This year saw a number of tragic celebrity deaths, and some were complicated further with estate planning issues. Using these stories can be a good way to transition into discussing issues of estate planning with your own family. A look back on the celebrity deaths and estate battles of the rich and famous shows just how many things can go wrong when an estate is not properly planned.
Although Patrick Swayze died over five years ago, reports are coming out now that members of his family believe that his will was forged only a couple of months before his death while Mr. Swayze was hospitalized. His entire estate was left to his widow, and nothing was left to his mother or siblings. Because of the length of time that the estate has been closed, chances are that the estate documents will remain valid despite allegations of forgery.
The lesson learned: estates are administered according to state rules and regulations where the person died. Anyone who feels wronged by the terms of an estate must act quickly before the statute of limitations on the will runs out.
Mick Jagger's girlfriend and fashion designer L'Wren Scott committed suicide earlier this year, and Mr. Jagger was so distraught that he postponed part of The Rolling Stones' world tour. The delay caused a multi-million dollar insurance claim that led to further legal proceedings between Mr. Jagger and insurance companies. The dispute was settled quickly after the insurance companies requested personal information regarding Ms. Scott's death from her family members, medical records, and social media accounts.
The lesson learned is that insurance disputes regarding a deceased loved one are not uncommon, especially when there is a dispute about who should be the rightful beneficiary to part of the estate. Good estate planning can help avoid these types of issues between family members or from becoming public.
The late author's estate is currently embroiled in a fight over eight million dollars because Mr. Clancy was never clear about who should be responsible for the taxes resulting from his $82 million estate. The dispute is whether his wife's share of a trust should pay for half of the IRS bill or if his children from a prior marriage should be forced to pay it all.
The lesson learned from his estate is that it is important to be clear and unambiguous in the drafting of a will and other estate planning documents. This is especially important in families with subsequent marriages, children from multiple families, or if the bonds of family are strained in any way.
Musician Lou Reed only relied on a will to distribute the entirety of his $30 million estate. Because the contents of a will are public record through the probate court system, newspapers and other media outlets could publish the details of Mr. Reed's assets, income, and distributions.
The lesson learned from Mr. Reed is that probate is public, time consuming, and expensive. The use of other estate planning tools instead of or in conjunction with a will can help keep a family's affairs private and out of probate.
This year saw a number of tragic celebrity deaths, and some were complicated further with estate planning issues. Using these stories can be a good way to transition into discussing issues of estate planning with your own family. A look back on the celebrity deaths and estate battles of the rich and famous shows just how many things can go wrong when an estate is not properly planned.
Divorce is almost always an emotionally and financially draining experience, and high asset divorces come with an increased level of tension and drama. It is because of that emotion that some spouses in high asset divorce settlements make irrational decisions or financial errors that can cost them thousands or millions of dollars in the end. However, there are some areas in a high asset divorce that can be analyzed to ensure that you are getting the most out of the settlement proceedings.
Hiring a Valuation Expert
One way to minimize potential mistakes in a high asset divorce is to hire a valuation expert. This person is an objective professional who is hired to make accurate valuations of all assets for the couple based on specific metrics and methodologies. Many valuation experts are associated with accounting firms and carry special designations for their profession. However, more help may be necessary for the expert if highly specialized assets like a privately held company, holdings in a family business, or other technical investment interests are at stake.
When assets like stock or equity portions of a business are at play all of the contingencies surrounding distributions, transfer of ownership, and sale must also be considered by the valuation expert. A divorce valuation expert with investment management experience who deals regularly with high-value, complex portfolios can help navigate these types of situations.
Review Life Insurance Policies
This is another area where misjudgments are often made in high asset divorces. Many people do not think of life insurance as an asset, but as any other form of insurance like auto or home. It is possible to accumulate a large amount of wealth within a life insurance policy without the other spouse ever knowing.
Even when an insurance review is conducted, life insurance policies can be difficult to valuate. Different policies are structured in different ways depending on the needs of the client, and oftentimes the money in a life insurance policy is held in trust for estate planning purposes. It is important to have someone on your team with knowledge of trusts and insurance that can properly determine the current value of the policy in addition to the best way to equitably divide it.
Looking at Lifestyle
The cost of maintaining a certain lifestyle often comes up in high asset divorce cases, but it is not often treated with the seriousness or financial scrutiny that it deserves. Looking at the lifestyle is especially important when one of the divorcing spouses is a high earner and the other one is not. By thoroughly reviewing the accounting and financials of the couple, knowing how and where the money was spent can help determine a fair split of assets for lifestyle accommodation.
