For the Newbies: Four Estate Planning Tips For Beginners

Estate planning is often a difficult topic to approach. Not only is it difficult for many people to discuss the reality of their own mortality, but the process of estate planning can quickly become confusing and overwhelming. If you have not prepared your estate plan yet, a recent article offers four steps to take care of most of your planning needs:

1. Prepare a Master Information Document: A master information document should include all of the information your executor will need in order to locate and settle your accounts. This document is simple to create, and will save your executor from the nightmare of an unorganized estate. Importantly, be sure to keep this document in a safe place so that it does not fall into the wrong hands.
2. Consider Purchasing Life Insurance:  Life insurance is an important estate-planning tool for anyone who leaves behind dependents. The proceeds can keep a person who relies on your income from financial ruin.
3. Draft a Will that Considers Important Possessions:  If you have any items that carry a sentimental or financial value, chances are you will want to dictate who receives that item after your death. Additionally, if you do not account for the distribution of such items, you may trigger a feud among your family members.
4. Designate a Guardian for Any Minor Children: If you have minor children, guardian designation is the single most important part of your estate plan. Carefully select the person you would trust to care for your children should you become unable to do so and discuss your designation with that person before putting it in your will.

Why Everyone Needs a Power of Attorney

A power of attorney is a vital part of any estate plan. Through this document, an individual gives another person the right to act on his or her behalf, should he or she become incapacitated. A recent article discusses why everyone needs a power of attorney.

It is impossible to know when you may become injured, sick, or otherwise incapacitated and unable to tend to your financial and legal affairs or make medical decisions for yourself. By establishing a power of attorney, you give a person of your choosing the ability to pay your bills, manage your assets, and make important decisions concerning the medical care you receive.  Parents of young children may also use a Power of Attorney to memorialize guardian wishes for their young children in the event of an incapacity.

Despite the importance of designating a power of attorney, most people have not done so because they believe that, should an accident occur, their family will be able to simply step in and make any necessary decisions. However, this is not always the case. Not only may a person’s loved ones argue about who should manage your affairs and how they should be managed, but they may not have the legal authority to take important actions on your behalf.

There are two types of power of attorney, one to designate the person who should make medical decisions for you, and the other to designate the person who should make financial decisions for you. Every individual should execute both.

Survey Says! Many High Net Worth Individuals Still Fail to Plan

Although estate planning is vital for high net worth families, a recent survey released by Spectrum’s Millionaire Corner reveals that less than one quarter of millionaires have sought estate planning advice from their financial advisors.

Although estate planning is vital for everybody, it comes as no surprise that it is even more essential for America’s wealthier residents. Estate planning is an important component of financial planning, as it ensures that a person’s assets are managed and distributed according to his or her wishes. Additionally, estate planning allows for a person to provide for the care of any minor children, direct decisions concerning end-of-life care, and select a power of attorney to deal with finances in the case of incapacity.

The younger and least wealthy millionaire investors surveyed indicated that they would seek estate planning advice in the future. However, it is important to remember that the future is not guaranteed. All too often, illness and accidents can cut lives tragically short.

If you do not have an estate plan in place, consider meeting with an estate planning attorney soon. Although it may be difficult to deal with the reality of your own mortality, it is the only way to ensure a smooth transition of your assets and the protection of your family after you are gone.

Watch That Step!: Estate Planning Oversights to Avoid

In order to have a solid estate plan, it is important to not only carefully put the plan together but to revise it regularly as well. With all the work involved, it is not surprising that estate planning oversights are common. A recent article discusses several estate planning oversights that can lead to unintended consequences.

  1.       Failing to Plan: The largest estate planning mistake a person can make is failing to create an estate plan. If a person dies without an estate plan, his or her assets are distributed to his or her heirs in accordance with state law. This might provide the outcome the decedent had wanted, but often it does not.
  2.       Failure to Understand the Difference Between Probate and Non-Probate Assets: A probate asset is any asset that is transferred through a will. These assets go through the process of probate. A non-probate asset is transferred by contract, outside of the will. In order to create the most efficient and cost-effective estate plan, it is important to understand the differences between these two types of assets.
  3.       Failing to Pay Attention to Tax Apportionment Clauses: State and federal taxes may be assessed to various assets according to different rules. While some assets may be taxed, others may not. This becomes problematic when two children receive two inheritances of equal value but one has to pay taxes while the other does not.

