Coronavirus Makes Estate and Tax Planning an Urgent Task – Annapolis and Towson Estate Planning

The Covid-19 pandemic has brought estate planning front and center to many people who would otherwise dismiss it as something they would get to at some point in the future, says the article “Estate and Life Insurance Considerations During the Covid-19 Pandemic” from Bloomberg Tax. Many do not have a frame of reference to address the medical, legal, financial, and insurance questions that now need to be addressed promptly. They have never experienced anything like today’s world. The time to get your affairs in order is now.

What will happen if we get sick? Will we recover? Who will take care of us and make legal decisions for us? What if a family member is in an assisted living facility and is incapacitated? All of these “what if” questions are now pressing concerns. Now is the time to review all legal, insurance and financial plans, and take into consideration two new laws: the SECURE Act and the CARES Act.

An experienced estate planning attorney who focuses in estate planning will save you an immense amount of money. Bargain hunters be careful: a small mistake or oversight in an estate plan can lead to expensive consequences. A competent legal professional is the best investment.

Here is an example of what can go wrong: A person names two minor children—under age 18—as beneficiaries on their IRA account, life insurance policy or bank account. The person dies. Minors are not permitted to hold title to assets. Minors in New York are considered wards of the court in need of protection and court supervision. Therefore, in this state, the result of the beneficiary designation means that a special Surrogate’s Court proceeding will need to occur to have a pecuniary guardian appointed for the minors, even if the applicant is their custodial guardian.

Another “what if?” is the support for a disabled or special needs beneficiary who may be receiving government support. If the parents are gone, who will care for their disabled child? What if there are not enough assets in the estate to provide supplemental financial support, in addition to the government benefits? Life insurance can be used to fund a special needs trust to ensure that their child will not be dependent upon family or friends to care for their needs. However, if there is no special needs trust in place, an inheritance may put the child’s government support in jeopardy.

Here are the core estate planning documents to be prepared:

  • Last Will and Testament
  • Revocable Living Trust
  • Durable General Power of Attorney
  • Health Care Declaration

The SECURE Act changed the rules regarding inherited IRAs. With the exception of a surviving spouse and a few other exempt individuals, the required minimum distributions must be taken within a ten- year time period. This causes an additional income tax liability for future generations. There are strategies to reduce the impact, but they require advance planning with the help of an estate planning attorney.

Reference: Bloomberg Tax (June 18, 2020) “Estate and Life Insurance Considerations During the Covid-19 Pandemic”

 

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Possible Pitfalls for Special Needs Planning for Parents – Annapolis and Towson Estate Planning

Public benefits for disabled individuals include health care, supplemental income, and resources, like day programs and other vital services. Some benefits are based on the individual’s disability status, but others are “needs tested,” where eligibility is determined based on financial resources, as explained in the article “Planning for loved ones with special needs” from NWTimes.com.

“Needs testing” is something that parents must address as part of special needs planning, in concert with their own estate planning. This ensures that the individual’s government benefits will continue, while their family has the comfort of knowing that after the parents die, their child may have access to resources to cover additional costs and maintain a quality of life they may not otherwise have.

Families must be very careful to make informed planning decisions, otherwise their loved ones may lose the benefits they rely upon.

A variety of special planning tools may be used, and the importance of skilled help from an elder law estate planning attorney cannot be overstated.

One family received a “re-determination” letter from the Social Security Administration. This is the process whereby the SSA scrutinizes a person’s eligibility for benefits, based on their possible access to other non-governmental resources. Once the process begins, the potential exists for a disabled person to lose benefits or be required to pay back benefits if they were deemed to have wrongfully received them.

In this case, a woman who lived in California, engaged in a periodic phone call with California Medicaid. California is known for aggressively pursuing on-going benefits eligibility. The woman mentioned a trust that had been created as a result of estate planning done by her late father. The brief mention was enough to spark an in-depth review of planning. The SSA requested no less than 15 different items, including estate documents, account history and a review of all disbursements for the last two years.

The process has created a tremendous amount of stress for the woman and for her family. The re-determination will also create expenses, as the attorney who drafted the original trust in Indiana, where the father lived, will need to work with a special needs attorney in California, who is knowledgeable about the process in the state.

Similar to estate planning, the special needs process required by Medicaid and the SSA is a constantly evolving process, and not a “one-and-done” transaction. Special needs and estate planning documents created as recently as three or four years ago should be reviewed.

