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Stepped-Up Basis Rules Can Ease the Income Tax Bite of an Inheritance
With the federal gift and estate tax exemption amount set at $13.99 million for 2025, most people won’t be liable for these taxes. However, capital gains tax on inherited assets may cause an unwelcome tax bite.
The good news is that the stepped-up basis rules can significantly reduce capital gains tax for family members who inherit your assets. Under these rules, when your loved one inherits an asset, the asset’s tax basis is adjusted to the fair market value at the time of your death. If the heir later sells the asset, he or she will owe capital gains tax only on the appreciation after the date of death rather than on the entire gain from when you acquired it.
Primer on capital gains tax
When assets such as securities are sold, any resulting gain generally is a taxable capital gain. The gain is taxed at favorable rates if the assets have been owned for longer than one year. The maximum tax rate on a long-term capital gain is 15% but increases to 20% for certain high-income individuals.
Conversely, a short-term capital gain is taxed at ordinary income tax rates as high as 37%. Gains and losses are accounted for when filing a tax return, so high-taxed gains may be offset wholly or partially by losses.
The amount of a taxable gain is equal to the difference between the basis of the asset and the sale price. For example, if you acquire stock for $10,000 and then sell it for $50,000, your taxable capital gain is $40,000.
These basic rules apply to capital assets owned by an individual and sold during his or her lifetime. However, a different set of rules applies to inherited assets.
How stepped-up basis works
When assets are passed on through inheritance, there’s no income tax liability until the assets are sold. For these purposes, the basis for calculating gain is “stepped up” to the value of the assets on the date of your death. Thus, only the appreciation in value since your death is subject to tax because the individual inherited the assets. The appreciation during your lifetime goes untaxed.
Securities, artwork, bank accounts, business interests, investment accounts, real estate and personal property are among the assets affected by the stepped-up basis rules. However, these rules don’t apply to retirement assets such as 401(k) plans or IRAs.
To illustrate the benefits, let’s look at a simplified example. Dan bought XYZ Corp. stock 10 years ago for $100,000. In his will, he leaves all the XYZ stock to his daughter, Alice. When Dan dies, the stock is worth $500,000. Alice’s basis is stepped up to $500,000.
When Alice sells the stock two years later, it’s worth $700,000. She must pay the maximum 20% rate on her long-term capital gain. On these facts, Alice has a $200,000 gain. With the 20% capital gains rate, she owes $40,000. Without the stepped-up basis, her tax on the $600,000 gain would be $120,000.
What happens if an asset declines in value after the deceased acquired it? The adjusted basis of the asset the individual inherits is still the value on the date of death. This could result in a taxable gain on a subsequent sale if the value rebounds after death, or a loss if the asset’s value continues to decline.
Turn to us for help
Without the stepped-up basis rules, your beneficiaries could face much higher capital gains taxes when they sell their inherited assets. If you have questions regarding these rules, please contact FMD.
Estate planning Q&A: Guardianship
If you’re the parent of a newborn, toddler or older child, you may be thinking about naming a guardian for him or her. This can be a difficult decision, especially if you have many choices or, on the other hand, no one you can trust.
The following are answers to common questions about guardianship:
Q. How do I choose a guardian for my child?
A. In most cases involving a single parent or a parenting couple, you designate the guardian in a legally valid will. This means the guardian will raise your child if you (or you and your partner) should die unexpectedly. A similar provision may address incapacitation issues.
Choose the best person for the job and designate an alternate in case your first choice can’t fulfill the duties. Parents frequently name a married couple who are relatives or close friends. If you take this approach, ensure both spouses have legal authority to act on the child’s behalf.
Also, select someone who has the necessary time and resources for this immense responsibility. Although it’s usually not recommended, you can name different guardians for different children.
In addition, consider the living arrangements and the geographic area where your child would reside if the guardian assumed legal responsibilities. Do you really want to uproot your child and send him or her to live somewhere far away from familiar surroundings?
Q. Do I have to justify my decision?
A. No. However, it can’t hurt — and it could help — to prepare a letter of explanation for the benefit of any judge presiding over a guardianship matter for your family. The letter can provide insights into your choice of guardian.
Notably, the judge will apply a standard based on the child’s “best interests,” so you should explain why the guardian you’ve named is the optimal choice. Focus on aspects such as the child’s preferences, who can best meet the child’s needs, the moral and ethical character of the potential guardian, and the guardian’s relationship to the child.
Whether you’re naming a guardian for a child in your will or you’re attempting to become a guardian yourself, you must adhere to the legal principles under state and local law. Fortunately, FMD can provide any necessary guidance.
Estate Planning for Residential Real Estate with a Qualified Personal Residence Trust
Do you own your principal residence? If so, you’re likely aware that you can benefit from the home’s build-up in equity, realize current tax breaks and pocket a sizable tax-exempt gain when you sell it.
And from an estate planning perspective, it may be beneficial to transfer ownership of your home to a qualified personal residence trust (QPRT). Using a QPRT, you can continue to live in the home for the duration of the trust’s term. When the term ends, the remainder interest passes to designated beneficiaries.
A QPRT in action
When you transfer a home to a QPRT, it’s removed from your taxable estate. The transfer of the remainder interest is subject to gift tax, but tax resulting from this future gift is generally reasonable. The IRS uses the Section 7520 rate, which is updated monthly, to calculate the tax. For September 2024, the rate is 4.8%, down from the year’s high thus far of 5.6% in June.
You must appoint a trustee to manage the QPRT. Frequently, the grantor will act as the trustee. Alternatively, it can be another family member, friend or professional advisor.
Typically, the home being transferred to the QPRT is your principal residence. However, a QPRT may also be used for a second home, such as a vacation house.
What happens if you die before the end of the trust’s term? Then the home is included in your taxable estate. Although this defeats the intentions of the trust, your family is no worse off than it was before you created the QPRT.
There’s no definitive period of time for the trust term, but the longer the term, the smaller the value of the remainder interest for tax purposes. Avoid choosing a term longer than your life expectancy. Doing so will reduce the chance that the home will be included in your estate should you die before the end of the term. If you sell the home during the term, you must reinvest the proceeds in another home that will be owned by the QPRT and subject to the same trust provisions.
