How Do I Use the Pandemic to Finish My Estate Plan?

The coronavirus is making this a most challenging time. It can make considering our own death all the more frightening. However, for some, this is the perfect time to think about estate planning strategy. Your estate plan should be a priority in this crisis.

While looking for issues is important, there are also opportunities to consider, according to Yahoo Finance’s recent article entitled “How to Take Advantage of New Estate Planning Opportunities Caused by the Coronavirus.”

For some, the current financial landscape may be advantageous, due to low interest rates and depressed asset values. That is where your estate planning strategy is needed.

The IRS just announced one of the lowest rates applicable to certain wealth transfer techniques. This, in addition to depressed asset prices, can make for some great opportunities.

This is a very good time for estate planning, because of the federal estate tax system. Even though the federal estate tax rate is a flat 40%, we can currently gift during life or leave at death a total of $11.58 million to children or loved ones without any taxes.

As a result, a married couple can leave more than $23 million to loved ones, before they start to pay federal estate tax.

The federal estate tax exemption is very liberal, when compared to the past. It is also scheduled to adjust upward for inflation until the end of 2025. The federal estate tax exemption will then be cut in half, unless extended or made permanent.

Yes, Congress can also act before that. They can enact a law, and a president could sign it to decrease the exemptions even sooner. Therefore, regardless of the current opportunity, it may be the right time to make gifts before the exemptions decrease.

The key is to have a strategic plan and to make decisions that are right for you and your family.

Estate planning can be intimidating and doubly so in this pandemic. Talk to an experienced estate planning attorney and take care of this today to protect your families and their futures.

Reference: Yahoo Finance (April 2, 2020) “How to Take Advantage of New Estate Planning Opportunities Caused by the Coronavirus”

How Bad Will Your Estate’s Taxes Be?

The federal estate tax has been a small but steady source of federal revenue for nearly 100 years. The tax was first imposed on wealthy families in America in 1916. They were paid by families whose assets were previously passed down through multiple generations completely and utterly untaxed, says the article “Will the government tax your estate when you die, seizing home and assets?” from The Orange County Register.

The words “Death Tax” don’t actually appear anywhere in the federal tax code, but was the expression used to create a sympathetic image of the grieving families of farmers and small business owners who were burdened by big tax bills at a time of personal loss, i.e., the death of a parent. The term was made popular in the 1990s by proponents of tax reform, who believed that estate and inheritance taxes were unfair and should be repealed.

Fast forward to today—2020. Will the federal government tax your estate when you die, seize your home and everything you had hoped to hand down to your children? Not likely. Most Americans don’t have to worry about estate or death taxes. With the new federal exemptions at a record high of $11,580,000 for singles and twice that much for married couples, only very big estates are subject to a federal estate tax. Add to that, the 100% marital deduction means that a surviving spouse can inherit from a deceased spouse and is not required to pay any estate tax, no matter how big the estate.

However, what about state estate taxes? To date, thirteen states still impose an estate tax, and many of these have exemptions that are considerably lower than the federal tax levels. Six states add to that with an inheritance tax. That’s a tax that is levied on the beneficiaries of the estate, usually based upon their relationship to the deceased.

Many estates will still be subject to state estate taxes and income taxes.

The personal representative or executor is responsible and legally authorized to file returns on a deceased person’s behalf. They are usually identified in a person’s will as the executor of the estate. If a family trust holds the assets, the trust document will name a trustee. If there was no will or trust, the probate court will appoint an administrator. This person may be a professional administrator and likely someone who never knew the person whose estate they are now in charge of. This can be very difficult for family members.

If the executor fails to file a return or files an inaccurate or incomplete return, the IRS may assess penalties and interest payments.

The final individual income tax return is filed in just the same way as it would be when the deceased was living. All income up to the date of death must be reported, and all credits and deductions that the person is entitled to can be claimed. The final 1040 should only include income earned from the start of the calendar year to the date of their death. The filing for the final 1040 is the same as for living taxpayers: April 15.

