BLOG

Ashleigh Laabs 3/25/22 Ashleigh Laabs 3/25/22

A beneficiary designation or joint title can override your will

Inattention to beneficiary designations and jointly titled assets can quickly unravel your estate plan. Suppose, for example, that your will provides for all of your property to be divided equally among your three children. But what if your IRA, which names the oldest child as beneficiary, accounts for half of the estate? In that case, the oldest child will inherit half of your estate plus a one-third share of the remaining assets — hardly equal.

The same goes for jointly owned property. When you die, the surviving owner takes title to the property regardless of the terms of your will. Unfortunately, many people don’t realize that their wills don’t control the disposition of nonprobate assets.

What are nonprobate assets?

Nonprobate assets generally are transferred automatically at death according to a beneficiary designation or contract. So they override your will. They include life insurance policies, retirement plans and IRAs, as well as joint bank or brokerage accounts. Even savings bonds come with beneficiary forms.

To ensure that your estate plan reflects your wishes, review beneficiary designations and property titles regularly, particularly after significant life events such as a marriage or divorce, the birth of a child, or the death of a loved one.

What about POD and TOD designations?

Payable-on-death (POD) and transfer-on-death (TOD) designations provide a simple and inexpensive way to transfer assets outside of probate. POD designations can be used for bank accounts and certificates of deposit. TOD designations can be used for stocks, bonds, brokerage accounts and, in many states, even real estate.

Setting one up is as easy as providing a signed POD or TOD beneficiary designation form. When you die, your beneficiaries just need to present a certified copy of the death certificate and their identification to the bank or brokerage, and the money or securities are theirs.

However, just like other beneficiary designations, POD and TOD designations can backfire if they’re not carefully coordinated with the rest of your estate plan. Too often, people designate an account as POD or TOD as an afterthought, without considering whether it may conflict with their wills, trusts or other estate planning documents.

Another potential problem with POD and TOD designations is that, if you use them for most of your assets, the assets left in your estate may be insufficient to pay debts, taxes or other expenses. Your executor would then have to initiate a proceeding to bring assets back into the estate.

Whether you have large retirement accounts or life insurance policies, hold joint accounts or use POD or TOD designations as part of your estate plan, we can review the rest of your plan to identify potential conflicts.

_____________________________________________________________________________

FMD’s estate planning team will work with you and your legal and financial advisers to design plans that align with your goals and objectives. When it comes to estate planning and wealth preservation, every one of our clients receives the quality of service and personal attention that are the hallmarks of FMD. To learn more about how we can help address your estate planning and wealth preservation needs, contact us today.

Ashleigh Laabs 3/22/22 Ashleigh Laabs 3/22/22

Defined-value gifts: Plan carefully to avoid unpleasant tax surprises

For 2022, the federal gift and estate tax exemption has reached its highest level ever. In fact, you can transfer up to $12.06 million by gift or bequest without triggering federal transfer taxes. This is a limited time offer, however, as the exemption amount is scheduled to drop to $5 million (adjusted for inflation) in 2026. (However, Congress could pass legislation to reduce it even sooner or to extend it longer.)

Many are considering making substantial gifts to the younger generation to take advantage of the current exemption while it lasts. Often, these gifts consist of hard-to-value assets — such as interests in a closely held business or family limited partnership (FLP) — which can be risky. A defined-value gift may help you avoid unexpected tax liabilities.

Hedging your bets

Simply put, a defined-value gift is a gift of assets that are valued at a specific dollar amount rather than a certain number of stock shares or FLP units or a specified percentage of a business entity.

Structured properly, a defined-value gift ensures that the gift won’t trigger an assessment of gift taxes down the road. The key to this strategy is that the defined-value language in the transfer document is drafted as a “formula” clause rather than an invalid “savings” clause.

A formula clause transfers a fixed dollar amount, subject to adjustment in the number of shares or units necessary to equal that dollar amount (based on a final determination of the value of those shares or units for federal gift and estate tax purposes). A savings clause, in contrast, provides for a portion of the gift to be returned to the donor if that portion is ultimately determined to be taxable.

Language matters

For a defined-value gift to be effective, it’s critical to use precise language in the transfer documents. In one recent case, the U.S. Tax Court rejected an intended defined-value gift of FLP interests and upheld the IRS’s assessment of gift taxes based on percentage interests. The documents called for the transfer of FLP interests with a defined fair market value “as determined by a qualified appraiser” within a specified time after the transfer.

The court found that the transfer documents failed to achieve a defined-value gift, because fair market value was determined by a qualified appraiser. The documents didn’t provide for an adjustment in the number of FLP units if their value “is finally determined for federal gift tax purposes to exceed the amount described.”

Seek professional advice

If you plan to make substantial gifts of interests in a closely held business, FLP or other hard-to-value asset, a defined-value gift can help you avoid unwanted gift tax consequences. Turn to us before taking action because to be effective, the transfer documents must contain specific language that provides for adjustment of the number of shares or units to convey the desired value. We’d be pleased to help.

_____________________________________________________________________________

Ashleigh Laabs 3/7/22 Ashleigh Laabs 3/7/22

Clarity counts when it comes to estate planning documents

Precise language is critical in wills, trusts and other estate planning documents. A lack of clarity may be an invitation to litigation. An example of this is the dispute that arose after Tom Petty’s death, between his widow and his two daughters from a previous marriage. (The two parties have since resolved their differences and dismissed all litigation matters.)

Interpreting “equal participation”

Details of the musician’s estate plan aren’t entirely clear. But it appears that his trust appointed his widow as a “directing trustee,” while providing that she and his daughters were entitled to “participate equally” in the management of his extensive music catalog and other assets. Unfortunately, the trust failed to spell out the meaning of “equal participation,” resulting in litigation between Petty’s widow and daughters over control of his assets.

