Category Archives: Estate Planning

What does a trustee do?

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Your estate plan may include several different trusts. The reason is that various types of trusts can accomplish a myriad of estate planning goals. Thus, it’s critical to understand the role of a trustee.

The trustee’s duties 

The trustee is the person who has legal responsibility for administering the trust on behalf of the interested parties. Depending on the trust terms, this authority may be broad or limited.

Generally, a trustee must meet fiduciary duties to the beneficiaries of the trust. He or she must manage the trust prudently and treat all beneficiaries fairly and impartially.

This can be more difficult than it sounds because beneficiaries may have competing interests. For example, under a trust’s terms, a spouse in a second marriage may be entitled to annual income while the children of the deceased’s first marriage are entitled to the remainder. The trustee must balance out their needs when making investment decisions.

In some instances, the trustee is granted the discretion to distribute or withhold the distribution of trust funds. For example, this discretionary power may be intended to protect assets from the beneficiary’s creditors or safeguard funds until the beneficiary reaches a certain age. The trustee in such a discretionary trust should be sympathetic to the intent of the trust and legitimate needs of the beneficiary.

The decision about naming a trustee is similar to the dilemma of choosing an executor. The responsibilities require great attention to detail, financial acumen and dedication. Because of the heavy reliance on investment expertise, choosing a professional over a family member or friend is generally recommended. At the very least, make it clear to the trustee that he or she may — and should — rely on professionals as appropriate.

Reasons for choosing an alternate

It’s not enough to designate someone as trustee. It’s absolutely essential to also designate a “successor” (or an “alternate”) in the event that your top choice is unable or unwilling to fulfill the responsibilities. For instance, what happens if your trustee predeceases you? Or what if your designated trustee declines to accept the position or subsequently resigns if permission is allowed by the trust or permitted by a court? This further accentuates the need to name backups for this important position.

Without a named successor, the probate court will appoint one for the estate. For a trustee, the trust will often outline procedures to follow. As a last resort, a court will appoint someone else to do the job.

Practical suggestion: Choose the “next best” person to step in. Make sure that he or she is on board with your decision. Similar to the discussion about naming a power of attorney, consider whether you should name a professional as a backup. Contact us with questions.

© 2021 Covenant CPA

4 questions single parents should ask about their estate plans

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Did you know that the United States has the highest rate of children living in single parent households? According to the Pew Research Center, nearly a quarter (23%) of U.S. children under the age of 18 live with one parent. This is more than three times the share (7%) of children from around the world who do so. If your household falls into this category, ensure your estate plan properly accounts for your children.

In many respects, estate planning for single parents is similar to estate planning for families with two parents. But when only one parent is involved, certain aspects of an estate plan demand special attention.

If you’re a single parent, here are four questions you should ask:

1. Are my will and other estate planning documents up-to-date? If you haven’t reviewed your estate plan recently, now is the time to do so to ensure it reflects your current circumstances. The last thing you want is for a probate court to decide your children’s future.

2. Have I selected an appropriate guardian? If the other parent is unavailable to take custody of your children should you become incapacitated or die suddenly, does your estate plan designate a suitable, willing guardian to care for them? Will the guardian need financial assistance to raise your kids and provide for their education? If not, you might want to preserve your wealth in a trust until your children are grown.

3. Am I adequately insured? With only one income to depend on, plan carefully to ensure that you can provide for your retirement as well as your children’s financial security. Life insurance can be an effective way to augment your estate. You should also consider disability insurance. Unlike many married couples, single parents generally don’t have a “backup” income in the event they can no longer work.

4. What happens if I remarry? Will you need to provide for your new spouse as well as your children? Where will you get the resources to provide for your new spouse? What if you placed your life insurance policy in an irrevocable trust for your kids to avoid estate taxes on the proceeds? Further complications can arise if you and your new spouse have children together or if your spouse has children from a previous marriage.

If you’ve recently become a single parent, contact us because it’s critical to review and, if necessary, revise your plan. We’d be pleased to help.