Even if taxes are not due on the 1040, a tax return must be filed for the deceased if a refund is due. To do so, use the Form 1310, Statement of a Person Claiming Refund Due to a Deceased Taxpayer. Anyone who files the final tax return on a decedent’s behalf must complete IRS Form 56, Notice Concerning Fiduciary Relationship, and attach it to the final Form 1040.

If the decedent was married, the widow or widower can file a joint return for the year of death, claiming the full standard deduction and using joint-return rates, as long as they did not remarry in that same year.

An estate planning attorney can help with these and the many other details that must be taken care of, before the estate can be finalized.

Reference: The Orange County Register (March 1, 2020) “Will the government tax your estate when you die, seizing home and assets?”

How Can I Upgrade My Estate Plan?

Forbes’ recent article, “4 Ways To Improve Your Estate Plan,” suggests that since most people want to plan for a good life and a good retirement, why not plan for a good end of life, too? Here are four ways you can refine your estate plan, protect your assets and create a degree of control and certainty for your family.

  1. Beneficiary Designations. Many types of accounts go directly to heirs, without going through the probate process. This includes life insurance contracts, 401(k)s and IRAs. These accounts can be transferred through beneficiary designations. You should update and review these forms and designations every few years, especially after major life events like divorce, marriage or the birth or adoption of children or grandchildren.
  2. Life Insurance. A main objective of life insurance is to protect against the loss of income, in the event of an individual’s untimely death. The most important time to have life insurance is while you’re working and supporting a family with your income. Life insurance can provide much needed cash flow and liquidity for estates that might be subject to estate taxes or that have lots of illiquid assets, like family businesses, farms, artwork or collectibles.
  3. Consider a Trust. In some situations, creating a trust to shelter or control assets is a good idea. There are two main types of trusts: revocable and irrevocable. You can fund revocable trusts with assets and still use the assets now, without changing their income tax nature. This can be an effective way to pass on assets outside of probate and allow a trustee to manage assets for their beneficiaries. An irrevocable trust can be a way to provide protection from creditors, separate assets from the annual tax liability of the original owner and even help reduce estate taxes in some situations.
  4. Charitable Giving. With charitable giving as part of an estate plan, you can make outright gifts to charities or set up a charitable remainder annuity trust (CRAT) to provide income to a surviving spouse, with the remainder going to the charity.

Your attorney will tell you that your estate plan is unique to your situation. A big part of an estate plan is about protecting your family, making sure assets pass smoothly to your designated heirs and eliminating stress for your loved ones.

Reference: Forbes (November 6, 2019) “4 Ways To Improve Your Estate Plan”

Are You Ready for Retirement?

While retirement planning may seem daunting, it’s critical to be certain that you have enough savings set aside for your golden years.

According to the Federal Reserve, 26% of non-retirees say they have nothing saved for retirement. Zero.

CNBC’s recent article, “Make these 6 moves now to be financially prepared for retirement,” provides the steps you should take right away to start building your retirement savings.

  1. Put on your thinking cap. Picture as accurately as you can what your ideal retirement will look like—and what it will cost. Use an online retirement savings calculator to help you see if you’re on the right spending and savings path.
  2. Get a checkup. Get educated about Medicare and weigh the alternatives for long-term care, such as long-term care insurance.
  3. Be sure your estate plan is up to date. See your attorney and be sure that all your estate documents work with the laws of the state where you’re retiring. Look at any possible concerns about estate taxes. Keep beneficiary designations up to date because, regardless of what’s said in your will, beneficiaries listed on specific accounts, such as IRAs, will inherit those funds.
  4. Think of charities now. With more time on your hands, consider selecting a cause or two. You can lend a hand or make a donation.
  5. Review your portfolio. You may have your money primarily deposited in a target-date fund that keeps your investment mix of stocks, bonds, cash, and other assets appropriate for your retirement time horizon. However, it’s a good idea to make certain that your asset allocation is where you want it. Remember that portfolio growth and market shifts can change your allocation at any time, and the closer you get to actual retirement—or if you’re already there—the more conservative an allocation you’ll want to have. You should also monitor the account fees you’re paying in funds and consider lower-cost alternatives.
  6. Get professional advice. If you’re not already working with a money and tax expert, consider it.

