Those who want to pass on assets spend a lot of time determining who should get what, but this means that sometimes how that person will handle the money is forgotten entirely.
A recent study completed by Accenture anticipates that between one and three trillion dollars will be transferred to heirs through 2050. Many of these people may never have inherited a large amount of money before presenting questions about managing these large windfalls.
Many professionals in the financial field recommend taking some time to avoid any action at the outset because this is more of an emotional process than simply winning the lottery.
This is not just a windfall because it is what is being given by someone who is no longer around. Moving too quickly can also lead to poor decisions and spending opportunities, like taking advice that could be regretted down the road or spending later. Plan on how you may deal with stress from relatives and friends about their recommendations regarding how you invest or spend the money.
It is very common for families in the position of a sudden windfall to argue over the outcome and how the money should be spent, so you should have a plan in place for addressing these issues with cooperation and care.
Art collectors are celebrating a recent decision handed down from a US Appeals Court which could help to minimize taxes. The court agree that shared ownership in a highly-valued blue chip art collection, which can also be noted as a “fractional interest” enabled one family a critical tax break in the settling of an estate.
The Texas family involved had collected Picassos, Jackson Pollock pieces, and art by Paul Cezanne. The family used a grantor-retained income trust where partial ownership of the art was handed down to each one of their three children. The idea is that shared ownership interest limits the opportunity to sell or transfer the works since this would also require agreement from each child.
The court ruling determined that the deficiency lay with the IRS commissioner’s failure to properly use the discount for restricted ownership in this case, although an earlier tax court had argued that the family was only entitled to a 10 percent discount.
If you have a substantial art collection and are concerned about how it will be passed down to beneficiaries, talking to an estate planning expert could be in your best interest. Contact our offices today to learn about trusts or other vehicles that might work best for you. Request an appointment via email at email@example.com or over the phone 732-521-945
New research from the Insured Retirement Institute shows that although nearly two-thirds of older individuals considered leaving an inheritance behind important in the past, those numbers have shifted out of beneficiary favor. According to their report, less than half of baby boomers today believe it’s critical to leave behind an inheritance.
So, what’s behind this big shift in attitude? Many older individuals and couples want to see that you are capable of handling an inheritance first, taking the following factors into consideration:
A pattern of good financial decision-making skills. This doesn’t mean you’re mistake free on your credit report. Parents just want to see improvement and a pattern of it to verify that you’re responsible enough to handle a lump sum inheritance.
Understanding of your own financial missteps and accomplishments. Once again, it’s not about being perfect. Some older parents thinking about an inheritance left behind want to know that you’ve made your mistakes, learned from them, and moved on. It’s a sign that you’re growing in terms of financial independence and understanding. If you have a pattern of racking up debt and then struggling to pay it off, however, that’s not a good sign.
Debt awareness. Are you making student loan payments? That’s okay, because it was an investment in your future. Credit card debts and big car loans, however, show that you might not be familiar with the right kind of debt- or the right way to pay it off. Both are red flags for parents.
Educate yourself. No need for a post-graduate degree here, but certainly some financial education on your own through books, planning, and even videos can be really helpful. Find out your weak spots and work to improve them on your own. This shows ambition and desire, both of which parents love to see.
There’s never been a better time to get started. To discuss your plans for asset protection, tax minimization, and your estate, email firstname.lastname@example.org or contact us via phone at 732-521-9455 to get started.
A former Supreme Court justice wrote his own will, using just 176 words. It cost his family $450,000 in estate taxes and court fees because he didn’t take the time to do it right.
Lesson: Know what you know, know what you don’t know.
A young woman left her assets to her minor son. When she died, she had $1 million in her estate due to a wrongful death claim. Her son died soon afterwards and the money went to his only heir, his father, who was a drug addict.
Lesson: She could have put the assets into trust with a contingency plan were he to die, so the money could not go to the father.
A father had a stroke and had to go into a nursing home. His children closed his bank account but never went through his mail. After he died, they found a statement for a $1 million life insurance policy. But the premiums had not been paid since the bank account was closed. They didn’t get the money.
Lesson: Make sure somebody knows what assets you have, usually the person who has power of attorney, a trustee named in a trust you have set up or the personal representative named in your will.
These are common mistakes that can be avoided if you engage a qualified estate planning attorney to help you with your estate plan.
