Michigan Estate Planning Blog

Incorporating Gifting with an Estate Plan

Kiplinger’s recent article entitled “Gifting sounds pretty simple, but there are many ways to do it, and several tax ramifications to be aware of as well” explains that no matter if a gift is made this year or in future years, there are some important questions to consider.
Increased exemption. The Tax Cuts and Jobs Act significantly upped the lifetime gift, estate and generation-skipping tax exemption to $11.58 million per individual ($23.16 million per couple). It’s set to expire at the end of 2025. Thus, there’s the prospect of possibly losing an opportunity to transfer wealth out of your estate and save on future estate taxes earlier than anticipated.
When to Give. A big question is whether a person should give away assets during their lifetime or at their death. Those who opt to gift while they’re alive often do so to reduce their estate and to share in the joy of seeing the effect it makes in the lives of the recipients. Others decide to gift after death for the security of having the assets on hand, if they’re needed. Gifting after death also gives recipients time to prepare for the responsibility that comes along with inheriting wealth.
Unified Federal Estate & Gift Tax Exemption. There are many ways to distribute assets. What works for one family isn’t necessarily the wisest strategy for another. Note that any transfer is gift tax-free up to the annual exclusion amount ($15,000 per person per donor in 2020). Any gift over this amount will count against the donor’s lifetime exemption amount. After that lifetime exemption is used, the gift will be subject to gift tax.
Outright cash gifts. This appears to be the most uncomplicated way of gifting. However, for those with significant wealth, this approach could have some drawbacks. These concern the ability and experience gift recipients have to manage money, outside risks, such as a spouse or high-risk professions, and demotivating recipients to live off their inheritance, instead of becoming productive on their own. Therefore, distributing large amounts of money—particularly at a young age—is generally discouraged.
Trusts. These are used frequently for larger gifts to provide for beneficiaries, while using controls by the grantor. These parameters can include things like distributing trust assets in stages (when the beneficiary reaches a certain age or achieves a specific goal). You can also leave assets in a discretionary lifetime trust, which would maintain the assets in a trust for the beneficiary’s entire lifetime. When set up by an experienced estate planning attorney, this offers a high level of protection from divorcing spouses, lawsuits, poor financial decisions and outside influences. It can also let the grantor create a lasting family legacy for many generations.
Gifts for education or medical expenses. Direct payments for college tuition or for medical expenses have no gift tax consequences. Educational gifts can also be made by funding a 529 educational savings plan. While there are no contribution limits for a 529 plan, gifts over the annual exclusion amount can have gift tax consequences or count against the lifetime exemption. You can also pre-fund an account up to $75,000 and it will receive the same tax treatment, as if it were gifted in $15,000 increments over five years.
Uniform Trust to Minors Act (UTMA) and Uniform Gifts to Minors Act (UGMA). These custodial accounts are generally less restrictive than trusts and let minor beneficiaries access funds at age a specific age depending on state of residence.
Reference: Kiplinger (Oct. 30, 2020) “Gifting sounds pretty simple, but there are many ways to do it, and several tax ramifications to be aware of as well.”

What Trusts are Available for Estate Planning?

A trust is a legal agreement that has at least three parties. The same person(a) can be in more than one of these roles at the same time. The terms of the trust usually are embodied in a legal document called a trust agreement. Forbes’s recent article entitled “Here’s What You Need To Know About The Most-Popular Estate Planning Trusts” explains that the first party is the person who creates the trust, known as a trustor, grantor, settlor, or creator.
The trustee is the second party to the agreement. This person has legal title to the property in the trust and manages the property, according to the instructions in the trust and state law. The third party is the beneficiary who benefits from the trust. There can be multiple beneficiaries at the same time, and there also can be different beneficiaries over time.
The trustee is a fiduciary who must manage the trust property only for the interests of the beneficiaries and consistent with the trust agreement and the law. Although a trust is created when the trust agreement is signed and executed, it isn’t really operational until it’s funded by transferring property to it.
A living trust, also called an inter vivos trust, is a trust that’s created during the trustor’s lifetime. A testamentary trust is created in the trustor’s last will and testament. A trust can be revocable, which means that the trustor can revoke it or modify the terms at any time. An irrevocable trust can’t be changed or revoked.
Assets that are owned by a trust avoid the cost, delay and publicity of probate. However, there are no tax benefits to a revocable living trust. The settlors-trustees are taxed as though they still own the assets. The trust assets are also included in their estates under the federal estate tax.
An irrevocable trust typically is created to reduce income and/or estate taxes. This type of trust can also protect assets from creditors. When assets are transferred to an irrevocable trust, the income and gains are taxed to the trust when they are retained by the trust and taxed to the beneficiaries when distributed to them.
Under the federal estate tax and most state estate taxes, assets that are retitled to an irrevocable trust aren’t part of the grantor’s estate. Transfers to the trust are gifts to the beneficiaries. The grantor’s gift tax annual exclusion and lifetime exemption can be used to avoid gift taxes, until gifts exceed the exclusion and exemption limit.
A grantor trust is an income tax term that describes a trust where the grantor is taxed on the income. That’s because he or she retained rights to or benefits of the property. The revocable living trust is an example of a grantor trust.
A trust can be discretionary or nondiscretionary. A trustee of a discretionary trust has the power to make or withhold distributions to beneficiaries as the trustee deems appropriate or in their best interests. In a nondiscretionary trust, the trustee makes distributions according to the directions in the trust agreement.
Another type of trust is a spendthrift trust. This is an irrevocable trust that can be either living or testamentary. The key term restricts limits the beneficiary’s access to the trust principal, and the beneficiary and the beneficiary’s creditors can’t force distributions. The spendthrift provision is used when the settlor is worried that a beneficiary might waste the money or have trouble with creditors. Many states permit spendthrift trusts, but some limit the amount of principal that can be protected, and some do not recognize spendthrift provisions.
Finally, a special needs trust can be used to provide for a person who needs assistance for life. In many cases, it’s a child or sibling of the trust settlor. It can be either living or testamentary. Critical to a special needs trust is it has provisions that make certain the beneficiary can receive financial support from the trust, without being disqualified from federal and state support programs for those with special needs.
For more about trusts and how one may fit into your estate planning, contact an experienced estate planning attorney.
Reference: Forbes (Oct. 26, 2020) “Here’s What You Need To Know About The Most-Popular Estate Planning Trusts”

Do I Need to Name a Guardian for My Children in the Will?

