King & Wood, P.A.

Estate Planning Ideas for the 56% Who Have Done Nothing So Far

“Fifty-six percent of Americans say they do not have a will.”

A recent survey found that a majority of Americans haven't decided how their estate should be divided after their passing. Yahoo Finance’s article, “Estate Planning Is Important for People Without Children,” reminds us that complications arise for people who are single without children, unmarried cohabitating couples or even married couples without kids. While the surviving spouse usually inherits all of the married couple’s assets, in the absence of an estate plan, things can and sometimes do go sideways.

There can be unintended beneficiaries, and this is especially true for singles. Complications and unintended consequences make it critical for singles and married couples without kids to plan for the distribution of their assets, as well as how to take care of themselves, if they become incapacitated.

Everyone’s estate plan should have, at the bare minimum, a will and powers of attorney (POA) for financial and health care decisions. Powers of attorney are used in the event that an individual is unable to make decisions for him or herself. Married couples typically default to the spouse. However, if a couple is in a long-term relationship without a legal relationship, (not married), then the powers of attorney are crucial. If you fail to name a person in a POA, the default may be a parent or sibling to whom you’re not physically or emotionally close. As a result, that person will be able to make decisions that may be contrary to what your partner would carry out according to your wishes.

Think hard about who you’d want to be a power of attorney. That person should have strong character and the ability to make tough decisions. After your POAs are created, think about the beneficiaries of your assets. When you do this, speak with your family members about these decisions.

For those couples without children, they may have favorite charities and may want to leave a gift to these organizations. As far as taxes are concerned, making charitable distributions while you’re alive is more efficient. The donor gets both an income tax deduction and a gift tax deduction, based on the amount of the gift.

One popular option is to create a donor-advised fund, which lets you take a current-year tax deduction on the fair market value of any gifts to the fund. The money doesn’t need to be immediately donated, allowing you time to make a decision on which charity to select.

Who you rather leave outright gifts to charity after your death? You can earmark money in IRAs, instead of other assets. A charity does not pay taxes on the retirement funds, but a non-charity beneficiary must.

You could also set up a charitable foundation with instructions on how to distribute the donation over time. An estate planning lawyer can help you do this. This lets your philanthropic objectives continue for years to come.

Reference: Yahoo Finance (February 16, 2017) “Estate Planning Is Important for People Without Children”

Mortality… Smortality, Get Your Affairs in Order!

“Writing a will and planning for the handling of our estate can be unpleasant, because it forces us to deal with our mortality.”

If you want a good example of why you should tackle your estate sooner rather than later, remember Prince. He was the mega star who died unexpectedly last year of an accidental painkiller overdose at age 57.

Prince left an estate valued at roughly $300 million. He had no will.

Because Prince had no spouse or children, his sister and five half-siblings are squabbling over the fortune he left behind. How much is that fortune?

Regardless of the final number, his estate will easily be reduced by 50% after federal and state estate taxes and attorneys’ fees.

Whatever the final result, the recent article in investors.com, “5 Must-Do Tips For Your Will And Estate Planning,” says that you can bet it won't be what Prince wanted.

To be certain that at your death your estate isn't dragged through the courts and eviscerated by taxes and all of your related decisions are executed in the way that you want, remember the following steps:

Inventory. Take inventory of your assets and liabilities to calculate your net worth and what’s in your estate. Before you visit an estate planning attorney, take some time to create this inventory to make sure that the meeting is worthwhile and to discuss the issues more thoroughly.

Beneficiaries. Select your beneficiaries and decide how you want your assets to be distributed. If you have children, you might consider a trust until the time when they receive their inheritance. For example, they could receive a portion at age 18, more at age 25 and the rest when they turn 30.  You should also be sure to update your beneficiaries on retirement accounts and life insurance policies.

Your plan manager. Who’s going to quarterback your plan? It is important to designate an individual to have power of attorney to handle financial matters, if you become incapacitated and an advance health care directive, so someone you trust can make medical decisions on your behalf. A living will details the types of medical decisions you would prefer, such as an order not to resuscitate (DNR).

What’s in the plan? Talk with an experienced estate planning attorney and determine what type of plan is best for your situation.

It’s important to consult with a qualified attorney and not an online resource. There are many nuances that go into drafting these documents.  As a result, estate planning is not a one-size-fits-all process.

Reference: investors.com (February 24, 2017) “5 Must-Do Tips For Your Will And Estate Planning”

Think of It as “Lifetime Planning”, not Estate Planning

“Estate planning, when properly done, could more appropriately be called lifetime planning.”

