King & Wood, P.A.

Busting Some Estate Planning Myths

“While thinking about legacy planning can be unpleasant because it involves discussions about incapacity or mortality, it's an important aspect of good financial planning that shouldn't be ignored.”

An estate plan consists of four basic documents: a last will, a living trust, a financial power of attorney and a medical power of attorney and advance directive, according to the article titled “Common Estate Planning Myths” from The Street.

These documents need to be well-integrated, funded and aligned with your financial plan. There are many common misconceptions about how these documents work together to create a roadmap for your legacy. Let’s explore them.

A last will is a legal document outlining how you want your assets to be collected and distributed after death. The last will is also used to name an executor, who is responsible for managing assets, paying debts and distributing what is left to beneficiaries you specify. A last will also designates a guardian to care for minor children upon your death.

Myth: “If you have a trust, you don’t need a will.” Fact: Even if you have a trust, you still need a will.

For a trust to be effective, it must be funded, which means transferring assets from individual ownership to the trust ownership. People often forget to transfer assets or something unexpected occurs. For example, if a person creates a trust but becomes incapacitated before assets are transferred, the last will controls the distribution of assets.

Myth: “Trusts are only for ultra-high net worth people.” Fact: Everyone can benefit from a trust.

Trusts are used to retain privacy, control assets, plan for incapacity and avoid probate. Trusts can also be useful when family dynamics are challenging, or if you want to assert control over assets even after death. Consider a married couple with a net worth of $1 million who die prematurely with two children in their 20s. Each child inherits $500,000. Twenty-somethings may not be ready to handle large sums of money. A trust would allow the heirs to receive smaller amounts over the course of years and not all at once.

Myth: “I have a trust, so I don’t need a power of attorney.” Fact: You need a power of attorney.

Some assets cannot be owned by a trust, including IRAs, which must be owned by an individual. If you became incapacitated and do not have a power of attorney, there will be no one able to oversee investment management, Required Minimum Distributions or pay bills. Your spouse or other family member will have to petition the court to appoint a conservator to manage financial affairs.

Myth: “My loved one is in the hospital. However, I’m their spouse/daughter/sibling, so of course the hospital will tell me about their medical status and let me make decisions for them.” Fact: Protecting patient confidentiality is the law and healthcare facilities are very mindful of adhering to all state and federal guidelines.

An 18 year old who suffers an illness or injury is legally an adult, and parents have no legal right to medical information or decision-making without a medical power of attorney and a HIPAA release form. They cannot speak with the insurance company, doctors or make decisions about their loved one’s care.

A comprehensive estate plan, including a last will, financial power of attorney and health care proxy is something every adult should have. Speak with an experienced estate planning attorney to protect those you love and prepare for the future.

Reference: The Street (Jan. 6, 2023) “Common Estate Planning Myths”

Can a Revocable Trust Protect Assets from Creditors?

“With a revocable trust, you are typically both the founder and the trustee. This means that you both create the trust and manage its assets and operations.”

Revocable trusts, sometimes referred to as “living trusts”, do not protect assets from creditors. They are subject to collections actions and lawsuits, and can be included when third parties evaluate personal assets, as explained in a recent article titled “Will Revocable Trusts Protect My Assets From Creditors” from yahoo!

There are many different types of trusts. However, the overwhelming majority fall into one of two categories: revocable or living trusts and irrevocable trusts. With a revocable trust, the grantor has full access to the trust’s terms, beneficiaries and assets at all times. They can change how the trust operates, who benefits from it and even dissolve the trust as they wish. They can also take assets out of the trust.

Contrast this with an irrevocable trust, where the grantor can’t take any of these actions. A revocable trust is considered a legal entity existing as an extension of a person’s financial and estate plan, while an irrevocable trust is an entirely independent legal entity. Once it has been created, the grantor can’t easily change the terms of the trust or access its assets.

What then is the purpose of a revocable trust? As a legal entity, the revocable trust survives the grantor’s death. Assets can then be distributed to heirs without having to go through probate. A revocable trust is also useful in case the grantor becomes incapacitated or is otherwise unable to make decisions about the assets in the trust.

Creditors can access a revocable trust. While the revocable trust is extremely useful as a planning tool, the level of access means the grantor is the legal owner of the trust and its assets. Courts and creditors alike can fully access the contents because its assets are indistinguishable from that of the grantor. If the grantor owes money, any assets in a revocable trust are considered part of their net worth.

