Klitzman Law Group, PLLC

Inheritances When Unequal Is Actually Fair

“There are times when it makes sense to leave more to one child than another.”

One of the cornerstones of estate planning for most families is to leave equal shares of inheritances to ensure fair treatment among siblings. However, equal shares aren’t always fair, especially when circumstances are complicated. In some cases, giving children equal inheritances is the worst option, according to a recent article, “How to avoid potential conflict among your kids when leaving an unequal inheritance” from MarketWatch.

Data from the University of Michigan’s Health and Retirement Study reveals that the proportion of parents over 50 who reported treating children unequally in their wills jumped from 16% to nearly 35% between 1995 and 2010.

Leaving unequal inheritances can be risky. Many American households report that their future financial stability depends upon receiving an inheritance.

When are parents likely to leave unequal inheritances? If one sibling is struggling financially and the other is flush with income and good fortune, it may be the right thing to do. This may also apply if one child has already received a large amount of financial support or has special needs.

One of the most common reasons for leaving unequal inheritances is to address uncompensated caregiving from an adult child. Two-thirds of respondents in a Merrill Lynch and Age Wave study said children who provided care late in life should receive a larger inheritance than those who did not.

Can you prevent conflict between siblings when inheritances are unequal? It is difficult, but worth a try:

Explain your wishes. Have a family meeting or one-on-one meetings with children to explain your thinking, and if necessary, consider including your estate planning attorney in the discussion. Consider writing a heartfelt, handwritten letter if you’re uncomfortable or the family dynamic is explosive. This may also help you if your will is contested in court, since it will demonstrate your intent.

Add a deterrent. If you anticipate your family ending up in court over their inheritances, talk with your estate planning attorney about a no-contest clause, which would be inserted in your will. It states that anyone who contests the will forfeits the right to any inheritance. Just be careful—these clauses are not interpreted the same way in every state. Therefore, consult with an experienced estate planning attorney to be sure that your will and your wishes will withstand a court challenge.

Consider a trust as part of your estate plan. Consider using a trust if your concern is focused on using your assets, as in the case of a spendthrift child or one with addiction issues. Your assets are placed in the trust, and you name a trustee to be in complete control of when and if the assets should be distributed to the named beneficiary. For example, you could set up an educational trust to preserve assets to be used for school costs. In the case of blended families, a trust can also be used to provide funds for a spouse but not children from a prior marriage. Trusts are harder to challenge because they bypass probate and remain private, unlike wills.

Reference: MarketWatch (May 6, 2023) “How to avoid potential conflict among your kids when leaving an unequal inheritance”

How Estate Planning Protects Unmarried Couples

“It is very important for unmarried couples to execute estate planning documents to make their wishes clear concerning the rights and responsibilities of their significant other.”

Many couples make the choice not to wed, even after being together for decades, for personal or financial reasons. For example, some clients don’t marry so as not to impact their children’s inheritance, while others would rather not bother with the legalities, says a recent article, “Estate Planning for Unmarried Couples” from My Prime Time News. In some cases, marriage would cause the couple to lose pension or Social Security benefits, if they remarried.

However, unmarried couples must take extra care to have estate planning documents in place to make their wishes clear and to protect each other in case of incapacity, serious illness and, ultimately, death.

From any statutory priority, a significant other does not have the legal rights granted to a spouse to serve as a personal representative or executor for their loved one’s estate. In addition, there is no statutory right to inherit property, including any family allowance or exempt property allowance.

The significant other also has no rights regarding acting as guardian or conservator for their partner and no ability to make medical decisions, if they become incapacitated or disabled.

All of these issues, however, can be resolved with the help of an estate planning attorney. Both partners should execute a will, health care power of attorney, general power of attorney and a living will to protect each other.

The last will and testament designates a personal representative or executor who will be in charge of the decedent’s estate and inherit the person’s assets. With no will, a partner will inherit no assets, unless they are owned jointly or the partner is a named beneficiary.

Having a health care power of attorney and a financial power of attorney gives a partner the power to make decisions if their loved one becomes incapacitated. In addition, these power of attorney documents are necessary for adult children to have priority in making these decisions, and guardianship proceedings will be required if there are no children or family members.

