Inheritance, Meet Technology: Estate Claims May Be Challenged – Annapolis and Towson Estate Planning

Between off-the-shelf DNA testing kits and online genealogical searches, family members who may have never known of each other’s existence are coming to light more often than ever before. So is the news that one’s parent may not be a biological parent, according to the article “Discovering long-lost family: Inheritance laws cover surprise relatives, but changes possible,” from The Indiana Lawyer.

This is yet another reason that wills and estate plans must be carefully drafted by an estate planning attorney. Language in the will must make it very clear that assets are only to be distributed to the known children of the married couple, unless that is not the person’s wish.

An inheritance may be left for a child who was given up through adoption or, if a previously unknown child shows up at the doorstep, the family may wish to bequeath a share of their estate to that child. There may be no legal claim, but the family may feel a moral obligation, which is entirely up to them.

Since technology is streamlining the search for lost relatives into a few keyboard clicks, the drafting of wills has become more complex. It’s not just filling out names on a form, because the will has to be drafted to prevent any unforeseen problems that may result when new relatives appear.

The search for unknown relatives usually comes from positive motives. Family members usually want to connect with long-lost cousins, aunts, uncles and siblings, out of a desire for connection and not financial gain. However, a properly prepared will should be drafted, according to the testator’s wishes.

Families are changing, with more openness, and estate plans are being adjusted accordingly.

One couple wrote a will to leave an inheritance to a grandson, even though he had been adopted by another man. Their son had died after fathering the child without marrying the child’s mother. The mother married, and her husband adopted the grandchild, but the grandparents had maintained a relationship with the family and left their son’s heir a portion of their estate.

People are more aware that family members may arrive unexpectedly. Occasionally, spouses want language in the will restricting assets only to the children who are the product of their marriage. That can spur some uncomfortable, but necessary, conversations.

When you sit down with an estate planning lawyer to discuss your will and distribution of assets, you’ll need to be honest and discuss any possible heirs who might appear that were previously unknown to the family. The more details and information you can provide to the attorney, the better prepared your will can be to withstand a challenge from a ‘new relative.’ If the wish is to take care of a previously unknown family member, that can be accomplished also.

Reference: The Indiana Lawyer (May 29, 2019) “Discovering long-lost family: Inheritance laws cover surprise relatives, but changes possible”

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

Are Inheritances Taxable? – Annapolis and Towson Estate Planning

Inheritances come in all sizes and shapes. People inherit financial accounts, real estate, jewelry and personal items. However, whatever kind of inheritance you have, you’ll want to understand exactly what, if any, taxes might be due, advises the article “Will I Pay Taxes on My Inheritance” from Orange Town News. An inheritance might have an impact on Medicare premiums, or financial aid eligibility for a college age child. Let’s look at the different assets and how they may impact a family’s tax liability.

Bank Savings Accounts or CDs. As long as the cash inherited is not from a retirement account, there are no federal taxes due. The IRS does not impose a federal inheritance tax. However, there are some states, including Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania, that do have an inheritance tax. Speak with an estate planning attorney about this tax.

Primary Residence or Other Real Estate. Inheriting a home is not a taxable event. However, once you take ownership and sell the home or other property, there will be taxes due on any gains. The value of the home or property is established on the day of death. If you inherit a home valued at death at $250,000 and you sell it a year later for $275,000, you’ll have to declare a long-term capital gain and pay taxes on the $25,000 gain. The cost-basis is determined when you take ownership.

Life Insurance Proceeds. Life insurance proceeds are not taxable, nor are they reported as income by the beneficiaries. There are exceptions: if interest is earned, which can happen when receipt of the proceeds is delayed, that is reportable. The beneficiary will receive a Form 1099-INT and that interest is taxable by the state and federal tax agencies. If the proceeds from the life insurance policy are transferred to an individual as part of an arrangement before the insured’s death, they are also fully taxable.

Retirement Accounts: 401(k) and IRA. Distributions from an inherited traditional IRA are taxable, just as they are for non-inherited IRAs. Distributions from an inherited Roth IRA are not taxable, unless the Roth was established within the past five years.

