SECURE Act has Changed Special Needs Planning – Annapolis and Towson Estate Planning

The SECURE Act eliminated the life expectancy payout for inherited IRAs for most people, but it also preserved the life expectancy option for five classes of eligible beneficiaries, referred to as “EDBs” in a recent article from Morningstar.com titled “Providing for Disabled Beneficiaries After the SECURE Act.” Two categories that are considered EDBs are disabled individuals and chronically ill individuals. Estate planning needs to be structured to take advantage of this option.

The first step is to determine if the individual would be considered disabled or chronically ill within the specific definition of the SECURE Act, which uses almost the same definition as that used by the Social Security Administration to determine eligibility for SS disability benefits.

A person is deemed to be “chronically ill” if they are unable to perform at least two activities of daily living or if they require substantial supervision because of cognitive impairment. A licensed healthcare practitioner certifies this status, typically used when a person enters a nursing home and files a long-term health insurance claim.

However, if the disabled or ill person receives any kind of medical care, subsidized housing or benefits under Medicaid or any government programs that are means-tested, an inheritance will disqualify them from receiving these benefits. They will typically need to spend down the inheritance (or have a court authorized trust created to hold the inheritance), which is likely not what the IRA owner had in mind.

Typically, a family member wishing to leave an inheritance to a disabled person leaves the inheritance to a Supplemental Needs Trust or SNT. This allows the individual to continue to receive benefits but can pay for things not covered by the programs, like eyeglasses, dental care, or vacations. However, does the SNT receive the same life expectancy payout treatment as an IRA?

Thanks to a special provision in the SECURE Act that applies only to the disabled and the chronically ill, a SNT that pays nothing to anyone other than the EDB can use the life expectancy payout. The SECURE Act calls this trust an “Applicable Multi-Beneficiary Trust,” or AMBT.

For other types of EDB, like a surviving spouse, the individual must be named either as the sole beneficiary or, if a trust is used, must be the sole beneficiary of a conduit trust to qualify for the life expectancy payout. Under a conduit trust, all distributions from the inherited IRA or other retirement plan must be paid out to the individual more or less as received during their lifetime. However, the SECURE Act removes that requirement for trusts created for the disabled or chronically ill.

However, not all of the SECURE Act’s impact on special needs planning is smooth sailing. The AMBT must provide that nothing may be paid from the trust to anyone but the disabled individual while they are living. What if the required minimum distribution from the inheritance is higher than what the beneficiary needs for any given year? Let us say the trustee must withdraw an RMD of $60,000, but the disabled person’s needs are only $20,000? The trust is left with $40,000 of gross income, and there is nowhere for the balance of the gross income to go.

In the past, SNTs included a provision that allowed the trustee to pass excess income to other family members and deduct the amount as distributable net income, shifting the tax liability to family members who might be in a lower tax bracket than the trust.

Special Needs Planning under the SECURE Act has raised this and other issues, which can be addressed by an experienced estate planning attorney.

Reference: Morningstar.com (Dec. 9, 2020) “Providing for Disabled Beneficiaries After the SECURE Act”

 

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How Can Blended Families Use Estate Planning to Protect All of the Siblings? – Annapolis and Towson Estate Planning

If two adult children in a blended family receive a lot more financial help from their parent and stepparents than other children, there may be expectations that the parent’s estate plan will be structured to address any unequal distributions. This unique circumstance requires a unique solution, as explained in the article “Estate Planning: A Trust Can Be Used to Protect Blended Families” from The Daily Sentinel. Blended families in which adult children and stepchildren have grandchildren also require unique estate planning.

Blended families face the question of what happens if one parent dies and the surviving step parent remarries. If the deceased spouse’s estate was given to the surviving step parent, will those assets be used to benefit the deceased spouse’s children, or will the new spouse and their children be the sole beneficiaries?

In a perfect world, all children would be treated equally, and assets would flow to the right heirs.  However, that does not always happen. There are many cases where the best of intentions is clear to all, but the death of the first spouse in a blended marriage change everything.

Other events occur that change how the deceased’s estate is distributed. If the surviving step-spouse suffers from Alzheimer’s or experiences another serious disease, their judgement may become impaired.