A court can order a grantor to pay debts based on what’s in the trust. They are considered part of the grantor’s total assets during a bankruptcy proceeding.

Some irrevocable trusts can be used protect assets. An irrevocable trust is an entirely separate legal entity from its creator. Therefore, the grantor loses control of any assets placed into it, subject to the terms of the trust. However, those assets are then legally considered no longer owned by the grantor.

This depends upon the jurisdiction and the nature of the trust, as state laws vary. Some trusts don’t work for protecting assets, especially not if the grantor has been named as a beneficiary. Some jurisdictions don’t recognize this at all, but it is a viable option under the right circumstances. But if a court determines the grantor moved assets around to keep them away from creditors, it would be considered fraud.

If you’re considering using trusts in your estate plan, speak with an estate planning attorney who can determine which type of trust is best suited to your needs.

Reference: yahoo! (Jan. 27, 2023) “Will Revocable Trusts Protect My Assets From Creditors”

Top Benefits of Estate Planning

“Estate planning isn’t just for the ultra-wealthy, nor is it something you should put off until your golden years.”

Despite the hard lessons learned during the COVID pandemic, surveys repeatedly show most Americans still don’t have an estate plan in place. According to the article “Five benefits of estate planning” from The Aspen Times, a comprehensive estate plan ensures your assets are distributed according to your wishes when you die, minimizes taxes on your estate and protects your loved ones, especially those who depend on you financially. In addition, estate planning protects you while you are living and ensures that your wishes are followed, if you become incapacitated.

Protect Yourself and Your Assets During Your Lifetime. No one likes to consider themselves at risk of incapacity. However, this happens. If you become mentally or physically incapacitated during your lifetime, you might not be able to earn income, or make decisions for yourself. Part of an estate plan includes documents to address these risks to protect yourself, your family and your assets.

Designating a health care proxy and a power of attorney gives people you choose the ability to make decisions on your behalf. Otherwise, the responsibility for your medical, legal and financial decisions may go to someone you don’t even know.

Asset Distribution. Without a last will, your home state’s laws govern the distribution of your assets. Your intentions to care for certain individuals won’t be relevant, as the law itself decides who gets what. A last will is used to state exactly how you want assets to be distributed. Your last will should be updated as your financial situation and/or family dynamics change. You should also review designated beneficiaries on investment accounts and insurance policies regularly and especially after any major life changes.

Minimize Transfer Taxes. While there’s no way to predict what taxes will take effect in the future, it’s safe to assume there will be taxes on your estate. If you hope to leave wealth of any size to your family, proper estate planning is crucial. There are many different strategies to minimize taxes on inherited wealth, including life insurance, Roth IRA conversions, lifetime giving and trusts. Your estate planning attorney will be able to create a plan suited for your unique situation.

Protect Family Wealth. As people accumulate wealth, they often become the targets of frivolous lawsuits. For this reason, placing assets in certain types of trusts can ensure efficient wealth transfer, as well as protecting assets from predators and creditors.

Create and Continue a Legacy. Legacy planning is part of the estate planning process. Many people donate money or assets on their death to causes they supported during their lifetime. These goals can be achieved by contributing to a donor advised fund, creating a family foundation or setting up a philanthropic trust.

Creating an estate plan is also a useful tool for having candid discussions with the family about the future, avoiding future conflicts and making your estate administration easier for loved ones.

Reference: The Aspen Times (Jan. 24, 2023) “Five benefits of estate planning”

Top Benefits of Estate Planning

“Estate planning isn’t just for the ultra-wealthy, nor is it something you should put off until your golden years.”

Despite the hard lessons learned during the COVID pandemic, surveys repeatedly show most Americans still don’t have an estate plan in place. According to the article “Five benefits of estate planning” from The Aspen Times, a comprehensive estate plan ensures your assets are distributed according to your wishes when you die, minimizes taxes on your estate and protects your loved ones, especially those who depend on you financially. In addition, estate planning protects you while you are living and ensures that your wishes are followed, if you become incapacitated.

Protect Yourself and Your Assets During Your Lifetime. No one likes to consider themselves at risk of incapacity. However, this happens. If you become mentally or physically incapacitated during your lifetime, you might not be able to earn income, or make decisions for yourself. Part of an estate plan includes documents to address these risks to protect yourself, your family and your assets.

