Estates and Trusts Law Blog
The Weekly Scenario
The Weekly Scenario: Where is the Original Copy of your Will?
You should let someone know where your original Will is stored. If one cannot be found after a person dies, a court may decide it was destroyed. Dying without a Will means intestacy will rule the day and, in that case, state law determines how probate assets will pass. It may be a good idea to keep a copy of the Will in a safe deposit box, but if you put the original there, it may be difficult to retrieve it after death. Most states require that safe deposit boxes be sealed after the renter dies and a Personal Representative will need to be appointed in order to gain access to the box. Other places to store your will include: Store an original in the office of the Register of Wills in the County where you reside. Have your attorney and/or your accountant retain the original will. Some law offices will retain the original in a Will safe file. Store the will at home in a safe place. While there is a possibility that the Will could be lost, inadvertently destroyed, or discovered by an interested party who could deliberately destroy or conceal it, this is generally not a huge risk. 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 13, 2021
The Weekly Scenario
The Weekly Scenario: Donor-Advised Funds
A donor-advised fund is like a charitable investment account, for the sole purpose of supporting charitable organizations you wish to benefit. When you contribute cash, securities or other assets to a donor-advised fund at a public charity, you are generally eligible to take an immediate tax deduction. Then those funds can be invested for tax-free growth and you can recommend grants to virtually any IRS-qualified public charity. When you give, you want your charitable donations to be as effective as possible. Donor-advised funds (DAF) are gaining in popularity because they are one of the easiest and most tax-advantageous ways to give to charity. But it is important for donors to keep in mind that a donor to a DAF can only claim an income tax deduction for a charitable contribution to a DAF if the donor makes a completed gift and relinquishes dominion and control over the donated property. In making a gift to a DAF, the DAF will generally advise its donors in writing of the following: their donations to the fund are irrevocable and unconditional, the donations are subject to the exclusive legal authority and control of the DAF as to their use and distribution, donors cannot make donations subject to any material restrictions or conditions (such as reserving a right to control or direct distributions or "any other condition that prevents the DAF from exercising exclusive legal control over the use of contributed assets to further its exempt purposes, and the DAF retains final authority over the distribution of all grants and may decline or modify a grant recommendation that is inconsistent with the DAF’s program policies, or for any other reason. It is for this reason, that it is crucial for donors to understand that once a gift is made, the donor gives up most of the control over the asset, other than as an advisory grant maker, and has very little recourse in gaining access to the asset for use other than advisory grant making. 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 6, 2021
The Weekly Scenario
The Weekly Scenario: Considerations for Trustees and their Deceased Loved Ones
What should a Trustee consider doing for a recently deceased loved one? Here are some items a Trustee should consider. 1. If a residence is owned by the Trust and will be vacant for an extended period of time, consider the following: Changing the locks. Remove valuables from the residence, make a detailed inventory of them and store them safely. Install an inexpensive security system that will call out to a security firm if there is a break-in. In colder climates, consider a temperature alarm to prevent frozen water pipes. Request postmaster to forward mail. Check for perishable items in the residence or storage unit. Decide whether to turn off some utilities (electricity, phone). Stop deliveries. Advise the homeowner's insurance agent that the residence will be vacant and make appropriate arrangements for insurance. If the property is in the trust (the trust needs to be named as the insured). 2. Determine immediate cash needs for any beneficiary and for immediate expenses and identify accounts where cash is immediately available. 3. Cancel charge accounts, credit cards and subscriptions. 4. Make certain that property and casualty insurance coverage continues on personal effects, cars and real estate. 5. If you have personal access or access as the Trustee to a safe deposit box, the box should be inventoried in the presence of a bank officer and only then should contents be removed. 6. Gather personal records, including checkbooks and statements and obtain copies of income tax returns for the last couple of years. 7. Contact individuals who owe money to the deceased and arrange for continued collection. 8. Gather all life insurance policies. 9. Contact the social security administration (if needed). 10. Check to see if there are pets or other animals needing care. The law in each state is different concerning the information given to beneficiaries and when the information must be provided. As early as possible, the person who is the fiduciary (Trustee or Executor) should obtain information about beneficiaries and heirs. 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 3, 2021
The Weekly Scenario
The Weekly Scenario: Guardians and Trustees
Sometimes the people who are the most nurturing are not necessarily the best at handling money. Although the person you name as guardian of a minor child can also serve as Trustee of a trust established for the child, it may not be the best solution. The dual role of guardian and Trustee presents the potential for a conflict of interest. For example, you name your sister as guardian of your children and name her as Trustee of trusts established for their benefit. Would it be reasonable for her to use the $100,000 from the trust to add an addition on her home? Perhaps it would be reasonable. But what if she uses $600,000 to buy a significantly larger home when her current home is worth $300,000? These types of scenarios are avoidable when there is one person named to raise the children and another to manage the finances. The guardian then simply makes requests from the Trustee when funds are needed. But since the Trustee has discretion in these matters, it doesn’t hurt to give clear guidance to the Trustee so that your children will be cared for in the way you want them to be. Some things to consider: Can the guardian expand the size of their current residence in order to house your children? Should the guardian be given a home improvement budget or car budget? Can trust funds be used to pay for private school? Can the trust funds be used to take her kids and your kids on vacations? Still, for many people, the persons they choose to put in charge of their children (and their finances) are honest and trustworthy and they are comfortable in putting them in charge of both the kids and the money. It really comes down to the people you choose. 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.