All of these are risks that can be avoided, if proper estate planning is done by both parents while they are still well and living. Chief among these is a trust,  a simple will does not provide the level of control of assets needed in this situation. Do not leave this to chance—there is no way to know how things will work out.

A trust can be created, so the spouse will have access to assets while they are living. When they pass, the remainder of the trust can be distributed to the children.

If a family that has helped out two children more than others, as mentioned above, the relationships between the siblings that took time to establish need to be addressed, while the parents are still living. This can be done with a gifting strategy, where children who felt their needs were being overlooked may receive gifts of any size that might be appropriate, to stem any feelings of resentment.

That is not to say that parents need to use their estate to satisfy their children’s expectations. However, in the case of the family above, it is a reasonable solution for that particular family and their dynamics.

A good estate plan addresses the parent’s needs and takes the children’s needs into consideration. Every parent needs to address their children’s unique needs and be able to distinguish their needs from wants. A gifting strategy, trusts and other estate planning tools can be explored in a consultation with an experienced estate planning attorney, who creates estate plans specific to the unique needs of each family.

Reference: The Daily Sentinel (Dec. 16, 2020) “Estate Planning: A Trust Can Be Used to Protect Blended Families”

 

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What Kind of Estate Planning Mistakes Do People Make? – Annapolis and Towson Estate Planning

Estate planning for any sized estate is an important responsibility to loved ones. Done correctly, it can help families flourish over generations, control how legacies are distributed and convey values from parents to children to grandchildren. However, a failed estate plan, says a recent article from Suffolk News-Herald titled “Estate planning mistakes to avoid,” can create bitter divisions between family members, become an expensive burden and even add unnecessary stress to a time of intense grief.

Here are some errors to avoid:

This is not the time for do-it-yourself estate planning.

An unexpected example comes from the late Chief Justice Warren Burger. Yes, even justices make mistakes with estate planning! He wrote a 176 word will, which cost his heirs more than $450,000 in estate taxes and fees. A properly prepared will could have saved the family a huge amount of money, time and anxiety.

Do not neglect to update your will or trust.

Life happens and relationships change. When a new person enters your life, whether by birth, adoption, marriage or other event, your estate planning wishes may change. The same goes for people departing your life. Death and divorce should always trigger an estate plan review.

Do not be coy with heirs about your estate plan.

Heirs do not need to know down to the penny what you intend to leave them but be wise enough to convey your purpose and intentions. If you are leaving more money to one child than to another, it would be a great kindness to the children’s relationship, if you explained why you are doing so. If you want your family to remain a family, share your thinking and your goals.

If there are certain possessions you know your family members value, making a list those items and who should get what. This will avoid family squabbles during a difficult time. Often it is not the money, but the sentimental items that cause family fights after a parent dies.

Understand what happens if you are not married to your partner.

Unmarried partners do not receive many of the estate tax breaks or other benefits of the law enjoyed by married couples. Unless you have an estate plan and a valid will in place, your partner will not be protected. Owning property jointly is just one part of an estate plan. Sit down with an experienced estate planning attorney to protect each other. The same applies to planning for incapacity. You will want to have a HIPAA release form and Power of Attorney for Health Care, so you are able to speak with each other’s medical providers.

Do not neglect to fund a trust once it is created.

It is easy to create a trust and it is equally easy to forget to fund the trust. That means retitling assets that have been placed in the trust or adding enough assets to a trust, so it may function as designed. Failing to retitle assets has left many people with estate plans that did not work.

Please do not be naïve about caregivers with designs on your assets or relatives, who appear after long periods of estrangement.

It is not pleasant to consider that people in your life may not be interested in your well-being, but in your finances. However, this must remain front and center during the estate planning process. Elder financial abuse and scams are extremely common. Family members and seemingly devoted caregivers have often been found to have ulterior motives. Be smart enough to recognize when this occurs in your life.

Reference: Suffolk News-Herald (Dec. 15, 2020) “Estate planning mistakes to avoid”

 

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Do You Know Your Job as Executor, Agent or Trustee? – Annapolis and Towson Estate Planning

It is not uncommon for a named executor or trustee to have some anxiety when they discover that they were named in a family member’s estate planning documents.

