Does Divorce Have an Impact on Estate Planning?

May 31, 2023

Even if your divorce is amicable, you still need to make changes to the paperwork, including your will and power of attorney. Yahoo News’ recent article entitled, “I’m Divorcing. Will That Impact My Estate Planning?” says to ask an experienced estate planning attorney how to protect your assets against potential loss due to a potential divorce. Here are some tips:

Revise Your Will. If you have a will, and if it’s written so that your soon-to-be ex will get all or most of your assets, you may want to change how to split up your assets after your death. Check with an estate planning attorney because state laws handle the assets in a will differently. Many states say that gifts to your ex are automatically revoked.

Change Your Trust. If you have a trust in your estate plan, your spouse may be designated as the trustee, so change who will be dispersing your assets.

Review Your Insurance Policies. You’ll want to remove your spouse from all of your insurance policies. However, if you have young children your ex-spouse will be raising, you may want to keep your ex-spouse as a beneficiary. If you were covered on your spouse’s health insurance plan while married, you’ll need to get your own policy. Also consider changing the beneficiaries on your life insurance policy if you’re worried about your future ex-spouse cashing in if something happens to you.

Change Your Power of Attorney. If your spouse is named as your medical or financial power of attorney, change that. Do that by the following steps:

Notify the person currently holding power of attorney
Make the change in writing
Include all required language
Notarize and, if necessary, record; and
Notify all concerned parties.

Divide Retirement Accounts. There are several factors to consider as retirements are divided, like the type of account and when the earnings were received. Before defined contribution plans can be split, the court must issue a qualified domestic relations order (QDRO). The court will determine which properties are marital and which are separate. When the judge signs the QDRO, it lets plan administrators enforce it. The order applies to all plans governed under the Employee Retirement Income Security Act (ERISA) of 1974, like 401(k) plans, 403(b) plans, and Thrift Savings Plan (TSP).

Reference: Yahoo News (Feb. 3, 2023) “I’m Divorcing. Will That Impact My Estate Planning?”

What You Need to Know About Estate Taxes

May 30, 2023

Most Americans don’t have to worry about federal estate and gift taxes. However, if you’re even moderately wealthy and want to transfer wealth to your children and grandchildren, you’ll want to know how to protect your ability to pass wealth to the next generation. A recent article from Woman’s World, “If You’re Rich, Read This—Your Estate Taxes Could Be at Stake (And Your Kids at Risk of Losing Their Inheritance” provides a good overview of estate taxes. If any of these issues are relevant to you, meet with an experienced estate planning attorney to learn how your state’s tax laws may impact your children’s inheritance.

A well-created estate plan can help you achieve your goals and minimize tax liability. There are three types of taxes the IRS levies on gifts and inheritances.

Few families worry about federal estate taxes for now. However, this will change in the future, and planning is always wiser. In 2023, the federal estate tax exemption is $12.92 million. Estates valued above this level have a tax rate of 40% on assets. People at this asset level usually have complex estate plans designed to minimize or completely avoid paying these taxes.

An estate not big enough to trigger federal estate taxes may still owe state estate taxes. Twelve states and the District of Columbia impose their own state taxes on residents’ estates, ranging from 0.8 percent to 20 percent, and some have a far lower exemption level than the federal estate tax. Some begin as low as $one million.

Six states impose an inheritance tax ranging between 10 percent and 18 percent. The beneficiary pays the tax, even if you live out of state. Spouses are typically exempt from inheritance taxes, which are often determined by kinship—sons and daughters pay one amount, while grandchildren pay another.

Taxpayers concerned about having estates big enough to trigger estate or inheritance taxes can make gifts during their lifetime to reduce the estate’s tax exposure. In 2023, the federal government allows individuals to make tax-free gifts of up to $17,000 in cash or assets to as many people as they want every year.

A couple with three children could give $17,000 to each of their children, creating a tax-free transfer of $102,000 to the next generation ($17,000 x 3 children x 2 individuals). The couple could repeat these gifts yearly for as long as they wished. Over time, these gifts could substantially reduce the size of their estate before it would be subject to an estate tax. It also gives their heirs a chance to enjoy their inheritance while their parents are living.

It should be noted that gifts over $17,000 in 2023 count against the individual estate tax limit. Therefore, your federal estate tax exemption will decline if you give more than the limit. This is why it’s essential to work with an estate planning attorney who can help you structure these gifts and discuss other estate tax and asset protection strategies.

