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Should I Leave an Inheritance to My Kids?

“Deciding whether to leave an inheritance for your children impacts the amount you save, the retirement plans you choose and how you take qualified retirement plan distributions. However, beyond your desire to leave some wealth to your children (or not), there are some essential personal financial issues to consider.”

Some retirees make a big mistake and give their retirement savings away without considering their own income needs. Before you make gifts to others, take a look at how much to spend on yourself. Determine how much you need to save and how much you can withdraw each year, when you retire.

Investopedia’s article, “Challenges in Leaving Inheritance to Children,” says to consider the effect of inflation and taxes and maintain a diversified portfolio of growth and income investments to help your portfolio keep pace with inflation.

The biggest unknowns with retirement income and children's inheritance are unexpected illness and high healthcare costs. Government programs are frequently not helpful in paying for nursing homes and other forms of long-term medical care. Medicare covers nursing home stays for a very limited period. Medicaid mandates that you spend nearly all of your own money, before it will pay for long-term care. You can’t just move assets to family members to qualify for Medicaid, because the program restricts benefits, if asset transfers were made within five years prior to applying for Medicaid. The rules are tricky, when it comes to eligibility.

You can protect your assets from the costs of catastrophic illness with a long-term care insurance policy. However, these policies can be very expensive and have coverage limitations. Consider them carefully.

What happens if you outlive your retirement funds? With longer life expectancies, it's crucial to try to manage retirement-plan withdrawals, so you do not deplete all of your assets during your lifetime.

You could purchase an immediate annuity with some retirement money to ensure a guaranteed amount, for at least as long as you live. Some pension and retirement plans may allow you to stretch payments over single or joint life expectancies, rather than receive the proceeds as a lump sum.

If you expect to inherit assets from your parents, you may be in a better position financially than someone who doesn’t expect to receive an inheritance. Note that certain inherited assets, like stocks and mutual funds, are eligible for a favorable tax treatment called a step-up in basis. If you are leaving assets to others, this could mean significant savings for heirs.

You may also want to set up a trust to control distributions from the estate to the surviving spouse and children. If you or your spouse have children from previous relationships but don't have a prenuptial agreement, trusts can ensure that specific assets are passed to designated children.

You may share your wealth with others by gifting assets, creating a trust, deferring income or purchasing life insurance or tax-deferred variable annuities.

Talk to an estate planning attorney to determine the best options for your circumstances.

Reference: Investopedia (November 26, 2018) “Challenges in Leaving Inheritance to Children”

How Do I Estate Plan for a Child with Special Needs?

“Estate planning for a child with special needs can be challenging.”

Estate planning is important for everyone, but it’s even more crucial for a family with a child who has special needs. It’s difficult to create an estate plan for children with special needs, because you don’t know what type of care he will need, or the type of government benefits for which she’ll be eligible, when she turns 18. People frequently become overwhelmed about special needs planning, because they don’t have a clear picture of what their children will need in the future.

A recent Forbes article, “Special Needs Kids Require Specialized Estate Planning,” says that if you have a child with special needs, it’s critical that you look at your planning options with your estate planning attorney and discuss your child’s health, capabilities and prognosis. You can then customize a plan that works for your child, with as much flexibility as possible.

Those with enough assets often would rather not to have their child get any government benefits and will set aside an amount to cover all the child’s living expenses in trust. Since the parents aren’t concerned with government benefits, the trust can be a discretionary trust that will distribute income and principal at the trustee’s discretion for the benefit of the child throughout the child’s life.

If there is a good chance the child will get government benefits, many parents create special needs trust to supplement (not replace) the government benefits that the child will receive. The trust must be drafted, so the child doesn’t become ineligible for the government benefits. These benefits provide for the child’s basic needs like a place to live, so the special needs trust will defray the cost of extras such as trips and entertainment.

If the parents can’t determine if their child will be eligible for government benefits, another option is for the parents to give their current trustees the authority to create a separate special needs trust at the time of the surviving parent’s death. Therefore, if the child is receiving benefits, the trustee can create the trust at that time, with the goal of preserving the child’s benefits.

All these trusts can be funded now. The parents can establish the trust and transfer cash or other assets to it, or the trust can be created now and left empty until a parent passes away. At that point, money can move into the trust from the parent’s estate, another trust or from a life insurance policy.

