Inheritance

How Do Transfer on Death Accounts Work?

Almost all estates with wills go to probate court. This is not a major issue in some states and an expensive headache in others. By learning how Transfer on Death accounts work, and using them as an additional estate planning tool, you can avoid some assets going through probate, says Yahoo! Finance in the article “Transfer on Death (TOD) Accounts for Estate Planning.”  

How Do Transfer on Death Accounts Work
Assets in a Transfer on Death account avoid probate court in Florida.

So, how do Transfer on Death accounts work?

A TOD account automatically transfers the assets to a named beneficiary, when the account holder dies. Let’s say you have a savings account with $100,000 in it. Your son is the beneficiary for the TOD account. When you die, the account’s assets are transferred directly to him without having to go through probate.

A more formal definition: a TOD is a provision of an account that allows the assets to pass directly to an intended beneficiary.  This is the equivalent of a beneficiary designation. (Note that the laws that govern estate planning vary from state to state, but most banks, investment accounts and even real estate deeds can become TOD accounts.)  If you own part of a TOD property, only your ownership share will be transferred.

TOD account holders can name multiple beneficiaries and split up assets any way they wish. You can open a TOD account to be split between two children, for instance, and they’ll each receive 50% of the holdings, when you pass away.

A couple of additional benefits to keep in mind: the beneficiaries have no right or access to the TOD account, while the owner is living. And the beneficiaries can be changed at any time, as long as the TOD account owner is mentally competent. Just as assets in a will can’t be accessed by heirs until you die, beneficiaries on a TOD account have no rights or access to a TOD account, until the original owner dies.

Simplicity is one reason why people like to use the TOD account. When you have a properly prepared will and estate plan, the process is far easier for your family members and beneficiaries. The will includes an executor, who is the person who takes care of distributing your assets and a guardian to take care of any minor children. Absent a will, the probate court will determine who the next of kin is and distribute your property, according to the laws of your state.

A TOD account usually requires only that a death certificate be sent to an agent at the account’s bank or brokerage house. The account is then re-registered in the beneficiary’s name.

Whatever is in your will does not impact how the Transfer on Death account works. If your will instructs your executor to give all of your money to your sister, but the TOD account names your brother as a beneficiary, any money in that account is going to your brother. Your sister will get any other assets.

Speak with an estate planning attorney about how a Transfer on Death account works and whether one might be useful for your purposes.

Reference: Yahoo! Finance (June 26, 2019) “Transfer on Death (TOD) Accounts for Estate Planning”

What Are the Basics About Trusts?

Forbes’s recent article, “A Beginner’s Guide To Reading A Trust,” says that as much as attorneys have tried to simplify documents, there’s some legalese that just can’t be avoided. Let’s look at the basics about trusts and a few tips in reviewing your trust.

Basis about trusts
Understanding basic trust terms is essential.

First, familiarize yourself with the terms. There are basic terms of the trust that you’ll need to know. Most of this can be found on its first page, such as the person who created the trust. He or she is usually referred to as the Donor, Grantor or Settlor (here in Florida we use the term Settlor). It is also necessary to identify the Trustee and any successor trustees, who will hold the trust assets and administer them for the benefit of the Beneficiaries.

You should next see who the Beneficiaries are and then look at the important provisions concerning asset distribution. See if the trustee is required to distribute the assets all at once to a specific beneficiary, or if she can give the money out in installments over time.

It is also important to determine if the distributions are completely left to the discretion of the trustee, so the beneficiary doesn’t have a right to withdraw the trust assets.  You’ll also want to check to see if the trustee can distribute both income and principal.

The next step is to see when the trust ends. Trusts usually end at a specific date or at the death of a beneficiary.

Other important basic trust provisions include whether the beneficiaries can remove and replace a trustee, if the trustee has to provide the beneficiaries with accountings and whether the trust is revocable or irrevocable. If the trust is revocable and you’re the settlor, you can change it at any time.

