King & Wood, P.A.

Why Is It Important to have a Will?

“Less than half of Americans have a will. Here's why it's critical to be among those who have taken the time to draft this important document.”

A Gallup poll released in June showed that slightly less than half of all Americans have a will to tell loved ones what they want to happen with their estate after they die. What’s surprising is that the results of this survey have been almost the same since 1990, explains the article “6 Reasons You Need to Make a Will Now” from Real Simple. The survey also showed that upper-income Americans are more likely than lower-income Americans to have a will, and the younger people are, the less likely they are to have a will.

One of the lessons from the pandemic, is how fragile our lives are. It’s never too early to start planning and properly document your wishes. If you need more reasons to begin estate planning, here are six:

No will often leads to unwanted consequences. A major misconception is the idea that you don’t need a will because everything you own will go to your family. Not necessarily. Each state has its own laws about what happens if you have no will, and those laws are usually based on bloodlines or kinship. Most states leave two-thirds of your assets to your children and one-third to your spouse. Will your spouse be able to maintain the same standard of living, or even remain in the family home if this is how assets are distributed? A no-will situation is a no-win situation and can fracture even the best families.

Wills are used to name guardians for minor children. No parent, especially young parents, thinks that anything will happen to them, or even more unlikely, to both parents. However, it does. Creating a will offers the opportunity to name guardians to care for your children after death. If you don’t designate a guardian, a judge will. The judge will have never met your children, nor understand your family’s dynamics, and might even determine that the children should be raised by strangers.

Wills and pet trusts can protect pets after your demise. If you have beloved animal companions, it’s important to understand what can happen to them after you die. The law considers pets to be property, so you can’t leave money to your pet. However, you can create a pet trust and name a person to be the caregiver for your pet, if it survives you. The trust is enforceable, and the pet’s care can be detailed. Otherwise, there is no guarantee your pet will avoid being euthanized.

Taxes are part of death. Creating an estate plan with an experienced estate planning attorney who is knowledgeable about estate taxes, could save your heirs from losing a significant part of their inheritance. There are many tools and strategies to minimize taxes, including making charitable gifts. Plans for large estates can be structured in a way to avoid as much as 40% of tax exposure. It’s even more important to protect a smaller estate from being lost to taxes.

Peace of mind. Remember, wills and estate plans are not just for the benefit of the person who creates them. They are for the family, the surviving spouse, children, and grandchildren. If you did not take the time and make the effort to create an estate plan, they are the ones who will live with the consequences. In many cases, it could change their lives—and not for the better.

Putting it off never ends well. When you’re young and healthy, it seems like nothing can ever go wrong. However, live long enough, and you learn life has ups and downs and unexpected events—like death and serious illness—happen to everyone. Creating an estate plan won’t make you die sooner but having one can provide you and your loved ones with security, so you can focus on living.

Reference: Real Simple (June 25, 2021) “6 Reasons You Need to Make a Will Now”

There are Rules for Social Security when Someone Dies

“When a loved one passes away, there are usually various arrangements that need to be made. One of the tasks to oversee will involve reporting the death to the Social Security Administration.”

Notifying Social Security about a death is one of a handful of must-do’s shortly after a loved one dies. If this task is not done promptly, says U.S. News & World Report in the recent article titled “How to Report a Death to Social Security,” then there may be problems and extra work in the future.

Here are the four steps that need to take place.

Report the death to the Social Security Administration. The funeral director might offer to do this.  However, it may be best if the family does it, so you don’t have to share the decedent’s Social Security information. You can call the SSA directly or contact the local Social Security office. This cannot be done online. It must be done on the phone. You will need the decedent’s complete date of birth and their Social Security number.

Review Social Security payments. Social Security benefits arrive the month after the month to which they apply. For example, a February benefit will arrive in March, the March benefit arrives in April, and so on. However, the day that a person dies, those benefits stop on that day. There’s no such thing as a grace period or partial payment for the month.

If the person dies during March, they won’t be eligible to get benefits for March. They will receive benefits for February, but not for March. It doesn’t matter if they die on the last day in the month or on the first day.

What if you receive a check for the month the person died? Mail the check back to the Social Security Administration. Keep the person’s bank account open, if the deposit is made directly to the account to allow the SSA to retrieve the last payment.

