Estate Planning and Trusts Blog

Blended Families Need More Thoughtful Estate Plans

Planning for a blended family is like playing 3D chess.
Planning for a blended family is like playing 3D chess.

Estate planning for blended families is like playing chess in three dimensions: even those who are very good at chess can struggle with so many moving parts in so many dimensions. Preparing an estate plan requires careful consideration of family dynamics, and those are multiplied in blended families. This is another reason why estate plans need to be tailored for each family’s circumstances, as described in the article “Blended families have unique considerations in estate planning” from The News Enterprise.

The Last Will and Testament is often considered the key document in an estate plan. But while the Will is very important, it has certain limitations and a few commonly used estate planning strategies can result in unpleasant endings, if this is the only document used.

Spouses often leave everything to each other as the primary beneficiary on death, with all of their children as contingent beneficiaries. This is based on the assumption that the second spouse will remain in the family home, and will distribute any proceeds equally between the children, if and when they move or die. However, the Will can be changed at any time before death, as long as the person making the Will has mental capacity. If, when the first spouse dies, the surviving spouse’s relationship with the deceased spouse’s children is not strong, it’s very possible that the surviving spouse may eventually change his or her Will.

If the stepchildren don’t have a strong connection with the surviving spouse, as often occurs when the second marriage occurs after the children are adults, things can go wrong. Their mutual grief at the passing of the first spouse does not always draw stepchildren and stepparents together. Often, it divides them.

The couple may also want to select different beneficiaries. The husband may name his wife first, then only his children in his Will, while the wife may name her husband and then her children in her Will. This creates a “survival race.” The surviving spouse receives all the property and the children of the spouse who died first won’t know when or if they will receive any assets.

Some couples use trusts for property distribution upon death. This can be more successful, if done properly. It can also be just as bad as a Will.

Trust provisions can be categorized according to the level of control the surviving spouse has after the death of the first spouse. A trust can be structured to lock down a portion of the trust assets upon the death of the first spouse. The surviving spouse remains a beneficiary but does not have the ability to change the ultimate distribution of the decedent’s portion of the assets. This gives the survivor the financial support they need, and provides the flexibility for the survivor to change the beneficiaries for his or her remaining share.

Not all blended families actually “blend,” but for those who do, a candid discussion with all, perhaps in the estate planning attorney’s office, is one way to ensure that the family remains a family when both parents are gone.

Reference: The News Enterprise (November 4, 2019) “Blended families have unique considerations in estate planning”

Other articles you may find interesting: 

Handwriting Analysis in Aretha Franklin’s Estate

Expressing Your End-of-Life Wishes

What Is Probate and How to Prepare for It

Probate court
Probate is the legal process of finalizing a deceased person’s affairs and distributing any remaining assets.

The word probate is from the Latin word, meaning “to prove.” It’s the court-supervised process of authenticating the Last Will and Testament of a person who has died and then taking a series of steps to administer their estate. The typical situation, according to the article “Some helpful hints to aid in navigating the probate process” from The Westerly Sun, is that someone passes away and their heirs must go to the Probate Court to obtain the authority to handle their final business and settle their affairs.

Many families work with an estate planning attorney to help them go through the probate process.

Regardless of whether or not there’s a Will, someone – usually a spouse or adult child – asks the court to be appointed as the executor of the estate. This person must accomplish a number of tasks to make sure the decedent’s wishes are followed, as documented by their Will.

People often think that just being the legally married spouse or child of the deceased person is all anyone needs to be empowered to handle their estate, but that’s not how it works. There must be an appointment by the Probate Court to manage the assets and deal with the IRS, the state, creditors and all of the deceased person’s outstanding personal affairs.

If there is a Will, once it’s validated by the court the executor begins the process of identifying and valuing the assets, which must be reported to the court. The last bills and funeral costs must be paid, the IRS must be contacted to obtain an estate taxpayer identification number and other financial matters will need to be addressed. Estate taxes may need to be paid, at the state or federal level. Final income tax returns, from the last year the person was alive, must be paid.

