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Four Provisions People Often Forget to Include in Their Estate Plan

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Even if you’ve created an estate plan, are you sure you included everything you need to? There are certain provisions that people often forget to put in a will or estate plan that can have a big impact on a family.

1. Alternate Beneficiaries

One of the most important things your estate plan should include is at least one alternative beneficiary in case the named beneficiary does not outlive you or is unable to claim under the will. If a will names a beneficiary who isn’t able to take possession of the property, your assets may pass as though you didn’t have a will at all. This means state law will determine who gets your property, not you. By providing an alternative beneficiary, you can make sure that the property goes where you want it to go.

2. Personal Possessions and Family Heirlooms

Not all heirlooms are worth a lot of money, but they may contain sentimental value. It is a good idea to be clear about which family members should get which items. You can write a list directly into your will, but this makes it difficult if you want to add items or delete items. A personal property memorandum is a separate document that details which friends and family members get what personal property. In some states, if the document is referenced in the will, it is legally binding. Even if the document is not legally binding, it is helpful to leave instructions for your heirs to avoid confusion and bickering.

3. Digital Assets

More and more, we are conducting business online. What happens to these online assets and accounts after you die? There are some steps you can take to help your family deal with your digital property. You should make a list of all of your online accounts, including e-mail, financial accounts, social media accounts, and anywhere else you conduct business online. Include your username and password for each account. Also, include access information for your digital devices, including smartphones and computers. And then you need to make sure the agent under your durable power of attorney and the personal representative named in your will have authority to deal with your online accounts.

4. Pets

Pets are beloved members of the family, but they can’t take care of themselves after you are gone. While you can’t leave property directly to a pet, you can name a caretaker in your will and leave that person money to care for the pet. Don’t forget to name an alternative beneficiary as well. If you want more security, in some states, you can set up a pet trust. With a pet trust, the trustee makes payments on a regular basis to your pet’s caregiver and pays for your pet’s needs as they come up.

Contact your attorney to make sure your will and estate plan takes care of all your needs.

How You Can Help Your Loved Ones by Planning Your Funeral Arrangements

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When an individual passes away without a funeral plan, responsibility for arranging the funeral often falls on the deceased’s close family members, such as surviving spouses and children. Planning your own funeral arrangements can assist your loved ones in an emotionally challenging time, while also protecting them from incurring extraneous costs.

According to the National Funeral Directors Association, in 2021, the average cost of a full-service burial was $7,848, and the average cost of full-service cremation was $6,971. When an individual dies without having outlined a funeral plan, surviving family members may be unsure of their loved one’s wishes. As a result, they may choose more expensive funeral options or feel pressure to overspend to demonstrate their love. Yet you can shield your family from these costs by prearranging the funeral and, in some cases, prepaying for funeral arrangements. (Always do your research before prepaying.)

Without a plan in place, grieving family members often face time constraints in making decisions. For instance, they may not have time to visit multiple funeral homes and compare their values after their loved one’s death. Often, they choose the first funeral home they see rather than exploring various options to find the best fit and value.

When individuals prearrange their funerals, they have time to research funeral homes and carefully decide the details of their end-of-life arrangements, ensuring that the services will follow their wishes.

Beyond choosing the funeral home, planning such arrangements ahead of time can include:

  • Deciding what happens to the remains, including burial or cremation
  • Determining the burial location, such as next to a loved one
  • Letting loved ones know where to spread or keep ashes
  • Deciding whether to donate organs or remains to scientific research
  • Selecting the type of funeral or memorial service (For instance, a traditional funeral ceremony may be held in a religious institution and include viewing and burial, whereas direct burials happen soon after death and do not include a viewing)

How to plan your funeral arrangements

Often, planning funeral arrangements entails writing down your wishes in detail. You may wish to give your family members copies of your written wishes. Additionally, people with a reasonable idea of where they will pass away can prepay a funeral home for services, ensuring family members do not need to take on the cost.

Advance directives can document your desires regarding end-of-life care and what happens to your remains after death. You can choose a person to act as your healthcare agent and help you with healthcare decisions. Although your agent’s authority often terminates upon your death, you may provide your agent with your funeral wishes, along with the power to oversee the arrangements.

