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Wills & Estate Planning

Tax Responsibilities After Someone Dies

The death of a loved one is always difficult but it can be even more challenging if you are the one who must handle all the resulting tax responsibilities.

There are a couple different ways you can assume the required duties:

  • You may be named as the executor of the decedent’s estate under his or her will.
  • In the absence of a will, you could be appointed as the administrator by the probate court.

Tax Responsibilities After Someone Dies

Either way, the duties are essentially the same, so for purposes of this article, we’ll call the person with the responsibility the executor.

What must be done? The executor is charged with the task of finding the estate’s assets, paying off its debts, and distributing whatever is left to the rightful heirs and beneficiaries. The executor is also required to file the necessary tax returns and pay any taxes due. If you are the executor and fail to do this, the IRS can come after you personally for tax underpayments, plus penalties and interest. So you need to understand what is involved and get the proper assistance from your attorney.

The duties may include:

Make Sure the Decedent’s Final 1040 Form is Filed

The decedent’s final tax return covers the period from January 1st through the date of death. The return is due on the normal date (generally April 15 of the following year). If the decedent was unmarried, the final 1040 is prepared in the usual fashion. When there is a surviving spouse, the final 1040 can be a joint return filed as if the decedent were still alive as of year end. The final joint return includes the decedent’s income and deductions up to the time of death, plus the surviving spouse’s income and deductions for the entire year.

The Handling of Medical Expenses

If large uninsured medical expenses were accrued but not paid before death, the executor must make an important choice about how they are treated for tax purposes. Along with any medical expenses paid before death, these accrued expenses can generally be deducted on the decedent’s final 1040 to the extent they exceed 7.5% or 10% of adjusted gross income (AGI). This is an exception to the general rule that expenses must be paid in cash before they can be deducted. Final medical expenses can easily exceed 7.5% or 10% of AGI, especially if death occurs early in the year before much income is earned.
Important Note: If the decedent was age 65 or older in 2016, the  7.5% figure applies for his or her 2016 tax return. As of 2017, the 10% applies regardless of age.

Alternatively, an executor can choose to deduct the accrued medical expenses on the decedent’s federal estate tax return. Of course, this is the wrong choice if no federal estate tax is owed. However, when estate tax is due, deducting accrued medical expenses on the estate tax return is usually the tax-smart option. Why? Because the estate tax rate is 40% while the decedent’s final income tax rate could be as low as 10%. Plus, the full amount of the accrued medical expenses can be deducted on the estate tax return (not just the excess over 10% or 7.5% of AGI).

In addition to the final tax return and the medical expenses, here are the rest of the tax-related duties:

File the Estate’s Income Tax ReturnsCalculator and Pen Tax Responsibilities

Immediately after death, the decedent’s estate may take over ownership of some or all of the decedent’s assets. If so, the estate will be taxed on its income under complicated IRS guidelines applicable to trusts.

Important distinctions: We are talking about income taxes for the estate, not the final income taxes of the decedent. And the federal estate tax is an entirely different subject.

Small estates (with gross income under $600) aren’t required to file income tax returns. If you are in charge of an estate that must file, get professional help to assist you with this onerous chore because the tax law is very complex.

File the Estate’s Estate Tax Return

The federal estate tax return is filed on Form 706. Assuming the decedent did not make any sizable gifts before dying, no estate tax is due, and no Form 706 is required, unless the estate is worth over $5.49 million (up from $5.45 million in 2016). By sizable gifts, we mean in excess of $14,000 to a single recipient for 2017 (and 2016). If sizable gifts were made, the excess over the $14,000 threshold is added back to the estate to see if the annual limit in effect for that year is surpassed.

Form 706 is due nine months after death, but the deadline can be extended up to six months. Remember: While life insurance proceeds are generally free of any income tax, they are usually included in the decedent’s estate for estate tax purposes — even if the money goes directly to policy beneficiaries. In fact, life insurance proceeds are the most common cause of unexpected estate tax bills.

One other very important point: Assets inherited by a surviving spouse are not included in the decedent’s estate, as long as the surviving spouse is a U.S. citizen. This is called the unlimited marital deduction privilege and it’s the most common reason why many large estates don’t owe any federal estate tax.

If you are the executor of a substantial estate, consult with your tax adviser even if you think no estate tax is actually due. If you’re correct, the cost to confirm your conclusion will be minimal. If you’re wrong, filing Form 706 is generally a complicated matter and you may need professional assistance. Also, an experienced estate advisor may be able to find perfectly legal ways to substantially reduce the tax bite or even make it disappear.

More Miscellaneous Details

  • If an estate must file income tax or estate tax returns, a federal employer identification number (EIN) must be obtained from the IRS.
  • You should open a checking account in the name of the estate with some funds transferred from the decedent’s accounts.
    The bank will ask for the estate’s EIN. Use the new account to accept deposits from income earned by the estate and to pay expenses – such as outstanding bills, funeral and medical expenses, and, of course, taxes.
  • State income tax returns and perhaps a state estate tax return will have to be filed.

 

An important planning step you can take right now, is to check the beneficiary designations for your bank accounts, brokerage firm accounts, tax-favored retirement accounts, company benefit plans, life insurance policies, annuities and 529 college accounts. Many people fail to take these simple steps, and the consequences can be dire. For more information, see: An Important Estate Planning Step to Take Now.

 

Points to Consider Before Making Gifts to Children

In the world of college financial aid, good estate planning strategies often result in less financial aid for your child or grandchild. For instance, a strategy included in many estate plans involves making annual tax-free monetary gifts to children. Annual gifts can be made, up to $14,000 or $28,000 if the gift is split with your spouse, to any number of individuals with no gift-tax consequences (unchanged from 2016). Once the gift is made, the assets are removed from your taxable estate and any income on the gifts is taxable to the recipient.

Monetary Gifts to Children

The Problem:

The problem results from how assets are treated for financial aid purposes. To determine a financial aid amount, a college takes the cost of attending that school and subtracts your expected family contribution (EFC).