So long as you live in the residence, you must continue to pay the monthly bills, including property taxes, maintenance and repair costs, and insurance. Because the QPRT is a grantor trust, you’re entitled to deduct qualified expenses on your tax return, within the usual limits.
Potential drawbacks
When a QPRT’s term ends, the trust’s beneficiaries become owners of the home, at which point you’ll need to pay them a fair market rental rate if you want to continue to live there. Despite the fact that it may feel strange to have to pay rent to live in “your” home, at that point, it’s no longer your home. Further, paying rent generally coincides with the objective of shifting more assets to younger loved ones.
Note, also, that a QPRT is an irrevocable trust. In other words, you can’t revise the trust or back out of the deal. The worst that can happen is you pay rent to your beneficiaries if you outlive the trust’s term, or the home reverts to your estate if you don’t. Also, the beneficiaries will owe income tax on any rental income.
Contact FMD to determine if a QPRT is right for your estate plan.
Estate Planning for Non-U.S. Citizens Requires Extra Care
Traditional estate planning strategies generally are based on the assumption that all family members involved are U.S. citizens. However, if you or your spouse is a noncitizen, special rules apply that require additional planning. Avoid costly tax traps by understanding how the U.S. gift and estate tax laws apply to noncitizens.
Defining “domicile”
Noncitizens can become subject to U.S. gift and estate taxes if they’re domiciled in the United States. Under IRS guidelines, an individual becomes domiciled in a country “by living there, for even a brief period of time, with no definite present intention of later removing therefrom.”
To determine a person’s “present intention,” the IRS considers a number of factors, such as the amount of time the person spends in the United States; their green card or visa status; the location of their business interests and residences; the location of their health care providers, jobs, places of worship and community ties; the place where their vehicles are registered and where they’re licensed to drive; the place where they’re registered to vote; and the domiciles of their friends and family members.
Noncitizens who are deemed to be domiciled in the United States are subject to U.S. gift and estate taxes on their worldwide assets, much like U.S. citizens. And, like U.S. citizens, they’re eligible for the federal gift and estate tax exemption ($13.99 million for 2025) and the annual gift tax exclusion ($19,000 per recipient for 2025).
A significant difference between U.S. citizens and noncitizens, and a potential tax trap for the unwary, is that the marital deduction isn’t available for transfers to noncitizens. Ordinarily, married couples can transfer an unlimited amount of assets between each other — during their lifetimes or at death — without triggering gift or estate taxes. However, estate planning strategies that rely on the marital deduction may not be available to noncitizen domiciliaries.
There are other options, however. For example, a spouse can:
Make tax-free transfers to his or her noncitizen spouse up to the transferor’s unused gift and estate tax exemption.
Make annual exclusion gifts. The annual exclusion for gifts to a noncitizen spouse is $190,000 for 2025.
Potential tax trap
A person who’s neither a U.S. citizen nor a U.S. domiciliary — that is, a “nonresident alien” — is subject to U.S. gift and estate taxes only on assets that are “situated” in the United States. Intangible property — such as corporate stock, bonds or promissory notes — is deemed to be situated in the United States for estate tax purposes (but typically not for gift tax purposes) if it’s issued by a domestic corporation or by a U.S. citizen or the U.S. government.
Here’s where the potential tax trap comes into play: The exemption amount for U.S.-situated assets owned by nonresident aliens is only $60,000, compared with $13.99 million for U.S. citizens or domiciliaries. Depending on the value of a person’s property in the United States, this can result in significant gift and estate taxes.
There may be strategies for avoiding these taxes, such as holding the assets through a properly structured and operated foreign corporation. Also, in some cases, tax treaties between the United States and a nonresident alien’s country of citizenship may provide some relief.
If you or your spouse is a noncitizen, talk to FMD about the potential estate planning ramifications.
What Happens if You and Your Siblings Inherit your Parents’ Home?
When estate planning, it’s common for parents to leave their primary residence or a vacation home to their children. While your parents’ wills or trusts may specify who gets what percentage of the home, typically, you and your siblings will receive equal shares in the property.
This can result in potential problems. For example, perhaps you and your siblings have different financial needs or can’t agree on what to do with the home. Let’s take a look at how to best approach the situation.
Determine what to do with the house
The first step is to sit down with your siblings and have an open, honest discussion about your wishes for handling the inherited home. Generally, the options are:
Keep the home and share it among family members,
Rent out the home and share the rental income,
Sell the home and divide the profits, or
Arrange for one sibling to buy out the others.
If you decide to share the home, have a written agreement drafted by your attorney that outlines rules regarding scheduling, allowable uses, and responsibility for maintenance and expenses. If you choose to sell the home or arrange a buyout, obtain a professional appraisal to avoid disputes over the home’s value.
Other considerations
If you rent out the home, determine how you’ll handle rent collection, maintenance and other rental activities. One option is to engage a property management company to handle the day-to-day management.
Another issue to consider is how the title to the property will be held. For example, if you and your siblings own the home as tenants in common, then your respective interests will pass to your heirs according to your individual estate plans. But if you hold the property as joint tenants, then when one sibling dies, the surviving siblings receive his or her share.
Keep in mind that each of the options described above has different tax implications. Contact FMD with questions.
Contributing to a Roth 401(k) Plan may Help Achieve Estate Planning Goals
When it comes to your 401(k) plan, you may have a choice to make regarding contributions. Should you make contributions on a pre-tax (traditional) basis or on an after-tax (Roth) basis? The right answer depends on your current and expected future tax circumstances as well as your estate planning goals.
Traditional vs. Roth 401(k)s
The main difference between a traditional and a Roth 401(k) plan is essentially the same as the difference between a traditional and a Roth IRA: the way they’re taxed. Contributions to a traditional 401(k) are made with pre-tax dollars — that is, they’re deductible. Funds grow on a tax-deferred basis and both contributions and earnings are taxable when they’re withdrawn. Contributions to a Roth 401(k) plan are made with after-tax dollars — that is, they’re nondeductible. But qualified withdrawals of both contributions and earnings are tax-free. Plus, you can participate in a Roth 401(k) plan regardless of your income.