Wills may contain sections describing desired funeral arrangements. However, wills are not the best place for funeral arrangements, as family members often read wills after the funeral. Instead, a separate document, such as a prepaid funeral or burial contract, can describe funeral arrangements and end-of-life wishes.

Deciding funeral arrangements in advance and providing instructions to your loved ones makes your wishes clear, avoiding arguments within your family and giving them more peace of mind after you pass away.

How Long Should I Hold on to Important Documents?

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It is hard to know what documents to trash and when. Before you know it, your spare room, office, basement, or garage is overflowing with boxes of papers that all seem important. Trying to weed through the mess and figure out what to toss? Keep reading.

Which Documents Should I Keep?

There are some documents that you will want to hang on to forever and some that you should keep for a few years. Consider the following examples:

Documents You Should Always Have

These following documents should always be available, and you should properly store them to ensure you can grab them when you need them:

  • Birth certificates
  • Death certificates
  • Marriage license
  • Social Security card (Lost yours? Now you can request a replacement online.)
  • Your current insurance policies (life, health, etc.)
  • The newest version of your estate planning documents

Documents You Should Only Keep Temporarily

Some documents lose importance as time goes by. However, it would help if you hung on to the following documents for a few years (typically, between five and seven years):

  • Papers related to charitable donations
  • Tax returns
  • Credit card statements
  • Cancelled checks
  • Bank statements

Why Is It Important to Keep Some Documents?

Should you pass away, it is crucial to have kept certain documents because the probate court may request them after your death. Maintaining important documents will help your family close your estate.

Other reasons to hold on to paperwork depend on your situation. For example, some people find themselves a party to a lawsuit. If that happens to you, you may need to produce documents, and it will be much easier if you can readily access the important ones.

Digital Storage

Digitally storing your documents can significantly cut down on the clutter. Before you start digitizing your essential documents, you want to have a plan. Sit down, look at all your documents, and determine whether they are necessary. Use a critical eye as you decide what to keep. The next step is scanning each document into your computer, on to an external hard drive, or on a flash drive.

Some important considerations when digitizing your files include keeping up to date with current technology and password-protecting your sensitive information. As technology advances, make sure that you advance with it. The last thing you want is to be unable to open your files. Always encrypt or password-protect your information. It is the best way to protect yourself against hackers and identity thieves.

How Community Property Affects Estate and Tax Planning

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In most states, spouses can purchase and own property separately from one another. However, in certain states – called community property states – if one spouse purchases property, it is considered the property of both spouses. How marital property is owned has implications for both estate and tax planning.

There are currently nine community property states. They are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. A few other states (for example, Alaska) allow couples to opt into community property arrangements.

Community property is property acquired by a husband and wife during marriage. In community property states, property held in only one spouse’s name can still be community property. For example, the paycheck that a spouse brings home every week is community property even though only one spouse’s name is on the check. If that check is used to buy an asset, then that asset is community property, regardless of whose name is on the account or the asset.

Property that is not community property is property that one spouse brings to the marriage, inherits, or is gifted. A spouse can turn separate property into community property by putting an asset owned by one spouse into both spouses’ names.

Depending on the state, partners may be able to change whether property is separate or community via pre-nuptial agreement, post-nuptial agreement, or exceptions in the law. Changing community property into separate property may be appropriate in second marriages or when one spouse is bringing significant separate property into the marriage. For example, if, at the time of the marriage, one spouse receives significant income from owning a business, the spouses may decide that it is appropriate that the business remain that spouse’s separate property and the income from that property will remain that spouse’s separate property.

One advantage of community property is with regard to capital gains taxes. If one spouse dies, the cost basis of the community property gets “stepped up.” The current value of the property becomes the cost basis. This means that if, for example, the couples’ house was purchased years ago for $150,000 and it is now worth $600,000. The surviving spouse will receive a step up from the original cost basis from $150,000 to $600,000. If the spouse sells the property right away, he or she will not owe any capital gains taxes. In non-community property states, if one spouse dies, only the deceased spouse’s interest (usually 50 percent of the value) is stepped up.