When calculating the EFC, a college generally considers your income and assets, as well as your child’s income and assets. A maximum of 5.6% of the parents’ assets and up to 47% of the parents’ income are included in the EFC, while 35% of the child’s assets and up to 50% of the child’s income are included.

The difference between 35% of the child’s assets and 5.6% of the parents’ assets can make a big difference in a financial aid award. For example, suppose you and your spouse have been making $10,000 gifts to your child for the past five years, so your child now has $50,000 of assets. For financial aid purposes, your child will be expected to use $17,500 of those assets towards first-year college expenses. On the other hand, if you still owned the $50,000 in assets, you would only be expected to use a maximum of $2,800 toward first-year college costs, which means your child would be much more likely to receive financial aid.

Considerations:

So before starting an annual gifting program, consider the possible impact on financial aid calculations. Become familiar with financial aid formulas, roughly calculating what you could expect in terms of financial aid. You should also consider which college your child or grandchild is likely to attend. Nearly 30 elite colleges have decided to only consider 5.6% of both the parents’ and student’s assets in financial aid calculations. While the federal financial aid formula and other colleges have not yet followed, the calculations may change in the future.

If, after going through the calculations, you find you probably won’t be eligible for financial aid, you may decide to make annual gifts to your child. However, if the calculation indicates you may receive financial aid, you might want to hold off on an annual gifting program.

Consider Hosting a Family Meeting about Your Estate Plan

If you’re a business owner and a high-net-worth individual, you may want to gather your family members together to discuss the details of your estate plan. This can be especially important if you own a business that employs family members. These meetings are a little like the Scottish clan gatherings held hundreds of years ago by clan chiefs to discuss their succession and inheritance plans.

Host a Family Meeting to Discuss Estate Plan

The Purpose of Gatherings

For centuries, some Scottish clans had a tradition of getting together periodically. When communication and travel were difficult, these gatherings provided a way to prepare for the future. Estate planning was simple then, with inheritances usually going to the eldest male in the family.

Of course, estates aren’t so simple today. After your death, your assets will be distributed under instructions from your will, trust and beneficiary account designations — unless some of your assets aren’t covered by such documents, in which case those assets will be distributed through the intestacy laws of your state. You can help your heirs accept the details of your estate plan by preparing them.

Barnett & Leuty, P.C., will take care of your legal needs when a family member dies. We handle various probate proceedings ranging from simple probating of a decedent’s will, to assisting with independent or dependent administration of an estate where there was no will, to determination of heirship and muniment of title proceedings.

The (Private) Reading of a Will

How many times have you seen a movie or a TV show that includes a dramatic “reading of the will,” where the heirs find out what they receive from the estate? These fictional postmortem readings don’t generally happen today. Instead, state law determines who receives copies of a will to read privately.

In some cases, beneficiaries learn about how an estate is to be distributed only after the death of the “clan chief,” or senior family member who owns the business. This often has negative consequences. Here are a couple of examples:

  • It can be stressful for heirs to discover — for the first time after a family member dies — how they fit into the distribution of an estate. The family business can suffer if relatives learn about its continuation or disposition in the deceased person’s will or trust.
  • There can be hurt feelings and questions about why the deceased individual made certain decisions. At a time of grief, family members can be unwittingly set off against one another as a result of the way assets are passed down. And of course, the estate holder is no longer available to explain the thought process that went into the distributions.

Details of the Estate Plan Meeting

Holding a family meeting to clarify your plans can help prevent angst and intra-family squabbling. After your attorney and business succession team have completed your estate plan, and you’re comfortable with it, you can ask your estate advisers to prepare summaries to distribute to family members. These documents can explain the estate plan in layman’s terms and with current values.

Once the family summaries have been prepared to your satisfaction, it’s time to call the family meeting and invite interested parties. Before the gathering, meet with the key stakeholders. This might include the person named as the executor or personal representative, those taking over the family business and perhaps any family members who may expect to take over. Hopefully, any issues with them will be resolved before the family meeting.

In addition to the family members, you may want to have your attorney or a CPA from your business succession planning team at the meeting. This person should be a trusted advisor to the family who has full knowledge of the legal, financial and tax issues in the estate plan.

As the senior family member, you (and, if you’re married, perhaps your spouse) should lead the meeting. But you can call on your attorney or CPA to assist in explaining your estate plan.

The written summaries that are handed out should be labeled “draft” because issues might arise that cause the plan to be revised. However, make it clear to all attending that you (along with your spouse) will make all final decisions. The meeting should be open to discussion and questions.

Avert Misunderstandings

The result of this meeting is that family members can participate in the estate plan and be fully informed as to the reasoning that went into it. A second meeting might be necessary to finalize everything. In addition, the meeting might bring to the forefront issues among family members that may need to be resolved in smaller meetings with just those involved.

In the end, an estate planning get-together can help your family be better prepared after your death and help avert misunderstandings and hurt feelings. It can also help sustain the business that you have spent years building.

An Important Estate Planning Step to Take Now

The topic of estate planning may not be something you worry about. This might be the case if you don’t think you own enough assets to make your estate liable for the federal estate tax.

Check your Beneficiary Designations

But no matter what your net worth is, there is an important estate planning action you should take right now. Check the beneficiary designations for your bank accounts, brokerage firm accounts, tax-favored retirement accounts, company benefit plans, life insurance policies, annuities and 529 college accounts.

If you have not yet turned in the forms to officially designate beneficiaries because you just haven’t gotten around to it, please turn them in. If your forms are out of date, turn in new ones.

Many people fail to take these simple steps, and the consequences can be dire.

Let’s say you die and your ex-spouse, who you intended to get nothing further after your divorce, was allowed to collect your company pension benefits and the proceeds from your company- provided life insurance. You intended for your children from an earlier marriage to get the money but you never got around to changing the beneficiary designations made years ago. Without the updated beneficiaries being listed, the money would go to your ex-spouse.

