What Does Recent Legislation Mean for the Generation-Skipping Transfer Tax (GSTT) Exemption? – Annapolis and Towson Estate Planning

Congress has made some significant changes through the planned sunset of the Tax Cuts and Jobs Act (TCJA) increased exemptions and through the recent changes to retirement planning in the Secure Act.

Think Advisor’s recent article entitled, “Estate Planning Tips and Updates,” looks at some of the most notable of these.

  1. Increased Estate Tax Exemption Amounts. The current applicable exemption amount of $11.58 million each (or $23.16 million for a married couple) lets many people totally avoid transfer taxes. However, the applicable exclusion amount reverts to its prior inflation adjusted amount in 2026. Therefore, if you have a gross estate of $11 million and previously made, say, $7 million of gifts, the rules eliminate any claw back of those gifts, if death occurs in 2026. However, you have no applicable exclusion amount remaining, says the IRS. As a result, after the sunset, you have a gross estate of $4 million and no remaining exemption. With this example, you would be wise to consider implementing one or more strategies, including gifts and sales to grantor trusts, before the end of 2025 to be certain you fully use the disappearing exemption.
  2. The Increased Generation-Skipping Transfer Tax (GSTT) Exemption. The TCJA also upped the GSTT exemption to $11.58 million each. This allows many people to exempt transfers for several generations, if not in perpetuity, under the laws of certain states. However, they must intentionally draft trusts to establish legal situs in states like Nevada to leverage longer perpetuities periods. This will result in avoiding additional estate, gift and GSTT taxes for longer periods, normally a net positive.
  3. Annual Exclusion Gifts. Regardless of the increased exemption amounts, continued annual exclusion gifts (currently $15,000) are still going to be a crucial component of most estate tax reduction planning, removing the amount of the gift and its future appreciation. The tax-exclusive nature of the gift tax makes gifts more tax-efficient.
  4. Basis Harvesting. The increased exemption amounts often will result in some people with previous trust planning no longer having estate tax issues. These people could look at reforming, amending, or decanting an existing trust to add older generations in a manner to cause inclusion in their estates. This inclusion triggers the basis step-up rules in the code and may dramatically reduce taxes upon a liquidity event, like the sale of a business interest previously gifted or sold over to the trust.
  5. Secure Act Age Changes. For those born after July 1, 1949, the Act raises the beginning age for minimum distributions (RMDs) to 72.
  6. Employer Inducements. The Act increases the current $500 credit for setting up a retirement plan to $5,000 in some situations and provides a $500 credit for three years to encourage the use of auto-enrollment.
  7. Inherited IRAs. The Act substantially restricts the use of “stretch” IRAs. For deaths after December 31, 2019, a recipient of an IRA from the deceased must generally take distributions from the IRA over no more than a 10-year period. However, the new rules exempt accounts inherited by a spouse, a minor child, a disabled or chronically ill person, or anyone less than 10 years younger than the deceased account owner.
  8. Annuities. The “stretch” IRA provisions also apply to annuities with one important exception. Annuities making payments before January 1, 2020, may still pay out over two lives. The new law encourages greater investment in annuities through 401(k) plans, and especially plans offered by smaller businesses, by decreasing the risk associated with offering annuities. As a result, employers offering annuities as investments will not have fiduciary duties as to those potential annuity investments, assuming they choose an issuer in good standing with the applicable state insurance commission. The Secure Act also offers portability for annuities, if you change jobs. This is a direct transfer between retirement plans.

Reference: Think Advisor (March 25, 2020) “Estate Planning Tips and Updates”

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Should I Use Life Insurance in My Estate Planning? – Annapolis and Towson Estate Planning

With proper planning, insurance money can pay expenses like estate taxes. It will help keep other assets intact.

For example, Hector passes away and leaves his rather large estate to his daughter, Isabella. Because of the size of the estate, there is a hefty estate tax due. However, unfortunately, most of Hector’s assets are tied up in real estate and an IRA. Isabella may not be keen on a quick forced sale of the real estate to free up some cash for the taxes. If Isabella taps the inherited IRA to raise cash, she will have to pay income tax on the withdrawal and lose a valuable opportunity for extended tax deferral.

