Who Is the Best Person for Executor? – Annapolis and Towson Estate Planning

Several critical estate planning documents give another person—known as an agent or personal representative—the legal right to act on another person’s behalf. They include wills, trusts, powers of attorney and advance health care directives, as described in a recent article titled “The nomination of trustees, executors and agents” from Lake County Record-Bee.

Your will is only activated after you die. The will and executor then have to be approved by the court. Many people think being named as an executor confers instant authority, but this is not true. Only when the will has been deemed valid by the court, does the executor have the power to act on behalf of the decedent.

After death, the court is petitioned for a court order appointing the executor and then letters testamentary are signed by the appointed executor. An executor then becomes active as an officer of the court with a fiduciary duty to act as personal representative of the decedent’s estate.

If the named person declines to serve, the will should have a secondary person named as executor, who can then request the appointment be validated by the court. Others can petition the court to be appointed. However, it is best to name two people of your choice in your will.

A trust is a separate legal entity with a trustee who is in charge of the trust and its assets. If a revocable will is created, the trustee is usually the same person who has the trust created, also known as the grantor. For an irrevocable trust, the trustee is someone other than the grantor. The appointment does not become official until the appointment is accepted, usually through signing a document or by the successor trustee taking action on behalf of the trust.

Just as an executor might not accept their role, a trustee can decide not to accept the nomination. However, once they do, they have a fiduciary duty to put the well-being of the trust first and manage it properly. You can’t accept the role and then walk away without serious consequences.

Powers of attorney are used while a person is living. The power of attorney’s effective date depends upon what kind of POA it is. A durable power of attorney is effective the moment it is signed. A springing POA sets forth terms upon which the POA becomes active, usually incapacity. The challenge with a Springing POA is that approval by the court may be required, usually with proof from a treating physician concerning the person’s condition.

Similarly, the health care power of attorney appoints a person who acts on behalf of another as their agent for health issues. They can decline the position. However, once they agree to take on the position, they are responsible for their actions.

If the POAs decline to serve and there is no secondary person named, or if all named POAs decline to serve, the family will need to apply for a conservatorship (also known as guardianship). This is a lengthy and expensive process requiring a thorough investigation of the situation and the person who needs representation. It can be contested if the person does not want to give up their independence, or by family members who feel it is not needed.

These are commonly used terms in estate planning. However, they are not always understood clearly. Your estate planning attorney will be able to address specific responsibilities and requirements, since every state has laws and appointments vary by state.

Contact our office to schedule a consultation with one of our experienced attorneys to discuss who the right people would be to serve as your Executor, Trustee, Power of Attorney, and/or Health Care Agent.

Reference: Lake Country Record-Bee (July 30, 2022) “The nomination of trustees, executors and agents”

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What are Alternatives to Guardianship? – Annapolis and Towson Estate Planning

Guardianships are drastic and very invasive. They strip individuals of their legal autonomy and establish the guardian as the sole decision maker. To become a guardian requires strong evidence of legal incapacity, and approval by a judge, explains an article titled “Guardianships Should Be a Last Resort–Consider These Less Draconian Options First” from Kiplinger. They should not be undertaken unless there is a serious need to do so. Once they are in place, guardianships are difficult to undo.

If an elderly person with dementia failed to make provisions durable powers of attorney for health care and for financial matters before becoming ill, a guardianship may be the only ways to protect the person and their estate. There are also instances where an aging parent is unable to care for themselves properly but refuses any help from family members.

Another scenario is an aging grandparent who plans to leave funds for minor beneficiaries. Their parents will need to seek guardianships, so they can manage the money until their children reach the age of majority.

Laws vary from state to state, so if you might need to address this situation, you will need to speak with an estate planning attorney in the elderly parent or family member’s state of residence. For the most part, each state requires less restrictive alternatives to be attempted before guardianship proceedings are begun.

Alternatives to guardianship include limited guardianship, focused on specific aspect of the person’s life. This can be established to manage the person’s finances only, or to manage only their medical and health care decisions. Limited guardianships need to be approved by a court and require evidence of incapacity.

Powers of attorney can be established for medical or financial decisions. This is far less burdensome to achieve and equally less restrictive. A Healthcare Power of Attorney will allow a family member to be involved with medical care, while the Durable General Power of Attorney is used to manage a person’s personal financial affairs.

