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Trusts, Estates & Business Succession Blog

This blog is published by the attorneys in Capehart Scatchard’s Wills, Trusts & Estates group. It addresses issues related to estate planning, wills, trusts, succession planning, tax and tax codes.

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Rethinking Old Trusts and Your Estate Planning

If you have a trust, you may think that their original purpose no longer seems compelling. Your estate plan may designate that your assets will pass into a “bypass” or “credit shelter” trust, which will pay income to your surviving spouse and ultimately pass assets to your children. Historically, it was common for married couples to set up such trusts to avoid wasting a deceased spouse’s unused estate-tax exemption. But “portability,” introduced in 2011, allows a surviving spouse’s estate to use any estate-tax exemption amount that the first-to-die spouse did not use.

What’s more, beneficiaries inheriting assets from such bypass or credit shelter trusts miss out on a big tax break. When assets such as stocks and real estate are passed directly through an estate, these assets “step up” in basis to the market value on the day the owner died, so heirs pay tax only on appreciation after that date. Assets passed through bypass trusts don’t get the basis step-up.

While the estate tax exemption has been increased and your estate may not be subject to federal estate tax, before you decide these trusts have not value, consider that they can serve many purposes beyond avoiding federal estate tax. Here are a couple of things to consider: Do you need the creditor protection that a trust can provide? What if you wind up in a nursing home and spend down all your assets, leaving nothing for heirs?

The new law also opens the door to trust strategies that provide immediate income-tax savings and asset protection while allowing you to maintain access to your money. If you are interested in getting around the new tax law’s $10,000 annual limit on state and local income and property tax deductions, there are planning options available that can help to save income taxes. Real estate transfers to a limited liability company could provide tax savings with regard to real estate tax deductions.

It is wise to review your estate planning documents periodically and especially when there have been significant changes in the tax laws or changes in personal situations. Each person’s situation is unique and may have options different than those of their neighbor.

When reviewing and updating your documents, wills and trusts are not the only documents to be reviewed. Don’t forget durable powers of attorney and health care directives. Situations may have changed that would be cause for updating these documents as well.

Freezes on Credit Reports

Are you interested in freezing your credit report/line to help avoid identity theft?  Good News – Congress has recently passed legislation that will allow people to freeze their credit lines for free.  This will allow people to block thieves from opening up credit in their name without charge.

In the past, credit rating companies have charged fees of $2 to $10 to those who want to freeze their credit reports to help protect themselves from fraud. In states that have not already outlawed the fees, the freezes can cost from $2 to $10, and you need to pay it to each of the three credit-rating agencies separately.

This new bill has been signed by the president and the no-fee service will go into effect in the coming months.

Support for the freeze gained ground in the months since Equifax, one of the three major credit-rating agencies, announced its data had been breached and that as many as 150 million consumers’ personal information was revealed. Fraudsters can use such information to establish credit in another person’s name, posing significant financial liability on the unsuspecting consumer and negatively affecting the consumer’s credit rating. With a freeze in place, no one can set up such credit in your name.

Be on the lookout for this option.  In the meantime, if you wish to check your credit report, the IRS suggests using www.freecreditreport.com to check your information with each of the three credit-reporting credit agencies.  You are able to obtain a report from each of the agencies once a year for free.

Think you do not have anything to leave behind? Think Again! (Part 4 of 4) – Living Will and Advance Directive

You have now prepared your Last Will and Testament and have named your Attorney-In-Fact in your Power of Attorney, but what about your health? Who will take care of you and your medical needs if you become incapacitated? That is precisely what a Living Will and Advance Directive will provide.

A Living Will and Advance Directive is a document that provides instructions regarding your care during the latter stages of your life. Similar to a Power of Attorney, you will select an individual to serve as your Attorney-In-Fact in this regard. There is also an important decision you must make within the document, and that is the decision regarding whether you would like to continue life sustaining treatment (life support) should the moment arise when doctors have determined there is no more hope for recovery. If that moment should arise, you will not be able to communicate with doctors what you would like done with regard to life support. However, if you have a Living Will and Advance Directive, doctors will be able to clearly see your decision that was made when you were mentally competent and abide by your choice.

A Living Will and Advance Directive also has other benefits. In addition to allowing you to make your own decisions regarding life support, it also will clearly show your intentions and prevent any arguing or disagreements about what you would want should that moment arise. This takes the difficult decision of cutting life support out of the hands of loved ones who may not be in the best mental or emotional state to make that decision. Further, loved ones may disagree and what they believe should happen, potentially leading to arguments and hurting family relations.