Salary deferral limits for traditional and Roth 401(k) plans are the same: for 2024, $23,000 plus an additional $7,500 in catch-up contributions if you’ll be 50 or older by the end of the year. The limits on combined employee and employer contributions are $69,000 and $76,500, respectively (up to 100% of compensation).
Distribution rules for traditional and Roth 401(k) plans are also similar. Penalty-free withdrawals (tax- and penalty-free withdrawals for Roth plans) are available when you reach age 59½, die or become disabled (with limited exceptions). In addition, for a Roth 401(k), the account must have been open for at least five years.
Another important difference between the two types of plans is that traditional 401(k) accounts are subject to required minimum distribution (RMD) rules when you reach a certain age. Specifically, age 73 for those who turn 72 this year or after, increasing to age 75 for those who reach that milestone after 2032. For Roth 401(k) accounts, RMDs aren’t required beginning in 2024.
From a tax perspective, with a Roth 401(k) you pay tax at the time of your contributions, while traditional 401(k) funds are taxed when you withdraw them. Mathematically speaking, that means the best choice depends on whether you expect to be in a higher or lower tax bracket after you retire.
If you’re a high earner and expect to be in a lower bracket when you retire, you’re better off with the upfront tax break offered by a traditional 401(k). If you expect to be in a higher tax bracket in retirement (for example, if you’re early in your career and expect your income to grow substantially in the future, or you believe Congress will raise taxes down the road), then consider a Roth plan and pay the tax now.
Estate planning factors
Taxes during your lifetime aren’t the only factor, however. It’s also important to consider the estate planning implications. The elimination of RMDs for Roth 401(k)s makes them a powerful estate planning tool. So long as you don’t need the funds for living expenses, you can leave them in the account, growing on a tax-free basis, for life. And if the account is at least five years old, your heirs will be able to withdraw the funds tax-free.
With a traditional 401(k), the RMD rules will force you to draw down the account, regardless of whether you need the funds, leaving less for your heirs. Plus, withdrawals by your heirs will be taxable.
It may be in Your Best Interest to File a Gift Tax Return
If you’ve given a significant financial gift to a family member, you may wonder whether you’re required to file a gift tax return. Even if no tax is due, filing Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, can be a smart decision. Indeed, a timely filed gift tax return that meets the IRS’s adequate disclosure requirements starts the clock on the statute of limitations. This year, the deadline to file a 2024 gift tax return is April 15 (October 15 if you file for an extension).
Three-year time limit
Generally, the IRS has three years to challenge the value of a transaction for gift tax purposes or to assert that a nongift was, in fact, a partial gift. But unless the transaction is adequately disclosed, there’s no time limit for reviewing it and assessing additional gift tax. That means the IRS can collect unpaid gift taxes — plus penalties and interest — years or even decades later.
Some may hesitate to file a gift tax return disclosing a non-gift transaction for fear of attracting IRS scrutiny. However, a carefully prepared gift tax return can be the best insurance against unpleasant tax surprises in the future.
Defining adequate disclosure
When you file a timely gift tax return that meets the adequate disclosure requirements, the IRS has only three years in which to challenge the gift’s valuation. To meet these requirements, a return must include:
A description of the transferred property and any consideration received,
The identity of, and the relationship between, the transferor and each transferee,
The trust’s tax identification number and a brief description of its terms (or a copy of the trust instrument) if property is transferred to a trust,
Either a detailed description of the method used to value the transferred property or a qualified appraisal,
A statement describing any position taken that’s contrary to any proposed, temporary or final tax regulations or revenue rulings published at the time of the transfer, and
An explanation as to why transfers reported as nongifts aren’t gifts.
Additional requirements apply to transfers of interests in a corporation, partnership (including a limited liability company) or trust to a member of the transferor’s family. In addition to the above, adequate disclosure requires:
A description of the transactions, including a description of the transferred and retained interests and the methods used to value each,
The identity of, and relationship between, the transferor, transferee, all other persons participating in the transactions, and all parties related to the transferor holding an equity interest in any entity involved in the transaction, and
A detailed description (including all actuarial factors and discount rates) of the method used (if any) to determine the amount of the gift, including, for equity interests that aren’t actively traded, the financial and other data used to determine value.
Financial data generally includes balance sheets and statements of net earnings, operating results, and dividends paid for each of the preceding five years.
Gain peace of mind
Certain gifts, such as those involving trusts, real estate or business interests, should always be reported to the IRS to establish clear tax treatment. Filing a return creates a paper trail, reducing the risk of disputes later.
Even if a gift tax return isn’t strictly required, filing one can provide peace of mind and strategic estate tax advantages. Contact FMD with any questions.
Single and Child-Free? Here’s Why Estate Planning is Still Crucial
Even if you’re single and have no children, having an estate plan helps ensure your final wishes are clearly documented and respected. Estate planning isn’t solely about passing assets on to direct descendants; it’s about taking control of your future.
Without a formal estate plan, state laws will determine how your assets are distributed, and those default decisions might not align with your values or desires. Whether they’re your financial investments or personal assets, a comprehensive estate plan allows you to specify exactly who should receive what, be they close friends, extended family or even charitable organizations.
Without a will, who’ll receive your assets?
It’s critical for single people to execute a will that specifies how and to whom their assets should be distributed when they die. Although certain types of assets can pass to your intended recipient(s) through beneficiary designations, absent a will, many types of assets will pass through the laws of intestate succession.
Those laws vary from state to state but generally provide for assets to go to the deceased person’s spouse or children. For example, the law might provide that if someone dies intestate, half of the estate goes to his or her spouse and half goes to the children. However, if you’re single with no children, these laws set out rules for distributing your assets to your closest relatives, such as your parents or siblings. Or, if you have no living relatives, your assets may go to the state.
