Estate Article

Financial Documents

Healthcare Documents

Note: Power of attorney laws can vary from state to state. An estate strategy that includes trusts may involve a complex web of tax rules and regulations. Consider working with a knowledgeable estate management professional before implementing such strategies.

 

Tip: One key difference between a will and a living trust is when they take effect. A will takes effect when you die; a living trust takes effect when you execute it and begins to operate when you transfer assets to it.

Do you have a will?

A will enables you to specify who you want to inherit your property and other assets. A will also enables you to name a guardian for your minor children.

Do you have healthcare documents in place?

Healthcare documents spell out your wishes for health care if you become unable to make medical decisions for yourself. They also authorize a person to make decisions on your behalf if that should prove necessary. These documents may include a living will, a power of attorney agreement, and a durable power of attorney agreement for healthcare.

Do you have financial documents in place?

Certain financial documents can outline your financial wishes. If you become unable to make decisions for yourself, these financial documents can be structured to empower a person to make decisions on your behalf. These documents may include joint ownership, durable power of attorney, and living trusts.

Have you filed beneficiary forms?

In some cases, naming a beneficiary for bank accounts and retirement plans makes these accounts “payable on death” to your beneficiaries. In other cases, you will need to fill out a “Payable on Death” form.

Do you have the right amount and type of life insurance?

When was the last time you assessed your life insurance coverage? Have you compared the life insurance benefit with your financial obligations?

Have you taken steps to manage your federal estate tax?

If you and your spouse have more than $11.2 million in assets (for 2018), you may want to consider taking steps to manage federal estate taxes, which will be due at the second spouse’s death.

Fast Fact: Although estate taxes could claim a sizable portion of your legacy, they make up less than one percent of total federal revenue. Source: Center on Budget and Policy Priorities, 2018

Have you taken steps to protect your business?

Do you have a succession plan? If you own a business with others, you may also want to consider a buyout agreement.

Have you created a letter of instruction?

A letter of instruction is a non-legal document that outlines your wishes. A strong, well-written letter may save your heirs time, effort, and expense as they administer your estate.

Will your heirs be able to locate your critical documents?

Your heirs will need access to the specific documents you have created to manage your estate. These documents may include:

  • Your will
  • Trust documents
  • Life insurance policies
  • Deeds to any real estate, and certificates for stocks, bonds, annuities
  • Information on your bank accounts, mutual funds, and safe deposit boxes
  • Information on your retirement plans, 401(k) accounts, or IRAs
  • Information on any debts you have: credit cards, mortgages and loans, utilities, and unpaid taxes

Note: Power of attorney laws can vary from state to state. An estate strategy that includes trusts may involve a complex web of tax rules and regulations. Consider working with a knowledgeable estate management professional before implementing such strategies.

Tip: Generally, children under the age of 18 cannot be executors. Source: Plea.org, May 20, 2016

In her will, American businesswoman Leona Helmsley left $12 million in a trust fund to her dog Trouble. Her four executors were responsible for seeing that her wishes were carried out. In the years after her death, they dealt with challenges from two disinherited grandchildren, oversaw scores of properties and hotels, negotiated settlements with disgruntled former employees, and managed a huge investment portfolio in a falling economy. What did they ask for in return? $100 million split between them.¹

The executor to your will may not be as busy or as well compensated as Ms. Helmsley’s. Still, you’ll want to give thoughtful consideration to this important choice. How do you choose an executor? Can anyone do it? What makes an individual a good choice?

Many people choose a spouse, sibling, child, or close friend as executor. In most cases, the job is fairly straightforward. Still, you might give special consideration to someone who is well organized and capable of handling financial matters. Someone who is respected by your heirs and a good communicator also may help make the process run smoothly.

Above all, an executor should be someone trustworthy, since this person will have legal responsibility to manage your money, pay your debts (including taxes), and distribute your assets to your beneficiaries as stated in your will.

If your estate is large or you anticipate a significant amount of court time for your executor, you might think of naming a bank, lawyer, or financial professional. These individuals will typically charge a fee, which would be paid by the estate. In some families, singling out one child or sibling as executor could be construed as favoritism, so naming an outside party may be a good alternative.

Fast Fact: Michael Jackson chose executors from outside his family to manage his estate. Source: Billboard.com, March 15, 2016

Whenever possible, choose an executor who lives near you. Court appearances, property issues, even checking mail can be simplified by proximity. Also, some states place additional restrictions on executors who live out of state, so check the laws where you live.

Whomever you choose, discuss your decision with that person. Make sure the individual understands and accepts the obligation—and knows where you keep important records. Because the person may pre-decease you—or have a change of heart about executing your wishes—it’s always a good idea to name one or two alternative executors.

The period following the death of a loved one is a stressful time, and can be confusing for family members. Choosing the right executor can help ensure that the distribution of your assets may be done efficiently and with as little upheaval as possible.

What Will?