Some families take the step of making a family member a joint owner on a bank, home, or an investment account. This sounds like a neat and simple solution, but assets are vulnerable if the co-owner has any creditor issues or risk exposure. A joint owner also does not have the same fiduciary responsibility as a POA.

An assisted decision-making agreement creates a surrogate decision-maker who can see the incapacitated person’s financial transactions. The bank is notified of the arrangement and alerts the surrogate when it sees a potentially suspicious or unusual transaction. This does not completely replace the primary account holder’s authority. However, it does create a limited means of preventing exploitation or fraud. The bank is put on notice and required to alert a second person before completing potentially fraudulent transactions.

Trusts can also be used to protect an incapacitated person. They can be used to manage assets, with a contingent trustee. For an elderly person, a co-trustee can step in if the grantor loses the capacity to make good decisions.

Planning in advance is the best solution for incapacity. Talk with an experienced estate planning attorney to protect loved ones from having to take draconian actions to protect your best interests.

Reference: Kiplinger (July 7, 2022) “Guardianships Should Be a Last Resort–Consider These Less Draconian Options First”

 

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What’s Involved with Being a Trustee? – Annapolis and Towson Estate Planning

There is an old saying that the two best days in a boat owner’s life are the day they buy their boat and the day they sell it.

Forbes’ recent article entitled “How To Be An Effective Trustee” says that a similar notion applies to being a trustee – it is an honor to be named and then a huge relief when it is over. That is because being a trustee is difficult.

Remember that a trust is a fiduciary relationship in which one party (the trustor) gives another party (the trustee) the right to hold title to property or assets for the benefit of a third party (the beneficiary). Trusts are created to provide legal protection for the trustor’s assets, to make certain those assets are distributed according to the wishes of the trustor, and to save time, reduce paperwork and, in some cases, avoid or reduce inheritance or estate taxes.

Being a trustee requires knowledge about a wide range of topics, including:

  • The trustee’s fiduciary duties, which include loyalty, impartiality, duty of care, protection of trust property, enforcement of claims and the duty to inform and account to beneficiaries, among others (violation of these duties exposes the trustee to liability).
  • Understanding the details of the trust, like the specifics of the distribution instructions.
  • Investments and the ability to engage and monitor investment managers.
  • Administrative matters, such as record keeping and principal and income accounting.
  • Estate planning, trusts and the basics of the estate, gift and generation skipping taxes.
  • Income tax, including how trusts are taxed both by the federal government and the state.

A trustee must also be able to productively communicate and work with the beneficiaries on their financial wellness and distribution needs, which is an area that can be full of conflict.

It is a daunting list. Talk with an experienced estate planning attorney to discuss your situation in detail.

Reference: Forbes (May 31, 2022) “How To Be An Effective Trustee”

 

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What Is the Best Asset Protection? – Annapolis and Towson Estate Planning

Everyone should have an estate plan incorporating asset protection and tax planning. Most people do not realize they live with a certain level of risk, and it can be addressed in their estate plan, says an article from Forbes titled “You Need An Asset Protection Plan Not Just A Will.”

Being aware of these issues and knowing that they need to be addressed is step one. Here is an illustration: a married couple in their 50s have two teenage children. They are diligent people and made sure to have an estate plan created early in their marriage. It has been updated over the years, adding guardians when their children were born and making changes as needed. They have worked hard and also have been fortunate. They own a vacation home they rent most of the year and a small retail business and both of their teenage children drive cars. They do not see a reason to tie asset protection and risk management into their estate plan. No one they know has ever been sued.

With assets in excess of $4 million and annual income of $350,000, they are a risk target. If one of their children were in an auto accident, they might be liable for any damages, especially if they own the cars the children drive.

The vacation home, if not held in a Limited Liability Company (LLC) or another type of entity, could lead to exposure risks too. If the property is not insured as an income-producing business property and something occurs on the property, the insurance company could easily refuse the claim if the house is insured as a residence.

If their retail business is owned by an LLC or another properly prepared entity, they have personal protection. However, if they have not followed the laws of their state for a business, they might lose the protection of the business structure.

