What are the Advantages of Putting an Estate in a Modern Directed Trust? – Annapolis and Towson Estate Planning

Many families use their estate, gift and generation-skipping transfer tax exemptions to fund a flexible modern trust for non-tax reasons, explains an article “Trust Planning in Unprecedented Times” from Wealth Management. Future uncertainty is one of the reasons, which seems keenly appropriate today.

Passing family values as well as wealth to future generations is an important part of estate planning for many families. A directed trust can accomplish both goals, through the participation of family members and advisors in the directed trust’s distribution committee (DC). The DC decides how trust income and principal will be distributed and directs the administrative trustee accordingly.

Any distribution over and above the health, education, maintenance and support of beneficiaries needs to be considered from a tax-sensitive perspective, but the DC has the flexibility to make these decisions.

These modern directed trusts can also be created to allow for charitable purposes. Donations to charity from a non-charitable modern directed trust lets the family express its social responsibility, while obtaining unlimited income tax deductions to the trust.

There are instances where knowledge of a trust is kept from beneficiaries or other family members, if they lack the financial maturity or do not understand or comply with family values. Other reasons to keep a trust quiet are asset protection, divorce, ID theft and similar issues. In many modern trust states, the trust can remain quiet, even after the grantor has died or becomes incapacitated.

Modern directed trusts provide protection against divorce. Often the trust’s main protection is the use of a spendthrift provision, which prevents the assignment of a beneficiaries’ interests in an irrevocable trust before the interest is distributed. There are exceptions to the spendthrift clause, and alimony is one of them. In recent cases, courts have disregarded the spendthrift clause when exceptions are involved, especially in cases of divorce.

Litigation can be a problem for trusts. Modern trusts provide excellent asset protection when trust discretionary interests are not defined as property or an enforcement right. Many trusts have clauses providing a court to award legal fees and costs to the winning party. The trustee may be reimbursed for attorney’s fees if the plaintiff loses, a significant discouragement for embarking on litigation against a modern trust.

COVID-19 has reframed how often people think about their mortality, which has fueled interest in creating trusts to protect family assets and heirlooms. A “purpose trust” does not have beneficiaries, but is created to care, protect and preserve an asset, either for an extended period of time or even perpetuity. Assets typically placed in a purpose trust include gravesites, antiques, art, jewelry, royalties, digital assets, land, property, buildings and vacation homes.

The uncertain times in which we live call for unprecedented estate planning. Modern directed trusts are a way to preserve wealth across generations with flexibility. Regardless of what changes to federal estate, gift or generation skipping trusts may come in the future, trusts make sense.

Reference: Wealth Management (Jan. 10, 2022) “Trust Planning in Unprecedented Times”

 

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

Storing Passwords in Case of Death – Annapolis and Towson Estate Planning

Despite having the resources to hire IT forensic experts to help access accounts, including her husband’s IRA, it has been three years and Deborah Placet still has not been able to gain access to her husband’s Bitcoin account. Placet and her late husband were financial planners and should have known better. However, they did not have a digital estate plan. Her situation, according to the Barron’s article “How to Ensure Heirs Avoid a Password-Protected Nightmare” offers cautionary tale.

Our digital footprint keeps expanding. As a result, there is no paper trail to follow when a loved one dies. In the past, an executor or estate administrator could simply have mail forwarded and figure out accounts, assets and values. Not only do we not have a paper trail, but digital accounts are protected by passwords, multifactor authentication processes, fingerprints, facial recognition systems and federal data privacy laws.

The starting point is to create a list of digital accounts. Instructions on how to gain access to the accounts must be very specific, because a password alone may not be enough information. Explain what you want to happen to the account: should ownership be transferred to someone else, who has permission to retrieve and save the data and whether you want the account to be shut down and no data saved, etc.

