During your lifetime, you spend the first part trying to attain financial security and the second part working to maintain it. This adage is why many people spend substantial time and effort maximizing their legacy goals in their estate plan, ensuring their wishes come to pass. Your life’s work and ability to provide for your family provide a gratifying feeling for you and your heirs. However, your careful planning can go awry when last-minute changes become part of the mix, often guided by advice from well-meaning family and friends but not a professional estate planning attorney.
Here are five common mistakes that people make that will upend your estate planning:
- Leaving money to someone while you are alive but not changing your will. Frequently people include cash gifts in their will. For instance, a favorite nephew may inherit $50,000, a childhood friend $100,000, even a housekeeper may receive $10,000 for loyal service. It is quite common when family members meet after a loved one has passed to hear that the deceased has already gifted these particular cash amounts. The mistake is that the gift is given, yet your will continues to reflect the named individual should be given what has already been received. In the absence of an updated will reflecting the gift, the probate process will still award the individual named the cash amount or, in essence, an additional gift. While some recipients will approach the gift during their lifetime as an advancement on inheritance, others may not agree, and the argument may wind up in court.
- Insufficient assets are funding your trust. You may have created your trust years ago, and its assets may have decreased in value and be insufficient to cover the costs of all the gifts associated with your trust. Your good intentions in creating the trust can evaporate, leaving some inheritors short-changed or receiving nothing at all without proper management and preservation of the trust’s assets. It is good to remember the rule that cash gifts get paid first. For example, if you leave your sister one million dollars and the rest in trust to your children, and you die with assets totaling $1,100,000, your sister will receive her cash outright while only $100,000 will remain in trust for your children. If there is no cash to fund the trust, the trust provisions are zero-sum, and the unlucky heir will have to learn of the unfortunate circumstances.
- All assets do not pass through your will. Your estate division is primarily likely to be probate and non-probate assets. Just because you believe your assets’ aggregate is enough to satisfy your gifting, not all assets will pass through the will. You must understand the difference between probate and non-probate assets. Non-probate assets often pass as a beneficiary designation or joint ownership outside of a will. Also, consider the need to deduct any outstanding debts, expenses, and taxes in the valuation of your assets.
- You are adding a joint owner of accounts or real estate. Joint ownership seems a simple solution bypassing excessive planning; however, adding a joint owner can create serious problems. Yes, the bank account or piece of real estate will quickly become wholly owned by the survivor, and yet if your will is reliant on that asset to pay other inheritors, debts, expenses, or taxes, there may be a cascade of problems after you die. Adding a joint owner will often lead to will contests and even prolonged court battles, so be sure your estate planning attorney agrees that the option of joint ownership is a sound one in your particular situation.
- Changes to your beneficiary designations. If you make changes to your beneficiaries without speaking to your estate planning attorney, you can create all sorts of unintended results. This situation is particularly true in the case of life insurance. For instance, the policy can pay your trust in order to meet bequests, shelter money from estate taxes, or pay those taxes. However, if you change the beneficiary, you will have to designate the money elsewhere to cover the existing bequests and estate taxes. In another case, if you have a retirement account payable to an individual inheritor but you change the beneficiary to your trust, you may create adverse income tax consequences.
These are just five of the more commonplace mistakes that can occur in your estate plan. Sadly, there are many others, and so caution and professional legal advice are crucial. While it is essential to review your estate planning documents regularly and perhaps make changes, it is imperative to do so under the advice of your attorney. What may seem like a harmless amendment or change may create unintended tax consequences, cut someone out of receiving an inheritance, or worse yet, set into motion a lengthy court battle that harms family relationships.
Reviewing your estate planning documents with your attorney will ensure that your desired changes will address your new need without negatively impacting your overall intentions. If you need assistance or would like to talk about your specific situation, contact our Cincinnati office at (513) 815-7006.
You might think that leaving your property to your heirs would be easy. You make a will or a trust, you do a transfer-on-death deed for your real estate, you put your kids on your bank account, you designate beneficiaries for your life insurance and retirement accounts, and you’re done.
If only things were that simple. The result you wanted can be seriously foiled, if all the above elements are not carefully coordinated.
After you consider the following, we hope you’ll agree that it’s best to consult a qualified attorney. That’s the person you need to help you construct an estate plan that will do what you want it to do.
