Heirs

How Much Should We Tell the Children About Our Estate Plan?

Congratulations, if you have finished your estate plan. You and your estate planning attorney created a plan that is suited for your family, you have checked on beneficiary designations, signed all of the necessary documents and named an executor to carry out your directions when you pass away. However, have you talked about your estate plan with your adult children? That is the issue explored in the recent article entitled “What to tell your adult kids when planning your estate” from CNBC. It can be a tricky one.

There are certain parts of estate plans that should be shared with adult children, even if money is not among them. Family conflict is common, whether the estate is worth $50,000 or $50 million. So, even if your estate plan is perfect, it might hold a number of surprises for your children, if you don’t speak with them about your plan while you are living.

Even the best estate plan can bequeath resentment and family conflicts, if family members don’t have a head’s up about what you’ve planned and why.

If you die without a will, there can be even more problems for the family. With no will—called dying “intestate”—it is up to the courts in your state to decide who inherits what. This is a public process, so your life’s work is on display for all to see. If your heirs have a history of arguing (especially over who deserves what), dying without a will can make a bad family situation worse.

Not everything about an estate plan has to do with distribution of possessions. Much of an estate plan is concerned with protecting you, while you are alive.

For starters, your estate planning attorney can help you with a Power of Attorney. You’ll name a person who will handle your finances, if you become unable to do so because of illness or injury. A Healthcare Power of Attorney is used to empower a trusted person to act as a surrogate and make medical decisions for you, if you are incapacitated. Some estate planning attorneys recommend having a Living Will, also called an Advance Healthcare Directive, to convey end-of-life wishes, if you don’t want to be kept alive through artificial means.

These documents do not require you to name a family member. A friend or colleague you trust and know to be responsible can carry out your wishes and can be named to any of these positions.

All of these matters should be discussed with your children. Even if you don’t want them to know about the assets in your estate, they should be told who will be responsible for making decisions on your finances and health care.

Consider if you want your children to learn about your finances during your lifetime, when you are able to discuss your choices with them, or if they will learn about them after you have passed, possibly from a stranger or from reading court documents.

Many of these decisions depend upon your family’s dynamics. Do your children work well together, or are there deep-seated hostilities that will lead to endless battles? You know your own children best, so this is a decision only you can make.

It is also important to take into consideration that an unexpected large inheritance can create emotional turbulence for many people. If heirs have never handled any sizable finances before, or if they have a marriage on shaky ground, an unexpected inheritance could create very real problems—and a divorce could put their inheritance at risk.

Talk with your children, if at all possible. Erring on the side of over-communicating might be a better mistake than leaving them in the dark.

Reference: CNBC (Nov. 11, 2020) “What to tell your adult kids when planning your estate”

Did You Inherit a House with a Mortgage?

When a loved one dies, there are always questions about wills, inheritances and how to manage all of their legal and financial affairs. It’s worse if there’s no will and no estate planning has been done. This recent Bankrate article, “Does the home you inherited include a mortgage?,” says that things can get even more complicated when you inherit a house with a mortgage.

inherit a house with a mortgage
There are several options available to anyone who inherits a house with a mortgage.

Heirs often inherit the family home. However, if it comes with a mortgage, you’ll want to work with an estate planning attorney. If there are family members who could become troublesome, if houses are located in different states or if there’s a lot of money in the estate, it’s better to have the help of an experienced professional.

Death does not mean the mortgage goes away. Heirs need to decide how to manage the loan payments, even if their plan is to sell the house. If there are missing payments, there may be penalties added onto the late payment. Worse, you may not know about the mortgage until after a few payments have gone unpaid.

Heirs who inherit a house with a mortgage have several options:

If the plan is for the heirs to move into the home, they may be able to assume the mortgage and continue paying it. There may also be an option to do a cash-out refinance and pay that way.

If the plan is to sell the home, which might make it easier if no one in the family wants to live in the home, paying off the mortgage by using the proceeds from the sale is usually the way to go. If there is enough money in the estate account to pay the mortgage while the home is on the market, that money will come out of everyone’s share. Here again, the help of an estate planning attorney will be valuable.

Heirs who inherit a house with a mortgage also have certain leverage when dealing with a mortgage bank in an estate situation. There are protections available that will provide some leeway as the estate is settling. More good news—the chance of owing federal estate taxes right now is pretty small. An estate must be worth at least $11.58 million, before the federal estate tax is due.