The probate process takes several months and sometimes more than a year. That includes distributing the assets and making gifts of tangible personal property to the heirs. Once this task is completed, the executor (or their legal representative) contacts the court. When everything has been done and the judge is satisfied that all business on behalf of the decedent has been completed, the executor is released from his duty and the estate is officially closed.

When there is no Will, the probate process is different. The laws of the state where the deceased lived will be used to guide the distribution of assets. Kinship, or how people are related, will be used, regardless of the relationship between the decedent and family members. This can often lead to fractures within a family, or to people receiving inheritances that were intended for other people.

Reference: The Westerly Sun (Nov. 16, 2019) “Some helpful hints to aid in navigating the probate process”

Other articles you may find interesting: 

Is a Will Contest Worth It?

Should I Use a Bank as My Executor Instead of a Family Member?

What Should I Know About Reverse Mortgages?

reverse mortgages
With a reverse mortgage, there are no monthly payments of principal and interest. The interest is added to the loan and the debt is paid off when you leave the property, die, or sell.

Many people age 62 and older may consider talking to lenders about reverse mortgages.

The Dallas Morning News’ article, “The pros and cons of reverse mortgages,” explains that to get an FHA reverse mortgage—the most common type and what the government calls a Home Equity Conversion Mortgage (HECM)—at least one owner-occupant must be age 62 or older. The property must have enough equity to support the loan amount being sought.

With this type of mortgage, the required monthly cash payments, that is the payments for principal and interest, are zero. These payments are deferred. If you have $150,000 on an existing mortgage with $700 monthly payments for principal and interest, the cash cost will be zero if you refinance with a reverse mortgage.

But understand that you’re not getting “free” money. The interest you defer and don’t pay each month is being added to the debt. Therefore, if you begin the process with a $150,000 balance, you’ll owe more each month. Said another way, a reverse mortgage is a “negatively-amortizing” loan. The size of the debt increases over time.

The debt is paid off when you leave the property, die, or sell. Because an FHA reverse mortgage is an example of “non-recourse” financing, you and your estate can never owe more than the value of the home. Your other assets cannot be touched.

These mortgages, however, can be foreclosed like any other mortgage. This can be done if a borrower fails to pay property taxes and retain appropriate insurance coverage. The borrower must also pay condo association and homeowners association fees. Failing to make the required payments means the borrower is violating the contract.

A study by the California Reinvestment Coalition and Jacksonville Area Legal Aid found that there were more than 3,600 reverse mortgage foreclosures each month from April 2016 to December 2016.

However, HUD has developed some new safeguards to protect reverse mortgage borrowers from foreclosure. For more information on this type of financing, speak with an experienced mortgage broker, or discuss the pros and cons with an elder law attorney.

Reference: The Dallas Morning News (October 26, 2019) “The pros and cons of reverse mortgages”

Other articles you may find interesting:

VA Pays Millions in Home Loan Refunds

What Happens When Real Estate Is Inherited?

 

The Funeral Rule

Funeral
Funeral shopping? There are federal laws funeral homes must follow.

Did you know that the federal government regulates funeral homes? I don’t remember seeing that power mentioned in the Constitution, but…

Yes, the Federal Trade Commission (FTC) mandates that people shopping for burial and cremation services must be provided certain information and must be provided itemized price lists for services and caskets so they can compare apples to apples as they shop. For example, prices must be provided over the phone as well as in person, and the funeral home must explain that embalming isn’t always required (no state laws requires routine embalming for every death).

But the FTC isn’t sure how well its rules are actually working, and is asking for your input as to whether the Rule is still needed and what your shopping experience was like.

You can learn more about the FTC’s Funeral Rule and give your input by clicking here.

Other articles you may find interesting:

What Are the Rules About an Inheritance Received During Marriage?

Timeshares: The Inheritance No One Wants

What’s the Difference Between Whole Life and Universal Life Insurance?

Life insurance
Life insurance is a great way to protect your family. Whole life and universal life offer some benefits term life doesn’t.

