Estate Planning Options to Consider in Uncertain Times – Annapolis and Towson Estate Planning

Now is a good time to reach out to an estate planning attorney to review and update beneficiaries, named executors, financial and healthcare powers of attorney, wills and trusts, advises the article “Planning Strategies During Market Uncertainty & Volatility: Estate Planning and Debt Usage” from Traders Magazine. There are also some strategic estate planning tools to consider in the current environment.

Intentionally Defective Grantor Trusts (IDGTs): These are irrevocable trusts that are structured to be “intentionally defective.” They are gifts to grantor trusts for non-grantor beneficiaries that allow contributed assets to appreciate outside of the grantor’s estate, while the income produced by the trust is taxed to the grantor, and not the trust. The external appreciation requires the grantor to use non-trust assets to pay the trust’s income taxes, which equals a tax-free gift to the beneficiaries of the trust, while reducing the grantor’s estate. Trust assets can grow tax-free, which creates additional appreciation opportunities for trust beneficiaries. IDGTs are especially useful to owners of real estate, closely held businesses or highly-appreciating assets that are or will likely be exposed to estate tax.

Grantor Retained Annuity Trusts (GRATs): GRATs allow asset owners to put assets irrevocably into trusts to benefit others, while receiving fixed annuity payments for a period of time. GRATs are especially effective in situations where low asset values and/or interest rates are present, because the “hurdle rate” of the annuity payment will be lower, while the price appreciation is potentially greater. GRATs are often used by asset owners with estate tax exposure who want to transfer assets out of their estate and retain access to cash flow from those assets, while they are living.

Debt strategies: Debt repayment represents an absolute and/or risk-adjusted rate of return that is often the same or better than savings rates or bond yields. Some debt strategies that are now useful include:

Mortgage refinancing: Interest rates are likely to be low for the foreseeable future. People with long-term debt may find refinancing right now an advantageous option.

Opportunistic lines of credit: The low interest rates may make tapping available lines of credit or opening new lines of credit attractive for investment opportunities, wealth transfer, or additional liquidity.

Low-rate intra-family loans: When structured properly, loans between family members can be made at below-interest, IRS-sanctioned interest rates. An estate planning attorney will be able to help structure the intra-family loan, so that it will be considered an arms-length transaction that does not impose gift tax consequences for the lender.

High-rate intra-family or -entity loans: This sounds counter-intuitive, but if structured properly, a high-rate intra-family or -entity loan can charge a higher but tax-appropriate rate that increases a fixed income cash flow for the borrower, while avoiding gift and income tax.

All of these techniques should be examined with the help of an experienced estate planning attorney to ensure that they align with the overall estate plan for the individual and the family.

Reference: Traders Magazine (May 6, 2020) “Planning Strategies During Market Uncertainty & Volatility: Estate Planning and Debt Usage”

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

What Is a Testamentary Trust and Do You Need One? – Annapolis and Towson Estate Planning

A couple doing some retirement planning has an updated will and a medical power of attorney in place, prepared with the help of an estate planning attorney. They own some rental property, a small business and life insurance, but their estate is not large enough for them to worry about the federal estate tax.

Do they need or want a trust to be part of their estate plan? That is a question from a recent article titled “It’s the law: Testamentary trusts provide protection for assets” from the Post Register.

First, there are many different types of trusts. A living trust, also known as a revocable trust, irrevocable trusts and testamentary trusts are just three types. The testamentary trust only comes into effect at death under a last will and testament, and in some cases, depending on how they are structured, they may never come into effect, because they are designed for certain circumstances.

If you leave everything to your spouse in a will or through a revocable trust, your spouse will receive everything with no limitations. The problem is, those assets are subject to claims by your spouse’s creditors, such as business issues, a car accident, or bankruptcy. The surviving spouse may use the money any way he or she wishes, during their lifetime or through a will at death.

Consider if your spouse remarried after your death. What happens if they leave assets that they have inherited from you to a new spouse? If the new spouse dies, do the new spouses’ children inherit assets?

By using a trust, assets are available for the surviving spouse. At the death of the surviving spouse, assets in the trust must be distributed as directed in the language of the trust. This is especially important in blended families, where there may be children from other marriages.

