If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!
Time and time again, when I meet with clients that have parents living, they begin to realize that they have no idea where their parents stand in terms of having the right plans in place to protect their assets and wishes if something were to happen to them. Even worse, frequently the adult children don’t even know where to begin looking to locate this information in the event of a crisis.
Do their parents have a will or trust and, if so, where are these and other important documents located? Should assisted living or nursing home care become necessary, what plans are in place to cover the costs? Will mom or dad even have enough money after these costs to carry them through retirement? Where do mom and dad keep their important legal and financial documents and when was the last time that they were reviewed and updated?
These are some very important questions that need to be asked, and an experienced wills and trusts lawyer can steer you in the right direction. That being said, no matter how good your relationship is with mom or dad, the subject can be a difficult one to approach.
Perhaps the best place to start is timing. Holidays such as Christmas, Hanukkah and Thanksgiving are known to be stressful times, so avoid these occasions. Current events often present the perfect opening, as there is always some Hollywood legend or financial mogul who dies leaving a fortune for the heirs to squabble over. For examples, see our prior blog posts on the Estates of the Rich & Famous and Lessons Learned from Michael Jackson’s Estate. Amy Winehouse, Rosa Parks, Farrah Fawcett and many others serve as additional examples.
Or, the personal experience of a friend or relative can be worked into a dialogue. “So-and-So’s mother was admitted to the hospital recently and no one knew where to find her important papers.” For the adult child who is doing estate planning of their own, it would only be natural to want to discuss their parents’ plans with them during this time.
For some families, several conversations over a longer period of time might be a better approach. No one wants to feel like they are being told what to do, and money matters are often emotionally charged conversations to begin with.
Remember, advance preparations are in the best interests of your parents, so that their wishes can be carried out upon death. Be sure to communicate this from the start to avoid your parents shutting down or getting defensive about the questions you are asking.
A friend of mine was called up to make medical decisions for her father upon his death bed. She told me how stressful it was for her, because her father had never documented his wishes and had never talked to her about them. At the end of the day, she did the best she could, but it was stressful and she always had that little nagging voice in the back of her mind saying, “is this really what he would have wanted?” The goal is to give everyone peace of mind by knowing there is clear guidance and instructions in place and that your parents will receive the care they desire.
Finally, don’t forget to include the topic of long-term care in your conversations with mom or dad. While no one likes to think about the possibility of becoming disabled or incapacitated by something like a stroke or Alzheimer’s disease, it does happen and it is something that must be planned well in advance for. If you start early enough, a wills and trust lawyer can help you put the right plans in place to ensure mom or dad’s wishes during incapacity are honored and that they won’t be forced to sell or give away all of their assets in order to qualify for state or federal assistance.
Are you now ready to help your parents put a rock-solid plan in place that ensures their end-of-life wishes are honored to the fullest? To get started, simply call our office at (919)443-3035 and ask about one of our upcoming workshops or to schedule a Peace of Mind Planning Session.
The following article originally appeared in an issue of Planning Partners Press, a free newsletter provided courtesy of Carolina Family Estate Planning to Triangle-area financial professionals. If you are a financial professional that would like to learn more, please click here to request a subscription.
Charitable Remainder Trusts are powerful tools for estate, tax, and financial planning. The potential sale of the income interest in a CRT adds more power and flexibility to planning. The CRT is a split interest trust where the grantor retains an income interest and the remainder goes to one or more charities, which can be chosen by the grantor or by somebody else.
For example, let’s consider a business owner considering selling her business. Instead of a traditional business sale, she might consider donating the business to the Trustee of a Charitable Remainder Trust and having the Trustee sell the business. The gift to the CRT can create an immediate income tax deduction of a portion of the value of the business. The capital gains taxes that she would have to pay on the traditional sale would be deferred and possibly avoided altogether. The transfer to the trust is a charitable gift, so there are no gift tax concerns and the business is removed from the grantor’s taxable estate.
The application of this tool in specific situations is potentially powerful and complex, and this planning should be undertaken only by those who have mastered this area. One downside to this planning is that the grantor receives an annuity payment from the trust rather than a lump sum or discretionary distributions. There is little flexibility to the income stream. What if the grantor finds that she has an immediate need for the funds?
