What Happens when You Inherit a Retirement Account? – Annapolis and Towson Estate Planning

The SECURE Act of 2019 reset the game for IRAs and other tax deferred retirement accounts, says a recent article from Financial Advisor titled “IRAs, Taxes and Inheritance: Planning Becomes a Family Affair.” Prior to SECURE, investors paid ordinary income tax rates on withdrawals, whether they were voluntary or Required Minimum Distributions (RMDs) from these accounts, except for Roths. When individuals stopped working and their income dropped, so did the tax rate on their withdrawals. All was well.

Then the SECURE Act came along, with good intentions. The time period for payouts of IRAs and similar accounts after the death of the account owner changed. Non-spouse beneficiaries now have only 10 years to empty out the accounts, setting themselves up for potentially huge tax bills, possibly when their own incomes are at peak levels. What can be done?

Heirs of individual investors or couples with hefty IRAs and investment accounts are most likely to face consequences of the new tax regulations for RMDs and inheritances from the SECURE Act.

A widowed spouse faces the lower of either their own or the partner’s RMD rate—it’s tied to birth years. However, there is a pitfall: the widowed spouse files a single tax return, which cuts available deductions in half and changes tax brackets. Single or married, consider accelerating IRA withdrawals as soon as taxable income lowers early in retirement. Taking withdrawals from IRAs at this time voluntarily often means the ability to defer and as a result, optimize Social Security benefits to age 70.

For non-spousal beneficiaries of inherited IRAs, there’s no way around that 10-year rule. Their tax rates will depend on income, whether they file single or joint and any deductions available. If a beneficiary dies while the account still owns the assets, those assets may be subject to estate taxes, which are high.

Here’s where tax planning could help. IRA owners may try to “equalize” inheritances among heirs with tax consequences in mind. For instance, a lower earning child could be the IRA beneficiary, while a higher earning child could receive assets from a brokerage account or Roth IRAs. Alternatively, an IRA owner could establish trusts or make charitable bequests to empty the IRAs before they become part of the estate.

Contact us to speak with one of our experienced estate planning attorneys who will help you create a road map for distributing IRA and other tax deferred assets based on the tax and timing for beneficiaries or what you want to fund after you pass.

Another strategy, if you don’t expect to exhaust your IRA assets in your lifetime, is to systematically withdraw money early in retirement to fund Roth IRAs, known as a Roth conversion. The advantage is simple: inherited Roth IRAs need to be drawn down in ten years, but the money isn’t taxable to beneficiaries.

Decumulation planning is complicated to do. However, your estate planning attorney will help evaluate your unique situation and create the optimal income sourcing plan for your family based on their assets, including taxable and tax-advantaged accounts, Social Security benefits, pensions, life insurance and annuities.

Reference: Financial Advisor (Sep. 29, 2022) “IRAs, Taxes and Inheritance: Planning Becomes a Family Affair”

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

The Future of Your IRA and How the SECURE Act Changed the Rules – Annapolis and Towson Estate Planning

An ongoing series of changes from Congress has estate planning lawyers paying close attention to what is going on in Washington. The IRS recently proposed more changes to IRAs, details of which are explained in this recent article “The Secure Act Changed Inherited IRA Rules. What’s an Advisor to Do?” from Think Advisor. Every time the laws change, new opportunities and new restrictions are presented.

Having to empty inherited IRAs within 10 years makes the IRA less attractive from an estate planning perspective. If your legacy plan included leaving significant assets through an IRA, there are a number of alternatives to consider. First, take a longer look at your estate through an estate planning, inheritance and tax planning lens. Do you have enough funds to pay for the retirement you planned without the IRA? If not, the next steps may not apply to your situation.

What are your estate planning goals? If married, your spouse is probably the beneficiary on retirement accounts and life insurance policies. If you do not know who is named as your intended beneficiary, now is the time to check to be sure your beneficiaries are up to date.

Taxes come next, for you, your spouse and any non-spousal heirs. Withdrawals from traditional Roth IRAs are not generally taxable. Will anyone (besides your spouse) receiving the IRA be able to pay the taxes, or will they need to use the assets in the IRA to pay taxes?

The Roth IRA provides an excellent alternative to getting hurt by the SECURE Act’s 10-year restriction on inherited IRAs. Taxes are paid when the account is funded, there are no withdrawal requirements, and the accounts are free to grow over any length of time. Money in a traditional IRA may be converted to a Roth IRA, although you will be paying taxes on the conversion.

