Estate Planning Blog

Estate Planning Blog

Elisabeth Pickle Law, P.L.C.

Vacation Home: What’s the Best Way to Pass to the Next Generation?

The generous exclusion that allows wealthy individuals to gift up to $11.4 million and not get hit with federal estate taxes, came from the Tax Cut and Jobs Act of 2017. However, it’s not expected to last forever, according to the article “What to Know When Gifting the Family Vacation Home” from Barron’s Penta. Those who can, may want to take advantage of this window to be extra-magnanimous before the exemption sunsets to about $5 million (adjusted for inflation) in 2025.

At issue for potentially giving, is that when someone transfers property, the recipients must account for it, according to the original price paid for the property. This is known as the basis. For example, shares of stock valued at $5 million today that were originally purchased for $1 million 10 years ago, would be subject to income taxes only on $4 million, if the recipient were to sell the stock.

Advice given to wealthy individuals is to make use of that higher estate tax exclusion while it’s still in place, and that may include property that they expect to gift to beneficiaries. The most likely asset would be the family vacation home, whether it’s a ski chalet or a beach house.

First, make sure your children want the property. There’s no sense going through all the processes, unless they plan on enjoying the vacation home. Next, figure out the best way to gift the home, while making the most of the high exclusion.

A nice point: you won’t have to give up the use or control of the house during this process. Experts advise not making an outright gift. This can lead to less control or the loss of a share to a child’s spouse, in the event of a marital split.

Another option: transfer the property into a trust. There are several kinds that would work for this purpose. Another is to consider a Limited Liability Corporation, which also serves to protect the family’s assets against any claims, if someone were to be injured on the property. The parents would transfer the property into the LLC and give children interests in the company.

A fairly common structure for vacation home ownership is called a Qualified Personal Residence Trust (QPRT). These are used by families who want to retain the right to continue using the home, usually for the rest of their lives. The property is transferred to the designated beneficiaries at death. If it is set up properly, a QPRT avoids any income or estate taxes.

A trust also lets an individual or a couple be very specific in how the property will be used, who can use it and any rules about how they want the home maintained. Making sure that a beloved family vacation home is well-cared for and not rented out for college parties, for instance, can provide a lot of comfort for a couple who have poured their hearts into creating a lovely vacation home.

Speak with an experienced estate planning attorney to learn how you can take advantage of the current federal estate tax exemption to pass your family’s vacation home on to the next generation.

Reference: Barron’s Penta (March 31, 2019) “What to Know When Gifting the Family Vacation Home”

 

Should You Include a No-Contest Clause in Your Will?

It’s impossible to know what is in the heart and mind of the deceased, except to consult their last will and testament. However, when there is a suspicion that the last will and testament has been changed through undue influence, the care that went into the will might be undone cautions the Santa Cruz Sentinel in “No-contest clause throws kink into trust plan.”

The example given is of a woman whose mother was in the care of her niece, who was also the trustee of her mother’s trust. The mother modified the trust to give the niece her home, which is estimated to be worth about a fifth of the total estate value. The daughter notes that at the time these changes were made to the will, her mother was in hospice care and being given morphine. It does sound as if it could be influence because changes made to a will during a critical illness, especially in the presence of strong pain medication, are questionable.

Since the trust included a no-contest clause, the daughter wonders if it’s worth challenging the will for one-fifth of the estate to charge the niece with undue influence?

An undue influence claim needs to have three points:

  • A confidential relationship — that between the grandmother and the grandchild;
  • Active procurement — the granddaughter got her grandmother to amend the trust;
  • Unjust enrichment — the granddaughter’s inheritance was increased to more than she would have otherwise received.

If all three elements are met, then the burden of proof shifts to the niece to show that she was not doing anything wrong.

There may also be a lack of capacity claim, based on the medication. It may be that the grandmother was too medicated to understand what she was doing.

