Should I Try Do-It-Yourself Estate Planning? – Annapolis and Towson Estate Planning

US News & World Report’s recent article entitled “6 Common Myths About Estate Planning explains that the coronavirus pandemic has made many people face decisions about estate planning. Many will use a do-it-yourself solution. Internet DIY websites make it easy to download forms. However, there are mistakes people make when they try do-it-yourself estate planning.

Here are some issues with do-it-yourself that estate planning attorneys regularly see:

You need to know what to ask. If you are trying to complete a specific form, you may be able to do it on your own. However, the challenge is sometimes not knowing what to ask. If you want a more comprehensive end-of-life plan and are not sure about what you need in addition to a will, work with an experienced estate planning attorney. If you want to cover everything, and are not sure what everything is, that is why you see them.

More complex issues require professional help. Take a more holistic look at your estate plan and look at estate planning, tax planning and financial planning together, since they are all interrelated. If you only look at one of these areas at a time, you may create complications in another. This could unintentionally increase your expenses or taxes. Your situation might also include special issues or circumstances. A do-it-yourself website might not be able to tell you how to account for your specific situation in the best possible way. It will just give you a blanket list, and it will all be cookie cutter. You will not have the individual attention to your goals and priorities you get by sitting down and talking to an experienced estate planning attorney.

Estate laws vary from state to state. Every state may have different rules for estate planning, such as for powers of attorney or a health care proxy. There are also 17 states and the District of Columbia that tax your estate, inheritance, or both. These tax laws can impact your estate planning. Eleven states and DC only have an estate tax (CT, HI, IL, ME, MA, MN, NY, OR, RI, VT and WA). Iowa, Kentucky, Nebraska, New Jersey and Pennsylvania have only an inheritance tax. Maryland has both an inheritance tax and an estate tax.

Setting up health care directives and making end-of-life decisions can be very involved. It is too important to try to do it yourself. If you make a mistake, it could impact the ability of your family to take care of financial expenses or manage health care issues. Do not do it yourself.

Reference: US News & World Report (July 5, 2021) “6 Common Myths About Estate Planning”

 

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Why Do You Need a Health Care Directive? – Annapolis and Towson Estate Planning

Healthy adults often make the mistake of thinking they do not need a health care directive. However, the pandemic has made clear everyone needs this estate planning document, at any time of life, according to a recent article “Health care directive beneficial for anyone” from The Times-Tribune.

Anytime a person becomes severely incapacitated, even if just for a short time, and any time a young person becomes a legal adult, a health care directive is needed. In other words, everyone over the age of 18 needs to have a health care directive.

Several health care directives are prepared by an estate planning attorney as part of a comprehensive estate plan.

A Living Will or Advance Directive is used to express wishes for medical treatments, if you are not able to express them yourself.

A Power of Attorney for Health Care (also known as a Durable POA for Health Care or a Health Care Proxy) lets you name a trusted person who will make health care decisions on your behalf, if you cannot make the decisions or communicate your wishes.

A HIPAA Privacy Authorization makes it possible for health care providers to share medical information with a person of your choice. Otherwise, the health care providers are not permitted to discuss your medical history, medical status, diagnostic reports, lab results, etc., with family members.

Short term incapacity can result from illness or recovery from surgery or intense medical treatments. Having these documents in place permits a person you trust to have important conversations with your health care providers and to make decisions on your behalf.

Physicians will be permitted to discuss medical care with a named agent, who, in turn, will be able to discuss care or status with family members.

This documentation will also allow an authorized person to help you with insurance companies, billing departments at hospitals, pharmacies and to schedule medical appointments on your behalf.

If you are not married, this is especially important. Even a partner of many years has no legal right to act on your behalf.

For parents of young adults, having these documents in place will allow them to stay involved in an adult child’s healthcare. It is not a scenario that any parent wants to contemplate, but having these documents prepared in advance can save a great deal of stress and anguish, if and when they are needed.