The Roth IRA conversion has a five-year requirement. Funds must be converted and remain in the account for five years before the more flexible Roth rules apply.

Roth IRAs may be passed to beneficiaries income-tax free. Non-spousal beneficiaries can take withdrawals from Roth IRAs tax-free as long as the five-year rule has been met. The beneficiaries can then use their inheritance as they wish, without the funds being diminished by higher taxes resulting from taking out large sums in a relatively short amount of time.

Roth IRAs are not exempt from federal estate taxes; just as traditional IRAs are not exempt. By making the conversion and paying the taxes upfront, however, you can at least minimize income taxes for heirs, even though you cannot eliminate the federal estate tax.

Rather than do the conversion all at once, consider doing a Roth IRA conversion over time, figuring out with your estate planning attorney the best way to do this to minimize your tax burden and adjust it for years when income is lower.

This flexible strategy with Roth IRAs can be used with all or a portion of the IRA, protecting part of the IRA for the next generation while using part of the funds for retirement. Your estate planning attorney will help you determine the best way to go forward, to meet your current and future needs.

Reference: Think Advisor (June 21, 2022) “The Secure Act Changed Inherited IRA Rules. What’s an Advisor to Do?”

 

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

Is a Bypass Trust Necessary? – Annapolis and Towson Estate Planning

A bypass trust removes a designated portion of an IRA or 401(k) proceeds from the surviving spouse’s taxable estate, while also achieving several tax benefits, according to a recent article titled “New Purposes for ‘Bypass’ Trusts in Estate Planning” from Financial Advisor.

Portability became law in 2013, when Congress permanently passed the portability election for assets passing outright to the surviving spouse when the first spouse dies. This allows the survivor to benefit from the unused federal estate tax exemption of the deceased spouse, thereby claiming two estate tax exemptions. Why would a couple need a bypass trust in their estate plan?

  • The portability election does not remove appreciation in the value of the ported assets from the surviving spouse’s taxable estate. A bypass trust removes all appreciation.
  • The portability election does not apply if the surviving spouse remarries, and the new spouse predeceases the surviving spouse. Remarriage does not impact a bypass trust.
  • The portability election does not apply to federal generation skipping transfer taxes. The amount could be subject to a federal transfer tax in the heir’s estates, including any appreciation in value.
  • If the decedent had debts or liability issues, ported assets do not have the protection against claims and lawsuits offered by a bypass trust.
  • The first spouse to die loses the ability to determine where the ported assets go after the death of the surviving spouse. This is particularly important when there are children from multiple marriages and parents want to ensure their children receive an inheritance.

This strategy should be reviewed in light of the SECURE Act 10-year maximum payout rule, since the outright payment of IRA and 401(k) plan proceeds to a surviving spouse is entitled to spousal rollover treatment and generally a greater income tax deferral.

Bypass trusts are also subject to the highest federal income tax rate at levels of gross income of as low as $13,550, and they do not qualify for income tax basis step-up at the death of the surviving spouse.

However, the use of IRC Section 678 in creating the bypass trust can eliminate the high trust income tax rates and the minimum exemption, also under Section 678, so the trust is not taxed the way a surviving spouse would be. There is also the potential to include a conditional general testamentary power of appointment in the trust, which can sometimes result in income tax basis step-up for all or a portion of the appreciated assets in the trust upon the death of the surviving spouse.

Every estate planning situation is unique, and these decisions should only be made after consideration of the size of the IRA or 401(k) plan, the tax situation of the surviving spouse and the tax situation of the heirs. An experienced estate planning attorney is needed to review each situation to determine whether or not a bypass trust is the best option for the couple and the family.

Reference: Financial Advisor (Feb. 1, 2022) “New Purposes for ‘Bypass’ Trusts in Estate Planning”

 

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

How Much can You Inherit and Not Pay Taxes? – Annapolis and Towson Estate Planning

Even with the new proposed rules from Biden’s lowered exemption, estates under $6 million will not have to worry about federal estate taxes for a few years—although state estate tax exemptions may be lower. However, what about inheritances and what about inherited IRAs? This is explored in a recent article titled “Minimizing Taxes When You Inherit Money” from Kiplinger.

If you inherit an IRA from a parent, taxes on required withdrawals could leave you with a far smaller legacy than you anticipated. For many couples, IRAs are the largest assets passed to the next generation. In some cases they may be worth more than the family home. Americans held more than $13 trillion in IRAs in the second quarter of 2021. Many of you reading this are likely to inherit an IRA.