There are several plausible interpretations of “equal participation.” One interpretation is that each of the three women has an equal vote, giving the daughters the ability to rule by majority.

Another interpretation is that each has an opportunity to participate in the decision-making process, but Petty’s widow has the final say as the directing trustee. Yet another possibility is that Petty intended for the women to make decisions by unanimous consent.

Determining intent

If the two parties hadn’t settled their differences out of court, it would have been up to the court to provide an answer based on evidence of Petty’s intent. But the time, expense and emotional strain of litigation may have been avoided by including language in the trust that made that intent clear.

If you’re planning your estate, the Petty case illustrates the importance of using unambiguous language to ensure that your wishes are carried out. And if you anticipate that one or more of your beneficiaries will perceive your plan as unfair, sit down with them to explain your reasoning. This discussion can go a long way toward avoiding future disputes.

Review and revise to make your intent crystal clear

If your estate plan has already been drafted and you have concerns regarding the language used, contact your attorney. He or she can review your documents to determine if more precise wording is necessary to make your intentions crystal clear for your family after your death.

_____________________________________________________________________________

Ashleigh Laabs 2/25/22 Ashleigh Laabs 2/25/22

Owning real estate in more than one state may multiply probate costs

One goal of estate planning is to avoid or minimize probate. This is particularly important if you own real estate in more than one state. Why? Because each piece of real estate titled in your name must go through probate in the state where the property is located.

Cost and time can become issues

Probate is a court-supervised administration of your estate. If probate proceedings are required in several states, the process can become expensive.

For example, your representative will need to engage a probate lawyer in each state, file certain documents in each state and comply with other redundant administrative requirements. In addition to the added expense, the process may also delay the settlement of your estate.

Place all real estate into a revocable trust

If you have a revocable trust (sometimes called a “living trust”), the simplest way to avoid multiple probate proceedings is to ensure that the trust holds the title to all of your real estate. Generally, this involves preparing a deed transferring each property to the trust and recording the deed in the county where the property is located. Property held in a revocable trust generally doesn’t have to go through probate.

Before you transfer real estate to a revocable trust, we can help determine if doing so will have negative tax or estate planning implications. For example, will transferring a residence to a trust affect your eligibility for homestead exemptions from property taxes or other tax breaks? Will the transfer affect any mortgages on the property? Will it be subject to any real property transfer taxes?

It’s also important to consider whether transferring title to property will affect the extent to which it’s shielded from the claims of creditors. Please contact us with any questions.

_____________________________________________________________________________

Ashleigh Laabs 2/21/22 Ashleigh Laabs 2/21/22

Use the net gift technique to reduce your gift tax rate

If you’re concerned about the impact of transfer taxes on your gifts, consider making “net gifts” to your loved ones. A net gift is simply a gift for which the recipient agrees to pay the gift tax, thereby reducing the value of the gift for tax purposes. It may also be possible to reduce its value further through the “net, net gift” technique.

The technique in action

The easiest way to demonstrate the benefits of a net gift is through an example. Suppose you’d like to make a $1 million gift to your adult son. For purposes of this example, also assume that you’ve already exhausted your federal gift and estate tax exemption amount, so the gift is fully taxable. At the current 40% marginal rate, the tax on your $1 million gift would be $400,000. However, if your son agrees to pay the gift tax as a condition of receiving the gift, then the value of the gift would be reduced by the amount of tax, which in turn would reduce the amount of gift tax owed.

Rather than get caught up in an endless loop of calculating the tax, reducing the gift’s value, recalculating the tax, and so on, there’s a simple formula for determining your son’s tax liability: Gift tax = tentative tax/(1 + tax rate). In our example, the tentative tax is $400,000 (the tax that would’ve been owed on an outright gift), so the gift tax on the net gift would be $400,000/1.4 = $285,714.

You can confirm that the math works out by assuming that you give your son $1 million and that he agrees to pay $285,714 in gift taxes. That tax liability reduces the gift to $1 million - $285,714 = $714,287, resulting in a tax liability of .40 x $714,287 = $285,714.

By using a net gift technique, you reduce the effective tax rate on the $1 million transfer from 40% to only 28.57%. Note that if the gift is in the form of appreciated assets rather than cash, the recipient’s payment of the tax liability can result in capital gains taxes for the donor.

Taking it up a notch

It may be possible to further reduce the effective gift tax rate by using a net, net gift. Under this technique, in addition to assuming liability for gift taxes, the recipient also agrees to pay any estate tax liability that might arise by virtue of the so-called “three-year rule.”

Under that rule, gifts made within three years of death are pulled back into the donor’s estate and subject to estate taxes. The U.S. Tax Court has effectively given its blessing to the net, net gift technique, allowing the value of a gift to be reduced by the actuarial value of the recipient’s contingent obligation to pay estate taxes that would be owed if the donor were to die within three years of making the gift.

If you’re considering the net gift technique, consult with us before taking any action.

_____________________________________________________________________________

Ashleigh Laabs 2/11/22 Ashleigh Laabs 2/11/22

The donor-advised fund: A powerful vehicle for charitable giving

If charitable giving is important to you, consider a donor-advised fund (DAF). A DAF — typically sponsored and managed by a community foundation or commercial investment company — offers many of the benefits of a private foundation at a fraction of the cost.

Upsides of a DAF

A DAF allows you to make tax-deductible contributions to an investment account and to advise the fund regarding which charities your contributions and earnings should be used to support. Tax regulations require the sponsor to have the final say on how your charitable dollars are spent, but in most cases the fund will follow your recommendations.

The advantages of a DAF include:

Immediate charitable deductions. The ability to set up a DAF quickly and secure an immediate charitable income tax deduction, without the need to identify a specific charitable beneficiary, is attractive to many donors. Why does this matter? Perhaps this is an ideal year for you — from a tax perspective — to make significant charitable donations, but you haven’t determined which charities you want to support.