If the trust is irrevocable, you won’t be able to make any changes without court approval. If your uncle was the donor and he passed away, the trust is most likely now irrevocable.

In addition, you should review the basic trust boilerplate language, as well as the tax provisions.

Talk to an estate planning attorney about any questions you may have and to help you interpret the basic trust terms.

Reference: Forbes (June 17, 2019) “A Beginner’s Guide To Reading A Trust”

Leaving a Legacy Isn’t Just About Money

A legacy is not necessarily about money, says a survey that was conducted by Bank of America/Merrill Lynch Ave Wave. More than 3,000 adults (2,600 of them were 50 and older) were surveyed and focus groups were asked about end-of-life planning and leaving a legacy. The article, “How to leave a legacy no matter how much money you have” from The Voice, shared a number of the participant’s responses.

Leaving a Legacy
Most people would rather be remembered for how they lived their life instead of how much money they made.

A total of 94% of those surveyed said that a life well-lived, is about “having friends and family that love me.” 75% said that a life well-lived is about having a positive impact on society. A mere 10% said that a life well-lived is about accumulating a lot of wealth.

People want to be remembered for how they lived, not what they did at work or how much money they saved. Nearly 70% said they most wanted to be remembered for the memories they shared with loved ones. And only nine percent said career success was something they wanted to be remembered for.

While everyone needs to have their affairs in order, especially people over age 55, only 55% of those surveyed reported having a will. Only 18% have what are considered the three key essentials for leaving a legacy: a will, a health care directive and a durable power of attorney.

The will addresses how property is to be distributed, names a personal representative of the estate and, if there are minor children, names who should be their guardian. The health care directive gives specific directions as to end-of-life preferences and designates someone to make health care decisions for you, if you can’t speak for yourself. A power of attorney designates an agent to make financial decisions on your behalf if you’re unable to do so, because of illness or incapacity.

An estate plan is often only considered when a trigger event occurs, like a loved one dying without the proper documents in place. That is a wake-up call for the family, once they see how difficult it is when there is no estate plan.

Parents age 55 and older had interesting views on leaving inheritances and who should receive their estate. Only about a third of boomers surveyed and 44% of Gen Xers said that it’s a parent’s duty to leave some kind of inheritance to their children. A higher percentage of millennials surveyed—55%–said that this was a duty of parents to their children.

The biggest surprise of the survey: 65% of people 55 and older reported that they would prefer to give away some of their money, while they are still alive. A mere 8% wanted to give away all their assets, before they died. Only 27% wanted to give away all their money after they died.

Reference: The Voice (June 16, 2019) “How to leave a legacy no matter how much money you have”

What Will Anderson Cooper Inherit From his Mother Gloria Vanderbilt?

The 95-year-old Gloria Vanderbilt was “a vestige of another era, reminiscent of Brooke Astor in her longevity and tangible connection to the Gilded Age of railroad and oil barons, who left their mark on New York society,” said Trust Advisor in its recent article, “Does A Long Island Landscaper (And Not Anderson Cooper) Inherit Gloria Vanderbilt’s Fortune?”  

However, unlike Brooke Astor, Vanderbilt was born in the limelight. Her long life started in the center of dynastic politics that got both messy and public. She and her trust fund became commodities in her parents’ divorce.

It’s reported that she had to sell off a few houses to pay the tax bills. Anything left behind is well-hidden in some estate planning documents. With her family fortune dwindling over time, Vanderbilt’s fashion empire came and went. However, the distributions kept coming to fill the holes. The old Vanderbilt fortune may be gone.

Her children and grandchildren built the careers they wanted, investing their inheritances into passion projects, with little or no immediate payday. Some are novelists, filmmakers and TV journalists. Gloria built a fashion empire of her own.

As the baby, Anderson was closest to his mother. He has probably accumulated the most personal wealth after years on CNN, so he doesn’t need his mom’s money. Her oldest son Stan probably doesn’t need the money either.

