Klitzman Law Group, PLLC

Take Advantage of Tax Laws Now

“If you like the way the laws are today, you need to take advantage of them now, before they are changed tomorrow. In other words, use it or lose it.”

The pundits are saying that the if Democrats win the White House and possibly Congress, expect changes to income, gift generation skipping transfer and estate taxes. This recent article from Forbes, “Use It Or Lose It: Locking In the $11.58 Million Unified Credit” says that the time to act is now.

Since 2000, the estate and gift tax exemption has taken a leap from $675,000 and a top marginal rate of 55% to an exemption of $11.58 million and a top marginal rate of 40%. However, it’s not permanent. If Congress does nothing, the tax laws go back in 2026 to a $5.6 million exemption and a top marginal rate of 55%. The expectation is that if Biden wins in November, and if Congress enacts the changes published in his tax plan, the exemption will fall to $3.5 million, and the top marginal rate will jump to 70%.

The current exemption and tax rate may be as good as it gets.

If you make a taxable gift today, you can effectively make the current tax laws permanent for you and your family. The gift will be reported in the year it is made, and the tax laws that are in effect when the gift is made will permanently applicable. Even if the tax laws change in the future, which is always a possibility, there have been proposed regulations published by the IRS that say the new tax laws will not be imposed on taxable gifts made in prior years.

Let’s say you make an outright taxable gift today of $11.58 million, or $23.16 million for a married couple. That gift amount, and any income and appreciation from the date of the gift to the date of death will not be taxed later in your estate. The higher $11.58 million exemption from the Generation Skipping Transfer Tax (GSTT) can also be applied to these gifts.

Of course, you’ll need to have enough assets to make a gift and still be financially secure. Don’t give a gift, if it means you won’t be able to support your spouse and family. To take advantage of the current exemption amount, you’ll need to make a gift that exceeds the reversionary exemption of $3.5 million. One way to do this is to have each spouse make a gift of the exemption amount to a Spousal Lifetime Access Trust (SLAT), a trust for the benefit of the other spouse for that spouse’s lifetime.

Be mindful that such a trust may draw attention from the IRS, because when two people make gifts to trusts for each other, which leaves each of them in the same economic position, the gifts are ignored and the assets in the trusts are included in their estate. The courts have ruled, however, that if the trusts are different from each other, based on the provisions in the trusts, state laws and even the timing of the creation and funding of the trusts may be acceptable.

These types of trusts need to be properly administered and aligned with the overall estate plan. Who will inherit the assets, and under what terms?

A word of caution: these are complex trusts and take time to create. Time may be running out. Speak with a skilled estate planning attorney with knowledge of tax law.

Reference: Forbes (July 17, 2020) “Use It Or Lose It: Locking In the $11.58 Million Unified Credit”

 

How to Plan for Incapacity

“One in four American adults live with a disability, according to the Center for Disease Control. One in 10 adults over the age of 65 has Alzheimer’s or dementia, according to the Alzheimer’s Association.”

Planning for incapacity is just as important as planning for death. One is certain, the other is extremely likely. Therefore, it makes sense to prepare in advance, advises the article “Planning ahead for incapacity helps you and family” from The Press-Enterprise.

Let’s start by defining capacity. Each state has its own language but for the most part, incapacity means that a person is incapable of making decisions or performing certain acts. A concerned adult child is usually the one trying to have a senior parent declared incapacitated.

A person who has a mental or physical disorder may still be capable of entering into a contract, getting married, making medical decisions, executing wills or trusts, or performing other actions. However, before a person is declared incapacitated by medical professionals or a court, having a plan in place makes a world of difference for the family or trusted person who will be caring for them. Certain legal documents are needed.

Power of Attorney. This is the primary document needed in case of incapacity. There are several kinds, and an estate planning attorney will know which one will be best for your situation. A “springing” power of attorney becomes effective, only when a person is deemed incapacitated and continues throughout their incapacity. A POA can be general, broadly authorizing a named person to act on different matters, like finances, determining where you will live, entering into contracts, caring for pets, etc. A POA can also be drafted with limited and specific powers, like to sell a car within a certain timeframe.

