may do away with some of the requirements in order to establish a valid will.  The testator should also designate a person to execute the document.  Consult your attorney to ensure that your will comports with your state’s particular laws and is sustainable against any future contests.  

 


Monday, August 15, 2016

The Revocable Living Trust

There are many benefits to a revocable living trust that are not available in a will.  An individual can choose to have one or both, and an attorney can best clarify the advantages of each.  If the person engaged in planning his or her estate wants to retain the ability to change or rescind the document, the living trust is probably the best option since it is revocable. 

The document is called a “living” trust because it is applicable throughout one's lifetime.  Another individual or entity, such as a bank, can be appointed as trustee to manage and protect assets and to distribute assets to beneficiaries upon one's death. 

A living trust will also protect assets if and when a person becomes sick or disabled.  The designated trustee will hold “legal title” of the assets in the trust.  If an individual wants to maintain full control over his or her property, he or she may also choose to remain the holder of the title as trustee. 

It should be noted, however, that the revocable power that comes with the trust may involve taxation. Usually, a trust is considered a part of the decedent’s estate, and therefore, an estate tax applies.  One cannot escape liability via a trust because the assets are still subject to debts upon death.  On the upside, the trust may not need to go through probate, which could save months of time and attorneys' fees. 

The revocable living trust is contrary to the irrevocable living trust, in that the latter cannot be rescinded or altered during one's lifetime.  It does, however, avoid the tax consequences of a revocable trust.  An attorney can explain the intricacies of other protections an irrevocable living trust provides. 

Anyone who wants to keep certain information or assets private, will likely want to create a living trust.  A trust is not normally made public, whereas a will is put into the public record once it passes through probate.   Consulting with an attorney can help determine the best methods to ensure protection of assets in individual cases.   


Wednesday, June 15, 2016

What are the powers and responsibilities of an executor?

An executor is responsible for the administration of an estate. The executor’s signature carries the same weight of the person whose estate is being administered. He or she must pay the deceased’s debts and then distribute the remaining assets of the estate. If any of the assets of the estate earn money, an executor must manage those assets responsibly. The process of doing so can be intimidating for an individual who has never done so before.

After a person passes away, the executor must locate the will and file it with the local probate office. Copies of the death certificate should be obtained and sent to banks, creditors, and relevant government agencies like social security. He or she should set up a new bank account in the name of the estate. All income received for the deceased, such as remaining paychecks, rents from investment properties, and the collection of outstanding loans receivable, should go into this separate bank account. Bills that need to be paid, like mortgage payments or tax bills, can be paid from this account. Assets should be maintained for the benefit of the estate’s heirs. An executor is under no obligation to contribute to an estate’s assets to pay the estate’s expenses.

An inventory of assets should be compiled and maintained by the executor at all times. An accounting of the estate’s assets, debts, income, and expenses should also be available upon request. If probate is not necessary to distribute the assets of an estate, the executor can elect not to enter probate. Assets may need to be sold in order to be distributed to the heirs. Only the executor can transfer title on behalf of an estate. If an estate becomes insolvent, the executor must declare bankruptcy on behalf of the estate. After debts are paid and assets are distributed, an executor must dispose of any property remaining. He or she may be required to hire an attorney and appear in court on behalf of the estate if the will is challenged. For all of this trouble, an executor is permitted to take a fee from the estate’s assets. However, because the executor of an estate is usually a close family member, it is not uncommon for the executor to waive this fee. If any of these responsibilities are overwhelming for an executor, he or she may elect not to accept the position, or, if he or she has already accepted, may resign at any time.


Monday, May 30, 2016

Year End Gifts

If you’re like most people, you want to make sure you and your loved ones pay the least amount of tax possible. Many use year-end gift giving as a way to transfer wealth to younger generations and also reduce the overall potential estate tax that will be due upon their death. Below are some steps you can take to make gifts to your heirs without triggering any gift tax liability. Some of these techniques may also reduce your own income tax liability.

