King & Wood, P.A.

What Is a Community Property Trust?

“Getting a step-up in basis when each spouse dies can be a big tax advantage. It has not been available to those who live in common-law states. However, it may now be–through a community property trust.”

Where you live matters for estate planning, since laws regarding estate planning are state specific. The same is true for taxes, especially for married couples, says a recent article “How Community Property Trusts Can Benefit Married Couples” from Kiplinger.

There are two different types of basic ownership law for married couples: common law and community property law. Variances can be found across states, but some general rules apply to all. If a state is not a community property state, it’s a common-law state.

Community property states have a tax advantage for assets when one spouse dies. But if you live in a common-law state, don’t worry: several states have now passed statutes allowing married couples living in a common-law state to establish a community property trust with a qualified trustee. They can gain a step-up in cost basis at each death, which previously was not allowed in common-law states.

First, let’s explain what community property means. Each member of the married couple owns one half of all the property of the couple, with full rights of ownership. All property acquired during a marriage is usually community property, with the exception of property from an inheritance or received as a gift. However, laws vary in the community property states regarding some ownership matters. For example, a spouse can identify some property as community property without the consent of the other spouse.

Under federal law, all community property (which includes both the decedent’s one-half interest in the community property and the surviving spouse’s one-half interest in the community property) gets a new basis at the death of the first spouse equal to its fair market value. The cost basis is stepped up, and assets can be sold without recognizing a capital gain.

Property in the name of the surviving spouse can receive a second step-up in basis. However, there’s no second step-up for assets placed into irrevocable trusts before the second death. This includes a trust set up to shelter assets under the lifetime estate tax exemption or to qualify assets for the unlimited marital deduction. This is often called “A-B” trust planning.

Under common law, married couples own assets together or individually. When the first spouse dies, assets in the decedent spouse’s name or in the name of a revocable trust are stepped-up. Assets owned jointly at death receive a step-up in basis on only half of the property. Assets in the surviving spouse’s name only are not stepped-up. However, when the surviving spouse dies, assets held in their name get another step-up in basis.

To date, five common-law states have passed community property trust statutes to empower a married couple to convert common-law property into community property. They include Alaska, Florida, Kentucky, South Dakota and Tennessee.

The community property trust allows married couples living in the resident state and others living in common-law states to obtain a stepped-up basis for all assets they own at the first death. Those who live in common-law states not permitting this trust solution can still execute a community property trust in a community property state. However, they will first need to appoint a qualified trustee in the state.

For this to work, the trusts need to be prepared properly by an experienced estate planning attorney, who will also be able to advise the couple whether there are any other means of achieving these and other tax planning goals.

Reference: Kiplinger (Sep. 18, 2022) “How Community Property Trusts Can Benefit Married Couples”

No Will? What Happens Now Can Be a Horror Show

“It's hard for a family to recuperate when the patriarchs and matriarchs have gone to glory, leaving a battle for who will carry the family's leadership role and manage the family's transition of wealth.”

Families who have lived through settling an estate without an estate plan will agree that the title of this article, “Preventing the Horrors of Dying Without a Will,” from Next Avenue, is no exaggeration. When the family is grieving is no time to be fighting, yet the absence of a will and an estate plan leads to this exact situation.

Why do people procrastinate having their wills and estate plans done?

Limited understanding about wealth transfers. People may think they do not have enough assets to require an estate plan. Their home, retirement funds or savings account may not be in the mega-millions, but this is actually more of a reason to have an estate plan.

Fear of mortality. We do not like to talk or think about death. However, talking about what will happen when you die or what may happen if you become incapacitated is very important. Planning so your children or other trusted family member or friends will be able to make decisions on your behalf or care for you alleviates what could otherwise turn into an expensive and emotionally disastrous time.

Perceived lack of benefits. Working with an experienced estate planning attorney who will put your interests first means you will have one less thing to worry about while you are living and towards the end of your life.