Some parents elect not to create a trust for their child and to disinherit him completely. The thinking is that the child can be supported solely by government benefits. Others go with a combination approach. They disinherit the special needs child and leave more assets to their other children, with the understanding that the other children will care for the special needs child. However, this isn’t a great idea. The siblings have no legal obligation to care for his or her sibling with special needs, just a moral one. If the child who inherited the bulk of the estate gets divorced, the assets are also susceptible to division upon divorce. Finally, the assets are liable to a creditor’s claim, if the child is sued.

Estate planning for a child with special needs can be hard, so get a flexible plan in place that will provide peace of mind.

Reference: Forbes (March 27, 2019) “Special Needs Kids Require Specialized Estate Planning”

What Does the Tax Cuts and Jobs Act Mean for My Estate Plan?

“The Tax Cuts and Jobs Act signed into law in December 2017 could have a big impact, not only on estate tax planning but also on income taxes derived from unrealized estate tax consequences.”

If you haven’t reexamined your estate plan in light of the changes in the Tax Cuts and Jobs Act, do so now, says The Kansas City Star in its article “Talk to estate attorney about impacts of Tax Cuts and Jobs Act.”

A big change in the tax law is the doubling of the federal estate tax exemption from $5.49 million per person in 2017 to $11.18 million per person in 2018 (or $22.36 million per couple). In 2019, the federal estate tax exemption is $11.4 million per person (or $22.8 million per couple).

You should review any wills or trusts drafted prior to the passing of the 2017 legislation. If the trusts use formulas tied to the federal estate tax exemption, then there could be unintended ramifications because of the new larger exemption amount.

You should also look at trusts drafted prior to 2011, when portability was introduced. This legislation allows for “portability” of the deceased spouse’s unused estate exemption. Therefore, the surviving spouse’s estate can now use any exemption amount that wasn’t used by the first deceased spouse’s estate.

The Tax Cuts and Jobs Act didn’t change the step-up of basis. However, the unintended effects of this “non-event” are potentially more significant now. When the decedent dies, the heir’s cost basis of many assets becomes the value of the asset on the date of their death. Thus, highly appreciated assets that avoided income taxes to the decedent, could also avoid or minimize income taxes to the heirs.

Maintaining the ability for assets to receive a step-up in basis is a more important part of estate planning now, because of the larger federal estate tax exemption. However, note that beneficiaries who inherit assets from a bypass or credit shelter trust upon the surviving spouse’s death don’t benefit from a “second” step-up of basis. Instead, the basis of the heir’s inheritance would be the original basis on the first spouse’s death.

As a result, bypass trusts are much less useful than in the past and could have negative income tax impacts for the heirs. This is particularly true, if the assets appreciated significantly after the first spouse’s death or if there was a relatively long amount of time between spouses’ deaths. If your current trust establishes a bypass trust at your death, you might want to ask your estate attorney about restructuring how the bypass trust is funded for the larger federal estate tax exemption.

If you haven’t looked at your estate planning documents with an estate attorney recently, do it in 2019.

Reference: The Kansas City Star (February 7, 2019) “Talk to estate attorney about impacts of Tax Cuts and Jobs Act”

What Happens If I Don’t Have a Will?

“Without a will, a deceased person’s loved ones are left to wonder about their intentions, their emotions and their connections.”

With all the tributes and remembrances for Aretha Franklin over the past month, you may have heard that the Queen of Soul didn’t have a will. What does that mean for the star’s finances, her homes, and her music? Mic’s recent article entitled “How to write a will — and what happens when you die without one” explains that without a will, a deceased person’s family is left to wonder about their intentions, their emotions and their connections. Having a will is also an act of love for those you leave behind.

Everyone should set out their wishes in a will, so that no one is left guessing or with questions after the person dies. A will directs your executor what to do with your property, and you can name a guardian for your minor children. If you don’t have a will, your friends and family who are already in mourning, may be placed in a state of added grief or confusion. These issues and hard feelings have been known to go on for years. You can eliminate these troubles by drafting a simple will.

If an individual dies without a will, there are laws in every state that will dictate what will happen to his or her assets and property. Each state has these laws of intestacy, which are triggered for anyone who dies without a will. The typical line of distribution is based on your legal status. If you’re…

• Married with no kids, all the assets will go to your spouse;
• Married with children, a percentage (it’s different in every state) goes to your spouse, and the rest to your children;
• Single with kids, they get everything;
• Single with no children, your assets pass to your parents.
• Single with no children and no parents, then your assets go to your siblings; and
• Then down the line to nieces and nephews, cousins, etc.