Of course, divorce is not the only situation when failing to turn in or update beneficiary designation forms can cause big problems for an individual’s intended heirs. You could have the same issue if you become disenchanted with, or estranged from, one of your adult children. Or you might want to leave more of your life insurance benefits to an adult child who just had twins and a less to your childless offspring. You get the idea. When things change, your beneficiary designations may need to change too.

Estate Planning Action Plan
Estate Planning Action Plan

Beyond making sure your money goes where you want, another advantage of designating individual beneficiaries is that it avoids probate. The benefits go directly to the named beneficiaries.

In contrast, if you name your estate as your beneficiary and depend on your will to direct the money to your loved ones, the estate must go through the potentially time-consuming and expensive process of court-supervised probate before the money is allowed to arrive at the intended destinations.

For Married Couples

If you are married and have accounts set up with you and your spouse as joint owners with right of survivorship, the surviving spouse will automatically take over sole ownership when the first spouse dies. If that is what you intend, you may not have to do anything. Still, you may want to name some secondary beneficiaries to cover the possibility that your spouse dies before you do.

Note that in the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin), you will usually need your spouse’s consent to make beneficiary changes because assets accumulated during your marriage are generally considered to be owned 50/50.

Your Will Has No Impact

Do not depend on your will to override outdated beneficiary designations. As a general rule, whoever is named on the most-recent beneficiary form (which may not be recent) will get the money automatically if you die — regardless of what your will might say.

Do You Have Money in IRAs?

If you have a hefty balance in one or more IRAs, consider dividing up the existing account(s) into separate IRAs for each of your intended beneficiaries. That way, they can act independently when they inherit the money and they can each calculate required minimum distributions from the inherited balance based on their individual life expectancies.

You can split up an IRA by making tax-free rollovers into new accounts set up for each beneficiary. IRAs with multiple beneficiaries are more problematic, because all your beneficiaries are unlikely to have the same objectives for the inherited money.

Note: An IRA can be split up tax-free after your death, but that requires somebody to do some tax-smart thinking and you may not be able to count on that after you’re gone.

Conclusion

In many cases, keeping your beneficiary designations up to date can obviate the need for a will. The key words are up to date. It’s a good idea to check your designations at least once a year or whenever significant life events occur.

It usually only takes a few minutes to conduct a checkup and make any needed changes and you can often get the forms online. But if you wait, it could be too late.

Seven Reasons to Update Your Will

Even if you have a valid will, you may need to draft a new one for a variety of reasons. A will is an essential part of planning for the future. But don’t think creating a will is a one-time proposition. Even if you have a valid document, you may need to draft a new will for a variety of reasons.

Last Will and Testament

Here are seven reasons to update your will:

1. Deaths – If individuals named (as heirs or executors) have died or they become incapacitated, a will should be reviewed to ensure changes are not needed.

2. Assets – Revisions may be needed if the value of assets has increased or decreased significantly, or they are no longer owned. For example, if you specifically leave your home to one of your children, and later sell it, you may want to change the distribution of your other assets.

3. Marriage – Wedding bells usually signal the need to review a will. Which assets should pass to your spouse? Are step-children involved? If this is not spelled out in a will, the state will decide. In a community property state, a spouse automatically inherits half of all community property. In most other states, a spouse may receive one‑third to one‑half of the estate, absent any other directions.
Also, keep in mind that an unmarried couple living together may want to leave assets to each other but in order to make an inheritance happen, it must generally be spelled out in a will.

4. Divorce – In many states, a divorce automatically revokes a will or those provisions concerning an ex‑spouse. As a result, if you get divorced, it’s best to have a new will drafted. For instance, you might have your former spouse removed as a primary beneficiary. In addition, you may want to change the beneficiary of your life insurance, pension or any existing IRAs. Consider the use of a trust if children from a previous marriage are involved.

You may also want to change your will if one of your children gets divorced.

5. Births – Once parents have children, you may want to consider updating your will to include the names of children. Also, you want to name guardians to care for the children in the event the parents die prematurely. (However, the naming of guardians is not binding by the probate court.) Grandparents might wish to draft a new will concerning the distribution of assets after children are born. Again, the use of a trust may be recommended.

6. Retirement – This event may also trigger the need to make changes to an existing will. For example, many retirees sell their homes and move to other states. But state laws can vary widely. Furthermore, individuals may consider a power of attorney that enables someone else to act on their behalf in the event of certain illnesses.

7. Tax law revisions – The Internal Revenue Code is regularly changed. In fact, the estate tax rules have undergone significant changes in recent years and more changes could occur. A will should be reviewed to take advantage of maximum tax benefits that exist today so it may have to be updated if tax laws change.

Note: In some cases, a will might be amended with a “codicil.” However, in many cases, it is best to draft a new will. Your attorney can guide you on how to proceed.

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5 Ways to Protect Your Loved Ones by Having a Will

We feel that having a will, and related powers of attorney and advanced directives, is one of the most important tasks one should complete.

After working hard your entire life to provide for your family, you should not allow the Texas Estates Code and the courts to decide how your assets are distributed.

Protect Your Loved Ones with a Will

This article points out the various problems of dying without a will and how these consequences are eliminated with a properly drafted will that disposes of your assets in accordance with your wishes.

1. Name Your Own Beneficiaries in your Will

Problem: When you die without a will, you are considered to die intestate and your property will pass in accordance with the descent and distribution provisions of the Texas Estates Code. Sometimes these individuals are the same you would provide for under your will, but not always.

Benefit: When you die with a will, the beneficiaries named under your will inherit your property exactly as you specify.

2. Reduce the Cost and Time of Probate

Problem: If you die without a will, the cost to probate your estate is substantially higher because of additional requirements, such as filing a determination of heirship with the court to decide the rightful heirs of your estate.

Benefit: This procedure is not necessary when the beneficiaries of your estate are named in your will.

Problem: The probate process is substantially more time consuming if a dependent administration is required in which the court has to approve every action taken by the administrator.

Benefit: An independent executor named in your will administers your estate with minimal court supervision. This allows the probate process to be completed in a timely and cost effective manner.

3. Name Your Own Executors in your Will

Problem: If you die without a will, the court will appoint an administrator of your estate based on the order specified in the Texas Estates Code.