A combination of estate and gift tax exemptions can be used to significantly reduce the overall tax liability of your estate. Upon your death, federal estate tax may be owed. A portion of your estate is exempt from the tax. That exemption amount is set by Congress and can change from year to year. 

Many taxpayers make annual gifts to loved ones during their lifetimes, to reduce the overall value of the estate so that it does not exceed the exemption amount in effect at the time of death. It is important to consider that gifts made during your lifetime are subject to a gift tax (equal to the estate tax). However, certain gifts or transfers are not subject to the gift tax, enabling you to make tax-free gifts that benefit your loved ones and reduce the overall taxable value of your estate upon your death.

The annual gift tax exclusion allows each individual to make annual gifts of up to $14,000 to each recipient. There is no limit to the number of recipients who may each receive up to $14,000 totally tax-free. Married couples may gift up to $28,000 to each recipient without triggering any tax liability. This annual exclusion expires on December 31 of each year, and larger gifts may be made by splitting it up into two payments. By making a payment in December and one the following January, you can take advantage of the gift tax exclusion for both years. Keeping annual gifts below $14,000 per recipient ensures that no gift tax return must be filed, and that there is no reduction in the estate tax exemption amount available upon your death.

Annual gifts may also be made in the form of contributions to a §529 College Savings Plan. These, too, are subject to the $14,000 annual gift tax exclusion. Additionally, such contributions may afford the giver with a state tax deduction.

Payment of a beneficiary’s medical expenses is also excluded from the gift tax. There is no limit to the amount of medical expense payments that may be excluded from tax. To qualify, the payment must be made directly to the health care provider and must be the type of expenses that would qualify for an income tax deduction.

If you have a large estate that may be subject to taxes upon your death, making annual gifts during your lifetime can be a simple way to reduce the size of your estate while avoiding negative tax consequences.


Monday, May 16, 2016

Overview of Life Estates

Establishing a Life Estate is a relatively simple process in which you transfer your property to your children, while retaining your right to use and live in the property. Life Estates are used to avoid probate, maximize tax benefits and protect the real property from potential long-term care expenses you may incur in your later years. Transferring property into a Life Estate avoids some of the disadvantages of making an outright gift of property to your heirs. However, it is not right for everyone and comes with its own set of advantages and disadvantages.

Life Estates establish two different categories of property owners: the Life Tenant Owner and the Remainder Owner. The Life Tenant Owner maintains the absolute and exclusive right to use the property during his or her lifetime. This can be a sole owner or joint Life Tenants. Life Tenant(s) maintain responsibility for property taxes, insurance and maintenance. Life Tenant(s) are also entitled to rent out the property and to receive all income generated by the property.

Remainder Owner(s) automatically take legal ownership of the property immediately upon the death of the last Life Tenant. Remainder Owners have no right to use the property or collect income generated by the property, and are not responsible for taxes, insurance or maintenance, as long as the Life Tenant is still alive.

Advantages

  • Life Estates are simple and inexpensive to establish; merely requiring that a new Deed be recorded.
  • Life Estates avoid probate; the property automatically transfers to your heirs upon the death of the last surviving Life Tenant.
  • Transferring title following your death is a simple, quick process.
  • Life Tenant’s right to use and occupy property is protected; a Remainder Owner’s problems (financial or otherwise) do not affect the Life Tenant’s absolute right to the property during your lifetime.
  • Favorable tax treatment upon the death of a Life Tenant; when property is titled this way, your heirs enjoy a stepped-up tax basis, as of the date of death, for capital gains purposes.
  • Property owned via a Life Estate is typically protected from Medicaid claims once 60 months have elapsed after the date of transfer into the Life Estate. After that five-year period, the property is protected against Medicaid liens to pay for end-of-life care.

