Klitzman Law Group, PLLC

What Information Should Be in a Will?

While it’s clearly more fun to plan for a baby shower than to contemplate your own mortality, making arrangements for the eventualities of life as we age—including incapacity and, yes, our own passing—does bring peace of mind. It’s necessary for everyone 18 and older, says a recent article from BestLife, “The 10 Most Important Things to Include in Your Will, Experts Say.”

The reason is simple: if you are incapacitated and cannot speak for yourself regarding healthcare decisions or your financial life, you need someone to do so for you. This is as much a part of your estate plan as asset distribution.

Planning for incapacity includes having a Power of Attorney (POA) and possibly a lifetime or revocable trust. The POA assigns someone else to manage everyday financial matters. The Healthcare POA is used to designate someone else to make medical decisions on your behalf if you can’t do so. You’ll need to discuss these roles with the person or people being named to ensure that they are comfortable with the responsibilities. Be sure that your Healthcare POA knows your wishes regarding medical directives and will carry them out, even if they feel differently about your wishes.

Your Last Will and Testament is part of a group of documents, including the POAs mentioned above. A will is used to name an executor who administers your estate. The executor has a large task, including gathering information for all assets, filing final taxes and estate taxes, paying off debts, notifying family members and distributing assets. Your executor should be someone you trust and who has the financial acumen to take on all these tasks, as well as managing heirs who don’t always appreciate the executor’s responsibilities.

You’ll need backups for all the people in all roles. Let’s say you chose a respected friend of many years to be your executor. If they become ill or die themselves, who will oversee your estate? You need a second, or even a third, backup executor to be named in your will. The same goes for trusts. A successor trustee is necessary to be sure that your trust and its assets are in good hands.

Minor children or dependents are protected through a will that is used to name a guardian (and a backup guardian) for minor children. If no one is named, the court will decide who will raise your child(ren). Similar issues need to be addressed, such as when you would want your children to receive an inheritance—all at once or when they reach legal age. Could it be specific percentages based on age? Picking the right person and creating a plan will ensure that the children have a good life, even in your absence.

Keeping wills up to date is critical to ensuring that your wishes are followed at every stage of life.  Everyone involved should know where the original copy of the will is located. Some estate planning attorneys will safeguard your will, while others recommend keeping it at home in a fire and water-proof safe. Whichever route you take, tell your executor and family members where it can be found.

Discuss the use of trusts with your estate planning attorney. Using trusts can minimize the amount of your estate needing to go through probate, which can be time-consuming and costly.

Don’t neglect your furry or feathered friends. If your lifestyle includes companion animals who are dear to you, consider who would take care of them if you became incapacitated or died. You can use a pet trust to provide assets for their care and name a caretaker, so they don’t end up in a shelter.

Avoid family battles by including your wishes for personal possessions with special meaning in your will. Family heirlooms, artwork and jewelry are among the items families fight over. Spare your family this stress by naming them in your will or gifting them while you are still living.

Digital assets have become a part of our modern lives. Suppose you leave a list of accounts, usernames, passwords and specific directions for your wishes. In that case, your executor will need to be able to manage your digital assets, including financial accounts, photos, subscriptions, airline miles, email and social media accounts.

If you wish to leave assets to a charity, you can do so in your will or make gifts before you die. Speak with your estate planning attorney about how to bequeath assets to a charity, which should be done in alignment with your overall estate plan.

Reference: BestLife (May 3, 2024) “The 10 Most Important Things to Include in Your Will, Experts Say”

Are Charitable Remainder Trusts a Good Idea?

For many years, the Stretch IRA was used to leave assets to heirs very tax-efficiently. Then came the SECURE Act, according to the article “Charitable Remainder Trust: The Stretch IRA Alternative” from Kiplinger. The ability for IRA beneficiaries to take the smallest of RMDs (Required Minimum Distributions) annually and leave a large sum in the IRA to grow tax-deferred over their lifetimes was over.

The SECURE Act in 2019 brought significant changes, taking away a valuable tool from anyone who died after Dec. 31, 2019. The new rules require the entire amount in an inherited IRA to be withdrawn by the end of the tenth year of the original account owner’s death. These withdrawals are taxable, so instead of stretching the withdrawal out over an extended period, accounts must be emptied, and taxes paid within a relatively short period. Compared to the stretch, the Ten-Year Rule is, in a word, taxing. It's crucial to understand these changes and their implications.

There are exceptions to the rule for certain beneficiaries, including spouses and disabled individuals, non-spouse beneficiaries no more than ten years younger than the original account owner and a biological or adopted minor until they reach age 21. On their 21^st birthday, they have ten years to empty the account.

