Carlsbad CA Estate Planning

5 Essential Actions to Protect Your Estate

 

It is true that a single person who dies in 2020 could have up to $11.58 million in personal assets and their heirs would not have to pay any federal estate tax. However, that doesn’t mean that regular people don’t need to worry about estate taxes—their heirs might have to pay state estate taxes, inheritance taxes or the estate may shrink because of other tax issues. That’s why U.S. News & World Report’s recent article “5 Estate Planning Tips to Keep Your Money in the Family” is worth reading.

Without proper planning, any number of factors could take a bite out of your children’s inheritance. They may be responsible for paying federal income taxes on retirement accounts, for instance. You want to be sure that a lifetime of hard work and savings doesn’t end up going to the wrong people.

The best way to protect your family and your legacy, is by meeting with an estate planning attorney and sorting through all of the complex issues of estate planning. Here are five areas you definitely need to address:

1. Creating a last will and testament
2. Checking that beneficiaries are correct
3. Creating a trust
4. Converting traditional IRA accounts to Roth accounts
5. Giving assets while you are living

A last will and testament. Only 32% of Americans have a will, according to a survey that asked 2,400 Americans that question. Of those who don’t have a will, 30% says they don’t think they have enough assets to warrant having a will. However, not having a will means that your entire estate goes through probate, which could become very expensive for your heirs. Having no will also makes it more likely that your family will challenge the distribution of assets. As a result, someone you may have never met could inherit your money and your home. It happens more often than you can imagine.

Checking beneficiaries. Once you die, beneficiaries cannot be changed. That could mean an ex-spouse gets the proceeds of your life insurance policy, retirement funds or any other account that has a named beneficiary. Over time, relationships change—make sure to check the beneficiaries named on any of your documents to ensure that your wishes are fulfilled. Your will does not control this distribution and is superseded by the named beneficiaries.

Set up a trust. Trusts are used to accomplish different goals. If a child is unable to manage money, for instance, a trust can be created, a trustee named and the account funded. The trust will include specific directions as to when the child receives funds or if any benchmarks need to be met, like completing college or staying sober. With an irrevocable trust, the money is taken out of your estate and cannot be subject to estate taxes. Money in a trust does not pass through probate, which is another benefit.

Convert traditional IRAs to Roth retirement accounts. When children inherit traditional IRAs, they come with many restrictions and heirs get the income tax liability of the IRA. Regular income tax must be paid on all distributions, and the account has to be emptied within ten years of the owner’s death, with limited exceptions. If the account balance is large, it could be consumed by taxes. By gradually converting traditional retirement accounts to Roth accounts, you pay the taxes as the accounts are converted. You want to do this in a controlled fashion, so as not to burden yourself. However, this means your heirs receive the accounts tax-free.

Gift with warm hands, wisely. Perhaps the best way to ensure that money stays in the family, is to give it to heirs while you are living. As of 2020, you may gift up to $15,000 per person, per year in gifts. The money is tax free for recipients. Just be careful when gifting assets that appreciate in value, like stocks or a house. When appreciating assets are inherited, the heirs receive a step-up in basis, meaning that the taxable amount of the assets are adjusted upon death, so some assets should only be passed down after you pass.

 

Reference: U.S. News & World Report (Sep. 30, 2020) “5 Estate Planning Tips to Keep Your Money in the Family”

How Does Guardianship Work?

“As a result of illness, old age or incapacity, what may happen when you can no longer handle your own decision-making, handle your own money or make your own health care choices? Who can step in to help and how are they empowered?”

For the most part, we are free to make our own decisions regarding how we live, where we live, how we spend our money and even with whom we socialize. However, when we are no longer capable of caring for ourselves, most commonly due to advancing age or dementia, or if an accident or illness occurs and we can’t manage our affairs, it may be necessary to seek a guardianship, as explained in the recent article “Legal Corner: A guardian can be a helpful tool in cases of incapacity” from The Westerly Sun. A guardianship is also necessary for the care of a child or adult with special needs.