Thousands of people have unexpected accidents or health events daily.  There is also the potential that you may survive and be in a coma or incapacitated long-term.

The Business Journal’s recent article, “Proper estate planning is as much about life as death,” notes that the failure to plan can result in expensive and unintended consequences. Here a few key areas to consider.

Make a plan. A will is a legal document that provides evidence of your wishes to those who will represent you after death as executor and provides instructions to that person on how and to whom to disburse the assets.

Power of Attorney and Revocable Living Trust. Without a durable power of attorney or a revocable living trust, financial institutions won’t speak with someone trying to help you with your financial affairs. If you’re critically injured or terminally ill and you have no end-of-life care instructions, your family won’t know how to carry out your wishes. A health care power of attorney can empower the person(s) that you choose, to direct your medical care consistent with your wishes.

Beneficiary Designations. Life insurance, retirement plans and financial accounts have beneficiary designations or are held as joint tenants. They, therefore, pass directly to someone else at death without probate. It is important that these designations are consistent with your overall estate plan.

Guardianship. If you have minor children, you need to designate your preference on guardianship. If you have young adult children or others dependent on you for care or financial support, there are trusts that can ensure this support continues during periods of incapacity and after death.

Taxes. You need to look at both income taxes and estate taxes when planning. Inheriting property is typically not a taxable event, but if you are liquidating certain inherited property—like an IRA or an annuity—it can result in a significant income tax bill. Proper planning can help minimize overall income and estate taxation.

Keep your plan current. Everyone has changes and life events. These changes can impact your family structure, financial situation, personal wishes and new tax laws on your estate. Review your estate documents and your beneficiary designations regularly.

Proper planning involves working with a qualified estate planning attorney. While this may be an expense now, bear in mind that a “do it yourself” estate plan can mean higher expenses later.

Reference: The Business Journal (March 1, 2017) “Proper estate planning is as much about life as death”

Finding the Right Estate Planning Attorney

“Losing a parent or grandparent can put into perspective the need for careful planning to avoid surprises, protect young children and spouses and properly execute the decedent’s wishes.”

The Norman Transcript’s recent article, “The right attorney is needed for wills and estate planning,” addresses how to find an attorney who will be a good match for your particular circumstances.

No one enjoys planning his or her estate. After all, who likes to think about not being here? Estate planning entails looking at your own mortality and possible incapacity. It’s not a simple task, regardless of your age. With estate planning, it seems that a person will get more serious about it when the crisis happens. At that point, it may be too late.

The daughter of a senior who develops dementia or another debilitating or life-threatening disease sees first-hand the true complexities of incapacity.  It helps the family to understand and appreciate the need and the value of health-care proxies, living wills and powers of attorney. These “life events” happen every day to many people. In order to address this reality of life, you need a plan.

The big question is, who’s going to be helping you?

Young generations will be quick to jump online or look at their phones. However, it is important to understand that estate planning is state-specific. Every state has specific requirements, timelines and deadlines. Your state’s laws will tell you just how estate planning documents must be written and how they need to be signed. A will or power of attorney form that you find online, may not satisfy your state’s requirements.

Remember that the law hasn’t caught up with technology. There is no way that you can execute your will on your smart phone.  In addition, many free or low-cost online legal service providers don’t provide state-specific advice or updated information.

When you talk with potential estate planning lawyers, make sure to ask questions to uncover their knowledge in this area of the law. You want an attorney who’s skilled and responsive to your needs, a good listener and a good communicator. There are general practitioners who take “whatever walks in the door,” which gives them a broad yet cursory level of experience with many types of law.

You want to work with an attorney who focuses on estate planning.  They will have a much deeper knowledge and extensive experience in this area of practice. Your estate planning attorney might not know how to defend a products liability claim. That’s OK, because he or she definitely will know how to create customized estate plans for their clients.

Interviews are critical and that means face-to-face encounters. You should also look at client references.  However, use caution when selecting an estate planning attorney based on a friend’s recommendation. Friends may not know anything in particular about an attorney’s skills and specialties. That can be dangerous because with estate planning, issues don’t come up until after death.

Reference: Norman Transcript (March 5, 2017) “The right attorney is needed for wills and estate planning”

No Sense Waiting for Trump to Plan Your Estate

“It may actually be better to go forward with tax planning, before changes in policy are made, anyhow.”

You may be wondering how to create an estate plan when the country is still awaiting some possible major changes to U.S. tax policy from President Trump. Should you wait until there is a more-definitive policy? According to financial-planning.com’s recent article, “Estate planning when tax laws are uncertain,” the answer is a resounding “no.”