Take a look at some famous people who left life without having a will in place.

  1. Prince
  2. Jimi Hendrix
  3. Bob Marley
  4. Sonny Bono
  5. Pablo Picasso
  6. Howard Hughes
  7. Steve McNair
  8. Abraham Lincoln

Source: Forbes, April 27, 2016

1. January 24, 2016

Tip: Let Them Know. Your will may be a good place to outline your funeral wishes. Although heirs are not legally bound to follow your directions, they may be glad to know your preferences.

According to a recent report, only 42% of American’s have estate planning documents, such as a will or living trust.1 This may not be entirely surprising. No one wants to be reminded of their own mortality or spend too much time thinking about what might happen once they’re gone.

But a will is an instrument of power. Creating one gives you control over the distribution of your assets. If you die without one, the state decides what becomes of your property, without regard to your priorities.

A will is a legal document by which an individual or a couple (known as “testator”) identifies their wishes regarding the distribution of their assets after death. A will can typically be broken down into four main parts.

  • Executors — Most wills begin by naming an executor. Executors are responsible for carrying out the wishes outlined in a will. This involves assessing the value of the estate, gathering the assets, paying inheritance tax and other debts (if necessary), and distributing assets among beneficiaries. It is recommended that you name at least two executors in case your first choice is unable to fulfill the obligation.
  • Guardians — A will allows you to designate a guardian for your minor children. Whomever you appoint, you will want to make sure beforehand that the individual is able and willing to assume the responsibility. For many people, this is the most important part of a will since, if you die without naming a guardian, the court will decide who takes care of your children.
  • Gifts — This section enables you to identify people or organizations to whom you wish to give gifts of money or specific possessions, such as jewelry or a car. You can also specify conditional gifts, such as a sum of money to a young daughter, but only when she reaches a certain age.
  • Estate — Your estate encompasses everything you own, including real property, financial investments, cash, and personal possessions. Once you have identified specific gifts you would like to distribute, you can apportion the rest of your estate in equal shares among your heirs, or you can split it into percentages. For example, you may decide to give 45% each to two children and the remaining 10% to your sibling.

Fast Fact: The Difference. Where does the term “Last Will and Testament” come from? Historically, a “will” only provided for the distribution of real estate, while a “testament” dealt with the giving of personal property.

The law does not require that a will be drawn up by a professional, and some people choose to create their own wills at home. But where wills are concerned, there is little room for error. You will not be around when the will is read to correct technical errors or clear up confusion. When you draft a will, consider enlisting the help of a legal, tax, or financial professional who may be able to offer additional insight, especially if you have a large estate or complex family situation.

Preparing for the eventual distribution of your assets may not sound enticing. But remember, a will puts the power in your hands.

You have worked hard to create a legacy for your loved ones. You deserve to decide what becomes of it.

No Time Like the Present

One recent survey noted that about half of people who don’t have a will say they just haven’t gotten around to it.

Chart Source: Caring.com, November 15, 2017

1. Caring.com, November 15, 2017

Tip: Regardless of your net worth, it’s critical to understand your choices when developing an estate strategy.

Federal estate taxes have been a source of funding for the federal government almost since the U.S. was founded.

In 1797, Congress instituted a system of federal stamps that were required on all wills offered for probate when property (land, homes) was transferred from one generation to the next. The revenue from these stamps was used to build the navy for an undeclared war with France, which had begun in 1794. When the crisis ended in 1802, the tax was repealed.¹

Estate taxes returned in the build up to the Civil War. The Revenue Act of 1862 included an inheritance tax, which applied to transfers of personal assets. In 1864, Congress amended the Revenue Act, added a tax on transfers of real estate, and increased the rates for inheritance taxes. As before, once the war ended the Act was repealed.²

Estate taxes returned in the build up to the Civil War. The Revenue Act of 1862 included an inheritance tax, which applied to transfers of personal assets. In 1864, Congress amended the Revenue Act, added a tax on transfers of real estate, and increased the rates for inheritance taxes. As before, once the war ended the Act was repealed.²

In 1898, a federal legacy tax was proposed to raise revenue for the Spanish-American War. This served as a precursor to modern estate taxes. It instituted tax rates that were graduated by the size of the estate. The end of the war came in 1902, and the legacy tax was repealed later that same year.³

Until 1916. The 16th Amendment to the Constitution was ratified in 1913 — the one that gives Congress the right to “lay and collect taxes on incomes, from whatever source derived.” The Revenue Act of 1916 established an estate tax, and in one way or another, it’s been part of U.S. history since then.

In 2010, the estate tax expired — briefly. But in December 2010, Congress passed the Tax Relief Act of 2010 and the new law retroactively imposed tax legislation on all estates settled in 2010.

In 2012, the American Tax Relief Act made the estate tax a permanent part of the tax code.

