Read more about the article How Wealthy People Save on Taxes—Can Regular People Do the Same? – Annapolis and Towson Estate Planning
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How Wealthy People Save on Taxes—Can Regular People Do the Same? – Annapolis and Towson Estate Planning

As a direct result of tax cuts made in recent years, Americans can give nearly $13 million in assets without paying any federal estate taxes. Only 0.2% of all tax payers worry about federal estate taxes these days, explains the article “Here are six ways the rich save big on taxes, from putting houses in trusts to guaranteeing inheritance for future generations” from Business Insider. Could some of their tactics work for “regular” people too?

Among these tax avoidance techniques include putting homes and vacation homes in trusts lasting decades and any appreciation in the property’s value doesn’t count towards their taxable estate. Qualified Personal Residence Trusts, or QPRTs, basically freeze the value of real estate properties for tax purposes. The home is placed in the trust, which retains ownership for however many years desired. When the trust ends, the property is transferred out of the taxable estate. The estate only pays the gift tax on the property’s value when the trust was formed—regardless of the appreciation of the home.

Dynasty trusts allow taxpayers to pass wealth to generations who haven’t been born yet and are only subject to the 40% generation-skipping tax once. Florida and Wyoming allow these trusts to last up to 1,000 years, which spans about 40 generations. Heirs don’t own the trust assets but have lifetime rights to the trust’s income and real estate.

Charitable Remainder Trusts (CRTs) can be funded with various assets, from yachts to closely held businesses. Taxpayers put assets in the trust, collect annual payments for as long as they live and get a partial tax break. Only 10% of what remains in the CRT must be donated to a charity to qualify with the IRS.

Taking loans to pay estate taxes is scrutinized by the IRS and has many hoops to jump through. Asset-rich people use this method but are cash-poor and facing a big estate tax bill. The estate can make an upfront deduction on the interest of “Graegin” loans, named after a 1988 Tax Court case. Suppose illiquid assets comprise at least 35% of the estate’s value. In that case, families can defer estate tax for as long as 14 years, paying in installments with interest and effectively taking a loan from the government. However, Graegin loans are prime targets for IRS auditors and can lead to legal battles.

Private-placement life insurance, or PPLI, can pass on assets without incurring any estate tax. A trust is created to own the life insurance policy, which has been created offshore. This strategy is only for the very wealthy, as it usually requires $5 million in upfront premiums and a small army of professionals to set up and administer.

A down market has one silver lining for high-net-worth individuals: it’s an excellent time to create new trusts, as people can transfer depressed assets at a lower tax basis. The Grantor-Retained Annuity Trust (GRAT) pays a fixed annuity during the trust term; any appreciation of the asset’s value is not subject to estate tax.

An experienced estate planning attorney will know which of these strategies might work for your family, along with many others used by “regular” people.

Questions? Contact us to schedule an initial call with one of our experienced estate planning attorneys.

Reference: Business Insider (June 12, 2023) “Here are six ways the rich save big on taxes, from putting houses in trusts to guaranteeing inheritance for future generations”

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

Read more about the article What Three Things Do People Overlook on Estate Planning Benefits? – Annapolis and Towson Estate Planning

What Three Things Do People Overlook on Estate Planning Benefits? – Annapolis and Towson Estate Planning

An estate plan is important for everyone. Without a legally enforceable estate plan, a court may apply state laws and decide how your assets will be distributed and who will raise your minor children. In addition to allowing you to direct the wrap-up of your affairs after you are gone, an estate plan can also help you reduce taxes, expedite settling your estate and reduce conflict in your family.

Yahoo Finance’s recent article, “3 Overlooked Benefits of Estate Planning,” explains that planning your estate entails making arrangements to ensure that your wishes are carried out after your death.

While some think estate planning is only for those with mansions and millions in the bank, this isn’t true. Instead, even those with modest assets can benefit from having a defined estate plan.

Remember that the estate planning process isn’t about how much you have—it’s about making sure what you do have ends up where you want it. It may also decide who will be responsible for raising any minor children who survive you.

Your estate plan can also affect taxes, the time it takes to settle your estate, your end-of-life medical care and the odds that your family will fight over it.

Deciding who gets what is the big question of many estate plans. Your estate consists of the assets, property and personal items you own at your death. This may include real estate, bank accounts, life insurance, stocks and investments, retirement accounts, and personal property like collectibles, vehicles, art and jewelry.

The documents in estate plans include a last will and testament, a living will, financial and medical powers of attorney and documents establishing various trusts.

