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Estate Tax Changes

What Happens to Estate Tax Benefits After 2025?

What will happen to the Estate Tax in the coming years? For starters, you may recall that the 2017 Republican tax reform legislation roughly doubled the estate and gift tax exemption.

This means starting in 2019, people are permitted to pass on, tax-free, $11.4 million from their estate and gifts they give before their death. Couples can pass on twice that amount, or $22.8 million.

These higher levels expire in 2026, but those who make large gifts while the exemption is higher and die after it goes back down, won’t see the estate tax benefit eroded, the IRS announced recently via new regulations.

“As a result, individuals planning to make large gifts between 2018 and 2025 can do so, without concern that they will lose the tax benefit of the higher exclusion level once it decreases after 2025,” the agency said in a press release.

Yahoo Finance’s recent article, “IRS Says Millionaires Can Keep Estate Tax Benefits After 2025,” says that the exemption increase was a big priority for Republicans in the 2017 tax overhaul.

This exemption decreased the number of individuals who’d be subject to the 40% estate tax by about two-thirds.

The exemption was $5.5 million prior to the law change.

However, Democrats are looking to reverse those changes, if they sweep the House, Senate and White House in the 2020 national elections.

Nearly every Democratic presidential candidate would like to see the estate tax apply to a greater number of wealthy families.

Senator Bernie Sanders has called for the estate tax, to begin when fortunes are worth at least $3.5 million. He has also proposed rates as high as 77%.

Reference: Yahoo Finance (November 22, 2019) “IRS Says Millionaires Can Keep Estate Tax Benefits After 2025”

Suggested Key Terms: Estate Planning Lawyer, Tax Planning, Probate Attorney, Estate Tax, Gift Tax, Unified Federal Estate and Gift Tax Exemption

Estate Tax Portability

What Does ‘Portability of Estate Tax’ Mean?

Portability is the ability to move a certain amount of money that can be left to others tax-free for estate planning purposes, as described by WMUR9’s article “Money Matters: Portability and estates.” The Tax Cuts and Jobs Act increased the exclusion significantly. In 2019, it is $11.4 million per person.

The portion not used by the deceased spouse can be transferred to the surviving spouse. If that were not good enough, the exclusion is indexed for inflation. However, this exemption is due to end in 2025, unless the law is extended. If it does end, it will probably lower to one-half of the current level.

Before the tax law changes, most estate planning lawyers would set up a trust for each spouse, known as an A/B trust. When the first spouse died, an amount equal to the exclusion would go to the B trust. The assets in the trust would be outside of the estate of the survivor and would not be subject to estate taxes. This is also known as a credit-shelter bypass trust.

Any assets in the estate of the first spouse to die, would be given to the surviving spouse or could go into another trust, depending upon the plan for the estate. The trust was often called an “A” or “marital” trust. Transfers to spouses are not usually subject to estate tax, so assets passing to the “A” marital trust would be free from estate tax. Upon the death of the survivor, their exclusion would be applied to the assets in the “A” trust. This was done so that both spouses received the benefit of their exclusion.

However, with the new tax law, the first to die uses the exclusion against assets in their estate.  Any unused exclusion amounts can then be used by the survivor, along with their own, when they die.

It seems like this may make a lot of things simpler, but that’s not necessarily so. Here are a few reasons:

  • The unused applicable exclusion from a prior marriage is not usually available. You can only use the amounts from your last deceased spouse. This needs to be taken into consideration for those contemplating a second marriage.
  • The unused exclusion amounts are not indexed for inflation. If it’s likely that the property the surviving spouse receives will be greater than the unused exclusion, the estate plan should consider using a “B” trust, so the appreciation may be excluded from the survivor’s estate tax exclusion.
  • To use portability, an estate tax return must be filed. The executor of the estate must make an election to do so, by filing a return. Even if the estate would otherwise not require a return to be filed, you must file an estate tax return, if you think portability may be used in the future.

