Michigan Estate Planning Blog

It’s Not Too Soon for Generation X to Start Estate Planning

 

Adults born between 1965 and 1980 are often called the “sandwich generation” as they sometimes support older children who are still figuring out who they want to be when they grow up and caring for aging parents. While retirement may feel far away, says a recent article from Kiplinger, “Come as You Are: Wealth Management for Gen X,” it’s on the horizon, and planning for the future should start now.

Some of the tools used for retirement planning include 401(k) plans, which are tax-deferred plans from an employer. If your employer offers matching funds, try to contribute enough to take advantage of the match. You can also use a personal IRA to make tax-free annual contributions.

With changes from the SECURE 2.0 Act, you can open and contribute to a 529 College Savings Account and then roll a portion of unused funds into a Roth IRA once the account has been opened for 15 years and the funds have been in the account for at least five years. There are rollover limits, but this might be a good fit for retirement savings. Commonly, 529 funds are used for various educational purposes, so even if your children are past college, your grandchildren might use them for private school, not just college.

The one constant in life is change, and estate planning documents created when your children were little need to be reviewed and possibly updated. If the last time you thought about your will was when your adult children were born, you should schedule a review with your estate planning attorney. Changes like marriage, divorce, death, financial ups and downs and changes in the tax law all call for updates to wills.

If you don’t have long-term care insurance, now is the time, while you’re still relatively young and healthy enough to be able to buy it. Insurance companies now offer hybrid policies combining life insurance with a long-term care insurance policy rider.

Digital assets are a relatively new asset class requiring estate planning. Speak with your estate planning attorney to be sure your estate plan documents reflect your digital life. If you are active on social media, investing in cryptocurrency, or own an online business, you have digital assets and need to protect them.

Be proactive about estate planning to protect yourself now and your loved ones after you’ve passed. Just as retirement is on the horizon, so are the inevitable events of aging. Make an appointment to see an estate planning attorney to learn your needs, now and in the future.

Reference: Kiplinger (Oct. 7, 2024) “Come as You Are: Wealth Management for Gen X”

Will My Family Need to Pay an Estate Tax?

 

Known as the “death tax,” an estate tax is applied to assets inherited by others when you die. In addition to the federal tax, twelve states and the District of Columbia have their own estate taxes, says a recent article from CNBC, “What is estate tax and who pays it?”

Inheritance taxes and estate taxes are often confused. A beneficiary pays inheritance taxes, while estate taxes are paid from the decedent’s estate before any remaining property or assets are distributed to heirs.

One of the executor’s duties is to file an estate tax return. The value of the assets is usually determined by their fair market value.

The unlimited marital deduction means the surviving spouse is exempt from federal estate taxes. However, the second spouse to die’s estate will need to pay estate taxes.

The current federal estate tax exemption ranges from 18% to 40%, depending on how much the estate is over $13.61 million. This historically high number will revert to $5 million (indexed for inflation) on January 1, 2026.

Twelve states and the District of Columbia impose their own estate taxes. These include Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington. Connecticut and Vermont have flat estate taxes. However, most estate tax rates increase with the total value of the assets.

An experienced estate planning attorney will help identify strategies to minimize or avoid paying estate taxes altogether. For instance, if you leave assets to a qualifying charity, that amount is deducted from the gross estate before taxes.

Gifting is a frequently used means of minimizing estate taxes. In 2024, you can gift up to $18,000 per individual without paying the federal gift tax and without the gift counting towards your lifetime gift exemption of $13.61 million. A married couple may give up to $36,000 tax-free combined.

Irrevocable trusts transfer control of an asset from the grantor to the beneficiary, protecting it from creditors and reducing the estate's value. While rules vary from state to state, irrevocable trusts typically may not be amended, modified, or terminated without the beneficiary's consent.

Contributions can also be made to 529 educational plans, which offer tax-free earnings and withdrawals for educational expenses. They are excluded from the taxable estate. However, the contribution can’t be more than $18,000 per year, or it will be subject to the gift tax. Each state sets its own contribution limits per beneficiary.