Start your estate plan today with the help of an experienced estate planning attorney and review it periodically to accommodate marriages, divorces and births. The process often includes reviewing your property and wishes, drafting a will, naming an executor, assigning healthcare and financial proxies and settling other matters, like funeral arrangements.

Questions? Contact us to schedule your complimentary initial call with one of our experienced estate planning attorneys.

Reference: Yahoo Finance (April 24, 2023) “3 Overlooked Benefits of Estate Planning”

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

Read more about the article What Is a Beneficiary? Annapolis and Towson Estate Planning

What Is a Beneficiary? Annapolis and Towson Estate Planning

A beneficiary can be designated by the owner or automatically assigned through the policy or contract. It’s essential to understand who these beneficiaries are and how they will be affected by the annuity payments to best plan for retirement income needs, says The Salisbury Post’s recent article entitled “What exactly is a beneficiary?” Let’s look at the different types:

  • Primary Beneficiary: This is typically designated by the owner when they buy the account who will receive any remaining funds from the annuity after the owner’s death. If there are multiple primary beneficiaries on an account, each may get a proportional portion of any remaining funds at death based on their age and relationship to the owner. Depending on individual circumstances, this may be taxable.
  • Secondary Beneficiaries: This is another individual who might benefit from an annuity upon the death of both owners (if it’s owned jointly). If a secondary beneficiary isn’t named, any remaining funds will pass directly through the owner’s estate according to state laws of intestate succession, if applicable.
  • Contingent Beneficiaries: In some instances, an owner may want to name a contingent beneficiary in the event that the primary and secondary beneficiaries predecease him or her before taking ownership of the annuity.

Annuity owners should keep their beneficiaries up to date by making sure they’re aware of changes in their lives such as marriages, divorces, the births or adoptions of children, the deaths of a loved ones, or any other relevant life events that may impact the ownership and/or distribution of the annuity policy.

It’s also important to think about the tax implications for everyone involved and how the funds should be allocated should something unexpected happen.

By understanding annuity beneficiaries and taking the time to name them correctly, an annuity owner can be sure his or her beneficiaries receive the funds from the annuity in accordance with their wishes.

Speak to an experienced estate planning attorney for more information about annuities and how naming the correct beneficiaries may help protect both you and those closest to you in the future.

Contact us to review your estate plan with one of our experienced estate planning attorneys.

Reference: Salisbury Post (Feb. 26, 2023) “What exactly is a beneficiary?”

 

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

Read more about the article When Is Life Insurance Taxable to Beneficiaries? Annapolis and Towson Estate Planning

When Is Life Insurance Taxable to Beneficiaries? Annapolis and Towson Estate Planning

When people purchase life insurance policies, they designate a beneficiary who will benefit from the policy’s proceeds. When the life insurance policyholder dies, the policy’s beneficiary then receives a payout known as the death benefit.

Yahoo Finance’s recent article entitled “Will My Beneficiaries Pay Taxes on Life Insurance?” says the big advantage of buying a life insurance policy is that, upon death, your beneficiaries can get a substantial lump sum payment without taxation, unless the amount of the life insurance pushes your estate above the applicable federal estate tax exemption. In that case, your estate will need to pay the tax.

While death benefits are usually tax-free, there are a few situations where the beneficiary of a life insurance policy may have to pay taxes on the lump sum payout. When you earn income from interest, it’s typically taxable. Therefore, if the beneficiary decides to delay the payout instead of receiving it right away, the death benefit may continue to accumulate interest. The death benefit won’t be taxed. However, the beneficiary will typically pay taxes on the additional interest.

If a life insurance policyholder decides to name their estate as the death benefit beneficiary, the estate could be subject to taxation. When you don’t designate a person as your beneficiary, the proceeds from the life insurance policy are subject to Section 2024 of the IRS code. That says if the gross estate incorporates proceeds of a life insurance policy, the value of a life insurance policy must be payable to the estate directly or indirectly or to named beneficiaries (if you had any “incidents of ownership” throughout the policy term).

The proceeds of a life insurance policy may also pass to the estate if the beneficiary dies, and there are no contingent beneficiaries. If you have a will in place, the proceeds will be paid out according to the terms of the will. If there’s no will in place, the probate court decides the way in which to distribute your assets.

The individual insured on a life insurance policy and the policyholder are usually the same person. The policyholder then names a beneficiary. However, a gift tax may apply if the insured, the policyholder and the beneficiary are three different parties. Because the IRS assumes the death benefit was a gift from the policyholder to the beneficiary, you might have to pay gift taxes on the death benefit.

Beneficiaries usually won’t have to pay taxes on life insurance proceeds. However, some situations can result in a taxable event. Be sure that your beneficiary designations are clearly outlined in the policy to avoid taxation.

