Beautiful photo: Courtesy of Jonathan Farber, thank you Jonathan!
I know a little bit about Estate Planning
Or just enough to be dangerous. Planning for the proper distribution of one’s estate can be a difficult subject matter to tackle. One reason for this is it gets deep into the weeds of tax law, it is there that these two subjects are joined at the hip. You can ask any CPA or even a CFP like myself, “of all the material on the exams required to earn those professional letters behind your name, which subject did you find the most difficult?” All of us would say “Tax” and tax law. Laws on taxation are created by Congress and we’ve had about 250 congresses in this country by now and as you can imagine there have been more addendums on top of addendums than there has been all out repeals of any tax law. However, my aim here is not to drag you through the weeds but equip you with some things that I feel are important for the commoners among us at least to know at base level. Those of you with extraordinary wealth can afford high-priced advice from talented Tax and Estate Planning attorneys that make a living by constructing all kinds of complicated trust strategies designed to delay taxation on gifted income and inheritance property. I’ll leave high dollar strategies to the folks that make their living working with those ultra high net worth clients. Therefore, those that remain won’t fall asleep from what I’m about to share. I intend to cover a brief list of bullet points on things having to do with the transfer of both real and liquid property upon the death of the owner. Sounds pretty simple but it can get complicated in a hurry!
You’re invited to follow along, below is a list of common questions/concerns [along with some abbreviated answers] upon the settling of one’s estate:
What happens if/when I die without a Will? [Intestate] The answer might surprise you!
If you die without a Will the court will be just as interested [or more] about who you owe money to than what you actually own. The court is about making sure all your creditors get paid first before any assets you may hold are distributed to available heirs. Of course, as you may have guessed, in the absence of a Will the court is forced to assign your assets, both real property as well as any bank and brokerage accounts, to your nearest living relative(s). That person or persons may be someone you aren’t really close to, imagine that! When there’s no living children involved it can also be a person [or persons] that you had no intention of leaving anything to for different reasons. There are a number of reasons why people choose who they want to get their things when they are gone. It’s not always about the quality of the relationship, sometimes it’s more about certain people they are closest to do not need their stuff as much as some others, or a certain relative is more attached to some of their property than others and therefore, they were promised to be left something specific, and on and on. There’s all kinds of reasons why people fall into inheritance. So please if you have put off creating a Will use an estate planning attorney who practices in your state of domicile and get that done before you exit the planet.
Do I need a Trust? How do I know if I should have an attorney create a Trust(s)?
The short answer to this question is most of us will know when creating a trust, or even creating multiple trusts are best in carrying out our final wishes. Here’s one simple scenario, you are divorced and your living children are all minors or still quite young in age. You want to make sure if something happens to you that they inherit your wealth but with some restrictions placed on their receiving it. Afterall, you wouldn’t want your teenage son to immediately blow his inheritance on a Ferrari once you’re gone, right? Trusts are a great way, the only way really to control the transfer of wealth “from the grave”, so to speak. Trusts are used in a multitude of ways to control the future ownership and transfer of property, and even income streams to heirs over time or upon them achieving certain age criteria. When you are leaving a substantial amount to heirs and/or charities, while at the same time wanting to maintain privacy, creating a Trust is the only way I know of to accomplish that.
There are, at minimum, three parties to a trust – there’s the Grantor of the property, this is the person who owns the assets to be poured into the trust, then there’s a designated Trustee who functions as the overseer of the assets inside the trust until all is distributed to the rightful heirs, and of course there’s the designated Beneficiary(s). Most simple trusts will have one trustee but two trustees is not uncommon. Warning: Never try and create a trust on your own via some kit you bought over the internet or a webpage, always seek the advice of an estate planning attorney licensed in your state, and preferably one that is board certified. Real property can be placed inside a trust [not required to be separate] in the state of Texas now but each state has laws that apply to property that can and cannot be placed inside a trust so be sure and check into applicable laws in your state. Some wealthy clients may own a vacation home in a different state than their primary residence is located in, or even own multiple properties in other states. So always check with local estate planning attorneys concerning the distribution of property held in any state where you do not maintain a permanent residence.
