Estate Tax

When Do I Need a Revocable Trust?

A will is a legal document that states how your property should be distributed when you die.  It also names guardians for any minor children. Whatever the size of your estate, without a will, there’s no guarantee that your assets will be distributed, according to your wishes. For those with a desire to simplify asset transfers after death and avoid probate, those with substantial assets, more complicated situations, or concerns of diminished capacity in later years, a revocable trust might also be considered, in addition to a will.

Revocable trusts have many benefits
A revocable trust is useful for anyone who wants to simplify the transfer of their assets or avoid probate.

Forbes’ recent article, “Revocable Trusts And Why Should You Consider One,” explains that a revocable trust, also called a “living trust” or an inter vivos trust, is created during your lifetime. On the other hand, a “testamentary trust” is created at death through a will. A revocable trust, like a will, details dispositive provisions upon death, successor and co-trustees, and other instructions. Upon the grantor’s passing, the revocable trust functions in a similar manner to a will.

A revocable trust is a flexible vehicle with few restrictions during your lifetime.  You usually designate yourself as the trustee and maintain control over the trust’s assets. You can move assets into or out of the trust, by retitling them. This movement has no income or estate tax consequences, nor is it a problem to distribute income or assets from the trust to fund your current lifestyle.

A living trust has some advantages over having your entire estate flow through probate. The primary advantages of having the majority of your assets avoid probate, is the ease of asset transfer and the lower costs. Another advantage of a trust is privacy, because a probated will is a public document that anyone can view.

Even with a revocable trust, you still need a will. A “pour over will” controls the decedent’s assets that haven’t been titled to the revocable trust, intentionally or by oversight. These assets may include personal property. This pour-over will generally names the revocable trust—which at death becomes irrevocable—as the beneficiary.

Another reason for creating a revocable trust is the possibility of future diminished legal capacity, when it may be better for another person, like a spouse or child, to help with your financial affairs. A co-trustee can pay bills and otherwise control the trust’s assets. This can also give you financial protection, by obviating the need for a court-ordered guardianship.

Talk to an experienced estate planning attorney about the best options for your situation to protect your estate and provide the peace of mind that your family will receive what you intended for them to inherit, with the least possible costs and stress.

Reference: Forbes (March 11, 2019) “Revocable Trusts And Why Should You Consider One”

How Will My IRA Be Taxed?

The most common of IRA tax traps results in tax bills through Unrelated Business Taxable Income (UBTI). The sources of business income from stocks, bonds, and funds like interest income, capital gains, and dividends are exempt from UBTI and the corresponding tax.

Careful consideration of your IRA’s tax treatment is necessary to avoid high taxes.

Fox Business’s recent article, “Your IRA and taxes: Don’t get a surprise tax bill” explains that IRAs that operate a business, have certain types of rental income, or receive income through certain partnerships will be taxed, when the total UBTI exceeds $1,000. This is to prevent tax-exempt entities from gaining an unfair advantage on regularly taxed business entities.

UBIT can take a chunk from an IRA, and the Tax Cuts and Jobs Act of 2017 replaced the tiered corporate tax structure with a flat 21% tax rate. That begins in tax year 2018 (this tax season). These tax bills often have penalties, because IRA owners aren’t even aware that the bill exists.

Master Limited Partnerships (MLPs) held within IRAs are a good example of how UBTI can catch investors by surprise. MLPs are fairly popular investments, but when they’re held within an IRA, they’re subject to UBIT. When the tax is due, the IRA custodian must get a special tax ID number and file Form 990-T to report the income to the IRS. That owner must pay the tax, and is typically unaware of the bill, until it arrives as a completed form to be submitted to the IRS (completed and signed on behalf of the owner). In some instances, the owner may have to pay estimated taxes throughout the year. This can mean a significant underpayment penalty.

Working with prohibited investments will also result in a tax bill. Self-directed IRAs can violate the rules. Alternative investments such as artwork, antiques, and precious metals (with some exceptions) are generally considered as distributions and are subject to taxes.

Prohibited transactions are a step above prohibited investments and can result in the loss of tax-deferred status for the entire IRA. This includes using an IRA as security to obtain a loan, using IRA funds to purchase personal property, or paying yourself an unreasonable compensation for managing your own self-directed IRA. Executing a prohibited transaction can result in the entire IRA being treated as a taxable distribution to you.

Therefore, like fund holdings, and other investments, it’s critical to understand exactly what you own and how to deal with the tax liabilities.