What about the one-time SS death benefit? Once the death has been reported, there may be a one-time death benefit of $255, sent to the surviving spouse, if they were living with the deceased. If the surviving spouse was living separately but is still eligible for benefits on the deceased’s record, the one-time payment may still be sent. If there is no surviving spouse, the death benefit can be sent to a child who is eligible for benefits based on the deceased’s record.

Arranging benefits for family members from Social Security. Depending upon the circumstances, family members may still be eligible to receive benefits. There will be paperwork. The best advice? Don’t delay, as when you apply will impact when benefits begin. Here are the family members who may be eligible for benefits after a death:

• A disabled widow or widower age 50 and older
• A widow or widower age 60 or older
• A widow or widower of any age caring for a child of the deceased under age 16, who is also disabled.
• An unmarried child of the deceased younger than 18, or 19 if they are a full-time student in elementary or secondary school
• A stepchild, grandchild, step-grandchild or adopted child in certain circumstances
• An unmarried child with a disability that began before age 22
• Parents who were dependent on the deceased for at least half of their support who are at least 62
• A surviving divorced spouse, but only in certain circumstances

The surviving spouse has several options regarding how and when to take which benefits. For instance, the surviving spouse may be able to apply for their own benefit plus a survivor’s benefit, but not at the same time. For instance, it may make sense to take a survivor’s benefit for several years and delay taking your own benefit, and then later take the surviving spouse’s own SS benefits when they are larger.

Reference: U.S. News & World Report (June 9, 2021) “How to Report a Death to Social Security”

Should You Add Someone to Your Bank Account?

“I know of someone who was joint account holder with his dad for many years, then later his dad then appointed him as power of attorney. How does that work? Is the son still a joint account holder?”

Adding another person to your bank account provides both of you with complete access to the account. A person can be a power of attorney and a joint account holder, but the two are very different roles, explains the article “What are my rights when someone adds me to a bank account?” from Lehigh Valley Live.

A joint account is a bank or investment account shared by two individuals, although more than two people may be on an account. They have equal access to funds, as well as equal responsibilities for any fees or expenses associated with the account. If there are transactions, depending upon the rules of the institution, all owners may be required to sign documents. The key is how the account is titled. That’s the controlling factor in determining how the assets in the account are divided, if one of the owners dies. There are several different types of joint ownership.

One is “Joint Tenants with Rights of Survivorship,” or JTWROS. If one of the account owners should die, the assets in the account go directly to the surviving account holder. These assets do not go through probate.

Then there’s “Tenants in Common,” or TIC. With TIC, each individual account owner has the right to designate a beneficiary for their portion of the assets upon their death. The assets might not be split 50/50. How the account is titled lets the account owners divide ownership however they want.

Another one: “Joint Tenants by the Entirety.” This describes a married couple who own real estate or a financial account as a legal entity with equal ownership. Neither person may transfer their half of the property during their lifetime or through a will or a trust. When one spouse dies, the entire account goes to the surviving spouse and it transfers without passing through probate.

In the example given at the start of the article, the establishment of a joint account gives both the father and son equal access to the account. If the father is unable to handle the account at any time in the future, for whatever reason, the son will be able to step in.

Power of Attorney or POA is a completely different thing. A POA is a legal document giving a person the authority to act on behalf of another person for a specific transaction or general legal and financial matters. Just as there are numerous types of joint ownership, there are numerous types of POA.

A general POA gives a person the power to act on behalf of the principal for all legal, property and financial matters, as long as the principal’s mental capacity is sound. The Durable POA gives authority to a person to act on behalf of the principal, even after the principal becomes mentally incapacitated. Special or limited power of attorney gives authority to act only for specific matters or transactions. A Springing Durable POA provides authority to act only under certain events or levels of incapacitation, which is defined in detail in the document.

You can be both a joint owner of an account and a power of attorney. These are two different ways to help a parent with financial and legal activities. An estate planning attorney can help create the POA that best fits the situation.

Reference: Lehigh Valley Live (June 10, 2021) “What are my rights when someone adds me to a bank account?”

Do I Have to Pay Deceased Loved One’s Taxes?

“When someone passes away, their tax headaches don’t die with them. In fact, those obligations can further complicate the lives of survivors: Federal estate taxes may be due and state inheritance taxes could also come into play.”