Contact us to review your estate plan with one of our experienced estate planning attorneys.

Reference: Yahoo Finance (Jan. 17, 2023) “Will My Beneficiaries Pay Taxes on Life Insurance?”

 

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

Some Assets Better Left Outside of Will – Annapolis and Towson Estate Planning

A will is a document of last resort to transfer assets. There are many ways to transfer assets that would preempt the terms of a will. AARP’s recent article entitled “The Legal Limits of Your Will” provides a list of some major assets that often fall outside a will’s scope, along with tips for getting them to the people or organizations you want.

Retirement accounts. Those named as beneficiaries will get those assets, no matter what the will says. That’s because a beneficiary designation already informed the plan administrator how to handle the asset after your death. There’s no need for probate court involvement.

Life insurance policies. A life insurance policy’s beneficiary listing, not the will, determines who gets the proceeds. However, some states automatically revoke the beneficiary designation of an ex-spouse on a life insurance policy.

Bank accounts. If an account is titled as transfer on death (TOD), payable on death (POD) or joint tenancy with right of survivorship (JTWROS), those designations generally override the will. The account’s signature card would show if any of these designations applies. Ask the bank to look up your card if you aren’t sure. For individual accounts titled TOD or POD, the beneficiary can go to the bank with a death certificate (or death certificates) and proof of identity to transfer or collect the funds. JTWROS accounts become the property of the surviving account holder, who will need to show the bank a death certificate for the other account holder.

Real estate. If two spouses own a home jointly with right of survivorship or as tenants by the entirety, the property automatically is transferred to the remaining spouse without a court’s involvement. Real estate can also be transferred outside a will in certain states through a TOD deed, in which you name the beneficiary on the property.

Trusts. Any asset in a trust isn’t governed by a will. Therefore, trusts are another tool for distributing assets outside of probate court. However, after a trust is created, you must retitle accounts, change beneficiaries, or take other measures so that each asset you want to put into the trust will actually end up there.

Reference: AARP (September 29, 2022) “The Legal Limits of Your Will”

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

Read more about the article Don’t Miss Out on Estate Planning Opportunities – Annapolis and Towson Estate Planning

Don’t Miss Out on Estate Planning Opportunities – Annapolis and Towson Estate Planning

The recent article, “Rooting Out Estate Planning Opportunities,” from Financial Advisor offers a number of frequently missed opportunities in estate planning. Chief among them is failing to update estate plans, as changes to tax laws could mean that strategies used when your estate plan was initially created may no longer be relevant.

Before these opportunities can be discovered, it’s important to have a clear accounting of all of your assets, including a balance sheet of each “bucket” of resources: personal assets, trust assets, qualified plan assets, etc. The secret to success: meeting with your estate planning attorney every few years to review this entire picture to identify potential opportunities.

Once you have a sense of the whole picture, it’s easier to spot opportunities. For instance:

A Spousal Lifetime Access Trust, or SLAT, is an irrevocable trust used when a grantor wants to transfer part of their spousal exclusion into a SLAT to provide for their spouse and descendants. The SLAT keeps assets out of the donor’s estate and authorizes the trustee to make distributions to the grantor’s spouse, while at the same time it allows children or other heirs to be named as beneficiaries. Many couples use these trusts to protect assets from lawsuits.

There are some drawbacks to keep in mind. If one spouse is the beneficiary of the other spouse, all is well while both are living. However, if one spouse dies or becomes incapacitated and all assets are in the trust, the other may lose access to the trust created for the now deceased spouse.

The loss of access and the restrictions on SLAT distribution could be addressed by having both spouses purchase life insurance policies to fill the gap. At the same time, the couple would be well advised to look into disability and long-term care insurance.

Another situation is the use of a credit shelter trust, often called a bypass trust because it bypasses the surviving spouse’s estate. They are not as advantageous as they used to be because of today’s high estate tax exemption. They were also popular when the surviving spouse wasn’t able to use their deceased spouse’s estate tax exemption.

With the federal estate tax exemption up to more than $12 million, many who still have credit shelter trusts may find they don’t make sense in the short term. However, for now the federal estate exemption is set to drop down to $6 million when the Jobs and Tax Act sunsets. Depending upon your circumstances, it may be worthwhile to maintain this trust. Your estate planning attorney will be able to guide you.

Merging old trusts into new ones, or “decanting” them, makes sense in some situations. A new trust can be better crafted to align with the latest in tax laws and serve the same beneficiaries for as long as your state’s laws permit.

