King & Wood, P.A.

Trusts can Work for ‘Regular’ People

“When you hear the word trust fund, you might think of the uber-wealthy giving their kids a big chunk of cash on their 25th birthday. However, trust funds aren’t just for the rich.”

A trust fund is an estate planning tool that can be used by anyone who wishes to pass their property to individuals, family members or nonprofits. They are used by wealthy people because they solve a number of wealth transfer problems and are equally applicable to people who aren’t mega-rich, explains this recent article from Forbes titled “Trust Funds: They’re Not Just For The Wealthy.”

A trust is a legal entity in the same way that a corporation is a legal entity. A trust is used in estate planning to own assets, as instructed by the terms of the trust. Terms commonly used in discussing trusts include:

• Grantor—the person who creates the trust and places assets into the trust.
• Beneficiary—the person or organization who will receive the assets, as directed by the trust documents.
• Trustee—the person who ensures that the assets in the trust are properly managed and distributed to beneficiaries.

Trusts may contain a variety of property, from real estate to personal property, stocks, bonds and even entire businesses.

Certain assets should not be placed in a trust, and an estate planning attorney will know how and why to make these decisions. Retirement accounts and other accounts with named beneficiaries don’t need to be placed inside a trust, since the asset will go to the named beneficiaries upon death. They do not pass through probate, which is the process of the court validating the will and how assets are passed as directed by the will. However, there may be reasons to designate such accounts to pass to the trust and your attorney will advise you accordingly.

Assets are transferred into trusts in two main ways: the grantor transfers assets into the trust while living, often by retitling the asset, or by using their estate plan to stipulate that a trust will be created and retain certain assets upon their death.

Trusts are used extensively because they work. Some benefits of using a trust as part of an estate plan include:

Avoiding probate. Assets placed in a trust pass to beneficiaries outside of the probate process.

Protecting beneficiaries from themselves. Young adults may be legally able to inherit but that doesn’t mean they are capable of handling large amounts of money or property. Trusts can be structured to pass along assets at certain ages or when they reach particular milestones in life.

Protecting assets. Trusts can be created to protect inheritances for beneficiaries from creditors and divorces. A trust can be created to ensure a former spouse has no legal claim to the assets in the trust.

Tax liabilities. Transferring assets into an irrevocable trust means they are owned and controlled by the trust. For example, with a non-grantor irrevocable trust, the former owner of the assets does not pay taxes on assets in the trust during his or her life, and they are not part of the taxable estate upon death.

Caring for a Special Needs beneficiary. Disabled individuals who receive government benefits may lose those benefits, if they inherit directly. If you want to provide income to someone with special needs when you have passed, a Special Needs Trust (sometimes known as a Supplemental Needs trust) can be created. An experienced estate planning attorney will know how to do this properly.

Reference: Forbes (March 15, 2021) “Trust Funds: They’re Not Just For The Wealthy”

What’s Happening to the Estate Tax?

“Under current rules, the federal estate tax won’t ever affect you, unless you’re quite wealthy. However, that could change rapidly, even if you are far from rich.”

Proposals now being considered by President Biden may expand the number of Americans who will need to pay the federal estate tax in one of two ways: raising rates and lowering qualifying thresholds on estates and increasing the liability for inheriting and selling assets. It is likely that these changes will raise revenues from the truly wealthy, while also imposing estate taxes on Americans with more modest assets, according to a recent article “It May Be Time to Start Worrying About the Estate Tax” from The New York Times.

Inheritance taxes are paid by the estate of a person who died. Some states have estate taxes of their own, with lower asset thresholds. As of this writing, a married couple would need to have assets of more than $23.4 million before they had to plan for federal estate taxes. This historically high exemption may be ending sooner than originally anticipated.

One of the changes being considered is a common tax shelter. Known as the “step-up in basis at death,” this values the assets in an estate at the date of death and disregards any capital gains in a deceased person’s portfolio. Eliminating the step-up in basis would require inheritors to pay capital gains whenever they sold assets, including everything from the family home to stock portfolios.

If you’re lucky enough to inherit wealth, this little item has been an accounting gift for many years. A person who inherits stock doesn’t have to think twice about what their parents or grandparents paid decades ago. All of the capital gains in those shares or any other inherited investment are effectively erased, when the owner dies. There are no capital gains to calculate or taxes to pay.