Property [of all kinds] held in trust has distinct advantages. Trust property avoids probate, once the grantor dies the property is transferred in accordance with the terms of the trust. There is a couple reasons why this is important. Probate attorneys and courts do not have to settle property transfers when they are held in trust, therefore the decedent’s property avoids the cost of probate. Not only that but the transfer of any property held in a trust remains private, there are no public announcements in newspapers, etc. to notify creditors that might be owed money by the deceased. My understanding is that now in the state of Texas the costs of probating property not titled in a trust will cost at least 5% of the value of the property subject to probate, so keep that in mind. Those fees would be carved out prior to the distribution of the property to its rightful heirs. Also, if you’re on social media sites and you want to keep your home address private for obvious reasons, you could pour your property into a trust as long as it’s available per state law. This would have your property show up on county tax appraisal records under the chosen name of your trust and not you.
Laws regarding the length of time assets can be held in trust can change as well. There have been laws in the past limiting trust terms that attempted to hold assets in perpetuity, just something to be aware of so check with your state regarding these laws. In general, assets can be held in trust for decades and multiple generations but it depends on each state where a trust is created. Just another reason to never try and accomplish something this critical without the assistance of a licensed Estate Planning Attorney.
Trust Workarounds
Important note for those who are not in this line of business – any property titled in the name of the owner that does not allow the naming of a beneficiary [real estate deeds, taxable bank and brokerage accounts, etc.], is subject to probate upon the death of the owner. [You may want to read that again to make sure you understand it]. However, there is another way to title certain types of accounts [those without designated beneficiaries] so that they avoid probate and transfer directly to your chosen heir(s) without the expense of creating a Trust. All banks and brokerage firms should have available to clients what are termed POD and TOD account titling. These forms must be completed by the client but it allows one to designate a beneficiary to a taxable account such as standard after-tax brokerage and bank savings accounts. Some institutions use the POD for account titling, short for “payment on death” and others I’ve run into use the TOD designation, which means “transfer on death” arrangement, both are equivalent measures wherein a family member will be designated to receive the asset once the owner is deceased. Nice and clean, the firm I worked for never charged the client to add these attributes to their accounts, I even have them on a couple of mine. If they’re after-tax checking and savings accounts this is a great way to make sure your designated heir can access the funds quickly should something happen to you. You’re welcome!
How are tax-deferred investment accounts such as IRAs, 401ks, 403bs [and others] treated once inherited?
Quite nicely I would say, just kidding! First of all, only a spouse of the deceased [at the time of death] can assume the account as his or her own upon the death of the deceased. Brokerage firms will initiate the retitling and IRA transfer to the spousal recipient once a valid death certificate and some paperwork are complete. Either way, for everyone involved tax-deferred retirement plans of any kind will be taxed upon each withdrawal in any amount. The bottom line is government is going to get their money. Non-spousal inheritors have a choice, they can withdrawal the entire sum and pay the tax then or they can choose to receive periodic payments over their estimated lifetime1, or over a 5-year schedule2. Those two options may have changed so don’t quote me on that without checking with the bank or brokerage if you happen to be a non-spouse and fall heir to one of these tax-deferred retirement arrangements. The laws governing these accounts are somewhat fluid and susceptible to change. Regardless, for any non-spousal inheritor of these type accounts the tax deferral benefits of the plan are pretty much over.
What are some things I should know about certain policies on pensions and Social Security income?
