While the new tax law doubled the federal estate tax exemption, meaning the vast majority of estates will not have to pay any federal estate tax, it doesn't mean you should ignore its impact on your estate plan.
In December 2017, Republicans in Congress and President Trump increased the federal estate tax exemption to $11.18 million for individuals and $22.36 million for couples, indexed for inflation. (For 2019, the figures are $11.4 million and $22.8 million, respectively.) The tax rate for those few estates subject to taxation is 40 percent.
While most estates won't be subject to the federal estate tax, you should review your estate plan to make sure the changes won't have other negative consequences or to see if there is a better way to pass on your assets. One common estate planning technique when the estate tax exemption was smaller was to leave everything that could pass free of the estate tax to the decedent's children and the rest to the spouse. If you still have that provision in your will, your kids could inherit your entire estate while your spouse would be disinherited.
For example, as recently as 2001 the federal estate tax exemption was a mere $675,000. Someone with, say, an $800,000 estate who hasn’t changed their estate plan since then could see the entire estate go to their children and none to their spouse.
Another consideration is how the new tax law might affect capital gains taxes. When someone inherits property, such as a house or stocks, the property is usually worth more than it was when the original owner purchased it. If the beneficiary were to sell the property, there could be huge capital gains taxes. Fortunately, when someone inherits property, the property’s tax basis is "stepped up," which means the tax basis would be the current value of the property. If the same property is gifted, there is no "step up" in basis, so the gift recipient would have to pay capital gains taxes. Previously, in order to avoid the estate tax you might have given property to your children or to a trust, even though there would be capital gains consequences. Now, it might be better for your beneficiaries to inherit the property.
In addition, many states have their own estate tax laws with much lower exemptions, so it is important to consult with your attorney to make sure your estate plan still works for you.
“Unlike personal property, real property–such as real estate or automobiles–is titled to convey ownership.”
Title to real property must be transferred, when the asset is sold and must be cleared (free of liens or encumbrances) for the transfer to occur. Unlike other real property assets, real estate ownership can take several forms. Each of these forms has implications on how ownership can be transferred and can affect how they can be financed, improved or used as collateral.
Joint Tenancy. This is when two or more people hold title to real estate jointly, with equal rights to enjoy the property during their lives. When one dies, their rights of ownership pass to the surviving tenant(s). The parties in the ownership need not be married or related, but any financing or use of the property for financial gain must be approved by all parties and cannot be transferred by will after one passes. Another disadvantage is that a creditor with a legal judgment to collect a debt from one of the owners, can also petition the court to divide the property and force a sale in order to collect on the judgment.
Tenancy In Common. In this situation, two or more persons hold title to real estate jointly with equal rights to enjoy the property during their lives. However, unlike joint tenancy, tenants in common hold title individually for their respective part of the property and can dispose of or encumber as they chose. Ownership can be willed to other parties, and in the event of death, ownership will transfer to that owner's heirs undivided. An owner can use the wealth created by their portion of the property, as collateral for financial transactions, and creditors can place liens only against one owner's specific portion of the property. Any liens must be cleared for a total transfer of ownership to take place.
Tenants by Entirety. This can only be used, when the owners are legally married. This is ownership in real estate under the assumption that the couple is one person for legal purposes. The title transfers to the other in entirety, if one of the couple dies. The advantage is that no legal action is required at the death of a spouse. There’s no need for a will, and probate or other legal action isn't necessary. Conveyance of the property must be done in total, and the property can’t be subdivided. In the case of divorce, the property converts to a tenancy in common, and one owner can transfer ownership of their respective part of the property to whomever they want.
Sole Ownership. This is ownership by an individual or entity legally capable of holding title. The main advantage to holding title as a sole owner, is the ease with which transactions can be accomplished, since no other party needs to authorize the transaction. The disadvantage is the potential for legal issues regarding the transfer of ownership, if the sole owner dies or become incapacitated. Unless there’s a will, the transfer of ownership upon death can be an issue.
Community Property. This form of ownership is by husband and wife during their marriage for property they intend to own together. Under community property, either spouse has the right to dispose of one half of the property or will it to another party. Anyone who’s lived with another person as a common-law spouse and doesn't specifically change title to the property as sole ownership (which is legally transacted with approval by the significant other) takes the risk of having to share ownership of the property, in the absence of a legal marriage.