If no proper estate planning has been done and no one has been given power of attorney or health care power of attorney, a guardianship may be necessary. This is a legal relationship where one person, ideally a responsible, capable and caring person known as a guardian, is given the legal power to manage the needs of a ward, the person who cannot manage their own affairs. This is usually supported through a court process, requires a medical assessment and comes before the probate court for a hearing.

Once the guardian is qualified and appointed by the court, they have the authority to oversee everything about the ward’s life. They have power over the ward’s money and how it is spent, health care decisions, residential issues and even with whom the ward spends time. At its essence, a guardianship is akin to a parent-child relationship.

Guardianships can be tailored by the court to meet the specific needs of the ward in each case, with the guardian’s powers either limited or expanded, as needed and as appropriate.

The guardian must report to the court on a yearly basis about the ward’s health and health care and file an annual accounting of what has been done with the ward’s money and how much money remains. The court supervision is intended to protect the ward from mismanagement of their finances and ensure that the guardianship is still needed and maintained on an annual basis.

The relationship between the ward and the guardian is often a close one and can continue for many years. The guardianship ends upon the death of the ward, the resignation or removal of the guardian, or in cases of temporary illness or incapacity, when the ward recovers and is once again able to handle their own affairs and make health care decisions on their own.

If and when an elderly family member can no longer manage their own lives, guardianship is a way to step in and care for them, if no prior estate planning has been done. It is preferable for an estate plan to be created and for powers of attorney be created, but in its absence, this is an option.

Reference: The Westerly Sun (Sep. 19, 2020) “Legal Corner: A guardian can be a helpful tool in cases of incapacity”

Estate Planning Needs for Every Stage

 

“Although there is often a progression of complexity in estate planning, this progression generally follows stages in life rather than specific ages.”

 

Many people decide they need an estate plan when they reach a certain age, but when an estate plan is needed is less about age than it is about stages in life, explains a recent article “Life stages dictate estate planning needs” from The News-Enterprise. Life’s stages can be broken into four groups, young with limited assets, young parents, getting close to retirement and post-retirement life.

Every adult should have an estate plan. Without one, we can’t determine who will take care of our financial and legal matters, if we are incapacitated or die unexpectedly. We also don’t have a voice in how any property we own will be distributed after death.

The first stage—a young individual with limited assets—includes college students, people in the early years of their careers and young couples, married or not. They may not own real estate or substantial assets, but they need a fiduciary and beneficiary. Distribution of assets is less of a priority than provisions for life emergencies.

Once a person becomes a parent, he or she needs to protect minor children or special needs dependents. Lifetime planning is still a concern, but protecting dependents is the priority. Estate planning is used in this stage to name guardians, set up trusts for children and name a trustee to oversee the child’s inheritance, regardless of size.

Many people use revocable living trusts as a means of protecting assets for minor dependents. The revocable trust directs property to pass to the minor beneficiary in whatever way the parents deem appropriate. This is typically done so the child can receive ongoing care, until the age when parents decide the child should receive his or her inheritance. The revocable trust also maintains privacy for the family, since the trust and its contents are not part of the probated estate.

The third stage of life includes people whose children are adults, who have no children or who are near retirement age and addresses different concerns, such as passing along assets to beneficiaries as smoothly as possible while minimizing taxes. The best planning strategy for this stage is often dictated by the primary type of asset.

For people with special situations, such as a beneficiary with substance abuse problems, or a person who owns multiple properties in multiple states or someone who is concerned about the public nature of probate, trusts are a critical part of protecting assets and privacy.

For people who own a primary residence and retirement assets, an estate plan that includes a will, a power of attorney and medical power of attorney may suffice. An estate planning attorney guides each family to make recommendations that will best suit their needs.

Reference: The News-Enterprise (Aug. 25, 2020) “Life stages dictate estate planning needs”

Searching for Lower Taxes? Check State Laws

 

“Some states are great to live in, but not so great to die in.”

 

If you are among the many Americans making a move because of economics, a recent article from MarketWatch titled “Thinking about moving to a state with lower taxes? These are the mistake to avoid” has the information you need about the tax impact of your prospective new home state.

Moving to a state with no personal income tax is not the quick and easy answer it seems. You’ve got to look at ALL the taxes that apply to residents, from property taxes to estate and inheritance taxes.