There are some changes coming to retirement accounts because of pending legislation, so it will be important to check on this with your estate planning attorney. Inherited 401(k) plans are or eventually will be taxable, but the tax rate depends upon the rules of the 401(k) plan. Many 401(k) plans require a lump-sum distribution upon the death of the owner. The surviving spouse is permitted to roll the 401(k) into an IRA, but if the beneficiary is not a spouse, they may have to take the lump-sum payment and pay the resulting taxes.

Stocks. Generally, when stocks or funds are sold, capital gains taxes are paid on any gains that occurred during the period of ownership. When stock is inherited, the cost basis is based on the fair market value of the stock or fund at the date of death.

Artwork and Jewelry. Collectibles, artwork, or jewelry that is inherited and sold will incur a tax on the net gain of the sale. There is a 28% capital gains tax rate, compared to a 15% to 20% capital gains tax rate that applies to most capital assets. The value is based on the value at the date of death or the alternate valuation date. This asset class includes anything that is considered an item worth collecting: rare stamps, books, fine art, antiques and coin collections fall into this category.

Speak with an estate planning attorney before signing and accepting an inheritance, so you’ll know what kind of tax liability comes with the inheritance. Take your time. Most people are advised to wait about a year before making any big financial decisions after a loss.

Reference: Orange Town News (May 29, 2019) “Will I Pay Taxes on My Inheritance”

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

‘Someday’ Is Sooner than You Think – Annapolis and Towson Estate Planning

The cause for sleepless nights for many now comes from worrying about aging parents. As parents age, it becomes more important to talk with them about a number of “someday” issues, advises Kanawha Metro in the article “Preparing for someday.” As their lives move into the elder years, your discussions will need to address housing, finances and end-of-life wishes.

Where do your parents want to spend their later years? It may be that they want to move to an active retirement community not far from where they live now, or they may want a complete change of scenery, perhaps in a warmer climate.

One family made arrangements for their mother to take a tour of a nearby senior-living community after their father passed. By showing their mother the senior-living community, they made an unknown, slightly intimidating thing into a familiar and attractive possibility. Because she saw the facility with no pressure, just a tour and lunch, she knew what kind of options it presented. The building was clean and pretty and the staff was friendly. Therefore, it was a positive experience. She was able to picture herself living there.

Money becomes an issue as parents age. If the person who always handled the family finances passes away, often the surviving spouse is left trying to figure out what has been done for the last five decades. A professional can help, especially if they have had a long-standing relationship.

However, when illness or an injury takes the surviving spouse out of the picture, even for a little while, things can get out of control fast. It only takes a few weeks of not being able to write checks or manage finances to demonstrate the wisdom of having children or a trusted person named with a power of attorney to be able to pay bills and manage the household.

As parents age and their health becomes fragile, they need help with doctor appointments. Having a child or trusted adult go with them to speak up on their behalf, or explain any confusing matters, is very important.

Having an estate plan in place is another part of the business of aging that needs to be accomplished. It may be helpful to go with your parents to meet with an estate planning attorney to create documents that include a last will and testament, durable power of attorney and advanced health care directive. Without these documents, executing their estate or helping them if they become incapacitated will be more complex and more costly.

Eliminate a scavenger hunt by making sure that at least two siblings know where the originals of these documents are.

One of the more difficult conversations has to do with end-of-life and funeral arrangements. Where do your parents want to be buried, or do they want to be cremated? What should be done with their remains?

What do they want to be done with their personal belongings? Are there certain items that they want to be given to certain members of the family, or other people they care for? One family used masking tape and a marker to write the names of the people they wanted to receive certain items.

Finally, what do they want to happen to their pets? If there is a family member who says they will take their parent’s pet, can that person be trusted to follow through? There needs to be a Plan A, Plan B and Plan C so that the beloved pet can be assured a long and comfortable life after their owner has passed.

Yes, these are difficult conversations. However, not having them can lead to far more difficult issues. Knowing what your loved ones wish to happen, and making it enforceable with an estate plan, provides everyone in the family with peace of mind.

Reference: Kanawha Metro (May 29, 2019) “Preparing for someday”

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

Is it Wise to Have Three Grown Children Named Co-Executors of Your Will? – Annapolis and Towson Estate Planning

Is it a good idea to have your three grown children listed as co-executors of your will? This may get somewhat confusing when probating a will if there are multiple executors.