However, those capital gains taxes are lost revenue to the federal government. Eliminating the step-up rules could potentially generate billions in taxes from the very wealthy but is likely to create financial pain for people who have lower levels of wealth. A family that inherited a home, for instance, would have a much bigger tax burden, even if the home was not a multi-million-dollar property but simply one that gained in value over time.

Reducing the estate tax exemption could lead to wealthy people having to revise their estate plans sooner rather than later. Twenty years ago, the exemption was $675,000 per person and the tax rate was 55%. Over the next two decades, the exemption grew and the rates fell. The exemption is now $11.7 million per person and the tax rate above that amount is 40%.

Lowering the exemption, possibly back to the 2009 level, would dramatically increase tax revenue.

What is likely to occur and when, remains unknown, but what is certain is that there will be changes to the federal estate tax. Stay up to date on proposed changes and be prepared to update your estate plan accordingly.

Reference: The New York Times (March 12, 2021) “It May Be Time to Start Worrying About the Estate Tax”

How Important Is Avoiding Probate?

“Probate is a process to transfer the assets after someone dies. For example, when a homeowner passes, probate allows for the home to be sold or transferred, if necessary, even though the owner is no longer alive to sign a deed.”

Estate planning attorneys are often asked if one of the goals of an estate plan is to avoid probate, regardless of the cost. The answer to that question is no, but a better question is the more even-tempered “Should I try to avoid probate?” In that case, the answer is “It depends.” A closer look at this question is provided in the recent article from The Daily Sentinel, “Estate Planning: Is Probate Something to Avoid at All Costs?”

Probate is not always a nightmare, depending upon where a decedent lived. Probate is a court process conducted by judges, who usually understand the difficulty executors and families are facing, and their support staff who genuinely care about the families involved. This is not everywhere, but your estate planning attorney will know what your local probate court is like. With that in mind, there are certain pitfalls to probate and there are situations where avoiding probate does make sense for your family.

In the case where it makes sense to avoid probate, whatever planning strategy is being used to avoid probate must be carefully evaluated. Does it make sense, or does it create further issues? Here’s an example of how this can backfire. A person provided their estate planning attorney with a copy of a beneficiary deed, which is a deed that transfers property to a designated person (called a “grantee”) immediately upon the death of the person who signed the deed (called a “grantor”).

The deed had been signed and recorded properly with the recorder’s office, just as a typical deed would be during the sale of a home. Note that a beneficiary deed does not transfer the title of ownership, until the grantor dies.

Here’s where things went bad. No one knew about the beneficiary deed, except for the grantor and the grantee. The remainder of the estate plan did not mention anything about the beneficiary deed. When the grantor died, ownership of the property was transferred to the grantee. However, the will contained conflicting instructions about the property and who was to inherit it.

Instead of avoiding probate, the grantor’s estate was tied up in court for more than a year. The family was torn apart, and the costs to resolve the matter were substantial.

Had the deceased simply relied upon the probate process or coordinated the transfer of ownership with his estate planning attorney, the intended person would have received the property and the family would have been spared the cost and stress. Sticking with the use of a last will and testament and the probate process would have protected everyone involved.

An experienced estate planning attorney can help determine the best approach for the family, with or without probate.

Reference: The Daily Sentinel (Oct. 3, 2020) “Estate Planning: Is Probate Something to Avoid at All Costs?”

Reviewing Your Estate Plan Protects Goals, Family

“Most people wish to have more control over who and how their assets are managed than what the state laws provide, and so they draft documents that can override the Laws of Intestacy when those laws do not match their objectives.”

Transferring the management of assets if and when you are unable to manage them yourself because of disability or death is the basic reason for an estate plan. This goes for people with $100 or $100 million. You already have an estate plan, because every state has laws addressing how assets are managed and who will inherit your assets, known as the Laws of Intestacy, if you do not have a will created. However, the estate plan created by your state’s laws might not be what you want, explains the article “Auditing Your Estate Plan” appearing in Forbes.

To take more control over your estate, you’ll want to have an estate planning attorney create an estate plan drafted to achieve your goals. To do so, you’ll need to start by defining your estate planning objectives. What are you trying to accomplish?

· Provide for a surviving spouse or family
· Save on income taxes now
· Save on estate and gift taxes later
· Provide for children later
· Bequeath assets to a charity
· Provide for retirement income, and/or
· Protect assets and beneficiaries from creditors.

A review of your estate plan, especially if you haven’t done so in more than three years, will show whether any of your goals have changed. You’ll need to review wills, trusts, powers of attorney, healthcare proxies, beneficiary designation forms, insurance policies and joint accounts.

