Klitzman Law Group, PLLC

Estate Planning Lessons from Mickey Mouse and Cinderella

At the center of every fairy tale is a human story centered around basic life experiences, as any English major will tell you. Therefore, it’s no surprise that the stories and characters from Disney hold life lessons for estate planning, as described in a recent article, “9 Estate Planning Lessons From Disney Movies,” from Forbes.

For a blended family story, look no further than Cinderella. When her father died and left his estate to an evil stepmother with two equally wicked daughters, he may not have thought of the impact it would have on poor Cinderella. By structuring the estate plan to provide for his daughter from the first marriage, he could have prevented Cinderella from being economically dependent on her stepmother. Leaving a portion to Cinderella and the remainder to the stepmother could have ended the story long before the prince entered the picture. Putting assets into a trust for Cinderella and naming a neutral party as trustee is another option her father could have explored.

Snow White’s seven dwarfs is a tale of planning for dependents. Each dwarf has their own behavior traits and needs, just as children do. For minors or children with special needs, unique circumstances need to be addressed by estate planning. Parents need to put a clear guardianship plan in place to protect dependents and be sure they are cared for by people who understand their needs. Without a plan, which includes a will naming guardians and a Special Needs Trust if appropriate, the court may appoint a guardian who might not be a good fit for the child. Establishing trusts can ensure that funds are available for education and living expenses, adding another person looking out for the child.

Who better represents incapacity than Sleeping Beauty? Facing a health crisis in which people can’t make their own decisions requires planning. A financial power of attorney and healthcare proxy ensure that someone you know and trust will be able to act on your behalf if you should eat a poisoned apple and fall into a deep sleep. By planning for incapacity, you can prevent court intervention and ensure that your healthcare choices are followed.

The Princess and the Frog exemplifies the need for good business succession planning to ensure that the business has a future. Does a business owner want to pass the business on to the next generation or sell it? This requires planning for taxes and estate planning. How should assets be gifted to minimize tax liabilities?

Failing to have an estate plan often leads to a sad ending for family members. Without it, there’s no guarantee of a kind-hearted prince or magical enchantress stepping in to make things right. Consult with an experienced estate planning attorney to protect your children and yourself from the twists and turns of life.

Reference: Forbes (Sept. 27, 2024) “9 Estate Planning Lessons From Disney Movies”

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.”

Is a Power of Attorney Really Necessary?

A power of attorney is a document to be signed and notarized and allows one person, known as the “principal,” to appoint another person, known as the “agent,” to act on the principal’s behalf within the scope of authority described in the document. According to a recent article from The Gazette, “Money & the Law: Powers of attorney more complex than they might seem,” the power of attorney can be very broad or limited to a particular transaction.

You may want someone to be able to pay your bills if you are temporarily incapacitated, for instance, but not to sell your home. A personalized power of attorney document can set specific limits for your unique situation.

As part of an estate plan, the POA is likely to be “general,” granting broad authority to the agent. This may be especially useful to someone who regularly travels and can’t always be physically present to conduct transactions. It also benefits someone who faces a risk of cognitive decline or impairment due to age or illness.

With proper language, a power of attorney can be made “durable,” meaning the grant of authority contained in the document survives legal incapacity. The POA does not survive the death of the principal.

If a person doesn’t have a durable financial POA and becomes incapacitated, a conservator must be appointed to handle the person’s financial affairs. This requires a legal proceeding, which can be costly, time-consuming and divisive among family members.

A POA should be created with careful thought and planning. The agent could turn rogue. For instance, a child appointed as the POA watching their inheritance shrink because of their ill parent’s medical expenses might skimp on an elderly parent’s health needs.

Financial powers of attorney can also create risks for agents. The agent’s job is simple when the person has full capacity—most of what the agent will do is carry out directions given by the principal. However, when the person becomes incapacitated, they are responsible to act as a fiduciary, in the same way a trustee or conservator would.

What duties does the POA entail once the principal becomes incapacitated? They must round up information and become responsible for managing whatever is delineated in the POA document. This may include financial affairs, investment accounts, tax obligations, pet care, etc.

Determining when incapacity has arrived can be difficult. In some elderly people, capacity comes and goes. When should the agent begin making discretionary decisions?

There are also questions about the standard of care applicable to agents named as POA. In most states, the standard of care is more than good faith, requiring diligence, competence, and prudence.