When estate planning in a community property state, it is important to fully review assets to determine which assets are community property and which are separate property. A surviving spouse in a community property state is entitled by law to half of the community property, regardless of what the spouses may have wanted to do with the property (such as pass it on to children). Community property can be a factor even in non-community property states if the couple owns property in a community property state.

If spouses move from one type of state to another, it is especially important that they have their estate plan reviewed by an attorney in the new state to make sure the plan still does what they want.

Using an Intentionally Defective Grantor Trust to Transfer Assets

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An intentionally defective grantor trust (IDGT) is a common estate planning tool that is used by wealthy families to transfer assets from one generation to the next while achieving significant tax savings. IDGTs are especially useful if you have assets that will appreciate significantly over time.

An IDGT is “intentionally defective” because it purposely gives the grantor – the person creating the trust – a right or power that allows the grantor to pay taxes on the income generated by the trust even though the trust assets are not a part of the grantor’s estate. The trust is irrevocable, which means the trust assets will not be counted for estate tax purposes. Transferring assets to an IDGT takes the assets out of an estate while the trust’s income is taxed at the grantor’s personal rate, not the trust’s much higher rate.

The benefit of an IDGT is that it allows the trust to grow without having to use trust assets to pay income taxes. This amounts to a tax-free gift to the trust. In addition, by paying the income taxes, you are also continuing to lower your taxable estate. IDGTs work best for assets that are likely to appreciate significantly in value, such as stock or real estate. For example, suppose you fund an IDGT with $10 million in assets and it earns 5 percent annually over a 30-year period. If the trust does not have to pay income tax, it might grow to more than $43 million. If the trust needs to pay income taxes from its own assets, its growth would likely be significantly less.

Bear in mind that when you transfer the assets to the trust, the transfer may be subject to gift taxes. Currently, the annual gift tax exclusion is $16,000 (for 2022). This means that any person who gives away $16,000 or less to any one individual (anyone other than their spouse) does not have to report the gift or gifts to the IRS. In addition, the IRS allows you to give away a total of $12.06 million (in 2022) during your lifetime before a gift tax is owed. Even if you gift assets to an IDGT and reduce your future gift and estate tax exemption, any future growth will occur outside of your estate.

If you want to avoid gift taxes, you may be able to sell assets to the trust. This is usually done in installments through an interest-bearing promissory note. When an asset is sold to an IDGT, there are no capital gains taxes because you are selling something to yourself. If the assets in the trust gain more in value than the interest rate, then the sale will still benefit the trust overall. This strategy works best when interest rates are low.

To find out if an IDGT is right for you, contact your attorney.

The Tax Consequences of Selling a House After the Death of a Spouse

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If your spouse dies, you may have to decide whether or when to sell your house. There are some tax considerations that go into that decision.

The biggest concern when selling property is capital gains taxes.  A capital gain is the difference between the “basis” in property and its selling price. The basis is usually the purchase price of property. So, if you purchased a house for $250,000 and sold it for $450,000 you would have $200,000 of gain ($450,000 – $250,000 = $200,000).

Couples who are married and file taxes jointly can sell their main residence and exclude up to $500,000 of the gain from the sale from their gross income. Single individuals can exclude only $250,000. Surviving spouses get the full $500,000 exclusion if they sell their house within two years of the date of the spouse’s death, and if other ownership and use requirements have been met. The result is that widows or widowers who sell within two years may not have to pay any capital gains tax on the sale of the home.

If it has been more than two years after the spouse’s death, the surviving spouse can exclude only $250,000 of capital gains. However, the surviving spouse does not automatically owe taxes on the rest of any gain.

When a property owner dies, the cost basis of the property is “stepped up.” This means the current value of the property becomes the basis. When a joint owner dies, half of the value of the property is stepped up. For example, suppose a husband and wife buy property for $200,000, and then the husband dies when the property has a fair market value of $300,000. The new cost basis of the property for the wife will be $250,000 ($100,000 for the wife’s original 50 percent interest and $150,000 for the other half passed to her at the husband’s death). In community property states, where property acquired during marriage is the community property of both spouses, the property’s entire basis is stepped up when one spouse dies.

