Why Even “Regular Folks” Can Benefit from Trust Funds – Annapolis and Towson Estate Planning

A trust is a useful tool, even if you’re not a wealthy person. There are many different types of trusts, but the most basic types are revocable and irrevocable. A recent article from Business Insider “A trust fund gives you control over your money after you’re gone, and it’s not just for the super rich” clarifies when and how to use a trust fund.

Trust funds are often used to avoid having assets pass through the probate process. They allow for a tax-efficient means of transferring wealth, avoid or defer estate taxes and help with charitable giving. An experienced estate planning attorney can help clarify what type of trust is needed, and how it can work with an overall estate plan.

Trust funds have a bad reputation for creating badly-behaved young adults, but they are a good planning tool for anyone. Some trusts are more expensive to maintain than others, which is why they are often associated with wealthy people. However, they have the same purpose: to ensure that a person’s money goes where they want it to go. The directions can be as specific as you wish.

There are three people involved in any trust: the grantor, who puts their assets in the trust fund; the beneficiary or beneficiaries, who receive those assets according to the terms of the trust; and the trustee, the person or group of advisors or the organization that is responsible for managing the trust when the trust is created and after the grantor has died. A grantor can put almost any kind of asset into a trust, but most people use them for real estate, bank accounts, investment accounts, business interests and life insurance policies.

If a trust is revocable, it means the grantor may make changes at any time and can generate income through the assets in the trust. The assets are included in the grantor’s estate and the grantor may pay taxes on the assets now and upon their death. Creditors can access the assets for any unpaid debts. Once the grantor of a revocable trust dies, the trust becomes irrevocable.

An irrevocable trust cannot be changed, once it is created. It can only be accessed after the death of the grantor. The assets are not included in the grantor’s estate and they do not have to pay taxes during their lifetime or at death. The taxes are the responsibility of the trust and beneficiaries. Depending on how the trust is designed, creditors may not access the trust.

If you are considering setting up a trust, meet with an estate planning lawyer to discuss your unique situation and determine which type of trust works best for you and your family.

Reference: Business Insider (December 2, 2019) “A trust fund gives you control over your money after you’re gone, and it’s not just for the super rich”

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

What 2020 Tax Changes May Bring for Wealthy Families – Annapolis and Towson Estate Planning

What happens in the political landscape in 2020 could have an impact on wealthy individuals, in a positive and a negative way. The biggest impact may be changes in estate and income taxes. With income taxes, the tax brackets are indexed, so they will go higher in 2020. There are also new IRS thresholds, so people will need to be aware of these changes.

The article “What Wealthy Clients Need to Know About 2020 Tax Changes” from Financial Advisor offers a look at what’s coming next year.

The tax rates were generally lowered, and thresholds increased. The top bracket for married couples in 2017 was 39.6% for couples whose taxable income was higher than $470,700. In 2020, that same bracket is 37%, with a new income threshold of $622,051.

There are more holiday gifts from the IRS. The estate exemption increases to $11.58 million in 2020, although the annual exclusion for gifts stays at $15,000. The maximums for retirement account contributions have also been increased.

The mandated penalty for not having health insurance is gone. Therefore, anyone who has the income to self-insure without having a policy that is ACA-qualified won’t have to pay a penalty. However, that varies by state: California enforces a tax penalty for people who do not have health insurance.

A major consideration for 2020 is the higher standard deduction. This may mean more strategic planning for which years people should itemize. Some experts are advising that taxpayers bunch their deductions, so they can itemize. One strategy is to do this every other year.

Many nonprofits are advising their donors to plan their charitable giving to take place every other year for the same reason.

With the stock market continuing to hit record highs, it may also make sense for people to transfer highly appreciated securities to donor advised funds.

Another potentially big series of changes that is still pending is the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. The legislation is still pending, but it is likely that some form of the bill will become law, and there will be further changes regarding retirement accounts and taxes. The bill passed the House in the spring, but it still pending in the Senate.