Here’s a good example: Texas has no personal state income tax. Colorado has a flat 4.63% personal state income tax. Therefore, if you are working and have a good income, it makes sense that Texas would be your best option, right? Wrong.

The property tax rate on a home in some Colorado Springs neighborhoods is about 0.49% of the property’s actual value. Let’s say you move to one of these areas and buy a home for $500,000. Your annual property tax bill: $2,450. Let’s say your taxable income is $200,000. Your Colorado state income tax bill would be $9,260, and with the property tax, your tax bill would be $11,710. For that same $500,000 home in Dallas—your property tax would be $21,200 or about $17,800 if you are over age 65 or a surviving spouse. The higher property tax means that your annual tax bill is lower in Colorado.

What about after you die? Seventeen states and the District of Columbia impose their own estate tax or inheritance tax, and Maryland imposes both. Exemptions from the state estate tax are way below the current federal estate tax exemption. However, if you move to the wrong state, your estate could shrink dramatically from the state’s death taxes.

To clarify, an estate tax is charged against the entire taxable estate, regardless of who inherits from the estate. An inheritance tax is charged against people who receive inheritance. The rate usually depends upon their relationship to you.

Here are a few state estate taxes to consider:

• Connecticut’s top estate tax rate is 12%, with a $5.1 million exemption allowed for 2020. The exemption increases to $7.1 million in 2021, and $9.1 million in 2022. Above $15 million of the estate tax value, the tax rate drops to 0%.
• Hawaii’s top estate tax rate is 20%, and in 2020, there is a $5.49 million exemption.
• In Illinois, the top tax rate is 16%, with a $4 million exemption in 2020.

Review the entire tax picture, before making this important decision. You should also confer with your estate planning attorney to learn how your estate’s structure—trusts and other estate planning tools—would work in a different state. Keep in mind that all of these tax exemptions, including the federal one, are likely to change as local, state and federal governments respond to the increased costs and lowered revenues brought about by the COVID-19 pandemic.

What Happens to Debt when You Die?

 

“Creditors typically try to collect on unpaid debt, by going after the decedent’s estate during a process called probate.”

 

When a person dies, it’s not unusual for them to leave behind some unpaid debt. What happens to that debt depends upon how their estate was organized, says the article “This is how your unpaid debts are handled if you pass away” from CNBC.com. The estate consists of whatever is owned, whether the person was wealthy or not. It includes financial accounts, real estate and personal possessions.

For surviving spouses, this can be worrisome. In most instances, they are not responsible for their spouse’s debt, but there are some exceptions. Here’s how it works.

Paying off all debts and then distributing the remaining assets is part of the probate process. Every state has its own laws regarding how long creditors have to make a claim against the estate. In some states, it’s a few months, in others it can last a few years. An estate planning attorney in your state will know how long the estate is vulnerable to creditors.

In most states, funeral expenses take priority, then the cost of administering the estate, followed by taxes and hospital and medical bills. However, not all assets are necessarily part of the estate, and this is where estate planning is important.

Life insurance policies, qualified retirement accounts and other assets with named beneficiaries go directly to the beneficiaries and do not pass through probate. The same goes for assets placed in trusts, as does jointly owned property, as long as it has been properly titled.

With the right planning, it is possible that an entire estate, including one that is insolvent, could be passed on to heirs outside of probate, leaving creditors high and dry. However, there are a handful of states that have “community property laws” that make debt more complicated.

The law in these states views both assets and certain debt accumulated during the marriage as being owned by both spouses, even if it is only in the decedent’s name. That includes debt like medical expenses or a mortgage. However, that’s not the final word. A well-structured letter with a copy of the death certificate can sometimes lead to the debt being discharged. During the probate process, the company holding the debt should be advised that the estate has little or no assets to cover the debt and ask that it be forgiven.

This does not apply to co-signing on a loan. Although the request can be made, it is not likely to be honored. Federal student loans are forgiven if the student dies, which seems a matter of kindness. Parent PLUS loans, which are loans taken out by parents to help pay for education, are usually discharged, if the student or parent dies.

Your estate planning attorney can help structure your estate to protect your surviving spouse and family members from creditors.