Community Property With the Right of Survivorship. This is a way for married couples to hold title to property. However, it is only available in Arizona, California, Nevada, Texas, and Wisconsin. It lets one spouse's interest in community-property assets pass probate-free to the surviving spouse, in the event of death.
Entities other than individuals can hold title to real estate in its entirety. Ownership in real estate can be done as a corporation. The legal entity is a company owned by shareholders but regarded under the law as having an existence separate from those shareholders. Real estate can also be owned as a partnership, which is an association of two or more people to carry on business for profit as co-owners. Real estate also can be owned by a trust. These legal entities own the properties and are managed by a trustee on behalf of the beneficiaries. There are many benefits, such as managerial influence, financial and legal liability and tax considerations.
“Wicked stepmothers are the stuff of Grimm’s fairy tales. Widowed stepmothers are the root of real-life inheritance wars.”
The biggest issues in inheritance battles stem from Alzheimer’s disease, widowed stepmothers and estate crime. Certain issues, like signs of dementia, questionable asset transfers and sudden changes in investment risk profiles are sure signals that something is going on, reports Think Advisor in the article “What the Nastiest Celebrity Estate Battles Can Teach Advisors.”
If regular family fights feel like civil wars, then celebrity battles elevate the conflicts into global meltdowns. Showbiz legends like Tony Curtis, Mickey Rooney and Jerry Lee Lewis serve as perfect examples.
Rock and roll legend Jerry Lee Lewis’s seventh wife (yes, seventh) and his third wife’s daughter have been in court for nearly two years. The wife has charged her stepdaughter with financial and physically abusing the singer, who is now 83. The daughter countersued, alleging that her stepmother was drugging her father into an incoherent state. Lewis recently had a stroke, and he was admitted to a rehab facility.
What can families do about elder abuse, which the American Bar Association has called the “crime of the 21st century?”
Pay attention. Over the next 30 years, as much as $30 trillion in Baby Boomer assets will be transferred to the next generation. The number of people getting older is taking a huge leap and so will the number of people who suffer from cognitive-related diseases.
Know what an “estate crime” is. This is the term to describe the unauthorized, unlawful taking of someone’s assets, while they are alive. It’s what happens when a personal representative, such as a trustee, suppresses assets and takes them. It’s more likely to occur when an entrepreneur or business owner keeps a lot of cash in the safe. That money mysteriously vanishes at their death. Therefore, if anyone has a lot of cash around, they need to be able to prove it and give that documentation to someone they trust.
What happens when a person’s family is involved in litigation and they are incapacitated? Attorneys will look for transfers that occurred just prior to the time the person became incapacitated. Would they be the result of undue influence or pressure? What about their estate documents — were they changed near the time the person became seriously ill or when they were near to death? Medical records and doctors’ reports become important in these cases.
What happened to Tony Curtis, romantic and comic leading man? A year before he died, Tony Curtis wrote a new will and revised his trust. He disinherited his five surviving children and left his entire estate worth $46 million to his sixth wife. The children, who include actress Jamie Lee Curtis, filed a suit claiming that their father was mentally impaired, but the case was dropped. It’s possible that the suit was settled confidentially. Any time there’s such a big change before death, expect litigation.
Why do so many famous people seem to die without a will? People don’t like to think about death, so they procrastinate. It’s that way for celebrities and for regular people. However, we read more about celebrities. Estate planning attorneys are the ones who see what happens, every day, when people don’t have wills and the family is faced with estate battles.
What’s the solution? It’s not that complicated. Find an estate planning attorney that you are comfortable with and draw up an estate plan. Make sure you have a will, power of attorney and health care power of attorney. Talk with your family about your intentions for distribution of your property and make sure that every few years, when events occur in your life or when laws change, you update your estate plan. That would save many people, famous and otherwise, from devoting time and money to cleaning up after their loved ones.
“If you were to receive a sizable inheritance, what should you do with it? This money could help you achieve some of your important financial goals , so you’ll want to think carefully about your choices.”
