Michigan Estate Planning Blog

Why Would I Need a Will or a Trust?

 

Say that some time ago-- when your family was still young, and the estate tax limit was $600,000—you created a revocable and an irrevocable life insurance trust (ILIT). This was designed to take care of your family after your death. However, at this point, everyone is financially independent, and the value of your estate is far less than the taxable threshold of $11.7 million.
If the trust is terminated, the beneficiaries will get a step-up basis at your death and pay taxes at their own rates, rather than the trust rate. Would you need a will, if all the accounts have your children as beneficiaries? The ILIT was also funded with a term life insurance policy that is going to expire soon.
Nj.com’s recent article entitled “Should I terminate this trust and do I need a will?” says that there are number of issues to address. The purpose of an irrevocable life insurance trust (ILIT) is to own and control term or permanent life insurance policies, so that the policy proceeds aren’t included in the insured’s taxable estate upon his or her death.
While the current federal estate tax exemption amount is $11.7 million per person, the law is scheduled to expire at the end of 2025, when it will return to an exemption of $5 million, adjusted for inflation. It’s unknown if Congress will change the proposed exemption amount when the law sunsets.
If the ILIT is funded with a term policy that is set to expire soon, it may be easier to let the policy owned by the ILIT expire, which would render the ILIT immaterial. The terms of the ILIT will govern the procedure for the termination of the trust, which may be simple or onerous. Consult with an experienced estate planning attorney to who can look more closely at the trust’s language.
A revocable living trust lets the person creating the trust control the assets in the trust and avoid probate. It also can be used to manage the trust assets by a successor trustee, in the event the grantor who created the trust becomes incapacitated.
For example, New Jersey banks may freeze 50% of the assets in an estate at the owner’s death to be certain that any estate or inheritance taxes that may be due are paid. A tax waiver must be obtained to lift the freeze. However, any assets in a trust, aren’t subject to a similar freeze.
At the grantor’s death, a trustee must pay income tax, if the gross income of the trust is $600 or more. Depending on the amount of assets in the trust, the trust may not accumulate gross income of $600, if the assets are distributed outright to the beneficiaries right after the death of the grantor.
Lastly, it’s wise to have a will, even if the majority of assets are in a living trust or are in IRAs and other retirement accounts. That is because there may be some assets that are outside the trust or retirement account or there may be a need for a personal representative of the estate to handle tax or other types of refunds.
Reference: nj.com (June 15, 2021) “Should I terminate this trust and do I need a will?”

Should a Trust Be a Component of My Estate Planning?

 

Let’s say that there’s a young father with a wife and young son, who owns a home and a Roth IRA account, with a few stock investments. On the stock investments, he’s filled out the beneficiary designation forms passing all his assets to his wife and son, should anything happen to him.
This father owns his home is joint tenancy with right of survivorship with his wife.
Does he need to set up a separate trust, if most of his assets pass through beneficiary designations?
Nj.com’s recent article entitled “Do I need a trust in case something happens to me?” says that leaving assets outright to a minor is typically a bad move. The son’s guardian and/or the court would take custody of the assets, both of which require significant court oversight and involvement.
The minor would also receive the assets upon attaining the age of majority, which in most states is age 18.
No one can tell what a young child will be like at the age of 18, especially after suffering the loss of their parents. Even if there are no significant issues, such as drug addiction or special needs, parents should think about what they’d have done with that much money at that age.
The best option is to leave assets in trust for the benefit of the minor son.
The trustee can manage and use the assets for the benefit of the young boy with limited court involvement.
The terms of the trust can also delay the point at which the assets can be distributed and ultimately paid over to the beneficiary, if at all.
For example, it’s not uncommon for a trust to stipulate that the beneficiary gets a third of the assets at 25, half of the remaining assets at 30 and the rest at age 35. However, other trusts don’t provide for such mandatory distributions and can hold the assets for the beneficiary’s lifetime, which has its advantages.
In some instances, the terms of the trust are included in a will. This creates a trust account after death, which is also called a testamentary trust.
Talk to an experienced estate planning attorney, who can assess your specific situation and provide guidance in creating an estate plan. The attorney can also make certain that trust assets are correctly titled and that beneficiary designations of retirement accounts and life insurance are correctly prepared, so the trust under the will receives those assets and not the minor individually.
Reference: nj.com (June 14, 2021) “Do I need a trust in case something happens to me?”

What are Top ‘To-Dos’ in Estate Planning?

