EHDH Estate Planning

Can I Avoid Probate?

If you have life insurance, lifetime survivor benefits, a home or other investments, who gets them and when depends on what you have done or should do: have an estate plan. This is how you legally protect your family and friends to be sure that they receive what you want after you die, says the article “How (and why) to avoid probate: A slap at your family!” from Federal News Network.

A common goal is to simplify your estate plan to make administering it as easy as possible for your loved ones. This usually involves structuring an estate plan to avoid probate, which can be time-consuming and, depending on where you live, add a considerable cost to settle your estate.

There are a number of ways to accomplish this through an estate plan, including jointly owned property, beneficiary designations and the use of trusts.

Many individuals hold property in joint names, also known as “tenant by the entirety” with a spouse. When one spouse dies, the other becomes the owner without probate. It should be noted that this supersedes the terms of a will or a trust.

Another type of joint ownership is “tenancy in common,” However, property held as tenants in common does not avoid probate. The distribution of property titled this way is governed by the will. If there is no will, the state’s estate laws will govern who receives the property on death of one of the owners.

Beware: property owned jointly is subject to any litigation or creditor issues of a joint owner. It can be risky.

Beneficiary designations are a seamless way to transfer property. This can take the form of a POD (payable on death) or TOD (transfer on death) account. Pensions, insurance policies and certain types of retirement accounts provide owners with the opportunity to name a beneficiary. Upon the death of the owner, the assets pass directly to the beneficiary. The asset is not subject to probate and the designations supersede the terms of a will or trust.

Review beneficiary designations every time you review your estate plan. If you opened a 401(k) account at your first job and have not reviewed the beneficiary designation in many years, you may be unwittingly giving someone you have not seen for years a nice surprise upon your passing.

If you own assets other than joint property or assets without beneficiary designation, an estate planning attorney can structure your estate plan to include trusts. A trust is a legal entity owning any property transferred into it. A trust can avoid probate and provide a great deal of control by the grantor as to what they want to happen to the property.

Reference: Federal News Network (March 30, 2022) “How (and why) to avoid probate: A slap at your family!”

Does Your Will and Estate Planning Documents Need to Be Updated?

It seems like a global pandemic would push people to get their estate plans in order, but more than half of American adults still do not have a will. For those who do, a recent article from CNBC advises “Be sure to keep your will or estate plan updated. Here are 3 key reasons why.” As for those who don’t have a will or an estate plan, the time to get this done is now.

We may think of an estate plan as end-of-life documents, but many estate planning documents are used while you are living. Having them updated protects you and your family. Certain trigger events, like birth, marriage, divorce, death, adoption of a child, inheritance or moving to another state, should all be followed by a review of your estate plan.

Your will and estate plan reflects the people in your life, and like it or not, relationships change. Your executor is the person you name to carry out the directions in your will. Are you still close with the person you picked five, ten or twenty years ago? Are they able to serve, or have they died? The executor has a big job of liquidating assets, making sure beneficiaries receive inheritances and even selling your primary residence. Are they still the right person for the job?

Guardians named when children were born also need to be updated. First, if your adorable babies are now adolescents, does the same person still want to be their guardian? If you named their grandmother when the kids were little, could she handle teenaged turbulence? Do not forget to name a second and even a third alternative guardian. If the primary guardian does not want to or cannot serve, a backup guardian could be the difference between a loving, familiar home, and foster care.

Other documents your estate planning attorney can review with you include Power of Attorney and Healthcare Proxy. Maybe your favorite brother-in-law has divorced your sister and you do not want him anywhere near your financial affairs, if you become incapacitated. You need to review and update these documents.

The same person does not have to serve in multiple roles. The person you chose to be your Healthcare Proxy does not have to also handle your financial life. Review both of these choices.

Reviewing and updating beneficiary designations are often the source of great frustration for families. A life insurance policy purchased twenty years ago likely names a spouse as the beneficiary. Are you still married to the same person? Review investment accounts to be sure the beneficiary is still the person who you want to receive assets upon your death.