Incorporate Your Prenup into Your Estate Plan

Later in life marriages, as well as second and third marriages that produce Blended Families, are increasingly common. Spouses entering into these marriages usually have more assets and, often, previous children that they would like to provide for in their will. For these couples, a recent article explains why it is important to incorporate your prenuptial agreement into your estate plan.

Importantly, if a married couple without a prenuptial agreement divorces, the surviving spouse is guaranteed a portion of the deceased spouse’s estate. This portion is known as the ‘elective share,’ and is different in every state. If the deceased spouse attempted to disinherit the surviving spouse or left him or her less than the elective share amount, the surviving spouse can elect to take the ‘elective share’ amount instead.

There are many reasons why the deceased spouse may not have wanted this. For example, the surviving spouse may be financially solid without the deceased spouse, and the deceased spouse would rather the assets go to children from a previous relationship. One of the few ways to block the surviving spouse from taking the elective share amount is to put it in a prenuptial agreement. If you have a prenuptial agreement and plan to do this, be sure that the estate plan and prenuptial agreement are coordinated with each other so that there is no confusion as to your intentions.  Another option is to gift assets into trust during lifetime with specific instructions as to what can/should happen upon death.

Our version of TMZ: Estate Planning Blunders & The Famous People Who Committed Them

Famous people are like us in many ways. They are born, they pay taxes, they make estate planning blunders, and they die. A recent article discussed several of the more common estate planning mistakes and the famous people who committed them.

English: US Congressional picture of Sonny Bono
English: US Congressional picture of Sonny Bono (Photo credit: Wikipedia)

Failing to Plan

Perhaps the worst estate planning blunder is failing to create an estate plan. When entertainer and Congressmen “Sonny” Bono died unexpectedly in a 1998 skiing accident, he left no estate plan. Therefore, his wife had to petition the court to administer his estate and continue his business ventures.

Failing to Seek a Professional

If anyone should be able to draft his own will without incident, it would be a former Chief Justice of the United States Supreme Court. However, even United States Supreme Court Justice Warren E. Burger couldn’t get it right. Burger drafted his own will, which contained simple errors, failed to address important things, and cost his family $450,000 in taxes.

Failure to Update

Importantly, a person’s estate plan should grow and change with him or her. Sometimes an out-of-date estate plan is worse than having no estate plan at all. When Actor Heath Ledger died at a young age, he had a will prepared. However, the will was drafted before the birth of his daughter, Matilda, and therefore left nothing to her.

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Choosing Your Executor

One of the most important estate planning decisions a person can make is deciding who will serve as the executor of the estate. This is a vital decision, because the executor will be in charge of overseeing the distribution of the estate in accordance with the decedent’s stated wishes. A recent article discusses several frequently asked questions when it comes to selecting an executor.

Does My Executor Need a Financial or Legal Background?
State law does not require individuals to have any sort of specialized background in order to serve as the executor of an estate. However, these skill sets are clearly beneficial when settling an estate. Although the executor can hire an attorney to assist with the estate administration, it is the executor who must make all final decisions.

Should I Select More Than One Executor?
Most commonly, people select a single executor. However, in some situations, it may be beneficial to select two executors. For example, where the deceased left behind an elderly spouse who is being assisted by an adult child, it may be beneficial if he or she named the spouse and child as joint executors, rather than the spouse alone.  Note that this may increase complexities in settling the estate.

Can My Named Executor Refuse to Serve?
The selection of an executor is not legally binding. Although the chosen executor will be given the opportunity to serve as such, he or she may renounce the appointment. If the decedent named a contingent executor, he or she will take over, if not, the court will appoint one.

Avoid These Common Estate Planning Mistakes

Estate planning is a field fraught with pitfalls. All too often, estate planning mistakes are discovered after the person who created the estate plan has passed on, so he or she cannot fix the problem or explain his or her intentions. A recent article discusses several estate planning mistakes to avoid.

Naming Special Needs Minors or Adults as Beneficiaries
This is often problematic because special needs individuals often receive benefits from the government. However, most of these benefits are needs based, and may cease if the individual receives a large inheritance. Therefore, gifts to special needs individuals must be structured in a way – such as a trust – that keeps them out of the immediate control of the individual.

Failing to Name a Contingent Beneficiary
Failing to name a contingent beneficiary becomes problematic when the primary beneficiary either predeceases the person who created the estate plan, or disclaims his or her share. In either situation, if a contingent beneficiary is not named, the share would pass in accordance with the intestacy statute under state law.

