As we told you a week ago, in addition to federal estate taxes, state estate taxes form a crazy quilt of different rules across the country. So much so that Forbes Magazine recently published an article on “Where Not To Die in 2014.”
Tax (Photo credit: 401(K) 2013)
Any guesses as to which state is the worst?
That’s right. New Jersey. Runner-up: Maryland. Both states impose not only an estate tax, but also an inheritance tax. As the Forbes article states:
“New Jersey, for example, imposes an estate tax between 4.2% and 16% on estates above $675,000, and an inheritance tax of between 11% and 16% on assets left to a sibling, nephew, niece or friend, but no inheritance tax on money left to parents, children or grandchildren. (Any estate tax owed is reduced by the inheritance tax paid.)”
See? We told you it’s a mess. That’s the bad news. The good news is that you can do something about it if you go see a competent estate planning attorney before it’s necessary.
Many parents divide their assets equally among their children. That’s the easy way.
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But what if you want to give more to one child than to another? Is that fair? Is it a good idea?
Sometimes it may be the best plan. For example, maybe one of your children earns much more than the others. Does this child really need to share equally in your estate?
Maybe one of your children has several children of his own, while the others are childless or have only one child. That may be a good case for giving the child with the most children a larger share.
Another reason might be that one of your children spent a lot of time and energy caring for you in your old age. Shouldn’t that child get rewarded?
And what if one of your children went down the wrong path? Maybe he became addicted to drugs or alcohol. Should this behavior be reinforced?
If you end up giving different children differing amounts in your will or estate plan, your decision may end up being challenged in court by the child or children who got less. It could turn into a mess.
To make sure your wishes are carried out, make sure to prove that you are of “sound mind” when you drew up your plan. You might want to get a letter from your doctor or psychologist saying so.
At the same time, make sure to talk to each of your children and explain what you are doing and why. This could result in fewer bad feelings.
Perhaps you can establish a pattern by helping those who need the most help while you are alive, as well as helping those who help you by giving them financial support during that time.
You can also include clauses mandating that disputes be settled through mediation or arbitration, not litigation. You can even include a “no contest” clause that says if any of the beneficiaries tries to contest the will, that child’s share is forfeited.
These are tough decisions that your estate planning attorney can help you make when drafting your will or estate plan.
Although the federal estate tax exemption has been raised to a generous $5.3 million, what about the states?
The truth is that, despite the large federal exemption, estate taxes still pose a worry in many states. In fact, 19 states as well as the District of Columbia impose estate taxes. The list includes New Jersey.
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And every state’s rules are slightly different, making it confusing should one be considering moving for whatever reason, whether it be to save tax money or to be closer to grandchildren.
So some wealthy individuals are now consulting estate planning attorneys to help them with what has become known as “domicile planning,” to help them not escape income taxes but estate taxes, according to an article on Forbes.com.
The federal estate tax exemption of $5.3 million is now permanent, with a 40 percent tax applied to anything over that figure.
States typically have far lower exemptions and impose up to a 16 percent tax on anything over the exempt amount. New Jersey’s exemption, for example, is only $675,000. The tax on anything over that is from 4.2 percent to 16 percent.
But some states are making changes. Illinois reinstated its tax in 2011. Delaware made its “temporary” tax permanent.
That’s why estate planning attorneys are counseling some clients to move to Florida where there is no income tax and no estate tax. To benefit, you have to consider Florida to be your home at the time of your death even if you don’t live there all the time. It is a subjective evaluation.
In the meantime, there are moves afoot in some states to try and repeal the tax. Your estate planning attorney will know the latest changes that are being passed or considered.
A recent appellate court ruling in Florida gives former spouses the legal grounds to take funds from a type of trust that was thought to be unavailable to them.
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Discretionary trusts are set up by the wealthy to give a trustee the authority to make or not make distributions from the trust. But the ruling late last year in Florida gives ex-spouses and the children of beneficiaries more leeway to gain access to those funds in certain circumstances.
However, estate planning experts are divided over whether this ruling establishes a precedent for other states, according to an article on fa-mag.com.
In this case, Bruce Berlinger challenged a lower court ruling that allowed his ex-wife, Roberta Casselberry, to obtain funds from a discretionary trust fund after he stopped paying her $16,000 a month alimony. The trust had been paying the money directly to her and not to him.
