Tag Archives: Estate Planning

National Estate Planning Awareness Week

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Creating an estate plan is about making sure your loved ones are protected after you’re gone.

An estate plan is a valuable set of documents outlining plans for your assets and family after you die. While everyone’s needs differ, ensuring your property and family are cared for is essential. It also has tax benefits.

Estate planning is the process of creating legal documents that outline:

  • How to distribute your property after you die
  • Who will get custody of your children and pets
  • Who will make financial and medical decisions on your behalf once you can no longer make them yourself

In addition to this documentation, an estate plan can include life insurance and long-term care insurance policies.

The goal is to protect you, your family and your assets. An estate plan ensures your property is transferred to the appropriate people while limiting estate taxes to maximize the legacy you pass to your heirs. The tax burden can vary based on your estate’s value and your state’s tax threshold, with larger estates typically incurring higher tax bills.

Dying without a will is called dying intestate. If you die intestate, your state’s laws determine who gets your property and who gets custody of your children. An estate plan allows you to make these choices based on your wishes and your family’s best interests.

An estate plan may involve a will, trust, power of attorney (POA) and health care directives. You can use an online service or work with various professionals — such as your financial planner, estate attorney and accountant — to create these documents.

Source:  Alison Tobin, Estate Planning Checklist, Money Magazine, Nov 27, 2023.

Estate Plan and Wills

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“55 percent of all Americans—regardless of wealth or status—die without a will or estate plan in place,” American Bar Association

When R&B artist Prince died in April 2016 at the age of 57, he left behind an estate worth hundred of millions of dollars, along with music and other intellectual property of inestimable value. Despite his fame and wealth, Prince died without a will or estate plan. As a result, his estate has remained entangled in probate court for nearly six years. Although the value of his estate is estimated to be more than $100 million, it has paid more than tens of millions of dollars in administration fees.

Before you express too much astonishment that someone so wealthy left no will, ask yourself: do you have one? If the answer is no, then it should not be surprising that Prince didn’t.

If you don’t have a will, you’re not alone in America. According to the American Bar Association, 55 percent of all Americans—regardless of wealth or status—die without a will or estate plan in place, and the number can be as high as 64 percent. For some reason, many people who should have wills, whether because of their age or financial situation, just don’t.

It’s hard to understand why. Maybe because it’s depressing to think about needing one. Maybe it’s because we know we won’t be around when our estates are distributed, so we let it slide.

Regardless, everybody should have at a minimum a last will and testament if you don’t have a more complex estate plan like a trust, because it’s always cheaper to administer an estate when you have a will than when you don’t have anything.

When a person passes without a will, or what the law calls “intestate,” the estate property is distributed according to state succession laws. A probate court judge will have to determine who and how the assets are distributed in the event of your passing or incapacitation.

Additionally, if you die without a Will, you’re giving the state you reside in full control over the distribution of your assets, and intestate serves as the precedent for how decisions are made and how your assets will be distributed on your behalf.

Dying intestate means the most crucial decisions — including who will care for your children, aged parents, pets or other dependents — will be made without your input. Further, your family will be forced to endure a lengthy and costly probate process and incur potentially crippling legal expenses to regain control of your finances and assets.

Most probate court cases are open to the public, which means many of the details of a person’s estate could be aired like dirty laundry. Although, a judge could decide that the documents should be sealed.

In most states, a surviving spouse is first in line for the estate’s assets. If there is no spouse, the law provides an order of succession. In many states, if there’s no spouse, the children get the estate. If there are no children or grandchildren, then the parents inherit.

If no parents are alive, then siblings, nephews, and grandnephews inherit—and on and on—all the way to first cousins twice-removed. And, if no heirs can be found, it may not surprise you to learn that your property eventually goes to the state—a process called “escheating.”

Estate Planning

When you think about Estate Planning, you must not only think about when you die, but you must think about the possibility of becoming disable.

Estate planning is much bigger than “You get my assets after I die”—it is about setting your families up for the type of generational wealth.

An estate plan ensures your medical, financial and guardianship decisions will be handled by the person(s) you choose and trust. Your plan ensures you have an advocate acting on your behalf, carrying out your wishes and directions as you intended. It ensures you have the legal documents in place if you become disabled, as well as what will happen to your assets when you die.

Statistically speaking, most people are going to be disabled for some period of time before they die now that people are living so long. If the person becomes disabled and can’t make their own medical or financial decisions, the only way that somebody can legally make decisions for them is to go to court and do a guardianship or conservatorship proceeding. It’s expensive and time-consuming, and it’s really unnecessary.