In Aretha Franklin’s situation, since she wasn’t married but had four sons, it’s likely her assets will be divided among them.

In addition to drafting a will, another way to automatically distribute assets upon death is through a living trust. A trust will avoid the delay and hassle of the probate process, which is required under a will, and all the transfers can be done privately, without any court involvement. (Wills are public records, so anyone can pry into the details.)

Speak with an experienced estate planning attorney soon to help your family by putting your final wishes in writing. Ask your attorney if a will or trust is the better choice… it will depend on your specific situation. Get going now!

Reference: Mic (August 31, 2018) “How to write a will — and what happens when you die without one”

Queen Elizabeth’s Estate Has Offshore Investments

 

“Leaked documents suggest that the private estate of Queen Elizabeth II invested in offshore funds.”

Leaks from what has been dubbed the “Paradise Papers” have been reported by the media, including CNN Money. It reported in its recent article, “Queen's estate invested $13 million in offshore tax havens,” that in Britain the BBC said it’d seen documents that show the Duchy of Lancaster, which provides the Queen with an income, had invested more than $13.1 million into funds in the Cayman Islands and Bermuda.

The Queen hasn’t been accused of any wrongdoing. However, these investments are a bit of an embarrassment for a royal family that closely guards its reputation.

"We operate a number of investments and a few of these are with overseas funds. All of our investments are fully audited and legitimate," the Duchy of Lancaster said in a statement.

The Duchy noted that the Queen, who’s officially exempt from British tax laws, "voluntarily pays tax" on income she receives from the estate.

The $680 million Duchy, which provides her with an income to cover official expenses, says it invests primarily in commercial, agricultural, and residential properties. The Duchy generated $25 million in net income in the most recent fiscal year, but one of its offshore investments has created some controversy.

The BBC reported that the Duchy invested $7.5 million in Dover Street VI Cayman Fund LP in 2005. The fund, which invested in medical and tech companies, later invested into U.K. retailer BrightHouse. The Duchy said its investment in the company is worth a mere $4,200. But BrightHouse, which gave customers credit to buy its home furniture and appliances, later was forced to compensate consumers after the U.K.'s Financial Conduct Authority found it wasn’t a responsible lender.

In all likelihood, the Queen probably had no idea where her money was invested, just like many of us.

Reference: CNN Money (November 6, 2017) “Queen's estate invested $13 million in offshore tax havens”

Businessman’s Estate Hands out $1M to Community Organizations

“During his life, William C. “Bill” Marks went from a farm boy in the Grant community to attaining significant wealth.”

By the time he died, William C. “Bill” Marks had become the managing partner in Wilson County Rock Products, Inc., a principal shareholder in Wilson County Concrete Co., an investor in several other businesses and was the owner of numerous development and rental properties, as reported by The Lebanon (TN) Democrat in an article “Marks’ estate endows $1 million to four community groups.”

“Bill once told me that he got his start digging potatoes in Grant and hauling them to town to sell,” said local attorney and former state Senator Bob Rochelle. “He was a smart, hardworking businessman who was very involved in the commercial, political and community aspects of Wilson County.”

Mr. Marks began work on an extensive estate plan in 1997. That plan included the creation of a trust designed to benefit his family for 20 years. Following that, the trust would then be distributed to four charitable institutions, which Marks thought were most beneficial to the community during his lifetime.

Marks was savvy enough to designate trustees to manage the trust assets.

In early May, the trustees, Mike Flanagan and Rochelle and Randall Clemons disbursed the trust funds to Cumberland University, Friendship Christian School, the Lebanon-Wilson County Library and College Hills Church of Christ.

“Bill was a wise man who wanted to give back to his community,” Clemons said. “It has been an honor to help carry out his intent.”

Flanagan said the gifts were given without restrictions.  Therefore, each of the four institutions would be able to decide how to best use the funds for themselves.

The distributions totaled $1 million.

For more information, please visit our website at www.totalcounselor.com

Reference: Lebanon (TN) Democrat (May 6, 2017) “Marks’ estate endows $1 million to four community groups”

Elvis’ Memorabilia Held Hostage in Vegas in Estate Dispute

“Hundreds of Elvis Presley artifacts and memorabilia are still being held by a Las Vegas casino, a year after the King’s estate filed a lawsuit to get those valuables back from a short-lived exhibit.”