Retirement assets also need to be protected. If they have employees and a retirement plan and are not adhering strictly to all of the requirements, their retirement plan qualification could easily be placed in jeopardy. Their estate planning attorney should be asked to review the pension plan and how it is being administered to ensure that their retirement is not at risk.

There are several reasons why tax oriented trusts would make a lot of sense for this couple. While current gift estate and GST (Generation Skipping Tax) exemptions are historically high right now, they won’t be forever.

This couple would be well-advised to speak with their estate planning attorney about the use of trusts, to serve several distinct functions. Trusts can shelter assets from litigation, decrease or minimize estate taxes when the estate tax changes in 2026 and possibly protect life insurance policies.

Estate planning and risk management are not only for people with mansions and global businesses. Regular people, business owners and wage earners in all tax brackets need an estate plan to address their legacy, protect their assets and defend their estate against risks.

Reference: Forbes (June 7, 2022) “You Need An Asset Protection Plan Not Just A Will”

 

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What Is Better, a Trust or a Will? – Annapolis and Towson Estate Planning

Estate plans come in all sizes and shapes. One of the decisions in creating an estate plan is whether a trust should be part of your plan, as detailed in this recent article titled “Trust vs. Will: What They Share (And 6 Ways They are Different)” from Yahoo! Money. Both trusts and wills give control over how assets are distributed. However, there are differences.

A trust is a tool for asset protection during and after life, created by an estate planning attorney. When the trust is created, assets are transferred into the trust, which is a legal entity. If it is a revocable trust, typically you are the grantor, trustee, and beneficiary. There are also other roles, like the successor trustee, who is the trustee if the primary is incapacitated and the beneficiary, the person who receives the assets. The trustee is a fiduciary and responsible for managing the assets for the best interest of the beneficiary.

There are many different types of trusts, but they mainly fall into two categories:

Revocable or living trusts allow the grantor full control of the trust. The trust assets are outside of the probate estate. Revocable trusts can be changed, assets may be added and beneficiaries can be changed. However, there is no protection from creditors and no unique tax benefits.

Irrevocable living trusts transfer assets upon death without going through probate. They provide stronger asset protection. Assets in an irrevocable trust are not accessible to creditors and, depending on how they are set up, may place assets outside of the taxable estate.

There are also many specialized trusts. A Special Needs Trust is used to care for a person with special needs, while maintaining their government benefits. A spendthrift trust can be used to leave assets for people who are not capable (or interested) in managing funds responsibly. Trusts provide significantly more control over assets after death than wills. They may also be harder to contest after death, since they go into effect while you are living and may remain in effect for many years.

Wills are used to provide specific directions about how you want to distribute assets upon your death. The will goes through probate, where the court determines if the will is valid, if the executor is acceptable and then the will becomes part of the public record. Creditors can make claims against the estate, family members may challenge the will and depending upon where you live, it could take many months or several years to settle the estate.

How are trusts and wills different?

1—Trusts can be more complex than wills and require management. The will goes into effect upon your death, and you can change a will whenever you want. You also can change a trust whenever you want, but only if it is revocable.

2—Trusts go into effect immediately and they need to be funded, so you will have to transfer assets to the trust.

3—A trust is a separate legal entity, so assets are shielded from estate and inheritance taxes. Certain trusts do pay taxes, so speak with your estate planning attorney about how this may work for you.

4—Certain trusts put assets well beyond the reach of creditors. However, a trust may not be created solely for this purpose, since it could be deemed invalid by a court. However, in most cases, trusts work well to protect assets to pass them along to beneficiaries. A will offers no such protection, unless a “testamentary” trust is created under the will. This will created trust can operate exactly as an inheritance trust created for loved ones after you die and your revocable trust becomes irrevocable.

5—Planning for incapacity should be part of any estate plan. Once a trust is set up and funded, the assets immediately enjoy the protection by having a successor trustee to be in charge of assets if the grantor/trustee becomes incapacitated. A will only addresses what happens after you die, not what happens if you become too sick or are injured and cannot manage your affairs.

6—The trust is the winner when it comes to control over assets after death, if you want to avoid probate. You can instruct the trustee to distribute funds to beneficiaries only under certain conditions and terms. If you want beneficiaries to finish college, for instance, you can direct the trustee to distribute a certain amount of money only after the person completes an undergraduate degree. You can also use the money to pay for their college education.