Stan has a successful landscaping business in Long Island. Any Vanderbilt money he inherited along the way, is probably well invested.

There’s also a third son, Stan’s brother Chris. He walked out years ago and never really came back, at least publicly. It’s assumed that he was disinherited at the time. Now, no one is sure if Gloria wrote him out of the will. She may have written him back in. There was allegedly a bit of a thaw in the last few years.

Reference: Trust Advisor (June 17, 2019) “Does A Long Island Landscaper (And Not Anderson Cooper) Inherit Gloria Vanderbilt’s Fortune?”

Are Inheritances Taxable?

Inheritances come in all sizes and shapes. People inherit financial accounts, real estate, jewelry and personal items. However, whatever kind of inheritance you have, you’ll want to understand exactly what, if any, taxes might be due, advises the article “Will I Pay Taxes on My Inheritance” from Orange Town News. An inheritance might have an impact on Medicare premiums, or financial aid eligibility for a college age child. Let’s look at the different assets and how they may impact a family’s tax liability.

Bank Savings Accounts or CDs. As long as the cash inherited is not from a retirement account, there are no federal taxes due. The IRS does not impose a federal inheritance tax. However, there are some states, including Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania, that do have an inheritance tax. Speak with an estate planning attorney about this tax.

Primary Residence or Other Real Estate. Inheriting a home is not a taxable event. However, once you take ownership and sell the home or other property, there will be taxes due on any gains. The value of the home or property is established on the day of death. If you inherit a home valued at death at $250,000 and you sell it a year later for $275,000, you’ll have to declare a long-term capital gain and pay taxes on the $25,000 gain. The cost-basis is determined, when you take ownership.

Life Insurance Proceeds. Life insurance proceeds are not taxable, nor are they reported as income by the beneficiaries. There are exceptions: if interest is earned, which can happen when receipt of the proceeds is delayed, that is reportable. The beneficiary will receive a Form 1099-INT and that interest is taxable by the state and federal tax agencies. If the proceeds from the life insurance policy are transferred to an individual as part of an arrangement before the insured’s death, they are also fully taxable.

Retirement Accounts: 401(k) and IRA. Distributions from an inherited traditional IRA are taxable, just as they are for non-inherited IRAs. Distributions from an inherited Roth IRA are not taxable, unless the Roth was established within the past five years.

There are some changes coming to retirement accounts because of pending legislation, so it will be important to check on this with your estate planning attorney. Inherited 401(k) plans are or eventually will be taxable, but the tax rate depends upon the rules of the 401(k) plan. Many 401(k) plans require a lump-sum distribution upon the death of the owner. The surviving spouse is permitted to roll the 401(k) into an IRA, but if the beneficiary is not a spouse, they may have to take the lump-sum payment and pay the resulting taxes.

Stocks. Generally, when stocks or funds are sold, capital gains taxes are paid on any gains that occurred during the period of ownership. When stock is inherited, the cost basis is based on the fair market value of the stock or fund at the date of death.

Artwork and Jewelry. Collectibles, artwork, or jewelry that is inherited and sold, will incur a tax on the net gain of the sale. There is a 28% capital gains tax rate, compared to a 15% to 20% capital gains tax rate that applies to most capital assets. The value is based on the value at the date of death or the alternate valuation date. This asset class includes anything that is considered an item worth collecting: rare stamps, books, fine art, antiques and coin collections fall into this category.

Speak with an estate planning attorney before signing and accepting an inheritance, so you’ll know what kind of tax liability comes with the inheritance. Take your time. Most people are advised to wait about a year before making any big financial decisions after a loss.

Reference: Orange Town News (May 29, 2019) “Will I Pay Taxes on My Inheritance”

What Should I Keep in Mind in Estate Planning as a Single Parent?

Most estate planning conversation eventually come to center upon the children, regardless of whether they’re still young or adults.  So what should you keep in mind in estate planning as a single parent?