Estate planning documents prepared before 2010 may no longer work to achieve tax savings. It is recommended that they be reviewed in light of these and other tax law changes.

Reference: WMUR9 (Nov. 21, 2019) “Money Matters: Portability and estates”

Suggested Key Terms: Portability, Estate Tax, Estate Planning Lawyer, Exclusion, Inflation, A/B Trusts, Credit Shelter Bypass Trust

Elder Law DIY?

Can You Tackle Elder Law on Your Own?

What usually happens when people do their own estate planning or work on elder law issues, without a lawyer who has years of practice? They may not incur the costs on the front end, but the costs, in financial and emotional terms, often arrive just when the individual or their family is most vulnerable. That message comes through loud and clear in the article “Do-it-yourself elder law estate planning can be risky” from a recent article in the Times Herald-Record.

Let’s clarify the two different areas:

  • Estate planning is about leaving assets to heirs with a minimum of court costs, legal fees and avoiding will contests.
  • Elder law is concerned with protecting assets from the cost of long-term care and empowering people who will be able to make legal, financial and medical decisions on your behalf, if you become incapacitated.

Two of the most important documents in an elder law estate plan are the Powers of Attorney (POA) and health care proxies. If these forms are not prepared correctly, problems will ensue. In some states, like New York, the POA form is long and complicated. Banks and financial institutions will refuse to recognize the form, if they are not completed correctly.

There will be similar issues to a do-it-yourself health care proxy. Here’s just one example of the many things that can go wrong: an agent may not make decisions about withholding certain extreme life support measures, even if they are in possession of a valid health care proxy. There needs to be a living will from the individual that explicitly states their wishes regarding withholding heroic means and/or artificial measures. Without the proper document, the person could remain on life support for months or years, even if this was not their wish.

A do-it-yourself approach leaves much to chance. As a result, the potential for problems is enormous. A far better solution that spares spouses and loved ones, is to work with an experienced estate planning lawyer. Can you put a price on peace of mind?

Reference: Times Herald-Record (Nov. 23, 2019) “Do-it-yourself elder law estate planning can be risky”

Suggested Key Terms: Estate Planning Lawyer, Elder Law, Power of Attorney, Health Care Proxy, Living Will, Statutory Gifts Rider, Nursing Home, Life Support

Choosing a Fiduciary

Tips for Choosing a Fiduciary

One of the important tasks in creating a complete estate plan is selecting people (or financial institutions) to represent you, in case of incapacity or death. Most people think of naming an executor, but there are many more roles, advises the article “What to consider when appointing a fiduciary?” from The Ledger.

Here are the most common roles that an estate planning attorney will ask you to select:

  • Executor or personal representative, who is named in your will and appointed by the court to administer your estate.
  • Agent-in-fact (under a durable power of attorney) who manages your financial affairs while you are living, if you are unable to do so.
  • Health care surrogate who makes health care decisions on your behalf while you are living, if you are incapacitated.
  • Trustee of a trust document; administers the trust that you have created.
  • Guardian: a person who makes health care and financial decisions on your behalf, if the court determines that other roles, like health care surrogate or agent-in-fact, are not sufficient.
  • Guardian for minor children: person(s) who make decisions for your children, if you are not able to because of death or a loss of capacity before the children reach adulthood.

The individuals or financial institutions who take on financial roles are considered fiduciaries; that is, they have a legal duty to put your well-being first. Their responsibilities may include applying for government benefits, managing and invest your assets and income, deciding where you will live and working with your attorneys, financial advisors and accountants.

Many people name their spouse or eldest child to take on these roles. However, that’s not the only option. A few questions to consider before making this important decision include:

  • Does this person have the experience, skill and maturity to manage my financial affairs?
  • Does this person have the time to serve as a fiduciary?
  • Would this person make the same health care decisions that I would make?
  • Can this person make a difficult decision for my health care?
  • Does this person live near enough to arrive quickly, if necessary?
  • How old is this person, and will they be living when I may need them?
  • What kind of response will my family have to this person being named?
  • Are my assets substantial enough to require a financial institution or accountant to manage?

