What Is Estate Planning?

Estate planning is the preparation of tasks that serve to manage an individual’s asset base in the event of their incapacitation or death. The planning includes the bequest of assets to heirs and the settlement of estate taxes.

Understanding Estate Planning

Estate planning involves determining how an individual’s assets will be preserved, managed, and distributed after death. It also takes into account the management of an individual’s properties and financial obligations in the event that they become incapacitated.

Assets that could make up an individual’s estate include houses, cars, stocks, artwork, life insurance, pensions, and debt. Individuals have various reasons for planning an estate, such as preserving family wealth, providing for a surviving spouse and children, funding children’s or grandchildren’s education, or leaving their legacy behind to a charitable cause.

The most basic step in estate planning involves writing a will. Other major estate planning tasks include the following:

• Limiting estate taxes by setting up trust accounts in the names of beneficiaries
• Establishing a guardian for living dependents
• Naming an executor of the estate to oversee the terms of the will
• Creating or updating beneficiaries on plans such as life insurance, IRAs, and 401(k)s
• Setting up funeral arrangements
• Establishing annual gifting to qualified charitable and non-profit organizations to reduce the taxable estate
• Setting up a durable power of attorney (POA) to direct other assets and investments

Writing a Will

A will is a legal document created to provide instructions on how an individual’s property and custody of minor children, if any, should be handled after death. The individual expresses their wishes through the document and names a trustee or executor that they trust to fulfill their stated intentions. The will also indicates whether a trust should be created after death. Depending on the estate owner’s intentions, a trust can go into effect during their lifetime (living trust) or after their death (testamentary trust).

The authenticity of a will is determined through a legal process known as probate. Probate is the first step taken in administering the estate of a deceased person and distributing assets to the beneficiaries. When an individual dies, the custodian of the will must take the will to the probate court or to the executor named in the will within 30 days of the death of the testator.

The probate process is a court-supervised procedure in which the authenticity of the will left behind is proved to be valid and accepted as the true last testament of the deceased. The court officially appoints the executor named in the will, which, in turn, gives the executor the legal power to act on behalf of the deceased.

Appointing the Right Executor

The legal personal representative or executor approved by the court is responsible for locating and overseeing all the assets of the deceased. The executor has to estimate the value of the estate by using either the date of death value or the alternative valuation date, as provided in the Internal Revenue Code (IRC).1

A list of assets that need to be assessed during probate includes retirement accounts, bank accounts, stocks and bonds, real estate property, jewelry, and any other items of value. Most assets that are subject to probate administration come under the supervision of the probate court in the place where the decedent lived at death.

The exception is real estate, which must be probated in the county in which it is located.

The executor also has to pay off any taxes and debt owed by the deceased from the estate. Creditors usually have a limited amount of time from the date they were notified of the testator’s death to make claims against the estate for money owed to them. Claims that are rejected by the executor can be taken to court where a probate judge will have the final say as to whether or not the claim is valid.

The executor is also responsible for filing the final personal income tax returns on behalf of the deceased. After the inventory of the estate has been taken, the value of assets calculated, and taxes and debt paid off, the executor will then seek authorization from the court to distribute whatever is left of the estate to the beneficiaries.

Planning for Estate Taxes

Federal and state taxes applied to an estate can considerably reduce its value before assets are distributed to beneficiaries. Death can result in large liabilities for the family, necessitating generational transfer strategies that can reduce, eliminate, or postpone tax payments.

During the estate-planning process, there are significant steps that individuals and married couples can take to reduce the impact of these taxes.

AB Trusts

Married couples, for example, can set up an AB trust that divides into two after the death of the first spouse.

Education Funding Strategies

A grandfather may encourage his grandchildren to seek college or advanced degrees and thus transfer assets to an entity, such as a 529 plan, for the purpose of current or future education funding.2 That may be a much more tax-efficient move than having those assets transferred after death to fund college when the beneficiaries are of college-age. The latter may trigger multiple tax events that can severely limit the amount of funding available to the kids.