FedWeek’s recent article entitled “Using Life Insurance to Protect Your Estate” that in this scenario, Hector could plan ahead. Anticipating such a result, he could buy insurance on his own life. The proceeds of that policy could be used to pay the estate tax bill. Isabella can then keep the real estate, while taking only the Required Minimum Distributions (RMD) that are warranted by law from the inherited IRA. If the insurance policy is owned by Isabella or by a trust, the proceeds most likely will not be included in Hector’s estate, and the money will not increase the estate tax liability she has.

However, some common life insurance mistakes can sabotage your estate plan:

  • Designating your estate as the beneficiary. This will place the policy proceeds in your estate, which exposes the funds to estate tax and your creditors. Your executor will also have more paperwork, if your estate is the beneficiary. Instead, name the appropriate people, trust or charities.
  • Naming just a single beneficiary. Name at least two “backup” beneficiaries to decrease confusion, in the event the main beneficiary should die before you.
  • Placing your policy in the “file and forget” drawer. Review your policies at least once every three years, make the appropriate changes and get a confirmation, in writing, from the insurance company.
  • Inadequate insurance. In the event of your untimely death, if you have a young child, in all likelihood it will take hundreds of thousands of dollars to pay all her expenses, such as college tuition. Failing to purchase adequate insurance coverage may hurt your family. This also should not be a hardship with term insurance costs so low.

Reference: FedWeek (Feb. 6, 2020) “Using Life Insurance to Protect Your Estate”

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

Why Is Estate Planning more Complicated with a ‘Gray Divorce’? – Annapolis and Towson Estate Planning

The increasing divorce rates among Americans over the age of 50 is a problem, because minimizing discord among beneficiaries is one of the top three reasons why people engage in estate planning.

The Clare County Review’s recent article entitled “Rising Gray Divorce Rates Are Making Estate Planning Problems More Complicated” notes that along with prolonged life expectancy and rising healthcare costs, this upward trend in couples divorcing after the age of 50 has created activity and interest in estate planning.

According to the CDC, the divorce rate in the United States is 3.2 per 1,000 people. The ‘first divorce rate,’ or the number of marriages that ended in divorce per 1,000 first marriages for women 18 and older, was 15.4 in 2016, according to research by the National Center for Family and Marriage Research at the Bowling Green State University. As noted earlier, black women experience divorce at the highest rate, 26.1 per 1,000, and the rate is lowest for Asian women at 9.2 per 1,000.  In Michigan, the current divorce rate is 9%, but Tennessee is way up at 43%.

Gray divorce is adding another level of complexity to estate planning that already happens with blended families, designation of heirs and changing domestic structures. Therefore, it is more crucial than ever to proactively review and discuss the estate plans with your estate planning attorney on an ongoing basis.

According to the TD Wealth survey, 39% of respondents said that divorce effects the costs of retirement planning and funding the most. Another 7% said that divorce impacts those responsible for enacting a power of attorney and 6% said divorce impacts how Social Security benefits will be determined.

It is important to communicate the estate plan with family members to reduce family conflict during the divorce process.

The divorce process is complicated at any age. However, for divorcing couples over the age of 50, the process can be especially tough because the spouse is frequently designated as a beneficiary on many, if not all, documents. Each of these documents will need to change to show new beneficiaries after the divorce has been finalized. It means that wills, trusts, retirement accounts, life insurance policies and listed assets will need to be revised.

Reference: Clare County Review (Feb. 10, 2020) “Rising Gray Divorce Rates Are Making Estate Planning Problems More Complicated”

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

Do I Need a Revocable Living Trust? – Annapolis and Towson Estate Planning

A revocable living trust is created with a written agreement or declaration that names a trustee to manage and administer the property of the grantor. If you are a competent adult, you can establish an RLT. As the grantor, or creator of the trust, you can name any competent adult as your trustee, or you can use a bank or a trust company for this role. The grantor can also act as trustee throughout his lifetime.