These are just a few of the questions to consider when choosing fiduciaries or health care agents in your estate plan. Speak with your estate planning attorney to help determine the best decision for you and your family.

Reference: The Ledger (Oct. 16, 2019) “What to consider when appointing a fiduciary?”

Suggested Key Terms: Estate Plan, Fiduciary, Durable Power of Attorney, Guardian

Inherited 401(k) Accounts

What Can I Do with an Inherited 401(k)?

Inheriting a 401(k) at the death of the account owner isn’t always as simple as inheriting a home or a piece of jewelry. The IRS has rules that 401(k) beneficiaries must follow that say when and how much tax they’ll pay to inherit someone else’s retirement plan. If you’re currently the beneficiary of a 401(k) or you’ve recently inherited one, here are some important things you need to know.

Smart Assets’s recent article entitled “A Guide to Inheriting a 401(k)” explains that if a spouse of the account owner waives their right to inherit a 401(k) or the account owner is unmarried, they can leave their account to whomever they want at their death.

An inherited 401(k) is taxed is based on three key factors: (i) your relationship to the account owner; (ii) your age when you inherit the 401(k); and (iii) the account owner’s age when they die.

There’s also several ways to take a distribution from a 401(k) when you’ve inherited it: you can do a lump sum, periodic payments, or distributions stretched out over your life expectancy.

If you inherit a 401(k) from your spouse, what you decide to do with it and the subsequent tax impacts may be based primarily upon your age. If you’re under age 59½, you have a choice of three things:

  1. Keep the money in the plan and take distributions. You can take withdrawals from the account without the 10% early withdrawal penalty. You’d still pay regular income tax on any distributions you take. If your spouse was age 70½ or older when they passed away, you would have to take required minimum distributions from this account. There’d be no early withdrawal penalty. However, you’d pay income tax on the withdrawals. If the spouse was younger than 70½ when they died, you could wait to take RMDs until you turn 70½.
  2. Move the money to an inherited IRA. This is an IRA that’s designed to hold rollover funds from an inherited retirement plan, including 401(k)s. You can make withdrawals without any early withdrawal penalty. With this type of account, you’d need to take RMDs. However, the amount would be based on your own life expectancy, not the amount your spouse would have been required to take.
  3. Move the money to your own IRA. If you already have an IRA, you could roll an inherited 401(k) into it with no tax penalty. However, if you’re under age 59½ when you execute the rollover, the withdrawal will be treated like a regular distribution, so you’ll pay income tax on the full amount, along with the 10% early withdrawal penalty. If you’re over age 59½, you won’t pay an early withdrawal penalty with any of these options. If your spouse was taking RMDs from their 401(k) when they died, you’d have the option to continue taking them or delay taking them until you turn 70½. If you’re already 70½ or older, you’d need to take RMDs, regardless of whether you leave the money in the 401(k), transfer it to an inherited IRA or roll it over to your existing IRA.

If you inherit a 401(k) from someone other than your spouse, your options are linked to how old the account owner was when you inherited the plan and the plan’s distribution rules. If the account owner hadn’t yet turned 70½, the plan may let you spread distributions out over your lifetime or spread them out over a five-year period. If you take the five-year option, you may have to fully withdraw all of the account assets by the end of the fifth year following the account owner’s death. In either case, you’d pay income tax on the withdrawals.

You could also roll the account over to an inherited IRA, if the plan permits this. Here, the RMDs would be based on your life expectancy, assuming the account owner hadn’t started taking them yet. If they had started with their RMDs, you’re required to continue taking those distributions. However, you could base the distribution amount on your life expectancy, rather than that of the account owner.

Speak with an experienced estate planning attorney to help you determine the route that makes the most sense to reduce taxes, while planning ahead for the future.

