Estates and Trusts Law Blog
Estates and Trusts
Estate Planning for the College-bound Kiddo
It is college decision time for so many families and their soon-to-be adult children. Most are fretting over the cost of college, what their child will study, and how far from home they will be in six short months. Between those worries, the endless Amazon orders, and trips to Bed Bath and Beyond, is that their college-age kids need a few simple estate-planning documents in place before they leave. Estate planning documents for an 18-year-old? Yes! The two most important documents that your now-adult child needs are a Health Directive and a Financial Power of Attorney, particularly when they are away from home. A health care directive in New York is referred to as a Health Care Proxy. A Health Care Proxy is an “advanced directive” that allows someone else to make health care decisions on your behalf. Most assume that this document is only needed for an older person, but that could not be further from the truth. A Health Care Proxy authorizes you to make decisions for your adult child in the case of a medical emergency when they are away. Most importantly, a Proxy can provide you access to your adult child’s health records and information. Access to your adult child’s health information can be vital to ensure that they are receiving proper care, particularly in light of the collective mental health issues that befall so many of our college-bound children. Every Health Care Proxy should contain a privacy waiver, referred to as a HIPPA waiver, that permits your adult child’s healthcare providers to share your adult child’s private health information with you; without this waiver, doctors and nurses cannot provide you with any information regarding your child’s health including, diagnoses, blood test results, treatment plans, etc. In addition to managing your adult child’s health care concerns, a second advanced directive, commonly referred to as a Financial Power of Attorney, will allow you to assist your child with his finances. Once your child turns 18, they are an adult, and you no longer have access to their child’s bank accounts, their school records, school loans, nor the ability to sign on their behalf. Many parents assume that because they are paying the tuition bill for their child’s college, for example, that they would automatically have access to all of their school information, including transcripts, and that is simply not the case. The power of attorney appoints you as your adult child’s agent to be able to access this information at any time, sign documents on their behalf, open and close bank accounts and renegotiate school loans. While 18 may be the legal age of adulthood, often the financial responsibilities associated with adulthood are best managed with a parent’s assistance, and the Power of Attorney document will provide you the authorization you will need to help your adult child. Certainly, we all wish that there was a guidebook available to help us send our children off safely to their dorms and embark on their new life of independence. In the meantime, having these two simple documents in place, you will be able to provide the assistance and the guidance that your adult child may need when they first leave home.
April 4, 2023
Estates and Trusts
Three Reasons a Lawyer Should Settle Your Estate
When a loved one has died, the shock and sorrow of their loss may quickly lead to another emotional jolt—the prospect of having to settle their estate. Being named personal representative (executor) under someone’s will is both an honor and a burden. The process usually takes several months. There will likely be financial accounts to marshal, real estate to deal with, bills and taxes to pay, and probate filings to prepare—all at an emotionally difficult time. For many personal representatives, their first question is “How can I get out of this?” The good news is that a probate attorney can provide the necessary support and expertise to ensure that the estate is managed efficiently. In fact, an experienced lawyer can handle most of the tasks the personal representative would otherwise be responsible for. After passing these administrative duties over a member of the bar, the personal representative may well feel that a great burden has been lifted from their shoulders. When it comes time to have your own will prepared, you can name a probate attorney as your personal representative and spare your loved ones the burden of settling your estate. Especially for those of us in the LGBTQ community, this can be an attractive option for three important reasons. A lawyer can help ensure that your wishes are respected. First, in addition to providing legal expertise, a lawyer can help ensure that your wishes are respected. Settling an estate often triggers disputes among family members. This can be especially true in families with strained relations. Animosity might stem from a parent or other relative’s homophobia, or from simple family dysfunction. Either way, a lawyer can help prevent disputes by acting as a buffer between members of your family and other beneficiaries. And as a point of contact for the estate, the attorney can explain the administration process and how the assets will be distributed—all without the emotional baggage that frequently exists between blood relations. The result is often a smoother and less contentious administration process than when a family member serves as personal representative. Second, naming a probate lawyer as your personal representative can also save time and reduce stress for your loved ones. Estate administration can be a long and burdensome process, and a non-lawyer will likely find it physically and emotionally draining. A lawyer can help streamline the process and handle the difficult legal aspects of the job, allowing your loved ones to focus on grieving and self-care. Most people who settle an estate do so only once in their life. While learning on the job, they may naturally make mistakes and missteps along the way. By contrast, a probate lawyer will be intimately familiar with every aspect of serving as personal representative. With the help of a team of legal assistants and paralegals, they can streamline the process and handle any challenges that may arise. Third, a lawyer can help avoid costly mistakes. Estate administration involves many important decisions, such as deciding what assets to liquidate, whether to improve a house before selling it, and choosing a fiscal tax year. At each step along the way, making the wrong choice can have significant financial consequences. By drawing on years of experience, a lawyer can help prevent expensive misjudgments and ensure that your estate is settled in the most economical manner possible. Settling an estate can be a complicated and emotionally challenging process. Fortunately, there is a way out. Put an experienced probate lawyer in charge and make life easier for the people you care about most. Contact an Estates & Trusts attorney today to get started.
March 2, 2023
Estates and Trusts
Case Study on Estate Tax Reduction Strategies: Business and Investment
In the following case study for business owners, Offit Kurman attorneys Herbert Fineburg and Charles “Max” McCauley illustrate an estate and gift planning strategy for removing your business from your taxable federal estate. This tax planning also works for your stock portfolio. The presentation was delivered at the Philadelphia chapter of The Exit Planning Exchange’s monthly conference.
October 14, 2022
Estates and Trusts
Empower Your Loved Ones with a ‘Power of Appointment’
Preparing an estate plan means having a say in what happens to your wealth after you are gone. Through a Last Will and Testament, you can name the important people in your life who will inherit your assets. You can also specify whether they should receive these assets immediately upon your death or over time through a trust. Looking even farther ahead, you can give your loved ones a “power of appointment,” enabling them to say where any remaining trust assets should go when they themselves are out of the picture. With a power of appointment at their disposal, your loved ones can direct their inheritance to subsequent generations wisely and effectively. Trusts — A Primer First, a little explanation. A trust is an arrangement under which money or other property is managed by one person, called the “trustee,” for the benefit of another person, called the “beneficiary.” Trusts can be especially useful if your loved ones include a young person, someone with special needs, or anyone who has trouble managing money. In placing their inheritance into a trust, you create a gatekeeper—the trustee. This person is a fiduciary who manages the trust assets and makes distributions only in your beneficiary’s best interests. With a power of appointment at their disposal, your loved ones can direct their inheritance to subsequent generations wisely and effectively. Some distributions could be discretionary. For example, the trustee could be authorized to cover expenses related to your loved one’s health, education, and support as the trustee deems advisable. This authority could be broadly defined to include things like paying for a wedding, buying a house, purchasing a business, or entering a trade or profession. Other distributions from the trust could be mandatory. A trust for a young person might say the beneficiary is entitled to withdraw half of the principal upon reaching the age of 25 and the balance when he or she turns 30. Some people like to include provisions that encourage the beneficiary to achieve certain life goals. The trust could state, for example, that the beneficiary is to receive a large distribution upon graduating from college. Trusts can also discourage harmful behavior by pausing distributions if the beneficiary falls prey to addiction or alcoholism—apart from payments for rehabilitative treatment. By including a “spendthrift clause” in the trust, you can prevent a creditor from placing on lien on the principal to satisfy your child’s unpaid debts. If your children are adopted, placing their inheritance into a trust can ward off possible intrusions from their birth family. Unscrupulous “friends” seeking a loan can also be kept at bay. Powers of Appointment In addition to protecting a loved one’s inheritance, a trust can say what happens upon the death of the beneficiary. Many trusts simply state that any remaining trust property goes to the beneficiary’s children in equal shares. With a power of appointment, however, you can give the beneficiary greater flexibility and control. A power of appointment is the legal right to designate the new owner of property. How can this be useful? Consider a beneficiary who has two children, one with special needs. The beneficiary could exercise the power by appointing half of the trust property in a special-needs trust for the disabled child and half to the other child, outright and free of any trust. In different circumstances, the beneficiary could effectively disinherit an estranged child. Or multiple children could be left different amounts of the trust property, based on their financial needs or how close they have been to the beneficiary. Under a “special power of appointment,” the potential appointees could be limited to a select group of people, such as the beneficiary’s spouse and children. Or the power could be “general,” meaning there are no restrictions on the beneficiary’s power to appoint (think unmarried partners, friends, or charities). Either way, the power could be exercised under the beneficiary’s own Will, which should specifically reference the power of appointment and name the new owners. A power of appointment has been called estate planning’s secret weapon. Consider including one in a trust for your loved ones. It will help them adjust your estate plan to their circumstances long after you are gone. To get started, call an Estates & Trusts lawyer for help.