Disputes between the adult children of unmarried couples are common if a comprehensive estate plan still needs to be completed. For example, imagine a partner of many decades becoming too ill to communicate their end-of-life wishes. Even after a lifetime together, the adult children will have the legal upper hand, regardless of what the couple has discussed as their wishes for this situation.

It may be challenging for unmarried couples to discuss their living arrangements and family dynamics. However, the experienced estate planning attorney has met with and helped families of all kinds and will have the knowledge to prepare an estate plan to address all family dynamics.

Once this work is done, the couple can rest easy, knowing they have protected each other in the best and worst circumstances.

Reference: My Prime Time News (May 1, 2023) “Estate Planning for Unmarried Couples”

How a Durable Power of Attorney Prevents Complex Guardianship Issues

“If you’re seeking guardianship or conservatorship for a relative who is unable to take care of their own personal or financial needs, get ready for the long haul.”

Guardianship or conservatorship documents are not easy to obtain and can take months to finalize, warns the article “Possible Guardianship Or Conservatorship in Your Future? Plan Ahead With A Durable Power of Attorney” from Idaho Senior Independent. However, there is a far easier way to plan for the future.

Guardianship is a tool to solve the issue of a person who has become incapacitated and cannot make personal care, legal or financial decisions. With a durable power of attorney for health care decisions and a general durable power of attorney for financial matters, you can achieve the same level of control, with far less time, trouble and cost.

The ultimate goal is to gain the legal authority to make decisions for the incapacitated individual which will be honored by third parties, including financial institutions and health care providers and facilities.

Most estate planning attorneys advise married couples to give each other durable power of attorney (POA) for health care and finances. As long as the couple doesn’t die at the same time or become incapacitated at the same time, the well spouse can manage the couple’s health and assets. It may also be a good idea to give his legal authority to another person, usually one of their children.

Having an estate planning attorney create a comprehensive estate plan, which includes powers of attorney, health care powers of attorney, a last will and testament and other necessary legal documents, may seem like a lot to do. However, the alternative, pursuing guardianship or conservatorship, is just as lengthy, if not more so, and only solves one problem. A complete estate plan solves many, from care during incapacity to the distribution of assets after death.

Guardianship is needed if there is no durable health care POA for a loved one and they are unable to care for themselves or make medical decisions. This is especially true if they need some kind of housing assistance, such as assisted living or memory care. A conservatorship allows the named person to manage the loved one’s assets, including Social Security, investments and any property or vehicles they own. The POA also permits you to use their assets to pay for their care.

None of this can happen while going through the guardianship/conservatorship process, meaning you or someone else will have to pay the bills and time-sensitive decisions cannot be executed.

Achieving guardianship/conservatorship involves filing a petition with the court in the county where your loved one lives. In most cases, an estate planning attorney will advise the family member to obtain an appointment for their loved one with a physician who can evaluate the person’s ability to manage their life. A physician will need to provide a letter verifying the need for guardianship/conservatorship. The letter becomes part of the petition filed with the court.

The attorney will require a hearing based on the information provided.

Many courts require a different attorney to be retained to represent your loved one to avoid any conflict of interest. A different physician will, in many cases, also be required to evaluate your relative.  Courts also often require an assessment by a legal “visitor,” typically a licensed social worker who independently evaluates your relative and makes recommendations.

The visitor reports their findings to the court and to the attorneys. The guardianship/conservatorship applicant pays for the visit and subsequent reports, plus any attorney fees.

All of this takes time, although an attorney can request that the court grant temporary guardianship and conservatorship.

Having legal, durable POAs for health and finances long before they will be needed is a far simpler way for you to care for loved ones, if and when they need it.

Reference: Idaho Senior Independent (May 1, 2023) “Possible Guardianship Or Conservatorship in Your Future? Plan Ahead With A Durable Power of Attorney”

Why Everyone Needs a Will and an Estate Plan

“Estate planning is the process of anticipating and arranging for the management and disposal of a person's estate during the person's life in preparation for a person's future incapacity or death.”