There are alternative strategies for IRA owners to consider to help heirs enjoy more of their legacy, which an experienced estate planning attorney will know. One is the Charitable Remainder Trust (CRT), which offers both tax benefits and charitable giving.

Start by designating a CRT as the beneficiary of your IRA. When you die, the assets will pass to the CRT. Since the CRT is a tax-exempt entity, the assets in the IRA continue to grow tax deferred. The CRT’s beneficiaries receive income distributions over a specified period. At the end of the CRT, any remaining funds go to a charitable beneficiary.

CRT beneficiaries may receive distributions over a much longer period than a direct inheritance or inherited IRA, which has a mandated 10-year distribution.

The CRT strategy is best for charitably minded people who would have donated to the charity regardless of the IRA restrictions. If this aligns with your values, it makes sense from an estate planning perspective. There are costs associated with setting up a CRT, which should be considered when considering the totality of your estate plan. Speak with your estate planning attorney to see if this makes sense for you and your family.

Reference: Kiplinger (April 19, 2024) “Charitable Remainder Trust: The Stretch IRA Alternative”

How Younger Adults Take Charge of Estate Planning

However, recent anecdotal trends show a new, positive shift among millennials or Gen-Z individuals. According to a recent article from Forbes, “Why Gen-Z Is Suddenly Creating Wills And Trusts—And You Should Too,” within recent months, more and more millennials and Gen-Zers who are being told to create an estate plan are actually going ahead and doing so.

The article says Gen-Zers and millennials have become the “quiet leaders” of estate planning. Several things are driving this shift:

Digital Assets. Younger people, even those of modest means, have significant digital assets, including cryptocurrencies, online businesses and many social media accounts.

COVID. Living through a global pandemic and experiencing the unexpected loss of family members raised awareness relatively early in their adult years of the repercussions of not having an estate plan.

Changing Family Structures. “Modern Family” is more than entertainment. Today’s family is more likely to be different than the traditional family structure of the past, and clear directives are needed to prepare for asset distribution.

Valuing Philanthropy. Younger adults are more aware of the role nonprofits play, whether in their immediate communities or globally. They are also more likely to give a portion of their estate to nonprofit organizations.

Financial Savvy. Younger adults are more candid than past generations with their peers about money and how to protect it through estate planning as part of money management and investment strategies.

Having an estate plan can protect a legacy for family and children, while not having one could mean giving half of your estate to the government in taxes. An estate planning attorney can help to avoid or minimize probate, a court process requiring your will to become a public document. Probate can delay the distribution of property and can be costly.

Another reason to have a will is to minimize family conflict. Your family won’t be left guessing how you want your assets to be distributed. It is also less likely that there will be family fights or misunderstandings after you’ve passed.

Estate plans are not just for wealthy people but anyone who cares enough about their family to protect them. Younger adults embracing estate planning is a good sign for the future.

Reference: Forbes (April 17, 2024) “Why Gen-Z Is Suddenly Creating Wills And Trusts—And You Should Too”

How are Retirement Plans Handled in an Estate Plan?

If you have recently completed your estate plan, Kudos! But if you haven’t updated an estate plan, or worse, don’t have one at all, and haven’t reviewed retirement assets in years, your heirs may be in for some unpleasant surprises. The recent article from Whittier Daily News, “Are your retirement and estate plans at odds? Tips to fix that,” provides essential details.

Whatever directions you provide will not affect the beneficiary designations on your retirement accounts. You may have wanted your spouse to receive all your assets after your death, but this won’t happen if the named beneficiary is someone else, such as a child or former spouse.

Pension and other retirement plans are subject to a host of federal regulations. Upon death, pension funds typically go to a surviving spouse. The surviving spouse is not allowed to designate anyone else as the beneficiary, even if a part of the surviving spouse’s retirement plan is deemed community property in your state.

IRAs and pension funds require careful planning to ensure distributions align with your wishes. Federal law governing qualified retirement plans requires a married spouse's consent to name anyone else as a beneficiary. Suppose the estate planning goal is to have the assets in the retirement account pass to biological children, not the spouse. In that case, an updated beneficiary designation form and the correct spousal release forms must be updated. A pre- or post-nuptial document will not suffice for this to be enforceable.

This is why all accounts or assets where beneficiaries can be named need to be reviewed whenever an estate plan is created or revised. This issue becomes particularly critical for blended families.

Suppose your trust contains language leaving retirement assets to your children. In that case, even if it contains great detail about the accounts and how you’d like the assets to be distributed, it won’t matter if the beneficiary designation names another person.