One possibility is the sale of the income interest. There are companies that will purchase these income interests. They will pay the grantor the present value of the income stream, giving the grantor immediate funds and the company some profits over time. The sale is taxed as a capital transaction, so there will probably be capital gains taxes on the sale. The capital gains tax rate will be at the current 15% bracket (or less), rather than whatever the future rates will be. Without the sale of the income stream, the taxpayer will pay taxes on all or some of the distributions, perhaps as capital gains, perhaps as other types of income. A spendthrift provision in the CRT could prevent the sale entirely, so an attorney should review the trust to ensure the sale doesn’t violate any trust provisions.
Roger Silk of Sterling Foundation Management points out that
CRTs are tax-deferral vehicles; they defer to the future the tax a client must pay on the donated assets. If tax rates are stable or falling, this deferral works great because the client gets to pay the tax at a lower rate. But if tax rates rise, the deferral works against the client by forcing them to take their income in the future, when tax rates are higher.
If a client does nothing and tax rates rise, they’ll almost certainly suffer a loss on the value of their CRT. They can avoid this loss entirely by selling their CRT interest today, for a lump-sum cash payment. The benefit, of course, is that the sale is considered a capital transaction, so the proceeds are taxed at capital gains rates.
The sale of a CRT income interest is not always the right thing to do, but sometimes it is. Financial advisers, attorneys and CPAs who have clients who have CRTs should take a look at whether the sale of the income interest makes sense. This review is best done as a team to consider the family, income tax, estate tax, and financial consequences of such a sale.
The following article originally appeared in an issue of Planning Partners Press, a free newsletter provided courtesy of Carolina Family Estate Planning to Triangle-area financial professionals. If you are a financial professional that would like to learn more, please click here to request a subscription.
I am a cop, assigned to the Bureau of Missing Estate Plans. My captain is Giuseppe Venerdi, my partner is Jose Viernes. My name is Joe Friday.
It was a balmy spring day when Captain Venerdi called us into his office. The captain started right in. “I need your help with a determination of probable cause. The decedent, Vic, was in business with his partner Tim. They had a lawyer draw up a cross-purchase buy-sell agreement so that if anything happened to Vic, Tim would buy his shares at a price to be set in the agreement, and vice versa. Vic and Tim were required to buy insurance on the life of the other to provide money for the purchase.”
“Sounds good.” I said.
“Yeah”, the captain continued, “there was nothing wrong with the document. But there is a blank spot in the agreement where the price was supposed to have been filled in. It’s been 10 years since the agreement was signed, and the amount of insurance has never been adjusted as the value of the business increased, and to top it all off, each partner purchased a policy on his own life, and Vic made his policy payable to his wife. Vic died unexpectedly two weeks ago. He was only fifty years old.”
José interrupted. “So the wife has the money, the estate has the stock, and Tim has an obligation to buy the shares, but no money to do it with.”
“You got it” the captain said. “Vic and Tim had a cross-purchase agreement, but they never funded it correctly, and never updated it, so they never had a business succession plan that would work. Tim says its Vic’s fault because he gave the insurance proceeds to his wife; the widow says it’s Tim’s fault because he was supposed to buy a policy on Vic’s life, not his own. The widow doesn’t want the stock, but doesn’t want to make a gift to Tim, and other creditors of the estate don’t want a sale at less than fair market value. So, who is responsible for the missing estate plan? Vic? Tim? The lawyer?”
I was silent. I was calculating the legal fees to straighten this mess out, and wishing I’d gone to law school.
BMEP CRIMESTOPPER TIPS:
- Clients tend to believe that their planning, be it estate planning or business succession planning, is complete as soon as the documents are signed. They need to be informed, and reminded, that no plan is complete until it is properly funded.
- Like any other estate plan, business succession plans need to be reviewed regularly, especially if the agreement itself sets the purchase price. A change in the tax laws may make a redemption agreement more favorable than a cross-purchase, or vice versa.
- A review of the funding of a buy-sell is also critical. As the business increases in value, additional insurance may become necessary. And as new insurance products are introduced, or as mortality tables change, the old policy may simply become a bad investment.
- The client’s advisory team needs to have a process for reviewing and updating the plan as things change. Without a formal plan, it is likely that the updating will never get done.
In the midst of finding the perfect dress, choosing a venue, and tasting countless cakes, Cary newlyweds often overlook the importance of finding a reputable wills and trusts lawyer. It’s easy to get caught up in planning for the wedding and to forget about planning for the marriage! Really, though, the beginning of your new life together is exactly the right time to start your estate planning.
Perhaps you think it’s unnecessary because you don’t have what you would consider an “estate.” Wills are not just about leaving property to your (potentially not-even-born-yet) children, however. They help protect you and your new spouse, as well as other family members, should something unexpected happen.