Whole life insurance helps with long-term goals, since it provides individuals with consistent premiums and guaranteed cash value accumulation. Universal life insurance gives consumers flexibility in premium payments, death benefits, and the savings component of their policy.

Investopedia’s article, Whole Life vs. Universal Life Insurance, explains that these two types of life insurance fall in the category of permanent life insurance. In contrast to term insurance, which guarantees a death benefit payout during a specified period, permanent policies provide lifetime coverage. If you want to cancel your permanent life policy, you’ll get the policy’s cash value. These policies are typically made up of two parts: a savings or investment part and an insurance part. Their premiums are higher than term policies, and insureds can also take out a loan by borrowing against the cash value. Thus, permanent life insurance is also called cash-value insurance.

Whole life insurance covers you as long as you’re alive. You must pay the same premium for a specific period to get the death benefit. This policy usually stays intact for the rest of your life, no matter how long you may live. This policy is good for long-term responsibilities, such as a surviving spouse’s income needs and post-death expenses.

One of its features is that it combines life insurance coverage with savings. Therefore, you may have to pay higher premiums at the start, when compared to a term insurance policy.

The insurance company deposits some of your money into a high-interest bank account. With every premium payment, your cash value increases. This savings part of your policy grows your cash value on a tax-deferred basis. You can receive the dividends in cash or allow them to accumulate with interest. You can also use your dividends to reduce your policy’s premiums or buy more coverage.

Universal life insurance is also called “adjustable life insurance,” because it has more flexibility compared to whole life insurance. You can decrease or increase your death benefit and pay your premiums at any time in any amount (with certain limits) after your first premium payment has been made. With this type of policy, you may be able to increase the face value of your insurance coverage. You can also decrease your coverage to a minimum amount, without surrendering your policy. Surrender charges may be applied against the cash value of your policy.

As far as the death benefit, there are two options: a fixed amount of death benefit or an increasing death benefit that is equal to the face value of your policy plus your cash value amount.

You also can change the amount and frequency of your premium payments. Therefore, you can increase your premiums or pay a lump sum, according to the specified limit in the policy. Some of your premium minus the cost of insurance is again deposited into an investment account, and any interest accrued is credited to your account. The interest grows on a tax-deferred basis, which increases your cash value. You can decrease or stop your premiums to use your cash value to pay premiums in a financial hardship. You can also partially withdraw funds with universal life insurance.

The downside of universal life insurance is the fluctuation of the return; if the policy does well, there could be growth in a savings fund. However, a bad performance means the estimated returns are not earned. Surrender charges may also be imposed when you terminate your policy or withdraw money from the account.

All in all, universal life insurance can be great protection for your family because of its security, flexibility, and variety of investment options.

Reference: Investopedia (April 18, 2019) Whole Life vs. Universal Life Insurance

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How Will The 2020 SECURE Act Affect You?

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Timeshares: The Inheritance No One Wants

timeshares vacations
Your heirs may not want the burden of  owning your vacation timeshare.

It seems like you can’t throw a rock in Florida without hitting someone who owns a timeshare, or who considered buying a timeshare. In general, the lucky ones are those who walked away from the sales pitch.

Don’t get me wrong – I’m sure there are millions of Floridians who actually use their week or two for getaways or family vacations. At least for a while. But, as an estate planning, elder law, and probate attorney, I frequently see families dealing with the downside of timeshare ownership. And as a financial professional, I can tell you they are NOT an investment – they’re an ongoing expense for an illiquid asset that will not appreciate, much like a swimming pool. People buy such things because they want them, not because they make any financial sense.

A timeshare is a form of fractional ownership in a property, typically in a resort or vacation destination. For example, if you purchase one week at a timeshare condominium each year, you own a 1/52 portion of that unit. Timeshares may be evidenced by a deed (you purchased an ownership interest in the property) or just a contract (you leased the right to use the property).