For most people, a combination of a will and trust works to control assets, prepare for incapacity and, just as importantly, provide peace of mind.

Bottom line: estate planning is complicated, not a do-it-yourself project and should be done with the counsel of an experienced estate planning attorney.

Reference: Yahoo! Money (June 5, 2022) “Trust vs. Will: What They Share (And 6 Ways They are Different”

 

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

What Happens Financially when a Spouse Dies? – Annapolis and Towson Estate Planning

Losing a beloved spouse is one of the most stressful events in life, so it is one we tend not to talk about. However, planning for life after the passing of a spouse needs to be done, as it is an eventuality. According to a recent article from AARP Magazine, “The Financial Penalty of Losing Your Spouse,” the best time to plan for this is before your spouse dies.

You will have the most options while your spouse is still living. Estate plans, wills, trusts, and beneficiary designations can still be updated, as long as your spouse has legal capacity. You can make sure you will still have access to savings, retirement, and investment accounts. Create a list of assets, including information needed to access digital accounts.

Make sure that your credit cards will be available. Many surviving spouses only learn after a death whether credit cards are in the spouse’s name or their own name.

Get help from professionals. Review your new status with your estate planning attorney, CPA and financial advisor. This includes which accounts need to be moved and which need to be renamed. Can you afford to maintain your home? An experienced professional who works regularly with widows or widowers can provide help, if you are open to asking.

A warning note: Be careful about new “friends.” Widows are key targets of scammers, and thieves are very good at scamming vulnerable people.

Be strategic about Social Security. If both partners were drawing benefits, the surviving spouse may elect the higher benefit going forward. If you have not claimed yet, you have options. You can take either a survivor’s benefit based on your spouse’s work history, or the retirement benefit based on your own work history. You will be able to switch to the higher benefit, if it ends up being higher, later on.

Be careful about your spouse’s 401(k) and IRA. If you are in your 50s, you are allowed to roll your spouse’s 401(k) or IRA into your own account. However, do not rush to move the 401(k). You can make a withdrawal from a late spouse’s 401(k) without penalty. However, it will be taxable as ordinary income. If you move the 401(k) to a rollover IRA, you will have to pay taxes plus a 10% penalty on any withdrawals taken from the IRA before you reach 59 ½. Your estate planning attorney can help with these accounts.

Use any advantages available to you. The IRS will still let you file jointly in the year of your spouse’s death. Tax rates are better for married filers than for singles. Any taxable withdrawals you’ll need to take from 401(k)s or IRAs may be taxed at a lower rate during this year. You may decide to use the money to create a rollover Roth IRA or to put some funds into a non-tax deferred account.

Do not rush to do anything you do not have to do. Selling your home, writing large checks to children, or moving are all things you should not do right now. Decisions made in the fog of grief are often regretted later on. Take your time to mourn, adjust to your admittedly unwanted new life and give yourself time for this major adjustment.

Reference: AARP Magazine (May 13, 2022) “The Financial Penalty of Losing Your Spouse”

 

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Should You have a GRAT? – Annapolis and Towson Estate Planning

Estate planning includes using various methods to reduce gift and estate taxes, as described in a recent article titled “Grantor Retained Annuity Trust Questions Answered” from Entrepreneur. GRATs are one type of irrevocable annuity trust used by estate planning attorneys to reduce taxes.

An annuity is a financial product, often sold by insurance companies, where you contribute funds or assets to an account, referred to as premiums. The trust distributes payments to a beneficiary on a regular basis. If you have a Grantor-Retained Annuity Trust (GRAT), the person establishing the trust is the Grantor, who receives the annuities from the trust.

The GRAT payments are typically made annually or near the anniversary of the funding date. However, they can be made any time within 105 days after the annuity date. Payments to the GRAT may not be made in advance, so consider your cash flow before determining how to fund a GRAT. For this to work, the grantor must receive assets equal in value to what they put into the GRAT. If the assets appreciate at a rate higher than the interest rate, it is a win. At the end of the GRAT term, all appreciation in the assets is gifted to the named remainder beneficiaries, with no gift or estate tax.

Here is a step-by-step look at how a GRAT is set up.