Cutting the Tax Effects of Charitable Contributions

Another strategy an estate planner can take to minimize the estate’s tax liability after death is by giving to charitable organizations while alive. The gifts reduce the financial size of the estate since they are excluded from the taxable estate, thus lowering the estate tax bill.3

As a result, the individual has a lower effective cost of giving, which provides additional incentive to make those gifts. And of course, an individual may wish to make charitable contributions to a variety of causes. Estate planners can work with the donor in order to reduce taxable income as a result of those contributions, or formulate strategies that maximize the effect of those donations.3

Estate Freezing

This is another strategy that can be used to limit death taxes. It involves an individual locking in the current value, and thus tax liability, of their property, while attributing the value of future growth of that capital property to another person. Any increase that occurs in the value of the assets in the future is transferred to the benefit of another person, such as a spouse, child, or grandchild.

This method involves freezing the value of an asset at its value on the date of transfer. Accordingly, the amount of potential capital gain at death is also frozen, allowing the estate planner to estimate their potential tax liability upon death and better plan for the payment of income taxes.

Using Life Insurance in Estate Planning

Life insurance serves as a source to pay death taxes and expenses, fund business buy-sell agreements, and fund retirement plans. If sufficient insurance proceeds are available and the policies are properly structured, any income tax on the deemed dispositions of assets following the death of an individual can be paid without resorting to the sale of assets. Proceeds from life insurance that are received by the beneficiaries upon the death of the insured are generally income tax-free.4

Estate planning is an ongoing process and should be started as soon as an individual has any measurable asset base. As life progresses and goals shift, the estate plan should shift in line with new goals. Lack of adequate estate planning can cause undue financial burdens to loved ones (estate taxes can run as high as 40%), so at the very least a will should be set up—even if the taxable estate is not large.

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How to avoid Deadly Estate Planning Mistakes

Most estate planning mistakes tend to fall into one of several categories. Every estate plan has unique features, but the same problems and mistakes recur. Many mistakes don’t vary with the value of an estate and other factors. Each of the classic mistakes is avoidable. All that’s needed is knowledge of what to beware of and a little time working with your planner.

Not understanding the plan. Many people, even the sophisticated and wealthy, become passive in the presence of an estate planner. They rely on the planner to make sure everything in the plan is what they need and is done properly. It’s not unusual for a person to sign the documents and say to the attorney, “I don’t really know what I just signed.” A few years back a survey of estate planning attorneys reported that the attorneys said they believed a high percentage of the plans they prepared weren’t fully implemented, and that the major reason for failure to implement is the clients didn’t understand the plans or what they needed to do after leaving the office.

Part of the estate planner’s job is to be sure you understand the basics of how the plan works, what you need to do to implement or maintain the plan, and how it works for you and your beneficiaries. It’s also part of your job to understand those things. You don’t need to know all the legal angles and why certain language is used, but you do need to understand the fundamentals.

Sometimes that means insisting the planner spend time walking you through the plan and the documents. Another good step is to take notes at each stage of the planning process. Often people make decisions after a discussion with the estate planner. At the time, they fully understand the decisions and the reasons for them, because they’ve been hashing them out with the planner. But days, weeks, or months later, the details are hazy. Take notes about the key decisions and why you made them, so you can refer to them in the future.

Outdated beneficiary designations. There are numerous cases and rulings involving this one, and it seems every estate planner has at least one horror story. Remember what your will says doesn’t affect who inherits certain assets. These assets have separate beneficiary designation forms, and that determines who inherits. These assets include retirement accounts, annuities, and life insurance.

Failure to update beneficiary designations means an asset might go to your parents or siblings, because that’s what you put on the form years ago when you first opened the account. Sometimes the asset goes to an ex-spouse, the estate of a deceased person, or other unintended beneficiaries. Other times someone is inadvertently excluded, because they were born or married into the family after you completed the form.

Review your beneficiary designations every couple of years and after every major life change in your family.

Not updating asset ownership. You might own some assets in your own name and others in joint title with your spouse, an adult child, or someone else. Some assets might be in trusts, limited partnerships, or other vehicles.

Like the beneficiary designations, these need to be reviewed. Does the arrangement still meet your needs? Has something changed in your situation, the law, or something else that makes different ownership better? The Tax Cuts and Jobs Act made significant changes in income and estate taxes. Many people should review their plans to see if their current plans are obsolete or add unnecessary costs and complexity.