Reference: NWTimes.com (June 21, 2020) “Planning for loved ones with special needs”

 

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What’s the Best Way to Select a Beneficiary for My 401(k)? – Annapolis and Towson Estate Planning

WTOP’s article “How to pick a beneficiary for your 401(k) plan” instructs us on how to make certain your 401(k) savings get to your intended heir.

  1. Name a Beneficiary. Designating a beneficiary of your retirement account lets that person receive your financial bequest without the need to access to your will, financial documents, or go through probate. In designating a beneficiary, carefully think about who that will be, just as you would for any other asset you intend to leave to your heirs.
  2. Name Contingent Beneficiaries. A contingent beneficiary will get the assets from the account in the event that all of the primary beneficiaries have died. Review your beneficiary designations at least annually to ensure each beneficiary, and their assigned percentage, is still appropriate.
  3. Update Your Named Beneficiaries After Significant Life Events. When you begin a job in your 20s, you might list your parents or siblings as the beneficiary of your account. However, when you marry, you may change your beneficiary to your spouse. If you want to leave your retirement account balance to your children, you must update your beneficiary form upon the birth of each child, or you might leave the youngest out, if you die unexpectedly.

Divorce or remarriage is another reason to change your beneficiary forms. If you remarry and do not change your ex-spouse’s name from your most recent beneficiary document, your ex-spouse may get your remaining retirement assets.

Note that beneficiary forms are unique to each 401(k) plan. This means that if you have multiple 401(k) accounts with previous employers, you will have to update each one.

You can also consider combining old 401(k) accounts or rolling them over into an IRA to make your beneficiary designations and investments easier to manage.

Many 401(k) plans let you update your beneficiaries online.

  1. Inform Your Beneficiaries About Your Accounts. Your heirs may be required to get in touch with the financial institution to get their inheritance. Tell them where you have accounts, so they know what to expect and can claim your unused retirement funds. Be certain that everyone has the information. That way, there is no question and access to those funds will be easy.

Reference: WTOP (June 8, 2020) “How to pick a beneficiary for your 401(k) plan”

 

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Save Your Family Stress and Plan Your Funeral – Annapolis and Towson Estate Planning

Making your way through the process of the death of a family member is an extremely personal journey, as well as a very big business that can put a financial strain on the surviving family.

Rate.com’s recent article entitled “Plan Your Own Funeral, Cheaply, and Leave Behind a Happier Family”  notes that on an individual basis, it can be a significant cost for a family dealing with grief. The National Funeral Directors Association found that the median cost for a traditional funeral, with a basic casket that also includes a vault (the casket liner most cemeteries require) can cost more than $9,000. With the cost of a (single) plot and the services of the cemetery to take care of the burial and ongoing maintenance and other expenses,  it can total more than $15,000.

Instead, if you opt for cremation and a simple service, it will run only $2,000 or less. That would save your estate or your family $13,000. Think of the amount of legacy that can grow from your last wishes.

If you want to research it further, it can be difficult. Without your directions, your grieving family is an easy mark for a death care industry that is run for profit. Even with federal disclosure rules, most states make it impossible to easily comparison shop among funeral service providers, and online price lists are not required. However, you can do the legwork to make it easier on your family, when you pass.

Funeral homes also are not usually forthright about costs that are required rather than optional. The median embalming cost is $750.However, there is no regulation requiring embalming. Likewise, a body need not be placed in a casket for cremation. The median cost for a cremation casket is $1,200 but an alternative “container” might cost less than $200.

The best thing you can do for your family is to write it down your wishes and plans and make it immediately discoverable.

It can be a great relief to tell your family everything you want (and do not want). However, if that is not feasible with your family dynamics, be certain that you detail of all your wishes in writing. You should also make sure that the document can be easily located by your executor.

Here is a simple option: Write everything out, place your instructions in a sealed envelope and let your children and the executor know the location of the letter.

This elementary step can be the start to helping their decision-making when you pass away, and potentially provide some extra money to help them reach their goals.

Reference: rate.com (June 21, 2020) “Plan Your Own Funeral, Cheaply, and Leave Behind a Happier Family”

 

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How Do the Children Divide Up Mom’s Tangible Property? – Annapolis and Towson Estate Planning

What should you do if you have been given the task to be in charge of divvying up a parent’s estate that includes assorted tangible items?