The two important takeaways here:

  • Estate planning requires a complete look at all of your assets and liabilities to make the best decisions on how to structure any estate and tax strategies; and
  • Estate plans need to be reviewed on a regular basis—every three to five years at a minimum—to ensure the strategies still work, despite any changes in tax laws and your situation.

If you believe your estate plan may need to be updated, contact us to schedule an appointment to review your current estate plan with one of our experienced estate planning attorneys.

Reference: Financial Advisor (Nov. 1, 2022) “Rooting Out Estate Planning Opportunities”

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

Is Your Business Included in Estate Plan? – Annapolis and Towson Estate Planning

Forbes’ recent article entitled “The Importance of Estate Planning When Building Your Business” says that every business that’s expected to survive must have a clear answer to this question. The plan needs to be shared with the current owners and management as well as the future owners.

The common things business owners use to put some protection in place are buy-sell agreements, key-person insurance and a succession plan. These are used to make certain that, when the time comes, there’s both certainty around what needs to happen, as well as the funding to make sure that it happens.

If your estate plan hasn’t considered your business interests or hasn’t been updated as the business has developed, it may be that this plan falls apart when it matters the most.

Buy-sell insurance policies that don’t state the current business values could result in your interests being sold far below fair value or may see the interests being bought by an external party that threatens the business itself.

If your agreements are not in place, or are challenged by the IRS, your estate may find itself with a far greater burden than anticipated.

Your estate plan should be reviewed regularly to account for changes in your situation, the value of your assets, the status of your (intended) beneficiaries and new tax laws and regulations.

There are a range of thresholds, exemptions and rules that apply. Adapting the plan to make best use of these given your current situation is well worth the effort. Contact us to talk to one of our experienced estate planning attorneys about your plan.

Including your estate planning as part of your general financial planning and management will frequently provide a valuable guidance in terms of how best to set up and manage your broader financial affairs.

Financial awareness can not only inform how you grow your wealth now but also ensure that it gets passed on effectively. The same is also true of your business.

A tough conversation about what happens in these situations can be a reminder to management that over dependence on any key person is not something to take for granted.

Reference: Forbes (Sep. July 12, 2019) “The Importance of Estate Planning When Building Your Business”

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

Ask Mom if She has a Will – Annapolis and Towson Estate Planning

The family was baffled. Not only was the will out of date, but it was also unsigned, and the person named as executor had died a decade before their mother died. Grandchildren born after the will was created were not mentioned and personal possessions left to some people in the will had been given away years ago.

This scenario, as described in the article “Mom, Do You Have a Will?” from Next Avenue, is not unusual because many older adults and their children are equally reticent to discuss death. It’s a hard topic to address, but without these conversations, how can you make sure the transition after they pass is smooth?

Who needs a will? Pretty much everyone does. If your parents don’t have a will, here are some talking points to remind them of why it matters:

  • If you are part of a blended family, estate planning avoids either a full or partial disinheritance of a surviving spouse or their children.
  • If there are minor children or adult children with special needs, a will is used to appoint guardians. With no will, the court makes decisions about who raises children or cares for a special needs individual.
  • If yours is a fighting family (you know who you are), and if you want certain things to go to certain people, there needs to be an updated will.

Single people need a plan for their assets, especially if they are in a committed relationship but not married. Many state inheritance laws make no provision for a domestic partner. If a relationship is recognized before a loved one dies the remaining partner can access their right to property or benefits.

When someone dies without a will or a living trust, known as intestate succession, assets may be distributed according to rules set out in state law, which vary state to state and may not be what they would have wanted.

When asked if there is a will, some may say they are prepared. However, as in the example, this may or may not be true. Their will may be old, no longer relevant to their situation or may not have been signed.

Clarifying the status of an older adult’s will is important to a smoother transition of assets and needs to be addressed when they are of sound mind and able to make their own decision about their estate.

When preparing to have a discussion with someone who is active and healthy, the conversation is easier. Ask if they have a will and what their wishes are after they have passed. You can explain how these steps are essential to creating their legacy and protect their family from estate taxes and expensive court oversight.

When a person is seriously ill, this is admittedly a harder conversation. Acknowledge the difficulty and let them know they can stop the discussion if necessary. It may take more than a few conversations to get to everything. Discuss these issues with respect and empathy. Offer ideas and options and steer clear of any ultimatums.

Contact us to talk with one of our experienced estate planning attorneys who will explain what you need for your specific family.

Reference: Next Avenue (Sep. 14, 2022) “Mom, Do You Have a Will?”

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

What Penalties Hurt Retirement Accounts? – Annapolis and Towson Estate Planning

Money Talks News’ recent article entitled “3 Tax Penalties That Can Ding Your Retirement Accounts” says make one wrong move, and Uncle Sam may ask for some explanations. Let’s review the three biggest mistakes people make.