Benefit: If you die with a will, the court will appoint the executor(s) named in your will before considering any other individuals.

4. Extend the Time in Which Beneficiaries Receive the Bulk of Your Estate

Problem: If you have minor children and you die without a will, your children will receive their share of your estate when they reach 18 years of age.

Benefit: With a properly drafted will, a contingent trust can hold your children’s share until they turn an age that is more appropriate for them to receive the bulk of your estate.

The trustee named in your will manages the children’s inheritance until they turn an appropriate age. The trustee may make distributions to your children during the life of the trust for their health, education, maintenance and support.

While the use of a contingent trust is most common when minor children are involved, they work just as well for any individual under a certain age or otherwise incapacitated.

Any beneficiary designations for your life insurance policies or retirement plans should also be coordinated with your will to make sure they are distributed to the children’s trust if they are under a certain age.

5. Eliminate or Reduce Any Estate Tax

Problem: Under current law, if your gross estate, including life insurance and retirement, is under $5.45 million, your estate will typically pass tax-free to your beneficiaries (and a married couple typically can pass up to $10.9 million of their wealth estate tax free).

Benefit: If your gross estate exceeds that number, you should contact an estate planning attorney to learn about estate planning options that can eliminate or substantially reduce any estate tax which would otherwise be payable to the Internal Revenue Service. With a federal estate tax rate as high as 40%, this issue should not be ignored.

Don’t wait…. Do it now….  Make it a priority to protect your loved ones this year!

Contact Us

While most people realize they should have a will, they still tend to procrastinate over having it done. Most attorneys can have a will prepared within days of the initial meeting, which will alleviate the many problems your loved ones will face if the time is not taken to get your affairs in order.

Avoid Family Feuds When Distributing Assets Part Two

 

 

Avoid Family Feuds

Our last blog post offered some tips for avoiding family feuds when distributing assets of a family member. It’s important to choose your executor carefully.The executor generally exercises discretion in distributing personal and household items. So it’s important to name a trustworthy person with a fair, impartial, reasonable personality — especially if there are sibling rivalry issues. You want someone who will fulfill your intentions. The right executor can reduce the chance of litigation.

No matter who you name as an executor, the individual will appreciate clear, written instructions.

Here is a “Textbook Example of Headaches, Heartaches and Expense”
Without specific estate instructions concerning asset distribution, family members can be left guessing what a deceased person would want — or decide what to do themselves.

In one case, a Michigan probate court had to step in and resolve bitter disputes by distributing numerous items. The court called it “a textbook example of the headaches, heartaches, and expense that can result from inadequate estate planning.”

Facts of the case: According to court documents, Barbara Waters was divorced and living with Kevin Goethe when she died. She had three children from a previous marriage and he had one son.

Goethe built and furnished the house. When the couple moved in together, they combined household furnishings and purchased items together and individually.

Goethe proposed and purchased an engagement ring but the couple never married. “Ms. Waters was diagnosed with cancer and told Mr. Goethe it would be unfair of her to marry him because of her illness,” according to court documents.

Waters made out a handwritten (holographic) will and signed it “Mom.” Upon review, the court stated the document did not meet the state’s legal requirements and was therefore invalid.

Weeks after Waters’ death, her children moved out of Goethe’s home. He packed some belongings and left them on the front porch for the children to pick up. He was not home when they arrived. The children gained entry to the house through another relative. They removed “almost everything they thought was their mother’s.”

Goethe testified the house was “ransacked.” Family photographs were removed. One photo was ripped in two, with Goethe’s image returned to the frame and Waters’ image taken.

The Probate Court called the children’s actions “offensive.” It then made decisions to divide the items, including:

  • A jewelry chest and small kitchenware had to be returned to the estate by Goethe. However, some jewelry items were determined to be gifts from Waters so Goethe got to keep them.
  • Photos were ordered returned or duplicated at estate expense.
  • A family pet was claimed by both sides. Goethe was awarded the Maltese Terrier “in lieu of compensation for items which either disappeared from his house or items to which he might have had a reasonable claim.”

The judge stated the court could not adopt either “extreme position” — that everything in the house belonged to Goethe or that the children were entitled to anything connected with their mother.

He added: “there is a difference between saying or writing down what you hope will happen and taking the proper legal steps to assure that a court will enforce your intentions.” (Waters, Probate Court for the County of Marquette, No. 10-31879-DE)

This article only provides basic answers to some of the questions involved in the distribution of assets. Consult with your estate planning adviser about your situation. By planning ahead, you can avoid battle lines being drawn after your death over possessions accumulated during your life.

Avoid Family Feuds When Distributing Assets

Avoid Family Feuds

In the days after a person dies, some family members may decide to take matters into their own hands. These individuals may have a key to the home and decide they are going to take items they want. Before the will is even read, furniture, jewelry, artwork and other items may disappear. Cash around the home may be grabbed. In some cases, trash bags of stuff are hauled away.
Family feuds may erupt when other beneficiaries find out items are missing.

In some families, nothing brings out greed and long-time resentments like divvying up sentimental items that remind adult children of their childhoods. The situation can become even worse if it involves divorce, a blended family, or an unmarried couple.

Splitting up material possessions among family members can be more acrimonious than dividing up financial assets. If there are four heirs and a bank account worth $10,000, it’s easy to divide it with each person receiving $2,500. But how do you divide a diamond ring or antique teapot four ways?

Unfortunately, some families wind up incurring large legal expenses over non-titled items that have more sentimental importance than monetary value.

To help avoid this in your family, here are some Q&As about how the executor collects and distributes the assets in an estate.

Q. Exactly how are assets distributed?

A. Here is a brief rundown of the process. After the will is read, the executor must inventory and gather the assets of the estate. Appraisals may be needed for items of value, such as jewelry.

An estate bank account is opened up by the executor, who also obtains a tax ID number. The various accounts of the deceased person are then transferred to the account.