The no-contest clause does present a problem. If the will is challenged, the daughter is disinherited — but only if she loses. If she wins, that no-contest amendment is invalid, and the trust returns to what it was before the changes were made.

At one point, no contest clauses were so powerful that there was consideration given to not allowing them to be used in wills. In California, as of Jan. 1, 2010, a person may file a contest and if the judge determines that they had probable cause, they are not automatically disinherited.

In this case, if the facts would lead a reasonable person to conclude that there was undue influence, it’s likely that the daughter in this example would win. It would be up to the court to determine whether she should be disinherited. No-contest clauses are strictly construed by the courts, so unless the no-contest clause says that it applies to amendments, she may be okay.

There is one fact that she needs to ascertain, before moving forward. If the estate planning attorney met with the mother and prepared the amendment, then the attorney will be a neutral witness who will be able to testify to her mother’s mental capacity and her wishes.

It is not uncommon for people to change their wills to favor the person who spends their last weeks or days with them, as they prepare to die. One must wonder in this case, as to why the niece and not the daughter was with the grandmother at this time. Perhaps the two were very close, or perhaps the granddaughter was manipulating her grandmother. However, no one will ever truly know, except for the granddaughter and the deceased.

Reference: Santa Cruz Sentinel (March 3, 2019) “No-contest clause throws kink into trust plan”

 

Planning for a Special Needs Child

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” 

Why Do I Need a Prenup for my Second Marriage After 50?

Many older people who remarry have significant assets—like pensions, retirement funds, homes, and maybe businesses and children from their prior marriage. The financial consequences could be significant, if their second marriage doesn’t last. Forbes’ recent article, “All About Prenups For Second Marriages,” says that a prenuptial agreement can address these issues:

  • Supporting the new spouse through retirement;
  • Paying expenses and accumulation of marital property, if the spouses have retired;
  • Leaving assets to children, if the new marriage is ongoing at the time of death;
  • Balancing the needs of the new spouse with helping their own children;
  • Making accurate financial results, if the marriage fails; and
  • Ensuring a peaceful divorce process, if the marriage fails.

In a prenup, the couple can decide how they will support themselves during the marriage and can create a plan for withdrawing retirement assets, depending on their relative wealth.

An issue with prenups for second marriages, comes from the distinction between “separate property” and “marital property.” Separate property is typically the property brought into the marriage and all past and future inherited property. Marital property are those assets that are built up through the efforts of the spouses, usually by lifetime earnings in the workplace.

However, what if the couple is retired, there is no opportunity to accumulate marital property and one of the spouses doesn’t have adequate separate property to provide for his or her retirement? That spouse may then feel vulnerable, if they divorce. This can foster bad feelings that fester during the marriage. A prenuptial agreement can alter this dynamic and provide a fair and easier result, if the marriage fails or if a wealthier spouse predeceases a less-moneyed spouse.

In a second marriage after 50, many people like to leave money to their children when they die and provide for their new spouse. A prenup can detail that an estate plan be created after the couple marries, to get the result they desire. The assets of the deceased spouse can eventually be distributed to the surviving spouse and the deceased spouse’s children. Some assets can be placed in a trust to benefit the surviving spouse during his or her lifetime. The rest can go to the children of the first spouse, after the death of the surviving spouse. In a second-marriage prenup, a couple can also decide that way in which they might assist their children financially during the couple’s lifetime.

A nice benefit of a prenup for a second marriage, is that it can specify the legal process to use if the couple divorces. For example, a prenup can require alternative dispute resolution, if there’s a divorce or if there is a disagreement between the heirs of a spouse and the surviving spouse.

However, sometimes, a prenup can even cause issues, typically in the process of negotiating one. Some couples even break off their engagements as a consequence. Talk to an attorney about creating an equitable prenup.