A pitfall: Conflict between deeds and wills or trusts
If your will or trust conflicts with a deed for real property, the law will resolve the conflict for you by following the deed, not the will or trust. This can produce unintended results.
Suppose Mary wanted to divide her property equally between her two children, John and Jane. She recorded a beneficiary deed for John so he could inherit the house. She wrote a will leaving money to her daughter Jane that was roughly the same value as the house.
Subsequently, however, Mary forgot about John’s deed. She made another will that split everything equally between John and Jane.
On Mary’s death, John ended up getting significantly more than Jane. The portion of the second will including the house would be invalidated because the earlier deed would supplant the will. So John got the house through the deed, plus half the money through the will. Jane got half the money only. That was not what Mary intended and the unfairness damaged John’s and Jane’s relationship.
A similar pitfall: Conflict between beneficiary designations and wills or trusts
Financial accounts can transfer automatically to people of your choice, avoiding probate, if you designate beneficiaries by means of “transfer on death” (TOD) through your broker. But you must not depend on your will to change TOD designations. The beneficiary designations establish a contract between the holder of the account and you. When you pass, the holder is legally obligated to transfer your account to the beneficiaries you designate, regardless of what your will says. The designations, like deeds, supplant wills.
So if you have named your spouse as a beneficiary of, say, a retirement account, and then you get divorced and forget to change the beneficiary designation, your ex-spouse – and neither your new spouse nor your children nor anybody else – will receive the account proceeds when you die, regardless what your will says.
Underage beneficiaries and guardianship proceedings
Suppose your financial advisor calls to alert you that you have not designated beneficiaries on your accounts and that if you don’t do so, your estate will have to go through probate when you pass. By making TOD designations, your beneficiary would simply present a death certificate and the assets would transfer to him or her without the need to go to court. That sounds good. So you follow your advisor’s suggestion and designate your beneficiaries.
In the meantime, your lawyer drafts a good will for you. This will, as good wills should, contain a subtrust providing for underage beneficiaries. Your lawyer, echoing your financial advisor, explains that the subtrust is intended to avoid the necessity of court proceedings.
Your efforts to avoid court will be defeated, however, if you choose an underage beneficiary to receive your financial account through TOD. Guardianship proceedings would still be necessary to administer the money until the beneficiary came of age.
It would have been better to route the gift to the underage beneficiary through a will or trust and not through TOD designation. If wills or trusts are properly drafted, they contain provisions to administer the underage beneficiary’s inheritance privately and thereby avoid the court guardianship proceedings.
Another pitfall: Disabled beneficiaries and government benefits
The pitfall here is similar to the one above. If your beneficiary is disabled and gets a TOD (or any other kind of) inheritance, the inherited money could jeopardize the beneficiary’s entitlement to government benefits. Most benefits programs are “means-tested.” To be eligible, recipients must own practically nothing. If your beneficiary were suddenly to inherit, he or she would lose benefits and end up having to pay for care until the inheritance was spent. That could involve a lot of money!
Rather, like for underage beneficiaries, the disabled beneficiary’s inheritance should be routed through a will or “supplemental needs trust” (SNT) that imposes restrictions on spending. With those restrictions in place, the benefits would keep coming, and the inheritance assets could be used to pay for “extras” that benefits don’t cover. These extras might include payment of real estate taxes, upkeep of a residence, or vacations, or a flat-screen television. The inherited money would be managed by a trusted person and the disabled beneficiary would still continue to receive the crucially important benefits.
Bank accounts and disabled or underage beneficiaries
The pitfall is the same as above. If you have designated underage or disabled beneficiaries by making your accounts “payable on death” (POD), court proceedings will be necessary in the case of the underage beneficiary, or the inheritance could jeopardize or eliminate the disabled beneficiary’s government benefits.
The problem is likewise similar here. If your beneficiary has a gambling habit or drug addiction, or if he or she needs bankruptcy protection from creditors, and if he or she inherits without trust protections, the inheritance could be lost to the beneficiary’s detriment.
Joint tenancy of real property
It may be tempting to avoid probate by putting real estate in your beneficiaries’ names as joint tenants. But if multiple people own real estate jointly, all must agree on what is to be done with the land and all should contribute equally to property maintenance expenses. This can create disputes. A better solution might be to subject the property to probate, to dispose of it in orderly court proceedings.