A power of attorney is more complex than it appears, requiring serious attention by estate planning attorneys and their clients as part of the estate planning process. They should be updated, just as an estate plan is updated, every three to five years or when circumstances warrant.

Reference: The Gazette (Sep. 3, 2023) “Money & the Law: Powers of attorney more complex than they might seem”

A Roth Conversion Can Benefit Retirement Plan

Before 2020, leaving a traditional IRA to younger beneficiaries created dual tax breaks. The original owner reduced taxable income by making pretax contributions during their lifetime, and beneficiaries could stretch the benefits of tax deferral over their lifetime. All that ended with the SECURE Act, but there are some options, as explained in the article “Why a Roth Conversion is a Powerful Estate Planning Tool” from Think Advisor.

After the SECURE Act, beneficiaries who don’t qualify as “eligible designated beneficiaries” or EDBs must empty the inherited IRA account within ten years. If the original owner had already begun taking minimum required distributions, the beneficiary must also take annual RMDs during the ten-year distribution period.

Someone who inherits a traditional IRA must now pay taxes on the entire account balance within ten years of the original account owner’s death. This can be a sizable tax burden, especially if the beneficiary is in their peak earning years.

Roth beneficiaries who don’t qualify as EBDs must empty the account within the same ten-year distribution period applying to traditional IRA accounts. However, Roths have a decisive advantage during the original owner’s lifetime: no RMD rules.

The original owner will always be deemed to have died before their required beginning date because a Roth account can never go into pay status since there is no required beginning date for distributions. Therefore, the Roth IRA beneficiary can wait until the tenth year to empty the account, allowing the funds to grow tax-free without worrying about the tax hit in Year 10.

When the beneficiary eventually takes distributions, the original contributions are nontaxable because the original owner paid taxes on Roth contributions during their lifetime. If the five-year rule is satisfied—at least five years have passed since the original owner made their first contribution or conversion to the account—earnings will also be tax and penalty-free to beneficiaries.

Roth accounts benefit the original owner because they offer a tax-free source of income during retirement. However, they’re also a valuable tax-free gift for account beneficiaries.

Reference: Think Advisor (Sep. 1, 2023) “Why a Roth Conversion is a Powerful Estate Planning Tool”

Tasks to Be Done After a Loved One Passes

If you haven’t dealt with losing a loved one, the days and weeks after a death can be overwhelming. Pain and grief are paired with important tasks that must be done, or unnecessary stress will result, explains a recent article, “11 Financial Steps to Follow After the Loss of a Loved One,” from U.S. News & World Report.

An official declaration of death. If the death occurs in a hospital, the hospital will issue it. If the death occurred at home, a medical professional or first responder would make the declaration.

Obtain a death certificate. This usually comes from the funeral home. You’ll want to get five to ten original certificates, which will be used for various legal and financial matters.

Gather financial documents. This includes estate planning documents, a will, a trust, bank and investment account information, utilities and bills, insurance policies and tax returns.

Reach out to advisors. This includes the estate planning attorney, financial advisor, CPA and other professionals working with the deceased. They will be able to offer guidance as you go through the process of managing the estate.

Contact any government agencies. If your loved one was receiving benefits from Social Security, the Veterans Administration, Medicare, Medicaid, or any other government agency, you must notify them of the death. The funeral home may have already sent the SSA a notification. You may still want to confirm if it has been sent, as the ultimate responsibility for notification is the surviving spouse or adult child.

Contact financial institutions. The financial institutions, including commercial banks, brokerage accounts and insurance companies, will all need to receive an original death certificate. If there is a POD (Payment on Death) order, the balance on accounts will be transferred to the designated beneficiary. If there are life insurance policies, you’ll need to find the policy and identify the designated beneficiary.

Avoid identity theft. Contact credit agencies, including Experian, Equifax and TransUnion, to notify them of the death. You may need to contact one for the others to become aware. You should also close the social media accounts of the deceased. Depending on the platform, you may only be able to memorialize the account instead of deleting it.

Other important institutions to contact. The post office will need to be notified, although you may first want to have the person’s mail sent to your home directly. The motor vehicle department needs a notification of death to stop renewing licenses. Unions and professional, service, or fraternal organizations should be notified. There may be survivor’s benefits.

Voter registration. You’ll want to notify the deceased’s voter registration agency, so they can remove their name from voting rolls.

Prepare the final tax return. There are two tax returns to be aware of—the final income tax returns and the estate tax returns. Your estate planning attorney will know the deadlines for both.