While there’s no one way that is right for everyone, there are some basic considerations about receiving a large inheritance that apply to almost anyone. According to the article “What should you do with an inheritance?” from The Rogersville Review, the size of the inheritance could make it possible for you to move up your retirement date. Just be mindful that it is very easy to spend large amounts of money very quickly, especially if this is a new experience.
Here are some ways to consider using an inheritance:
Get rid of your debt load. Car loans, credit cards and most school loans are at higher rates than you can get from any investments. Therefore, it makes sense to use at least some of your inheritance to get rid of this expensive debt. Some people believe that it’s best to not have a mortgage, since now there are limits to deductions. You may not want to pay off a mortgage, since you’ll have less flexibility if you need cash.
Contribute more to retirement accounts. If the inheritance gives you a little breathing room in your regular budget, it’s a good idea to increase your contributions to an employer-sponsored 401(k) or another plan, as well as to your personal IRA. Remember that this money grows tax-free and it is possible you’ll need it.
Start college funding. If your financial plan includes helping children or even grandchildren attend college, you could use an inheritance to open a 529 account. This gives you tax benefits and considerable flexibility in distributing the money. Every state has a 529 account program and it’s easy to open an account.
Create or reinforce an emergency fund. A recent survey found that most Americans don’t have emergency funds. Therefore, a bill for more than $400 would be difficult for them to pay. Use your inheritance to create an emergency fund, which should have six to 12 months’ worth of living expenses. Put the money into a liquid, low-risk account, so that you can access it easily if necessary. This way you don’t tap into long-term funds.
Review your estate plan. Anytime you have a large life event, like the death of a parent or an inheritance, it’s time to review your estate plan. Depending upon the size of the estate, there may be some tax liabilities you’ll need to deal with. You may also want to set some of the assets aside in trust for children or grandchildren. Your estate planning attorney will be able to provide you with experienced counsel on the use of the inheritance for you and future generations.
“A family from the United Kingdom has made international news, as a result of an alleged will forgery fueled by a mother-in-law’s disdain for her daughter’s husband.”
When Gillian Williams died in May 2017, it’s unlikely that she expected to be at the center of an international spotlight on her family’s life. She left behind a married daughter, Julie Fairs, who is accused, along with her husband Brian, of falsifying a signature on her mother’s last will and testament. The mother’s own sister testified that her sister would never have left her daughter anything, because of how much she disliked her son-in-law, reports Above the Law in the article “What To Do When You Hate Your Son-In-Law: A Practical Lesson in Estate Planning.”
The matter became public when it went to trial. There’s been a lot of nasty family business being shared. Most people avoid going to trial for will contests, since the underlying emotions come out in full view.
Not everyone has friendly family relationships with in-laws. Frequently, the in-law relationship is prickly at best. There is no law that you must like your son-in-law. However, the law presumes that you like your child enough to include her in your estate, regardless of how you feel about her spouse. That means that if there is no surviving spouse, children are permitted to be the “natural object of your bounty.” In other words, these are the individuals who will receive your assets when you die, based on social and public policy and the law.
There are issues in estate planning, when a person wants to exclude a child because of their dislike of the child’s spouse. You may want to exclude a child out of concern that the spouse will mishandle the money or benefit from the money in a divorce. Sometimes parents can’t get past their dismay over a child marrying against their wishes. Disinheritance is not an unusual punishment. However, increased scrutiny is going to be applied to the review of a will, when a child is excluded.
When one child is disinherited, it colors their relationship with their siblings. The beneficiaries and the executor are left to defend the decedent’s decision. That is not easy to do, unless an explanation of why this happened was done beforehand.
There are options to disinheritance, if the child’s spouse is an issue. A beneficiary’s share can be held in a continuing trust, so the spouse does not have access to the funds. The assets can be protected and preserved, in the event of a divorce or just for general money security. It should be recognized that while inheritances are generally protected in divorce, the second the monies are co-mingled, they become joint property. A trust is often the best way to protect an inheritance in this situation.
Another tactic is for the person to skip a generation and instead make a bequest to the grandchildren. The option works best when the funds are not significant, since the parent may be insulted by the decision to leave a bequest to their children and this could pit the child against their own child (the grandchild).
Dividing the estate among the children in unequal shares can be done so as not to completely disinherit a child, but to leave less money. This also holds the potential for creating bad feelings between family members.