Naming Your Estate As The Beneficiary on a Retirement Plan
When an individual receives the proceeds of a retirement plan after the death of the plan owner, he or she can take advantage of special IRA “stretch out” provisions. Using these provisions, the beneficiary can structure the inherited IRA to receive distributions throughout his or her life. These provisions do not apply when the beneficiary on the plan is an estate.

When Considering Life Insurance

Life insurance is a simple concept. A person takes out a policy in order to provide funds to his or her loved ones upon his or her death. However, life insurance can get complicated by the various products that life insurance companies offer. A recent article attempts to assist insurance customers in understanding how to make good decisions concerning their life insurance.

The article first suggests that people consider life insurance as financial plan insurance. The term itself is rather misleading, considering that life insurance cannot bring you back once you have passed on. Rather, life insurance provides for the financial future of your loved ones.

Here is one rule of thumb: when purchasing life insurance, first calculate how much money you believe your family would need to live comfortably without you. Factor in any mortgage or car payments, college tuition for children, and supplemental income. When you have factored in all of these assets, consider how long your family will have these specific needs. Often, a level term policy that expires at the same time that your working career would be over is the best option.

Life insurance replaces your income, so consider how long of a working career you believe you will have. For example, if you plan on retiring at age 65, calculate your income until that date. After which, there is no anticipated income to protect.

529 Plans Benefit Grandparents and Grandchildren

As a recent article explains, a majority of wealthier investors prefer to transfer money to their grandchildren through 529 college savings plans. In part, 529 college savings plans are popular because they allow the grandparents to reduce the value of their taxable estate, while also maintaining control of the funds removed from the estate.

A person can open a 529 College Savings Plan for each of his or her grandchildren. The grandparents can then transfer up to the current annual gift tax exemption amount to each account, tax-free. Not only will the 529 account grow tax-free, but any withdrawals made by the grandchildren will be tax-free, as well.

English: A grandfather teaching his little gra...
(Photo credit: Wikipedia)

Importantly, the donors to the account are the ones who determine how the assets will be distributed. For example, if a grandparent unexpectedly has a stay in an emergency room and requires the money, he or she can take the assets back. If this happens, however, any investment gains would be taxed to the grandparents when the assets are withdrawn. This penalty tax, however, is only ten percent. Many donors attempt to “frontload” the 529 account so that they can make a lump sum gift of $65,000, tax free.

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Thanks Gramps! Planning Gifts to Grandchildren

Often, grandparents who have extra money wish to assist their grandchildren financially. A recent article discusses three ways through which grandparents can give to their grandchildren.

Grandparents with a child
Grandparents with a child (Photo credit: Nestlé)

Write a Check

Many grandparents simply write checks to their grandchildren without thinking twice about it. Under current tax rules, a person can give as much as $14,000 per recipient per year, without tax consequences. If you would like to give an individual grandchild more than $14,000, consider using another vehicle to avoid tax consequences. Finally, remember that this type of gift is often calculated into a giver’s estate for the calculation of whether a person is eligible for means-tested government programs such as Medicaid.

Invest in a College Savings Plan

If you want to assist your children with paying for a college education, consider a 529 account rather than simply writing a check. With a 529, you can be certain that the money is spent exactly how you would like it to be spent. Additionally, 529 accounts offer important tax benefits that will not have any impact on your grandchild’s ability to apply for means-tested financial aid.

Use a Gift Trust

Finally, you can transfer money to your grandchild through a gift trust. A gift trust is an account that you set up where you or a named individual serves as the trustee. The trustee can direct the timing and use of any distributions made from the trust.

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Calling an Audible: Avoiding Taxes Caused by a Bypass Trust

Since estate-planning maneuvers can cause unintended consequences, it’s important to plan with flexibility. A recent article discusses how one man dealt with the unintended consequences of a bypass trust he inherited from his wife before it was too late.

Bypass trusts are a very common estate-planning tool used to pass wealth to several generations. Angie Stephenson, partner at ParenteBeard Wealth Management LLC, explains that “these [bypass] trusts were common years ago when the estate-tax exemption was much lower, so you see them in many wills.”

When this particular man’s wife passed away, he received a bypass trust worth $730,000. In creating the trust, his wife’s intentions were that the trust provide him with income for the remainder of his life, and then distribute the remaining assets to their children. The problem was that when the children receive the remaining assets, they would also receive a large bill for capital gains taxes.