If you’ve earned a corporate pension over your tenure at a company congratulations! There’s not a ton of these left. The military still offers pensions as long as someone is enlisted for a number of years but many companies have done away with these, opting more for an array of contributory self-directed retirement plans such as 401Ks and Roths, etc. If you or your spouse has earned a pension you probably already know the pension rules stating what the surviving spouse will receive should he or she predecease you while you’re still married. But if you don’t know then please call their benefits department to ask right away! I’ve heard answers from zero, nada, all the way up to 50% of what the worker currently receives in monthly pension, so do ask the question and be prepared for any answer. 🙂
Is the Social Security Administration evil? Are they out to get you? The answer is No! This agency gets a lot of negative press and I really don’t think some of it is fair. They’re pretty helpful I’d say if you can ever get them on the phone – good luck with that! Now, I’d like to make a distinction here, sometimes I haven’t liked their answers but policy is policy and they can only tell me what the current rules are for any given inquiry or situation. I would give the several Social Security folks I’ve dealt with high marks. Just because I didn’t like the answer does not mean they are out to get me, right?
There are many rules for income recipients coming from this agency depending on a contributor’s age, income, contributions they paid into social security over the years of work, whether someone is disabled, becomes disabled, is a child and disabled, is a minor in a household of a deceased parent who earned benefits, or even a female divorced from a recipient where they were married for at least 10 years and she has not remarried. I’m not going to even try to regurgitate all the possible situations this agency has stated rules for, only to say that in some instances specific rules apply for recipients to receive income payments.
Here’s one example, if you are male and were married for at least 10 years before you two divorced and your spouse has never remarried? She is eligible to receive, beginning on her full retirement benefit age, half of your social security payment or the full retirement amount she earned over her own years, whichever is greater. Your payments will not be reduced or affected in any way by this rule so do not fear that. If she happens to remarry in the meantime then her eligibility for this particular avenue goes away. The Social Security Administration is tied to the IRS so never assume they don’t have or can’t see your tax returns every year. This is how they determine your benefits amount as well as your monthly cost for Medicare. They use a two-year rolling lookback period to determine these amounts.
Can I gift money or property to anyone [other than my spouse] tax free?
Here’s the short answer “it depends”. The truth is no short answer exists for this question! 🙂 There are things one needs to be aware of when they start on a course of gifting things of value to people, at least to any person other than their spouse. Gifts between spouses are “unlimited’, [as they are looked at by the IRS for tax purposes as a single unit], no matter the size unless the spouse receiving the gift is not a citizen of the United States. In this case I think the gift maximum is set at around $190,000?
Let’s say I win a lottery and I like my neighbors so I want to hand them a check for $25,000, for doing nothing other than being nice people. Can I do this? The answer is yes and no. You can, but with consequences. Such a thing exists in the United States known as the Gift Tax Maximum Rule. Congress writes the rules [indexed for inflation] for the amount of money that we can gift to anyone [other than a spouse] in a given year without incurring tax consequences. That amount currently is $19,000. So you may award anyone property valued at $19,000 or less each year without tax consequences. When you exceed this amount you are instructed [by law] to file an IRS form 709 for any amounts exceeding the applicable gift tax exclusion rule in a given year. On top of all this, these excessive amounts are tallied against your “lifetime gift tax exclusion rule” of $13.99 million dollars. What happens if the giver exceeds the gift tax exclusion rules? The one gifting pays the tax on any amounts exceeding the maximums and these tax rates are atrocious, my understanding is they may be as high as 40% or more, something crazy like that. So do keep this in mind. However, there are caveats built into the system, a rescue of sorts that excludes certain services from being viewed as taxable gifts. In the case of your child enrolled in schools, the costs of tuition, books and other fees to pursue a university education are not included under the annual gift tax rules as long as you pay these amounts directly to the institution. Paying the cost of medical care is another exception as long as the amounts paid are paid directly to the providers of care, then the IRS does not consider these taxable gifts.
I hope all these words of wisdom find you better off than before, remembering that we come into this world with nothing and that’s exactly how we leave, with nothing. Why not make good plans so that your final wishes can carry on?