Reference: Financial Advisor (December 2, 2019) “What Wealthy Clients Need to Know About 2020 Tax Changes”

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

I’ve Inherited an IRA – Now, What about Taxes? – Annapolis and Towson Estate Planning

Inheriting an IRA comes with several constraints. As a result, it can be tricky to navigate. You are at an intersection of tax planning, financial planning and estate planning, says Bankrate’s article “7 inherited IRA rules all beneficiaries must know.” There are a number of choices for you to make, depending upon your situation. How can you figure out what to do?

Whatever your situation, do NOT cash out the IRA, or roll it into a non-IRA account. Doing this could make the entire IRA taxable as regular income. Do nothing until you have the right advisors in place. For most people, the best step is to find an estate planning attorney who is experienced with inherited IRAs.

Here’s what you need to know:

The rules are different for spouses. A spouse heir of an IRA can do one of three things:

  • Name himself as the owner and treat the IRA as if it was theirs;
  • Treat the IRA as if it was his, by rolling it into another IRA or a qualified employer plan, including 403(b) plans;
  • Treat himself as the beneficiary of the plan.

Each of these actions may create additional choices for the spousal heir. For example, if a spouse inherits the IRA and treats it as his own, he may have to start taking required minimum distributions, depending on his age.

“Stretch” or choose the 5-year rule. Non-spouse heirs have two options:

  • Take distributions over their life expectancy, known as the “stretch” option, which leaves the funds in the IRA for as long as possible, or
  • Liquidate the entire account within five years of the original owner’s death. That comes with a hefty tax burden.

Congress is considering legislation that may eliminate the stretch option, but the proposed law has not been passed as of this writing. The stretch option is the golden ticket for heirs, letting the IRA grow for years without being liquidated and having to pay taxes. If the IRA is a Roth IRA, taxes were paid before the money went into the account.

Non-spouse beneficiaries need to act promptly, if they want to take the stretch option. There is a cutoff date for taking the first withdrawal, depending upon whether the original account owner was over or under 70 ½ years old.

There are year-of-death distribution requirements. If the original owner has taken his or her RMD in the year that they died, the beneficiary needs to make sure the minimum distribution has been taken.

There might be a tax break. For estates subject to the federal estate tax, inheritors of an IRA may get an income-tax deduction for the estate taxes paid on the account. The taxable income earned (but not received by the deceased individual) is “income in respect of a decedent.”

Make sure the beneficiary forms are properly filled out. This is for the IRA owners. If a form is incomplete, doesn’t name a beneficiary or is not on record with the custodian, the beneficiary may be stuck with no option but the five-year distribution of the IRA.

A poorly drafted trust can sink the IRA. If a trust is listed as a primary beneficiary of an IRA, it must be done correctly. If not, some custodians won’t be able to determine who the qualified beneficiaries are, in which case the IRS’s accelerated distribution rules for IRAs will be required. Work with an estate planning attorney who is experienced with the rules for leaving IRAs to trusts.

Reference: Bankrate (Nov. 19, 2019) “7 inherited IRA rules all beneficiaries must know.”

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

Will We Have to Pay Gift Taxes if We Give a Rental Property to Our Son? – Annapolis and Towson Estate Planning

Older couples frequently invest in real estate. Many manage rental properties as an income stream.

Let’s say that a couple jointly bought a rental property worth $120,000 this year with their adult son. The son started his own limited liability company (LLC) and is a single owner. The parents plan to transfer the property to him, so he can use the rental income from the business for college expenses.

A common question is whether there will be any tax implication for the parents, if they move the property to their son’s LLC. The Washington Post’s recent article, “How to avoid gift taxes when shifting ownership of rental property to offspring,” answers that question by first assuming that the parents and the son purchased the rental property together in their own names. The son recently set up the LLC to use as the holding company for this rental property and other real estate properties he may own.

As far as gift tax implications, the couple have the ability to give their son $30,000 this year without having to file any federal gift tax forms or having any effect on their federal income taxes. Each person has the ability to gift another individual up to $15,000 a year without any IRS issues or the filing of forms. If each parent gave their son $30,000 this year and $30,000 next year, then that would effectively transfer their share of the property to him.

