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What Happens When Unmarried Couples Don’t Have Wills?

Estate planning for unmarried couples is even more important than for married couples.

There can be serious problems when people live together without the benefit of marriage. One is that they don’t have any legal right to make medical decisions for each other. Another is that without any will or estate plan in place, the surviving partner has no legal right to any of the decedent’s property. That’s just for starters, explains the article “Longtime unmarried couple hasn’t planned for future” from the Santa Cruz Sentinel.

The unmarried couple may be pleased with their decision to live on their own terms.  However, by not creating an estate plan an unmarried couple is creating unnecessary difficulty for their loved ones. The children and grandchildren of the couple are likely going to end up having to sort out the mess, after one of the couple dies. They may end up in court, battling over the house or other assets.

If the couple wants their property to end up in the hands of their children when they pass away, having no estate plan is not the way to make that happen. When one spouse dies, any assets they own in joint tenancy will go to the surviving partner. When the surviving partner passes, those assets will go to their children, and nothing will be passed to the other family.

The surviving partner will have no legal right to the assets of the deceased partner, other than any that have been titled to joint tenancy. There is no community property between cohabitating couples, unless they have registered as domestic partners. This is how the law works in California, and every state has its own rules. Assets owned by the deceased partner that are titled in his or her name only, belong to the decedent’s probate estate and will pass to their children. If the gentleman dies first, in this example, will his companion be left homeless?

This is a situation that can be easily remedied with thoughtful estate planning for unmarried couples by creating wills and trusts that clearly spell out how they want their assets to be distributed upon death. There are many different ways to make this happen, but they will need to work with an estate planning attorney. Where the surviving non-homeowner will live after the homeowner dies is a serious issue, unless other plans have been made. One way to do this is to leave a life estate in the home in his will, or by creating a trust that holds the home for her use. When the survivor passes away, the home can then pass to the homeowner’s children. In that case, a series of agreements about how the home will be maintained may need to be created.

Taking the time and making the investment in an estate plan, is for the benefit of the individual and the family. An indifferent attitude about the future is hurtful to those who are left behind.

Reference: Santa Cruz Sentinel (April 7, 2019) “Longtime unmarried couple hasn’t planned for future”

What If My Beneficiary Isn’t Ready to Handle an Inheritance?

A recent Kiplinger article asks: “Is Your Beneficiary Ready to Receive Money?” In fact, not everyone will be mentally or emotionally prepared for the money you wish to leave them. Here are some things estate planning attorney’s suggest you consider:

inheritance
Even the most responsible young adults aren’t likely ready to handle an inheritance.

The Beneficiary’s Age. Children under 18 years old cannot sign legal contracts. Without some planning, the court will take custody of the funds on the child’s behalf. This could occur via custody accounts, protective orders or conservatorships. If this happens, there’s little control over how the money will be used. The conservatorship will usually end and the funds be paid to the child, when they become an adult. Giving significant financial resources to a young adult who’s not ready for the responsibility, often ends in disaster. Work with an estate planning attorney to find a solution to avoid this result.

The Beneficiary’s Lifestyle. There are many other circumstances for which you need to consider and plan. These include the following:

  • A beneficiary with a substance abuse or gambling problem;
  • A beneficiary and her inheritance winds up in an abusive relationship;
  • A beneficiary is sued;
  • A beneficiary is going through a divorce;
  • A beneficiary has a disability; and
  • A beneficiary who’s unable to manage assets.

All of these issues can be addressed, with the aid of an estate planning attorney. A testamentary trust can be created to make certain that minors (and adults who just may not be ready) don’t get money too soon, while also making sure they have funds available to help with school, health care and life expenses.

Who Will Manage the Trust? Every trust must have a trustee. Find a person who is willing to do the work. You can also engage a professional trust company for larger trusts. The trustee will distribute funds, only in the ways you’ve instructed. Conditions can include getting an education, or using the money for a home or for substance abuse rehab.

Estate Plan Review. Review your estate plan after major life events or every few years. Talk to a qualified estate planning attorney to make the process easier and to be certain that your money goes to the right people at the right time.

Reference: Kiplinger (April 1, 2019) “Is Your Beneficiary Ready to Receive Money?”