Some still hold onto the old-school idea of estate planning being needed only by people living on an estate, owning a business, or having inherited significant wealth. This isn’t true, as explained in the article “Everyone needs a will—and here’s why” from JOLT News.

Times change, and so do laws and possibilities. Estate planning is vital for everyone. It includes planning for incapacity, which can happen to anyone at any age and stage of life. A durable power of attorney is one of the most important estate planning tools. If you become incapacitated, it allows you to name another person to manage your financial and legal affairs.

Without a durable power of attorney, your family will need to go to court and be named your guardian to be able to pay your bills and tackle other everyday tasks we usually don’t think twice about. Unfortunately, obtaining guardianship is a lengthy and expensive process. Having an experienced estate planning attorney create a power of attorney customized to your particular situation is a far better option.

When the last will and testament is needed, a power of attorney expires upon death. This is the foundation of distributing your assets. An estate planning attorney will review your situation thoroughly to make the best plan for you and your family.

A common mistake occurs when people think they can circumvent estate planning by adding another person to their bank and investment accounts. This unfortunately makes the accounts vulnerable to a number of bad outcomes. For example, if the person you name has any problems with debt, their creditors can come after your assets.

Upon the original owner’s death, the assets in the jointly owned accounts will be distributed directly to the joint owner, which may or may not have been the intention. As a result, heirs will have no ability to recover those assets.

For those living in community property states, some assets automatically transfer to the surviving spouse. However, some will require an administrative process to transfer assets to the surviving spouse formally. A meeting with an estate planning attorney will clarify and document the couple’s wishes.

The will is the most common planning tool. It must be signed by the person making the will, known as the testator, in the presence of witnesses. In some states, one witness is required, but two are required in other states. Your estate planning attorney will know the policies and requirements of your state.

Your will is the document used to name an executor, who will administer the estate and distribute assets. If you have minor children, you’ll name a primary and secondary guardian to raise the children in the event of your passing.

Reference: JOLT News (April 19, 2023) “Everyone needs a will—and here’s why”

Do Heirs Have to Pay Debts from an Estate?

“First, debts in a person’s estate are payable from the decedent’s assets in the course of administering their probate estate or administering their living trust estate.”

Part of estate planning is considering how future repayment of debts, both owed to the person and debts they are responsible for, will impact inheritances received by beneficiaries. A recent article from Lake County News, “Estate Planning: Debts and Estate Planning,” explains how the process works.

Assets passing to a beneficiary directly, outside of probate, are not typically subject to paying a decedent’s debts. These are life insurance proceeds, joint tenancy assets, Payable on Death (POD) and Transfer on Death (TOD), to name a few.

The estate plan must consider how much debt exists and how it might be paid. One approach is to purchase life insurance made payable to the trust estate.

A person may specifically gift real property, which would be subject to repaying an outstanding debt, like a mortgage.

If the beneficiary who would otherwise receive the residence takes it subject to repaying the secured debt, other assets in the estate would need to be reduced to pay the debt.

This should be addressed when the estate plan is created and must be expressly documented. If not addressed, the default rule is that any secured debt goes with the gift. It’s not likely to have been the plan. However, this is how the law works.

Third, parents and children may loan money between themselves. This is usually between parent and child.

Such family debts merit attention during estate planning. For example, parents may wish to loan money to a child to pay higher education costs, to buy a home, or to launch a business.

Upon the death of the parent, should any unpaid balance be repaid by the child to the parent’s estate, or should the child’s debt be forgiven? This must also be clearly stated in the will or trust, whatever is relevant.

If the parent wishes the child to pay the unpaid balance, the debt obligation and its payment history must be in writing and updated. The debt may be assigned to the parent’s trust and enforced by the successor trustee.

At death, the unpaid balance would need to be added back into the estate's value to arrive at the correct gross value necessary to assess each share of the total estate.

The unpaid balance is usually subtracted from the debtor’s share.

Children might also be owed money from a parent. For example, the adult child might provide at-home personal care services to their parent, or money may be lent to help with the parent’s cost of living. The debt and repayment history also needs to be in writing and updated regularly.

Debt must be acknowledged, and the means of repaying the debt must be made clear. An estate planning attorney will help document and build repayment into the estate plan.