Filing the will with the probate court. Once the will goes through probate and is approved by the court, the executor will be able to distribute the deceased’s assets in accordance with the will. If there is no will, the distribution will be overseen by the court and follow the state’s intestacy laws.

Settle any remaining debts. In most cases, the remaining liability on a mortgage or car loan will be payable by the person inheriting them. All other forms of debt, like student loans, credit cards and medical loans, will be charged against the decedent’s estate.

Carrying out these tasks during a difficult time is not easy. An experienced estate planning attorney can help make the process easier for all concerned.

Reference: U.S. News & World Report (Sep. 1, 2023) “11 Financial Steps to Follow After the Loss of a Loved One”

Social Security has a Little Known “Do-Over” Clause

Most seniors rely on Social Security benefits to make ends meet in retirement, says a recent article from The Motley Fool, “The Little-Known Social Security Do-Over Clause That’s a Must-Know for Baby Boomers.” While this under-the-radar item can help create a considerably larger Social Security payout, it comes with two catches and is unavailable for everyone.

Getting the most out of Social Security requires understanding how you are paid and the ins and outs of your own claiming decision.

Several factors impact how much of your Social Security benefit you get to keep. If you file early, you may be subject to the retirement earnings test. If you earn above a preset income threshold, you may have benefits taxed at the federal and/or state level. However, when you break Social Security down to the basics, four parts determine your benefits.

The first two are work history and earnings history. The Social Security Administration considers the 35 highest-earning, inflation-adjusted years when determining the monthly benefit. Workers must earn income for 35 years to avoid having a $0 averaged in by the SSA for each year less than 35.

The third factor is the full retirement age (FRA). This is when you become eligible for the 100% payout, determined by your birth year. Based on the retirement age charge, boomers' FRAs range between 66 and 67.

The fourth factor is your claiming age. For every year you wait to take benefits, your monthly payout rises by 8%, starting at age 62 and continuing through age 69. Taking benefits before your FRA means a permanent reduction of up to 40%, depending upon your birth year. However, if you can wait until after your FRA, you could increase your Social Security benefit by anywhere from 24% to 32%.

Social Security’s Annual Statistical Supplement shows that most retirees take benefits before full retirement age. As of 2021, 65% of the 47.29 million retirees took a permanently reduced monthly payout.

This is the optimal choice for many, meaning the selection generates the highest lifetime income from Social Security. For example, someone with chronic illnesses that shorten their life expectancy may benefit from claiming early. A lifetime low-income spouse could take their payout early to allow their higher-earning partners’ benefits to grow over time. This is a good way to generate household income while larger future benefits grow.

Historically, early claims don’t work out so well. A study released in 2019 found that just 8% of claimants at ages 62, 63, and 64 made an optimal choice. However, there’s a silver lining for some boomers and future retirees who may regret their early claiming decision, even though it comes with two catches.

The “do-over” clause is Form SSA-521, officially known as “Request for Withdrawal of Application.” This is a request to SSA to withdraw your benefits claim. If approved, the early claim is undone, and your benefits go back to accruing up to 8% annually through age 69. This is especially helpful for workers with little or nothing saved for retirement who took a reduced payout but ended up back in the workforce not long after. Boomers landing high-paying jobs may file SSA-521 and forgo their payout in favor of a higher Social Security payout a few years later.

However, there are two important restrictions. One, requests to cancel or withdraw the application can only be made up to 12 months after you start getting benefits. You can't use this form if you’ve been receiving benefits for 18 months. You can also only cancel your benefits application once.

Secondly, you have to pay back every penny in benefits you received in the 12 months leading up to filing Form SSA-521. This includes any benefits spouses or children may have received based on your earnings history.

While this little-known clause has limitations, it may offer select baby boomers a chance to start over if they took Social Security too early. It’s not for everyone, but it’s a must—know for all.

Reference: The Motley Fool (Aug. 27, 2023) “The Little-Known Social Security Do-Over Clause That’s a Must-Know for Baby Boomers”

What Is a No-Contest Clause?

There are different ways to defend a last will and testament from a claim filed by an individual or a group of individuals who want to alter the terms you put into your will. One way is to hope your executor or, if the issue concerns a trust, your trustee, can effectively defend your choices, says a recent article from Kiplinger, “What Do No-Contest Clauses Have to Do With Undue Influence?” Another is to include a no-contest clause, which would disinherit all claimants if they lose their challenge or for even filing a challenge in the first place.

