Addressing Vacation Home in Another State in Estate Planning – Annapolis and Towson Estate Planning

Many families have an out-of-state cabin or vacation home that is passed down by putting the property in a will. While that is an option, this strategy might not make it as easy as you think for your family to inherit this home in the future.

Florida Today’s recent article entitled “Avoiding probate: What is the best option for my out-of-state vacation home?” explains the reason to look into a more comprehensive plan. While you could just leave an out-of-state vacation home in your will, you might consider protecting your loved ones from the often expensive, overwhelming and complicated process of dealing both an in-state probate and an out-of-state probate.

There are options to help avoid probate on an out-of-state vacation home that can save your family headaches in the future. Let’s take a look:

  • Revocable trust: This type of trust can be altered while you are still living, especially as your assets or beneficiaries change. You can place all your assets into this trust, but at the very least, put the vacation home in the trust to avoid the property going through probate. Another benefit of a revocable trust is you could set aside money in the trust specifically for the management and upkeep of the property, and you can leave instructions on how the vacation home should be managed upon your death.
  • Irrevocable trust: similar to the revocable trust, assets can be put into an irrevocable trust, including your vacation home. You can leave instructions and money for the management of the vacation home. However, once an irrevocable trust is established, you cannot amend or terminate it.
  • Limited liability company (LLC): You can also create an LLC and list your home as an asset of the company to eliminate probate and save you or your family from the risk of losing any other assets outside of the vacation home, if sued. You can protect yourself if renting out a vacation home and the renter decides to sue. The most you could then lose is that property, rather than possibly losing any other assets. Having beneficiaries rent the home will help keep out-of-pocket expenses low for future beneficiaries. With the creation of an LLC, you are also able to create a plan to help with the future management of the vacation home.
  • Transfer via a deed: When you have multiple children, issues may arise when making decisions surrounding the home. This is usually because your wishes for the management of the house are not explicitly detailed in writing.
  • Joint ownership: You can hold the title to the property with another that’s given the right of survivorship. However, like with the deed, this can lead to miscommunication as to how the house should be cared for and used.

Plan for the future to help make certain that the property continues to be a place where cherished memories can be made for years to come. Talk to a qualified estate planning attorney for expert legal advice for your specific situation.

Reference: Florida Today (July 2, 2022) “Avoiding probate: What is the best option for my out-of-state vacation home?”

 

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

What Happens to Stock Options when Someone Dies? – Annapolis and Towson Estate Planning

Once your business grows, so does the pressure to make good financial decisions in the short and long term. When you think about the future, estate and succession planning emerge as two major concerns. You are not just considering balance sheets, profits and losses, but your family and what will happen to them and your business when you are not around. This thinking leads to what seems like a great idea: transferring stock or LLC membership units to one or more of your adult children.

There are benefits, especially the ability to avoid a 40% estate tax and other benefits. However, there are also lots of ways this can go sideways, fast.

Executing due diligence and creating an exit plan to minimize taxes and successfully transfer the business takes planning and, even harder, removing emotions from the plan to make a good decision.

An outright transfer of stock or ownership units can expose you and your business to risk. Even if your children are Ivy-league MBA grads, with track records of great decision making and caring for you and your spouse, this transaction offers zero protection and all risk for you. What could go wrong?

  • An in-law (one you may not have even met yet) could try to place a claim on the business and move it away from the family.
  • Creditors could seize assets from the children, entirely likely if their future holds legal or financial problems—or if they have such problems now and have not shared them with you.
  • Assets could go into your children’s estates, which reintroduces exposure to estate taxes.

No family is immune from any of these situations, and if you ask your estate planning attorney, you will hear as many horror stories as you can tolerate.

Trusts are a solution. Thoughtfully crafted for your unique situation, a trust can help avoid exposure to some estate and other taxes, allocating effective ownership to your children, in a protected manner. Your ultimate goal: keeping ownership in the family and minimizing tax exposure.

A Beneficiary Defective Inheritance Trust (BDIT) may be appropriate for you. If you have already executed an outright transfer of the stock, it is not too late to fix things. The BDIT is a grantor trust serving to enable protection of stock and eliminate any “residue” in your children’s estates.

If you have not yet transferred stock to children, do not do it. The risk is very high. If you have already completed the transfer, speak with an experienced estate planning attorney about how to reverse the transfer and create a plan to protect the business and your family.

Bottom line: business interests are better protected when they are held not by individuals, but by trusts for the benefit of individuals. Your estate planning attorney can draft trusts to achieve goals, minimize estate taxes and, in some situations, even minimize state income taxes.