By preparing a will, you can ensure your assets are distributed according to your wishes, whether that’s to family, friends or charitable organizations.
Who’ll handle your finances if you become incapacitated?
Consider signing a durable power of attorney that appoints someone you trust to manage your investments, pay bills, file tax returns and otherwise make financial decisions should you become incapacitated. Although the law varies from state to state, typically, without a power of attorney, a court will appoint someone to make those decisions on your behalf. Not only will you have no say in who the court appoints, but the process can be costly and time consuming.
Who’ll make medical decisions on your behalf?
You should prepare a living will, a health care directive (also known as a medical power of attorney) or both. This will ensure your wishes regarding medical care — particularly resuscitation and other lifesaving measures — will be carried out in the event you’re incapacitated. These documents can also appoint someone you trust to make medical decisions that aren’t expressly addressed.
Without such instructions, the laws in some states allow a spouse, children or other “surrogates” to make those decisions. In the absence of a suitable surrogate, or in states without such a law, medical decisions are generally left to the judgment of health care professionals or court-appointed guardians.
What strategies should you use to reduce gift and estate taxes?
When it comes to taxes, married couples have some big advantages. For example, they can use both of their federal gift and estate tax exemptions (currently, $13.99 million per person) to transfer assets to their loved ones tax-free. Also, the marital deduction allows spouses to transfer an unlimited amount of property to each other — either during life or at death — without triggering immediate gift or estate tax liabilities.
For single people with substantial estates, it’s important to consider employing trusts and other estate planning techniques to avoid, or at least defer, gift and estate taxes.
Form your plan
Finally, planning ahead can help avoid potential complications in the future. Unexpected events can lead to family disputes if there’s no clear guidance on how your affairs should be handled.
With an estate plan, your personal wishes are followed precisely, ensuring that your legacy — whether it includes contributions to a cause you believe in or support for a family member — is preserved exactly as you intend. Contact FMD if you’re single, without children and have no estate plan. We can help draft one that’s best suited for you.
Business Owner? A Buy-Sell Agreement Should be Part of Your Estate Plan
If you hold an interest in a business that’s closely held or family owned, a buy-sell agreement should be a component of your estate plan. The agreement provides for the orderly disposition of each owner’s interest after a “triggering event,” such as death, disability, divorce, termination of employment or withdrawal from the business.
A buy-sell agreement accomplishes this by permitting or requiring the company or the remaining owners to purchase the departing owner’s interest. Often, life insurance is used to fund the buyout. And because circumstances frequently change, reviewing your buy-sell agreement periodically is important to ensure that it continues to meet your needs.
Valuation provision must be current
It’s essential to revisit the agreement’s valuation provision — the mechanism for setting the purchase price for an owner’s interest — to ensure that it reflects the business’s current value. A pressing reason to do this sooner rather than later is because, absent congressional action, the federal gift and estate tax exemption is scheduled to be halved beginning in 2026.
As you review your agreement, pay close attention to the valuation provision. Generally, a valuation provision follows one of three approaches when a triggering event occurs:
Independent appraisal by one or more business valuation experts,
Formulas, such as book value or a multiple of earnings or revenues as of a specified date, or
Negotiated price.
Independent appraisals almost always produce the most accurate valuations. Formulas tend to become less reliable over time as circumstances change and may lead to over- or underpayments if earnings have fluctuated substantially since the valuation date.
A negotiated price can be a good approach in theory, but expecting owners to reach an agreement under stressful, potentially adversarial conditions is asking a lot. One potential solution is to use a negotiated price but provide for an independent appraisal in the event the parties fail to agree on a price within a specified period.
“Redemption” vs. “cross-purchase” agreement
The type of buy-sell agreement you use can have significant tax and estate planning implications. Generally, the choices are structured either as “redemption” or “cross-purchase” agreements. A redemption agreement permits or requires the company to purchase a departing owner’s interest, while a cross-purchase agreement permits or requires the remaining owners to make the purchase.
A disadvantage of cross-purchase agreements is that they can be cumbersome, especially if there are many owners. For example, if life insurance is used to fund the purchase of a departing owner’s shares, each owner will have to purchase an insurance policy on the lives of each of the other owners. Note that redemption agreements may trigger a variety of unwelcome tax consequences.
A versatile document
A buy-sell agreement can provide several significant benefits, including keeping ownership and control within your family, creating a market for otherwise unmarketable interests, and providing liquidity to pay estate tax and other expenses. In some cases, a buy-sell agreement can even establish the value of an ownership interest for estate tax purposes. FMD can work with you to design a buy-sell agreement that helps preserve the value of your business for your family.
A Power of Appointment Can Provide Estate Planning Flexibility
A difficult aspect of planning your estate is taking into account your family members’ needs after your death. Indeed, after you’re gone, events may transpire that you hadn’t anticipated or couldn’t have reasonably foreseen.
While there’s no way to predict the future, you can supplement your estate plan with a trust provision that provides a designated beneficiary a power of appointment over some or all of the trust’s property. This trusted person will have the discretion to change distributions from the trust or even add or subtract beneficiaries.
Adding flexibility
Assuming the holder of your power of appointment fulfills the duties properly, he or she can make informed decisions when all the facts are known. This can create more flexibility within your estate plan.
Typically, the trust will designate a surviving spouse or an adult child as the holder of the power of appointment. After you die, the holder has authority to make changes consistent with the language contained in the power of appointment clause. This may include the ability to revise beneficiaries. For instance, if you give your spouse this power, he or she can later decide if your grandchildren are capable of managing property on their own or if the property should be transferred to a trust managed by a professional trustee.
Detailing types of powers
If you take this approach, there are two types of powers of appointment:
“General” power of appointment. This allows the holder of the power to appoint the property for the benefit of anyone, including him- or herself, his or her estate or the estate’s creditors. The property is usually included in a trust but may be given to the holder outright. Also, this power of appointment can be transferred to another person.
“Limited” or “special” power of appointment. Here, the person holding the power of appointment can give the property to a select group of people who’ve specifically been identified by the deceased. For example, it might provide that a surviving spouse can give property to surviving children, as he or she chooses, but not to anyone else. Thus, this power is more restrictive than a general power of appointment.