By taking a holistic approach to looking at all potential items of value in a high asset divorce, it ensures that nothing is left on the table for either party. It also safeguards one spouse from making an emotional or irrational decision during the divorce proceedings that could cost one of them or their family dearly.
It is risky to leave your estate and financial affairs unattended or secret from the rest of your family. According to research released this year, over 64% of all Americans do not have a will, and half of the people included in that statistic have children. When you do not have a will or keep your estate planning matters secret, it has the potential to cause discord in the family or cause the assets in the estate to be improperly handled. However, with the holiday season upon us, now can be a great time to discuss your estate plans with family members and avoid any potential problems in the future.
Choose the Right People for the Right Roles
One common error in the estate planning process is giving roles to members of the family according to what the testator thinks that they would want, rather than assigning tasks according to who would be best suited for the role. Acting as a fiduciary, trustee, or executor to an estate is a job, and you need to pick the right candidate. This means considering who would be truly best suited to handle tough responsibilities like medical, financial, and legal decisions.
Set the Tone of the Talk
Depending on your personal family dynamic, you can set the tone of the talk as something more informal as a purely family affair or more formal with the help of an estate planning attorney ready to answer any questions that may arise. Many experts believe that the informal approach is preferable because it keeps the talk from being too formal, antagonistic, or feeling like it is a preliminary round before litigation. However, some families prefer an estate planning attorney be there to help answer the more technical or difficult questions that the family may have.
Prepare the Paperwork and Bring Copies
Once you know who you want to fill key roles in your estate plan, have the paperwork drafted and any necessary documents notarized before the talk. This cements your wishes and presenting copies to all of your family members leaves little room for misinterpretation of your wishes.
Prepare Your Answers Ahead of Time
Another helpful tip is to prepare what you want to say beforehand, and think about how you will answer any potential questions that may arise during the talk. This includes giving clear answers to why you chose a person for a specific duty and what your goals are in setting up your estate plan. If an estate planning attorney is present, you can also go over what questions you will field and what is the attorney's responsibility to answer.
Keep Discord to a Minimum
In order to keep argument to a minimum, remind your family that the goal of the talk is to let them know that you are securing their futures in addition to informing them about what your wishes are for your estate. Answers questions in a forthright manner, but try not to do so at the expense of antagonizing other family members. You can set ground rules for the discussion, and do not be afraid to squash any unnecessary drama that may arise.
Remember that It is an Ongoing Discussion
Estate plans often change and are revised over time, so keep in mind that this talk is an ongoing discussion between you and your family. It is also important for your loved ones to remember it, too, and to understand that as circumstances change the will may change with it. Because of this, you do not need to feel pressured to share every detail of your estate plan, and you can set up the expectation that future talks will happen about the estate.
Balancing the relationship between a trustee and beneficiary can be delicate, and if it is not handled properly the results can be costly problems and years of frustration. The beneficiaries are set to inherit valuables, homes, stock, and other assets. Yet it is the very nature of those assets that can cause tension with a trustee who controls the purse strings. However, there are some tips that can help ease the tension and create a good relationship between the person in charge of managing a trust and those set to inherit it.
Address Sources of Tension
The entire purpose of a trustee is to be a barrier between an heir and the money, so there are natural sources of tension between a trustee and a beneficiary. Most often, an heir wants access to their inheritance faster, and the trustee is hesitant out of fear that the money will be spent unwisely.
If a beneficiary wants access to the trust earlier, they should look into the terms of the trust and see if a case can be made to the trustee. However, some trusts give a lot of leeway to the trustee to change the terms as the circumstances change.
Both parties need to try and see the other perspective. For example, a beneficiary may think that taking money from the trust to put a down payment on a house is a good reason for distributions, but the trustee may be hesitant because money was distributed recently and wants to grow the portfolio before distributing again.
Discuss Money Issues
Fees are often another source of conflict between a trustee and beneficiary. The terms for fees can vary widely: private trustees can set their own terms, some states offer guidelines for fees, and other trustees do it for free as a personal favor to the trust creator. If a beneficiary thinks that the fees are too steep, he may hire another person to run the investment of the trust funds.
Splitting the roles may help keep the trustee's costs down and thereby ease tension with the beneficiary. However, another money issue that sometimes arises is the actual investment of trust funds. Beneficiaries need to keep an eye on how the funds are being invested, and it should be tailored to the needs of the beneficiary at that time in their life.