 

Spotlight News’ recent article entitled “Estate Planning To-Dos” says that with the potential for substantial changes to estate and gift tax rules under the Biden administration, this may be an opportune time to create or review our estate plan. If you are not sure where to begin, look at these to-dos for an estate plan.
See an experienced estate planning attorney to discuss your plans. The biggest estate planning mistake is having no plan whatsoever. The top triggers for estate planning conversations can be life-altering events, such as a car accident or health crisis. If you already have a plan in place, visit your estate planning attorney and keep it up to date with the changes in your life.
Draft financial and healthcare powers of attorney. Estate plans contain multiple pieces that may overlap, including long-term care plans and powers of attorney. These say who has decision-making power in the event of a medical emergency.
Draft a healthcare directive. Living wills and other advance directives are written to provide legal instructions describing your preferences for medical care, if you are unable to make decisions for yourself. Advance care planning is a process that includes quality of life decisions and palliative and hospice care.
Make a will. A will is one of the foundational aspects of estate planning, However, this is frequently the only thing people do when estate planning. A huge misconception about estate planning is that a will can oversee the distribution of all assets. A will is a necessity, but you should think about estate plans holistically—as more than just a will. For example, a modern aspect of financial planning that can be overlooked in wills and estate plans is digital assets. It is also recommended that you ask an experienced estate planning attorney about whether a trust fits into your circumstances, and to help you with the other parts of a complete estate plan.
Review beneficiary designations. Retirement plans, life insurance, pensions and annuities are independent of the will and require beneficiary designations. One of the biggest estate planning mistakes is having outdated beneficiary designations, which only supports the need to review estate plans and designated beneficiaries with an experienced estate planning attorney on a regular basis.
Reference: Spotlight News (May 19, 2021) “Estate Planning To-Dos”

Why Is Estate Planning So Important?

 

Big Easy Magazine’s recent article “Estate Planning Is Essential and Here’s Why” says that writing a last will isn’t limited to what happens to your house, car, company, or other assets after you die. It also states who will take care of your minor children, if they are orphaned.
Your instructions for burial and other smaller things can be included.
If you fail to provide specific instructions, the state intestacy laws will apply upon your death. Here is a glimpse of the consequences of not writing your last will:
Your burial preferences may not be honored.
Your properties may be managed by an individual you don’t necessarily trust. Without a named executor to your last will, some other family member may be asked to file taxes, make transfers and manage your estate.
Family members may not get an inheritance. Under intestacy laws, same-sex relationships and common-law marriages may not be recognized. So, your partner may not get a portion of your estate.
Your favorite charity may be left out. If you are committed to leaving a legacy, your charity, religious organization, or other organization of choice should be mentioned in the last will.
The government will name the guardians for your minor children.
With a last will, you can designate a guardian for your children and avoid additional taxes. Ask an experienced estate planning attorney about developing a comprehensive estate plan.
Aside from this, estate planning can also save your loved ones considerable angst and money.
A detailed last will with your instructions will avoid complications and provide comfort, while your loved ones recover emotionally from their loss.
Reference: Big Easy Magazine (May 17, 2021) “Estate Planning Is Essential and Here’s Why”

 

What Does Tax Proposal Mean for Estate Planning?

The president’s tax plan proposes to nearly double the top tax rate on capital gains and eliminate a tax benefit on appreciated assets, known as the “step-up in basis.”
CNBC’s recent article entitled “Wealthy may face up to 61% tax rate on inherited wealth under Biden plan” reports that the combined tax rate would be the highest in nearly a century.
Some more well-off families could face combined tax rates of as much as 61% on inherited wealth under President Biden’s tax plan.
It is not known if President Biden’s plan can get through Congress, even with changes. Many moderate Democrats are likely to resist his proposal to raise the capital gains rate to 39.6%, as well as the plan to eliminate the step-up. Moreover, just a small number of the wealthiest taxpayers would ever see a rate of 61%. Most of us others would try to avoid this hike with tax and estate planning.
According to analysis by the Tax Foundation, families who own a business or a large amount of stock and want to transfer the assets to heirs could see a dramatic tax change.
For instance, you are an entrepreneur who started a business decades ago, that is now worth $100 million. Under the current tax law, the business would pass to the family without a capital gains tax—the value of the business would be “stepped-up,” or adjusted to its current value and the heirs would only pay a capital gain, if they later sold at a higher valuation. However, under President Biden’s plan, the family would immediately owe a capital gains tax of $42.96 million upon death (capital gains rate of 39.6%, plus the net investment income tax of 3.8%, minus the $1 million exemption).
If the estate tax remains unchanged, the family would also have an estate tax of 40% on the $57.04 million of remaining value of the assets. Including exemptions, the estate tax would amount to $18.13 million.
The combined estate tax and capital gains tax liability would total $61.10 million, reflecting a combined effective tax rate of just over 61% on the original $100 million asset. The rate rises, when including potential state capital gains and estate taxes.
However, experts say that if the step-up is eliminated, Congress would likely eliminate or overhaul the estate tax.
Reference: CNBC (May 3, 2021) “Wealthy may face up to 61% tax rate on inherited wealth under Biden plan”

What’s the Best Thing to Do with an Inherited House?