Reference: Woman’s World (April 5, 2023) “If You’re Rich, Read This—Your Estate Taxes Could Be at Stake (And Your Kids at Risk of Losing Their Inheritance”

Bernie Sanders Again Presents Plan for Higher Estate Taxes

May 12, 2023

Sen. Bernie Sanders, with Senator Elizabeth Warren and Representative Jimmy Gomez, are introducing new legislation targeting heirs who receive over $3.5 million. Named the: For the 99.5 Percent Act,” the proposed bill would impose a 45% tax on estates worth $3.5 million and a 65% tax on estates worth over $1 billion.

It’s similar to legislation that Sanders has tried to get passed in several variations over the last few years. It comes as some Republicans seek to roll back the estate tax entirely, says Insider’s recent article entitled, “Bernie Sanders once again wants to raise taxes on rich heirs.”

“It is unacceptable that working families across the country today are struggling to file their taxes on time and put food on the table while the wealthiest among us profit off of enormous tax loopholes and giant tax breaks,” Sanders said in a press release.

The amount of money exempt from the estate tax has increased significantly over the last two decades. For 2023, the tax exemption stands at just under $13 million, a large bump from around $12 million in 2022.

As of 2019, the most recent year for which the IRS has data, only 0.08% of adult deaths were eligible for the estate tax. The Tax Policy Center likewise saw that fewer than 0.1% of people who would die in 2020 would owe estate tax. The estate tax rate only goes up to 40% on estates worth a million dollars more than the exempted amount.

The senator’s proposed legislation also seeks to address the loopholes that the ultra-wealthy can use to protect their assets from taxation, like dynasty trusts that don’t incur estate or gift taxes when the family doles out money from a passed-down trust.

However, like Sanders’ previous attempts to hike taxes on the rich, the proposal is unlikely to make it far.

Even when Democrats held both chambers of Congress, centrist sentiment stalled proposed hikes on big corporations and closing loopholes for private equity investors.

With tax-averse Republicans holding the House, any legislation to hike rates will not be successful.

Reference: Insider (April 18, 2023) “Bernie Sanders once again wants to raise taxes on rich heirs”

More Heirs Found for Pope Benedict XVI’s Estate

May 10, 2023

The archbishop who assisted Pope Benedict XVI has been trying to handle the late pontiff’s estate, but has found more heirs than he was expecting, reports Fox News’ recent article entitled, “Vatican searching for heirs to Pope Benedict XVI’s estate.”

Born in Marktl, Bavaria, Pope Benedict XVI, passed away last year at the age of 95.

Some estimates show Pope Benedict’s net worth was approximately $2.5 million. After he stepped down as the head of the Catholic Church, he continued to receive a monthly pension of about $3,300, CNBC reported in 2013.

He was buried on January 5, 2023, in St. Peter’s Basilica, Vatican City. There are 90 other popes buried under the church.

Archbishop Georg Gänswein, Benedict’s personal secretary, told Vatican News that he was surprised to find he had five individuals with claims to Pope Benedict’s estate.

“This has been very interesting for me. I thought he had two relatives, two cousins, but there are five cousins in total,” the archbishop said, according to translations from Catholic News Agency.

He continued, “By law I have to write to the cousins who are the closest relatives, and also by law I have to ask them, ‘Do you accept the inheritance, or do you not accept it?’”

What money or assets are to be inherited from the late pontiff is not publicly known.

Pope Benedict XVI spent his last few years living simply in a Vatican apartment.

Gänswein told the newspaper Il Messaggero that “other personal items, from watches to pens, from paintings to liturgical items, were included in a list meticulously drawn up by Benedict XVI before he died.”

The late pope’s vast library was willed to the Vatican and the Joseph Ratzinger Vatican Foundation.

Reference: Fox News (March 22, 2023) “Vatican searching for heirs to Pope Benedict XVI’s estate”

What Is the Purpose of an Executor?

May 9, 2023

It is flattering to be named the executor for a loved one. It demonstrates an extremely high level of trust and respect, as the person considers you capable enough to fulfill their wishes when they have passed. However, just because you have been named executor does not mean you are obliged to serve, says the recent article, “What are the responsibilities of an executor?” from Daily Local News.