Usually, a creditor may not garnish funds in a discretionary trust if the trustee does not make the distributions to the beneficiary. In this case, the court ruling the ex-spouse was deemed to be an “exception creditor “and could seek distributions from the trust to satisfy her alimony requirements.
About 30 states have some form of “exception creditor” provision in their trust codes.
Parents of special needs children have unique needs when it comes to estate planning. As a recent article explains, parents of special needs children who have not yet created an estate plan should put it on the top of their to-do list.
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Unlike the majority of non-special needs children, many special needs children will require constant care for the remainder of their lives. Additionally, many special needs children are not able to work or otherwise earn the income necessary to pay for their care. Therefore, planning for a special needs child includes not only leaving the proper amount of resources for procuring the proper care, but also helping to determine how that care will be provided.
However, planning for special needs children is not as simple as leaving ample resources and a plan for that child’s continuing care. This is because most special needs children already receive government benefits to assist in paying for their care. However, these benefits are need-based and will cease if the child no longer qualifies to receive them. Therefore, many parents of special needs children employ a special needs trust. This trust, rather than the child, owns the child’s inheritance. By using this trust, the money is not considered to be the child’s and he or she will continue to receive government benefits.
It is not uncommon for Americans to spend significant time away from their home state in order to take advantage of more favorable living conditions. Be it to live for less, for diversity investments, or to simply enjoy one last adventure, more and more Americans are choosing to retire abroad. A recent article discusses the 15 best countries for Americans to retire in 2014.
The Annual Global Retirement Index created the list based on a series of factors, including the price of necessary goods and services such as groceries and utilities, average temperature, and friendliness of the locals. As executive editor Jennifer Stevens explains, the list is “designed to be a real-world snapshot of the places we deem most worth a potential-retiree’s attention today.”
English: View of the Chagres River in Gamboa, Panama. (Photo credit: Wikipedia)
Topping the list for 2014 is Panama. As Stevens explains, Panama offers American retirees a “great combination of variety and value…No matter what it is you’re hoping to find, Panama is a good place to look for it.” The remaining rankings are as follows: (2) Ecuador, (3) Malaysia, (4) Costa Rica, (5) Spain, (6) Colombia, (7) Mexico, (8) Malta, (9) Uruguay, (10) Thailand, (11) Ireland, (12) New Zealand, (13) Nicaragua, (14) Italy and (15) Portugal.
Taking advantage of overseas options does not always mean changing your place of residence, but precautions should be taken to make sure that your estate plan is appropriately adjusted for your travel. To determine your unique considerations before booking your tickets, consult with a qualified estate-planning attorney.
Many investors are so focused on their return on investment that they fail to consider or implement asset protection strategies. As a recent article explains, an investor who has not protected his investments is a mere sitting duck. If you haven’t considered asset protection for your investments, below are four strategies you should consider:
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1. Insurance: This is an important part of any asset protection plan because it shifts the risk of loss to somebody else. Insurance can be purchased for almost any asset or activity.
2. Wait for Social Security: Social security is an important safety net for an individual or couple as they age. By waiting as long as possible before withdrawing benefits, an individual or couple can increase their ultimate return.
3. Execute and Update an Estate Plan: An estate plan accomplishes many tasks. Not only does it provide for your loved ones after your death, but it can also utilize various tools to reduce the tax liability on your estate and your heirs.
4. Consider Business Ownership for a Favorable Tax Rate: Ownership of assets by a business entity rather than an individual often means a lower tax liability on the assets. If you have a home business or simply a large amount of assets, consider forming a corporate entity to lower your tax liability.
Recently, a number of legal battles have stemmed from Farrah Fawcett’s death. Perhaps most notably, the University of Texas sued Fawcett’s partner Ryan O’Neal for taking Andy Warhol’s famed Farrah Fawcett painting from Fawcett’s home after her death. A recent article discusses what can be learned from the legal mess.
Farrah Fawcett (Photo credit: rocor)
Although most families do not own million dollar items such as Warhol paintings, it is not uncommon for families to get into similar legal fights concerning valuable or sentimental property left behind after a loved one dies. These fights are also common when a person gifts a piece of personal property before his or her death. Often, these gifts are inconsistent with the person’s estate planning documents, leading to a fight over whether the gift was valid.