July 30, 2021
The Weekly Scenario
The Weekly Scenario: Should You Share Estate Planning Documents with Family Members?
The question as to whether you should share your estate planning documents with your immediate family is one that comes up fairly often. The answer depends on the personal choices and family dynamics of a client. In thinking through this issue at hand, it is important to consider that the primary purpose of an estate plan is to make it easier for the family when a person dies. The assumption for many clients is that family members should have copies of their documents. However, keep in mind there are certain drawbacks of giving copies of legal documents to family members. For one thing, what if the plan changes in the future? What if someone named in the document is later taken out or is in line to receive less in the way of an inheritance. Will this person contest the legitimacy of any later version of a Will? Moreover, would you want to be put in a position to have to explain your reasons for your own plan? The other side of the coin is that giving family members an ‘advance copy’ so to speak may avoid any surprises or conflicts later. There are many clients who are actually very comfortable with family members seeing their documents and financial information. In my experience, I generally tell clients to let family members know (at a minimum) that they have an estate plan and where the documents will be stored. I also like the idea of letting them know where to find bank account information, passwords to phones and tablets, family papers (marriage certificates, divorce orders, etc.) and of course, contact information for attorneys, accountants and financial advisors. Armed with this essential information, it will certainly make it easier for family members to carry out your wishes. 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.
July 23, 2021
The Weekly Scenario
The Weekly Scenario: Documents You Should Have Before You Travel
But Particularly if You Fall into a Specific Risk Group No one likes to think of worst-case scenarios before a trip, but there are certain estate planning documents you should have in place before you leave. Like purchasing trip cancellation insurance, making some arrangements ahead of time will provide peace of mind while you are away. Some of these documents become even more critical if you are a person that falls into what I refer to as a category that could be construed as riskier. Last Will and Testament It is important if you have assets to make sure you have a current and legally binding Will that appoints someone to settle your affairs, designates who will receive property, and names guardians for any minor children. If you are an individual who is not married or does not have children, dying intestate (without a Will) can have more drastic consequences because the assets are more likely to pass to unintended family members. HIPPA Authorization Because of the HIPPA Privacy Rule, you'll need to give consent for a traveling companion, friend, or family member to receive medical information should anything happen to you. Durable Power of Attorney A Durable Power of Attorney gives an individual the ability to make decisions on your behalf if you become unable to do so. The document covers financial and legal decisions (usually not medical). Health Care Proxy or Advance Medical Directives Also known as a durable medical power of attorney or advance medical directive, a health care proxy allows your designee to make medical treatment decisions on your behalf if you are unable to do that yourself and establishes a point person for medical communications. If you are not married or do not have adult children, the problem is not having someone for whom the law of the certain state or country would recognize as having the ability to make these decisions. Having a document in place becomes all the more important. Guardian Designation If you have children younger than 18 or are responsible for adult family members who can't care for themselves, it is important to name a guardian. While it would be better to have a full estate plan in place, often naming a trust as the recipient of financial assets for minor children, at a minimum, you should have a responsible person (i.e., a person you trust) named who could serve as guardian. Proof of Parentage Rights If you've crossed the border with a minor child, officials in many countries are vigilant about preventing child abduction. When traveling overseas with a minor child, have proof of relationship such as their birth certificate, or travel and medical consent letters if you are not the child's parent or guardian. Same-sex couples who have families through surrogacy or adoption should finalize parentage rights before traveling to countries that might not be as friendly to same sex-couples. Updated Beneficiaries If you haven't updated your will in years, it might not reflect your current wishes about beneficiaries, especially if you're divorced. If you have a minor beneficiary named on a life insurance policy or retirement plan account, you need to know that the property will be managed by a guardian unless a trust is established to receive those proceeds. Financial and Social Media Account Login Information Make sure someone you trust has login information for financial, social media, and other online accounts. It is not a bad idea to write out a plan of action for social media accounts (keep active, close, etc.) Happy Travels! 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.
