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Drafting Your Estate Plan Isn’t a Do-It-Yourself Project
There’s no shortage of online do-it-yourself (DIY) tools that promise to help you create an “estate plan.” But while these tools can generate wills, trusts and other documents relatively cheaply, they can be risky except in the simplest cases. If your estate is modest in size, your assets are in your name alone, and you plan to leave them to your spouse or other closest surviving family member, then using an online service may be a cost-effective option. Anything more complex can expose you to a variety of costly pitfalls.
Your plan’s details count
Part of the problem is that online services can help you create individual documents — the good ones can even help you comply with applicable laws, such as ensuring the right number of witnesses to your will — but they can’t help you create an estate plan. Putting together a plan means determining your objectives and coordinating a collection of carefully drafted documents designed to achieve those objectives. And in most cases, that requires professional guidance.
For example, let’s suppose Ken’s estate consists of a home valued at $500,000 and a mutual fund with a $500,000 balance. He uses a DIY tool to create a will that leaves the home to his daughter and the mutual fund to his son. It seems like a fair arrangement. But suppose that by the time Ken dies, he’s sold the home and invested the proceeds in his mutual fund. Unless he amended his will, he will disinherit his daughter. An experienced estate planning advisor would have anticipated such contingencies and ensured that Ken’s plan treated both children fairly, regardless of the specific assets in his estate.
Professional experience vs. technical expertise
DIY tools also fall short when a decision demands a professional’s experience rather than mere technical expertise. An online service makes it easy to name a guardian for your minor children, for example, but it can’t help you evaluate the many characteristics and factors that go into selecting the best candidate.
FMD will gladly any of your estate planning questions and help draft your documents.
© 2022
Life Insurance Still Plays an Important Role in Estate Planning
Because the federal gift and estate tax exemption amount currently is $12.06 million, fewer people need life insurance to provide their families with the liquidity to pay estate taxes. But life insurance can still play an important part in your estate plan, particularly in conjunction with charitable remainder trusts (CRTs) and other charitable giving strategies.
Home for highly appreciated assets
CRTs are irrevocable trusts that work like this: You contribute property to a CRT during your life or upon your death and the trust makes annual distributions to you or your beneficiary (typically, your spouse) for a specified period of time. When that period ends, the remainder goes to a charity of your choice.
These instruments may be useful when you contribute highly appreciated assets, such as stock or real estate, and want to reduce capital gains tax exposure. Because the CRT is tax-exempt, it can sell the assets and reinvest the proceeds without currently triggering the entire capital gain. Another benefit is that, if you opt to receive annual distributions from your trust, that income stream generally will be taxed at a lower rate than other income using a formula that combines ordinary taxable income, tax-exempt income, capital gains and other rates.
Here’s where life insurance comes in. Because CRT assets eventually go to charity — usually after both you and your spouse have died — you won’t have as much to leave to your children or other heirs. A life insurance policy can replace that “lost” wealth in a tax advantaged way.
Charities as beneficiaries
CRTs are ideal for philanthropically minded individuals. But there are other ways to use life insurance to fund charitable gifts and enjoy tax benefits. You might, for example, transfer your policy to a nonprofit organization and take a charitable income tax deduction (subject to certain limitations) for it. If you continue to pay premiums on the policy after the charity becomes its owner and beneficiary, you can take additional charitable deductions.
Another scenario is to just name a charity as your policy’s beneficiary. Because you retain ownership, you can’t take charitable income tax deductions during your life. But when you die, your estate will be entitled to an estate tax charitable deduction.
Wealth replacement tool
Life insurance can be used to replace wealth in many circumstances — not only when you’re donating to charity. For instance, if you’ve decided to forgo long term care (LTC) insurance and pay any LTC-related expenses (such as home nursing services or care in a nursing facility) out of pocket, you may not have as much to leave your heirs. Life insurance can help ensure that you provide your family with an inheritance.
Multiple benefits
Federal estate tax liability may no longer be a concern if your estate is valued at less than $12.06 million. But, depending on your goals, life insurance can help you make charitable gifts, leave money to your heirs and realize tax advantages. We can explain the types of policies that might be appropriate for estate planning purposes.
© 2022
Trust in a Trust to Keep Assets Secure
Whether the economic climate is stable or volatile, one thing never changes: the need to protect your assets from risk. Hazards may occur as a result of factors entirely outside of your control, such as the stock market or the economy. It’s even possible that dangers lie closer to home, including the behavior of your heirs and creditors. In any case, it’s wise to consider taking steps to mitigate potential peril. One such step is to set up a trust.
Make sure it’s irrevocable
A trust can be a great way to protect your assets — but it must become the owner of the assets and be irrevocable. That is, you as the grantor can’t modify or terminate the trust after it has been set up. This is the opposite of a revocable trust, which allows the grantor to modify the trust.
Once you transfer assets into an irrevocable trust, you’ve effectively removed all of your rights of ownership to the assets and the trust. The benefit is that, because the property is no longer yours, it’s unavailable to satisfy claims against you.
Placing assets in a trust won’t allow you to sidestep responsibility for any debts or claims that are already outstanding at the time you fund the trust. There may also be a substantial “look-back” period that could negate the protection that would otherwise be provided.
Consider a spendthrift trust
If you’re concerned about what will happen to your assets after they pass to the next generation, you may want to consider a “spendthrift” trust. Despite the name, a spendthrift trust does more than just protect your heirs from themselves. It can protect your family’s assets against dishonest business partners or unscrupulous creditors.
