What Is Better, a Trust or a Will? – Annapolis and Towson Estate Planning

Estate plans come in all sizes and shapes. One of the decisions in creating an estate plan is whether a trust should be part of your plan, as detailed in this recent article titled “Trust vs. Will: What They Share (And 6 Ways They are Different)” from Yahoo! Money. Both trusts and wills give control over how assets are distributed. However, there are differences.

A trust is a tool for asset protection during and after life, created by an estate planning attorney. When the trust is created, assets are transferred into the trust, which is a legal entity. If it is a revocable trust, typically you are the grantor, trustee, and beneficiary. There are also other roles, like the successor trustee, who is the trustee if the primary is incapacitated and the beneficiary, the person who receives the assets. The trustee is a fiduciary and responsible for managing the assets for the best interest of the beneficiary.

There are many different types of trusts, but they mainly fall into two categories:

Revocable or living trusts allow the grantor full control of the trust. The trust assets are outside of the probate estate. Revocable trusts can be changed, assets may be added and beneficiaries can be changed. However, there is no protection from creditors and no unique tax benefits.

Irrevocable living trusts transfer assets upon death without going through probate. They provide stronger asset protection. Assets in an irrevocable trust are not accessible to creditors and, depending on how they are set up, may place assets outside of the taxable estate.

There are also many specialized trusts. A Special Needs Trust is used to care for a person with special needs, while maintaining their government benefits. A spendthrift trust can be used to leave assets for people who are not capable (or interested) in managing funds responsibly. Trusts provide significantly more control over assets after death than wills. They may also be harder to contest after death, since they go into effect while you are living and may remain in effect for many years.

Wills are used to provide specific directions about how you want to distribute assets upon your death. The will goes through probate, where the court determines if the will is valid, if the executor is acceptable and then the will becomes part of the public record. Creditors can make claims against the estate, family members may challenge the will and depending upon where you live, it could take many months or several years to settle the estate.

How are trusts and wills different?

1—Trusts can be more complex than wills and require management. The will goes into effect upon your death, and you can change a will whenever you want. You also can change a trust whenever you want, but only if it is revocable.

2—Trusts go into effect immediately and they need to be funded, so you will have to transfer assets to the trust.

3—A trust is a separate legal entity, so assets are shielded from estate and inheritance taxes. Certain trusts do pay taxes, so speak with your estate planning attorney about how this may work for you.

4—Certain trusts put assets well beyond the reach of creditors. However, a trust may not be created solely for this purpose, since it could be deemed invalid by a court. However, in most cases, trusts work well to protect assets to pass them along to beneficiaries. A will offers no such protection, unless a “testamentary” trust is created under the will. This will created trust can operate exactly as an inheritance trust created for loved ones after you die and your revocable trust becomes irrevocable.

5—Planning for incapacity should be part of any estate plan. Once a trust is set up and funded, the assets immediately enjoy the protection by having a successor trustee to be in charge of assets if the grantor/trustee becomes incapacitated. A will only addresses what happens after you die, not what happens if you become too sick or are injured and cannot manage your affairs.

6—The trust is the winner when it comes to control over assets after death, if you want to avoid probate. You can instruct the trustee to distribute funds to beneficiaries only under certain conditions and terms. If you want beneficiaries to finish college, for instance, you can direct the trustee to distribute a certain amount of money only after the person completes an undergraduate degree. You can also use the money to pay for their college education.

For most people, a combination of a will and trust works to control assets, prepare for incapacity and, just as importantly, provide peace of mind.

Bottom line: estate planning is complicated, not a do-it-yourself project and should be done with the counsel of an experienced estate planning attorney.

Reference: Yahoo! Money (June 5, 2022) “Trust vs. Will: What They Share (And 6 Ways They are Different”

 

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Is Your Estate Plan Ready for Tax Changes? – Annapolis and Towson Estate Planning

After December 1, 2025, the federal estate tax exemption will fall back to $5 million (indexed for inflation) from the current $12 million level. Now is the time to use available estate planning strategies and ensure that your plan factors in changes in tax law, advises a recent article titled “Are Clients’ Current Estate Plans Soundproof for the Future?” from Financial Advisor.