Reference: Smart Asset (October 22, 2019) “A Guide to Inheriting a 401(k)”

Suggested Key Terms: Asset Protection, Tax Planning, Financial Planning, Inherited IRA, Roth Conversion, Required Minimum Distribution (RMD)

Making a Beneficiary Designation

The Often-Overlooked Beneficiary Designation

Remember the life insurance policy that you bought when you first became a parent and bought your first home? The one you haven’t thought about much in decades, except to pay annual or semi-annual invoices? Think about the last time you reviewed it to see what kind of coverage it offers, and who you named as a beneficiary. Beneficiary designations and estate planning go hand in hand.

If you can’t remember, you’re among many people who have assets with beneficiary designations and have no idea what those designations are. This is just one of a number of problems that arise concerning beneficiaries, as noted in the article “Five mistakes to avoid when naming beneficiaries” from the News-Herald.

1–Not naming beneficiaries on accounts. You need to name a beneficiary on every account that provides this option. That includes all investment, retirement and banking accounts and insurance policies. If you don’t name a beneficiary on one or more accounts, your estate will become the beneficiary and your loved ones will need to go through the probate process. Most families try to avoid this through the creation of an estate plan. If a retirement plan asset goes through probate, like an IRA, your loved ones may lose the ability to use the “stretch” payouts based on their own life expectancy, when the tax-advantaged status for a retirement asset is gone when the asset goes to an estate.

2—Forgetting to name a contingency beneficiary on all accounts. Most people name the same person—usually a spouse or a child—as the primary beneficiary on all their accounts. That’s all well and good. However, if that person passes away before you and no contingent beneficiary is named, it’s the same thing as having no beneficiary named. If you and the primary beneficiary die at the same time and there’s no contingent beneficiary, funds go into the probate process.

3—Not using specific and correct names. Stating that your daughter, parents or an aunt is your beneficiary creates big problems for distributing assets. This becomes especially problematic, when there are stepchildren involved. Most states don’t recognize stepchildren as family members, even if you do. If a family member learns that your estate is being probated and tries to make a claim on your estate, just naming “my aunt” could leave the door open for a valid claim. Use the full and proper name of your beneficiaries.

4—Neglecting to update beneficiaries regularly. Just as you must update your will every three or four years, your beneficiaries need to be updated. If a beneficiary has died, married or you are no longer close with them, you need to make those changes. If you divorce and haven’t changed your life insurance beneficiary from your ex-spouse, they could inherit the proceeds.

To be sure that your assets are passed to the people you want, be sure that your estate plan and your beneficiary names are all up to date. Talk with your estate planning attorney every few years to be sure that your wishes are followed.

Reference: News Herald (Nov. 12, 2019) “Five mistakes to avoid when naming beneficiaries”

Suggested Key Terms: Estate Planning Attorney, Beneficiaries, Divorce, Stepchildren, Contingent Beneficiary, Designation

Probate Court Hearing

What Is Probate and How to Prepare for It?

The word probate is from the Latin word, meaning “to prove.” It is the court-supervised process of authenticating the last will and testament of a person who has died and then taking a series of steps to administer their estate. The typical situation, according to the article “Some helpful hints to aid in navigating the probate process” from The Westerly Sun, is that someone passes away and their heirs must go to the Probate Court to obtain the authority to handle their final business and settle their affairs.

Many families work with an estate planning attorney to help them go through the probate process.

Regardless of whether there is a will, someone, usually a spouse or adult child, asks the court to be appointed as the executor of the estate. This person must accomplish a number of tasks to make sure the decedent’s wishes are followed, as documented by their will.

People often think that just being the legally married spouse or child of the deceased person is all anyone needs to be empowered to handle their estate, but that’s not how it works. There must be an appointment by the court to manage the assets and deal with the IRS, the state, creditors and all of the person’s outstanding personal affairs.

If there is a will, once it is validated by the court, the executor begins the process of identifying and valuing the assets, which must be reported to the court. The last bills and funeral costs must be paid, the IRS must be contacted to obtain an estate taxpayer identification number and other financial matters will need to be addressed. Estate taxes may need to be paid, at the state or federal level. Final tax returns, from the last year the person was alive, must be paid.