July 16, 2021
The Weekly Scenario
The Weekly Scenario: Setting Up Special Needs Trusts
Planning for beneficiaries with special needs can be a challenge. While navigating the requirements for both IRA beneficiaries and trusts has never been without pitfalls, the more recent requirements of the SECURE Act have added even more wrinkles. The goal of the Special Needs Trust is to protect the funds for a person with special needs while not jeopardizing any government benefits to which the individual may be entitled. The trustee can make distributions to the beneficiary with special needs for vacations, food, housing and other personal items to improve and enhance their lives. The goal is not to jeopardize the current and future potential benefits. Under the SECURE Act, beneficiaries with special needs who qualify as disabled or chronically ill are eligible designated beneficiaries (often referred to as “EDBs”) and can still take advantage of the stretch IRA. Under the SECURE Act, there are certain rules that specifically preserve the lifetime stretch for beneficiaries who are chronically ill or have a disability through a trust called a Multi-Beneficiary Trust (MBT). As the name implies, the MBT may have multiple beneficiaries of the trust, in addition to the person with a disability. These other beneficiaries must be designated beneficiaries but do not have to be an eligible designated beneficiary. Examples of designated beneficiaries include other children or siblings (but not a charity or an estate). For example, if Mark creates a special needs trust for the benefit of his daughter with a disability and names the trust as beneficiary of his IRA, and the trust provides that any remaining funds from the IRA be paid to a charity, the trust would not qualify as a multi-beneficiary trust. As such, the minimum required distributions will not be permitted to be stretched over the child’s life expectancy (instead, the 10-year rule would be applicable). However, while these multi-beneficiary trusts are beneficial from a stretch point of view, special needs trusts can be problematic from an income tax standpoint. Because trust tax brackets are highly compressed (reaching the highest income tax rate at fairly low levels), funds retained in the trust will be subject to high trust tax rates. It is for this reason that it is beneficial to explore exchanging assets like traditional IRAs for more tax-efficient assets like Roth IRAs and life insurance. Employing alternative strategies can mitigate the tax bite while providing a source of funding for special needs trusts. 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.
July 9, 2021
The Weekly Scenario
The Weekly Scenario: Health Care Directives
A common mistake is to assume that estate planning is solely about ‘death’ planning and writing wills (and trusts) to make sure that your property is distributed according to your wishes after your death. Planning for incapacity or disability planning is often overlooked, but it can be essential because it addresses what happens if you are unable to make medical decisions or handle your financial affairs because of an injury or medical condition. In most states, your wishes regarding your medical treatment may be made known by executing an advance directive to express your healthcare wishes. A healthcare directive often contains both healthcare Power of Attorney provisions in addition to a “Living” Will. Healthcare directives will allow you to express which kinds of medical treatments should be withheld. For example, you may specify that you would not want surgery, respirators, or other life-prolonging procedures to be used if there is no reasonable expectation of your recovery. Once you have executed a healthcare directive, you have the option to change it or revoke it at any time. Living wills take effect when your death can no longer be significantly delayed by treatment. Healthcare directives, in contrast, will generally become effective as soon as you are unable to speak for yourself due to a terminal or end-stage medical condition or coma. The healthcare Power of Attorney allows you to appoint an agent to make healthcare decisions on your behalf should you become unable to communicate your healthcare wishes yourself. You can specify that your agent must make healthcare wishes according to what is stated in your healthcare directive. If your healthcare directive does not address a particular situation, or your desire is to give your agent authority to make all medical decisions for you, you can direct your agent to decide based on the preferences you have expressed to that person (within or outside the document). In addition to making healthcare decisions on your behalf, your agent can be empowered to: Check you in and out of hospitals and medical facilities Hire and fire medical staff responsible for your care Receive information concerning your care Review your medical records Speak to insurance providers It is essential to have a medical directive as part of any 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.