A major part of estate planning can be transferring assets to irrevocable trusts. This offers asset protection, divorce protection, and management structure for potential future disability. There’s really no reason to wait for new tax laws to implement planning that can be protective and vital—regardless of the final policies.

You should focus on planning for your futures, rather than the ever-changing tax debate in the nation’s capital.

In some cases, it might be smarter to go ahead with tax planning before any changes in tax policy are made. If Trump repeals the generation-skipping transfer tax, you might be prohibited from moving assets outside of the transfer tax system, since there may be no tax system from which to shift!

Here are a few ideas to consider:

Flexibility. Use trusts that are flexible in light of the uncertainties and variability in what might happen with tax laws.

Where to locate the trust. Look at “trust-friendly” jurisdictions instead of your home state. For example, consider these four states —Alaska, Delaware, Nevada, and South Dakota. These states have tax and legal environments that are very conducive to trusts. This is important because if there are significant changes in policy, these states may respond quickly with new laws. Other states might be slower to react.

Trust protectors. A protector can be an independent person who’s a fiduciary and is given the authority to remove and replace the trustee, change the situs (where the trust is administered), the governing law of the trust and other powers. This adds additional flexibility to an estate plan.

Determine who will benefit. Unless there is a personal, legal or tax rationale for another route, make your spouse the beneficiary, so you are able to benefit indirectly through your spouse receiving distributions from the trust.

Singles. For singles or those worried about only being able to access trust assets through a spouse, create what is called a Domestic Asset Protection Trust (DAPT). There are 17 states that allow them, so ask your estate planning attorney about them. With this type of trust, the assets are outside of your estate.  However, you can still be a beneficiary. If this seems too risky, consider a hybrid DAPT. This gives a person, acting in a non-fiduciary capacity, the authority to add any descendant of your grandparents as a beneficiary.

Grantor Trusts. Most trusts should be created as grantor trusts—meaning that trust income is taxable to the grantor. The most common way to achieve this status is swap power. Under current law, this power can permit the settlor to swap assets from his or her personal name into the trust, in exchange for assets of equivalent value. It can be implemented to take highly appreciated assets out of an irrevocable trust, so they’re included in the settlor’s estate on death. They can also receive a step-up or increase in income tax basis, which is a benefit when calculating capital gains. If Trump enacts a capital gains on the death tax, this swap power can be used in reverse to swap appreciated assets from a client’s estate, where they’d be subject to a capital gains tax on death, into an irrevocable trust, where they might avoid that gain.  This type of flexibility is another reason to plan now.

The tax law is uncertain, but estate planning should proceed as usual. If that planning is done with creativity and flexibility, you should benefit regardless of the final tax policies from the new administration.

Reference: financial-planning.com (March 2, 2017) “Estate planning when tax laws are uncertain”

Iowa Supreme Court Rules Age by Itself Sufficient to Show a Person Needs Protection from Elder Abuse

“In a split decision, the Iowa Supreme Court has ruled that age alone is enough to show a person needs protection from elder abuse under a state law enacted in 2014.”

The Iowa Supreme Court’s recent decision was in the case of Judith Chapman, a 69-year-old woman from Grimes, Iowa. In 2014, Chapman successfully obtained an elder abuse protection order against her adult son, John Wilkinson Jr., as reported by The Des Moines Register in its article entitled “Iowa Supreme Court: Age enough to order elder abuse protection.”

Chapman purchased a mobile home in 2008 and subsequently transferred title to her son. She told him the trailer would be his inheritance when she passed away. However, after an adult daughter moved into the trailer, Wilkinson demanded $35,000 to transfer title back to his mother, according to court records. When Chapman said no, he posted eviction notices on her door three different times, leading her to petition the court for the protection order.

A trial court granted the order, and the Court of Appeals affirmed it.

Justice David Wiggins wrote in his opinion for the court, that the law defines a vulnerable adult as a person 60 or older who’s unable to protect himself or herself as a result of “age or a mental or physical condition.” Three other Supreme Court Justices agreed.

In a dissenting opinion, Justice Edward Mansfield—joined by Justices Thomas Waterman and Bruce Zager—believed there wasn’t any evidence that the elderly mother was unable to protect herself due to her age. Judge Mansfield thought the dispute should have been worked out in a title proceeding.

Attorney Carmen Eichmann of Des Moines, who is representing Wilkinson, commented that the case is likely to get the attention of the Iowa Legislature. Eichmann says the state legislature should modify the language in the fairly new law, to show that a person must show he or she can’t protect themselves from abuse, rather than just providing that a senior’s being older than 60 entitles him or her to the enhanced protection.