Try to Resolve Disputes
If the beneficiary is unhappy with the way that the trust is being handled, the first thing to do is open the lines of communication to the trustee before doing something drastic, like litigating. Try setting a meeting with the trustee, and feel free to bring an attorney to mediate the situation.
First, try to figure out the reasoning behind the trustee's actions because there may be a good reason why the decision was made. Also, try to seek compromise between the wishes as a beneficiary and the trustee. If the relationship is beyond saving, a change in trustee may be necessary. However, whenever possible, try to resolve disputes before taking more serious action.
Each decade of life ushers in a new set of challenges and issues for financial and estate planning. In your 20s, you are trying to establish yourself as independently financial and pay off your student loans. In your 30s, the estate and financial focus typically turns to planning for a family.
There can be more complications in your 40s, where you must balance supporting your children in addition to yourself and possible your parents. This decade is also crucial because there is still enough time before retirement to significantly affect your future. Here are some financial and estate planning moves to make before you turn fifty that can keep your retirement plan on track.
Increase Retirement Plan Contributions
By the time you are in your forties, you have hopefully paid off your student loans and hit a solid point in your career, allowing you to allocate more money into your retirement accounts. You should consider ramping up the amount that you set aside in retirement accounts every pay period. If you delay into your fifties, you will not have the compound interest working in your favor.
By increasing your contributions, you can also take advantage of any employer matching that takes place. If you have already maxed out your contributions, look into whether your employer offers other tax-advantaged options for retirement like a 457(b) plan.
Recalibrate Your Risk Tolerance
Now that you are nearing retirement age, you should also consider recalibrating the amount of risk that you are willing to take with assets in your estate. Called the "Rule of 120," this method helps you determine the appropriate balance of stocks and bonds in your portfolio according to your age and time until retirement.
The rule is simple: subtract your age from 120, and that number is the percentage of your portfolio that should be allocated to stocks. If it still seems too aggressive, try subtracting from 110. Discussing these plans with a financial advisor and estate planning attorney can help you find the right mix for you.
Prepare with the Right Insurance
Over seventy percent of people over the age of 65 will require some form of long-term health insurance during his lifetime. Forty percent of those people will need nursing home care, and the chances are likely that you will have to cover most or all of the costs of care. By shopping for long-term health insurance in your forties, you will be able to afford any medical assistance that you may need later down the line.
At the same time, you should be looking into getting a life insurance policy as well. Many people in their forties have others that depend on them, and life insurance can cover their needs should anything happen to you.
Get Your Other Estate Planning Documents in Order
Many people in their forties have amassed some level of assets, and your estate plan serves to protect what you own. Estate planning tools give you control over the distribution of your property, allows you to designate custody of minor children or pets, and ensures that your loved ones are taken care of after you are gone.
In addition to drafting any documents that you have put off writing, be sure to also double check your existing documents. This includes anything outside of the typical estate plan, like accounts and policies with beneficiary designations. Update any forms, documents, or lists of digital assets, too.
Couples without children have two main tasks when it comes to estate planning: the first is determining how to distribute the assets in the estate. The second, and arguably trickier task, is to assign a person or people who will handle your medical and financial affairs in the unfortunate event that you become incapacitated.
Durable Power of Attorney and Healthcare Proxy
A durable power of attorney form names a person to handle all of your financial matters if you become incapacitated or otherwise unable to take care of your own finances. This includes some legal matters, as well. A healthcare proxy is similar to a durable power of attorney, but this person is responsible for all medical decisions if you are incapable of making those decisions for yourself.
Naming the Proper Proxies
Couples with children typically name one of them as the durable power of attorney and healthcare proxy; however, oftentimes people without children struggle to find someone that they can trust. Spouses can appoint each other to these positions, but almost every estate planning attorney recommends having a "Plan B." This usually entails naming another, younger person to serve simultaneously or in succession to these positions in case the spouse also becomes incapacitated or passes away.
Horror stories abound of childless couples that only named each other as proxies and then had something happen to them both. Their loved ones or extended family members then had to go to court in order to have a successor appointed, a process that takes time and thousands of dollars in court fees.
In some states, there are professional fiduciaries that can be hired as professional powers of attorney or as a healthcare proxy. Some geriatric care managers will also agree to serve in proxy positions, as well. Other possible candidates for childless couples include nieces, nephews, friends, trusted neighbors, clergy, siblings, or cousins.
When naming a durable power of attorney or healthcare proxy, it is important to do more than sign the forms. Be sure to sit down with the person or people that you appoint and go over what your wishes are for your legal, financial, and medical future.