Many young couples with children and bills to pay may look at you askance, when asked about estate planning and say, “what estate?”
However, a critical part of having a will—one frequently overlooked—is naming a guardian. If you don’t name a guardian, it could result in issues for your children after your death. Your child might even be placed in a foster home.
For a young family, designating a guardian is another good reason to draft a will. If you and your spouse die together with no guardian specified in a will, the guardian will be chosen by the court.
In a worst-case scenario, if you have no close family or no one in your family who can take your child, the court will send them to foster care, until a permanent guardian can be named.
The judge will collect as much information as possible about your children and family circumstances to make a good decision.
However, the judge won’t have any intimate knowledge of who you know or which of your relatives would be good guardians. This could result in a choice of one of the last people you might pick to take care of your child.
Try to find common ground, by agreeing to a set of criteria you want in a guardian. This could include the following:
The potential guardian’s willingness to be a guardian
The potential guardian’s financial situation
Where the child might live with that person
The potential guardian’s values, religion, or political beliefs
The potential guardian’s parenting skills; and
The potential guardian’s age and health.
Next, make a decision, get the chosen guardian’s consent, write it all down, and then set out to create a will.
Ask an experienced estate planning attorney to help you do it correctly.
Reference: Lifehacker (Oct. 27, 2020) “Why You Should Name a Guardian for Your Kids Right Away”

Is My Estate Plan Set with a Power of Attorney?

A June 2020 Transamerica Center for Retirement Studies survey showed that a mere 28% of retirees have a financial power of attorney (POA)—and many people don’t understand that there are two types of these advance directives that serve different purposes.

MarketWatch recently published an article “Does your estate plan use the right type of Power of Attorney for you?” that says knowing how both types work is crucial in the pandemic, especially in the event that you get sick with coronavirus.

A Durable Power of Attorney for Finance can be either “springing” or “immediate.” “Durable” refers to the fact that this Power of Attorney will endure after you have lost mental or physical capacities, whether temporary or permanent. It lists when the powers would be granted to the person of your choosing and the powers end at your death.

An “immediate” Durable Power of Attorney for Finance is effective, as soon as you sign the document. In contrast, a “springing” POA for Finance means two physicians must first examine you and confirm in writing that you can no longer manage independently.

Therefore, to begin paying your bills, your agent must have those two physicians’ letters, and he or she doesn’t automatically have the authority to ask for them.

When issues, such as doctors’ letters, are required before the agent you chose can serve you, ask your estate planning attorney for guidance.

An obstacle for a Durable Power of Attorney for Finance can come upon you very fast and possibly include you and your spouse at the same time. For example, you both might get COVID-19.

The powers granted by a typical POA for Finance are often broad and permit selling and buying assets; managing your debt, car and Social Security payments; filing your tax returns; and caring for any assets not named in a trust you may have, such as your IRA.

If you recover your capacity, your agent must turn everything back over to you when you ask.

Remember that your advance directive documents are only as good as the people who implement them. You should also make certain anyone named knows that they’ll have the job, if needed. They must know where to find your POA and all other important information.

Reference: MarketWatch (Oct. 9, 2020) “Does your estate plan use the right type of Power of Attorney for you?”

How Do You Ask Parents about Estate Planning?

How do you ask your parents about their estate planning? No matter how you slice it, it’s a touchy subject to bring up. You don’t want to come off as greedy when asking your parents about their estate planning. However, you need answers to certain questions to ensure that their financial wishes are carried out and there is a smooth transition of wealth and assets. Yahoo Finance’s recent article entitled “How To Talk to Your Parents About Their Estate Plan (Without Making It Awkward)” shows us how to approach this touchy subject and get the info that you need. Begin by asking your parents about whether they have an estate plan. You can tell them that they don’t need to share the numbers and that you just want to be able to follow their instructions. A good way to start this conversation, is to acknowledge how awkward and difficult this conversation is for you. You should emphasize that you don’t want to think about their deaths but are just trying to sort things out. Experts say that you’ll likely get a better reception from your parents, if you let the conversation happen organically and not schedule a time to talk. No matter how you approach the topic of an inheritance from your parents, the objective of the discussion is to make certain they have a plan in place, so there will be a clear path for whomever is left behind to go forward. You can start by asking if they have these key legal documents: A will A power of attorney; and A living will or health care directive. Ask where your parents keep these documents and how you can access them, if necessary. You should also ask if your parents have written funeral or burial instructions. You also need to ask them to give you other important information, so you can handle their finances if they are unable to or when they die. This includes account numbers and passwords, insurance policies, information on their retirement plan or pension administrator, as well as the contact information for their accountant, attorney, financial planner, or other financial professional. Reference: Yahoo Finance (Oct. 7, 2020) “How To Talk to Your Parents About Their Estate Plan (Without Making It Awkward)”