Minneapolis Tribune’s article entitled “A clever way to divvy up items after a parent’s death” says that some families do it by taking turns selecting which items each will keep.

The article discusses how a family decided to divide things up their mom’s grand estate and how the method the family used to divvy up the tangible items could be one that other families with much smaller estates could use.

After their mom’s death at 93, the brother and sister co-executors created an inventory of 724 items in her estate that had monetary or sentimental value. These included things like furniture, artwork, oriental rugs, cutlery, china, a piano and a car. They did not include their mom’s jewelry, books or linens, or her silver, gold and collectible coins. The four siblings all agreed to sell the coins and to deal with the many books, linens, and jewelry more informally, after the more significant items had been distributed.

The family did not use the common way of disbursing tangible items of an estate, in which family members take turns choosing items. With over 700 items, that could take a while. They felt that system would not maximize the value received by the four children and seven grandchildren. Instead, their process for dividing the intangible items used the following steps:

  1. The inventory was given to all four siblings and asked each one to state the items that they were interested in. This divided the 724 items into three groups: (a) items in which no one had an interest; (b) items in which only one person had an interest; and (c) those in which two or more were interested. Things in which no one had an interest were set aside to be sold or given away, and those who were the only siblings to want certain items got them.
  2. They then made lists of items in which more than one sibling expressed an interest. Each received a list of those items. They were not given information on ones in which they were not interested—one of two ways the system was not transparent.
  3. Each person was then “given” 500 virtual poker chips that he or she could use to bid for contested items. However, prior to the bidding deadline, they could talk with one another about their intentions. The result was that many had bid for several similar items, like family pictures, bookcases and oriental rugs — when they really only wanted one from each category. Thus, they agreed among themselves who would receive each one, without wasting too many chips. This also avoided two siblings using a lot of tokens to bid for a particular item, and no one bidding on another similar one.
  4. After the bids were in, the co-executors announced the results without revealing the bids, to avoid a silent auction where bidders can see what others are bidding and readjust their bids up to the deadline. This was the second part of the system that was not transparent.
  5. Finally, when all the allocations were determined, the co-executors tabulated the monetary value of all the items and readjusted the estate monetary distributions to ensure that everyone came out at the same place financially. The most valuable items were a 1919 Steinway drawing room grand piano valued at $25,000; a 2005 Toyota Camry valued at $4,500; and some oriental rugs with a total value of $13,975. Those who got the big-ticket items had to pay their siblings something for them, with a total of $17,500 trading hands.

It was time-consuming and took several months, but the siblings thought that their system was very fair and the process, unlike what is done in some other family estates, relieved tensions and brought the siblings closer together.

Reference: Minneapolis Tribune (Feb. 25, 2020) “A clever way to divvy up items after a parent’s death”

 

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What Can a Strong Estate Planning Attorney Help Me Accomplish? – Annapolis and Towson Estate Planning

The Legal Reader’s recent article entitled “When Should I Start My Estate Planning?” explains that, as we settle down, we should start considering how we will provide for and protect those you love.

Talk to an experienced estate planning attorney—one with the knowledge and skill to help you design a workable, legally binding estate plan that will keep your assets safe as they accumulate, protect your spouse and children and consider the possibility that you may become incapacitated when you least expect it.

No matter what your age, the estate planning attorney you hire should have outstanding credentials and testimonials to his/her efficiency and personal concern.

This legal professional must be able to:

  • Listen, understand, and address your individual needs
  • Clarify your options
  • Draft, review, and file all necessary estate planning documents
  • Make certain your estate plan covers all contingencies; and
  • Is prepared to modify your documents as your life circumstances change.

When you see that the future is unpredictable, you realize that estate planning can help you make that future as secure as possible.

Estate planning can be as complicated as it is essential. Accordingly, regardless of our age, speak with a highly competent estate planning attorney as soon as possible.

As the COVID-19 pandemic has dramatically shown us, planning for the unexpected can never be addressed too soon.

Reference: Legal Reader (June 23, 2020) “When Should I Start My Estate Planning?”