Investopedia’s article from last fall entitled “Should You Set up a Revocable Living Trust?” explains that after it is created, you must retitled assets—like investments, bank accounts, and real estate—into the trust. You no longer “own” those assets directly. Instead, they belong to the trust and do not have to go through probate at your death. However, with a revocable living trust, you retain control of the assets while you are alive, even though they no longer belong to you directly. A revocable living trust can be changed, and any income earned by the trust’s assets passes to you and is taxable. However, the assets themselves do not transfer from the trust to your beneficiaries until your death.

Avoiding probate is the big benefit of a living trust, but other benefits like privacy protection and flexibility make it a good choice. A living trust can be used to help control a guardian’s spending habits for the benefit of minor children. It can also instruct another individual to act on your behalf, if you become incapacitated and need someone to make decisions for you. Should you become impaired or disabled, the trust can automatically appoint your trustee to oversee it and your financial affairs without a durable power of attorney.

Although there are several advantages to establishing a revocable living trust, there also some drawbacks:

Expense. Establishing a trust requires legal assistance, which is an expense.

Maintaining Records. Most of the time, you need to monitor it on an annual basis and make adjustments as needed (they do not automatically adapt to changed circumstances, like a divorce or a new grandchild). There is the trouble of ensuring that future assets are continuously registered to the trust.

Re-titling Property. When your RLT is established, property must be re-titled in the name of the trust, requiring additional time. Fees can apply to processing title changes.

Minimal Asset Protection. Despite the myth, a revocable living trust offers little asset protection beyond avoiding probate if you retain an ownership interest, such as naming yourself as trustee.

Administrative Expenses. There can also be additional professional fees, such as investment advisory and trustee fees, if you appoint a bank or trust company as the trustee.

There’s No Tax Break. Your assets in the RLT will continue to incur taxes on their gains or income and be subject to creditors and legal action.

Compared to wills, revocable trusts have more privacy, more control and flexibility over asset distribution. With a revocable living trust, you do most of the work up front, making the disposition of your estate easier and faster. However, an RLT requires more effort, and there is an expense in creating and maintaining it.

Work with an experienced estate planning attorney, if you are considering a revocable living trust.

Reference: Investopedia (Oct. 31, 2019) “Should You Set up a Revocable Living Trust?”

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

Do You Think Everything Is All Set with Your Estate Plan? – Annapolis and Towson Estate Planning

Many people would like to believe that estate planning is simple, and that once you sign everything you’re finished. Not so. There are other things to consider as part of the process, and topics that need to be revisited over time.

When you pass away, your executor will typically have many tasks to handle to settle your estate. Anything you can do in advance to add clarity and lessen the burden on her work is wise. MarketWatch’s recent article entitled “Why your estate plan is not as buttoned up as you think it is” gives us a list of seven items to review to be certain that your estate is as planned as you think:

Check to make sure your will is up to date. That is assuming you have written your will (and if you have not, get on it!). How long has it been since you drafted it? Think about any major changes in your life that have happened since that time. If things have changed, be sure to update it.

Check to make sure that your will is sufficiently detailed. Most people think about the big stuff in their estate, like the house, car and jewelry. However, you also need to provide directions for items with sentimental value. This will help to avoid family fighting over these items. Leave directions about who gets what, even if these items of sentimental value do not have a high dollar value.

Check to make sure that your will spells out your wishes in a way that’s legally binding. Every state has its own laws, when it comes to the requirements for a valid will. Work with a seasoned estate planning attorney to make certain that your will is valid. You can also let them do it, so you do not make a mistake that could lead to problems for your executor after you are gone.

Check to make sure that your will has your funeral plans sufficiently detailed. Do not force your grieving family to plan your funeral and try to guess your wishes at the same time. Preplan your funeral. Funeral directors are happy to talk to you to preplan. Leave instructions regarding your wishes, including whether you want to be cremated or buried in a casket; the services you would like and if you would like charitable donations to be made in lieu of people sending flowers.

