Does a Beneficiary have to Pay Taxes on 401(k)? – Annapolis and Towson Estate Planning

There are many complicated rules for inheriting assets in the form of retirement plans, workplace plans and Individual Retirement Accounts (IRAs), says a recent article titled “How Much 401(k) Inheritance Taxes Will Really Cost You” from The Madison Leader-Gazette. Any assets passed from one person to another in the form of a 401(k) are taxable. You’ll want to be prepared.

How are Inherited 401(k)s Taxed?

The inheritance rule for 401(k) tax usually follows the same path as the rules used when making contributions or withdrawals to tax deferred retirement plans. When a person dies, their 401(k) becomes part of their taxable estate.

This means that any taxes due on earnings not paid during the person’s lifetime need to be paid.

Traditional 401(k) plans are funded with pre-tax dollars. This is great for the saver, who gets to defer paying taxes while they are working. When they retire, withdrawals are taxed at their ordinary income tax rate, which is typically lower than when they are working.

There is an exception with Roth 401(k)s, where contributions are made with after-tax dollars and qualified withdrawals are tax free.

How the IRS taxes an inherited 401(k) depends on three factors:

  • The relationship between the account owner and the heir
  • The age of the heir
  • How old the account owner was at the time of death.

Who Pays Taxes on an inherited 401(k)?

The beneficiary who inherits the 40(k) is responsible for paying the tax. They are taxed at the heir’s ordinary income tax rate. This could push the heir into a higher tax bracket.

What Should I Do with an Inherited 401(k)?

If your spouse was the original owner, you may leave the money in the plan and take regular distributions, paying income tax on the withdrawals. You may also roll it over into your own 401(k) or to an IRA. This allows the money to continue to grow tax free, until withdrawals are taken.

Can I Avoid Taxes on an Inherited 401(k)?

The only way to avoid taxes on inherited 401(k) would be to disclaim the inheritance, at which point the 401(k) would be passed to the contingent beneficiary. If you don’t need the money, don’t want the tax headaches, or would rather see it go to another family member, this is an option. Most people pay the taxes.

Planning For Taxes When Creating an Estate Plan

Talk with one of our experienced estate planning attorneys about your taxable assets and how to manage the tax liabilities to your heirs. There are numerous tools to address these and related issues. Your heirs will be grateful for your foresight and care.

Reference: The Madison Leader Gazette (July 29, 2022) “How Much 401(k) Inheritance Taxes Will Really Cost You”

 

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

IRS Extends Portability Election Option Deadline from Two to Five Years – Annapolis and Towson Estate Planning

The Internal Revenue Service recently issued a change to the rules regarding portability of a deceased spouse’s unused exclusion (DSUE), expanding the time period from two years to five years. As explained in the recent article “IRS Extends Portability Election” from The National Law Review, portability allows spouses to combine their exemption from estate and gift tax. Here is how it works.

A surviving spouse may use the unused estate tax exemption of the deceased spouse to lower their tax liability. Let’s say Spouse A dies in 2022, when the estate tax exemption is $12.06 million. If, during Spouse A’s lifetime, they had only used $1 million of their exemption amount, Surviving Spouse B may elect portability to claim $11.06 million DSUE, as long as they file for the exemption within five years of the decedent’s date of death.

Prior to the rule change, the surviving spouse only had two years to claim the DSUE. The due date of an estate tax return is still required to be filed nine months after the decedent’s death or on the last day of the period covered by an extension, if one had been secured.

The IRS had previously extended the deadline to file for portability to two years. However, over time, the taxing agency found itself managing a large number of requests for private letter rulings from estates failing to meet the two year deadline. It was noted many of these requests for portability relief occurred on or before the fifth anniversary of a decedent’s date of death, which led to the current change.

How do I Elect Portability?

