What is Portability and How Does It Impact Estate Planning? – Annapolis and Towson Estate Planning

Let’s address the elephant in the room: the word “estate” in planning doesn’t have anything to do with the size of your home. It simply refers to a person’s assets: their home, bank accounts, a second home, investment accounts, cars, etc.

The federal estate tax, says The Times Herald in the article “Federal estate tax and portability considerations,” impacts very few people today, as a person would have to have assets that total more than $11.4 million (or $22.8 for a couple) before they have to worry about the federal estate tax.

Individuals and couples with significant assets are advised to have an estate plan created by an estate planning attorney with experience working with people with large assets.  There are numerous tools used to minimize the federal tax liability.

However, when one spouse dies, it is generally recommended that the surviving spouse file a Federal Estate Tax return for reasons of portability. That is because when the first spouse dies, they use a portion of the Federal Estate Tax exemption, but there’s usually a portion available for the surviving spouse.

If IRS Form 706 is filed in a timely manner, the surviving spouse can “port over” or protect the remaining amount of Federal Estate Tax exemption that the deceased spouse has not used. This return needs to be filed within nine months of the date of death, although the surviving spouse can obtain an extension.

No tax will be owed, since the return is filed merely for reporting purposes. The assets in the entire estate must be reported, including everything the person owned. That may be cash, securities, real estate, insurance, trusts, annuities, business interests, and other assets. It should be noted that this will likely include probate as well as non-probate property. Appraisals and significant documentation are not usually required on a return just for portability purposes.

Why does a return need to be filed to claim the unused exemption, if no taxes are going to be paid? For one thing, the law may change and if the Federal Estate Tax exemption amount is reduced in the future, the surviving spouse will have protected their additional exemption amounts for his or her heirs. If the surviving spouse remarries and acquires significant assets, they will need proof of their exemption. The surviving spouse might own land or other property that increases dramatically in value. Or, the surviving spouse may inherit a large amount of assets.

Completing an IRS Form 706 for portability is not a complex task, but it should be done in conjunction with settling the estate, which should be done with the help of an estate planning attorney to be sure any tax issues are dealt with properly. In addition, when one spouse has passed, it is time for the surviving spouse to review their estate plan to make any necessary changes.

Reference: The Times Herald (July 7, 2019) “Federal estate tax and portability considerations”

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

Does Your Estate Plan Include Your Pets? – Annapolis and Towson Estate Planning

Estate planning helps to create a strategy for managing assets while we are living and their distribution when we pass away. That includes determining what happens to our tangible property as well as financial investments, retirement accounts, etc. An estate plan can also be used to protect the well-being of our beloved companion animals, says The Balance in the article “Estate Planning for Fido: How to Set Up a Pet Trust.”

Pet trusts were once thought of as something only for extremely wealthy or eccentric individuals, but today many ‘regular’ people use pet trusts to ensure that if they die before their pets, their pets will have a secure future.

Every state and the District of Columbia, except for Washington, now has laws governing the creation and use of pet trusts. Knowing how they work and what they can and cannot do will be helpful if you are considering having a pet trust made as part of your estate plan.

When you set up a trust, you are the “grantor.” You have the authority as creator of the trust to direct how you want the assets in the trust to be managed, for yourself and any beneficiaries of the trust. The same principal holds true for pet trusts. You set up the trust and name a trustee. The trustee oversees the money and any other assets placed in the trust for the pet’s benefit. Those funds are to be used to pay for the pet’s care and related expenses. These expenses can include:

  • Regular care by a veterinarian,
  • Emergency veterinarian care,
  • Grooming, and
  • Feeding and boarding costs.

A pet trust can also be used to provide directions for end of life care and treatment for pets, as well as burial or cremation arrangements you may want for your pet.

In most instances, the pet trust, once established, remains in place for the entire life span of the pet. Some states, however, place a time limit on how long a pet trust can continue. For animals with very long lives, like certain birds or horses, you’ll want to be sure the pet trust will be created to last for the entire life span of your pet. In several states, the limit is 21 years.

An estate planning attorney who has experience with pet trusts will know the laws of your state, so you’ll be able to create a pet trust for your pet.

Creating a pet trust is like creating any other type of trust. An estate planning attorney can help with drafting the documents, helping you select a trustee, and if you’re worried about your pet outliving the first trustee, naming any successor trustees.