Whether you should use a general or limited power of appointment depends on your circumstances and expectations.
Understanding the tax impact
The resulting tax impact may also affect the decision to use a general or limited power of appointment. The rules are complicated, but property subject to a general power of appointment is typically included in the taxable estate of the designated holder of the power. However, property included in the deceased’s estate receives a step-up in basis to fair market value on the date of death. Therefore, your heirs can sell property that was covered by a general power of appointment with little or no income tax consequences.
In contrast, property covered by a limited power isn’t included in the holder’s estate. However, the new heirs inherit the property with a carryover basis and no step-up in basis. So, if the heirs sell appreciated property, they face a potentially high capital gains tax.
Your final decision requires an in-depth analysis of your tax and financial situation by your estate tax advisor. Contact FMD with any questions.
Do You Have the Right Amount of Life Insurance Coverage?
Life insurance plays a vital role in your estate plan because its proceeds can provide for your family in the event of your untimely death. And for wealthier families, life insurance proceeds can cover any estate tax liability not covered by the current $13.99 million federal gift and estate tax exemption.
But when was the last time you reviewed your policy? The amount of life insurance that’s right for you depends on your circumstances, so it’s critical to regularly review your life insurance policy.
Reevaluating your policy
Life insurance isn’t a one-size-fits-all solution. Milestones such as marriage, having children, buying a home or starting a business bring new financial responsibilities. A policy purchased years ago may no longer protect your loved ones adequately.
Conversely, you may be over-insured, paying for coverage you no longer need. For example, if your children are financially independent or you’ve paid off significant debts, your coverage requirements might decrease.
The right amount of insurance depends on your family’s current and expected future income and expenses, as well as the amount of income your family would lose in the event of your untimely death.
On the other hand, health care expenses for you and your spouse may increase. When you retire, you’ll no longer have a salary, but you may have new sources of income, such as retirement plans and Social Security. You may or may not have paid off your mortgage, student loans or other debts. And you may or may not have accumulated sufficient wealth to provide for your family.
When you sit down to reevaluate your life insurance policy, consider the:
Coverage amount. Is your policy sufficient to cover current expenses, future obligations and debts?
Policy type. Term life insurance can be cost-effective for temporary needs, while whole life or universal policies may offer long-term benefits such as cash value accumulation.
Beneficiaries. Ensure your policy lists the correct beneficiaries, especially after a major life event such as marriage, divorce or the birth of a child.
Premiums. Are you paying a competitive rate? Shopping around or converting an old policy could save money.
While reviewing your policy, keep in mind your broader financial plan. How does your policy currently fit within your overall strategy, including tax implications, estate planning and business succession planning?
Turn to us for help
Taking the time to reassess your life insurance needs is an investment in your family’s financial security. Contact FMD to ensure your coverage aligns with your current and future estate planning goals.
5 Questions Single Parents Should Ask About their Estate Plans
In many respects, estate planning for single parents is similar to that of families with two parents. Parents want to provide for their children’s care and financial needs after they’re gone. However, when only one parent is involved, certain aspects of an estate plan demand special attention. If you’re a single parent, here are five questions you should ask your advisor:
1. Are my will and other estate planning documents up to date? If you haven’t reviewed your estate plan recently, talk with your advisor to be sure it reflects your current circumstances. The last thing you want is a probate court to decide your children’s future.
2. Have I selected an appropriate guardian? Does your estate plan designate a suitable, willing guardian to care for your children if the other parent is unavailable to take custody of them in the event you become incapacitated or die suddenly? Will the guardian need financial assistance to raise your kids and provide for their education? If not, you might want to preserve your wealth in a trust until your children are grown.
3. Have I established a trust for my children? Trust planning is one of the most effective ways to provide for your children. Trust assets are managed by a trusted individual or corporate trustee, and you specify when and under what circumstances funds should be distributed to your kids. A trust is critical if you have minor children. Without one, your assets may come under the control of your former spouse or a court-appointed administrator.
4. What if I become incapacitated? As a single parent, it’s important for your estate plan to include a living will, advance directive or health care power of attorney to specify your health care preferences if you become incapacitated and to designate someone to make medical decisions on your behalf. You should also have a revocable living trust or durable power of attorney that provides for the management of your finances in the event you’re unable to do so.
5. Can the other parent help? If your spouse (or ex-spouse) is alive, is he or she willing to help care for your children or provide financial resources? If your spouse (or ex-spouse) is deceased, does his or her estate plan provide any financial assistance for your children?
If you’ve recently become a single parent, contact FMD. We’d be happy to help review and, if necessary, revise your estate plan.
A Revocable Trust Can be a Versatile Tool in Your Estate Plan
A revocable trust (sometimes referred to as a “living trust”) is a popular estate planning tool that allows you to manage your assets during your lifetime and ensure a smooth transfer of those assets to your family after your death. Plus, trust assets bypass the probate process, which can save time, reduce costs and maintain privacy. However, like any legal instrument, a revocable trust has certain disadvantages.
A revocable trust in action
A revocable trust’s premise is relatively simple. You establish the trust, transfer assets to it (essentially funding it), and name a trustee to handle administrative matters. You can name yourself as trustee or choose a professional to handle the job. Regardless of who you choose, name a successor trustee who can take over the reins if required.
If you designate yourself as the trust’s initial beneficiary, you’re entitled to receive income from the trust for your lifetime. You should also designate secondary beneficiaries, such as your spouse and children, who are entitled to receive the remaining assets after the trust terminates.
Added flexibility
One of the primary benefits of a revocable trust is its flexibility. As the grantor, you retain control over the trust and can change its terms, add or remove assets, or even dissolve it at any time during your life. This control makes it a flexible tool for adapting to changing life circumstances, such as new family members, changes in financial status, or shifts in your estate planning goals.