To elect portability, the executor (or personal representative) of the estate must file an estate tax return on or before the fifth anniversary of the decedent’s date of death. This estate tax return is a Form 706. The executor must note at the top of Form 706 that it is filed pursuant to Rev. Proc. 2022-32 to elect portability under Sec. 2010(C)(5)(A).

Eligibility to elect portability is not overly burdensome for most people. The decedent must have been a U.S. citizen or resident on the date of their death and the executor must not have been otherwise required to file an estate tax return. This means the decedent was under the estate tax exemption at the time of their death. With the current estate tax exemption now at $12.06 million for an individual, most people will find themselves well under the limit.

This new regulation expands the number of people who will be able to take advantage of the exemption and will help families pass wealth on to the next generation without incurring the federal estate tax.

To learn more about how you can elect portability, please contact us to schedule a call with one of our experienced estate planning attorneys.

Reference: The National Law Review (Aug. 1, 2022) “IRS Extends Portability Election”

 

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

Actress Helen McCrory Leaves Money in Trust – Annapolis and Towson Estate Planning

Late British actress Helen McCrory left her entire $1 million estate in the name of her husband and actor Damian Lewis and their two children. The will states that the Harry Potter star had put her money into a trust.

Her will appointed Damian as one of the trustees of the 125-year-long fund – along with HM the Queen’s bankers Coutts – with the power to make payments out of the trust to himself and the other beneficiaries.

SK Pop’s recent article entitled “What was Helen McCrory’s net worth at the time of her death?” reports that her children, Manon (15), and Gulliver (14), along with any future grandchildren, have been named beneficiaries.

McCrory, who last starred in Netflix’s Peaky Blinders, died in April 2021 after secretly battling breast cancer for years. She was 52 and had been married to Lewis since 2007.

Her net worth was combined with her husband’s and was around $25 million at the time of her death.

In 2017, Helen was awarded an OBE for her services in drama. McCrory  was most remembered for playing Aunt Polly, the Shelby family matriarch in Netflix’s crime drama series Peaky Blinders. She died during the filming of the show’s final season.

She also starred as Narcissa Malfoy in the Harry Potter film series and played roles in Skyfall and the 2006 film The Queen.

McCrory received many accolades during her lifetime, including a BAFTA award for Streetlife (1995), a Broadcasting Press Guild Award for North Square and a Golden FIPA at the Biarritz International Festival of Audiovisual Programming.

The National Theatre’s artistic director Rufus Norris said she was “unquestionably one of the great actors of her generation.”

McCrory and Lewis made contributions during the pandemic and helped raise $1.8 million for Feed NHS.

Her actor husband was the Emmy Award-winning star of Band of Brothers, Homeland and Wolf Hall.

Reference: SK Pop (July 23, 2022) “What was Helen McCrory’s net worth at the time of her death?”

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

Must I Pay for Spouse’s Debt If They Die? – Annapolis and Towson Estate Planning

Nj.com’s recent article entitled “Who has to pay medical bills when a spouse dies?” says that a creditor may pursue collection against a spouse for an expense incurred by the other spouse for “necessaries.” only where the financial resources of the spouse who incurred the expense are insufficient, unless both spouses agreed to pay the debt.

In situations where both spouses incurred the debt, or agreed to pay the debt, or one spouse guaranteed the debt of the other spouse, the creditor may go after either or both spouses.

However, if one spouse incurs a medical expense or other expense deemed necessary — including, in some cases, legal fees or clothing — the creditor must first look to the spouse who incurred the expense.

Note that only if the spouse’s assets are insufficient to pay may the creditor seek payment from the non-debtor spouse.

It is also important to know that each spouse holding his or her assets in separate names doesn’t avoid responsibility for the debtor spouse’s medical bills, if the debtor spouse’s assets are insufficient to pay such bills.

Signing a pre-marital or post-marital agreement, in which each spouse agrees to be responsible for his or her own medical expenses, also doesn’t prevent a creditor from pursuing payment against the non-debtor spouse if the debtor spouse, or the debtor spouse’s estate, lacks the ability to pay.