Here are some things to consider when setting up your pet’s trust:

  • What’s your pet’s current standard of living and care?
  • What kind of care do you expect the pet’s new caregiver to offer?
  • Who do you want to be the pet’s caregiver, and who should be the successor caregivers?
  • How often should the caregiver report on the pet’s status to the trustee?
  • How long you expect the pet to live?
  • How likely your pet is to develop a serious illness?
  • How much money do you think your pet’s caregiver will need to cover all pet-related expenses?
  • What should happen to the money, if any remains in the pet trust, after the pet passes away?

The last item is important if you don’t want any funds to disappear. You might want to have the money split up to your beneficiaries to your will, or you may want to have it donated to charity. The pet trust needs to include a contingency plan for these scenarios.

Another point: think about when you want the pet trust to go into effect. You may not expect to become incapacitated, but these things do happen. Your pet trust can be designed to become effective if you become incapacitated.

Make sure the pet trust clearly identifies your pet so no one can abuse its terms and access trust funds fraudulently. One way to do this is to have your pet microchipped and record the chip number in the pet document. Also include photos of your pet and a physical description.

Be as specific as necessary when creating the document. If there are certain types of foods that you use, list them. If there are regular routines that your pet is comfortable with and that you’d like the caregiver to continue, then detail them. The more information you can provide, the more likely it will be that your pet will continue to live as they did when you were taking care of them.

Finally, make sure that your estate planning attorney, the trustee, and the pet’s designated caregiver all have a copy of your pet trust, so they are certain to follow your wishes.

Reference: The Balance (March 27, 2019) “Estate Planning for Fido: How to Set Up a Pet Trust”

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

The Next Wave in Retirement Planning: Digital and Cyber Assets – Annapolis and Towson Estate Planning

You’ve worked hard for decades, saving and planning for retirement. Don’t put it at risk by delaying having an estate plan created by a qualified estate planning attorney, advises The Press of Atlantic City in the article “Estate planning for your digital and cyber assets.”

But here’s the thing: even when you have a comprehensive estate plan in place, meaning a last will and testament, a power of attorney, a health care power of attorney and the appropriate trusts, you’re not quite done.

That’s because today we have an entirely new type of property that must be dealt with in estate planning. Unlike tangible property that people have been handing down for centuries, this is a relatively new kind of property: digital assets. One of the problems with digital assets is that, unlike paper documents, your family members can’t simply sift through decades of physical records to find out what you own. The online world is endless, and if they don’t know what websites to look at, there’s simply no way that they can find your digital assets.

What is a digital asset? They include such things as:

  • Mobile devices, like cell phones, laptops, tablets
  • Email accounts—all of them
  • Social media profiles including Facebook, Instagram, Twitter, LinkedIn, etc.
  • Sites that contain music, photos, and other personal information
  • Your personal desktop
  • Online banking, investment accounts, cybercurrency
  • Online gaming accounts
  • Online bill paying, like utilities, EZ-Pass, and any automatic payments
  • Websites or blogs

You’ll want to let your executor know what you want to be done with your digital assets. Some platforms have the ability for you to express your wishes for your digital assets, like Facebook. What do you want to happen to your pages when you are gone? Do you want people to be able to see your pages, or to post on them? Would you want them to be taken down a month after you pass, or left up permanently?

You’ll need to list out all your digital assets, your username and your passwords, and provide a directive to specifically state what you want to happen to each website. Yes, it will take time and it may be tedious, but imagine how challenging it will be for your family members to try to track down all your digital assets. Speak with your estate planning attorney as to how to share this information—but don’t put it in a will, because your will becomes a public document if your estate goes through probate (which happens to most wills).

Just as you have taken the time to have an estate plan created, making sure to have a digital assets plan is a gift to your loved ones. With these details taken care of, your family will be able to focus their attention on taking care of each other, dealing with your estate, and going through the grief process. You’ll have spared them a lot of additional stress and expenses.

An estate planning attorney will be well worth the investment. You can be confident that your will is going to be prepared in accordance with the laws of your state, and that your family will be protected as you wished.

Reference: The Press of Atlantic City (July 4, 2019) “Estate planning for your digital and cyber assets”

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

How to Design an Estate Plan with a Blended Family? – Annapolis and Towson Estate Planning

There are several things that blended families need to consider when updating their estate plans, says The University Herald in the article “The Challenges and Complexities of Estate Planning for Blended Families.”

Estate plans should be reviewed and updated whenever there’s a major life event, like a divorce, marriage or the birth or adoption of a child. If you don’t do this, it can lead to disastrous consequences after your death, like giving all your assets to an ex-spouse.