Disadvantages

  • Medicaid; that 60-month waiting period referenced above also means that the Life Tenants are subject to a 60-month disqualification period for Medicaid purposes. This period begins on the date the property is transferred into the Life Estate.
  • Potential income tax consequences if the property is sold while the Life Tenant is still alive; Life Tenants do not receive the full income tax exemption normally available when a personal residence is sold. Remainder Owners receive no such exemption, so any capital gains tax would likely be due from the Remainder Owner’s proportionate share of proceeds from the sale.
  • In order to sell the property, all owners must agree and sign the Deed, including Life Tenants and Remainder Owners; Life Tenant’s lose the right of sole control over the property.
  • Transfer into a Life Estate is irrevocable; however if all Life Tenants and Remainder Owners agree, a change can be made but may be subject to negative tax or Medicaid consequences.

Monday, May 9, 2016

Issues to Consider When Gifting to Grandchildren

Many grandparents who are financially stable love the idea of making gifts to their grandchildren. However, they are usually not aware of the many issues related to what many consider to be a simple gift. If you are considering making a significant gift to a grandchild, you should consult with a qualified attorney to guide you through the legal and tax issues that are involved.

Making a Lifetime Gift or a Bequest:  Before making a gift, you should consider whether you want to make the gift during your lifetime or leave the gift in your will. If you make the gift as a bequest in your will, you will not experience the joy of seeing your grandchild’s appreciation and use of the gift. However, there’s always the possibility that you will need the money to live on during your lifetime, and in reality, once a gift is made it cannot be taken back. Also, if you anticipate needing Medicaid or other government programs to pay for a nursing home or other benefits at some point in your life, any gifts you make in the prior five years can be considered as part of your assets when determining your eligibility.

What Form Gift Should Take:  You may consider making a gift outright to a grandchild. However, once such a gift is made, you give up control over how the funds can be used. If your grandchild decides to purchase a brand-new sports car or take an extravagant vacation, you will have no legal right to stop the grandchild. The grandchild’s parents could also in some cases access the money without your approval.

You could consider making a gift under the Uniform Gift to Minors Act (UGMA) or the Uniform Transfer to Minors Act (UTMA), depending on which state you live in. The accounts are easy to open, but once the grandchild reaches the age of majority, he or she will have unfettered access to the funds. You could also consider depositing money into a 529 plan, which is specifically designed for education purposes. Finally, you could consider establishing a trust with an estate planning attorney, which can be more expensive to set up, but can be customized to fit your needs. Such a trust can provide for spendthrift, divorce and creditor protection while allowing for more flexibility for expenditures such as education or purchase of a first home.

Tax Consequences: If you have a large estate, giving gifts to grandchildren may be a great way to get money out of your estate in order to reduce your future estate tax liability. In 2016, a single person can pass $5.45 million at death free of estate tax, and a couple can pass a combined $10 million without paying estate taxes. In addition, a person can give $14,000 in 2016 to any number of individuals without incurring any gift taxes. A grandparent with 10 grandchildren could give $140,000 per year to all grandchildren (and a married couple could give $280,000), thereby removing that property from his or her estate.


Monday, April 25, 2016

Should a Power of Attorney be a part of my Estate Plan?

A durable power of attorney is an important part of an estate plan. It provides that, in the event of disability or incapacitation, a preselected agent can be granted power over the affairs of the individual signing the document. This power can be limited to specific decisions, like the decision to continue life sustaining treatment, or it can be much broader in scope to allow the agent power over the individual’s financial dealings.

Estate planning is meant to prepare for contingencies beyond an individual’s control. A traumatic accident could leave an individual without the ability to manage his or her own financial affairs. Debilitating diseases, like Alzheimer’s, can affect a person’s ability to make sound decisions for him or herself. In these scenarios, someone must be appointed to do make decisions on behalf of the incapacitated individual. Preparing a durable power of attorney as a part of an estate plan accomplishes three things. First, it gives the power of appointment to the individual, instead of to a judge. Second, it avoids the need for a potentially expensive court proceeding necessary to make that appointment. Finally, a power of attorney may be used to respond to time sensitive issues without waiting for a court hearing to grant an agent the power to act.