October 11, 2022
Estates and Trusts
Historic Increase to Your Lifetime Exclusion from Federal Estate Taxes for 2023
Ironically, there is good news for some families due to rising inflation for gift and estate planning purposes. As a result of inflation adjustments built into federal estate tax laws, your lifetime exclusion from federal estate taxes is set to rise from $12.06 million per person in 2022 to almost $13 million in 2023. This is a total exclusion amount of almost $26 million per married couple [The inheritance tax rules, if any, for the state where you reside vary from state to state and are not discussed in this article]. Specifically, according to recent reports, in 2023 the estimated inflation adjustment will be $860,000, resulting in an aggregate exclusion amount of almost $13 million per person ($12,060,000 plus $860,000 = $12,920,000). This is a remarkable increase when compared to the 2022 inflation adjustment increase of $360,000, at that time the largest on record. By comparison, the inflation adjustment for 2016 was a mere $20,000. Additionally, the annual gift tax exclusion is set to rise from $16,000 per donee in 2022 to $17,000 per donee in 2023. This means you can gift up to $17,000 to an unlimited number of individual recipients without incurring gift tax consequences or reducing your estate tax lifetime exclusion. High-net-worth individuals will benefit from the inflation adjustments because they can move significant assets out of their taxable estates before the scheduled reduction of the exclusion amount on January 1, 2026, when the exclusion amount will drop by a staggering 50%. For example, in 2026, a married couple will go from being able to gift nearly $26 million free of federal estate tax to only being able to gift $12 million (adjusted for inflation) free of federal estate tax. Acting now to take advantage of the historically high exemption could save your family millions in federal estate taxes. Note: If you die before 2026, under the portability rules, your surviving spouse can carry over your unused exclusion to the surviving spouse’s federal estate tax return; otherwise, your exclusion is permanently lost. An individual who wants to take advantage of the current tax laws before they expire may loan their stock portfolio to an intentionally defective grantor trust for the benefit of the individual’s spouse or children in exchange for a promissory note that can be forgiven in 2025 — the eve of the tax law changes — using the exclusion amount before it disappears. Couples will typically consider a trust for a spouse to preserve access to the trust portfolio during the spouse’s lifetime as the trust beneficiary. In conclusion, if you expect that your taxable federal estate will be more than $6 million (adjusted for inflation) for a single individual or $12 million (adjusted for inflation) for a married couple, you should consider the federal estate tax benefits to your heirs by engaging in estate and gift tax planning. Please get in touch with Danielle Friedman or Herb Fineburg with any questions or additional estate planning techniques to reduce your taxable estate and preserve your lifetime exclusion.
October 10, 2022
Estates and Trusts
Is Same-Sex Marriage in Jeopardy?
This article has been updated. The Supreme Court’s decision overturning Roe v. Wade has sent abortion-rights advocates reeling. In a 6–3 opinion, the Court ended a constitutional right that was the law of the land for nearly half a century. The ruling could put other constitutional rights in jeopardy as well. Many in the LGBTQ community are asking, “Is same-sex marriage next?” Like the right to abortion, the right to same-sex marriage hinges on the Due Process clause of the Constitution’s 14th Amendment. This amendment was adopted after the Civil War as part of Reconstruction. Over the years, the Supreme Court has interpreted the amendment to guarantee the right to use birth control (Griswold v. Connecticut, 1965), to be intimate with someone of the same sex (Lawrence v. Texas, 2003), and to marry a person of one’s choosing (Obergefell v. Hodges, 2015). Writing for the majority in Dobbs v. Jackson, Justice Samuel Alito doesn’t mince words. He argues that Roe v. Wade was wrongly decided because the Constitution doesn’t explicitly mention abortion, and because a woman’s right to end a pregnancy isn’t “deeply rooted in this nation’s history.” This argument is misguided, if only because it runs afoul of stare decisis, the legal doctrine that obliges a court of law to follow prior court decisions when making a ruling on a similar case. The reasoning behind Justice Alito’s opinion may nevertheless form a road map for overturning same-sex marriage and other 14th Amendment rights. For those of us in the LGBTQ community, the question is what we can do to protect ourselves and our hard-won right to marriage. Those of us in same-sex relationships should prepare for the unexpected by drawing up estate plans. It is important to remember that a Supreme Court decision overturning Obergefell would not make same-sex marriage illegal. It would simply leave it to states legislatures to determine whether to allow gay marriages in their state. The Maryland Legislature has already done this. In 2012, it passed a bill legalizing same-sex marriage in the Free State. The law took effect on January 1, 2013, after winning approval from a majority of Marylanders in a statewide ballot referendum. Maryland’s same-sex couples who are already married can therefore take comfort. In the wake of a Supreme Court decision overturning Obergefell, our unions should survive, at least at the state level. But continued federal recognition of gay marriage would be less certain, and a national patchwork of laws and policies might necessarily develop. A marriage recognized in Maryland could suddenly be considered invalid in other states, and by the federal government. That could mean the end of important federal benefits, such increased Social Security payments to a surviving spouse. With that in mind, many same-sex couples are rushing to tie the knot. This is especially true of couples whose marriage plans were delayed by the Covid-19 pandemic. Whether we are disposed toward marriage or not, those of us in same-sex relationships should prepare for the unexpected by drawing up estate plans. Most plans include a will, financial power of attorney, and advance medical directive for each partner. These essential documents will authorize your partner or someone else you trust to manage your finances and health care if you ever become incapacitated. They will also help to ensure the efficient transfer of your assets upon your death. Marriage confers significant legal benefits, but a marriage license alone isn’t enough. No matter what the future holds for same-sex unions, an estate plan will help protect your relationship from some of life’s most significant uncertainties.