Suppose you decide the responsibilities of being an executor are more than you’re willing or able to handle. In that case, you can renounce your position as executor, and a successor executor named in the will becomes the executor. If the person who named you executor did not name a successor, the court will select a person for the role.

If you have any doubts about this role, please tell the person who asks you to serve, so they can make other arrangements.

If you choose to serve, you’ll want to understand what the job entails. Each estate is unique, and its administration depends upon the assets owned by the deceased, what debts they had and their wishes for distribution.

Some duties are the same regardless of the complexity or simplicity of the estate. For example, the executor often makes arrangements with the funeral home and provides information for the death certificate. Once the death certificate is issued, the executor probates the will with the local court in the county where the decedent last lived. Most people retain an estate planning attorney to guide them through probate and estate administration.

Once the petition for probate has been filed and the court issues Letters Testamentary empowering you to serve as the executor, the administration begins. Some, but not all, of the tasks, include:

Gathering assets
Notifying beneficiaries named in the will
Obtaining an EIN federal tax number for the estate
Opening an estate checking account
Verifying and paying the debts of the decedent
Liquidating and transferring estate assets into the estate checking account
Filing a final personal income tax return
Providing an accounting to beneficiaries and distributing the estate in accordance with the decedent’s will
Filing an estate tax return.

The executor also handles other tasks, such as selling the contents of the person’s residence and home.

The executor is entitled to reasonable compensation for their services. The amount is treated as taxable income. Determining the fee depends on the value and complexity of the estate and the amount of time it took to settle the estate. Some family members waive a fee, while others feel their time deserves compensation.

An estate planning attorney can provide invaluable assistance and prevent expensive mistakes from occurring. If the estate involves businesses, complex ownership structures, trusts, or other sophisticated assets, it is worthwhile to have the help of an experienced professional.

Reference: Daily Local News (March 22, 2023) “What are an executor’s responsibilities?”

Single Parents Need Estate Planning

May 5, 2023

For single parents, estate planning is an even greater need than for married couples, advises a recent article, “Estate planning 101 for single parents,” from The Orange County Register. However, even single parents blessed with a strong support system need an estate plan to protect their children. Here’s why.

An estate plan names a guardian in the will. Who will raise your children and become their guardian if you unexpectedly die or become incapacitated? If the other parent is surviving and has not lost parental rights, they will have custody of the child or children as a matter of law. This is not guardianship. They are the legal parent.

However, if the other parent is deceased or their parental rights have been terminated, the court will need to grant guardianship. You need two documents to name a person whom you would want to raise your child. One is your will. It’s a good idea to list more than one person, in case someone named cannot or doesn’t wish to serve.

For example, “My mother, Sue Sandler, and if she cannot serve, then my brother Mike Sandler, and then my friend Leslie Strong.” There’s no guarantee that the court will appoint any of these people. However, the court may consider the parent’s preferences.

Depending upon your state, you could have a “Nomination of Guardian” document separate from your will. Remember that your will becomes effective only upon your death. If you become incapacitated, this document would be considered when determining who will be named guardian.

You’ll also want a health care directive. This document states who is authorized to make health care decisions for you, if you cannot, and provides general directions about what kind of care you want to receive.

If there are minor children, a “Nomination of Health Care Agent” should also be in place, where you nominate another person to make healthcare decisions for your children if you cannot. For example, if you and your children are in a car accident and you are incapacitated and can’t respond to authorize health care, hospitalization, or other care for your child.

A will and a trust are critical if you have minor children. The will sets forth your nomination of guardians, and a trust can hold your assets, including life insurance proceeds and any other significant assets for the benefit of your children as directed in the trust. The trust is managed by the successor trustee appointed in the trust document. Even if the other parent lives and the child lives with them, the trust is controlled by the trustee, so your ex cannot access the money and the children receive the funds according to your wishes.

If you have only a will and die, your estate will go through probate and assets will effectively be put into a trust for the child and be given to the child when they become of legal age. However, most 18 or 21-year-olds are not mature enough to manage large sums of money, so a trust managed by a responsible adult with a framework for distribution will ensure that the assets are protected.

Once a child reaches the age of legal majority, they are considered an adult. As a result, the nomination of a guardian is no longer necessary, nor is the nomination of a health care agent. However, this is when they need to execute their health care directive, power of attorney and HIPAA form. If they were to become seriously sick, even as their parent, you would not have any legal right to discuss their care or treatment with health care providers without these documents.