Forgot to Update Your Beneficiary Designations? Your Ex Will be Delighted

Your will does not control who inherits all your assets when you die. This is an aspect of estate planning that many people do not know. Instead, many of your assets will pass by beneficiary designations, says Kiplinger in the article “Beneficiary Designations: 5 Critical Mistakes to Avoid.”

The beneficiary designation is the form that you fill out, when opening many different types of financial accounts. You select a primary beneficiary and, in most cases, a contingency beneficiary, who will inherit the asset when you die.

estate planning beneficiary
If you don’t update your beneficiaries after a divorce your ex will receive some of your assets.

Typical accounts with beneficiary designations are retirement accounts, including 401(k)s, 403(b)s, IRAs, SEPs, life insurance, annuities and investment accounts. Many financial institutions allow beneficiaries to be named on non-retirement accounts, which are most commonly set up as Transfer on Death (TOD) or Pay on Death (POD) accounts.

It’s easy to name a beneficiary and be confident that your loved one will receive the asset, without having to wait for probate or estate administration to be completed. However, there are some problems that occur and mistakes get expensive.

Here are mistakes you don’t want to make:

Failing to name a beneficiary. It’s hard to say whether people just forget to fill out the forms or they don’t know that they have the option to name a beneficiary. However, either way, not naming a beneficiary becomes a problem for your survivors. Each company will have its own rules about what happens to the assets when you die. Life insurance proceeds are typically paid to your probate estate, if there is no named beneficiary. Your family will need to go to court and probate your estate.

When it comes to retirement benefits, your spouse will most likely receive the assets. However, if you are not married, the retirement account will be paid to your probate estate. Not only does that mean your family will need to go to court to probate your estate, but taxes could be levied on the asset. When an estate is the beneficiary of a retirement account, all the assets must be paid out of the account within five years from the date of death. This acceleration of what would otherwise be a deferred income tax, must be paid much sooner.

Neglecting special family considerations. There may be members of your family who are not well-equipped to receive or manage an inheritance. A family member with special needs who receives an inheritance, is likely to lose government benefits. Therefore, your planning needs to include a SNT — Special Needs Trust. Minors may not legally claim an inheritance, so a court-appointed person will claim and manage their money until they turn 18. This is known as a conservatorship. Conservatorships are costly to set up. They must also make an annual accounting to the court. Conservators may need to file a bond with the court, which is usually bought from an insurance company. This is another expensive cost.

If you follow this course of action, at age 18 your heir may have access to a large sum of money. That may not be a good idea, regardless of how responsible they might be. A better way to prepare for this situation is to have a trust created.  The trustee would be in charge of the money for a period of time that is determined by the personality and situation of your heirs.

Using an incorrect beneficiary name. This happens quite frequently. There may be several people in a family with the same name. However, one is Senior and another is Junior. The person might also change their name through marriage, divorce, etc. Not only can using the wrong name cause delays, but it could lead to litigation, especially if both people believe they were the intended recipient.

Failing to update beneficiaries. Just as your will must change when life changes occur, so must your beneficiaries. It’s that simple, unless you really wanted to give your ex a windfall.

Failing to review beneficiaries with your estate planning attorney. Beneficiary designations are part of your overall estate plan and financial plan. For instance, if you are leaving a large insurance policy to one family member, it may impact how the rest of your assets are distributed.

Take the time to review your beneficiary designations, just as you review your estate plan. You have the power to determine how your assets are distributed, so don’t leave that to someone else.

Reference: Kiplinger (April 5, 2019) “Beneficiary Designations: 5 Critical Mistakes to Avoid”

The Latest on Florida’s Attempt to Create an Online Notary Law

The Florida legislature is giving consideration to HB 409, which would make signing estate planning documents, like a will or power of attorney, more convenient. Some have expressed concerns that greater convenience could lead to more fraud, especially for the elderly.

Florida’s proposed law had pros and cons.

The San Francisco Chronicle reports in the story “Florida may allow legal papers to be notarized online” that the legislation was proposed by Representative Daniel Perez, R-Miami. The bill moved Tuesday through the House transportation and tourism appropriations subcommittee and will be considered next in the Judiciary Committee—the last step before a House vote. However, a Senate version hasn’t made as much progress.

Representative Perez remarked that he’d recently traveled to Colombia and realized as he boarded his flight, that he’d failed to assign power of attorney to his in-laws. The requirement that he appear in person before a Florida-commissioned notary made it impossible to fix his oversight, he said.

