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Estate Planning Blog

Serving Clients Throughout North Central Missouri

Extended-Family

How Do You Split Estate in a Blended Family?

When it comes to blended families and estate planning, there are no guarantees, especially concerning estate planning. However, there are some classic mistakes to avoid, reports this recent article from AARP titled “Remarried With Children? 5 Estate Planning Mistakes to Avoid.”

Most people mean well. They want to protect their spouses and hope that their heirs will share in any proceeds when the second spouse dies. They want all the children to be happy. They also hope that the step siblings will still regard each other as “siblings” after the parents are passed. However, there are situations where children get shut out of their inheritance or an ex-spouse inherits it all, even if that wasn’t the plan. Here are five mistakes to avoid:

#1: Not changing named beneficiaries. People neglect to update their wills and beneficiary designations. This is something to do immediately, before or after the wedding. By changing the name of the beneficiary on your 401(k), for instance, it passes directly to the surviving spouse without probate. All financial accounts should be checked, as should life insurance beneficiaries. You can designate children as secondary beneficiaries, so they receive assets, in the event that both parents die.

While you’re doing that, update legal directives: including the medical power of attorney and the power of attorney. That is, unless you’d like your ex to make medical and financial decisions for you!

#2 Not updating your will. Most assets pass through the will, unless you have planned otherwise. In many second marriages, estate planning is done hoping the spouse inherits all the assets and upon their death, the remaining assets are divided among all of the children. There is nothing stopping a surviving spouse from re-writing their will and for the late spouses’ children to be left without anything from their biological parent. An estate planning attorney can explore different options to avoid this from occurring.

#3 Treating all heirs equally. Yes, this is a mistake. If one person came to the marriage with significantly more assets than another, care must be taken if the goal is to have those assets remain in the bloodline. If one person owned the house, for instance, and a second spouse and children moved into the house, the wish might be to have only the original homeowner’s children inherit the proceeds of the sale of the house. The same goes for pension and retirement accounts.

#4 Waiting to give until you’ve passed. If you are able to, it may be worth gifting to your heirs while you are still living, rather than gifting through a will. You may give up to $15,000 per person or $30,000 to a couple without having to pay a federal gift tax. Recipients don’t pay tax on most gifts. Let’s say you and your spouse have four children and they are all married. You may give each child and their spouse $30,000, without triggering any taxes for you or for them. It gets better: your spouse can also make the same size gift. Therefore, you and your spouse can give $60,000 to each couple, a total of $240,000 per year for all eight people and no taxes need be paid by anyone. This takes assets out of your estate and is not considered income to the recipients.

#5 Doing it yourself. If you’re older with a second marriage, ex-spouses, blended families and comingled assets, your estate planning will be complicated. Add a child with special needs or an aging parent and it becomes even more complex. Trying to create your own estate plan without a current and thorough knowledge of the law (including tax law) is looking for trouble, which is what you will leave to your children. The services of an estate planning attorney are a worthwhile investment, especially for blended families.

Reference: AARP (July 9, 2021) “Remarried With Children? 5 Estate Planning Mistakes to Avoid”

 

estate planning for singles

How Do I Stop Heirs from Foolishly Wasting Inheritance?

This is a problem solved by a trust—a “spendthrift” trust. With a spendthrift provision in a testamentary trust created under a will or an inheritance trust created under a revocable living trust, the trustee makes all decisions about distributions. This can be an effective means of controlling the flow of money.

A spendthrift trust, according to the article “Possible to spendthrift-proof a trust” from Record Courier, is created for the benefit and protection of a financially irresponsible person.

For a spendthrift trust, it may be better not to choose a family member or trusted friend to serve as the trustee. Such person might not live long enough or have the capacity to serve as trustee for as long as required, especially if the heir is a young adult. Conflicts among family members are common, when money is involved. An independent and well-established trust company or bank may be a better choice as a trustee. Large estates often go this route, since their services can be expensive. However, some retail banks do have a private wealth division. All options need to be explored.