In a will, the person who makes the will picks the executor, the person that’s in charge. You can say that you want your executor to serve without posting a bond. If that’s not stated in a will, you have to get a fiduciary bond so that the court knows you’re not going to steal the assets.

If you have minor children, a will is the only legal document where you can nominate guardians for your children.

But if you don’t have the will, then it’s the state statute that determines who is the person with priority to administer your estate. And because the state doesn’t know whether the person who says they want to administer your estate is a crook or not, the court often makes someone post a fiduciary bond. You have to pay the premium for the bond and the person has to qualify financially for a bond.

What you should learn from Prince’s passing without a Will or Estate Plan is that unless you create an estate plan now, you will leave your loved ones and potential heirs with a legal mess whether you are worth millions or not.

References:

  1. https://www.cnn.com/2016/04/28/opinions/prince-died-intestate-you-might-too-cevallos/index.html
  2. https://matermea.com/estate-planning-basics-african-americans-black-families/
  3. https://blavity.com/how-black-americans-are-missing-out-on-the-largest-wealth-transfer-in-history

What is a Trust Fund

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“Regardless of your income, estate planning is a vital part of your financial plan. Planning ahead can give you greater control, privacy, and security of your legacy.” Fidelity

A trust is an estate planning tool that anyone can use to ensure their assets are passed down as they wish, to friends, family or a charity. It is a legal entity that that allows a third party, or trustee, to hold assets until an intended recipient or beneficiary is able to receive them.

Trusts can be arranged in many ways and can greatly expands your options when it comes to managing your financial assets, whether you’re trying to shield your wealth from taxes or pass it on to your children or grandchildren.

To understand how a trust fund works, it helps to understand the following three terms:

  • Grantor. This is the person who transfers assets to a trust fund. That would be you, if you’re the one looking to start a trust.
  • Beneficiary. The person who is given the legal right to assets in a trust fund is a beneficiary. That might be your loved ones or a favorite charity.
  • Trustee. The decisionmaker responsible for ensuring the assets in the trust fund are appropriately distributed is called the trustee.

Trusts can hold assets like real property (such as heirlooms or jewelry), real estate, stocks, bonds or even businesses.

Since trusts usually avoid probate, your beneficiaries may gain access to the trust’s financial assets more quickly than they might to assets that are transferred using a will. Additionally, if it is an irrevocable trust, it may not be considered part of the taxable estate, so fewer taxes may be due upon your death.

Assets in a trust may also be able to pass outside of probate, saving time, court fees, and potentially reducing estate taxes as well.

Other benefits of trusts include:

  • Control of your wealth. You can specify the terms of a trust precisely, controlling when and to whom distributions may be made. You may also, for example, set up a revocable trust so that the trust assets remain accessible to you during your lifetime while designating to whom the remaining assets will pass thereafter, even when there are complex situations such as children from more than one marriage.
  • Protection of your legacy. A properly constructed trust can help protect your estate from your heirs’ creditors or from beneficiaries who may not be adept at money management.
  • Privacy and probate savings. Probate is a matter of public record; a trust may allow assets to pass outside of probate and remain private, in addition to possibly reducing the amount lost to court fees and taxes in the process.

There are several basic types of trusts

  • Marital or “A” trust – Designed to provide benefits to a surviving spouse; generally included in the taxable estate of the surviving spouse
  • Bypass or “B” trust – Also known as credit shelter trust, established to bypass the surviving spouse’s estate in order to make full use of any federal estate tax exemption for each spouse
  • Testamentary trust – Outlined in a will and created through the will after the death, with funds subject to probate and transfer taxes; often continues to be subject to probate court supervision thereafter

Revocable vs. irrevocable

The major distinction between trust is whether they are revocable or irrevocable.

Revocable trust: Also known as a living trust, a revocable trust can help assets pass outside of probate, yet allows you to retain control of the assets during your (the grantor’s) lifetime. A living trust is a legal document that states who you want to manage and distribute your assets if you’re unable to do so, and who receives them when you pass away. Having one helps communicate your wishes so your loved ones aren’t left guessing or dealing with the courts. It is flexible and can be dissolved at any time, should your circumstances or intentions change. A revocable trust typically becomes irrevocable upon the death of the grantor.

You can name yourself trustee (or co-trustee) and retain ownership and control over the trust, its terms and assets during your lifetime, but make provisions for a successor trustee to manage them in the event of your incapacity or death.