Every estate plan has unique features, but the same problems and mistakes recur. Each classic mistake is avoidable. It’s not unusual for a person to sign the documents and say to the attorney, “I don’t really know what I signed.”  It’s not unusual for a person to sign the documents and say to the attorney, “I don’t really know what I signed.”

Failure to fund revocable trusts. Many estates include a revocable trust, also known as a living trust. Assets owned by the trusts avoid probate and help with disability planning and some other issues. They generally aren’t created to save taxes.

The problem in many estates is the owners skip a step. The trust is created after the attorney prepares the trust agreement and all the interested parties sign it. After that, the trust has to be funded. That means legal title to assets has to be transferred to the trust.

For some assets that’s easy. Household and personal effects are transferred to the trust with simple language in the trust or a schedule of assets attached to the trust agreement. But other assets require more. For real estate, the deed has to be changed to reflect that the trust now is the owner. Automobile registrations have to be changed. For financial accounts, you have to change the name of record with the custodian. That might mean applying to open a new account and transferring the old account assets to the new account.

None of these steps is difficult or expensive, but many people neglect to do them. The result is they wasted money paying for the trust documents. Their assets won’t avoid probate, and they won’t reap the other expected benefits of the trusts. Be sure you are clear with your planner about any actions you need to take to ensure the plan is fully implemented and maintained.

Not coordinating trusts and retirement plans. Many people routinely designate their living trusts or other trusts as beneficiaries of their retirement plans. There can be good reasons to name a trust as an IRA or other retirement plan beneficiary. But there also are potential problems. Because of IRS regulations, naming the wrong type of trust as an IRA beneficiary can accelerate taxes.

To retain the tax deferral of a retirement account, a trust that is the beneficiary of the account needs to have certain language that qualifies it as a see-through trust. Be sure any trusts you named as beneficiaries qualify and meet your goals. Otherwise, name individuals as beneficiaries instead of a trust.

Not updating powers of attorney. Every estate plan should include powers of attorney. You need at least two, one for financial matters and one for medical care (often called an advance medical directive). You’re more likely to become disabled and need these documents before you need a will and the rest of your estate plan.

Unfortunately, many people don’t have either of these documents, and others haven’t kept them up to date or given the details much thought. Be sure you have these documents and that they have been reviewed recently.

Not updating the plan. I’ve highlighted some parts of the plan that routinely become obsolete for many people. But there are other parts of the plan that might need to be changed from time to time. You should be in touch with your estate planner any time there’s a major life change in your family, such as a birth, death, divorce, or marriage. Changes in your net worth, the composition of your estate, job status, residence, and many other factors also should trigger a review of your plan. Of course, a change in your goals or in the law also means a meeting with your planner is in order.

For more information please feel free to contact us: https://legaldocs101.com/contact/

Being Prepared: Documents You and Your Family Will Need

If you’re creating a Living Trust, you’ll need to access financial records and other important documents.

End-of-life planning now will save future anxiety and stress

This is important for your own family, but it may be even more critical for those who are caring for family members. A stunning 10,000 baby boomers are turning 70 every day. That means a lot of family members are stepping up to take care of them. If you’re dealing with a parent’s health crisis, you won’t have time to be rummaging around your attic or through piles of dusty documents looking for a Do Not Resuscitate Order.

We all muddle along until there’s the inevitable health crisis
When it comes to caring for ourselves or our parents, it seems that we muddle along until we can’t anymore. It’s nearly always a health crisis that necessitates intervention. In one case, when, Jim, was diagnosed with a terminal disease, it was his health crisis that required our team to provide care solutions.

Fortunately, his daughter Jan doesn’t work, so by default, she became our team leader. Jim spent 40 years as a money manager, where he learned to keep good records. Jan was the team leader, and we all chipped in, as we could. We scheduled home visits, doctor appointments, and recreation. For nearly two years until he died, we thought we had it all covered. But we missed one very important detail that should have been a no-brainer; we all knew better. Jim had a Will, but no Living Trust. Jan and her brother are now having to Probate their father’s estate.

Parents, money, and privacy

What is it anyway? We don’t like to talk about finances with our parents—either ours or theirs. These secrets can lead to stress for whole families in cases when an unprepared elderly parent develops memory loss, falls ill or suddenly passes away.