The last will and testament is a very permanent document and may not be the right forum to be used to let feelings be expressed or take a stand about an unfavorable life decision by an adult child. The impact of this decision can also have long lasting effects, including lawsuits and family fighting. It is also likely to create a battle between the child and their spouse.
A conversation with an estate planning attorney, who has likely seen this situation hundreds of times in their practice, should be able to help sort out the best solution. There may be a way to avoid conflict, or at least to make sure everyone is clear from the get-go, as to what is going to happen in the future, and why.
“While everyone from brand new parents to great grandparents can benefit from the advice of a competent estate planning lawyer, frequently the individuals making sure that their affairs are in order, are those in their golden years. They have a common concern: what about their grandbabies?”
Leaving money or real estate to a child under the age of 18 requires careful handling, usually under the guidance of an estate planning attorney. The same is true for money awarded by a court, when a child has received property for other reasons, like a settlement for a personal injury matter.
According to the article “Gifts from Grandma, and other problems with children owning property” from the Cherokee-Tribune & Ledger News, if a child under age 18 receives money as an inheritance through a trust, or if the trust states that the asset will be “held in trust” until the child reaches age 18, then the trustee named in the will or trust is responsible for managing the money.
Until the child reaches age 18, the trustee is to use the money only for the child’s benefit. The terms of the trust will detail what the trustee can or cannot do with the money. In any situation, the trustee may not benefit from the money in any way.
The child does not have free access to the money. Children may not legally hold assets in their own names. However, what happens if there is no will, and no trust?
A child could be entitled to receive property under the laws of intestacy, which defines what happens to a person’s assets, if there is no will. Another way a child might receive assets, would be from the proceeds of a life insurance policy, or another asset where the child has been named a beneficiary and the asset is not part of the probate estate. However, children may not legally own assets. What happens next?
The answer depends upon the value of the asset. State laws vary but generally speaking, if the assets are below a certain threshold, the child’s parents may receive and hold the funds in a custodial account. The custodian has a duty to manage the child’s money, but there isn’t any court oversight.
In Georgia, the threshold is $15,000. Check with a local estate planning attorney to determine your state’s limitations.
If the asset is valued at more than $15,000, or whatever the threshold is for the state, the probate court will exercise its oversight. If no trust has been set up, then an adult will need to become a conservator, a person responsible for managing a child’s property. This person needs to apply to the court to be named conservator, and while it is frequently the child’s parent, this is not always the case.
The conservator is required to report to the probate court on the child’s assets and how they are being used. If monies are used improperly, then the conservator will be liable for repayment. The same situation occurs, if the child receives money through a court settlement.
Making parents go through a conservatorship appointment and report to the probate court is a bit of a burden for most people. A properly created estate plan can avoid this issue and prepare a trust, if necessary, and name a trustee to be in charge of the asset.
Another point to consider: turning 18 and receiving a large amount of money is rarely a good thing for any young adult, no matter how mature they are. An estate planning attorney can discuss how the inheritance can be structured, so the assets are used for college expenses or other important expenses for a young person. The goal is to not distribute the funds all at once to a young person, who may not be prepared to manage a large inheritance.
“I am 60 years old, divorced and have never taken an active interest in my finances. I’ve never worried about saving for retirement. I felt that when I retired, I’d be able to sell my business and that along with the inheritance I would receive from my parents, I would be in good shape.”
The first sentence in this article from Hometown Life,“Playing off charge card debt a major priority,” tells the entire story: “I…have never taken an active interest in my finances.” The person never had his business evaluated by a professional and learned at age 60 that his business had no resale value. In addition, he learned that his parents were supporting a sister and any inheritance he was anticipating would not be enough to live on.
Making matters worse, he has more than $80,000 in credit card debt on various cards, at interest rates between 18% and 21%. With next to no equity in his home and a home equity loan and a mortgage, this person has only one asset: an IRA worth around $100,000.
At some point in their lives, most people realize that they must be active participants in their financial lives. They need a budget to contain spending and a savings plan, so they can enjoy their retirement and control of their credit card debt. It sounds like this man just got a wake-up call.
He wonders how to resolve his credit card debt, but it seems there are a number of other issues that need to be addressed.