The trust also protects loved ones in the event of relationship changes. For example, if your son divorces, his spouse generally won’t be able to claim a share of the trust property in the divorce settlement.
Several trust types can be designated as a spendthrift trust — you just need to add a spendthrift clause to the trust document. This type of clause restricts a beneficiary’s ability to assign or transfer his or her interests in the trust, and it restricts the rights of creditors to reach the trust assets. But a spendthrift trust won’t avoid claims from your own creditors unless you relinquish any interest in the trust assets.
Bear in mind that the protection offered by a spendthrift trust isn’t absolute. Depending on applicable law, it’s possible for government agencies to reach the trust assets to, for example, satisfy a delinquent tax debt.
You can gain greater protection against creditors’ claims if you give your trustee more discretion over trust distributions. If the trust requires the trustee to make distributions for a beneficiary’s support, for example, a court may rule that a creditor can reach the trust assets to satisfy support-related debts. For increased protection, give the trustee full discretion over whether and when to make distributions. You’ll need to balance the potentially competing objectives of having the access you want and preventing others from having access against your wishes.
Secure your assets
Obviously, you can choose from many types of trusts, depending on your particular circumstances. Talk to us to help you determine which type of trust is best for you going forward.
© 2022
If You’re Moving Out of State, Review Your Estate Plan
Are you planning to move to a different state? It may be due to a change in jobs, a desire for a better climate, an opportunity to downsize or to be closer to your kids. In any event, you’ll have to cope with some hassles, including securing motor vehicle registrations, finding new physicians and updating financial records.
In addition to these tasks, here’s some practical advice: Don’t forget to amend your will and other estate planning documents. It doesn’t have to be the first thing you do, but it shouldn’t be the last, either.
Different state, different laws
Remember that the laws governing wills, as well as most other estate planning documents, vary from state to state. Although your will is still generally valid, you may need to take extra steps to ensure complete enforcement. For example, depending on your situation, you might consider appointing a different executor.
Furthermore, state laws for estate planning are constantly changing. This could adversely affect the implementation of your will, trusts, powers of attorney and medical directives. You may no longer be able to achieve the intended results or you might have to forfeit certain tax benefits. In a worst-case scenario, your documents could be rendered obsolete. Also, consider the state tax impact on pensions and other retirement plan accounts.
Review and revise before you relocate
The optimal approach is to review your estate plan before relocating to determine if any changes will be needed. We can help you revise your estate planning documents as necessary.
© 2022
Deducting a Trust’s Charitable Donations
If you’re charitably inclined, it may be desirable to donate assets held in a trust. Why? Perhaps you’re not ready to let go of assets you hold individually. Or maybe the tax benefits of donating trust property would be more attractive than making an individual donation.
Before moving forward, it’s important to understand the differences, for tax purposes, between individual and trust donations and the circumstances under which donations by a trust are deductible.
Tax treatment of individual donations
Generally, you’re permitted to deduct charitable donations for income tax purposes only if you itemize. Itemized charitable deductions for cash gifts to public charities generally are limited to 50% of adjusted gross income (AGI), while cash gifts to private foundations are limited to 30% of AGI. Note that through 2025, the Tax Cuts and Jobs Act increased the limit for certain cash gifts to public charities to 60% of AGI.
Noncash donations to public charities generally are limited to 30% of AGI and 20% for donations to private foundations. If you donate appreciated long-term capital gain property to a public charity, you’re generally entitled to deduct its full fair market value. But with the exception of publicly traded stock, deductions for similar donations to private foundations are limited to your cost basis in the property.
Deductions for ordinary income property (including short-term capital gain property) are limited to your cost basis, regardless of the recipient.
Tax treatment of trust donations
The discussion that follows focuses on nongrantor trusts. Because grantor trusts are essentially ignored for income tax purposes, charitable donations by such trusts are treated as if they were made directly by the grantor, subject to the rules applicable to individual donations. Also, this article doesn’t discuss trusts that are specifically designed for charitable purposes, such as charitable remainder trusts or charitable lead trusts.
Making charitable donations from a nongrantor trust may have several advantages over individual donations, including the ability to claim a charitable deduction even if you don’t itemize deductions on your individual income tax return. And a trust can deduct up to 100% of its gross taxable income, free of the AGI-based percentage limitations previously discussed.
In addition, trust deductions can be more valuable than individual deductions because the highest tax rates for trust income kick in at much lower income levels. If you’re contemplating a charitable donation from a trust, there are a few caveats to keep in mind:
The trust instrument must authorize charitable donations.
The donation must be made from (that is, traceable to) the trust’s gross taxable income. This includes donations of property acquired with such income, but not property that was contributed to the trust.
Unlike certain individual charitable donations, deductions for noncash donations by a trust generally are limited to the asset’s cost basis.
Special rules apply to trusts that own interests in partnerships or S corporations, as well as to certain older trusts (generally, those created on or before Oct. 9, 1969).
Make the most of charitable deductions
If income limits or restrictions on itemized deductions have hampered your ability to deduct charitable donations, consider making donations from a trust. We can help you determine if this is a tax-wise option for your situation.
© 2022
What Does “Probate” Mean?
The term “probate” is one you’ve probably heard and might associate with negative connotations. But you may not fully understand what it is. For some people, the term conjures images of lengthy delays waiting for wealth to be transferred as well as bitter disputes among family members. Others, because the probate process is open to the public, worry about their “dirty laundry” being aired out. The good news is that there are strategies you can employ to keep much or all of your estate out of probate.