Sometimes it’s just time to come clean. Seniors need to make sure their loved ones have access to crucial information in case of a serious emergency. If family members are trying to help their parents, they absolutely need to be aware of bank accounts, assets, and pensions, or at least where to find that information. This information is critical for planning for assisted care or a nursing home.

Financial documents can be crucial when applying for VA benefits or Medicaid

If a family member cannot locate important documents like tax returns or bank account information, it can delay or even cause the senior to be denied benefits from Medicaid or the VA. Seniors applying for Medicaid or veteran’s benefits are required to demonstrate their financial need and will have to provide comprehensive documentation of past and present finances. The approval process for such benefits can be stalled for months because of a single missing piece of paperwork. A stalled application can translate to delayed assistance—and this can be risky for those with serious health conditions.

Bank records will help locate savings and other financial accounts

You will need bank records to locate savings he/she might have had. In the final year for my own parents, when my brother was managing their affairs, we met with both their CPA and banker, making sure there were no overlooked accounts. Toward the end, my folks were really not much help. My stepfather was confusing the number of zeros associated with his accounts. He had us all thinking we were going to inherit millions, and my mother had completely checked out. After this experience, I can totally understand how hundreds of millions of dollars sit idle across the country in bank accounts of people who have been dead for years.

We caution all of our Living Trust clients: Keep your Trust in a secure place

Alert a trusted family member or friend of its location. You will receive both a hardbound portfolio and a soft copy. You may want to share the soft copy (pdf file) with someone you trust. A Trust doesn’t get filed with the county like a Divorce or a Deed. A Trust that can’t be found doesn’t exist.

Vital financial documents include:

• List of all bank accounts
• Pension documents 401(k) information, and annuity contracts
• Tax returns
• Savings bonds, stock certificates or brokerage accounts
• Partnership and corporate operating agreements
• Deeds to all property
• Vehicle title
• Documentation of loans and debts, including all credit accounts
• Power-of-Attorney

TEAM Legal Document Services assists our clients in the preparation of their Living Trusts, which include a Power of Attorney and Advance Healthcare Directive. Most of our clients are surprised at how easy it is. Schedule an appointment today by contacting us. Our dedicated team is helpful, compassionate and affordable.

Estate Planning

DIVORCE AND THE NEW TAX LAWS: WHAT YOU NEED TO KNOW

As if Divorce weren’t stressful enough, the GOP Tax Cuts and Jobs Act that was signed into law last December may be creating additional anxiety for divorcing couples. If you’re getting divorced or thinking about Divorce, you should absolutely be paying attention to these changes. Not understanding how they will affect your Divorce can be a very expensive mistake.

1. Tax rates got lowered and the standard deduction got higher

• The new tax law lowered the tax rate for most taxpayers–generally good news, right? It also doubled the standard deduction that every taxpayer who didn’t itemize deductions used to get. That may make you think your income taxes will drop in 2018, but like everything this Congress does, there’s more to the story, and it’s rarely good news.

• Fewer people are likely to itemize next year because the standard deduction–what you can subtract from your income before figuring out how much taxes you owe–is nearly doubling to $12,000 for single filers, $18,000 for heads of households and $24,000 for married couples that file jointly.

• Despite lower tax rates, some filers who usually itemize could see their taxes rise because many popular deductions are being reduced or eliminated. State and local income taxes, sales taxes and property taxes were fully deductible under the old tax law. Now they are capped at a combined $10,000 annually. There are also limits on how much interest homeowners can deduct on new mortgages.

2. Personal exemptions

• In the past, when you filed your taxes, you claimed yourself and each of your kids as dependents on your taxes. Known as “personal exemptions” or “dependency exemptions,” these tax breaks allowed you to subtract a certain amount of money from your taxable income for every dependent you claimed. The more dependents you claimed, the more money you could subtract.

• When couples divorced, they often argued over who got to claim the kids as dependents on their taxes. The new tax law has eliminated all of these personal exemptions. Beginning in 2018, and continuing through 2025, no one will get a tax exemption for claiming the kids as dependents.