Reference: Forbes (February 13, 2019) “All About Prenups For Second Marriages

 

How to Be Smart about an Inheritance

While there’s no one way that is right for everyone, there are some basic considerations about receiving a large inheritance that apply to almost anyone. According to the article “What should you do with an inheritance?” from The Rogersville Review, the size of the inheritance could make it possible for you to move up your retirement date. Just be mindful that it is very easy to spend large amounts of money very quickly, especially if this is a new experience.

Here are some ways to consider using an inheritance:

Get rid of your debt load. Car loans, credit cards and most school loans are at higher rates than you can get from any investments. Therefore, it makes sense to use at least some of your inheritance to get rid of this expensive debt. Some people believe that it’s best to not have a mortgage, since now there are limits to deductions. You may not want to pay off a mortgage, since you’ll have less flexibility if you need cash.

Contribute more to retirement accounts. If the inheritance gives you a little breathing room in your regular budget, it’s a good idea to increase your contributions to an employer-sponsored 401(k) or another plan, as well as to your personal IRA. Remember that this money grows tax-free and it is possible you’ll need it.

Start college funding. If your financial plan includes helping children or even grandchildren attend college, you could use an inheritance to open a 529 account. This gives you tax benefits and considerable flexibility in distributing the money. Every state has a 529 account program and it’s easy to open an account.

Create or reinforce an emergency fund. A recent survey found that most Americans don’t have emergency funds. Therefore, a bill for more than $400 would be difficult for them to pay. Use your inheritance to create an emergency fund, which should have six to 12 months’ worth of living expenses. Put the money into a liquid, low-risk account, so that you can access it easily if necessary. This way you don’t tap into long-term funds.

Review your estate plan. Anytime you have a large life event, like the death of a parent or an inheritance, it’s time to review your estate plan. Depending upon the size of the estate, there may be some tax liabilities you’ll need to deal with. You may also want to set some of the assets aside in trust for children or grandchildren. Your estate planning attorney will be able to provide you with experienced counsel on the use of the inheritance for you and future generations.

Reference: The Rogersville Review (March 21, 2019) “What should you do with an inheritance?”

How Do I Make the Right Estate Planning Moves When I Divorce?

The Journal Enterprise explains in its recent article, “5 Estate Planning Moves If You Are Getting Divorced,” that the following tips will help you get your plans in order, so your final wishes will be carried out later.

Medical Power of Attorney. This is also called a healthcare proxy. This person is named to make decisions on your medical care, if you’re ill or injured and can’t state your medical care decisions. Unless you make the change, your ex-spouse will have this right.

Financial Power of Attorney. Like a healthcare proxy, this is someone you select to take charge, if you become incapacitated. This person has authority over your financial decisions, and it means they have the authority to pay your bills, access your bank and investment accounts, collect and cash your paychecks and make financial decisions for you. You want to be certain that your assets are protected, and your financial obligations are met, while you’re unable to act on your own behalf. Most people name a spouse, but if you get divorced and don’t switch this designation, your spouse will still be your financial power of attorney and will retain access to your finances.

Create a List of Things to Change After Your Divorce. A divorce can freeze some assets and accounts, which remains in effect until it’s finalized. Therefore, you won’t be able to change the beneficiary on life insurance policies, pensions and other types of accounts. Ask your estate planning attorney to find out exactly what accounts will be affected. Once you know which ones are frozen, you should make a list to ensure you won’t neglect to change them, when the divorce is finalized.

Modify Your Will. In some states, you may not be permitted to create a new will, but your attorney should still be able to help you make the necessary changes. You’ll want to review your heirs. If you do have minor children and you have sole custody, you may want to designate another person as their guardian. If you named your spouse as executor of your will, you may want to consider changing that.

Modify Your Trust. You may have a revocable living trust, in addition to a will. One of the advantages of a revocable trust is that it doesn’t go through probate, so your heirs get a bigger inheritance more quickly. If you have a revocable trust, talk to your attorney about changing it after your divorce.

If you don’t create a new estate plan after your divorce, your assets may not go to the right beneficiaries, or your ex-spouse may end up with rights you didn’t intend.