As part of the 2017 Tax Cuts and Jobs Act, estate tax rules were again adjusted. The estate tax exemption was raised to $11.2 million, a doubling of the $5.6 million that previously existed. Married couples may be able to pass as much as $22.4 million to their heirs. The 2017 Act is set to expire in 2025, so it’s possible the estate tax law may be adjusted at least once during the next few years. If you’re uncertain about your estate strategy, it may be a good time to review the approach you currently have in place.

Estate Taxes and Overall Federal Revenues

Estate taxes typically account for less than one percent of total federal revenue.

Chart Source: Center on Budget and Policy Priorities, 2015

Exemption through the Years

Federal estate taxes exempt a share of estates from federal estate taxes. For the 2017 tax year, if an estate’s worth less than $5.49 million, no federal estate taxes may apply.

Chart Source: Internal Revenue Service, 2017

1,2,3. Internal Revenue Service, 2016

 

Tip: Importance of Itemizing. Charitable contributions are deductible only if you itemize deductions on Form 1040, Schedule A. Those who take the standard deduction cannot deduct their contributions.

Internal Revenue Service, 2017

According to Giving USA 2017, Americans gave an estimated $390.05 billion to charity in 2016. That’s the highest total in more than 60 years since the report was first published.1

Americans give to charity for two main reasons: To support a cause or organization they care about, or to leave a legacy through their support.

When giving to charitable organizations, some people elect to support through cash donations. Others, however, understand that supporting an organization may generate tax benefits. They may opt to follow techniques that can maximize both the gift and the potential tax benefit. Here’s a quick review of a few charitable choices:

Direct gifts are just that: contributions made directly to charitable organizations. Direct gifts may be deductible from income taxes depending on your individual situation.

Charitable gift annuities are not related to annuities offered by insurance companies. Under this arrangement, the donor gives money, securities, or real estate, and in return, the charitable organization agrees to pay the donor a fixed income. Upon the death of the donor, the assets pass to the charitable organization. Charitable gift annuities enable donors to receive consistent income and potentially manage taxes.

Pooled-income funds pool contributions from various donors into a fund, which is invested by the charitable organization. Income from the fund is distributed to the donors according to their share of the fund. Pooled-income funds enable donors to receive income, potentially manage taxes, and make a future gift to charity.

Fast Fact:Contributions by individuals, couples, and families accounted for 72% of the $390.05 billion donated to charitable organizations in 2016.

Giving USA Foundation, 2017

Gifts in trust enable donors to contribute to a charity and leave assets to beneficiaries. Generally, these irrevocable trusts take one of two forms. With a charitable remainder trust, the donor can receive lifetime income from the assets in the trust, which then pass to the charity when the donor dies; in the case of a charitable lead trust, the charity receives the income from the assets in the trust, which then pass to the donor’s beneficiaries when the donor dies.

Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional who is familiar with the rules and regulations.

Donor-advised funds are funds administered by a charity to which a donor can make irrevocable contributions. This gift may have tax considerations, which is another benefit. The donor also can recommend that the fund make distributions to qualified charitable organizations.

Some people are comfortable with their current gifting strategies. Others, however, may want a more advanced strategy that can maximize their gift and generate potential tax benefits. A financial professional can help you assess which approach may work best for you.

Remember, the information in this article is not intended as tax or legal advice. And it may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

Giving and Net Worth

Charitable giving appears to trail household net worth by about one year. When household net worth dipped in 2008, charitable giving dipped in 2009.

Where the Money Goes

The biggest percentage of charitable contributions — 32% — went to churches and religious organizations. A variety of different types of groups were on the receiving end of charitable gifts.

Chart Source: Giving USA Foundation, 2016

1. Giving USA Foundation, 2017

Tip: Both the lawyer and the executor are entitled to fees from an estate. In addition, there will be court costs, appraiser’s fees, and may be other expenses. Nolo, 2018

Many people have heard they should avoid probate, but few understand what probate is and how the process works.

What Is Probate?

Probate is the legal process that wraps up a person’s legal and financial affairs after their death. During the probate process a person’s property is identified, cataloged, and appraised. In addition, probate makes certain any outstanding debts and taxes are paid. It can be a complex process, filled with very specific legal requirements.

For example, if someone dies without a valid will, the probate court sees that the deceased person’s assets are distributed according to the laws of the state.

If someone dies with a valid will, the probate court is charged with ensuring the deceased person’s assets are distributed according to their wishes.

Probate Process

Probate can take a long time — anywhere from a few months to more than a year. If there is a will, and one or more of the heirs chooses to contest the document, the process can take a lot longer.1

Probate can be expensive. Even though probate costs are capped in some states, they may reach 5% or more of the estate’s value. That’s calculated on the gross value of the estate — before taxes, debts, and other expenses are paid. And if the probate process is challenged, the legal costs can rise.2

Finally, probate takes place in a public court. That makes everything a matter of public record; there is no privacy. Anyone who wants to can find out exactly what was left behind (and how much each of a deceased person’s heirs received) and can review the court records for the deceased person’s estate.