© 2021 Covenant CPA

Does your estate plan clearly communicate your wishes?

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Precise language is critical in wills, trusts and other estate planning documents. A lack of clarity may be an invitation to litigation. An example of this is the dispute that arose after Tom Petty’s death between his widow and his two daughters from a previous marriage. (The two parties have since resolved their differences and dismissed all litigation matters.)

Defining “equal participation” 

Details of the musician’s estate plan aren’t entirely public. But it appears that his trust appointed his widow as “directing trustee,” while providing that she and his daughters were entitled to “participate equally” in the management of his extensive music catalog and other assets. Unfortunately, the trust failed to spell out the meaning of equal participation, resulting in litigation between Petty’s widow and daughters over control of his assets.

There are several plausible interpretations of “equal participation.” One interpretation is that each of the three women has an equal vote, giving the daughters the ability to rule by majority. Another interpretation is that each has an opportunity to participate in the decision-making process, but Petty’s widow has the final say as directing trustee. Yet another possibility is that Petty intended for the women to make decisions by unanimous consent.

If the two parties hadn’t settled their differences out of court, it would have been up to the courts to provide an answer based on evidence of Petty’s intent. But the time, expense and emotional strain of litigation could have been avoided by including language in the trust that made that intent clear.

Clarify and communicate your intent

If you’re planning your estate, the Petty case illustrates the importance of using unambiguous language to ensure that your wishes are carried out. And if you anticipate that one or more of your beneficiaries will perceive your plan as unfair, it’s a good idea to sit down with them to explain your reasoning. This sort of discussion can go a long way toward avoiding future disputes. Contact us to help review your estate plan documents to ensure your intent is clearly spelled out.

© 2020 Covenant CPA

2 options for families with disabled loved ones: ABLE accounts and SNTs

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If you have a family member who’s disabled, you likely know that financial and estate planning can be tricky. You don’t want to jeopardize his or her eligibility for means-tested government benefits such as Medicaid or Supplemental Security Income (SSI). A special needs trust (SNT) is one option to consider. Another is to open a Section 520A account, often referred to as an ABLE account, because it was created by the Achieving a Better Life Experience (ABLE) Act.

ABCs of an ABLE account

The ABLE Act allows family members and others to make nondeductible cash contributions to a qualified beneficiary’s ABLE account, with total annual contributions limited to the federal gift tax annual exclusion amount (currently, $15,000). To qualify, a beneficiary must have become blind or disabled before age 26.

The account grows tax-free, and earnings may be withdrawn tax-free provided they’re used to pay “qualified disability expenses.” These include health care, education, housing, transportation, employment training, assistive technology, personal support services, financial management and legal expenses.

An ABLE account generally won’t affect the beneficiary’s eligibility for Medicaid and SSI — which limits a recipient’s “countable assets” to $2,000 — with a couple of exceptions. First, distributions from an ABLE account used to pay housing expenses are countable assets. Second, if an ABLE account’s balance grows beyond $100,000, the beneficiary’s eligibility for SSI is suspended until the balance is brought below that threshold.

ABLE vs. SNT

Here’s a quick review of the relative advantages and disadvantages of ABLE accounts and SNTs:

Availability. Anyone can establish an SNT, but ABLE accounts are available only if your home state offers them, or contracts with another state to make them available. Also, as previously noted, ABLE account beneficiaries must have become blind or disabled before age 26. There’s no age limit for SNTs.

Qualified expenses. ABLE accounts may be used to pay only specified types of expenses. SNTs may be used for any expenses the government doesn’t pay for, including “quality-of-life” expenses, such as travel, recreation, hobbies and entertainment.

Tax treatment. An ABLE account’s earnings and qualified distributions are tax-free. An SNT’s earnings are taxable.

Contribution limits. Annual contributions to ABLE accounts currently are limited to $15,000, and total contributions are effectively limited to $100,000 to avoid suspension of SSI benefits. There are no limits on contributions to SNTs, although contributions that exceed $15,000 per year may have gift tax implications.