Beneficiary designations are distributed outside of probate estate, directly to the beneficiaries, by way of the contract between you and the financial institution. Whoever is the beneficiary on the document gets the assets—regardless of what changes may have occurred in your life.

Certain pensions and retirement accounts require current spouses to be the beneficiary, unless they sign legal documents disclaiming their rights.

If you have failed to designate a beneficiary on accounts with this option, or if the named person has died and there is no contingent beneficiary, the assets will go into your probate estate.

Even if your life has not changed, which is unlikely, there have been many big changes in tax laws. You may miss out on opportunities, another reason for a review with your estate planning attorney.

Reference: CNBC (Jan. 27, 2022) “Be sure to keep your will or estate plan updated. Here are 3 key reasons why”

What’s the Difference between Probate Assets and Non-Probate Assets?

Updating estate plans and reviewing beneficiary designations are both important estate planning tasks, more important than most people think. They’re easy to fix while you are alive, but the problems created by ignoring these tasks occur after you have passed, when they can’t be easily fixed or, can’t be fixed at all. The article “Who gets the brokerage account?” from Glen Rose Reporter shares one family’s story.

The father of three children had an estate plan done when the children were in their twenties. His Last Will and Testament directed all assets in a substantial brokerage account to be equally divided between the three children.

His Last Will was never updated.

Thirty years later, his two sons are successful, affluent physicians with high incomes. His daughter is a retired educator who had raised two children as a single mom and struggled financially for many years.

When her father met with his investment advisor, he signed a beneficiary designation leaving the substantial brokerage account, including the substantial growth occurring over the years, to his daughter.

When he dies, the two brothers claim his Last Will, dividing all assets equally, must be the final word. They insist the brokerage account is to be divided equally among the three children.

Any assets held in an account with a beneficiary designation are considered non-probate assets. They do not pass through the probate process. Their disposition is not controlled by the Last Will. The contract between the institution and the individual is paramount.

Insurance policies, retirement accounts, bank and brokerage accounts usually have these designations. They often include a pay-on-death provision, and the person who is to receive the assets upon death of the owner is clearly named.

If the owner of the account fails to sign a right of survivorship, pay-on-death or to name a beneficiary designation before they die, then the assets are paid by the financial institution to the probate estate. This is to be avoided, however, since it complicates what could be a simple transaction.

The two sons were correctly advised by an estate planning attorney of their sister’s full and protected right to receive the investment account, despite their wishes. When the provisions in the Last Will conflict with a contract made between an owner and a financial institution, the contract prevails.

In this case, a less financially secure daughter and her family benefited from the wishes and foresight of her father.

Last Wills and beneficiary designations need to be reviewed and revised to ensure that they reflect the wishes of the parent as time goes by.

Reference: Glen Rose Reporter (Jan. 13, 2022) “Who gets the brokerage account?”

Why Naming Beneficiaries Is Important to Your Estate Plan

For the loved ones of people who neglect to update the beneficiaries on their estate plan and assets with the option of naming beneficiaries, the cost in time, money and emotional stress is quite high, says the recent article “Five Mistakes To Avoid When Naming Beneficiaries” from The Chattanoogan.

The biggest mistake is failing to name a beneficiary on all of your accounts, including retirement, investment and bank accounts as well as insurance policies. What happens if you fail to name a beneficiary? Assets in the accounts and proceeds from life insurance policies will automatically become part of your estate.

Any planning you’ve done with your estate planning attorney to avoid probate will be undercut by having all of these assets go through probate. Beneficiaries may not see their inheritance for months, versus receiving access to the assets much sooner. It’s even worse for retirement accounts like IRAs. Any ability your heir might have had to withdraw assets over time will be lost.

Next is forgetting to name a contingency beneficiary. Most people name their spouse, an adult child, or a sibling as their primary beneficiary. However, if the primary beneficiary should predecease you and there is no contingency beneficiary, it is as if you didn’t have a beneficiary at all.