What are the pros and cons to choosing one child to act as your executor instead of selecting all three of your children to act together?

nj.com’s recent article asks “I’m planning my will. Is it bad to have more than one executor?”

The article explains that the duty of the executor is to gather all the decedent’s assets, pay any outstanding debts and liabilities and then account for and distribute the remaining estate to the beneficiaries according to the instructions in the decedent’s will.

The executor is allowed to hire professionals and others to help with tasks, like completing a decedent’s final income tax return or preparing the home for sale.

When you have multiple executors appointed, these tasks can be assigned to each person to lessen the burden of the many duties and responsibilities that an executor has.

On the downside, if those appointed can’t work together easily and without strife, appointing multiple siblings can make the administration of an estate much more difficult due to arguments, conflicts of interest, one sibling taking the lead to the resentment of the others or one executor undermining another executor’s actions.

The problem is, in situations where the siblings don’t get along, designating one of them as executor can cause hard feelings and conflict. It’s not uncommon for those siblings who aren’t named as executor to complain about every decision made by the named executor or delay in the administration of the estate.

If there are multiple executors, the majority rules. That can avoid deadlock. Simple math in this case says that you want to avoid naming an even number of executors or name a person who can act as the tiebreaker.

Even with a “majority rules” agreement among the executors, there are some financial institutions and other entities that may require all the executors to sign documents and/or checks on behalf of the estate. This can become burdensome and inefficient, if there are multiple executors.

Speak with your estate planning attorney about your family dynamics and get their opinion about what would be best in your personal situation.

Reference: nj.com (May 22, 2019) “I’m planning my will. Is it bad to have more than one executor?”

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

Will Contests May Be Rare, but They Do Happen – Annapolis and Towson Estate Planning

In an ideal world, wills and estate plans are created when people are of sound mind and body, just as the familiar legal phrase describes. The best way to avoid a will contest is to have a well-written will, prepared by a qualified estate planning attorney who can help avoid legal contest. However, there are times when this is not the case, says The Huntsville Item in the article “Legal Corner: Will contests while rare are messy.”

A will is contested, when the person challenging the will believes that it does not represent the true intent of the testator to pass the estate to the people he wanted.

A will must be written in the correct form and executed according to the law in order to be valid. This is why it is necessary to work with an estate planning attorney to create a will. A person may try to do it on their own, typing it out, downloading a form or copying a form, but because the law is very strict about the form and execution, many of these do-it-yourself wills end up being deemed invalid by the courts.

When the will is not valid, the laws of intestacy are applied to the person’s estate. This is rarely in accordance with the person’s wishes, but at this point, it’s too late.

To make a will, the person must have “testamentary capacity.” That means that he or she knows what they are doing, what their estate includes and who the recipients of the estate will be. They also must not have been subject to undue influence. That means that the person making the will is so controlled and dominated by another person, that they were not able to make the will that they wanted.

When the sad day comes that a loved one passes, the family grieves. Each member will deal with the loss in their own way. For some people, the intense level of emotions can bring about conflicts. Sometimes these are the result of old battles that were never resolved. Sibling rivalry that’s been simmering for decades can emerge.

One of the goals of a properly prepared will, is to prevent any family fights after a loved one has passed.

Studies have found that the struggle over mom’s necklace or dad’s watch are not about the material items themselves, but over the symbolic meaning of those items. When families fight over inheritances, it’s rarely because of the actual item or even the money.

As the family’s older member, you want to do anything you can to avoid fracturing the family after you’ve gone.

Unless you take the steps to create a will and a strong estate plan, your loved ones could be entrenched in a long inheritance conflict that lasts years and consumes more resources than anyone can spare.  However, with careful planning, you can avoid inheritance conflicts. After all, estate planning is more for those you love than for you.

Rely on the skill and knowledge of an experienced estate planning attorney and leave your family intact.

Reference: The Huntsville Item (May 26, 2019) “Legal Corner: Will contests while rare are messy”

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

What Can I Do When My Aging Parent Refuses to Give Up Control? – Annapolis and Towson Estate Planning

It’s a common problem for families when a parent in charge of finances develops cognitive impairment and needs help managing the family trust and his own spending. It can be financially dangerous with a stubborn parent.

