King & Wood, P.A.

Why Is Updating a Will Necessary?

“Changes in tax law and in your personal life may mean that yours needs to be updated. Here are the easiest (and smartest) ways to do it.”

More than a few estate planning attorneys meet with clients who haven’t looked at their will since their children were in diapers. The meeting occurs when the children have children of their own. This mistake can have grave consequences for everyone in the family, says a recent article from Consumer Reports titled “Why You Need to Update Your Will Now.”

Even if it’s been five years since you last reviewed your estate plan, you need to make an appointment and go over your documents with an estate planning attorney. This isn’t just about updating because you now have grandchildren. It is also because federal and state tax laws have changed dramatically, especially in the last twelve years.

See if any of these apply:

• The will was created before 2001. In 2001, the federal estate tax exemption was $675,000. You can now leave heirs more than $12 million without paying federal estate tax. This high number is scheduled to end in the not-too-distant future, so you need to prepare for the coming change.
• You’ve moved to a new state where the estate tax exemption is higher or lower. In Connecticut, the estate tax exemption is $9.1 million, while in Oregon, it’s $1 million.
• You got (pick one): married, divorced, are in a stable committed relationship or have children who are now adults.
• Your relationships with family members or friends have changed and the beneficiaries, executors and/or heirs are different.

Whatever the reason for updating, you’ll need to address at least these critical parts:

• The will or trusts used to distribute assets to heirs.
• Durable Power of Attorney (POA), which gives a person of your choosing the power to manage your affairs, if you become incapacitated.
• A health care proxy, allowing the person you name to serve as your healthcare advocate.
• An advance directive (living will) to detail your wishes in the case of a medical emergency when decisions need to be made.

While federal estate taxes are far lower than they used to be, this status will change in 2026. Of the 12 states plus the District of Columbia with state estate tax rates, several have changed. State estate taxes tied to the federal estate tax rate may see changes again in 2026.

Many of the rules concerning inherited retirement accounts have changed. Anyone who inherits a traditional IRA or 401(k) who is NOT a spouse has to withdraw every dime in the account within ten years of the date of death. Planning how to move this money with regard to taxes due is a conversation to have with your estate planning attorney. Do you want to take the withdrawals now and move the money into another financial product, like life insurance, for your heirs? Or do you want to take the money out gradually over ten years?

Another question is whether your financial status changed over the years, for better or worse? If your old will directed large sums to go to a charity but you no longer have those funds, it needs an update.

Have you discussed the use of trusts with an estate planning attorney? You might wish to set up a trust for beneficiaries to control how funds are disbursed over the years; the funds might come from an inherited IRA since the last time your will was updated.

If you are in a committed relationship but not married, you can protect each other through estate planning. Unmarried partners have little or no inheritance rights. A trust could smooth the process of passing assets to an unmarried partner by keeping the estate out of probate court. A trust is also a private document, unlike a will, which becomes part of the public record once it goes through probate. If there are family members who you believe might challenge the will, a trust is likely the better option.

Reference: Consumer Reports (June 9, 2022) “Why You Need to Update Your Will Now”

Should You Consider a Reverse Mortgage?

“Many of the negatives have been addressed with federal insurance and oversight. At the least, they’re worth considering for people who are cash poor and house rich.”

A loan of last resort for many years has gotten an upgrade. Stories of borrowers who faced foreclosure and surviving spouses evicted from their own homes are decreasing, as the new reverse mortgage often does what they were originally intended to do: provide financial help for retired homeowners who want to stay in their homes.

Home equity conversion mortgages (HECMs) are insured by the Federal Housing Administration and overseen by the Department of Housing and Urban development, explains a recent article from The Wall Street Journal titled “The New Math of Reverse Mortgages for Retirees.” There are limits on how much borrowers can take, so seniors don’t have the option to take wildly inappropriate large lump sums. There are protections from defaults if the house value sinks to less than the loan amount and provisions to protect a surviving spouse’s right to stay in the home after the death of the borrower.