Excess IRA contribution penalty. Contributing too much to an individual retirement account (IRA) can mean a penalty from the IRS. You can do this if you contribute more than the applicable annual contribution limit for your IRA or improperly rolling over money into an IRA. The IRS states, “Excess contributions are taxed at 6% per year as long as the excess amounts remain in the IRA. The tax can’t be more than 6% of the combined value of all your IRAs as of the end of the tax year.”

The IRS lets you remedy your mistake before any penalties will be applied. You must withdraw the excess contributions — and any income earned on those contributions — by the due date of your federal income tax return for that year.

Taking money out too soon from a retirement account. If you withdraw funds from your IRA before the age of 59½, you might be subject to paying income taxes on the money, plus an additional 10% penalty. However, there are several exceptions when you’re permitted to take early IRA withdrawals without penalties: if you lose your employment, you’re allowed to tap your IRA early to pay for health insurance premiums.

The same penalties apply to early withdrawals from retirement plans like 401(k)s, but again, there are exceptions to the rule that allow you to make early withdrawals without penalty. The exceptions that let you make early retirement plan withdrawals without penalty may differ from the exceptions that allow you to make early IRA withdrawals without penalty.

Missed RMD penalty. Taxpayers were previously obligated to take required minimum distributions — also known as RMDs — from most types of retirement accounts beginning the year they turn 70½. However, the Secure Act of 2019 bumped up that age to 72.

The consequences of not making these mandatory withdrawals still apply. If you fail to take your RMDs starting the year you turn 72, you face harsh penalties. The IRS says that if you don’t take any distributions, or if the distributions aren’t large enough, you may have to pay a 50% excise tax on the amount not distributed as required.

Reference: Money Talks News (March 1, 2022) “3 Tax Penalties That Can Ding Your Retirement Accounts”

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

Read more about the article What Is a QTIP Trust? – Annapolis and Towson Estate Planning

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

A Qualified Terminable Interest Property Trust, or QTIP, is a trust allowing the person who makes the trust (the grantor) to provide for a surviving spouse while maintaining control of how the trust’s assets are distributed once the surviving spouse passes, as explained in the article “QTIP Trusts” from Investopedia.

QTIPs are irrevocable trusts, commonly used by people who have children from prior marriages. The QTIP allows the grantor to take care of their spouse and ensure assets in the trust are eventually passed to beneficiaries of their own choosing. Beneficiaries could be the grantor’s offspring from a prior marriage, grandchildren, other family members or friends.

In addition to providing the surviving spouse with income, the QTIP also limits applicable estate and gift taxes. The property within the QTIP trust provides income to the surviving spouse and qualifies as a marital deduction, meaning the value of the trust is not taxable after the death of the first spouse. Rather, the property in the QTIP trust will be included in the estate of the surviving spouse and subject to estate taxes depending on the value of their own assets and the estate tax exemption in effect at the time of death.

The QTIP can also assert control over how assets are handled when the surviving spouse dies, as the spouse never assumes the power of appointment over the principal. This is especially important when there is more than one marriage and children from more than one family. This prevents those assets from being transferred to the living spouse’s new spouse if they should re-marry.

A minimum of one trustee must be appointed to manage the trust, although there may be multiple trustees named. The trustee is responsible for controlling the trust and has full authority over assets under management. The surviving spouse, a financial institution, an estate planning attorney or other family member or friend may serve as a trustee.

The surviving spouse named in a QTIP trust usually receives income from the trust based on the trust’s income, similar to stock dividends. Payments may only be made from the principal if the grantor allows it when the trust was created, so it must be created to suit the couple’s needs.

Payments are made to the spouse as long as they live. Upon their death, the payments end, and they are not transferable to another person. The assets in the trust then become the property of the listed beneficiaries.

The marital trust is similar to the QTIP, but there is a difference in how the assets are controlled. A QTIP allows the grantor to dictate how assets within the trust are distributed and requires at least annual distributions. A marital trust allows the surviving spouse to dictate how assets are distributed, regular distributions are not required, and new beneficiaries can be added. The marital trust is more flexible and, accordingly, more common in first marriages and not in blended families.

Your estate planning attorney will explain further how else these two trusts are different and which one is best for your situation. There are other ways to create trusts to control how assets are distributed, how taxes are minimized and to set conditions on benefits. Each person’s situation is different, and there are trusts and strategies to meet almost every need imaginable.

Contact us to determine which trust is best for your family and situation with one of our experienced estate planning attorneys.

Reference: Investopedia (Aug. 14, 2022) “QTIP Trusts”

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