Simplicity and low cost. Setting up a DAF is nearly as cheap and easy as opening a mutual fund account. Minimum contributions average around $25,000, although some DAFs allow you to open an account with as little as $5,000.

Private foundations, on the other hand, usually involve six- or seven-figure contributions, take several months to set up, and come with significant legal fees and other expenses. And while a DAF’s sponsor handles investment management and administration, a private foundation requires you to establish a board, hold periodic board meetings, keep meeting minutes and file tax returns.

Higher deduction limits. Cash contributions to DAFs, like donations to other public charities, are deductible up to 60% of your adjusted gross income (AGI). Noncash contributions are deductible up to 30% of AGI. Deduction limits for private foundations are 30% and 20%, respectively.

Privacy. Unlike private foundations and other charitable giving vehicles, a DAF allows you to remain anonymous if you so desire. Technically, when a DAF sponsor donates to a charity, it’s distributing its own assets, so you can elect to keep your name out of it. Alternatively, you can name your DAF after your mission — for example, the Fund for Alzheimer’s Research.

Downsides of a DAF

Once you contribute assets to a DAF, they become the sponsor’s property. Your role in directing distributions is, as the name indicates, strictly advisory, and you have little or no control over investment management.

Evaluate the costs and benefits

Whether a DAF is right for you depends on how much you plan to give to charity, the amount of time and resources you wish to commit to philanthropic activities, your need to retain control over your charitable assets, and other estate planning objectives. We can help you evaluate the relative costs and benefits to determine if a DAF is right for you.

_____________________________________________________________________________

Ashleigh Laabs 2/3/22 Ashleigh Laabs 2/3/22

The 2021 gift tax return deadline is almost here, too

April 18, 2022, is the deadline for filing your federal income tax return. Keep in mind that the gift tax return deadline is on the very same date. So, if you made large gifts to family members or heirs last year, it’s important to determine whether you’re required to file Form 709.

Filing requirements

Generally, you must file a gift tax return for 2021 if, during the tax year, you made gifts that exceeded the $15,000-per-recipient annual gift tax exclusion (other than to your U.S. citizen spouse). (For 2022, the exclusion amount has increased to $16,000 per recipient or $32,000 if you split gifts with your spouse.)

You also need to file if you made gifts to a Section 529 college savings plan and wish to accelerate up to five years’ worth of annual exclusions ($75,000) into 2021. Other reasons to file include making gifts:

That exceeded the $159,000 (for 2021) annual exclusion for gifts to a noncitizen spouse,
Of future interests (such as remainder interests in a trust) regardless of the amount, or
Of jointly held or community property.

Keep in mind that you’ll owe gift tax only to the extent an exclusion doesn’t apply and you’ve used up your federal gift and estate tax exemption ($11.7 million for 2021). As you can see, some transfers require a return even if you don’t owe tax.

No return required

No gift tax return is required if your gifts for the year consist solely of gifts that are tax-free because they qualify as annual exclusion gifts, present interest gifts to a U.S. citizen spouse, educational or medical expenses paid directly to a school or health care provider, or political or charitable contributions.

But if you transferred hard-to-value property, such as artwork or interests in a family-owned business, consider filing a gift tax return even if you’re not required to. Adequate disclosure of the transfer in a return triggers the statute of limitations, generally preventing the IRS from challenging your valuation more than three years after you file.

Be ready

If you’re unsure whether you need to file a gift tax return or if you owe gift tax to the IRS, we can help. Act quickly, though, because the filing deadline is fast approaching.

_____________________________________________________________________________

Ashleigh Laabs 1/31/22 Ashleigh Laabs 1/31/22

Does your trust need protection?

Designing an estate plan can be a delicate balancing act. On the one hand, you want to preserve as much wealth as possible for your family by protecting it from estate taxes and creditors’ claims. On the other hand, you want to have some control over your assets during your life.

Unfortunately, these two goals often conflict with each other. Generally, the most effective way to remove wealth from your taxable estate and shield it from creditors is to place it in one or more irrevocable trusts. But, as the name suggests, an irrevocable trust requires you to relinquish control over the trust assets. One potential solution to this problem is to appoint a trust protector.

Trust protector’s duties

A trust protector is often compared to a member of a corporation’s board of directors. A trustee manages the trust’s day-to-day affairs while the trust protector serves in an oversight capacity to prevent trustee mismanagement and to participate in certain major decisions.

A trust protector’s specific powers are set forth in the trust document. Among other things, powers may include adding, changing or eliminating beneficiaries’ interests; replacing a trustee; and amending the trust or redirecting distributions to comply with new laws or to reflect beneficiaries’ changing circumstances.

One advantage of using a trust protector is that you can confer powers on the protector that you wouldn’t be able to hold yourself without exposing your assets to creditors or triggering gift or estate taxes.

Bear in mind that a trust protector should be distinguished from a trust advisor, who’s available to advise the trustee but has no power to make binding decisions on trust matters.

2 primary benefits

Trust protectors offer two primary benefits:

1. They provide a check against mismanagement, fraud or abuse by the trustee. A trust protector might have the power to remove or replace the trustee, or veto certain decisions, if the trustee isn’t acting in the beneficiaries’ best interests.

2. They allow you to build some flexibility into an otherwise rigid estate planning tool. Many people are reluctant to transfer assets to an irrevocable trust for fear that changing tax laws or changing circumstances years or even decades later may affect the trust’s ability to achieve their original goals. At the same time, they may be hesitant to provide the trustee with too much discretionary authority over the trust. A trust protector can step in if circumstances change and modify the trust or take other actions to ensure that the trust continues to accomplish your estate planning objectives.