HECMs are a tiny part of the financing options available to seniors who need to take equity from their homes in later years. Some downsides to the reverse mortgage remain, particularly the high upfront fees. However, the reverse mortgage burden is mainly on heirs, who will not inherit the equity or the home, unless they want to pay back the loan.

For seniors who are concerned about outliving their savings and want to stay at home until the very end of life, a reverse mortgage may be a worthwhile strategy. The cash can be a way to pay for long-term care and other unexpected expenses.

Another benefit: disbursed funds aren’t taxed, since they are considered a loan advance. Distributions from traditional IRAs and 401(k)s are taxed as ordinary income.

According to a trade association, HECMs make up 95% of the reverse mortgage market. There are about 580,000 totaling about $113.5 billion. However, a 2019 study from the Brookings Institute found less than 2% of homeowners age 62 and older hold a reverse mortgage of any kind.

A simplified version of how it works: to qualify for an HECM, borrowers must be age 62 and older, owners and occupants of the home and have the financial ability to maintain the home, including paying property taxes, insurance, and if relevant, homeowner association fees.

HECMs must be obtained through an approved FHA-approved lender and borrowers must buy FHA mortgage insurance and attend an information session with an HUD-counselor. The amount to borrow is determined by the appraised property value, how much is owed on the primary mortgage, the borrower’s age and current interest rates.

The borrower has an option of a payment plan with an adjustable interest rate or a fixed rate. If they choose the fixed rate, they must take the lump-sum disbursement option. This decision may have an impact on eligibility for government benefits, so it needs to be discussed with an elder law attorney.

For the adjustable interest rate, disbursements are made at will and the untouched amount can continue to grow at the variable interest rate. The loan is received as a line of credit, letting the borrower take distributions as needed or as “tenure,” monthly payments for the life of the loan. Other options include monthly payments for another specified term or a combination of these options. Depending on the loan, the recipient can change their payment plan to other options at any time, as long as funds are available.

The risk to the lump-sum payment is simple. In the past, seniors took out lump-sum payments, spent the money quickly and then were without funds to pay household expenses, like insurance and property tax.

Today’s HECM attempts to reduce this risk by limiting the amount to be borrowed. The FHA also performs assessments of loan applicants. Ultimately, the homeowner must use the funds well and wisely to serve their intended purpose.

Reference: The Wall Street Journal (June 3, 2022) “The New Math of Reverse Mortgages for Retirees”

Do I Need a Generation-Skipping Trust?

“Due to recent tax law changes, your family may be able to avoid adverse federal estate tax consequences when you leave assets to your adult children.”

The unified estate and gift tax exemption increased from $5 million to $10 million, with inflation indexing stands at $12.06 million in 2022. A married couple can shelter as much as $24.12 million from the federal estate tax. However, what about assets you gift or leave in your will to grandchildren, asks a recent article titled “Beware the Generation-Skipping Transfer Tax” from CPA Practice Advisor.

Without proper estate planning, the Generation-Skipping Transfer Tax (GSTT) may be imposed on families who aren’t prepared for it. There are some strategies to work around the GSTT. However, you’ll need to get this done in advance of making any gifts or before you die.

The GSTT was created to prevent wealthy individuals from getting too far around the estate and gift rules through generation-skipping transfers, as the name implies. A simple explanation of the tax is this: the tax applies to transfers to related individuals who are more than one generation away—that would be grandchildren or great grandchildren—and any unrelated individuals more than 37 ½ years younger. They are known as “skip persons.”

Transferring assets to a trust and naming grandchildren or a much younger person as the ultimate beneficiary doesn’t work to avoid the GSTT. If you took this route, all of the trust beneficiaries, which could also be adult children, would be treated as skip persons. Even the trust itself may be considered a skip person, in certain circumstances.