With the testator or grantor dead or incapacitated, the named individual is often desperate to learn what their responsibilities are.

It may seem like they are asked to put together pieces in a puzzle without a picture, especially when there is limited information to start with, says The Sentinel-Record’s recent article entitled “You’re an executor or trustee … Now what?”

Here is a quick run-down of the responsibilities of each of these types of agents:

An executor of an estate. This is a court-appointed person (or corporate executor) who administers the estate of a deceased person, after having been nominated for the role in the decedent’s last will and testament.

A trustee. This is an individual (or corporate trustee) who maintains and administers property or assets for the benefit of a beneficiary under a trust.

An agent named under a power of attorney. This person (or corporate agent) has the legal authority to act for the benefit of another person during that person’s disability or incapacity.

Each of these roles has different duties and responsibilities. For example, an executor, in most cases, is responsible for filing the original last will and testament of the testator with the probate court and then to be formally appointed by the court as the executor.

A trustee and executor both must provide notice to the beneficiaries of their role and a copy of the documents.

An agent named under a power of attorney may have authority to act immediately or only when the creator of the documents becomes disabled or incapacitated. This is often referred to as a “springing” power of attorney.

Each of these individuals is responsible for managing and preserving assets for the benefit of the beneficiary.

They also must pay bills out of the assets of the estate or trust, such as burial and funeral expenses.

Finally, they settle the estate or trust and make distributions.

Reference: The Sentinel-Record (Nov. 24, 2020) “You’re an executor or trustee … Now what?”

 

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What Happens If You Fail to Submit a Change of Beneficiary Form? – Annapolis and Towson Estate Planning

Wealth Advisor’s recent article entitled “I’m being denied an inheritance. Can they do that?” explains the situation where an individual, Peter, was given a CD/IRA by a friend named Paul.

Paul told Peter that he wanted him to have it, in case anything happened to him. Paul was married and did not tell his wife about this. Paul’s wife was the beneficiary of several other accounts.

Paul told Peter to sign a document before he died, and they got it notarized.

Paul died somewhat unexpectedly, and Peter took the signed and notarized beneficiary designation form to the bank to see about collecting the money.

However, the bank told Peter that there was no beneficiary designation given to them prior to Pauls’ death.

Is there anything that Peter can do?

The article explains that it is a matter of timing, and it is probably too late. That is because it looks like Paul failed to submit a written beneficiary change form to the financial institution prior to his death.

As a result, the financial institution must distribute the CD to the person or entities that otherwise would be entitled to receive it.

In most states, you can choose any IRA beneficiary you want. However, in nine community property states, you are required to name your spouse as your heir. If you want to name anyone else, your spouse must give written permission. The same laws apply, if you want to change your beneficiary designation.

The nine community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

The only way for Peter to see the money, is if he can show that Paul intended for him to receive the asset. That bank does not want to be sued by another person, who claims they are entitled to the CD.

In this situation, it is best to speak with an experienced estate planning attorney who can examine the specifics of this type of issue.

Reference: Wealth Advisor (Nov. 24, 2020) “I’m being denied an inheritance. Can they do that?”

 

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Is Probate Required If There Is a Surviving Spouse? – Annapolis and Towson Estate Planning

Probate, also called “estate administration,” is the management and final settlement of a deceased person’s estate. It is conducted by an executor, also known as a personal representative, who is nominated in the will and approved by the court. Estate administration needs to be done when there are assets subject to probate, regardless of whether there is a will, says the article “Probating your spouse’s will” from The Huntsville Item.

Probate is the formal process of administering a person’s estate. In the absence of a will, probate also establishes heirship. In some regions, this is a quick and easy process, while in others it is a lengthy, complex and expensive process. The complexity depends upon the size and value of the estate, whether a proper estate plan was prepared by the decedent prior to death and if there are family members or others who might contest the will.

Family dynamics can cause a tremendous amount of complications and delays, especially if the family has blended children from prior marriages or if a child has predeceased their parents.

There are some exceptions, when the estate is extremely small and when probate is not required. However, in most cases, it is required.

A recent District Court case ruled that a will not admitted to probate is not effective for proving title and thereby ownership, to real estate. A title company was sued for defamation after the title company issued a title report that included the statement that the decedent had died intestate, that is, without a will.