Forbes’ recent article asks, “What Can You Do When A Stubborn Aging Parent Refuses To Give Up Control?” The article explains what it took one family to get an aging parent out of the position as trustee and to permit the successor, the adult daughter, to take over.

The family saw signs of dementia and a family member’s financial abuse.

The trust provided that the parent could be removed as trustee, if two physicians declared him to be incapacitated for handling his own finances. In that case, a judge’s decision wasn’t required. The doctors verified that the elderly parent was incapacitated to safely handle his money. However, all this takes time.

A parent’s failure to listen to reason and their stubborn refusal to resign as trustee when asked, can cost his children dearly. In that situation, a family may have to engage an attorney to resolve the problem.

Remember that even if your aging parents are fine, there’s no time like the present to ask them to review their estate planning documents with you. Look at the terms that define what happens in the event of “incapacity.” Be sure that all of you understand what would happen, if impaired parents are unwilling to give up financial control and you have to institute the proscribed process to remove control from them.

Those who are named in a trust as the “successor trustee,” must know what that means and how much responsibility is involved. The family needs to recognize that financial elder abuse is a huge problem in our country, and family members are frequently the abusers. If you see abuse, and your elderly parent can’t resist the pressure to give money to any dishonest person, an elder law attorney will be able to give you worthwhile advice on the best approach, as well as the law.

Lastly, in the event your aging parent never created an estate plan, work with an experienced estate planning attorney and ask your parent to get going for the family’s sake. You don’t want to live through the situation described above, with no legal means to stop an impaired parent from financial ruin.

Reference: Forbes (May 7, 2019) “What Can You Do When A Stubborn Aging Parent Refuses To Give Up Control?”

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

What Are Some Advantages of Making Lifetime Gifts? – Annapolis and Towson Estate Planning

There are several non-tax advantages of making lifetime gifts. One is that you’re able to see the recipient or “donee” enjoy your gift. It might give you satisfaction to help your children achieve financial independence or have fewer financial concerns.

WMUR’s recent article, “Money Matters: Lifetime non-charitable giving,” explains that lifetime giving means you dictate who gets your property. Remember, if you die without a will, the intestacy laws of the state will dictate who gets what. With a will, you can decide how you want your property distributed after your death. However, it’s true that even with a will, you won’t really know how the property is distributed because a beneficiary could disclaim an inheritance. With lifetime giving, you have more control over how your assets are distributed.

At your death, your property may go through probate. Lifetime giving will help reduce probate and administration costs, since lifetime gifts are typically not included in your probate estate at death.  Unlike probate, lifetime gifts are private.

Let’s discuss some of the tax advantages. First, a properly structured gifting program can save income and estate taxes. A gift isn’t taxable income to the donee, but any income earned by the gift property or capital gain subsequent to the gift usually is taxable. The donor must pay state and/or federal transfer taxes on the gift. There may be state gift tax, state generation-skipping transfer tax, federal gift and estate taxes, as well as federal generation-skipping transfer (GST) tax.

A big reason for lifetime giving is to remove appreciating assets from your estate (i.e., one that’s expected to increase in value over time). If you give the asset away, any future appreciation in value is removed from your estate. The taxes today may be significantly less than what they would be in the future after the asset’s value has increased. Note that lifetime giving results in the carryover of your basis in the property to the donee. If the asset is left to the donee at your death, it will usually receive a step-up in value to a new basis (usually the fair market value at the date of your death). Therefore, if the donee plans to sell the asset, she may have a smaller gain by inheriting it at your death, rather than as a gift during your life.

You can also give by paying tuition to an education institution or medical expenses to a medical care provider directly on behalf of the donee. These transfers are exempt from any federal gift and estate tax.

Remember that the federal annual gift tax exclusion lets you to give $15,000 (for the 2019 year) per donee to an unlimited number of donees without any federal gift and estate tax or federal GST tax (it applies only to gifts of present interest).

Prior to making a gift, discuss your strategy with an estate planning attorney to be sure that it matches your estate plan goals.

Reference: WMUR (April 18, 2019) “Money Matters: Lifetime non-charitable giving”

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

Does Estate Planning Include Your Account Passwords? – Annapolis and Towson Estate Planning

With most bank customers receiving financial statements electronically instead of on paper, there are some actions you need to take to be sure your accounts are incorporated into your estate planning.