The rules for the GSTT are the same as apply to federal estate taxes. The top tax rate for the GSTT is 40%, the same rate for federal estate taxes. The GSTT also shares the same exemption rate, indexed for inflation, as the federal estate tax.

However, remember what’s coming. In 2026, the exemption is scheduled to revert to $5 million, plus inflation indexing. If Congress enacts any other legislation before then, it will change sooner.

There’s more. There is a GSTT exemption for lifetime transfers aligned with the annual gift tax exclusion. You may gift up to $16,000 per recipient, including a grandchild or other descendent, every year, without triggering a GSTT bill.

Talk with your estate planning attorney to see if these three strategies are appropriate for you to avoid or reduce the GSTT:

• Make the most of the GSTT exemption. Even though lifetime transfers do reduce the available estate tax shelter, the current $12.06 million exemption provides a lot of flexibility.
• You can use the annual gift tax exemption to shelter tax gifts up to $16,000 above and beyond the lifetime exemption. Use this before the lifetime exemption.
• Always look to see how trusts within the usual tax law boundaries can be used to protect assets from taxes.

Reference: CPA Practice Advisor (June 3, 2022) “Beware the Generation-Skipping Transfer Tax”

Your Cryptocurrency and NFTs Need to Be Included in Your Estate Plan

“Handled incorrectly, these popular assets could go poof. You need a password-sharing plan, a plan for naming beneficiaries and possibly a trust.”

As more people continue to purchase cryptocurrencies and non-fungible tokens (NFTs), digital assets are becoming a bigger part of the investment world and of people’s estate plans. If you want to pass these assets to loved ones upon death, you’ll need to plan for it, says the article “Got Cryptocurrency or NFTs? They Need to Be in Your Estate Plan” from Kiplinger. Otherwise, securing, transferring and gifting crypto and NFTs can create unsolvable problems and lost assets.

There are many different kinds of crypto and NFTs, with Bitcoin, Ethereum, Binance Coin, Thether among them. An NFT is a unique, collectable, and tradable digital asset, like digital art or a photo. NFTs are purchased through a bidding process in this universe and in the metaverse, an online world where people are buying homes, real estate and more in the shape of NFTs. Sales of NFTs are estimated to have reached more than $17 billion in 2021. For better or worse, the future is here.

Cryptocurrency is accessed through a private key. This is a series of alphanumeric characters known only to the owner and stored in cold storage or a digital wallet. Whoever has possession of the key can buy, sell and spend the digital currency. If you have crypto, your family or fiduciary needs to know what you have, where to find the assets and what to do with them.

One option is to share the private key or place crypto assets and NFTs in custody, using a software application or a hardware wallet. There are a number of companies now offering these services. An old-school option for this new world asset is to create a secure spreadsheet of your digital assets and list the login protocols for each account.

For now, it is difficult to open crypto accounts and NFTs in the name of a revocable or irrevocable trust. However, digital wallets allowing you to open an account in the name of a trust do exist, if the company handling the digital asset permits. This is a very new, rapidly evolving asset class. Beneficiaries may not yet be named for crypto accounts. However, this may change in the future.

With no trust account and no named beneficiary, what happens to your crypto and NFTs when you die? For now, they must pass through your probate estate under the will. Your estate planning attorney will make sure your estate plan includes the correct way to give digital asset powers for the fiduciary handling your estate and include digital asset powers in your will, trust, and durable power of attorney.

If your state has adopted the Uniform Fiduciary Access to Digital Assets Act (UFADAA) or the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA)—46 states have—then it will be easier for loved ones to manage digital assets in case of incapacity or when you pass, as long as your estate plan addresses them.

Reference: Kiplinger (May 23, 2022) “Got Cryptocurrency or NFTs? They Need to Be in Your Estate Plan”

How Do Estate Plans and Trusts Work?

“In this article, we will address two terms which some people use interchangeably, but which are very different things: living trusts and estate plans.”