The POA can be activated before you become incapacitated. Let’s say that you are diagnosed with early-stage dementia. You may still have legal capacity but might wish a trusted family member to help handle matters. For elderly people who feel more comfortable having someone else handle their finances or the sale of their home, a POA can be created to allow a trusted individual to act on their behalf for these specific tasks.

A POA is a powerful document. A POA gives another person control of your life. Yes, your named agent has a fiduciary duty to put your interests first and could be sued for mismanagement or abuse. However, the goal of a POA is to protect your interests, not put them at risk. Choosing a person to be your POA must be done with care. You should also be sure to name an alternate POA. A POA expires on your death, so the person will not be involved in any decisions regarding your estate, burial or funeral arrangements. That is the role of the executor, named in your will.

Advance health care directive, or living will, provides your instructions about medical care. This document is one that most people would rather not think about. However, it is very important if your wishes are to be followed. It explains what kind of medical care you do or do not want, in the event of dementia, a stroke, coma or brain injury. It gets into the details: do you want resuscitation, mechanical ventilation or feeding tubes to keep you alive? It can also be used for post-death wishes concerning autopsies, organ donation, cremation or burial.

The dramatic events of 2020 have taught us all that we don’t know what is coming in the near future. Planning in advance is a kindness to yourself and your family.

Reference: The Press-Enterprise (July 19, 2020) “Planning ahead for incapacity helps you and family”

 

Legislation to Prevent Medicare Mistake Penalties Making Progress

“The BENES Act, which cleared committee Wednesday, aims to minimize the chance that beneficiaries get slapped with life-lasting late-enrollment penalties.”

More older workers are remaining in the workplace. In 2016, about 60% of 65-year-olds were receiving Social Security benefits, compared to 92% in 2002. Consumer advocates expect that change to result in a growing number of older people making expensive mistakes, when they enroll in basic Medicare, says the article “Bipartisan bill to prevent costly Medicare mistakes advances in the house” from CNBC.com.

The hope is that the bill will make Medicare a little easier to understand. The congressional measure to help prevent costly enrollment mistakes cleared a House committee as part of a group of bipartisan health-care bills. Next up would be a vote by the full chamber.

There’s a companion bill in the Senate, but it’s stuck in the Finance Committee. The House bill, known as the BENES Act, has several goals. One is to eliminate delays between the time that someone signs up and the time that they are covered by Medicare. Another is to offer more outreach and information about Medicare to people, as they get closer to being eligible at 65.

About 62.4 million Americans—most of whom are 65 or older—are enrolled in Medicare. Most people do end up tapping their Social Security benefits before that time, and they are automatically enrolled, but today many more people are delaying their benefits beyond that age. As a result, the expectation is that many more people are going to make expensive mistakes, when they do go to enroll in basic Medicare. That includes Part A, for hospital coverage and Part B, for outpatient care and medical equipment. There are no late-enrollment penalties for Part A but coming late to Part B can lead to a world of trouble.

The penalty for enrolling late to Part B is 10% of the standard premium for each 12-month period that the person should have been enrolled but wasn’t and worse, it can increase each year as the premium adjusts. Sixty-five-year-olds who fit into the exception category—that is, they have group health insurance at work—are allowed to delay enrolling. However, once they leave that group, they face deadlines.

Last year, as many as 764,000 people paid the Part B late-enrollment penalty, which on average pushed their premiums up by 28%. Based on the 2020 standard Part B premium, that would mean an additional $40 per month (although some pay more or less than the standard).

There is also a serious coverage delay for those who sign up during the general enrollment period (that’s January 1 to March 31), if they missed their initial signup window, which means they aren’t covered until July 1. You could sign up on January 2 and not have health coverage until July!

The BENES Act also requires that the Health and Human Services Secretary submit a report on how to most effectively align the early year general enrollment period for Parts A and B with the annual fall open enrollment period, which is for enrollment for different parts of Medicare: Part C Advantage Plans and Part D prescription drug plans.

Reference: CNBC.com (July 16, 2020) “Bipartisan bill to prevent costly Medicare mistakes advances in the house”

What COVID-19 Does to Roth Conversions

“Has the Covid-19 stock market volatility caused your retirement accounts to decline? Will the temporary suspension of required minimum distributions (RMD) or a reduction in your compensation lower your 2020 tax liability?”