 

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What Must Be Done when a Loved One Dies? – Annapolis and Towson Estate Planning

When a member of a family dies, it falls to the people left behind to pick up the pieces. Someone has to find out if the person left a last will, get the bills paid, stop Social Security or other automatic payments and file final tax returns. This is a hard time, but these tasks are among many that need to be done, according to the article “How to manage a loved one’s finances after they die” from Business Insider.

This year, more families than usual are faced with the challenge of taking care of the business of a loved one’s life while grieving a loss. When death comes suddenly, there is not always time to prepare.

The first step is to determine who will be in charge. If there is a will, then it contains the name of the person selected to be the executor. When a married person dies, usually the surviving spouse has been named as the executor. Otherwise, the family will need to work together to pick one person, usually the one who lives closest to the person who died. That person may need to keep an eye on the house and obtain documents, so proximity is a plus. In a perfect world, the person would have an estate plan, so these decisions would have been made in advance.

Do not procrastinate. It is hard, but time is an issue. After the funeral and mourning period, it is time to get to work. Obtain death certificates, and make sure to get enough certified copies—most people get ten or twelve. They will be needed for banks, brokerage houses and utility service providers. You will also need death certificates for taking control of some digital assets, like the person’s Facebook page.

The first agency to notify is Social Security. If there are other recurring payments, like VA benefits or a pension, those organizations also need to be notified. Contact banks, insurance companie, and financial advisors.

Get the person’s credit cards into your possession and call the credit card companies immediately. Fraud on the deceased is common. Scammers look at death notices and then go onto the dark web to find the person’s Social Security number, credit card and other personal identification info. The sooner the cards are shut down, the better.

Physical assets need to be secured. Locks on a house may be changed to prevent relatives or strangers from walking into the house and taking out property. Remove any possessions that are of value, both sentimental or financial. You should also take a complete inventory of what is in the house. Take pictures of everything and be prepared to keep the house well-maintained. If there are tenants or housemates, make arrangements to get them out of the house as soon as possible.

Accounts with beneficiaries are distributed directly to those beneficiaries, like payable-on-death (POD) accounts, 401(k)s, joint bank accounts and real property held in joint tenancy. The executor’s role is to notify the institutions of the death, but not to distribute funds to beneficiaries.

The executor must also file a final tax return. The final federal tax return is due on April 15 of the year after death. Any taxes that were not filed for any prior years, also need to be completed.

This is a big job, which is made harder by grief. Your estate planning attorney may have some suggestions for who might be qualified to help you. An attorney or a fiduciary will take a fee, either based on an hourly rate for services performed or a percentage of the entire value of the estate. If no one in the family is able to manage the tasks, it may be worth the investment.

Reference: Business Insider (May 2, 2020) “How to manage a loved one’s finances after they die”

 

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Is a Life Insurance Policy Beneficiary Required to Pay for a Funeral with Insurance Proceeds? – Annapolis and Towson Estate Planning

It is not that uncommon for a close family member to be named as the executor of a parent’s will. Let us say that rather than your brother, it is your stepsister who is the executor of your father’s estate.

This person has failed to provide any documentation about where Dad’s assets and money have gone.

Add to this the fact that sis has asked all of the siblings to forfeit their life insurance proceeds to her to pay for Dad’s funeral—a funeral that no one can attend because of the coronavirus.

What can the siblings do about the actions of their stepsister as executor of their father’s will?

A recent nj.com article asks “Do we have to pay for a funeral with life insurance proceeds?” According to the article, it is becoming more frequent that estate beneficiaries are hiring their own attorneys to make certain the executor administers the estate properly.

Hiring a private probate attorney is especially common when stepsiblings and multiple marriages are involved.

In most states, the appointed executor is obligated to account in detail to all estate beneficiaries what she has done.

In addition, there is absolutely no requirement that a named beneficiary of a life insurance policy must hand over their pay-out to pay for the decedent’s funeral or estate debts—unless there was some sort of agreement to do this.

Beneficiaries of an estate are entitled to an accounting and should demand one in writing.

The beneficiaries could also ask to review the bank statements of the estate that show all transactions, if they are unable to get an accounting from the executor.

If an executor is not complying with the law and her duties under it, it can be extremely hard for beneficiaries to see results without hiring an elder law attorney or probate attorney who knows how to get this accomplished.

Reference: nj.com (June 16, 2020) “Do we have to pay for a funeral with life insurance proceeds?”