Reference: The Street (June 27, 2022) “Should I Transfer Company Stock to My Kids?”

 

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

Can Estate Planning Reduce Taxes? – Annapolis and Towson Estate Planning

The estate tax exemption won’t always be so high. The runup in housing prices may mean capital gains taxes will become a serious issue for many people. There are solutions to be found in estate planning, including one known as an “Upstream Power of Appointment” Trust, as explained in the article “How to Use Your Estate Plan to Save on Taxes While You’re Still Alive!” from Kiplinger.

The strategy is not for everyone. It requires a completely trustworthy, elderly and less wealthy relative, such as a parent, aunt, or uncle, to serve as an additional trust beneficiary. First, here is some background information:

Basis: This is the amount by which a price is reduced to determine the taxable gain. This is often the historical cost of an asset, which may be adjusted for depreciation or other items. Estate planning attorneys are familiar with these terms.

Step-up (in-basis): If you bought a house for $100,000 and sold it for $400,000, your taxable gain would be $300,000. However, if the house had belonged to your father and was being sold to distribute assets between you and your siblings, the basis (cost) would be increased to the fair market value at the date of your father’s passing. This increase is known as the “step-up in basis” and here is the benefit: there would be no capital gain on the sale and no taxes owed.

Lifetime estate tax exemption: This is currently at $12.06 million per person or $24.12 for married couples. This is the amount of assets which can be passed to children or others free of any federal estate tax. However, the number will take a deep dive on January 1, 2026, when it reverts back to just under $6 million, adjusted for inflation. Plan for the change now, because 2026 will be here before you know it!

Upstream planning involves transferring certain appreciated assets to older or other family members with shorter life expectancies. Since the person is expected to die sooner, the basis step-up is triggered sooner. When the named person dies, you obtain a basis step-up on the asset, saving income taxes on depreciation and saving capital gains on a future sale of the property.

Most Americans are not worried about paying estate taxes now, but no one wants to pay too much in income taxes or capital gains taxes.

To make this happen, your estate planning attorney will need to give an elderly person (let’s say Aunt Rose) the general power of appointment over the asset. Section 2041 of the Internal Revenue Code says you may give your Aunt Rose a power to appoint the asset to her estate, creditors, or the creditors of her estate. Providing the power will include the value of the property in her estate, not yours, ensuring the basis step-up and income tax savings.

Do not do this lightly, as a general power of appointment also gives Aunt Rose ownership and the right to give the property to herself or anyone she wishes. Can you protect yourself, if Aunt Rose goes rogue?

While the IRC rule does not require Aunt Rose to get your permission to control or change distribution of the property, a trust can be crafted with a provision to effectuate the desired result. The IRC does not require Aunt Rose to know about this provision. This is why the best person for this role is someone who you know and trust without question and who understands your wishes and the desired outcome.

Proper planning with an experienced estate planning attorney is a must for this kind of transaction. All the provisions need to be right: the beneficiary need not survive for any stated period of time, you should not lose access to the assets receiving the basis increase, you want a formula clause to prevent a basis step down if the property or asset values fall and you want to be sure that assets are not exposed to creditor claims or any other liabilities of the person holding this broad power.

Reference: Kiplinger (July 3, 2022) “How to Use Your Estate Plan to Save on Taxes While You’re Still Alive!”

 

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

What’s Involved with Being a Trustee? – Annapolis and Towson Estate Planning

There is an old saying that the two best days in a boat owner’s life are the day they buy their boat and the day they sell it.

Forbes’ recent article entitled “How To Be An Effective Trustee” says that a similar notion applies to being a trustee – it is an honor to be named and then a huge relief when it is over. That is because being a trustee is difficult.

Remember that a trust is a fiduciary relationship in which one party (the trustor) gives another party (the trustee) the right to hold title to property or assets for the benefit of a third party (the beneficiary). Trusts are created to provide legal protection for the trustor’s assets, to make certain those assets are distributed according to the wishes of the trustor, and to save time, reduce paperwork and, in some cases, avoid or reduce inheritance or estate taxes.

Being a trustee requires knowledge about a wide range of topics, including:

  • The trustee’s fiduciary duties, which include loyalty, impartiality, duty of care, protection of trust property, enforcement of claims and the duty to inform and account to beneficiaries, among others (violation of these duties exposes the trustee to liability).
  • Understanding the details of the trust, like the specifics of the distribution instructions.
  • Investments and the ability to engage and monitor investment managers.
  • Administrative matters, such as record keeping and principal and income accounting.
  • Estate planning, trusts and the basics of the estate, gift and generation skipping taxes.
  • Income tax, including how trusts are taxed both by the federal government and the state.