So, what are some of the downsides? Well, first of all, the fees never end. On top of the loan payment (if you financed your timeshare), there are annual fees, unexpected assessments, and miscellaneous fees to change weeks, trade locations, etc. And unlike a house, land, or even a car, you’ll never know what your timeshare is worth. While there are exceptions for the most desirable locations/weeks in places like Disney or highly desirable beach resorts, most “used” timeshares are NOT repurchased by the timeshare company, and end up being sold for next to nothing. In fact, sometimes it’s hard to even give them away!

Here’s a true story: Jack had a timeshare he no longer wanted. He gave it to a family member, Bill, as a gift. Bill used it for several years, but then had a financial setback and couldn’t afford the fees. He fell behind. He tried to sell it, but to no avail. So then he offered to give it back to Jack. Jack wanted no part of the timeshare and associated fees, and said “Thanks, but no thanks.” Then one day Jack received a recorded deed in the mail; Bill had quitclaimed the timeshare back to Jack! (In Florida, only the seller has to sign the deed). So, Jack then quitclaimed the timeshare back to Bill. I don’t know what happened after that – maybe they’re still tossing the hot potato back and forth.

Timeshares also cause problems at the owner’s death when:

  • The owner never transferred it into his living trust, thus triggering probate for an illiquid asset.
  • The owner became ill before death and stopped paying the annual fees or assessments, and at death she owes thousands of dollars to the timeshare company, for a property no one will buy.
  • The timeshare was properly transferred to a living trust, but no heirs want it and they can’t find a buyer.
  • The post-death transfer of the timeshare was done incorrectly, and eventually the timeshare company tells the heir that they can’t use the week until they re-probate the property and have the transfer done properly. Oh, but they still need to pay the fees and assessments!

Sometimes, abandonment is the only option children have when Mom and Dad leave them an unwanted timeshare, but it has to be done properly to prevent problems.

So, if you own a timeshare, find out whether anyone actually wants it when you die, AND whether they can afford to pay the fees and assessments year after year, even if they lose their job. If not, consider getting rid of it while you’re still alive. If you can.

Other articles you may find interesting:

Can I Protect My Daughter’s Inheritance from Her Loser Husband?

What Happens When Real Estate Is Inherited?

Hearing Aids May Save Your Brain

Hearing loss
There may be a link between hearing loss and cognitive decline.

If it seems like every day brings something new to worry about. Take heart—this is one thing that you can do something about.

People with moderate hearing loss were twice as likely to experience cognitive decline as their peers, while those with severe hearing loss faced five times the risk, according to a study from Johns Hopkins University School of Medicine says Next Avenue’s article “A Delay In Getting Hearing Aids Can Mean More than Hearing Trouble.”

Another study, from the University of Colorado at Boulder, found that the brain’s ability to process sound declines as the person’s ability to hear decreases. The study looked at adults between the ages of 37 to 68 who had their hearing tested and their brains examined. None were being treated for hearing loss, although some felt their hearing was not as good as it once was.

The subjects underwent hearing tests and other tests using visual stimuli to see how they were processing information. They also underwent electroencephalograms (EEGs) that showed that not only were their brains’ visual centers firing when seeing the stimuli, but the hearing center was also active in those who had suffered some hearing loss.

In other words, parts of the brain that used to process sounds were now processing visual signals, as the hearing part of the brain was being repurposed to process images.

The brain’s ability to repurpose different areas for different functions is known as “cross-modal recruitment.” Several areas of the brain can be affected by hearing loss, including the pre-frontal cortex, which is in charge of higher-level thinking and executive functions.

If this part of the brain is needed to help overcome hearing loss, then there’s less capacity for putting new information into long-term memory, and for comprehending and responding to sounds and conversation.

The researchers also found that people in the study regained some of their cognitive losses after being fitted with very high-quality hearing aids.

Unfortunately, many adults delay having their hearing tested and getting hearing aids. The stigma associated with hearing aids as a marker of aging is one reason. Another reason is that hearing loss is a very gradual process and people get used to not being able to hear.

Get a hearing test now, and save your brain.