Trusts are also valuable to distribute assets, if there are beneficiaries with an inability to manage money, undue spousal interference or a substance abuse problem.

Note that the trust only protects the decedent’s assets, that is, their separate property and half of the community property, if they live in a community property state.

The best solution to the issue of how to distribute assets, is to meet with an estate planning attorney and determine the goal of each spouse and the couple’s situation. People who own businesses need to protect their assets from litigation. It may make sense to have significant assets placed in trust to control how they pass to family members and shield them from possible lawsuits.

Reference: Post Register (April 26, 2020) “It’s the law: Testamentary trusts provide protection for assets”

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

How Low-Interest Rates Create Estate Planning Opportunities – Annapolis and Towson Estate Planning

One result of the global health crisis is that interest rates are lower now than they have been in many, many years. The April 2020 AFRs (Applicable Federal Rates), which are used to determine the least amount of interest that has to be charged for below-market loans and are often used for intrafamily lending, have decreased to 0.91 percent for loans less than 36 months, 0.99 percent for loans of 36 months or more and less than nine years, and 1.44 percent for loans of nine years or longer.

The article, titled “Estate Planning in a Low Interest Rate Environment,” from The National Law Review Journal, explains that for families where intrafamily lending has already occurred, these low rates provide a chance to amend the terms of current promissory notes to obtain these rates.

There are two opportunities presented:

  • The amount that the borrower needs to repay is reduced, thereby easing the burden on a borrower who has a cash flow problem.
  • If a parent has already lent money to a child who will eventually inherit assets from the parent, this lower interest rate will help to facilitate wealth transfer. The parent will receive lower payments under the note, minimizing the assets that are added back to the lender’s taxable estate.

Here are a few situations where these loans are typically used:

  • Parents extend a loan to adult child, who is going through a challenging financial period.
  • Parent lends money to a child with the understanding that the child will invest the money at a higher rate of return than the interest charged under the note, thus allowing growth to occur in the child’s estate rather than in the parent’s estate.
  • Complex estate planning, where a sale is made to an intentionally defective trust, where the seller’s goal is to freeze the value of the estate for a price at which the asset was sold on an installment basis. This allows future growth to take place outside of the seller’s taxable estate.

These intrafamily loans are usually part of sophisticated estate planning. Other methods include Grantor Retained Annuity Trusts (GRATs), or Charitable Lead Trusts (CLTs), which also become more attractive in a low interest rate environment.

With a GRAT, there is a transfer of assets to a trust, in which the settlor retains an annuity payment for a certain number of years. At the end of the term, the remaining assets pass to the trust beneficiaries with no estate tax implication. The CLT operates in a similar way, except that the payment for a specified number of years is made to a charity.

Speak with an experienced estate planning attorney about how your estate could benefit from the current low interest rate environment.

Reference: The National Law Review (April 13, 2020) “Estate Planning in a Low Interest Rate Environment”

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

If Not Now, When? It is the Time for Estate Planning – Annapolis and Towson Estate Planning

What else could possibly go wrong? You might not want to ask that question, given recent events. A global pandemic, markets in what feels like free fall, schools closed for an extended period of time—these are just a few of the challenges facing our communities, our nation and our world. The time is now, in other words, to be sure that everyone has their estate planning completed, advises Kiplinger in the article “Coronavirus Legal Advice: Get Your Business and Estate in Order Now.”

Business owners from large and small sized companies are contacting estate planning attorney’s offices to get their plans done. People who have delayed having their estate plans done or never finalized their plans are now getting their affairs in order. What would happen if multiple family members got sick, and a family business was left unprotected?

Because the virus is recognized as being especially dangerous for people who are over age 60 or have underlying medical issues, which includes many business owners and CEOs, the question of “What if I get it?” needs to be addressed. Not having a succession plan or an estate plan, could lead to havoc for the company and the family.

Establishing a Power of Attorney is a key part of the estate plan, in case key decision makers are incapacitated, or if the head of the household cannot take care of paying bills, taxes or taking care of family or business matters. For that, you need a Durable Power of Attorney.