There are still 17 states and Washington D.C. that will want payment of a state estate tax, an inheritance tax or both (Florida is not one of them). There also might be capital gains tax liability from the sale of the home.

If you decide to take over the loan, the lender should be willing to work with you. The law allows heirs who inherit a house with a mortgage to assume a loan, especially when the transfer of property is to a relative. Surviving spouses have special protections to ensure that they can keep an inherited home, as long as they can afford it. In many states, this is done by holding title by “tenancy by the entireties” or “joint tenants with right of survivorship.”

When there is a reverse mortgage on the property, options include paying off or refinancing the balance and keeping the home, selling the home for at least 95% of the appraised value, or agreeing to a deed in lieu of foreclosure. There is a window of time for the balance to be repaid, which may be extended, if the heir is actively engaged with the lender to pay the debt. However, if a year goes by and the reverse mortgage is not paid off, the lender must begin the foreclosure process.

Nothing changes if the heir is a surviving spouse, but if the borrower who dies had an unmarried partner, they have limited options, unless they are on the loan.

What if you inherit a house with a mortgage that is “underwater,” meaning that the value of the inherited home is less than the outstanding mortgage debt? If the mortgage is a non-recourse loan, meaning the borrower does not have to pay more than the value of the home, then the lender has few options outside of foreclosure. This is also true with a reverse mortgage. Heirs are fully protected, if the home isn’t worth enough to pay off the entire balance.

If there is no will, things get extremely complicated. Contact an estate planning attorney as soon as possible.

Reference: Bankrate (Oct. 22, 2020) “Does the home you inherited include a mortgage?”

There Is a Difference between Probate and Trust Administration

Many people get these two things confused. A recent article, “Appreciating the differences between probate and trust administration,” from Lake County News clarifies the distinctions.

Let’s start with probate, which is a court-supervised process. To begin the probate process, a legal notice must be published in a newspaper and court appearances may be needed. However, to start trust administration, a letter of notice is mailed to the decedent’s heirs and beneficiaries. Trust administration is far more private, which is why many people chose this path.

In the probate process, the last will and testament and most other documents in the court file are available to the public. While the general public may not have any specific interest in your will, estranged relatives, relatives you never knew you had, creditors and scammers have easy and completely legal access to this information.

If there is no will, the court documents that are created in intestacy (the heirs inherit according to state law), are also available to anyone who wants to see them.

In trust administration, the only people who can see trust documents are the heirs and beneficiaries.

There are cost differences. In probate, a court filing fee must be paid for each petition, plus the newspaper publication fee. The fees vary, depending upon the jurisdiction. Add to that the attorney’s and personal representative’s fees, which also vary by jurisdiction. Some are on an hourly basis, while others are computed as a sliding scale percentage of the value of the estate under management. For example, each may be paid 4% of the first $100,000, 3% of the next $100,000 and 2% of any excess value of the estate under management. The court also has the discretion to add fees, if the estate is more time consuming and complex than the average estate.

For trust administration, the trustee and the estate planning attorney are typically paid on an hourly basis, or however the attorney sets their fee structure. Expenses are likely to be far lower, since there is no court involvement.

There are similarities between probate and trust administration. Both require that the decedent’s assets be collected, safeguarded, inventoried and appraised for tax and/or distribution purposes. Both also require that the decedent’s creditors be notified, and debts be paid. Tax obligations must be fulfilled, and the debts and administration expenses must be paid. Finally, the decedent’s beneficiaries must be informed about the estate and its administration.

The use of trusts in estate planning can be a means of minimizing taxes and planning for family assets to be passed to future generations in a private and controlled fashion. This is the reason for the popularity of trusts in estate planning.

Reference: Lake County News (July 4, 2020) “Appreciating the differences between probate and trust administration”

How Does a Spendthrift Trust Protect Heirs from Themselves?

This is not an unusual question for most estate planning lawyers—and in most cases, the children aren’t bad. They just lack self-control or have a history of making poor decisions. Fortunately, there are solutions, as described in a recent article titled “Estate Planning: What to do to protect trusts from a spendthrift” from NWI.com.