Another benefit to a spendthrift trust—funds are protected against current or future creditors of the beneficiary. Let’s say a parent wants to leave money to a child, but knows the child has credit card debt already. Unless they are co-signers, the parent and their estate do not have a duty to pay an adult child’s debts. The spendthrift trust will not be accessible to the credit card company.

It is difficult to set up a spendthrift trust to protect one’s own money from creditors. This is something that must be approached only with an experienced estate planning attorney. This is because the rules are complex and there are significant limitations. If you wanted to create a spendthrift trust for yourself, you would have to completely give over control of assets to the trustee. There is no way to predict whether a court will consider the person to have relinquished enough control to make the trust valid.

This type of spendthrift trust may not be created with an intent to defraud, delay or hinder creditors. Doing so may make the trust invalid and any possible protection will be lost.

A spendthrift provision in a will is a clause used to protect a beneficiary from a creditor attaching prior debts against the beneficiary’s future inheritance. This means that the creditor may not force an heir or the estate’s executor to pay the beneficiary’s inheritance to the creditor, instead of the beneficiary. It also prevents the beneficiary from procuring a debt based on a future inheritance.

It is important to be aware that a spendthrift provision in a will or a spendthrift trust has limitations. The assets are only protected when they are in the trust or in the estate. Once a distribution is received, creditors can seek payment from the assets owned by the beneficiary.

Another qualifying factor: the spendthrift provision in the will must prevent both the voluntary and involuntary transfer of a beneficiary’s interest. The beneficiary may not transfer their interest to someone else.

The spendthrift trust and clause are mainly intended to protect a beneficiary’s interests from present and future creditors. They are not valid if their intent is to defraud others and may not be created to avoid paying any IRS debts.

Reference: Record Courier (July 10, 2021) “Possible to spendthrift-proof a trust”

 

Is Estate Planning for Everyone?

Do I Need Long-Term Care Insurance?

Women face some unique challenges as they get older. The Population Reference Bureau, a Washington based think tank, says women live about seven years longer than men. This living longer means planning for a longer retirement. While that may sound nice, a longer retirement increases the chances of needing long-term care.

Kiplinger’s recent article entitled “A Woman’s Guide to Long-Term Care” explains that living longer also increases the chances of going it alone and outliving your spouse. According to the Joint Center for Housing Studies of Harvard University, in 2018 women made up nearly three-quarters (74%) of solo households age 80 and over. Thus, women should consider how to plan for long-term care.

Ability to pay. Long-term care is costly. For example, the average private room at a long-term care facility is more than $13,000/month in Connecticut and about $11,000/month in Naples, Florida. There are some ways to keep the cost down, such as paying for care at home. Home health care is about $5,000/month in Naples, Florida. Multiply these numbers by 1.44 years, which is the average duration of care for women. These numbers can get big fast.

Medicare and Medicaid. Medicare may cover some long-term care expenses, but only for the first 100 days. Medicare does not pay for custodial care (at home long-term care). Medicaid pays for long-term care, but you have to qualify financially. Spending down an estate to qualify for Medicaid is one way to pay for long-term care but ask an experienced Medicaid Attorney about how to do this.

Make Some Retirement Projections. First, consider an ideal scenario where perhaps both spouses live long happy lives, and no long-term care is needed. Then, ask yourself “what-if” questions, such as What if my husband passes early and how does that affect retirement? What if a single woman needs long-term care for dementia?

Planning for Long-Term Care. If a female client has a modest degree of retirement success, she may want to decrease current expenses to save more for the future. Moreover, she may want to look into long-term care insurance.

Waiting to Take Social Security. Women can also consider waiting to claim Social Security until age 70. If women live longer, the extra benefits accrued by waiting can help with long-term care. Women with a higher-earning husband may want to encourage the higher-earning spouse to delay until age 70, if that makes sense. When the higher-earning spouse dies, the surviving spouse can step into the higher benefit. The average break-even age is generally around age 77-83 for Social Security. If an individual can live longer than 83, the more dollars and sense it makes to delay claiming benefits until age 70.