Sooner or later, someone has to resolve the tax liabilities when a loved one dies. It is usually a family member who faces this task. For one woman, the unexpected passing of her father in early 2018 left her the task of filing his 2017 return and the family’s estate planning attorney filed the 2018 return through the father’s estate. The family is still waiting for the 2017 tax refund from the IRS, and needs to resolve a stimulus check for $1,200 her family received last spring that had to be sent back.

Many families are facing similar situations, as reported in this recent article “Death and taxes: Americans grapple with filing the final tax return for deceased relatives in a pandemic year” from USA Today. Survivors are anxious about complex tax issues at the same time they are in mourning for a loved one.

The final tax return uses IRS Form 1040, the same one that would have been used if the taxpayer were living. The major difference: the word “deceased” is written after the taxpayer’s name.

If the taxpayer was married, the surviving spouse may file a joint return for the year of death. For two years after the taxpayer’s death, the surviving spouse may file as a qualifying widow or widower, which lets them continue to use the same tax brackets that apply to married-filing-jointly returns.

The larger the estate and income for a decedent, the more complicated taxes after death can become. Estate planning attorneys recommend naming an executor in the will and tasking them with taking care of final taxes.

The estate tax is paid on assets owned at the time of death. As of this writing, estates valued at more than $11.7 million (or $23.4 million per married couple), pay a 40% federal tax, in addition to state estate or inheritance taxes, if there are any. It is generally expected that the coming months will see a large reduction in the federal estate tax exemption.

The deadline to file a final return is the tax filing deadline of the year following the taxpayer’s death. The executor or administrator is usually the person who signs the tax return, although a surviving spouse signs the joint return. If there is no executor, whoever is responsible for filing the return signs it and should note that they are signing on behalf of the decedent. For a joint return, the spouse signs the return and writes “filing as surviving spouse” in the space for the other spouse’s signature.

There’s one more step if a return is due. If the deceased is owed money, the IRS Form 1310 should be used. That’s the Statement of a Person Claiming Refund Due a Deceased Taxpayer. The IRS says that surviving spouses signing a joint return don’t have to file this form, but tax experts think it’s a good idea to try to proactively prevent any delays.

If the decedent owes taxes, the tax bill is to be settled by the estate’s executor. If there are insufficient funds to pay the federal income and estate taxes, relatives are not responsible for the remaining balance.

Note that the executor may be held liable if the assets are distributed before paying the taxes, or if the debts of the estate are paid before taxes are paid. The same is true if the executor is aware of the insufficient funds and inability to pay the taxes but spends assets anyway.

Talk with an estate planning attorney about the taxes that will need to be paid from an estate. You don’t want to leave a legacy of tax pain for the family.

Reference: USA Today (April 22, 2021) “Death and taxes: Americans grapple with filing the final tax return for deceased relatives in a pandemic year”

Delaying Social Security during COVID can Be Risky

“The Covid economy has pushed a lot of older workers into early retirement. However, hold off on taking those government checks.”

Putting off claiming Social Security until age 70 is one of the best financial strategies for American workers, but only 4% of people born between 1943-1947 were able to wait that long. According to a recent article titled “Forced to Retire? Don’t Claim Social Security Just Yet” from Bloomberg, the pressure to claim Social Security earlier than anticipated is especially great now.

Covid has had a harsh impact on the labor market. More than 2.7 million workers age 55 and older lost their jobs or left the labor market since March 2020, out of 38 million workers from this age group. Nearly three million Americans are at risk for early and involuntary retirement.

Claiming benefits before age 70, when benefits reach their maximum, means permanent cuts for you, your surviving spouse and any dependents. Over the years, Congress has cut Social Security benefits by raising the retirement age and gradually increasing monthly benefits, if workers wait until age 70. For people born after 1960, who are 61 years old in 2021, monthly benefits increase by a little under 7% per year between ages 62 and 70. That’s a healthy rate of return.

Delaying is the best option, but it’s not always the most comfortable one. People worry about dying early, about the Social Security system collapsing, or massive cuts being made to Social Security. Economists know that most people believe they will die sooner than the mortality tables predict.  While there are plenty of articles about how Social Security will become insolvent, there are just as many articles saying it won’t.

Here is an example of how delaying Social Security benefits can work. Let’s say Jane Doe claims Social Security at age 62. She receives a monthly benefit of $1,125. But if she waits until age 70, her monthly benefit will be $1,980. An $855 monthly increase would give her a lot more spending power.