Reference: The Orange County Register (March 12, 2023) “Estate planning 101 for single parents”

When Can I Sue an Executor?

May 3, 2023

When someone dies, an executor is charged with overseeing the distribution of someone’s assets according to the will or state inheritance laws if they die without a will, explains, AOL’s recent article entitled, “When Can a Beneficiary Sue an Executor?”

An executor is someone who is appointed either through a will or by the court to oversee the probate process.

An estate beneficiary is a person named in a will to inherit assets from someone else. Beneficiaries and heirs may be the same individuals or different people. A beneficiary is typically named in a will or trust. An heir is a person identified by state inheritance laws as having the right to receive assets from an individual’s estate. Heirs are typically the decedent’s spouse, children and other relatives. A beneficiary’s rights include the following:

Receive assets from the estate of the deceased person that they’re entitled to according to the terms of their will or state law promptly;
Request and receive information about the administration of the estate, including financial details; and
Ask for the removal of an executor.

Beneficiaries also have the right to sue the executor if they think there’s a breach of fiduciary duty, which requires executors to act in the best interests of the beneficiaries or other persons they represent in financial matters. For a beneficiary to sue an executor, they have to have grounds for doing so. This includes:

Failing to provide beneficiaries with financial statements regarding the estate when you request them
Delaying in the distribution of assets without any legal reasoning for doing so
Appearing to favor one beneficiary over another when distributing assets
Mismanaging or misusing estate assets for their benefit
Making risky investments with estate assets
Failing to meet financial obligations associated with the management of the estate; and
Having an obvious conflict of interest because they’re also a beneficiary of the estate.

Reference: AOL (March 20, 2023) “When Can a Beneficiary Sue an Executor?”

You Can Avoid Unintended Consequences

May 1, 2023

The mistake can be as simple as signing a document without understanding its potential impact on property distribution, failing to have a last will and testament properly executed, or expecting a result different from what the will directs. Unfortunately, these unintended consequences are relatively common, says the article “Advice for avoiding unintended issues in estate planning” from The News-Enterprise.

The most common mistake that leads to unintended consequences is leaving everything to a spouse in a blended family. Even if children don’t have a close relationship with their stepparent, they’re willing to get along for the sake of their biological parent. However, when the first spouse dies, the decedent’s beneficiaries are generally disinherited if the surviving spouse receives the entire estate.

If the family truly has blended and maintains close relationships, the surviving spouse may ensure that the decedent’s children receive a fair share of the estate. However, if the relationships are tenuous at best, and the surviving spouse changes their will so their biological children receive everything, the family is likely to fracture.

Using a revocable living trust as the primary planning tool is a safer option. An experienced estate planning attorney can create the trust to allow full flexibility during the lifetime of both spouses. Upon the first spouse’s death, part of the estate is still protected for the decedent’s intended beneficiaries.

This way, the surviving spouse has full use of marital assets but can only change beneficiaries for his or her portion of the estate, protecting both the surviving spouse and the decedent’s intended beneficiaries.

Another common mistake occurs when married couples execute their last will and testaments with different beneficiaries. For example, if they’ve named each other as the primary beneficiary, only the survivor will have property to leave to loved ones.

An alternative is to decide what the couple wants to happen to the estate as a whole, then include fractional shares to all beneficiaries, not just the one spouse’s beneficiaries. This protects everyone.

Many people assume that if they die without a will, their spouse will inherit everything. Unfortunately, this is not always the case, and a local estate planning attorney will be able to explain how your state’s laws work when there is no will. Children or other family members are often entitled to a share of the estate. This may not be terrible if the family is close. However, if there are estranged relationships, it can lead to the wrong people inheriting more than you’d want.

Failing to plan in case an heir becomes disabled can cause life-altering problems. If an heir develops a disability and receives government benefits, an inheritance could make them ineligible. The problem is that we don’t know what state of health and abilities our heirs will be in when we die, and few will want their estate to be used to reimburse the state for the cost of care. A few extra provisions in a professionally prepared estate plan can result in significant savings for all concerned.

Estate planning is about more than signing off on a handful of documents. It requires thoughtful consideration of goals and potential consequences. Can every single outcome be anticipated? Not every single one, but certainly enough to be worth the effort.

Reference: The News-Enterprise (March 25, 2023) “Advice for avoiding unintended issues in estate planning”

What Exactly Is Probate Court?