For the healthcare proxy in particular, consider drafting a living will. This estate planning document lists your wishes regarding any and all medical care should you become incapacitated. This includes certain medications, procedures, resuscitation, and the like that you do or do not wish to have done to you in a medical emergency. Your healthcare proxy is bound to your wishes in the living will, and it can ensure that your medical wishes are carried out.
In addition, consider paying or bequeathing assets to your proxies as payment for services rendered. This lets them know not only that you appreciate the service that they are providing, but it also prevents your proxies from feeling resentful. It can also prevent your proxies from helping themselves to your assets or money while you are incapacitated.
In previous posts, we have discussed the use of trusts to pass down pieces of art and other collectibles to your heirs. However, special considerations come into play when estate planning involves the inheritance of guns. Regardless of whether it is an antique gun from the Revolutionary War, your grandparent's service gun from his time in war, or a current collection of guns for hunting or home protection, gifting firearms comes with a set of unique challenges. However, some estate planning attorneys are solving these issues through the use of a new planning tool, the "gun trust."
What is a Gun Trust?
A gun trust is typically set up as a revocable living trust. It is made specifically to transfer firearms, with the gun owner set up as the trustee. Gun trusts are most commonly used to transfer firearms that come with federal restrictions, such as guns with silencers. This is because the trust can cut down on some of the paperwork needed to possess, transfer, and own these types of guns. However, a growing number of people are now using gun trusts to pass down a deceased loved one's personal collection.
Benefits of a Gun Trust
One benefit of a gun trust is that the person named as executor or trustee can have a working knowledge of state and federal gun laws, safety and storage protocols, and how to best liquidate a collection. In addition, any successor trustee named to the gun trust can be well-versed in firearms before inheriting control of the trust.
Another benefit of a gun trust is that the owner of the collection can state with specificity how the collection should be handled. In one case, the owner made a list of collectors that he knew would properly value the collection and instructed family to only interact with them when liquidating the guns.
Having a gun trust can also ensure that the beneficiaries are legally allowed to own or access the firearms. The trustee or successor trustee can check that all beneficiaries clear the restrictions of the U.S. Gun Control Act or enact contingency plans in the case that a beneficiary can no longer legally possess the collection.
One final benefit of a gun trust is avoiding the probate system. When a firearm collection has to go through the probate court, it and the beneficiaries involved become part of the public record. For collectors with particularly impressive gun collections, privacy also gives an added layer of protection against thieves.
When Isn't a Gun Trust for You?
A gun trust does not always make sense for a client who wishes to pass down firearms. If your heirs are adept at firearms and know the laws surrounding them, a gun trust may not be for you. In addition, if the collection is not very valuable you do not have to worry as much about the guns going through probate and becoming part of the public record. Finally, if the guns do not come with federal restrictions, the benefits of a gun trust are also diminished.
Many parents with adult children find the idea of discussing their estate plans uncomfortable, embarrassing, or unnecessary. Few parents want to think about their mortality or bring up the subject with their kids. Concerns about family fights over parts of the estate, which child is getting what, or reliance on a future inheritance also put parents off from discussing their plans with their children; however, there are some great benefits both emotionally and financially that can come with sharing your plans with your children.
Telling your children ahead of time about your estate plans allows you as parents to explain your decisions and lets the children plan their lives accordingly. Feedback from the children can also have an effect on your estate plans that you can implement before it is too late. In some cases, there can even be tax benefits involved. Full disclosure of estate plans may not be right for every family, but here are five reasons why it might be worthwhile to share your estate planning with your children.
You Can Settle Any Issues
Resentment over distributions in an estate plan amongst children can last a lifetime and end up costing them their inheritance if someone decides to sue. By having the conversation with the children, parents can explain why they are bequeathing their estate in that way. Perhaps one child needs more assistance, one has multiple children and others have none, or maybe the parents plan on leaving a segment of the estate to a nonprofit or charitable organization. By discussing the "why" while alive, it can alleviate hurt feelings in the future.
You Can Save Hassles and Prevent Mistakes
When parents let their children know what to expect in the estate plan, and where everything is located, it can save them a lot of hassle during an already devastating time. Grieving while also trying to sort out financial and legal issues is a nightmare that can be easily avoided with a simple conversation.
You Can Presently Increase Their Quality of Life
Not all children will simply give up on their dreams or become lax in their lives because they know that they will eventually get an inheritance. In fact, many adult children could use that money now to help with a business, provide for their family, or use it in other productive ways. Sometimes gifting part of the inheritance while the parents are alive is more productive for the children than waiting until the parents are gone to receive it.