Another document needed now, more than ever: is an Advance Health Care Directive. This explains how you want medical decisions to be made, if you are too sick to make these decisions on your own behalf. It tells your health care team and family members what kind of care you want, what kind of care you do not want and who should make these decisions for you.

This is especially important for people who are living together without the legal protection that being married provides. While some states may recognize registered domestic partners, in other states, medical personnel will not permit someone who is not legally married to another person to be involved in their health care decisions.

Personal information that lives only online is also at risk. Most bills today do not arrive in the mail, but in your email inbox. What happens if the person who pays the bill is in a hospital, on a ventilator? Just as you make sure that your spouse or children know where your estate plan documents are, they also need to know who your estate planning attorney is, where your insurance policies, financial records and legal documents are and your contact list of key friends and family members.

Right now, estate planning attorneys are talking with clients about a “Plan C”—a plan for what would happen if heirs, beneficiaries and contingent beneficiaries are wiped out. They are adding language that states which beneficiaries or charities should receive their assets, if all of the people named in the estate plan have died. This is to maintain control over the distribution of assets, even in a worst-case scenario, rather than having assets pass via the rules of intestate succession. Without a Plan C, an entire estate could go to a distant relative, regardless of whether you wanted that to happen.

Reference: Kiplinger (March 16, 2020) “Coronavirus Legal Advice: Get Your Business and Estate in Order Now.”

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

What’s the Best Way to Provide for My Family when I’m Gone? – Annapolis and Towson Estate Planning

The estate planning process should begin when you are at least 18 years old, of sound mind and as free as possible from emotional stress, suggests Essence’s recent article entitled “Death And Money: How To Protect And Provide For The Loved Ones You Leave Behind.” You do not want to do this kind of planning when you are on your sickbed or when your mental capabilities are in decline.

If you are new to estate planning, here are the necessary steps to ensure you start the process on the right foot. Work with an experienced estate planning attorney to be certain that your plan is correct and legal.

A will. This is a legal document that details how to distribute your property and other assets upon death. A will can also nominate guardians for minor children. Without this, the state will dictate how to distribute your assets to your beneficiaries, according to the laws of intestate succession. If you already have a will, be sure it is updated to reflect an accurate listing of assets and beneficiaries that may be changed with a divorce, financial changes, or the birth or adoption of a child.

Life insurance. This is a great idea to protect and provide for your family when you are gone. Life insurance pays out money either upon your death or after a set period. Even if you have a life insurance policy as an employee benefit, this coverage is not portable, which means it does not follow you when you switch jobs. This can result in gaps in coverage at times when you may need it most.

Work with a legal professional. Estate planning is not a DIY project, like cleaning the garage. You should have the counsel and assistance of an experienced estate planning attorney to help you create a comprehensive estate plan. An estate planning attorney can also coordinate with your financial advisor to manage your estate’s finances, such as making recommendations and funding investment, retirement and trust accounts.

An estate planning attorney also can make sure that all of your beneficiaries and secondary beneficiaries are up-to-date on your investment accounts, pensions and insurance policies. An estate planning attorney will also help you with the best options for maintaining your estate after death or in the event of incapacity. In addition to preparing a will, your attorney can create a living trust that details your desires regarding your assets, your dependents and your heirs while you are still alive. He can also draw up your power of attorney for your health care, verify property titles and create legal document to ensure a succession plan for your business.

Finally, an estate planning attorney or probate attorney can help the personal representative or executor of an estate with closing responsibilities setting up an estate account, tax filings and paying the final distributions to beneficiaries.

A key to estate planning is to get (and stay) organized. Know the location and passwords (if applicable) of all your important legal and financial documents. You should also communicate the location of these files to trusted family members and to your estate planning or probate attorney.

Reference: Essence (Jan. 29, 2020) “Death And Money: How To Protect And Provide For The Loved Ones You Leave Behind”

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

How Bad Can a Do-It-Yourself Estate Plan Be? Very! – Annapolis and Towson Estate Planning

Here is a real world example of why what seems like a good idea backfires, as reported in The National Law Review’s article “Unintended Consequences of a Do-It-Yourself Estate Plan.”