Scope of a trust protector’s powers

What powers should you grant your trust protector? The answer depends on the nature of your estate plan, your family’s situation, the capabilities of the trustee and your specific estate planning objectives. But in most cases, it’s advisable to limit the trust protector’s authority to relatively narrow circumstances. Contact us if you have questions regarding the role a trust protector should play in your estate plan.

_____________________________________________________________________________

Ashleigh Laabs 1/24/22 Ashleigh Laabs 1/24/22

Educate Your Children On Wealth Management

If you’ve worked a lifetime to build a large estate, you undoubtedly would like to leave a lasting legacy to your children and future generations. Educating your children about saving, investing and other money management skills can help keep your legacy alive.

Teaching techniques

There’s no one right way to teach your children about money. The best way depends on your circumstances, their personalities and your comfort level.

If your kids are old enough, consider sending them to a money management class. For younger children, you might start by simply giving them an allowance in exchange for doing household chores. This helps teach them the value of work. And, after they spend the money all in one place a few times and don’t have anything left for something they really want, they (hopefully) will learn the value of saving. Opening a savings account or a CD, or buying bonds, can help teach kids about investing and the power of compounding.

For families that are charitably inclined, a private foundation can be a vehicle for teaching children about the joys of giving and the impact wealth can make beyond one’s family. For this strategy to be effective, children should have some input into the foundation’s activities.

Timing and amounts of distributions

Many parents take an all-or-nothing approach when it comes to the timing and amounts of distributions to their children — either transferring substantial amounts of wealth all at once or making gifts that are too small to provide meaningful lessons.

Consider making distributions large enough so that your kids have something significant to lose, but not so large that their entire inheritance is at risk. For example, if your child’s trust is worth $2 million, consider having the trust distribute $200,000 when your son or daughter reaches age 21. This amount is large enough to provide a meaningful test run of your child’s financial responsibility while safeguarding the bulk of the nest egg.

Introduce incentives, but remain flexible

An incentive trust is one that rewards children for doing things that they might not otherwise do. Such a trust can be an effective estate planning tool, but there’s a fine line between encouraging positive behavior and controlling your children’s life choices. A trust that’s too restrictive may incite rebellion or invite lawsuits.

Incentives can be valuable, however, if the trust is flexible enough to allow a child to chart his or her own course. A so-called principle trust, for example, gives the trustee discretion to make distributions based on certain guiding principles or values without limiting beneficiaries to narrowly defined goals. But no matter how carefully designed, an incentive trust won’t teach your children critical money skills.

Communication is key

To maintain family harmony when leaving a large portion of your estate to your children, clearly communicate the reasons for your decisions. Contact your estate planning advisor for more information.

_____________________________________________________________________________

Ashleigh Laabs 1/19/22 Ashleigh Laabs 1/19/22

Avoiding Undue Influence Claims

A primary purpose of estate planning is to ensure that your wealth is distributed according to your wishes after you die. But if a family member challenges the plan, that purpose may be defeated. If the challenge is successful, a judge will decide who’ll inherit your property.

Will contests and similar challenges often occur when one’s estate plan operates in an unexpected way. For example, if you favor one child over the others or leave a substantial inheritance to a nonfamily member, those who expected to inherit that wealth may challenge your plan, often on grounds of undue influence. There are steps you can take, however, to reduce the risks of these challenges.

Not all influence is undue

It’s important to recognize that a certain level of influence is permissible, so long as it doesn’t rise to the level of “undue” influence. For example, there’s generally nothing wrong with a daughter who encourages her father to leave her the family vacation home. But if the father is in a vulnerable position — perhaps he’s ill or frail and the daughter is his caregiver — a court might find that he’s susceptible to undue influence and that the daughter improperly influenced him to change his will.

Protecting your plan

Here are steps you can take to reduce the chances of undue influence claims and increase the odds your wishes are carried out:

Use a revocable trust. Rather than relying on a will alone, create a revocable, or “living,” trust. These trusts don’t go through probate, so they’re more difficult and costly to challenge.

Establish competency. Claims of undue influence often go hand in hand with challenges on grounds of lack of testamentary capacity. With your attorney, establish that you were “of sound mind and body” at the time you sign your will. It can go a long way toward combating an undue influence claim.

Avoid the appearance of undue influence. If you reward someone who’s in a position to influence you, take steps to avoid the appearance of undue influence. For example, prepare your will independently — that is, under conditions that are free from interference by family members or other beneficiaries.

To deter challenges to your plan, consider including a no-contest clause, which provides that, if a beneficiary challenges your will or trust unsuccessfully, he or she will receive nothing. Keep in mind, however, that you may want to leave something to people who are likely to challenge your plan; otherwise, they have nothing to lose by contesting it.

No guarantees

If your estate plan leaves any family members less of an inheritance than they expect, there’s a risk they’ll contest it. Although there’s no guaranteed way to protect your plan, these strategies can minimize the chances that a disgruntled beneficiary will challenge your plan in court. Your attorney can address any concerns you have about your family possibly challenging your estate plan.

_____________________________________________________________________________

Ashleigh Laabs 1/10/22 Ashleigh Laabs 1/10/22

With proper planning, a charitable remainder trust can replicate a “stretch” IRA

With proper planning, a charitable remainder trust can replicate a “stretch” IRA

The “stretch” IRA generally no longer exists. But if you have a substantial balance in a traditional IRA, a properly designed charitable remainder trust (CRT) can allow you to replicate many of its benefits.

SECURE Act’s effects on stretch IRAs

For years, a stretch IRA was an effective tool that allowed your children or other beneficiaries to stretch inherited IRA savings over their life expectancies. This was a big advantage, because it allowed funds to continue growing and compounding on a tax-deferred basis potentially for decades. However, the SECURE Act generally killed the stretch IRA, beginning on January 1, 2020, by requiring most beneficiaries of inherited IRAs (other than certain eligible individuals described below) to withdraw all of the funds within 10 years.