The account list should include:

  • Social media platforms
  • Traditional bank, retirement and investment accounts
  • PayPal, Venmo and similar payment accounts
  • Cryptocurrency wallets, nonfungible token (NFT) assets
  • Home and utilities accounts, like mortgage, electric, gas, cable, internet
  • Insurance, including home, auto, flood, health, life, disability, long-term care.
  • Smart phone accounts
  • Online storage accounts
  • Photo, music and video accounts
  • Subscription services
  • Loyalty/rewards programs
  • Gaming accounts

Some accounts may be accessed by using a username and password. However, others are more secure and require biometric protection. This information should all be included in a document, but the document should not be included in the Last Will and Testament, since the Last Will and Testament becomes public information through probate and is accessible to anyone who wants to see it.

Certain platforms have created a process to allow heirs to access assets. Typically, death certificates, a Last Will and Testament or probate documents, a valid photo ID of the deceased and a letter signed by those named in the probate records outlining what is to be done with assets are required. However, not every platform has addressed this issue.

Compiling a list of digital assets is about as much fun as preparing for tax season. However, without a plan, digital assets are likely to be lost. Identity theft and fraud occurs when assets are unprotected and unused.

Just as a traditional estate plan protects heirs to avoid further stress and expense, a digital estate plan helps to protect the family and loved ones. Speak with your estate planning attorney as you are working on your estate plan to create a digital estate plan.

Reference: Barron’s (Dec. 15, 2021) “How to Ensure Heirs Avoid a Password-Protected Nightmare”

 

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

Can I Restructure Assets to Qualify for Medicaid? – Annapolis and Towson Estate Planning

Some people believe that Medicaid is only for poor and low-income seniors. However, with proper and thoughtful estate planning and the help of an attorney who specializes in Medicaid planning, all but the very wealthiest people can often qualify for program benefits.

Kiplinger’s recent article entitled “How to Restructure Your Assets to Qualify for Medicaid” says that unlike Medicare, Medicaid is not a federally run program. Operating within broad federal guidelines, each state determines its own Medicaid eligibility criteria, eligible coverage groups, services covered, administrative and operating procedures and payment levels.

The Medicaid program covers long-term nursing home care costs and many home health care costs, which are not covered by Medicare. If your income exceeds your state’s Medicaid eligibility threshold, there are two commonly used trusts that can be used to divert excess income to maintain your program eligibility.

Qualified Income Trusts (QITs): Also known as a “Miller trust,” this is an irrevocable trust into which your income is placed and then controlled by a trustee. The restrictions are tight on what the income placed in the trust can be used for (e.g., both a personal and if applicable a spousal “needs allowance,” as well as any medical care costs, including the cost of private health insurance premiums). However, due to the fact that the funds are legally owned by the trust (not you individually), they no longer count against your Medicaid income eligibility.

Pooled Income Trusts: Like a QIT, these are irrevocable trusts into which your “surplus income” can be placed to maintain Medicaid eligibility. To take advantage of this type of trust, you must qualify as disabled. Your income is pooled together with the income of others and managed by a non-profit charitable organization that acts as trustee and makes monthly disbursements to pay expenses on behalf of the individuals for whom the trust was made. Any funds remaining in the trust at your death are used to help other disabled individuals in the trust.

These income trusts are designed to create a legal pathway to Medicaid eligibility for those with too much income to qualify for assistance, but not enough wealth to pay for the rising cost of much-needed care. Like income limitations, the Medicaid “asset test” is complicated and varies from state to state. Generally, your home’s value (up to a maximum amount) is exempt, provided you still live there or intend to return. Otherwise, most states require you to spend down other assets to around $2,000/person ($4,000/married couple) to qualify.

Reference: Kiplinger (Nov. 7, 2021) “How to Restructure Your Assets to Qualify for Medicaid”

 

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How Do I Plan with a Special Needs Child? – Annapolis and Towson Estate Planning

The three main structures a family should put in place to provide future protection for their child relate to money management, self-care and housing, says CNBC’s recent article entitled “If you have a child with special needs, here’s how to plan for their life after you pass.”