Mrs. Ann Aldrich wrote her own will, using a preprinted legal form. She listed her property, including account numbers for her financial accounts. She left each item of property to her sister, Mary Jane Eaton. If Mary Jane Eaton did not survive, then Mr. James Aldrich, Ann’s brother, was the designated beneficiary.

A few things that you do not find on forms: wills and trusts need to contain a residuary, and other clauses so that assets are properly distributed. Ms. Aldrich, not being an experienced estate planning attorney, did not include such clauses. This one omission became a costly problem for her heir that led to litigation.

Mary Jane Eaton predeceased Ms. Aldrich. As Mary Jane Eaton had named Ms. Aldrich as her beneficiary, Ms. Aldrich then created a new account to receive her inheritance from Ms. Eaton. She also, as was appropriate, took title to Ms. Eaton’s real estate.

However, Ms. Aldrich never updated her will to include the new account and the new real estate property.

After Ms. Aldrich’s death, James Aldrich became enmeshed in litigation with two of Ms. Aldrich’s nieces over the assets that were not included in Ms. Aldrich’s will. The case went to court.

The Florida Supreme Court ruled that Ms. Aldrich’s will only addressed the property specifically listed to be distributed to Mr. James Aldrich. Those assets passed to Ms. Aldrich’s nieces.

Ms. Aldrich did not name those nieces anywhere in her will, and likely had no intention for them to receive any property. However, the intent could not be inferred by the court, which could only follow the will.

This is a real example of two basic problems that can result from do-it-yourself estate planning: unintended heirs and costly litigation.

More complex problems can arise when there are blended family or other family structure issues, incomplete tax planning or wills that are not prepared properly and that are deemed invalid by the court.

Even ‘simple’ estate plans that are not prepared by an estate planning lawyer can lead to unintended consequences. Not only was the cost of litigation far more than the cost of having an estate plan prepared, but the relationship between Ms. Aldrich’s brother and her nieces was likely damaged beyond repair.

Reference: The National Law Review (Feb. 10, 2020) “Unintended Consequences of a Do-It-Yourself Estate Plan”

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

Estate Planning Checklist, Especially for Procrastinators – Annapolis and Towson Estate Planning

Many people do not think of themselves as having an “estate.” However, a house, car, savings account, life insurance, and all the possessions you own are an estate. If, after years of procrastinating, you finally did the right thing and had an estate plan created with an experienced estate planning attorney, is there anything else you need to do? Yes, says Federal News Network in the article “Good at putting things off? Here’s the last checklist you’ll ever need!”

Where should you keep your estate planning documents? These documents need to be kept in a secure location that is known to the people who will need access to them. A will might be kept at home in a fire and waterproof safe, or at your attorney’s office. Each estate planning attorney has his or her own process and can make recommendations. A will placed in a safe deposit box may create huge headaches, if the box is sealed upon death. Remember that people will need easy access to some documents, like a Do Not Resuscitate, or Medical Health Care Proxy, so they could be stored somewhere in the home where they can be grabbed in an emergency.

Who should have a copy of my estate plan? This is a personal preference. Some people give a copy to all heirs and their executor. Others prefer to keep it private. It is essential that the person who will be your executor knows where your will is and can get access to it quickly.

Update beneficiary designations. Many assets are governed not by the will, but by the beneficiary designations on the accounts. That may include retirement accounts, annuities, IRAs, life insurance, and possibly bank accounts and investment accounts. Check them every few years, especially if there have been divorces, marriages and new members added to the family.

Review how your assets are titled. If there are assets owned as “joint with right of survivorship,” they will not pass through probate and will become owned by the joint owner upon death. Sometimes this works well for large accounts, but sometimes it backfires. Talk with your estate planning lawyer.

How long does my estate plan last? An estate plan does not have an expiration date.

When should I amend my estate plan? Anytime there is a large change in the law, as has recently occurred with the passage of the SECURE Act, the estate plan should be reviewed. The SECURE Act has changed the rules about IRA distributions for heirs. Anyone with a sizable IRA should review their plan.