The Westgate Las Vegas Resort and Casino’s chief operating officer Mark Waltrip said that Elvis Presley’s artifacts and memorabilia, which include stage outfits, jewelry, and letters, are locked up at the casino, where the now-closed “Graceland Presents Elvis” attraction once stood.

According to Trust Advisor’s recent article, “Casino Still Holding Elvis Presley Items Sought By Estate,” the dispute arose from the 10-year leasing agreement that Westgate says the exhibit defaulted on when it vacated the casino. Last year, a judge ruled that Elvis Presley Enterprises, which runs the Graceland attraction in Memphis, Tennessee, could retrieve the items by posting a $9 million bond while the leasing issue was pending. Instead, the parties decided to take their dispute to arbitration. Waltrip expects a decision in a few weeks.

The Westgate took control of the items in February of last year, when the attraction closed. “Graceland Presents Elvis” included a museum exhibit, a wedding chapel and a theater. The attraction’s operator abruptly said it was quitting. The casino believes this move was the result of poor attendance and poor marketing and promotional efforts.

At that time, the Westgate said the “Graceland Presents Elvis” exhibit was defaulting on its lease. The casino claimed that it spent millions of dollars reconfiguring the space. It said it was holding the items to recoup money owed as part of the leasing contract. The estate responded by filing an action to retrieve the items it said the casino seized with no legitimate legal basis.

Graceland Presents Elvis was open less than a year. It debuted with great fanfare in the same casino where Elvis performed several hundred shows.  At that time, it was known as the Las Vegas Hilton and The International. The exhibit was billed as the biggest display of Elvis memorabilia outside of Graceland.

The attraction included a 28,000-square-foot exhibit featuring a rotating display of Elvis items, such as the $1 million-a-year tablecloth contract that Elvis signed to perform at what’s now the Westgate and the two-piece black tunic and single-button black suit that he wore for his first performances there. In addition, the Presley attraction also contained an Elvis Presley wedding chapel. The chapel was featured on NBC’s “Today Show” when it hosted its first ceremony with Elvis’ ex-wife, Priscilla Presley, who was the bride’s surprise matron-of-honor.

For more information, please visit our website at www.totalcounselor.com

Reference: Trust Advisor (May 1, 2017) “Casino Still Holding Elvis Presley Items Sought By Estate”

What’s Better: A Joint Tenancy or a Trust to Give a Home to a Child?

“When leaving a home to your children, you can avoid probate by using either joint ownership or a revocable trust, but which is the better method?”

In the event you decide to add your child as a joint tenant on your home, you’ll each have an equal ownership interest in the property. When one joint tenant dies, the other joint tenant owns the entire property. This is an option that has the advantage of allowing you to avoid probate.

A recent article asks “Is It Better to Use Joint Ownership or a Trust to Pass Down a Home?

This article, in elderlawanswers.com, explains that a disadvantage of joint tenancy is that creditors can attach the tenant's property to satisfy a debt. In such a case, if a co-tenant defaults on his or her debts, the creditors can sue in a partition proceeding to have the property interests uncoupled so the property can be sold, even over the objections of the non-debtor owner(s). What’s more, without a creditor issue, one co-owner of the property can sue to partition the property and can force another owner to move out.

Joint tenancy can also impact the capital gains treatment of the property. When you give property to a child, the tax basis for the property is the same price for which you purchased the property.  However, inherited property receives a step up in basis. This means that the basis would be the current value of the property. When you pass, your child inherits your half of the property—one half of the property will receive a step up in basis. However, the tax basis of the gifted half of the property will be the same as the original purchase price. If your child sells the home after the parent dies, he or she would have to pay capital gains taxes on the difference between the tax basis and the selling price. To avoid this tax, the child must live in the house for at least two years before selling it. When that happens, he or she can exclude up to $250,000 ($500,000 for a couple) of capital gains from taxes.

Revocable Trust

If you place the property in a revocable trust and name yourself as the beneficiary and your child as the beneficiary after you die, the property will go to your child without going through probate when you pass away. A trust will also be able to guarantee you the right to live in the house and take into account changes in circumstances, like if your child passes away before you do.

One other important benefit of a trust pertains to capital gains taxes. The tax basis of property in a revocable trust is stepped up when you die. This means the basis in the home would be the date of death value of the property. Therefore, if your child sells the property immediately after inheriting it, the value of the property would not see much change. As a result, the capital gains taxes would be little or nothing.