Although a revocable trust may help avoid probate, it is usually still subject to estate taxes. It also means that during your lifetime, it is treated like any other asset you own.

Irrevocable trust. An irrevocable trust typically transfers your assets out of your (the grantor’s) estate and potentially out of the reach of estate taxes and probate, but cannot be altered by the grantor after it has been executed. Therefore, once you establish the trust, you will lose control over the assets and you cannot change any terms or decide to dissolve the trust.

An irrevocable trust is generally preferred over a revocable trust if your primary aim is to reduce the amount subject to estate taxes by effectively removing the trust assets from your estate. Also, since the assets have been transferred to the trust, you are relieved of the tax liability on the income generated by the trust assets (although distributions will typically have income tax consequences). It may also be protected in the event of a legal judgment against you.

Deciding on a trust
State laws vary significantly in the area of trusts and should be considered before making any decisions about a trust. Consult your attorney for details.

As mentioned above, by creating a trust, you can:

  • Determine where your assets go and when your beneficiaries have access to them.
  • Save your beneficiaries (your children, for example) from paying estate taxes and court fees.
  • Protect your assets from creditors that your beneficiaries may have, or from loss through divorce settlements.
  • Direct where remaining assets should go in the event of a beneficiary’s death. This can be helpful in a family that includes second marriages and step-children.
  • Avoid a lengthy probate court process.

This last point is a crucial one, as trusts also allow you to pass on assets quickly and privately. In contrast, settling an estate through a traditional will may trigger the probate court process — in which a judge, not your children or other beneficiaries, has final say on who gets what. Not only that, the probate process can drag on for months or even years and may even become a public spectacle as well.

With a trust, much of that delay can be avoided, and the entire process is private, saving your beneficiaries from unwanted scrutiny or solicitation.

References:

  1. https://www.fidelity.com/life-events/estate-planning/trusts
  2. https://www.legalzoom.com/sem/ep/living-trust.html
  3. https://www.forbes.com/advisor/investing/trust-fund

Letter from a Dead Husband|

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If something tragic were to happen to you, would your surviving family members be able to manage the family finances without you? Motley Fool

Devoted husband Bob Hassmiller asked himself this same question because he was concerned that his spouse wouldn’t be able to take care of the household finances if he passed away, according to an article posted by Motley Fool.

So he wrote his spouse a letter, called “A Letter From Your Dead Husband,” that he updated every year. This letter was a document that contains information and instructions to help your loved ones make sense of their financial life after you die. If something happened to him, his wife would have the letter providing detailed instructions about where to find everything she needed.

In Hassmiller’s “Letter From Your Dead Husband”, he included things that were important to him. Additionally, in the letter, he described why this is important and meaningful, both for him and his spouse.

But, before you begin, spend some time thinking about how you’d like to structure your letter. Do you want to create a giant table or spreadsheet in a program like Excel? Or do you prefer typing out instructions in a word processor? Maybe you want to use a hybrid of both approaches.

Before discussing the topics to include in your letter, keep in mind that federal and state laws often differ depending on where you’re located. Please use this as a basic guide — but financial and estate experts recommend you do your own research.

Have an introduction

Although it may seem self-explanatory, your letter should describe why this is important and meaningful, both for you and whomever you leave behind.

This is a good place to list the contact info for those who are part of your “financial team” (attorney, financial planner, executor, etc.).

You should also include the locations of your personal documents (Quicken files, utility bills, tax returns, etc.), as well as the locations of any legal documents and the names of anyone else who has copies. Don’t forget to include access instructions for safes, alarms, and websites.

Break down your accounts

List all the accounts that hold your money, including the account numbers. Leave no account unidentified! Be sure to note what is and isn’t automatically paid. You can also include a section for recurring and automatic payment accounts that your spouse may wish to stop — things such as Netflix, Amazon Prime, home loans, insurance, and others. Some types of accounts to consider include savings, checking, money market, CDs, brokerage accounts, retirement accounts (401(k), IRA, Roth IRA), and FSAs (health and dependent care).

List out your assets

Provide the physical locations of your non-monetary items that have value. Include identifying information such as license plates, VINs, insurance appraisals, etc.. Some assets to consider are real estate, personal property (autos, motorcycles, jewelry, artwork, etc.), stock or bond certificates held outside brokerage accounts, what’s owed you (money, goods, or services), business interests, Social Security income, and pension income.