Joint bank accounts
The intent to avoid probate here is similar to a joint tenancy of land, but putting your bank account in your and your children’s names exposes the funds to risk that should be avoided. Once a person is named as a co-owner of a bank account, that person has immediate and unfettered access to the funds. The funds are thus exposed to misappropriation by the joint-tenant child, or they can go instead to the child’s creditors in bankruptcy, or to ex-spouses in divorce proceedings.
It would be better to create a power of attorney that allows a trusted agent access to bank-account funds for your benefit while you are alive. Then, for when you pass, you could name beneficiaries via a POD designation with the bank – but remember the warnings above regarding underage or disabled or spendthrift beneficiaries. Those beneficiaries’ access to funds should be protected by a trust.
A lot of moving parts
Each of the estate-planning strategies above could work well in and of themselves, but, taken together, may have an adverse impact. Crafting a plan that combines and coordinates the various strategies requires expertise and care. That care is worth taking, to safeguard the wealth you have built up over the years. Don’t risk a result you don’t want. Call on us to design a plan that harmonizes all the moving parts, so the gears will work together and you will leave the legacy you intended. If you need assistance or would like to talk about your specific situation, contact our Cincinnati office at (513) 815-7006.
Attorney’s prepare powers-of-attorney documents for clients in order to communicate their wishes and delegate an entrusted person to make decisions on the clients’ behalf when their clients no longer can. But when it comes to actually using those documents at the time of a healthcare crisis, clear and powerful documents are just the beginning. The decision points can (and must) be put down on paper in advance, but when it comes to end-of-life situations, the clarity on which we lawyers thrive can be very hard to find.
Sitting in her lawyer’s office, the client may have been quite certain about health-care decisions. She does not want her life prolonged by a battery of aggressive treatments, where these would not preserve her quality of life. She does not want blood transfusions, dialysis, repeated courses of antibiotics and chemotherapy, cardiopulmonary resuscitation, or breathing and feeding tubes. She does not want to die inert in the ICU, surrounded by machines and strangers. She wants to die at home, surrounded by loved ones, at a time when she retains the presence of mind to make her peace.
But that goal doesn’t just happen from wishing it and stating it. It happens with additional careful preparation for the realities. As the end of life approaches, the clarity we lawyers enjoy can be elusive. When a person gets a prognosis of two to five years (maybe), where, along that continuum, would be the time to start declining aggressive treatment? When there’s always one more intervention that may (or may not) produce a good result? When one decision could create an ever-widening array of complications? When, step by step, the patient becomes less and less able to exercise autonomy, and where treatment decisions by caregivers are not in line with the care the patient was clear about when she was sitting in the lawyer’s office?
No matter how clear the powers-of-attorney documents, with all these imponderables, the patient can end up in a situation many miles away from what she wanted. And there’s no possible do-over.
Powerful and clear power-of-attorney documents are an essential first step and we lawyers are glad to take care of that part. Beyond that, though, thorough preparation is essential.
Consider that the best result may be one that cares for comfort right now, at the moment. The question is not necessarily about how long life can be prolonged. The question may be, rather, how comfort can be maintained – at this moment, and then the next moment, and the next. The question is how life can be made better right now. Watch a video by palliative-care physician B.J. Miller, on why this is so important, here.
Make concrete plans. These include specifying what you want to happen if you’re no longer able to live independently; choosing wisely whom you want to act for you, to make sure your plans will be followed; being ready with your health-care documents before you find yourself deposited in the emergency room or ICU; and seeking the reassurance that your loved ones will be cared for when you’re no longer there. Judy MacDonald Johnson has prepared simple, forthright worksheets to help with this process, here. She speaks about these worksheets in this moving video.
There is no doubt that the process of safeguarding the quality of life at the end of it is possibly the most challenging of all. But if that process can create as much pleasure as possible through an extremely difficult time of life, and if forthrightly engaging in that process would facilitate a passing more in line with what we would envision, the worth of the process will be felt. The transition will be smoother and more meaningful for the dying person, and a kinder legacy will be left behind for those who accompany us on this journey.
Please don’t hesitate to reach out if we can help you or a loved one with a plan. If you need assistance or would like to talk about your specific situation, contact our Cincinnati office at (513) 815-7006.
A new tax law proposal greatly impacting estate planning may soon be enacted into law. While it is too early to know what will become law, the House Ways & Means Committee tax plan draft indicates that change is coming soon. While new details emerge and changes are made to the proposals over the coming weeks, it is critical to understand how these possible tax changes may affect your estate planning.