Money Management: If the child gets government benefits, such as Supplemental Security Income or Medicaid, parents will usually establish a special needs trust to shield assets to allow the child continued access to those benefits. A trustee oversees the funds and other trust provisions not under the child’s control.

Life Insurance. This is the cheapest way to fund a trust. That is because you need to know what is left over from your estate to care for the child, and this creates that certain bucket of money.

Self-Care: Parents must arrange the services their child will need to live independently or semi-independently, which may be overseen by a court-appointed conservator (or guardian). This person makes all decisions regarding an individual’s financial and/or personal affairs. In the alterative, decisions may be made by a person with power of attorney, as well as the individual.

Parents may want to write a “letter of intent,” which is a guide for those who will care for the child in the future. This letter can cover family history, medical care, benefits, daily routines, diet, behavior management, residential arrangements, education, social life, career, religion and end-of-life decisions, according to the Autism Society.

Housing: With respect to future housing for the child, location is more important than the house itself. Parents should consider options beyond keeping their loved one in the family home. It is more important to look at the individual and the interests and supports they might require. Parents may think of retiring to a community that supports the interests of the child. There is a trend toward more community-based living. State-administered Medicaid HCBS waiver programs allow people with disabilities to live in a house or apartment. The state, in turn, provides staffing for a group of similar residents. Sometimes, a group of families will purchase a collection of houses or condominiums. Also, people are rehabbing houses for roommate living, resulting in neighborhoods of people with special needs.

It is critical to work with specialists in this type of planning, such as an experienced estate planning or elder law attorney.

Reference: CNBC (Dec. 6, 2021) “If you have a child with special needs, here’s how to plan for their life after you pass”

 

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Any Ideas How to Pay for Long-Term Care? – Annapolis and Towson Estate Planning

SGE’s recent article entitled “How to Pay for Long-Term Care” explains that although long-term care insurance can be a good way to pay for long-term care costs, not everyone can buy a policy. Insurance companies will not sell coverage to people already in long-term care or having trouble with activities of daily living. They may also refuse coverage, if you have had a stroke or been diagnosed with dementia, cancer, AIDS or Parkinson’s Disease. Even healthy people over 85 may not be able to get long-term care coverage.

The potential costs of long-term care be challenging for even a relatively prosperous patient if they are forced to stay for some time in a nursing home. However, there are a number of options for covering these expenses, including the following:

  • Federal and state governments. While the federal government’s health insurance plan does not cover most long-term care costs, it would pay for up to 100 days in a nursing home if patients required skilled services and rehabilitative care. Skilled home health or other skilled in-home service may also be covered by Medicare. State programs will also pay for long-term care services for people whose incomes are below a certain level and meet other requirements.
  • Private health insurance. Employer-sponsored health plans and other private health insurance will cover some long-term care costs, such as shorter-term, medically necessary skilled care.
  • Long-term care insurance. Private long-term care insurance policies can cover many of the costs of long-term care.
  • Private savings. Older adults who require long-term care that is not covered by government programs and who do not have long-term care insurance can use money from their retirement accounts, personal savings, brokerage accounts and other sources.
  • Health savings accounts. Money in these tax-advantaged savings can be withdrawn tax-free to pay for qualifying medical expenses, such as long-term care. However, only those in high-deductible health plans can put money into health savings accounts.
  • Home equity loans. Many older adults have paid off their mortgages or have a lot of equity in their homes. A home equity loan is a way to tap this value to pay for long-term care.
  • Reverse mortgage. This allows a homeowner to get what amounts to a home equity loan without paying interest or principal on the loans while they are alive. When the homeowner dies or moves out, the entire balance of the loan becomes due. The lender usually takes ownership.
  • Life insurance. Asset-based long-term care insurance is a whole life insurance policy that permits the policyholder to use the death benefits to pay for long-term care. Life insurance policies can also be purchased with a long-term care rider as a secondary benefit.
  • Hybrid insurance policies. Some long-term care insurance policies are designed annuities. With a single premium payment, the insurer provides benefits that can be used for long-term care. You can also buy a deferred long-term care annuity that is specially designed to cover these costs. Some permanent life insurance policies also have long-term care riders.