The decedent’s son, who was her executor, sued the title company because his mother did indeed have a will and the title report was defamatory. The court rejected this theory, and the case was brought to the Appellate Court to seek relief for the family. The Appellate Court ruled that until a will has been admitted to probate, it is not effective for the purpose of proving title to real property.

If a person owns real estate, they must have an estate plan to ensure that their property can be successfully transferred to heirs. When there is no estate plan, heirs find out how big a problem this can be when someone decides they want to sell the property or divide it up among family members.

Problems also arise when the family finds that they must pay taxes on the property or that there are expenses that must be paid to maintain the property. Without a will, the disposition of the property is determined by the state’s estate law. Things can become complicated quickly, when there is no will.

If the deceased spouse has children from outside the most recent marriage, those children may have rights to the property and end up owning a portion of the property along with the surviving spouse. However, neither the children nor the surviving spouse can sell the property without each other’s approval. This is a common occurrence.

There are also limitations as to how probate can be used to distribute and manage an estate. In some states, the time limit is four years from the date of death.

An estate planning attorney can help the family move through the probate process more efficiently when there is no will. A better situation would be for the family to speak with their parents about having a will and estate plan created before it is too late.

Reference: The Huntsville Item (Nov. 22, 2020) “Probating your spouse’s will”

 

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Should a Husband and Wife have Separate Trusts? – Annapolis and Towson Estate Planning

The decision about separate or joint trusts is not as straightforward as you might think. Sometimes, there is an obvious need to keep things separate, according to the recent article “Joint Trusts or Separate Trusts: Advice for Married Couples” from Kiplinger. However, it is not always the case.

A revocable living trust is a popular way to pass assets to heirs. Assets titled in a revocable living trust do not go through probate and information about the trust remains private. It is also a good way to plan for incapacity, avoid or reduce the likelihood of a death tax and make sure the right people inherit the trust.

There are advantages to Separate Trusts:

They offer better protection from creditors. When the first spouse dies, the deceased spouse’s trust becomes irrevocable, which makes it far more difficult for creditors to access, while the surviving spouse can still access funds.

If assets are going to non-spouse heirs, separate is better. If one spouse has children from a previous marriage and wants to provide for their spouse and their children, a qualified terminable interest property trust allows assets to be left for the surviving spouse, while the balance of funds are held in trust until the surviving spouse’s death. Then the funds are paid to the children from the previous marriage.

Reducing or eliminating the death tax with separate trusts. Unless the couple has an estate valued at more than $23.16 million in 2020 (or $23.4 million in 2021), they will not have to worry about federal estate taxes. However, there are still a dozen states, plus the District of Columbia, with state estate taxes and half-dozen states with inheritance taxes. These estate tax exemptions are considerably lower than the federal exemption, and heirs could get stuck with the bill. Separate trusts as part of a credit shelter trust would let the couple double their estate tax exemption.

When is a Joint Trust Better?

If there are no creditor issues, both spouses want all assets to go to the surviving spouse and state estate tax and/or inheritance taxes are not an issue, then a joint trust could work better because:

Joint trusts are easier to fund and maintain. There is no worrying about having to equalize the trusts, or consider which one should be funded first, etc.

There is less work at tax time. The joint trust does not become irrevocable, until both spouses have passed. Therefore, there is no need to file an extra trust tax return. With separate trusts, when the first spouse dies, their trust becomes irrevocable and a separate tax return must be filed every year.

Joint trusts are not subject to higher trust tax brackets, because they do not become irrevocable until the first spouse dies. However, any investment or interest income generated in an account titled in a deceased spouse’s trust, now irrevocable, will be subject to trust tax brackets. This will trigger higher taxes for the surviving spouse, if the income is not withdrawn by December 31 of each year.

In a joint trust, after the death of the first spouse, the surviving spouse has complete control of the assets. When separate trusts are used, the deceased spouses’ trust becomes irrevocable and the surviving spouse has limited control over assets.

Your estate planning attorney will be able to help you determine which is best for your situation. This is a complex topic, and this is just a brief introduction.