Reference: Fox Business (March 6, 2019) “Your IRA and taxes: Don’t get a surprise tax bill”

Smart Women Protect Themselves with Estate Planning

The reason to have an estate plan is two-fold: to protect yourself, while you are living and to protect those you love, after you have passed. If you have an estate plan, says the Boca Newspaper in the article titled “Smart Tips for Women: Estate Planning,” your wishes for the distribution of your assets are more likely to be carried out, tax liabilities can be minimized and your loved ones will not be faced with an extended and expensive process of settling your estate.

Smart Women have Estate Plans
Smart women protect themselves and their families by making sure they have an estate plan in place.

Here are some action items every woman should consider when putting your estate plan in place:

If you have an estate plan but aren’t really sure what’s in it, it’s time to get those questions answered. Make sure that you understand everything. Don’t be intimidated by the legal language: ask questions and keep asking until you fully understand the documents.

If you have not reviewed your estate plan in three or four years, it’s time for a review. There have been new tax laws that may have changed the outcomes from your estate plan. Anytime there is a big change in the law or in your life, it’s time for a review. Triggering events include births, deaths, marriages, and divorces, purchases of a home or a business or a major change in financial status, good or bad.

If you don’t have an estate plan, stop postponing and make an appointment with an estate planning attorney, as soon as possible.

Your estate plan should include advance directives, including a Durable Power of Attorney, Health Care Surrogate (and HIPAA Release), and a Living Will. You may not be capable of executing these documents during a health emergency and having them in place will make it possible for those you name to make decisions on your behalf.

Anyone who is over the age of 18, needs to have these same documents in place. Parents do not have a legal right to make any decisions or obtain medical information about their children, or even review their healthcare documents, once they celebrate their 18th birthday.

Make a list of your trusted professionals: your estate planning attorney, CPA, financial advisor, your insurance agent and anyone else your executor will need to contact.

Tell your family where this list is located. Don’t ask them to go on a scavenger hunt, while they are grieving your loss.

List all your assets. You don’t have to include every single item you own, but you large and expensive items, as well as family heirlooms and those items with sentimental value.  You should include where they are located, account numbers, contact phone numbers, etc. Tell your family that this list exists and where to find it.

If you have assets with primary beneficiaries, make sure that they also have contingent beneficiaries.

If you have assets from a first marriage and remarry, be smart and have a prenuptial agreement drafted that aligns with a new estate plan.

If you have children and assets from a first marriage and want to make sure that they continue to be your heirs, work with an estate planning attorney to determine the best way to make this happen. You may need a will, or you may simply need to have your children become the primary beneficiaries on certain accounts. A trust may be needed. Your estate planning attorney will know the best strategy for your situation.

If you own a business, make sure you have a plan for what will happen to that business, if you become incapacitated or die unexpectedly. Who will run the business, who will own it and should it be sold? Consider what you’d like to happen for long-standing employees and clients.

Smart women make plans for themselves and their loved ones. An estate planning attorney will be able to help you navigate through an estate plan. Remember that an estate plan needs upkeep on a regular basis.

Reference: Boca Newspaper (March 4, 2019) “Smart Tips for Women: Estate Planning”

Why Should I Create a Trust If I’m Not Rich?

It’s probably not high on your list of fun things to do, considering the way in which your assets will be distributed, when you pass away. However, consider the alternative, which could be family battles, unnecessary taxes and an extended probate process. These issues and others can be avoided by creating a trust.

Revocable Living Trust
Trusts aren’t just for the rich.

Barron’s recent article, “Why a Trust Is a Great Estate-Planning Tool — Even if You’re Not Rich,” explains that there are many types of trusts, but the most frequently used for these purposes is a revocable living trust. This trust allows you—the grantor—to specify exactly how your estate will be distributed to your beneficiaries when you die, and at the same time avoiding probate and stress for your loved ones.

When you speak with an estate planning attorney about setting up a trust, also ask about your will, healthcare derivatives, a living will and powers of attorney.

Your attorney will have retitle your probatable assets to the trust. This includes brokerage accounts, real estate, jewelry, artwork, and other valuables. Your attorney can add a pour-over will to include any additional assets in the trust. Retirement accounts and insurance policies aren’t involved with probate, because a beneficiary is named.

While you’re still alive, you have control over the trust and can alter it any way you want. You can even revoke it altogether.