With a combination of lowered 2020 tax liability, the potential for future tax increases and potentially lower portfolio values, we are in uncharted financial waters. However, all of these factors may make a Roth conversion more attractive than ever, according to the article “Covid-19 and the CARES Act enhance the Roth conversion game” from the Jacksonville Business Journal.

A quick look first at essentials of the traditional and Roth IRAs:

Tradition IRA contributions are tax deductible.

• Growth inside the account is tax-deferred,
• Qualified distributions are taxed as ordinary income, and
• Required minimum distributions must begin at age 72.

Roth IRA contributions are not tax deductible.

• Growth inside the account is tax free,
• Qualified distributions are tax free, and
• There are no required minimum distributions.

Roth IRAs are an essential part of both estate and retirement planning. Converting a traditional IRA to a Roth IRA lets you decide when you or your beneficiaries pay taxes. Convert all of your IRA to a Roth, and pay the taxes up front, based on the year the conversion is made. If you have a low-income year, and the value of your IRAs is low, that’s the time to do the conversion.

Just be mindful that making this move for a large amount of money could potentially move you into a higher tax bracket. Being strategic and moving a portion of your IRA could make more sense, especially if you expect that you’ll be in a higher tax bracket during retirement, or if you anticipate that your ultimate beneficiary may be in a higher tax bracket within ten years following their inheritance. (As a result of the SECURE Act, inherited IRA accounts must be emptied within ten years after they are received.)

You’ll also need a plan to pay the taxes on that conversion. In a perfect world, those taxes would be paid from funds outside of your retirement accounts. If the only way to pay this tax is by using funds from your IRA, you can have the funds withheld during the conversion. Be sure to run the numbers before doing the conversion. If you pull money from your IRA account to do the conversion, there will be less money to grow long-term for you, and it will be included in your taxable income for the year.

We all like something for nothing, but there are costs to Roth conversions. The five-year rule requires that a Roth needs to exist for five years, before you can take out money tax free. You’ll need to be sure that you have enough cash on hand to live on for five years after the conversion. However, that’s not all. There are a number of different variations on the five-year rule, depending on your situation. If you are under age 59½ and take a distribution of profits before the five years, you will get hit with a 10% penalty without an allowable exception on the amount you converted. An experienced estate planning attorney will be able to help you make a strategically sound decision.

Reference: Jacksonville Business Journal (July 13, 2020) “Covid-19 and the CARES Act enhance the Roth conversion game”

That Last Step: Trust Funding

“If you have updated your estate plan during the Covid crisis and even found a way to sign your documents while maintaining social distance, do not overlook the last step of trust funding.”

Neglecting to fund trusts is a surprisingly common mistake, and one that can undo the best estate and tax plans. Many people put it on the back burner, then forget about it, says the article “Don’t Overlook Your Trust Funding” from Forbes.

Done properly, trust funding helps avoid probate, provides for you and your family in the event of incapacity and helps save on estate taxes.

Creating a revocable trust gives you control. With a revocable trust, you can make changes to the trust while you are living, including funding. Think of a trust like an empty box—you can put assets in it now, or after you pass. If you transfer assets to the trust now, however, your executor won’t have to do it when you die.

Note that if you don’t put assets in the trust while you are living, those assets will go through the probate process. While the executor will have the authority to transfer assets, they’ll have to get court approval. That takes time and costs money. It is best to do it while you are living.

A trust helps if you become incapacitated. You may be managing the trust while you are living, but what happens if you die or become too sick to manage your own affairs? If the trust is funded and a successor trustee has been named, the successor trustee will be able to manage your assets and take care of you and your family. If the successor trustee has control of an empty, unfunded trust, a conservatorship may need to be appointed by the court to oversee assets.

There’s a tax benefit to trusts. For married people, trusts are often created that contain provisions for estate tax savings that defer estate taxes until the death of the second spouse. Income is provided to the surviving spouse and access to the principal during their lifetime. The children are usually the ultimate beneficiaries. However, the trust won’t work if it’s empty.