“The bottom line here is, having a normal, working man be declared an elder abuser — I think the dissent made it very clear how significant that is,” Eichmann said. “That’s a sad thing here.”

Reference: The Des Moines Register (February 25, 2017) “Iowa Supreme Court: Age enough to order elder abuse protection”

Life Estate Questions Answered

“With a life estate, there are two types of property owners.”

A recent article in USA Today, “Estate planning: Consider a life estate deed,” explains that a life estate is a way to transfer real estate to your beneficiaries during your lifetime.  However, it still allows you to keep the right to use and/or live on the property for the rest of your life. This simple process has some tax advantages, and it’s a way to avoid probate on the real estate.

The life tenant has the exclusive right to use the property during his or her lifetime. In many cases, this is a joint life tenant, like a husband and wife. The life tenant must maintain the property and pay the taxes and insurance. The remainderman has the exclusive ownership rights and responsibilities after the life tenant(s) die. At that point, the full ownership automatically transfers to the remainderman—without any probate or court filings. At this point, there’s what’s known as a full step up in basis, which provides capital gain tax advantages to the remainderman.

If a property is sold when there is a life tenant, both the life tenant and the remainderman must approve the sale. If both parties agree to the sale, then the life tenant will get a percentage of the sale proceeds (based on the life tenant’s age) and the remainderman will receive a percentage of the proceeds.

It is important to note that there may be an issue for the life tenant, if he or she is receiving or planning to qualify for Medicaid benefits. An estate planning attorney can help plan the sale properly, so the proceeds may not need to be spent down on the cost of care.

Life estates were used in the past as a way to protect real estate from potential long-term care costs and to keep control over the real estate during one’s lifetime. After five years lapsed from the transfer date, prior to applying for Medicaid, the property was protected from the cost of care. When applying for Medicaid for long-term care costs, the state usually wouldn’t calculate a life estate as an available asset.

However, some states have passed laws providing that all life estates created on or after a certain date are thereafter subject to estate recovery. This means that upon the death of a person receiving Medicaid benefits, the state could recover a percentage of the value of the life estate property, with the percentage determined by the age of the Medicaid recipient at the time of death. In these states, a life estate deed wouldn’t be the best way to preserve real estate from the cost of potential long-term care.

Life estates aren’t the best solution for everyone. Talk with an experienced estate planning attorney to determine the best ways to achieve your goals.

Reference: USA Today (February 27, 2017) “Estate planning: Consider a life estate deed”

Estate Planning Rocks, So Get on With It

“Creating a solid estate planning strategy is the capper on the jug of a life well lived - so take it seriously.”

Americans are notoriously hesitant to think about—let alone act on—end-of-life financial needs. That’s understandable given the taboo nature of dealing with one's own eventual demise, says The Street in its recent article, “5 Great Estate Planning Tips for the Rest of Your Life.”

A 2015 Everplans study found that 69% of Americans say they’ve seriously thought about drafting a will, but just 34% follow through and do it.  Another 95% of the study participant say that they don't plan well for the handling of their estates due to the lack of knowledge and good financial tools. That’s just an excuse.

There are several "must have" estate planning components you'll need, and some creative components that really help a good estate plan. Keep reading.

Who’s your “Go-To” Guy (or Gal)? Ask yourself who will take care of your estate. This doesn’t have to be your spouse or your children.  The next step is to hire an estate planning attorney. This should be someone who specializes in this type of legal work. Just like a brain surgeon or a rocket scientist, you need someone with the focused knowledge, skill and experience in this area for this assignment.

Be Flexible. With changing administrations and potential changes to estate tax laws, flexibility is critical in estate planning. Talk with your estate planning attorney when significant changes occur in your life, and create the flexibility in your estate planning documents to account for future changes in tax laws.

Fund Your Trusts. A common estate planning mistake is setting up a revocable living trust and then failing to fund it. A living trust lets someone else manage your financial affairs when you die or in the event you become incapacitated. However, people often will create revocable living trusts, sign the trust documents and then never actually fund the trust with the appropriate assets. You must retitle your investments, bank accounts, and other financial assets from individual or joint accounts into the trust and transfer the deeds for real estate and other real property into the trust.

Life Insurance. Consider whether you need a death benefit to take the place of your income or protect your family if you die prematurely. Death insurance is the ticket, not life insurance. It’s low-cost term life coverage that provides a sufficient death benefit without a cash value. This type of insurance will manage the risk of dying prematurely for a set period of time. That’s it. Cash value life insurance, like whole life or variable life, is much more expensive and not the answer for those that need pure life insurance protection.