For many families, structured and leveraged gifting is one of the most useful wealth transfer vehicles. A parent could use their GST and gift tax exemptions to make gifts to children, grandchildren and other family members before this tax law changes.

Here is an example, using a high-net-worth family. Bill and Sue are married, so they can make combined lifetime gifts of $24,120,000. They own a family business worth $10 million in equal shares. They transfer 20% of the business to their children. This is a minority stake, meaning the minority owners have no right to make relevant business decisions and vote on important issues. As a result, the minority stake is discounted and worth $1.3 million instead of $2 million for gift and estate tax purposes and Bill and Sue retain $700,000 more of their allotted exemption.

For lifetime transfers, the valuation date is the date of the gifting, but for transfers at death, the valuation date is the date of death. By using this valuation discount while they are living, Bill and Sue have reduced the value of their company for estate tax purposes, giving their children a percentage of the company in a manner costing less in terms of transfer tax.

By making these gifts in 2022, Bill and Sue have removed $24,120,000 from their estate tax free. They have also removed the appreciation on the assets gifted away from their estate. However—if the gift is not made and the federal estate tax exemption reduces to $6 million per person before their deaths in 2040, then when the second spouse dies, heirs or beneficiaries will receive significantly less than what they would have received if the gift was made prior to the reduction of the federal exemption.

There was concern about tax outcomes if the taxpayer makes gifts now and the exemptions are reduced sooner. However, the IRS Treasury Decision 9884 confirms there will be no claw backs under these circumstances.

If the parents are concerned about making outright gifts to chosen beneficiaries who are too young, immature, or vulnerable to creditors, other strategies can be used to allow them to maintain control, while protecting assets and locking in these estate and gift tax advantages. The grantor can execute a plan ensuring that the donor receives an income from the transferred asset and/or maintaining access to principal.

Speak with an experienced estate planning attorney to learn what strategies are available now to prevent overly burdensome estate taxes in the future. After all, 2025 is not as far away as it seems.

Reference: Financial Advisor (June 8, 2022) “Are Clients’ Current Estate Plans Soundproof for the Future?”

 

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How Do I Store Estate Planning Documents? – Annapolis and Towson Estate Planning

It is a common series of events: an elderly parent is rushed to the hospital in the middle of the afternoon and once children are notified, the search for the Power of Attorney, Living Will and Health Care Power of Attorney begins. It is easily avoided with planning and communication, according to an article from The News-Enterprise titled “Give thought to storing your estate papers.” However, just because the solution is simple does not mean most people address it.

As a general rule, estate planning documents should be kept together in a fire and waterproof container in a location known to fiduciaries.

Most people think of a bank safe deposit box as a protected place. However, it is not a good location for several reasons. Individuals may not have access to the contents of the safe deposit box, unless they are named on the account. Even with their names on the account, emergencies do not follow bankers’ hours. If the Power of Attorney giving the person the ability to access the safe deposit box is inside the safe deposit box, bank officials are not likely to be willing to open the box to an unknown person.

A well-organized binder of documents in a fire and waterproof container at home makes the most sense.

Certain documents should be given in advance to certain agencies or offices. For instance, health care documents, like the Health Care Power of Attorney and Advance Medical Directive (or Living Will) should be given to each healthcare provider to keep in the person’s medical record and be sure they are accessible 24/7 to health care providers. Make sure that there are copies for adult children or whoever has been designated to serve as the Health Care Power of Attorney.

Power of Attorney documents should be given to each financial institution or agency in preparation for use, if and when the time comes.

It may feel like an overwhelming task to contact banks and brokerage houses in advance to make sure they accept a Power of Attorney form in advance. However, imagine the same hours plus the immense stress if this has to be done when a parent is incapacitated or has died. Banks, in particular, require POAs to be reviewed by their own attorneys before the document can be approved, which could take weeks to complete.