While long-term care can be costly, most people will not face extremely burdensome long-term care costs because nursing home stays tend to be short, since statistics show that most people died within six months of entering a nursing home. Moreover, the vast majority of elder adults are not in nursing homes, and many never go into them.

Reference: SGE (Dec. 4, 2021) “How to Pay for Long-Term Care”

 

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How Do You Gift Your House to Your Children during Your Lifetime? – Annapolis and Towson Estate Planning

Whether you have a split level or a log cabin, your estate plan should be considered when passing property along to the next generation. How you structure the transaction has legal and tax implications, explains the article “How estate planning can help you pass down a house to your kids and give them a financial leg up” from USA Today.

For one family, which had been rental property landlords for more than two decades, parents set up a revocable trust and directed the trustee to be responsible for liquidating houses only when they became vacant, otherwise maintaining them as rental properties as long as tenants were in good standing. They did this when the wife was pregnant with their first child, with the goal to maximize the value to their children as beneficiaries. This was a long-term strategy.

Taxes must always be considered. When a home or any capital asset is given to children while the parents are alive, there may be a capital gains tax issue. It is possible for the carryover cost basis to lead to a big cost. However, using a revocable trust avoids probate and gives them a step-up in basis to avoid capital gains taxes.

Many families use a traditional method: gifting the house to the children. The parents retain the ownership and benefit of the property during their lifetimes. When the last parent dies, the children get the home and the benefit of the stepped-up basis. However, many estate planning attorneys prefer to have a house pass to the next generation through a revocable trust. It not only avoids probate but having a trust allows the parents to dictate exactly what is to be done with the house. For example, the trust can be used to direct what happens if only one child wants the house. The one who wants the house can have it, but not without buying out the other children’s’ shares.

If the children are added onto the deed of the house, keep in mind whoever is added to the deed has all the rights and liabilities of an owner. If one child wants to live in the home and the others do not, the others will not be able to sell the house. The revocable trust mentioned above provides more control.

Selling the family home to an adult child may work, especially if the parents cannot afford to maintain the home and the child can. However, there are pitfalls here, since the parents lose control of the home. An alternative might be to deed the property to the children, have the children refinance the property and cash the parents out.

If parents sell the home below fair market value, they are giving up proceeds to finance their retirement. If they do not need the money, great, but if not, this is a bad financial move. There are also taxable gains consequences, if the home is sold for more than they paid. A home’s sale might result in a dramatic increase in property taxes to the buyer.

However you decide to pass the family home or other real estate property to children, the transfer needs to be aligned with the rest of your estate plan to avoid any unexpected costs or complications. Your estate planning attorney will be able to help determine the best way to do this, for now and for the future.

Reference: USA Today (Dec. 3, 2021) “How estate planning can help you pass down a house to your kids and give them a financial leg up”

 

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Is It Necessary to have a Medical Power of Attorney? – Annapolis and Towson Estate Planning

There is no way around it, this is a difficult conversation to have with aging parents or loved ones. Who will take care of parents when they cannot take care of themselves? Do they have their estate plan in order? According to this article from Health, an important detail is often overlooked: “A Health Care Power of Attorney Is Essential for Aging Parents—Here’s Why.”

Referred to as a health care proxy or a medical power of attorney, a health care power of attorney allows a person to choose someone to make medical decisions on their behalf, if they are unable to do so. This is a different document than a living will, which serves to let a person outline their wishes if they cannot communicate for end-of-life care.

Naming a medical proxy in advance lets the person conduct their wishes, with full and complete knowledge of what those wishes are.

A health care power of attorney is also not the same as a last will and testament, which goes into effect after a person dies. There is nothing in a health care power of attorney concerning wealth distribution. The will and trusts address those matters.

Giving a trusted person the legal power to make medical decisions is a big step, but one that provides a sense of control and peace of mind. There should be a first choice and an alternate, in case the first person, usually a spouse, is unable or unwilling to serve.