Having a contingency beneficiary has another benefit: the primary beneficiary has the option to execute a qualified disclaimer, so some assets may be passed along to the next-in-line heir. Let’s say your spouse doesn’t need the money or doesn’t want to take it because of tax implications. Someone else in the family can more easily receive the assets.

Naming beneficiaries without taking care to use their proper legal name or identify the person with specificity has led to more surprises than you can imagine. If there are three generations of Geoffrey Paddingtons in the family and the only name on the document is Geoffrey Paddington, who will receive the inheritance? Use the person’s full name, their relationship to you (“child,” “cousin,” etc.) and if the document requires a Social Security number for identification, use it.

When was the last time you reviewed beneficiary documents? The only time many people look at these documents is when they open the account, start a new job, or buy an insurance policy. Every few years, around the same time you review your estate plan, you should gather all of your financial and insurance documents and make sure the same people named two decades ago are still the ones you want to receive your assets on death.

Finally, talk with loved ones about your legacy and your wishes. Let them know that an estate plan exists and you’ve given time and thought to what you want to happen when you die. There’s no need to give exact amounts. However, a bird’s eye view of your plan will help establish expectations.

If naming beneficiaries is challenging because of a complex situation, your estate planning attorney will be able to help as a sounding board or with estate planning strategies to accomplish your goals.

Reference: The Chattanoogan (Dec. 6, 2021) “Five Mistakes To Avoid When Naming Beneficiaries”

How Much Is the Required Minimum Distribution from Retirement Accounts?

The IRS has updated the formulas for Required Minimum Distributions, or RMDs, the amounts required to be taken annually from 401(k)s, 403(b)s, or traditional Individual Retirement Accounts (IRAs) in 2022. According to a recent article from AARP titled “How an IRS Rule Update Impacts Required Minimum Distributions,” the new RMDs will be smaller now than in previous years. RMDs have always been a complicated topic, and now they might just be a little more so.

Getting the calculations right has always been a bit of a muddle. For one thing, in 2020 RMDs were suspended entirely. Before the pandemic, the 2019 SECURE Act changed the age when you had to take withdrawals from 70½ to 72. This was except for people who were already taking RMDs in 2019. Are you confused?

Now, if your 72^nd birthday occurred before July 1, 2021, you need to take an RMD before December 31. However, if your 72^nd birthday takes place in the second half of 2021, you have until April 1, 2022 to take your first withdrawal—only you’ll need to use the 2021 tables from the IRS to calculate it.

A reminder: Roth IRAs do not require any RMDs, but 401(k) Roths do.

Starting in 2022, many people will be able to take about six or seven percent less in their RMD under the life expectancy tables from the IRS. A 75-year-old single woman with an IRA worth $100,000 at the end of 2021 will need to withdraw at least $4,065 in 2022, about $300 less than under prior guidelines.

However, you need to consider whether or not taking less from your IRA or 401(k) or 403(b) is a good idea in the long run. If you need to take more to live on, then you need to withdraw what you need, regardless of the IRS rules. There’s no penalty for taking more, except the taxes you’ll pay.

If you retire before age 70, before any RMDs are required, you might want to withdraw more from your tax-deferred retirement accounts in order to delay taking Social Security benefits. The longer you delay taking Social Security benefits, the larger your monthly payment will be. This is a good move for many Americans, especially those who are counting on Social Security for income in their 80s and 90s.

There isn’t a single person in America (well, maybe there is one) who isn’t frustrated by having to pay taxes on earned income required to be withdrawn from retirement accounts. However, there are ways to blunt the impact of income taxes on IRAs. Those who are older than 70½ can donate to registered 501(c)(3) charities, by making a Qualified Charitable Distribution (QCD), which is counted toward any RMD as the amount of the donation is exempted from income taxes. However, this only works if you take the standard deduction and don’t itemize charitable gifts.