Probate primer
Probate is predicated on state law, so the exact process varies from state to state. This has led to misconceptions about the length of probate. On average, the process takes six to nine months, but it can run longer for complex situations in certain states. Also, some states exempt small estates or provide a simplified process for surviving spouses.
In basic terms, probate is the process of settling an estate and passing legal title of ownership of assets to heirs. If the deceased person has a valid will, probate begins when the executor named in the will presents the document to the county courthouse. If there’s no will — in legal parlance, the deceased has died “intestate”— the court will appoint someone to administer the estate. Thereafter, this person becomes the estate’s legal representative.
The process
With that in mind, here’s how the process generally works. First, a petition is filed with the probate court, providing notice to the beneficiaries named in the deceased’s will. Typically, such notice is published in a local newspaper for the general public’s benefit. If someone wants to object to the petition, they can do so in court.
The executor takes an inventory of the deceased’s property, including securities, real estate and business interests. In some states, an appraisal of value may be required. Then the executor must provide notice to all known creditors. Generally, a creditor must stake a claim within a limited time specified under state law. The executor also determines which creditor claims are legitimate and then meets those obligations. He or she also pays any taxes and other debts that are owed by the estate.
Ownership of assets is then transferred to beneficiaries named in the will, following the waiting period allowed for creditors to file claims. If the deceased died intestate, state law governs the disposition of those assets. However, before any transfers take place, the executor must petition the court to distribute the assets as provided by will or state intestacy law.
Ways to avoid probate
Certain assets, such as an account held jointly or an IRA or bank account for which you’ve designated a beneficiary, are exempt from probate. But you also may be able to avoid the process with additional planning. The easiest way to do this is through the initial form of ownership or the use of a living trust.
In the case of joint ownership with rights of survivorship, you acquire the property with another party, such as your spouse. The property then automatically passes to the surviving joint tenant upon the death of the deceased joint tenant. This form of ownership typically is used when a married couple buys a home or other real estate.
A revocable living trust may be used to avoid probate and protect privacy. The assets are typically transferred to the trust during your lifetime and managed by a trustee that you designate.
Protect your privacy
The reason many people dread the word probate is the fact that it’s a public process. But by using the right strategies, you can protect your privacy while saving your family time, money and hardship. We can help you implement the right techniques.
© 2022
2 Estate Planning Options for Families with Disabled Loved Ones
If you have a family member who’s disabled, financial and estate planning can be tricky. You don’t want to jeopardize his or her eligibility for means-tested government benefits such as Medicaid or Supplemental Security Income (SSI). A special needs trust (SNT) is one option to consider. Another is to open a Section 529A account, also referred to as an ABLE account, because it was created by the Achieving a Better Life Experience (ABLE) Act.
ABLE account details
The ABLE Act allows family members and others to make nondeductible cash contributions to a qualified beneficiary’s ABLE account, with total annual contributions limited to the federal gift tax annual exclusion amount ($16,000 for 2022). To qualify, a beneficiary must have become blind or disabled before age 26.
The account grows tax-free, and earnings may be withdrawn tax-free provided they’re used to pay “qualified disability expenses.” These include health care, education, housing, transportation, employment training, assistive technology, personal support services, financial management and legal expenses.
An ABLE account generally won’t affect the beneficiary’s eligibility for Medicaid and SSI — which limits a recipient’s “countable assets” to just $2,000 — with a couple of exceptions. First, distributions from an ABLE account used to pay housing expenses are countable assets. Second, if an ABLE account’s balance grows beyond $100,000, the beneficiary’s eligibility for SSI is suspended until the balance is brought below that threshold.
ABLE account vs. SNT
Here’s a quick overview of the relative advantages and disadvantages of ABLE accounts and SNTs:
Availability. Anyone can establish an SNT, but ABLE accounts are available only if your home state offers them, or contracts with another state to make them available. Also, as previously noted, ABLE account beneficiaries must have become blind or disabled before age 26. There’s no age limit for SNTs.
Qualified expenses. ABLE accounts may be used to pay only specified types of expenses. SNTs may be used for any expenses the government doesn’t pay for, including “quality-of-life” expenses, such as travel, recreation, hobbies and entertainment.
Tax treatment. An ABLE account’s earnings and qualified distributions are tax-free. An SNT’s earnings are taxable.
Contribution limits. Annual contributions to ABLE accounts currently are limited to $16,000, and total contributions are effectively limited to $100,000 to avoid suspension of SSI benefits. There are no limits on contributions to SNTs, although contributions that exceed $16,000 per year may be subject to gift tax.
Investments. Contributions to ABLE accounts are limited to cash, and the beneficiary (or his or her representative) may direct the investment of the account funds twice a year. With an SNT, you can contribute a variety of assets, including cash, stock or real estate. And the trustee — preferably an experienced professional fiduciary — has complete flexibility to direct the trust’s investments.
Medicaid reimbursement. If an ABLE account beneficiary dies before the account assets have been depleted, the balance must be used to reimburse the government for any Medicaid benefits the beneficiary received after the account was established. There’s also a reimbursement requirement for SNTs. With either an ABLE account or an SNT, any remaining assets are distributed according to the terms of the account or the SNT.