A revocable trust doesn’t require an additional tax return or other processing, except for updating it for a major life event or change in your circumstances. The downside is because the trust is part of your estate, it doesn’t give much in terms of tax benefits or asset protection. If that was your focus, you’d use an irrevocable trust. However, once you set up such a trust it can be difficult to change or cancel. The other benefits of a revocable trust are clarity and control— you get to detail exactly how your assets should be distributed. This can help protect the long-term financial interests of your family and avoid unnecessary conflict.

If you have younger children, a trust can also instruct the trustee on the ages and conditions under which they receive all or part of their inheritance. In second marriages and blended families, a trust removes some of the confusion about which assets should go to a surviving spouse versus the children or grandchildren from a previous marriage.

Trusts can have long-term legal, tax and financial implications, so it’s a good idea to work with an experienced estate planning attorney.

Reference: Barron’s (February 23, 2019) “Why a Trust Is a Great Estate-Planning Tool — Even if You’re Not Rich”

Should I Designate a Trust as Beneficiary of my IRA?

There are many pros and cons to naming a trust, rather than an individual as a beneficiary of the IRA. However, there are some complex rules. You need to get it right, because this may be your biggest asset.

Name a Trust as Beneficiary of my IRA
Naming a trust as beneficiary of your IRA has many benefits.

Investment News’ recent article on this subject asks “Should you name a trust as an IRA beneficiary?” The article explains that individual retirement account assets can’t be put into trusts directly during a person’s lifetime, without destroying the IRA’s tax shelter. Therefore, a trust may only be named as the beneficiary of the IRA. The trust would inherit the IRA upon the owner’s death, and beneficiaries of that trust would have access to the funds.

Asset protection is one rationale for making this move, because some trusts shield IRA assets from lawsuits, business failures, divorce and creditors. Taxpayers enjoy state and federal protections for IRA assets during their lifetime. However, heirs who inherit an IRA directly—not through a trust—don’t receive those protections, unless provided by state law. Trusts also allow for some control over the assets. The terms of a trust can stipulate the way in which distributions are made if an heir is a minor, disabled, financially unreliable, incapacitated or vulnerable.

Naming a trust as an IRA beneficiary may not be practical for people who plan to bequeath their IRA to a spouse, rather than their children, grandchildren or others. Spouses are allowed roll over the decedent’s IRA assets into their own IRA tax-free.

There are some technical rules to follow, like the IRA beneficiary form must indicate before a person’s death, that the trust is the primary beneficiary. After death, the IRA must be retitled as an inherited IRA. Required minimum distributions (RMDs) would still also be required for the IRA. This is an area where using the right type of trust is important. A “see-through” or “look-through” trust may be the best bet.

Structuring a trust this way maintains the IRA’s preferential tax treatment. That allows a trust beneficiary to spread the RMDs over a long period based on his life expectancy. This is called a “stretch IRA.” The RMD amount would be based on the oldest beneficiary of the trust. However, beneficiaries with separate trust shares would have different RMDs.

In addition, the trust’s language must also state that distributions from the IRA can only go to “designated beneficiaries,” not to pay expenses. The risk of not creating the trust as a see-through or including this language, is that the IRA assets are distributed and the resulting tax paid within a much shorter time frame—potentially five years.

Trusts may also be set up as “conduit” or “discretionary” trusts. With a conduit trust, the annual RMDs pass through the trust to beneficiaries, who pay tax at their individual rates. Discretionary trusts don’t distribute the RMDs out of the trust and they pay tax at the more punitive trust tax rates. However, they keep the most post-death control over assets.

Talk to an experienced estate planning attorney about these trusts and how they can work with your IRA.

Reference: Investment News (February 22, 2019) “Should you name a trust as an IRA beneficiary?”

How Do I Include Charitable Giving in My Estate Plan?

One approach frequently employed to give to charity, is to donate at the time of your death. Including charitable giving into an estate plan, is great way to support a favorite charity.

Baltimore Voice’s recent article, “Estate planning and charitable giving,” notes that there are several ways to incorporate charitable giving into an estate plan.

Charitable Giving
Incorporating charitable giving in your estate plan is one of the most common ways to give to charity.

Dictate giving in your will. When looking into charitable giving and estate planning, many people may start to feel intimidated by estate taxes, thinking that their family members won’t get as much of their money as they hoped. However, including a charitable contribution in your estate plan will decrease estate tax liabilities, which will help to maximize the final value of the estate for your family. Talk to an experienced estate attorney to be certain that your donations are set out correctly in your will.