Most Americans don’t have to pay federal estate taxes. Still, many state taxes have lower exemption levels, so speak with your estate planning attorney to learn your estate’s tax liability and consider how to minimize it for your heirs.

Reference: CNBC (Feb. 17, 2024) “What is estate tax and who pays it?”

How Does Estate Planning Protect Young Children?

 

Once you have a child, you’ve got a bundle of joy—and a lifelong commitment to caring for the child, sometimes even after they reach adulthood. What would happen if something happened to you and your partner? To be sure your child or children are taken care of, you’ll need to take these estate planning steps, as explained in a recent article from Kiplinger, “To Protect Your Kids, Consider These Estate Planning Steps.”

Appointing a guardian. Planning for the absence of parents from a physical and financial perspective needs to be done. Parents need to establish a guardian and have the person named in their will. It may be a good idea to name a secondary guardian if something happens and the primary guardian is unwilling or unable to serve in this role.

Create a trust. Parents should consider creating a trust for their children to ensure that there is money to provide for their care if both parents die. A child under the age of 18 is a minor and, as such, may not legally hold title to property. A trust is used to hold assets for the child’s benefit. The language of the trust would have instructions to provide for the children’s education, health and support.

There are two basic trusts to consider. A revocable trust is created during a person’s lifetime and can be changed anytime by the trustmaker. A testamentary trust is created as part of a will. Neither trust needs to be funded until the person passes away, at which time the property of the decedent is placed in a trust if the will contains the correct instructions. An estate planning attorney will be able to structure this plan.

Assign a trustee. This person manages the trust assets for the children's benefit. They need to be financially responsible people who can manage the funds for the children. The trustee can be a family member but should not be the same person chosen as the guardian. Keeping these roles separate ensures that the guardian will not misuse funds. Another option is to hire a professional to serve as the trustee. Professional trustees, including banks or financial advisors, usually charge a percentage of assets. In some cases, estate planning attorneys serve as trustees for minor children.

Establish terms of distribution. It’s up to the parents to decide how their children should receive trust assets. They can mandate principal distributions at certain ages, like a certain percentage at age 20, another at 30 and the balance at 40. While the parent dictates the terms of distribution while the children are minors, the trustee will be the one to decide on distributions for food, health, education, or extracurricular activities.

How do you be sure there will be money for your children? Parents should purchase life insurance, since most young parents don’t have a lot of liquidity. Term policies are the least expensive and can be for ten, twenty, or thirty years, during which the policy is guaranteed if the premium is paid. Whole life insurance is another option. However, it is more expensive.

Start a 529 college savings fund. These accounts can be funded through automatic withdrawals from a checking account, or family members can be encouraged to make gifts to these accounts. In some states, there are state income tax benefits for residents. The growth is tax-free if the funds are used for qualifying educational expenses.

When the child becomes a legal adult. Once a child celebrates their 18th birthday, they are legal adults, and parents lose their rights. New adults should have a healthcare proxy so someone can make medical decisions for them in case of incapacity. They should also execute a HIPAA disclosure form so healthcare professionals can discuss their medical care with parents.

If a child has special needs. An estate planning attorney will create a Special Needs Trust to hold assets and name a trustee to manage the funds. This trust allows a child with special needs who may be eligible for government benefits to continue to receive benefits in addition to distributions from the trust.

Reference: Kiplinger (Nov. 19, 2023) “To Protect Your Kids, Consider These Estate Planning Steps”

Should You Gift Kids Inheritance Now, or After You’ve Passed?

 

This is a genuine dilemma facing millions of parents and grandparents as they prepare to pass an enormous amount of wealth—$73 trillion—to the next generation. There are pros and cons to both approaches, according to the article, “Give the Kids Their Inheritance Now or Make Them Wait? 3 Things to Keep in Mind,” from Barron’s.

Giving too much too early could put parents in an economic bind in their later years. Therefore, this needs to be considered in light of today’s longer life spans. However, if you can afford to make a generous gift and your children could use the money now for a good purpose, it’s hard to justify making them wait.

How much to give is as critical as when to make the gift. The predominant concern is if you give your children too much, they won’t be motivated to earn their own wealth, or other family members will resent the gift. Estate planning attorneys and financial advisors routinely speak with families about these issues. These conversations always consider the values they want to instill in their children.