Depending on where you live, a trust may benefit you with regard to state estate taxes. Putting money in the trust takes it out of your taxable estate. You’ll need to work with an estate planning attorney to ensure that the assets are properly structured. For instance, if your assets are owned jointly with your spouse, they will not pass into a trust at your death and won’t be outside of your taxable estate.

Move the right assets to the right trust. It’s very important that any assets you transfer to the trust are aligned with your estate plan. Taxable brokerage accounts, bank accounts and real estate are usually transferred into a trust. Some tangible assets may be transferred into the trust, as well as any stocks from a family business or interests in a limited liability company. Your estate planning attorney, financial advisor and insurance broker should be consulted to avoid making expensive mistakes.

You’ve worked hard to accumulate assets and protecting them with a trust is a good idea. Just don’t forget the final step of funding the trust.

Reference: Forbes (July 13, 2020) “Don’t Overlook Your Trust Funding”

Estate Planning and Probate Planning

“Probate is the court process to distribute someone's estate after their death, even if there is a will and is notoriously slow in California.”

The nature of the probate process varies from state to state, and even varies from county to county. However, the nature of the process is the same. A court has to validate a will to ensure that it meets the legal requirements of the state before assets can be distributed, explains the article “Probate workarounds can save heirs time, money” from the Baker City Herald. A typical will in some states can take nine to twelve months, and court shutdowns related to COVID-19 means that the wait could be longer. Probate is also expensive.

When does probate make sense? When a person dies with a lot of debt, probate can be helpful by limiting the amount of time creditors have to make their claims against the estate. If there’s not enough to pay everyone, the probate court makes the decision about how much each creditor gets. Without probate, creditors may surface long after assets have been distributed, and depending upon the amount owed, may sue heirs or the executor.

The court supervision provided by probate can be helpful, if there are any concerns about the instructions in the will not being carried out. However, the will and the details of the estate become public, which is bad not just for privacy reasons. If there are any greedy or litigation-happy family members, they’ll be able to see how assets were distributed. All assets, debts and costs paid by the estate are disclosed, and the court approves each distribution. This much oversight can be protective in some situations.

What’s the alternative? Some states have simplified probate for smaller estates, which can reduce the time and cost of probate. However, it varies by state. In Delaware, it is estates worth no more than $30,000, but in Seattle, small means estates valued at $275,000 or less.

These limits don’t include assets that go directly to heirs, like accounts with beneficiaries or jointly owned assets. Most retirement funds and life insurance policies have named beneficiaries. The same is often true for bank and investment accounts. Just remember not to name your estate as a beneficiary, which defeats the purpose of having a beneficiary.

Are there any other ways to avoid probate? Here’s where trusts come in. Trusts are legal documents that allow you to place your assets into ownership by the trust. A living trust takes effect while you are still alive, and you can be a trustee. Once created, property needs to be transferred into the trust, which requires managing details: changing titles and deeds and account names. This type of trust is revocable, which means you can change it any time. As a trustee, you have complete control over the property. A successor trustee is named to take over, if you die or become incapacitated.

An estate planning attorney will know other legal strategies to avoid probate for part or all of your estate.

Reference: Baker City Herald (July 16, 2020) “Probate workarounds can save heirs time, money”

What Happens When a Will Is Challenged?

“Sometimes beneficiaries end up not receiving their assets. Beneficiaries often lose out because the estate planning wasn’t done properly, but sometimes another family member contests the decedent’s will.”

What happens when estate planning doesn’t go according to plan? A last will and testament is a legally binding contract that determines who will get a person’s assets. However, according to the article “Can you prevent someone from challenging your will?” in the Augusta Free Press, it is possible for someone to bring a legal challenge.

Most will contests are centered around five key reasons:

• The deceased had a more recent will.
• The will was not signed voluntarily.
• The deceased was incapacitated, when she signed the will.
• The will was not signed in front of the right number of witnesses.
• The will was signed under some kind of duress or mental impairment.