July 2, 2021
The Weekly Scenario
The Weekly Scenario: Retirement Funds from Previous Employers – Weighing the Options
The year 2020, and so far 2021, has been a reset of sorts. The ever-changing landscape has resulted in people deciding to retire, move or literally reset their careers. For most people, their retirement accounts represent a significant amount of wealth for them. What to do with retirement funds from a previous employer is an important decision. This discussion should be had with an advisor before jumping in. I will discuss 3 of the primary options for most people. Option #1 is to keep the funds in a company plan. A great reason to do so is that these plan assets receive federal creditor protection under ERISA. ERISA protection is a very high bar in bankruptcy, lawsuits and other judgments against the plan participant. Creditor protection should be considered before rolling these funds out of a company protected plan. Another reason to stay in the company plan has to do with the age 55 plan exception. If a participant is age 55 or older in the year he separates from service, keeping the 401(k) money in the plan means there will be no 10% early withdrawal penalty. If a rollover to an IRA is done, the age 55-exception on this money is lost. IRA withdrawals prior to age 59 ½ will generally be subject to the 10% early withdrawal penalty. Option #2 is to roll over the plan to a traditional IRA. IRAs have a number of benefits. Typically, IRA rollovers permit flexibility in making changes more quickly without the administrative hurdles that other plans can impose. Many employer-based plans can be more restrictive for example in terms of permitting trusts to be beneficiaries or will need spousal consents. IRAs do not have such requirements so for the most flexible and favorable post death payout, the better choice is almost always rolling the company plan into an IRA. Plan participants that take distributions from employer plans thinking there will be no 10% penalty if the funds are used for higher education expenses or (first time) home purchases are mistaken. The exceptions to the penalty only apply to withdrawals from an IRA. IRA plans can also generally offer more diverse and wide-ranging investment options. Option #3 is to convert to a Roth IRA. A conversion can be done within the plan if the plan permits this. If there is no Roth component to the employer plan, rolling plan money to a Roth IRA is the only way to get into a Roth. It is permissible to roll over part of the plan to a traditional IRA and part to a Roth IRA. This type of rollover to a Roth IRA would qualify as a valid conversion. However, it is not necessary to move the entire plan to a traditional IRA and then convert. For most people, it is recommended to roll after tax dollar plans (if applicable) into a Roth IRA (this would qualify as a tax-free conversion). After tax money rolled into a traditional IRA will create cost basis in the IRA and will need to be accounted for going forward.
June 25, 2021
The Weekly Scenario
The Weekly Scenario: The Importance of Digital Assets in an Estate Plan
When creating an estate plan, it is important to consider how to deal with your digital assets. Technology is constantly evolving, and so what constitutes a digital asset now may evolve into something completely different in a few years. What are some common examples of digital assets? Social media accounts Digital copyrights or trademarks Online bank accounts or investment accounts Digital photos, videos, or written works that produce income Email accounts Online photos Virtual currencies Credit card rewards Information or documents stored in the cloud Because digital assets usually do not have a tangible financial value, people often ask why you need to account for digital assets when planning your estate. The answer to this question is that creating a plan for digital accounts, whether they are financially ‘valuable’ in their nature, will make it easier for your family to retrieve these assets after you pass away. Estate planning for your digital assets eliminates the need for your loved ones to track down passwords and gives the beneficiaries of your estate the legal right to your passwords. Additionally, specifically for online financial accounts, estate planning for digital assets protects income that your digital assets can generate, such as royalty income or online records from a business. From a legal perspective, digital property is similar to other kinds of property. However, as digital property laws are still evolving, gaining access to digital assets or digitally encoded financial information can present challenges to those other than the original owner. For example, take passwords. If a family member does not know a password, he or she may not be able to access phone or computer and the digital assets on these devices. Aside from the password, data encryption is a complicating factor. Encryption can destroy data in a single file, device, or in the cloud, making it impossible for anyone without the proper passcode to unscramble it. Most digital assets exist on new technology, such as smartphones, that have advanced encryption. Thus, it is vital that you leave passwords behind or risk your family losing all of your information. All this has to be navigated around data privacy laws, which make it so online account service providers are unable to give the contents of electronic communications to anyone without the lawful consent of the data’s owner. The upshot is that this could leave your heirs unable to access photos, messages, online accounts, and other data. In order to address these difficult problems, the first step in the planning process is to inventory your digital assets (e.g., keep track of your online accounts and passwords). Next, you should determine how you want to manage your assets. You must decide what you want your estate or family to do with each of your digital assets when you pass away. You will also want to choose who you want to manage your assets –the executor of your estate, a family member, or perhaps a professional advisor. Finally, it is advisable to put any digital asset plan in writing. 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.
June 18, 2021
The Weekly Scenario
The Weekly Scenario: Witnesses and Wills
Some clients ask why all the formalities when we execute estate planning documents such as a Will. When a client comes in to sign a Will, we always assist the client with witnesses and a notary. In many states, a Will is not valid if not witnessed by at least two individuals. A DC case from the D.C. Probate Division illustrates this point. The probate court allowed the probate of a Will that had been signed without any witnesses. D.C. law requires two witnesses to sign a Will in order to be legally valid. In this case, the court admitted certifications from people who had personal knowledge of the circumstances surrounding the execution of the Will. When the case went to the Court of Appeals, the Court held that there is no getting around the requirement to have two witnesses for the Will to be valid. The distinction is that the court said the law could allow a Will to be admitted to probate even if the two witnesses could not be reached at the time the Will was probated. Nevertheless, it was not a substitute for having actual witnesses.