In order to avoid similar fate, it is important to make your wishes concerning specific personal items exceedingly clear. If you are aware of a particular object that may cause fighting amongst your heirs, explain its disposition in your will. If you would like to give it away before your death, discuss the gift with your other heirs. If they understand your reasoning, they will be less likely to file suit after your death.
The end of a person’s life can be a difficult and confusing time. However, it doesn’t have to be. A recent article discusses four actions that every person should complete as they prepare for the next life. By completing these four actions, an individual can get the most out of his or her final days.
Estate Planning: Estate planning is a process. Every person should execute his or her first estate plan upon becoming an adult. Importantly, however, a person should not neglect his or her estate plan. It is good practice for individuals to update their estate plans every three to five years, as well as after an important family event such as a birth, death, or marriage.
Cover of The Bucket List
Making Decisions for End of Life Care: The method through which a person wishes to leave this world is a highly personal decision. Unfortunately, many people don’t realize that they can take control over how they spend their final days. This control is gained through a living will and medical power of attorney.
Bury the Hatchet: It is impossible to know when the end will be. While some people may have the time and notice necessary to atone and make amends with the individuals they have hurt or from whom they have otherwise become estranged, others will pass on suddenly without any warning. It is therefore important to take care to not carry old grudges or remain estranged from former friends or family members.
Bucket List: The idea of a bucket list has been gaining in popularity since the 2007 movie of the same name. A bucket list is a list of things that an individual or couple would like to do before “kicking the bucket.” If you have any such desires, consider documenting them as the first step toward making them happen.
For families that own small businesses, one vital part of estate planning is succession planning. Through succession planning, a business owner plans for the future of his or her business. A recent article discusses how Charlie Luck IV is planning to keep family-owned firm, Luck Stone, in the family.
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At only 53, Luck is in no hurry to pass the business on to his heirs. However, in planning ahead, Luck shows the forethought that all small business owners should have when it comes to succession planning. Luck is already considering which, if any, of his three children display the responsibility and interest necessary to run the business.
Although Luck’s biggest goal is to keep the business in the family, he knows that it will only work if he selects the right successor. As Luck explained, “One of the worst things in the world you can do is put any person in a company role, family or non-family, that does not align with who they are, with their skill set and their capacity…that is unethical.”
Statistics are not on the side of family businesses. Only three percent of family businesses in the same position as Luck Stone – moving from generation three to generation four – survive the transition.
For those parents who have multiple children, estate planning is often a matter of attempting to determine what distribution of powers will be perceived as ‘fair’. The reality is that different children have different interests and skills that make them appropriate for various estate planning responsibilities. A recent article discusses how to divvy up estate planning powers between your children.
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This decision may be an easy one. For example, if all but one of your children has moved out of state, it makes sense to name the local child as your power of attorney. However, if the local child is irresponsible or untrustworthy, somebody else should be named.
Sometimes it is easier to first consider which children should not serve as your power of attorney. Your power of attorney will be responsible for making financial and legal decisions on your behalf. Some children are simply not cut out for this task.
If you have more than one child who you believe could serve as your power of attorney, it is possible to draft several limited powers of attorney to spread out responsibility among your children. For example, you could assign one child to tend to your business affairs and another to handle your personal financial affairs.
For assistance in setting up a power of attorney, please contact us at 732-521-9455.
Estate planning is especially important for those who put a large amount of time and energy into cultivating their wealth. Additionally, investors within the Lesbian, Gay, Bisexual and Transgender community have unique estate planning needs that should be addressed by an estate planning professional. According to a recent Spectrem Millionaire Corner Study, fewer LGBT investors have estate plans in place than their non-LGBT counterparts.
LGBT (lesbian, gay, bisexual, transgender) Pride flag (Photo credit: Wikipedia)
The study revealed that only sixty-three percent of LGBT investors have executed a last will and testament, and only fifty-four percent of LGBT investors have executed a living will. Both of these documents are vital pieces of an estate plan, as a last will and testament allows a person to control the disposition of his or her assets, while a living will allows a person to control the end-of-life medical care he or she receives.