It takes several months and sometimes more than a year to settle an estate. That includes distributing the assets and making gifts of tangible personal property to the heirs. Once this task is completed, the executor (or their legal representative) contacts the court. When everything has been done and the judge is satisfied that all business on behalf of the decedent has been completed, the executor is released from their duty and the estate is officially closed.

When there is no will, the process is different. The laws of the state where the deceased lived will be used to guide the distribution of assets. Kinship, or how people are related, will be used, regardless of the relationship between the decedent and family members. This can often lead to fractures within a family, or to people receiving inheritances that were intended for other people.

Reference: The Westerly Sun (Nov. 16, 2019) “Some helpful hints to aid in navigating the probate process”

Suggested Key Terms: Probate, Kinship, Inheritance, Last Will and Testament, Executor, Estate Identification Number, Estate Planning Attorney

401(k) Nest Egg

Costly Mistakes with 401(k)s and How to Avoid Them

Making sure that you handle your 401(k)s correctly, is not as easy as letting payments be automatically deducted from your wages. Here’s a look at commonly made mistakes, detailed in the article aptly named “More common 401(k) mistakes—and their consequences” from tucson.com.

Investing after-tax dollars before maxing out pretax opportunities. Some plans let you choose to contribute to your 401(k) on a pretax or after-tax basis, or both. The problem happens when the forms provide these choices, without giving an explanation of the different choices. Generally speaking, you always want to lower your W-2 earnings, by contributing pretax dollars first. Your W-2 won’t include the money you put in a 401(k) or other retirement savings vehicle.

Cashing out a 401(k) when you change jobs. This is a big and bad one. The IRS loves when you do this, because the withdrawal is taxable income that would otherwise sit in a 401(k) for years, possibly decades. One survey showed that as many as 28% of people between the ages of 35-65 did not know that some of their retirement distribution choices would trigger tax liabilities and penalties.

A better option: leave the 401(k) with your old employer, move it to your new employer’s plan if that is an option, or set up a rollover IRA with a bank or investment firm to transfer the 401(k). Do this very carefully: you are rolling over the money, not cashing it out. Don’t use the money when you move it—this is your best savings option for retirement.

Borrowing from the plan to pay for a big-ticket purchase. Yes, there may be a loan feature in your 401(k) plan. However, while this may be a blessing in an emergency, it is likely to be one of the most expensive loans you ever take. There are strict rules about paying back 401(k) loans and running afoul of them could create more problems. Read the fine print, before borrowing against your retirement fund. Remember, you are borrowing against your future.

Defaulting on a 401(k) loan. Don’t give yourself a loan from your 401(k), unless you understand all of the rules and penalties. Most 401(k) loans must be paid back within five years, unless the loan is used to purchase a primary residence. However, this is supposed to be a retirement savings account, not a house fund. You should also find out what happens if you quit or lose your job, while the loan is outstanding. The balance of your 401(k) account is often used to pay for the outstanding loan and you’ll be responsible for paying taxes on the withdrawal, PLUS a tax penalty for early withdrawal from the 401(k).

Thinking you’ve got plenty of time before retirement. The sooner you start saving for retirement, like when you receive your first paycheck, the better. Pay your future self, first. You can always get a loan for a home, a car or your children’s college education, but there’s no such thing as a retirement loan.

Reference: tucson.com (Nov. 15, 2019) “More common 401(k) mistakes—and their consequences”

Suggested Key Terms: 401(k), Retirement Savings, Pre-Tax, After Tax Dollars, Penalties, Defaulting,

Blended Family Wedding

Estate Planning in Virginia With Blended Families

The holiday season is a popular time for people to get engaged, including people who have been married before. If that’s you, understand that blending families means you’ll need to deal with inheritance and finance issues, says U.S. News & World Report’s article “6 Financial Considerations for Remarriage.” The best time to have these conversations is before you walk down the aisle, not afterwards.