Fast Fact: Sounds like Latin. The word “probate” comes from the Latin verb “probatum” which means “to prove.” Thus, when a will is probated, its validity is “proved” before a court, which then orders the terms of the will to be followed. Merriam-Webster, 2018

Those who have concerns for their heirs’ privacy may want to take steps to manage the probate process.

Every estate passes through probate following the owner’s death. Probate can be a public process that exposes all your assets, or it can be managed to include as little information as possible. When preparing your estate documents, consider how you want the courts to handle your personal finances after your passing.

Property That Avoids Probate

Some assets can be structured so they may not have to go through probate. Here’s a partial list:

  • Property held in a trust
  • Jointly held property (but not common property)
  • Death benefits from insurance policies (unless payable to the estate)
  • Property given away before you die
  • Assets in a pay-on-death account
  • Retirement accounts with a named beneficiary

1,2. Nolo.com, 2018

 

According to a recent study by U.S. Trust, 64% of millionaire business owners over 50 have no formal succession plan.¹ While the number may shock you, it is not surprising that many small business owners are consumed by the myriad responsibilities of running their businesses.

Nevertheless, owners ignore succession planning at their peril, and possibly at the peril of their heirs.

There are a number of reasons for business owners to consider a business succession plan sooner rather than later. Let’s take a look at two of them.

The first reason is taxes. Upon the owner’s death, estate taxes may be due, and a proactive strategy may help to better manage them.² Failure to properly plan can also lead to a loss of control over the final disposition of the company.

Second, the absence of a succession plan may result in a decline in the value of the business in the event of the owner’s death or unexpected disability.

The process of business succession planning is comprised of three basic steps:

  1. Identify Your Goals: When you know your objectives, it becomes easier to develop a plan to pursue them. For instance, do you want future income from the business for you and your spouse? What level of involvement do you want in the business? Do you want to create a legacy for your family or a charity? What are the values that you want to ensure, perhaps as they relate to your employees or community?
  2. Determine Steps to Pursue Your Objectives: There are a number of tools to help you follow the goals you’ve identified. They may include buy/sell agreements, gifting shares, establishing a variety of trusts or even creating an employee stock ownership plan if your desire is that employees have an ownership stake in the future.
  3. Implement the Plan: The execution step converts ideas into action. Once it’s implemented, you should revisit the plan regularly to make sure it remains relevant in the face of changing circumstances, such as divorce, changes in business profitability, or the death of a stakeholder.

Keep in mind that a fundamental prerequisite to business succession planning is valuing your business.

As you might imagine, business succession is a complicated exercise that involves a complex set of tax rules and regulations. Before moving forward with a succession plan, consider working with legal and tax professionals who are familiar with the process.

1. CNBC, March 15, 2016

2. Typically, estate taxes are due nine months after the date of death. And estate taxes are paid in cash. In addition to estate taxes, there may be a variety of other costs, including probate, final expenses, and administration fees.

In the third quarter of 2017, more than 2,500 small businesses were sold. The median sale price was $225,000, up from $200,000 the year before.¹

As a business owner, ascertaining the value of your business is important for a variety of reasons, including business succession, estate tax estimates, or qualifying for a loan.

There are a number of valuation techniques, ranging from the simple to the very complex. Outlined below are three of the different approaches to valuing a business.

  1. Asset Based: Calculates the value of all tangible and intangible assets held by the business. This approach ignores the future earning potential of the company. Thus, a pure asset-based valuation model is often used for companies that are bankrupt or looking to liquidate.
  2. Earnings Based: Seeks to arrive at a business’s value by applying a multiple to normalized earnings, i.e., earnings adjusted to subtract owner’s compensation and related expenses. The multiplier can vary substantially, depending upon the industry and the outlook for the business.
  3. Market Based: Compares the business to recent sales of similar companies.

Business valuation is not just a formulaic exercise. For instance, there is a value to the business of being a “going concern” as opposed to the start-up alternative. Ownership percentage will also matter; purchasing a minority share that has limited control may result in a discount to the actual value. The prospects for the business impact value. A greater premium will likely apply to a company engaged in a leading-edge technology than to one involved in a mature market.

Valuing a small business is not an exact science. Some aspect of the valuation may be debatable (e.g., the remaining life expectancy of a machine), while other aspects may be positively subjective (e.g., the value of the company’s reputation).

Willing Seller & Buyer

The true value of anything can only be determined when a willing seller and a willing buyer agree on a price of exchange. As a consequence, any valuation exercise may yield only a rough estimate.

Before moving forward with a business valuation, consider working with legal and tax professionals who are familiar with the process. Also, a qualified business appraiser may be able to offer some valuable insight.

1. BizBuySell, 2017

In March 2015, about 679,072 new business had been created in the preceding year.¹ All individuals pursuing the dream of exercising their entrepreneurial muscles, will face the same question, “Which business structure should I adopt?”