Designating a health care proxy and a power of attorney gives people you choose the ability to make decisions on your behalf. Otherwise, the responsibility for your medical, legal and financial decisions may go to someone you don’t even know.

Asset Distribution. Without a last will, your home state’s laws govern the distribution of your assets. Your intentions to care for certain individuals won’t be relevant, as the law itself decides who gets what. A last will is used to state exactly how you want assets to be distributed. Your last will should be updated as your financial situation and/or family dynamics change. You should also review designated beneficiaries on investment accounts and insurance policies regularly and especially after any major life changes.

Minimize Transfer Taxes. While there’s no way to predict what taxes will take effect in the future, it’s safe to assume there will be taxes on your estate. If you hope to leave wealth of any size to your family, proper estate planning is crucial. There are many different strategies to minimize taxes on inherited wealth, including life insurance, Roth IRA conversions, lifetime giving and trusts. Your estate planning attorney will be able to create a plan suited for your unique situation.

Protect Family Wealth. As people accumulate wealth, they often become the targets of frivolous lawsuits. For this reason, placing assets in certain types of trusts can ensure efficient wealth transfer, as well as protecting assets from predators and creditors.

Create and Continue a Legacy. Legacy planning is part of the estate planning process. Many people donate money or assets on their death to causes they supported during their lifetime. These goals can be achieved by contributing to a donor advised fund, creating a family foundation or setting up a philanthropic trust.

Creating an estate plan is also a useful tool for having candid discussions with the family about the future, avoiding future conflicts and making your estate administration easier for loved ones.

Reference: The Aspen Times (Jan. 24, 2023) “Five benefits of estate planning”

Why It’s Important to Update Your Estate Plan

“It is a common misconception that once the estate plan is prepared and executed, it does not require any further attention.”

When someone dies without having updated their estate plan for many years, the executors often face a difficult task of administering a disorganized and incomplete estate. At best, the executor needs additional time and resources to organize the estate. At worst, says a recent article titled “Estate plans require maintenance” from The Record-Courier, the decedent’s wishes and desired distributions are not followed.

Among several reasons for updating an estate plan are major life events, known as “trigger” events. These include marriage, birth, death, divorce or changed financial circumstances.

The same is true for the death of a beneficiary or changed personal relationships.

If the grantor becomes incapacitated, changes in the estate plan may become necessary if the person needs long-term care or will be receiving any kind of means-tested government benefits.

A revision of the estate plan is warranted if there is a change in one’s assets, from purchasing a new home or business, selling real property or the modification of a business venture. A growing estate may require a revised plan focused on minimizing estate tax liabilities. On the other hand, if the size of the estate has decreased significantly, an estate plan focused on tax planning may need to be revised or simplified.

Most businesses require a succession plan and the designation of a person to take control of the business upon the death of the grantor.

Finally, as assets within the estate change, the property list, often referred to as the “schedule,” should be updated. All newly acquired assets need to be titled properly, especially if the plan is for them to be owned by a trust.

Each state has different estate laws, so a move to a different state definitely requires an estate plan to be revised, as some elements of the estate plan may become invalid. For example, in some states two witnesses are required to execute a last will, while in others one witness is sufficient. If you move from a one-witness state to a two-witness state, the possibility exists for your last will to be deemed invalid.

Any changes to the estate plan desired by the grantors, such as changed distribution of assets on death or a wish to name a different person to inherit, requires a revision.

Changes in the law, especially those regarding estate taxes, also make it necessary to update an estate plan. The general recommendation is to review the estate plan every three to five years, regardless of whether any trigger events have occurred.

Establishing a comprehensive estate plan, which includes a last will, health and financial powers of attorney and any necessary trusts, and maintaining it is the best way to ensure your wishes will be carried out in case of incapacity and death.

Reference: The Record-Courier (Jan. 28, 2023) “Estate plans require maintenance”

Estate, Gift, and Generation Skipping Taxes for 2023

“The Internal Revenue Services has announced the inflation-adjusted figures for estate, gift and generation-skipping transfer (‘GST’) tax exemptions for 2023.”