Estate Planning. Having the right estate documents is a must. Both women and men should have a power of attorney (POA). This legal document gives a trusted person the authority to write checks and send money to pay for long-term care.

Reference: Kiplinger (July 11, 2021) “A Woman’s Guide to Long-Term Care”

 

estate planning

What’s the Latest on Country Star Charley Pride’s Estate?

Grammy-winning country star Charley Pride died from COVID-19 in December, and an article from 5 NBC DFW entitled “Charley Pride’s ‘Secret’ Son Contests Will” reports that his son Tyler has revealed the family “secret.” His story started with an affair between his mother, a flight attendant, and his father, country music’s first Black superstar.

At the time of their relationship, Charley was already married to his wife of many years, Rozene, and the couple had three children. A paternity test later confirmed that Tyler was also Charley’s son.

“We made it through and had the best relationship that we could, per the circumstances,” said Tyler. “We still got to talk on the phone a lot and get to know each other that way, but it was difficult because of his situation and having to keep peace at home, as he put it over and over.”

Tyler said his father visited when he was able, and even after he turned 18 and Charley’s obligation to financially support him ended, Tyler said his father stayed involved in his life. However, when Charley died of COVID-19, Tyler said the family did not even tell him that his father was sick. In fact, Tyler’s name was not included in the obituary, and he said he was not allowed to attend the funeral.

Tyler also wasn’t named in Charley’s will, which Tyler has filed a lawsuit to contest. He says there was undue influence by Rozene over her husband, who’d publicly acknowledged mental health struggles.

“I don’t think he could imagine that this is going on right now and I don’t think it’s what he wanted. Because he always said he wanted his kids taken care of equally. Up until his death, that’s what I was told every time we talked,” said Tyler.

Rozene’s statement said, “Tyler does not have a valid claim, so he has resorted to a hurtful smear campaign. His attack on Charley hurts me and his other children deeply, but we all know that Charley was doing great physically and mentally and making his own decisions, until he was taken down by COVID. Much of what Tyler is saying about Charley and me is a lie that Tyler hopes reporters will spread to grab headlines.”

However, Tyler says this isn’t a financial fight. It’s instead about honoring his father’s wishes and finally being recognized as his son.

“He is my dad and I’m proud to be able to tell that part of the story because I am part of his story,” said Tyler.

Reference: 5 NBC DFW (June 11, 2021) “Charley Pride’s ‘Secret’ Son Contests Will”

 

Approaching Retirement

Can I Be Certain My Estate Plan Is Successful?

Forbes’ recent article entitled“7 Steps to Ensure a Successful Estate Plan” listed seven actions to take for a good estate plan:

  1. Educate and communicate. A big reason estate plans aren’t successful, is that the next generation isn’t ready and they waste or mismanage the assets. You can reduce those risks and put your estate in a trust to allows children limited access. In addition, you can ensure that the children have a basic knowledge of and are comfortable with wealth. Children also benefit from understanding their parents’ philosophy about managing, accumulating, spending and giving money.
  2. Anticipate family conflicts. Family conflicts can come to a head when one or both parents pass, and frequently the details of the estate plan itself cause or exacerbate family conflicts or resentments. Many people just think that “the kids will work it out,” or they create conflicts by committing classic mistakes, like having siblings with different personalities or philosophies jointly inherit property or a business.
  3. Plan before making gifts. In many cases, gift giving is a primary component of an estate plan, and gifts can be a good way for the next generation to become comfortable handling wealth. Rather than just automatically writing checks, the older generation should develop a strategy that will maximize the impact of their gifts. Cash gifts can be spent quickly, but property gifts are more apt to be kept and held for the future.
  4. Understand the basics of the plan. Few people understand the basics of their estate plans, so ask questions and get comfortable with what your estate planning attorney is saying and recommending.
  5. Organize, simplify, and prepare. A major reason it takes a lot of time and expense in settling an estate, is that the owner didn’t make it easy for the executor. The owner may have failed to make information easy to locate. An executor must understand the details of the estate.
  6. Have a business succession plan. Most business owners don’t have a real succession plan. This is the primary reason why few businesses survive the second generation of owners. The value of a small business rapidly declines, when the owner leaves with no succession plan in place. A succession plan designates the individual who’ll run the business and who will own it, as well as when the transitions will happen. If no one in your family wants to run the business, the succession plan should provide that the company is to be sold when you retire or die. A business must be managed and structured, so it’s ready for a sale or inheritance, which frequently entails improving accounting and other information systems.
  7. Fund living trusts. A frequent estate planning error is the failure to fund a revocable living trust. The trust is created to avoid probate and establish a process under which trust assets will be managed. However, a living trust has no impact, unless it’s given legal title to assets. Be sure to transfer legal ownership of assets to the trust.