Before the SECURE Act changed how IRAs are distributed, people who inherited IRAs and other tax-deferred accounts transferred their assets into a beneficiary IRA account and took withdrawals over their life expectancy. This allowed money to continue to grow tax free for decades. Withdrawals were taxed as ordinary income.

The SECURE Act made it mandatory for anyone who inherited an IRA (with some exceptions) to decide between two options: take the money in a lump sum and lose a huge part of it to taxes or transfer the money to an inherited or beneficiary IRA and deplete it within ten years of the date of death of the original owner.

The exceptions are a surviving spouse, who may roll the money into their own IRA and allow it to grow, tax deferred, until they reach age 72, when they need to start taking Required Minimum Distributions (RMDs). If the IRA was a Roth, there are no RMDs, and any withdrawals are tax free. The surviving spouse can also transfer money into an inherited IRA and take distributions on their life expectancy.

If you are not eligible for the exceptions, any IRA you inherit will come with a big tax bill. If the inherited IRA is a Roth, you still have to empty it out in ten years. However, there are no taxes due as long as the Roth was funded at least five years before the original owner died.

Rushing to cash out an inherited IRA will slash the value of the IRA significantly because of the taxes due on the IRA. You might find yourself bumped up into a higher tax bracket. It is generally better to transfer the money to an inherited IRA to spread distributions out over a ten-year period.

The rules do not require you to empty the account in any particular order. Therefore, you could conceivably wait ten years and then empty the account. However, you will then have a huge tax bill.

Other assets are less constrained, at least as far as taxes go. Real estate and investment accounts benefit from the step-up in cost basis. Let us say your mother paid $50 for a share of stock and it was worth $250 on the day she died. Your “basis” would be $250. If you sell the stock immediately, you will not owe any taxes. If you hold onto to it, you will only owe taxes (or claim a loss) on the difference between $250 and the sale price. Proposals to curb the step-up have been bandied about for years. However, to date they have not succeeded.

The step-up in basis also applies to the family home and other inherited property. If you keep inherited investments or property, you will owe taxes on the difference between the value of the assets on the day of the original owner’s death and the day you sell.

Estate planning and tax planning should go hand-in-hand. If you are expecting a significant inheritance, a conversation with aging parents may be helpful to protect the family’s assets and preclude any expensive surprises.

Reference: Kiplinger (Oct. 29, 2021) “Minimizing Taxes When You Inherit Money”

 

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

What Is the Best Thing to Do with an Inherited IRA? – Annapolis and Towson Estate Planning

When a parent dies and their adult child inherits a traditional IRA, knowing what to do can be the difference between an inheritance and a tax disaster. Many people take the money from the IRA account and place it into their own IRA. However, that is a mistake, says the article “How to manage an inherited IRA from a parent” from Sentinel Source.com.

Any inherited IRA, whether it is from a parent, sibling, or friend, cannot be simply rolled into your own account or treated as if it is your own IRA. Instead, the assets must be transferred in a timely manner to a new IRA that must be titled as an “Inherited IRA” that includes the name of the deceased owner and the phrase “For the benefit of…” and your name. Different financial institutions may have small variations in how they title the account. However, this seemingly small detail is critical.

If a traditional IRA has more than one beneficiary, it must be split into separate accounts for each beneficiary. Each heir will treat their own inherited portion in the same way, as if they were the sole beneficiary.

It is the heir’s choice to either set up a new Inherited IRA Beneficiary account with a financial institution or advisor of their own, or to create a new account using the prior institution. Sometimes using the same firm that held the account is easier, as long as the correct title is used.

The new owner of a Beneficiary IRA needs to know the rules to avoid costly penalties. After the SECURE Act became law in December 2019, most beneficiaries are now required to deplete an inherited IRA within ten (10) years of the original account owner’s death. This applies to any inherited IRAs where the owner has died after December 31, 2019.

The prior rules allowed Inherited IRAs to be depleted over the lifetime of the beneficiary, which allowed the accounts to grow tax-deferred and in many cases, be passed to a third generation, often referred to as “Stretch IRAs.” This option is gone.

There are no limits as to how much or how often withdrawals can be taken from the account, as long as it is depleted in ten years. However, the withdrawals are taxable as regular income, so if you wait until the ten year mark and take out the entire amount, you will end up with a hefty tax bill.

There are exceptions to the withdrawal rule. A surviving spouse, a minor child, a disabled or chronically ill beneficiary, or a beneficiary within ten years of age of the original IRA owner may have a little more time to withdraw funds (and pay taxes on the withdrawals).