  • First, an individual transfers assets into an irrevocable trust for a certain amount of time. It is best if those assets have a high appreciation potential.
  • Two parts of the GRAT value are the annuity stream and the remainder interest. An estate planning attorney will know how to calculate these values.
  • Annuity payments are received by the grantor. The trust must produce a minimum return at least equal to the IRS Section 7520 interest rate, or the trust will use the principal to pay the annuity. In this case, the GRAT has failed, reverting the trust assets back to the grantor.
  • Once the final annuity payment is made, all remaining assets and asset growth are gifted to beneficiaries, if the GRAT returns meet the IRS Section 7520 interest rate requirements.

The best candidates for GRATS are those who face significant estate tax liabilities at death. An estate freeze can be achieved by shifting all or some of the appreciation to heirs through a GRAT.

A GRAT can also be used to permit an S-Corporation owner to preserve control of the business, while freezing the asset’s value and taking it out of the owner’s taxable estate. Caution is required here, because if the owner of the business dies during the term of the GRAT, the current stock value is returned to the owner’s estate and becomes taxable.

GRATs are most beneficial in transferring large amounts of money to beneficiaries, while paying little or no gift tax. A GRAT allows you to give a beneficiary more than $16,000 without triggering a gift tax, which is especially useful for wealthy individuals with healthy estates.

There are some downsides to GRATs. When the trust term is over, remaining assets become the property of the beneficiaries. Setting a term must be done mindfully. If you have a long-term GRAT of 20 years, it is more likely that you may experience serious health challenges as you age, and possibly die before the term is over. If the assets in the GRAT depreciate below the IRS’s assumed return rate, any benefits of the GRAT are lost.

Reference: Entrepreneur (March 17, 2022) “Grantor Retained Annuity Trust Questions Answered”

 

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Can I Plan My Estate to Avoid Leaving Residual Assets? – Annapolis and Towson Estate Planning

When looking into your estate plan, you see the term “residuary estate.” This is any part of your estate that has not been distributed to your heirs through a will. It is also called estate residue or residual estate. However, it simply means assets that are left over once your will has been read, the assets have been distributed to your heirs and any final expenses have been paid.

Proper estate planning can help you avoid leaving residual assets behind, says Yahoo Finance’s recent article entitled “Residuary Estate Definition and Example.” An experienced estate planning attorney can help you select a structure for your estate that accomplishes your objectives.

A will lets you state how you want your assets to be divided among your heirs when you pass away. However, it is possible that not all of your assets will make it into your will for some reason. Any assets that are not included in your will or distributed through a trust automatically becomes part of your residuary estate when you pass away.

Residual estates can be created without advance planning. For example, your heirs may be left to deal with a residuary estate if:

  • You neglected to include certain assets in your will;
  • You acquired new assets after drafting your will and failed to amend the document for the distribution of these assets; or
  • Someone you named in your will dies before you or is unable to receive their inheritance for some other reason.

Assets that are designed to have a named beneficiary but do not have one, can also be included in the residuary estate.

When a residuary estate exists, it can complicate the probate process for your family. Any unclaimed or otherwise overlooked assets would be distributed according to the state’s inheritance laws, after any estate taxes, outstanding debts or final expenses have been paid.

You should also know that it is possible to have a residuary beneficiary of a living trust. This person would receive any property or assets transferred to the trust that were not designated for specific beneficiaries. If you create a trust properly, there should be a provision for each beneficiary you want to be included and which assets they should receive. However, you could still run into issues if a named beneficiary dies, and you haven’t named anyone as a residuary beneficiary.

A residuary estate is something you may need to plan for when creating a will or trust. Fortunately, it is pretty easy to do so by including the proper wording in your will and trust documents. Ask an estate planning attorney to eliminate confusion and to plan your estate properly.

Reference: Yahoo Finance (Dec. 30, 2021) “Residuary Estate Definition and Example”

 

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What are the Current Gift Tax Limits? – Annapolis and Towson Estate Planning

The expanded estate and gift tax exemptions expire at the end of 2025, which is not as far away as it seemed in 2017. For 2021, the lifetime exemption for both gift and estate taxes was $11.7 million per individual, and in 2022, an inflation adjustment boosted it to $12.06 million per person. The increase is set to lapse in 2025, according to the article “Estate and Gift Taxes 2021—2022: What’s New This Year and What You Need to Know” from The Wall Street Journal.