For many people, the main reason for using a revocable trust — and sometimes the only one that really matters — is that the trust’s assets avoid probate. Probate is the process of settling an estate and passing the legal title of ownership of assets to heirs specified in a will. Depending on applicable state law, probate can be costly and time-consuming. The process is also open to the public, which can be a major detriment if you treasure your privacy.
Assets passing through a revocable trust aren’t subject to probate. This gives you control to decide who in the family gets what without all the trappings of a will. Along with the flexibility, it keeps your personal arrangements away from prying eyes.
Potential drawbacks
One of the most notable drawbacks of a revocable trust is the upfront cost and effort involved in setting one up. Drafting a revocable trust requires the assistance of an attorney. You’ll also need to retitle your assets under the name of the trust, which can be time-consuming and may incur fees.
Another limitation is that a revocable trust doesn’t provide asset protection from creditors or lawsuits during your lifetime. Because the trust is revocable, its assets are still considered your property and are thus subject to claims against you.
Finally, despite a common misconception, revocable living trusts don’t provide direct tax benefits. The assets are included in your taxable estate and dispositions of trust property can result in tax liability. You must report the income tax that’s due, including capital gains on sales of assets, on your personal tax return.
Right for you?
For many individuals, a revocable trust can be an invaluable part of their estate plans, offering flexibility, privacy, and efficiency. However, it’s not a one-size-fits-all solution. Before deciding, weigh the benefits and drawbacks in the context of your unique financial situation and estate planning goals. Contact the FMD team with questions regarding a revocable trust. Be sure to consult with an estate planning attorney to draft your revocable trust.
Have You Prepared an Advance Health Care Directive?
An advance health care directive allows you to communicate your preferences, in advance, for medical care in the event you become incapacitated. Often part of a comprehensive estate plan, these directives sometimes go by different legal names depending on your jurisdiction. Let’s take a closer look at a few healthcare directives you should consider including in your estate plan.
Health care power of attorney
Comparable to a durable power of attorney that gives an “agent” authority to handle your financial affairs if you’re incapacitated, a health care power of attorney (or medical power of attorney) enables another person to make health care decisions for you. In some states, this is called a healthcare proxy.
Choosing your agent is critical. You can’t anticipate every situation that might arise in which it’s likely that someone will have to make decisions concerning your health. Therefore, the agent should be a person who knows you well and understands your general outlook. Frequently, this is a family member, close friend, or trusted professional. Remember to designate an alternate agent in the event your first choice can’t do the job.
Living will
A living will is a legal document that establishes criteria for prolonging or ending medical treatment. It indicates the types of medical treatment you want — or don’t want — in the event you suffer from a terminal illness or are incapacitated.
This document doesn’t take effect unless you’re incapacitated. Typically, a physician must certify that you’re suffering from a terminal illness or that you’re permanently unconscious. Address common end-of-life decisions in your living will. This may require consultations with a physician.
The requirements for a living will vary from state to state. Have an attorney experienced in these matters prepare your living will based on your state’s prevailing laws.
DNR and DNI orders
Despite the common perception, it’s not a legal requirement for you to have an advance health care directive or living will on file to implement a “do not resuscitate” (DNR) or “do not intubate” (DNI) order. To establish a DNR or DNI order, discuss your preferences with your physician and have him or her prepare the paperwork. The order is then placed in your medical file.
Even if your living will spells out your preferences regarding resuscitation and intubation, it’s still a good idea to create DNR or DNI orders when you’re admitted to a new hospital or healthcare facility. This can avoid confusion during an emotionally charged time.
Put your directive into action
Advance health care directives must be put in writing. Each state has different forms and requirements for creating these legal documents. Depending on where you live, you may need certain forms signed by a witness or notarized. Contact an attorney for assistance if you’re unsure of the requirements or the process.
Finally, be aware that health care directives aren’t written in stone. You can revise them at any time. Just be sure to follow your state’s requirements for revisions
Should a married couple use a joint trust or separate trusts?
There are many benefits of including a revocable trust in your estate plan. This trust type allows you to minimize probate expenses, keep your financial affairs private, and provide for the management of your assets in the event you become incapacitated. Importantly, they offer flexibility: You’re free to amend the terms of the trust or even revoke it altogether at any time.
If you’re married, you and your spouse must decide whether to use a joint trust or separate trusts. The right choice depends on your financial and family circumstances, applicable state law, and other factors.
Maintaining a joint trust is simpler
If you’re comfortable with your spouse inheriting your combined assets (and vice versa), a joint trust can be less complex to set up and administer than separate trusts. Funding the trust is a simple matter of transferring assets into it and avoids the need to divide assets between two separate trusts.
In addition, during your lifetimes, you and your spouse have equal control over the trust’s assets, which can make it easier to manage and conduct transactions involving the assets. On the other hand, separate trusts may be the way to go for spouses who aren’t comfortable sharing control of their combined assets.
Separate trusts may provide greater asset protection
If shielding assets from creditors is a concern, separate trusts usually offer greater protection. With a joint trust, if a creditor obtains a judgment against one spouse, all trust assets may be at risk. A spouse’s trust is generally protected from the other spouse’s creditors.
Also, when one spouse dies, his or her trust becomes irrevocable, making it more difficult for creditors of either spouse to reach the trust assets. Keep in mind that the degree of asset protection a trust provides depends on the type of debt involved, applicable state law, and the existence of a prenuptial agreement.
Factor in taxes
For most couples today, federal gift and estate taxes aren’t a concern. This is because they enjoy a combined gift and estate tax exemption of more than $27 million in 2024 and 2025.
However, if a couple’s wealth exceeds the exemption amount, or if they live in a state where an estate or inheritance tax kicks in at lower asset levels, separate trusts offer greater opportunities to avoid or minimize these taxes. For example, some states have exemption amounts as low as $1 million or $2 million. In these states, separate trusts can be used to make the most of each spouse’s exemption amount and minimize exposure to death taxes.
It’s also important to consider income tax. As previously mentioned, when one spouse dies, his or her trust becomes irrevocable. That means filing tax returns for the trust each year and, to the extent trust income is accumulated in the trust, paying tax at significantly higher trust tax rates.