Your Children Might Have Been Ideas for the Estate
Some parents might have concerns about specific assets in the estate, particularly a house or business, and want to ensure that it will be taken care of. Discussing these plans with the children can help the parent see any potential pitfall in their requirements and allow the children to know what is expected of them.
You Can Save Them Some Taxes
Lastly, parents need to consider the tax consequences that leaving their estate might have on their children. This is especially important for adult children that already have a taxable estate without the assets that the parents leave behind. By coordinating estate plans with their children, parents can help save their children taxes by exploring other options for inheritance such as passing on wealth to the grandchildren or gifting assets while alive.
For wealthy donors who wish to put their name on a building, beware. There can be a lot of disappointment for donors who give away large sums of money, thinking that they would get to see their name on a building or institution like a university, science lab, or cultural center but end up in a legal battle instead.
Naming Rights and More
The best way to ensure that this type of drama is avoided is for donors to clearly state their wishes in a detailed, legally binding document. Donors need to make sure that all payment terms, signage, publicity, and deadlines for work to be done are also set within the contract. Each party should know exactly what they are agreeing to.
For example, one wealthy donor wanted to leave millions to his alma mater and have a library named after him. His agreement specified that his name was the only one to be on the library and that it must last into perpetuity. The detailed agreement came in handy when the university tried to replace the donor's name with another after a few months. One phone call was all that it took to rectify the mistake because the contract provided that the donor could sue the school to enforce the agreement or get his money back.
Some disputes go beyond the naming rights and into other areas. For example, country singer Garth Brooks recently got into a battle with an organization over the construction of a building. Mr. Brooks made a $500,000 donation to Intigris Canadian Valley Hospital in Oklahoma on the condition that the hospital would build a women's center named after his mother. The hospital argued that it never agreed to those conditions and used the money elsewhere. Mr. Brooks sued and the jury not only awarded him back his donation but also doubled the award for punitive damages against the hospital.
Donors have the right to decide how much flexibility an organization can have with a donation. The donation can be made with strict compliance guidelines, or it can be given with a little leeway. They should also be sure to elect someone to ensure that the recipient sticks to the agreement after the donor becomes incapacitated or dies.
Other Issues with Naming Rights
Donors much also consider how long the recipient must stick to the agreement. As years go by, the circumstances surrounding the donation and naming rights might need some flexibility. For example, donors should consider what should happen if the building needs serious renovation or is torn down, and new potential donors want naming rights.
Similar considerations apply if the donation is a bequest or a gift named in an estate plan to an organization or institution. In that case, the estate plan should include room for flexibility in case the gift's purpose is no longer relevant. That can be accomplished by either giving the recipient leeway with the gift or by naming alternate plans for the donation.
One estate planning scam is growing in popularity for people who are looking to begin crafting their estate plan and have amassed wealth or business over their lifetimes. The estate planning aggregator claims to do comprehensive planning for people who have concerns about taxes on their wealth or business issues in their estate.
Estate Planning Aggregator
An aggregator is a person who claims to do comprehensive estate planning for individuals with complex estates. Typically, they recommend that you purchase a "wealth blueprint" or something similarly named for tens of thousands of dollars that will detail how exactly your estate will be taken care of.
Once a person agrees to purchase a wealth blueprint and sends in information regarding their estate and assets, the aggregator will create a thick booklet full of flowery discussion of your wealth, all sorts of spreadsheets and discussion that shows how you can reduce your estate taxes to zero, give your assets silver-bullet protection against creditors, and also reduce your income taxes to a pittance. It sounds great, but once you agree to the plan, the scam kicks in.
The Aggregator Scam
The aggregator will inform you that he does not actually do any of the work for the estate plan, but he can recommend the professionals who will know how to get it done. The planner then sends you a letter recommending that you go see Attorney A about drafting one part of the plan and Attorney B about another part. You also have to meet with Insurance Salesman C because you must have life insurance with your estate plan, and do not forget to see Financial Planner D to invest your moneys.
That is the scam of the aggregator - someone who does not make money doing any of the actual planning but makes great money putting together the information into a pretty booklet. For the tens of thousands of dollars that you paid, he took a couple of hours inputting your information into a program, five minutes printing the pages, and another ten minutes to bind it and stick it in the mail.
Sometimes the aggregator will tell you that the reason for the price is the state of the art software that he developed or the countless hours that he spent creating your plan. However, several companies license software to aggregators and claims of their own proprietary software should not be seriously considered.