Reference: Next Avenue (October 21, 2019) “A Delay In Getting Hearing Aids Can Mean More than Hearing Trouble”

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Causes of Insomnia in Seniors

Should I Use a Bank as My Executor Instead of a Family Member?

executor of a will
Choose your executor (personal representative) carefully.

You can choose anybody you like to be the executor of your Will, but consider who will do the best job.

Executors, or personal representatives (as they’re called in Florida), are legally responsible for several tasks, including identifying everything in the estate, collecting all the assets, and paying all the debts and liabilities. When all of that is done, then the personal representative is allowed to make distributions to beneficiaries, in accordance with the terms of the Will.

nj.com’s article on this topic asks “Should I choose a bank to be the executor of my will?” The article explains that there are some advantages in designating a bank as a personal representative.

  • The trust departments of a bank are in the business of managing money and are experienced in administering estates. This typically means they may be able to settle the estate more quickly and efficiently than a family member could.
  • Banks have policies and procedures in place to make certain that the assets are protected from mismanagement and theft.
  • Banks are impartial parties that cannot be influenced by beneficiaries. Impatient beneficiaries can be a big headache for a family member who is asked to be executor. Relationships can deteriorate over the enforcement of the terms of a Will, especially when one sibling is named executor and has the authority over the administration of the estate—perhaps to the detriment of her brothers and sisters.

What are some of the disadvantages? While any executor is entitled to compensation under state laws, family members frequently waive this – especially if they’re also a beneficiary. However, banks do charge fees for serving as executors, and these fees may be higher than you’d expect. Also, many banks won’t serve as executor unless the estate is substantial enough to meet the minimum fees charged by the bank.

But, if you’d prefer not to burden your loved ones with months of time-consuming and aggravating work settling your estate, and family harmony is important to you, consider naming a bank as your executor.

Reference: nj.com (November 5, 2019) “Should I choose a bank to be the executor of my will?”

Other articles you may find interesting: 

What Does an Executor Actually Do?

How Will Jeffrey Epstein’s Estate Be Settled?

State Taxes on Retirees Differ by Type of Retirement Income

Retirement income taxes due
Every state has its own method of taxing certain types of retirement income.

Did you know that based on the state in which you decide to retire, your state income tax bill could vary by several thousands of dollars? However, it’s not only a state’s tax rate that’s important. In addition, the type of income you get in retirement, frequently has a greater effect on your state tax liability than the tax rate you pay.

That’s because each state has its own method of taxing certain types of retirement income, explains Kiplinger’s article “State Taxes on Retirees Differ by Types of Retirement Income.” The article examines the way in which states tax two common forms of retirement income: Social Security benefits and retirement plan payouts.

First, let’s look at the taxes on Social Security benefits. While the federal government taxes up to 85% of Social Security benefits, most states don’t tax Social Security benefits at all. Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming don’t tax these benefits because they simply don’t have an income tax. New Hampshire and Tennessee only tax interest and dividends.

Social Security benefits are exempt from tax in the District of Columbia and 28 states (AL, AZ, AR, CA, DE, GA, HI, ID, IL, IN, IA, KY, LA, ME, MD, MA, MI, MS, NJ, NY, NC, OH, OK, OR PA, SC, VA, and WI). The remaining 13 states may tax some of Social Security benefits. New Mexico, Utah, and West Virginia currently tax Social Security benefits to the same extent they are taxed on the federal return. However, West Virginia will begin phasing out its tax on Social Security benefits in 2020. Taxation of Social Security benefits in the remaining states (CO, CT, KS, MN, MO, MT, NE, ND, RI and VT) depends on a person’s income and on your filing status in many instances.