First, he should pay off his credit card debt. At 18% to 21%, there is no investment he could make that would come near that rate. One way to do this, is to increase his monthly payments. It may take many years to knock down such a large debt, so another option is to use his IRA to pay off the money immediately.
Equally important is for him to commit to use the money he would have otherwise used to pay off credit card debt and invest that into a retirement fund. It doesn’t matter if he uses an IRA, a SEP or a Roth, but he needs to be disciplined and start putting money away for his retirement.
Potential inheritances are troublesome for people who count their chickens before they hatch. Until the inheritance is safely in your own bank account, you cannot count on it. In a time where living expenses are high and people are living longer, fewer and fewer people are expecting to receive inheritances. Basing a lifestyle around an expected inheritance, can only lead to financial disaster.
Preparing for retirement and taking an active role in managing your finances, is a life-long task and part of our responsibility as adults. Another responsibility is to have an estate plan in place, so even people who die in debt, can be assured that what assets they do have will go to their heirs.
“However, there’s one type of tax on millionaires that Americans have consistently been skeptical of: the estate tax. Polling typically shows that a majority of Americans favor repealing this tax completely.”
There are many headlines right now about proposals to increase taxes on wealthy people. While this sentiment crosses party lines, the majority of people have generally always been in favor of wealthy Americans paying more taxes. However, for some reason, the estate tax has always been looked at as a bad tax that is unfair, observes this article titled “People like the estate tax a whole lot more, when they learn how wealth is distributed” from The Washington Post.
The use of the phrase “death tax” hasn’t done much to enhance the federal estate taxes’ likability. It is the tax on a person’s estate and is paid when the person dies. Many people feel like it’s an unfair tax, levied during a time of a family’s grief. However, a research study from Sweden has revealed some interesting responses to how people feel, when questioned about wealth inheritance. Sweden abolished its estate tax in 2004.
The study gave participants information about wealth inheritance in three bullet points:
Inherited wealth represents about half of all wealth in the population.
Those with the highest incomes inherit the most.
A majority of Swedish billionaires have inherited their fortunes.
Others in the study were not given this information. The group who received this information were more likely to support the estate tax than those who did not. Of the people who did not receive these three facts, 25% supported the estate tax. Here’s the interesting thing: support among the group that did receive these facts stood at 33%, meaning the support for the tax was boosted by about 8 percentage points.
It boils down to this: people who do not know much about wealth distribution are likely to think an estate tax is not a good thing. The larger implication is that once people have a greater understanding of how wealth is distributed (or in this case, not distributed), they are far more likely to support an estate tax.
Similar studies in the U.S. have come to the same conclusion. People were asked if the estate tax should be abolished. Half of them were told that the tax effects only estates worth more than $5 million. In that group, support for keeping the tax was 46%. In the other half, people who were not told that fact, 27% didn’t want to keep the tax.
Generally speaking, most Americans don’t know as much about wealth distribution. One study revealed that Americans think the bottom 60% of the country owns a little more than 20% of the total wealth. The bottom 60% of this country owns 1% of the total wealth. Ninety percent of wealth is held by the richest 20% of families, with the richest 1% owning 40% of it.
Regardless of where you sit on the economic scale, and whether you think the estate tax should be abolished, your assets will be more likely to be passed to the next generation, if you have an estate plan in place.
“According to the Centers for Disease Control and Prevention, more than 42,000 people lost their lives due to opioid use in 2016, a fivefold increase from 1999.”
Opioid addiction has reached epidemic proportions, with drug overdoses now the leading cause of death for Americans under age 50. Families struggling with the emotional and financial damage, are the subject of the article “How to leave money to a family member with an addiction” from MarketWatch.
Even good children from loving families become addicted and are driven to steal and lie to get money to support their habits. Parents of children are wracked by guilt and anger. The stories of families spending hundreds of thousands of dollars in an effort to help their children are growing in number—as are the number of families who exhaust their retirement savings paying for rehabilitation and related services.
Trusted family advisors, including estate planning attorneys and financial advisors, find themselves working with families to protect the family finances and the well-being of their addicted family members. The fallout from addiction creates many secondary problems for families.