Reference: Forbes (May 21, 2021) “7 Steps to Ensure a Successful Estate Plan”

 

Retirement Planning

Succession Planning for Farm Transition and Estate Planning

If you think it’s bad that 60% of farmers don’t have a will, here’s what’s even worse: 89% don’t have a farm transfer plan, as reported in the recent article “10 Farm Transition and Estate Planning Mistakes from Farm Journal’s Pork Business. Here are the ten most commonly made mistakes farmers make. Substitute the word “family-owned business” for farm and the problems created are identical.

Procrastination. Just as production methods have to be updated, so does estate planning. People wait until the perfect time to create the perfect plan, but life doesn’t work that way. Having a plan of some kind is better than none at all. If you die with no plan, your family gets to clean up the mess.

Failing to plan for substitute decision-making and health care directives. Everyone should have power of attorney and health care directive planning. A business or farm that requires your day-in-day-out supervision and decision making could die with you. Name a power of attorney, name an alternate POA and have every detail of operations spelled out. You can have a different person to act as your agent for running the farm and another to make health care decisions, or the same person can take on these responsibilities. Consult with an estate planning attorney to be sure your documents reflect your wishes and speak with family members.

Failing to communicate, early and often. There’s no room for secrecy, if you want your farm or family business to transfer successfully to the next generation. Schedule family meetings on a regular basis, establish agendas, take minutes and consider having an outsider serve as a meeting facilitator.

Treating everyone equally does not fit every situation. If some family members work and live on the farm and others work and live elsewhere, their roles in the future of the farm will be different. An estate planning attorney familiar with farm families will be able to give you suggestions on how to address this.

Not inventorying assets and liabilities. Real property includes land, buildings, fencing, livestock, equipment and bank accounts. Succession planning requires a complete inventory and valuation of all assets. Check on how property is titled to be sure land you intend to leave to children is not owned by someone else. Don’t neglect liabilities. When you pass down the farm, will your children also inherit debt? Everyone needs to know what is owned and what is owed.

Making decisions based on incorrect information. If you aren’t familiar with your state’s estate tax laws, you might be handing down a different sized estate than you think. Here’s an example: in Iowa, there is no inheritance tax due on shares left to a surviving spouse, lineal descendants or charitable, religious, or educational institutions. If you live in Iowa, do you have an estate plan that takes this into consideration? Do you know what taxes will be owed, and how they will be paid?

Lack of liquidity. Death is expensive. Cash may be needed to keep the business going between the date of death and the settling of the estate. It is also important to consider who will pay for the funeral, and how? Life insurance is one option.

Disorganization. Making your loved ones go through a post-mortem scavenger hunt is unkind. Business records should be well-organized. Tell the appropriate people where important records can be found. Walk them through everything, including online accounts. Consider using an old-fashioned three-ring binder system. In times of great stress, organization is appreciated.

No team of professionals to provide experience and expertise. The saying “it takes a village” applies to estate planning and farm succession. An accountant, estate planning attorney and financial advisor will more than pay for their services. Without them, your family may be left guessing about the future of the farm and the family.