There can be some confusion around terms used in estate planning. Unless you are an estate planning attorney yourself, it’s not likely you know all the terminology used. A recent article from The Dallas Morning News explains further in the article “Clearing up confusion: The difference between a living trust and an estate plan.”

Living trusts, sometimes called “revocable living trusts,” or more formally, “inter-vivos trusts” are documents prepared and implemented when a person is living. They commonly include a distribution plan for assets owned in the trust, in contrast to a last will and testament, which only comes into effect when the person has died.

In most cases, the person who has created the trust (the grantor) is also the person to benefit from the trust (the beneficiary) as well as the person who controls and manages the trusts (the trustee). A living trust also makes provisions for the trust to be controlled and managed by a successor trustee, in case the owner is incapacitated. This also prevents the need for guardianship proceedings to gain control of the trustee.

If the person has no family members to care for them in the event of incapacity, the successor trustee may be a bank or other financial institution.

Living trusts are good tools to use for disposition of assets, especially in blended family situations. Trusts are harder to challenge than wills, and unlike wills, they are private documents. When an estate goes through probate, the will becomes part of the public record. As a result, anyone can see its contents.

An estate plan refers to the larger plan, which may or may not contain a living trust. It also includes an analysis of all of your assets and directions for how each will pass to your beneficiaries. Estate planning also addresses tax planning: federal and state estate taxes and inheritance taxes.

An estate plan also plans for incapacity. Preparing financial and medical powers of attorney, HIPAA releases and advance directives allow designated representatives to take care of your business affairs, talk with doctors about your care and know what your wishes are, if end-of-life decisions need to be made.

To be clear, estate planning is the “process” which creates a course of action for the passage of assets and the preparation of documents to facilitate the plan. A living trust is part of an estate plan, but not the only piece of the estate plan.

Some people are confused by the use of the word “estate.” Your estate includes everything you own at the time of death. Assets owned outside of trusts are divided into probate estate and non-probate estate assets. The non-probate estate consists of assets with beneficiary designations, usually life insurance policies, investment accounts, jointly owned assets and any Transfer on Death or Payable on Death accounts.

The probate estate includes assets distributed under the terms of a will. If you don’t have a will, the court will appoint an administrator to distribute your assets according to the laws of your state. There’s no obligation for the court to name a family member as the administrator. Therefore, a complete stranger might be in charge of everything you’ve ever worked for. The better route: speak with an estate planning attorney to create an estate plan and learn if your situation warrants a living trust.

Reference: The Dallas Morning News (May 24, 2022) “Clearing up confusion: The difference between a living trust and an estate plan”

Some Must-Have Documents are Always Needed

“Since we’re all going to die (yes, even those of us who are still in our 20s!), we might as well make things easier for the loved ones who, along with grieving our loss, will have to deal with the financial and logistical pieces of our lives.”

Sad but true—we never know when we’re going to die. Estate planning lawyers who help protect assets for heirs or charities know from previous experience what happens when there’s no plan for their passing. This blunt assessment comes from the aptly titled article “Morbid Money: 8 Things to Do Before You Die” from Millie.

When someone dies without a will, called “dying intestate,” the laws of the state are in charge of your estate assets subject to probate and the people and/or pets who depend on you. The state doesn’t know your dog hates your brother and you wanted your money to go to your life partner and not your parents or siblings. If you and your life partner aren’t married, your partner has no legal right to make any claims on your estate, regardless of your wishes.

Try to think of planning for death not as a morbid chore, but a gift to deliver to loved ones. Here’s what you’ll need to do:

Make an inventory of usernames and passwords used for everything from bank accounts to health insurance portals, streaming services, gym memberships, mobile phones and social media accounts. Someone will need to access this information, cancel subscriptions, and erase accounts.

Make a record of your assets. This includes retirement savings accounts, college savings accounts, life insurance, investments, real estate property, businesses, and any possessions of financial and sentimental value. Include names for your estate planning attorney, financial advisor and CPA.