June 11, 2021
The Weekly Scenario
The Weekly Scenario: Estate Planning in 2021
What may be the best word to describe estate planning in 2021? I submit ‘uncertainty.’ This year may be the year to account for potential changing circumstances. The typical estate plan for a married couple leaves all property to the other. In the case of retirement plan benefits, the spouse is named as the primary beneficiary and the children as contingent beneficiaries. Children will usually wait to receive their inheritance after the surviving spouse’s death. One twist on the standard plan is through the use of disclaimers. A disclaimer provision allows your named beneficiary to say, I don’t want the money, give it to the next in line. If you include disclaimer provisions in your wills, trusts, and in the beneficiary designations of retirement plans, your surviving spouse generally has up to nine months after your death to consider how much to keep and how much to disclaim to your children. Your children would also be able to disclaim into trusts for the benefit of their own children. For example, if the surviving spouse had executed a disclaimer in 2019 of at least a portion of the IRA (e.g., $1,000,000), that amount would be transferred as an Inherited IRA directly to the children. The disclaimer would have allowed the children to defer income taxes on their Inherited IRA, and perhaps would have saved the family a million dollars or more in estate taxes. The rules in effect in 2019 (as opposed to 2020 and beyond under SECURE) allowed the stretch of the Inherited IRA, resulting in a good result for the family. In contrast, if an IRA owner dies after January 1, 2020, there may not be as big of an income tax incentive to disclaim IRA dollars due to the inability to secure the stretch payments. But in some circumstances, there is still incentive. In addition, there may be an incentive to disclaim after-tax or non-IRA dollars. The big point is there is a constant uncertainty surrounding what laws will be in effect when you die. You can’t control Congress, the market, or many other things. Furthermore, for each type of asset, whether it is an IRA, a Roth IRA, a brokerage account, life insurance, an annuity, real estate, or other assets, there might be compelling reasons to do something that cannot be predicted today. A change in circumstances could change the optimal choice of which beneficiary gets which asset. The key concept here is disclaiming. In this type of plan, you can’t force anyone to accept a bequest. The plan works by allowing the beneficiary of an asset to accept the property for him/herself, or to say, I don’t want that asset, or any part of it. If there is a disclaimer of all or part of an IRA, for example, we look to see who is next in line, or if we want to use the official term, the contingent beneficiary. The ability for the primary beneficiary to make a partial disclaimer adds enormous flexibility to the plan. This means that he or she can accept part of the asset and let the contingent beneficiary have the rest. If a surviving spouse needs all the money, that is fine ¾ if he or she can keep everything left to him or her. But if the surviving spouse doesn’t need the money, or more likely doesn’t need all of the money, then he or she can disclaim either all, or again more likely, a portion of it, in favor of the next beneficiary on the list (i.e., the children). The child can also decide to accept the property or disclaim it further down the line. With traditional planning and traditional estate administration, children do not get any inherited money until both spouse’s deaths. Grandchildren do not get anything until their parents are gone. Incorporating disclaimers into the estate plan allows the children to receive money at the first death, which not only has potential tax advantages but also can help them out while they are younger and may need it more. Disclaiming can not only reduce taxes after your death but also get money to younger generations sooner when they have a greater financial need for it. It is too tough to guess what the best strategy will be after the first and second death. Therefore, you will want to build flexibility into the estate plan with disclaimers. Ultimately, you might be able to get the right assets to the right beneficiaries at the right time and save money on taxes 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.
June 3, 2021
The Weekly Scenario
The Weekly Scenario: No One is Too Old to Make IRA Contributions Now
By the time this article is published, ‘tax season’ for the 2020 reporting will be coming to a close. Tax season is the time when individuals have the opportunity of contributing to an IRA. It is not well known, but one benefit the SECURE Act gave us was to do away with the age limit for traditional IRA contributions. Now, no one will be too old to contribute to an IRA. 2020 is the first year that those age 70 ½ and older can make traditional IRA contributions. As such, individuals who may still be working, even part-time, can continue to add to their retirement plan. No one is ever too old to contribute to an IRA anymore. An individual must have earned income to contribute, but age is no longer a barrier. The SECURE Act did away with the age limit for traditional IRA contributions. This is good news for older individuals who may still be working, even part-time because they may be able to continue to add to their retirement savings. Example: Mary is 80 and works part-time at a local market. She has earned income of $25,000 for 2020. Since the SECURE Act has eliminated the age limit for traditional IRA contributions, Mary can make a contribution to an IRA of $7,000. Mary will still have to take her minimum required distribution, however, if she had a balance on December 31 of the previous year. In order to make an IRA contribution, one must have earned income. This means salary from a job or self-employment income. One exception to the ‘rule’ is for a spousal IRA for a nonworking spouse. A nonworking spouse can make a contribution based on a working spouse’s earned income. Contributions would be made to the nonworking spouse’s IRA. Any IRA contributions to that nonworking spouse’s IRA from earned income (at a future time) can also be made to the same IRA. 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.