If inheriting an IRA from a spouse, you may transfer the IRA balance into your own account and delay distributions until age 72.

Consider your IRAs carefully when working with an estate planning attorney on the distribution of your assets. Will your heirs be able to pay the taxes on their inherited IRAs, or should they be converted to Roth IRAs to relieve heirs of a future tax burden? These are questions that your estate planning attorney will be able to address.

Reference: Sentinel Source.com (Sep. 18, 2021) “How to manage an inherited IRA from a parent”

 

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

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?

 

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

The Stretch IRA Is Diminished but Not Completely Gone – Annapolis and Towson Estate Planning

Before the SECURE Act, named beneficiaries who inherited an IRA were able to take distributions over the course of their lifetimes. This allowed the IRA to grow over many years, sometimes decades. This option came to an end in 2019 for most heirs, but not for all, says the recent article “Who is Still Eligible for a Stretch IRA?” from Fed Week.

A quick refresher: the SECURE Act—Setting Every Community Up for Retirement Enhancement—was passed in December 2019. Its purpose was, ostensibly, to make retirement savings more accessible for less-advantaged people. Among many other things, it extended the time workers could put savings into IRAs and when they needed to start taking Required Minimum Distributions (RMDs).

However, one of the features not welcomed by many, was the change in inherited IRA distributions. Those not eligible for the stretch option must empty the account, no matter its size, within ten years of the death of the original owner. Large IRAs are diminished by the taxes and some individuals are pushed into higher tax brackets as a result.

However, not everyone has lost the ability to use the stretch option, including anyone who inherited an IRA before January 1, 2020. This is who is included in this category:

  • Surviving Spouses.
  • Minor children of the deceased account owner–but only until they reach the age of majority. Once the minor becomes of legal age, he or she must deplete the IRA within ten years. The only exception is for full-time students, which ends at age 26.
  • Disabled individuals. There is a high bar to qualify. The person must meet the total disability definition, which is close to the definition used by Social Security. The person must be unable to engage in any type of employment because of a medically determined or mental impairment that would result in death or to be of chronic duration.
  • Chronically ill persons. This is another challenge for qualifying. The individual must meet the same standards used by insurance companies used to qualify policyowners for long-term care coverage. The person must be certified by a treating physician or other licensed health care practitioner as not able to perform at least two activities of daily living or require substantial supervision, due to a cognitive impairment.
  • Those who are not more than ten years younger than the deceased account owner. That means any beneficiary, not just someone who was related to the account owner.

What was behind this change? Despite the struggles of most Americans to put aside money for their retirement, which is a looming national crisis, there are trillions of dollars sitting in IRA accounts. Where better to find tax revenue, than in these accounts? Yes, this was a major tax grab for the federal coffers.

Reference: Fed Week (March 3, 2021) “Who is Still Eligible for a Stretch IRA?”

 

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

SECURE Act has Changed Special Needs Planning – Annapolis and Towson Estate Planning

The SECURE Act eliminated the life expectancy payout for inherited IRAs for most people, but it also preserved the life expectancy option for five classes of eligible beneficiaries, referred to as “EDBs” in a recent article from Morningstar.com titled “Providing for Disabled Beneficiaries After the SECURE Act.” Two categories that are considered EDBs are disabled individuals and chronically ill individuals. Estate planning needs to be structured to take advantage of this option.

The first step is to determine if the individual would be considered disabled or chronically ill within the specific definition of the SECURE Act, which uses almost the same definition as that used by the Social Security Administration to determine eligibility for SS disability benefits.

A person is deemed to be “chronically ill” if they are unable to perform at least two activities of daily living or if they require substantial supervision because of cognitive impairment. A licensed healthcare practitioner certifies this status, typically used when a person enters a nursing home and files a long-term health insurance claim.

However, if the disabled or ill person receives any kind of medical care, subsidized housing or benefits under Medicaid or any government programs that are means-tested, an inheritance will disqualify them from receiving these benefits. They will typically need to spend down the inheritance (or have a court authorized trust created to hold the inheritance), which is likely not what the IRA owner had in mind.

Typically, a family member wishing to leave an inheritance to a disabled person leaves the inheritance to a Supplemental Needs Trust or SNT. This allows the individual to continue to receive benefits but can pay for things not covered by the programs, like eyeglasses, dental care, or vacations. However, does the SNT receive the same life expectancy payout treatment as an IRA?

Thanks to a special provision in the SECURE Act that applies only to the disabled and the chronically ill, a SNT that pays nothing to anyone other than the EDB can use the life expectancy payout. The SECURE Act calls this trust an “Applicable Multi-Beneficiary Trust,” or AMBT.