The new year brings new inflation-adjusted figures for many estate planning exemptions, as reported in the article “2023 Estate, Gift and GST Tax Changes” from mondaq. These should be considered when creating or reviewing estate and tax planning documents.

The annual gift tax exclusion amount is the amount which can be given by any person free of gift tax. This has increased from $16,000 to $17,000 per person, or $34,000 for a married couple.

The federal lifetime gift and tax exemption amount is the total amount an individual can give away during their lifetime or at death free of gift or estate tax. This has increased by $860,000 from $12.06 million to $12.92 million in 2023. A married couple could transfer a combined total of $25.84 million without owing any federal estate tax. The top federal gift and estate tax rate remains at 40%.

The federal Generation Skipping Tax (GST) increases to $12.92 million. This is the tax on transfers to grandchildren or more remote descendants or unrelated individuals who are more than 37 ½ years younger than the person making the gift. The GST tax rate remains a flat 40%.

Unlike the federal estate tax exemption, any GST tax exemption not used on the death of one spouse may not be used by the surviving spouse.

The federal lifetime gift and estate tax exemption was increased by the 2017 Tax Cuts and & Jobs Act and unless Congress acts, the exemption will drop by about a half on January 1, 2026.

If the lower levels of federal estate tax exemption are a concern, now is the time to transfer property to use up all or most of the remaining amount and lock in the higher exemption amount. Treasury Regulations were issued in 2019, the “anti-clawback rule,” which effectively approved this strategy. Gifts designed to lock in the current estate tax exemption can be structured in many ways and funded with a variety of assets. Speak with your estate planning attorney to explore various ways to accomplish this.

The SECURE Act passed in 2019 made substantial changes to the rules governing IRAs and other qualified plans. One of the most notable eliminated the ability of most non-spouse beneficiaries to stretch withdrawals from inherited IRAs or other retirement plans over the beneficiary’s lifetime. Instead, these beneficiaries must withdraw all of the account assets within ten years of the plan participant’s death.

The SECURE 2.0 Act passed in December 2022 as a follow up made further changes to retirement plans. Most notably, those who were born after December 31, 1950 may now defer taking Required Minimum Distributions (RMDs) until age 73, and participants born after December 31, 1958, may defer taking RMDs until age 75.

Estate and tax laws have changed a great deal in recent years, making this an important time to evaluate estate plans made before 2020.

Reference: mondaq (Jan. 12, 2023) “2023 Estate, Gift and GST Tax Changes”

Busting Some Estate Planning Myths

“While thinking about legacy planning can be unpleasant because it involves discussions about incapacity or mortality, it's an important aspect of good financial planning that shouldn't be ignored.”

An estate plan consists of four basic documents: a last will, a living trust, a financial power of attorney and a medical power of attorney and advance directive, according to the article titled “Common Estate Planning Myths” from The Street.

These documents need to be well-integrated, funded and aligned with your financial plan. There are many common misconceptions about how these documents work together to create a roadmap for your legacy. Let’s explore them.

A last will is a legal document outlining how you want your assets to be collected and distributed after death. The last will is also used to name an executor, who is responsible for managing assets, paying debts and distributing what is left to beneficiaries you specify. A last will also designates a guardian to care for minor children upon your death.

Myth: “If you have a trust, you don’t need a will.” Fact: Even if you have a trust, you still need a will.

For a trust to be effective, it must be funded, which means transferring assets from individual ownership to the trust ownership. People often forget to transfer assets or something unexpected occurs. For example, if a person creates a trust but becomes incapacitated before assets are transferred, the last will controls the distribution of assets.

Myth: “Trusts are only for ultra-high net worth people.” Fact: Everyone can benefit from a trust.

Trusts are used to retain privacy, control assets, plan for incapacity and avoid probate. Trusts can also be useful when family dynamics are challenging, or if you want to assert control over assets even after death. Consider a married couple with a net worth of $1 million who die prematurely with two children in their 20s. Each child inherits $500,000. Twenty-somethings may not be ready to handle large sums of money. A trust would allow the heirs to receive smaller amounts over the course of years and not all at once.

Myth: “I have a trust, so I don’t need a power of attorney.” Fact: You need a power of attorney.

Some assets cannot be owned by a trust, including IRAs, which must be owned by an individual. If you became incapacitated and do not have a power of attorney, there will be no one able to oversee investment management, Required Minimum Distributions or pay bills. Your spouse or other family member will have to petition the court to appoint a conservator to manage financial affairs.