Estate planning documents contain the wishes and directives for your legacy and finances after you pass. They answer questions like:

• Who should look after your minor children, if both primary caregivers die before the children reach adulthood?
• If you become incapacitated, who should handle your financial affairs, who should be in charge of your healthcare and what kind of end-of-life care do you want?
• What do you want to happen to your assets after you die? Your estate refers to your financial accounts, personal possessions, retirement funds, pensions and real estate.

Your estate plan includes a will, trusts (if appropriate), a durable financial power of attorney, a health care power of attorney or advanced directive and a living will. The will distributes your property and also names an executor, who is in charge of making sure the directions in the will are carried out.

If you become incapacitated by illness or injury, the POA gives agency to someone else to carry out your wishes while you are living. The living will provides an opportunity to express your wishes regarding end-of-life care.

There are many different reasons to put off having an estate plan, but they all end up in the same place: the potential to create family disruption, unnecessary expenses and stress. Show your family how much you love them, by overcoming your fears and preparing for the next generation. Meet with an estate planning attorney and prepare for the future.

Reference: Next Avenue (March 21, 2022) “Preventing the Horrors of Dying Without a Will”

How Do I Protect Myself and My Children in a Second Marriage?

“Who’s going to inherit on the death of one of the re-marrieds? Will this be the surviving spouse? If so, where will those inherited monies go on the second-to-die’s death?”

In first marriages, working together to raise children can solidify a marriage. However, in a second marriage, the adult children are in a different position altogether. If important estate planning issues are not addressed, the relationship between the siblings and the new spouses can have serious consequences, according to a recent article titled “Into the Breach; Getting Married Again?” from the Pittsburgh Post-Gazette.

Chief among the issues center on inheritances and financial matters, especially if one of the parties has the bulk of the income and the assets. How will the household expenses be shared? Should they be divided equally, even if one spouse has a significantly higher income than the other?

Other concerns involve real estate. If both parties own their own homes, in which house will they live? Will the other home be used for rental income or sold? Will both names be on the title for the primary residence?

Planning for incapacity also becomes more complex. If a 90-year-old man marries a 79-year-old woman, will his children or his spouse be named as agents (i.e., attorneys in fact) under his Power of Attorney if he is incapacitated? Who will make healthcare decisions for the 79-year-old spouse—her children or her 90-year-old husband?

There are so many different situations and family dynamics to consider. Will a stepdaughter end up making the decision to withdraw artificial feeding for an elderly stepmother, if the stepmother’s own children cannot be reached in a timely manner? If stepsiblings do not get along and critical decisions need to be made, can they set aside their differences to act in their collective parent’s best interests?

The matter of inheritances for second and subsequent marriages often becomes the pivot point for family discord. If the family has not had an estate plan created with an experienced estate planning attorney who understands the complexities of multiple marriages, then the battles between stepchildren can become nasty and expensive.

Do not discount the impact of the spouses of adult children. If you have a stepchild whose partner feels they have been wronged by the parent, they could bring a world of trouble to an otherwise amicable group.

The attorney may recommend the use of trusts to ensure the assets of the first spouse to die eventually make their way to their own children, while ensuring the surviving spouse has income during their lifetime. There are several trusts designed to accomplish this exact scenario, including one known as SLAT—Spousal Lifetime Access Trust.

Discussions about health care proxies and power of attorney should take place well before they are needed. Ideally, all members of the family can gather peacefully for discussions while their parents are living, to avoid surprises. If the relationships are rocky, a group discussion may not be possible and parents and adult children may need to meet for one-on-one discussions. However, the conversations still need to take place.

Second marriages at any age and stage need to have a prenuptial and an estate plan in place before the couple walks down the aisle to say, “I do…again.”  

Reference: Pittsburgh Post-Gazette (March 1, 2022) “Into the Breach; Getting Married Again?”

How to Protect an Estate from a Rotten Son-in-Law

“Whatever the reason, whether your life is a bed of roses or a getting-worse-nightmare, there are things you can do now to insure what you leave will go to who you want. And when. And in what portion or portions.”