Spouses also may not be able to avoid a creditor seeking reimbursement with respect to `necessaries’ merely by separating.

Before paying any creditors for a deceased person, please contact our office to speak with one of our attorneys.

Reference: nj.com (Aug. 3, 2022) “Who has to pay medical bills when a spouse dies?”

 

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

What Happens If Couple Divorce and Own Business? – Annapolis and Towson Estate Planning

High-profile cases like the Bezos or the Gates should cause many people to consider how their business and marital assets are tied together. You need to have plans in place from the beginning. No one thinks their partnership will end. However, it’s necessary to have a plan or prenuptial agreement in place, just in case.

The Dallas Business Journal’s recent article entitled “Does your business need a prenup?” explains that there are three typical outcomes when married couples working as business partners decide to end their relationship:

  • One individual buys out the other partner’s shares and continues running the business;
  • The partners sell the business and divide the proceeds; or
  • The couple continues working as partners after the divorce.

Safeguards can be put in place on the first day of the relationship to protect your personal and business assets in the event of a divorce. A way to do this is through a prenuptial agreement, which states what will happen if a split happens. A pre-nup should:

  • Establish the value of the business as of the date of marriage or the date the agreement is signed;
  • Detail a course of action with the appreciation or depreciation of the business from the date of the marriage;
  • Say how business value will be measured; and
  • Specify the allocation of business interests to be awarded to each spouse in the event of a divorce.

In addition to a prenuptial agreement, any privately held company should have a shareholder agreement (or “operating agreement” for non-corporations). The shareholder agreement is one of the most important documents owners of a closely held business will ever sign.

It controls the transfer of ownership when certain events occur, like divorce and states the following:

  • Which party will buy out the other’s shares of the company if a buyout occurs; or
  • If either party has the right to sell, how the ownership interest will be valued and the terms and conditions concerning the acquisition.

Because there are some tax implications involved in a buyout, it’s best to bring in experienced estate planning attorney for this process. In addition, life events like divorce or changes in a business partnership are an appropriate time to update your will, estate plans and any necessary insurance policies.

Please contact our office to schedule a call with one of our attorneys.

Reference: Dallas Business Journal (Aug. 1, 2022) “Does your business need a prenup?”

 

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

Who Is the Best Person for Executor? – Annapolis and Towson Estate Planning

Several critical estate planning documents give another person—known as an agent or personal representative—the legal right to act on another person’s behalf. They include wills, trusts, powers of attorney and advance health care directives, as described in a recent article titled “The nomination of trustees, executors and agents” from Lake County Record-Bee.

Your will is only activated after you die. The will and executor then have to be approved by the court. Many people think being named as an executor confers instant authority, but this is not true. Only when the will has been deemed valid by the court, does the executor have the power to act on behalf of the decedent.

After death, the court is petitioned for a court order appointing the executor and then letters testamentary are signed by the appointed executor. An executor then becomes active as an officer of the court with a fiduciary duty to act as personal representative of the decedent’s estate.

If the named person declines to serve, the will should have a secondary person named as executor, who can then request the appointment be validated by the court. Others can petition the court to be appointed. However, it is best to name two people of your choice in your will.

A trust is a separate legal entity with a trustee who is in charge of the trust and its assets. If a revocable will is created, the trustee is usually the same person who has the trust created, also known as the grantor. For an irrevocable trust, the trustee is someone other than the grantor. The appointment does not become official until the appointment is accepted, usually through signing a document or by the successor trustee taking action on behalf of the trust.

Just as an executor might not accept their role, a trustee can decide not to accept the nomination. However, once they do, they have a fiduciary duty to put the well-being of the trust first and manage it properly. You can’t accept the role and then walk away without serious consequences.