Make a list of your debts. Like it or not, creditors and debts get paid first from an estate, so your executor will need to know how big or small your debts are. Heirs will also have a more realistic idea of what they may be inheriting.

Are your advanced directives complete and updated? This includes a living will, which tells what medical treatments you do or do not want if you become terminally ill or injured. You’ll also want a power of attorney to name the person who you want to manage your finances, if you are unable.

Have a will prepared by an experienced estate planning attorney. Another expression commonly heard from estate planning attorneys: dying without a will is like driving without a license. Anyone over age 18 should have a will, but less than half of all American adults do. This is the legal document used to direct how you want your assets distributed. If you have minor children, the will names the person you want to raise your minor children.

Check beneficiary designations. Some assets are not included in your will because they pass directly to individually appointed beneficiaries, referred to as designated beneficiaries. Your life insurance policies, pension plan and/or retirement accounts are the most likely to have a designated beneficiary assigned to inherit the asset on your passing. Some banking and investment accounts do as well. Check these to be sure they are up to date. If you opened a 401(k) account with your first job and have married since then, you likely want to update your beneficiary to be your spouse.

Write a letter of intent. This is not a legally enforceable document in most states. However, it can be used to show the court your intent, if anyone questions your will. If you have personal possessions you want to go to certain people, this can be in your will but should also be in your letter of intent. This is also where you share your wishes for the disposition of your body and memorial services, not in your will. By the time your will is found, the “disposition” of your remains may well be completed. Without your written guidance, this can be a burden for loved ones who can only guess about your wishes.

Review your plan every three to five years, and every time a large event in your life occurs. Don’t keep these documents a secret. A trusted person needs to know where these documents can be found so they can act on your behalf when they need to, whether the date is a year or a decade from now.

Reference: Millie (May 17, 2022) “Morbid Money: 8 Things to Do Before You Die”

Why Is Beneficiary Designation Important?

“When you set up your estate plan it is important to coordinate the legal planning documents that you or you and your attorney create with the document provided by your retirement account custodian and/or your life insurance carrier called a ‘Designation of Beneficiary.’”

The beneficiary designation will always supersede language of your will. Neglecting to know which assets have beneficiary designations and failing to update the designations can undo even the best estate plan.

The beneficiary designation for your life insurance or retirement account custodian provides an opportunity to tell the company who is to receive life insurance proceeds or retirement savings upon your death, explains a recent article titled “This Important Estate Planning Step is Often Missed” from Coeur d’Alene/Post Falls Press. If these are not coordinated with a last will and testament, the results are problematic at best, and worse, financially, and emotionally devastating.

This epic fail comes in many different forms, but the most common is when a life insurance policy has never been updated and an ex-spouse receives the policy proceeds. The rules differ between retirement accounts and life insurance and can be impacted by various state and federal laws (and the divorce decree, if the life insurance policy was included). However, for the most part, the ex will receive the proceeds and litigation will not succeed.

Another common beneficiary designation mistake is when a person has created a living trust or revocable trust to prevent assets from going through probate when they die. Probate can take many months to complete and there are several strategies used to take assets out of the probate estate.

When the living trust is established and assets are transferred into the trust, those assets do not pass through probate.

However, if a person (or married couple) established a living trust and fails to list both primary and secondary beneficiaries for life insurance and/or retirement accounts, it is entirely possible that the assets will go through probate.

Take the time to make an inventory of all assets and accounts. Determine which ones have a beneficiary designation and find out who is named as the beneficiary. If your retirement accounts and life insurance policies were established decades ago, this is especially important.

Failing to coordinate beneficiary designations with your estate plan could undermine your wishes. Review these items with your estate planning attorney to avoid these and many other potential pitfalls.

Reference: Coeur d’Alene/Post Falls Press (May 23, 2022) “This Important Estate Planning Step is Often Missed”

What Is the Proposed IRS Anti-Clawback Provision?