Thinking your plan is done at any point in time. Like estate planning, succession planning is never really finished. Laws change, relationships change and family farms go through changes. An estate plan is not a one-and-done event. It needs to be reviewed and refreshed every few years.

Reference: Farm Journal’s Pork Business (June 28, 2021) “10 Farm Transition and Estate Planning Mistakes

 

estate planning for Retirement

Aging Parents and Blended Families Create Estate Planning Challenges

Law school teaches about estate planning and inheritance, but experience teaches about family dynamics, especially when it comes to blended families with aging parents and step siblings. Not recognizing the realities of stepsibling relationships can put an estate plan at risk, advises the article “Could Your Aging Parents’ Estate Plan Create A Nightmare For Step-Siblings?” from Forbes. The estate plan has to be designed with realistic family dynamics in mind.

Trouble often begins when one parent loses the ability to make decisions. That’s when trusts are reviewed for language addressing what should happen, if one of the trustees becomes incapacitated. This also occurs in powers of attorney, health care directives and wills. If the elderly person has been married more than once and there are step siblings, it’s important to have candid discussions. Putting all of the adult children into the mix because the parents want them to have equal involvement could be a recipe for disaster.

Here’s an example: a father develops dementia at age 86 and can no longer care for himself. His younger wife has become abusive and neglectful, so much so that she has to be removed from the home. The father has two children from a prior marriage and the wife has one from a first marriage. The step siblings have only met a few times, and do not know each other. The father’s trust listed all three children as successors, and the same for the healthcare directive. When the wife is removed from the home, the battle begins.

The same thing can occur with a nuclear family but is more likely to occur with blended families. Here are some steps adult children can take to protect the whole family:

While parents are still competent, ask who they would want to take over, if they became disabled and cannot manage their finances. If it’s multiple children and they don’t get along, address the issue and create the necessary documents with an estate planning attorney.

Plan for the possibility that one or both parents may lose the ability to make decisions about money and health in the future.

If possible, review all the legal documents, so you have a complete understanding of what is going to happen in the case of incapacity or death. What are the directions in the trust, and who are the successor trustees? Who will have to take on these tasks, and how will they be accomplished?

If there are any questions, a family meeting with the estate planning attorney is in order. Most experienced estate planning attorneys have seen just about every situation you can imagine and many that you can’t. They should be able to give your family guidance, even connecting you with a social worker who has experience in blended families, if the problems seem unresolvable.

Reference: Forbes (June 28, 2021) “Could Your Aging Parents’ Estate Plan Create A Nightmare For Step-Siblings?”

 

estate planning

How to Prepare for Higher Taxes

Taxing the appreciation of property on gifting or at death as capital gains or ordinary income is under scrutiny as a means of raising significant revenue for the federal government. The Biden administration has proposed this but proposing and passing into law are two very different things, observes Financial Advisor in the article “How Rich Clients Should Prepare For A Biden Estate Tax Regime.”

The tax hikes are being considered as a means of paying for the American Jobs Act and the American Families Act. Paired with the COVID-19 relief bill, the government will need a total of $6.4 trillion over the course of a decade to cover those costs. Reportedly, both Republicans and Democrats are pushing back on this proposal.

A step-up in basis recalculates the value of appreciated assets for tax purposes when they are inherited, which is when the asset’s value usually is higher than when it was originally purchased. For the beneficiary, the step-up in basis at the death of the original owner reduces the capital gains tax on the asset. Taxes are reduced significantly, or in some cases, completely eliminated.

For now, taxpayers pay an estate tax on the value of the assets and the basis of appreciated assets is stepped up to fair market value. The plan under consideration would treat appreciated assets owned at the time of death as sold, which would trigger income tax and subject those assets to estate tax.