Kiplinger’s recent story, “Your Estate Plan Isn’t Complete Without Fixing the Password Problem,” says that having online access to investments is a great convenience for us. We can monitor bank balances, conduct stock trades, transfer funds and many other services that not long ago required the help of another person.

The bad thing about these advancements is that they can make for a very difficult situation for a surviving spouse or executor attempting to determine where the assets of a deceased person are held.

This was in the news recently when the founder and CEO of a cryptocurrency exchange died unexpectedly. Gerry Cotten didn’t share the password to the exchange’s cold storage locker—leaving $190 million in cryptocurrency belonging to his clients totally inaccessible. Investors may never see their funds again.

You can see how important it is to provide a way for someone to access your data if you become incapacitated or die.

The easiest, but least secure answer, is to just give your passwords to a trusted family member. They’ll need passwords to access your accounts. They’ll also need a password to access your email, where electronic financial statements are sent. Another simple option is to write down and place all passwords in a safe deposit box.

Your executor or guardian/attorney-in-fact through a power of attorney (in the case of incapacitation) can access the box and your passwords to access your computer, email and financial platforms.

This is a bit safer than simply writing down and providing passwords to a trusted friend or spouse. However, it requires diligence to keep the password list updated.

Finally, the most secure way to safely and securely store passwords is with a digital wallet. A digital wallet keeps track of all your passwords across all your devices and does so in an encrypted file in the cloud.

There’s only one obstacle for an executor or surviving spouse to overcome—the password for your digital wallet.

Reference: Kiplinger (April 19, 2019) “Your Estate Plan Isn’t Complete Without Fixing the Password Problem”

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

What Do I Need to Know About ABLE Accounts? – Annapolis and Towson Estate Planning

Millions of Americans with disabilities and their families depend on public benefits to help provide income, health care, food and housing assistance. Eligibility for assistance through Supplemental Security Income, SNAP and Medicaid is based upon a resource test, so disabled individuals seeking benefits are typically limited to no more than $2,000 in savings or assets. This can present a difficult problem.

The Achieving a Better Life Experience Act (ABLE) was created as a way to create a tax-advantaged savings tool for individuals with disabilities and their families.

nj.com’s article, “ABLE accounts–A tax advantaged tool for special needs planning,” advises that when used correctly, this overlooked savings account may allow families to build a small nest egg, without affecting eligibility for public program benefits.

An ABLE 529 account is designed to be a savings or investment account to supplement public benefits. It can be a powerful strategy for individuals, who previously were unable to build supplemental funds outside of a trust for their needs. An ABLE account is funded with after-tax contributions that can grow tax-free, when used for a qualified disability expense. The account owner is also the beneficiary and contributions can be made from any person including the account beneficiary, friends, and family.

The ABLE account is available to individuals with significant disabilities, whose age of onset of disability was before they turned 26. A person could be over the age of 26 but must have had an age of onset before their 26th birthday.

Contributions are restricted to $15,000 per year. Because the ABLE account is connected to the 529 plan for education, the total contribution limit is based upon the individual state’s limit for 529 plans. Individuals can have up to $100,000 in an ABLE account, without impacting SSI eligibility. The first $100,000 also does not count toward the $2,000 resource restriction.

A frequently asked question is whether to use an ABLE account or a Special Needs Trust for planning purposes. ABLE are subject to certain limitations that make it impossible, or at least ill advised, to use them instead of a Special Needs Trust. Remember that ABLE accounts can only receive $15,000 in deposits each year, but, in most cases, Special Needs Trusts can receive much larger contributions in a year, once they are funded. This is an important difference for parents who want to leave more substantial assets to their child when they die but don’t want to jeopardize the child’s eligibility for critical services. In that situation, a Special Needs Trust may be more desirable.

When the beneficiary of the ABLE account passes away, any leftover funds in the account are typically reimbursed to the state to defray the costs of providing services during the beneficiary’s life. However, that’s different than a properly drafted Special Needs Trust.

In 2019, ABLE account owners who work but don’t have an employer-sponsored retirement account, can now save up to $12,140 in additional savings from their earnings.

Ask your estate planning attorney about possibly coordinating an ABLE account with a Special Needs Trust.

Reference: nj.com (April 20, 2019) “ABLE accounts – A tax advantaged tool for special needs planning”

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