In some cases, parental support can help a child while working at an entry-level (i.e., low paying) job in their dream career. Covering the cost of rent for a few years can offer young adults a support net until they achieve financial stability.

This is very different than paying the expenses of a young adult with no career goal whose primary focus is a robust social life.

Anyone can make a yearly gift to any other person of up to $17,000 tax-free, or $34,000 per couple, but there are ways to make gifts without triggering gift taxes. Direct tuition payments to schools are tax-free. Unlike putting money into a 529 account, there is no limit to how much can be paid directly to a college or university. Parents and grandparents could also help with a downpayment on a child’s home without paying gift taxes.

Gifts don’t have to be large to have an impact. Some parents and grandparents give their children or grandchildren a small amount to start saving for retirement. A gift of a few thousand dollars during their 20s can grow into a nice sum over many decades. If the recipient has earned income, you can contribute to their IRA or Roth IRA accounts.

If assets are limited, consider giving personal possessions, such as jewelry or family heirlooms, to younger generations. You’ll get to see them enjoy their gifts, without putting your own financial situation at risk.

Whenever the decision is made to make these gifts, families should talk about their values and intentions around money.

If there are concerns about children losing an incentive to work because of the family’s wealth, a spendthrift trust might pass wealth along while controlling its distribution.

Remember that today’s generous federal estate tax rules are set to expire in 2026. Currently, individuals can gift up to about $13 million ($26 million for couples) tax-free in their estate plans. If the exemptions expire, this amount will be cut by approximately half.

Reference: Barron’s (Nov. 4, 2023) “Give the Kids Their Inheritance Now or Make Them Wait? 3 Things to Keep in Mind”

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.”

Will Your IRA Affect Your Medicaid Eligibility?

For many of us and the older loved ones for whom we may care, receiving needed medical care in old age will mean ensuring an easy transition into Medicaid. The problem, however, is that there are some strict financial rules governing eligibility to receive Medicaid benefits. Consequently, it is often all-too-easy to run afoul of them. Here is an important question to ask: “Can an IRA Affect Medicaid Eligibility?” ElderLawAnswers posed and answered this question, noting that the greatest asset many of us will own throughout our lives and well into old age will be our IRA or other retirement account. That said, just because you have the account doesn’t mean it can or will pay for the needed care. No, in the end you might need Medicaid. However, the mere existence of the IRA may cause you some trouble getting into the program. So, can an IRA affect Medicaid eligibility? The short answer is that “it depends.” It depends upon whether or not the IRA is in “payout status” (i.e., are taking minimum required distributions?). This might actually work differently than you’d expect. If your IRA is in payout status, then you might be in the clear. Medicaid allows you to have some income for personal use, after all. As a result, the payout from an IRA might be so small as to not cross the Medicaid income threshold and larger amounts will simply go to the nursing home until reduced to the small personal expense amount. If your IRA is not in payout status, however, then the IRA is non-exempt and can be held against you, potentially to full value. What to do with the IRA depends upon state law and the possibility of transfer versus cashing-out. Either option may not be pretty or productive. With proper planning beforehand you can help ensure that your assets won’t accidentally trigger a problem. IRAs can be tricky. Much of what you should do will depend upon your needs and your assets, with more than a little hanging on state law. Interpreting the relevant laws can mean a world of difference, so seek competent Elder Law counsel in structuring a plan.

Reference: ElderLawAnswers (March 28, 2014) “Can an IRA Affect Medicaid Eligibility?”