Beneficiaries must consider a number of possibilities when they inherit a home, especially if they’re sharing that gift with others. There are tax implications whether they keep or sell the home, emotional attachments to the house and the items within the house, along with potential estate planning issues.
MarketWatch’s recent article entitled “Inheriting a house? Read this before you make any rash decisions” explains that there’s no right or wrong answer, when choosing to keep or sell an inherited home. In some cases, the property can be used as rental income, whereas in other situations, it could be a source of cash after it’s sold, especially if the real-estate market is doing well. However, prior to deciding, consider this:
Those who sell a home after living in it for two out of the last five years get a tax exemption. For single filers, the exclusion is $250,000, and for married filing jointly, it’s $500,000. This exemption is applied when a home is sold to reduce the capital gains the sellers would have to pay.
Surviving spouses who inherit the full value of their home after their husband or wife dies can still use the $500,000 exemption, if they sell the house within two years of death. Non-spouses should consider if and when they plan to sell the home. Their basis of the inherited home becomes the fair market value on the date of death of the grantor. As a result, they’ll pay very little in taxes, if they sell the property in the short-term. However, they could have significant tax exposure, if they were to sell after a few years, or decades.
Beneficiaries should ascertain the fair market value of the home or get an appraisal on the property. Establishing the value of the property can pay for itself many times over in tax savings. Usually, there’s time to look at the situation and see you want to keep the property and either use it or turn it into a rental property or sell it.
If the home still has a mortgage, beneficiaries should call the lender to see if there were any clauses regarding the change in ownership. If the existing rate is favorable, they might be able to keep the loan, instead of refinancing.
An inheritance of a home can get more complicated, if there are multiple beneficiaries. This is especially true if it is children and grandchildren. If there’s no agreement, the only solution may be to sell. There are several options, such as selling the home and dividing the proceeds; renting the home and sharing the income; or coming to an agreement if one sibling wants to keep the house, like buying out the other owners, or trading other inherited assets for the property.
Reference: MarketWatch (April 13, 2021) “Inheriting a house? Read this before you make any rash decisions”

Should I Discuss Estate Planning with My Children?

US News & World Report’s recent article entitled “Discuss Your Estate Plan With Your Children” says that staying up-to-date with your estate plan and sharing your plans with your children could make a big impact on your legacy and what you’ll pay in estate taxes. Let’s look at why you should consider talking to your children about estate planning.
People frequently create an estate plan and name their child as the trustee or executor. However, they fail to discuss the role and what’s involved with them. Ask your kids if they’re comfortable acting as the executor, trustee, or power of attorney. Review what each of the roles involves and explain the responsibilities. The estate documents state some critical responsibilities but don’t provide all the details. Having your children involved in the process and getting their buy-in will be a big benefit in the future.
Share information about valuables stored in a fireproof safe or add their name to the safety deposit box. Tell them about your accounts at financial institutions and the titling of the various accounts, so that these accounts aren’t forgotten, and bills get paid when you’re not around.
Parents can get children involved with a meeting with their estate planning attorney to review the estate plan and pertinent duties of each child. If they have questions, an experienced estate planning attorney can answer them in the context of the overall estate plan.
If children are minors, invite the successor trustee to also be part of the meeting.
Explain what you own, what type of accounts you have and how they’re treated from a tax perspective.
Discussing your estate plan with your children provides a valuable opportunity to connect with your loved ones, even after you are gone. An individual’s attitudes about money says much about his or her values.
Sharing with your children what your money means to you, and why you are speaking with them about it, will help guide them in honoring your memory.
There are many personal reasons to discuss your estate plans with your children. While it’s a simple step, it’s not easy to have this conversation. However, the pandemic emphasized the need to not procrastinate when it comes to estate planning. It’s also provided an opportunity to discuss these estate plans with your children.
Reference: US News & World Report (Feb. 17, 2021) “Discuss Your Estate Plan With Your Children”

Why are Beneficiary Designations Important in Estate Planning?

Not having your beneficiary designations set up correctly can cause a lot of trouble after you pass away.
A designated beneficiary is named on a life insurance policy or on a financial account as the person who will receive those assets, in the event of the account holder's death.
This person usually must file a claim with a copy of the death certificate to receive the assets.
NJ Money Help’s recent article entitled “Beneficiary designation – specific or not?” says that naming a beneficiary takes a little consideration.
When naming the beneficiaries on your accounts or insurance policies, you should always consider a primary and secondary (or contingent) beneficiary.
The owner of a policy or account can name multiple beneficiaries. The proceeds or assets can be divided among more than one primary beneficiary. Likewise, there can also be more than one secondary beneficiary.
The primary beneficiary or beneficiaries are the first ones to receive the asset. The secondary beneficiary is second next in line, if the primary beneficiary dies before the owner of the asset, can’t be found, or refuses to accept the asset.
Note that simply naming beneficiaries in generic terms, such as “wife,” “spouse”’ or “children,” may create legal issues, if there’s a divorce or in case someone becomes disenfranchised.
It is always best to name your beneficiaries specifically and if they are minors, make certain you have designated a guardian.
Because our lives are constantly changing, you should review your life insurance policies, IRAs, 401(k)s, and any other instruments that require beneficiary designations every couple of years to make certain that everything is exactly the way you want.
Reference: NJ Money Help (Oct. 2017) “Beneficiary designation – specific or not?”