A no-contest clause can be a strong deterrent for a beneficiary who believes they are entitled to more than the amount provided if they know that just by filing a challenge, they’ll forfeit their share. However, it may not be powerful enough for someone completely omitted from the estate plan altogether. Many estate planning attorneys recommend leaving something for even a disliked heir to give them a reason not to challenge the will.

There are more reasons than disgruntled heirs to have a no-contest clause in your will. A no-contest clause can help if your will omits any heirs at law not specifically mentioned in the document or revoke the share provided for anyone seeking to claim a share in your estate, increase their share, or claim certain assets in your estate.

A no-contest clause is also useful if someone is trying to invalidate your will, or any provision in it or to take part of your estate in a way not specifically described in your last will and testament.

Many no-contest clauses treat a challenger as having predeceased you or having predeceased you leaving no descendants, thereby passing their share according to other terms in the document. In certain states, it is very important to include a specific direction as to what should happen to these forfeited shares. Your estate planning attorney will know how your state’s laws work and how best to include this language in your will.

However, what if the person challenging the will has a good reason to do so? For instance, numerous cases have been brought to court because probable cause existed where the decedent was subjected to undue influence and even elder abuse by a caregiver or a relative in charge of their finances.

In many cases, family members only learn of the abuse after discovering the depletion of the estate and the admission of a new last will to favor the elder abuser over the decedent’s family. The no-contest clause could cause a complete disinheritance for a family member seeking to protect the estate and any other person who appears in court to support the petition.

Not all states treat the no-contest clause the same. Some refuse to enforce them as a matter of public policy. Others strictly construe the clause because they disfavor any forfeitures. Your estate plan should be created with a no-contest clause aligning with the laws of your state. Your estate planning attorney can create a will designed to avoid punishing a challenge brought in good faith.

Reference: Kiplinger (Sep. 1, 2023) “What Do No-Contest Clauses Have to Do With Undue Influence?”

Unmarried? What You Need to Know about Estate Planning

Unmarried couples must engage in estate planning because, without proper planning, their partner may be left with nothing when the first partner dies. Details of protecting partners are explained in a recent article, “BUSINESS: Unmarried Couples and Estate Planning,” from The Item.

For married couples, the spouse is usually the first to inherit, followed by children, parents, siblings, and other relatives, depending on who is still living. However, if you’re unmarried and no plans have been made, your partner receives nothing. In fact, in many states, the law doesn’t recognize unmarried couples at all.

Life insurance policies and retirement accounts could go to your estate if no designated beneficiary is named. This could lead to probate, a complicated and costly legal process where the court decides how assets should be distributed.

To avoid these and many other problems, having an estate plan to take care of your partner is best. This includes making a Will, naming beneficiaries for life insurance and retirement accounts and clearly stating your intentions in legally enforceable documents. This protects your partner’s rights and ensures your assets are distributed according to your wishes.

Married partners have the advantage of gifts, as they can give each other unlimited amounts of money or property without worrying about gift tax. However, there are limits to how much unmarried partners may give without facing gift tax exclusions, also known as the annual exclusion.

If you gift your partner more than the annual exclusion amount in a year, you must file a federal gift tax return and report the excess amount. The rules for federal estate tax are quite similar to the gift tax rules.

When married people die, they may leave an unlimited amount of money and property to each other without worrying about federal estate tax. However, any money or property left to an unmarried partner will count towards your lifetime exclusion amount.

Once this exclusion amount is exceeded, an estate tax will be due when the giver passes away. In 2023, the lifetime gift and estate tax exemption is $12.92 million, and the annual exclusion is $17,000. This amount will change over time because of inflation.

There are also personal matters to think about. You’ll want to designate someone to handle financial and legal transactions and make medical decisions on your behalf if you cannot do so. If you don’t choose a trusted person for these roles and have the appropriate documents created, your partner may not be included in these decisions. If you don’t have a good relationship with your family, this could create a situation where your partner is shunted aside.

What can you do? Meet with an experienced estate planning attorney and create a Will to protect your wishes after you pass. Have a Power of Attorney and Medical Power of Attorney created, so your partner can make decisions on your behalf if you become incapacitated. Doublecheck your beneficiary designations to be sure the person who will receive proceeds from your life insurance and retirement accounts is the person you want. If you own a home together, talk with your estate planning attorney to plan for what will happen if one of you needs long-term care or predeceases the other.

Reference: The Item (Aug. 26, 2023) “BUSINESS: Unmarried Couples and Estate Planning”

How can You Make Changes to Estate Plan?