A joint trust remains revocable after the first spouse’s death (it doesn’t become irrevocable until both spouses have passed). In this case, income is taxed to the surviving spouse at his or her individual tax rate.
Review the pros and cons
Joint and separate trusts each have advantages and disadvantages. Contact FMD to determine which is right for you. We’d be pleased to review your circumstances and help you make a final decision.
Achieve Multiple Estate Planning Goals With One Trust: A CRT
For many people, two common estate planning goals are contributing to a favorite charity and leaving significant assets to your family under favorable tax terms. A charitable remainder trust (CRT) can help you achieve both goals.
ABCs of CRTs
Typically, you set up one of two CRT types (described below) and fund it with assets such as cash and securities. The trust then pays out income to the designated beneficiary or beneficiaries — perhaps yourself or your spouse — for life or a term of 20 years or less. The CRT then distributes the remaining assets to one or more charities.
When using a CRT, you may be eligible for a current tax deduction based on several factors. They include the value of the assets at the time of the transfer, the ages of the income beneficiaries, and the government’s Section 7520 rate. Generally, the greater the payout to you (and consequently, the lower the amount that ultimately goes to charity), the lower the deduction.
2 flavors of CRTs
There are two types of CRTs, each with its own pros and cons:
A charitable remainder annuity trust (CRAT) pays out a fixed percentage (ranging from 5% to 50%) of the trust’s initial value and doesn’t allow additional contributions once it’s funded.
A charitable remainder unitrust (CRUT) pays out a fixed percentage (ranging from 5% to 50%) of the trust’s value, recalculated annually, and allows additional contributions.
CRATs offer the advantage of uniform payouts, regardless of fluctuations in the trust’s value. CRUTs, on the other hand, allow payouts to keep pace with inflation because they increase as the trust’s value increases. And, as noted, CRUTs allow you to make additional contributions. One potential disadvantage of a CRUT is that payouts shrink if the trust’s value declines.
Who to choose as a trustee?
When setting up a CRT, appoint a trustee to manage the trust’s assets. The trustee should be someone with the requisite financial knowledge and a familiarity with your personal situation. Thus, it could be a professional or an entity, a family member, or a close friend.
Because of the potentially significant dollars at stake, many trust creators opt for a professional who specializes in managing trust assets. If you’re leaning in this direction, interview several candidates and choose the best one for your situation, considering factors such as experience, investment performance and the level of services provided.
Know that a trustee must adhere to the terms of the trust and follow your instructions. Thus, you still maintain some control if someone else handles these duties. For instance, you may retain the right to change the trustee if you become dissatisfied or designate a different charity to receive the remainder assets.
Finally, be aware that a CRT is irrevocable. In other words, you can’t undo it once it’s executed. So, you must be fully committed to this approach before taking the plunge. Contact FMD to learn whether a CRT might be a good fit to achieve your estate planning goals.
The Ins and Outs of Relocating Your Trust to a Tax-Friendlier State
It’s not uncommon for people who live in states with high-income taxes to relocate to states with more favorable tax climates. Did you know that you can use a similar strategy for certain trusts? Indeed, if a trust is subject to high state income tax, you may be able to change its residence — or “situs” — to a state with low or no income taxes.
How different trust types are taxed
The taxation of a trust depends on the trust type. Revocable trusts and irrevocable “grantor” trusts — those over which the grantor retains enough control to be considered the owner for tax purposes — aren’t taxed at the trust level. Instead, trust income is included on the grantor’s tax return and taxed at the grantor’s personal income tax rate.
Irrevocable, nongrantor trusts generally are subject to federal and state tax at the trust level on any undistributed ordinary income or capital gains, often at higher rates than personal income taxes. Income distributed to beneficiaries is deductible by the trust and taxable to beneficiaries.
Therefore, relocating a trust may offer a tax advantage if the trust:
Is an irrevocable, nongrantor trust,
Accumulates (rather than distributes) substantial amounts of ordinary income or capital gains, and
Can be moved to a state with low or no taxes on accumulated trust income.
There may be other advantages to moving a trust. For example, the laws in some states allow you or the trustee to obtain greater protection against creditor claims, reduce the trust’s administrative expenses, or create a “dynasty” trust that lasts for decades or even centuries.
Determining if the trust is movable
For an irrevocable trust, the ability to change its situs depends on several factors, including the language of the trust document (does it authorize a change in situs?) and the laws of the current and destination states. In determining a trust’s state of “residence” for tax purposes, states generally consider one or more of the following factors:
The trust creator’s state of residence or domicile,
The state in which the trust is administered (for example, the state where the trustees reside or where the trust’s records are maintained), and
The state or states in which the trust’s beneficiaries reside.
Some states apply a formula based on these factors to tax a portion of the trust’s income. Also, some states tax all income derived from sources within their borders — such as businesses, real estate, or other assets located in the state — even if a trust in another state owns those assets.
Depending on state law and the language of the trust document, moving a trust may involve appointing a replacement trustee in the new state and moving the trust’s assets and records to that state. In some cases, it may be necessary to amend the trust document or to transfer the trust’s assets to a new trust in the destination state. A situs change may also require the consent of the trust’s beneficiaries or court approval.
For tax purposes, a final return should be filed in the current jurisdiction. The return should explain the reasons why the trust is no longer taxable in that state. Before taking action, discuss with us the pros and cons of moving your trust. FMD can help you determine whether it’s worth your while.
Leaving specific assets to specific heirs may lead to unintentional outcomes
Does your estate plan leave specific assets to specific family members? If so, you may want to reconsider your plan. While it may be tempting to say, leave your son your classic car and give your daughter a family heirloom, doing so risks inadvertently disinheriting other family members, even if you’ve gone out of your way to ensure that they’re treated equally.
Let’s consider an example. Dan has three children, Susan, Peter, and Emma. At the time he prepares his estate plan, Dan has three primary assets: company stock valued at $1 million, a mutual fund with a $1 million balance, and a $1 million life insurance policy. His estate plan calls for Susan to acquire the stock, Peter to gain the mutual fund, and Emma to become the life insurance policy’s beneficiary.