If you have children from previous marriages, make sure they inherit the assets you desire after your death. When new spouses are named as sole beneficiaries on retirement accounts, life insurance policies, and other accounts, they aren’t legally required to share any assets with the children.

Take time to review and update your estate plan. It will save you and your family a lot of stress in the future.

Your estate planning attorney can help you with this process.

You may need more than a simple will to protect your biological children’s ability to inherit. If you draft a will that leaves everything to your new spouse, he or she can cut out the children from your previous marriage altogether. Ask your attorney about a trust for those children. There are many options.

You can create a trust that will leave assets to your new spouse during his or her lifetime and then pass those assets to your children upon your spouse’s death. Be sure that you select your trustee wisely. It’s not uncommon to have tension between your spouse and your children. The trustee may need to serve as a referee between them, so name a person who will carry out your wishes as intended and who respects both your children and your spouse.

Another option is to simply leave assets to your biological children upon your death. The only problem here is if your spouse is depending upon you to provide a means of support after you have passed, this would allocate your assets to your children instead of your spouse.

An experienced estate planning attorney will be able to help you map out a plan so that no one is left behind. The earlier in your second (or subsequent) married life you start this process, the better.

Reference: University Herald (June 29, 2019) “The Challenges and Complexities of Estate Planning for Blended Families”

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

Estate Planning Can Solve Problems Before They Happen – Annapolis and Towson Estate Planning

Creating an estate plan, with the help of an experienced estate planning attorney, can help people gain clarity on larger issues like who should inherit the family home, and small details like what to do with the personal items that none of the children want.

Until you go through the process of mapping out a plan, these questions can remain unanswered. However, according the East Idaho Business Journal, “Estate plans can help you answer questions about the future.”

Let’s look at some of these questions:

What will happen to my children when I die? You hope that you’ll live a long and happy life and that you’ll get to see your children grow up and have families of their own. However, what if you don’t? A will is used to name a guardian to take care of your children if their parents are not alive. Some people also use their wills to name a “conservator.” That’s the person who is responsible for the assets that any minor children might inherit.

Will my family fight over their inheritance? Without an estate plan, that’s a distinct possibility. When an estate goes through probate, it is a public process. Relatives and creditors can both gain access to your records and could challenge your will. Many people use and “fund” revocable living trusts to place assets outside of the will and to avoid the probate process entirely.

Who will take care of my finances, if I’m too sick? Estate planning includes documents like a durable power of attorney, which allows a person you name (before becoming incapacitated) to take charge of your financial affairs. Speak with your estate planning attorney about also having a medical power of attorney. This lets someone else handle health care decisions on your behalf.

Should I be generous to charities or leave all my assets to my family? That’s a very personal question. Unless you have significant wealth, chances are you will leave most of your assets to family members. However, giving to charity could be a part of your legacy, whether you are giving a large or small amount. It may give your children a valuable lesson about what should happen to a lifetime of work and saving.

One way of giving, is to establish a charitable lead trust. This provides financial support to a charity (or charities) of choice for a period of time with the remaining assets eventually going to family members. There is also the charitable remainder trust, which provides a steady stream of income for family members for a certain term of the trust. The remaining assets are then transferred to one or more charitable organizations.

Careful estate planning can help answer many worrisome questions. Just keep in mind that these are complex issues that are best addressed with the help of an experienced estate planning attorney.

Reference: East Idaho Business Journal (June 25, 2019) “Estate plans can help you answer questions about the future.”

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

What Happens When Real Estate Is Inherited? – Annapolis and Towson Estate Planning

The number one question on most people’s minds when they inherit real estate is whether they have to pay taxes on it.

For the most part, people don’t have to pay taxes on what they inherit, unless they live in a state with an inheritance tax. There are tax forms to be filed, says the Petoskey News-Review in the article “The pros and cons of inheriting real estate,” but not every estate has to pay taxes.

The estate has to pay taxes on any gains or losses after the death of the decedent, if and when they sell the property. The seller will have either capital gains or capital losses, depending upon what the house was purchased for and what it sold for.

Let’s say that Mom purchased the house for $100,000, gave it to her children and then they sold it for $120,000. They have to pay capital gains on the $20,000. When someone dies, heirs get the step-up in basis, so they get the value of the property at the date of the decedent’s death. If mom bought the house for $100,000 and when she died it had jumped in value to $220,000 the children sold it for $220,000, there would be no capital gain.