Reference: Journal Enterprise (March 20, 2019) “5 Estate Planning Moves If You Are Getting Divorced”

 

What You Need to Know, If the Next Generation Is Inheriting the Family Farm

Understanding the tax liabilities for inheriting, buying or being gifted the family farm, is critical to avoid a costly financial misstep, says Capital Press in the article “The family farm is coming to you: What’s next?” You’ll need to work closely with your estate planning attorney and CPA to make sure you understand the basis in the real estate, especially if the property is sold and taxes will need to be paid. How you inherit the property, makes a big difference in the tax bill.

If you receive the property as a gift from parents while they are alive, then you retain their income tax basis in the property. If they inherited it also, they likely have a low tax basis. Farms with a basis of $50,000 that are now worth $2 million are not unusual. If the farm is sold, there will be a capital gains tax on the difference between the basis and the present value, which could be more than $600,000.

If you inherit the farm from a parent and then sell it for $2 million, its value at the time of their death, you would not have to pay a capital gains tax. That saves $600,000.

If you bought the farm from a parent’s trust or estate for $2 million, then you have a $2 million basis in the property and will probably not owe any property gains tax, if you eventually sell it for $2 million.

Just be sure that you comply with all reporting requirements. Failure to comply, means that a portion of the estate tax will have to be repaid.

If you own the farm without other family members, you should start planning your next steps. To whom do you want to pass the farm? If you want to keep the farm in the family, work with an attorney who is familiar with farm families, so that you can keep working the land and reduce any disputes.

Farmers often separate business operations from the land, with the operations held by one business and the land held by another entity. This allows the estate planning attorney to plan for succession in how operations and land are transferred to the next generation. It also provides asset protection, while you are alive.

Make sure that your farm succession plan and your estate plan are aligned. A common issue is finding that buy-sell documents don’t align with the will or trust. Some farmers use a revocable living trust as a will, so they can incorporate estate tax planning and transition the farm privately upon death.

Reference: Capital Press (March 24, 2019) “The family farm is coming to you: What’s next?”

 

Here’s One Way to Handle the Son-In-Law You Hate

When Gillian Williams died in May 2017, it’s unlikely that she expected to be at the center of an international spotlight on her family’s life. She left behind a married daughter, Julie Fairs, who is accused, along with her husband Brian, of falsifying a signature on her mother’s last will and testament. The mother’s own sister testified that her sister would never have left her daughter anything, because of how much she disliked her son-in-law, reports Above the Law in the article “What To Do When You Hate Your Son-In-Law: A Practical Lesson in Estate Planning.”

The matter became public when it went to trial. There’s been a lot of nasty family business being shared. Most people avoid going to trial for will contests, since the underlying emotions come out in full view.

Not everyone has friendly family relationships with in-laws. Frequently, the in-law relationship is prickly at best. There is no law that you must like your son-in-law. However, the law presumes that you like your child enough to include her in your estate, regardless of how you feel about her spouse. That means that if there is no surviving spouse, children are permitted to be the “natural object of your bounty.” In other words, these are the individuals who will receive your assets when you die, based on social and public policy and the law.

There are issues in estate planning, when a person wants to exclude a child because of their dislike of the child’s spouse. You may want to exclude a child out of concern that the spouse will mishandle the money or benefit from the money in a divorce. Sometimes parents can’t get past their dismay over a child marrying against their wishes. Disinheritance is not an unusual punishment. However, increased scrutiny is going to be applied to the review of a will, when a child is excluded.

When one child is disinherited, it colors their relationship with their siblings. The beneficiaries and the executor are left to defend the decedent’s decision. That is not easy to do, unless an explanation of why this happened was done beforehand.

There are options to disinheritance, if the child’s spouse is an issue. A beneficiary’s share can be held in a continuing trust, so the spouse does not have access to the funds. The assets can be protected and preserved, in the event of a divorce or just for general money security. It should be recognized that while inheritances are generally protected in divorce, the second the monies are co-mingled, they become joint property. A trust is often the best way to protect an inheritance in this situation.