Donate your retirement account. Another way to leverage your estate plan, is to designate the charity of your choice as the beneficiary of your retirement account. Note that charities are exempt from both income and estate taxes. In choosing this option, you guarantee that your favorite charity will receive 100% of the account’s value, when it’s liquidated.

A charitable trust. Charitable trusts are another way to give back through estate planning. There is what is known as a split-interest trust that lets you donate assets to a charity but retain some of the benefits of holding the assets. A split-interest trust funds a trust in the charity’s name. The person who opens one, receives a tax deduction when money is transferred into the trust. However, the donors still control the assets in the trust, and it’s passed onto the charity at the time of their death. There are several options for charitable trusts, so speak to a qualified estate planning attorney to help you choose the best one for you.

Charitable giving is a component of many estate plans. Talk to your attorney about your options and select the one that’s most beneficial to you, your family and the charities you want to support.

Reference: Baltimore Voice (January 27, 2019) “Estate planning and charitable giving”

Why Do I Need Estate Planning If I’m Not Rich?

Most people spend more time planning a vacation than they do thinking about who will inherit their assets after they pass away. Although estate planning isn’t the most enjoyable activity, without it, you don’t get to direct who gets the things you’ve worked so hard for after you pass away.

Estate Planning isn't only for the rich
An Estate Plan will protect your assets and your loved ones

Investopedia asks you to consider these four reasons why you should have an estate plan to avoid potentially devastating results for your heirs in its article “4 Reasons Estate Planning Is So Important.”

Wealth Won’t Go to Unintended Beneficiaries. Estate planning may have been once considered something only rich people needed, but that’s changed. Everyone now needs to plan for when something happens to a family’s breadwinner(s). The primary part of estate planning is naming heirs for your assets and a guardian for your minor children. Without an estate plan, the courts will decide who will receive your property and raise your kids.

Protection for Families With Young Children. If you are the parent of small children, you need to have a will to ensure that your children are taken care of. You can designate their guardians, if both parents die before the children turn 18. Without a will with a guardianship clause, a judge will decide this important issue, and the results may not be what you would have wanted.

Avoid Taxes. Estate planning is also about protecting your loved ones from the IRS. Estate planning is transferring assets to your family, with an attempt to create the smallest tax burden for them as possible. A little estate planning can reduce much or even all of their federal and state estate taxes or state inheritance taxes. There are also ways to reduce the income tax that beneficiaries might have to pay. However, without an estate plan, the amount your heirs will owe the government could be substantial.

No Family Fighting (or Very Little). One sibling may believe he or she deserves more than another. This type of fighting happens all the time, and it can turn ugly and end up in court, pitting family members against each other. However, an estate plan enables you to choose who controls your finances and assets, if you’re unable to manage your own assets or after you die. It also will go a long way towards settling any family conflict and ensuring that your assets are handled in the way you wanted.

To protect your assets and your loved ones when you no longer can do it, you’ll need an estate plan. Without one, your family could see large tax burdens, and the courts could say how your assets are divided, or even who will care for your children.

Reference: Investopedia (May 25, 2018) “4 Reasons Estate Planning Is So Important”

Theft Reported in Aretha Franklin’s Estate

Careful estate planning can prevent heirs from stealing assets from your estate. Aretha Franklin’s estate is a sad example.

Careful Estate Planning
Aretha Franklin’s estate woes highlight the need for careful estate planning.,

Detroit area police told the Free Press that an active theft investigation was ongoing, involving Aretha Franklin’s suburban mansion. However, the investigation began prior to her death.

The 76-year-old Queen of Soul passed away from pancreatic cancer in August in her Detroit riverfront apartment. When she died, she still owned her 4,100-square-foot Colonial-style home in Bloomfield Township, Michigan, which is in the sights of the IRS.

Wealth Advisor says in its article, “Police investigate theft from Aretha Franklin’s estate,” that the theft investigation was first reported by The Blast, a celebrity news website claiming Franklin’s estate is fighting with Franklin’s 61-year-old son, Edward, who was born when Aretha was only 14.

Her son Edward has been attempting to get a court order to force the estate to provide monthly financial documents to his mother’s heirs. However, the estate won’t turn over the information because it contends such information could negatively impact the criminal investigation involving stolen estate property.