The notary bill has made it past attempts by two Democrats that would’ve limited its scope. Representative Barbara Watson, D-Miami Gardens, compared the risks of fraud under the system to college students who buy fake IDs to illegally drink alcohol. She proposed requiring notary witnesses to be in the same place physically, as whoever is signing legal documents.

“When we have no one tangibly looking at this information, not having it in their hands for close inspection to verify its validity, we’re in trouble,” Watson said.

Representative Ben Diamond, D-St. Petersburg, said allowing wills and powers of attorney to be created online was dangerous for Florida’s elderly. He said lawmakers need to balance between better business and protecting older residents.

“I have a concern about someone going into a nursing home with an iPad and walking room to room and getting people to click buttons and then they get a couple of powers of attorney,” Diamond said.

Perez responded that it was possible for criminals to take advantage of elderly people, even with the current notary requirements.

Attorneys are split. Lawyers from the Florida Bar’s Real Property Probate and Trust Law section said the proposal puts the elderly at greater risk of fraud, but those in the Elder Law section said the online services will make it easier for Florida’s older population to plan estates.

Reference: San Francisco Chronicle (March 27, 2019) “Florida may allow legal papers to be notarized online”

What’s the Best Way to Pass the Family Vacation Home to the Next Generation?

The generous exclusion that allows wealthy individuals to gift up to $11.4 million and not get hit with federal estate taxes, came from the Tax Cut and Jobs Act of 2017. However, it’s not expected to last forever, according to the article “What to Know When Gifting the Family Vacation Home” from Barron’s Penta. Those who can, may want to take advantage of this window to be extra-magnanimous before the exemption sunsets to about $5 million (adjusted for inflation) in 2025.

At issue is that when someone transfers property, the recipients must account for it, according to the original price paid for the property. This is known as the basis. For example, shares of stock valued at $5 million today that were originally purchased for $1 million 10 years ago, would be subject to income taxes only on $4 million, if the recipient were to sell the stock.

Advice given to wealthy individuals is to make use of that higher estate tax exclusion while it’s still in place, and that may include property that they expect to gift to beneficiaries. The most likely asset would be the family vacation home, whether it’s a ski chalet or a beach house.

First, make sure your children want the property. There’s no sense going through all the processes, unless they plan on enjoying the vacation home. Next, figure out the best way to gift the home, while making the most of the high exclusion.

A nice point: you won’t have to give up the use or control of the house during this process. Experts advise not making an outright gift. This can lead to less control or the loss of a share to a child’s spouse, in the event of a marital split.

Another option: transfer the property into a trust. There are several kinds that would work for this purpose. Another is to consider a Limited Liability Corporation, which also serves to protect the family’s assets against any claims, if someone were to be injured on the property. The parents would transfer the property into the LLC and give children interests in the company.

A fairly common structure for vacation home ownership is called a Qualified Personal Residence Trust (QPRT). These are used by families who want to retain the right to continue using the home, usually for the rest of their lives. The property is transferred to the designated beneficiaries at death. If it is set up properly, a QPRT avoids any income or estate taxes.

A trust also lets an individual or a couple be very specific in how the property will be used, who can use it and any rules about how they want the home maintained. Making sure that a beloved family vacation home is well-cared for and not rented out for college parties, for instance, can provide a lot of comfort for a couple who have poured their hearts into creating a lovely vacation home.

Speak with an experienced estate planning attorney to learn how you can take advantage of the current federal estate tax exemption to pass your family’s vacation home on to the next generation.

Reference: Barron’s Penta (March 31, 2019) “What to Know When Gifting the Family Vacation Home”

Should My Estate Plan Include a Trust?

There are as many types of trusts, as there are reasons to have trusts. They all have benefits and drawbacks. What type of trust is best for you? The answer is best discussed in person with an estate planning attorney. However, an article from U.S. News & World Report titled “8 Things to Know About Trusts,” gives a good overview.

Estate Plan
Determining whether your estate plan should include a trust is best done by consulting with an estate planning attorney.

Revocable or Irrevocable? Revocable trusts are usually established for a person (the grantor) during their lifetime, and then pass assets to the named beneficiaries, when the grantor dies. The revocable trust allows for a fair amount of flexibility during the grantor’s lifetime. An irrevocable trust is harder to change, and in some cases cannot be changed or amended. Some states do allow the option of “decanting” trusts, that is, pouring over assets from one trust to another. You’ll want to work with an experienced estate planning attorney to be sure trusts are set up correctly and achieve the goals you want.