Through planning, the man was able to work out a way to include the trust assets into his estate, thereby eliminating the capital gains tax liability for his children. In order to accomplish this transfer, the man was granted the power of appointment over all assets held by the trust. Importantly, this maneuver gave him control over the assets which would then be considered as part of his estate upon his death. Such a result illustrates the benefit of planning with flexibility.

Back to the Basics: Estate Planning for a “Typical” Family

Contrary to popular belief, estate planning is still important for the vast majority of Americans who are not wealthy. After all, after a person has worked his or her entire life to amass all of his or her assets, he or she should seize the opportunity to direct what happens to the assets after his or her death. A recent article discusses five important estate planning maneuvers for the “typical” family (although we are pretty sure there is no such thing as a “typical” family).

Day 73: Kerns family self portrait {about me}
(Photo credit: lorenkerns)
  1. Sign an Advance Health Care Directive: This document allows you to put your wishes in a document to be followed by your doctors, concerning the end-of-life medical care you’d like to receive.
  2. Complete a Durable Power of Attorney, which will allow you to select the person who you would like to take control of your financial affairs, should you become unable to do so.
  3. Execute a Last Will and Testament: This is an important document because it directs the distribution of your assets. Through your will, you designate the guardian for your minor children.
  4. Complete and review your beneficiary designations: These are the designations on policies, such as life insurance, that pass straight to your intended heirs upon your death.
  5. Be sure to consider the impact of property held via joint ownership. Such property is inherited immediately by the joint owner upon your death.
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Income Tax Planning While Planning Your Estate

Now that the American Taxpayer Relief Act of 2012 has bumped the federal estate tax exemption up to $5.25 million, a recent article explains that many individuals are now turning their energy to estate planning maneuvers that will reduce their income tax bills.

Most income tax planning strategies are aimed at individuals who have a high net worth, yet do not anticipate their estate to be valued at or above $5.25 million upon their death. One popular strategy is making a loan to a family member or friend in a lower tax bracket at a low interest rate. The borrower can invest the money and take out the dividends, interest, and capital gains. Eventually the borrower will pay the loan back and the lender will have his or her money back so he or she can pay for retirement or medical expenses.

Like the maneuver described above, income tax planning often involves the shifting of assets in order to reduce the income tax liability on those assets. Incorporating a trust into the strategy may also fortify the plan to protect against creditors and State Estate taxes.

Minding Mom & Pop’s Shop: Five Steps to the Succession of Your Family Business

Succession planning for a family business is often no easy task. Recently, an article in Forbes outlined the five necessary steps for a viable succession plan. The five steps include:

English: Demise of a family business? Coulson ...
(Photo credit: Wikipedia)
  1. Planning for the general transition of the business: The article notes that only one third of family businesses successfully make this transition.
  2. Creating a plan that aligns the family interests: This is important because the succession of a business must serve many family goals. Not only must it pass the business on to the next generation, but it must also provide a retirement income for the current owners.
  3. Creating a buyout agreement that balances financial returns: Often it is difficult to value a family business. While the retiring owner may look to the balance sheets for the value, the real value of the business is often based on a model of earnings capitalization.
  4. Creating a succession plan that quells any potential interfamily disputes: Often, interfamily disputes can spell the end of a family business. These disputes are most typical where the interests of all family members are not aligned. Pay particular attention when there is a divorce or death that leaves a non-involved family member stock.
  5. Avoid potential estate and inheritance issues, such as tax and probate delays that may hold up the succession of the business.  

Safeguard Your Wealth for Retirement

It is never too early to start planning for a long and comfortable retirement. A major part of retirement planning is safeguarding assets from the uncertainty that life often brings. A recent article shares some tips for protecting retirement savings from potential liabilities such as lawsuits, while also ensuring that there is money available to you when you need it.  Here are some important takeaways:

retirement
retirement (Photo credit: 401(K) 2013)

Schedule Your Assets Based on Your Financial Timeline
People often protect their wealth by putting it in investments or policies that they will not be able to access for a number of years. While this is typically a great way to keep assets from creditors, it may become problematic if a person needs access to the money. Therefore, it is wise to schedule your investments and policies so that they become due at various, critical times in your life, such as when your children go to college or when you plan to retire.

Be Risky, Within Reason
Risky maneuvers, such as putting money into the stock market, can often pay off where financial planning is concerned. However, too much risk can lead to disaster as well. In order to safeguard the bulk of your retirement savings, you may consider secured-return investments such as a fixed indexed annuity. Place a much smaller portion into vulnerable investments and securities.

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Wait, I Did What?!?! Are You Second-Guessing Your ILIT?