Powers of attorney are used while a person is living. The power of attorney’s effective date depends upon what kind of POA it is. A durable power of attorney is effective the moment it is signed. A springing POA sets forth terms upon which the POA becomes active, usually incapacity. The challenge with a Springing POA is that approval by the court may be required, usually with proof from a treating physician concerning the person’s condition.

Similarly, the health care power of attorney appoints a person who acts on behalf of another as their agent for health issues. They can decline the position. However, once they agree to take on the position, they are responsible for their actions.

If the POAs decline to serve and there is no secondary person named, or if all named POAs decline to serve, the family will need to apply for a conservatorship (also known as guardianship). This is a lengthy and expensive process requiring a thorough investigation of the situation and the person who needs representation. It can be contested if the person does not want to give up their independence, or by family members who feel it is not needed.

These are commonly used terms in estate planning. However, they are not always understood clearly. Your estate planning attorney will be able to address specific responsibilities and requirements, since every state has laws and appointments vary by state.

Contact our office to schedule a consultation with one of our experienced attorneys to discuss who the right people would be to serve as your Executor, Trustee, Power of Attorney, and/or Health Care Agent.

Reference: Lake Country Record-Bee (July 30, 2022) “The nomination of trustees, executors and agents”

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

Some States Have Tough Estate and Inheritance Taxes – Annapolis and Towson Estate Planning

For now, most people don’t have to be scared of federal estate taxes. In 2022, only estates valued at $12.06 million or more for an individual ($24.12 million or more for a married couple) need to pay federal estate taxes. Even better for the very wealthy, there’s no federal inheritance tax for heirs who reside in such lofty economic brackets, notes the recent article titled “States with Scary Death Taxes” from Kiplinger.

By definition, estate taxes are paid by the estate and based on the estate’s overall value, while inheritance taxes are paid by the individual who inherits property, assets, or anything else of value. This isn’t to say “regular people” don’t need to worry about death taxes. We do, because states have their own estate taxes, and a few still have inheritance taxes.

A number of states eliminated estate taxes in the last ten years or so, in an effort to keep retirees from leaving and heading to places like Florida, where there’s no estate tax. However, a dozen states and the District of Columbia still have estate taxes, six states have an inheritance tax and one has both an estate and inheritance tax: Maryland.

Here’s how some state taxes look in 2022:

Connecticut has an estate tax, with an exemption level at $7.1 million. However, there is no inheritance tax. The Nutmeg state is the only state with a gift tax on assets gifted during one’s life.

The District of Columbia has an estate tax, with an exemption level of $4 million.

Hawaii’s estate tax exemption level is $5.49 million., one of the higher state estate tax exclusions, and is not adjusted for inflation.

Illinois’s estate tax is $4 million, but there’s no inheritance tax. It’s known as one of the least taxpayer friendly states in the country for retirees.

Iowa is phasing out inheritance taxes, but this doesn’t take effect until 2025. In the meantime, there’s no estate tax, and if the estate is valued at less than $25,000, there’s no inheritance tax. No taxes are due on property inherited by a lineal ascendent or descendent, but for other family members, the taxes range from 8%—12%.

There’s no estate tax in Kentucky. However, depending upon your relationship to the person who died and the value of the property, the inheritance tax is 4% to 16%.

Maine has an estate tax exemption of $5.87 million, but no inheritance tax.

Maryland’s has both an estate tax exemption of $5 million and a flat 10% inheritance tax (on transfers to individuals who are not direct relatives (e.g. – cousins, nephews, friends, etc.)

Massachusetts has no inheritance tax and a $1 million estate tax exemption.

Minnesota has a low estate tax exemption of $3 million. Any taxable gifts made three years prior to death are included.

New York, New Jersey, Rhode Island, Oregon, Vermont and Washington have no inheritance taxes, while Pennsylvania has no estate tax but does have an inheritance tax.

It’s not necessary to move purely to avoid estate or inheritance taxes. An experienced estate planning attorney uses strategic tax planning as part of an estate plan, minimizing tax liability and preserving assets.