June 21, 2022
The Weekly Scenario
The Weekly Scenario: Virtual Maryland Wills and Trusts
Effective April 21, 2022, people can now sign their Maryland Wills and Trusts virtually. Senate Bill 36 is new legislation initiated in 2021 in response to the COVID-19 pandemic; in passing this legislation, Maryland will join several other states that permit electronic wills. To execute a valid Will in Maryland, an individual has to sign his Will in the physical presence of two witnesses. This new law allows an individual signing her Will to meet with their witnesses virtually (in their “electronic presence”) and sign their wills via an interface that supports videoconferencing and electronic signature, thus bypassing the requirement to meet in person. Thus, individuals who are hospitalized or for other reasons prefer not to visit the law office in person can put the Wills in place. After the document is electronically signed in the presence of two witnesses, a “certified paper original” of the Will is created either by the client or client’s attorney or by the client himself, in which case it must be notarized. Senate Bill 36 also made it possible to remotely execute a notarized trust agreement. It became possible to remotely execute other important estate planning documents (Powers of Attorney and Advanced Medical Directives) in 2021. While it is now possible to sign these documents electronically, I believe most attorneys will still want clients to come to the office to sign documents in person. Signing in person will allow questions to be asked and changes to be made if need be in a more formal setting.
May 20, 2022
Estates and Trusts
Leaving Little to Chance — A Trust for Your Financial Legacy
Receiving an inheritance can seem like winning the lottery. A financial windfall lands on your doorstep and promises to change your life for the better. But an inheritance and lottery winnings differ in many important ways, starting with the likelihood of receiving one. You are much more likely to receive an inheritance than win the lottery, especially if you are already well off. About 20 percent of Americans inherit money at some point in their lives, but that number jumps to almost 40 percent for people in more affluent households. Lottery winners, on the other hand, tend to be less well off, and they often have trouble managing their newfound wealth. They may also view their windfall differently. Someone who wins the lottery feels like a “winner” and may show little restraint in spending the prize money. When a sprawling house, luxury cars, and European vacations are all within easy reach, there may seem to be little reason to hold back. Someone who receives an inheritance is a different kind of winner—a person who has earned enough love and devotion to be remembered in someone’s will. Instead of being called a winner, the recipient is a “legatee.” (The word comes from the legal term for an inheritance, a “legacy.”) Whether the benefactor is a parent or grandparent, a partner or spouse, the recipient may well view the gift as that person’s personal legacy. It’s not a prize from government coffers but wealth passed down in love after a lifetime of hard work and careful investing. Viewed in this light, an inheritance is not a license to become a spendthrift. It’s a legacy that carries the implicit obligation to husband the assets in a way that honors the donor and perhaps considers the next generation. An inheritance carries the implicit obligation to honor the donor and consider the next generation. The government has recognized this difference by making lottery winnings taxable to the recipient while inherited assets generally are not. (In Maryland, one exception is the 10% inheritance tax, which applies to a bequest left to anyone who is not a close family member, such as an unmarried partner, niece or nephew, or friend.) One way in which lottery winnings and inherited wealth are the same is that they are both easy to squander. A disproportionate number of lottery winners declare bankruptcy within five years. For those who inherit, the money that had been earned through hard work may be lost through fast living. This is especially true of legacies left to a young person or someone with money-management problems. You can’t guarantee that someone will win the lottery, but you can leave them a legacy designed to last. Speak with an estates and trusts attorney about preparing a will that provides for the people you care about. If they include a young person or someone who struggles with being responsible, ask about including a “spendthrift trust” in your will. This kind of trust can protect your bequest by putting someone responsible, called the “trustee,” in charge of administering the assets. As the gatekeeper, the trustee can ensure that the money held in trust is spent for worthwhile purposes. The principal may also be shielded from your loved one’s creditors. Take care of the people you care about by having your will prepared by an estates and trusts lawyer who understands your needs on a personal level.
April 26, 2022
The Weekly Scenario
The Weekly Scenario: Governor Hogan Signed into Law the Maryland Tax Reduction Act on Friday, April 1st.
The act will cut retirement taxes by eliminating all state tax on the first $50,000 of income for retirees making up to $100,000 in federally adjusted gross income. Retirees with Maryland income will pay no state tax up to $50k. This is purported to be the largest tax reduction for Maryland residents in two decades. The tax reductions are scheduled to be phased in over five years, beginning this year. In addition, Governor Hogan will be introducing the Hometown Heroes Act to exempt retired law enforcement, fire, rescue, corrections, and emergency response workers from state tax on all retirement income specific to the profession. In 2017, the Governor exempted the first $15,000 of these employees’ income. He will push to exempt income on these professions and lower the age of eligibility from 55 to 50 years. Specifically, this bipartisan tax relief agreement includes the following provisions for FY23-FY27: Tax Relief for Retirees65 and older making up to $100,000 in retirement income, and married couples making up to $150,000 in retirement income. As a result, 80% of Maryland’s retirees will receive substantial relief or pay no state income taxes at all. ($1.55 billion) The Work Opportunity Tax Creditincentivizes employers and businesses to hire and retain workers from underserved communities that have faced significant barriers to employment. ($195 million) Family Budget Boosters: sales tax exemptions for childcare products such as diapers, car seats, baby bottles and critical health products such as dental hygiene products, diabetic care products and medical devices. ($115.6 million) Signing ceremony later this week! As always, if you have any questions or would like to learn more, please contact Steve Shane at sshane@offitkurman.com or 301.575.0313.
April 15, 2022
The Weekly Scenario
The Weekly Scenario: New FDIC Rule to Simplify Banking for Trusts
On January 21, 2022, the Federal Deposit Insurance Corporation (“FDIC”) approved a new rule (going into effect on April 1, 2024) that will simplify the agency’s deposit insurance coverage regulations (after you can through 20 pages of rules!). For clients with deposits in Revocable and Irrevocable Trust accounts, the FDIC is merging the two deposit insurance categories for revocable and irrevocable trusts and applying simpler coverage rule. The point of the new rules is that they will create a consistent and (perhaps) easier process for bankers and those making deposits. Basically, the new rule is the insuring up to $250,000 for each trust beneficiary (not to exceed five beneficiaries), regardless of whether the trust is revocable or irrevocable, and regardless of any contingencies, the allocation of distributions among beneficiaries; and the maximum deposit insurance coverage of $1,250,000 per insured depository institution for trust deposits. As an example, you create a trust for your son and his three children. The Trustee can make distributions to any of the trust beneficiaries. If this trust deposits $1,000,000 in Bank 1 and $1,000,000 in Bank 2, the deposits in both banks will be protected by FDIC insurance. By contrast, if this trust deposits $1,500,000 in Bank 3, only $1,000,000 ($250,000 x 4 beneficiaries) of this account will be protected by FDIC insurance. The FDIC does not expect most trust depositors to experience any change in coverage when the rule takes effect but will be giving a two-year lead time for banks and depositors to become familiar with the new regulation.