What needs to happen? Plan to provide for the child’s well-being but keep the actual assets out of their control. The best way to do this is through the use of a trust. By leaving money to a child in a trust, a responsible party can be in charge of the money. That person is known as the “trustee.”

People sometimes get nervous when they hear the word trust, because they think that a trust is only for wealthy people or that creating a trust must be very expensive. Not necessarily. In many states, a trust can be created to benefit an heir in the last will and testament. The will may be a little longer, but a trust can be created without the expense of an additional document. Your estate planning attorney will know how to create a trust, in accordance with the laws of your state.

In this scenario, the trust is created in the will, known as a testamentary trust. Instead of leaving money to Joe Smith directly, the money (or other asset) is left to the John Smith Testamentary Trust for the benefit of Joe Smith.

The terms of the trust are defined in the appropriate article in the will and can be created to suit your wishes. For instance, you can decide to distribute the money over a period of years. Funds could be distributed monthly, to create an income stream. They could also be distributed only when certain benchmarks are reached, such as after a full year of employment has occurred. This is known as an incentive trust.

The opposite can be true: distributions can be withheld, if the heir is engaged in behavior you want to discourage, like gambling or using drugs.

Reference: NWI.com (May 17, 2020) “Estate Planning: What to do to protect trusts from a spendthrift”

If Not Now, When? It is the Time for Estate Planning

What else could possibly go wrong? You might not want to ask that question, given recent events. A global pandemic, markets in what feels like free fall, schools closed for an extended period of time—these are just a few of the challenges facing our communities, our nation and our world. The time is now, in other words, to be sure that everyone has their estate planning completed, advises Kiplinger in the article “Coronavirus Legal Advice: Get Your Business and Estate in Order Now.”  

Business owners from large and small sized companies are contacting estate planning attorney’s offices to get their plans done. People who have delayed having their estate plans done or never finalized their plans are now getting their affairs in order.

Because the virus is recognized as being especially dangerous for people who are over age 60 or have underlying medical issues, which includes many business owners and CEOs, the question of “What if I get it?” needs to be addressed. Not having a succession plan or an estate plan, could lead to havoc for the company and the family.

Establishing a Power of Attorney is a key part of the estate plan, in case key decision makers are incapacitated, or if the head of the household can’t take care of paying bills, taxes or taking care of family or business matters. For that, you need a Durable Power of Attorney.

Another document needed now, more than ever: is an Advance Health Care Directive. This explains how you want medical decisions to be made, if you are too sick to make these decisions on your own behalf. It tells your health care team and family members what kind of care you want, what kind of care you don’t want and who should make these decisions for you.

This is especially important for people who are living together without the legal protection that being married provides. While some states may recognize registered domestic partners, in other states, medical personnel will not permit someone who is not legally married to another person to be involved in their health care decisions unless they are appointed in an Advanced Health Care Directive.

Personal information that lives only online is also at risk. Many bills today don’t arrive in the mail, but in your email inbox. What happens if the person who pays the bill is in a hospital, on a ventilator? Just as you make sure that your spouse or children know where your estate plan documents are, they also need to know how to access your online accounts, who your estate planning attorney is, where your insurance policies, financial records and legal documents are and your contact list of key friends and family members.

Reference: Kiplinger (March 16, 2020) “Coronavirus Legal Advice: Get Your Business and Estate in Order Now.”

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”

Which Debts Must Be Paid Before and After Probate?

Everything that has to be addressed in settling an estate becomes more complicated when there is no will and no estate planning has taken place before someone passes away. Debts are a particular area of concern for the estate and the personal representative. What has to be paid, and who gets paid first? These are explained in the article “Dealing with Debts and Mortgages in Probate” from The Balance.

probate
Knowing which debts have to be paid before and after probate is important.

Probate is the process of gaining court approval of the estate and paying off final bills and expenses, before property can be transferred to beneficiaries. The process of paying the debts of a deceased person can typically begin before probate officially starts.