What are the Major Proposed Changes that Impact Estate Planning?
One of the most significant changes to affect estate planning is that as of January 1, 2022, the federal estate and gift tax exemption is facing a reduction from $11.7 million to approximately $6 million. Ambitious budget and spending proposals require additional sources of revenue. While technically not yet a law, there is little doubt, per the Congressional Budget Office, that this particular estate and gift exemptions will become law. This near certainty provides a small window for individuals to make full use of their 2021 permissible exemption.
Other major change proposals include grantor trusts which may not have until December 31, 2021, to take full advantage of existing planning opportunities. For decades grantor trusts permitted the grantor to be individually liable for income taxes on earned income, yet the grantor trust remained excluded from the grantor’s taxable estate. If the proposed changes take effect, there will be an elimination of grantor’s trusts in estate gift planning.
Under the current rules, existing grantor trusts are exempt from the law change proposal (grandfathered) with one significant limitation. A gift pre-existing proposed grantor trust law change will be exempt; however, the portion attributable post-act contribution is under the new rules. Therefore that new rule portion is included in the grantor’s taxable estate. Grantor trusts include life insurance trusts. Therefore, pre-funding this trust type with enough cash to pay premiums for several years to ensure its exemption status is required to remain outside the taxable estate. Execution and funding must happen before enacting the proposal to take full advantage of existing grantor trust laws.
Finally, the proposal regulations upend rules regarding the sale of appreciated assets by a grantor to their grantor trust. Today, this action is not an income tax recognition event. The proposal act, however, would deem such a sale as being between unrelated parties. This change means the sale to a grantor trust becomes an income tax recognition event to the grantor. Typically, assets sold to grantor trusts have substantial gains already built-in. Therefore the strategy to sell to a grantor trust largely disappears with the change proposal enactment, and not even losses could have recognition upon such a sale.
Valuation rules such as discounts on ownership interests in passive assets face elimination. Any individual wishing to claim a valuation discount on a gift of interest of an entity must complete the gift before enacting the proposed legislation. Again, the window of opportunity for claiming these types of valuation discounts may close, even long before December 31, 2021.
Understanding Proposed Changes to Tax income Rules
Tax income rules are also under scrutiny and ripe for change. A new surcharge proposal of three percent of a trust’s modified adjusted gross income or an estate above $100,000 is likely to enact into law. Realizing income gains in 2021 rather than 2022 can help to preserve your wealth.
Also, expect individual and capital gains and dividends tax rate increases. Individual tax rates may increase from 37 to 39.6 percent, and the income level threshold for these higher rates will decrease. The current level for higher-income taxpayers’ capital gains will change from 23.8 percent to as high as 31.8 percent. Part of these taxes includes a three percent surtax applying to high-income individuals, estates, and trusts.
The current draft legislation does not propose eliminating the step-up in basis at death or implementing a carryover basis at death, nor transfers of lifetime gifts (other than sales to a grantor trust, see above) or upon the death of an income tax realization event. The legislation does not propose setting a minimum term for grantor retained annuity trusts or eliminating zeroed out grantor retained annuity trusts. Nor does the draft legislation increase the estate tax rate from forty percent or create a progressive estate tax rate structure, limit the annual exclusion to trusts or gifts, and finally will not create new limitations on the use of dynasty trusts.
The recently unveiled Build Back Better Act has the possibility of implementing wide-sweeping changes to the US tax code and has drastic impacts on commonly used estate planning techniques. Whether you have an existing estate plan or need to create one, speak with an attorney today to understand how these proposed changes may affect your existing or future estate plans. If you need assistance or would like to talk about your specific situation, contact our Cincinnati office at (513) 815-7006.
A trust is a great mechanism for handling estate business and it can be beneficial to anyone with any number of assets. You want to keep your affairs private and stay out of probate court? Maybe you have stepchildren? You want to leave money to your favorite charities? Or you own a small business and you’re concerned about liability. Perhaps you have a child with special needs. You have an elderly parent who might need government benefits. And so on. There are lots of situations where a trust is just the thing.
In an ideal world, a trust runs like a well-oiled machine. The creator of the trust is even-handed and fair in where he wants his money to go. The recipients of trust funds – the beneficiaries – want the best for all, including themselves. The trustee – the person entrusted with managing the money in the trust – is conscientious and responsible. She invests wisely. She provides beneficiaries with regular accountings of how those investments are doing. She pays beneficiaries earned interest right on time. When the trust has served its purpose, she pays out assets and winds up the estate.