Reference: The Times-Tribune (Aug. 15, 2021) “Health care directive beneficial for anyone”

 

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What Happens If You Don’t Name Beneficiaries? – Annapolis and Towson Estate Planning

It is always good to check into your retirement accounts and consider if you are saving enough and if your investments are properly balanced. However, what is just as important is whether you have reviewed named beneficiaries for these and other accounts. The recommendation comes from the article titled “Review your IRA, 401(k) beneficiaries” from Idaho State Business Journal, and it’s sound advice.

In more cases than you might think, people overlook this detail, and their loved ones are left with the consequences. After all, you opened those accounts long ago, and who even remembers? Does it really matter?

In a word, yes. What if your family circumstances have changed since you named a beneficiary? If divorce and remarriage occurred, do you want your former spouse to receive your IRA, 401(k) and life insurance proceeds?

It is important to understand that beneficiary designations supersede anything in your last will and testament. Therefore, while you have been dutifully updating your estate plans whenever life changes occur and neglecting beneficiary designations, your ex or someone else who is no longer in your life could receive a surprise windfall.

Here is another detail often overlooked: retirement plans, and insurance policies may need more than one beneficiary. Any time there is an opportunity to name a contingent beneficiary, take advantage of it. If the primary beneficiary dies or refuses the inheritance and there is no contingent or secondary beneficiary, the proceeds could end up back into your estate. Depending on the laws of your state, they might end up being taxable, in addition to not going to your intended heir.

This is an easy thing to fix, but it takes diligence and in some cases, a fair amount of time.

Start by gathering information on all your accounts, including retirement, checking and savings accounts, 401(k)s, pension plans, insurance policies and any accounts containing assets you want to pass to loved ones. If you see anything incorrect or outdated, immediately contact the financial institution, your company’s benefits manager or your insurance representative to request a change-of-beneficiary form.

Once you receive the form, immediately address making the changes. Request a printed confirmation from the financial organization to confirm the change has been made. Do not accept a verbal acknowledgement by a call center employee—this is too important to leave to chance.

To be on the safe side, it would be wise to have your estate planning attorney work with you on documenting your beneficiary designations as part of your estate plan. You may also pick up some smart pointers on other suggestions for dealing with beneficiaries.

For example, children are not permitted to control assets until they reach the age of majority. But when most children reach age 18 or 21, they are not ready to manage substantial sums of money. Your will names a guardian for minor children, but it is also wise to create a trust for the benefit of a minor that controls when distributions are made when they are older.

Most people want to leave something behind for those they love. Make sure to do it in the right way—including paying attention to beneficiary designations.

Reference: Idaho State Business Journal (July 27, 2021) “Review your IRA, 401(k) beneficiaries”

 

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What Exactly Is a Trust? – Annapolis and Towson Estate Planning

MSN Money’s recent article entitled “What is a trust?” explains that many people create trusts to minimize issues and costs for their families or to create a legacy of charitable giving. Trusts can be used in conjunction with a last will to instruct where your assets should go after you die. However, trusts offer several great estate planning benefits that you do not get in a last will, like letting your heirs to see a relatively speedy conclusion to settling your estate.

Working with an experienced estate planning attorney, you can create a trust to minimize taxes, protect assets and spare your family from going through the lengthy probate process to divide up your assets after you pass away. A trust can also let you control to whom your assets will be disbursed, as well as how the money will be paid out. That is a major point if the beneficiary is a child or a family member who does not have the ability to handle money wisely. You can name a trustee to execute your wishes stated in the trust document. When you draft a trust, you can:

  • Say where your assets go and when your beneficiaries have access to them
  • Save your beneficiaries from paying estate taxes and court fees
  • Shield your assets from your beneficiaries’ creditors or from loss through divorce settlements
  • Instruct where your remaining assets should go if a beneficiary dies, which can be helpful in a family that includes second marriages and stepchildren; and
  • Avoid a long probate court process.