Unless the rules change, converting tax-deferred IRA money into a Roth IRA is a strategy to shift not whether you pay taxes, but when. Converting traditional IRA assets during a low-income year—or a portion of traditional IRA assets—allows the money in the Roth account to continue to grow tax free and no taxes are due on any withdrawals. Unless the laws change—again.

Reference: AARP (Dec. 8, 2021) “How an IRS Rule Update Impacts Required Minimum Distributions”

Can I Change My Estate Plan During Divorce?

Divorce is never easy. Adding the complexities of estate planning can make it harder. However, it still needs to be included during the divorce process, says a recent article entitled “How to Change Your Estate Plan During Divorce from the Waco Tribune-Herald.

Some of the key things to bear in mind during a divorce include:

Is your Last Will and Testament aligned with your pending divorce? The unexpected occurs, whether planning a relaxing vacation or a contentious divorce. If you were to die in the process, which usually takes a few years, who would inherit your worldly goods? Your ex? A trust created to take care of your children, with a trusted sibling as a trustee?

Are your beneficiary designations up to date? For the same reason, make sure that life insurance policies, retirement accounts and any financial accounts allowing you to name a beneficiary are current to reflect your pending or new marital status.

Certain changes may not be made until the divorce is finalized. For instance, there are laws concerning spouses and pension distribution. You might not be able to make a change until the divorce is finalized.  If your divorce agreement includes maintaining life insurance for the support of minor children, you must keep your spouse (or whoever is the agreed-upon guardian) as the policy beneficiary.

Once the divorce decree is accepted by the court, the best path forward is to have a completely new will prepared. Making a patchwork estate plan of amendments can be more expensive and leave your estate more vulnerable after you have passed. A new will revokes the original document, including naming an executor and a guardian for minor children.

The will is far from the only document to be changed. Other documents to be created include health care directives and medical and financial powers of attorney. All of these are used to name people who will act on your behalf, in the event of incapacity.

It’s a good idea to update these documents during the divorce process. If you are in the middle of an ugly, emotionally charged divorce, the last person you want making life or death decisions as your health care proxy or being in charge of your finances is your soon-to-be ex.

Talk with your estate planning attorney so your attorney they know you’re going through the divorce process. They will be able to make further recommendations to protect you, your children and your estate during and after the divorce.

Reference: Waco Tribune-Herald (Oct. 18, 2021) “How to Change Your Estate Plan During Divorce”

Does Anyone Know Where Your Money Is?

A woman’s brother is in a coma. No one in the family, even the man’s wife, knows anything about his savings, investments, debts, or any financial matters. The family doesn’t know who his financial advisor is, if he has a will or how much money is available to pay bills, which are piling up rapidly. When they did locate bank accounts, the family had to work with three different banks to get access to the money. At least there was a Power of Attorney in place, so bills could be paid. However, what else did he own?

The family’s story, as related in the article “Someone Needs to Know Where Your Money Is” from Kiplinger, is not unusual. An estate plan with preparations for incapacity as well as death, shared with his wife or a family member, would have prevented many of these problems. What can you do if faced with this same scenario?

Finding the most recent tax return will yield a lot of information. This document will have the name of the person who prepared the return, if the person used a CPA. The tax return will also document income and possibly list some assets. Information like earned interest, dividends, pension income and withdrawals from retirement accounts will be on the tax return. If you know the name of the person’s employer, call the human resources department, since they may be aware of a life insurance benefit or a 401(k) account.

The person in this example was admitted to the hospital and their health deteriorated so rapidly that there was no time to make any proper arrangements. We never know what the future will bring. Having an estate plan and gathering information on finances and assets—and sharing this information with loved ones—should be done by everyone.

Here are the documents most people need in case of incapacity:

• Will, Financial Power of Attorney and Trust Documents, if any exist
• Bank, Investment and Social Security statements
• Information for all online assets, including financial assets, websites, business accounts and cryptocurrency
• List of all Retirement Accounts, annuities and life insurance policies
• Cost basis of all investment in taxable brokerage accounts or stocks
• A list of any assets of value, including real estate and automobiles
• A list of debts, and
• Most recent tax returns.

