Klitzman Law Group, PLLC

What Happens to Digital Assets When You Die?

Remember the phrase “Swedish death cleaning?” This trend was based on decluttering your life while you’re living so you don’t leave a disaster for loved ones when you pass. Digital death cleaning may be even more critical than decluttering because you can’t clean out what you can’t find.

A recent article from The Wall Street Journal, “Why Everyone Needs a ‘Digital Death-Cleaning’ Plan,” offers a way to get organized so digital assets aren’t lost or used for identity theft and even worse cybercrimes.

Create categories and label files. A file with deeply personal materials might be labeled “DoD—Delete Upon Death,” while a file containing information about finances could be labeled “Relevant.” The goal is to let survivors know if they will need the files.

DoD files are stuff you don’t want anyone to read after you’ve passed. Years of complaints about your ex-spouse or the difficulties in raising children might be better-left unread. Another idea is to put these kinds of files on a hard drive somewhere and label them, so they can be destroyed as per the instructions in your will. Don’t count on encryption to protect files. Just as any password can be hacked, any file can be opened.

Relevant files include information about your estate, finances and account passwords. If you keep instructions about heating or air conditioning systems on the computer, they may be needed to keep things running—for example, if your oil burner is cranky and needs extra TLC at the start of every heating season.

You’ll probably have files to label “Memorabilia.” These may be photos, videos, or anything you think children or grandchildren would like to read in the distant future to learn about you, your family history and the world you lived in.

All your organizing will work best if you also leave a physical document with a list of digital assets, such as subscriptions, email addresses, utility login info, etc.

Talk with your estate planning attorney to determine how your state addresses digital assets in wills. Most states have adopted a uniform law concerning digital assets, so you’ll want the estate plan to follow these rules.

Finally, consider digitizing your life. If you have a collection of photos, articles you’ve published, or ephemera, all of it can fit into a shoebox if it’s been digitized and stored on thumb drives. You’ll be able to enjoy it as an online memory book now, and your children won’t be stuck clawing through an endless series of boxes later. If you’re a true packrat, chances are your children know it and will appreciate your efforts to lighten their lives after you’ve passed.

Doing your digital cleaning is also the time to review your estate plan, especially if it’s been a few years since it was reviewed. If you don’t have an estate plan, now is the time to meet with an experienced estate planning attorney to create a will, plan for incapacity with a Power of Attorney and Health Care Power of Attorney and related documents depending upon your unique situation.

Reference: The Wall Street Journal (Aug. 6, 2024) “Why Everyone Needs a ‘Digital Death-Cleaning’ Plan”

Do You Need an Estate Plan?

No matter your age or assets, estate planning attorneys know why everyone needs an estate plan, as explained in the article “Estate planning: Not just for the wealthy” from The Las Cruces Bulletin. The word “estate” is the legal term meaning all a person’s possessions. An estate plan also does more than distribute possessions after a person dies.

Establishing an estate plan protects people if they become disabled or incapacitated. If you can't, it allows you to name another person to manage your financial and legal affairs. This is done through a Power of Attorney. Once you have the right person and the right Power of Attorney in place, it will be easier for the business side of your life to be taken care of if you are physically or mentally unable to complete basic tasks necessary to maintain the business side.

If you die without a last will and testament, your property will be distributed according to the state’s laws. Suppose you become incapacitated and there is no Power of Attorney in place. In that case, your family must go to court and pursue a guardianship and conservatorship proceeding to take charge of your medical care and property. It is not only stressful and expensive. There may also be decisions and actions taken before the court finalizes these arrangements. The family won’t be able to do anything while waiting.

People often come to an estate planning attorney’s office only after experiencing the loss of a parent or family member who didn’t have an estate plan. When they have had to go through court proceedings, not be able to access accounts and wrestle with the many decisions surrounding settling an estate, they find themselves vowing not to put their own loved ones through the same difficult situation.

An estate planning attorney will also help the family prepare for things like funeral services. These are not easy conversations, but they are necessary if you want your wishes to be followed. If, for instance, your preference is cremation rather than burial, these wishes would need to be made clear. Do you want your family to follow your faith’s traditions in a memorial service? They might not if you don’t tell them.

Funeral and memorial wishes should not be in your will. The last will and testament may not be reviewed for several weeks after death or longer after funeral and memorial services. Your estate planning attorney will know the best way to include your intentions in your estate plan.

An estate planning attorney can also help create a Special Needs Trust, which is used if someone in the family is receiving government benefits because of a disability. These benefits are “means-tested,” and an inheritance could make the person ineligible and undo all their service plans.