Estate planning for a family grappling with addiction addresses many different issues, not just inheritance. Guardianship of minor children and protecting the interests of family members are among the issues that estate planning addresses. A mindfully created estate plan can serve as a resource and a means of protecting a legacy.
Lump sum distributions or full bequests to an adult struggling with addiction can be deadly, if the person uses the funds to purchase large quantities of drugs. At the same time, writing someone out of the will completely and withdrawing all support, can be devastating to the addicted adult and the family.
Creating a trust can help to protect assets and ensure that there is some degree of accountability in how the distributions are made. Incentive trusts, where a certain behavior or accomplishment markers are determined, can be used to encourage behaviors.
This may mean that the addicted adult does not receive funds, until after passing a drug test, attending a certain number of treatment sessions or entering a residential rehabilitation program.
Incentive trusts are part of a special area of estate planning. Therefore, it is necessary to work with an attorney who has experience with trusts and with incentive trusts. Ideally, the attorney who helps your family, will be one who is also familiar with the impact of addiction on families.
Creating incentives for positive outcomes includes having consequences when the person fails to meet the terms of the trust.
In this situation, a trustee who is extremely trustworthy and not prone to being manipulated is necessary. They will need to make sure the person adheres to the requirements and while they may be given certain levels of discretion, this person will need to be strong-willed enough to withstand a strong-minded, potentially aggressive, addict.
This kind of trust may require the beneficiary to submit to specific terms and provide access to their health records, which itself requires a HIPAA waiver for the trustee.
Creating an estate plan with an incentive trust presents many challenges for the family and the trustee. It may well become a highly charged, emotional process. However, talking about these issues openly is part of preparing for the future. Concerns about what will happen to an addictive member of the family after the parents are gone, will hopefully create some peace of mind in a turbulent setting.
“You wouldn't trust your toddler with a pile of cash, right? Well, this estate-planning technique may allow you to safely pass your IRA on to future generations—if you do it right.”
Some of the biggest blunders in IRA distributions come to those who inherit these accounts. On the bright side, if handled correctly, you can structure the distribution, so your children or grandchildren reap the benefits for many years, says CNBC in the article “Leaving an IRA to a loved one? How to avoid a tax bomb.”
Naming a trust as an IRA beneficiary is a good way to protect large IRAs, since it provides some means of control. By naming a trust, you can protect heirs who are minors, vulnerable to creditors, not able to handle large sums of money or disabled. Trusts only need $12,750 of taxable income in 2019 to be subject to the top tax rate of 37%.
If you don’t structure the trust right, you could accelerate the liquidation of the IRA at warp speed.
Most people think of their spouse, when it comes to naming a beneficiary for an IRA. Unless your spouse needs the funds, it’s best to name the next generation. What are the pitfalls? Not all IRA custodians allow you to list a trust on the beneficiary form. The tax code has very specific conditions, when trusts are the beneficiaries of retirement accounts. If you fail to follow the rules, your heirs could face huge tax bills. For a trust to be viable as a designated beneficiary, it must meet a four-step test:
It must be valid under your state’s laws.
It must be an irrevocable trust, or one that will become irrevocable upon your death.
Beneficiaries must be identifiable from the trust document.
The IRA custodian or trust administrator must have received a copy of the trust by October 31 of the year after the death of the IRA’s owner.
The beneficiaries must be people, not charities and not your estate. If your beneficiaries are not people, then your IRA may not have a designated beneficiary. In that case, your heirs can’t stretch the IRA by taking required minimum distributions, based on the longer life expectancy of a child or a grandchild.
Worse—if your trust fails to meet the test, it is subject to the same rules as if there was no designated beneficiary at all. That means it’ll be depleted faster than you may have wished. If you die before you start taking RMDs (70½) then the IRA must be distributed within five years after death. If you die after you start taking RMDs, then distributions pay out over what would have been your life expectancy.
Speak with an estate planning attorney about the type of trust that will work best. There are two to chose from: a conduit trust, which distributes the RMDs directly to the beneficiary, or a discretionary trust, if you’re worried about a child who can’t manage money or who may be indebted to creditors. Note that RMDs are taxable income to the beneficiary when they receive it, but if the distribution is held in the trust, then the trust owes the taxes.