Any time there is a large event in your life, is another time when your estate plan should be reviewed. Those events include a death, birth, marriage, or divorce. If the person you had named as your executor or who had been given Power of Attorney or Health Care Proxy is no longer in your life or is no longer trusted, you also want to review and change these documents.

Reference: Federal News Network (Feb. 5, 2020) “Good at putting things off? Here’s the last checklist you’ll ever need!”

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

Avoiding Probate with a Trust – Annapolis and Towson Estate Planning

Privacy is just one of the benefits of having a trust created as part of an estate plan. That is because assets that are placed in a trust are no longer in the person’s name, and as a result do not need to go through probate when the person dies. An article from The Daily Sentinel asks, “When is a trust worth the cost and effort?” The article explains why a trust can be so advantageous, even when the assets are not necessarily large.

Let us say a person owns a piece of property. They can put the property in a trust, by signing a deed that will transfer the title to the trust. That property is now owned by the trust and can only be transferred when the trustee signs a deed. Because the trust is the owner of the property, there is no need to involve probate or the court when the original owner dies.

Establishing a trust is even more useful for those who own property in more than one state. If you own property in a state, the property must go through probate to be distributed from your estate to another person’s ownership. Therefore, if you own property in three states, your executor will need to manage three probate processes.

Privacy is often a problem when estates pass from one generation to the next. In most states, heirs and family members must be notified that you have died and that your estate is being probated. The probate process often requires the executor, or personal representative, to create a list of assets that are shared with certain family members. When the will is probated, that information is available to the public through the courts.

Family members who were not included in the will but were close enough kin to be notified of your death and your assets, may not respond well to being left out. This can create problems for the executor and heirs.

Having greater control over how and when assets are distributed is another benefit of using a trust rather than a will. Not all young adults are prepared or capable of managing large inheritances. With a trust, the inheritance can be distributed in portions: a third at age 28, a third at age 38, and a fourth at age 45, for instance. This kind of control is not always necessary, but when it is, a trust can provide the comfort of knowing that your children are less likely to be irresponsible about an inheritance.

There are other circumstances when a trust is necessary. If the family includes a member who has special needs and is receiving government benefits, an inheritance could make them ineligible for those benefits. In this circumstance, a special needs trust is created to serve their needs.

Another type of trust growing in popularity is the pet trust. Check with a local estate planning lawyer to learn if your state allows this type of trust. A pet trust allows you to set aside a certain amount of money that is only to be used for your pet’s care, by a person you name to be their caretaker. In many instances, any money left in the trust after the pet passes can be donated to a charitable organization, usually one that cares for animals.

Finally, trusts can be drafted that are permanent, or “irrevocable,” or that can be changed by the person who wants to create it, a “revocable” trust. Once an irrevocable trust is created, it cannot be changed. Trusts should be created with the help of an experienced trusts and estate planning attorney, who will know how to create the trust and what type of trust will best suit your needs.

Reference: The Daily Sentinel (Jan. 23, 2020) “When is a trust worth the cost and effort?”

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

Alternatives for Stretch IRA Strategies – Annapolis and Towson Estate Planning

The majority of many people’s wealth is in their IRAs, that is saved from a lifetime of work. Their goal is to leave their IRAs to their children, says a recent article from Think Advisor titled “Three Replacements for Stretch IRAs.” The ability to distribute IRA wealth over years, and even decades, was eliminated with the passage of the SECURE Act.

The purpose of the law was to add an estimated $428 million to the federal budget over the next 10 years. Of the $16.2 billion in revenue provisions, some $15.7 billion is accounted for by eliminating the stretch IRA.

Existing beneficiaries of stretch IRAs will not be affected by the change in the law. But going forward, most IRA heirs—with a few exceptions, including spousal heirs—will have to take their withdrawals within a ten year period of time.

The estate planning legal and financial community is currently scrutinizing the law and looking for strategies that will protect these large accounts from taxes. Here are three estate planning approaches that are emerging as front runners.