We’ll also assume that when they purchased the property, the parents paid closing costs and may have had other expenses while they’ve owned the property. Those expenses would play a part when calculating the tax basis of the property.

Assuming that the parents and their son each paid $60,000 for the property, when the son transfers the property from all the owners’ names into the LLC, the parents may have a taxable event for IRS purposes. That’s because the parents are effectively giving away ownership of their share of the property to their son. He’ll now own the property on his own. If the son signs a promissory note to the parents for $60,000 at the time of the transfer to the LLC, he’ll have an obligation to repay them the money for their share over the next six months. They could forgive $30,000 of the debt immediately and then they could forgive the other $30,000 in the new year. Their son would probably owe a little interest, but he could probably pay that from the income he receives from the rent.

This is just one solution to the transfer. There are many others, and some are much more complicated. Speak with an experienced estate planning attorney to review these issues and explore some other ideas that could work to everyone’s benefit.

Reference: The Washington Post (November 11, 2019) “How to avoid gift taxes when shifting ownership of rental property to offspring”

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

What Should I Do If I Strike it Rich? – Annapolis and Towson Estate Planning

There’s nothing quite like getting an unexpected sum of money. That happiness can be magnified when the amounts are six, seven, eight digits or more.

However, the greater the amount you receive, the greater your stress.

Investopedia’s recent article, “Tips For Handling Sudden Wealth” reports that there’s even a stress-related disorder called “Sudden Wealth Syndrome.”

This stress results in the recipients doing things that will threaten their good fortune and may leave them worse off than before they got the money.

Let’s look at few ideas to help you hang onto that new wealth:

  1. Tally your money. Take the time to carefully review all the documentation associated with the windfall. Note the areas you don’t understand and talk with your attorney.
  2. Create a comprehensive financial and life plan. Don’t settle for a cookie-cutter solution. Look for customization that takes into account your circumstances, your goals and your desired legacy.
  3. Be wary of friends and family. A downside of sudden new wealth is that new friends and estranged family members may come out of the woodwork. One idea is to pay yourself a salary, which can put some distance between you and these people.
  4. Don’t buy big ticket items, until you’re comfortable with the advice and understand your new financial position. You should address your taxes on the gain, pay down debts or take a small vacation. However, don’t make too many changes all at once. Talk to your advisors.

More money can mean more problems. Use these tips and consult with your attorney, when deciding what to do with your newfound riches.

Reference: Investopedia (June 25, 2019) “Tips For Handling Sudden Wealth”

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

How Can I Upgrade My Estate Plan? – Annapolis and Towson Estate Planning

Forbes’ recent article, “4 Ways To Improve Your Estate Plan,” suggests that since most people want to plan for a good life and a good retirement, why not plan for a good end of life, too? Here are four ways you can refine your estate plan, protect your assets and create a degree of control and certainty for your family.

  1. Beneficiary Designations. Many types of accounts go directly to heirs, without going through the probate process. This includes life insurance contracts, 401(k)s and IRAs. These accounts can be transferred through beneficiary designations. You should update and review these forms and designations every few years, especially after major life events like divorce, marriage or the birth or adoption of children or grandchildren.
  2. Life Insurance. A main objective of life insurance is to protect against the loss of income, in the event of an individual’s untimely death. The most important time to have life insurance is while you’re working and supporting a family with your income. Life insurance can provide much needed cash flow and liquidity for estates that might be subject to estate taxes or that have lots of illiquid assets, like family businesses, farms, artwork or collectibles.
  3. Consider a Trust. In some situations, creating a trust to shelter or control assets is a good idea. There are two main types of trusts: revocable and irrevocable. You can fund revocable trusts with assets and still use the assets now, without changing their income tax nature. This can be an effective way to pass on assets outside of probate and allow a trustee to manage assets for their beneficiaries. An irrevocable trust can be a way to provide protection from creditors, separate assets from the annual tax liability of the original owner and even help reduce estate taxes in some situations.
  4. Charitable Giving. With charitable giving as part of an estate plan, you can make outright gifts to charities or set up a charitable remainder annuity trust (CRAT) to provide income to a surviving spouse, with the remainder going to the charity.