Test Drive Your Power of Attorney. Try out your POA (power of attorney) when you're still healthy to see if it would be accepted by the bank. Each financial institution has its own test for determining a power of attorney’s validity.

If your estate plan is anything less than a will and some instructions, and you're a head of household with dependents counting on you, then you need to create a solid plan with a trusted estate planning lawyer.

Reference: The Street (February 22, 2017) “5 Great Estate Planning Tips for the Rest of Your Life”

Now that You’re a Grown-up, Get Serious About Protecting Your Assets

“Your 30s are a good time to get serious about your finances and make real progress toward increasing and protecting your wealth.”

If you're in your 30s, you've most likely been in the workforce for about 10 years. We’re also hoping that you have fully funded an emergency cash account with six months' worth of living expenses? You should also be saving for retirement in your employer’s sponsored retirement plan or an IRA. You should now be ready to take the next big step on the path to financial security.

Motley Fool’s article, “3 Smart Money Moves to Make in Your 30s,”  mentions three things to write down on every 30-something's financial to-do list.

1. Bump up retirement savings. While still at an early stage of your career, saving for retirement should be your #1 priority. Remember: the earlier you begin to save, the better it is because there’s more time for your money to compound for you. You may also not have any big financial commitments yet, like a home and family. It is important to save as much as you can now, because it becomes a lot more difficult when you have added financial responsibilities. If you’re not maxing out your contributions to your retirement account at work, think about upping your deferral by at least 1% a year—if your salary also increases each year.
2. Manage risks. Two of your greatest assets are your health and your ability to earn income. You need to protect those assets. One option to protect your income stream is to invest in disability insurance and life insurance. The Social Security Administration says there’s a 1-in-4 chance that a 20-year-old will become disabled during his or her working life. The loss of income due to a short-term or long-term injury or disability can have a dramatic impact on your life and finances. Your income is important to your well-being and to your livelihood. It is important to determine if your employer has disability insurance and to check to see if the coverage fits your situation. Your need for life insurance depends, to a great degree, on whether you have someone else who depends upon your income. If there is no such person, then there's a good chance you don't need life insurance. However, if you have children or support your elderly parents, a policy may be needed.
3. Begin your estate planning. Estate planning will protect your assets and make sure that your family is given what they need when you die. As you continue to build wealth, your estate planning needs will change. Speak with an experienced estate planning attorney to learn about the types of estate planning documents you need. It should also be noted that retirement accounts—like 401(k)s and IRAs—have separate beneficiary designations that work outside of your will. Be certain to keep these up-to-date.

Reference: Motley Fool (February 22, 2017) “3 Smart Money Moves to Make in Your 30s”

Tackling the Myths Surrounding Reverse Mortgages

“There are many misconceptions surrounding reverse mortgages.”

TC Palm’s recent article, “Myths vs. realities surrounding reverse mortgages,” highlights some of the misunderstandings and misinformation that commonly come up when talking about reverse mortgages.

Myth # 1: My lender will own our home. No, you will keep the title and ownership of the home during the life of the loan. You can also sell your home at any time. The loan won’t become due  as long as you keep satisfying the loan obligations, including living in the home, maintaining the home according to FHA requirements and paying property taxes and homeowner's insurance.

Myth # 2: The home has to be free and clear of existing mortgages. This is also not true. Many borrowers use the reverse mortgage loan to pay off an existing mortgage and eliminate monthly mortgage payments.

Myth # 3: You must pay taxes on the loan proceeds when they are received. Reverse mortgage loan proceeds are tax-free.  They are really not considered income. However, there may be an impact on government benefits eligibility.

Myth # 4: The borrower is limited on how to use the loan proceeds. When any existing mortgage or lien has been paid off, the loan proceeds from your Home Equity Conversion Mortgage (HECM) loan can be used for anything, such as supplementing household retirement income, deferring receiving Social Security benefits, paying off other debt, paying medical expenses, remodeling the home or helping family members.

Myth # 5: Reverse mortgages are for poor people. This is not true. The notion that reverse mortgages help only the poor borrower is changing. More affluent senior borrowers with multimillion dollar homes and healthy retirement assets now use reverse mortgage loans as part of their financial and estate planning.

Myth # 6: My children will have to pay off the loan. Reverse mortgages are a non-recourse loan. Therefore, if your children want to keep the home and the loan balance is more than its value, they’d have to pay 95% of the appraised value to keep the home.

Reference: TC Palm (February 21, 2017) “Myths vs. realities surrounding reverse mortgages”