Late last year, the IRS filed a claim in the County Probate Court, alleging that the Franklin estate owed millions in back taxes and penalties. An attorney for the estate stated that it had repaid more than $3 million in back taxes, since Franklin’s death. It’s believed that Franklin owed more than $6.3 million in back taxes from 2012 to 2018 and $1.5 million in penalties.

The Oakland County court documents did not state the exact value of her estate, which is believed to be in the tens of millions.

Immediately after her death, Franklin’s mansion, which is part of a gated community, was listed for sale at $800,000. However, it was then taken off the market. The custom-built home features six bedrooms, seven bathrooms, white marble floors and floor-to-ceiling windows overlooking two small ponds and a lap pool. The mansion also sports a sauna, a three-car garage and a jetted tub.

Franklin is said to have purchased the mansion for $1.2 million in 1997, according to The Detroit News. The home was built in 1990 and remodeled in 2002.

You can read more about asset protection on our website.

Reference: Wealth Advisor (January 11, 2019) “Police investigate theft from Aretha Franklin’s estate”

How Do I Calculate Estate Taxes?

Handling the affairs of a loved one’s estate can be stressful and difficult. However, to receive the full benefit of the gift a loved one leaves you, it’s critical to be prepared for the taxes that gift may incur. This is the advice in Investopedia’s article, “Estate Taxes: How to Calculate Them.” The article explains the potential tax liability, upon transfer of an estate after death.

The high rate of the federal estate tax (40%) motivates most people to calculate their potential estate tax beforehand. It’s a good idea to figure the amount you might owe in estate tax before something happens, instead of leaving your family to deal with the consequences afterwards.

Estate tax is calculated on the federal and state level. Florida does not have an estate tax, however, there are now still several states that have their own estate tax: Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington, as well as the District of Columbia.

The federal estate tax starts when the fair market value of your assets hits $11.18 million per individual. Each state that has an estate tax has its own minimum on when the estate tax kicks in, ranging from $675,000 to $1 million. As a result, you can be eligible to pay the state estate tax, the federal, or both. Because the estate tax is determined based on the current market value of your assets instead of what you paid for them, calculating that number can be more complex.

There’s no need to include any property you intend to leave your spouse or an eligible charitable organization. Initially, you’ll need to calculate the value of the gross estate. Debt, administrative fees, and assets that will be left to charities or a surviving spouse will then be deducted from the total market value of those assets.

Next, add any gifts, including gifts that fall above the gift tax exemption. The $11.18 million exemption includes gifts (it’s a way of keeping people from giving away their fortune before their death to avoid estate taxes).

If the loss of a loved one is imminent, preparing for the tax burden of estate transference ahead of time, can make the grieving process a little easier and can be a comforting distraction.

You can also prepare for taxes on your own estate to lessen the burden of the friends and family you leave behind. If you have questions, speak to an experienced estate planning attorney.

Reference: Investopedia “Estate Taxes: How to Calculate Them”

Why Do I Need an Estate Plan?

Investopedia’s recent article, “4 Reasons Estate Planning Is So Important,” says you should think about the following four reasons you should have an estate plan. According to the article, doing so can help avoid potentially devastating consequences for your family.

  1. An Estate Plan Keeps Your Assets from Going to Unintended Beneficiaries. A primary part of estate planning is choosing heirs for your assets. Without an estate plan, a judge will decide who gets your assets. This process can take years and can get heated. There’s no guarantee the judge will automatically rule that the surviving spouse gets everything.
  2. An Estate Plan Protects Your Young Children. If you are the parent of minor children, you need to name their guardians, in the event that both parents die before the children turn 18. Without including this in your will, the courts will make this decision.
  3. An Estate Plan Eliminates a Large Tax Burden for Your Heirs. Estate planning means protecting your loved ones—that also entails providing them with protection from the IRS. Your estate plan should transfer assets to your heirs and create the smallest tax burden as possible for them. Without a plan, the amount your heirs may owe the government could be substantial.
  4. An Estate Plan Reduces Family Headaches After You’ve Passed. There are plenty of horror stories about how the family starts fighting after the death of a loved one. You can avoid this. One way is to carefully choose who controls your finances and assets, if you become mentally incapacitated or after you die. This goes a long way towards eliminating family strife and making certain that your assets are handled in the way you want.

If you want to protect your assets and your loved ones after you’re gone, you need an estate plan. Without one, your heirs could face large tax burdens and the courts could decide how your assets are divided or even who will care for your children.

Reference: Investopedia (May 25, 2018) “4 Reasons Estate Planning Is So Important”

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