Depending upon where you live, Durable General Powers of Attorney may be filed at the county clerk’s office. If a POA is filed but is later revoked and a new document created, or if a fiduciary needs to convey real estate property with the powers conferred by a POA, the document at the county clerk’s office should be updated.

Last will and testaments are treated differently than POA documents. Wills are usually kept at home and not filed anywhere until after death.

Each fiduciary listed in the documents should be given a copy of the documents. This will be helpful when it is time to show proof they are a decision maker.

Having estate planning documents properly prepared by an experienced estate planning attorney is the first step. Step two is ensuring they are safely and properly stored, so they are ready for use when needed.

Reference: The Times-Enterprise (June 11, 2022) “Give thought to storing your estate papers”

 

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

What’s Involved in an Estate Inventory? – Annapolis and Towson Estate Planning

If you are named as executor of an estate, you will be tasked with identifying all the assets of the decedent. Let’s look at some of the options you may have for identifying assets:

  • The deceased’s will if they have one
  • Their financial statements or legal documents
  • Their recent tax returns
  • Abandoned asset database searching; and
  • A public property records search.

Yahoo Finance’s recent article entitled “What Is Included in an Estate Inventory?” says you may also be able to find assets for an estate inventory by talking to the decedent’s financial advisor, estate planning attorney, or relatives. An executor must be as thorough as possible, so the final inventory list submitted to the probate court is accurate and complete.

If you are planning your estate, you can make this job easier for your executor by creating an estate inventory yourself. Keep a copy of this inventory with a copy of your will, if you have one in place. (If you do not have a will, draft one sooner rather than later.) If you pass without a will in place, your assets would be distributed according to state law.

If you are making an inventory of your estate, include the types of assets for which an executor might search. Depending on your financial situation, your personal estate inventory might include:

  • A 401(k) plan or similar employer-sponsored retirement plan
  • Traditional or Roth IRAs
  • Business retirement accounts, such as a solo 401(k) or SEP IRA if you are self-employed
  • Taxable brokerage accounts
  • A Health Savings Account (HSA)
  • College savings accounts
  • Life insurance policies
  • Bank accounts
  • Vehicles
  • Real estate and land
  • Personal possessions that are valued at $500 or more; and
  • Family heirlooms, antiques, or collectibles.

The executor’s job can be simplified by making a list of any liabilities or debts that you owe. This can include a mortgage on your home, auto loans, private student loans, credit cards, installment loans, business loans, tax liens, medical bills and personal loans. Once you complete your personal estate inventory you may want to file a copy of it with your estate planning attorney. Review your inventory annually to make certain that it is up to date.

Knowing what is included in an estate inventory can make your job as an executor easier. If you submit an incomplete inventory, it may delay the probate process.

Reference: Yahoo Finance (Feb. 15, 2022) “What Is Included in an Estate Inventory?”

 

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How Do IRAs and 401(k)s Fit into Estate Planning? – Annapolis and Towson Estate Planning

When investing for retirement, two common types of accounts are part of the planning: 401(k)s and IRAs. J.P. Morgan’s recent article entitled “What are IRAs and 401(k)s?” explains that a 401(k) is an employer-sponsored plan that lets you contribute some of your paycheck to save for retirement.

A potential benefit of a 401(k) is that your employer may match your contributions to your account up to a certain point. If this is available to you, then a good goal is to contribute at least enough to receive the maximum matching contribution your employer offers. An IRA is an account you usually open on your own. As far as these accounts are concerned, the key is knowing the various benefits and limitations of each type. Remember that you may be able to have more than one type of account.

IRAs and 401(k)s can come in two main types – traditional and Roth – with significant differences. However, both let you to delay paying taxes on any investment growth or income, while your money is in the account.