Dr. Seuss’ Controversy Impact on Estate?

It may surprise you to know exactly how profitable the estate of Dr. Seuss continues to be. Eighty years after the publication of his first children’s book — “And to Think That I Saw It on Mulberry Street,” which is among the works being discontinued — the author’s collection still makes a whole lot of money, says The Wealth Advisor’s recent article entitled “How Dr. Seuss became the second highest-paid dead celebrity.”
Forbes.com’s annual inventory of the highest-paid dead celebrities, Theodor Geisel —AKA “Dr. Seuss”— ranks second, only trailing Michael Jackson. The Seuss empire raked in earnings last year of $33 million. In other words, the Vipper of Vipp, Flummox and Fox in Sox generated a bushel-full of dough in 2020.
Add to this, the fact that because of the news that six of his 60+ books will no longer be published, buyers are scrambling to purchase his back catalog. This means more money for the good doctor, as evidenced by the fact that recently nine of the top 10 spots on Amazon’s best-sellers list were occupied by Dr. Seuss, including classics “The Cat in the Hat,” “One Fish, Two Fish, Red Fish, Blue Fish” and “Oh, the Places You’ll Go!”
The answer to how Dr. Suess’ estate has maintained a $33 million fortune 30 years after his death, is that it’s his wife’s doing. Geisel died in 1991 at the age of 87. Two years after that, Audrey Geisel, founded Dr. Seuss Enterprises to handle licensing and film deals for her husband’s work.
She passed away in 2018, but Dr. Seuss Enterprises is still going strong. It’s shrewdly built the Seuss brand with kids’ merchandise and several television and film projects, notably the animated “Green Eggs and Ham” series, which debuted on Netflix in 2019, starring Michael Douglas, Keegan-Michael Key and Diane Keaton.
Past Seuss projects include Jim Carrey’s “The Grinch” in 2000; Mike Myers’s mediocre “The Cat in the Hat” in 2003, “Horton Hears a Who!” in 2008; not to mention the 2001 Broadway bomb “Seussical.”
Reference: The Wealth Advisor (March 9, 2021) “How Dr. Seuss became the second highest-paid dead celebrity”

Why Do I Need Estate Planning?

Many people who failed to plan their estate with the help of an experienced estate planning attorney have their assets tied up in lengthy, and often messy, legal battles that were decided by people not of their choosing.
Forbes’ recent article entitled “Everyone Needs An Estate Plan: Here's What You Need To Know” says that although many of us don't have quite as much at stake financially, it doesn't mean that estate planning is any less important. In fact, leaving a legacy, passing down wealth and helping family aren’t things that are just for the ultra-rich.
The biggest misstep is not creating an estate plan at all. This is more than just a last will and includes powers of attorney, healthcare directives, a living will and a HIPAA waiver. People put this important responsibility off because they do not want to contemplate their own death. They try to avoid the subject. Some others may have complex family dynamics, and still others are hesitant to confide their complicated relationships with a lawyer. However, all these are just excuses.
We know that life is full of changes, and people get married, divorced, have children and grandchildren, relocate to different states, change careers and get inheritances. Each of these events could make you reconsider your goals. This may necessitate an update to your estate plan.
You need to review the beneficiaries on your IRAs, life insurance policies and pensions. You should look at how you want your heirs to receive your assets and any charitable or philanthropic notions. With powers of attorney, healthcare directives, living wills and HIPAA waivers, you need to think about who you’ll entrust to make important medical and financial decisions for you, if you become incapacitated. You see these critical questions and many others are fluid and prone to change every few years as your life changes.
Remember that your assets receive different treatment from the IRS based on the type and who owns legally owns them. For example, individual retirement accounts (IRAs), Roth IRAs, traditional brokerage accounts, life insurance policies and bank accounts are different than the family home. Therefore, it’s important to be mindful of which assets are left to whom.
Don’t wait. Speak to an experienced estate planning attorney to be certain that you give this process the attention it deserves for the well-being of you and your family.
Reference: Forbes (Feb. 26, 2021) “Everyone Needs An Estate Plan: Here's What You Need To Know”