Your attorney will tell you that your estate plan is unique to your situation. A big part of an estate plan is about protecting your family, making sure assets pass smoothly to your designated heirs and eliminating stress for your loved ones.

Reference: Forbes (November 6, 2019) “4 Ways To Improve Your Estate Plan”

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

Death Is Very Taxing — What you Need to Know – Annapolis and Towson Estate Planning

When a person dies, their assets are gathered, their debts are paid, business affairs are settled and assets are distributed, as directed by their will. If there is no will, the intestate laws of their state will be used to determine how to distribute their assets. A big part of the process of settling an estate is dealing with taxes. A recent article from Wicked Local Westwood, titled “Five things to know about taxes after death,” explains the key things an executor or personal representative needs to know.

The Deceased Final Income Tax Returns. Yes, the dead pay taxes. The personal representative is responsible for filing the deceased final income tax return for both the year of death and prior year, if those returns have not been filed. The final income tax return includes any income earned or received by the decedent from January 1 of the year of death through the date of death. It’s common for a deceased person who is ill during the last months or year of their life to fail to file tax returns, so the executor needs to find out about the decedent’s tax status. Failure to do so, could lead to the representative being personally liable for paying those taxes.

Filing a Federal Estate Tax Return. The personal representative must file a federal estate tax return, if the value of the estate assets exceeds the federal estate tax exemption, which is $11.4 million in 2019. Even if the value of the estate does not exceed the federal estate tax exemption amount, a federal estate tax return should be filed if the decedent is survived by a spouse. This way, the deceased’s unused exemption can be used by the spouse at their death. Note that the filing deadline for the federal estate tax return is nine months after the date of death. An estate planning attorney can help with this.

Fiduciary income tax returns. A personal representative and trustee may have to file fiduciary income tax returns for an estate or a trust. The estate is a taxpayer and the representative must get a tax identification number and file a fiduciary income tax return for the estate, if income is earned on estate assets or received during the administration of the estate. A revocable trust becomes irrevocable after the death of the trust creator. A tax identification number must be obtained, and a fiduciary income tax return must be filed for any income earned by trust assets.

Estate taxes and trust taxes can become complex and confusing for people who don’t do this on a regular basis. An estate planning attorney can be a valuable resource, so that taxes are properly paid and to make the most of any tax planning opportunities for estates, trusts and their beneficiaries.

Reference: Wicked Local Westwood (Nov. 5, 2019) “Five things to know about taxes after death”

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

New IRS Regulations Won’t Claw Back Estate Tax Benefits – Annapolis and Towson Estate Planning

The IRS published regulations on Friday that there will not be a claw back in the event exemptions are reduced in 2026, when the current tax levels expire. We recommend clients consider making lifetime gifts to use some of the federal estate tax exemptions before the exemption is reduced.

Please feel free to give us a call if you would like to discuss this further.

IRS Says Millionaires Can Keep Estate Tax Benefits After 2025

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

Your Spouse Just Died … Now What? – Annapolis and Towson Estate Planning

There are several steps to take while both spouses are alive and well, to help reduce the chance of the surviving spouse finding themselves in a “financial deadlock” situation, or worse. The preparations require the non-financially dominant partner to be involved as much as possible, says Barron’s in the article “How to Avoid Financial Deadlock—or Worse—After One Spouse Dies”

Step one is to prepare the financial equivalent of a “go-bag,” like the ones people are supposed to have when they must leave their home in a crisis. That means a list of all financial contacts, advisors, estate planning attorney, accountants, insurance professionals and copies of all beneficiary designations. There should also be a list or a spreadsheet of all the couple’s assets and liabilities, including digital assets and passwords to these accounts. The spouse should also note the location of financial records, including insurance policies, wills, trusts and any other critical legal documents.

Each partner must have access to checking and cash independently of the other and the spouses need to review together how assets and accounts are titled.

It is especially important for both spouses to be on the deed to their home with right of survivorship, so that the surviving spouse can easily prove that they are the sole owner of the home after the spouse dies. Otherwise, they may not be able to communicate with the mortgage company. If a surviving spouse must go to court and file probate in order to deal with the home, it can become costly and more stressful.