What is the best way to lessen the chances of someone challenging your will? Take certain steps when the will is created, including:

Be sure your will is created by an estate planning attorney. Just writing your wishes on a piece of paper and signing and dating the paper is not the way to go. Certain qualifications must be met, which they vary by state. In some states, one witness is enough for a will to be properly executed. In others, there must be two and they can’t be beneficiaries.

The will must state the names of the intended beneficiaries. If you want someone specific to be excluded, you’ll have to state their name and that you want them to be excluded. A will should also name a guardian, if your children are minors.  It should also contain the name of an alternate executor, in case the primary executor predeceases you or cannot serve.

What about video wills? First, make a proper paper will. If you feel the need to be creative, make a video. In many states, a video will is not considered to be valid. A video can also become confusing, especially if what you say in the paper will is not exactly the same as what’s in the video. Discrepancies can lead to will contests.

Don’t count on those free templates. Downloading a form from a website seems like a simple solution, but some of the templates online are not up to date. They also might not reflect the laws in your state. If you own property, or your estate is complex, a downloaded form could create confusion and lead to family battles.

Tell your executor where your will is kept. If no one can find your will, people you may have wanted to exclude from your estate will have a better chance of succeeding in a will challenge. You should also tell your executor about any trusts, insurance policies and any assets that are not listed in the will.

Don’t expect that everything will go as you planned. Prepare for things to go sideways, to protect your loved ones. It is costly, time-consuming and stressful to bring an estate challenge, but the same is true on the receiving end. If you want your beneficiaries to receive the assets you intend for them, a good estate planning attorney is the right way to go.

Reference: Augusta Free Press (July 12, 2020) “Can you prevent someone from challenging your will?”

 

Balancing Retirement Planning with Special Needs Planning

“Having a child with special needs can come with all sorts of unique challenges from a financial and estate planning standpoint. Public benefits, for example, can play a huge role in anticipating how much money your child will need down the road in your later years, as well as when you've passed away.”

Many government benefits are “means tested,” which can put financial restrictions on how much money the individual can have in their name. Careful estate and financial planning is important, advises the article “How Having A Child With Special Needs Impacts Your Retirement Planning” from Forbes.

In most instances, providing financially for children ends a year or two after college. However, for the family with a special needs family member, the financial assistance does not end. It’s also likely that the child will live with their parents well into the parent’s retirement. The family will need more money during retirement to provide for their child’s needs, including therapies, transportation and hobbies.

The family may choose to have the child live in a group home setting, but those costs are substantially higher, depending on the home and the level of care required.

Parents are often more focused on planning to care for their disabled family member and overlook their own retirement planning. It is important to do both.

Social Security planning is a bigger factor for the family with a special needs family member. If parents decide to collect their Social Security benefits, they need to map out what different scenarios could mean, including delaying when to take benefits and spend down assets.

If the disability of a child with special needs began before age 22, the child may be eligible for Social Security Disability Insurance, generally half of the last surviving parent’s Social Security payment in retirement (in addition to what the parent receives). When that parent dies, the amount increases to three-quarters of the parent’s benefits. This must be calculated in terms of income now for the child while the parents are living and after the parents pass.

It’s critical for the parents of an individual with special needs to do a careful budget analysis of their own retirement income and what they will need to care for their child. Once they understand these numbers, they can figure out what assets and income streams will make the most sense. A professional financial advisor can be very helpful for this process.

The family may need to set up a special needs trust (SNT), which is best done with an experienced estate planning elder law attorney. Life insurance may be purchased to fund a child’s lifetime needs and be placed in the SNT.

The family will also need to address tax planning. Traditional 401(k) plans and IRA accounts are not taxed until withdrawals are taken. There have been a number of changes to the law in recent months, not the least of which is the CARES Act, which allows withdrawals to be made from retirement accounts with no extra penalties.

Reference: Forbes (July 1, 2020) “How Having A Child With Special Needs Impacts Your Retirement Planning”

What are Fiduciary Duties in Estate Planning?

“As you plan how you will leave your estate, it is important to your family’s future that you leave a legacy with well-executed documents. It’s also essential that you understand all of the roles of the people involved in your estate, especially the person or organization who will manage your estate.”