Finally, a Living Will and Advance Directive can also include a Healthcare Power of Attorney, which, as mentioned, will give your Attorney-In-Fact authority to make medical decisions for you should you be unable to make your own medical decisions. It also allows your Attorney-In-Fact to speak for you in regards to health care matters. It goes without saying that your Attorney-In-Fact should be someone who you not only trust with your healthcare needs, but also someone who has the emotional and mental ability to make potentially difficult decisions that are ultimately in your best interest. For that reason, it may be appropriate to appoint a trusted person outside of your family to be your Attorney-In-Fact.

The Last Will and Testament, Power of Attorney, and Living Will and Advance Directive are three vital documents that should be a part of everyone’s estate plan. If you do not have either or any of these documents, it is prudent to consider having them created. Being proactive now when it comes to not only your future, but also your loved ones future can help prevent many headaches down the road.

Think you do not have anything to leave behind? Think Again! (Part 3 of 4) – Durable Power of Attorney

Ok, so now you have a Last Will and Testament where you have directed where your assets will go after you pass away and who will be responsible for administering your estate. But who will help you during your lifetime if you become incapacitated and need assistance handing your finances? Enter the Durable Power of Attorney.

First, it is important to understand what a Power of Attorney does. A Power of Attorney allows another individual to act on your behalf in regards to your finances. That means that the individual can access your bank account, pay your bills, operate business accounts, etc. The person you give Power of Attorney over your finances is called the Attorney-In-Fact or Agent There a few different types of Powers of Attorney, including a General, Special, and Durable Power of Attorney.

A General Power of Attorney gives your Attorney-In-Fact the broad authority to handle all of your financial affairs. This is effective for when you age and have someone who you trust with the ability to handle your finances. However, a General Power of Attorney will become invalid immediately if you lose mental capacity.

A Durable Power of Attorney helps solve the issue of a General Power of Attorney becoming invalid once you become mentally incapacitated. A Durable Power of Attorney will allow the Power of Attorney to remain valid even if you become mentally incapacitated. To accomplish this, there must be express language in the Power of Attorney that indicates your intention for the Power of Attorney to remain valid even if you become mentally incapacitated. This is particularly effective if you are aging or your mental capacity is showing signs of deteriorating.

The third type of Power of Attorney is a Special Power of Attorney. This Power of Attorney is beneficial to an individual who wants someone to only handle a certain aspect of his or her financials. In a Special Power of Attorney, you have the ability to choose exactly what powers the Attorney-In-Fact can exercise. For example, you may only want the Attorney-In-Fact to manage your rental property, or handle your company’s business transactions, or handle the sale of your real estate. With a Specific Power of Attorney, you have the power to dictate exactly when and in what circumstances your Attorney-In-Fact may utilize the Power of Attorney.

A Power of Attorney, however, does not last forever. In addition to being revocable at any time, the Power of Attorney will automatically become invalid when you pass away. It is said that the Power of Attorney “dies with you”. After you pass away, the terms of you Last Will and Testament will govern the disposition of your assets, making it all the more important to have a valid Last Will and Testament.

Think you do not have anything to leave behind? Think Again! (Part 2 of 4) – Wills

Now that you have considered all of the various possibilities that you may amass a sizeable estate when you pass away, you then must consider to whom you would like the assets to pass to and, just as important, who will administer your estate.

First, the decision of who will inherit from your estate. A Last Will and Testament will dictate to whom your assets will pass to after your death. This provides you with all of the power to tell your loved ones after your death “who gets what” or “who does not get what”. This saves time and money after your death and saves loved ones from potentially fighting over your most prized possessions.

If you have children, you may consider where each child is in life or where you anticipate them to be at the time of your passing. Is one child better off than the other? Does one child need more support due to an incapacity issue? Or do you simply not have a relationship with one child and would not like that child to inherit from your estate? These are all important questions to ask yourself when considering estate planning documents, and each of them can be addressed in your Last Will and Testament. Do not leave it to the State to distribute your assets when you have the ability to control that yourself.

The Last Will and Testament governs the distribution of probate assets as opposed to non-probate assets. What is the difference? Non-probate assets are assets that already have a listed beneficiary on it for the assets to be distributed to upon your death. For example, life insurance, IRAs, joint bank accounts with rights of survivorship, payable on death accounts, are all types of non-probate assets. Each of these accounts will generally have an individual (beneficiary) already listed who will receive the assets of that account upon your death. However, if no beneficiary is listed, then the estate is the presumed beneficiary of the asset and it will then become a probate asset and will be distributed according to your Last Will and Testament.

In addition to cash assets, you may also consider your home if you own one. Who would you like to inherit your property? Do you even want anyone to inherit your home? Or would you like it to be sold first and distribute the proceeds? Again, these all can be addressed in your Last Will and Testament. This will take away any uncertainty with what will happen to your property after you pass away. You can rest assured that your assets will be distributed to the right people in the manner in which you desire when you pass.