One of the most common trusts is called a living or revocable trust, which lets you put assets in a trust while you are alive. The control of the trust is transferred after you die to beneficiaries that you named. You might want to ask an experienced estate planning attorney about creating a living trust for several reasons, such as:

  • If you would like someone else to take on the management responsibilities for some or all of your property
  • If you have a business and want to be certain that it operates smoothly with no interruption of income flow, if you die or become disabled
  • If you want to shield assets from the incompetency or incapacity of yourself or your beneficiaries; or
  • If you want to decrease the chances that your will may be contested.

A living trust can be a smart move for those with even relatively modest estates. The downside is that while a revocable trust will usually keep your assets out of probate if you were to die, there still will be estate taxes if you hit the threshold.

By contrast, an irrevocable trust cannot be changed once it has been created. You also relinquish control of the assets you put into the trust. However, an irrevocable trust has a key advantage in that it can protect beneficiaries from probate and estate taxes.

In addition, there are many types of specialty trusts you can create. Each is structured to accomplish different goals. Ask an experienced estate planning attorney about these.

Reference: MSN Money (July 9, 2021) “What is a trust?”

 

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How Important Is a Power of Attorney? – Annapolis and Towson Estate Planning

People are often surprised to learn a power of attorney is one of the most urgently needed estate planning documents to have, with a last will and health care proxy close behind in order of importance. Everyone over age 18 should have these documents, explains a recent article titled “The dangers of not having a power of attorney” from the Rome Sentinel. The reason is simple: if you have a short- or long-term health problem and cannot manage your own assets or even medical decisions and have not given anyone the ability to do so, you may spend your rehabilitation period dealing with an easily avoidable nightmare.

Here are other problems that may result from not having your incapacity legal planning in place:

A guardianship proceeding might be needed. If you are incapacitated without this planning, loved ones may have to petition the court to apply for guardianship so they can make fundamental decisions for you. Even if you are married, your spouse is not automatically empowered to manage your financial affairs, except perhaps for assets that are jointly owned. It can take months to obtain guardianship and costs far more than the legal documents in the first place. If there are family issues, guardianship might lead to litigation and family fights.

The cost of not being able to pay bills in a timely manner adds up quickly. The world keeps moving while you are incapacitated. Mortgage payments and car loans need to be paid, as do utilities and healthcare bills. Lapses of insurance for your home, auto or life, could turn a health crisis into a financial crisis, if no one can act on your behalf.

Nursing home bills and Medicaid eligibility denials. Even one month of paying for a nursing home out of pocket, when you would otherwise qualify for Medicaid, could take a large bite out of savings. The Medicaid application process requires a responsible person to gather a lot of medical records, sign numerous documents and follow through with the appropriate government authorities.

Getting medical records in a HIPAA world. Your power of attorney should include an authorization for your representative to take care of all health care billing and payments and to access your medical records. If a spouse or family member is denied access to review records, your treatment and care may suffer. If your health crisis is the result of an accident or medical malpractice, this could jeopardize your defense.

Transferring assets. It may be necessary to transfer assets, like a home, or other assets, out of your immediate control. You may be in a final stage of life. As a result, transferring assets while you are still living will avoid costly and time-consuming probate proceedings. If a power of attorney is up to date and includes a fully executed “Statutory Gift” authorization, your loved ones will be able to manage your assets for the best possible outcome.

The power of attorney is a uniquely flexible estate planning document. It can be broad and permit someone you trust to manage all of your financial and legal matters, or it can be narrow in scope. Your estate planning attorney will be able to craft an appropriate power of attorney that is best suited for your needs and family. The most important thing: do not delay having a new or updated power of attorney created. If you have a power of attorney, but it was created more than four or five years ago, it may not be recognized by financial institutions.