When Dan dies 15 years later, the values of the three assets have changed considerably. The stock’s value has dropped to $500,000, the mutual fund has grown to $2.5 million and he inadvertently allowed the life insurance policy to lapse.
The result: Although Dan intended to treat his children equally, Peter ended up with the bulk of his estate, Susan’s inheritance was significantly smaller than expected and Emma was disinherited altogether. To avoid unintended results like this, consider distributing your wealth among your heirs based on percentages or dollar values rather than providing for specific assets to go to specific people.
However, if it’s important to you that certain heirs receive certain assets, there may be planning strategies you can use to ensure your heirs are treated fairly. Returning to the example, Dan could’ve provided for his wealth to be divided equally among his children, with Susan receiving the stock (valued at fair market value) as part of her share. That way, Susan would have received the stock plus $500,000 of the mutual fund, and Peter and Emma would each have received $1 million of the mutual fund.
Contact FMD if you have questions regarding how your estate plan currently distributes your assets among family members. We can help determine if all your heirs will be treated equally.
Should a married couple use a joint trust or separate trusts?
There are many benefits of including a revocable trust in your estate plan. This trust type allows you to minimize probate expenses, keep your financial affairs private and provide for the management of your assets in the event you become incapacitated. Importantly, they offer flexibility: You’re free to amend the terms of the trust or even revoke it altogether at any time.
If you’re married, you and your spouse must decide whether to use a joint trust or separate trusts. The right choice depends on your financial and family circumstances, applicable state law, and other factors.
Maintaining a joint trust is simpler
If you’re comfortable with your spouse inheriting your combined assets (and vice versa), a joint trust can be less complex to set up and administer than separate trusts. Funding the trust is a simple matter of transferring assets into it and avoids the need to divide assets between two separate trusts.
In addition, during your lifetimes, you and your spouse have equal control over the trust’s assets, which can make it easier to manage and conduct transactions involving the assets. On the other hand, separate trusts may be the way to go for spouses who aren’t comfortable sharing control of their combined assets.
Separate trusts may provide greater asset protection
If shielding assets from creditors is a concern, separate trusts usually offer greater protection. With a joint trust, if a creditor obtains a judgment against one spouse, all trust assets may be at risk. A spouse’s trust is generally protected from the other spouse’s creditors.
Also, when one spouse dies, his or her trust becomes irrevocable, making it more difficult for creditors of either spouse to reach the trust assets. Keep in mind that the degree of asset protection a trust provides depends on the type of debt involved, applicable state law and the existence of a prenuptial agreement.
Factor in taxes
For most couples today, federal gift and estate taxes aren’t a concern. This is because they enjoy a combined gift and estate tax exemption of more than $27 million in 2024 and 2025.
However, if a couple’s wealth exceeds the exemption amount, or if they live in a state where an estate or inheritance tax kicks in at lower asset levels, separate trusts offer greater opportunities to avoid or minimize these taxes. For example, some states have exemption amounts as low as $1 million or $2 million. In these states, separate trusts can be used to make the most of each spouse’s exemption amount and minimize exposure to death taxes.
It’s also important to consider income tax. As previously mentioned, when one spouse dies, his or her trust becomes irrevocable. That means filing tax returns for the trust each year and, to the extent trust income is accumulated in the trust, paying tax at significantly higher trust tax rates.
A joint trust remains revocable after the first spouse’s death (it doesn’t become irrevocable until both spouses have passed). In this case, income is taxed to the surviving spouse at his or her individual tax rate.
Review the pros and cons
Joint and separate trusts each have advantages and disadvantages. Contact us to determine which is right for you. We’d be pleased to review your circumstances and help you make a final decision.
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Ensure you’re properly documenting your charitable donations
If you’re charitably inclined and itemize deductions, you may be entitled to deduct charitable donations. The key word is “may” because there are requirements you must meet. One such requirement is the need to substantiate charitable gifts with proper documentation that will satisfy the IRS. Indeed, a charitable gift may be legitimate, but if the taxpayer fails to substantiate it properly, the deduction may be lost.
Making cash donations
Cash donations, regardless of the amount, must be substantiated with one of the following:
Bank records. These can include bank statements, electronic fund transfer receipts, canceled checks (including scanned images of both sides of a check from the bank’s website) or credit card statements.
Written communication. This can be in the form of a letter or email from the charitable organization, showing the donee’s name, the contribution date and the amount. A blank pledge card furnished by the donee isn’t sufficient.
In addition to the above, cash donations of $250 or more require a contemporaneous written acknowledgment (CWA) from the donee that details the following:
The contribution amount, and
A description and good faith estimate of the value of any goods or services provided in consideration (in whole or in part) for the donation.
You can use a single document to meet both the written communication and CWA requirements. For the CWA to be “contemporaneous,” you must obtain it by the earlier of 1) the extended due date of your tax return for the year the donation is made, or 2) the date you file your return.
Making noncash donations
You must substantiate noncash donations of less than $250 with a receipt from the donee showing the donee’s name and address, the date of the contribution, and a detailed description of the property. For noncash donations of $250 or more, there are additional substantiation requirements depending on the size of the donation:
Donations of $250 to $500 require a CWA.
Donations over $500 but not more than $5,000 require a CWA and you must complete Section A of Form 8283 and file it with your tax return. Section A includes a description of the property, its fair market value and the method of determining that value.
Donations over $5,000 require all the above, plus you must obtain a qualified appraisal of the property and complete Section B of Form 8283 (signed by the appraiser and the donee). There may be additional requirements in certain situations. For instance, if you donate art of $20,000 or more, or any donation valued over $500,000, you must attach a copy of the appraisal to your return. Note: No appraisal is required for donations of publicly traded securities.
Additional rules may apply to certain types of property, such as vehicles, clothing, household items or securities.
The rules are complex
The regulations on substantiating charitable donations are complex, and one mistake can cause you to lose valuable tax deductions. When in doubt, contact us to ensure you follow all the rules correctly.
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