However, in 2019 the Treasury Department and the IRS issued “grandfather” regulations to allow the increased exemption to apply to earlier gifts, if Congress reduces the exemption in the future.

Let’s say Josh gives assets of $11 million to a trust to benefit heirs in 2020. The transfer had no gift tax because it was under the $11.58 million for 2020. If Congress lowers the exemption to $5 million per person and Josh dies in 2023, when the lower exemption is in effect, as the law now stands, the estate will not owe tax on any portion of his gift to the trust, even if $6 million is above the $5 million lifetime limit in effect at the time of his death.

Current law also has investment assets held at the time of death exempt from capital gains tax, known as the “step up in basis.” If Robin dies owning shares of stock worth $100 each, originally purchased for $5 each and held in a taxable account, the estate will not owe capital gains tax on the $95 growth of each share. The shares will go into Robin’s estate at their full market value of $100 each. Heirs who receive the shares have a cost basis of $100 as the starting point for measuring taxable gains or losses when they sell.

The annual gift tax exemption has risen to $16,000 per donor, per recipient, for 2022. A generous person can give someone else assets up to the limit every year, free of federal gift taxes. A married couple with two married children and six grandchildren could give away as much as $320,000 to their ten family members, plus $32,000 to other individuals, if they wished.

Annual gifts are not deductible for income tax purposes. They also do not count as income for the recipient. Gifts above the exclusion are subtracted from the giver’s lifetime gift and estate tax exemption. However, a married couple could use “gift splitting” to let one spouse make up to $32,000 of tax-free gifts per recipient on behalf of both partners. A gift tax return must be filed in this case to document the transaction for the IRS.

If the gift is not cash, the giver’s cost basis carries over to the recipient. If someone gives a family member a share of stock worth $1,000 originally acquired for $200, neither the giver nor the recipient owes tax on the gift. However, if the recipient sells, the starting point for measuring taxable gain will be $200. If the share is sold for $1,200, for instance, the recipient’s taxable gain would be $1,000.

For some families, “bunching” gifts for five years of annual $16,000 gifts to a 529 education account makes good sense. A gift tax return should also be filed in this case. Your estate planning attorney will be able to guide you in creating a gifting strategy to align with your estate plan and minimize taxes.

Reference: The Wall Street Journal (March 10, 2022) “Estate and Gift Taxes 2021—2022: What’s New This Year and What You Need to Know.”

 

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Is Estate Planning Affected by Property in Two States? – Annapolis and Towson Estate Planning

Cleveland Jewish News’ recent article titled “Use attorney when considering multi-state estate plan” says that if a person owns real estate or other tangible property (like a boat) in another state, they should think about creating a trust that can hold all their real estate. You do not need one for each state. You can assign or deed their property to the trust, no matter where the property is located.

Some inherited assets require taxes be paid by the inheritors. Those taxes are determined by the laws of the state in which the asset is located.

A big mistake that people frequently make is not creating a trust. When a person fails to do this, their assets will go to probate. Some other common errors include improperly titling the property in their trust or failing to fund the trust. When those things occur, ancillary probate is required.  This means a probate estate needs to be opened in the other state. As a result, there may be two probate estates going on in two different states, which can mean twice the work and expense, as well as twice the stress.

Having two estates going through probate simultaneously in two different states can delay the time it takes to close the probate estate.

There are some other options besides using a trust to avoid filing an ancillary estate. Most states let an estate holder file a “transfer on death affidavit,” also known as a “transfer on death deed” or “beneficiary deed” when the asset is real estate. This permits property to go directly to a beneficiary without needing to go through probate.

A real estate owner may also avoid probate by appointing a co-owner with survivorship rights on the deed. Do not attempt this without consulting an attorney.

If you have real estate, like a second home, in another state (and) you die owning that individually, you are going to have to probate that in the state where it is located. It is usually best to avoid probate in multiple jurisdictions, and also to avoid probate altogether.

A co-owner with survivorship is an option for avoiding probate. If there is no surviving spouse, or after the first one dies, you could transfer the estate to their revocable trust.

Each state has different requirements. If you are going to move to another state or have property in another state, you should consult with a local estate planning attorney.

Reference: Cleveland Jewish News (March 21, 2022) “Use attorney when considering multi-state estate plan”

 

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