Talk to a qualified estate planning attorney and let him or her know your overall perspective about your children, and what you see as their capabilities and limitations. This information can frequently determine whether you restrict their access to funds and how long those limitations should be in place, in the event you’re no longer around.

Kiplinger’s recent article, “Estate Planning for Single Parents” explains that when one parent dies, the children typically don’t have to leave their home, school and community. However, when a single parent passes, a child may be required to move from that location to live with a relative or ex-spouse.

After looking at your children’s situation with your estate planning attorney to understand your approach to those relationships, you should then discuss your support network to see if there’s anyone who could serve in a formal capacity, if necessary. A big factor in planning decisions is the parent’s relationship with their ex. Most people think that their child’s other parent is the best person to take over full custody, in the event of incapacity or death. For others, this isn’t the case. As a result, their estate plan must be designed with great care. These parents should have a supportive network ready to advocate for the child.

Your estate planning attorney may suggest a trust with a trustee. This fund can accept funds from your estate, a retirement plan, IRA and life insurance settlement. This trust should be set up, so that any court that may be involved will have sound instructions to determine your wishes and expectations for your kids. The trust tells the court who you want to carry out your wishes and who should continue to be an advocate and influence in your child’s life.

Your will should also designate the child’s intended guardian, as well as an alternate, in case the surviving parent can’t serve for some reason. The trust should detail how funds should be spent, as well as the amount of discretion the child may be given and when, and who should be involved in the child’s life.

A trust can be drafted in many ways, but a single parent should discuss all of their questions with an estate planning attorney.

Reference: Kiplinger (May 20, 2019) “Estate Planning for Single Parents”

What Do I Tell My Kids About Their Inheritance?

knowing whether to tell your kids about their inheritance can be tough decision

For some parents, it can be difficult to discuss family wealth with their children and knowing whether to tell your kids about their inheritance can be tough decision. You may worry that when your kid learns they’re going to inherit a chunk of money, they’ll drop out of college and devote all their time to their tan.

Kiplinger’s recent article, “To Prepare Your Heirs for Future Wealth, Don’t Hide the Truth,” says that some parents have lived through many obstacles themselves. Therefore, they may try to find a middle road between keeping their children in the dark and telling them too early and without the proper planning. However, this is missing one critical element, which is the role their children want to play in creating their own futures.

In addition to the finer points of estate planning and tax planning, another crucial part of successfully transferring wealth is honest communication between parents and their children. This can be valuable on many levels, including having heirs see the family vision and bolstering personal relationships between parents and children through trust, honesty and vulnerability.

For example, if the parents had inherited a $25 million estate and their children would be the primary beneficiaries, transparency would be of the utmost importance. That can create some expectations of money to burn for the kids. However, that might not be the case, if the parents worked with an experienced estate planning attorney to lessen estate taxes for a more successful transfer of wealth.

Without having conversations with parents about the family’s wealth and how it will be distributed, the support a child gets now and what she may receive in the future, may be far different than what she originally thought. With this information, the child could make informed decisions about her future education and how she would live.

Heirs can have a wide variety of motivations to understand their family’s wealth and what they stand to inherit. However, most concern planning for their future. As a child matures and begins to assume greater responsibility, parents should identify opportunities to keep them informed and to learn about their children’s aspirations, and what they want to accomplish.

The best way to find out about an heir’s motivation, is simply to talk to talk to your kids about their inheritance.

Reference: Kiplinger (May 22, 2019) “To Prepare Your Heirs for Future Wealth, Don’t Hide the Truth”

Entertainer Prince’s Estate Battle May Take Decades to Resolve

Three years later and the “Purple Rain’s” estate remains as unsettled as it was on the day he died in his beloved Paisley Park mansion, located just outside of Minneapolis, says the New York Post’s Page Six in the article “Fight over Prince’s $200 M estate could go on for years.”