People who inherit property should have it appraised by an experienced real estate appraiser to determine the actual value at the date of death. An estate planning attorney will be able to recommend an appraiser.

One of the biggest disagreements that families face after the death of a loved one centers on selling real estate property. Some families actually break up over it, which is a shame. It would be far better for the family to talk about the property before the parents die and work out a plan.

The sticking point often centers on a summer home being passed down to multiple heirs. One wants to sell it, another wants to rent it out for summers and use it during winters and the third wants to move in. If they can resolve these issues with their parents, it’s less likely to come up as a divisive factor when the parents die and emotions are running high. This gives the parents or grandparents a chance to talk about what they want after they have passed and why.

Conflicts can also arise when it’s time to clean up the house after someone inherits the property. Mom’s old lemon juicer or Dad’s favorite barbecue fork seem like small items until they become part of family history.

The best thing for families that are able to pass a house down to the next generation is to start the discussion early and make a plan.

An estate planning attorney can help the family work through the issues, including creating a plan for how the real estate property should be handled. The attorney will also be able to help the family  plan for any taxes that might be due, so there are no big surprises.

Reference: Petoskey News-Review (June 25, 2019) “The pros and cons of inheriting real estate”

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

You’ve Received an Inheritance. Now What? – Annapolis and Towson Estate Planning

Inheriting money puts a whole new spin on your outlook on money, says The Kansas City Star in its article “Coming into some money? Be wise with it.”

Should you pay off your debts first, if you have any? Make a list of your debt balances and their interest rates. If the interest rate is high, you may want to pay it off. If it’s low, you may be better off investing the funds.

Next, check on your emergency fund. If you don’t have three to six months’ worth of living expenses on hand, you can use your inheritance to ramp up that fund. Yes, you can use credit cards sometimes. However, having at least two months’ worth of living expenses in cash is worthwhile.

Another option is to contribute some money to a health savings account (HSA), if your employer does not contribute to it and if you have a qualifying health plan. That’s $3,500 if you are single, $7,000 for families and add $1,000, if you are over 55. This gets you a nice tax deduction and withdrawals are tax-free, as long as they are used for qualified medical expenses.

If you’re still working, and depending upon the size of the inheritance, it might be time to “tax-shift” your portfolio.

Let’s say you regularly contribute $3,000 to a 401(k). You can increase that amount by $22,000, to the maximum, if you’re 50 and older. Since your paycheck decreases, so does your tax. If your tax rate is currently 22%, you’ll only need to add $17,160 from your inherited account to reach the same spendable dollars. The tax-deferred account in your portfolio will grow faster while the taxable account shrinks.

Think about whether to commingle funds with your significant other or not. Let’s say you and your spouse have a retirement portfolio. You both can spend it now, maybe on your house. The inheritance may also help you to retire earlier. If you save the inheritance, keeping it in a separate account with only your name on it, it remains your asset, in case of a divorce. Most states will consider this money a non-marital asset, and not subject to division between divorcing parties.

Consider using the inheritance as a way to avoiding tapping into retirement accounts. Withdrawals from IRAs are taxable. If you’re not worried about commingling funds or investment gains, then you can use the inherited account to minimize the tax losses from retirement accounts.

Most people don’t have enough saved to keep spending during retirement as they did while working. Skip the spending spree that often follows an inheritance and enjoy the money over an extended period of time.

Receiving an inheritance is one of the times when a review of your estate plan becomes a wise move. A new financial position may require more tax planning and more legacy planning.

Reference: The Kansas City Star (June 27, 2019) “Coming into some money? Be wise with it”

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

Why Would I Need to Revise My Will? – Annapolis and Towson Estate Planning

OK, great!! You’ve created your will! Now you can it stow away and check off a very important item on your to-do list. Well, not entirely.

Thrive Global’s recent article, “7 Reasons Why You Need to Review your Will Right Now,” says it’s extremely important that you regularly update your will to avoid any potential confusion and extra stress for your family at a very emotional time. As circumstances change, you need to have your will reflect changes in your life. As time passes and your situation changes, your will may become invalid, obsolete or even create added confusion when the time comes for your will to be administered.

New people in your life. If you do have more children after you’ve created your will, review your estate plan to make certain that the wording is still correct. You may also marry or re-marry, and grandchildren may be born that you want to include. Make a formal update to your estate plan to include the new people who play an important part in your life and to remove those with whom you lose touch.