April 1, 2022
The Weekly Scenario
The Weekly Scenario: Planning for Diminished Capacity
There are numerous decisions that must be made when considering an estate plan. One decision to think about is who will decide things for me from a financial standpoint if I am not able to decide for myself. This could be in a temporary or permanent situation or a situation of ‘cognitive decline’ or ‘diminished capacity.’ A financial Power of Attorney (POA) is a legal document where an individual can set up a series of legal protections to deal with the contingency of incapacity. The individual, as the “principal,” can designate an “agent” to act on his behalf. Most financial POAs are durable in nature, meaning they stay in effect until the principal either recovers or dies. Some states allow springing powers, where the POA only springs into being when the principal is incapacitated. Other states don’t permit this power, so the principal’s jurisdiction is an important consideration. While many POAs are indeed broad and grant a number of powers, it is important to clarify what powers the principal wants their agent to have. For example, do they want their agent to be able to make gifts on their behalf or change a beneficiary designation on a retirement plan account? A POA is a powerful tool, but all parties should be clear about expectations. Trusts are another tool for dealing with the issue of diminished capacity. A revocable or living trust allows the person to be the grantor, beneficiary and Trustee of the trust. Thus, the individual remains in charge of the trust assets so long as they’re willing and legally competent. If the individual can no longer serve as Trustee (due to incapacity or otherwise), the successor trustee will take over and act on her behalf. A trust offers a great deal of flexibility without forcing a person to give up any control upfront. Guardianship pre-designation: For most individuals, guardianship (called “conservatorship” in some states) is a situation that generally should be avoided because it is both cumbersome and expensive. However, in many states, the individual at least can influence who would be appointed as their guardian. These states allow the individual to pre-designate or pre-plan who they would want to act as their guardian. For many states, you can pre-designate a guardian in an advance medical directive. Representative payee: An important complement to many retirees’ personal retirement assets is their Social Security. The Social Security Administration (SSA) does not accept financial POAs; instead, the SSA requires a separate designation, called a Representative Payee, to act as the agent to manage Social Security benefits in the event of incapacity. If the Social Security beneficiary hasn’t designated a desired Representative Payee in advance, in the event of loss of legal capacity, the SSA will appoint one for them. While not fun to think about, these are important issues that should be addressed in every estate plan. As always, if you have any questions or would like to learn more, please contact Steve Shane at sshane@offitkurman.com or 301.575.0313.
March 4, 2022
The Weekly Scenario
The Weekly Scenario: Qualities to Look for When Choosing a Guardian for Minor Children
When you are nominating the guardian of your minor children, the goal is to provide each child as little disruption to his or her life as possible. To accomplish that, you want to choose someone who will raise your children the same way you would raise them if you were still alive. The guardian should have similar philosophies to yours about raising children, about education, about discipline and about religious or spiritual matters. A good indicator of how someone might raise your children is how they are raising their own children. If you are choosing a married person, you will need to decide whether to name just one individual (like a relative) or if you are naming the couple. You should consider what will happen if the guardians you appoint get divorced after your children have moved in with them. You will also want to consider the economic wherewithal of the guardian so that you don’t saddle them with responsibility that will overwhelm them financially. If you have more than one child and want to keep your children together, you’ll have to name a guardian that is willing and able to take all of them. All of this assumes that the person you name agrees to take your children. You should always check with them ahead of time to be sure they are willing and then name backup guardians in case circumstances change and the person who agreed in advance is unable to take the children at the actual time of your death. As always, if you have any questions or would like to learn more, please contact Steve Shane at sshane@offitkurman.com or 301.575.0313.
February 24, 2022
The Weekly Scenario
The Weekly Scenario: Identity Theft and Protection of the Estate
Stolen identities and fraudulent usage of personal identifying information continues to be a big problem. These concerns grow when an estate includes digital assets that never existed only a few decades ago. As a result, being mindful of the risks of data breaches and understanding the need for the protection of electronic information have become critically important. Identity Theft of a Deceased Individual While technology allows us secure passwords, firewalls, and credit card chips to lessen the potential to become a victim, when a person dies, his identity can be illegally stolen, which is problematic for an estate that still has to safeguard assets and benefits for estate beneficiaries. Dealing with the identity theft of a deceased individual can complicate an already complex estate administration. Steps to Prevent Identity Theft of Deceased The executor of the decedent’s estate should take a number of steps depending on the specific estate. Credit card companies, banks, and places where the deceased individual had accounts should be notified. There may be estate debts that will need to be addressed, and a death certificate will be required by each company. For closed accounts, it may be a good idea to list an alert on the account that the individual is deceased to prevent theft or forgery. It may also be prudent to request a copy of the decedent’s credit report so you can check active credit cards, collection matters, or relevant account information. Some agencies that should be considered for notification include the Social Security Administration, Veteran’s Affairs, and MVA. Homeowners insurance and other service providers offer a range of identity services and indemnity coverage to address the immediate potential for financial harm. In most instances, relying on guidance from insurer experts or an identity restoration service provider can be cost-effective and efficient. Perhaps, the best protection against identity theft or fraud is to remain vigilant! As always, if you have any questions or would like to learn more, please contact Steve Shane at sshane@offitkurman.com or 301.575.0313.
February 4, 2022
The Weekly Scenario
The Weekly Scenario: The Build Back Better Act
The Build Back Better Act did not pass in 2021. However, this is not to say that Congress won’t try to get something through in 2022 by piecing out the legislation into two bills or further trimming down programs. This takes us into the new year with the same uncertainty regarding taxation as we had in 2021. Estate and Gift Tax Exemption In 2022, the estate and gift tax exemption will climb higher to $12.06 million per individual – up from $11.7 million per individual in 2021. As such, an individual can leave $12.06 million to heirs and pay no estate or gift tax, and a married couple can pass $24.12 million estates and gift tax-free. (One version of the BBB Act included a provision that would have cut the estate and gift tax exemption to about $6 Million.) Gift Tax Annual Exclusion Amount In addition, the gift tax annual exclusion amount will increase to $16,000 for 2022, up from $15,000 since 2018. Individuals and couples will be able to give away $16,000 to as many people as they like – children, grandchildren, friends, fellow citizens, and anyone else – with no federal or gift tax consequences. Multiple annual exclusion gifts can add up significantly and do not reduce the $12 million credit. This is a simple way to reduce one’s estate. You can also make unlimited direct payments for medical and tuition expenses for as many people as you like with no gift, estate, or income tax consequence. Reducing the Likelihood of Estate Taxes The IRS taxes estates above the threshold at rates of up to 40%. By making gifts and transferring wealth early, the wealthy can reduce the likelihood of the estate tax. The state in which you reside is another consideration for gifting strategy. Seventeen states and the District of Columbia levy some form of an estate or inheritance tax (or in the case of Maryland – potentially both!), so even if you don’t qualify on the federal level, you might wind up owing taxes on a state level. As we enter 2022, regardless of what happens with tax legislation, there are steps you can take to prepare. But, first, everyone must evaluate their situations and identify opportunities. And if you have never done any estate planning and do not have a will or trust, it is essential to get this accomplished. As always, if you have any questions or would like to learn more, please contact Steve Shane at sshane@offitkurman.com or 301.575.0313.