Be sure that your financial affairs are organized. Your executor will need to know about your typical monthly bills. Make a list of your account numbers and passwords to simplify your executor’s job. Be sure to include automatic deductions or charges on your credit card for things like internet-based subscriptions, club memberships, recurring charitable donations and automatic utility payments.

Make arrangements for the care of your family members who survive you. If you are a caregiver to a parent, spouse, child, or another family member, create a detailed plan concerning who will take over their care, if they outlive you. Do not forget your pets, since the laws on the care for animals contained in a will are different in each state. It is a good idea to make your loved ones aware of your wishes for your furry family members.

Thorough estate planning will help ensure that you family has less to deal with in their grief. Anything you can do to help them get through that difficult time by managing your affairs today is a great gift to them.

Reference: MarketWatch (March 4, 2020) “Why your estate plan is not as buttoned up as you think it is”

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

What are the Main Estate Planning Blunders to Avoid? – Annapolis and Towson Estate Planning

There are a few important mistakes that can make an estate plan defective—most of these can be easily avoided by reviewing your estate plan periodically and keeping it up to date.

Investopedia’s article from a few years ago entitled “5 Ways to Mess Up Estate Planning” lists these common blunders:

Not Updating Your Beneficiaries. Big events like a marriage, divorce, birth, adoption and death can all have an effect on who will receive your assets. Be certain that those you want to inherit your property are clearly detailed as such on the proper forms. Whenever you have a life change, update your estate plan, as well as all your financial, retirement accounts and insurance policies.

Forgetting Important Legal Documents. Your will may be just fine, but it will not exempt your assets from the probate process in most states, if the dollar value of your estate exceeds a certain amount. Some assets are inherently exempt from probate by law, like life insurance, retirement plans and annuities and any financial account that has a transfer on death (TOD) beneficiary listed. You should also make sure that you nominate the guardians of minor children in your will, in the event that something should happen to you and/or your spouse or partner.

Lousy Recordkeeping. There are few things that your family will like less than having to spend a huge amount of time and effort finding, organizing and hunting down all of your assets and belongings without any directions from you on where to look. Create a detailed letter of instruction that tells your executor or executrix where everything is found, along with the names and contact information of everyone with whom they will have to work, like your banker, broker, insurance agent, financial planner, etc.. You should also list all of the financial websites you use with your login info, so that your accounts can be conveniently accessed.

Bad Communication. Telling your loved ones that you will do one thing with your money or possessions and then failing to make provisions in your plan for that to happen is a sure way to create hard feelings, broken relationships and perhaps litigation. It is a good idea to compose a letter of explanation that sets out your intentions or tells them why you changed your mind about something. This could help in providing closure or peace of mind (despite the fact that it has no legal authority).

No Estate Plan. While this is about the most obvious mistake in the list, it is also one of the most common. There are many tales of famous people who lost virtually all of their estates to court fees and legal costs, because they failed to plan.

These are just a few of the common estate planning errors that commonly happen. Make sure they do not happen to you: talk to a qualified estate planning attorney.

Reference: Investopedia (Sep. 30, 2018) “5 Ways to Mess Up Estate Planning”

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

No Will? Don’t Count on a Happy Ending for Your Family – Annapolis and Towson Estate Planning

The gentleman at the heart of this article is not the first, and sadly he will not be the last, to start and not finish the process of preparing a will and all of the other documents that go into having an estate plan. People say they do not need to do this just yet, or they are having trouble deciding who should be their executor, etc. Regardless of the reason, the end result of an unfinished estate plan is almost always a disaster for the family. It certainly is in the article “Thy will be done (and you really should get it drawn up right now)” from the San Antonio Express-News.

One week after a woman spoke to her dad about his estate plan, he became ill and was hospitalized. The man’s girlfriend became verbally abusive to family members. The sisters of the man had previously sued him, accusing him, as trustee of the father’s trust, of taking more than his fair share of the family money. The daughter was trying to pay for his care during a two-month stay in the hospital. However, without a power of attorney and in the middle of a costly lawsuit from the man’s sisters, the only way forward was declaring a “conservatorship” of her father’s assets. The father died, with no will, and with his estate under attack from his sisters.