Trusts need careful construction to prevent children from being disinherited. Often, the answer is to have a single trust designed to “split” into two trusts upon the first spouse's death. These are known as “A/B” trusts. The surviving spouse’s share is held in Trust A, while the decedent’s share of the trust is held in Trust B and accessible to the surviving spouse. When the second spouse dies, whatever assets are held in Trust B are distributed to the stated beneficiaries. Other estate planning solutions are available when concerns about the surviving spouse arise within the trusts.

A final note: if you fail to complete beneficiary designation forms for retirement plans, the assets may need to go through probate. Distribution of the retirement plan assets will be governed by the retirement plan document, which includes language for a default beneficiary. Usually, the default beneficiary is your estate.

Consult with an estate planning attorney to ensure that your estate plan and retirement plan work together to achieve the desired results.

Reference: Whittier Daily News (April 7, 2024) “Are your retirement and estate plans at odds? Tips to fix that”

What Is the Primary Purpose of a Revocable Trust?

There are many basic tools of estate planning, which become more effective when they are coordinated and complement each other. For asset protection and tax planning, aligning strategies is critical for success, says a recent article from Kiplinger, “Revocable Trusts: The Most Common Trusts in Estate Planning.” The benefits of revocable trusts include letting the grantor—the person making the trust—have control of assets.

As the name implies, revocable trusts are more flexible than irrevocable trusts. The grantor of a revocable trust may change the terms of the trust whenever they wish, transfer property in and out of the trust, and change beneficiaries at will.

A revocable trust has many benefits. One benefit is that assets placed in a trust are not subject to probate when the estate is settled, keeping the terms of the trust and the nature of the assets private. A revocable trust allows for a step-up in basis, which can reduce or, in some cases, eliminate capital gains taxes.

The language of the trust provides instructions for managing and disposing of the assets upon the grantor’s death. A revocable trust can also be designed to protect assets for beneficiaries, set certain conditions for asset distribution, or require the funds to be used for specific costs, like education or home purchase.

There are some limitations to be aware of, which should be discussed with your estate planning attorney. If the goal is to protect assets for the grantor, an irrevocable trust is better. For example, if the grantor was involved in litigation and lost, a revocable trust’s assets could be recovered as part of the judgment. This is because the grantor still has control of the assets.

If the assets were in an irrevocable trust, the grantor would have no access to them, which adds a layer of protection.

The grantor needs to consider trading control of and access to assets for protection from court judgments and creditors.

You and your estate planning attorney should discuss which trust is better for your situation. A revocable trust is an excellent tool for estate planning, but an irrevocable trust provides more protection and can potentially shield assets from taxes.

Many people of modest means find that a revocable trust serves their interests well. In contrast, people with higher estate values find a combination of revocable and irrevocable trusts allows them to structure trusts to meet their goals.

Reference: Kiplinger (April 4, 2024) “Revocable Trusts: The Most Common Trusts in Estate Planning”

Can You Support a Child with Special Needs?

Families that include individuals with special needs require planning to secure their loved ones' security in the future, both in legal and financial terms. There’s usually no expectation of the child becoming an independent adult, so careful planning is needed, as advised in the recent article “Financial Planning for Families with Disabilities” from Wealth Management.

Many families neglect planning for their retirement, focusing all their resources on developing a plan for their disabled child. However, retirement and their child’s future need to be secured, which is where an estate planning attorney can help.

In 2014, Congress created The Achieving a Better Life Experience (ABLE) accounts to allow disabled individuals to own accounts with up to $100,000 without the assets being counted against their eligibility for Supplemental Security Income. A parent may make annual contributions, and costs not covered by government benefits can be paid using this account.

A Pooled Special Needs Trust is a group of several Special Needs Trusts managed by a nonprofit, which, as its name implies, pools the assets of many Special Needs individuals together. Each account remains separate, and the trust provides management and investment services.

Unlike a typical SNT, people over 65 may participate in a pooled SNT. Medicaid and SSI beneficiaries wishing to spend down their assets to become eligible can transfer assets directly into a pooled trust account. Consult with an estate planning attorney to ensure that this occurs correctly.

The most significant responsibility for parents planning for their disabled child is to ensure that no one mistakenly puts their child’s eligibility at risk for Medicaid and SSI. A well-meaning family member leaving assets to the child could undo plans, so they must be informed of the necessary restrictions.

Medicaid does far more than provide health care benefits. It funds social and occupational programming, residences for group living and many other benefits of great value to the disabled individual. The eligibility rules are complex and require the help of a skilled estate planning attorney to navigate successfully.

Will New IRS Memo End the Decanting of Irrevocable Trusts?