Reference: CNBC.com (July 31, 2020) “This is how your unpaid debts are handled if you pass away”

Estate Planning Basics You Need to Know

 

“Estate planning can come in a variety of forms, from basic beneficiary designations when you open a bank or brokerage account to more complex and comprehensive plans.”

 

The key reason for estate planning is to create a plan directing where your assets will go after you die. The ultimate goal is for wealth and real property to be given to the people or organizations you wish, while minimizing taxes, so beneficiaries can keep more of your wealth. However, good estate planning also reduces family arguments, protects minor children and provides a roadmap for end-of-life decisions, says the article “What is estate planning?” from Bankrate.

Whenever you’ve opened a checking and savings account, retirement account or purchased life insurance, you’ve been asked to provide the name of a beneficiary for the account. This person (or persons) will receive these assets directly upon your passing. You can have multiple beneficiaries, but you should always have contingent beneficiaries, in case something happens to your primary beneficiaries. Named beneficiaries always supersede any declarations in your will, so you want to make sure any account that permits a beneficiary has at least one and update them as you go through the inevitable changes of life.

A last will and testament is a key document in your estate plan. It directs the distribution of assets that are not distributed through otherwise designated beneficiaries. Property you own jointly, typically but not always with a spouse, passes to the surviving owner(s). An executor you name in your will is appointed by the court to take care of carrying out your instructions in the will. Choose the executor carefully—he or she will have a lot to take care of, including the probate of your will.

Probate is the process of having a court review your estate plan and approve it. It can be challenging and depending upon where you live and how complicated your estate is, could take six months to two years to complete. It can also be expensive, with court fees determined by the size of the estate.

Many people use trusts to minimize how much of their estate goes through probate and to minimize estate taxes. Assets that are distributed through trusts are also private, unlike probate documents, which become public documents and can be seen by anyone from nosy relatives to salespeople to thieves and scammers.

Trusts can be complex, but they don’t have to be. Trusts can also offer a much greater level of control over how assets are distributed. For instance, a spendthrift trust is used when an heir is not good with handling money. A trustee distributes assets, and a time frame or specific requirements can be set before any funds are distributed.

Living wills are also part of an estate plan. These are documents used to give another person the ability to make decisions on your behalf, if you become incapacitated or if decisions need to be made concerning end-of-life care.

An estate plan can help prevent family fights over who gets what. Arguments over sentimental items, or someone wanting to make a grab for cash can create fractures that last for generations. A properly prepared estate plan makes your wishes clear, lessening the reasons for squabbles during a difficult period.

Protecting minor children and heirs is another important reason to have a well thought out estate plan. Your last will and testament is used to nominate a guardian for minor children and can also be used to direct who will be in charge of any assets left for the children’s care.

Reference: Bankrate (Aug. 3, 2020) “What is estate planning?”

Don’t Overlook These 7 Key Parts in Your Estate Plan

 

“During the past four months, more than 141,000 Americans have died of COVID-19. Anecdotal evidence suggests that the pandemic has prompted some people to get serious about creating or updating their estate plans, according to Christine Benz, Morningstar’s director of personal finance.”

 

The importance of having key estate planning documents cannot be overstated. That includes a will, an advance directive, powers of attorney for health care and financial matters and guardianships for minor children. Trusts may also be part of an estate plan, and they need to be created and funded in a timely manner. However,, according to the article “7 Things Your Client’s Estate Plan Might Be Missing: Morningstar” from Think Advisor, there are a number of frequently overlooked additional parts to an estate plan that make a difference.