Each option presents its own set of pros and cons. To complicate matters a bit, the 2017 Tax Cuts and Jobs Act created several key changes that may benefit certain business structures. For example, the new law added a 20 percent deduction of qualified business income for certain pass-through entities. However, service industries (e.g., health, law, professional services) are generally excluded, except where income is below $315,000 for joint filers and $157,500 for other filers. This provision is set to expire December 31, 2025.

This overview is not intended as tax or legal advice and may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding the most appropriate business structure for your organization.

Sole Proprietorship/Partnership

This structure is the simplest. But it creates no separation from its owner. Income from the business is simply added to the individual’s personal tax return.

Advantages: Easy to set up and simple to maintain.

Disadvantages: Owners are personally liable for the business’s financial obligations, exposing their personal assets (house, savings, etc.). It does not offer the prestige or sense of permanence of a corporation or LLC.

C-Corporation

A corporation is a separate legal entity from its owners, making it easier to raise money, issue stock, and transfer ownership. Its life is perpetual and will survive the owner’s death.

Advantages: There may be tax advantages, including more allowable business expenses. It protects owners from personal liability for the company’s financial obligations and may lend a measure of prestige and permanence.

Disadvantages: More expensive to set up, the paperwork and formality are greater than for a sole proprietorship or LLC. Income may be taxed twice, once at the corporate level and when distributed to owners as dividend income.

S-Corporation

After forming a corporation an owner may elect an “S-Corporation Status” by adopting a resolution to that effect and submitting Form 2553 to the IRS.

The S-corporation is taxed like a sole proprietorship, i.e., the company’s income will pass through to shareholders and be reported on their respective personal tax returns.

Advantages: S-corporations avoid the double taxation issue associated with C-corporations, while enjoying many of their tax advantages. Owners are shielded from personal liability for the company’s financial obligations. It provides the prestige of a corporation for small businesses.

Disadvantages: S-corporations do not have all the tax-deductible expenses of a C-corporation. The cost of set up, the paperwork, and formality are greater than for a sole proprietorship or LLC. S-corporations have certain restrictions, including a “100 or fewer” shareholders requirement. Shareholders must be U.S. citizens and the business cannot be owned by another business.

Limited Liability Company

An LLC is a hybrid between a corporation and a sole proprietorship, offering easy management, pass-through taxation, and the liability protection of a corporation. Similar to a corporation, it is a separate legal entity, but there is no stock.

Advantages: LLCs provide the protections of a corporation, but are taxed similar to a sole proprietorship.

Disadvantages: Typically more expensive to form than a sole proprietorship, LLCs require more paperwork and formalized behavior.

Remember, the choice of business structure is not an irreversible decision. You may amend your business structure to accommodate your changing needs and circumstances.

1. Bureau of Labor Statistics, 2016 (latest data available)

When an individual dies, the executor is faced with an important decision that has the potential to impact the taxes owed by the estate and its heirs.¹

The executor will have the option of valuing the estate on the date of death, or on the six-month anniversary of death — the “Alternate Valuation Date.”

Pick a Date

It may seem like an obvious decision and simple choice, but it’s not. Here’s why.

For estates with substantial holdings in stocks, the use of the Alternate Valuation Date may be an appropriate approach if the executor believes stock prices will be lower than they were on the date of death.

When heirs inherit assets, such as stocks, they may receive a step-up in the cost basis if the value of the asset is higher than it was when the original owner acquired it. The heir’s valuation is reset to either the value on the date of the owner’s death — or the value on the Alternate Valuation Date — whichever is chosen by the executor.

Market Moves

Let’s take a look at a hypothetical example. Say Dad bought Out of Date Technologies at $10 per share several years ago. At his death, the stock was worth $35. The executor used the Alternate Valuation Date and six months later, due to market movements, the stock was worth $28.

His heir, Julie, will inherit this asset and receive a step-up in the cost basis to $28, the value declared by the estate. Let’s now assume that Julie sells the stock a short time later at $35.

If the estate had used the value on the date of death — $35 — she might not have owed capital gains tax, since she would have been selling the stock at the same price as her cost basis. But, since she received the stock with the lower cost basis — $28 — because the executor chose the Alternate Valuation Date, capital gains tax on the $7 per share gain may be due.²

In this example, the estate saved money by electing the Alternate Valuation Date, but the heir was exposed to a lower cost basis and the prospect of paying higher capital gains tax in the future.

Consider & Balance

As the executor thinks through this balancing act, he or she should consider the relative prevailing tax rates for the estate and for the heirs to ascertain what approach may result in the most efficient transfer, net of taxes, to the heirs.

Keep in mind the information in this article is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

1. The article assumes the deceased has a valid will and has named an executor, who is responsible for carrying out the directions of the will. If a person dies intestate, it means that a valid will has not been executed. Without a valid will, a person’s property will be distributed to the heirs as defined by the state law.