If you’ve been working for a while, you have an estate. If you’ve been working for a long time, you may even have a sizable estate, and between your home, insurance and growing retirement funds, your estate may reach the million dollar mark. That’s the good news. But the bad news might be an adult child with a drug or drinking problem, or a child who married a person who doesn’t deserve to inherit any part of your estate. Not to mention an ex-spouse or two. What will happen when you aren’t there to protect your estate?

There are steps to protect your estate and your family members, as described in the recent article “Is your son-in-law a jerk? Armor plate your estate” from Federal News Network.

Don’t overlook beneficiary designations. Most employer-sponsored retirement and savings accounts have beneficiary designations to identify the people you wish to receive these assets when you die. Here’s an important fact to know: the beneficiary designation overrides any language in your last will and testament. If your beneficiary designation on an account names a child but your will gives your estate to your spouse, your child will receive assets in the account, and your spouse will not receive any proceeds from the account.

Don’t try to sell a property for below-market value. The same goes for trying to remove assets from your ownership to qualify for Medicaid to cover long-term care costs. Selling your home to an adult child for $1 will not pass unnoticed. Estate taxes, gift taxes, income taxes and eligibility for government benefits can’t be avoided by this tactic.

A common estate planning mistake is to name specific investments in a will. A will becomes part of the public record when it is probated. Providing details in a will is asking for trouble, especially if a nefarious family member is looking for assets. And if the sale or other disposition of the named asset before your death impacts bequests, your estate may be vulnerable to litigation.

How will you leave real estate assets to heirs? Real estate assets can be problematic and need special consideration. Are you leaving shares to a vacation home or the family home? If kids or their spouses don’t get along, or one person wants to live in the home while others want to sell it, this could cause years of family fights.

Making a bequest to a grandchild instead of to a troubled adult child. Minor children may not legally inherit property, so leaving assets to a grandchild does not avoid giving assets to an adult child. The most likely guardian will be their parent, undoing the attempt to keep assets out of the parent’s control.

Include a residuary clause in a will or trust. Residuary clauses are used to dispose of assets not specifically mentioned in a will or trust. Your estate planning attorney will create the residuary clauses most appropriate for your unique situations.

Prepare for the unexpected. Your estate plan can be designed to address the unexpected. If a primary beneficiary like a daughter or son divorces their spouse, a trust could prevent the ex from gaining access to your assets.

An effective estate plan, prepared with an experienced estate planning attorney, can plan for all of the “what ifs” to protect loved ones after you have passed.

Reference: Federal News Network (Sep. 1, 2021) “Is your son-in-law a jerk? Armor plate your estate”

What are the Stages of Probate?

“Although most assets in your estate may pass through the probate process, other assets may not. It often depends on the type of asset or how an asset is titled.”

Probate is a court-supervised process occurring after your death. It takes place in the state where you were a resident at the time of your death and addresses your estate—all of your financial assets, real estate, personal belongings, debts and unpaid taxes. If you have an estate plan, your last will names an executor, the person who takes charge of your estate and settles your affairs, explains the article “Understanding Probate” from Pike County Courier. How exactly does the probate process work?

If your estate is subject to probate, your estate planning attorney files an application for the probate of your last will with the local court. The application, known as a petition, is brought to the probate court, along with the last will. That is also usually when the petitioner files an application for the appointment of the executor of your estate.

First, the court must rule on the validity of the last will. Does it meet all of the state’s requirements? Was it witnessed properly? If the last will meets the state’s requirements, then the court deems it valid and addresses the application for the executor. That person must also meet the legal requirements of your state. If the court agrees that the person is fit to serve, it approves the application.

The executor plays a very important role in settling your estate. The executor is usually a spouse or a close family member. However, there are situations when naming an attorney or a bank is a better option. The person needs to be completely trustworthy. Your fiduciary will have a legal responsibility to be honest, impartial and put your estate’s well-being above the fiduciary’s own. If they do not have a good grasp of financial matters, the fiduciary must have the common sense to ask for expert help when needed.