“The Treasury Department is on the cusp of changing a taxpayer-friendly regulation regarding federal estate taxes, but there’s no need to panic. As long as taxpayers can show that their gifts are truly gifts, they should not be affected by the revision.”

The proposed amendment is designed to fix some loopholes in a 2019 regulation passed in response to the 2017 Tax Cuts and Jobs Act. The 2017 law doubled the value of the estate and gift tax exemption until December 31, 2025, when it goes from $12.06 million to $5.49 million. According to this recent article from Financial Advisor titled “Amending The IRS’s Anti-Clawback Provision on Gifting,” the law generated concern among those who wanted to make large gifts to take advantage of the historically high federal estate and gift tax exemption.

The concern was whether the IRS would attempt to clawback the taxes, if the taxpayer died after 2025. This is when the estate tax reverts back to a much lower number. A regulation was issued in 2019 to reassure taxpayers and explain how they could take advantage of the high exemption as long as they made gifts before 2026, regardless of the exemption at the time of their death.

The IRS recognized this as a good step. However, it had a loophole and hence the new proposed amendment. The amendment provides clarity on what constitutes an actual gift. If the donor garners a benefit from the gift or maintains control over the gift, is it really a gift?

Giving the gift of a promissory note worth $12.06 million to lock in the high exemption and leaving it unpaid until death, for instance, is not a gift. The person is not actually giving anything away until after death. Therefore, the note is part of the taxable estate and bound by the estate tax exemption amount in place at the day of death.

The same goes for a person who gives ownership interests in a limited liability company, while continuing to serve as the company’s manager. Taxpayers must be very careful not to mischaracterize their gifts to stay on the right side of this regulation.

Another example: let’s say a person puts a $12 million vacation home into an LLC, with clear directions for home to be kept in the family, and then makes gifts of the LLC ownership interests to the children. If the donor wants those gifts to max out the current $12.06 million exemption, rather than be subject to the lower exemption in place at the date of death, the owner should not be the manager of the LLC. The same goes for the owner living rent-free in any property he’s gifted to anyone, if the wish is to take advantage of the gifting exemption.

In the same way, a mother who places money into a trust fund for a child may not serve as a trustee and control the assets and distributions, if she wishes to take advantage of the tax benefit.

If your estate plan uses grantor annuity trusts (GRATs), Grantor Retained Income Trusts (GRITs) and qualified personal residence trusts (QPRTs), speak with your estate planning attorney. If you die during the annuity period or term of the trust, your estate may lose the benefit of the anti-clawback regulation.

If the amendment is approved, which is expected in late summer, make sure your estate plan follows the new guidelines. If you are truly giving gifts before 2026, you will likely be able to take advantage of this substantial tax benefit and pass more of your estate to your heirs.

Reference: Financial Advisor (May 27, 2022) “Amending The IRS’s Anti-Clawback Provision on Gifting”

Does a Supplemental Needs Trust have an Impact on Government Benefits?

“For disabled persons receiving financially based government benefits, supplemental needs trusts (‘SNTs’) can safeguard benefits and serve as an effective estate planning tool.”

Supplemental Needs Trusts allow disabled individuals to retain inheritances or gifts without eliminating or reducing government benefits, like Medicaid or Supplemental Security Income (SSI). There are cases where the individual is vulnerable to exploitation or unable to manage their own finances and using an SNT allows them to receive additional funds to pay for things not covered by their benefits.

Having an experienced estate planning attorney properly create the SNT is critical to preserving the individual’s benefits, according to a recent article titled “Protecting Government Benefits using Supplemental Needs Trusts” from Mondaq.

Disabled individuals who receive SSI must be careful, since the rules about assets from SSI are far more restrictive then if the person only received Medicaid or Social Security Disability and Medicaid.

The trustee of an SNT makes distributions to third parties like personal care items, transportation (including buying a car), entertainment, technology purchases, payment of rent and medical or therapeutic equipment. Payment of rent or even ownership of a home may be paid for by the trustee.