2. This is a hypothetical example used for illustrative purposes only. It is not representative of any specific investment or combination of investments.

It has been said that the best inheritance we can give our children is a few minutes of our time every day. It’s also true, though, that our children will not always have us in their lives.

Children with special needs may require lifetime assistance, which can necessitate that parents prepare for their child’s care after they are gone, or are unable to care for him or her any longer.

Envisioning a Life Without You

Parents have to think about the potential needs of their surviving child. Will he or she require daily custodial care?

Ongoing medical treatments? Will their child live alone or in a group home? Can family assume some of the care? Answers to these and other questions can help form the vision of what may need to be done to plan for your child’s care.

Planning Your Estate

Supporting lifetime needs can outstrip your resources. One funding resource is government benefits, which your child may qualify for when he or she becomes an adult, e.g., Supplemental Security Income (SSI) and Medicaid.

Because such government programs have low asset thresholds for qualification, you may want to consider whether to make property transfers to your special needs child.

Ensure you have an up-to-date will that reflects your wishes. Consider creating a special needs trust, the assets of which can be structured to fund your child’s care without disqualifying him or her from government assistance.1

Involve the Family

All affected family members should be involved in the decision-making process. You will want a united front of surviving family members to care for your child after you’ve passed.

Identify a Caregiver

In order for caregivers to make financial and healthcare decisions after your child reaches adulthood, the caregiver must be appointed as guardian. This can take time, so contemplate starting early.

Consider a “Letter of Intent” to the caregiver and family to express your wishes, along with information about your child’s care. This isn’t a legal document, but it may help to communicate your desires. Store this letter alongside your will in a safe place.

Planning for a special needs child can be complicated, confusing, and even overwhelming. Be sure to work with qualified professionals to help you navigate the myriad considerations that come with this challenge.

1. Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional who is familiar with the rules and regulations.

I’m proud to pay taxes in the United States; the only thing is, I could be just as proud for half the money.

Entertainer Arthur Godfrey1

The irrevocable life insurance trust (ILIT) can be an important estate strategy tool that may accomplish a number of estate objectives, though it may not be appropriate for every individual.2,3

What Is an ILIT?

An ILIT is created by an individual (the grantor) during his or her lifetime. The ILIT owns a life insurance policy on the grantor’s life via the transfer of ownership of an existing policy, or through the grantor’s annual contribution of cash to pay the premiums on a policy purchased by the trust.

The grantor designates beneficiaries, usually family members, who will typically receive the proceeds upon the death of the grantor.

The trust is irrevocable, meaning that the grantor forfeits all rights to the property contained in the trust. Its irrevocable nature is integral to accomplishing the ILIT’s objectives.

What Can an ILIT Accomplish?

The ILIT may be able to accomplish several estate objectives, including:

1. Meeting liquidity needs;

2. Managing estate taxation on the policy proceeds;

3. Providing income to survivors.

How Does an ILIT Work?

When you die the trust is designed to receive a payment equal to the policy coverage amount, e.g., $500,000. Since the trust’s ownership of the policy is irrevocable, the proceeds are not considered your property. Consequently, they do not fall into your estate, thus potentially avoiding estate taxation. (Remember, generally no income tax is due on such life insurance proceeds.)4

The trust provisions should be set up to provide direction about how and to whom payments may be made. You may direct that the trust pay out cash to cover certain expenses, e.g., funeral costs, probate, taxes, final medical expenses, and debts.

This may obviate the need to sell less liquid assets at an inopportune time to cover such costs.

The trust’s beneficiaries may receive the proceeds (after any payments are made to satisfy liquidity needs), creating an inheritance free of estate taxes.

Finally, creditors should not be able to attack these assets since they belong to the trust, not you.

Creating an ILIT should be done only with the assistance of a qualified estate planning attorney. It is a complicated exercise in which mistakes may result in losing the benefits ILITs offer.

1. BrainyQuote, November 2016

2. Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional who is familiar with the rules and regulations.

3. Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.

4. This is a hypothetical example used for illustrative purposes only. It is not representative of any specific estate or estate strategy. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

A living trust is a popular consideration in many estate strategy conversations, but its appropriateness will depend upon your individual needs and objectives.

What is a living trust?

A living trust is created while you are alive and funded with the assets you choose to transfer into it. The trustee (typically you) has full power to manage these assets.1

A living trust will also designate a beneficiary, or beneficiaries, much like a will, to whom the assets are structured to automatically pass upon your death.

If you create a revocable living trust, you may change the terms of the trust, the trustee, and the beneficiaries at any time. You can also terminate the trust altogether.

Why create a living trust?