Many Americans let out a sigh of relief when the American Taxpayer Relief Act of 2012 was finally signed into law. The signing of the act put an end to much of the uncertainty that previously surrounded estate planning where taxes are concerned. As a recent article explains, one consequence of this newfound certainty is that individuals who planned meticulously in order to avoid death taxes are now attempting to back-pedal .

One product that many individuals are now second-guessing is the Irrevocable Life Insurance Trust (“ILIT”). As the term “irrevocable” implies, ILITs are relatively inflexible. However, there are certain ways through which estate-planning attorneys can soften the terms of an ILIT.

Options such as adding a spousal access clause, adding a special trustee clause, or increasing the discretionary power of the trustee allow the trust creator to exercise more control over the trust. Some state governments have also attempted to make ILITs flexible by enacting “decanting” statutes that provide for the transfer of assets from an old ILIT to a new, less restrictive one.

If you would like to modify or revoke your ILIT, it is important to examine the originating documents carefully. Be sure to consider the legal, tax, financial, and insurance components of any planned adjustment. Importantly, any changes to your trust should comply with its terms and make financial sense.

 

Double Your Estate Tax Exemption

When a person dies, not all of his or her estate will be subject to federal estate taxes. A base amount of his or her estate, an amount equal to or less than the federal estate tax exemption, will not trigger any federal estate tax liability. A recent article discusses how an individual may be able to double his or her federal estate tax provision to $10.5 million.

This estate-planning maneuver utilizes the portability provision. This provision, which is only available to married spouses, allows one spouse to transfer any unused portion of his or her federal estate tax exemption to the other. For example, if the first spouse to die has an unused estate tax exemption of $3 million, the surviving spouse can add that $3 million to his or her $5.25 million estate tax exemption to enjoy a total exemption of $8.25 million.

Therefore, if the first-to-die spouse does not utilize his or her $5.25 million exception amount, it may pass directly to the remaining spouse, giving him or her a federal estate tax exemption of $10.5 million. Portability is not automatic, however. If you would like to utilize this feature, you must timely file IRS Form 706. In order to be considered timely, this form must be completed within nine months of the first-to-die spouse’s death.

Pass on the Bypass? Is a Bypass Trust Necessary?

Many people wonder whether bypass trusts are still necessary for asset protection. Even after the 2013 unified credit changes have been implemented for estate planning, making the transfer of assets between spouses easier, a recent article explains why bypass trusts may still be a good idea for certain estate plans.

One benefit of a bypass trust is that it protects assets from creditors and lawsuits. The provisions of a bypass trust that offer this protection depend on the state that the trust was created in and the state that the surviving spouse currently resides in.

Bypass trusts are also a good tool because they can transfer assets to more than one generation. A bypass trust can be set up to benefit the surviving spouse for the remainder of his or her life, then provide assets for his or her children and grandchildren. Bypass trusts can be written to include various other special benefits. These benefits can include professional management, provisions to limit spending, and provisions to avoid probate.

Finally, bypass trusts are helpful in avoiding estate taxes on appreciating assets. For example, imagine that a person put $5.25 million worth of assets in a bypass trust. Further, imagine that the $5.25 million grows to a value of over $10 million while in the trust. In this scenario, the entire $10 million will avoid estate taxes. As a result, bypass trusts may still be essential for particular estate plans.

Long-Term Care for Your Cat

All too often, cats are surrendered to animal shelters because their owner either died or had to enter a long-term care facility where the cat was not allowed. In order to avoid this fate, a recent article argues that cat owners need to have a long-term care plan in place for their pet. Importantly, this care plan can be simple and easy to create.

The first step in creating a long-term care plan for your cat is selecting a trusted friend or relative who may be willing to care for the cat in your absence. Discuss your designation with that person to make sure that he or she is up for the task. If you have an estate plan, you can insert a clause that gives your cat, and some money for its care, to the designated caregiver. If you do not have an estate plan, you can simply make a care arrangement with that person.

English: Portrait of a female feral cat (Felis...
(Photo credit: Wikipedia)

In your will or care arrangement, be sure to outline your cat’s routine. This may include feeding and exercise habits. Also include all medical information, including your cat’s veterinarian, where his or her medical records are located and any current medications.

Importantly, provide the designated caregiver with a spare key to your home or apartment. This will allow the person to enter your home if you suddenly become incapacitated. Finally, be sure to set some money aside for your cat’s care. When determining how much money to provide, consider that your friend will need to pay for food, veterinarian bills and any other necessary care expenses.