The executor must pay creditors, file tax returns and pay any taxes due. Then, he must collect any money or benefits owed to the decedent. Finally, he or she distributes the remainder in accordance with the will. The executor generally exercises discretion in distributing personal and household items. (Unwanted items must be disposed of or donated to charity.)

Q. How long does it take before assets in a will are given to beneficiaries?

A. Generally, beneficiaries have to wait a certain amount of time, say at least six months. That time is used to allow creditors to come forward and to pay them off with the estate assets. (In some cases, an executor may make partial distributions to the heirs after he or she estimates the debts. However, if the estimates are wrong, the distributions can be called back.)

Q. What happens in the time between when a person dies and the assets are finally distributed?

A. The executor must handle the everyday tasks of the estate to preserve the assets. For example, if there is a home that needs to be sold, the executor must be sure to make mortgage payments, as well as pay insurance premiums and utility bills. (Foreclosure can be started if a few mortgage payments are missed.)

Q. What if a relative has a key to the home and goes in to take items he or she wants?

A. The executor should inventory the assets as soon as possible — before family members get a chance to remove items. If a valuable or important item is taken, and the person responsible refuses to return it, a court can step in to order the item back into the estate.

If the executor knows there are outstanding keys to the decedent’s house, or is concerned about someone coming in without authorization, the locks should be changed.

Q. What happens if the beneficiaries are not satisfied with the way the executor distributes personal items? Or what if the heirs suspect the executor has taken or hidden certain valuable items for himself or herself?

A. The beneficiaries can request an informal accounting of the assets from the executor. If the executor refuses, or the beneficiaries are still not satisfied, they can petition the court for a mandatory accounting. Consult with your attorney about how to proceed.

Q. What can I do to prevent these types of disputes from occurring after I die?

A. There are a number of steps you can take:

  • Give away gifts while you are still alive. If there are specific items you want to loved ones, present them now. In other words, get them out of your estate. It can be rewarding to see your prized possessions go to individuals who appreciate them. Depending on the size of your house, you may have thousands of items. Throw away or donate things you no longer need. (A donation to a qualified charity may result in a tax deduction.)
  • Make specific bequests in your will or in a letter of intent. If you want your car to go to your daughter or your golf clubs to go to your grandson, put it in writing. Without detailed instructions and guidance, the executor may have to devise an equitable system for distributing your possessions. That can place a large burden on the executor and lead to disputes among your heirs.
  • Choose your executor carefully. The executor generally exercises discretion in distributing personal and household items. So it’s important to name a trustworthy person with a fair, impartial, reasonable personality — especially if there are sibling rivalry issues. You want someone who will fulfill your intentions. The right executor can reduce the chance of litigation.

No matter who you name as an executor, the individual will appreciate clear, written instructions.

This article only provides basic answers to some of the questions involved in the distribution of assets. Consult with your estate planning adviser about your situation. By planning ahead, you can avoid battle lines being drawn after your death over possessions accumulated during your life.

The Basics of Gift Taxes

 

The Basics of Gift Taxes-2

For many people with large estates, planning ahead and gifting to family members can save a bundle in taxes. This ultimately means your heirs may get more and Uncle Sam may get less. But before you start stuffing checks in envelopes and passing them out to your loved ones, you should know the basics of gifting. This article explains the current rules.

For federal purposes, the gift and estate taxes are unified. In other words, you can’t save on estate taxes by giving your fortune away shortly before you die. Once you’re above the exemption amount (discussed below), $1 of gifts reduce your estate tax exemption by $1. The 2016 exemption amount is currently $5.45 million (up from $5.43 in 2015 and adjusted annually for inflation) for a single individual. An individual can use his or her spouse’s unused exemption amount — effectively doubling the amount for a couple to $10.86 million.lores_envelope_red_satin_bow_gift_ah

For example, Fred is single but has a favorite nephew. Fred’s net worth is $7 million. He gives $5.45 million to his nephew free of the gift tax. But two years later, he dies with a $1.55 million estate. He’s used up his exemption so the estate pays tax at 40 percent on the $1.55 million. The tax result is the same as if he had given the entire $7 million to his nephew on his death. (We’ve ignored the annual gift tax exclusion and any increase in the estate tax exemption for inflation to keep it simple.)

Clearly, it can be more complicated. Even calculating the tax can be complicated for a number of reasons. There are differences between making gifts and leaving assets in your will. We’ll deal with the most frequently encountered below. Keep in mind that a number of states have gift and estate taxes. Some of them are structured the same way as the federal tax, but some are not. In some cases, the exemption is lower than the federal and the rates are high enough that the tax consequences cannot be ignored.

Annual Exclusion

One frequent comment we hear is: “I know I can give away a certain amount every year without paying any gift tax but I’m not sure of the amount.” For 2016 (and 2015), the exclusion is $14,000. It is indexed for inflation so it may change in future years. Tax law has contained an annual exemption amount for many years. The way it works is simple. Let’s say you give $14,000 to your favorite niece in 2016. The $14,000 does not affect your $5,45 million estate tax exemption.

Exclusion Mechanics

The $14,000 exemption is available annually and applies to each donee. Thus, Sue can give $14,000 tax free to each of her 10 children and grandchildren (each year), or $140,000, without impacting her estate exemption. Over a 10-year period she could give away $1.4 million. Her husband, Fred, can do likewise, giving an additional $14,000 annually to each child and grandchild.

What if Sue controls all the money? She takes care of all the family finances and all the bank accounts are solely in her name. Sue and Fred could elect to “split” any gifts they make. In this case, Sue writes a check for $28,000, but Sue and Fred are each deemed to give $14,000 if the election is made. The election is made on IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.

As you can see from the example of Sue and her husband, if you elect to split a gift, even if you don’t go over the $14,000 threshold, you’ll need to file a gift tax return if one spouse controls all the money. If may be just as easy for Fred to ask Sue to deposit $14,000 in his personal checking account. Then, both could write $14,000 checks and avoid filing a gift tax return.

The exclusion applies to each donee and expires at the end of each year. Once the year is over, you’ve lost a chance to reduce your estate tax by $14,000. That’s why year-end gifts can be important.