Biden’s proposal would also subject many families to the estate tax, which they would not otherwise face, since the federal estate tax exclusion is still historically high—$11.7 million for individuals and $23.4 million for married couples. Let’s say a widowed mother dies with a $3 million estate. Most of the value of the estate is the home she lived in with her spouse for the last four decades. Her estate would not owe any federal tax, but the deemed sale of a highly appreciated home would generate income tax liability.

The proposal allows a $1 million per individual and $2 million per married couple exclusion from gain recognition on property transferred by gift or owned at death. The $1 million per person exclusion is in addition to exclusions for property transfers of tangible personal property, transfers to a spouse, transfers to charity, capital gains on certain business stock and the current exclusion of $250,000 for capital gain on a personal residence.

How should people prepare for what sounds like an unsettling proposal but may end up at a completely different place?

For some, the right move is transferring properties now, if it makes sense with their overall estate plan. Regardless of what Congress does with this proposal, the estate tax exemption will sunset to just north of $5 million (due to inflation adjustments) from the current $11.7 million. However, the likelihood of the proposal passing in its present state is low. The best option may be to make any revisions focused on the change to the estate tax exemption levels.

Reference: Financial Advisor (June 28, 2021) “How Rich Clients Should Prepare For A Biden Estate Tax Regime”

 

Retirement Planning

Reviewing Estate Plans Matters

If your estate plan or your parent’s estate plan hasn’t been reviewed in the last four years—or the last forty years—it’s time for an estate plan check-up—sooner, not later. Besides the potential for costing a lot to correct, says a recent article in Forbes entitled “5 Reasons To Have Your Parents’ Estate Plan Reviewed,” the documents may no longer work to achieve your parent’s wishes.

Rather than fix a messy situation after death, have an experienced estate planning attorney review the documents now. Here’s why.

Stale documents are anathema to financial institutions. If a power of attorney is more than twenty years old, don’t expect it to be received well by a bank or brokerage house. The financial institution will probably want to get an affidavit from the attorney who originally created the document to attest to its validity. Start with a hunt to find said attorney, and then hope that nothing occurs between the time that you request the affidavit and the time it arrives. For one client, the unexpected death of a parent during this process created all kinds of headaches. A regular review and refresh of estate documents would have prevented this issue.

State laws change. Changes to state laws change how estates are handled. They may be positive changes that could benefit your parents and your family. Let’s say your mother’s will leaves all of the contents of her home to numerous people. Locating all of these people becomes costly, especially if the will needs to be probated. Many states now allow for a separate document that lets personal items be disposed of, without being part of the probated estate. However, if the will has not been reviewed in ten or twenty years, you won’t know about this option.

Languages in estate planning documents change. In addition to changes in the law, there are changes to language that may have a big impact on the estate. Many attorneys have changed the language they use for trusts based on the SECURE Act. If your parent has a retirement account payable to a trust, it is critical that this language be modified, so that it complies with the new law. Lacking these updates, your parent’s estate may be subject to an increase in taxes, fees, or penalties.

Estate laws change over time. Recent years have seen major changes to estate law, from the aforementioned SECURE Act to changes in federal exclusions and gift taxes. Is your parent’s estate plan (or yours) in compliance with the new laws? If assets have changed since the last estate plan was done, there may be tax law changes to be incorporated. Are there enough assets available to pay the taxes from the estate or the trusts? If many accounts pass by beneficiary designation, getting beneficiaries to come up with the cash to pay the tax bill may be problematic.

The decedent’s wishes may not be followed, if documents are not updated. Here’s an example. A man came to an estate planning attorney’s office with his father’s will, which had not been updated. His father died, having been predeceased by the father’s sister. The man was the only living child. He and his father had a mutual understanding that the son would inherit the entire estate on the death of his father. However, his father’s sister had also died, and the will stated that her children would receive the sister’s share. The man had to share his inheritance with estranged nieces and nephews. Had the will been reviewed with an attorney, this mishap could have been prevented very easily.

Reference: Forbes (May 25, 2021) “5 Reasons To Have Your Parents’ Estate Plan Reviewed”