Here are some of the tasks the fiduciary must address:

• Finding and gathering assets and liabilities
• Inventorying and appraising assets
• Filing the estate tax return and your last tax return
• Paying debts, managing creditors and paying taxes
• Distributing assets
• Providing a detailed report of the estate settlement to the court and any other parties

What is the probate court’s role in this part of the process? It depends upon the state. The probate court is more involved in some states than in others. If the state allows for a less formal process, it’s simpler and faster. If the estate is complicated with multiple properties, significant assets and multiple heirs, probate can take years.

If there is no executor named in your last will, the court will appoint an administrator. If you do not have a last will, the court will also appoint an administrator to settle your estate following the laws of the state. This is the worst possible scenario, since your assets may be distributed in ways you never wished.

Does all of your estate go through the probate process? With proper estate planning, many assets can be taken out of your probate estate, allowing them to be distributed faster and easier. How assets are titled determines whether they go through probate. Any assets with named beneficiaries pass directly to those beneficiaries and are outside of the estate. That includes life insurance policies and retirement plans with named beneficiaries. It also includes assets titled “jointly with rights of survivorship,” which is how most people own their homes.

Your estate planning attorney will discuss how the probate process works in your state and how to prepare a last will and any needed trusts to distribute your assets as efficiently as possible.

Reference: Pike County Courier (March 4, 2021) “Understanding Probate”

How to Manage a Will and Trust

“By definition, a Will accounts for a person’s wishes of how their assets and estate should be distributed and handled once they die. It spells out who should get what and who should do what, after the benefactor’s demise.”

A last will and testament is used to point out the beneficiaries and trustees and the legal professionals you want to be involved with your estate when you have passed, explains this recent article “What You Need To Know About Handling a Will and Trust from Your Dearly Departed Loved One” from North Forty News. If there are minor children in the picture, the last will is used to direct who will be their guardians.

A trust is different than the last will. A trust is a legal entity where one person places assets in the trust and names a trustee to be in charge of the assets in the trust on behalf of the beneficiaries. The assets are legally protected and must be distributed as per the instructions in the trust document. Trusts are a good way to reduce paperwork, save time and reduce estate taxes.

Don’t go it alone. If your loved one had a last will and trust, chances are they were prepared by an estate planning lawyer. The estate planning attorney can help you go through the legal process. The attorney also knows how to prepare for any possible disputes from relatives.

It may be more complicated than you expect. There are times when honoring the wishes of the deceased about how their property is distributed becomes difficult. Sometimes, there are issues between the beneficiaries and the last will and trust custodians. If you locate the attorney who was present at the time the last will was signed and the trusts created, she may be able to make the process easier.

Be prepared to get organized. There’s usually a lot of paperwork. First, gather all of the documents—an original last will, the death certificate, life insurance policies, marriage certificates, real estate titles, military discharge papers, divorce papers (if any) and any trust documents. Review the last will and trust with an estate planning attorney to understand what you will need to do.

Protect personal property and assets. Homes, boats, vehicles and other large assets will need to be secured to protect them from theft. Once the funeral has taken place, you’ll need to identify all of the property owned by the deceased and make sure they are property insured and valued. If a home is going to be empty, changing the locks is a reasonable precaution. You don’t know who has keys or feels entitled to its contents.

Distribution of assets. If there is a last will, it must be filed with the probate court and all beneficiaries—everyone mentioned in the last will has to be notified of the decedent’s passing. As the executor, you are responsible for ensuring that every person gets what they have been assigned. You will need to prepare a document that accounts for the distribution of all properties, which the court has to certify before the estate can be closed.

Taking on the responsibility of finalizing a person’s estate is not without challenges. An estate planning attorney can help you through the process, making sure you are managing all the details according to the last will and the state’s laws. There may be personal liability attached to serving as the executor, so you’ll want to make sure to have good guidance on your side.

Reference: North Forty News (Feb. 3, 2021) “What You Need To Know About Handling a Will and Trust from Your Dearly Departed Loved One”

 

Homeownership and Medicaid Can Be Problem

 

“Many people work hard to acquire real estate and then later find that that real estate makes them ineligible for Medicaid to help pay for nursing home or in-home, long-term care.”