Examine the differences
When considering which option is best for your family, remember the key differences: An ABLE account may offer greater tax advantages, while an SNT may offer greater flexibility. We can help your family decide how to proceed to best provide for your loved one.
© 2022
Does Your Trust Provide for the Removal of a Trustee?
To ensure that a trust operates as intended, it’s critical to appoint a trustee that you can count on to carry out your wishes. But to avoid protracted court battles in the event that the trustee isn’t doing a good job, consider giving your beneficiaries the right to remove and replace a trustee. Without this option, your beneficiaries’ only recourse would be to petition a court to remove the trustee for cause.
Defining “cause”
The definition of “cause” varies from state to state, but common grounds for removal include:
Fraud, mismanagement or other misconduct,
A conflict of interest with one or more beneficiaries,
Legal incapacity,
Poor health, or
Bankruptcy or insolvency if it would affect the trustee’s ability to manage the trust.
Not only is it time-consuming and expensive to go to court, but most courts are hesitant to remove a trustee that was chosen by the trust’s creator. That’s why including a provision in the trust document that allows your beneficiaries to remove a trustee without cause if they’re dissatisfied with his or her performance can be a good idea. Alternatively, you could authorize your beneficiaries to remove a trustee under specific circumstances outlined in the trust document.
Adding successor trustees
If you’re concerned about giving your beneficiaries too much power, you can include a list of successor trustees in the trust document. That way, if the beneficiaries end up removing a trustee, the next person on the list takes over automatically, rather than the beneficiaries choosing a successor.
Alternatively, or, in addition, you could appoint a “trust protector” with the power to remove and replace trustees and to make certain other decisions regarding management of the trust. Contact us for additional information on the role of a trustee.
© 2022
Avoid These 4 Estate Planning Pitfalls
No one likes to contemplate his or her own mortality. But ignoring the need for an estate plan or procrastinating in the creation of one is asking for trouble. If you haven’t started the process, don’t delay any longer. For your estate plan to achieve your goals, avoid these four pitfalls:
Pitfall #1: Failing to update beneficiary forms. Your will spells out who gets what, where, when and how, but it’s often superseded by other documents such as beneficiary forms for retirement plans, annuities, life insurance policies and other accounts. Therefore, like your will, you must also keep these forms up to date. For example, despite your intentions, retirement plan assets could go to a sibling or parent — or even worse, an ex-spouse — instead of your children or grandchildren. Review beneficiary forms periodically and make any necessary adjustments.
Pitfall #2: Not properly funding trusts. Frequently, an estate plan will include one or more trusts, including a revocable living trust. The main benefit of a living trust is that assets transferred to the trust don’t have to be probated and exposed to public inspection. It’s generally recommended that such a trust be used only as a complement to a will, not as a replacement.
However, the trust must be funded with assets, meaning that legal ownership of the assets must be transferred to the trust. For example, if real estate is being transferred, the deed must be changed to reflect this. If you’re transferring securities or bank accounts, you should follow the directions provided by the financial institutions. Otherwise, the assets must be probated.
Pitfall #3: Mistitling assets. Both inside and outside of trusts, the manner in which you own assets can make a big difference. For instance, if you own property as joint tenants with rights of survivorship, the assets will go directly to the other named person, such as your spouse, on your death.
Not only is titling assets critical, you should review these designations periodically, just as you should your beneficiary designations. Major changes in your personal circumstances or the prevailing laws could dictate a change in the ownership method.
Pitfall #4: Not coordinating different plan aspects. Typically, there are several moving parts to an estate plan, including a will, a power of attorney, trusts, retirement plan accounts and life insurance policies. Don’t look at each one in a vacuum. Even though they have different objectives, consider them components that should be coordinated within your overall plan. For instance, you may want to arrange to take distributions from investments — including securities, qualified retirement plans, and traditional and Roth IRAs — in a way that preserves more wealth.
To help ensure that your estate plan succeeds at reaching your goals and avoids these pitfalls, turn to us. We can provide you with the peace of mind that you’ve covered all the estate planning bases.
© 2022
Complete Your Estate Plan By Adding Powers of Attorney
As you create your estate plan, your main objectives likely revolve around your family, both current and future generations. Your goals may include reducing estate tax liability so that you can pass as much wealth as possible to your loved ones.
But it’s also critical to think about yourself. What if you’re unable to make financial and medical decisions? To address this risk, powers of attorney (POA) for property and health care are crucial components to include in your estate plan.
What is a POA?
A POA is defined as a legal document authorizing another person to act on your behalf. This person is referred to as the “attorney-in-fact” or “agent” — or sometimes by the same name as the document, “power of attorney.” Generally, there are separate POAs for property and health care.
Be aware that a POA is no longer valid if you become incapacitated. For many people, this is actually when the authorization is needed the most. Therefore, to thwart dire circumstances, you can adopt a “durable” POA.
A durable POA remains in effect if you become incapacitated and terminates only on your death. Thus, it’s generally preferable to a regular POA. The document must include specific language required under state law to qualify as a durable POA.
Who should you name as POA?
Despite the name, your POA doesn’t necessarily have to be an attorney, although that’s an option. Typically, in the case of POAs for property, the designated agent is either a professional, such as an attorney, CPA or financial planner, or a family member or close friend. In any event, the person should be someone you trust implicitly and who is adept at financial matters. In the case of health care POAs, a family member or close friend is the most common choice.
Regardless of whom you choose, it’s important to name a successor agent in case your top choice is unable to fulfill the duties or predeceases you.