Reference: CNBC (November 11, 2019) “Make these 6 moves now to be financially prepared for retirement”

Why Do I Need an Attorney to Help Me with Estate Planning?

Your estate plan can be simple or complicated. The New Hampshire Union Leader’s recent article, “Estate planning is important and may require help from a professional,” says that some strategies are definitely easier to implement—like having a will, for example. Others are more complex, like creating a trust. Whatever your needs, most strategies will probably necessitate that you hire a qualified estate planning attorney. Here are some situations that may require special planning attention:

  • Your estate is valued at more than the federal gift and/or estate tax applicable exclusion amount ($11.4 million per person in 2019);
  • You have minor children;
  • You have loved ones with special needs who depend on you;
  • You own a business;
  • You have property in more than one state;
  • You want to donate to charities;
  • You own valuable artwork or collectibles;
  • You have specific thoughts concerning health care; or
  • You desire privacy and want to avoid the probate process.

First, you need to understand your situation, and that includes factors like your age, health and wealth. Your thoughts about benefitting family members and taxes also need to be considered. You’ll want to have plans in place should you become incapacitated.

Next, think about your goals and objectives. Some common goals are:

  • Providing financial security for your family;
  • Preserving property for your heirs;
  • Avoiding disputes among family members or business partners;
  • Giving to a charity;
  • Managing your affairs, if you are disabled;
  • Having sufficient liquidity to pay the expenses of your estate; and
  • Transferring ownership of your property or business interests.

Ask your attorney about a will. If you have minor children, you must have a will to address guardianship, unless your state provides an alternative legal means to do so. Some people many need a trust to properly address their planning concerns. Some of your assets will also have their own beneficiary designations. Once you have you a plan, review it every few years or when there’s a birth, adoption, death, or divorce in the family.

Reference: New Hampshire Union Leader (July 27, 2019) “Estate planning is important and may require help from a professional”

What are the Details of the New SECURE Act?

The SECURE Act proposes a number of changes to retirement savings. These include changes to parts of IRAs and 401(k)s. The Act is expected to be passed in some form. Some of the changes look to be common sense, like broadening access to IRAs and 401(k)s, as well as including updating the rules to reflect that retirement is now a longer period of life. However, with these changes come potential limitations with stretch IRAs.

Forbes asks in its recent article “Are Concerns Over Stretch IRAs And The SECURE Act Justified?” You should know that an IRA is a tax-wrapper for your investment that is sheltered from tax. Your distributions can also be tax-free, if you use a Roth IRA. That’s a good thing if you have an option between paying taxes on your investment income and not paying taxes on it. The IRA, which is essentially a tax-shield, then leaves with more money for the same investment performance, because no tax is usually paid. The SECURE act isn’t changing this fundamental process, but the issue is when you still have an IRA balance at death.

A Stretch IRA can be a great estate planning tool. Here’s how it works: you give the IRA to a young beneficiary in your family. The tax shield of the IRA is then “stretched,” for what can be decades, based on the principle that an IRA is used over your life expectancy. This is important because the longer the IRA lasts, the more investment gains and income can be protected from taxes.

Today, the longer the lifetime of the beneficiary, the bigger the stretch and the bigger the tax shelter. However, the SECURE Act could change that: instead of IRA funds being spread over the lifetime of the beneficiary, they’d be spread over a much shorter period, maybe 10 years. That’s a big change for estate planning.

For a person who uses their own IRA in retirement and uses it up or passes it to their spouse as an inheritance—the SECURE Act changes almost nothing. For those looking to use their own IRA in retirement, IRAs are slightly improved due to the new ability to continue to contribute after age 70½ and other small improvements. Therefore, most typical IRA holders will be unaffected or benefit to some degree.

For many people, the bulk of IRA funds will be used in retirement and the Stretch IRA is less relevant.

Reference: Forbes (July 16, 2019) “Are Concerns Over Stretch IRAs And The SECURE Act Justified?”