January 28, 2022
The Weekly Scenario
The Weekly Scenario: Three Common Estate Planning Mistakes
Estate planning attorneys frequently see certain common mistakes in an estate plan. Here are the three estate planning mistakes that you should be able to easily avoid. Naming Minors as Beneficiaries Beneficiary designations are a simple way to avoid probate and be certain that an asset goes to your beneficiary at death. Most life insurance policies, retirement accounts, investment accounts and other financial accounts permit you to name a beneficiary. Many well-meaning parents and grandparents name a child or grandchild as a beneficiary. However, a minor is not permitted to own property. Therefore, the financial institution will not name the minor child as the new owner. A guardian or conservator must be appointed by the court to receive the asset on behalf of the child and they must hold that asset for the minor’s benefit until the minor becomes of legal age. The guardian must file annual accountings with the court reflecting activity in the account and report on how any funds were used for the minor’s benefit until the minor becomes a legal adult. The time, effort, and expense of this are unnecessary and should be avoided. Handing a large amount of money to a child the moment they become of legal age is rarely a good idea. Leaving assets in trust for the benefit of a minor or young adult, without naming them directly as a beneficiary, is a possible alternative. Adding Joint Owners to Bank Accounts It seems like a good idea. Adding an adult child to a bank account, allows the child to help the parent with paying bills if hospitalized or lets them pay post-death bills. If the amount of money in the account is not large, that may work out okay. However, the child is considered an owner of any account they are added to. If the child is sued, gets divorced, files for bankruptcy or has trouble with creditors, that bank account is an asset that can be reached. This concept also applies to houses and other property that is owned jointly. Joint ownership of accounts after death can also be problematic if your will does not clearly state what your intentions are for that account (and even if they do, it could still result in a contest). Do those funds go to the joint owner, or should they be distributed between heirs? Analytical estate planning, that includes power of attorney and trust planning, will permit access to your assets when needed and division of assets after your death in a manner that is consistent with your intentions. Poor Choices of Co-Fiduciaries If your children have never gotten along, don’t expect that to change when you die. Recognize your children’s strengths and weaknesses and be realistic about their ability to work together when deciding who will make financial decisions under a power of attorney, health care decisions under a health care proxy and who will best be able to settle your estate. If you choose people who do not get along or do not trust each other (and never will), it will take far longer and cost more to settle your estate. As always, if you have any questions or would like to learn more, please contact Steve Shane at sshane@offitkurman.com or 301.575.0313.
January 18, 2022
The Weekly Scenario
The Weekly Scenario: Estate Tax Liabilities
Protecting a Personal Representative When There are Retirement Plan Accounts In certain situations where a person has a large retirement plan account, such as an IRA, and a substantial estate tax liability, but insufficient probate assets to pay the estate tax, certain precautions may be in order. The personal representative of the estate is responsible to pay the federal and state estate tax to the extent there are probate assets. However, if a personal representative has knowledge of unpaid estate tax but distributes money to creditors of an estate instead of paying the federal and state taxing authorities, the IRS and state taxing authority can hold the personal representative liable for any unpaid taxes. Moreover, if IRA assets pass directly to a beneficiary or beneficiaries, each recipient can be held personally liable for the unpaid estate tax, generally limited to the amount of IRA distributions received. So how might a personal representative protect his or her own interests and the interests of the beneficiaries? One solution is to name a trust as the IRA beneficiary. The trust could stipulate that the Trustee will pay the estate an amount equal to the estate tax attributable to the retirement assets. The trust could also provide that the Trustee is required to pay the income taxes attributable to the IRA funds. This type of trust should be drafted to allow distributions to IRA beneficiaries, but after settling any taxes that are due. Any trust would likely be drafted as a short-term trust (2-4 years) with enough time to give the Trustee the ability to settle the tax liabilities. As always, if you have any questions or would like to learn more, please contact Steve Shane at sshane@offitkurman.com or 301.575.0313.
January 7, 2022
The Weekly Scenario
The Weekly Scenario: How to Avoid Unintentionally Disinheriting a Family Member
When an account owner dies, the assets go directly to the beneficiaries named on the account. This overrides the will or trust. Therefore, you should use care in coordinating your overall estate plan. You don’t want the wrong person ending up with the financial benefits. Too many stories to count where the individual remarried after the death of his spouse but didn’t change his IRA beneficiary form. At his death, someone else (i.e., second wife, etc.) was left out. So the intended beneficiary receives nothing from the IRA, and the retirement money went to his first wife, the named beneficiary. Many types of accounts have beneficiary forms, like U.S. savings bonds, bank accounts, certificates of deposit that can be made payable on death, investment accounts that are set up as transfer on death, life insurance, annuities and retirement accounts. Generally, beneficiary designations don’t carry over, when you roll your 401(k) to a new plan or IRA. You can name as your beneficiaries individuals, trusts, charities, donor-advised funds, or your estate. You can name groups, like “all my living grandchildren who survive me.” However, be certain that the beneficiary form lets you pass assets “per stirpes,” meaning, equally among the branches of your family. For example, say you’re leaving your life insurance to your four children. One predeceases you. Without the “per stirpes” clause, the remaining three children would divide the death proceeds. With the “per stirpes” clause, the deceased child’s share would pass to the late child’s children (your grandchildren). If you can help it, it is not recommended to leave assets to minors outright, because it creates the process of having a court-appointed guardian care for the assets, until the age of 18 in most states. Instead, you might create trusts for the minor heirs, have the trust as the beneficiary of the assets, and then have the trust pay the money to heirs over time, after they have reached legal age. You should also not name disabled individuals as beneficiaries, because it can cause them to lose their government benefits. A special needs or supplemental care trust is often a good solution. This preserves their ability to continue to receive the government benefits. As always, if you have any questions or would like to learn more, please contact Steve Shane at sshane@offitkurman.com or 301.575.0313.
December 24, 2021
The Weekly Scenario
The Weekly Scenario: Roth IRA/401(k) Head to Head
Both Roth IRA and Roth 401(k) contributions are made with after-tax dollars, grow tax-free, and can be withdrawn tax-free as a qualified distribution. If you believe your tax rates are lower now than they will be when distributions are made, a Roth contribution often makes sense. Anyone meeting certain income restrictions can contribute up to $6,000 (or $7,000 if age 50 or older), to a Roth IRA for 2021 or 2022. Employer plans are not required to offer Roth contributions. If a company does offer a Roth 401(k) option, employees can make Roth plan contributions of up to $19,500, or $26,000 if age 50 or older, in 2021. There is no combined limit for Roth IRAs and Roth 401(k)s. This means that you can contribute the maximum amount to both a Roth IRA and Roth 401(k) in the same year. That is a good outlay of cash to maximize both a Roth IRA and 401(k). If you were presented with both options, which is the correct one to choose? Advantages to a Roth IRA No Lifetime Required minimum distributions (or RMDs): One of the most significant advantages of Roth IRAs is that owners are not subject to required minimum distributions (RMDs) during their lifetime. In contrast to Roth IRAs, Roth 401(k) participants are subject to RMDs. More investment options. Roth IRAs have almost the universe of investment options. Prohibited investments include are collectibles, life insurance and S corporation stock. By contrast, Roth 401(k) investments are restricted to the limited options offered by the plan. Easier accessibility. Roth IRA distributions can be taken at any time (note that earnings may be taxable and subject to the 10% early distribution penalty). With Roth 401(k)s, not so much. An employee still working cannot access his Roth 401(k) assets before age 59½ (except in cases of financial hardship). Easier-to-satisfy “qualified distribution” rules. Earnings on both Roth IRA and Roth 401(k) contributions can be withdrawn tax-free as long as the distribution is considered “qualified.” A qualified distribution requires that the distribution be taken after a so-called ‘triggering event’ and satisfaction of a five-year holding period. Triggering events for both Roth IRA and Roth 401(k) distributions are attainment of age 59½, death, or disability (and also – for Roth IRA distributions, a first-time home purchase also qualifies). In general, the Roth IRA five-year holding period rules are easier to satisfy (I can’t go into all the details here so …trust me?). Advantages of Roth 401(k) Higher annual limit and no income restrictions. The annual Roth 401(k) contribution limits are significantly higher than the Roth IRA limits and do not have income restrictions. As noted, Roth 401(k) contributions have no income restrictions. By contrast, Roth IRA contributions cannot be made directly if MAGI exceeds a certain dollar limit (for 2021, the phase-outs are $198,000- $208,000 for married couples filing jointly and $125,000-$140,000 for single filers). Matching contributions. Many 401(k) plans match Roth 401(k) contributions, but there is no comparable bonus for making Roth IRA contributions. Loans and life insurance available. 401(k) plans often allow loans. Roth IRAs (like traditional IRAs) cannot offer loans and cannot be invested in life insurance. Age-55 10% early distribution penalty relief. Roth 401(k) distributions made after separation from service are exempt from the 10% early distribution penalty if separation occurs in the year the employee turns age 55 or older. This age-55 exception does not apply to Roth IRAs. So, the answer? It depends. Of course! As always, if you have any questions or would like to learn more, please contact Steve Shane at sshane@offitkurman.com or 301.575.0313.