It’s not emotionally easy to go through all this information but it is critical for the surviving spouse’s financial security.

Any information that will be needed by the surviving spouse should be documented in a way that is easily accessible and understandable for the spouse. Even if someone is very organized and has a well-developed description of their assets and estate plan, it may not be as easily understood for someone whose mind works differently. This is especially true, if the couple has had years where the non-financial spouse was not involved with the family’s assets and is suddenly digesting a lot of new information.

It is wise for the non-financial spouse to meet with key advisors and take on some of the tasks like bill paying, reviewing insurance policies and reconciling accounts well before either spouse experiences any kind of cognitive decline. Ideally, the financially dominant partner takes the time to train the other spouse and then lets them take the lead, until they are both comfortable managing all the details.

Each spouse needs to understand how the death of the other will impact the household income. If one spouse has a pension without survivor benefits and that spouse is the first to die, the surviving spouse may find themselves struggling to replace that income. They also need to consider daily aspects of their lives, like if one spouse is highly dependent upon the other for caregiving.

Spouses are advised not to make any big financial or life decisions within a year or so of a spouse’s death. The surviving spouse is often not in a good emotional state to make smart decisions and this is the time that they are most at risk for senior financial abuse.

Both spouses should sit down with their estate planning attorney and discuss what will happen when they are widowed. It is a difficult topic but planning ahead will make the transition less traumatic from a financial and legal perspective.

Reference: Barron’s (Sep. 15, 2019) “How to Avoid Financial Deadlock—or Worse—After One Spouse Dies”

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

Elder Law Estate Planning for the Future – Annapolis and Towson Estate Planning

Seniors who are parents of adult children can make their children’s lives easier, by making the effort to button down major goals in elder law estate planning, advises Times Herald-Record in the article “Three ways for seniors to make things easier for their kids.” Those tasks are planning for disability, protecting assets from long-term care or nursing home costs and minimizing costs and stress in passing assets to the next generation. Here’s what you need to do, and how to do it.

Disability planning includes signing advance directives. These are legal documents that are created while you still have all of your mental faculties. Naming people who will make decisions on your behalf, if and when you become incapacitated, gives those you love the ability to take care of you without having to apply for guardianship or other legal proceedings. Advance directives include powers of attorney, health care powers or attorney or proxies and living wills.

Your power of attorney will make all and any legal and financial decisions on your behalf. In addition, if you use the elder law power of attorney, they are able to make unlimited gifting powers that may save about half of a single person’s assets from the cost of nursing home care. With a health care proxy, a person is named who can make medical decisions. In a living will, you have the ability to convey your wishes for end-of-life care, including resuscitation and artificial feeding.

When advance directives are in place, you spare your family the need to have a judge appoint a legal guardian to manage your affairs. That saves time, money and keeps the judiciary out of your life. Your children can act on your behalf when they need to, during what will already be a very difficult time.

Goal number two is protecting assets from the cost of long-term care. Losing the family home and retirement savings to unexpected nursing costs is devasting and may be avoided with the right planning. The first and best option is to purchase long-term care insurance. If you don’t have or can’t obtain a policy, the next best is the Medicaid Asset Protection Trust (MAPT) that is used to protect assets in the trust from nursing home costs, after the assets have been in the trust for five years.

The third thing that will make your adult children’s lives easier, is to have a will. This lets you leave assets to the family as you want, with the least amount of court costs, legal fees, taxes and family battles over inheritances. Work with an experienced estate planning attorney to have a will created.  If your attorney advises it, you can also consider having trusts created, so your assets can be placed into the trusts and avoid probate, which is a public process. A trust can be easier for children, because estates settle more quickly.

Think of estate planning as part of your legacy of taking care of your family, ensuring that your hard-earned assets are passed to the next generation. You can’t avoid your own death, or that of your spouse, but you can prepare so those you love are helped by thoughtful and proper planning.

Reference: Times Herald-Record (July 13, 2019) “Three ways for seniors to make things easier for their kids”

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