It’s rare for a person to put their estate plan together once and never change it. A recent article from Coeur d’Alene/Post Falls Press asks a good question: “Can you amend your estate plan by writing the changes on your existing documents?”

Effectively and legally changing your will or trust so the changes are enforced per your wishes is best done with an experienced estate planning attorney. People often hand-write edits and changes to the original documents, thinking this is the simple way to amend their wishes. Most attorneys have tales of family members coming into their offices with a handwritten addendum added to the front or back of a will or trust document, which has been written and attached after the document has been signed and executed.

These approaches are problematic, as they are never done in a way that meets the requirements for a legally valid amendment to a will or trust.

A legally enforceable change to a will is accomplished in one of two ways. One is to replace the entire document with a new will document, which should include explicit language stating all prior wills are revoked and replaced, or by adding a new document called a codicil to the old will document. The codicil must make clear exactly what part of the old document is being changed, and typically, it reaffirms the unchanged terms of the old will.

Changes to a trust are accomplished in most states in one of two ways. The first is by replacing the prior trust document with an entirely new trust document, although the name and creation date of the trust must remain the same, and it is explicitly not a revocation of the trust. This is called a trust restatement. The second way to change a trust is using a trust amendment, similar to adding a codicil of a will. A Trust Amendment is a new document added to the existing trust document. It states which part or parts of the original trust document are being changed.

Every state has specific technical requirements for a will codicil or trust amendment/restatement, which must be followed to enforce the changes legally. Just writing on the documents will never meet those requirements and will almost always lead to major disputes among family members and other interested parties.

Handwritten or holographic wills are legal in some states. However, those states have very specific requirements, and wills still need to go through probate. There are many ways to create major problems trying to use this method and only a few ways to do it right.

The good news is an experienced estate planning attorney can help with any modifications, large or small, to make your estate planning documents accurately reflect your wishes.

Reference: Coeur d’Alene/Post Falls Press (Aug. 16, 2023) “Can you amend your estate plan by writing the changes on your existing documents?”

Why are Contingent Beneficiaries Important?

If you’ve been married or in a longstanding relationship, it’s almost certain your initial beneficiary will be your spouse or partner. If you have children, it’s likely an easy decision to make them contingent or successor beneficiaries to your estate. More often than not, children inherit equally, explains the article “PLANNING AHEAD: The problems we have naming contingent beneficiaries” from The Mercury.

To avoid conflict, parents often decide to name children equally, even if they’d prefer a greater share to go to one child over another, usually because of a greater need. This is, of course, a matter of individual preference.

However, as you move down the line in naming a successor or contingent beneficiaries, you may encounter some unexpected stumbling blocks.

If there is a beneficiary who is disabled, whether a child, grandchild or more distant relative, or even a spouse, you have to determine if naming them is a good idea. If the disabled individual is receiving Medicaid or other government assistance, an inheritance could cause this person to become ineligible for local, state, or federal government benefits. An estate planning attorney with knowledge of special needs planning will help you understand how to help your loved one without risking their benefits.

A Supplemental Needs Trust may be in order, or a Special Needs Trust. If the person’s only benefit is Social Security Disability—different from Supplemental Security Income or some others—they may be free to inherit without a trust and will not impact benefits. Social Security Disability recipients cannot work in “substantial gainful employment.”

Another issue in naming successor and contingent beneficiaries is the choice of a trustee or manager to handle funds if a beneficiary cannot receive benefits directly. A grandparent will sometimes be reluctant to name a son-in-law or a daughter-in-law as trustees for minors if their daughter or son predeceases and the inheritance is intended for a minor or disabled grandchildren. The grandparents may be concerned about how the funds will be used or how well or poorly the person has handled financial matters in the past.

The same concern may be at issue for a child. A trust can be structured with specific parameters for a grandchild regarding the use of funds. If a supplemental needs trust is established, the trustee must understand clearly what they can and cannot do.

What happens if you’ve run out of beneficiaries? For those with small families or who live into their 90s, many family members and friends have passed before them. These seniors may be more vulnerable to scams or new “friends” whose genuine interest is in their assets. In these cases, an estate plan prepared by an experienced estate planning attorney will need to consider this when mapping out the distribution of their estate, however large or small, to follow their wishes.

Reference: The Mercury (Aug. 28, 2023) “PLANNING AHEAD: The problems we have naming contingent beneficiaries”