Reference: Lake Country News (April 29, 2023) “Estate Planning: Debts and Estate Planning”

Tax Scams Involving Charitable Remainder Annuity Trusts

“Part of the agency’s latest annual ‘Dirty Dozen’ scams, these potentially ‘abusive arrangements’ involve charitable remainder annuity trusts and monetized installment sales.”

The IRS has issued a warning about promoters aiming specifically at wealthy taxpayers, advises a recent article, “IRS Warns Of Tax Scams That Target Wealthy,” from Financial Advisor. Charitable Remainder Annuity Trusts (CRATs) are irrevocable trusts that allow individuals to donate assets to charity and draw annual income for life or for a fixed period. A CRAT pays a dollar amount each year, and the IRS examines these trusts to ensure they correctly report trust income and distributions to beneficiaries. Of course, tax documents must also be filed properly.

Some sophisticated scammers boast of the benefits of using CRATs to eliminate ordinary income or capital gain on the sale of the property. However, property with a fair market value over its basis is transferred to the CRAT, the IRS explains, and taxpayers may wrongly claim the transfer of the property to the CRAT, resulting in an increase in basis to fair market value, as if the property had been sold to the trust.

The CRAT then sells the property but needs to recognize the gain due to the claimed step-up in basis.  The CRAT then purchases a single premium immediate annuity with the proceeds from the property sale. This is a misapplication of tax rules. The taxpayer or beneficiary may not treat the remaining portion as an excluding portion representing a return of investment for which no tax is due.

In another scam, abusive monetized installment sales, thieves find taxpayers seeking to defer the recognition of gain at the sale of appreciated property. They facilitate a purported monetized installment sale for the taxpayer for a fee. These sales occur when an intermediary purchase appreciated property from a seller in exchange for an installment note, which typically provides interest payments only, with the principal paid at the end of the term.

The seller gets the larger share of the proceeds but improperly delays recognition of gain on the appreciated property until the final payment on the installment note, often years later.

Anyone who pressures an investor to invest quickly, guarantees high returns or tax-free income, or says they can eliminate taxes using installment sales, trusts, or other means, should be dismissed immediately. Your estate planning attorney is well-versed in how CRATs, LLCs, S Corps, trusts, or charitable donations are used and will steer you and your assets into legal, proper investment strategies.

Reference: Financial Advisor (April 24, 203) “IRS Warns Of Tax Scams That Target Wealthy”

Is It Possible to Split an IRA?

“Like most assets, you can inherit an individual retirement account (IRA) after the owner’s death. For spouses, inheriting an IRA is a relatively straightforward process.”

If you and a sibling have inherited an IRA, there are several options, says a recent article from yahoo! finance, appropriately titled “My Sibling and I Inherited an IRA. How Do We Split It?” The choices are different than when a spouse inherits an IRA. Making a mistake could be costly, so work with an estate planning attorney familiar with the process.

An IRA is a tax-advantaged retirement account owned and managed by an individual. It’s different from 401(k) accounts, managed through employers. The rules about inheriting an IRA are more complicated than any other form of investment because of the IRA’s tax status. The traditional IRA is known as a “pre-tax” portfolio. This is because you don’t pay taxes on the money invested into the account. You pay taxes on the account’s growth when making withdrawals.

Starting at age 72 or 73, you must take money out of the IRA every year. These are called Required Minimum Distributions (RMDs) and are required by law. The amount depends on your age and the amount in the account. If you inherit an IRA, distributions from the account will still be required.

From a policy perspective, these withdrawals are required to generate tax revenue. Otherwise, people would have “eternal” IRAs, which would continue to grow tax-free for decades and generations.

Reference: yahoo! finance (April 24, 2023) “My Sibling and I Inherited an IRA. How Do We Split It?”

When siblings inherit an IRA, the first question is whether or not the siblings are “eligible designated beneficiaries.” A beneficiary is a person named in the account to receive it after the owner’s death.  The beneficiary then inherits the account directly. Under the SECURE Act, starting in 2020, certain categories count as “eligible designated beneficiaries.” This includes the spouse, any minor children, disabled or chronically ill individuals and anyone not more than ten years younger than the account owner. Adult children over 18 do not qualify as eligible designated beneficiaries.