A beneficiary or other person dies. If a person you had designated as a beneficiary or executor of your will has died, you must make a change or it could result in confusion when the time comes for your estate to be distributed. You need to update your will if an individual named in your estate passes away before you.

Divorce. If your will was created prior to a divorce and you want to remove your ex from your estate plan, talk to an estate planning attorney about the changes you need to make.

Your spouse dies. Wills should be written in such a way as to always have a backup plan in place. For example, if your husband or wife dies before you, their portion of your estate might go to another family member or another named individual. If this happens, you may want to redistribute your assets to other people.

A child becomes an adult. When a child turns 18 and comes of age, she is no longer a dependent.  Therefore, you may need to update your will in any areas that provided additional funds for any dependents.

You experience a change in your financial situation. This is a great opportunity to update your will to protect your new financial situation.

You change your mind. It’s your will and you can change your mind whenever you like.

Reference: Thrive Global (June 17, 2019) “7 Reasons Why You Need to Review your Will Right Now”

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

How Has the New Tax Reform Affected Charitable Giving? – Annapolis and Towson Estate Planning

People typically don’t donate to charity because of tax benefits, but without it, they’re likely to give less.

CNBC’s recent article, “Charitable contributions take a hit following tax reform,” reports that 2018 was the first time the effect of the new tax law could be gauged. The law eliminated or significantly reduced the benefits of charitable giving for many would-be donors.

In total, individuals, bequests, foundations and corporations donated roughly $430 billion to U.S. charities in 2018, according to Giving USA. However, while the giving by individuals dropped, contributions from foundations and corporations went up.

Even though the deduction for donations was unchanged in the Tax Cuts and Jobs Act, individuals are still required to itemize to claim it. That is now a much higher bar because of the nearly doubled standard deduction.

Under the new tax reform legislation, total itemized deductions must be more than $12,000, which is the new standard deduction. That is an increase from the past $6,350 standard deduction for single people. Married couples need deductions exceeding $24,000, which is an increase from $12,700.

Because of this change, there will be fewer people who itemize their individual tax returns. The result is that many people won’t enjoy the tax benefits of their charitable contributions.

One analysis from the Tax Policy Center showed that the number of itemizers fell from to about 19 million under the new tax law. That’s a decrease of more than half from about 46 million. At the same time, lower tax rates also reduced the marginal benefit of giving, the Tax Policy Center said.

Tax reform probably impacted the middle households that used to itemize the hardest, one tax analyst remarked. As a result, lower-income families reduced giving, a change that could be an issue for non-profits in the long term. The greater the revenue is concentrated in only a few sources, the greater the risk for these charities.

Another study from the Fundraising Effectiveness Project revealed that there was a nearly 3% increase in large gifts, defined as $1,000 or more in 2018. However, modest gifts between $250 and $999 dropped by 4%; and gifts under $250 decreased by more than 4%. In addition, the total number of donors declined.

Reference: CNBC (June 18, 2019) “Charitable contributions take a hit following tax reform”

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

What Happens When the Family Fights over Personal Items or Artwork? – Annapolis and Towson Estate Planning

A few years after her death in 2014, Joan Rivers’ family put hundreds of her personal items up for auction at Christie’s in New York.  As The Financial Times reported in “Why an art collector’s estate needs tight planning,” a silver Tiffany bowl engraved with her dog’s name, Spike, made headlines when it sold for thirty times its estimated price.

This shows how an auction house can generate a buzz around the estate of a late collector, creating demand for items that, had they been sold separately, might have failed to attract as much attention.

A problem for some art and collectible owners is that their heirs may feel much less passionately about the works than the person who collected them.

A collector can either gift, donate or sell in their lifetime. He or she can also wait until they pass away and then gift, donate, or sell posthumously.

The way a collector can make certain his or her wishes are carried out or eliminate family conflicts after their death is to take the decision out of the hands of the family by placing an art collection in trust.

The trust will have the collector’s wishes added into the agreement and the trustees are appointed from the family and from independent advisers with no interest in a transaction taking place.

Many collectors like to seal their legacy by making a permanent loan or gift of art works to a museum.  However, their children can renege on these agreements if they’re not adequately protected by trusts or other legal safeguards after a collector’s death.

Even with a trust or other legal structure put in place to preserve a legacy, the key to avoiding a fight over a valuable collection after the death of the collector is to have frank discussions about estate planning with the family well before the reading of the will. This can ensure that their wishes are respected.

Reference: Financial Times (June 20, 2019) “Why an art collector’s estate needs tight planning”

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