A trustee must also be able to productively communicate and work with the beneficiaries on their financial wellness and distribution needs, which is an area that can be full of conflict.

It is a daunting list. Talk with an experienced estate planning attorney to discuss your situation in detail.

Reference: Forbes (May 31, 2022) “How To Be An Effective Trustee”

 

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

What Does a Blended Family Need to Know about Finances? – Annapolis and Towson Estate Planning

Family finances can be a big issue in any circumstances. It is even more significant with blended families, where two sets of often well-established financial histories and philosophies try to merge into one.

Kiplinger’s recent article entitled “Yours, Mine and Ours: A Checklist for Blended Family Finances” says that a blended family is one where people have remarried, either after a divorce or the death of a spouse. Sometimes it is older couples already in retirement. In other cases, it is a younger couple still trying to raise children.

However, regardless of the specifics of any individual situation, when families blend, so do their finances. That is when things can get problematic, if careful planning and communication do not occur.

Here are a few things to consider:

Money habits. People are raised with different ideas about money. They are influenced by their parents or by the circumstances of their formative years. Some people are exceptionally frugal and save every penny and seldom, if ever, splurge on something just for fun. Others spend with reckless abandon, unconcerned about the unexpected expenses that life can throw at them at any moment.

Many people are somewhere in between these extremes. If you are entering a serious relationship, you should speak to your new partner about how each of you approaches spending money.

Financial accounts and bills. Once you learn each other’s financial philosophy, you will have decisions to make. These include whether to blend your financial accounts or keep them separate. If the two of you are closely aligned with your finances and how you approach spending, you may want to simply combine everything. If you are older, have adult children from prior relationships and are more financially established, you may decide to keep things separate.

For many, a hybrid approach may be best — keep some things separate, but have common savings, investments and household accounts to reach your blended goals.

Family. When there are children from a prior marriage — especially young children — additional financial situations will need to be addressed. Issues of child support and how it fits into the overall budget is one concern, as is the status of college funding for the children.

Talk to an experienced estate planning attorney to make sure you have the plans for your blended family set up the way you wish.

Reference: Kiplinger (June 27, 2022) “Yours, Mine and Ours: A Checklist for Blended Family Finances”

 

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

What Is Power of Attorney and Is It Important? – Annapolis and Towson Estate Planning

Most people realize the importance of the last will and testament. However, they remain unaware of the importance of a durable power of attorney. This document authorizes another person to act on your behalf while you are alive and expires upon death, as explained in a recent article titled “Power of attorney likely to be first vital estate document” from The News-Enterprise.

The power of attorney is used to give authorization regarding legal and financial matters. It can be tailored to be as broad or as narrow as one wishes. A healthcare proxy, also known as a healthcare power of attorney, is used to give authorization for medical decisions.

The general POA is used when a person is unable to act for themselves due to illness or injury. It is also needed when a person is unable to act on their own behalf because of mental incapacity. The POA is also used for when someone prefers to have another person manage their financial affairs.

Spouses use POAs to handle day-to-day financial tasks, from dealing with insurance companies to managing bank accounts, loans, or other financial matters. If one spouse cannot attend a real estate closing, for instance, the other will need a POA so they may represent their spouse.

Some people think just adding another person to an account will work the same way as a POA. However, this is not accurate. A co-owner might be able to pay bills. However, their ability to do anything else will be limited. They will not be able to amend the account, unless both parties are present, for instance.

POAs are state-specific documents, so any POA, whether for healthcare or finances, should be created by an estate planning attorney in the state where you live and any state where you own property.

Some powers, including the ability to make gifts of the principal’s property or to change beneficiaries for retirement accounts or life insurance policies, may sound as if they are far beyond what is needed when these documents are first drafted. However, unexpected things happen at all stages of life, and situations arise where these powers are needed. Seemingly simple tasks become far more complicated, if the POA does not permit these types of additional powers.

If there is concern about broad powers, the document can include limited language. For instance, a POA can include a limit on gifting the principal’s property pursuant to any previously documented wishes. This will allow gifting to be completed, but only to the terms already indicated. However, be careful about broad limiting language, like limiting gifts to annual gift exclusions. Prohibiting an agent from acting in ways to protect the principal’s property and best interest could be counterproductive.

Drafted by an experienced estate planning attorney to suit the specific needs of the individual, a power of attorney can make it possible for a trusted individual to conduct your wishes and protect your best interests. Make sure that you have one and update it whenever you update your overall estate plan.