Look at your budget and talk about how things will work. That includes day-to-day expenses, monthly expenses and large purchases, like houses, vacations and cars. Talk about a game plan for going forward. Will you merge your credit card accounts or bank accounts? What about investment accounts?

Financial obligations outside of the marriage. Two things to check before you wed: your divorce papers and the state’s laws. Does anything change regarding your spousal support (alimony) or child support, if you remarry? It’s unlikely that you would lose child support, but the court may determine it can be reduced. The person who is paying child support or alimony also needs to be transparent about their financial obligations.

Review insurance and beneficiaries. One of the biggest mistakes people make, is failing to update beneficiaries on numerous accounts. If your divorce papers do not require life insurance to be left for your spouse on behalf of your children (and some do), then you probably want to make your new spouse the beneficiary of life insurance policies. Investment accounts, bank account, and any other assets where a beneficiary can be named should be reviewed and updated. It’s a simple task, but overlooking it creates all kinds of havoc and frustration for survivors.

What will remarriage do to college financing options? A second marriage may increase a parent’s income for college purposes and make children ineligible for college loans or needs-based scholarships. Even if the newly married couple has not blended their finances, FAFSA looks at total household income. Talk about how each member of the couple plans on managing college expenses.

A new estate plan should be addressed, even before the wedding takes place. Remember, an estate plan is for more than distributing assets. It includes planning for incapacity, including Do Not Resuscitate Orders (DNR), powers of attorney for finances and for health care, designations of guardianship or consent to adoption, various trusts and if needed, Special Needs planning.

Create a plan for inheritance. If either spouse has children from a prior marriage, an estate plan is critical to protect the children’s inheritance. If one spouse dies and the surviving spouse inherits everything, there is no legal requirement for the surviving spouse to pass any of the deceased’s assets to their children. Even if you are in mid-life and death seems far away, you need to take care of this.

Speak with an estate planning attorney who can help you create the necessary documents. You should also talk with your children, at the age appropriate level, about your plans, so they understand that they are being planned for and will be taken care of in the new family.

Reference: U.S. News & World Report (Nov. 18, 2019) “6 Financial Considerations for Remarriage”

Suggested Key Terms: Remarriage, Power of Attorney, Guardianship, Adoption, Trusts, Inheritance

Chairs overlooking a lake

Here’s Why You Need an Estate Plan

It’s always the right time to do your estate planning, but it’s most critical when you have beneficiaries who are minors or with special needs, says the Capital Press in the recent article, “Ag Finance: Why you need to do estate planning.”

While it’s likely that most adult children can work things out, even if it’s costly and time-consuming in probate, minor young children must have protections in place. Wills are frequently written, so the estate goes to the child when he reaches age 18. However, few teens can manage big property at that age. A trust can help, by directing that the property will be held for him by a trustee or executor until a set age, like 25 or 30.

Probate is the default process to administer an estate after someone’s death, when a will or other documents are presented in court and an executor is appointed to manage it. It also gives creditors a chance to present claims for money owed to them. Distribution of assets will occur only after all proper notices have been issued, and all outstanding bills have been paid.

Probate can be expensive. However, wise estate planning can help most families avoid this and ensure the transition of wealth and property in a smooth manner. Talk to an experienced estate planning attorney about establishing a trust. Farmers can name themselves as the beneficiaries during their lifetime, and instruct to whom it will pass after their death. A living trust can be amended or revoked at any time, if circumstances change.

The title of the farm is transferred to the trust with the farm’s former owner as trustee. With a trust, it makes it easier to avoid probate because nothing’s in his name, and the property can transition to the beneficiaries without having to go to court. Living trusts also help in the event of incapacity or a disease, like Alzheimer’s, to avoid conservatorship (guardianship of an adult who loses capacity). It can also help to decrease capital gains taxes, since the property transfers before their death.

If you have several children, but only two work with you on the farm, an attorney can help you with how to divide an estate that is land rich and cash poor.

Reference: Capital Press (December 20, 2018) “Ag Finance: Why you need to do estate planning”

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