Adult siblings may transfer the IRA into an Inherited IRA, using a single account they own jointly, or distribute the IRA among multiple inherited IRA accounts that each owns individually. The transfer must occur by December 31 of the year the IRA was inherited. Once the account is transferred, the siblings have ten years to withdraw and pay taxes on all the money in the inherited IRA account.

If the siblings wish to withdraw and use the assets, they may. However, they must pay ordinary income taxes on the assets, which could be considerable. The tax rate is set based on the sibling’s income for the year.

Minor children inheriting an IRA have another option. Their parent or guardian may transfer the IRA into an inherited IRA and take RMDs based on their life expectancy and the account’s value. The distribution must begin on December 31 of the year when they inherited the IRA. The money is taxed as income. Once the minor child reaches legal age, the ten-year rule applies. They must take all of the money out of the account within ten years of achieving their legal age.

Splitting an IRA between siblings requires the knowledge of an estate planning attorney to make informed decisions to protect the assets and minimize taxes.

What to Do When a Spouse Dies

“Unfortunately, during the grieving process surviving spouses also need to navigate the complex financial issues that arise after the death of their partner.”

The death of a spouse is one of life’s most stressful events and is an overwhelming experience. Having to deal with life’s legal and financial aspects while grieving is a challenge, says a recent article, “What To Do After The Death Of A Spouse,” from Forbes. One thing to note: all tasks don’t have to be done at once.

What does need to be done promptly is making funeral arrangements, notifying family and friends and alerting your estate planning attorney. Other immediate steps include:

• Obtaining multiple copies of the death certificate
• Asking a friend or relative to watch the house during the funeral. Burglaries often occur during funerals, when burial plans are public.
• Arrange for any pets to be cared for.

There are a number of things to avoid as well. Letting grief and fear delay important actions can lead to larger estate problems. Don’t neglect to contact Social Security to report the death and monitor tax and other deadlines. Don’t start giving away assets, whatever persistent family members may say. You’ll need to go through the estate process properly. Assets are not distributed until all other tasks have been completed.

Legal and financial documents must be gathered and reviewed, including bank statements, investment accounts, retirement accounts and beneficiary designations, life insurance policies, estate planning documents and outstanding debts or liabilities.

Bills need to be paid. This can become problematic. For example, were the bills paid from joint accounts, your or your spouse’s account? Do you have a list of all accounts? Is it okay to pay a joint bill from your bank account? Do you need to change regularly made payments formerly made from your deceased spouse’s account to your account?

Hopefully, you and your spouse had the right estate planning documents completed beforehand. Next, contact your estate planning attorney to discuss the will and any trusts. Assets owned by your spouse only will likely go through probate. Assets with beneficiary designations, like retirement accounts or life insurance policy proceeds, will go directly to the beneficiaries.

The surviving spouse needs to file taxes for themselves and the deceased spouse by April 15 of the following year. Discuss with your estate planning attorney whether or not you’ll need to file a federal or state estate tax return, which is due nine months after death. Note that these may need to be filed even if no tax is due.

Reference: Forbes (April 20, 2023) “What To Do After The Death Of A Spouse”

Use Estate Planning to Prepare for Cognitive Decline

“Data from sources like the U.S. Census Bureau shows in no uncertain terms that the U.S. population has grown older over the prior two decades.”

Since 2000, the national median age in the U.S. has increased by 3.4 years, with the largest single year gain of 0.3 years in 2021, when the median age reached 38.8 years. This may seem young compared to the life expectancies of older Americans. However, the median age in 1960 was significantly lower, at 29.5 years, according to the article “Don’t Let Cognitive Decline Derail Well-Laid Financial Plans” from Think Advisor.

An aging population brings many challenges to estate planning attorneys, who are mindful of the challenges of aging, both mental, physical and financial. Experienced estate planning attorneys are in the best position to help clients prepare for these challenges by taking concrete steps to protect themselves.