When you have finished choosing who to leave your specific property to, what happens to the rest of the assets in your estate? The remaining assets, such as bank accounts, in your estate that do not have a listed beneficiary will pour into what is called the “residue” of your estate. You have the ability to direct how your residuary estate is distributed and to whom it will be distributed.

After considering what you have and to whom the assets will be distributed to, the crucial decision needs to be made as to who will be responsible for administering your estate. This should be person that you trust to be able to gather your assets and contact all of the beneficiaries of your estate in a timely manner to administer those assets from your estate. This person is called the “Executor” of your Estate. The Executor will also be responsible for the payment of any death taxes your Estate may owe as a result of your death and will be responsible for filing income taxes for your Estate as well. You may also list successor executors as well. These individuals will step in for your initially listed Executor should he or she choose not to serve as your Executor or becomes incapacitated and is no longer able to serve as Executor.

A will gives you great power and discretion to see that the proper people receive the assets of your estate. If you have life milestone moments coming up or do not have one, consider seeing an attorney to have your Last Will and Testament drafted.

Think you do not have anything to leave behind? Think Again! (Part 1 of 4)

We hear it time and time again. People considering whether or not to have estate planning documents done, but stopping short of following through because they think “I really do not have anything to leave behind” or “There is no need right now, I only have one bank account anyway”.

While that may be true right now, it may not always be true throughout your life, and having proactive estate planning documents can come in handy before it really is too late.

Consider this: You currently may have a few assets that you do not believe have much value. But what happens if an unfortunate event happens in your life where you pass on but your Estate comes into a large amount of money via a settlement from an accident? Do you really want to leave who inherits your assets up to the laws of New Jersey? Having estate planning documents can help you and your estate be prepared for the future and can help prepare for the unexpected.

This is precisely why estate planning is so important, even at a young age. There may be someone specific you would want to inherit the settlement, or, sometimes more importantly, someone who you don’t want inheriting from your estate. If you do not have a will directing who is to inherit from your estate, that decision is taken out of your hands and placed in the hands of a state statute.

But you don’t just pass down cash when you pass away. There are more assets that would be a part of your estate than you likely think. Your car, your home, your computers, your collectables, all are items that you can choose to pass to certain people when you pass away.

There are generally three important documents in an individual’s estate plan. First, is the Last Will and Testament. Second, the Living Will (Healthcare Power of Attorney). Finally, there is the Power of Attorney. This article, and the next few to follow, will discuss each of these instruments and provide a general overview of each to give you an idea of the considerations needed when creating estate planning documents.

Are you just getting married, or maybe having children, or buying your first home, or even going on vacation? These are all important times and life moments where you should consider updating your estate planning documents, or, if you haven’t already, creating estate planning documents. Estate planning allows you to dictate how you want things to be distributed after your death. So before you think that estate planning may not be worth the time or that you are too young to do so, consider all your different life moments coming up, and think again!

Tax Return Copies and Transcripts

The IRS recommends that taxpayers keep a copy of tax returns for at least three years. Doing so can help taxpayers prepare future tax returns or even assist with amending a prior year’s return. If a taxpayer is unable to locate copies of previous year tax returns, they should check with their software provider or tax preparer first. Tax returns are available from IRS for a fee.

Even though taxpayers may have a copy of their tax return, some taxpayers need a transcript. These are often necessary for a mortgage or college financial aid application.

Here is some information about copies of tax returns and transcripts that can help taxpayers know when and how to get them:

Transcripts

To get a transcript, taxpayers can:

Transcripts are free and available for the current tax year and the past three years. A transcript usually displays most line items from the tax return. This includes marital status, the type of return filed, adjusted gross income and taxable income. It also includes items from any related forms and schedules filed. It doesn’t reflect any changes the taxpayer or the IRS may have made to the original return.

Taxpayers needing a transcript should remember to plan ahead. Delivery times for online and phone orders typically take five to 10 days from the time the IRS receives the request. Taxpayers should allow 30 days to receive a transcript ordered by mail, and 75 days for copies of your tax return.

Copies of tax returns

Taxpayers who need an actual copy of a tax return can get one for the current tax year and as far back as six years. The fee per copy is $50. A taxpayer will complete and mail Form 4506 to request a copy of a tax return. They should mail the request to the appropriate IRS office listed on the form.

Have You Looked At Your Estate Plan Lately?

You have most likely heard the phrase “the only certainties in life are death and taxes”, but have you thought about how the timing of death and the amount of taxes owed are not certain?