A trust typically allows for greater flexibility and offers more options to protect both the parent and the child. Everyone’s situation is different. Be sure to speak with a qualified estate planning and Elder Law attorney about how to pass down your property effectively.

For more information, please visit our website at www.totalcounselor.com

Reference: elderlawanswers.com (February 27, 2017) “Is It Better to Use Joint Ownership or a Trust to Pass Down a Home?

Some Things to Know About Trusts

“What are some disadvantages of using a trust to protect your assets?”

There are a lot of benefits of trusts, but there also are some disadvantages. NJ 101.5’s recent post, “The disadvantages to trusts,” discusses some of the things you should know before moving forward.

Trusts can save on estate taxes but are typically subject to higher income tax rates than those of an individual taxpayer once the “grantor” (i.e., trustmaker) dies. Trusts have to pay income taxes on the income they generate by the assets they hold. Such irrevocable trusts hit the top bracket at a very low income threshold: $12,400 of taxable income in 2016. The top income tax bracket for an individual doesn’t happen until his or her income exceeds $415,050. Also, the additional 3.8% net investment income tax applies at low thresholds.

So, when a trust is being used for estate tax planning purposes, it’s smart to measure the estate tax efficiency of the trust versus the potential income tax inefficiencies of the trust.

These tax rules are in effect when the trust pays its own taxes. However, in some situations, a trust will be a “grantor trust,” which means that the grantor of the trust is still treated as the owner of the trust’s assets for income tax purposes. As a result, since the income of the trust is taxed to the grantor, these lower tax thresholds usually don’t apply.

Aside from the gory details of taxes, remember that the use of trusts for tax or asset protection purposes typically means you give away absolute control over the trust assets—that would apply if the assets were owned by the grantor or the beneficiaries.

A trustee is designated for the trust to conduct investment and distribution decisions. This trustee is, in many instances, a family member and (when properly drafted) the beneficiary of the trust—neither the grantor nor the beneficiary will have the level of access either would have enjoyed had the assets been owned outright and outside of a trust.

There are ways to avoid surrendering absolute control while keeping the protective components of a trust. The rules are complex, so leave the drafting of a trust to a knowledgeable trust and estate attorney.

For more information on trust planning, please visit our website here

Reference: NJ 101.5 (August 3, 2016) “The disadvantages to trusts”

Grab a GRAT While You Still Can

“Clients who had planned to incorporate these valuation discounts into their business succession and estate planning strategies may find that their plans are no longer viable in light of the new regulations.”

A few months ago, the Treasury Department announced its proposed regulations that will, if finalized as currently written, substantially limit the applicability of current valuation discounts for transfers of interests in family-owned businesses.

As Think Advisor says in its article “GRAT Valuation Discounts Disappearing Soon,” since the regulations probably won’t become effective until the middle of next year, you still have some time to capitalize on the valuation discounts still available.

For many small businesses, a grantor retained annuity trust or “GRAT” can form part of an effective planning strategy. This would allow you to use both the value of the GRAT strategy and today’s family-business valuation discounts.

The proposed changes to Section 2704 are aimed at cutting out the valuation discounts for interests in family-owned businesses when transferred and the family controls the entity both before and after the transfer (most likely it’s a transfer within the family). The current rules allow certain restrictions on liquidation rights in the family-owned business situation that mean big valuation discounts—but these restrictions are ignored if they’re more restrictive than the default state law that would apply to the entity.

The proposed regulations would all but eliminate the reference to state laws and state laws will only be considered when determining whether a discount is appropriate if an applicable state law provision is mandatory. Also, restrictions that limit a transferor’s ability to require liquidation or redemption of his or her own business interests will be disregarded in valuing the interests. Instead, it’ll be assumed the transferor has a six-month “put” option to liquidate or redeem the business interests.

In summary, the new proposed regulations would substantially limit the ability of family-owned businesses to take advantage of discounts for lack of control over the business or lack of marketability.

To use the valuation discounts that currently apply for small business interests, a GRAT strategy can be implemented to “freeze” the current value of these interests and transfer the appreciation to the beneficiaries. A GRAT combines a trust that’s established for a certain predetermined period of time with an annuity that pays the trust creator a set value each year of the trust's existence. At the end of the GRAT term, the remaining value passes to the beneficiaries, so it’s out of his or her estate.

A qualified estate planning attorney can help you navigate these complexities.

For more information on Estate Planning please visit our website here

Reference: Think Advisor (Sept. 14, 2016) “GRAT Valuation Discounts Disappearing Soon”