Your contributions to traditional or “pretax” 401(k)s are automatically excluded from your taxable income, while contributions to traditional IRAs may be tax-deductible. For an IRA, it means that you may be able to deduct your contributions from your income for tax purposes. This may decrease your taxes. Even if you are not eligible for a tax-deduction, you are still allowed to make a contribution to a traditional IRA, as long as you have earned income. When you withdraw money from traditional IRAs or 401(k)s, distributions are generally taxed as ordinary income.

With Roth IRAs and Roth 401(k)s, you contribute after-tax dollars, and the withdrawals you take are tax-free, provided that they are a return of contributions, or “qualified distributions” as defined by the IRS. For Roth IRAs, your income may limit the amount you can contribute, or whether you can contribute at all.

If a Roth 401(k) is offered by your employer, a big benefit is that your ability to contribute typically is not phased out when your income reaches a certain level. 401(k) plans have higher annual IRS contribution limits than traditional and Roth IRAs.

When investing for retirement, you may be able to use both a 401(k) and an IRA with both Roth and traditional account types. Note that there are some exceptions to the rule that withdrawals from IRAs and 401(k)s before age 59½ typically trigger an additional 10% early withdrawal tax.

Reference: J.P. Morgan (May 12, 2021) “What are IRAs and 401(k)s?”

 

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What Sparks the Contesting of a Will? – Annapolis and Towson Estate Planning

A last will and testament is the document used to direct your executor to distribute assets and property according to your wishes. However, it is not uncommon for disgruntled or distant family members or others to dispute the validity of the will. A recent article titled “5 Reasons A Law Will May Be Contested” from Vents Magazine explains the top five factors to keep in mind when preparing your will.

Undue influence is a commonly invoked reason for a challenge. If a potential beneficiary can prove the person making the will (the testator) was influenced by another person to make decisions they would not have otherwise made, a will challenge could be brought to court. Undue influence means the testator’s decision was significantly affected by a person who stood to gain something by the outcome of the will and made a concerted effort to change the testator’s mind.

Even if there was no evidence of fraud, any suspicion of the testator’s being influenced is enough for a court to accept a case. If you think someone unduly influenced a loved one, especially if they suffer from any mental frailties or dementia, you may have cause to bring a case.

Outright fraud or forgery is another reason for the will to be contested. If there have been many erasures or signature styles appear different from one document to another, there may have been fraud. An estate planning attorney should examine documents to evaluate whether there is enough cause for suspicion to challenge the will.

Improper witnesses. The testator is required to sign the will with witnesses present. In some states, only one witness is required. In most states, two witnesses must be present to sign the will in front of the testator. A beneficiary may not be a witness to the signing of the will. Some states have changed laws to allow for remote signings in response to COVID. If the rules have not been followed, the will may be invalid.

Mistaken identity seems farfetched. However, it is a common occurrence, especially when someone has a common name or more than one person in the family has the same name, and the document has not been properly signed or witnessed. This could create confusion and make the document vulnerable to a challenge. An experienced estate planning attorney will know how to prepare documents to withstand any challenges.

Capacity in the law means someone is able to understand the concept of a will and contents of the document they are signing, along with the identities of the people to whom they are leaving their assets. The person does not need to have perfect mental health, so people with mild cognitive impairments, such as depression or anxiety, may make and sign a will. A medical opinion may be needed, if there might be any doubt as to whether a person had testamentary capacity when the will is signed.

A will contest can be time-consuming and expensive, so keep these issues in mind, especially if the family includes some litigious individuals.

Reference: Vents Magazine (May 6, 2022) “5 Reasons A Law Will May Be Contested”

 

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

What Is the Proposed IRS Anti-Clawback Provision? – Annapolis and Towson Estate Planning

The proposed amendment is designed to fix some loopholes in a 2019 regulation passed in response to the 2017 Tax Cuts and Jobs Act. The 2017 law doubled the value of the estate and gift tax exemption until December 31, 2025, when it goes from $12.06 million to $5.49 million. According to this recent article from Financial Advisor titled “Amending The IRS’s Anti-Clawback Provision on Gifting,” the law generated concern among those who wanted to make large gifts to take advantage of the historically high federal estate and gift tax exemption.