Without a medical power of attorney, the family may need to go to court to get legal permission to make decisions. It is the last thing anyone wants to do when their loved one is in a critical medical situation. Imagine having to leave the hospital to go to court, when the minutes are ticking away and your parent is in the midst of medical crisis.

If someone fails to name a medical proxy and becomes incapacitated, the hospital itself will most often step in to make treatment decisions or rely on the rules of the state to pick a family member to make decisions. The person named by the hospital might not be the person the family wants, but it will have no choice.

Like having an estate plan in place, having a medical proxy in place eliminates a lot of unnecessary stress. Most parents name the adult children they feel will make decisions in their best interest. The responsible, dependable child, regardless of their age relative their siblings, is often named. If siblings do not get along and have a history of fighting, it may be best to name a cousin or trusted family friend.

An experienced estate planning attorney will make sure the health care proxy documents comply with the laws in the person’s state of residence. Every state has its own forms, and its own laws.

A discussion needs to take place between the person and the people they name in the health care proxy. Make sure the proxy is willing to take on the role and understands the person’s wishes.  The form should also be submitted to a health care facility or doctor’s office, so it is on file if it is needed. Unexpected events occur every day—being prepared makes it easier for loved ones.

Reference: Health (Dec. 1, 2021) “A Health Care Power of Attorney Is Essential for Aging Parents—Here’s Why”

 

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

What’s the Best Way to Mess Up Estate Plan? – Annapolis and Towson Estate Planning

Forbes’ recent article entitled “5 Ways People Mess Up Their Estate Plan” describes the most common mistakes people make that wreak havoc with their estate plans.

Giving money to an individual during life, but not changing their will. Cash gifts in a will are common. However, the will often is not changed. When the will gets probated, the individual named still gets the gift (or an additional gift). No one—including the probate court knows the gift was satisfied during life. As a result, a person may get double.

Not enough assets to fund their trust. If you created a trust years ago, and your overall assets have decreased in value, you should be certain there are sufficient assets going into your trust to pay all the gifts. Some people create elaborate estate plans to give cash gifts to friends and family and create trusts for others. However, if you do not have enough money in your trust to pay for all of these gifts, some people will get short changed, or get nothing at all.

Assuming all assets pass under the will. Some people think they have enough money to satisfy all the gifts in their will because they total up all their assets and arrive at a large enough amount. However, not all the assets will come into the will. Probate assets pass from the deceased person’s name to their estate and get distributed according to the will. However, non-probate assets pass outside the will to someone else, often by beneficiary designation or joint ownership. Understand the difference so you know how much money will actually be in the estate to be distributed in accordance with the will.  Do not forget to deduct debts, expenses and taxes.

Adding a joint owner. If you want someone to have an asset when you die, like real estate, you can add them as a joint owner. However, if your will is dependent on that asset coming into your estate to pay other people (or to pay debts, expenses or taxes), there could be an issue after you die. Adding joint owners often leads to will contests and prolonged court battles. Talk to an experienced estate planning attorney.

Changing beneficiary designations. Changing your beneficiary on a life insurance policy could present another issue. The policy may have been payable to your trust to pay bequests, shelter monies from estate taxes, or pay estate taxes. If it is paid to someone else, your planning could be down the drain. Likewise, if you have a retirement account that was supposed to be payable to an individual and you change the beneficiary to your trust, there could be adverse income tax consequences.

Talk to your estate planning attorney and review your estate plan, your assets and your beneficiary designations. Do not make these common mistakes!

Reference: Forbes (Oct. 26, 2021) “5 Ways People Mess Up Their Estate Plan”

 

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Will My Social Security Benefits Be Taxed? – Annapolis and Towson Estate Planning

Money Talks News’ recent article entitled “These 13 States Tax Social Security Income” says the federal government can tax plenty of types of retirement income — including Social Security benefits.