May 24, 2021
The Weekly Scenario
The Weekly Scenario: Trust Decanting
What is trust decanting? Trust decanting is the act of distributing assets from one trust to a new trust with different terms for one or more beneficiaries of the first trust. As I have heard some practitioners say, ‘just as you can decant wine by pouring it from its original bottle into a new bottle, leaving the ‘unwanted’ sediment in the original bottle, the distribution trustee can pour the assets from one trust into a new trust, leaving the unwanted terms in the original trust.’ For years, practitioners have struggled to find ways to change the terms of an irrevocable trust. However, through the decanting statutes that have been enacted in many jurisdictions, it is now possible to modify an irrevocable trust by having the trustee distribute the trust assets into a new or different irrevocable trust for one or more of the same beneficiaries of the first trust. Not all states allow decanting through their own state statutes. There are 31 states that have decanting statutes. Some states have laws with respect to decanting that offer more flexibility than others. There are rankings that are published to this end (feel free to reach out to me if you would like me to provide you a state ranking chart). So, what if the trust is in a non-decanting jurisdiction? Do you throw in the towel? No! We first look into the trust agreement to see if it has decanting language. Since decanting is a relatively recent phenomenon, it likely does not have such a statute. However, if it does, then one can likely utilize decanting through the authority granted in the trust agreement. Assuming no decanting language is in the trust, the trust may give the trustee the power to change the trust situs. If it does, then we can often move the trust to a new situs that allows decanting. If the trust does not give anybody the power to change the situs, then we look at the current situs statutes to see if there is a nonjudicial settlement agreement statute. If there is, we may be able to change the situs using that statute and then decant it under the new situs statute. Typically, clients are comfortable changing the trust via a nonjudicial settlement agreement statute, however, since the statute requires all interest parties to agree, it doesn’t always work. As a final remedy, we can petition the court for a trust reformation. Taking a case through the judicial system however, may be the most costly alternative. 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.
May 13, 2021
The Weekly Scenario
The Weekly Scenario: Required Minimum Distribution (“RMD”) under the SECURE Act
Is there a year of death for Required Minimum Distribution (“RMD”) under the SECURE Act? Even over a year in the passage of the SECURE Act, many questions remain about the correct way to handle the RMD in the year of death. The RMD for the year of death will only need to be taken if the IRA owner died on or after their required beginning date (RBD) and had not already taken all of their RMD. Under the new rules of the SECURE Act, the RBD is now April 1 of the year following the year the IRA owner reaches age 72. Note that all Roth IRA owners are considered to have died before their RBD. This means that there is never a year-of-death RMD required from a Roth IRA. Nothing needs to be withdrawn in the year of death. Example 1: Jane’s 72nd birthday is November 21, 2021. She died in December of 2021 without taking her 2021 RMD. Jane died before her RBD (April 1, 2022). Therefore, no RMD is required for the year of her death (2021). The RMD for the year of death is calculated as if the IRA owner had lived for that year. This means it will be calculated using the Uniform Lifetime Table. The requirement that a year-of-death RMD be taken is unaffected by the SECURE Act. This is because the changes made in the SECURE Act to the calculation of RMDs deal only with post-death RMDs. The amount of the year-of-death RMD is based on the IRA owner’s pre-death lifetime payments. Example 2: Dave, age 75, dies in 2021. The year-of-death RMD that must be taken from his IRA will still be calculated using the factor that corresponds to his age 75 on the Uniform Lifetime Table (22.9). If the year-of-death RMD was not already taken by the IRA owner, it must be taken by the beneficiary. It is not paid to the IRA owner’s estate (unless the estate is named as the beneficiary). The beneficiary will also pay the tax on the distribution. The SECURE Act’s requirement that non-spouse beneficiaries use the 10-year rule does NOT remove the beneficiary’s responsibility to take the year-of-death RMD. Example 3: Sam died in 2021 at age 81. He named his nephew Joey as his IRA beneficiary. However, Sam did not take his RMD prior to his death. Joey is a non-eligible designated beneficiary and is subject to the 10-year payout term. Joey is responsible for taking his uncle’s year-of-death RMD prior to the end of 2021. 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.