The term “irrevocable trust” is not quite what it seems, says a recent article from The National Law Review, “Is CCA 202352018 the Death of Irrevocable Trust Decantings?” There are several mechanisms by which irrevocable trusts can be modified. Generally, they can be modified in one or two ways, depending on the state’s laws. In some states, an irrevocable trust can be modified with the consent of the beneficiaries and the trustees. Some states also require the consent of the settlor if they are living. This is referred to as a “non-judicial modification.”

In other states, an irrevocable trust can be modified by a decanting, a process where an authorized trustee exercises their independent discretion to “pour” over the property of the trust to a new trust with different terms—hence the term decanting.

However, the IRS’ Chief Council Advice Memorandum (CCA 202352018) (the “CCA”) may be the end of irrevocable trust decantings as they have been used for years. It’s all about the taxes.

Estate planning attorneys have been concerned that using a non-judicial modification to make changes with the beneficiaries' consent, such as removing a beneficiary, shifting beneficial interests, or diluting a beneficiary’s interest, might be considered a taxable gift by the beneficiaries. The concern wasn’t present for decantings, since they are effectuated by the independent act of an authorized trustee, who doesn’t have a beneficial interest in the trust without the beneficiaries' consent - until the CCA.

The CCA Memorandum reviewed a case where, in the first year, an irrevocable inter vivos trust is established for the benefit of a Child and the Child’s descendants, and the trustee may distribute income and principal for the benefit of the child according to the trustee’s discretion. When the Child dies, the remainder will be distributed to the Child’s issue per stirpes.

In year two, when the Child has no living grandchildren or remote descendants, the trustee petitions the state court to modify the terms of the trust. The Child and Child’s issue consent to the modification. Later that year, the State Court grants the petition and issues an order modifying the trust to provide a trustee of the Trust with the power to reimburse the grantor for any income taxes. The grantor pays due to the inclusion of the Trust’s income in the grantor’s taxable income.

The Chief Counsel finds the modification of the irrevocable trust with the consent of the beneficiaries may constitute a taxable gift from the beneficiaries. However, the CCA goes on to say, “[t]he result would be the same if the modification was pursuant to a state statute that provides beneficiaries with a right to notice and a right to object to the modification and a beneficiary fails to exercise their right to object.”

This additional comment from the Chief Counsel is seen as foreshadowing the IRS’ position concerning decanting, and it may prove problematic. Most states currently authorizing trust decanting by statute require the trustee to provide the beneficiaries with notice of the decanting and provide that unless the beneficiaries consent to an earlier effective date, the decanting is only effective after a period of time elapses following the beneficiaries’ receipt of the notice.

It remains to be seen whether this comment from the Chief Counsel will foreclose all possible options for decanting. Decantings are permitted by law in various states, and many estate planning attorneys include provisions in their irrevocable trusts allowing the trustee to decant the trust under the terms of the trust, using the language of an “internal decanting provision.”

Whether the IRS will issue further guidance on the intersection of decantings and gift tax implications remains to be seen. If you are exploring the possibility of modifying an irrevocable trust, it is always best to speak with an estate planning attorney to review options and possible risks.

Reference: The National Law Review (Feb. 29, 2024) “Is CCA 202352018 the Death of Irrevocable Trust Decantings?”

How Does a Revocable Trust Work?

A revocable or living trust is a document created by you while you are living, creating a separate legal entity to hold title to property or receive property by being the designated beneficiary of financial assets. Real estate is moved into the trust by recording a deed for the real estate into your trust, according to the article “What are the pros and cons to putting my home in our trust” from Coastal Point.

There are many benefits to having property in a revocable trust, including probate avoidance, especially when you use one trust to hold property in more than one state, thereby avoiding having the estate go through probate in more than one state. Trusts are also used to make the administration of an estate easier and maintain property in further trust for beneficiaries within the initial trust. Trusts are also used to maintain privacy, since a revocable trust is never a public record in most states, unlike a last will and testament.

The revocable trust can be more expensive and time-consuming to set up initially. Nevertheless, they save the beneficiaries time and money after the death of the grantor (the person creating the trust). They can be a little more difficult for people to understand than the traditional last will and testament. However, the overall pros usually outweigh the negatives.

Probate is the process by which the court approves the validity of the will and the plan to distribute assets to beneficiaries. When someone dies, and their real estate and assets are not in a trust, the estate is probated, meaning an estate is opened at the Register of Wills in each state where the person owned real estate. The assets of the decedent are tied up for at least eight months, so any creditors of the decedent can submit claims against the estate. After the period of time required by each state, check with your estate planning attorney to find out about your state’s process. The estate can be closed, and assets can be distributed.