Trusts can protect assets. Irrevocable trusts are often used, when a grantor must go into a nursing home and the goal is to protect assets. However, this means that the grantor no longer has access to the money and has fundamentally given it away to the trust. Putting assets into an irrevocable trust is commonly done to preserve assets, when a person will need to become eligible for Medicaid.  The trust must be created and funded five years before applying for benefits. Irrevocable trusts can also be used to obtain veteran’s benefits, if they are asset-based. VA benefits have a three-year look-back period, as compared to Medicaid’s five-year look-back period.

Trusts can’t own retirement accounts. Trusts can own non-retirement bank accounts, life insurance policies, property and securities. However, retirement accounts become taxable immediately, if they are owned by a trust.

Trusts help avoid probate after the grantor’s death. Most people think of trusts for this purpose. Assets in a trust do not pass through probate, which is the process of settling an estate through the courts. Having someone named as a trustee, a trusted family member, friend or a financial institution, means that the assets can be managed for the beneficiaries, if they are not deemed able to manage the assets. Another good part about trusts: you can direct how and when the funds are to be distributed.

Trusts offer privacy. When a will is filed in the courthouse, it becomes part of the public record. Trusts are not, and that keeps assets and distribution plans private. A grantor could put real estate and other personal property into a trust and title of ownership would remain private.

Tax savings. Before the federal estate tax exemptions became so high, people would put assets into trusts to avoid taxation. However, state taxes may still be avoided, if the assets don’t reach state tax levels. You can also transfer funds into an irrevocable trust to transfer it to others, without making it become part of a taxable estate. This is something to discuss in detail with an estate planning attorney.

Irrevocable Trusts can be expensive. If you are considering an irrevocable trust as a means of controlling the cost of an estate, this is not the solution you are looking for. Trusts require careful administration, annual tax filings and other fees. You may also lose the advantage of long-term capital gains by putting assets into trusts, since they are taxed upon withdrawal, and usually based upon current market value. The marginal rates for trust income of all kinds apply at much lower levels, so that the highest marginal taxes will be paid on very low levels of income.

Work with an experienced trusts and estates lawyer. Trusts and their administration can be complex. Seek the help of a trusts and estates attorney, who will be able to factor in tax liability and the impact of the trusts on the rest of your estate plan. Remember that every state has its own laws about trusts. Finally, an estate plan needs to be updated every few years. For example, trusts that were set up for a far lower federal estate tax exemption several years ago are now out of date, and may not work to achieve their intended goal. The laws changes, and the role of trusts also changes.

Reference: U.S. News & World Report (March 29, 2019) “8 Things to Know About Trusts”

Can I Revoke an Irrevocable Trust?

A trust can be revocable or irrevocable, says nj.com’s article, “Can an irrevocable trust be revoked?”

Revoke an Irrevocable Trust
In some states you can revoke an irrevocable trust if the revocation complies with the underlying purpose of the trust.

A revocable trust is a living trust that’s created with a written agreement between the person creating the trust (also called the grantor or settlor) and the trustee. That’s the person who will manage the assets in the trust. The person who creates the trust can also name herself as the trustee for her lifetime, and the trust agreement may say that the grantor can revoke or dissolve the trust. That’s why it’s called a revocable trust.

However, with an irrevocable trust, the grantor doesn’t reserve the right to revoke the trust. In effect, once the assets of an irrevocable trust are re-titled and placed in the trust, they belong to the trust beneficiaries, not the grantor. Nonetheless, an irrevocable trust can still be revoked in some situations. The grantor may be able to terminate an irrevocable trust by following the state laws on dissolution. The laws of each state vary in this area. For example, New Jersey has adopted the Uniform Trust Code, which stipulates that an irrevocable trust can be terminated by consent of the trustee and the beneficiaries.

In that state, an irrevocable trust may be terminated by a court, provided that the termination isn’t inconsistent with a material purpose of the trust. Likewise, the Minnesota Trust Code grants probate courts authority to modify non-charitable irrevocable trusts in specific situations. In the Gopher State, there are eight different sets of circumstances in which Minnesota’s probate courts have authority to modify or terminate a noncharitable irrevocable trust.

