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Category Archives: Estate Planning

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 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 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.

Estate Planning for a Single Person

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If you are single, you may not think you need to plan your estate, but single people are in as much need of a plan as anyone else. Estate planning not only involves determining where your assets will go when you die — it also helps you plan for what will happen should you become incapacitated, perhaps as the result of a stroke, dementia, or injury. If you don’t make a plan, you will have no say in what happens to you or your assets.

Without a properly executed will in place when you die, your estate will be distributed according to state law. If you are single, most states provide that your estate will go to your children, parents, or other living relatives. If you have absolutely no living relatives, then your estate will go to the state. This may not be what you want to have happen to your assets. You may have charities, close friends, or particular relatives that you want to provide for after your death.

If you become incapacitated without any planning, a court will have to determine who will have the authority to handle your finances and make health care decisions for you. The court may not choose the person you would have chosen. In addition, going to court to set up a guardianship is time-consuming and expensive. With proper planning, you can execute a power of attorney and a health care proxy, which gives the people you choose the authority to act on your behalf, as well as an advance directive giving instructions on what type of care you would like. The power of attorney can also dictate exactly what powers the individual has.

Single individuals who are divorced need to make especially certain that the beneficiary designations on their IRAs, life insurance policies, and relevant bank accounts are up to date. If you don’t, your ex-spouse could get the funds. And for single people of means, opportunities to avoid state or federal estate taxes can be more limited than for married couples, although advance planning can close the gap.

In short, proper planning is a good idea for everyone. Contact your attorney to help you create an estate plan.

What Is a Fiduciary and What Are Its Obligations?

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When you need someone else to care for money or property on your behalf, that person (or organization) is called a fiduciary.  A fiduciary is a person or entity entrusted with the power to act for someone else, and this power comes with the legal obligation to act for the benefit of that other person.

Many types of positions involve being a fiduciary, including that of broker, trustee, agent under a power of attorney, guardian, executor and representative payee. An individual becomes a fiduciary by entering into an agreement to do so or by being appointed by a court or by a legal document.

Being a fiduciary calls for the highest standard of care under the law. For example, a trustee must pay even more attention to the trust investments and disbursements than for his or her own accounts. No matter what their role is or how they are appointed, all fiduciaries owe four special duties to the people for whom they are managing money or resources. A fiduciary’s duties are:

  • to act only in the interest of the person they are helping;
  • to manage that person’s money or property carefully;
  • to keep that person’s money and property separate from their own; and
  • to keep good records and report them as required. Any agent appointed by a court or government agency, for example, must report regularly to that court or agency.

Remember, your fiduciary exists to protect you and your interests. If your fiduciary fails to perform any of those four duties or generally mismanages your money or affairs, you can take legal action. The fiduciary will probably be required to compensate you for any loss you suffered because of their mismanagement.

Don’t Just Hope for an Inheritance; Get It in Writing

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A Massachusetts case demonstrates the importance of getting any agreements about inheritance in writing. The Massachusetts Appeals Court ruled that rendering services to someone in the hope or expectation that it will result in payment from an estate is not sufficient to entitle an individual to a portion of the estate.

Suzanne M. Cheney performed many services for her stepfather, Anthony R. Turco, expecting to receive a share of his estate. However, to her great disappointment, upon his passing he left her nothing. Ms. Cheney subsequently sued James F. Flood, Jr., who was both her stepfather’s lawyer and administrator of her stepfather’s estate, alleging legal malpractice and that she was entitled to recovery from the estate for the reasonable value of the services she and her family performed for Mr. Turco during the last years of his life.

The trial court judge dismissed the legal malpractice claim because Ms. Cheney and Mr. Flood had no attorney-client relationship.  The judge then dismissed the claim that there had been an implied promise of payment for services, called quantum meruit under the law, because Ms. Cheney failed to allege that she performed services for Mr. Turco with the expectation that she would be paid for them.

Ms. Cheney appealed the decision regarding the quantum meruit claim, arguing that while there was no express agreement between her and Mr. Turco that she would provide services to him in exchange for being listed in his will as beneficiary, she had always hoped that he would pay her through his estate. Unfortunately for Ms. Cheney, the court found that this gave her no legal basis for payment without an underlying contract or agreement between the parties.  The court ruled that Ms. Cheney’s hope or expectation, even though well founded, is not equivalent to entitling her to reasonable value of services under the legal concept of quantum meruit.

It seems that Ms. Cheney’s mistake was relying on a hope or expectation of receiving an inheritance under her stepfather’s estate and neither discussing it with him nor documenting a contract or agreement between the two.

Using a Minority Valuation Discount to Reduce Estate Taxes

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While the current estate tax exemption is quite high, a closely held family business may put your estate over the limit. Careful planning is necessary to lower or completely avoid the tax, and minority valuation discounts are one strategy.

Families that want to pass on their business may run into the estate tax. Estates valued at more than $11.7 million (in 2021) are subject to federal estate taxation. If you decide to give your business away before you die, you need to consider the gift tax. The lifetime federal gift tax exclusion – the amount you can give away without incurring a tax – is also $11.7 million (in 2021). You can also give any number of other people $15,000 each per year (in 2021) without the gifts counting against the lifetime limit.

One estate planning strategy for reducing estate taxes is to gift some or all of a company’s ownership to your children. When you transfer a minority interest in a company, that stake is not as valuable because the minority owner doesn’t have the right to make all the decisions or vote on important issues relevant to the company. This is called a “minority discount.” So, for example, if a company is worth $10 million, a 10 percent interest in the company would be discounted to less than $1 million. The amount of the discount depends on each individual case, but usually ranges between 10 to 40 percent of the undiscounted value.

By using discounts, you can reduce the value of your company for estate tax purposes while at the same time gift your children a percentage of the company at a reduced rate. These discounts apply even if everyone who owns a stake in the company is a family member.

In 2016, federal regulations were introduced to eliminate this type of discounting. The regulations were withdrawn in 2017, but under the new administration it is possible that they will come back.

To find out if a minority valuation discount is the right strategy for your family business, contact your attorney.

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