Some options: Jane could spend down her retirement account of $100,000—which is the average American retirement account. That would last year eight years if she withdrew $1,125 per month, about what her Social Security benefit would be. When she got to age 70, she could claim the higher benefit from Social Security.

She could also keep working at a low-paying job and be helped by a new law that expanded the Earned Income Tax Credit to childless low-pay workers. Even if the job is low paying, it will help extend her retirement account, until she can maximize her Social Security. While Social Security benefits are based on 35 of a worker’s highest-paid years, it is good to avoid “zero income” years.

Even delaying Social Security for a few years, can have an important impact for workers and their dependents.

Reference: Bloomberg (April 17, 2021) “Forced to Retire? Don’t Claim Social Security Just Yet”

How Does an Inherited IRA or 401(k) Work?

“So, you inherited a retirement account. Before you make any decisions on when and how to access the money, it’s worth familiarizing yourself with the rules that apply to different beneficiaries.”

The rules for inheriting retirement assets are complicated—just as complicated as the rules for having 401(k)s and IRA to begin with. Mistakes can be hard to undo, warns the article “Here’s how to handle the complicated rules for an inherited 401(k) or IRA” from CNBC.

The 2019 Secure Act changed how inherited tax deferred assets are treated after the original owner’s death. The options depend upon the relationship between the owner and the heir. The ability to stretch out distributions across the heir’s lifetime if the owner died on or after January 1, 2020 ended for most heirs. Exceptions are the spouse, certain disabled beneficiaries, or minor children of the decedent. Otherwise, those accounts must be depleted within ten years.

Non-spouses with flexibility include minor children. That’s all well and fine, but once the minor child turns 18 (in most states), the 10-year rule kicks in and the individual has 10 years to empty the account. Before that time, the minor child must take annual required minimum distributions (RMDs) based on their own life expectancy.

These required withdrawals typically begin when a retiree reaches age 72, and the amount is based on the account owner’s anticipated lifespan.

Beneficiaries who are chronically ill or disabled, or who are not more than ten years younger than the decedent, may take distributions based on their own life expectancy. They are not subject to the ten- year rule.

Beneficiaries subject to that ten-year depletion rule should create a strategy, including creating an Inherited IRA and transferring the funds to it. If the inherited account is a Roth or a traditional IRA, the process is slightly different. Distributions from a Roth IRA are generally tax-free, and traditional IRA distributions are taxed when withdrawals occur. One point about Roths—if you inherit a Roth that’s less than five years old, any earnings withdrawn will be subject to taxes, but the contributed after-tax amounts remain tax-free.

If an heir ends up with a retirement account via an estate, versus being the named beneficiary on the account, the account must be depleted within five years, if the original owner had not started taking RMDs. If RMDs were underway, the heir would need to keep those withdrawals going as if the original owner continued to live.

For spouses, there are more options. First, roll the money into your own IRA and follow the standard RMD rules. At age 72, start taking required withdrawals based on your own life expectancy. If you don’t need the income, you can leave the money in the account, where it can continue to grow. However, if you are not yet age 59½, you may be subject to a 10% early withdrawal penalty if you take money from the account. In that case, put the money into an Inherited IRA account, with yourself as the beneficiary.

IRAs and 401(k)s are complicated. Speak with your estate planning attorney to make an informed decision when creating an estate plan, so your inherited assets will work with, not against, your overall strategy.

Reference: CNBC (April 11, 2021) “Here’s how to handle the complicated rules for an inherited 401(k) or IRA”

How Does Home Ownership Transfer after a Parent Dies?

“My father passed away recently. How do we remove his name from the title to the home? Can we record a death certificate or have mom sign a new deed?”

The first thing you’ll need to know about selling a home after the death of a parent, is how your parents held title, or owned, the home, begins the recent article “Home ownership after the death of a spouse” from nwi.com. In most cases, the home is owned by a couple as “joint tenants with rights of survivorship” or as “tenants by the entirety.” The latter is less common.

Tenancy by the entirety is a form of ownership available only to married people in a limited number of states and offers several advantages to the owners. It creates an ownership interest where the spouses own property jointly and not as individuals. It also creates the rights of survivorship, so that the surviving spouse owns the property by law when the first spouse dies.