For m ore information, see www.jerryreiflawyer.com

Charitable Giving – Leaving A Lasting Legacy

At some point in your life, there comes a moment when it becomes important – vital, in fact – to focus your energies on a cause and give to charity with all the passion that went into amassing your worth. But what drives so many generous givers to this moment? A recent Wall Street Journal article points out that it’s the age-old, if hackneyed, idea: legacy. Beyond a doubt, there are certain tax advantages to well-timed and well-planned charity; the tax code is designed for this. But also it is important to realize that there is a history to the tax code. Regardless however convoluted the reason, many a tax advantage exists beyond the lobbying of non-profits and the work of those set to take advantage for fiduciary reasons. No, such advantages exist to recognize the urge to provide a legacy. Planning for your estate and your wealth, in life and after death, is usually about “legacy” in one form or another. Your family is part of your legacy, that is oftentimes a give, but the missions you held dear in life are just as much a part of your legacy. In fact, they are an extension of your ideas, dreams and hopes for the world, or some small corner of it. The original article goes as far as to say that legacy, in broad terms, is why we give to charity in the first place. So, what will your legacy be, and what do you want to leave for the world? If there is something that you care about, perhaps it is worth acting upon, either in life or as a bequest.

Reference: The Wall Street Journal (March 8, 2012) “Why the Rich Give to Charity”

Powers of Attorney – Not A Good Idea for The Do-It-Yourselfer

The internet has become an unprecedented tool for legal research and empowerment. For example, I write here to advance public awareness of estate planning law through the power of the internet, after all. Nevertheless, too much information also can lead to a dearth of actual information, or at least a lack of good useful information. Beware of the simple estate planning tools you find online, as confirmed in a recent Elder Law Answers post. Off-the-shelf and stock power of attorney forms not only can be ineffective, but they also can prove a liability and a detriment to your plans. Such forms may purport to cover every conceivable situation only to find that they do not satisfy the statutory substance or format required by your state. Moreover, anyone who has had an encounter of the first kind with any aspect of a bureaucratic system (you’ve finished your taxes, right?) knows that one-size-fits-all forms have their limitations.

Reference: Elder Law Answers (February 2012) “Why Not Just Use an Off-the-Shelf Power of Attorney Form?

Trusts – Better Robust Than Bust

Trusts are like pocket knives, in a way. Even a fairly basic pocket knife can make your life immensely easier, especially in a pinch, but a particularly well built and expansive pocket knife is an actual survival tool. When it comes to trusts, however, why settle for a basic trust when a robust trust can provide essential protection for your loved ones? While surfing my news sources I discovered yet another, renewed, lesson in the robust set of provisions that can be crafted into a single trust, here. In addition, this article illustrates the difficult space between divorce and the trust, and that’s one more area where a robust trust can make all the difference. Depending on how you’ve structured it, a trust can last for varying lengths of time and offer the beneficiary/child various ways of accessing those funds. You might use this to teach lessons, for example, but don’t forget that you’re not always planning for the budding child but also the future adult. Unfortunately, that future adult may have creditors who could attempt an attack on the trust funds. More likely, however, is that a divorce and an ex-spouse will come into play, perhaps also children and child-support. How the courts treat your trust depends on numerous factors best considered at the formation and worthy of your consideration at that time. For more ideas (and at least one promising court case) read the original article. In the end, as with so many planning devices, everything hinges entirely on you, your family, and your unique circumstances.

Reference: Financial Planning Magazine (February 1, 2012) “Trust, But Verify”

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Trusts for Heirs – Six Rules for the Road

It doesn’t take an experienced estate planner to say so, but “money is the root of all evil.” Unfortunately money bears with it the potential for good and bad ends alike. An experienced estate planner can help your loved ones lean to the positive when it comes to the inheritance you leave them. When it comes to trust money, and inheritances in general, you need to find a balance that will help your children become the people you know they can be. For some solid tips, check out this article and the 5 trust fund rules to help children. The balance these rules help to create, as so aptly put by Warren Buffet, give your children “enough to do anything, but not enough to do nothing.” So, let’s review a few of the rules. Carrots and Sticks. A trust need not just leave money; but it can be a tool. By building the appropriate provisions, you can offer certain tests and incentives to guide your heirs towards positive goals. You earned your money through hard work and, likewise, the trust can help foster similar lessons as you see fit. Timing. The funds in a trust can be made readily available or made available over time, with or without incentive goals. After all, you might not want to lock a child into set goals (you might not know enough about which goals are appropriate for them), but you might want to keep their access to the funds at a pace consistent with their age and maturity. Generally speaking, such an approach generally is a solid bet. It can give a sense of security, without instilling laziness, too. Money Isn’t Everything. In keeping with the above, consider using the conditions that surround the trust (i.e., your death) as an opportunity to provide your wisdom through your own letters or videotapes of success stories, so that the trust fund is opened as your words are received. That’s only three of the five rules. For the other two, read the original article. Regardless, the time to act is now. The issues surrounding how to create the trust are worth mulling over, but just as important is the planning that goes into creating the trust and the correct timing to maximize its value. You can make good use of this timing given the present generous state of our estate and gift tax law, along with the currently depressed asset values. Again, whether it’s thinking about the funds to put in the trust or the future of the inheritor, there’s no time like the present!