Schedule B on a tax return can reveal some surprises for family members. If there are no paper records or log-in information to financial websites, ask the tax preparer for a copy of the 1099 form for each asset. Once the list is complete, put together the information, along with all insurance company information and the tax return, into a large envelope to be reviewed once a year.

Some estate planning attorneys keep original wills for clients, but not all do. Contact your estate planning attorney to find out what would happen if you became incapacitated and be sure to have the necessary documents created or updated, including a will, financial power of attorney, health care power of attorney and any trust documents. A copy of your Social Security card, birth and marriage certificates and your estate planning documents can go into a big envelope marked “Legal Documents” and placed in a secure location, also to be reviewed annually.

Tell your executor and trusted family members where these documents are, so they can be accessed when needed. They will be able to act on your behalf in the event of incapacity and you will have spared them unnecessary stress and expenses.

Reference: Kiplinger (Nov. 1, 2021) “Someone Needs to Know Where Your Money Is”

What a Will Won’t Accomplish

Everyone needs a will. A last will and testament is how an executor is named to manage your estate, how a guardian is named to care for any minor children and how you give directions for distribution of property. However, not all property passes via your will. You’ll want to know what a will can and cannot do, as well as how assets are distributed outside of a will. This was the topic of “The Legal Limits of Your Will” from AARP Magazine.

Retirement and Pension Accounts

The beneficiaries named on retirement accounts, including 401(k)s, pensions, and IRAs, receive these assets directly. Some states have laws about requiring spouses to receive some or all assets. However, if you don’t keep these beneficiary names updated, the wrong person may receive the asset, like it or not. Don’t expect anyone to willingly give up a surprise windfall. If a primary beneficiary has died and no contingency beneficiary was named, the recipient may also be determined by default terms, which may not be what you have in mind.

Life Insurance Policies.

The beneficiary designations on an insurance policy determine who will receive proceeds upon your death. Laws vary by state, so check with an estate planning attorney to learn what would happen if you died without updating life insurance policies. A simpler strategy is to create a list of all of your financial accounts, determine how they are distributed and update names as necessary.

Note there are exceptions to all rules. If your divorce agreement includes a provision naming your ex as the sole beneficiary, you may not have an option to make a change.

Financial Accounts

Adding another person to your bank account through various means—Payable on Death (POD), Transfer on Death (TOD), or Joint Tenancy with Right of Survivorship (JTWROS)—may generally override a will, but may not be acceptable for all accounts, or to all financial institutions. There are unanticipated consequences of transferring assets this way, including the simplest: once transferred, assets are immediately vulnerable to creditors, divorce proceedings, etc.

Trusts

Trusts are used in estate planning to remove assets from a personal estate and place them in safekeeping for beneficiaries. Once the assets are properly transferred into the trust, their distribution and use are defined by the trust document. The flexibility and variety of trusts makes this a key estate planning tool, regardless of the value of the assets in the estate.

Reference: AARP Magazine (Sep. 29, 2021) “The Legal Limits of Your Will”

When Should You Fund a Trust?

If your estate plan includes a revocable trust, sometimes called a “living trust,” you need to be certain the trust is funded. When created by an experienced estate planning attorney, revocable trusts provide many benefits, from avoiding having assets owned by the trust pass through probate to facilitating asset management in case of incapacity. However, it doesn’t happen automatically, according to a recent article from mondaq.com, “Is Your Revocable Trust Fully Funded?”

For the trust to work, it must be funded. Assets must be transferred to the trust, or beneficiary accounts must have the trust named as the designated beneficiary. The SECURE Act changed many rules concerning distribution of retirement account to trusts and not all beneficiary accounts permit a trust to be the owner, so you’ll need to verify this.

The revocable trust works well to avoid probate, and as the “grantor,” or creator of the trust, you may instruct trustees how and when to distribute trust assets. You may also revoke the trust at any time. However, to effectively avoid probate, you must transfer title to virtually all your assets. It includes those you own now and in the future. Any assets owned by you and not the trust will be subject to probate. This may include life insurance, annuities and retirement plans, if you have not designated a beneficiary or secondary beneficiary for each account.