Reference: The News Enterprise (June 25, 2022) “Power of attorney likely to be first vital estate document”

 

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

The Future of Your IRA and How the SECURE Act Changed the Rules – Annapolis and Towson Estate Planning

An ongoing series of changes from Congress has estate planning lawyers paying close attention to what is going on in Washington. The IRS recently proposed more changes to IRAs, details of which are explained in this recent article “The Secure Act Changed Inherited IRA Rules. What’s an Advisor to Do?” from Think Advisor. Every time the laws change, new opportunities and new restrictions are presented.

Having to empty inherited IRAs within 10 years makes the IRA less attractive from an estate planning perspective. If your legacy plan included leaving significant assets through an IRA, there are a number of alternatives to consider. First, take a longer look at your estate through an estate planning, inheritance and tax planning lens. Do you have enough funds to pay for the retirement you planned without the IRA? If not, the next steps may not apply to your situation.

What are your estate planning goals? If married, your spouse is probably the beneficiary on retirement accounts and life insurance policies. If you do not know who is named as your intended beneficiary, now is the time to check to be sure your beneficiaries are up to date.

Taxes come next, for you, your spouse and any non-spousal heirs. Withdrawals from traditional Roth IRAs are not generally taxable. Will anyone (besides your spouse) receiving the IRA be able to pay the taxes, or will they need to use the assets in the IRA to pay taxes?

The Roth IRA provides an excellent alternative to getting hurt by the SECURE Act’s 10-year restriction on inherited IRAs. Taxes are paid when the account is funded, there are no withdrawal requirements, and the accounts are free to grow over any length of time. Money in a traditional IRA may be converted to a Roth IRA, although you will be paying taxes on the conversion.

The Roth IRA conversion has a five-year requirement. Funds must be converted and remain in the account for five years before the more flexible Roth rules apply.

Roth IRAs may be passed to beneficiaries income-tax free. Non-spousal beneficiaries can take withdrawals from Roth IRAs tax-free as long as the five-year rule has been met. The beneficiaries can then use their inheritance as they wish, without the funds being diminished by higher taxes resulting from taking out large sums in a relatively short amount of time.

Roth IRAs are not exempt from federal estate taxes; just as traditional IRAs are not exempt. By making the conversion and paying the taxes upfront, however, you can at least minimize income taxes for heirs, even though you cannot eliminate the federal estate tax.

Rather than do the conversion all at once, consider doing a Roth IRA conversion over time, figuring out with your estate planning attorney the best way to do this to minimize your tax burden and adjust it for years when income is lower.

This flexible strategy with Roth IRAs can be used with all or a portion of the IRA, protecting part of the IRA for the next generation while using part of the funds for retirement. Your estate planning attorney will help you determine the best way to go forward, to meet your current and future needs.

Reference: Think Advisor (June 21, 2022) “The Secure Act Changed Inherited IRA Rules. What’s an Advisor to Do?”

 

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

What Is the Best Asset Protection? – Annapolis and Towson Estate Planning

Everyone should have an estate plan incorporating asset protection and tax planning. Most people do not realize they live with a certain level of risk, and it can be addressed in their estate plan, says an article from Forbes titled “You Need An Asset Protection Plan Not Just A Will.”

Being aware of these issues and knowing that they need to be addressed is step one. Here is an illustration: a married couple in their 50s have two teenage children. They are diligent people and made sure to have an estate plan created early in their marriage. It has been updated over the years, adding guardians when their children were born and making changes as needed. They have worked hard and also have been fortunate. They own a vacation home they rent most of the year and a small retail business and both of their teenage children drive cars. They do not see a reason to tie asset protection and risk management into their estate plan. No one they know has ever been sued.

With assets in excess of $4 million and annual income of $350,000, they are a risk target. If one of their children were in an auto accident, they might be liable for any damages, especially if they own the cars the children drive.

The vacation home, if not held in a Limited Liability Company (LLC) or another type of entity, could lead to exposure risks too. If the property is not insured as an income-producing business property and something occurs on the property, the insurance company could easily refuse the claim if the house is insured as a residence.

If their retail business is owned by an LLC or another properly prepared entity, they have personal protection. However, if they have not followed the laws of their state for a business, they might lose the protection of the business structure.

Retirement assets also need to be protected. If they have employees and a retirement plan and are not adhering strictly to all of the requirements, their retirement plan qualification could easily be placed in jeopardy. Their estate planning attorney should be asked to review the pension plan and how it is being administered to ensure that their retirement is not at risk.