To understand the tax consequences of selling property after the death of a spouse, contact your attorney.

What to Do If You Want to Leave Your Children Unequal Inheritances

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Parents usually want to leave their children equal shares of their estate, but equal isn’t always fair. If you plan to provide more (or less) for one child in your estate plan, preparation is important.

It is natural for parents to want to treat their children equally in their estate plan, but there are some circumstances in which a parent might want to leave children unequal shares. If one child is providing all the caregiving, the parent might want to reward that child. If one child is substantially better off than another child, then the parent might want to provide more for the child who has a greater need for the funds.

Other factors that can influence how much to give each child is if one child has special needs or if there is a family business that only one child wants to run. It’s also possible that the parents have already provided more for one child during their lifetime, maybe by paying for graduate school or helping them buy a house.

Whatever the reason for leaving your children unequal shares, the important thing is to discuss your reasoning with the children. Sit down with them and explain your decision-making process. If you feel like the conversation could be difficult and contentious, you could hire a mediator to help facilitate the discussion.

Your children may be understanding of your decision, but if you are worried about one child challenging your will after you die, you may want to take additional steps:

  • Draft your will and estate plan with the assistance of an attorney and make sure it is properly executed. To avoid accusations of undue influence, do not involve any of your children in the process.
  • Explain in detail your reasoning in your estate planning document and make it clear that it is your decision and not the influence of the child who is receiving more.
  • Include a no-contest clause (also called an “in terrorem clause”) in your will. A no-contest clause provides that if an heir challenges the will and loses, then he or she will get nothing. You must leave the heir enough so that a challenge is not worth the risk of losing the inheritance.

Using a Roth IRA as an Estate Planning Tool

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A Roth IRA does not have to be used as just a retirement plan; it can also be a way to transfer assets tax-free to the next generation.

Unlike a traditional IRA, contributions to a Roth IRA are taxed, which means that the distributions are tax-free. Also, unlike a traditional IRA, you are also not required to take any distributions on a Roth IRA, regardless of your age. If you don’t need the money for retirement, you can leave all of it in the IRA to grow tax-free and eventually pass on to your heirs.

If your spouse is the beneficiary on your Roth IRA, your spouse can become the owner of the account. Your spouse can either put the IRA in his or her name or roll it over into a new IRA, and the IRS will treat the IRA as if your spouse had always owned it. Just like you, your spouse does not need to take any distributions from the IRA if they are not needed.

The rules for a child or grandchild (or other non-spouse) who inherits an IRA are different than those for a spouse. They must withdraw all of the assets in the inherited account within 10 years. There are no required distributions during those 10 years, but it must all be distributed by the 10th year.

Certain non-spouse beneficiaries are treated like spouses, which means they can treat the IRA as their own:

  • Disabled or chronically ill individuals
  • Individuals who are not more than 10 years younger than the account owner
  • Minor children. Once the child reaches the age of majority, he or she has 10 years to withdraw the money from the account.

The benefit of a Roth IRA for your heirs is that the assets will be distributed tax-free. As long as you opened and began making contributions to the Roth IRA more than five years before you died, the distributions will not be taxed when the beneficiary takes distributions.

Another consideration is that money you leave your heirs in a Roth IRA does not go through the probate process. This can make it easier for your beneficiaries to access the funds quickly. But make sure that you name a beneficiary on your account. If no beneficiary is named, the account will go to your estate and will then have to go through probate. Also, be sure to regularly check that your beneficiary designations are up to date.

Leaving your heirs a tax-free Roth IRA may not always be the best plan. In figuring out the best type of IRA to leave to your beneficiaries, you need to consider whether your beneficiary’s tax rate will be higher or lower than your tax rate when you fund the IRA. In general, if your beneficiary’s tax rate is higher than your tax rate, then you should leave your beneficiary a Roth IRA. Because the funds in a Roth IRA are taxed before they are put into the IRA, it makes sense to fund it when your tax rate is lower. On the other hand, if your beneficiary’s tax rate is lower than your tax rate, a traditional IRA might make more sense. That way, you won’t pay the taxes at your higher rate; instead, your beneficiary will pay at their lower tax rate.