Myth: “My loved one is in the hospital. However, I’m their spouse/daughter/sibling, so of course the hospital will tell me about their medical status and let me make decisions for them.” Fact: Protecting patient confidentiality is the law and healthcare facilities are very mindful of adhering to all state and federal guidelines.

An 18 year old who suffers an illness or injury is legally an adult, and parents have no legal right to medical information or decision-making without a medical power of attorney and a HIPAA release form. They cannot speak with the insurance company, doctors or make decisions about their loved one’s care.

A comprehensive estate plan, including a last will, financial power of attorney and health care proxy is something every adult should have. Speak with an experienced estate planning attorney to protect those you love and prepare for the future.

Reference: The Street (Jan. 6, 2023) “Common Estate Planning Myths”

Can a Revocable Trust Protect Assets from Creditors?

“With a revocable trust, you are typically both the founder and the trustee. This means that you both create the trust and manage its assets and operations.”

Revocable trusts, sometimes referred to as “living trusts”, do not protect assets from creditors. They are subject to collections actions and lawsuits, and can be included when third parties evaluate personal assets, as explained in a recent article titled “Will Revocable Trusts Protect My Assets From Creditors” from yahoo!

There are many different types of trusts. However, the overwhelming majority fall into one of two categories: revocable or living trusts and irrevocable trusts. With a revocable trust, the grantor has full access to the trust’s terms, beneficiaries and assets at all times. They can change how the trust operates, who benefits from it and even dissolve the trust as they wish. They can also take assets out of the trust.

Contrast this with an irrevocable trust, where the grantor can’t take any of these actions. A revocable trust is considered a legal entity existing as an extension of a person’s financial and estate plan, while an irrevocable trust is an entirely independent legal entity. Once it has been created, the grantor can’t easily change the terms of the trust or access its assets.

What then is the purpose of a revocable trust? As a legal entity, the revocable trust survives the grantor’s death. Assets can then be distributed to heirs without having to go through probate. A revocable trust is also useful in case the grantor becomes incapacitated or is otherwise unable to make decisions about the assets in the trust.

Creditors can access a revocable trust. While the revocable trust is extremely useful as a planning tool, the level of access means the grantor is the legal owner of the trust and its assets. Courts and creditors alike can fully access the contents because its assets are indistinguishable from that of the grantor. If the grantor owes money, any assets in a revocable trust are considered part of their net worth.

A court can order a grantor to pay debts based on what’s in the trust. They are considered part of the grantor’s total assets during a bankruptcy proceeding.

Some irrevocable trusts can be used protect assets. An irrevocable trust is an entirely separate legal entity from its creator. Therefore, the grantor loses control of any assets placed into it, subject to the terms of the trust. However, those assets are then legally considered no longer owned by the grantor.

This depends upon the jurisdiction and the nature of the trust, as state laws vary. Some trusts don’t work for protecting assets, especially not if the grantor has been named as a beneficiary. Some jurisdictions don’t recognize this at all, but it is a viable option under the right circumstances. But if a court determines the grantor moved assets around to keep them away from creditors, it would be considered fraud.

If you’re considering using trusts in your estate plan, speak with an estate planning attorney who can determine which type of trust is best suited to your needs.

Reference: yahoo! (Jan. 27, 2023) “Will Revocable Trusts Protect My Assets From Creditors”

How Does an ABLE Account Work for a Special Needs Child?

“If you have a child or grandchild with disabilities, one of your biggest worries is what will happen when you are no longer around to provide aid.”

For many families, a plan for the future includes an Achieving a Better Life Experience, or ABLE, account to allow those with disabilities to set aside extra money without interfering with their federal aid. All but four states—Idaho, North Dakota, South Dakota, and Wisconsin—provide ABLE accounts, according to a recent article titled “ABLE Accounts Give Help For People with Disabilities” from AARP.

Other states, including California and Pennsylvania, allow people from other states to invest in their ABLE program.

Account owners are permitted to invest their money and shield earnings from taxes. Withdrawals are tax-free, as long as the money is used for approved expenses related to the account owner’s condition. Much or all of the money in an ABLE account does not count against asset limits which impact eligibility for safety-net programs, like Medicaid and Supplemental Security Income (SSI).