Joint tenancy with rights of survivorship is similar to tenants by the entirety, in that they both convey rights of survivorship. However, joint tenancy does not treat the owners as a single unit. If you own entireties property with a spouse, you may not transfer your interest without your spouse’s permission because you own it as a unit.

In joint tenants, if one of the tenants want to transfer their interest in the property, he or she may do so at any time—and do not need the permission of the other tenant. This has led to some sticky situations, which is why tenants by the entirety is preferred in many situations.

If your parents own their home as tenants by the entireties or as joint tenants with rights of survivorship, the surviving spouse owns the home as a matter of law, and legally, ownership begins at the moment that first spouse dies.

Different states record this change of ownership differently, so you’ll need to speak with an estate planning attorney in your community (or the state where your parents lived, if it was different than where you live).

To notify the recorder’s office of the death, some state laws require the submission of a surviving spouse affidavit, which puts the recorder and the community on notice that one of the owners has died and the survivor now owns the home individually. Here again, an estate planning attorney will know the laws that apply in your situation.

There was a time when people recorded a death certificate, but this does not occur often. The affidavit makes a number of recitals that are important, and the recorded document proves the change of title.

In most cases, there is no need for a new deed, since the surviving spouse owns the property at the time of death, and the affidavit itself demonstrates proof of the transfer of title in lieu of a deed.

Reference: nwi.com (March 14, 2021) “Home ownership after the death of a spouse”

The Stretch IRA Is Diminished but Not Completely Gone

“In the pre-SECURE Act universe, there were designated beneficiaries. These beneficiaries could be individuals (sometimes called named beneficiaries), institutions, such as charities, or estates.”

Before the SECURE Act, named beneficiaries who inherited an IRA were able to take distributions over the course of their lifetimes. This allowed the IRA to grow over many years, sometimes decades. This option came to an end in 2019 for most heirs, but not for all, says the recent article “Who is Still Eligible for a Stretch IRA?” from Fed Week.

A quick refresher: the SECURE Act—Setting Every Community Up for Retirement Enhancement—was passed in December 2019. Its purpose was, ostensibly, to make retirement savings more accessible for less-advantaged people. Among many other things, it extended the time workers could put savings into IRAs and when they needed to start taking Required Minimum Distributions (RMDs).

However, one of the features not welcomed by many, was the change in inherited IRA distributions. Those not eligible for the stretch option must empty the account, no matter its size, within ten years of the death of the original owner. Large IRAs are diminished by the taxes and some individuals are pushed into higher tax brackets as a result.

However, not everyone has lost the ability to use the stretch option, including anyone who inherited an IRA before January 1, 2020. This is who is included in this category:

• Surviving Spouses.
• Minor children of the deceased account owner–but only until they reach the age of majority. Once the minor becomes of legal age, he or she must deplete the IRA within ten years. The only exception is for full-time students, which ends at age 26.
• Disabled individuals. There is a high bar to qualify. The person must meet the total disability definition, which is close to the definition used by Social Security. The person must be unable to engage in any type of employment because of a medically determined or mental impairment that would result in death or to be of chronic duration.
• Chronically ill persons. This is another challenge for qualifying. The individual must meet the same standards used by insurance companies used to qualify policyowners for long-term care coverage. The person must be certified by a treating physician or other licensed health care practitioner as not able to perform at least two activities of daily living or require substantial supervision, due to a cognitive impairment.
• Those who are not more than ten years younger than the deceased account owner. That means any beneficiary, not just someone who was related to the account owner.

What was behind this change? Despite the struggles of most Americans to put aside money for their retirement, which is a looming national crisis, there are trillions of dollars sitting in IRA accounts. Where better to find tax revenue, than in these accounts? Yes, this was a major tax grab for the federal coffers.

Reference: Fed Week (March 3, 2021) “Who is Still Eligible for a Stretch IRA?”

How to Maximize Social Security Benefits

“Sophisticated analyses take into account the tradeoff of receiving no income during the deferral period and more income later in retirement.”

Claiming Social Security benefits early costs American households an average of $68,000 in lost wealth. More than a third of Americans claim Social Security at age 62, and two thirds claim long before they reach their Full Retirement Age or FRA, according to a recent article in Think Advisor titled “How to Help Clients Maximize Social Security Benefits.”