Reference: Kiplinger (Nov. 20, 2020) “Joint Trusts or Separate Trusts: Advice for Married Couples”

 

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How Much Power Does an Executor Have? – Annapolis and Towson Estate Planning

The Pauls Valley Daily Democrat’s recent article entitled “It doesn’t end with the will” explains that there is constant confusion about wills. This misunderstanding involves the scope of power of those named in the will as the personal representative (or executor) of the decedent’s estate. Let us try to straighten out some of these myths or pieces of bad information about wills and probate.

The Executor Does Not Need Court Permission. False. An estate executor or personal representative cannot distribute a decedent’s assets to themselves or to any heirs, until okayed by the court. Many people think that a will provides immediate authorization to distribute the assets of an estate.

If He Had A Will, We Do Not Need Probate. Another incorrect belief is that if a person dies with a will, probate is not needed or required. If a person has a will, the will and the distributions named in it can only be made valid by the probate court. There are ways to avoid the probate process. However, the fact that a person had a will does not do it.

The Executor Can Start Giving Away Stuff ASAP. This is also false. Some people think that as soon as a person receives appointment as the personal representative or executor from the probate court, they can begin distributing assets from the decedent’s estate. Nope. If this were true, it would defeat the objectives of probate, which is court oversight and control.

The Court Does Not Monitor The Executor’s Actions. This statement is also incorrect. The entire probate process is structured to provide a court monitored coordination of a decedent’s estate to make certain that his or her wishes are followed. This also helps to prevent unauthorized distributions or “raids” on a decedent’s assets by improper persons.

Remember, the executor’s Letters Testamentary authorize that person to act for the estate—they do not permit any distributions before court approval or final probate court order.

What Does Probate Do? Probate fulfills these purposes:

  • At death, the deceased’s property is subject to control and monitoring by the court.
  • The court then starts to see what the decedent’s wishes were for distribution and who was named to administer the estate.
  • The court must also review the scope of the estate, define all assets in the estate and determine all debts of the estate.
  • Probate requires a notice to creditors, so the executor has a complete list of debts of the estate and to give each creditor the opportunity to be paid.
  • The court watches any transfers, sales of assets or payments during probate.
  • The executor is authorized to receive money and manage the assets of the estate, but he cannot withdraw or transfer assets from the estate.
  • At a final hearing and after notice to interested parties, the court determines who should get distributions.

Ask an experienced estate planning attorney about the probate process and how to devise a complete estate plan.

Reference: Pauls Valley Daily Democrat (Oct. 1, 2020) “It doesn’t end with the will”

 

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How Do You Ask Parents about Estate Planning? – Annapolis and Towson Estate Planning

How do you ask your parents about their estate planning? No matter how you slice it, it is a touchy subject to bring up.

You do not want to come off as greedy when asking your parents about their estate planning.  However, you need answers to certain questions to ensure that their financial wishes are carried out and there is a smooth transition of wealth and assets.

Yahoo Finance’s recent article entitled “How To Talk to Your Parents About Their Estate Plan (Without Making It Awkward)” shows us how to approach this touchy subject and get the info that you need.

Begin by asking your parents about whether they have an estate plan. You can tell them that they do not need to share the numbers and that you just want to be able to follow their instructions. A good way to start this conversation, is to acknowledge how awkward and difficult this conversation is for you. You should emphasize that you do not want to think about their deaths but are just trying to sort things out.

Experts say that you will likely get a better reception from your parents, if you let the conversation happen organically and not schedule a time to talk. No matter how you approach the topic of an inheritance from your parents, the objective of the discussion is to make certain they have a plan in place, so there will be a clear path for whomever is left behind to go forward. You can start by asking if they have these key legal documents:

  • A will
  • A power of attorney; and
  • A living will or health care directive.

Ask where your parents keep these documents and how you can access them, if necessary.

You should also ask if your parents have written funeral or burial instructions. You also need to ask them to give you other important information, so you can handle their finances if they are unable to or when they die. This includes account numbers and passwords, insurance policies, information on their retirement plan or pension administrator, as well as the contact information for their accountant, attorney, financial planner, or other financial professional.

Reference: Yahoo Finance (Oct. 7, 2020) “How To Talk to Your Parents About Their Estate Plan (Without Making It Awkward)”

 

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