If you wish to protect your money or assets or are about to receive a sudden windfall such as an inheritance, you may want to consider a number of strategies to protect yourself from lawsuits. Simple reason: “The Deep Pockets Theory”; the people with the money are the people who are sued.
1) Increase your liability insurance. If you are about to inherit $3 million, call your broker and increase your liability policy to protect that additional $3 million. Do it before you get the money. Rates are inexpensive.
2) Consider separating assets. You may not want your spouse to have access to your new windfall. If you put the money in a joint account, that is what will happen.
3) Protect yourself from renters. If you have rental property or are going to get rental property, put the property into a business entity such as an LLC to shield your assets from a disgruntled tenant. That way, they can sue the entity for what it has, but cannot go after you and what you have.
4) Create a trust and/or business entity to shield your assets. If you do part-time work you probably are operating as a sole proprietorship. But all of your assets are at risk if you are sued.
5) Be careful with partnerships. If you have an informal partnership, you are responsible for the actions of your partner. Form an LLC or other entity to provide legal protection.
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.
Actor Paul Walker of Fast & Furious fame, who died in a car accident in November, left his entire fortune of $25 million to his 15-year-old daughter, who had recently left her mother and childhood home in Hawaii to live with him in California.
Walker did not leave a dime to any other family members or even his girlfriend.
But Walker’s will did have one catch. His daughter, Meadow, will not be able to touch the money until she becomes an adult. Nothing unusual there, except that Walker named his own mother to be Meadow’s guardian.
According to an article on cafemom.com, this is a bit unusual and could be tricky. One wonders why he named Meadow’s grandmother as her guardian rather than Meadow’s own mother, Rebecca Soteros.
However, the matter will be decided by a judge later this month. In the meantime, Meadow is back in Hawaii living with her mother.
Walker was a very private person and not much is known about the circumstances of his breakup or the decision to have Meadow come live with him in California.
Actor Phillip Seymour Hoffman, who died of a drug overdose in February, had not updated his will in years. The mistake could prove troublesome for two of his daughters and their mother.
The will was signed in 2004 when the actor had just one child, Cooper, now 11. But he subsequently had two daughters, Tallulah and Willa, neither of whom are mentioned in the will.
This may or may not be a problem.
The award-winning actor, who was just 46 when he died, left everything to his longtime companion, Marianne O’Donnell, the mother of his three children. But that’s just the beginning of the story, according to an article on Forbes.com.
Since Hoffman and O’Donnell were not married, she does not get any of the estate tax breaks available to spouses. You can give an unlimited amount to your spouse during life or in an estate plan, with no federal or state tax applied.
Hoffman was worth an estimated $35 million at the time of his death. The federal estate tax exemption is $5.3 million, but the rest is taxed at up to 40 percent. New York has its own estate tax of up to 16 percent for non-spouses, with a $1 million exemption.
In all, Hoffman’s estate will be taxed at more than $15 million. And since they were not married, any assets that remain at O’Donnell’s death would be taxed again.
There may be a way out for O’Donnell, however, The will allows for her to turn down all or part of her inheritance and put it into a trust. Any assets that go into the trust bypass her estate and cannot be taxed when she dies.
But the fact that only Cooper was mentioned in the will, complicates the matter. The will provides that he get half the principal of such a trust when he turns 25 and the other half when he turns 30. However, the law of New York and most states protects children not named in a will that has not been updated from being disinherited.
The article suggests that O’Donnell, who is the executor of the will, should appoint a guardian to represent the two sisters.
Other matters that could complicate matters include if Hoffman had set up a retirement account or a life insurance policy.
But all the confusion could have been avoided if Hoffman had included a clause in the will stipulating that any reference to Cooper includes any other children born after him.
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.
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.
The fear that a person’s adult children will mismanage their inheritance is not uncommon. Luckily, the field of estate planning offers many tools to assist parents in ensuring that this does not happen. As a recent article explains, one of these tools is the trusteed IRA.
A trusteed IRA combines a traditional IRA with the benefits of a trust account. Importantly, the owner of a trusteed IRA can more confidently leave his or her account to his or her heirs, as the trusteed IRA provides a long-term distribution plan for making withdrawals. Chief fiduciary officer of U.S. Bancorp Sally Mullen explains that “for clients who want to control what happens after their death, this is an interesting and attractive vehicle.”