People who don’t have enough retirement savings or who stopped working earlier than anticipated may feel they have no alternative but to take Social Security benefits early. This is understandable. There are also those who don’t believe Social Security will be solvent by the time they reach FRA and decide to get their benefits now.

A closer look into the impact of postponing benefits, even when there is no income during the deferral period, can have a profound impact on the recipient and their surviving spouse.

Women (who statistically outlive their male partners) and healthier Americans (often those with higher incomes) who receive the annual income increase from deferring claims are those who stand the most to lose from taking benefits earlier.

If you are among those who think Social Security is going to vanish or cut benefits, Boston University economics professor Larry Kotlikoff says the income of those who claim early will be cut by the same percentage as those who claim later.

Let’s say that benefits are cut by 23% in 2034. The average present value of payments for a man who claims at age 62 is $678,124. If he claims at age 70, the average present value is $764,084. Cutting benefits earlier than 2034 will only increase the difference. Without a benefit cut, the difference between claiming at age 62 and 70 is $131,951 ($818,747 versus $950,698).

Getting the claiming decision right can add six figures to the family balance sheet, so it’s worth a closer look.

It’s best to think like an insurance company when estimating the value of claiming Social Security. When pricing products like annuities and life insurance policies, insurance companies take into account such variables as U.S. government Treasury bonds, actuarial data measuring mortality and market rates on returns on other inflation protected securities.

Health is also a critical factor. How healthy is the person considering when to claim benefits? How healthy is their spouse? Consider how taking benefits early will impact the surviving spouse’s benefits.

Social Security claiming strategies succeed when using an objective fact-based process and recognizing that Social Security is an asset like any other asset and requires decisions to be made with as little emotional or political bias as possible.

Reference: Think Advisor (Feb. 21, 2021) “How to Help Clients Maximize Social Security Benefits”

What Is a SLAT in Estate Planning?

If you have been thinking about making large gifts to take advantage of the current $11,700,000 lifetime federal estate tax exemption, you have probably been contemplating a spousal lifetime access trust, commonly known as a SLAT.”

A SLAT is a type of irrevocable trust that can only be used by married couples for the benefit of a spouse, children, or other beneficiaries. Is a SLAT right for your family? The recent article titled “Should a SLAT Be Part Of Your Estate Planning?” from Forbes examines when a SLAT works, and when it doesn’t.

A SLAT works well while your spouse is alive. They have access to it and the assets it contains, since they are the beneficiary. As of this writing, up to $11,700,000 of assets can be removed from a taxable estate using your federal estate tax exemption, while your spouse continues to have access to the assets.

Sounds like a win-win, doesn’t it? However, there are drawbacks. If your spouse dies, you lose access to the assets. They will pass to the remainder beneficiaries in the trust, typically children, but they can be other beneficiaries of your choice.

If you and your spouse divorce, the spouse is still a beneficiary of the SLAT. Ask your estate planning attorney if this is something they can build into the SLAT but be mindful that if the attorney is representing both spouses for estate planning, there will be ethical considerations that could get tricky.

What about a SLAT for each spouse? If you and your spouse both establish SLATs to benefit each other, you run the risk of the “reciprocal trust doctrine.” The IRS could take the position that the trusts cancel each other out, and rule that the only reason for the SLAT was to remove taxable assets from your estate.

The SLATs need to be different from each other in more than a few ways. Your estate planning attorney will need to develop this with you. A few ways to structure two SLATs:

• Create them at different times. The more time between their creation, the better.
• Consider establishing the trusts in different states.
• Have different trustees.
• Vary the distribution rules for the surviving spouse and the distribution rules upon the death of the second spouse. For instance, one spouse’s trust could hold the assets in lifetime trusts for the children, while the other spouse’s trust could terminate, and assets be distributed to the children when they reach age 40.

The SLAT is an especially useful way to address tax liability. If you have not maxed out lifetime gifts in 2020, now is the time to start this process. December 2025, when the federal estate tax exemption reverts back to $5 million, will be here faster than you think. If the country needs to find revenue quickly, that change may come even sooner. Tax reform that occurs in 2021 is not likely to be retroactive to January 1, 2021, but there are no guarantees.

Reference: Forbes (Feb. 16, 2021) “Should a SLAT Be Part Of Your Estate Planning?”