Reference: The Fiscal Times (September 20, 2011) “5 Trust Fund Rules That Can Really Help Children”

Charitable Giving – A Family Affair

Financial skill is far from an inherited ability: it is learned. So, too, with charity. The drive to give (and the know-how to do so well) is often taught rather than genetic. A novel idea, then, is to begin the family charity tradition. During the recent holiday season, an article in Reuters addressed this matter. When it comes to charity, to include beginning a family charity tradition, there should be no “seasonal” limitation. In other words, there is no time like the present. Giving to charity, whether in modest gifts or in larger ones, can be a family activity and a lesson to your children with just a bit of foresight. For example, let your children choose where to give and, perhaps, teach them why you give as you do. Just as important as why you give, consider teaching your children “how” to give. How do you give efficiently or to effect the greatest gain? How do you understand the financial decisions that go into process in the first place? Of course, it’s bound to be a learning experience for you, too, and you might find that it’s a difficult one. For a bit of advice, check out the original article.

Reference: Reuters (December 23, 2011) “How to create a family charity tradition”

Your Portfolio And Your Estate Planning

Your portfolio can be thought of a machine, with many moving parts all working and buzzing away on their own. If you direct your own investments, however, your portfolio is more likely to resemble a well-tended garden that responds to the care and direction of you, the caretaker. What happens to the portfolio when you pass away? This is a very real question in need of an answer, especially when you are both the caretaker and the family financial mind. Just as with any other matter, how you want your finances to be tended is important information you ought to share with your loved ones sooner rather than later. Unfortunately, you can plan it out and hold family meetings on the subject but there is always the very real – and perhaps also, likely – possibility that your advice won’t be heeded. Spouses can forget or be persuaded otherwise, and adult children may think they know best and make the same mistakes as a novice. To make matters worse still, an expensive and mediocre advisor might get called in instead. This is the message of a recent Forbes article on the topic. If this matter is a concern for you, then there are ways to plan around it. For some, proper planning will entail establishing relations with an advisor and handing over some of the reins early. In terms of your portfolio and its role in your estate plans as a whole, you might consider a trust and a faithful trustee to do the work you know needs to be done. Clearly, your investments are important to you and your family, and so they also are important to your estate plan.

Reference: Forbes (January 5, 2012) “My Spouse Will Call You When I’m Dead”

GIVING / COLLEGE 529 PLANS

Whether you’re a parent or a grandparent, one of the hallmark ways of preparing for the upcoming generation is the college savings 529 plan. There’s a bit of bittersweet news there nowadays: overall funds are down, but the alternatives even lower. According to a recent Wall Street Journal article, and Morningstar research, investments in 529 plans fell an average of 9.5% in the third quarter and are now down 5.9% this year through Sept. 30. This marks the worst setback since the market crash in early 2009. Of course, thanks to market volatility and several rounds of bad news from around the globe, the Standard & Poor's 500-stock index fell 14% and 10% over the same periods. Further, while the S&P has been fairly flat over the past five years, the average 529 plan has returned 4.6%, and accumulated earnings are still tax free. It just may be, as many uphold, that the 529 is still a great option if you have a future student for whom you need to plan. Indeed, especially for grandparents, the current tax environment might be especially helpful. Whatever investment vehicle you choose, your help and proper planning may be more important now than ever before as the last five years also have seen tuition and fees increases by as much as 38% for in-state, public college students and 30% for private college students.

Reference: The Wall Street Journal (October 18, 2011) “Bad Marks for College-Savings Plan May Not Call for a Time Out”