One of the reasons people uses trusts in their estate planning, is that the person named as a trustee has a legal duty to put the trust’s interests first, rather than their own interests. This is called a “fiduciary duty,” and it becomes very important when planning for the future of your assets and family. It’s an enforceable legal obligation says the article “Fiduciary Duties in Trusts and Estate Planning” from yahoo! finance.

A trustee is the person appointed to be in charge of a trust. There are many different kinds of trusts, created to own assets, including money, life insurance policies and homes. The person named as trustee in the trust document makes decisions about the trust assets to benefit the beneficiary’s best interests.

Trusts created while a person is living are known, appropriately enough, as living trusts. There are people who choose to be their own trustees and manage their trusts for as long as they are able. Married couples may be co-trustees on their trusts. The trust documents should be prepared, so that upon the death of one spouse, the surviving spouse becomes the trustee and manages the account.

The person creating the trust should also name a successor trustee. This is the person who will manage the trust when the trustee or the co-trustees are no longer competent to manage the trust. That might be because they have died or because they have become incapacitated due to an injury or illness.

The fiduciary duties of a trustee are to act in the best interest of the beneficiaries. These are some guidelines:

• The assets a trustee manages do not belong to them, and the trustee must not mix personal assets with assets in the trust.
• A trustee may not use the trust’s assets for their benefit.
• The trustee must not favor one beneficiary over the other.
• The trustee must follow the directions in the trust document.
• The trustee must keep accurate records, file tax returns and report to beneficiaries, as directed in the trust.

There are three fiduciary duties when it comes to a trust: loyalty, care and full disclosure. The trustee(s) must act in the best interest of the trust and its beneficiaries. This is a high standard and why the decision on who to name as a trustee is so important.

The terms of every trust vary, depending on the type of trust and the needs of the estate plan. The trustee needs to be familiar with the trust and its directions, so they can perform correctly.

An estate planning attorney is needed to draft trusts, so they reflect the wishes of the person and their goals. Using a downloaded form or even a standard legal form is a big risk for families.

yahoo! finance (July 8, 2020) “Fiduciary Duties in Trusts and Estate Planning”

Can I Disinherit Anyone I Want?

“So, you’ve decided that a family member won’t be getting an inheritance, after all. Maybe you have an ungrateful or irresponsible family member you want to cut out of the will.”

If there’s someone you believe is more deserving or needs more of your help, that may mean someone else in your life may receive little or nothing from you when you die. However, be careful—disinheriting an heir is not as simple as leaving them out of your will, explains the article “How to Disinherit an Heir” from smart asset.

Disinheriting an heir means you’ve prevented them from receiving a portion of your estate, when you die. A local estate planning lawyer will know what your state requires, and every state’s laws are different.

One way is by leaving the person out completely. However, this could also leave your will up for interpretation, as there may be questions raised about your intent. A challenge could be raised that you didn’t mean to leave them out—and that could create stress, expenses and family fights.

You may also disinherit a person, by stating in your will that you do not wish to leave anything to this specific person. You might even provide information about why you are doing this, so your intent is clear. There could still be challenges, even with your providing reasons for cutting the person out of your will.

Disinheriting someone can be a tricky thing to do. It requires professional help. Working with an experienced estate planning attorney who has experience in will contests, may be your best choice for an estate planning attorney.

There are instances where relatives known and unknown to you are entitled to make a claim on your estate. An experienced estate planning attorney may suggest a search for relatives to ensure that no surprises come out of the woodwork, after your passing.

There are some relatives who cannot be disinherited, even in a legally binding last will and testament. In many states, you may not disinherit your spouse or children. Most states protect spouses from being disinherited, and in some states, children are legally entitled to a certain amount of your property. However, in most states, you may disinherit parents, if they outlive you.

There are many reasons you may want to disinherit someone. You may have been estranged from a child or a cousin for many years, or you may believe they have enough financial resources and want someone else to receive an inheritance from you.

Many high-profile individuals have declared that their children will not receive an inheritance, preferring to give their assets to charitable foundations or organizations working for causes they support.

Whatever your reasons for disinheriting someone, make sure you go about it with professional help to ensure that your wishes are followed after you die.

Reference: smart asset (June 1, 2020) “How to Disinherit an Heir”