The challenges begin when homeowners don’t do any Medicaid planning and decide the best answer is simply to gift their home to their children. It doesn’t always work out well for the homeowners or their children, warns the article “Owning real estate without jeopardizing Medicaid paying for nursing home” from limaohio.com.

A key tax avoidance opportunity is usually missed, when real property is gifted outright. The IRS says that if someone owns real estate, when that person passes, the heirs may eliminate a large portion of the taxable gains, if the real estate ends up being sold by an heir for more than the original owner paid for the property.

Let’s walk through an example of how this works. Let’s say Terry buys a farm for $1,000. The cost to buy the farm is referred to as a “tax basis.”

If the family is planning for the possibility of nursing home costs, Terry might want to give that farm away to her children Ted and Zach. She needs to do it at least five years before she thinks she’ll need Medicaid to pay for long-term nursing care, because of a five-year lookback.

When Terry gifts the farm to Ted and Zach, the two children acquire Terry’s tax basis of $1,000. Ted gets $500 of the tax basic credit, and so does Zach.

The years go by and Ted wants to buy out Zach’s half of the farm. The farm is now worth $5,000. So, Ted pays Zach $2,500 for Zach’s half of the farm. Zach now has a tax basis of $500, which is not subject to tax. And Ted receives $2,000 more than his $500 tax basis, and Ted will need to pay capital gains on that $2,000 gain.

It could be handled smarter from a tax perspective. If Terry owns the farm when she dies, then Ted and Zach get the farm through her will, trust or whatever estate planning method is used. If the farm is worth $3,000 when Terry dies, then Ted and Zach will get a higher tax basis: $3,000 in total, or $1,500 each. By owning the farm when Terry dies, she gives them the opportunity to have their tax basis (and amount that won’t be taxed if they sell to each other or to anyone else) adjusted to the value of the property when Terry dies. In most cases, the value of real estate property is higher at the time of death than when it was purchased initially.

There’s another way to transfer ownership of the farm that works even better for everyone concerned. In this method, Terry continues to own the farm, helping Zach and Ted avoid taxes, and keeps the property out of her countable assets for Medicaid. The solution is for Terry to keep a specific type of life estate in the farm. This needs to be prepared by an experienced estate planning attorney, so that Terry won’t have to sell the farm if she eventually needs to apply for Medicaid for long term care.

Your estate planning attorney will be able to help you and your family navigate protecting your home and other assets, while benefiting from smart tax strategies.

Reference: limaohio.com (Nov. 7, 2020) “Owning real estate without jeopardizing Medicaid paying for nursing home”

The Biggest Mistake in Trusts: Funding

 

 

 

 

                                                    "Your real estate holdings, life insurance, bank accounts and retirement savings won’t magically flow into your trust.”

Failing to put assets into trusts creates headaches for heirs and probate hassles, says the article “Once You Create a Living Trust, Don’t Forget to Fund It” from Kiplinger. It’s the last step of creating an estate plan that often gets forgotten, much to the dismay of heirs and estate planning attorneys.
Are people so relieved when their estate plan is finished, that they forget to cross the last “t” and dot the last “i”? Could be! Retitling accounts is not something we do on a regular basis, and it does take time to get done. However, without this last step, the entire estate plan can be doomed.
Here are the steps that need to be competed:
Check the deeds on all real estate property. If the intention of your estate plan is to place your primary residence, vacation home, timeshare or rental properties into the trust, all deeds need to be updated. The property is being moved from your ownership to the ownership of the trust, and the title must reflect that. If at some point you refinanced a home, the lender may have asked you to remove the name of the trust for purposes of financing the loan. In that case, you need to change the deed back into the name of the trust. If your estate planning attorney wasn’t part of that transaction, they won’t know about this extra step. Check all deeds to be certain.
Review financial statements. Gather bank statements, brokerage statements and any financial accounts. Confirm that any of the accounts you want to be owned by the trust are titled correctly. You may need to contact the institutions to make sure that the titles on the statements are correct. If there is no reference to the trust at all, then the account has not been recorded correctly and changes need to be made.
It’s also a good idea to review any accounts with named beneficiaries. Talk with your estate planning attorney about whether these accounts should be retitled. The rules regarding beneficiaries for annuities changed a few years ago, so naming the trust as a beneficiary might not work for your estate plan or your tax planning goals as it did in the past.
IRAs and other retirement accounts. These accounts need to be treated on an individual basis when deciding if they should have a trust listed as a primary or contingent beneficiary. Listing a trust as a beneficiary can, in some cases, accelerate income tax due on the account. If the trust is listed as the beneficiary, the ability to distribute assets to trust beneficiaries may be impacted.
The main reason to list a trust as a beneficiary to an IRA or retirement plan is to protect the asset from creditors, financially reckless heirs, or a beneficiary with special needs. An estate planning attorney will know the correct way to handle this.
Making sure that your assets are in the trust takes a little time, but it is up to the owner of the trust to take care of this final detail. The estate planning attorney may provide you with written directions, but unless you make specific arrangements with the office, they will expect you to take care of this. The assets don’t move themselves – you’ll need to make it happen.
Reference: Kiplinger (Oct. 26, 2020) “Once You Create a Living Trust, Don’t Forget to Fund It”