Roth conversions. Traditional IRA owners who wished to leave their retirement assets to children may be passing on big tax burdens now that the stretch is gone, especially if beneficiaries themselves are high earners. An alternative is to convert regular IRAs to Roth IRAs and take the tax hit at the time of the conversion.

There is no guarantee that the Roth IRA will never be taxed, but tax rates right now are relatively low. If tax rates go up, it might make converting the Roth IRAs too expensive.

This needs to be balanced with state inheritance taxes. Converting to a Roth could reduce the size of the estate and thereby reduce tax exposure for the state as well.

Life insurance. This is being widely touted as the answer to the loss of the stretch, but like all other methods, it needs to be viewed as part of the entire estate plan. Using distributions from an IRA to pay for a life insurance policy is not a new strategy.

Charitable Remainder Trusts (CRT). The IRA could be used to fund a charitable remainder trust. This allows the benefactor to establish an income stream for heirs with part of the IRA assets, with the remainder going to a named charity. The trust can grow assets tax free. There are two different ways to do this: a charitable remainder annuity trust, which distributes a fixed annual annuity and does not allow continued contributions, or a charitable remainder unitrust, which distributes a fixed percentage of the initial assets and does allow continued contributions.

Speak with your estate planning lawyer about what options may work best in your unique situation.

Reference: Think Advisor (Jan. 24, 2020) “Three Replacements for Stretch IRAs”

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

Estate Planning for Unmarried Couples – Annapolis and Towson Estate Planning

For some couples, getting married just does not feel necessary. However, they do not enjoy the automatic legal rights and protections that legally wed spouses do, especially when it comes to death. There are many spousal rights that come with a marriage certificate, reports CNBC in the article “Here is what happens to your partner if you are not married and you die.” Without the benefit of marriage, extra planning is necessary to protect each other.

Taxes are a non-starter. There is no federal or state income tax form that will permit a non-married couple to file jointly. If one of the couple’s employers is the source of health insurance for both, the amount that the company contributes is taxable to the employee. A spouse does not have to pay taxes on health insurance.

More important, however, is what happens when one of the partners dies or becomes incapacitated. A number of documents need to be created, so should one become incapacitated, the other is able to act on their behalf. Preparations also need to be made, so the surviving partner is protected and can manage the deceased’s estate.

In order to be prepared, an estate plan is necessary. Creating a plan for what happens to you and your estate is critical for unmarried couples who want their commitment to each other to be protected at death. The general default for a married couple is that everything goes to the surviving spouse. However, for unmarried couples, the default may be a sibling, children, parents or other relatives. It will not be the unmarried partner.

This is especially true, if a person dies with no will. The courts in the state of residence will decide who gets what, depending upon the law of that state. If there are multiple heirs who have conflicting interests, it could become nasty—and expensive.

However, a will is not all that is needed.

Most tax-advantaged accounts—Roth IRAs, traditional IRAs, 401(k) plans, etc.—have beneficiaries named. That person receives the assets upon death of the owner. The same is true for investment accounts, annuities, life insurance and any financial product that has a beneficiary named. The beneficiary receives the asset, regardless of what is in the will. Therefore, checking beneficiaries need to be part of the estate plan.

Checking, savings and investment accounts that are in both partner’s names will become the property of the surviving person, but accounts with only one person’s name on them will not. A Transfer on Death (TOD) or Payable on Death (POD) designation should be added to any single-name accounts.

Unmarried couples who own a home together need to check how the deed is titled, regardless who is on the mortgage. The legal owner is the person whose name is on the deed. If the house is only in one person’s name, it will not become part of the estate. Change the deed so both names are on the deed with rights of survivorship, so both are entitled to assume full ownership upon the death of the other.

To prepare for incapacity, an estate planning attorney can help create a durable power of attorney for health care, so partners will be able to make medical decisions on each other’s behalf. A living will should also be created for both people, which states wishes for end of life decisions. For financial matters, a durable power of attorney will allow each partner to have control over each other’s financial affairs.

It takes a little extra planning for unmarried couples, but the peace of mind that comes from knowing that you have prepared to care for each other, until death do you part, is priceless.

Reference: CNBC (Dec. 16, 2019) “Here is what happens to your partner if you are not married and you die”

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