Reference: Rome Sentinel (July 25, 2021) “The dangers of not having a power of attorney”

 

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Checklist for Estate Plan’s Success – Annapolis and Towson Estate Planning

We know why estate planning for your assets, family and legacy falls through the cracks.  It is not the thing a new parent wants to think about while cuddling a newborn, or a grandparent wants to think about as they prepare for a family get-together. However, this is an important thing to take care of, advises a recent article from Kiplinger titled “2021 Estate Planning Checkup: Is Your Estate Plan Up to Date?

Every four years, or every time a trigger event occurs—birth, death, marriage, divorce, relocation—the estate plan needs to be reviewed. Reviewing an estate plan is a relatively straightforward matter and neglecting it could lead to undoing strategic tax plans and unnecessary costs.

Moving to a new state? Estate laws are different from state to state, so what works in one state may not be considered valid in another. You will also want to update your address, and make sure that family and advisors know where your last will can be found in your new home.

Changes in the law. The last five years have seen an inordinate number of changes to laws that impact retirement accounts and taxes. One big example is the SECURE Act, which eliminated the Stretch IRA, requiring heirs to empty inherited IRA accounts in ten years, instead of over their lifetimes. A strategy that worked great a few years ago no longer works. However, there are other means of protecting your heirs and retirement accounts.

Do you have a Power of Attorney? A Power of Attorney (“POA”) gives a person you authorize the ability to manage your financial, business, personal and legal affairs, if you become incapacitated. If the POA is old, a bank or investment company may balk at allowing your representative to act on your behalf. If you have one, make sure it is up to date and the person you named is still the person you want. If you need to make a change, it is very important that you put it in writing and notify the proper parties.

Health Care Power of Attorney needs to be updated as well. Marriage does not automatically authorize your spouse to speak with doctors, obtain medical records or make medical decisions on your behalf. If you have strong opinions about what procedures you do and do not want, the Health Care POA can document your wishes.

Last Will and Testament is Essential. Your last will needs regular review throughout your lifetime. Has the person you named as an executor four years ago remained in your life, or moved to another state? A last will also names an executor for your property and a guardian for minor children. It also needs to have trust provisions to pay for your children’s upbringing and to protect their inheritance.

Speaking of Trusts. If your estate plan includes trusts, review trustee and successor appointments to be sure they are still appropriate. You should also check on estate and inheritance taxes to ensure that the estate will be able to cover these costs. If you have an irrevocable trust, confirm that the trustee is still ready and able to carry out the duties, including administration, management and tax returns.

Gifting in the Estate Plan. Laws concerning charitable giving also change, so be sure your gifting strategies are still appropriate for your estate. An estate plan review is also a good time to review the organizations you wish to support.

Reference: Kiplinger (July 28, 2021) “2021 Estate Planning Checkup: Is Your Estate Plan Up to Date?

 

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Does a Married Couple without Children Need a Will? – Annapolis and Towson Estate Planning

While estate planning for couples with no children seems like it would be very simple, the opposite is almost always the case, according to this informative article titled “Three keys to estate planning for couples without children” from The News-Enterprise.

If there is no last will, intestate succession laws dictate who will receive property.

There are three relatively simple ways for couples to be sure their wishes will be followed, and property distributed as they want.

A secondary level of beneficiaries. Couples do not always die at the same time, although it does happen. For the most part, upon one spouse’s death, assets owned together, including Payable on Death, or POD accounts, remain in the possession of the surviving spouse. If all of the assets are owned jointly, the surviving spouse may be able to avoid probate altogether. However, they should check with an estate planning attorney to be sure their state will accept this.

There should be provisions in the last will, in case of a simultaneous death. This lets the more important provisions focus on the beneficiaries. While property may pass easily outside of probate to the survivor, the same will not be true if property is to pass to beneficiaries. The estate will go through probate.

If at all possible, couples should have the same designated beneficiaries. If the couple intends to leave everything to the surviving spouse, they will need to decide who will receive joint property after both have died.

Last wills for each spouse must be created to work together. Designating separate lists of beneficiaries in each spouse’s last will and testament ultimately results in the marital property being left only to one spouse’s loved ones. The result: the other spouse’s family can end up being disinherited.