Can Mom Leave a Home to Daughter but Not Grandchildren?

“If you want a legal plan that avoids probate court, there are two options: first, an enhanced life estate deed, and second a living trust. Each has its pros and cons.”

There are numerous ways to accomplish distributing property, according to specific wishes. A woman with three grown daughters faced a problem about passing down the family home. She wanted to give it to the youngest daughter, who has taken care of and is closest to her. However, she also wanted to be sure that, if something happened to this daughter, the house would go to her two other daughters and not the close daughter’s adult children.

With proper planning, this can be done, as described in the article “Mom needs contingency plan to pass house title” from mySanAntonio.

One way is to rely on a last will and testament. The will would state that she leaves the house to the youngest daughter, under terms of a testamentary trust inside the will. The daughter is permitted to use, enjoy, and live in the house during her lifetime, as the beneficiary of the testamentary trust.

The two older daughters would be named as the secondary beneficiaries of the trust. When the younger daughter dies, the trust distributes the house to the older daughters.

The plan will need to be prepared by a qualified estate planning attorney and it will likely be probated. This is not a terrible process, if the will is professionally written, properly signed by the mother and two witnesses, includes an executor and a trustee and clear instructions about her wishes. An estate planning attorney can prepare it correctly.

If the goal includes avoiding probate, there are other options. One is an enhanced life estate deed, and another is a living trust. The enhanced life estate deed specifies that the woman is retaining a life estate, that is, the right to use, enjoy and occupy her home, for the rest of her life. The document specifies that when she dies, the home goes to her youngest daughter. The owner would also want to specify that she has the right to change her mind at any time.

This approach avoids probate. However, there is a downside. If the youngest daughter dies before the mother, then the mother will need to take legal action to cancel the deed and issue a new one to the two older daughters. If the daughter outlives her mother, once she inherits the house, there will be no way to have it transferred to the other sisters in the future (unless the daughter choses to do so).

A living trust provides the detailed control allowed in a will, but the trust, which must be properly created and funded, avoids going to probate. The trust would let the mother live in the home, and when she dies, the title to the house stays in trust with her youngest daughter, who is able to live in the house. However, she never becomes the owner of the house. The trust would continue to own the house. The trust would specify that when the daughter dies, the house goes to the two older daughters. To be extra safe, it should also specify what she would want to happen, if one or both of the older daughters dies.

None of these is simple, but they are all feasible. Speak with an experienced estate planning attorney.

Reference: mySanAntonio (June 8, 2020) “Mom needs contingency plan to pass house title”

 

Please Welcome Megan Hance!

We are pleased to announce that Megan Hance has joined our firm as a closing specialist. Megan comes to us with an extensive banking background. She worked in commercial lending for a year and a half and residential lending for two years. In her free time, she likes spending time with her family. She also enjoyed reading, cooking, and as a native Ohioan, cheering on the Ohio State Buckeyes during college football season.