Considerations for Donees

Usually we think of making gifts to our children, or close relatives. But the gift tax rules aren’t limited to that. Let’s say you have a friend you have been close to since college. The friend has a talented son who could go on to become a professional musician but he needs funds to live on. From a gift tax standpoint, a gift to the talented musician is the same as one to your children.

The exclusion applies to an unlimited number of donees. So you can reduce your estate by giving gifts to 10, 20 or even more children, grandchildren, relatives and others. But there’s a prohibition against reciprocal gifts. For example, Ken and Keith are brothers who each have two children. Ken can give $14,000 to each of his two children and $14,000 to each of Keith’s two children. But if Keith reciprocates giving $14,000 to each of Ken’s children, the exclusion may be denied. On the other hand, Sue and Sharon are sisters. Sue is a neurosurgeon who makes more than $800,000 a year. Sharon is a tropical medicine specialist who volunteers in Africa. Sue gives $14,000 annually to Sharon’s daughter, but Sharon doesn’t reciprocate. In this case, the exclusion applies.

Note: Gift taxes do not apply to gifts to political organizations.

Keep in mind that a gift is a transfer where no “consideration” is received. For example, let’s say your business is short-staffed, your secretary works long hours during the year so you give her a check for $10,000 in late December. That would probably be considered a fully taxable bonus and not a gift. On the other hand, your secretary and wife have been good friends for years. Your wife becomes ill and your secretary, without being asked, takes her to doctors’ appointments, stays with her after an operation, and helps out as a friend. You give her $10,000. That might be considered a gift. The facts are important. Get professional advice.

Spousal Gifts

Gifts of cash or property to your spouse are not considered gifts for gift tax purposes. Put another way, there’s an unlimited exemption. For example, let’s say you inherit a small office building worth $750,000 from your parents. The attorney titles it in your name. The following year, you get married and retitle the property in both your name and your spouse’s name. There are no gift tax consequences.lores_envelopes_bow_gold_silver_ah

Exceptions and notes: If your spouse is not a U.S. citizen and the total gifts exceed $148,000 in 2016 (up from $147,000 in 2015), you need to file a federal gift tax return.

There are some gifts (certain terminable interests) to a spouse that also require the filing of a return.

Same-sex couples who are legally married in a state that recognizes such unions qualify for the unlimited exclusion, even if they move to a state that does not recognize such marriages.

Medical, Tuition Exclusion

Amounts you pay for qualified medical or tuition expenses are excluded from gift taxes, no matter what the amount. However, there are two requirements.

The expense must be qualified. For medical expenses, they must meet the requirements for a deduction. For example, amounts paid for cosmetic surgery generally don’t qualify. In the case of education expenses, the payment must be made to a qualifying domestic or foreign educational institution for tuition. College tuition qualifies, horseback riding lessons don’t.
The amount must be paid directly to the provider — a doctor, hospital, etc. for medical expenses or to a college or school for education expenses. You can’t cut a check to your daughter so she can pay for her tuition.
While contributions to 529 plans are subject to the $14,000 exclusion, you can make a lump-sum payment and treat it as made ratable over a five-year period. For example, you can write a check to the plan for $70,000 and treat it as you made $14,000 annually for five years.

Return Requirements

If you don’t make any gifts that exceed $14,000, you generally don’t have to file a return. A gift can involve cash, marketable securities or property. For marketable securities, you’ll have to list how you calculated the value. For other property, you’ll need a qualified appraisal. Giving your son a classic car? You need more than a handwritten note from a guy down the street who rebuilds old cars. Depending on the property, an appraisal might be costly. And the appraisal must be attached to the return. For these, and other reasons, you might want to just give cash.

Keep in mind that giving property may have implications in terms of your basis, which we’ll describe below.

Failure to file a return with the IRS or to disclose all required information will keep the statute of limitations open. Gifts must be reported on the donor’s estate tax return and if no gift tax return is filed, the valuation of the gift is open to challenge. If a valuation question is involved, convincing the IRS of the value you claimed could be difficult years down the road. In addition, there are penalties for willful failure to file and substantial understatement (such as undervaluing the property subject to an appraisal).

Gifts to Minors

A gift to a minor is considered a present interest and qualifies for the $14,000 exclusion if all of the following conditions are met:

Both the property and its income may be expended by, or be for the benefit of, the minor before the minor reaches age 21.

All remaining property and its income must pass to the minor on the minor’s 21st birthday.

If the minor dies before the age of 21, the property and its income is payable either to the minor’s estate or to whomever the minor may appoint under a general power of appointment.

Basis in Property Received

There’s a big difference in the recipient’s basis in the property if the transfer is a gift versus an inheritance. A donee’s basis in the property is the same as the donor’s basis for gain — but the lesser of the donor’s adjusted basis or the fair market value of the property at the time of the gift for loss. If an individual inherits property, the basis is the fair market value at the date of death of the transferor for gain or loss.

Example 1: Fred bought a corporation at $1 a share in 1994. His total investment was $10,000. The stock is now worth $2 million. He gives his entire holdings in the corporation to his daughter, who sells the stock the next day for $2 million. She has to report a long-term capital gain of $1,990,000.lores_envelope_money_bow_ah

Example 2: The facts are the same as in Example 1, but Fred leaves the stock to his daughter in his will. On his death, the stock is valued at $2 million. She sells it the next day for $2 million and reports no gain.

The differences in basis will make a big difference in what assets should be gifted or left in your estate and the timing of any transfer.

For example, Fred inherited a lake house from his parents that has been in the family for years. The house is not only valuable monetarily (worth $500,000), it has sentimental value. Fred’s basis is $50,000. Fred is single and will have a taxable estate. His two children, Sue and Sharon, both enjoy the property with their children. Sue and Sharon are on good terms and want to keep the property. Because of the lake’s location and a low turnover of properties, prices have been climbing at more than 12 percent per year. Fred’s in good health. It’s not unreasonable to assume that the property could double in value before he dies. Gifting the property now would keep at least $500,000 (the additional increase in value) out of his estate. Moreover, the stepped-up basis on an inherited property doesn’t mean much in this case because the beneficiaries have no intention of selling.