To be eligible for an ABLE account, the person must have a disability which began by the time they reached age 26 and in most cases, be receiving SSI or Social Security Disability Insurance (SSDI). If a person has reached the age requirement but isn’t receiving SSI or SSDI benefits, they may still be able to open an ABLE account if they meet Social Security’s disability definitions and can get a letter of disability from a doctor certifying their condition.

A person with disabilities may only have one account. However, anyone can contribute to it. The maximum contribution is 2023 is $17,000. However, those who work may deposit an additional amount up to their annual gross salary or the individual Federal Poverty Level (FPL). For an individual, the FPL in 2023 is $13,590. In some states, contributions are deductible from state income taxes.

Account owners may keep $235,000 to $550,000 in an ABLE account, depending upon state limits. If there is more than $100,000 in an ABLE account, the excess could cause SSI to be suspended, assuming they had $2,000 in other accounts. SSI can be reinstated if assets fall below the cap. The $100,000 ABLE limit does not apply to benefits from Medicaid or the Supplemental Nutrition Assistance Program, formerly known as food stamps.

Without an ABLE account, many people with disabilities face a choice between building savings and keeping benefits. If ABLE money is spent on a qualified disability expense, such as food, housing, transportation, and other things that improve health, independence or quality of life, withdrawals are free from federal and state taxes.

When the ABLE account owner dies, their estate may use funds from the account to pay for any qualified disability expenses, funeral and burial costs. The state may file a claim on the account equal to the amount the state spent on the individual’s Medicaid program. Any remaining amount passes to the owner’s estate.

Each state’s plan is different, so it makes sense to look at ABLE accounts offered by other states. Several states offer state income tax deductions for in-state residents who make contributions to an ABLE account.

Reference: AARP (Jan. 4, 2023) “ABLE Accounts Give Help For People with Disabilities”

What Is a Beneficiary Defective Inheritor’s Trust?

“A Beneficiary Defective Inheritor’s Trust, also known as a ‘BDIT,’ is a specific type of estate planning trust.”

The purpose of a Beneficiary Defective Inheritor’s Trust is to allow an individual with a federal estate tax problem to maintain control of the assets to the maximum extent allowed by law. The assets placed in a BDIT will not be included in the individuals tax estate when they pass away. This type of trust, as explained in the article “Special trust helps protect inheritance funds” from Times Reporter, is an excellent estate planning technique to consider when creating an estate plan.

This type of trust will be most beneficial to anyone having an estate tax issue upon their death. While the current tax exemption is $12,920,000, the exemption is expected to drop to $5 million to $6 million in 2026. The estate tax rate is 40% of any asset over those estate tax exemption amounts. The BDIT helps reduce the estate tax.

How does a BDIT work?

The BDIT is created by an independent settlor and a different independent person is named as trustee. The settlor executes the trust agreement and gives the trust a check for $5,000.

The person with the estate tax problem is the beneficiary of the trust and has the right to move the $5,000 from the trust.

As the result of the right to remove the $5,000 from the trust, the beneficiary is considered the owner of the trust assets for income tax purposes. However, not for estate tax purposes.

The trust also has a protector, an independent individual who has various responsibilities, including the right to remove and replace the trustee.

The BDIT allows the beneficiary as much control as they can have without including the assets in the beneficiary’s estate.

The beneficiary reports all income on the beneficiary’s individual 1040 tax return.

The beneficiary then sells assets—they could be stocks or units of a closely held business—in exchange for a promissory note. Thus, the BDIT owns the securities and/or the closely held business.

The BDIT then receives distributions from the business and in return, makes payments to the beneficiary on the promissory note.

The beneficiary continues to receive payments on the promissory note until the note is paid off. The promissory note is included in the beneficiary’s estate. By paying off the note, the assets in the individual’s estate are being reduced.

The BDIT also provides that the beneficiary is to receive income and principal for health, education, maintenance and support, so when the note is paid off, the individual still receives these payments from the BDIT.

On the death of the beneficiary, the contingent beneficiary can be the beneficiary’s descendants. The assets in the BDIT are never included in anyone’s taxable estate.

This is a somewhat complex estate planning technique and should be considered only after a thorough review of your unique situation with an estate planning attorney.

Reference: Times Reporter (Jan. 8, 2023) “Special trust helps protect inheritance funds”