1. Financial Overview. This gives a broad outline of your assets and can be a useful discussion starting point, when one spouse manages the money and the other needs to be brought up to speed. It includes information about larger assets, including the home, investments, cars and other valuables.
2. A Directory. Creating a complete master list of all accounts, including the account number, website addresses and the names of any individuals that you deal with on a regular basis, avoids sending loved ones on a scavenger hunt. Keep this document safe—either encrypt it or keep it in a locked, fireproof safe in your home.
3. Personal Property. Wills contain directions about property, but not everything gets included. Make a list of any tangible personal property that you want to go to specific people, like jewelry or artwork, and create a detailed memo. It won’t be part of the will, but most states consider such memos legally binding, as long as they are mentioned in the will. Your estate planning attorney will know what is best for your situation and in your state.
4. Plan for Pets. The best way to do this is with a pet trust, which is enforceable. You name a person to take care of your pets, and how much money they should use to care for the pet. The will can be used to specify who should be your pet’s caretaker. You can leave assets for the pet, but the designated person is not legally bound to use the money for the pet’s well-being.
5. Digital Estate Plan. Make a plan for your digital property, including tangible digital devices, like computers and phones and the data stored on devices in the cloud and online accounts, including social media, websites, emails, photos, videos, etc. Start by making an inventory of all digital accounts, which needs to be stored in the same way your directory is: under lock and key.
6. End of Life Plan. Advance directives are used to direct your wishes towards life-extending care, but they don’t always go into detail. Providing additional information to loved ones who might need to make health care decisions could alleviate a lifetime of guilt. Having conversations is a starting point but putting your wishes into a document is better.
7. Ethical Will. An ethical will in which the person hands down their belief system to loved ones is a gift and part of your legacy. What would you want the next generation to know about your beliefs? What life lessons do you want to share?

Reference: Think Advisor (July 22, 2020) “7 Things Your Client’s Estate Plan Might Be Missing: Morningstar”

That Last Step: Trust Funding

 

“If you have updated your estate plan during the Covid crisis and even found a way to sign your documents while maintaining social distance, do not overlook the last step of trust funding.”

 

Neglecting to fund trusts is a surprisingly common mistake, and one that can undo the best estate and tax plans. Many people put it on the back burner, then forget about it, says the article “Don’t Overlook Your Trust Funding” from Forbes.

Done properly, trust funding helps avoid probate, provides for you and your family in the event of incapacity and helps save on estate taxes.

Creating a revocable trust gives you control. With a revocable trust, you can make changes to the trust while you are living, including funding. Think of a trust like an empty box—you can put assets in it now, or after you pass. If you transfer assets to the trust now, however, your executor won’t have to do it when you die.

Note that if you don’t put assets in the trust while you are living, those assets will go through the probate process. While the executor will have the authority to transfer assets, they’ll have to get court approval. That takes time and costs money. It is best to do it while you are living.

A trust helps if you become incapacitated. You may be managing the trust while you are living, but what happens if you die or become too sick to manage your own affairs? If the trust is funded and a successor trustee has been named, the successor trustee will be able to manage your assets and take care of you and your family. If the successor trustee has control of an empty, unfunded trust, a conservatorship may need to be appointed by the court to oversee assets.

There’s a tax benefit to trusts. For married people, trusts are often created that contain provisions for estate tax savings that defer estate taxes until the death of the second spouse. Income is provided to the surviving spouse and access to the principal during their lifetime. The children are usually the ultimate beneficiaries. However, the trust won’t work if it’s empty.

Depending on where you live, a trust may benefit you with regard to state estate taxes. Putting money in the trust takes it out of your taxable estate. You’ll need to work with an estate planning attorney to ensure that the assets are properly structured. For instance, if your assets are owned jointly with your spouse, they will not pass into a trust at your death and won’t be outside of your taxable estate.

Move the right assets to the right trust. It’s very important that any assets you transfer to the trust are aligned with your estate plan. Taxable brokerage accounts, bank accounts and real estate are usually transferred into a trust. Some tangible assets may be transferred into the trust, as well as any stocks from a family business or interests in a limited liability company. Your estate planning attorney, financial advisor and insurance broker should be consulted to avoid making expensive mistakes.

You’ve worked hard to accumulate assets and protecting them with a trust is a good idea. Just don’t forget the final step of funding the trust.

Reference: Forbes (July 13, 2020) “Don’t Overlook Your Trust Funding”

Can I Disinherit Anyone I Want?

 

“So, you’ve decided that a family member won’t be getting an inheritance, after all. Maybe you have an ungrateful or irresponsible family member you want to cut out of the will.”

 

If there’s someone you believe is more deserving or needs more of your help, that may mean someone else in your life may receive little or nothing from you when you die. However, be careful—disinheriting an heir is not as simple as leaving them out of your will, explains the article “How to Disinherit an Heir” from smart asset.