That’s the ideal world. Not everybody lives there, unfortunately. Individual trustees can be inexperienced, overworked, overwhelmed, intentionally uncooperative, or even abusive or dishonest. Beneficiaries can become anxious and suspicious, with or without reason. And grit gets in the gears.
If you are a beneficiary who’s concerned that the trustee is not living up to her duties, we suggest a stepped approach. Start by being nice and assuming the best intentions. Specifically, identify what’s troubling you. Try to sit down with the trustee to discuss your concerns. Disagreements may turn out to be misunderstandings that can be worked out amicably.
If you don’t have a copy of the trust document, ask for it. Don’t believe what you’re told about what the trust says. You as beneficiary have the right to read the document and to make sure that what you think you’re entitled to is in fact what you are entitled to.
Beneficiaries have the right to know where trust funds have been placed, how much income the funds have earned, and how much the trustee has spent on expenses and commissions. If your trustee has not provided you with an accounting, ask politely in writing. Request that the trustee responds within a specified reasonable time. If your request is simple – for example, you’re only asking for a copy of the trust document – that time could be short. If you want an accounting, allow the trustee more time to calculate expenses and reconcile accounts.
If all goes well, the situation may be resolved at that point.
If not, though, act immediately. Don’t merely hope things will take care of themselves. Your time to go to court is limited and you may be penalized for not acting promptly. Call an experienced trust-and-estate lawyer. General practitioners may be good negotiators, but they are probably unfamiliar with current trust-and-estate law. You need an attorney who has extensive experience with trustees or executors who have mishandled an estate or otherwise breached their duties. And remember – you need your own attorney, not the attorney who drafted the trust.
You and your attorney can then choose the optimal way to reach your goals. Maybe simply a letter from the attorney to the trustee will do the job. If it doesn’t, though, it may be time to go to court. Your attorney will advise you.
But what if you think the trustee is actually stealing? Misappropriating your inheritance? Isn’t that a crime? A police matter?
Yes, but. The police won’t pursue a case unless the trustee has actually embezzled or absconded. Otherwise, if your trustee has invested funds recklessly, or lost money, or won’t communicate with you, those are civil disputes that are resolved in probate court, not criminal court. The probate judge can force uncooperative trustees to act, or, if necessary, may remove the trustee altogether if she is unfit or the situation otherwise warrants.
In sum, an individual serving as trustee is responsible to communicate honestly and openly with beneficiaries, gather and invest property of the estate, and to account for the property that passes through. That can be a big job, so allow your trustee some latitude if possible. But life being what it is, drama and chaos can break out, especially if familial relationships aren’t what they could be wished for.
If you find yourself in that situation, we would be happy to talk with you about how we could help provide support and expertise, to move toward a happier solution. If you need assistance or would like to talk about your specific situation, contact our Cincinnati office at (513) 815-7006.
When a family member has passed, the family occasionally ends up arguing over personal property. Arguments can take place over things like a coffee mug, a piece of jewelry, or a painting. These types of arguments can be eliminated by filling out a personal property memorandum and keeping it with your will or trust.
A personal property memorandum is designed to cover who should receive items owned that don’t have an official title record. Personal property includes furniture, jewelry, art, and other collections, as well as household items like china and silverware. Personal property memoranda may not include real estate or business interests, money and bank accounts, stocks or bonds, copyrights, and IOUs.
When writing your memorandum, it is best to keep things simple. Personal property memoranda generally resemble a list of items with the attached names of the inheritors. It can be handwritten or typed but should always be signed and dated.
All items should contain sufficient detail so that argument and confusion can be avoided. Complete contact information including address, phone, email, and a backup contact if possible should be included. Do not include items that you have already explicitly left in your will or trust.
The beauty of a separate list of personal items and their planned distribution is that if you later decide to change who receives what, you simply update your current list, or replace the list altogether. You can destroy an old record or maintain signature and dates on each of your personal property memoranda so that it is easy to identify your most current set of wishes.
A personal property memorandum for your tangible personal effects is a simple way to address how you want your personal property to be distributed. We would be happy to help you create a legal personal property memorandum along with any other estate planning documents you may need. If you need assistance or would like to talk about your specific situation, contact our Cincinnati office at (513) 815-7006.