Giving property that has declined in value generally doesn’t make sense because neither the donor nor the donee gets a tax benefit for the loss in value.

If you own a business or have income-producing assets such as rental properties, etc., talk with your tax adviser about your options.

Income Tax Implications

You can’t claim a deduction on your income tax return for gifts to your children, relatives, etc. On the other hand, the recipient is not generally liable for income taxes on the amounts received.

 

The more complicated your assets, the more planning opportunities there may be and the more complex those opportunities become to implement. While there are steps you can take if your family assets consist only of a personal residence, vacation home, and $10 million in marketable securities, your options increase if your assets consist of one or more active businesses, rental properties, farm or timber land, etc. Planning involves tradeoffs and an analysis of both the estate tax and income tax implications of any actions.

Other planning options may include setting up a family limited partnership, gifting property at a discount because of minority interests or other restrictions, using strategies to leverage basis in business ownership (S corporation, partnerships, LLCs, etc.), taking passive activity losses associated with business ownership, creating special trusts including charitable trusts, and implementing strategies involving the generation-skipping transfer tax. Consult with your estate planning adviser about these and other potential avenues to explore.

Why Do I Need a Will?

We feel that having a will, and related powers of attorney and advanced directives, is one of the most important tasks one should complete, and at this time of year, being around family and making new year’s resolutions, people are often thinking of getting this done soon. So we’ve decide to repost this article.

After working hard your entire life to provide for your family, you should not allow the Texas Probate Code and the courts to decide how your assets are distributed. This newsletter points out the various problems of dying without a will and how these consequences are eliminated with a properly drafted will that disposes of your assets in accordance with your wishes.2

Name Your Own Beneficiaries

When you die without a will, you are considered to die intestate and your property will pass in accordance with the descent and distribution provisions of the Texas Probate Code. Sometimes these individuals are the same you would provide for under your will, but not always. When you die with a will, the beneficiaries named under your will inherit your property exactly as you specify.

Reduce the Cost and Time of Probate

If you die without a will, the cost to probate your estate is substantially higher because of additional requirements, such as filing a determination of heirship with the court to decide the rightful heirs of your estate. This procedure is not necessary when the beneficiaries of your estate are named in your will. In addition to the increased expense, the probate process is substantially more time consuming if a dependent administration is required in which the court has to approve every action taken by the administrator. On the other hand, an independent executor named in your will administers your estate with minimal court supervision. This allows the probate process to be completed in a timely and cost effective manner.

Name Your Own Executors

If you die without a will, the court will appoint an administrator of your estate based on the order specified in the Texas Probate Code. If you die with a will, the court will appoint the executor(s) named in your will before considering any other individuals.

Extend the Time in Which Beneficiaries Receive the Bulk of Your Estate

If you have minor children and you die without a will, your children will receive their share of your estate when they reach 18 years of age. With a properly drafted will, a contingent trust can hold your children’s share until they turn an age that is more appropriate for them to receive the bulk of your estate. The trustee named in your will manages the children’s inheritance until they turn an appropriate age. The trustee may make distributions to your children during the life of the trust for their health, education, maintenance and support. While the use of a contingent trust is most common when minor children are involved, they work just as well for any individual under a certain age or otherwise incapacitated. Any beneficiary designations for your life insurance policies or retirement plans should also be coordinated with your will to make sure they are distributed to the children’s trust if they are under a certain age.

Eliminate or Reduce Any Estate Tax

Under current law, if your gross estate, including life insurance and retirement, is under $5.45 million, your estate will typically pass tax-free to your beneficiaries (and a married couple typically can pass up to $10.9 million of their wealth estate tax free). However, if your gross estate exceeds that number, you should contact an estate planning attorney to learn about estate planning options that can eliminate or substantially reduce any estate tax which would otherwise be payable to the Internal Revenue Service. With a federal estate tax rate as high as 40%, this issue should not be ignored.

Don’t wait…. Do it now….  Make it your New Year’s Resolution this year

While most people realize they should have a will, they still tend to procrastinate over having it done. Most attorneys can have a will prepared within days of the initial meeting, which will alleviate the many problems your loved ones will face if the time is not taken to get your affairs in order.

Estate Administration: The Will After Death

Wills are the most common way for people to state their preferences about how their estates should be handled after their deaths. A person who makes a will is known as a testator (male) or testatrix (female). A will is similar to an instruction booklet for the probate court. It provides the court with guidance as to how to distribute the person’s assets in accordance with the person’s wishes. Generally, a gift after death cannot be made to anyone other than a surviving spouse, children, or other relatives specified in state law in the laws pertaining to intestacy (dying without a will), unless there is a will that meets all the legal formalities required by state law. Thus, a will is the cornerstone of any estate plan.

A will is a very important legal document. The law favors the testamentary disposition of property, which is a main purpose and function of a will – to dispose of property which the testator owns. However, the disposition of property is not an essential characteristic of a will and a valid will may be made for the sole purpose of naming an executor. In general, people make wills in satisfaction of moral obligations. With such an obligation in mind, the testator almost always drafts a will that includes provisions for the distribution of his or her property after death. As circumstances, including applicable law, change, it is wise to consider updating your will.

Wills only control probate assets, that is, those assets that can be transferred by the probate court. Some assets do not have to be probated and generally are not controlled by a will. These assets include life insurance proceeds, which are paid to the beneficiaries designated in the policy. Other non-probate assets include property held in joint tenancy, which provides that, upon the death of a joint tenant, the deceased person’s interest automatically passes to the surviving joint tenant(s). Because these assets are transferred by means other than the probate process, a will generally does not control how they are distributed. A skilled estate or elder law attorney is the best source of advice regarding which assets are best distributed through a will, and which should be distributed through other estate planning instruments.

Example: A person names her spouse in a beneficiary designation (within the policy documents) to receive her life insurance proceeds on her death. In her will, she names her sister to receive those same proceeds. Because the proceeds are paid directly to the spouse, they never become part of the deceased person’s estate. Therefore, her will, which only controls her estate, cannot override the beneficiary designation.