Disinheriting an heir means you’ve prevented them from receiving a portion of your estate, when you die. A local estate planning lawyer will know what your state requires, and every state’s laws are different.

One way is by leaving the person out completely. However, this could also leave your will up for interpretation, as there may be questions raised about your intent. A challenge could be raised that you didn’t mean to leave them out—and that could create stress, expenses and family fights.

You may also disinherit a person, by stating in your will that you do not wish to leave anything to this specific person. You might even provide information about why you are doing this, so your intent is clear. There could still be challenges, even with your providing reasons for cutting the person out of your will.

Disinheriting someone can be a tricky thing to do. It requires professional help. Working with an experienced estate planning attorney who has experience in will contests, may be your best choice for an estate planning attorney.

There are instances where relatives known and unknown to you are entitled to make a claim on your estate. An experienced estate planning attorney may suggest a search for relatives to ensure that no surprises come out of the woodwork, after your passing.

There are some relatives who cannot be disinherited, even in a legally binding last will and testament. In many states, you may not disinherit your spouse or children. Most states protect spouses from being disinherited, and in some states, children are legally entitled to a certain amount of your property. However, in most states, you may disinherit parents, if they outlive you.

There are many reasons you may want to disinherit someone. You may have been estranged from a child or a cousin for many years, or you may believe they have enough financial resources and want someone else to receive an inheritance from you.

Many high-profile individuals have declared that their children will not receive an inheritance, preferring to give their assets to charitable foundations or organizations working for causes they support.

Whatever your reasons for disinheriting someone, make sure you go about it with professional help to ensure that your wishes are followed after you die.

Reference: smart asset (June 1, 2020) “How to Disinherit an Heir”

What are Fiduciary Duties of a Trustee?

 

“As you plan how you will leave your estate, it is important to your family’s future that you leave a legacy with well-executed documents. It’s also essential that you understand all of the roles of the people involved in your estate, especially the person or organization who will manage your estate.”

 

One of the reasons people uses trusts in their estate planning, is that the person named as a trustee has a legal duty to put the trust’s interests first, rather than their own interests. This is called a “fiduciary duty,” and it becomes very important when planning for the future of your assets and family. It’s an enforceable legal obligation says the article “Fiduciary Duties in Trusts and Estate Planning” from yahoo! finance.

A trustee is the person appointed to be in charge of a trust. There are many different kinds of trusts, created to own assets, including money, life insurance policies and homes. The person named as trustee in the trust document makes decisions about the trust assets to benefit the beneficiary’s best interests.

Trusts created while a person is living are known, appropriately enough, as living trusts. There are people who choose to be their own trustees and manage their trusts for as long as they are able. Married couples may be co-trustees on their trusts. The trust documents should be prepared, so that upon the death of one spouse, the surviving spouse becomes the trustee and manages the account.

The person creating the trust should also name a successor trustee. This is the person who will manage the trust when the trustee or the co-trustees are no longer competent to manage the trust. That might be because they have died or because they have become incapacitated due to an injury or illness.

The fiduciary duties of a trustee are to act in the best interest of the beneficiaries. These are some guidelines:

• The assets a trustee manages do not belong to them, and the trustee must not mix personal assets with assets in the trust.
• A trustee may not use the trust’s assets for their benefit.
• The trustee must not favor one beneficiary over the other.
• The trustee must follow the directions in the trust document.
• The trustee must keep accurate records, file tax returns and report to beneficiaries, as directed in the trust.

There are three fiduciary duties when it comes to a trust: loyalty, care and full disclosure. The trustee(s) must act in the best interest of the trust and its beneficiaries. This is a high standard and why the decision on who to name as a trustee is so important.

The terms of every trust vary, depending on the type of trust and the needs of the estate plan. The trustee needs to be familiar with the trust and its directions, so they can perform correctly.

An estate planning attorney is needed to draft trusts, so they reflect the wishes of the person and their goals. Using a downloaded form or even a standard legal form is a big risk for families.

Reference: yahoo! finance (July 8, 2020) “Fiduciary Duties in Trusts and Estate Planning”