Strength of the Plan
Some people might think that the aggregator is still worth it because in the end you got an amazing plan, but the aggregator does not know whether his strategies will work or fail. His job is simply to cast a wide net for planners and strategies that he can sell to potential clients. It does not matter if the strategy works as long as it looks like it could create huge savings for the client.
In addition to the tens of thousands of dollars received by the client, the aggregator also makes much more. Each strategy peddler that the aggregator sends a client to also sends him a referral fee for services, depending on what they spend. The planners are usually just mills, meaning that they only do one or two specific transactions but does a lot of them cookie-cutter style. No matter the client's particular circumstances or needs, the client is going to be squished into fitting that strategy.
One New York resident, now 65 years old and in retirement, has amassed a Las Vegas chip collection worth an estimated $500,000 over the course of two decades. However, he is childless, and no one in his extended family has expressed an interest in keeping the collection. He is also concerned that they will sell the collection for far less than its actual worth. Collectors can spend a lifetime accumulating things like baseball cards, comic books, casino chips, and art. However, too often these collectors do not think about what to do with these collections once they pass away.
The Need for Proper Planning
Many collectors hope that someone in their family or group of friends will enjoy their collection enough to keep it and maintain what they have done. Others think that another collector will pay a lot of money to their heirs for what they have amassed and assume that the heirs know what it is worth. Some hope that their collections will be donated to a museum in order to be displayed for posterity. However, none of these plans can be known for certain without proper estate planning.
If you do not state with certainty what you wish to have happen to your collection after you pass away, it could as easily end up in a yard sale as it could a museum. In addition, you and your heirs could miss out on valuable tax saving opportunities if you do not have an estate plan for these belongings.
Estate Planning Options for Collectors
There are a few estate planning options for collectors in regards to what they wish to have happen to their collections after they are gone. Each option comes with its own set of steps to ensure that your heirs follow through with your final wishes for your collection.
Passing on the Collection
If you wish to pass on your collection to your heirs, the most important thing to do is make sure that there is someone who wants to take it. You also need to make sure that your heir has the ability to maintain the collection and pay for any upkeep, including insurance and storage.
Other considerations for passing on a collection include how to compensate those heirs who do not receive the collection? If more than one heir expresses an interest in the collection, how do you split it up? If you split the collection, will it affect the value? Finally, if no one can afford the upkeep on the collection, are you willing to leave an endowment from your estate to maintain it?
Selling the Collection
If you wish to have your collection sold upon your death, the first thing that you should do is have it appraised, both as a whole and as any smaller lots you may think might happen in the selling process. Keep in mind that collectibles are taxed for capital gains at a rate of 28%, and the sale might be subject to other costs like commission and shipping.
Donating the Collection
A final option for collectors in estate planning is to donate their collections. Donation can be a complex and time consuming process. Some institutions only want part of a collection, and others want a donation of money in addition to the collection for maintenance and storage. However, donating to public organizations can also come with tax benefits for the current year and up to the next five years.
If your loved one has special needs or development disabilities, you may want to consider establishing a special needs trust. Also known as a supplemental needs trust, this type of trust is a legal tool used to help disabled people keep more of their income or assets without losing public benefits.
Purpose of Special Needs Trusts
This type of trust was initially created to help parents with disabled children provide for them as they grew up without making them ineligible for public benefit programs, like Social Security and Medicaid. The intent of the trust is to supplement any government benefits that they may receive or to shield excess income for Medicaid purposes.
The Medicaid program requires that participants spend down their assets in order to reach a certain level of need before qualifying for benefits. A special needs trust can be used so that a disabled Medicaid beneficiary can keep the benefit of almost all of their income, instead of using it to pay for care. That income can also be used to qualify a disabled person for the Medicare Savings Program.
If a disabled person under the age of 65 receives a lump sum, from retroactive Social Security or a personal injury settlement, a special needs trust can protect that money and keep that person eligible for government benefits. By transferring the lump sum into a special needs trust the person can remain eligible for all of their benefits and use the money in the trust to supplement their regular income for years to come.
Types of Special Needs Trusts
New York law recognizes three kinds of special needs trusts, but each type of special needs trust comes with its own set of rules, requirements, and registration. The three types of special needs trusts are a first party, third party, and pooled trust.
First Party Special Needs Trust
A first party special needs trust is funded with assets owned by the trust beneficiary. Also known as a "self-settled trust" or "(d)(4)(A) trust," this type of trust can be established to protect current or future income from, for example, an inheritance or personal injury settlement that would bring the disabled person above the limits for government benefits.