One way to address this is to create marital shares of property. Couples generally divide marital property in equal shares, although couples in blended families may choose to use a different fractional share.

For each fractional share, each spouse should write out their own list of beneficiaries, being sure that the total ends up being 100%.

Another point to be determined: will survivors within the group receive a larger share pro rata, or will children of the deceased beneficiaries receive their shares? This needs to be clarified when the estate plan is created to avoid potential problems for beneficiaries.

Beneficiaries could potentially be changed after the death of the first spouse, so if the couple wants to prevent anyone from being disinherited, they can use a revocable living trust. This can lock up the deceased spouse’s shares in a manner to allow the property to remain available for the survivor, but the survivor cannot change beneficiaries for the deceased spouse’s share.

Estate planning for couples with no children can have its own pitfalls, so consult with an experienced estate planning attorney, who will know how to protect all members of the family.

Reference: The News-Enterprise (July 27, 2021) “Three keys to estate planning for couples without children”

 

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Do You Pay Income Tax when You Sell Inherited Property? – Annapolis and Towson Estate Planning

From the description above, it is clear the family had a plan for their land. However, from the question posed in a recent article titled “I inherited land that recently sold. What will I owe in taxes?” from The Washington Post, it is clear the plan ended with the sale of the property.

For an heir who is expecting to receive a share of the proceeds, as directed in the mother’s last will, the question of taxes is a good one. What value of the land is used to determine the heir’s tax liability?

The good news: when the great grandfather died, the land passed to the mother and her siblings. To keep this example simple, let’s assume the great-grandfather’s estate was well under the federal estate tax limits of his time and there were no federal estate taxes due.

Next, the mother and her siblings inherit the land. When a person inherits an asset, they usually inherit both the asset and the step-up in the value of the asset at the time of the person’s death. If the great-grandfather bought the land for $10,000 and when he died the land was worth $100,000, the mother and her siblings inherited it at that value.

When the uncles sold the land after the death of their sister, the mother, her heirs inherited her interest in the land. If the person asking about taxes is an only child and an only beneficiary, then he should receive his mother’s one-third share of the land or one-third share in the proceeds. With the stepped-up basis rules, the son inherits the land at its value at the time of the mother’s death.

Assuming the land was worth $300,000 at the time of her death, the son’s share of the land would be worth $100,000. That is his cost or basis in the land. If he sold the land around the time she died or up to a year after her death, receiving his share of $100,000, he would not have any federal income or capital gains to pay.

If the family sold the land for $390,000 recently, the son’s basis in the land is $100,000 and his sales proceeds would be $130,000, or a $30,000 profit. He would be responsible for paying taxes on the $30,000.

If the land was sold within a year of the mother’s death, there would be no tax to pay. However, after one year, any profit is taxed at the capital gains rate.

There will also be state taxes due on the profit and there is an additional 3.8 percent tax on the sale of investment property. If the son used the home on the land as a primary residence, there would not be an investment property sales tax.

In this kind of situation where there are multiple heirs, it is best to consult with an estate planning attorney to ensure that the transaction and taxes are handled correctly.

Reference: The Washington Post (July 26, 2021) “I inherited land that recently sold. What will I owe in taxes?”

 

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What Paperwork Is Required to Transfer the Ownership of Home to Children? – Annapolis and Towson Estate Planning

Some seniors may ask if they would need to draft a new deed with their name on it and attach an affidavit and have it notarized. Or should the home be fully gifted to the children in life?

And for a partial gift to the children in life, were they co-owners, would the parent be required to complete the same paperwork as a full gift? Is there a way to change the owner of a property without having to pay taxes?

The reason for considering the transfer of a full or partial ownership in your home makes a difference in how you should proceed, says nj.com’s recent article entitled “What taxes are owed if I add my children to my deed?”

If the objective is to avoid probate when you pass away, adding children as joint tenants with rights of survivorship will accomplish this. However, there may also be some drawbacks that should be considered.