To determine if a Roth IRA should be a part of your estate plan, consult with your attorney.

Can My Family Inherit My Season Tickets?

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Sports fans with season tickets may want their families to enjoy the tickets after they are gone, but passing on these tickets may not be simple.

Getting season tickets to your favorite sport is not always an easy task. Season tickets for some teams can cost a lot of money and require time on a waitlist. It makes sense that you may want family or friends to be able to take advantage of tickets that are still usable after you pass away. However, most teams place limits on how you can transfer the tickets both before and after death.

A season ticket is a contract between the purchaser and the team, so the team can put any restrictions it wishes in the contract. This includes setting limits on when and how the tickets can be transferred to someone else. Teams may explicitly state that the tickets cannot be transferred by will or trust, allow transfers only to a spouse or close family members, or require that ticket holders follow certain procedures in order to transfer the tickets.

For example, some teams have a form that you will need to fill out, designating a beneficiary to inherit your tickets. Other teams state that only a spouse can use a deceased fan’s season tickets. Still others allow transfers only to a parent, spouse, child, or sibling. If there is no surviving family member who can take over the tickets, the tickets go back to the team.

Note that some teams require fans to purchase a seat license before buying season tickets. This means the fan pays a large fee to buy a license for particular seats and then has the right to buy season tickets for those seats. A seat license, unlike season tickets, is transferable via a will or trust.

If you own season tickets, be sure to include them in your estate planning. Your attorney can determine the best way to transfer the tickets.

Why Small Business Owners Need an Estate Plan

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Running a small business can keep you busy, but it should not keep you from creating an estate plan. Not having a plan in place can cause problems for your business and your family after you are gone.

While an estate plan is important for everyone, it is especially important for small business owners. Planning allows you to dictate what will happen with your business after you die or are no longer able to manage it. It can help you avoid excess taxes and debts and facilitate your business’s continued success.

Before sitting down to start the estate planning process, you should think about your goals for the business. What do you want to have happen if you die or become incapacitated? Should the business continue with current partners or be sold to new owners? Should your family take over? Should the business be shut down? Consider your family dynamics when thinking about these questions. Once you have come up with your goals, you can create a plan to meet them.

The basic building blocks of any estate plan include a will, power of attorney, and medical directives. The will allows you to direct who will receive your property at your death while the power of attorney and medical directives dictate who can act in your place for financial and health care purposes.

Following are some additional things a small business owner should consider as part of an estate plan:

  • Tax Planning. If your business is not a separate entity, you may want to consider ways to minimize estate taxes. The current estate tax exemption ($12.06 million in 2022) is so high that most estates do not pay any estate tax. However, a small business could put an estate over the limit. Also, the fact that the estate tax exemption is set to be cut in half in 2026 and that states have their own estate taxes means that tax planning is important. You may want to put your business assets into a trust or a separate business entity like a limited liability company to lower your estate tax burden.
  • Trust. A trust can be useful not only to reduce estate taxes, but also to ensure the continued running of your business if you die or become incapacitated. Because a trust passes outside of probate, the assets in the trust can be transferred immediately to the person you want to run the business without waiting for the whole estate to go through probate. In addition, if you become incapacitated, the trustee can continue to run your business without court involvement.
  • Buy-Sell Agreement. If you own your business with others, a buy-sell agreement can be very useful. Buy-sell agreements are used if one of the owners dies, leaves the company, or becomes incapacitated. It specifies who can buy an owner’s share of the business, under what conditions, and for what price.
  • Life Insurance. When you own a business, life insurance takes on new importance. A life insurance policy can ensure that your family continues to receive an income in the event of your death. It can also provide funds to keep the business running and be used to fund a buy-sell agreement.

Your estate planning attorney can help you come up with a plan to meet the needs of your business.

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