Requiring heirs to withdraw IRA funds more quickly means they’ll have to pay income taxes on those funds when they take distributions whether they need the money or not. This also may result in pushing them into higher tax brackets. Note that these rules don’t apply to spouses who inherit IRAs. As before, they may roll the funds into their own IRAs and defer distributions until they reach age 72.

In addition to your spouse, the SECURE Act designates several other potential beneficiaries for which a stretch IRA is still an option:

A person who isn’t more than 10 years younger than you (whether related to you or not),
A disabled or chronically ill person (as defined by the SECURE Act), or
A minor child, provided he or she is the sole beneficiary of a separate share of the IRA, either outright or in trust.

For a minor child, annual distributions may be based on the child’s life expectancy until he or she reaches the age of majority (usually 18 or 21), after which the remaining IRA funds must be distributed within the next 10 years.

The charitable solution

Leaving your IRA to a CRT may come close to duplicating the benefits of a stretch IRA. And even though the trust must preserve some of its assets for charity, the tax savings enjoyed by your heirs often make up for the loss of principal.

Here’s how it works: You provide in your estate plan that on your death your IRA will be transferred to a CRT. This is an irrevocable trust that pays out a percentage of its assets to your children or other beneficiaries for life (or for a term of up to 20 years) and then distributes its remaining assets to one or more charities. A CRT is a tax-exempt entity, so any assets you contribute to the trust — including IRAs — aren’t subject to tax unless they’re distributed to noncharitable beneficiaries.

The longer distributions can be stretched out, the closer a CRT comes to replicating a stretch IRA. It’s important to note, however, that the trust’s ability to do so depends on the age of your beneficiaries when you die. Contact us for more information.

_____________________________________________________________________________

Ashleigh Laabs 1/4/22 Ashleigh Laabs 1/4/22

Making funeral arrangements in advance can ease family turmoil after your death

It’s difficult for many people to think about their mortality, so it’s not surprising to learn that many put off planning their own funerals. Unfortunately, this lack of planning may result in emotional turmoil for surviving family members when someone dies unexpectedly.

Also, a death in the family may cause unintended financial consequences. Why not take matters out of your heirs’ hands? By planning ahead, as much as it may be disconcerting, you can remove this future burden from your loved ones.

Communicate your wishes

First, make your funeral wishes known to other family members. This typically includes instructions about where you are to be buried or cremated, if you prefer a formal or religious ceremony, and even the clothing you’ll be buried in.

It may also cover a memorial service in lieu of, or supplementing, a funeral. If you don’t have a next of kin or would prefer someone else to be in charge of funeral arrangements, you can appoint another representative.

Be aware that the methods for expressing these wishes vary from state to state. With the help of your attorney, you can include a provision in your will, language in a health care proxy or power of attorney, or a separate form specifically designed for communicating your funeral arrangements.

Whichever method you use, it should, at a minimum, state 1) whether you prefer burial or cremation, 2) where you wish to be buried or have your ashes interred or scattered (and any other special instructions), and 3) the person you’d like to be responsible for making these arrangements. Some people also request a specific funeral home.

Consider the ins and outs of a prepaid funeral

There’s a division of opinion in the financial community as to whether you should prepay funeral expenses. If you prepay and opt for a “guaranteed plan,” you lock in the prices for the arrangements, no matter how high fees may escalate before death. With a “nonguaranteed plan,” prices aren’t locked in, but the prepayment accumulates interest that may be put toward any rising costs.

When weighing whether to use a prepaid plan, the Federal Trade Commission recommends that you ask the following questions:

What happens to the money you’ve prepaid?
What happens to the interest income on prepayments placed in a trust account?
Are you protected if the funeral provider goes out of business?

Before signing off on a prepaid plan, learn whether there’s a cancellation clause to the plan in the event you change your mind.

Open a POD bank account

One alternative that avoids the pitfalls of prepaid plans is to let your family know your desired arrangements and set aside funds in a payable-on-death (POD) bank account. Simply name the person who will handle your funeral arrangements as beneficiary. When you die, he or she will gain immediate access to the funds without the need for probate. Contact us if you have questions about how to address your funeral in your estate plan. We’d be pleased to assist you.

Ashleigh Laabs 12/28/21 Ashleigh Laabs 12/28/21

Have you named contingent beneficiaries?

Although your will or revocable trust governs the distribution of many or most of your assets, certain assets — such as retirement plans, insurance policies, and bank or brokerage accounts — require you to name a beneficiary (or beneficiaries). This can be an advantage, because when you die, the funds can pass directly to your beneficiaries without going through probate. But to avoid unpleasant surprises, it’s critical not only to choose your beneficiaries carefully, but to also name contingent beneficiaries in case a primary beneficiary dies before you.

Outcome depends on asset type

Suppose a beneficiary predeceases you but you don’t get around to updating the beneficiary form before you die. If you haven’t named a contingent beneficiary, then the disposition of the funds depends on the type of asset.

For retirement plans, the plan document might call for the funds to go to your spouse or, if you’re not married, to your estate. Leaving retirement plan assets to your estate can have undesirable consequences. For one thing, they’ll pass according to the terms of your will, which may be contrary to your wishes. Plus, they’ll have to be distributed and taxed under a five-year rule, depriving your beneficiaries of opportunities to defer those taxes for 10 years or more.

For other types of assets, the funds will likely end up in your estate, which can lead to unfortunate results. Suppose, for example, that your will leaves your entire estate, valued at $1 million, to your son. You also have a $1 million life insurance policy naming your daughter as beneficiary. If your daughter predeceases you and you haven’t updated the beneficiary designation or named a contingent beneficiary (your grandchild, for example), then your son will receive everything, effectively disinheriting your daughter’s family.

Have a backup plan

To ensure that your wishes are fulfilled, name at least one contingent beneficiary for each primary beneficiary. Your contingent beneficiaries can be virtually anyone you choose, including distant family members, friends or even charitable organizations. Contact us if you have questions regarding beneficiary designations. We’d be pleased to help.