If the home has unrealized capital gains when you die, only your ownership share receives a step-up in basis. With a step-up in basis, the cost of the home is increased to its fair market value on the date of death. This eliminates any capital gains that accrued from the purchase date.

There is the home-sale tax exclusion. If you sell the home during your lifetime, you are eligible to exclude up to $500,000 of capital gains if you are married, or $250,000 for taxpayers filing single, if the home was your primary residence for two of the last five years. However, if you add your children as owners, and they own other primary residences, they will not be eligible for this tax exclusion when they sell your home.

In addition, your co-owner(s) could file for bankruptcy or become subject to a creditor or divorce claim. Depending on state law, a creditor may be able to attach a lien on the co-owner’s share of the property.

Finally, if you transfer your entire interest, the new owners will be given total control over the home, allowing them to sell, rent, or use the home as collateral against which to borrow money. If you transfer a partial interest, you may need the co-owner’s consent to take certain actions, like refinancing the mortgage.

If you decide to transfer ownership, talk to an experienced estate planning attorney to prepare the legal documents and to discuss your goals and the implications of the transfer. The attorney would draft the new deed and record the deed with the county office where the property resides.

A gift tax return, Form 709, should be filed, but there should not be any federal gift tax on the transfer, unless the cumulative lifetime gifts exceed the threshold of $11.7 million or $23.4 million for a married couple.

Reference: nj.com (June 15, 2021) “What taxes are owed if I add my children to my deed?”

 

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Can I Be Certain My Estate Plan Is Successful? – Annapolis and Towson Estate Planning

Forbes’ recent article entitled“7 Steps to Ensure a Successful Estate Plan” listed seven actions to take for a good estate plan:

  1. Educate and communicate. A big reason estate plans are not successful, is that the next generation is not ready and they waste or mismanage the assets. You can reduce those risks and put your estate in a trust to allows children limited access. In addition, you can ensure that the children have a basic knowledge of and are comfortable with wealth. Children also benefit from understanding their parents’ philosophy about managing, accumulating, spending and giving money.
  2. Anticipate family conflicts. Family conflicts can come to a head when one or both parents pass, and frequently the details of the estate plan itself cause or exacerbate family conflicts or resentments. Many people just think that “the kids will work it out,” or they create conflicts by committing classic mistakes, like having siblings with different personalities or philosophies jointly inherit property or a business.
  3. Plan before making gifts. In many cases, gift giving is a primary component of an estate plan, and gifts can be a good way for the next generation to become comfortable handling wealth. Rather than just automatically writing checks, the older generation should develop a strategy that will maximize the impact of their gifts. Cash gifts can be spent quickly, but property gifts are more apt to be kept and held for the future.
  4. Understand the basics of the plan. Few people understand the basics of their estate plans, so ask questions and get comfortable with what your estate planning attorney is saying and recommending.
  5. Organize, simplify, and prepare. A major reason it takes a lot of time and expense in settling an estate, is that the owner did not make it easy for the executor. The owner may have failed to make information easy to locate. An executor must understand the details of the estate.
  6. Have a business succession plan. Most business owners do not have a real succession plan. This is the primary reason why few businesses survive the second generation of owners. The value of a small business rapidly declines, when the owner leaves with no succession plan in place. A succession plan designates the individual who will run the business and who will own it, as well as when the transitions will happen. If no one in your family wants to run the business, the succession plan should provide that the company is to be sold when you retire or die. A business must be managed and structured, so it is ready for a sale or inheritance, which frequently entails improving accounting and other information systems.
  7. Fund living trusts. A frequent estate planning error is the failure to fund a revocable living trust. The trust is created to avoid probate and establish a process under which trust assets will be managed. However, a living trust has no impact, unless it is given legal title to assets. Be sure to transfer legal ownership of assets to the trust.

Reference: Forbes (May 21, 2021) “7 Steps to Ensure a Successful Estate Plan”

 

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