For other types of EDB, like a surviving spouse, the individual must be named either as the sole beneficiary or, if a trust is used, must be the sole beneficiary of a conduit trust to qualify for the life expectancy payout. Under a conduit trust, all distributions from the inherited IRA or other retirement plan must be paid out to the individual more or less as received during their lifetime. However, the SECURE Act removes that requirement for trusts created for the disabled or chronically ill.

However, not all of the SECURE Act’s impact on special needs planning is smooth sailing. The AMBT must provide that nothing may be paid from the trust to anyone but the disabled individual while they are living. What if the required minimum distribution from the inheritance is higher than what the beneficiary needs for any given year? Let us say the trustee must withdraw an RMD of $60,000, but the disabled person’s needs are only $20,000? The trust is left with $40,000 of gross income, and there is nowhere for the balance of the gross income to go.

In the past, SNTs included a provision that allowed the trustee to pass excess income to other family members and deduct the amount as distributable net income, shifting the tax liability to family members who might be in a lower tax bracket than the trust.

Special Needs Planning under the SECURE Act has raised this and other issues, which can be addressed by an experienced estate planning attorney.

Reference: Morningstar.com (Dec. 9, 2020) “Providing for Disabled Beneficiaries After the SECURE Act”

 

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

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”

 

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

Update Will at These 12 Times in Your Life – Annapolis and Towson Estate Planning

Estate planning lawyers hear it all the time—people meaning to update their will, but somehow never getting around to actually getting it done. The only group larger than the ones who mean to “someday,” are the ones who do not think they ever need to update their documents, says the article “12 Different Times When You Should Update Your Will” from Kiplinger. The problems become abundantly clear when people die, and survivors learn that their will is so out-of-date that it creates a world of problems for a grieving family.

There are some wills that do stand the test of time, but they are far and few between. Families undergo all kinds of changes, and those changes should be reflected in the will. Here are one dozen times in life when wills need to be reviewed:

Welcoming a child to the family. The focus is on naming a guardian and a trustee to oversee their finances. The will should be flexible to accommodate additional children in the future.

Divorce is a possibility. Do not wait until the divorce is underway to make changes. Do it beforehand. If you die before the divorce is finalized, your spouse will have marital rights to your property. Once you file for divorce, in many states you are not permitted to change your will, until the divorce is finalized. Make no moves here, however, without the advice of your attorney.

Your divorce has been finalized. If you did not do it before, update your will now. Do not neglect updating beneficiaries on life insurance and any other accounts that may have named your ex as a beneficiary.

When your child(ren) marry. You may be able to mitigate the lack of a prenuptial agreement, by creating trusts in your will, so anything you leave your child will not be considered a marital asset, if his or her marriage goes south.

Your beneficiary has problems with drugs or money. Money left directly to a beneficiary is at risk of being attached by creditors or dissolving into a drug habit. Updating your will to includes trusts that allow a trustee to only distribute funds under optimal circumstances protects your beneficiary and their inheritance.

Named executor or beneficiary dies. Your old will may have a contingency plan for what should happen if a beneficiary or executor dies, but you should probably revisit the plan. If a named executor dies and you do not update the will, then what happens if the second executor dies?

A young family member grows up. Most people name a parent as their executor, then a spouse or trusted sibling. Two or three decades go by. An adult child may now be ready to take on the task of handling your estate.

New laws go into effect. In recent months, there have been many big changes to the law that impact estate planning, from the SECURE Act to the CARES act. Ask your estate planning attorney every few years, if there have been new laws that are relevant to your estate plan.

An inheritance or a windfall. If you come into a significant amount of money, your tax liability changes. You will want to update your will, so you can do efficient tax planning as part of your estate plan.

Can’t find your will? If you cannot find the original will, then you need a new will. Your estate planning attorney will make sure that your new will has language that states revokes all prior wills.

Buying property in another country or moving to another country. Some countries have reciprocity with America. However, transferring property to an heir in one country may be delayed, if the will needs to be probated in another country. Ask your estate planning attorney, if you need wills for each country in which you own property.

Family and friends are enemies. Friends have no rights when it comes to your estate plan. Therefore, if families and friends are fighting, the family member will win. If you suspect that your family may push back to any bequests to friends, consider adding a “No Contest” clause to disinherit family members who try to elbow your friends out of the estate.

Reference: Kiplinger (May 26, 2020) “12 Different Times When You Should Update Your Will”

 

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