Although the percentages of LGBT investors with various estate planning documents rise with the wealth of the investor, they never reach the percentages of their non-LGBT counterparts. This is not only true for the execution of a last will and testament and living will, but for the creation of trusts as well. At the time the study was conducted, only eight percent of LGBT investors had an irrevocable trust in place.
Estate planning is particularly important for LGBT investors if they wish to have a comparable level of control over the disposition of their assets at death as their non-LGBT counterparts. Accordingly, LGBT investors are encouraged to seek able counsel to formulate an appropriate estate plan for their needs.
A recent article quoted financial planner Michael Joyce as saying, “There’s nothing magic about reviewing goals […], but it is a good time to refocus people on their financial goals.” Joyce’s statement could not be moretrue. It is good practice to periodically review financial and estate planning goals, and the end of the year or the beginning of a new year is a great time to check this off of the to do list.
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Individuals should begin their review by checking the beneficiary designations on their retirement accounts, life insurance policies, 401(k) plans, and any other account with a beneficiary designation. It is important to not only ensure that a beneficiary has been named, but also that the named beneficiary is still appropriate.
Additionally, review the provisions in your will and trust documents. Consider whether any provisions need to be changed, added, or omitted. This is especially important if you have experienced a marriage, divorce, or the birth or death of a loved one since you first signed your will.
Individuals should also consider any tax law changes that will impact their assets. Tax laws are in constant flux, so a periodic review of applicable laws is the best way to plan to reduce anticipated taxes. This review should also include a review of gift tax limits, which may encourage an individual to increase year-end gift-giving in order to achieve a greater tax benefit.
Asset protection planning is an important part of any estate plan. Incorporating asset protection strategies into an individual’s estate plan is the best way to ensure that he or she is able to leave the bulk of his or her assets to his or her heirs, rather than his or her creditors. A recent article discusses several rules of asset protection.
First, realize that everything sees the light of day. An individual should craft his asset protection plan with the knowledge that his or her creditors will eventually become aware of the plan and purpose. Typically, the use of secrecy in asset protection planning can only lead to trouble.
Second, it is important to begin such planning before claims arise. An asset protection strategy will work best if it is implemented early and reviewed often. Typically, after a claim arises, it will be too late to take any asset protection measures, as they may be considered fraudulent transfers.
Finally, realize that asset protection planning cannot substitute for purchasing insurance. Having an asset protection plan in place should not deter a person from purchasing liability and professional insurance. Instead, planning should be seen as a supplement to that insurance.
While it is not the first item on everyone’s resolution list, the New Year is a great time to discuss your estate plan with your family. As a recent article explains, the benefits of having the estate planning discussion far outweigh the problems that may otherwise arise out of the desire to avoid a sometimes awkward or difficult conversation.
First, discussing estate planning provides your family with a sense of empowerment because it allows your family members to take control of your family’s collective future. Without this element of control, many aspects of your estate plan are inevitably left to chance.
Additionally, through discussing estate planning, you can pass on your family values. For example, discussing charitable giving is a great way to talk about the causes you are passionate about. Additionally, you can discuss the stories behind sentimental objects and why you are distributing them as you have selected.
Finally, discussing your estate plan with your family helps to prepare the family, should you become incapacitated. Your family will be better able to carry out your wishes and tend to your affairs if they know what your plan for incapacity is and how you would like them to implement it.
An estate plan is not one document. Rather, it is a collection of various documents that deal with a wide variety of assets, and leave instructions for various situations. An important part of any estate plan is a person’s beneficiary accounts. As a recent article explains, one of the most widespread estate planning mistakes occurs when people fail to update their beneficiary designations.
Beneficiary accounts such as IRAs, retirement accounts, insurance policies, mutual funds, bank accounts, brokerage accounts, annuities, and 529 college savings plans are accounts that are transferred to a designated beneficiary immediately at the death of the account holder.
Importantly, a person’s will or trust does not trump his or her beneficiary designations. For example, if a divorced man failed to take his ex-wife’s name off of his retirement account before he died, the proceeds of the account would go to his ex-wife. This would be the outcome even if he clearly stated that the ex-wife was to be disinherited in his will.
It is good practice to update your beneficiary designations once every few years and after important events, such a marriage or divorce.