The main benefit of placing real estate in trust is to avoid probate. This not only saves time and expense but allows the property to pass immediately to the beneficiaries, be sold to a third party, or otherwise be disposed of following the instructions in the trust. Holding assets in trust also provides privacy and lets you be very specific about what you want to happen to those estates.

If the trust is revocable (as opposed to irrevocable), you also have a lot of flexibility. Changes can be made to the terms, contents and distributions as wished by the grantor. The trust can even be revoked entirely, if wished. A revocable trust remains private and is not part of the public record.

Be sure to fund the trust once it is created, either by retitling deeds or other asset ownerships. Knowing exactly how to title the property deed or make proper changes to account names is something your estate planning attorney can help with.

Reference: Coastal Point (Feb. 15, 2024) “What are the pros and cons to putting my home in our trust”

How Should a Single Person Create an Estate Plan?

The short answer is singles should be doing the same things as people who are married and have families, except their situation may require some additional steps, says an article from Kiplinger, “Estate Planning for Singles.”

The most important thing is having a Durable Power of Attorney, naming someone as your agent so they can make financial decisions if you become incapacitated. Similarly, you should also appoint a Health Care Proxy to handle medical decisions.

If you don’t have a will, your state’s law will determine how your assets will be distributed, but no state will have a list of people to make financial or health care decisions for you.

Adult children often fill these roles, but it’s fine to look for other people to serve in these roles. A trusted friend whose judgment you trust completely and who is good at managing financial and legal matters could also serve in this role.

If the person you name to be your representative dies or becomes incapacitated, you’ll want to have a plan for someone else to take on the role.

Consider the age of the person you may want to serve in their role. If they are your age, can they take on these tasks if and when needed? A younger, trusted person may be a better choice, although there are no guarantees of age determining their availability.

If you don’t know anyone who could manage these roles, you could hire a professional, either an estate planning attorney, a trust company, or, in some states, someone licensed as a “professional fiduciary.”

What about your pets? An estate plan can also deal with issues of special concern to singles who own pets. You can use your will or create a pet trust to name a guardian and provide financial support for a furry or feathered friend.

Lastly, certain states have estate taxes, which have far lower exemptions than the current federal estate tax of more than $13 million. Some state estate taxes kick in on estates valued at $1 million. Married couples can delay estate taxes until the second spouse's death, but singles need to plan for tax liabilities, which is part of an estate plan.

Reference: Kiplinger (Feb. 17, 2024) “Estate Planning for Singles”

Do You Need an Estate Plan?

Estate planning is the process of getting assets organized during your lifetime, so they are efficiently and properly distributed after your passing. According to a recent article from The Record-Courier, “Estate planning a complex process,” estate planning includes making decisions about fiduciaries, determining who will be in charge of your affairs if you become incapacitated and after you die, as well as who you want to be your beneficiary.

Everyone should have an estate plan, regardless of their age or the size of their estate. Estate plans are also not only for wealthy people. It gives you control over financial and healthcare decisions during incapacity and ensures that your wishes are fulfilled, reducing the potential for family disputes and legal conflicts.

Multiple legal documents make up your estate plan, including wills, trusts and power of attorney. Core documents in the estate plan include:

• Will: a document specifying how your assets are to be distributed upon death and allowing for a nomination of a guardian for minor children.
• Trust: a document creating a legal entity to hold and manage assets during your lifetime, in incapacity and after death through specific instructions.
• Power of Attorney for financial decisions: a document granting another person, known as your agent or attorney-in-fact, the authority to make legal and financial decisions on your behalf.
• Healthcare Power of Attorney: a document granting another person, also referred to as an agent or attorney-in-fact, the authority to make healthcare decisions.
• Living Will: a document outlining end-of-life decisions.

What happens in the absence of an estate plan? In the case of incapacity, a court order may be needed to authorize a family member to make health and financial decisions. Upon death, with no estate plan, the state laws regarding the distribution of assets will be followed, regardless of your wishes.

Estate plans must be created and revised every three to five years. Unseen circumstances can arise at any time, and it’s best to have a plan in place so that when an emergency occurs, the right documents and plans are set.

Can you do an estate plan on your own? Working with an experienced estate planning attorney will avoid having a court find your estate plan invalid or having healthcare professionals tell your loved ones they cannot be involved in your care.

Estate planning can seem overwhelming. However, it can be managed, and having it done properly will alleviate a great deal of uncertainty for you and your family.

Reference: The Record Courier (Jan. 13, 2024) “Estate planning a complex process”