 

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Does a Beneficiary of a Trust Have to Pay a Tax? – Annapolis and Towson Estate Planning

When a trust makes a distribution, it deducts the income distributed on its own tax return and issues the beneficiary a tax form called a K-1. That form shows what part of the beneficiary’s distribution is interest income and principal. This tells beneficiaries what they must claim as taxable income, when filing taxes.

A recent Investopedia article asks “Do Trust Beneficiaries Pay Taxes?” The article explains that a trust is a fiduciary relationship, whereby the trustor or grantor gives another party–the trustee–the right to hold assets for the benefit of a beneficiary. Trusts are established to provide legal protection and to safeguard assets as part of estate planning.

When trust beneficiaries get distributions from the trust’s principal balance, they do not have to pay taxes on the distribution. The IRS assumes this money was already taxed before it was placed into the trust. Once money is placed into the trust, the interest it accumulates is taxable as income—either to the beneficiary or the trust itself. The trust is required to pay taxes on any interest income it holds and doesn’t distribute past year-end. Interest income the trust distributes is taxable to the beneficiary.

The amount distributed to the beneficiary is thought to be from the current-year income first, then from the accumulated principal. This is usually the original contribution plus subsequent ones. It is income in excess of the amount distributed.

Capital gains from this amount may be taxable to either the trust or the beneficiary. The entire amount distributed to and for the benefit of the beneficiary is taxable to that person to the extent of the distribution deduction of the trust.

The two most significant tax forms for trusts are the 1041 and the K-1. Form 1041 is similar to Form 1040. The trust deducts from its own taxable income any interest it distributes to beneficiaries in Form 1041. At the same time, the trust issues a K-1. That form details the distribution, or how much of the distributed money came from principal versus interest.

The K-1 schedule for taxing distributed amounts is generated by the trust and given to the IRS.

The IRS will then send the document to the beneficiary to pay the tax.

The trust then fills out a Form 1041 to determine the income distribution deduction that is accorded to the distributed amount.

Reference: Investopedia (Feb. 8, 2020). “Do Trust Beneficiaries Pay Taxes?”

 

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Don’t Neglect a Plan for Your Pet During the Pandemic – Annapolis and Towson Estate Planning

If you have a pet, chances are you have worried about what would happen to your furry companion if something were to happen to you. However, worrying and having an actual plan are two very different things, as discussed at a Council of Aging webinar. That is the subject of the article “COA speakers urge pet owners to plan for their animal’s future” that appeared in The Harvard Press.

It is stressful to worry about something happening, but it is not that difficult to put something in place. After you have got a plan for yourself, your children and your property, add a plan for your pet.

Start by considering who would really commit to caring for your pet, if you had a long-term illness or in the event of your unexpected passing. Have a discussion with them. Do not assume that they will take care of your pet. A casual agreement is not enough. The owner needs to be sure that the potential caretaker understands the degree of commitment and responsibility involved.

If you should need to receive home health care, do not also assume that your health care provider will be willing to take care of your pet. It is best to find a pet sitter or friend who can care for the pet before the need arises. Write down the pet’s information: the name and contact info for the vets, the brand of food, medication and any behavioral quirks.

There are legal documents that can be put into place to protect a pet. Your will can contain general directions about how the pet should be cared for, and a certain amount of money can be set aside in a will, although that method may not be legally enforceable. Owners cannot leave money directly to a pet, but a pet trust can be created to hold money to be used for the benefit of the pet, under the management of the trustee. The trust can also be accessed while the owner is still living. Therefore, if the owner becomes incapacitated, the pet’s care will not be interrupted.

An estate planning attorney will know the laws concerning pet trusts in your state. Not all states permit them, although many do.

A pet trust is also preferable to a mention in a will, because the caretaker will have to wait until the will is probated to receive funds to care for your pet. The cost of veterinary services, food, medication, boarding or pet sitters can add up quickly, as pet owners know.

A durable power of attorney can also be used to make provisions for the care of a pet. The person in that role has the authority to access and use the owner’s financial resources to care for the animal.

The legal documents will not contain information about the pet, so it is a good idea to provide info on the pet’s habits, medications, etc., in a separate document. Choose the caretaker wisely—your pet’s well-being will depend upon it!

Reference: The Harvard Press (May 14, 2020) “COA speakers urge pet owners to plan for their animal’s future”

 

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