Explain your liabilities

List all the debt or other liabilities in this section. List everything you owe, with account numbers and information about automatic payments, if applicable. Be sure to identify debts held in your name alone separately from what is held jointly by you and another person (spouse, business partner, etc.).

Liabilities to consider are credit card accounts, home equity loans or lines of credit, student loans, personal loans, mortgages, auto loans, business loans, and money, goods, or services you owe someone.

Run through your insurance

People sometimes forget how many different types of insurance they have. If you have minor children, it is wise to review your insurance needs about every three years. And be sure to list the term/renewal date of any insurance.

Some insurances to consider are life, health, disability, vehicle, home or renters, and property (you know, for Aunt Gertrude’s rubies that nobody wants to wear).

Collect your legal documents

Provide the locations of all your legal or other important documents, as well as who has hard copies.  Legal documents should include a will, a living will, instructions for final arrangements, trusts or a living trust, power of attorney, medical power of attorney or an advance directive, financial power of attorney, and account names and locations of any passwords.

You can also use this section to address the general disposition of your assets when you die.

Share your financial roadmap
Use this section to provide a summary of your existing finances. You want to give your spouse a general overview of how your finances are set up, what your short- and long-term goals are, and how those may change once you’re gone. Along with a net-worth summary and a list of all our investments.

List trusted financial advisor and their telephone number, especially if you have allowed your investments to become complicated.

Plan for your spouse’s future, and end with love
Your can dictate the disbursement items or money that you feel strongly about. But many people choose to leave everything in bulk to a spouse, giving them the flexibility to spend as they see fit. So make your general wishes known, and include any special instructions.

End your letters with a statement of love. Your completing this letter speaks of all the wonderful times you’ve planned for your future. The document should require only minimal “tweaking” in the future, though it should be a yearly reminder to you and your spouse that financial planning, too, is a sign of your love.

There’s no “right” way to write your letter, so do what makes sense for your family. Remember, this document is for them — make sure they’re comfortable using it!

References:

  1. https://www.fool.com/retirement/letter.aspx
  2. file:///C:/Users/ebrow/Downloads/DeadLetterChecklist.PDF

 

Income tax rates have increased relative to estate tax rates

Aside

Changes in the federal tax law make it increasingly important to focus on the income tax consequences of estate planning in addition to the estate tax consequences. For estates still subject to federal estate tax, the federal estate tax rate is 40%. These rates must be compared with the top federal income tax rates of 37% on ordinary income and 20% on long-term capital gains and qualified dividends, plus a 3.8% Medicare net investment income tax.

Furthermore, trust income tax rates must be taken into consideration. Trusts are taxed at the highest federal income tax bracket starting at $12,950 in annual trust income. Therefore, when transferring assets to a trust for estate planning purposes, consideration should be given to the potentially negative consequences of higher income taxes. Outdated estate plans may not provide the flexibility required to shift the income tax burden from the trust to individuals in potentially lower tax brackets.

Revisit your estate planning documents and gifting strategies with your attorney and tax professional to determine whether they are still appropriate, considering the Medicare net investment income tax, the current federal estate tax rate, and the increased applicable exclusion amount.

Wealth accumulation can create estate tax issues

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Financial security is a goal for us all, but with wealth comes complexity. An increase in wealth not only typically causes an increase in annual income taxes, but it may also beget estate and gift taxes. Current federal law allows each citizen to transfer a certain amount of assets free of federal estate and gift taxes, named the” applicable exclusion amount.

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In 2020, every citizen may, at death, transfer assets valued in the aggregate of $11.58 million ($23.16 million for married couples), free from federal estate tax. For gifts made during one’s lifetime, the applicable exclusion amount is the same. Therefore, every person is allowed to transfer a total of $11.58 million during their life or at death, without any federal estate and gift tax. (This does not include the annual gift exclusion, which applies as long as each annual gift to each recipient is less than $15,000.)

Therefore, generally, only estates worth more than these amounts at the time of death will be subject to federal estate taxes. But this wasn’t always so. From 2001 to 2009, the applicable exclusion rose steadily, from $675,000 to $3.5 million. 2010 was a unique year, in that there was no estate tax, but it was brought back in 2011 and then made permanent (unless there is further legislation) by the American Tax Relief Act of 2012 at an exclusion amount of $5 million, indexed for inflation. The Tax Cuts and Jobs Act passed in December of 2017 doubled the exclusion amount to $10 million, indexed for inflation ($11.58 million for 2020). However, the new exclusion amount is temporary and is scheduled to revert back to the previous exclusion levels in 2026.