Before selecting any estate planning device, it is important to understand the risks associated with various devices. A trusteed IRA presents two major risks: (1) the trusteed IRA could end up with a higher tax liability than the heirs would have otherwise been responsible for, and (2) the IRS may determine that the trust is not a “see-through” or “conduit” trust, meaning that his or her heirs would not be able to take the stretched-out withdrawals as planned.
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.
For parents of minor children, passing assets on to their children cannot be the only focal point of estate planning. Rather, parents must have a plan for the management and control of these assets until the children are old enough to handle them responsibly. A recent article discusses how trusts accounts can be used to accomplish this goal.
Even if your children are no longer minors at the time of your death, they still may be unable to responsibly handle an inheritance. There are a number of reasons that this may be the case, such as immaturity, substance abuse, or mental incapacity. Additionally, parents who leave their children particularly large inheritances tend to spread them out until the children reach age 25 or 30.
No matter how you choose to structure the distribution, the simplest way to do so is through a trust. When creating the trust, you can select a person to manage and distribute the assets for your children (a “Trustee”). Additionally, you can leave detailed instructions for the trust to ensure that the assets are distributed the way you would have wanted. For example, you can specify that funds will not be released until a child is 25, unless he or she needs them for college tuition.
Furthermore, a parent can design the trust so that he or she retains access to all assets within the trust during his or her lifetime. That way there is no worry that the assets are being given up too soon. Finally, during the life of the trust, it can provide the added bonus of protection against divorcing parents, creditors, plaintiffs, and business risks.
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.
Although taxes may be one of the items furthest from an individual’s mind when a close friend or family member passes away, a large amount of people will unfortunately face death tax issues at what is already an extraordinarily difficult time. A recent article discusses how individuals can plan their estates to shield their beneficiaries from this fate.
It is first important to understand how common tax issues are in estate planning and administration. According to chief fiduciary officer at Bank of the West in San Francisco, “One in 10 estates have some tax issues . . . There’s nothing worse than being in your worst grieving moments and having to deal with financial chaos.” There are a variety of state or federal taxes that may plague a family after a death.
In order to plan for and avoid these taxes, it is important to create an estate plan that takes them into account. One tax issue may be an unpaid federal or state tax liability. This often occurs when a person faces a long illness before his or her death and no one took charge to see that financial obligations were met. There may also be unforeseen federal or state taxes due. Although federal estate taxes don’t kick in until the estate is worth $5.25 million, some state estate taxes apply at much lower levels. For example, New Jersey’s estate taxes apply at $675,000 while New York’s estate taxes apply at $1 million.
Can you imagine receiving a few hundred thousand dollars in your account when you were 18 years of age? Typically, parents wish to leave their assets to their children or grandchildren. Although many people simply leave their assets to their children and grandchildren outright, a recent article discussed why it might be best to leave gifts to minor children and grandchildren in trust accounts.
If a parent leaves an inheritance to a minor child outright, the inheritance must go through the process of probate. Because a minor cannot legally hold property in his or her own name, a probate judge must appoint a guardian to hold the property until the child reaches the age of 18. The court-appointed guardian may not be a person that the parent or grandparent would have chosen. Moreover, the cost of compensating the guardian may diminish the inheritance.
Creating a trust for your minor child is the only way to remain in control of the assets. Through the trust, you can dictate how the funds may be used, and when they may be distributed to the beneficiary. Moreover, through creation of the trust you can select a trustworthy person to serve as trustee. Finally, a trust will take effect immediately. Therefore, the beneficiary will not be forced to submit to the probate proceedings.
The founder of the National Enquirer tabloid magazine, Generoso Pope, died in 1989. His two beneficiaries were his wife, Lois Pope, and his son, Paul Pope. Years later, Lois and Paul are again in court over Generoso’s multi-million dollar estate.
When the National Enquirer was initially sold, Lois received $200 million, and Paul received $20 million. Lois recently filed court documents claiming that her son has been harassing, stalking, and threatening her because he wants more of her inheritance.
According to court documents, Lois once gave her son $8 million and bought him a yacht. After that, the two have been involved in nonstop litigation. Paul has most recently demanded another $875,000 from his mother. Neither attorney has commented on the case.