December 17, 2021
The Weekly Scenario
The Weekly Scenario: 529-ABLE Programs
The 529-ABLE programs have been available nationwide for about 5 years now. With Maryland ABLE, you can contribute up to $15,000 per year (or more if the beneficiary is working) for a wide range of qualified disability expenses. The ABLE to Work Act allows beneficiaries who are employed to contribute an amount equal to their current year’s gross income --up to a maximum of $12,760 in 2021 each year to their ABLE accounts in addition to the annual standard contribution limit of $15,000. The account’s growth is tax-free, and contributions could qualify for an income deduction (for Maryland state income taxes). Contributions can be made up to a maximum account value of $500,000 over the life of the account. Other federal means-tested benefits such as Medicaid, housing and food assistance are not impacted by the balance of the ABLE account. Similarly, ABLE account balances are disregarded for the purpose of determining eligibility to receive, or the amount of, any assistance or benefits from Maryland means-tested programs. Before ABLE accounts, the only way families could save for the future of a disabled child without losing access to SSI and Medicaid benefits was with a special needs trust. That generally involves lawyer’s fees and other costs. While the ABLE isn’t a substitute for a special needs trust, it is a good solution to improve the life of someone with a disability and save some on income taxes. The account works like a 529 college savings account—earnings and withdrawals for qualified expenses are federal and state tax free. 529-ABLEs can be used to save for medical and educational needs, job training, and housing. What’s tricky is the basic rules for the accounts--set by Congress--are the same, but important details vary among plans. All ABLEs are for individuals who were disabled before age 26; An individual can open only one account; The maximum annual contribution is tied to the federal gift tax exclusion amount which is currently $15,000. What’s different? Things like investment choices, fees, and benefits for in-state residents. You must do a little digging on each state plan’s web site and the plan disclosure statements to compare ABLEs. Before you open an account in a state that’s not your home state, check to see if your state will be offering tax incentives for contributions. As always, if you have any questions or would like to learn more, please contact Steve Shane at sshane@offitkurman.com or 301.575.0313.
November 19, 2021
The Weekly Scenario
The Weekly Scenario: Newest Tax Law Updates
My recollection is that Ben Franklin can be credited as saying, “nothing in this world is certain except death and taxes.” Perhaps more apt right now with all the pending tax legislation and the potential changes to the estate tax system is that nothing is certain aboutdeath and taxes! As tax advisors, we have been waiting on pins and needles to see whether a new tax bill will be passed and, if it is passed, what language the final bill would contain. While the proposed legislation failed to include any changes regarding estate taxes, including a reduction in the estate/gift tax exemption amount to approximately $5,000,000 like many thought, that is not to say it may not be added later. Anything can still happen, and we could find ourselves in a situation like 2012, where a significant change was made at the 11th hour. At this time, the main focus is a new 5% tax to be applied to individual taxpayers’ whose Modified Adjusted Gross Income (MAGI) is in excess of $10,000,000 ($5,000,000 if married but filing separately) and high income (really about $200,000) earning trusts and estates. There is also an expansion of the Net Investment Income Tax for individual taxpayers with a MAGI in excess of $400,000 ($500,000 for joint filers) and trusts and estate undistributed income with no income threshold. Should the new proposed tax legislation go into effect on January 1, 2022, high earners will also feel a significant impact on their Net Investment Income Tax, specifically those who use S-corporations and partnerships to shield themselves from higher taxes. Other proposed changes to note include a 100% gain exclusion on the sale of Section 1202 Qualified Small Business Stock would be limited to 50% of the gain for those with an AGI exceeding $400,000 (unless otherwise contracted for prior to September 13, 2021), a requirement that cryptocurrencies be subject to the constructive and wash sale rules, and 15% minimum tax for large corporations on reported income to be calculated based on complex formulas. The proposed legislation did not include (as was originally expected) a removal of the limitation on deductions for State and Local Income taxes paid (SALT Cap). There was no proposal for an increase in personal income tax or capital gains tax rates, no proposal to compress the current rate brackets, and no proposal to deny fair market value income tax basis for estates of individuals who die owning appreciated assets. To recap, some of the best news from the proposal came from what was omitted: There was no increase in personal income tax rates; No increase in capital gains tax rates; No reduction of the estate tax exemption; No elimination of the step-up in basis on death; and No proposals to eliminate the ability to utilize grantor trusts or valuation discounts for non-active trades or businesses. As always, if you have any questions or would like to learn more, please contact Steve Shane at sshane@offitkurman.com or 301.575.0313.
November 12, 2021
The Weekly Scenario
The Weekly Scenario: Portability
As I (and many others) have reported, the estate tax exemption amounts may change this year. Right now, the latest is that it does not look like the House proposal will include a lowering of the federal estate tax exemption this year, but regardless of what happens this year, the rules covering the estate tax exemption are scheduled to sunset after 2025. Estate Tax Portability Depending on inflation, the exemption could drop to between $5- $6 million after 2025. With this prospect in mind, it has become vital for married couples to make the most of estate tax portability. Mistakes can lead to a reduced exemption and a substantial amount of unnecessary tax. Married Couples and Estate Tax Portability With estate tax “portability” in place, a married couple can effectively use both spouses’ estate tax exemptions, passing as much as $23.4 million to other heirs with no federal estate tax liability. Example 1: Mike has $8 million in assets, including a $5 million IRA, and Mike’s wife, Megan, has $6 million in assets (including joint property). Mike dies in November 2021, leaving everything to Megan. Marital bequests don’t generate estate tax, so Megan gets to keep all $8 million from Mike, estate tax-free. Going forward, Megan might die with a $15 million estate, including the assets inherited from Mike. If her estate tax exemption then is $6 million, Megan’s estate would be $8 million over the limit and her heirs could owe $3 million in tax, at today’s 40% estate tax rate. The tax bill could be even higher because of an increased rate or state tax obligations or both. Deceased Spouse’s Unused Exemption (DSUE) Something called “Portability” can prevent this type of scenario because the surviving spouse can use the Deceased Spouse’s Unused Exemption (DSUE) as well as her own. Mike did not use any estate tax exemption at his death, because he left all his assets to his spouse. If Mike dies in 2021, his unused exemption amount — the DSUE — would be $11.7 million, which Megan can claim as part of her own. Thus, if Megan dies with a $6 million exemption, under the law effective at her death, using the $11.7 million DSUE from Mike would raise her exemption to almost 18 million. Megan’s hypothetical $15 million estate, mentioned previously, would generate no estate tax with an $18 million estate tax exemption. Note that the IRS has announced that a deceased spouse’s unused exemption is locked in, even if the estate tax exemption is reduced, the unused exemption amount claimed at the death of the first spouse will remain in effect, assuming all the proper elections are made. As always, if you have any questions or would like to learn more, please contact Steve Shane at sshane@offitkurman.com or 301.575.0313.