“The Tax Cuts and Jobs Act of 2017 leaves the federal wealth transfer tax system in place, but temporarily doubles the exclusion amount for estate and gift taxes to $11.18 million per individual or $22.36 million per married couple until the end of 2025,” said Joyce Beebe, a fellow at Rice University’s Center for Public Finance. “In 2026, absent congressional action, the base exclusion amount will revert to $5 million, indexed for inflation.”

Since 2001, states have been moving away from the estate tax as a stable revenue source. Many states either repealed the tax or increased the exclusion amounts and in 2018, only 12 states plus Washington, D.C., levy estate taxes, all with different structures from the federal tax. State officials stated that a major reason for eliminating the estate tax was tax competition – they believe that if wealthy senior citizens do not move to other states to avoid paying state estate taxes, the state may eventually collect more revenue from state personal income taxes, property taxes or sales taxes to recoup the lost estate tax revenue.

After 2020, a more likely outcome is that either the increased exclusion will be made permanent, or the exclusion amount will be adjusted prior to the 2026 sunset of the bill. As history has shown, we won’t likely see changes to the exclusion amount until the start of 2026.

The new tax law has led some seniors to assume that they can delete estate planning from their to-do lists. But that is a dangerous assumption.

With the new tax law roughly doubling the federal estate-tax exemption to about $11.2 million per person, the vast majority of people will not be subject to federal estate tax. But before you delete your estate planner from your contacts, did you consider that your old estate planning documents may still need to be updated?

The law opens new opportunities for estate-planning techniques which may save on income tax. And it does nothing to diminish a host of other factors that drive many people to engage in estate planning, including creditor protection, defense against elder financial abuse, and maximizing bequests. Just to cement your estate planner’s job security, the new higher exemption amount sunsets at the start of 2026, when the old $5 million exemption—adjusted for inflation—reappears. And the law could be changed legislatively even sooner. Who knows?

It’s always a good idea to review your estate plan regularly, regardless of legislative changes. Your net worth changes, you or your children get married or divorced, grandchildren are born—and old documents may no longer reflect your wishes. So rather than consigning estate planning to the back burner, the new law should actually light a fire under seniors who haven’t reviewed their documents in years.

Did You Get A Letter Or Notice From The IRS?

First of all, DON’T panic until you read the letter or notice. Every year, the IRS sends millions of notices and letters to taxpayers, and some of them, believe it or not, are benign.

Next, you should IMMEDIATELY forward the letter/notice to your tax preparer.  They are much more accustomed to these notices/letters and can provide guidance as to what must be done, if anything.  What you do not want to do, is keep the letter/notice to yourself.  There may be time constraints that must be complied with and failure to do so could result unfavorably to you.

If you receive a letter, keep the following thoughts in mind:

  • If you are requested to send in additional documentation, do so.
  • If there is a change in the calculation of tax, compare the information in the notice to your tax return. There may or may not be additional tax due.  Further, you may or may not need to do anything.
  • If you find that you might have erroneously omitted something, work to resolve the omission by paying additional tax by responding to the notice. Don’t prolong the outstanding tax as additional penalties and/or interest could apply.
  • If you do not agree with the correction made by the IRS, respond as soon as possible with detailed information as to why you disagree. Read the notice for instructions of where to send this information.
  • If you have questions, note that there will be a phone number on the letter/notice that can be used to contact the IRS with regard to the matter. When calling, we suggest calling early morning to avoid delays.  Have the notice/letter and a copy of your return in front of you when you call.
  • Keep copies of all correspondence from and to the IRS.
  • When corresponding by mail, we suggest that you send your correspondence by certified mail as proof of mailing.

If you think that your letter/notice from the IRS is suspicious, call the IRS.  Don’t fall prey to scammers.  And as importantly, watch emails, phone calls and faxes claiming to be from the IRS as they don’t use any of these methods to make the initial contact.  If in doubt, call the IRS about your account.  Protect your identity.

Beneficiary Designations

Are your beneficiary designations for life insurance, IRAs, 401(k) plans as you intend them to be?  Are you sure?

Query:  If you have designated a beneficiary for a life insurance or an annuity-related asset as “my children in equal shares,” is that truly your intention?  Keep in mind that if that particular designation exists on your beneficiary election forms and you have the unfortunate situation that a child should predecease you leaving grandchildren, the grandchildren will be precluded from receiving their deceased parent’s share of that particular asset.  The asset would pass in equal shares to your then-living children, completely bypassing any children of a predeceased child.

Consider reviewing your beneficiary designations for life insurance and annuity-related accounts to ensure that your beneficiary designations are as you intend.

If you have questions, please do not hesitate to contact one of the attorneys in our Estate and Trust Department who would be glad to assist you in this regard.

 

Questions regarding this article may be sent to Publications@Capehart.com.

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