_____________________________________________________________________________

Ashleigh Laabs 12/19/21 Ashleigh Laabs 12/19/21

A blended family requires smart estate planning

If you’re married and have children from a previous marriage plus children or stepchildren from your current marriage, your family is considered a blended family. And because you’ll likely wish to pass your wealth on to all of your biological children but also provide for your spouse and perhaps any stepchildren, estate planning can get tricky. Two estate planning strategies to consider involve a qualified terminable interest property (QTIP) trust and an irrevocable life insurance trust (ILIT).

QTIP trust: The upside and downside

One of the most effective estate planning tools for blended families is a QTIP trust. This trust is designed to qualify for the estate tax marital deduction, so that assets you transfer to the trust aren’t taxed after your death.

Unlike an ordinary marital trust, however, a QTIP trust provides your spouse with income for life but can preserve the principal for your children from your previous marriage. Note that, when your spouse dies, the trust assets are included in his or her taxable estate.

Under the right circumstances, a QTIP trust is a great tool for balancing competing estate planning goals and preserving family harmony. But in some cases — particularly when one spouse is considerably older than the other — it can hinder estate planning efforts.

For example, Pete and Kim got married 10 years ago and have two children, ages six and four. Pete is age 50 and has two children from a previous marriage, ages 17 and 24. Kim is age 34 and this is her first marriage. Pete wants to make sure that Kim and their young children are provided for after his death, but he also wants to share his wealth with his older children. In addition, it’s important to him that everyone in the family feels they’ve been treated fairly.

A QTIP trust would allow Pete to spread his wealth among the family, however, it has a big disadvantage: Pete’s older children would have to wait until Kim died to receive their inheritance. And with a relatively small age difference between the older children and their stepmother, that could be a long time. Pete worries that such an arrangement would create tension.

ILIT: The alternative

As an alternative, Pete’s advisor suggests an ILIT. The ILIT purchases insurance on Pete’s life, and Pete makes annual exclusion gifts to the trust to cover the premiums. If the ILIT is designed properly, there won’t be any estate tax on the insurance proceeds.

When Pete dies, the ILIT collects the death benefit and pays it out to his children from his first marriage. The older children receive their inheritance immediately, and Pete’s other assets remain available to provide for Kim and the younger children.

Communication is key

Whether you choose a QTIP trust, an ILIT or another strategy, explain your plans — and the reasons behind them — to your children and spouse. Communication is important to maintaining blended family harmony. Contact us with any questions regarding estate planning and your blended family. We’d be pleased to assist you.

Ashleigh Laabs 12/19/21 Ashleigh Laabs 12/19/21

Is your estate plan up to date following a divorce?

If you’ve recently divorced, your time likely has been consumed with attorney meetings and negotiations, even if everything was amicable. Probably the last thing you want to do is review your estate plan. But you owe it to yourself and your children to make the necessary updates to reflect your current situation.

Keep assets in your control

The good news is that a divorce generally extinguishes your spouse’s rights under your will or any trusts. So there’s little danger that your ex-spouse will inherit your property outright, even if those documents haven’t been revised yet. If you have minor children, however, your ex-spouse might have more control over your wealth than you’d like.

Generally, property inherited by minors is held by a custodian until they reach the age of majority in the state where they reside (usually age 18, but in some states it’s age 21). In some cases, a surviving parent — perhaps your ex-spouse — may act as custodian. In such a case, your ex-spouse will have considerable discretion in determining how your assets are invested and spent while the children are minors.

One way to avoid this result is to create one or more trusts for the benefit of your children. With a trust, you can appoint the person who’ll be responsible for managing assets and making distributions to your children. It’s the trustee of your choosing — not your ex-spouse’s.

Consider a variety of trusts

As part of the post-divorce estate planning process, you might include a variety of trusts, including, but not limited to a:

Living trust. With a revocable living trust, you can arrange for the transfer of selected assets to designated beneficiaries. This trust type typically is exempt from the probate process and is often used to complement a will.

Credit shelter trust. This trust type typically is used to maximize estate tax benefits when you have children from a prior marriage and you also want to provide financial security for a new spouse. Essentially, the trust maximizes the benefits of the estate tax exemption.

Irrevocable life insurance trust (ILIT). If you transfer ownership of life insurance policies to an ILIT, the proceeds generally are removed from your taxable estate. Furthermore, your family may use part of the proceeds to pay estate costs.

Qualified terminable interest property (QTIP) trust. A QTIP trust is often used after divorces and remarriages. The surviving spouse receives income from the trust while the beneficiaries — typically, children from a first marriage — are entitled to the remainder when the surviving spouse dies.

Make the necessary revisions

If you’re currently in the middle of a divorce, contact us to help you make the necessary revisions to your estate plan, as well as to discuss changing the titling or the beneficiary designations on retirement accounts, life insurance policies and joint tenancy accounts.

Ashleigh Laabs 12/7/21 Ashleigh Laabs 12/7/21

Prepare for a new year by reviewing your estate plan

Hopefully, you already have a sound estate plan in place to protect the interests of your heirs and minimize potential estate tax liability. But that doesn’t mean you’re completely in the clear. You can’t just fill out the paperwork, lock up the documents in a file cabinet or store them electronically, and forget about it. Consider your estate plan to be a “work in progress.”

Notably, your circumstances could be affected by certain life events that should be reflected in your estate plan. And the plan should be reviewed periodically anyway to ensure that it still meets your main objectives and is up to date. Although you can examine the plan whenever you choose, the end of the year and the start of a new year is often an opportune time for individuals to take stock of their situations.