Making a list of all of the decedent’s liabilities and looking for the following bills or statements is the best way to begin:

  • Mortgages (and reverse mortgages)
  • Home equity loans
  • Lines of credit
  • Condo fees
  • Property taxes
  • Federal and state income taxes
  • Car and boat loans
  • Personal loans
  • Loans against life insurance policies
  • Loans against retirement accounts
  • Credit card bills
  • Utility bills
  • Cell phone bills

Next, divide those items into two categories: those that will be ongoing during probate—consider them administrative expenses—and those that can be paid off after the probate estate is opened. These are considered “final bills.” Administrative bills include things like mortgages, condo fees, property taxes and utility bills. They must be kept current. Final bills include income taxes, personal loans, credit card bills, cell phone bills and loans against retirement accounts and/or life insurance policies.

The personal representative and heirs should not pay any bills out of their own pockets. The personal representative deals with all of these liabilities in the process of settling the estate.

For some of the liabilities, heirs may have a decision to make about whether to keep the assets with loans. If the beneficiary wants to keep the house or a car, they may, but they have to keep paying down the debt. Otherwise, these payments should be made only by the estate.

The personal representative decides which bills to pay and which assets should be liquidated to pay final bills.

A far better plan for your beneficiaries, is to create a comprehensive estate plan that includes a will that details how you want your assets distributed and addresses what your wishes are. If you want to leave a house to a loved one, your estate planning attorney will be able to explain how to make that happen, while minimizing taxes on your estate.

Reference: The Balance (March 21, 2019) “Dealing with Debts and Mortgages in Probate”

Estate Planning Hacks Create More Problems

“My idea: put our accounts in my wife’s name and put the land in our children’s names. The way I figure it, when something happens to me, they won’t need to do any of that courtroom mumbo jumbo that costs a few thousand dollars.”

The estate planning attorney in this gentleman’s neighborhood isn’t worried about this man’s plan to avoid the “courtroom mumbo jumbo.” It’s not the first time someone thought they could make a short-cut work, and it won’t be the last. However, as described in the article “Estate planning workaround idea needs work” from My San Antonio, the problems this rancher will create for himself, his wife, and his children, will easily eclipse any savings in time or fees he thinks he may have avoided.

Estate Planning Hacks
Estate planning hacks, or “work-arounds” almost always end up costing the family more time and money in the end.

Let’s start with the idea of putting all the man’s assets in his wife’s name. For starters, that means she has complete control and access to all the accounts. Even if the accounts began as community property, once they are in her name only, she is the sole manager of these accounts.

If the husband dies first, she will not have to go into probate court. That is true. However, if she dies first, the husband will need to go to probate court to access and claim the accounts. If the marriage goes sour, it’s not likely that she’ll be in a big hurry to return access to everything.

Another solution: set the accounts up as joint accounts with right of survivorship. The bank would have to specify that when spouse dies, the other owns the accounts. However, that’s just one facet of this estate planning hack.

The next proposal is to put the land into the adult children’s names. Gifting the property to children has a number of irreversible consequences.

First, the children will all be co-owners. Each one of them will have full legal control. What if they don’t agree on something? How will they break an impasse? Will they own the property by majority rule? What if they don’t want to honor any of the parent’s requests?  In addition, if one of them dies, their spouse or their child will inherit their share. If they divorce, will their future ex-spouse retain ownership of their shares of the property?

Second, you can’t gift the property and still be an owner. The husband and wife will no longer own the property. If they don’t agree with the kid’s plans for the property, they can be evicted. After all, the parents gave them the entire property.

Third, the transfer to the children is a gift. There will be a federal gift tax return form to be filed. Depending on the value of the property, the parents may have to pay gift tax to the IRS.  Because the children have become owners of the property by virtue of a gift, they receive the tax-saving “free step-up in basis.” If they sell (and they have that right), they will get hit with capital gains taxes that will cost a lot more than the cost of an estate plan with an estate planning attorney and the “courtroom mumbo jumbo.”

Finally, the property is not the children’s homestead. If it has been gifted it to them, it’s not the parent’s homestead either. Therefore, they can expect an increase in the local property taxes. Those taxes will also be due every year for the rest of the parent’s life and again, will cost more over time than the cost of creating a proper estate plan. Since the property is not a homestead, it is subject to a creditor’s claim, if any of the new owners—those children —have a financial problem.

Estate plans exist to protect the current owners and their heirs. If the goal is to keep the property in the family and have the next generation take over, everyone concerned will be better served by sitting down with an estate planning attorney and discussing the many different ways to make this happen.

Reference: My San Antonio (April 29, 2019) “Estate planning workaround idea needs work”

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