The concern was whether the IRS would attempt to clawback the taxes, if the taxpayer died after 2025. This is when the estate tax reverts back to a much lower number. A regulation was issued in 2019 to reassure taxpayers and explain how they could take advantage of the high exemption as long as they made gifts before 2026, regardless of the exemption at the time of their death.

The IRS recognized this as a good step. However, it had a loophole and hence the new proposed amendment. The amendment provides clarity on what constitutes an actual gift. If the donor garners a benefit from the gift or maintains control over the gift, is it really a gift?

Giving the gift of a promissory note worth $12.06 million to lock in the high exemption and leaving it unpaid until death, for instance, is not a gift. The person is not actually giving anything away until after death. Therefore, the note is part of the taxable estate and bound by the estate tax exemption amount in place at the day of death.

The same goes for a person who gives ownership interests in a limited liability company, while continuing to serve as the company’s manager. Taxpayers must be very careful not to mischaracterize their gifts to stay on the right side of this regulation.

Another example: let’s say a person puts a $12 million vacation home into an LLC, with clear directions for home to be kept in the family, and then makes gifts of the LLC ownership interests to the children. If the donor wants those gifts to max out the current $12.06 million exemption, rather than be subject to the lower exemption in place at the date of death, the owner should not be the manager of the LLC. The same goes for the owner living rent-free in any property he’s gifted to anyone, if the wish is to take advantage of the gifting exemption.

In the same way, a mother who places money into a trust fund for a child may not serve as a trustee and control the assets and distributions, if she wishes to take advantage of the tax benefit.

If your estate plan uses grantor annuity trusts (GRATs), Grantor Retained Income Trusts (GRITs) and qualified personal residence trusts (QPRTs), speak with your estate planning attorney. If you die during the annuity period or term of the trust, your estate may lose the benefit of the anti-clawback regulation.

If the amendment is approved, which is expected in late summer, make sure your estate plan follows the new guidelines. If you are truly giving gifts before 2026, you will likely be able to take advantage of this substantial tax benefit and pass more of your estate to your heirs.

Reference: Financial Advisor (May 27, 2022) “Amending The IRS’s Anti-Clawback Provision on Gifting”

 

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

Does a Supplemental Needs Trust have an Impact on Government Benefits? – Annapolis and Towson Estate Planning

Supplemental Needs Trusts allow disabled individuals to retain inheritances or gifts without eliminating or reducing government benefits, like Medicaid or Supplemental Security Income (SSI). There are cases where the individual is vulnerable to exploitation or unable to manage their own finances and using an SNT allows them to receive additional funds to pay for things not covered by their benefits.

Having an experienced estate planning attorney properly create the SNT is critical to preserving the individual’s benefits, according to a recent article titled “Protecting Government Benefits using Supplemental Needs Trusts” from Mondaq.

Disabled individuals who receive SSI must be careful, since the rules about assets from SSI are far more restrictive then if the person only received Medicaid or Social Security Disability and Medicaid.

The trustee of an SNT makes distributions to third parties like personal care items, transportation (including buying a car), entertainment, technology purchases, payment of rent and medical or therapeutic equipment. Payment of rent or even ownership of a home may be paid for by the trustee.

The SNT may not make cash distributions to the beneficiary. Payment for any items or services must be made directly to the service provider, retailers, or other entity, for benefit of the individual. Not following this rule could lead to the SNT becoming invalid.

SNTs may be funded using the disabled person’s own funds or by a third party for their benefit. If the SNT is funded using the person’s own funds, it is called a “Self-Settled SNT.” This is a useful tool if the disabled person inherits money, receives a court settlement or owned assets before becoming disabled.

If someone other than the disabled person funds the SNT, it is known as a “Third-Party SNT.” These are most commonly created as part of an estate plan to protect a family member and ensure they have supplementary funds as needed and to preserve assets for other family members when the disabled individual dies.