Investments. Contributions to ABLE accounts are limited to cash, and the beneficiary (or his or her representative) may direct the investment of the account funds twice a year. With an SNT, you can contribute a variety of assets, including cash, stock or real estate. And the trustee — preferably an experienced professional fiduciary — has complete flexibility to direct the trust’s investments.

Examine the differences

When considering which option is best for your family (or whether you should have both), remember the key differences: An ABLE account may offer greater tax advantages, while an SNT may offer greater flexibility. We can help answer any questions.

© 2020 Covenant CPA

Review your estate plan in light of a new presidential administration

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As President-elect Joe Biden moves forward with the transition and prepares for the inauguration next month, you may be wondering how the federal estate tax may be affected.

During the campaign, Biden pledged to roll back many of President Trump’s tax policies. In response to the Tax Cuts and Jobs Act (TCJA), Biden has promised a progressive approach to taxation, focused primarily on increasing the burden on high-income individuals and businesses.

Bear in mind that his odds of translating his proposals into legislation in the next couple of years largely hinges on the outcomes of runoff elections for the two Georgia seats in the U.S. Senate. Biden’s party needs to win both seats to take a majority in the Senate. These elections are scheduled for January 5, 2021.

Proposals for gift and estate taxes

The TCJA temporarily doubled the federal gift and estate tax exemption to $10 million (adjusted annually for inflation), through 2025. The 2020 exemption is $11.58 million for individuals and $23.16 million for married couples; for 2021, it’s $11.7 million and $23.4 million, respectively. These TCJA amounts are scheduled to expire after 2025 to $5 million for individuals and $10 million for married couples, adjusted annually for inflation. 

Biden has proposed reducing the exemption to $3.5 million for estate taxes and exempting $1 million for the gift tax. He also favors imposing a top estate tax rate of 45%, from the current rate of 40%.

In addition, Biden would like to end the “step-up” in basis that spares beneficiaries substantial tax liability for capital gains on inherited assets that have appreciated in value, such as stock or a house. If a beneficiary sells an inherited asset now, the capital gains generated is the difference between the asset’s fair market value at the time of sale less the stepped-up basis (the fair market value of the asset at the date of the deceased’s death), rather than the basis at the date of the original purchase. Without the step-up in basis, the capital gains generated on sale would be a larger amount.

Review your estate plan

As mentioned above, the ability of Biden to implement his proposals rests largely on the outcome of the Georgia runoff elections for Senate early next month. In the meantime, it would be worth your while to review your estate plan and make any necessary revisions. Potential tax law changes are a reason to trigger a review, as well as life changes, such as a marriage, the birth of a child or a divorce. Please turn to us for help reviewing your plan and making changes based on your specific circumstances.

© 2020 Covenant CPA

Avoid these four estate planning deadly sins

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According to literature, the “seven deadly sins” are lust, gluttony, greed, laziness, wrath, envy and pride. Although individuals may be guilty of these from time to time, other types of “sins” can be fatal to an estate plan if you’re not careful. Here are four transgressions to avoid.

Sin #1: You don’t update beneficiary forms. Of course, your will spells out who gets what, where, when and how. But a will is often superseded by other documents like beneficiary forms for retirement plans, bank accounts, annuities and life insurance policies. Therefore, like your will, you must also keep these forms up-to-date.

For example, despite your intentions, retirement plan assets could go to a sibling — or even an ex-spouse — instead of your children or grandchildren if you haven’t updated your retirement plan beneficiary form in a long time. Review beneficiary forms for relevant accounts periodically and make the necessary adjustments.

Sin #2: You don’t properly fund trusts. Frequently, an estate plan will include one or more trusts, including a revocable living trust. The main benefit of a living trust is that assets don’t have to be probated and exposed to public inspection. It’s generally recommended that such a trust be used only as a complement to a will, not as a replacement.

However, the trust must be funded with assets, meaning that legal ownership of the assets must be transferred to the trust. For example, if real estate is being transferred, the deed must be changed to reflect this. If you’re transferring securities or bank accounts, you should follow the directions provided by the financial institutions. Otherwise, the assets may have to go through probate.