The taxation does not necessarily stop with the federal government because there are a number of state governments that also expect a cut from your Social Security income. In fact, there are 13 states that tax Social Security benefits:

  • Colorado
  • Connecticut
  • Kansas
  • Minnesota
  • Missouri
  • Montana
  • Nebraska
  • New Mexico
  • North Dakota
  • Rhode Island
  • Utah
  • Vermont
  • West Virginia

Whether your Social Security retirement benefits are subject to federal income taxes is determined by your tax filing status and what the U.S. Social Security Administration calls your “combined income.” This is your wages and self-employment income, interest and dividends and other taxable income. If your benefits are subject to federal taxes, the federal government will tax up to 85% of your benefits.

States that tax Social Security benefits do so according to their own rules, which can vary from state to state and differ from the federal tax code. Therefore, even if your benefits are not subject to federal taxes, they could still be subject to state income taxes — or vice versa. It depends on how a state taxes income and whether it offers any tax breaks that apply to Social Security income.

For example, Connecticut offers some residents a full exemption from state income tax for benefits. These residents pay no taxes on Social Security income, if one of the following situations applies: (i) their federal filing status is single or married filing separately, and their federal adjusted gross income is less than $50,000; or (ii) their federal filing status is married filing jointly, head of household or qualifying widow/widower and their federal adjusted gross income is less than $60,000.

Reference: Money Talks News (Sep. 22, 2021) “These 13 States Tax Social Security Income”

 

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What Happens If I Take a Bigger RMD? – Annapolis and Towson Estate Planning

Once you celebrate your 72nd birthday, the IRS requires you to take a minimum amount from IRAs or other tax-deferred retirement accounts. Most people take the minimum, says a recent article from Kiplinger titled “Should You Take an Extra Big RMD This Year?” However, taking the minimum is not always the right strategy.

Looking at the broader picture might lead you to go bigger with your RMDs. For example, Bill and Betty are ages 75 and 71. Bill has an IRA worth $850,000. Their retirement income consists of a pension totaling $34,000, dividends of $8,000 and combined Social Security benefits of $77,000. Bob’s 2021 IRA RMD is $37,118. Using the standard deduction of $28,100 (for a married couple where both are over age 65 plus a $300 charitable contribution deduction), their taxable income is $116,468. Federal taxes are $16,560.

Bill and Betty could recognize another $65,000 of ordinary income from his IRA before they land in the 24% tax bracket. In 2022, Betty will have to start taking RMDs on her IRA—did we mention that her IRA is worth $1.5 million?—which will bump them into the 24% tax bracket. Bill should take another $64,000 from his IRA, filing up the 22% ordinary income bracket and reducing his RMD for 2022.

Another example: Alan Smithers is 81 and remarried ten years after his first wife passed. His IRA is worth $1.3 million, and his daughter is the beneficiary. His IRA RMD is $66,000 and he intends to be generous with charity this year, using about $30,000 for a Qualified Charitable Distribution (QCS). Based on a projection of his 2021 tax return, Alan could take another $22,000 from his IRA, taxable at 12%. His daughter Daphne is 51, has a high income and significant assets. He should consider filling up his own 12% marginal ordinary income bracket, because when Daphne starts taking her own beneficiary distributions, she will be facing high taxes.

Here is what you need to consider when making RMD decisions:

Your tax bracket. How much more income can you realize while staying within your current tax bracket? Taxpayers in the 10-12% brackets should be extra careful of maxing out on ordinary income.

Your income. What does 2022 look like for your income? Will there be other sources of income, such as an inherited IRA, spouse’s IRA RMD, or annuity income to be considered?

Beneficiaries. How does your own tax rate compare with the tax rates of your beneficiaries? If you have a large IRA and your children have high incomes, could an inheritance push them into a higher tax bracket?

Medicare Premiums. Increases in income can lead to higher Medicare Part B and D premiums in coming years, so also keep that in mind.

It is best to take the broader view when planning for RMDs and taxes. A short-sighted approach could end up being more costly for you and your heirs.

Reference: Kiplinger (Nov. 23, 2021) “Should You Take an Extra Big RMD This Year?”

 

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