Lois claims that, when she refused to pay her son, he spread public rumors about her through a gossip columnist. Included in these rumors, Paul claimed that Lois planned to kidnap one of his children. Lois countered that Paul asked Lois to kidnap one of his children so that he could get the kidnap insurance. Paul also maintains that Lois throws lavish parties to the tune of $1 million, and that she owns a private jet to transport her 18 dogs.
(and, no, this blog post was not written in the checkout aisle at our local grocery store!)
One of the most interesting parts of Warren Buffett’s estate plan is how he designed it to leave his children just enough so that they can do anything they like, while also not leaving them so much that they never have to do anything. As a recent article explains, many people would like to replicate this part of his estate plan.
Many parents wonder how much they can leave their children, before their children become lazy spendthrifts. However, simply leaving money to children may not be the whole problem. As Warren Buffett recently explained, “I think that more of our kids are ruined by the behavior of their parents than by the amount of the inheritance.” Parents who do not want their children to grow up as spoiled brats should focus on the environment that they raise their children in, rather than the inheritance they will give them.
Buffett also believes that it is “crazy” for your children to read your will for the first time after you have died. This is because communication is key to a smooth estate transition. If you discuss your will with your children before your passing, you stand a far better chance of avoiding disaster after your death. Although this conversation may be awkward, it is often necessary to outline your intentions and reasoning.
Many Americans may be unaware of what an irrevocable life insurance trust (“ILIT”) is, let alone the benefits it may provide to them. A recent article discusses several of the benefits offered by ILITs.
Typically, life insurance policy proceeds are not subject to income taxation. However, they are included in the calculation of a person’s gross taxable estate. This is where the ILIT comes in. If a person puts their life insurance policy into an ILIT, the proceeds of the policy are kept out of his or her taxable estate. The proceeds will therefore be available to his or her heirs free of income and estate tax.
Additionally, ILITs are a great way to provide cash to help pay for the taxes that will be levied on your estate. Beneficiaries of your ILIT can use some of the proceeds to pay the taxes owed on your estate. By doing this, your actual estate is kept in tact. This strategy is especially beneficial to those whose estate consists largely of illiquid assets such as a business or real estate. Through setting up an ILIT, you can ensure that your family will not have to sell the illiquid assets in your estate in order to satisfy the estate taxes.
After the death of New York City legend Ed Koch on February 1st, 2013, his estate plan became the topic of public conversation. A recent article discussing the plan suggests that he could have saved his estate 3 million dollars in taxes had he set up an irrevocable trust.
Koch drafted his final estate plan in 2007. Through his will, he directed that his 10 million dollar estate be distributed mainly between his sister, three sons, and secretary of 40 years. His estate plan did not utilize any type of irrevocable trust in order to facilitate these distributions. According to Managing Director of Estate Street Partners, LLC, Rocco Beatrice, using such a trust could have eliminated the entire estate tax bill of 3 million.
Koch’s estate will be required to pay New York state taxes of 16% on the amount by which it exceeds $1 million, as well as federal estate tax of 40% on the amount by which the estate exceeds $5.25 million. Assuming his estate is worth $10 million, these taxes would amount to $1.44 million and $1.90 million, respectively.
According to Beatrice, “That is a lot of money in taxes which could have easily been avoided.” Beatrice explained that, had Koch set up irrevocable trusts, the $3 million could have gone to his family, rather than the government.
We will die, our debts will not. Many people falsely believe that any debts they have incurred will dissolve when they die. Unfortunately, this is not the case. A new article discusses steps you can take to ensure that your debts do not eat away at the assets you had intended would go to your heirs.
One important move you can take now to protect your heirs later is to do what you can to pay down your debt. Speak with a financial advisor about how much debt you have, and how you can responsibly continue to pay it down while you are still alive. If you have a large amount of debt, consider cutting your spending now so you have more money to put towards your debts.
You may also want to consider loan protection insurance. This type of insurance is offered in a declining-term policy that will pay off specific loans if you die or become otherwise unable to pay through disability. Whether you need insurance for your home loan, credit card balances, or car loan, loan protection insurance may be a good option for you. These types of loans are often offered from lenders who provide mortgages, and may be a sensible solution for some individuals and couples.