Usually, the POA will simply continue until death. However, you may revoke a POA — whether it’s durable or not — at any time and for any reason. If you’ve had a change of heart, notify the agent in writing about the revocation. In addition, notify other parties who may be affected.
How does a health care POA differ from a living will?
A durable POA for health care can, for instance, establish the terms for determining whether you’re incapacitated. It’s important that you discuss these matters in detail with your agent to give more direction on your wishes.
Don’t confuse a health care POA with a living will. A durable POA gives another person the power to make health care decisions in your best interests. In contrast, a living will provides specific directions concerning end-of-life decisions.
Final thoughts
To ensure that your health care and financial wishes are carried out, consider preparing and signing POAs as soon as possible. Also, don’t forget to let your family know how to gain access to the POAs in case of emergency. Finally, health care providers and financial institutions may be reluctant to honor a POA that was executed years or decades earlier. So, it’s a good idea to sign new documents periodically. Contact us with questions.
© 2022
Leave a Lasting Legacy with a Family Education Trust
Providing for the educational needs of your children, grandchildren and even future generations is an honorable estate planning objective. What are your options for achieving this goal? A 529 plan can be a highly effective tool for funding tuition and other educational expenses on a tax-advantaged basis. But after your death, there’s no guarantee that subsequent plan owners will continue to use it to fulfill your original vision. An alternative strategy is to create a family education trust that invests in one or more 529 plans.
529 plan flexibility
529 plans are state-sponsored investment accounts that permit parents, grandparents or other family members to make substantial cash contributions. Contributions are nondeductible, but the funds grow tax-free and earnings may be withdrawn tax-free for federal income tax purposes (plus state tax breaks in some cases) provided they’re used for qualified education expenses. Qualified expenses include tuition, fees, books, supplies, equipment, and some room and board at most accredited colleges and universities and certain vocational schools.
529 plans offer owners a great deal of flexibility. For example, depending on a plan’s terms, owners have control over the timing of distributions, can change beneficiaries and can roll the funds over into another state’s plan tax-free. It’s even possible to recover funds that won’t be used for education expenses (subject to taxes and, in most cases, a 10% penalty).
In addition to the risk that a subsequent owner will use the funds for noneducational purposes, disadvantages of 529 plans include relatively limited investment choices and an inability to invest assets other than cash.
Transfer a 529 plan to a trust
Establishing a family education trust to hold one or more 529 plans provides several benefits. For example, it permits you to maintain tax-advantaged education funds indefinitely (depending on applicable state law) to benefit future generations and it keeps the funds out of the hands of those who would use them for other purposes.
In addition, the trust allows you to establish guidelines on which family members are eligible for educational assistance and direct how the funds will be used or distributed in the event they’re no longer needed for educational purposes. You can also appoint trustees and successor trustees to oversee the trust.
Finally, the trust can use funds held outside of 529 plans for purposes other than education, such as paying medical expenses or nonqualified living expenses.
Turn to the professionals
Leaving an education legacy for your loved ones and future heirs requires considerable planning, but can be incredibly fulfilling for you and beneficial for your family. We can provide guidance in creating a family education trust.
© 2022
Estates now have an additional three years to file for a portability election
Portability allows a surviving spouse to apply a deceased spouse’s unused federal gift and estate tax exemption amount toward his or her own transfers during life or at death. To secure these benefits, however, the deceased spouse’s executor must have made a portability election on a timely filed estate tax return (Form 706). The return is due nine months after death, with a six-month extension option.
Unfortunately, estates that aren’t otherwise required to file a return (typically because they don’t meet the filing threshold) often miss this deadline. The IRS recently revised its rules for obtaining an extension to elect portability beyond the original nine-months after death (plus six-month extension) timeframe.
What’s new?
In 2017, the IRS issued Revenue Procedure 2017-34, making it easier (and cheaper) for estates to obtain an extension of time to file a portability election. The procedure grants an automatic extension, provided:
The deceased was a U.S. citizen or resident,
The executor wasn’t otherwise required to file an estate tax return and didn’t file one by the deadline, and
The executor files a complete and properly prepared estate tax return within two years of the date of death.
Since the 2017 ruling, the IRS has had to issue numerous private letter rulings granting an extension of time to elect portability in situations where the deceased’s estate wasn’t required to file an estate tax return and the time for obtaining relief under the simplified method (two years of the date of death) had expired. According to the IRS, these requests placed a significant burden on the agency’s resources.
The IRS has now issued Revenue Procedure 2022-32. Under the new procedure, an extension request must be made on or before the fifth anniversary of the deceased’s death (an increase of three years). This method, which doesn’t require a user fee, should be used in lieu of the private letter ruling process. (The fee for requesting a private letter ruling from the IRS can cost hundreds or thousands of dollars.)
Don’t miss the revised deadline
If your spouse predeceases you and you’d benefit from portability, be sure that his or her estate files a portability election by the fifth anniversary of the date of death. Contact us with any questions you have regarding portability.
© 2022
When little things mean a lot: Estate planning for personal property
Personal items — which may have modest monetary value but significant sentimental value — may be more difficult to address in an estate plan than big-ticket items. Squabbling over these items may lead to emotionally charged disputes and even litigation. In some cases, the legal fees and court costs can eclipse the monetary value of the property itself.
Create a dialogue
There’s no reason to guess which personal items mean the most to your children and other family members. Create a dialogue to find out who wants what and to express your feelings about how you’d like to share your prized possessions.