Living Wills
Living wills are a powerful example of why newlyweds need a wills and trusts lawyer. A living will declares your wishes in case you are unable to make them clear on your own. Would you want to live on life support? Do you wish to donate your organs? Are there medical procedures that you absolutely would not want to undergo? Your attorney can help you draw up the paperwork that makes your wishes clear and relieves your new spouse of trying to make those very difficult decisions in what would likely be the worst time of his or her life.
Along with a living will, you will likely also need to create powers of attorney. These will designate who is able to make decisions for you, both medically and financially. In many cases, this will be your spouse, but what would happen if you were both unable to make quick decisions for yourself? A wills and trusts lawyer will help you create these important documents according to your local laws and regulations.
Probate
If you should suddenly pass away, would your spouse or other family members have access to your insurance? Your bank accounts? Your property? The answer is not as obvious as it seems. Your estate could easily end up in probate, meaning that those who should inherit from you are denied access for months or even years. Putting an estate plan in place can help relieve some of this burden while speeding up the process for your loved ones. It can also save them considerable amounts of money.
A wills and trusts lawyer will help you make sense of what needs to be done, and the process is actually far easier than many people imagine. It’s also less expensive than you might think, and certainly less expensive than having your new spouse or family denied inheritance that should rightfully be theirs. Just consider it one more administrative task that needs to be taken care of as you add your spouse’s name to your accounts, get a driver license with your new name, or take care of the other paperwork that comes along with being a newlywed.
At Carolina Family Estate Planning, we often work with newly married couples to create a plan that works now, but also takes into consideration your wishes and plans for the future (i.e. children, acquisition of new assets, business growth). To get started, simply call our office at 919-443-3035 and ask to schedule a Peace of Mind Planning Session.
The following article originally appeared in an issue of Planning Partners Press, a free newsletter provided courtesy of Carolina Family Estate Planning to Triangle-area financial professionals. If you are a financial professional that would like to learn more, please click here to request a subscription.
That is one of the most common questions about the administration of trusts and estates The answer is, “it depends.” The beneficiaries, and perhaps the trusts themselves, are subject to the income tax. Distributions of principal are not subject to income tax. Distributions of income are subject to income tax. The trust has to pay income tax on any income that is not distributed.
Some trustmakers have so much control over the trusts they have created that the IRS ignores the trusts completely. These are called Grantor Trusts and any income earned by the trust is simply part of the trustmaker’s personal income tax return.
If a trust or estate has over $600 of income during the year, the trustee (or executor) must file an income tax form called a Form 1041. The biggest difference between a 1041 and a 1040 is that a trust gets a deduction for distributions of income to beneficiaries. This results in ensuring that either the trust or the beneficiary, but not both, pays income tax on every dollar of income. The trustee files an informational return, a K-1, if there were any distributions. This lets the beneficiaries know how much of the distributions they received are taxable to them. If there is any tax due by the trust, the trustee is responsible for making sure the income tax is paid.
A rule that is sometimes hard to grasp is that trust income and the taxable income of trusts are not the same thing! For example, most states’ laws regard capital gains distributions as principal, not income, for trust accounting. For income tax, these are income. It is important to keep this in mind while working with trust income.
The income tax on the amount of trust income that is distributed to beneficiaries is paid by the beneficiaries, as part of the beneficiaries’ tax returns. The income keeps the same character as it had for the trust; for example, if the trust had long-term capital gains and distributes them, the beneficiary has long-term capital gains. This amount is a deduction on the trust’s income tax return. So, somebody’s going to pay income taxes on any income earned by the trust. It could be the trustmaker (in a Grantor Trust), the beneficiary (if there were distributions), or the trust itself. The trustee does not decide which distributions are income and which are principal; we calculate the Distributable Net Income and apply the DNI rules to determine who pays what. The results are sometimes surprising, especially when the trust receives tax-free income.
Keep in mind that the tax rates for trusts are the same as for individuals, but the brackets are smaller so the trust marginal tax rates are usually higher. Trusts reach the 35% income tax bracket at only $11,200 of taxable income.
It is important that trustees review their income and distributions with their tax advisors at the end of the year. Fortunately, the IRS grants trustees (and executors) the option to treat distributions during the first 65 days of a tax year as made in the prior year; so, the trustee and his tax advisors do have a couple of months to get this done. During that review, they can figure out what the best results would be and structure the distributions to achieve them.