All parents must have a last will, which includes directions for who they want to become their children’s guardian to ensure that people of their choice raise them. Otherwise, this is another decision to be made by the court. A family member may not necessarily be chosen to care for your children.

Finally, your estate plan protects the family when there are complicated relationships among family members. Blended families, families with estranged members, or economic disparities among children are especially vulnerable to family fighting when parents die, and assets need to be distributed.

Having an estate plan provides peace of mind for everyone. It establishes your wishes, provides direction, avoids conflict and allows the family to grieve without guessing.

Reference: The Las Cruces Bulletin (Aug. 28, 2024) “Estate planning: Not just for the wealthy”

Don’t Wait until the Last Minute to Address Estate Exemption Changes

As a result of the Tax Cuts and Jobs Act of 2017, individuals and married couples could transfer large amounts of their wealth without incurring federal estate or gift taxes for several years. The exemptions, still now in effect, are $13.61 million for individuals and $27.22 million for married couples.

A recent article from Reuters, “Avoiding the mad dash to 2026: the use of LLCs for vanishing gift exemptions,” advises high net worth individuals and families to consider using a Limited Liability Company to use the high exemption amounts before they decrease.

By forming and funding an LLC and then gifting the ownership interest in the LLC to subsequent generations, donors receive several benefits. They can centralize management of the underlying assets, use gifting to move assets out of their estate before 2026 and integrate the use of LLC gift interests into a long-term estate planning strategy. This strategy may apply to families who own businesses and real estate property.

The federal exemption amounts need to be used by December 31, 2025. If an individual only uses $5 million of their exemption before the deadline and then the exemption decreases to roughly $7 million, they’ll only have an exemption of $2 million for future lifetime gifts or upon their death. This is a “use it or lose it” opportunity.

The IRS has confirmed it won’t “claw-back” exemptions done before the law sunsets. If a person or a couple uses their exemption in a timely manner, the estate won’t be penalized. Donors who use the full exemption will be grandfathered into the higher exemptions, if the exemptions expire.

If a surviving spouse has remaining Deceased Spousal Unused Exemptions, or DSUE, they must first use all remaining DSUE before using their own exemptions. Let’s say a surviving spouse has $8 million of remaining DSUE and $13.61 of their own gift tax exemption. They would have to make gifts of at least $21.61 to use the entire remaining exemption.

If you are considering using the LLC gift strategy, you should start by forming an LLC and transferring assets into it. The assets may include cash, securities, private investments and real estate that you would otherwise have gifted to the next generation. Once the property has been contributed to the LLC, there will be time to decide how to make the gifts.

It is possible that the legislation could be negotiated towards the end of 2025. However, the LLC will already be in place, and the assets will still be under the donor's control and ownership.

Given the uncertainty over the future of these federal exemptions, meet with your estate planning attorney now to develop a strategy to maximize wealth transfer. Other tools must also be explored, all of which take time to consider and execute.

Reference: Reuters (Aug. 26, 2024) “Avoiding the mad dash to 2026: the use of LLCs for vanishing gift exemptions”

Michael Jackson’s Estate Continues to Unwind

A long-standing tax dispute between Michael Jackson’s estate and the IRS and other legal challenges have still not been resolved after more than a decade. His musical legacy is incredibly profitable, but as explained by a recent article from UPI, “$600M fight over Michael Jackson’s catalog offers estate planning lesson,” the estate battles continue. The latest installment: a California appellate court approved a sale of assets valued at $600 million proposed by Jackson’s estate in late August.

There are lessons to be learned, even if you’re not the King of Pop:

Jackson did have a will, which was signed in 2002. Nearly everything he owned was left in a trust for his children, with his mother receiving a small lifetime interest. The will gave his executors the right to sell estate assets as they think best, with proceeds to be distributed to the children. In February 2024, they negotiated to sell a large part of his catalog to a joint venture with Sony for $600 million. However, Jackson’s mother objected because, as she told the court, Michael had told family members before he died the assets should never be sold.

The court cleared the way for the sale, as a person’s expressed wishes aren’t the same as the instructions in a will, trust, contract, or deed.

In California, as in many states, a will must be in writing, signed by the person making the will—known as the “testator”—and signed by two witnesses. This reasoning is simple. People create wills to preserve reliable evidence of their intent for the estate plan.

However, when the testator’s intent is questioned, courts typically allow witnesses to testify about how the text should be interpreted. Michael’s will gave his executors broad powers to sell estate property. His mother believed he wanted to gift his music catalog to the trust.