Having these conversations can help you identify potential conflicts. After learning of any ongoing issues, work out acceptable compromises during your lifetime so that your loved ones don’t end up fighting over your property after your death.
Make specific bequests when possible
Some people have their beneficiaries choose the items they want or authorize their executors to distribute personal property as they see fit. For some families, this approach may work. But more often than not, it invites conflict.
Generally, the most effective strategy for avoiding costly disputes and litigation over personal property is to make specific bequests — in your will or revocable trust — to specific beneficiaries. For example, you might leave your art collection to your son and your jewelry to your daughter.
Specific bequests are particularly important if you wish to leave personal property to a nonfamily member, such as a caregiver. The best way to avoid a challenge from family members on grounds of undue influence or lack of testamentary capacity is to express your wishes in a valid will executed when you’re “of sound mind.”
If you use a revocable trust (sometimes referred to as a “living” trust), you must transfer ownership of personal property to the trust to ensure that the property is distributed according to the trust’s terms. The trust controls only the property you put into it. It’s also a good idea to have a “pour-over” will, which provides that any property you own at your death is transferred to your trust. Keep in mind, however, that property that passes through your will and pours into your trust generally must go through probate.
Prepare a memorandum
A more convenient solution than listing every gift of personal property in a will or trust is to write a personal property memorandum. In many states, a personal property memorandum is legally binding, provided it’s specifically referred to in your will and meets certain other requirements. You can change it or add to it at any time without the need to formally amend your will. Even if it’s not legally binding in your state, however, a personal property memorandum can be an effective tool for expressing your wishes and explaining the reasons for your gifts, which can go a long way toward avoiding disputes.
© 2022
Take a balanced approach to retirement and estate planning using a split annuity
If you’re approaching retirement or have already retired, one of the biggest challenges is balancing the need to maintain your standard of living with your desire to preserve as much wealth as possible for your loved ones. This balance can be difficult to achieve, especially when retirement can last decades. One strategy to consider is the split annuity, which creates a current income stream while preserving wealth for the future.
ABCs of an annuity
An annuity is a tax-advantaged investment contract, usually with an insurance company or other financial services provider. You pay either a lump sum or annual premiums, and in exchange, the provider makes periodic payments to you for a term of years or for life.
For purposes of the split annuity strategy discussed below, we’ll focus on “fixed” annuities, which generally provide a guaranteed minimum rate of return. Other types of annuities include “variable” and “equity-indexed,” which may offer greater upside potential but also involve greater risk.
Annuities can be immediate or deferred. As the names suggest, with an immediate annuity, payouts begin right away, while a deferred annuity is designed to begin payouts at a specified date in the future.
From a tax perspective, annuity earnings are tax-deferred — that is, they grow tax-free until they’re paid out or withdrawn. A portion of each payment is subject to ordinary income tax, and a portion is treated as a tax-free return of principal (premiums). The ability to accumulate earnings on a tax-deferred basis allows deferred annuities to grow more quickly than comparable taxable accounts, which helps make up for their usually modest interest rates.
Annuities offer some flexibility to withdraw or reallocate the funds should your circumstances change. But keep in mind that — depending on how much you withdraw and when — you may be subject to surrender or early withdrawal charges.
Split annuity strategy
A split annuity may sound like a single product, but in fact, it simply refers to two (or more) annuities, usually funded with a single investment. In a typical split annuity strategy, you use a portion of the funds to purchase an immediate annuity that makes fixed payments to you for a specified term (10 years, for example). The remaining funds are applied to a deferred annuity that begins paying out at the end of the initial annuity period.
Ideally, at the end of the immediate annuity term, the deferred annuity will have accumulated enough earnings so that its value is equal to your original investment. In other words, if the split annuity is designed properly, you’ll enjoy a fixed income stream for a term of years while preserving your principal.
At the end of the term, you can reevaluate your options. For example, you might start receiving payments from the deferred annuity, withdraw some or all its cash value, or reinvest the funds in another split annuity or another investment vehicle.
If you’re interested in learning more about a split annuity, please contact us. We’d be pleased to help you determine if this strategy is right for your situation.
4 estate planning documents your college-aged child should have
Does your college-aged child have a basic estate plan? In more cases than not, the answer is “no.” The good news is that the summer months are the perfect time to enlist the help of an estate planning advisor to create a plan, as your child will be available to sign the documents before heading to school in the fall.
Here are the four critical estate planning documents college-bound students should have:
Will. Although your child is still in his or her upper teens or early twenties, he or she isn’t too young to have a will drawn up. The will specifies the disposition of his or her assets and can tie up other loose ends of the estate.
Health care power of attorney. With a health care power of attorney, your child appoints someone to act as his or her proxy or surrogate for health care decisions. Typically, a parent is designated as the attorney-in-fact for this purpose.
HIPAA authorization. To accompany the health care power of attorney, Health Insurance Portability and Accountability Act (HIPAA) authorization gives health care providers the ability to share information about your child’s medical condition with you and your spouse. Absent a HIPAA authorization, making health care decisions could be more difficult.
Financial power of attorney. This legal document enables you and your spouse to conduct financial activities on your child’s behalf. A “durable” power of attorney, which is the most common form, continues in the event that your child becomes incapacitated.
If you and your child are ready to create a basic estate plan, please don’t hesitate to contact us. We’d be pleased to help give your family the peace of mind that comes with having an estate plan.