It took two years to settle the probate case and the lawsuit between the sisters and the estate of their brother. That is a long time to mix mourning, family strife and court actions.

The value of the father’s estate was drained by the long litigation and probate process. The daughter estimates that her father’s estate paid 13 times more than necessary, because there was no power of attorney and three times more than necessary because of the lack of a will. And making matters worse, more than 30 percent of the estate vanished because of the unfinished estate plan and poor communication between family members.

More than $500,000 remained in probate, and then was drained by a third over the course of the two years.

However, the worst part cannot be measured in money. It is the emotional cost of siblings who grew to hate one another. The sisters did not say goodbye to their brother, or even attend his funeral.

A Gallup poll in 2016 found that only 44% of Americans have a will. Thirty-two percent of Americans over age 65 still do not have a will. What are they waiting for? Some think they are saving their families money by not having a will, but the above example is clear proof of how wrong that thinking is.  Doing an online will is not much better. One attorney said it best: when wills are not prepared by estate planning attorneys and they go wrong, they go very wrong.

Speak with an estate planning attorney and make sure that your family is protected from the fights, the costs and the lost time that cannot be regained.

Reference: San Antonio Express-News (March 9, 2020) “Thy will be done (and you really should get it drawn up right now)”

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

What’s the Best Way to Provide for My Family when I’m Gone? – Annapolis and Towson Estate Planning

The estate planning process should begin when you are at least 18 years old, of sound mind and as free as possible from emotional stress, suggests Essence’s recent article entitled “Death And Money: How To Protect And Provide For The Loved Ones You Leave Behind.” You do not want to do this kind of planning when you are on your sickbed or when your mental capabilities are in decline.

If you are new to estate planning, here are the necessary steps to ensure you start the process on the right foot. Work with an experienced estate planning attorney to be certain that your plan is correct and legal.

A will. This is a legal document that details how to distribute your property and other assets upon death. A will can also nominate guardians for minor children. Without this, the state will dictate how to distribute your assets to your beneficiaries, according to the laws of intestate succession. If you already have a will, be sure it is updated to reflect an accurate listing of assets and beneficiaries that may be changed with a divorce, financial changes, or the birth or adoption of a child.

Life insurance. This is a great idea to protect and provide for your family when you are gone. Life insurance pays out money either upon your death or after a set period. Even if you have a life insurance policy as an employee benefit, this coverage is not portable, which means it does not follow you when you switch jobs. This can result in gaps in coverage at times when you may need it most.

Work with a legal professional. Estate planning is not a DIY project, like cleaning the garage. You should have the counsel and assistance of an experienced estate planning attorney to help you create a comprehensive estate plan. An estate planning attorney can also coordinate with your financial advisor to manage your estate’s finances, such as making recommendations and funding investment, retirement and trust accounts.

An estate planning attorney also can make sure that all of your beneficiaries and secondary beneficiaries are up-to-date on your investment accounts, pensions and insurance policies. An estate planning attorney will also help you with the best options for maintaining your estate after death or in the event of incapacity. In addition to preparing a will, your attorney can create a living trust that details your desires regarding your assets, your dependents and your heirs while you are still alive. He can also draw up your power of attorney for your health care, verify property titles and create legal document to ensure a succession plan for your business.

Finally, an estate planning attorney or probate attorney can help the personal representative or executor of an estate with closing responsibilities setting up an estate account, tax filings and paying the final distributions to beneficiaries.

A key to estate planning is to get (and stay) organized. Know the location and passwords (if applicable) of all your important legal and financial documents. You should also communicate the location of these files to trusted family members and to your estate planning or probate attorney.

Reference: Essence (Jan. 29, 2020) “Death And Money: How To Protect And Provide For The Loved Ones You Leave Behind”

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

How Do I Revoke a Revocable Trust? – Annapolis and Towson Estate Planning

A revocable trust is a flexible legal vehicle that lets the creator (known as the grantor) manage trust assets, as well as to alter the trust itself or its beneficiaries at any time in her lifetime. Also called a “living trust,” this trust is frequently used to transfer assets to heirs to avoid the time and expenses of probate. It is much different than if assets were simply bequeathed in a will. During the life of the trust, income earned is distributed to the grantor, and only after her death does its property transfer to the beneficiaries.