The estate, which includes a 10,000 square foot Caribbean villa in addition to Paisley Park and master tapes of his recordings, has been estimated by some to be worth in the neighborhood of $200 million. But what will be left after all the battles between heirs and the consultants (whose fees are adding up)?

The heirs are now in a court-battle with the estate’s administrator, which has already blown through $45 million in administrative expenses. That’s from a probate-court petition filed by Prince’s heirs. They’ve asked the court for a transition plan and a new administrator, which is scheduled for the end of June.

One observer noted that this estate may take decades to resolve, all because there was no will.

A judge had to determine who Prince’s heirs were. More than 45 people stepped up to claim inheritance rights, when the Purple One died in 2016. Some said they were wives, others said they were siblings and one said he was the artist’s son. DNA testing debunked that claim.

The list of heirs has been narrowed down to six: his full sister, Tyka Nelson, and half siblings Norrine Nelson, Sharon Nelson, John Nelson, Alfred Jackson and Omarr Baker.

Until fairly recently, the heirs were divided and quarrelling among themselves. For now, they have come together to challenge the court appointed bank that became the estate’s administrator, Comerica. The estate was being run by Bremer Trust at first, but that was a temporary appointment.

The statement said they don’t agree with Comerica’s cash flow projections, accounting, or inventory of estate assets. They also claim that Comerica is not being responsive to their concerns. What is even worse, they say that Comerica is the reason that the estate is $31 million behind on estate taxes, which are continuing to accumulate interest.

The company stated that it was the best possible administrator of the estate and insisted it is making all tax payments necessary to settle the estate.

Everyone needs to have a will (even with a small estate), so that heirs are not left battling over assets. While Prince may have thought of himself as too young to die, a will and a plan for his estate would have preserved his assets for his heirs and let him determine what happens to his music and his artistic legacy.

Reference: New York Post’s Page Six (April 19, 2019) “Fight over Prince’s $200 M estate could go on for years.”

What Are the Six Most Frequent Estate Planning Mistakes?

It’s a grim topic, but it is an important one. Without a legal will in place, your loved ones may spend years stuck in court proceedings and spend a lot on legal fees and court costs to settle your estate.

The San Diego Tribune writes in its recent article, 6 estate-planning mistakes to avoid, that without a plan, everything is more stressful and expensive. Let’s look at the top six estate-planning mistakes that people need to avoid:

Estate Planning Mistakes
Estate planning is tricky to get right without the help of a trained professional.

No Plan. Regardless of your age or financial status, it’s critical to have a basic estate plan. This includes crafting powers of attorney for both healthcare and finances and a living will.

No Discussion. Once you create your plan, tell your family. Those you’ve named to take care of you, need to know what you’ve decided and where to find your plan.

Focusing Only on Taxes. Estate planning can be much more than just about tax avoidance. There are many other reasons to create an estate plan that have nothing to do with taxes, like charitable giving, special needs planning for a family member, succession planning in the event of incapacity and planning for children of a prior marriage, to name just a few.

Leaving Assets Directly to Children. If you leave assets directly to your children or grandchildren under age 18, it can cause unintended custodian or guardianship issues. Minors can’t own legal property, so a guardian will be appointed by the court to manage the property for them, until they reach age 18. If you don’t name a guardian, the court will appoint one for you and that person may have very different ideas about how your children should be raised.

Making Mistakes with Ownership and Property Titles. With many blended families, you may want to preserve assets from an inheritance as your own separate property or from a prior marriage for your children. There are many tax consequences and control issues in blended families about which you may not be aware.

Messing Up Your Trust. Many people don’t properly fund or update their trusts. An unfunded trust doesn’t do anyone any good. Assets that aren’t titled in the name of the trust don’t avoid probate.

Finally, the easiest way to avoid these frequent estate planning mistakes is by reviewing your estate plan regularly, as your circumstances change.

Reference: San Diego Tribune (April 18, 2019) “6 estate-planning mistakes to avoid”

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