Speak with an experienced estate planning attorney, if you have questions about revocable and irrevocable trusts.

Reference: nj.com (March 25, 2019) “Can an irrevocable trust be revoked?”

When Do I Need a Power of Attorney?

Estate planning is important. Signing a power of attorney can be essential for those seeking to safeguard their financial resources and other assets.

Power of Attorney
A power of attorney is an essential estate planning document that lets an agent assist you with financial items such as paying your bills and maintaining your property.

The Tri-County Times explains in its article, “Power of attorney protects loved ones,” that a POA is granted to an “attorney-in-fact” or “agent.” It gives that individual the legal authority to make decisions for the “principal.” The laws for creating a POA vary based on the state.  However, there are some general similarities.

Many people think their families will be able to intercede, if an event occurs that leaves them incapacitated or unable to make decisions for themselves. That’s not always true. If a person isn’t named as an agent or granted legal access to financial, medica, and other information, family members may be left out. Further, the government may appoint someone to make certain decisions for an individual, if no agent is named in a POA.

Almost everyone can benefit from establishing a power of attorney.

A signed POA will remove the legal obstacles that may arise in the event that a person is no longer physically or mentally capable of managing certain tasks.

A power of attorney is a broad term that covers a wide range of decision-making. The main types are a general POA, health care POA, and durable POA.

The responsibilities of some of these overlap, but there are some legal differences. For instance, a durable POA relates to all the appointments involved in general, special and health care powers of attorney being made “durable”—meaning that the document will remain in effect or take effect if a person becomes mentally incompetent.

Certain POA’s may expire within a certain time period.

An agent appointed through POA may be able to handle many tasks, depending on what powers are granted in the document. They include banking transactions, filing tax returns, managing government-supplied benefits, deciding on medical treatments and executing advanced health care directives.

Although a power of attorney document can be completed on your own, sitting down with an experienced estate planning attorney who understands the nuances of your state’s laws is preferred to better understand the intricacies of this vital document and ensuring that it will be legally binding and properly prepared.

If you’d like to schedule a complementary consultation to discuss completing a POA or any other estate planning documents, contact Mastry Law.

Reference: Tri-County (MI) Times (January 24, 2019) “Power of attorney protects loved ones”

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”

As a New Parent, Have You Updated (or Created) Your Estate Plan?

You just had a baby. As a new parent you’re sleep-deprived, overwhelmed, and frazzled. Having a child dramatically changes one’s legacy and makes having an estate plan all the more necessary, says ThinkAdvisor’s recent article, “5 Legacy Planning Basics for New Parents.”

If you have a baby, estate planning is a must
After you have a baby, putting an estate plan in place is one of the most important and effective things you can do to protect your child.

Take time to talk through two high-priority items. Create a staggered checklist—starting with today—and set attainable dates to complete the rest of the tasks. Here are five things to put on that list:

  1. Will. This gives the probate court your instructions on who will care for your children, if something happens to both you and your spouse. A will also should name a guardian to be responsible for the children. Parents also should think about how they want to share their personal belongings and financial assets. Without a will, the state decides what goes to whom. Lastly, a will must name an executor.
  2. Beneficiaries. Review your beneficiary designations when you create your will, because you don’t want your will and designations (on life insurance policies and investments) telling two different stories. If there’s an issue, the beneficiary designation overrides the will. All accounts with a beneficiary listed automatically avoid probate court.
  3. Trust. Created by an experienced estate planning attorney, a trust has some excellent benefits, particularly if you have young children. Everything in a trust is shielded from probate court, including property. This avoids court fees and hassle. A trust also provides some flexibility and customization to your plan. You can instruct that your children get a sum of money at 18, 25 or 30, and you can say that the money is for school, among other conditions. The trustee will distribute funds, according to your instructions.
  4. Power of Attorney and Health Care Proxy. These are two separate documents, but they’re both used in the event of incapacitation. Their power of attorney and health care proxy designees can make important financial and medical decisions, when you’re incapable of doing so.
  5. Life Insurance. Most people don’t think about purchasing life insurance, until they have children. Therefore, if you haven’t thought about it, you’re not alone. If you are among the few who bought a policy pre-child, consider increasing the amount so your child is covered, if something should happen.

Reference: ThinkAdvisor (March 7, 2019) “5 Legacy Planning Basics for New Parents”

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