What happens when the trust is not funded? The assets are subject to probate, and they will not be subject to any of the controls in the trust, if you become incapacitated. One way to avoid this is to take inventory of your assets and ensure they are properly titled on a regular basis.

Another reason to fund a trust: maximizing protection from the Federal Deposit Insurance Corporation (FDIC) insurance coverage. Most of us enjoy this protection in our bank accounts on deposits up to $250,000. However, a properly structured revocable trust account can increase protection up to $250,000 per beneficiary, up to five beneficiaries, regardless of the dollar amount or percentage.

If your revocable trust names five beneficiaries, a bank account in the name of the trust is eligible for FDIC insurance coverage up to $250,000 per beneficiary, or $1.25 million (or $2.5 million for jointlyowned accounts). For informal revocable trust accounts, the bank’s records (although not the account name) must include all beneficiaries who are to be covered. FDIC insurance is on a per-institution basis, so coverage can be multiplied by opening similarly structured accounts at several different banks.

One last note: FDIC rules regarding revocable trust accounts are complex, especially if a revocable trust has multiple beneficiaries. Speak with your estate planning attorney to maximize insurance coverage.

Reference: mondaq.com (Sep. 10, 2021) “Is Your Revocable Trust Fully Funded?”

Can You Have Bitcoin in IRA?

Experts on both sides of the cryptocurrency world agree on one thing: it’s still early to put these kinds of investments into retirement accounts, especially IRAs. A recent article from CNBC, “Want to put bitcoin in your IRA? Why experts say you may want to rethink that,” explains why this temptation should be put on pause for a while.

Investors who have remained on the sidelines on cryptocurrency are taking a second look as this new asset class surpassed the $2 trillion mark in late August. Looking at retirement accounts flush with positive growth from stocks, it seems like a good time to take some gains and test the crypto waters.

However, the pros warn against using cryptocurrency in retirement accounts. “Not just yet” is the message from both bulls and bears. One expert says using cryptocurrency in a retirement account is like taking a delicate and exotic animal out of its natural element and putting it in a concrete zoo. Cryptocurrency is not like “regular” money.

The accounts are structured differently The average investor also won’t be able to hold the keys to their own cryptocurrency investment. It’s a buy and hold, with no individual ability to move the assets around. While there are some investment platforms working to change that, an inability to move assets, especially such volatile assets, is not for everyone.

Cryptocurrency is a much riskier investment. A quarterly look at account updates would be like only checking your retirement accounts every five years. Cryptocurrency values are volatile, and an account balance can change dramatically from one week, one day or even one hour to the next one. Crypto is a 24/7/365-day market.

Self-directed IRAs are allowed to have crypto assets, but just because you can doesn’t mean you should. Another reason: stocks, bonds and real estate have a stated market value, which means they are taxed when withdrawals are taken. However, the expected value of cryptocurrencies is not clear. They are not regulated, while IRAs are among the most highly regulated accounts. This is a big reason as to why most IRA account administrators don’t permit cryptocurrencies in their accounts.

Investment decisions are based on the eventual use of the funds. For IRAs, the intention is not to lose money, and ideally for it to grow, so there is more money for your retirement, not less. Separate margin or trading accounts are typically used for riskier investments.

One expert advised limiting cryptocurrency investments to 5% of your total retirement accounts. If money is lost, it won’t destroy your retirement, and any wins are extra money. Another expert says investing such a small amount won’t be worth the time or effort, so don’t even bother.

For those who are determined to get in the game, a Roth IRA may be preferable if you have an extended time horizon and can stand the ups and downs of cryptocurrency investments. The appreciation in a Roth IRA will be tax-free.

Reference: CNBC (Aug. 17, 2021) “Want to put bitcoin in your IRA? Why experts say you may want to rethink that”