There are several reasons why tax oriented trusts would make a lot of sense for this couple. While current gift estate and GST (Generation Skipping Tax) exemptions are historically high right now, they won’t be forever.

This couple would be well-advised to speak with their estate planning attorney about the use of trusts, to serve several distinct functions. Trusts can shelter assets from litigation, decrease or minimize estate taxes when the estate tax changes in 2026 and possibly protect life insurance policies.

Estate planning and risk management are not only for people with mansions and global businesses. Regular people, business owners and wage earners in all tax brackets need an estate plan to address their legacy, protect their assets and defend their estate against risks.

Reference: Forbes (June 7, 2022) “You Need An Asset Protection Plan Not Just A Will”

 

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

Should a Reverse Mortgage Be Used for Long-Term Care? – Annapolis and Towson Estate Planning

Someone turning 65 has nearly a 7-in-10 chance of needing long-term care in the future, according to the Department of Health and Human Services. However, many people do not have the savings to manage the cost of assisted living. What they do have is a mortgage-free home — and the equity in it, giving them the potential option of a reverse mortgage to help cover care costs.

MSN’s recent article entitled “A reverse mortgage could be one way to pay for long-term care, but should you do it?” looks at how to evaluate whether a reverse mortgage might be a smart option.

A reverse mortgage is a loan or line of credit on the assessed value of your home. Most reverse mortgages are federally backed Home Equity Conversion Mortgages, or HECMs, which are loans up to a federal limit of $970,800. Homeowners must be 62 years old to apply.

If you have at least 50% to 55% equity in your home, you have a good chance of qualifying for a loan or line of credit for a portion of that equity. The amount depends on your age and the home’s appraised value. Note that you must keep paying taxes and insurance on the home. The loan is repaid when the borrower dies or moves out. If there are two borrowers, the line of credit remains until the second borrower dies or moves out.

A reverse mortgage can provide a stream of income to pay for long-term care. However, there are some limitations. A reverse mortgage requires that you live in the home.

If you are the sole borrower of a reverse mortgage, and you move to a care facility for a year or longer, you will be in violation of the loan requirements. Therefore, you will have to repay the loan.

Because of the costs, reverse mortgages are also best suited for a circumstance where you plan to stay in your home long-term. They do not make sense if your home is not right for aging in place or if you plan to move in the next three to five years. However, for home health care or paying for a second borrower who is in a nursing home, this loan can help bridge the gap.

The income is also tax-free, and it does not affect your Social Security or Medicare benefits.

Reverse mortgages are expensive. The costs are equal to those of a traditional mortgage, 3% to 5% of the home’s appraised value. Interest accrues on any portion you have used, so eventually you will owe more than you have borrowed. Finally, you will leave less to your heirs.

Reference: MSN (June 13, 2022) “A reverse mortgage could be one way to pay for long-term care, but should you do it?”

 

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

Should I Update My Estate Plan? – Annapolis and Towson Estate Planning

An estate plan exists to accomplish three things.

  1. Preserving your accumulated wealth
  2. To specify who will inherit your assets after your death; and
  3. To indicate who will make health care and financial decisions on your behalf if you are unable.

Real Daily’s recent article entitled “4 Good Reasons to Update Your Estate Plan” says that as you age, you should consider updating your estate plan. Why? Well, your feelings may change over time, or you may experience a significant life event that requires you to update things. These are events such as a marriage or divorce, a new child or grandchild, or a significant change in your health, wealth and outlook on life.

In addition to your will and trusts, you need to review your power of attorney, healthcare directive, living will and HIPAA waiver.

It is critical to recognize the life events that may necessitate updating your estate plan.

For example, if you are recently married or divorced, according to some state laws, existing wills are nullified when someone gets married or divorced.

It is also possible that your wealth has increased significantly, which may affect the way you view how your assets should be distributed to your beneficiaries.

Another reason to update your plan, is if you want to give more (or less) to charity or to your heirs.

Your executor or trustees may change their minds about their roles, no longer live nearby, or they themselves have died. If an individual is no longer interested in assuming those responsibilities, no longer alive, or no longer in good health or of repute, then there is a need to revise the document.

Some other reasons to update your plan include if you are in the process of retiring, moving to another state, or buying or selling real estate.

Each of these events calls for a comprehensive estate plan review.

Finally, your goals may evolve over the years as a result of changes to your lifestyle or circumstances, such as an inheritance, career change, marriage, house purchase, or a growing family.

Reference: Real Daily (June 13, 2022) “4 Good Reasons to Update Your Estate Plan”

 

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