Executors need the ability to make decisions about buying and selling estate property during probate, so they don’t need court approval for routine transactions. The overall goal is to increase the value of the estate distributed to beneficiaries.

Estate planning attorneys often advise clients against attaching restrictions to the sale of property. It’s impossible to know how various types of property will be valued in the future. For example, Joseph Pulitzer, a media baron and founder of the Pulitzer Prize, used his will to bar executors from selling any part of his newspaper business. Twenty years after Pulitzer died, trustees had to go to court to gain permission to revise the will so heirs could sell the newspaper. The value of the newspaper had decreased significantly. However, it still had enough value to be salable.

The bottom line is that wills and trusts are enforceable parts of an estate plan. When questions are raised, courts are reluctant to make changes based on posthumous testimony from others.

An experienced estate planning attorney will ensure that your wishes are documented and enforceable in your last will and testament and your trust. Take the long view with your wishes, since restrictions that make sense when your will is created may not serve your heir’s best interests in the future.

Reference: UPI (Aug. 28, 2024) “$600M fight over Michael Jackson’s catalog offers estate planning lesson”

What’s the Primary Purpose of a Living Trust?

One of many options for people who want to pass an inheritance to loved ones is a living trust, also known as a revocable trust. There are several benefits, as detailed in this article from msn.com, “3 Benefits of Using a Living Trust to Pass an Inheritance to Your Family.”

Trusts are used to avoid the probate process. This is a court process where the court evaluates the will, decides whether or not it is valid and then supervises how the assets in the estate are distributed. If you’ve ever had the misfortune of experiencing the probate process, you know it can be stressful.

Probate takes time. While it varies depending on the jurisdiction, it can take months and sometimes years to complete. While the estate is in probate, heirs cannot access estate assets.

Probate can be expensive. There are court costs, administrative fees, legal fees and accountant's fees if the estate is complicated.

Probate is public, and trusts are private. Once a will is entered into probate, it becomes public information and anyone can access it. This includes estranged relatives, creditors, salespeople and thieves. They all look at the will to learn about the size of the estate, asset values, names of beneficiaries and where they live and whatever information is in the will.

The only people who have access to trusts are the estate planning attorney who created them, the trustee and the beneficiaries. This level of privacy is sometimes a bigger reason to have a trust than avoiding probate, especially for people who scammers could target.

Trusts allow flexibility. Living trusts are also called “revocable” because they can be changed during your lifetime. You can change the terms of the trust, the names of the beneficiaries, what assets you want heirs to receive, etc. If you have a big change in your financial situation, good or bad, the trust can be modified.

If a revocable trust sounds like a good option for your situation, speak with an experienced estate planning attorney. They’ll help you create a trust and estate plan to protect you and your loved ones.

Reference: msn.com (Aug. 21, 2024) “3 Benefits of Using a Living Trust to Pass an Inheritance to Your Family”

Be Wary of Schemes that Deal with Estate Tax Exemption Sunset

If an estate planning strategy sounds too good to be true and is offered by someone not an experienced estate planning attorney, stay away. The title of a recent article from Wealth Management says it all: “Don’t Be Tempted By Pop-Up Estate Planning Schemes.”

This is not the time to get engaged with improperly prepared trusts or someone’s brilliant but untested twist on a basic trust. While we don’t know who will win this fall’s Presidential election, it’s highly unlikely estate planning and gift exemption limits will be reduced. If you don’t take advantage of these historically high levels before they change, you and your heirs may miss a once-in-a-lifetime chance to get assets out of your estate tax-free.

An experienced estate planning attorney will create a plan offering flexibility. They’ll educate you and identify options, which may include charitable giving. However, creating and executing these plans takes time, so don’t wait until the last minute.

Spousal Lifetime Access Trusts (SLATs) are very popular right now for all the right reasons. The SLAT is funded by one spouse (the donor spouse), who transfers their assets into the trust and out of their estate. Their spouse has access to the assets. Assets can be gifted up to the current lifetime gift exemption—currently $13.61 million per taxpayer. As long as you stay married, the assets can support your lifestyle, while the principal and future growth have been removed from your taxable estate.

Be careful about “pop-up” estate planning schemes. A trust created in haste using untested strategies is asking for trouble. One example is a yacht brokerage website that says you can use ownership of a yacht or jet to get a tax write-off and then give the yacht or jet to charity. Promotional materials declare that this is “IRS-sanctioned,” and somehow magically eliminates the hobby-loss rules. Take a pass on this.

Another comes from a group selling mineral rights and claims you can earn a tax deduction worth eight times the original investment—a $400,000 income tax deduction for a $50,000 investment. The explanation is you’re buying minerals at the low cost of getting them out of the ground, then gifting them to a charity at a marked-up retail price. The attorney opinions posted on the website are from non-existent law firms. Do you need to know more? Pass.