The law requires that the trust must be for the benefit of the individual with disabilities, and it must be established by a parent, grandparent, legal guardian, or the court. It must be irrevocable, and the trust agreement must also include a Medicaid payback provision. This requires the state Medicaid program to be reimbursed upon the death of the beneficiary.
Third Party Special Needs Trust
A third party special needs trust is funded by parents, relatives, or friends of the disabled beneficiary. This type of trust is preferred by parents or other friends and relatives who want to leave an inheritance to a loved one with disabilities. Not only does this type of trust shelter an intended inheritance, it can also be used during the parents' lifetimes for ongoing expenses that are not covered by government benefits.
A significant attraction of the third party SNT is that, unlike a first party SNT, when the beneficiary dies, there is no Medicaid payback requirement. The person who created the third party SNT (often a parent) chooses and has complete control over selection of the trust remainder beneficiaries.
Pooled Special Needs Trust
A pooled trust is also funded with assets that are owned by the disabled person, like a first party trust. Pooled trusts are established and managed by nonprofit organizations. The assets in the trust are pooled together for investment purposes, but the organization manages a sub-account for the beneficiary. In a pooled trust, the trust beneficiary can establish the pooled trust sub-account on their own.
If you want to lower your overall taxes for this year, now is the time to act. The opportunities to cut taxes on your overall bill are reduced dramatically after December 31. Many taxpayers forget about these opportunities or act too late to take advantage. In addition, Congress has yet to enact any intense tax changes this year, unlike the changes made in 2013. In fact, legislators have not moved on dozens of taxpayer friendly provisions that expire January 1.
Provisions that are Ending
One of the most popular provisions on the chopping block is a law that allows owners of individual retirement accounts who are 70½ and older to give up to $100,000 of their IRA assets directly to charity each year. In addition, a federal write-off for state sales taxes instead of state income taxes and a deduction of up to $4,000 a year for qualified expenses for college or other post-high school education may also end this year.
Hopefully, lawmakers will extend these provisions during this year's lame duck session, and if so, they will likely be retroactive to the beginning of the year. However, IRS Commissioner John Koskinen has warned Congress publicly that if they do not enact these extensions before the end of the year it could cause delays in tax refunds this spring.
Key Areas to Consider Reviewing
There are plenty of other issues facing taxpayers, especially given the complexity of the current code, numerous phase-outs, phase-ins, surtaxes and hidden marginal rates. Many taxpayers should consider running their 2014 tax numbers before the end of the year to see how they could benefit from specific strategies. This is particularly important for taxpayers who have had a significant change in their income or a major life event like a birth, death, marriage, divorce, retirement, the sale of a home, or a job change.
Here are some key areas to consider before the end of the year:
Adjusted Gross Income
Phase-outs and surtaxes are attached to different adjusted gross income (AGI) thresholds. One good way to avoid losing benefits or incurred surtaxes is to keep your AGI as low as possible. You can do this by spreading income over more than one year, offsetting capital gains with capital losses, making pretax contributions to a 401(k), IRA or other retirement plan, or by contributing to a health savings account.
Investment Gains and Losses
Be sure to include mutual funds held in taxable accounts because some have announced capital gains distributions before the end of the year. Taxpayers can use realized capital losses to offset realized capital gains, plus $3,000 of ordinary income, every year. Unused losses carry forward for use in the future.
All contributions should be made by the end of the year. However, a more tax-efficient move than writing a check is to give the same value in appreciated assets like shares of stock. Donors often get a deduction for the full market value of the asset while avoiding capital gains tax. For a large gift, consider using a donor-advised fund.
Unreimbursed medical costs are only deductible over ten percent of AGI, or 7.5% for people ages 65 and older. However, some assisted living costs and nursing home costs are typically deductible, in addition to tuition for special schools for students needing special therapies. If you meet the threshold, there are a wide range of other healthcare costs are deductible, as well.
This is the first year to implement a tax on people who do not have health insurance that meets the Affordable Care Act. To avoid the tax, people need to have been covered by an approved healthcare policy for nine months in 2014. If you were not, the penalty is either a flat amount or one percent of income, whichever is greater.
It's not uncommon to turn on the television and see an advertisement for a state that is enticing visitors to vacation or move there permanently. However, more and more states across the nation are also trying to advertise that they are a great place to die. In 2015, four states are increasing their state-level estate tax exemption, reducing or eliminating altogether the amount of state estate tax that heirs will have to pay.