May 6, 2021
The Weekly Scenario
The Weekly Scenario: Uncertainty and Opportunity in 2021
Is Now the Time to Make a Substantial Gift? As I reported last week, we may soon see a rollback in the ‘Trump’ tax cuts. Such a roll-back might even be made effective retroactively to January 1, 2021. Most of the changes made by the Tax Cuts and Jobs Act of 2017, as related to individuals, are already set to expire after 2025. Under this act, we now have an estate, gift, and generation-skipping transfer tax exemption amount of $11,700,000 per person. This exemption amount is up from $5,490,000, where it stood in 2017 prior to the ‘Trump’ tax cuts taking effect. This means that until the end of 2021, an individual dying or making a large gift can pass up to $11,700,000 free of any federal transfer tax. Thereafter a roughly 40% tax on the fair market value of the estate or gift would be paid. For married couples, they can now pass up to $23,400,000 (federal estate/gift/generation-skipping). The individual exemptions may likely roll back soon to around $5 million per donor or even $3.5 million per donor. On November 26, 2019, the IRS issued a regulation under IR-2019-189 that there would have been no “clawback” for any gifts made in 2020. Thus, if an individual had given up to $11.5 million in 2020, and the related exemption amount was reduced in 2021 to something less than that, then the difference between those amounts would not have been added back when computing the value of the taxable estate when the donor later dies. This is the “use it or lose it” approach that many people talk about in trying to figure out whether to make a large gift. While it is likely the IRS would do this again; there are no guarantees. The analysis to figure out whether a gift might be beneficial to a family is difficult and requires many different factors. Some of the factors include the total estate value, the health of the family member, the income tax basis of the estate assets, the charitable giving goals, prior gifts, the desire to retain control over the use of assets, and the readiness of beneficiaries to receive a large gift. Keep in mind that a gift doesn’t have to be made directly to an individual beneficiary. It can be made in trust, for example, given a person access to the property but not ownership or control. 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 28, 2021
The Weekly Scenario
The Weekly Scenario: What is a Spendthrift Provision?
One of the best forms of asset protection we can provide is through a trust that contains a spendthrift provision. The general idea behind a spendthrift trust is to prevent certain beneficiaries from receiving their inheritances all at once. The risk is that the ‘spendthrift’ beneficiary will end up blowing through the money in a short period of time. The process of establishing a spendthrift trust is nearly identical to creating any other trust, except the trust instrument must contain a spendthrift provision. So what exactly does a spendthrift provision do? A spendthrift provision is a provision within a trust that limits the beneficiary’s access to trust. This restriction protects the trust property in two ways: First, it prevents a beneficiary from selling his or her interest in the trust property as a beneficiary to a creditor, and second, it prevents the beneficiary’s creditors from compelling the trustee to satisfy a debt by making a distribution except where this would void public policy like in the case of alimony, child support and some civil judgments. So, for instance, creditor X demands that Beneficiary 1 use the money to pay his debt of $20,000. Even if the beneficiary cannot pay off his debt, creditor X cannot compel the trust to pay a debt directly to creditor X if the trust is discretionary and contains such a spendthrift provision. However, once the trustee has made a distribution to a beneficiary, the creditor may then take the distributed assets from the individual beneficiary. In a discretionary spendthrift trust arrangement, the beneficiary's inheritance is, therefore, distributed in portions over an extended period of time. The beneficiary has no right to the money and can't spend it before actually receiving any of these distributions, and creditors and others can only reach the money that the beneficiary has actually received—not the portion of the inheritance that remains in the trust. The trustee would have discretion to decide when and why payments are made, or the creator of the trust can set these terms in the trust documents when the trust is created. There are some debts that courts do not allow spendthrift provisions to protect due to public policy concerns. For instance, a spendthrift provision will not apply to claims for alimony, child support, and back taxes. The courts favors these debtors because it is public policy to keep families from relying on support from the state when there are other resources that could provide support. If such great protection from creditors exists, why not simply create a spendthrift trust and name yourself a beneficiary? The reason is that most states won't allow this for public policy reasons. However, there are some exceptions where certain states allow something called ‘self-settled’ asset protection trusts where the person setting up the spendthrift trust can also be a 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.