3. Child tax credit

• Before 2018, the child tax credit lowered the amount of taxes that parents paid by $1,000.00 per “qualifying child.” In the new tax law, Congress increased the amount of the child tax credit to $2,000. They also dramatically increased the amount of money that parents could make before the child tax credit gets phased out. That’s the good news.

• A child only qualifies for the child tax credit for the parent who can claim him/her as a dependent. In your Divorce settlement you still need to negotiate which parent can claim each child as a dependent. If you don’t identify who can claim the child as a dependent, you risk losing the child tax credit. That can be a big deal because the child tax credit directly reduces the amount of income tax you pay. It doesn’t just reduce your taxable income. It reduces your taxes. And really, who wouldn’t want to pay $2,000 less in taxes per year?

4. Education expenses (529 Plans)

529 Plans are special tax-advantaged savings accounts that parents could create to save money for college educational expenses.

• In the past, 529 Plans could only be used to fund “Qualified Higher Education Costs”–college tuition and certain other college expenses.

• Now, if your kids are going to private school, you or your spouse could use the kids’ college money to pay for it. That will save you from having to pay the private-school tuition yourselves.

• Under the new tax laws, parents can take up to $10,000 per year out of a child’s 529 Plan and use it to pay for that child’s elementary or secondary school tuition.

• Deciding what to do with your kids’ 529 Plans is now one more thing you can negotiate in your Divorce.

5. Moving expenses

When a couple divorces, someone has to move out. In many cases, the person who moved out also gets a new job.

• Before this year, if you were moving because of a new job, you could deduct your moving expenses from your taxable income.

• Now, you can’t, and moving can be expensive—this may be something you negotiate in your Divorce settlement.

6. Mortgage interest and HELOC payments

Under the current tax law, you can deduct the interest you pay on your home mortgage. You could deduct that interest if it was on any kind of a mortgage or home equity loan. It didn’t matter if you actually used the money to pay for your home or pay off your credit cards.

• That’s all changed now. The new tax law limits the mortgage interest deduction to interest paid on the first $750,000 of your loan—not $1,000,000.

• To be deductible, the loan must also be used to buy, build, or substantially improve the home that secures the loan. That also applies to home equity loans and lines of credit.

• The IRS has now closed a potential means of cash flow that often made settling your Divorce easier.

7. Medical expenses

The changes to the medical expense deduction are positive. Before, you could only deduct medical expenses that exceeded 10% of your adjusted gross income. Now you can deduct medical expenses that exceed 7.5% of your income. There’s a bigger chance that you’ll be able to deduct medical expenses on your taxes. Congress made this change retroactive to 2017 so that you can take advantage of this tax deduction immediately. But before you get too excited about this, be aware that there’s an insidious component to this tax change.

• From 2019 on, the deduction threshold goes back up to 10%. But get this: Congress just gave us a two-year reprieve on the medical expense deduction.

• In order to deduct medical expenses at all, you must itemize your deductions. Since fewer people will be able to itemize their deductions in 2018, fewer people will be eligible to use this deduction.

8. A repeal of the deduction for alimony payments

The repeal of a deduction for alimony payments, effective 2019. Potential divorcees have the rest of 2018 to use the alimony deduction as a bargaining chip in their negotiations with estranged spouses. Many believe that removing this deduction will make Divorces more acrimonious, that people won’t be willing to pay as much alimony. Since it is women who tend to earn less and are most often the recipients of alimony, many believe this tax change could disproportionately hurt women.
Consulting a tax professional

Even if you are just thinking about Divorce, it’s wise to consult an accountant or financial planner who can identify problems and opportunities for deductions that may not be apparent to you.

Can an LLC Be Taxed as an S Corp.? 

LLC taxes can vary, depending on how you structure your business tax arrangement with the Internal Revenue Service (IRS). Choosing to have your LLC taxed as an S corp. is one of the options. 