A power of attorney provides much flexibility for the individual signing it. It can take effect only upon disability, or right away, regardless of disability. It can specify what funds may or may not be used for. If a person does not want to live in an assisted living facility, he or she can make sure that money from his or her own bank accounts is not used for those purposes. Different assets can be managed by different agents. The power of attorney can give an agent power to distribute assets as gifts on a specific schedule to collaborate with an existing estate plan. The level of detail and amount of instruction that is possible as a part of the document is unlimited. It will always be quicker and more economical than a guardianship or conservatorship proceeding, and it will always serve the disabled person’s interests better than the broad powers granted to an individual by a court.


Monday, April 18, 2016

How to Calculate Estate Tax

In order to predict how much your estate will have to pay in taxes, one must first determine the value of the estate. To determine this, many assets might have to be appraised at fair market value. The estate includes all assets including real estate, cash, securities, stocks, bonds, business interests, loans receivable, furnishings, jewelry, and other valuables.

Once your net worth is established, you can subtract liabilities like mortgages, credit cards, other legitimate debts, funeral expenses, medical bills, and the administrative cost to settle your estate including attorney, accounting and appraisal fees, storage and shipping fees, insurances, and court fees. The administrative expenses will likely total roughly 5% of the total estate. Any assets that is bequeathed to charity through a trust escapes taxation, and the value of those assets must be subtracted from the total. Any assets transferred to a surviving spouse are not subject to taxation as long as your spouse is a US citizen.

If the net worth of an estate is less than the Federal and state exemptions, no taxes must be paid. However, the value of assets over the exemptions will be taxed. The amount over the exemptions is referred to as the taxable estate. A testator’s assets are taxed by the state in which the will is probated. Taxes paid by the estate to the state may be deducted for Federal tax purposes. The Federal exemption was $5.43 million in 2015 and is slated to increase in 2016. The top Federal estate tax rate in 2015 was 40%.

If an estate earns money while it is being administered and distributed, for example, if real estate is rented or businesses continue to operate, it will be necessary for the estate to complete a tax return and pay taxes on the income it receives. The net income of the estate can be added to the taxable portion of the estate if it is over the federal or state exemption. It is important to be aware that the laws surrounding estate taxes change frequently and require seasoned professionals to navigate, and to notify you if changes in the laws will affect your estate plan. 


Monday, April 11, 2016

How does life insurance fit into my estate plan?

Life insurance can be an integral part of an estate plan. Policies can be set up to be paid directly to the beneficiary, without the need to pass through the estate, and without the need for any taxes to be paid. Having a life insurance policy ensures that some assets will be liquid, so that debts and expenses can be paid quickly and easily without the need to dispose of assets. Beneficiaries can be changed at any time as can the benefit amount. The policy can be used to accumulate savings if the plan is surrendered before death. Life insurance policies, especially those purchased later in life, can pay out significantly more than what was invested into them. There are many benefits to purchasing a life insurance policy as part of an estate plan.

An attorney can set up a life insurance trust to help avoid estate taxes. A life insurance trust must be irrevocable, cannot be managed by the policy holder, and must be in place at least three years before the death of the policy holder. Any money received from the life insurance trust is not a part of the taxable estate. The need for this is rare as the exemption for estate taxes is currently almost five and a half million dollars, but it is a useful tool for some nonetheless.

There is a limit to how much life insurance an individual is permitted to purchase. A person may carry a multiple of his or her gross income which reduces with age. A twenty five year old can buy a policy worth thirty times his or her annual income. A sixty five year old may only purchase ten times his or her annual income worth of life insurance. This is an important factor to consider when deciding whether life insurance should be a part of your estate plan.

Life insurance as a part of estate planning is a complicated issue. It makes sense to consult with an estate attorney and a tax professional before meeting with an insurance broker. Both can help an individual understand the benefits of insurance over other means of transferring assets.


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