States Lowering Estate Taxes
As of January 1 next year, Tennessee's estate tax exemption will jump to $5 million from $2 million this year. In addition, Maryland's raised its estate tax exemption level from $1 million this year to $1.5 million next year. Minnesota is increasing to $1.5 million from $1.2 million, and in April 2015, New York's exemption level will rise from $2.062 million to $3.125 million.
And that is not all - in 2016, Tennessee is eliminating its state-level estate taxes. Maryland and New York plan on continuing to increase their exemption levels through 2019, when they will match the federal estate tax exemption level. Minnesota plans on increasing its exemption for state estate taxes by $200,000 every year until it reaches $2 million in 2018.
Reasons Behind the Shift
Legislators in states that have enacted a state-level estate tax are concerned that wealthy retirees will simply move to another state to avoid the taxes, depriving the state of income taxes now. Taxes are the most common reason why retirees move from one state to another, and it is not hard to understand why that is the case.
Hawaii and Delaware have state-level estate tax exemptions that match the federal level. However, fourteen states and Washington, D.C. have lower exemption levels than the federal limit, and their tax rates range from twelve to nineteen percent. New Jersey's estate tax exemption level is only $675,000, which affects heirs that inherit even relatively modest estates.
In addition, seven states have an inheritance tax, which differs from an estate tax. Unlike an estate tax, which is made against an estate before the assets have been distributed, an inheritance tax is paid by the beneficiaries. Maryland and New Jersey have both estate and inheritance taxes with maximum rates ranging from 9.5% to 18%.
What You Should Do
If you live in a state that has an estate or inheritance tax, you can consider moving to a state that does not or that has a high exemption level. If you live in a state that has an estate or inheritance tax and you do not want to move, you should speak with an experienced estate planning attorney about other tax saving strategies for your estate plan. For example, you can take advantage of making gifts during your lifetime to reduce the size of your estate.
In addition, if you already have an estate plan in order, make sure that it is regularly updated to reflect any changes in your state's estate or inheritance tax laws. As more states try to keep or lure more retirees, more changes to the state-level estate tax should be expected.
Part of proper estate planning means safeguarding not only your physical, tangible assets but your digital assets, as well. Many people do not protect these assets for a variety of reasons: a few do not think that it is important, some do not know how, and others simply do not want to think of the prospect of estate planning. However, protecting your digital assets can be easy and doing so will not only give you some peace of mind but will do so for your loved ones, too.
Why You Should Protect Digital Assets
You can do and buy just about anything online nowadays, and most of it you can accomplish with the phone in your pocket. Digital assets are more plentiful than ever, and you might not be aware of how much you have actually amassed in this form. One study by McAfee, a computer protection company, found that the average person has over $35,000 worth of digital assets on various devices that they own.
These assets include everything from sensitive financial records, personal information on social media accounts, music on iTunes and more. Digital estate planning is more than just accounting for what assets you have in digital form; it is also about protecting digital assets that have personal value. And yet, 63% of the participants surveyed in the study admit that they have no idea what will happen to it all once they pass away.
How to Protect Digital Assets
To begin, compile a list of all of your digital assets that includes everything from social media accounts, music playlists, email accounts, financial accounts, online subscriptions, retail accounts, digital payment tools like Paypal or Dwolla, and any other information that can be stored on a computer. Afterwards, put together an inventory list of all usernames and passwords that are connected to those accounts.
Once you have created a list of your digital assets, you also need a safe place to store it. You should consider both online and physical storage - whatever you feel more comfortable with. If you want to save the list online, websites like PasswordBox and apps like Dashlane can consolidate all of your online login information. You can pass on the access to these websites and apps to someone in your estate plan. If you opt to keep a physical list of your digital assets and their associated passwords, make sure that you keep it in a safe place like a safety deposit box and tell someone that you trust where to find the list once you are gone.
Extra Considerations for Digital Assets
While you are compiling your list of digital assets, also take time to look at the policies for your social media accounts and emails. For example, Facebook gives family members of deceased loved ones the option to memorialize that person's account, downloading, or deleting it. Google's Gmail has the option to activate an "Inactive Account Manager" that can give access to an email account to another person or delete it after a certain period of inactivity.
You should also consider whether you would like the executor of your estate to also be the executor of your digital assets. A digital executor can be appointed in your estate plan to manage all of your digital assets once you have passed. By naming a digital executor and specifically listing your wishes for your digital assets, you can ensure that your final wishes for them will be fulfilled.