LLCs and the IRS 

You can choose how your limited liability company (LLC) will be taxed. An LLC may be taxed as a sole proprietorship, a partnership, a C corporation, or an S corporation. The IRS classifies an LLC in one of the following categories: 

• An entity disregarded as separate from its owner. This applies to a single member LLC, and is essentially the same as a sole proprietorship. The income and expenses of the LLC are the income and expenses of the business owner. 
• A partnership. This applies to an LLC with two or more members. The LLC itself is not taxed, but the profits of the LLC are taxed to the members. 
• A C corporation. This applies to both single member and multi-member LLCs. An LLC taxed as a C corporation is taxed on its profits, then any profits passed on to the members are taxed to the members. 
• An S corporation. There are no separate S corp. taxes. A multi-member or single member LLC taxed as an S corporation is not taxed on its profits, but the profits are taxed to the individual members (even if the profits are not actually distributed to the members). 

What If You Do Nothing? 

If you do not file any special forms with the IRS, your LLC will be taxed as either a sole proprietorship (if you are the only member) or as a partnership (if your LLC has two or more members). 

Federal Taxes 

If your LLC is taxed as a sole proprietorship, you will report the income and expenses of the business on your individual Form 1040, along with Schedule C, Profit or Loss From Business (Sole Proprietorship), Schedule E, Supplemental Income and Loss, or Schedule F, Profit or Loss From Farming. 

If your LLC is taxed as a partnership, the LLC will file IRS Form 1065, U.S. Return of Partnership Income, which will show each member’s share of the profit or loss. Each member will report his or her share of the profits or losses on their individual Form 1040, along with Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc. 

An LLC taxed as a C corporation will file Form 1120, U.S. Corporation Income Tax Return. The corporate tax rate will be applied to any profits. If any shares of the profits are passed on to the members, each member will report his or her share on their individual Form 1040, along with Schedule B, Interest and Ordinary Dividends. 

An LLC taxed as an S corporation will file Form 1120S, U.S. Income Tax Return for an S Corporation. Each member will need to report his or her share of the profits on their individual Form 1040, along with Schedule K-1 (Form 1120S), Shareholder’s Share of Income, Deductions, Credits, etc. 

Regardless of how the LLC is taxed, each member will be responsible for paying any quarterly estimated taxes, and self-employment tax, that may be required. 

Should Your LLC Elect S Corp. Status? 

The decision as to how to have your LLC taxed will take a number of factors into consideration, including the amount of anticipated profits, whether profits will be distributed to the member or retained by the business, whether you have employees, the benefits offered to employees and members, and how your state will tax the entity. 

How to Elect S Corp. Status 

If you want your LLC to be taxed as an S corporation, you need to file IRS Form 2553, Election by a Small Business Corporation. If you file Form 2553, you do not need to file Form 8832, Entity Classification Election, as you would for a C corporation. You may use online tax filing or can file by fax or mail. More information about S corp. status for your LLC can be found at www.irs.gov, including Publication 3402, Taxation of Limited Liability Companies. 

Estate Tax Law Changes Make it Time to Amend Dated AB Trust

Many of our clients are coming in to simplify their old AB Trusts. The AB Trust was originally designed to create estate tax savings by keeping the deceased spouse’s property out of the estate of the surviving spouse. In 2011, however, a dramatic change in the federal estate tax laws exempted most estates from paying any estate taxes. For 2017, for example, the exemption is $5.49 million, which quickly eliminates the vast majority of Americans.

How the AB Trust works

When the first spouse dies, the Trust is divided into two Trusts: Trust A and Trust B. Trust A receives half of the couple’s community property and the surviving spouse’s separate property. Trust B receives the other half of the community property, and the separate property of the deceased spouse, but with the surviving spouse named as life beneficiary of the Trust. The surviving spouse can receive all income from Trust B and may also receive some principal, if Trust A is exhausted.

Results of the estate tax laws changes

The results of the estate tax law changes mean that an estimated 1% of the US population now pays any estate tax at all. This makes the old AB Trusts dated and cumbersome for the vast majority of Americans.

Limitations of the AB Trust

• Restrictions on what the surviving spouse can do with AB Trust property can make it difficult to sell assts.
• The surviving spouse cannot make gifts of the AB Trust’s property to anyone.
• There can be substantial costs involved in managing the AB Trust after the death of the first spouse—preparing taxes and ensuring that this property is kept separate from that of the surviving spouse.

The reality is that the AB Trust is no longer necessary or advisable for estate planning. We are helping many of our clients amend or restate their Trusts to remove the AB Trust provisions.