A recent Investopedia article asks “How exactly does one go about revoking a revocable trust?” According to the article, people might revoke a trust for several reasons, but typically it involves a life change. A common reason for revoking a trust, is a divorce when the trust was created as a joint document with one’s soon-to-be ex-spouse.

A trust might also be revoked because the grantor wants to make changes that are so extensive that it would be simpler to dissolve the trust and create a new one. A revocable trust may also be revoked, if the grantor wants to appoint a new trustee or totally change the provisions of the trust.

Note that while they avoid probate, revocable trusts are not exempt from estate taxes. Because of the fact that the grantor has control of the assets during his or her lifetime, the property is considered part of the taxable estate.

When dissolving a revocable trust, first remove all the assets that have been transferred into it. This means changing titles, deeds, or other legal documents to transfer ownership from the assets of the trust back to the trust’s grantor directly. Next, have a legal document created that states the trust’s creator, having the right to revoke the trust, does want to revoke all terms and conditions of the trust and dissolve it completely. This is often called a “trust revocation declaration” or “revocation of living trust.” As a seasoned estate planning attorney to create this document for you to be sure that it is correctly worded and meets all the qualifications of your state’s laws. If the trust has a variety of assets, it is also often smarter to let an experienced attorney make certain that everything has been properly transferred out of the trust.

The dissolution document should be signed, dated, witnessed and notarized. If the trust being dissolved was registered with a specific court, the dissolution document should be filed with the same court. Otherwise, you can just attach it to your trust papers and store it with your will or new trust documents.

Reference: Investopedia (Jan. 13, 2020) “How exactly does one go about revoking a revocable trust?”

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

What Is So Important About Powers Of Attorney? – Annapolis and Towson Estate Planning

Powers of attorney can provide significant authority to another person, if you are unable to do so. These powers can include the right to access your bank accounts and to make decisions for you. AARP’s article from last October entitled, “Powers of Attorney: Crucial Documents for Caregiving,” describes the different types of powers of attorney.

Just like it sounds, a specific power of attorney restricts your agent to taking care of only certain tasks, such as paying bills or selling a house. This power is typically only on a temporary basis.

A general power of attorney provides your agent with sweeping authority. The agent has the authority to step into your shoes and handle all of your legal and financial affairs.

The authority of these powers of attorney can stop at the time you become incapacitated. Durable powers of attorney may be specific or general. However, the “durable” part means your agent retains the authority, even if you become physically or mentally incapacitated. In effect, your family probably will not need to petition a court to intervene, if you have a medical crisis or have severe cognitive decline like late stage dementia.

In some instances, medical decision-making is part of a durable power of attorney for health care. This can also be addressed in a separate document that is just for health care, like a health care surrogate designation.

There are a few states that recognize “springing” durable powers of attorney. With these, the agent can begin using his or her authority, only after you become incapacitated. Other states do not have these, which means your agent can use the document the day you sign the durable power of attorney.

A well-drafted power of attorney helps your agent help you, because he or she can keep the details of your life addressed, if you cannot. That can be things like applying for financial assistance or a public benefit, such as Medicaid, or verifying that your utilities stay on and your taxes get paid. Attempting to take care of any of these things without the proper document can be almost impossible.

In the absence of proper incapacity legal planning, your loved ones will need to initiate a court procedure known as a guardianship or conservatorship. However, these hearings can be expensive, time-consuming and contested by family members who do not agree with moving forward.

Do not wait to do this. Every person who is at least age 18 should have a power of attorney in place. If you do have a power of attorney, be sure that it is up to date. Ask an experienced elder law or estate planning attorney to help you create these documents.

Reference: AARP (October 31, 2019) “Powers of Attorney: Crucial Documents for Caregiving”

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