Probate is a court-supervised process through which the provisions of a person’s will are carried out. Many people choose to avoid probate by employing various estate planning tools that transfer their assets outside of their will. As a recent article explains, an additional benefit of creating non-probate transfers is that they provide a level of asset protection.
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If a person’s estate goes through probate, his or her executor will begin the process by collecting the decedent’s assets and giving notice of the death to any potential creditors. After this notice is given, the decedent’s creditors will have a specified amount of time to make any claims against the estate. The executor will have to pay these claims through the estate before distribution to the heirs.
Alternatively, certain non-probate assets such as life insurance policies, beneficiary accounts, and items held in joint tenancy pass immediately to the beneficiary or joint tenant upon the decedent’s death. Therefore, creditors are often unable to reach these assets.
Although non-probate transfers are a great way to incorporate asset protection planning into your estate plan, it is important not to use non-probate transfers specifically to avoid a particular creditor. These transfers can be undone if a court finds that the transfer was made for the sole purpose of avoiding an existing obligation to a creditor.
Although it is important for every individual to have an estate plan, the process of estate planning is often confusing and overwhelming. A recent article addresses several frequently asked questions concerning estate planning.
Those who have drafted a will often wonder where they should keep it. There are a variety of appropriate places to keep a will, including a safety deposit box, your attorney’s office, or even on file with the probate court in the county in which you live. No matter where you decide to store your will, it is important to be sure that your will is safe and that your heirs will be able to locate it.
Another frequently asked question concerns what information should be left out of a person’s will. Since a will must go through probate before it has any legal effect, any document that needs to be viewed immediately upon a person’s incapacity or death should not be included in a person’s will. These documents include advance directives, organ donation information, wishes for the disposition of a person’s remains and funeral instructions.
Finally, many individuals have a hard time understanding whether they need a will, trust, or both. To understand which you need, it is important to understand the difference between the two. A will takes effect only after a person’s death and it distributes non-probate assets. A trust takes effect when it is created and it allows a person to exercise extended management and control over his or her assets. It is good practice for everyone to draft a will and to add a trust if necessary.
Some assets are more difficult to plan for than others. As a recent article explains, timeshares can be the source of an extreme headache when it comes to estate planning.
First, it is important to realize that, after death, the deceased owner’s estate remains responsible for paying any timeshare maintenance fees and property taxes incurred. These fees can quickly add up, especially when the decedent’s heirs are unaware of them.
Most often, the decedent owner’s estate wishes to sell the timeshare. Unfortunately, timeshares are difficult to sell and it is often necessary for the estate to go to the timeshare company itself. The company may assist in selling the timeshare, however it will likely charge a large commission.
If the timeshare is deeded – rather than leased – the decedent owns a real property interest in it. This means that after the owner dies, the transfer of the timeshare will be controlled by the laws of the state where the timeshare is located, regardless of where the owner resides.
Alternatively, if the timeshare is held in a joint tenancy with a right of survivorship, the timeshare will automatically pass to the joint tenant. The surviving joint tenant will need to file an affidavit of death in order to have the deceased joint tenant removed from the deed.
One popular misconception concerning estate planning is that any trust will protect an individual’s assets from creditors. However, as a recent article explains, this is not true. If you are considering incorporating a trust into your estate plan as an asset protection tool, it is important to understand which trusts will actually provide asset protection.
As the title suggests, a revocable living trust will not protect trust assets from creditors. The primary purpose of these trusts is preserve privacy & ease the transfer of wealth by keeping a person’s assets out of probate, which often saves a family time and money. If you have a revocable living trust, it is important to realize that creditors can reach the assets within that trust. This is because you never fully relinquish control of your assets in a revocable trust so you are still considered the legal owner.
If you are interested in incorporating a level of asset protection into your estate plan, consider using an irrevocable trust, or in some cases, as Family Limited Partnership (FLP) or Family Limited Liability Company (FLLC). In contrast to a revocable living trust, an irrevocable trust, FLP and FLLC will protect your assets from creditors. This is because the trust or entity creator is not considered the owner of the assets held in the trust or entity. The trade off, however, is that you may relinquish direct total control of the assets placed in the trust (although, if done right, you may still exercise indirect control.)