Preparing for incapacity is just as important as distributing assets. Who should manage your medical, financial and legal affairs? Designating someone, or more than one person, to act on your behalf, and making your wishes clear and enforceable with estate planning documents, will give you and your loved ones security. You are ready, and they will be ready to help you, if something unexpected occurs.

There are a few more steps, if your estate plan needs to be revised:

· Make the plan, based on your goals,
· Engage the people, including an estate planning attorney, to execute the plan,
· Have a will updated and executed, along with other necessary documents,
· Re-title assets as needed and complete any changes to beneficiary designations, and
· Schedule a review of your estate plan every few years and more frequently if there are large changes to tax laws or your life circumstances.

Reference: Forbes (Sep. 23, 2020) “Auditing Your Estate Plan”

Does Your Estate Plan Include Digital Property Protection?

“It’s difficult to go a few hours without interacting with a digital account. Whether that is email, online banking, or social media, many daily tasks involve  digital informational storage.”

One of the challenges facing estate plans today is a new class of assets, known as digital property or digital assets. When a person dies, what happens to their digital lives? According to the article “Digital assets important part of modern estate planning” from the Cleveland Jewish News, digital assets need to be included in an estate plan, just like any other property.
What is a digital asset? There are many, but the basics include things like social media—Facebook, Instagram, Snapchat—as well as financial accounts, bank and investment accounts, blogs, photo sharing accounts, cloud storage, text messages, emails, and more. If it has a username and a password and you access it on a digital device, consider it a digital asset.
Business and household files stored on a local computer or in the cloud should also be considered as digital assets. The same goes for any cryptocurrency; Bitcoin is the most well-known type, and there are many others.

The Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA) has been adopted by almost all states to provide legal guidance on rights to access digital assets for four (4) different types of fiduciaries: executors, trustees, agents under a financial power of attorney and guardians. The law allows people the right to grant not only their digital assets but the contents of their communications. It establishes a three-tier system for the user, the most important part being if the person expresses permission in an online platform for a specific asset, directly with the custodian of a digital platform, that is the controlling law. If they have not done so, they can provide for permission to be granted in their estate planning documents. They can also allow or forbid people to gain access to their digital assets.

If a person does not take either of these steps, the terms of service they agreed to with the platform custodian governs the rights to access or deny access to their digital assets.
It’s important to discuss this new asset class with your estate planning attorney to ensure that your estate plan addresses your digital assets. Having a list of digital assets is the first step, but it’s just the start. Leaving the family to fight with a tech giant to gain access to digital accounts is a stressful legacy to leave behind.
Reference: Cleveland Jewish News (Sep. 24, 2020) “Digital assets important part of modern estate planning”

Common Myths about Your Estate When You Die

“Regardless of whether the law makes sense to us, we are all required to abide by it.”

There are many misconceptions about the law in general and about estate planning in particular. There are also many opportunities to use the law to protect those we love, when it comes to helping families navigate life and the legal processes that happen after the death or disability of a loved one. The best option is to plan ahead, reports the article “I’m dead, now what? Myths about deaths in Georgia” from the Cherokee Tribune & Ledger-News. Here are the top four myths about what happens when someone dies.

A Will. If there’s no will, my spouse gets everything. Well, no. While you are a team, and you may want your spouse to get everything, if there’s no will, the laws of your state will determine who gets what. Your spouse in some states will split your possessions with your children. Your spouse in some states will get no less than a third of your assets. If you want your spouse to inherit everything, you need a will.

You also need a will if you want your spouse to receive everything so they can take care of your children, if something unexpected happens to you. Without it, your spouse will have to create a budget for your children’s needs and present that to the court before they can spend any of the children’s money. That’s how it works in Georgia. Check with a local estate planning attorney to make sure that’s what you’re prepared to leave for your spouse to do, or what your state’s laws say.

Having a will allows you to determine who you want to inherit what.

A will means there’s no need for probate court. Wrong again! Having a will does not mean you avoid probate court and the legal process known as probate. A will is not legally effective, until the nominated executor presents your will to the probate court and the court accepts the will and declares it to be valid. This is a longer process in some jurisdictions. However, there are potential problems. If there’s a disgruntled family member or a need for privacy, the probate process creates a public record and information can and often is obtained by family members. To avoid making your life a public matter, you need an estate plan that includes trusts, which do not go through the probate process and do not become public records.