April 22, 2021
The Weekly Scenario
The Weekly Scenario: What to Know About the “For the 99.5% Act” and the “Sensible Taxation and Equity Promotion (STEP) Act"
There are many potential tax law changes that may be coming to a theatre near you. I can’t get too far into the weeds in this blog, but I’ll address two current proposals that may be of interest. About three weeks ago, Senators Bernie Sanders (D-VT) and Sheldon Whitehouse (D-RI) introduced what they refer to as the “For the 99.5% Act.” As the name implies, the Act is focused on the top 0.5% of Americans. Under current law, the estate and gift tax lifetime exemption amount is $11.7 million per person (indexed for inflation), with amounts transferred in excess of this amount (this does not include annual gift tax exclusion gifts of $15,000 per person) subject to a 40% tax. The estate and gift tax exemptions are currently unified, meaning amounts not used via gifts during one’s life can be applied to offset estate tax upon death. The current exemption levels were doubled by the Tax Cuts and Jobs Act (TCJA) of 2017 and are expected to “sunset” or return to pre-TCJA 2017 amounts at the end of 2025. Some of the most significant provisions of the 99.5% Act are as follows: Reduces the estate tax exemption amount to $3.5 million per person but continues to index it for inflation. Reduces the gift tax exemption to $1 million per person (the system would no longer be unified). Increases the estate and gift tax rate (40%) to: 45% of an estate between $3.5 million and $10 million. 50% of an estate between $10 million and $50 million. 55% of an estate between $50 million and $1 billion. 65% of an estate over $1 billion. Eliminates valuation discounts for non-business assets. Eliminates the use of “Defective (for income tax purposes) Trusts.” Restricts the funding of Grantor Retained Annuity Trusts (GRATs) and imposes a minimum term of 10 years. Limits on "Generation-Skipping” while also imposing a maximum term of 50 years. Reduce the annual gift tax exemption (as mentioned above) from $15,000 per donee per year to $10,000 per donee per year. About the same time, Senators Chris Van Hollen (D-MD), Corey Booker (D-NJ), Elizabeth Warren (D-MA), Bernie Sanders (D-VT), and Sheldon Whitehouse (D-RI) introduced what they call the Sensible Taxation and Equity Promotion (STEP) Act. Under the current law, when an individual dies, the cost basis of property would receive a cost basis adjustment being adjusted to its Fair Market Value (FMV) at the date of death. When gifting appreciated property, the cost basis would carry over to the recipient. Some of the most significant provisions of the STEP Act are as follows: Property transferred by gift or bequest is treated as sold for its FMV, with the gain (or loss, but only if transferred via bequest) being recognized currently. There would be a $100,000 exclusion for gifts and a $1 million exclusion for transfers at death. There is a deferral period of 15 years built in to pay the tax. The exclusion of up to $250,000 per person on the sale of a principal residence would continue. All ‘non-grantor' trusts would have to pay tax on unrealized gains every 21 years (although trusts created in 2005 or earlier would have their first “deemed realization” in 2026). Gifts or bequests to spouses or charities would be exempt. The effective date of these proposed changes would be January 1, 2022. 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, 2021
The Weekly Scenario
The Weekly Scenario: Designating a Beneficiary on a Vehicle Title
Like an individual retirement account or life insurance policy, a vehicle owner can designate a beneficiary to receive ownership of a Maryland titled vehicle upon their death. Since the designation is made prior to the death of the individual, the vehicle will not be considered part of the estate; therefore, Letters of Administration (obtained as a result of opening a probate estate matter) will not be required for transfer. What are the requirements (and clarifications): The vehicle must be solely owned and currently titled in Maryland; Only one beneficiary can be named; which can be either an individual or a business entity; A beneficiary must be designated prior to the death of the vehicle owner; A beneficiary may be added, even if the vehicle is subject to a lien. When the vehicle is transferred to the beneficiary all liens must be satisfied, or a letter of permission from the lien holder must be provided to change ownership to the beneficiary; The designation of a beneficiary does not affect the ownership of the vehicle until the death of the vehicle owner; The owner of the vehicle may choose to delete or change the designation of a beneficiary or sell the vehicle at any time prior to their death without the consent of the beneficiary. Once a beneficiary is designated, a corrected title will be delivered to the vehicle owner. All previously issued titles will be voided. In addition, no inspection is required if the beneficiary is an immediate family member (spouse, child, or parent of the deceased). In addition: The vehicle registration may be transferred if the vehicle is transferred to a member of the immediate family. All other transfers will require the purchase of new registration plates; At the time the transaction is submitted for processing a death certificate must accompany the title. If the MVA has received notification of the vehicle owner’s death from the Department of Health and Mental Hygiene, the death certificate would not be required; There is a fee to add, delete or change a beneficiary to a vehicle title record. The beneficiary designation form is available on the MVA’s website. 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 8, 2021