April 28, 2023

Probate is started when a person files a petition for probate with the state’s probate court. The petition is normally filed by the executor of the deceased’s will or by a member of the deceased’s family.

Investopedia’s recent article entitled, “What Is Probate Court?” explains that the individual filing the petition must also file the original will and a copy of the certified death certificate.

In the first hearing, the probate court appoints the executor for the deceased’s estate. The executor (or administrator, if there’s no will) is responsible for distributing the deceased’s estate to the proper beneficiaries, among other administrative duties.

The judge will provide the executor with Letters Testamentary (or Letters of Administration), which give the executor the authority to pay bills, sell assets and perform other duties.

Before accepting the Letters and performing their duty, the executor may need to post bond (to protect the estate from any adverse consequences of their actions). However, this is fairly rare.

The executor then will do the following:

Notify those to whom the deceased owed money (creditors)
Notify beneficiaries
Inventory the deceased’s assets
Pay outstanding bills
Sell assets if necessary to pay what’s owed; and
Pay taxes and file a final tax return.

Once those tasks are completed, the executor distributes the remaining assets to the beneficiaries, according to the will’s provisions.

The probate court monitors the executor’s activities and handles issues that may arise. For instance, if the executor objects to a claim, the court will hear the evidence and make a decision.

The executor must usually provide an accounting of how the estate was handled. Once the court approves this, it closes the probate process.

An informal probate process, also called summary probate that requires less court oversight can be used if it’s a small estate, the will is simple, all parties are in agreement with it and no objections are made.

When a person dies with no will—known as intestacy—the court will distribute the decedent’s property to their next of kin, according to the state probate laws.

Investopedia (Sep. 21, 2022) “What Is Probate Court?”

What Is the Meaning of Step-Up in Basis?

April 26, 2023

This aspect of the tax code changes the value—known as the “cost basis”—of an inherited asset, including stocks or property. As a result, the heir may receive a reduction in the capital gains tax they must pay on the inherited assets. For others, according to the recent article, “What Is Step-Up In Basis?” from Forbes, it allows families to avoid paying what would be a normal share in capital gains taxes by passing assets across generations. Estate planning attorneys often incorporate this into estate plans for their clients to minimize taxes and protect assets.

Here’s how it works.

If someone sells an inherited asset, a step-up in basis may protect them from higher capital gains taxes. A capital gains tax occurs when an asset is sold for more than it originally cost. A step-up in basis considers the asset’s fair market value when it was inherited versus when it was first acquired. This means there has been a “step-up” from the original value to the current market value.

Assets held for generations and passed from original owners to heirs are never subject to capital gains taxes, if the assets are never sold. However, if the heir decides to sell the asset, any tax is assessed on the new value, meaning only the appreciation after the asset had been inherited would face capital gains tax.

For example, Michael buys 200 shares of ABC Company stock at $50 a share. Jasmine inherits the stock after Michael’s death. The stock’s price is valued at $70 a share by then. When Jasmine decides to sell the shares five years after inheriting them, the stock is valued at $90 a share.

Without the step-up in basis, Jasmine would have to pay capital gains taxes on the $40 per share difference between the price originally paid for the stock ($50) and the sale price of $90 per share.

Other assets falling under the step-up provision include artwork, collectibles, bank accounts, businesses, stocks, bonds, investment accounts, real estate and personal property. Assets not affected by the step-up rule are retirement accounts, including 401(k)s, IRAs, pensions and most assets in irrevocable trusts.

If someone gives a gift during their lifetime, the recipient retains the basis of the person who made the gift—known as “carryover basis.” Under this basis, capital gains on a gifted asset are calculated using the asset’s purchase price.

Say Michael gave Jasmine five shares of ABC Company stock when it was priced at $75 a share. The carryover basis is $375 for all five stocks. Then Jasmine decides to sell the five shares of stock for $150 each, for $750. According to the carryover basis, Jasmine would have a taxable gain of $375 ($750 in sale proceeds subtracted by the $375 carryover basis = $375).

The gift giver is usually responsible for any gift tax owed. The tax liability starts when the gift amount exceeds the annual exclusion allowed by the IRS. For example, if Michael made the gift in 2018, he could avoid gift taxes on a gift he gave to Jasmine that year with a value of up to $15,000. This gift tax exemption for 2023 is $17,000.

Reference: Forbes (March 28, 2023) “What Is Step-Up In Basis?”

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