The living trust offers a number of potential benefits, including:

  • Avoid Probate – Assets are designed to transfer outside the probate process, providing a seamless and private transfer of assets.
  • Manage Your Affairs – A living trust can be a mechanism for caring for you and your property in the event of your physical or mental disability, provided you have adequately funded it and named a trustworthy trustee or alternative trustee.
  • Ease and Simplicity –It is a simple matter for a qualified lawyer to create a living trust tailored to your specific objectives. Should circumstances change, it is also a straightforward task to change the trust’s provisions.
  • Avoid Will Contests – Assets passing via a living trust may be less susceptible to the sort of challenge you might see with a will transfer.

The drawbacks of a living trust

Living trusts are not an estate panacea. They won’t accomplish some potentially important objectives, including:

  • A living trust is not designed to protect assets from creditors. It is also considered a “countable resource” when determining your Medicaid eligibility.2
  • There is a cost associated with setting up a revocable living trust.
  • Not all assets are easily transferred to a living trust. For example, if you transfer ownership of a car, you may have difficulty obtaining insurance, since you are no longer the owner.
  • A living trust is not a mechanism to save on taxes, now or at your death.2

1. Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional who is familiar with the rules and regulations.

2. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

The need to care for special-needs children may continue into their adult years, and even after the passing of their parents.

The care choices are wide ranging—family, health-care aides, special-care facilities, day programs, and group homes. However, your child’s specific needs and your available financial resources may dictate which is appropriate for your situation.

Family Limits

Family members are a logical first choice for care. However, the physical, financial, and emotional demands must be considered.

Home-health aides can provide respite for family caregivers. You may want to distinguish between individuals who work directly with a family versus those employed by a company, since the former may be less expensive.

In some situations, the relief provided by an aide may allow a family member to earn additional income in excess of the cost of a caregiver.

Some care needs may require an extended care facility.

In any case, there is a wealth of private and public resources available to help you through all phases of securing care for your child.

Ask Questions

Whichever direction you take, you will want to perform due diligence on caregiver candidates.

For individual caregivers, ask about their education, experience, and skills. Do they match your child’s needs? Is the caregiver certified? Pose questions relating to your child’s situation. Be attuned to whether the candidate is empathetic or simply views your child as a job.

Interviewing a care facility is also about gauging competency and compassion. Ask about alleged abuse or neglect. What is the staff-to-patient ratio? Call response time? Is supervision present 24/7? What activities are offered? Does the facility have patients compatible to your child? Is the facility accredited? What’s the staff turnover rate?

In each case, ask for references and contact them.

Stay Involved

Ongoing communication is critical to the caregiver understanding your expectations and meeting them. Set regular meetings with the caregiver and ask questions. Offer to volunteer time or join in activities, which will provide you with a deeper insight into care levels. Participation sends a strong message to your child and the facility.

When the rules of the game change, tactics should follow in response to the new landscape. While estate tax exemptions have ridden an uncertain roller coaster in recent years, the rules appear to be stabilizing with the passing of the Tax Cuts and Jobs Act, prompting many to reconsider estate strategies.¹

In 2017, Congress raised the estate and gift tax exemption to $11.2 million, doubling the $5.6 million that previously existed.²

This exemption increase means that potentially hundreds of additional American households may be able to pass on their assets free of estate taxes. It also means that individuals may want to revisit their current approach to estate management.

Changes in Gift Strategies

One of the objectives of gifting assets is to manage taxation on an estate’s future growth. However, this strategy comes at the cost of losing the tax advantage of the step-up in cost basis attached to inherited assets. Since more assets are excluded from the estate tax, the need to gift assets for tax purposes may no longer be necessary.

For many estates, there may now be no reason to gift assets during a lifetime, unless there is a present need with a family member.

Joint Ownership of Assets

An individual may want to consider re-titling assets to joint ownership with a spouse to take advantage of the step-up when the first spouse dies, which may save capital gains taxes when the asset is subsequently sold by the surviving spouse.

Rethinking Trust Strategies

Spouses no longer need to create or maintain a trust in order to take full advantage of both spousal exemptions, since the surviving spouse is now able to claim the deceased spouse’s exemption. Indeed, previously established trusts may actually raise tax bills by missing out on the step-up.³

Creating an estate strategy is complex and should be done with the assistance of a tax or legal professional. Suffice it to say that these recent changes represent a good reason to revisit your existing approach to estate management.

1. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

2. Internal Revenue Service, 2017

3. Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional who is familiar with the rules and regulations.

If you are one of the many Americans who are in a second marriage, you may need to revisit your estate strategy.¹

Unlike a typical first marriage, second marriages often require special consideration that should address children from a prior marriage and the disposition of assets accumulated prior to the second marriage.

Second Marriages

Here are some ideas you may want to think about when updating your estate strategy:

  • You may want to ensure that your children from your first marriage are set up to receive assets from your estate, even as you provide your second spouse with adequate resources to live should you die first.
  • Consider titling of assets. Assets that are jointly owned in your name and your second spouse’s name are set up to pass to your second spouse, often regardless of any instructions in your will.
  • If you are designating your second spouse as beneficiary on retirement accounts, remember, once you die the surviving spouse can name any beneficiary he or she chooses, despite any promises to name your children from a previous marriage as successor beneficiaries.
  • Consider any prenuptial and postnuptial agreements with a professional who has legal expertise in the area of estate management.
  • If your new spouse is closer in age to your children than to you, your children may worry that they may never receive an inheritance. Consider passing them assets upon your death, which may be accomplished through the purchase of life insurance.²
  • Consider approaches to help protect against the drain extended health care may have on assets designed to support your spouse or pass to your children.

1. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. 2. Several factors will affect the cost and availability of life insurance, including age, health and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.

You’re young, have little in savings and likely have no one yet relying on you financially. So why do you need to think about estate management?¹

Here are four great reasons:

Estate Strategies: They’re Not Just for the Elderly

  1. You need a will. You may ask why a will is important if there’s not much to pass on. A will is not just about transferring assets. It can be used to accomplish other tasks, such as naming who should manage your social media accounts once you’re gone or inherit items you’ve accumulated, like collectibles or your car.
  2. Don’t burden others with burial expenses. Funerals can be expensive, and if you don’t have the savings to meet those costs, that burden gets shifted to others.
  3. Consider a medical directive. This important document states your wishes for end-oflife care. In the case of an unfortunate accident, a medical directive provides instructions about the level of care you want, e.g., palliative care only.
  4. Create a durable power of attorney for health care. In the event that you are unable to make medical decisions for yourself, this gives the individual of your choice the legal power to act as a healthcare proxy for you.

Not only do a medical directive and durable power of attorney for health care ensure you are provided the level of care consistent with your wishes, but they can prevent family discord in the event of differing opinions.

Though the multiple financial goals of many young adults often require more resources than present earnings can meet, these important planning steps can be accomplished at a small cost.

1. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

Determining the value of an estate is a fundamental first step in estate management and a critical requirement for settling a decedent’s estate.¹

How to Assess the Value of an Estate

1.Select the date of calculation. Because values move up and down, you need to set a specific date for a valuation. For a living person, you are free to pick any date. If you’re assessing the value of a decedent’s estate, you may choose either the date of death, or the date six months after death (the “alternate valuation date”). If you use the alternate valuation date, any asset sold or distributed during the first six months following the death must be valued as of the date of sale or distribution.²

2. Determine the assets comprising the estate. This asset list should include everything an individual owns or has ownership interests in.

3. Gather all financial statements as of the date of calculation. If an account is owned individually, the entire value should be calculated in the estate. If owned jointly with a spouse with rights of survivorship, then 50 percent of the value should be included.

Remember to;

Deduct any outstanding mortgage balance, and

Include life insurance when the policy owner is the deceased individual or the beneficiary is the decedent’s estate.³

4. Calculate deductions. Subtract any debts from the total value of assets. For the decedent this may also include any regular bills that may be due (e.g., utilities, medical expenses, etc.), charitable gifts, and state tax obligations.

Assessing the precise value of an estate can be complicated, especially when settling an estate. Please consult a professional with estate expertise regarding your individual situation.

1. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

2. The article assumes the deceased has a valid will and has named an executor who is responsible for carrying out the directions of the will. If a person dies intestate, it means that a valid will has not been executed. Without a valid will, a person’s property will be distributed to the heirs as defined by the state law.

3. Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.

Passing your estate to an heir with credit problems or a gambling or alcohol addiction might not only lead to that wealth being squandered, but the inheritance could worsen the destructive behaviors.

Of course, you don’t want to disinherit your child simply because of his or her personal challenges. There are potential solutions that allow parents to control and incent behaviors long after they are gone, ensuring that a troubled child’s inheritance won’t be misused.¹

Some Common Approaches

A trust is one idea since it can pass wealth to an heir while maintaining control over how, when, where and why the heir can access funds.²

When establishing such a trust, you can appoint a trustee, which is typically an independent third party (e.g., trust company) or family member. Appointing a family member, however, may be fraught with problems. For example, who do you think is more able to resist the pleadings of a desperate beneficiary, a close relative or a corporate entity?

The trust can specify the precise circumstances under which money will be paid to the trust’s beneficiary, or specify that the trustee will retain complete discretion in the disbursement of funds.

Structuring Ideas

Trusts can also include incentives, such as requiring drug or alcohol testing before the funds are paid out, or that a lump sum payment be made only upon graduation from college.

To ensure that an heir is committed to change, lump-sum amounts can be paid out after prescribed periods of time, e.g., five years of sobriety. To encourage your heir to seek gainful employment, the trust might pay out a dollar for every dollar in wages.

Alternatively, the trust can be written whereby payments are made directly to service providers, like a landlord or utility company.

Trusts can be flexible in their design, but before moving forward with a trust, consider working with a professional who is familiar with the rules and regulations.

1. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

2. Using a trust involves a complex set of tax rules and regulations. Before moving forward with a trust, consider working with a professional who is familiar with the rules and regulations.

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