As we approach the end of these exemptions, more of these shady schemes are likely to emerge. Steer clear and rely upon a realistic estate planning attorney who has the experience and knowledge to help you achieve your goals.

Reference: Wealth Management (Aug. 22, 2024) “Don’t Be Tempted By Pop-Up Estate Planning Schemes”

You Need a Will Sooner and Not Later

The exception to this love of planning is our shared inevitable fate. A recent article from Main Line Today, “Why You Should Make a Will Now, According to Main Line Area Experts,” discusses why you shouldn’t put off creating a will.

Creating a will requires thinking about emotional decisions, like who should be named a guardian for your children and what you want to happen to your property upon your death. Deciding to start estate planning means you’re coming to terms with your own mortality, which most of us find uncomfortable to consider.

Others are concerned with the cost of having a will prepared. However, the cost of not having a will is going to be far more expensive to loved ones if you don’t do it yourself. And if you don’t have a will, the state’s laws will determine how your estate should be distributed. Your loved ones won’t have any say in what happens.

How young is too young to have a will? In the best possible world, you have a will once you’re a young adult before you marry and start a family. If you have children and don’t have a will, start immediately. Without a will, a court will decide who will raise your children, where they will live and how often family members will get to visit them. Your will is used to name a guardian, and your estate plan may include a trust to support your children after you have passed.

Do you need a will if you’re not wealthy? Yes, because the size of your estate—the total of all your assets, including your home, investment accounts, retirement accounts and any property you own—has nothing to do with whether or not you need a will. A will is your opportunity to state your own wishes about what you want to happen to your possessions after you die.

Creating an estate plan, including a will, is made easier with the help of an experienced estate planning attorney. They will help clarify your wishes for your assets, create documents for incapacity (Power of Attorney, Healthcare Proxy, Living Will), create trusts if appropriate for your estate and give you the peace of mind of knowing your children and loved ones will be cared for after you have passed.

Without estate planning, your state’s laws and the court will make all the decisions. Your family won’t have any say, even if you’ve told them what you want for years. Make an appointment with an estate planning attorney and get your will and estate plan started.

Reference: Main Line Today (Aug. 20, 2024) “Why You Should Make a Will Now, According to Main Line Area Experts”

Estate Planning can Include Pets as Well as ‘Regular’ People

Who could forget the headlines when billionaire Lenora Helmsley was found to have set aside $12 million for her dog, aptly named Trouble, after she passed? You don’t have to be a billionaire to want to protect your animal companion, says a recent article from The Wall Street Journal, “Putting Pets in Your Will Is No Longer Just for Eccentric Billionaires.”

One family created their will with instructions for caring for their two young children, naming a guardian and a plan for distributing their assets, a basic part of an estate plan. They’ve also planned for their two dogs, naming a sister as their caretaker.

No matter how much you love your dog, cat, horse, or mouse, they are legally considered personal property. If there are no directions in the will for who will take care of your pets when you die, they will go to whoever inherits your property, with no guarantee of what will happen to them. Worse, if you die without a will, the laws of your state will determine what happens to them.

Many pets whose owners die end up at shelters, and not every city has no-kill shelters. This situation is not great for older pets or those with medical conditions who aren’t as adaptable as puppies or kittens. Large birds, like parrots, can live as long as humans, making plans for their future especially important. Other animals end up abandoned, living on the streets.

In other words, don’t assume your family members love your pet as much as you do. You need to make a plan for their future.

Some shelters have programs helping people include pets in their wills, often tied to making a bequest to be made to the shelter to fund the pet’s care.

When parents pass, and a guardian has been named to care for children, there is usually a certain degree of court supervision. However, the same isn’t true for pets. If you choose to name a pet’s caretaker in the will and provide assets for the pet’s care, there’s no one watching to be sure your beloved animal companion is being cared for with the money you provided.

An enforceable alternative is the creation of a pet trust. The caretaker and the trustee should be different people. A trustee’s fiduciary duty is to ensure that the assets in the trust are being used for their intended purpose. The caretaker is responsible for the pet's overall quality of life.

Your estate planning attorney will be able to create a trust to care for your beloved animal companions, so they will be safe and well cared for. You don’t have to be a billionaire to make this happen.

Reference: The Wall Street Journal (Aug. 10, 2024) “Putting Pets in Your Will Is No Longer Just for Eccentric Billionaires”

Can an Irrevocable Trust Be Changed?