Another tactic is for the person to skip a generation and instead make a bequest to the grandchildren. The option works best when the funds are not significant, since the parent may be insulted by the decision to leave a bequest to their children and this could pit the child against their own child (the grandchild).

Dividing the estate among the children in unequal shares can be done so as not to completely disinherit a child, but to leave less money. This also holds the potential for creating bad feelings between family members.

The last will and testament is a very permanent document and may not be the right forum to be used to let feelings be expressed or take a stand about an unfavorable life decision by an adult child. The impact of this decision can also have long lasting effects, including lawsuits and family fighting. It is also likely to create a battle between the child and their spouse.

A conversation with an estate planning attorney, who has likely seen this situation hundreds of times in their practice, should be able to help sort out the best solution. There may be a way to avoid conflict, or at least to make sure everyone is clear from the get-go, as to what is going to happen in the future, and why.

Reference: Above the Law (March 12, 2019) “What To Do When You Hate Your Son-In-Law: A Practical Lesson in Estate Planning 

What is the Best Way to Leave an Inheritance to a Grandchild?
Gifts to Grandchildren

What is the Best Way to Leave an Inheritance to a Grandchild?

Leaving money or real estate to a child under the age of 18 requires careful handling, usually under the guidance of an estate planning attorney. The same is true for money awarded by a court, when a child has received property for other reasons, like a settlement for a personal injury matter.

According to the article “Gifts from Grandma, and other problems with children owning property” from the Cherokee-Tribune & Ledger News, if a child under age 18 receives money as an inheritance through a trust, or if the trust states that the asset will be “held in trust” until the child reaches age 18, then the trustee named in the will or trust is responsible for managing the money.

Until the child reaches age 18, the trustee is to use the money only for the child’s benefit. The terms of the trust will detail what the trustee can or cannot do with the money. In any situation, the trustee may not benefit from the money in any way.

The child does not have free access to the money. Children may not legally hold assets in their own names. However, what happens if there is no will, and no trust?

A child could be entitled to receive property under the laws of intestacy, which defines what happens to a person’s assets, if there is no will. Another way a child might receive assets, would be from the proceeds of a life insurance policy, or another asset where the child has been named a beneficiary and the asset is not part of the probate estate. However, children may not legally own assets. What happens next?

The answer depends upon the value of the asset. State laws vary but generally speaking, if the assets are below a certain threshold, the child’s parents may receive and hold the funds in a custodial account. The custodian has a duty to manage the child’s money, but there isn’t any court oversight.

In Arizona, the threshold is $10,000. Check with a local estate planning attorney to determine your state’s limitations.

If the asset is valued at more than $10,000, or whatever the threshold is for the state, the probate court will exercise its oversight. If no trust has been set up, then an adult will need to become a conservator, a person responsible for managing a child’s property. This person needs to apply to the court to be named conservator, and while it is frequently the child’s parent, this is not always the case.

The conservator is required to report to the probate court on the child’s assets and how they are being used. If monies are used improperly, then the conservator will be liable for repayment. The same situation occurs, if the child receives money through a court settlement.

Making parents go through a conservatorship appointment and report to the probate court is a bit of a burden for most people. A properly created estate plan can avoid this issue and prepare a trust, if necessary, and name a trustee to be in charge of the asset.

Another point to consider: turning 18 and receiving a large amount of money is rarely a good thing for any young adult, no matter how mature they are. An estate planning attorney can discuss how the inheritance can be structured, so the assets are used for college expenses or other important expenses for a young person. The goal is to not distribute the funds all at once to a young person, who may not be prepared to manage a large inheritance.

Reference: Cherokee-Tribune & Ledger News (March 1, 2019) “Gifts from Grandma, and other problems with children owning property”