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Understanding the terms of health care directives
Estate planning experts usually cite the need to include advance health care directives in a comprehensive estate plan. But there may be different legal names given to those directives, depending on one’s jurisdiction.
In any event, regardless of what they’re called in the state where you reside, it’s important to create these documents and keep your family in the loop. Let’s take a closer look at a few health care directives.
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. This is also called a health care proxy in some states.
Choosing an agent is critical. You probably can’t anticipate every situation that might arise — virtually no one can — 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 a successor in the event your first choice is unable to do the job.
Living wills
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 do not 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 living wills vary from state to state. Have an attorney who’s experienced in these matters prepare your living will based on the prevailing laws.
DNRs and DNIs
Despite the common perception, it’s not a legal requirement for you to have an advance 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.
Putting directives into action
Advance 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 to have certain forms signed by a witness or notarized. If you’re unsure of the requirements or the process, contact an attorney for assistance.
Review your advance directives with your physician and your health care agent to be sure you’ve accurately filled out the forms. Then let all the interested parties — including your attorney, physician, power of attorney agent and family members — know where the documents are located and how to access them.
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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.
Opening up to SLAT opportunities
Opening up to SLAT opportunities
Estate tax planning can become complicated when multiple parties are involved. For example, you may be concerned about providing assets to a surviving spouse of a second marriage, while also providing for your children from your first marriage. Of course, you also want to take advantage of favorable estate tax provisions in the law.
Fortunately, there’s a relatively simple way to meet your objectives with few dire tax consequences. It’s commonly called a spousal lifetime access trust (SLAT).
A SLAT in action
Essentially, a SLAT is an irrevocable trust established by a grantor spouse for the benefit of the other spouse — called the beneficiary spouse — plus other family members, such as children and grandchildren. The beneficiary spouse is granted limited access to the trust’s funds. As a result, the assets generally are protected from the reach of the beneficiary spouse’s creditors. This ensures that the remainder beneficiaries — namely, the children and grandchildren — will have a nest egg to rely on.
According to the SLAT terms, lifetime distributions are made to the beneficiary spouse to meet his or her needs. Preferably, if other funds are available to the beneficiary spouse outside of the trust, those funds are used first instead of making regular distributions to the spouse. Otherwise, distributions from the SLAT to the beneficiary spouse will reduce the trust’s effectiveness over time.
Favorable tax provisions
One of the primary attractions of a SLAT is that it’s designed to minimize federal tax liabilities. First, the transfer of assets is treated as a taxable gift, but it can be sheltered from gift tax by a combination of the annual gift tax exclusion ($16,000 for 2022) and the gift and estate tax exemption ($12.06 million for 2022). However, be aware that use of the exemption during the grantor spouse’s lifetime reduces the available estate tax shelter at death.
Second, assets transferred by the grantor spouse to a SLAT are removed from his or her taxable estate. Thus, estate taxes aren’t a concern, thereby allowing the remaining estate tax exemption to be used for other assets.
Third, a SLAT is considered to be a “grantor trust” for income tax purposes. In other words, when a grantor spouse establishes a SLAT for the benefit of the beneficiary spouse, the trust’s taxable income is reported on the grantor’s personal tax return, but the trust entity pays zero tax. This may be advantageous because the assets can compound inside the trust without any income tax erosion. On the death of the grantor spouse, the trust is required to pay income tax.
Other planning considerations
As mentioned above, the transfer of assets to a SLAT is a gift, so the grantor must file a federal gift tax return. Finally, don’t forget that a SLAT is an irrevocable trust. Thus, once the grantor spouse transfers assets to the trust, he or she can’t get them back.
If you’re considering using a SLAT, contact us for additional details.
© 2022
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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.
Careful planning required for beneficiaries to borrow from a trust
Intrafamily loans allow you to provide financial assistance to loved ones — often at favorable terms — while potentially reducing gift and estate taxes. But what about families that lack the liquid assets to make such loans? Are there other options if they have a trust?
One lesser-known possibility is for trust beneficiaries to borrow money from a trust. This strategy requires careful planning, however, because the trustee must consider his or her fiduciary duty to the trust and its other beneficiaries in approving and structuring such a loan.
Benefits of intrafamily loans
An intrafamily loan can be a great way to help out your children or other family members financially while also transferring significant amounts of wealth, free of gift and estate tax. Why not simply make an outright gift? Actually, a gift is the better option, so long as your unused exemption is enough to cover it and you don’t need the funds or the interest income. But if transfer taxes are an issue or you’re not prepared to part with the money just yet, a loan can be an attractive alternative.
Generally, to pass muster with the IRS, the interest rate on an intrafamily loan must be at least the applicable federal rate for the month in which the loan is made. Otherwise, the IRS may view the loan as a disguised distribution, which can result in a variety of unpleasant tax complications. The loan should also be documented by a promissory note and otherwise treated as an arm’s-length transaction.
Trust loans vs. distributions
If an intrafamily loan isn’t an option, it may be possible for a trust beneficiary to obtain a loan from the trust. You might wonder why a beneficiary would borrow from the trust rather than take a distribution. There are several situations in which a loan may be necessary or desirable, including:
The trust’s terms place conditions on distributions that aren’t currently satisfied,
The borrower seeks an amount that exceeds limits on distributions imposed by the trust (an income-only trust, for example),
The trust has multiple beneficiaries and the borrower seeks an amount that would be unfair to other beneficiaries if taken as a distribution, or
A loan is preferable for tax planning purposes.