Contact our office to schedule a preliminary call with one of our experienced estate planning attorneys to review your estate plan and determine whether there are strategies to reduce or eliminate estate or inheritance taxes.

Reference: Kiplinger (July 29, 2022) “States with Scary Death Taxes”

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

Does the Way I Title My Assets Have an Impact on My Estate? – Annapolis and Towson Estate Planning

FedWeek’s recent article entitled “How Assets Are Titled Can Make a Big Difference” discusses the different ways property may be titled, and the significance of each one.

The way in which you take title to assets can affect your estate, taxes and perhaps the disposition of the asset if a couple divorces. Many couples want assets to be titled simply in the event something happens to one, so the other spouse can take possession immediately without taxes or complications. Joint ownership may be the simplest way to meet most of these objectives. However, this can get complicated if any number of things happen, such as divorce, second marriage, children from multiple marriages, adoption and blended families of all types.

It is critical to be educated on the different types of ownership, so you know when a change may be needed. Here are the main options:

Holding Assets in Your Own Name is simple and inexpensive. However, if you become incompetent, those assets might be mismanaged. At your death, individually owned assets may have to go through probate.

Joint Tenants with Right of Survivorship is when one co-owner dies, all assets held this way automatically pass to the survivor. One joint owner can take over if the other is incapacitated, and jointly held assets do not go through probate.

Tenants in Common means there is a divided interest, although none of the owners may claim to own a specific part of the property. At the death of one of the joint owners, the share owned by the deceased must pass through their will to determine ownership. The surviving joint owner does not automatically own the entirety of assets.

Tenancy by the Entirety is a type of joint ownership similar to rights of survivorship for married couples. It lets spouses own property together as a single legal entity. Ownership cannot be separated, which means creditors of an individual spouse may not attach and sell the property. Only creditors of the couple may make claims against the property.

With Entity Ownership, you might create a trust, a partnership (such as a family limited partnership), or a limited liability company (LLC) to hold assets. These entities may provide protection from creditors and tax benefits.

Community Property may only be used by married couples in community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin). Each person owns an undivided interest in the entire property. When a spouse dies, the survivor automatically receives the entire interest, so there is no need for probate. Community property cannot be controlled by a person’s will or trust.

Ask an experienced estate planning attorney to review your estate plan and how assets are titled.

Reference: FedWeek (July 27, 2022) “How Assets Are Titled Can Make a Big Difference”

 

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

What’s the Most Important Step in Farm Succession? – Annapolis and Towson Estate Planning

There are countless horror stories about grandchildren in tears, as they watch family farmland auctioned off because their grandparents had to liquidate assets to satisfy the taxes.

Another tale is siblings who were once in business together and now do not talk to each other after one felt slighted because they did not receive the family’s antique tractor.

Ag Web’s recent article entitled “Who Gets What? Take This Important Estate Planning Step” says that no matter where you are in the process, you can always take another step.

First, decide what you are going to do with your assets. Each farmer operating today needs to be considering what happens, if he or she passes away tonight. Think about what would happen to your spouse or your children, and who will manage the operation.

The asset part is important because you can assign heirs to each or a plan to sell them. From a management perspective, farmers should then reflect on the wishes of your potential heirs.

Children who grew up on the farm will no longer have an interest in it. That is because they are successful in business in the city, or they just do not have an interest or the management ability to continue the operation.

After a farmer takes an honest assessment, he or she can look at several options, such as renting out the farmland or enlisting the service of a farmland management company.

Just remember to work out that first decision: What happens to the farm if I am dead?

Once you work with an experienced estate planning attorney to create this basic framework, make a habit of reviewing it regularly.

You should, at a minimum, review the plan every two to three years and make changes based on tax or circumstance changes.

Reference: Ag Web (August 1, 2022) “Who Gets What? Take This Important Estate Planning Step”

 

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