The most important distinction between a Self-Settled SNT and a Third-Party SNT is a Self-Settled SNT must contain a provision to direct the trust to pay back the state’s Medicaid agency for any assistance provided. This is known as a “Payback Provision.”

The Third-Party SNT is not required to contain this provision and any assets remaining in the trust at the time of the disabled person’s death may be passed on to residual beneficiaries.

Many estate planning attorneys use a “standby” SNT as part of their planning, so their loved ones may be protected, in case an unexpected event occurs and a family member becomes disabled.

References: Mondaq (May 27, 2022) “Protecting Government Benefits using Supplemental Needs Trusts”

 

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

How Can I Help My Family After I Pass Away? – Annapolis and Towson Estate Planning

In addition to attempting to arrange a spouse’s funeral, a grieving person must try to locate the deceased’s will, the executor, information on the family’s finances and the various family accounts’ usernames and passwords.

Starts at 60’s recent article entitled “How to take care of your family in life and in death” explains that estate planning is always a difficult subject to deal with, because no one wants to arrange things for when they die.

However, good communication and planning make the life of the surviving spouse and family easier, particularly during the inevitably stressful time of dealing with the death. Let’s look at seven key points of estate planning:

Communication. Sharing information is crucial. Both spouses should be aware of the family’s investments and advisors. The advisers should also know both clients to help make any transition as seamless as possible. Where one spouse has taken responsibility for the financial affairs, he or she should leave specific instructions concerning who to contact in the event of their death and what steps to be taken.

Bank accounts. It is important to know what bank accounts the couple has, and, importantly, what are the accounts’ usernames and passwords. They should also make the executor or adult children aware of the location of the keys to the safety deposit box or the code to the safe at home.

Financial contacts. The couple should divulge important family financial contacts, such as an accountant, estate planning attorney, their insurance broker and financial advisors.

Will. Determine where their wills are kept and if they are up to date. Note the names of the executors. You should also see if the executors are aware they have been named as executors, and if the couple has any power of attorney documents.

Life Insurance. See if the couple has life insurance and note the details of the policy, as well as the agent’s contact information.

Other family assets. Your other valuables should be recorded with the specific ownership of each noted and shared with an estate planning attorney. This includes companies, motor vehicles, boats, vacation homes and art collections.

Reference: Starts at 60 (April 2, 2022) “How to take care of your family in life and in death”

 

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

Can I Make Decisions for My 18-Year-Old ‘Kid’ If She Becomes Incapacitated? – Annapolis and Towson Estate Planning

The Press-Enterprise’s recent article entitled “Legal documents for young adults” describes some of the important legal and estate planning documents your “kid” (who is now an adult) should have.

HIPAA Waiver. This form allows medical personnel to provide information to the parties you have named in the document. Without it, even mom would be prohibited from accessing her 19-year-old’s health information—even in an emergency. However, know that this form does not authorize anyone to make decisions. For that, see Health Care Directives below.

Health Care Directive. Also known as a health care power of attorney, this authorizes someone else to make health care decisions for you and details the decisions you would like made.

Durable Power of Attorney. Once your child turns 18, you are no longer able to act on their behalf, make decisions for them, or enter into any kind of an agreement binding them. This can be a big concern, if your adult child becomes incapacitated. A springing durable power of attorney is a document that becomes effective only upon the incapacity of the principal (the person signing the document). It is called a “springing” power because it springs into effect upon incapacity, rather than being effective immediately.

A durable power of attorney, whether springing or immediate, states who can make decisions for you upon your incapacity and what powers the agent has. The designated agent will typically be able to access bank accounts, pay bills, file insurance claims, engage attorneys or other professionals, and in general, act on behalf of the incapacitated person.

They will always be your babies, but once your child turns 18, he or she is legally an adult.

Be certain that you have got the legal documents in place to be there for them in case of an emergency.

Remember a spring break, when they are home for summer after their 18th birthday, or a senior road trip are all opportunities when these documents may be needed.

Reference: The Press-Enterprise (April 2, 2022) “Legal documents for young adults”

 

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