The SNT may not make cash distributions to the beneficiary. Payment for any items or services must be made directly to the service provider, retailers, or other entity, for benefit of the individual. Not following this rule could lead to the SNT becoming invalid.

SNTs may be funded using the disabled person’s own funds or by a third party for their benefit. If the SNT is funded using the person’s own funds, it is called a “Self-Settled SNT.” This is a useful tool if the disabled person inherits money, receives a court settlement or owned assets before becoming disabled.

If someone other than the disabled person funds the SNT, it’s known as a “Third-Party SNT.” These are most commonly created as part of an estate plan to protect a family member and ensure they have supplementary funds as needed and to preserve assets for other family members when the disabled individual dies.

The most important distinction between a Self-Settled SNT and a Third-Party SNT is a Self-Settled SNT must contain a provision to direct the trust to pay back the state’s Medicaid agency for any assistance provided. This is known as a “Payback Provision.”

The Third-Party SNT is not required to contain this provision and any assets remaining in the trust at the time of the disabled person’s death may be passed on to residual beneficiaries.

Many estate planning attorneys use a “standby” SNT as part of their planning, so their loved ones may be protected, in case an unexpected event occurs and a family member becomes disabled.

References: Mondaq (May 27, 2022) “Protecting Government Benefits using Supplemental Needs Trusts”

How Is a TOD CD Account Taxed?

“Certificates of deposit (CDs) are a low-risk way of putting some money aside for the short- to medium-term future and are a popular way for seniors to earn a modest return on their savings.”

Because of their relative stability, CDs are often included in estates, where they can be passed to heirs in a number of ways. In an effort to avoid the CDs being subject to probate, many people name a TOD, or Transfer on Death beneficiary to their accounts, according to a recent article from Investopedia titled “Are Transfer-on-Death CD Accounts Subject to Estate Taxes?”

The goal is to keep the CD out of probate. However, it doesn’t help when it comes to estate taxes. It may still be a good idea to name a TOD beneficiary on your CD. Here’s why.

When you die, the value of your estate is assessed and may be subject to federal and state estate and/or inheritance taxes. For the federal estate tax to apply, the value of the estate needs to be at a very high level—as of right now. The federal estate tax only applies if the estate is worth $12.06 million or more. Many states no longer have an estate tax, or an inheritance tax, but many still do. The state estate tax exemption limit is considerably lower than the federal threshold—just $1 million in Oregon and Massachusetts

For most people, federal estate tax is not an issue. However, state and inheritance taxes still need to be planned for, so they don’t consume your estate.

There are tax consequences when inheriting a CD. The interest earned by a CD prior to the account owner’s death is not taxable to the beneficiary, and neither is the original amount deposited. However, any interest earned after the original owner’s death is taxable to beneficiaries. If the CD is modest, the taxes will be minimal as well, but there will still be taxes.

What if the CD is a five or six figure CD? There might be a big tax bill due.

This is important to be aware of, since many people incorrectly believe that if they create a TOD CD account, the heir has no tax liability. This is not true. Naming a TOD beneficiary on a CD is a good idea for simplifying the distribution of assets. However, there’s no tax benefit to the heir.

Anyone can be a TOD beneficiary. The TOD beneficiary doesn’t even have to be a person. A charity, business or trust can be a TOD beneficiary. If the TOD is a person, they may be a spouse, child, friend, or anyone you know. If you are married, your spouse may have certain rights to the CD superseding the named TOD beneficiaries. Check with your estate planning attorney, if you are married and want to name someone else as your TOD beneficiary.

Naming a TOD beneficiary to your Certificate of Deposit accounts can help some of your assets avoid probate, a worthwhile goal. The asset will belong to the person faster than if they had to wait for the probate process to be completed. Your estate planning attorney will help identify other assets you can take out of your probate estate and simplify their transfer after death.

Reference: Investopedia (May 23, 2022) “Are Transfer-on-Death CD Accounts Subject to Estate Taxes?”