November 5, 2021
The Weekly Scenario
The Weekly Scenario: Tax Update
As you have likely heard, there are a number of proposed tax rules under Federal law that are working their way through Congress. One potential change could have a dramatic impact on people who own life insurance policies inside of irrevocable life insurance trusts. The House Ways and Means Committee recently released an outline detailing possible tax increases designed to pay for the administration’s infrastructure plan. Of the proposed modifications, one change would cause so-called "grantor" trusts to be included in the taxable estate of the person who made the gifts into the trust. Many life insurance trusts are considered "grantor" trusts and could fall within the scope of this proposed rule. While the details have not yet been released, it appears that the new rule would cause these trusts to be included in a person's taxable estate only if the person made gifts into the trust after the date the law is passed. This could cause problems for those who make cash gifts to their insurance trusts in order to fund insurance premiums. One potential solution may be to make a large gift to an insurance trust now before the law becomes effective. The gift may be retained inside the trust and used to pay premiums in later years -- thereby avoiding future gifts to the trust that would violate the new rule. Right now, this is only a proposal that is part of a larger outline released by the Ways and Means committee. To become law, the outline must first clear the House Ways and Means Committee, be voted on by the full House, have the same rule be proposed in, and voted on, in the Senate, and then have the final bill be signed by the President. If the proposal does become law, then there may be little time for people to preserve the tax-free treatment that life insurance trusts are intended to provide. As always, if you have any questions or would like to learn more, please contact Steve Shane at sshane@offitkurman.com or 301.575.0313.
October 22, 2021
The Weekly Scenario
The Weekly Scenario: Executor of an Estate
An executor of an estate has several duties. Of the many duties, one that is often missed is to ensure that all income tax returns have been filed for the decedent, including filing the final personal income tax return. After a person dies, any income earned prior to their death must be reported to the IRS (and state taxing authorities) on the final income tax return. The deadline is April 15th of the year following death. If a person passed away in 2021 and had income before he died, then by April 15, 2022, the final income tax return needs to be filed or an extension needs to be filed. The filing of the income tax return can sometimes hold up the closing of the estate. An executor would be prudent to wait until the final income tax return is filed to close out the estate. If a decedent was married, keep in mind that the surviving widow or widower may file a joint return. If there is money owed for income taxes, then the executor must make the payment from the estate. If there is a refund, then the executor must claim the refund. In order to claim the refund, an IRS form 1310 must be filed with the final return. Note that there is no requirement they a probate administration be opened to request the tax refund. The form 1310 allows the IRS to pay the refund directly to the executor, therefore, avoiding the need for an estate administration (probate). As always, if you have any questions or would like to learn more, please contact Steve Shane at sshane@offitkurman.com or 301.575.0313.
October 15, 2021
The Weekly Scenario
The Weekly Scenario: Naming a Trust as Beneficiary of an IRA
There are certainly valid reasons for naming a trust as beneficiary of an IRA. But if an adult beneficiary is otherwise healthy and responsible, and if there is no desire to control assets after death, then naming a person directly as an IRA beneficiary may be a better option. In cases when a trust is necessary, be sure the trustee – the person responsible for following the provisions of the trust and dispersing its assets — understands the trust and IRA rules. Putting an inexperienced trustee (often an unwary family member or friend of the family) on such a task can lead to a number of egregious mistakes. I’ve reported on botched IRA trust beneficiary articles in the past. In a recent Private Letter Ruling (202125007) relayed a few months ago by the IRS, an IRA owner named a trust as an IRA beneficiary. After her death, the IRA assets were properly moved into a trust-owned inherited IRA. In this case: The adult children of the original IRA owner, as trustees and trust beneficiaries, had total control of the assets. The children wanted to do their own investing in the IRA. They were informed by the custodian that the existing account could not accommodate their request. So, the trustee children decided to transfer the stocks held in the inherited IRA assets to a non-qualified (non-IRA) brokerage account, owned by the trust. This action resulted in a taxable distribution — at trust tax rates of most of the IRA assets. When inherited IRA dollars are withdrawn by a non-spouse beneficiary, there is no putting the genie back in the bottle. Even if the error is discovered within 60 days of the original transaction, a rollover is not allowed, and the distribution is likely going to result in the entire account being subject to tax. Even though the trustees identified their error several months later and requested that the former IRA dollars be returned, there was no remedy that could be done here. The IRS concluded that: “…once the assets have been distributed from an inherited IRA, there is no permitted method of transferring them back into an IRA.” The moral of the story is to be sure that there is a good and legitimate purpose of having a trust that will inherit the IRA account, and if there is a good reason, be sure there are safeguards put in place so mistakes are not made by the Trustee along the way. As always, if you have any questions or would like to learn more, please contact Steve Shane at sshane@offitkurman.com or 301.575.0313.
October 8, 2021
The Weekly Scenario
The Weekly Scenario: Legislative Tax Update
About two weeks ago, the House of Representatives Ways and Means Committee released an agenda as part of a $3.5 trillion spending and tax bill that Democrats hope to pass. Many of the details will likely change as the bill makes its way through a series of deliberations and votes. But the initial draft provides a good deal of insight about what we can expect. Below is a summary of the proposed changes in the estate tax and some key takeaways: Lowers lifetime gift/estate tax exemptionto $5.85 from $11.7 million, effective January 1, 2022. Clients looking to maximize exemptions should make their gifts as soon as possible, especially gifts to grantor trusts, in case the date of enactment is moved up. Irrevocable grantor trusts in estates, effective upon enactment. A grantor trust is a common estate planning tool which allows an individual (or ‘grantor’) to establish a trust for another (typically a family member). The new provision pulls the assets held in a grantor trust into a decedent’s taxable estate when the decedent is the deemed owner of the trusts. Prior to this provision, taxpayers were able to use grantor trusts to keep assets out of their estate while controlling the trust closely. Establishes an income tax on sales to grantor trustby grantor, effective upon enactment. Currently, a sale to a grantor trust would not trigger an income tax. Clients looking to sell assets to a grantor trust may wish to consider doing so now. However, the proposal maintains stepped-up basis at death. In conjunction with reducing their taxable estates, clients should continue to keep highly appreciated assets in their taxable estates to the extent possible. As always, if you have any questions or would like to learn more, please contact Steve Shane at sshane@offitkurman.com or 301.575.0313.