There are also some states that totally exempt Social Security for taxpayers under specific income thresholds. For example, Kansas says that Social Security benefits are completely exempt from state tax, if your federal adjusted gross income (AGI) is $75,000 or less, regardless of your filing status.  Beginning this year in North Dakota, single residents can fully exclude Social Security benefits from state taxable income, if their federal AGI is $50,000 or less. Married North Dakota residents filing a joint return can claim the exclusion with a federal AGI of $100,000 or less. Missouri has partial exemptions for joint filers with federal AGI above $100,000 and all other filers with AGI over $85,000. Missouri taxpayers with income below these thresholds can get a full state tax exemption. The rest of the states have specific formulas for deciding whose Social Security benefits are taxed and to what extent.

State taxation of payouts from retirement plans, such as pensions, IRAs and 401(k)s, can be more complex. The states without an income tax (FL, AK, NV, SD, TX, WA, WY) or that just tax interest and dividends do not tax retirement plan payouts. However, in other states, there are a wide variety of rules. Mississippi and Pennsylvania generally don’t tax any retirement income. However, California, Washington, D.C., Nebraska, and Vermont have slight or no tax breaks for retirement plan payouts. Many of the states in between offer credits or deductions that can run from a few hundred dollars to tens of thousands of dollars. Georgia has the largest tax break with a $65,000 retirement-income exclusion for anyone age 65 and older (couples can shelter up to $130,000).

To make it more complicated, some states differentiate based on the type of retirement plan. Take Kansas, for example. It exempts income from government pensions but taxes private pension payouts. Alabama taxes defined-contribution plan distributions but not private pension payouts.  Beginning this year, North Dakota exempts military retirement pay but not other retirement plan payouts.

But keep in mind that a state’s or city’s property and sales taxes could outweigh any benefit you receive by paying lower or no income taxes. And some states will tax your estate and/or your beneficiaries when you die. If you’re considering moving to another state due to taxes, meet with an experienced tax professional in that state to get a clearer picture of your particular situation.

Reference: Kiplinger (October 28, 2019) “State Taxes on Retirees Differ by Types of Retirement Income”

Other articles you may find interesting: 

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What Are the Rules About an Inheritance Received During Marriage?

A big inheritance
When an inheritance or any other exempt asset (like a premarital asset) is “commingled” with marital assets, it can lose its exempt status.

A good add-on to that sentence is something like, “provided that it is kept separate from marital assets.” To say it another way, when an inheritance or any other exempt asset (like a premarital asset) is “commingled” with marital assets, it can lose its exempt status.

Trust Advisor’s article asks, “Do I Have To Divide The Inheritance I Received During My Marriage?” As the article explains, this is the basic rule, but it’s not iron-clad.

A few courts have said that an inheritance was exempt even when it was left for a short time in a joint bank account. This might happen after a parent’s death when the proceeds of a life insurance policy were put into the family account to save time during a stressful situation. In another case, the wife took the insurance check her husband had received and opened a joint investment account with the money. That money was never touched, but the wife still wanted half of it when the couple divorced a few years later. However, in that case, the judge ruled that the proceeds from the insurance policy were the husband’s separate property.

The law generally says that assets exempt from equitable distribution (like insurance proceeds) may become subject to equitable distribution if the recipient intends them to become marital assets. The commingling (mixing) of these assets with marital assets may make them subject to a division in a divorce. However, if there’s no intent for the assets to become martial property, the assets may remain the recipient spouse’s property.

Courts will look at “donative intent,” which asks if the spouse had the intent to gift the inheritance to the marriage, making it a marital asset. Courts may look at a commingled inheritance for donative intent, but also examine other factors. This can include the proximity in time between the inheritance and the divorce. Therefore, if a spouse deposited an inheritance into a joint account a year before the divorce, she could argue that there should be a disproportionate distribution in her favor or that she should get back the whole amount. Of course, the longer amount of time between the inheritance and the divorce, the more difficult this argument becomes.

Be sure to speak with a divorce attorney or your estate planning attorney about the specific laws in your state. If there is a hint of trouble in the marriage, it might be wiser to simply open a new account for the inheritance.

Reference: Trust Advisor (October 29, 2019) “Do I Have To Divide The Inheritance I Received During My Marriage?”

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Change Your Life Insurance Beneficiary After Divorce

Smart Second Marriage Planning Tips