Be sure to check whether trust loans are permissible. Many trust instruments explicitly authorize loans.
Handle with care
There’s a critical difference between intrafamily loans and trust loans: The trustee has a fiduciary duty to manage the trust in a prudent and impartial manner. If you lend money to family members from your personal assets, you’re generally permitted to structure the transaction as you see fit.
However, a trustee considering a loan request must act in the best interests of the trust and all of its beneficiaries. So, for example, a trustee who approves a loan to a current beneficiary who’s a bad credit risk is likely breaching his or her fiduciary duty to the remainder beneficiaries.
Contact us for additional details.
© 2022
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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.
What estate planning strategies are available for non-U.S. citizens?
Are you, or is your spouse, a non-U.S. citizen? If so, several traditional estate planning techniques won’t be available to you. However, if you’re a U.S. resident, but not a citizen, the IRS will treat you similarly to a U.S. citizen.
If you’re considered a resident, you’re subject to federal gift and estate taxes on your worldwide assets, but you also enjoy the benefits of the $12.06 million federal gift and estate tax exemption and the $16,000 per recipient annual exclusion in 2022. And you can double the annual exclusion to $32,000 through gift-splitting with your spouse, so long as your spouse is a U.S. citizen or resident. Special rules apply to the marital deduction, however.
Understanding residency
Residency is a complicated subject. IRS regulations define a U.S. resident for federal estate tax purposes as someone who had his or her domicile in the United States at the time of death. A person acquires a domicile in a place by living there, even briefly, with a present intention of making that place a permanent home.
Whether you have your domicile in the United States depends on an analysis of several factors, including the relative time you spend in the United States and abroad, the locations and relative values of your residences and business interests, visa status, community ties, and the location of family members.
Estate tax law for nonresident aliens
If you’re a nonresident alien — that is, if you’re neither a U.S. citizen nor a U.S. resident — there’s good news and bad news in regard to estate tax law. The good news is that you’re subject to U.S. gift and estate taxes only on property that’s “situated” in the United States. Also, you can take advantage of the $16,000 annual exclusion (although you can’t split gifts with your spouse).
The bad news is that your estate tax exemption drops from $12.06 million to a miniscule $60,000, so substantial U.S. property holdings can result in a big estate tax bill. Taxable property includes U.S. real estate as well as tangible personal property (such as cars, boats and artwork) located in the United States.
Determining the location of intangible property — such as stocks, bonds, partnership interests or other equity or debt interests — is more complicated. For example, if a nonresident alien makes a gift of stock in a U.S. corporation, the gift is exempt from U.S. gift tax. But a bequest of that same stock at death is subject to estate tax. On the other hand, a gift of cash on deposit in a U.S. bank is subject to gift tax, while a bequest of the same cash would be exempt from estate tax.
We can help you determine which property is situated in the United States and explore strategies for minimizing your tax exposure.
© 2022
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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.
Power up your trust with Crummey powers
The unified gift and estate tax exemption is set at an inflation-adjusted $12.06 million for 2022, up from $11.7 million for 2021. This means that for many families, estate tax liability isn’t a factor. However, for others, the annual gift tax exclusion continues to be an important estate planning strategy — especially since future tax law changes could lower the gift and estate tax exemption. For this reason, using a Crummey trust in your estate plan remains an important estate planning strategy. Here’s why.
Using the annual exclusion
Under the annual gift tax exclusion, you can give gifts to each recipient, valued up to a specific limit, without incurring any gift tax. The limit for 2022 is $16,000 per recipient. (This amount is indexed for inflation, but only in $1,000 increments.)
Therefore, if you have, for example, three adult children and seven grandchildren, you can give each one $16,000 this year, for a total of $160,000, and pay zero gift tax. The exclusion is per donor, meaning that for a married couple the amount is doubled.
If you give outright gifts, however, you run the risk that the money or property could be squandered, especially if the recipient is young or irresponsible. Alternatively, you can transfer assets to a trust and name a child as a beneficiary. With this setup, the designated trustee manages the assets until the child reaches a specified age.
But there’s a catch. To qualify for the annual exclusion, a gift must be a transfer of a “present interest.” This is defined as an unrestricted right to the immediate use, possession or enjoyment of the property or the income from it. Without certain provisions in the trust language, a gift to the trust doesn’t qualify as a gift of a present interest. Instead, it’s treated as a gift of a “future interest” that’s not eligible for the annual gift tax exclusion.
Giving Crummey powers to a trust
This is where a Crummey trust can come to the rescue. It satisfies the rules for gifts of a present interest without requiring the trustee to distribute the assets to the beneficiary.
Typically, periodic contributions of assets to the trust are coordinated with an immediate power giving the beneficiary the right to withdraw the contribution for a limited time. However, the expectation of the donor is that the power won’t be exercised. (The trust document cannot expressly provide this.)
As a result, the beneficiary’s limited withdrawal right allows the gift to the trust to be treated as a gift of a present interest. Thus, it qualifies for the annual gift tax exclusion. Note that it’s the existence of the legal power — not the exercise of it — that determines the tax outcome.
Avoiding pitfalls
To pass muster with the IRS, the beneficiary must be given actual notice of the withdrawal right, along with a reasonable period to exercise it. Generally, at least 30 days is required. Contact us with additional questions regarding the use of a Crummey trust.
© 2022
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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.