October 1, 2021
The Weekly Scenario
The Weekly Scenario: Roth Conversion Planning Review
As we all have heard, Congress is targeting apparent tax loopholes used by wealthy people with the goal of raising taxes to help finance proposed spending. Retirement plans happen to be in their scopes too. The way this may have come about is a widely publicized story of a guy who managed to amass $50 million or so in a Roth IRA. Forget that the story was made public due to an illegal release of his confidential tax return information from the IRS! The following proposed changes to personal retirement plan accounts apply, for years after 2021, to a person who: Is a “high income” individual, that is, a married filing jointly taxpayer with taxable income in excess of $450,000 or a single filer with taxable income over $400,000. This appears to line up with President Biden’s campaign promise not to increase taxes on anyone making less than $400,000 a year. The combined balance of a person’s IRAs, Roth IRAs, and other defined contribution plan accounts (e.g., a 401(k) plan) exceeds $10 million in value as of the prior year-end. Here are the tax consequences inflicted on such as person: He/she may not make a regular contribution to an IRA. Since the maximum annual IRA contribution is in the range of $7,000, this is not such a problem for someone who already has over $10 million in plans. The rest are more consequential: He/she must take a “required minimum distribution” equal to half the excess over $10 million. And.... If this person has more than $20 million in combined value in such plans, he/she must take an RMD equal to 100% of the excess over $20 million! And such excess must be taken from Roth accounts first! Note that these new RMD requirements have no age component. There’s one change in the mix that may cause some 2021 action. They propose to outlaw the Roth conversion of after-tax money whether in an IRA or in a qualified plan, and this new prohibition would not be limited to higher-income individuals. The Roth conversion of after-tax money is a true “loophole” and it makes sense for them to close it, but it will also make sense for a lot of individuals to take advantage of the loophole while it still exists and complete conversions of their after-tax money (if possible) this year. As always, if you have any questions or would like to learn more, please contact Steve Shane at sshane@offitkurman.com or 301.575.0313.
September 24, 2021
The Weekly Scenario
The Weekly Scenario: How Can a Trust Protect My Children’s Inheritance?
One of the main reasons for estate planning is to provide loved ones with protection from claims of future creditors and divorcing spouses or lawsuits. If you leave your property to your child as an outright distribution, the property will not necessarily be protected. 'Spendthrift' Protection There is a longstanding concept in trust law known as ‘spendthrift’ protection. These provisions state that the Trustee will have sole control to make distributions from the Trust without interference from others. The spendthrift clause prevents a third party (e.g., creditor) from being able to compel the Trustee into making distributions of trust property for the benefit of the third party. Protection from Creditors Under the spendthrift rules of most states, a person is free to leave assets in the trust for another person, with specific language in the trust specifying who, besides a trust beneficiary, can have access to the trust assets. If the trust includes a ‘spendthrift’ clause that specifically states that trust income and principal is not to be available for payment to a trust beneficiary’s creditors, then as a general rule the trust would be immune from attack by a beneficiary’s creditors. This strong protection would apply regardless of the amount or nature of a beneficiary’s liabilities and would include protection of the trust assets if the child were to go through a divorce. Variation Between States However, the extent of protection offered by a trust with a spendthrift clause will depend upon state law. In some states, certain creditors are still permitted access to the trust. This might include obligations for alimony, child support or payments to creditors who have provided certain ‘essentials of life’ to the beneficiary. As always, if you have any questions or would like to learn more, please contact Steve Shane at sshane@offitkurman.com or 301.575.0313.
September 17, 2021
The Weekly Scenario
The Weekly Scenario: Dynasty Trust planning
The reasons for creating a dynasty trust vary depending upon the needs and desires of the trust settlor. Dynasty trusts can be created to provide creditor and so-called ‘predator’ protection for the beneficiaries of the trust generation after generation. Such trusts can shield against divorce proceedings initiated against a beneficiary of the trust or creditors of a beneficiary arising out of a business failure. The dynasty trust can also provide a pool of assets to be managed by a trustee for the benefit of all the beneficiaries, thus preventing individual beneficiaries from squandering their inheritance by misusing the funds or investing poorly. The dynasty trust can also be used to encourage participation in certain worthwhile causes or discourage behavior that is unacceptable. One of the greatest way’s dynasty trusts are used by families who value education is to establish a fund that will pay for the secondary and graduate education of many future generations. When you ask most people to name their great -great grandparents, they are unable to do so. But providing full college tuition and other educational perks for future generations could be helpful to establish a family legacy. The generation skipping transfer tax exemption can be utilized to plan for several generations and build significant wealth. One of the reasons Congress enacted the generation skipping transfer tax is to curb the wealth building effects of dynasty planning. The concept of dynasty planning is to pass the maximum amount of wealth one can to their grandchildren (and subsequent generations) without subjecting the transfer to the tax. In so doing, one can exempt the trust property from future generations skipping the transfer tax. As always, if you have any questions or would like to learn more, please contact Steve Shane at sshane@offitkurman.com or 301.575.0313.
September 10, 2021
The Weekly Scenario
The Weekly Scenario: Items that an Estate Plan Should Provide for a Spouse
The objectives that we hear most often from clients regarding a spouse include: I want my spouse to be able to maintain the lifestyle that we currently enjoy after I’m gone. I want to protect what I leave my spouse from people who might otherwise take advantage whether family members or strangers. I am in a second marriage and I want my spouse cared for after I am gone. But I also want to ensure that my estate goes to my children after my spouse passes away. I have handled most of our investments throughout our married life and my spouse has not been involved. I would like my spouse to maintain control, but I’d also like to provide investment guidance. I want to be sure my spouse can, while still benefiting my children, make adjustments in my bequests in order to address changes in the circumstances of my children and grandchildren that occur after I am gone. I want to get any tax protections that are available to my spouse. But what if my spouse remarries? One of the ways to protect a spouse’s assets is to have the estate plan require the surviving spouse sign a prenup if they desire to maintain control of the assets if and when they remarry. The plan could even remove the spouse as trustee or as a beneficiary of the trust if specific criteria are not met. As always, if you have any questions or would like to learn more, please contact Steve Shane at sshane@offitkurman.com or 301.575.0313.
August 27, 2021
The Weekly Scenario
The Weekly Scenario: Where to Keep Your Trust
What if I can’t find a copy of my Trust and how do I prove it exists? Without a copy of the trust instrument, proving that such a trust is in existence can be a challenge. The attorney who drafted the trust, or the attorney or firm’s successor, should keep a record of the trust on file. But sometimes law firms go under or lawyers retire, and files are lost. One potential solution if no copy of the trust can be located is to file a declaratory action with the court. Such an action will provide clarification of the existence of the trust. The hope is that through the filing of the declaratory action, the court will issue an order of the existence of the trust and what the terms of the trust provide. A trustee will need to be appointed and if none exists, the court could appoint one at that time. While there might not be an actual trust document, there will likely be other evidence of the existence of the trust such as references to the trust on titling documents (Deeds, account statements, etc.). There might be an annual tax return that was filed which an accountant could attest to with the tax records. The court can consider these extraneous documents in a ruling of the existence of a trust. Clearly, having a copy of the trust instrument would be ideal. It would not be a bad idea to keep a copy in a safe deposit box or home safe (just be sure you are not the only person with access) with other important papers. You could also keep a copy in a cloud file, though accessing the cloud is not always 100% reliable. Your lawyer should have a cloud backup for all your executed legal documents. As always, if you have any questions or would like to learn more, please contact Steve Shane at sshane@offitkurman.com or 301.575.0313.
August 20, 2021