Outdated estate documents may include planning that was appropriate for estates at much lower exemption values. Many documents have formulas that force a trust to be funded up to this applicable exclusion amount, which may now be too large or unnecessary altogether, given an individual’s or family’s asset level.

Take the time to review the formulas in your estate documents with your attorney and tax professional to determine whether the planning you have in place is still appropriate.

https://www.fidelity.com/insights/personal-finance/estate-planning-pitfalls?ah=1

Estate Planning

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“I want to leave my children enough that they feel they can do anything, but not so much that they do nothing.” ~ Warren Buffet

Your Estate Plan

Although estate planning can be a complex task, a well-informed plan can make a big difference in what is left for your loved ones.

Source: Fidelity Investment

Here are a few steps you can take to begin thinking about your estate plan:

  • Gather important documents, and make sure that key family members know where they are.
  • Gather a list of all the things you own, noting any liabilities (like your mortgage) as well. Record the value of each asset (properties, collectibles, jewelry, etc.). Print copies of your most recent statements from your relevant accounts. Note the values and benefits from insurance policies.
  • Consider and write down your objectives for your estate plan. Who should get which assets? Who should get them if something should happen to your beneficiaries? Do you have minors who need care if something were to happen right now? Who should handle your assets if you become unable to make decisions about them? And so forth.
  • Review your will, if you have one in place.
  • Review and update the beneficiaries of your retirement accounts or insurance policies.
  • Review and update powers of attorney for matters of health care or other affairs.
  • Consider if you want to establish a trust, and prepare to talk to an attorney and experienced financial adviser about it.

We never know what could happen tomorrow. But we do know that having a solid estate plan can help ease the burden of your passing on your loved ones.

Revocable vs. Irrevocable Trusts

A trust is a fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries. Trusts can be arranged in many ways and can specify exactly how and when the assets pass to the beneficiaries.

Since trusts usually avoid probate, your beneficiaries may gain access to these assets more quickly than they might to assets that are transferred using a will. Additionally, if it is an irrevocable trust, it may not be considered part of the taxable estate, so fewer taxes may be due upon your death.

Assets in a trust may also be able to pass outside of probate, saving time, court fees, and potentially reducing estate taxes as well.

Other benefits of trusts include:

  • Control of your wealth. You can specify the terms of a trust precisely, controlling when and to whom distributions may be made. You may also, for example, set up a revocable trust so that the trust assets remain accessible to you during your lifetime while designating to whom the remaining assets will pass thereafter, even when there are complex situations such as children from more than one marriage.
  • Protection of your legacy. A properly constructed trust can help protect your estate from your heirs’ creditors or from beneficiaries who may not be adept at money management.
  • Privacy and probate savings. Probate is a matter of public record; a trust may allow assets to pass outside of probate and remain private, in addition to possibly reducing the amount lost to court fees and taxes in the process.Trusts are a powerful and beneficial tool when properly used.

There are two types of trusts: a revocable living trust and an irrevocable trust. Some other terms associated with trusts include “grantor” and “non-grantor” — which are the parties creating the trust.

With a revocable living trust, you still control the assets, can change the trustee at any time, or sell your assets while you’re living, because the grantor — the person who created the trust — is normally the trustee as well. The only benefit a revocable living trust provides is to ensure your assets bypass probate. It does not provide any immediate tax benefits. In fact, income from a revocable living trust is taxed to the grantor.

An irrevocable trust is completely different. It can be used when “gifting” assets in order to reduce a grantor’s taxable estate. Be aware that once you transfer assets to an irrevocable trust, changes are permanent and cannot be undone — or at best — can only be made through a lengthy process. You no longer have any control to sell investments inside the trust and will have to ask your trustee — typically your children or grandchildren — to do so. Since you don’t legally own the assets any longer, they’re either taxed at trust income tax rates or your beneficiaries’ tax rates.

By using a will or trust to legally ensure that you will not only protect the things you worked hard to achieve, you will have the final say about those assets — taking care of the people you love when you’re no longer here. That means not leaving such decisions to attorneys, state governments or the IRS.

References:

  1. https://www.kiplinger.com/article/retirement/T021-C032-S014-estate-planning-is-more-important-than-you-think.html
  2. https://www.fidelity.com/life-events/estate-planning/basics
  3. https://www.fidelity.com/life-events/estate-planning/trusts