Most irrevocable trusts are created to serve for generations. However, life and tax laws change. The terms of the trust sometimes simply don’t work for the family any more. An article from Kiplinger, “Can You Change an Irrevocable Trust? Yes, But Be Careful,” explains how changes to irrevocable trusts can be made, with a few caveats.

 

Changes to an irrevocable trust shouldn’t be done without the guidance of an experienced estate planning attorney. Be very clear about why you want to make any changes. Make sure that you understand what your choices are for making changes. You may learn that you can’t do exactly what you have in mind. If this is the case, find out what changes you can make. Understand the tax consequences, which could be considerable.

Why would you want to make changes to an irrevocable trust? In most cases, a trust created twenty years ago no longer serves its purpose. Other reasons include fixing errors in drafting the trust, changes in family circumstances, needing to fund a Special Needs Trust, the death or incapacity of a trustee or successor trustee and permitting investment flexibility.

There are also tax-based reasons to change an irrevocable trust. You’ll want to make changes if you want to move the trust to a state with lower income taxes, include or exclude assets from a beneficiary’s estate, convert a grantor trust to a non-grantor trust, change provisions for IRA distributions, or qualify a trust to own stock in an S corporation.

How do you actually make the changes to the trust? Start by reviewing the trust with your estate planning attorney. The trust may already contain language permitting changes to be made. The trust terms may also block your usage of certain trust strategies.

Review the state’s governing laws. Laws about trusts may have changed since the trust was originally created. Some states, including New York, Delaware and California, have “decanting” statutes, meaning one can “pour” assets from one trust into another. Your estate planning attorney will be up to date on these laws.

Consider a trust modification. Depending upon the state’s laws, you might be able to make changes without court involvement simply by obtaining and documenting beneficiaries' consent. In some states, you’ll need to obtain approval from the court.

Be mindful of tax implications. If the trust assets will be included in a beneficiary’s estate, this could be a good thing—or a bad thing. Assets subject to estate tax receive a step-up in income tax basis. Therefore, having these assets in the beneficiary’s estate might be costly.

Changes to the terms of the trust may make sense as your life progresses and laws change. Just be certain to make changes with the guidance of an experienced estate planning attorney.

Reference: Kiplinger (Aug. 26, 2024) “Can You Change an Irrevocable Trust? Yes, But Be Careful”

How Special Needs Trusts are Used to Protect Loved Ones

To qualify for Supplemental Security Income (SSI) and Medicaid, you have to own less than $2,000 in assets. These two programs are intended to pay for basic living expenses and primary medical services, according to a recent article from Barron’s, “Kids With Special Needs Deserve Benefits. A Trust Protects Them.”

A Special Needs Trust (SNT) is used to pay for other expenses. This can be anything from the cost of having a cell phone to traveling for the individual and a companion. An estate planning attorney should create the trust in tandem with the family’s overall estate plan.

There are two types of SNTs to consider for high-income families, and a third, explained below, is useful for families of moderate means. The main difference between the first two SNTs is how the money left in the trust is distributed after the death of the disabled person.

In a third-party supplemental trust, the special needs family member doesn’t have access to the money at any time. The trustee designates a beneficiary if any assets are left in the trust upon the death of the disabled person.

A first-party supplemental trust is used for money received outright, such as from an improperly planned inheritance or an award from a lawsuit. Assets in these trusts can be used during the individual’s lifetime, but upon their death, Medicaid can take back benefits paid over the person’s lifetime before any remaining assets are distributed to beneficiaries.

Parents planning for their child’s well-being after their own deaths typically choose a family member who is close to the disabled person as their trustee. This is good thinking, with some limitations. The person who is the trustee needs to be financially savvy. Remember, the person with special needs may never receive money directly. If they do, their benefits are at risk.

Trustees need to know the details of SNTs so they don’t mishandle funds. For instance, funds in the trust should not be used for anything already paid for by SSI, like housing.

An alternative to privately created and managed trusts is a Pooled Trust. These are run by nonprofit organizations, which offer services like trustees for smaller accounts.

When it comes to retirement, parents need to address their retirement assets to enjoy their retirement years. They can fund SNTs by taking out life insurance policies. Life insurance policies make sense also because funds in trusts should be liquid. For younger parents in particular, term life might be a good option.

A warning for parents with SNTs who are tempted to leave all of their assets to their child with special needs: this is not necessary and could be problematic. Don’t forgo taking care of siblings, or resentment may lead to a family member resenting the family member with special needs.

Reference: Barron’s (July 27, 2024) “Kids With Special Needs Deserve Benefits. A Trust Protects Them.”