Reflect life-changing events

What sort of life events might require you to update or modify estate planning documents? The following list isn’t all-inclusive by any means, but it can give you a good idea of when changes may be required:

Your divorce or remarriage,
The birth or adoption of a child or grandchild,
The death of a spouse or another family member,
The illness or disability of you, your spouse or another family member,
When a child or grandchild reaches the age of majority,
When a child or grandchild has education funding needs,
Changes in long-term care insurance coverage,
Taking out a large loan or incurring other debt,
Sizable changes in the value of your assets,
Sale or purchase of a principal residence or second home,
Your retirement or the retirement of your spouse,
Receipt of a large gift or inheritance,
Sale of a business interest, or
Changes in federal or state income tax or estate tax laws.

As part of your estate plan review, examine the critical components — including the key legal documents incorporated within the plan.

Update your letter of instruction

As you review your estate plan, be sure to reread your letter of instruction and make any necessary revisions. Although a letter of instruction isn’t legally binding, it can be incredibly useful.

The letter may provide an inventory and location of assets; account numbers for securities, retirement plans, IRAs and insurance policies; and a list of professional contacts that can help your heirs after your death. It may also be used to state personal preferences (for example, specifics for funeral arrangements).

Prepare for a new year

Don’t put off your estate plan review any longer. Identify any items that should be changed and arrange to have the necessary adjustments made soon after 2022 arrives, if not sooner. We can help you complete your review and make any needed updates.

Ashleigh Laabs 12/7/21 Ashleigh Laabs 12/7/21

Consider all the angles of joint ownership

Estate planners generally tout the virtues of owning property jointly — and with good reason. Joint ownership offers several advantages for surviving family members. But this shouldn’t be viewed as a panacea for every estate planning concern. You must also be aware of all the implications.

2 types of joint ownership

As the name implies, joint ownership requires interests in property by more than one party. The type of joint ownership depends on the wording of the title to the property.

From a legal standpoint, there are two main options for married couples:

Joint tenants with rights of survivorship (JTWROS). This is the most common form and often is used for a personal residence or other real estate. With JTWROS, one spouse’s share of the property can be sold without the other spouse’s consent. The property is subject to the reach of creditors of all owners.
Tenancy by the entirety (TBE). In this case, one spouse’s share of the property can’t be sold without the other spouse joining in. But TBE offers more protection from creditors in noncommunity property states if only one spouse is liable for the debt. Currently, a TBE is available in slightly more than half the states.

Property may also be owned as a “tenancy in common.” With this form of ownership, each party has a separate transferable right to the property. Generally this would apply to co-owners who aren’t married to each other, though in certain situations married couples may opt to be tenants in common.

Key benefits

The main estate planning attraction of joint ownership is that the property avoids probate. Probate is the process, based on prevailing state law, whereby a deceased person’s assets are legally transferred to the beneficiaries. Depending on the state, it may be time-consuming or costly — or both — as well as being intrusive. Jointly owned property, however, simply passes to the surviving owner.

Disadvantages

Joint ownership is a convenient and inexpensive way to establish ownership rights. But the long-standing legal concept has its drawbacks, too. Some disadvantages of joint ownership relate to potential liability for federal gift and estate tax. Comparable rules may also apply on the state level.

For example, if parties other than a married couple create joint ownership, it generally triggers a taxable gift, unless each one contributed property to obtain a share of the title. However, for a property interest in securities or a financial account, there’s no taxable gift until the other person makes a withdrawal.

Lessons to be learned

Joint ownership is a valuable estate planning tool, especially because it avoids probate. But it’s not the solution for all problems. Nor should this technique be considered a replacement for a will. We can help coordinate joint ownership with other aspects of your estate plan.

Ashleigh Laabs 11/29/21 Ashleigh Laabs 11/29/21

Converting a traditional IRA to a Roth IRA can benefit your retirement and estate plans

Converting a traditional IRA to a Roth IRA can benefit your retirement and estate plans

Retirement planning and estate planning often go hand in hand: The more you save in retirement, the more you’ll have to pass on to the next generation. If you currently have a substantial balance in a traditional IRA, you may be considering whether you should convert the IRA to a Roth IRA. To answer that question, know that there are estate planning benefits to using a Roth IRA and that now is a good time to make the conversion.

Estate planning benefits

The main difference between a traditional IRA and a Roth IRA is the timing of income taxes. With a traditional IRA, your eligible contributions are deductible on your tax return, but distributions of both contributions and earnings are taxable when you receive them. With a Roth IRA, on the other hand, your contributions are nondeductible — that is, they’re made with after-tax dollars — but qualified distributions of both contributions and earnings are tax-free if you meet certain requirements.

Generally, from a tax perspective, you’re better off with a Roth IRA if you expect your tax rate to be higher when it comes time to withdraw the funds. That’s because you pay the tax up front when your tax rate is lower.

Also, from an estate planning perspective, a Roth IRA has two distinct advantages. First, unlike a traditional IRA, a Roth IRA doesn’t mandate required minimum distributions (RMDs) beginning at age 72. If your other assets are sufficient to meet your living expenses, you can allow the funds in a Roth IRA to continue growing tax-free for the rest of your life, multiplying the amount available for your loved ones. Second, after your death, your children or other beneficiaries can withdraw funds from a Roth IRA tax-free. In contrast, an inherited traditional IRA will come with a sizable income tax bill.

Timing is everything

The Tax Cuts and Jobs Act (TCJA) reduced individual income tax rates from 2018 through 2025. By making the conversion now, the TCJA both enhances the benefits of a Roth IRA and reduces the cost of converting. You’ll have to pay federal taxes when you convert from a traditional IRA to a Roth (and possibly state taxes too). But as previously discussed, Roth IRAs offer tax advantages if you expect your tax rate to be higher in the future.