Individuals with cognitive decline become more vulnerable to potentially negative influences at the same time their network of trusted friends and family members begins to shrink. As people become older, they are often more isolated, making them increasingly susceptible to scams. The current scam-rich environment is yet another reason to use estate planning.

When a person is diagnosed with Alzheimer’s or any other form of dementia, an estate plan must be put into place as soon as possible, as long as the person is still able express their wishes. A diagnosis can lead to profound distress. However, there is no time to delay.

While typically, the person may state they wish their spouse to be entrusted with everything, this has to be properly documented and is only part of the solution. This is especially the case if the couple is close in age. A secondary and even tertiary agent needs to be made part of the plan for incapacity.

The documents needed to protect the individual and the family are a will, financial power of attorney, durable power of attorney and health care documentation. In addition, for families with more sophisticated finances and legacy goals, trusts and other estate and tax planning strategies are needed.

A common challenge occurs when parents cannot entrust their children to be named as their primary or secondary agents. For example, suppose no immediate family members can be trusted to manage their affairs. In that case, it may be necessary to appoint a family friend or the child of a family friend known to be responsible and trustworthy.

The creation of power of attorney documents by an estate planning attorney is critical. This is because if no one is named, the court will need to step in and name a professional guardian. This person won’t know the person or their family dynamics and may not put their ward’s best interests first, even though they are legally bound to do so. There have been many reports of financial and emotional abuse by court-appointed guardians, so this is something to avoid if possible.

Reference: Think Advisor (April 21, 2023) “Don’t Let Cognitive Decline Derail Well-Laid Financial Plans”

Should You Convert to a Roth IRA?

“If you have a Roth IRA, you may be planning to use it as part of your retirement income.”

Roth IRAs are very popular alternatives to traditional IRAs, which have more restrictions than a Roth. Like any other IRA, the Roth allows investments to grow tax free, explains the article “7 Mistakes to Avoid With a Roth IRA” from U.S. News & World Report. Understanding how the Roth works will help make the most of assets in the account, including avoiding common pitfalls.

Some of the more common mistakes made with Roth IRAs:

Not asking if Roth IRAs are safe. Account owners may contribute up to a certain amount every year as long as they meet the eligibility requirements. Funds may be allocated to different types of investments, including stocks, bonds, exchange-traded funds and mutual funds. Funds placed in a Roth IRA are after-tax dollars—they are taxed as income when placed into the account. Investment gains and withdrawals are tax-free, which is part of the appeal of the Roth. They are considered relatively low-risk investments.

Can you lose money in a Roth? Any account can lose money depending upon the investments you select. Be sure that investment accounts are allocated according to your risk tolerance.

Don’t access funds earlier than permitted. Once you turn 59 ½, you may make withdrawals. Taking out funds earlier may generate taxes and penalties. Sometimes, you might qualify for a hardship withdrawal if you lose your job or have high medical bills not covered by insurance.

Not having earned income. One of the requirements for using a Roth is that the owner must have earned income in the calendar year of the contribution. For example, if you open a Roth IRA for a child, they’ll need proof of wages, such as a W-2 for part-time work. Taxable compensation is a requirement for a Roth IRA.

Contributions if your salary is too high. Roth IRAs have income thresholds, so your contribution limit is based on your salary. You may run into tax issues if you are above the limit, but continue to fund the account. If you file single and earn less than $138,000, you can contribute the full amount. If you earn at least $138,000 and less than $153,000, your contribution limit will be reduced. You cannot contribute to the Roth if you earn $153,000 or more. The contribution reductions for married couples filing jointly begin at $218,000 and phase out entirely at $228,000. The IRS typically charges a 6% tax on Roth IRA contributions above the limits, so be mindful of these guidelines.

Don’t overlook spouse eligibility. There’s no such thing as a joint Roth IRA, but there is a spousal Roth IRA. If a couple files a joint tax return and one spouse is not a wage earner, they may open a Roth IRA for a nonworking spouse. This allows the working spouse to contribute to their own Roth IRA and the Roth IRA of their non-working spouse. This gives the spouse who isn’t working an opportunity to save for retirement.

Reference: U.S. News & World Report (April 129, 2023) “7 Mistakes to Avoid With a Roth IRA”