If I don’t have a will, the state will take it all. It’s very rare that any state will take everything, even if there is no will. The state only does that if absolutely no family members can be found, or if the state’s Medicaid program has an aggressive claw back policy that seeks to recover the cost of nursing home care provided to the decedent. If the person who died did not need Medicaid services, then it’s unlikely that the state will take the assets. More likely? A family member, determined by degree of kinship, will be entitled to inherit. Again, the law varies by state, so check with an experienced estate planning lawyer in your state.

The family gets stuck with the debts. That’s a yes and no answer. The debts of family members do not have to be paid by the family. However, they are paid by the deceased’s estate, which will be decreased by the amount of debt owed. Therefore, the family members will inherit less, but it’s not coming out of their own pockets. The debts of the deceased are to be paid by whatever assets he or she owned at the time of death. If there’s not enough in the estate, the family is not obligated to pay the debt. The exception is if the spouse was a joint borrower or otherwise legally obligated to pay the debt.

What you know and don’t know about estate planning can hurt you and your family. An easy way to address this: meet with an experienced estate planning attorney and make a plan that will distribute your assets according to your wishes.

Reference: Cherokee Tribune & Ledger-News (Feb. 1, 2020) “I’m dead, now what? Myths about deaths in Georgia”

 

 

Can You Apply for a Mortgage at an Advanced Age?

“Federal law, under the Equal Credit Opportunity Act, forbids discrimination in the mortgage market on the basis of age. Nonetheless, loan officers say older borrowers often don’t realize they can get loans with terms that will expire on their 110th, 120th or nearly 130th birthdays.”

A senior loan officer with a mortgage company in Florida recently wrote a 30-year loan for a retiree who was purchasing a home in New Port Rickey. He didn’t expect to have trouble qualifying for the loan, but he was surprised that he did.

That’s because he was 97 years old.

Under the Equal Credit Opportunity Act, federal law forbids discrimination in the mortgage market on the basis of age, reports The Wall Street Journal in a recent article “You’re Never Too Old to Apply for a Mortgage.” However, most seniors don’t know that they can get loans that will expire on their 110^th, 120^th and even later birthdays. In fact, the Federal Housing Finance Agency says that borrowers over age 65 make up ten percent of all mortgages originated annually.

Some lenders are working harder to find ways to qualify retirees, including rolling out lending programs that allow borrowers to use their investment portfolios to qualify without taking monthly distributions. Loan officers, especially in areas with large numbers of retirees, have become skilled at adding up income streams, helping borrowers establish new ones and willingly guiding them through the process.

The simplest way is for a retiree to add up their monthly fixed income from all sources, which are then treated like a salary by the lenders. If those numbers are not high enough, the next step is to create an ongoing distribution from a retirement account, like an IRA or 401(k). For one mortgage lender, a retired borrower needs to show $8,000 of monthly income for a 30-year home purchase loan. The borrower set up a distribution for that amount from an IRA worth $500,000, and had her financial advisor draft a letter to the lending company about the new income stream. This made her qualified for the loan, even though at that rate, her entire IRA would be drained in five or six years. Fannie Mae rules only require that distributions are guaranteed to continue for three years.

If the property produces income, those funds can be counted towards the qualifying amount. However, the underlying value of the property, even if it is owned outright or if there is a lot of equity in the home, is not considered by the lender. Property tax and homeowner’s insurance are measured as debt in the debt-to-income equation.

If qualifying is still a problem, lenders are increasingly willing to include stocks, bonds, and mutual funds. This is very different than creating a distribution steam that counts as income. The borrower is not required to take a monthly amount from their portfolio. The lender uses a formula called “asset depreciation” or “asset annuitization or depletion” to impute a monthly distribution from the investment portfolio.

Some jumbo lenders who cater to high net worth individuals have more liberal asset depreciation programs. In New York, an 83-year-old retired co-op owner received a $1 million, 10-year, interest only adjustable rate mortgage for a re-finance at a highly competitive rate through a bank’s program similar to an asset depreciation plan. With the deposit of a few hundred thousand dollars into the bank, the owner qualified based on a portfolio of stocks and bonds valued at $1.6 million.

Speak with your estate planning lawyer before making this kind of large financial decision, since it may have a significant impact on your overall estate plan.

Reference: Barron’s (Jan. 16, 2020) “You’re Never Too Old to Apply for a Mortgage”