By temporarily lowering individual income tax rates, the TCJA ensures that your tax rate will increase in 2026 (unless Congress lowers tax rates). Future tax rates are irrelevant, of course, if you plan to hold the funds for life and leave them to your loved ones. In that case, you’re generally better off with a Roth IRA, which avoids RMDs and allows the full balance to continue growing tax-free.

Proceed with caution

If you’re contemplating a Roth IRA conversion, discuss with us the costs, benefits and potential risks. Bear in mind, too, that certain provisions of the Build Back Better Act currently being discussed by Congress would restrict, and, in some circumstances, eliminate Roth conversions for certain taxpayers. Contact us to help determine if a Roth IRA conversion is right for you.

Ashleigh Laabs 11/23/21 Ashleigh Laabs 11/23/21

Why a gifting strategy still matters

The IRS recently announced next year’s cost-of-living adjustment amounts. For 2022, the federal gift and estate tax exemption has cracked the $12 million mark: $12.06 million to be exact. Arguably more notable, the annual gift tax exemption has increased by $1,000 to $16,000 per recipient ($32,000 for married couples). It’s adjusted only in $1,000 increments, so it typically increases only every few years.

With the federal gift and estate tax exemption so high, making lifetime gifts to your loved ones may seem less critical than it was in the past. But even if your wealth is well within the exemption amount, a lifetime gifting program offers significant estate planning and personal benefits.

Tax-free gifts

A program of regular tax-free gifts reduces the size of your estate and shields your wealth against potential future estate tax liability. Tax-free gifts include those within the annual gift tax exclusion — for 2021 the exclusion amount is $15,000 per recipient ($30,000 for married couples) — as well as an unlimited amount of direct payments of tuition or medical expenses on another person’s behalf.

Even though estate tax may not seem that important now because it’s not applicable to a vast majority of families, there are no guarantees that a future Congress won’t reduce the exemption amount. Indeed, the gift and estate tax exemption is scheduled to be reduced to an inflation-adjusted $5 million on January 1, 2026. And a provision in an earlier version of the Build Back Better Act currently being discussed by Congress also slashed the exemption amount. However, as of this writing, that provision is no longer included in the bill.

The good news is that lifetime gifts remove assets from your estate, including all future appreciation in value, providing some “insurance” against changes in the law down the road.

Taxable gifts

Taxable gifts — that is, gifts over the annual exclusion amount — may also provide advantages. Although these gifts are subject to tax (or applied against your exemption amount), they can reduce your tax liability by removing future appreciation from your estate.

When contemplating lifetime gifts, be sure to consider income tax implications. Currently, assets transferred at death receive a “stepped-up basis,” meaning that their tax basis increases or decreases to their fair market value amount on the date of death. This would allow your heirs to sell appreciated assets without triggering capital gains taxes.

Assets transferred during life, on the other hand, retain your tax basis, so the recipients could end up with a large tax bill should they sell them.

Beyond taxes

Even if gift-giving offered no tax advantages, there are many nontax benefits to making lifetime gifts. For example, it allows you to help loved ones or transfer business interests to the next generation.

Get with the program

Regardless of your level of wealth and whether you’re likely to be subject to estate tax, making gifts continues to offer substantial tax and nontax benefits. We’d be pleased to help you take advantage of these benefits.

Ashleigh Laabs 11/5/21 Ashleigh Laabs 11/5/21

Estate planning for the young and affluent can be tricky

Events of the last decade have taught us that tax law is anything but certain. So how can young, affluent people plan their estates when the tax landscape may look dramatically different 20, 30 or 40 years from now — or even a few months from now? The answer is by taking a flexible approach that allows you to hedge your bets.

Conflicting strategies

Many traditional estate planning techniques evolved during a time when the gift and estate tax exemption was relatively low and the top estate tax rate was substantially higher than the top income tax rate. Under those circumstances, it usually made sense to remove assets from the estate early to shield future asset appreciation from estate taxes.

Today, the exemption has climbed to $10 million, indexed annually for inflation ($11.7 million for 2021) and the top gift and estate tax rate (40%) is roughly the same as the top income tax rate (37%). If the gift and estate tax regime remains the same and your estate’s worth is within the exemption amount, estate tax isn’t a concern and there’s no gift and estate tax benefit to making lifetime gifts.

But there may be a big income tax advantage to keeping assets in your estate: Under current law, the basis of assets transferred at death is stepped up to their current fair market value, so beneficiaries can turn around and sell them without generating capital gains tax liability.

Unpredictable future

For young and affluent people, designing an estate plan is a challenge because it’s difficult to predict what the estate and income tax laws will look like — and what their own net worth will be — decades from now. If you believe that the value of your estate will remain lower than the exemption amount, then it may make sense to hold on to your assets and transfer them at death so your children can potentially enjoy the income tax benefits of a stepped-up basis.

But what if your wealth grows beyond the exemption amount so that estate taxes become a concern again? Or what if the exemption goes down? Indeed, Congress is currently considering legislation that would halve the gift and estate tax exemption to $5 million, indexed annually for inflation (which likely would be somewhere around $6 million for 2022). If that happens, you may have to remove assets from your estate to ease estate tax liability.

Or what if the step-up in basis rules change, reducing or eliminating the income tax benefits of holding assets until death? Major changes to the rules had been proposed earlier this year. These changes aren’t included in the latest version of the legislation, but they could be proposed again in the future.

Building flexibility into your plan

A carefully designed trust can make it possible to remove assets from your estate now, while giving the trustee the authority to force the assets back into your estate if that turns out to be the better strategy. This allows you to shield decades of appreciation from estate tax while retaining the option to include the assets in your estate should income tax savings become a priority.

For the technique to work, the trust must be irrevocable, the grantor (you) must retain no control over the trust assets (including the ability to remove and replace the trustee), and the trustee should have absolute discretion over distributions.

This trust type offers welcome flexibility, but it’s not risk-free. Contact us for more information.

BLOG

Strategic | Experienced | Connected