A will must meet certain formal requirements in order to be valid. These requirements vary from state to state. Generally, the testator must be an adult of sound mind, meaning that the testator must be able to understand the full meaning of the document. Wills must be written. Some states, including Texas, allow a will to be in the testator’s own handwriting, which is known as a holographic will.  But it is generally considered a better and more enforceable option to have a typed or pre-printed document. For non-holographic wills, a testator must sign his or her own will, unless he or she is unable to do so, in which case the testator must direct another person to sign the will in the presence of witnesses, and  the signature must be witnessed and/or notarized. A valid will remains in force until revoked or superseded by a subsequent valid will. Some changes may be made by amendment (a “codicil”) without requiring a complete re-write.

Some legal restrictions prevent a testator from giving full effect to his or her wishes. Some laws prohibit disinheritance of spouses or dependent children. A married person cannot completely disinherit a spouse without the spouse’s consent, usually in a prenuptial agreement. In most jurisdictions, including Texas, a surviving spouse has a right of election, which allows the spouse to take a legally determined percentage (up to one-half in some places and circumstances) of the estate when he or she is dissatisfied with the will. Nondependent children may be disinherited, but this preference should be clearly stated in the will in order to avoid confusion and possible legal challenges.

A will usually appoints an executor or personal representative to perform the specific wishes of the testator after he or she dies. The personal representative consolidates and manages the testator’s assets, collects any debts owed to the testator at death, sells property necessary to pay estate taxes or expenses, and files all necessary court and tax documents for the estate. In many states, if the language of the will provides for it, the personal representative may act independently of court oversight and approval; in Texas, this is called being appointed as an independent executor or independent administrator.  If language allowing a personal representative to be independent is not included in the will, by default generally the administration of the estate must be “dependent” and must have court oversight and approval of most actions. Under certain conditions, it is possible to avoid a dependent administration even when the will does not provide for an independent executor.

While wills may be “tickets” to go through the probate process, not having a will forces the probate court to distribute the property without guidance from the testator. Dying without a will leaves an estate intestate, and a probate court must step in to divide up the estate using legal defaults to give property to surviving relatives. A personal representative must still be appointed, but the court must choose someone rather than following the deceased person’s wishes.

The court requires that any unpaid debts and death expenses be paid first, and then any distributions follow the legal guidelines found in the probate statutes. The rules vary depending on whether the deceased was married and had children, and whether the spouse and children are alive. If the intestate individual has no surviving spouse, children or grandchildren the estate is divided between various other relatives. Therefore, intestacy means that people who would never have been chosen to receive property may do so. Additionally, state intestacy laws only recognize relatives, so close friends or charities that the deceased favored do not receive anything. If no relatives are found, the estate goes to the government in its entirety. When made aware of the consequences of intestacy, most people prefer to leave instructions rather than subject their survivors and property to mandated division.

Why Do I Need a Will?

After working hard your entire life to provide for your family, you should not allow the Texas Probate Code and the courts to decide how your assets are distributed. This newsletter points out the various problems of dying without a will and how these consequences are eliminated with a properly drafted will that disposes of your assets in accordance with your wishes.

Name Your Own Beneficiaries

When you die without a will, you are considered to die intestate and your property will pass in accordance with the descent and distribution provisions of the Texas Probate Code. Sometimes these individuals are the same you would provide for under your will, but not always. When you die with a will, the beneficiaries named under your will inherit your property exactly as you specify.

Reduce the Cost and Time of Probate

If you die without a will, the cost to probate your estate is substantially higher because of additional requirements, such as filing a determination of heirship with the court to decide the rightful heirs of your estate. This procedure is not necessary when the beneficiaries of your estate are named in your will. In addition to the increased expense, the probate process is substantially more time consuming if a dependent administration is required in which the court has to approve every action taken by the administrator. On the other hand, an independent executor named in your will administers your estate with minimal court supervision. This allows the probate process to be completed in a timely and cost effective manner.

Name Your Own Executors

If you die without a will, the court will appoint an administrator of your estate based on the order specified in the Texas Probate Code. If you die with a will, the court will appoint the executor(s) named in your will before considering any other individuals.

Extend the Time in Which Beneficiaries Receive the Bulk of Your Estate

If you have minor children and you die without a will, your children will receive their share of your estate when they reach 18 years of age. With a properly drafted will, a contingent trust can hold your children’s share until they turn an age that is more appropriate for them to receive the bulk of your estate. The trustee named in your will manages the children’s inheritance until they turn an appropriate age. The trustee may make distributions to your children during the life of the trust for their health, education, maintenance and support. While the use of a contingent trust is most common when minor children are involved, they work just as well for any individual under a certain age or otherwise incapacitated. Any beneficiary designations for your life insurance policies or retirement plans should also be coordinated with your will to make sure they are distributed to the children’s trust if they are under a certain age.

Eliminate or Reduce Any Estate Tax

Under current law (through December 31, 2012; Congress has not determined if this will be extended or will change effective January 1, 2013), if your gross estate, including life insurance and retirement, is under five million dollars, your estate will typically pass tax-free to your beneficiaries. However, if your gross estate exceeds that number, you should contact an estate planning attorney to learn about several estate planning options that can eliminate or substantially reduce any estate tax which would otherwise be payable to the Internal Revenue Service. For example, a married couple can pass up to seven million dollars of their estate tax free with a properly drafted estate planning will that includes the use of a bypass trust. With an estate tax rate as high as 35% (or higher if the law changes on Jan. 1), this issue should not be ignored.  Additionally, if Congress fails to address the estate tax soon, the current law will expire and the amount you can pass estate tax free is due to revert downward back to one-million dollars.

Don’t wait…. Do it now….  Make it your New Year’s Resolution this year

While most people realize they should have a will, they still tend to procrastinate over having it done. Most attorneys can have a will prepared within days of the initial meeting, which will alleviate the many problems your loved ones will face if the time is not taken to get your affairs in order.

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