Sin #3: You don’t properly title assets. Both inside and outside of trusts, the manner in which you own assets can make a big difference. For instance, if you own property as joint tenants with rights of survivorship, the assets will go directly to the other named person, such as your spouse, on your death.

Not only is titling assets critical, you should review these designations periodically, just as you should your beneficiary designations. In particular, major changes in your personal circumstances or the prevailing laws could dictate a change in the ownership method.

Sin #4: You don’t coordinate different plan aspects. Typically, there are a number of moving parts to an estate plan, including a will, a power of attorney, trusts, retirement plan accounts and life insurance policies. Don’t look at each one in a vacuum. Even though they have different objectives, consider them to be components that should be coordinated within the overall plan.

For instance, arrange to take distributions from investments — including securities, qualified retirement plans, and traditional and Roth IRAs — in a way that preserves more wealth. Also, naming a revocable living trust as a retirement plan beneficiary could accelerate tax liability.

Work with us to make sure your estate plan continues to meet your objectives.

© 2020 Covenant CPA

Name the right person as executor to help ensure your planning objectives are carried through

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The executor’s role is critical to the administration of your estate and the achievement of your estate planning objectives. So your first instinct may be to name a trusted family member as executor. But that might not be the best choice.

Duties of an executor

Your executor will have a variety of important duties, including:

  • Arranging for probate of your will (if necessary) and obtaining court approval to administer your estate,
  • Taking inventory of — and collecting, recovering or maintaining — your assets, including life insurance proceeds and retirement plan benefits,
  • Obtaining valuations of your assets if necessary,
  • Preparing a schedule of assets and liabilities,
  • Arranging for the safekeeping of personal property,
  • Contacting your beneficiaries to advise them of their entitlements under your will,
  • Paying any debts incurred by you or your estate and handling creditors’ claims,
  • Defending your will in the event of litigation,
  • Filing tax returns on behalf of your estate, and
  • Distributing your assets among your beneficiaries according to the terms of your will.

Typically, family members lack the skills and time to handle all of these tasks on their own. They’re entitled, of course, to hire accountants, attorneys, financial planners and other advisors — at the estate’s expense — for assistance. But even with professional help, serving as executor is a big job that requires a substantial time commitment during an already stressful period. Plus, if your executor is also a beneficiary of your will, other beneficiaries may view that as a conflict of interest.

Other choices

So, what are your options? One is to name a trusted advisor, such as an accountant or lawyer, as executor. Another is to appoint an advisor and a family member as co-executors. The advisor would handle most of the executor’s day-to-day responsibilities, while your family member would oversee the process and ensure that the advisor acts in your family’s best interests. (However, be aware that naming co-executors may result in delays and other issues.)

If you still haven’t decided who you should appoint at your estate’s executor, discuss the issues with us. We’d be pleased to help you make the right decision based on your circumstances.

© 2020 Covenant CPA

Estate planning and your art collection

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If you’re an art collector, it’s critical for your estate plan to address your collection separately from other types of assets. Investments in artwork may be motivated in part by potential financial gain, but for most collectors the primary motivation is a passion for the art itself.

As a result, managing these assets involves issues that aren’t presented by purely financial assets. Naturally, you’ll want to preserve the value of your collection and avoid unnecessary taxes, but you’ll also be keenly interested in how your collection will be managed and displayed after you’re gone.

Know the collection’s value

It’s vital to have your collection appraised by a professional at least every three years, if not annually. Regular appraisals give you an idea of how the collection is growing in value and help you anticipate tax consequences down the road. Also, most art donations, gifts or bequests require a “qualified appraisal” by a “qualified appraiser” for tax purposes.

It’s also important to catalog and photograph your collection and gather all appraisals, bills of sale, insurance policies and other provenance documents. These items will be necessary for the recipient or recipients to carry out your wishes.

Review your options

Generally, there are three options for handling your art collection in your estate plan: Sell it, bequeath it to your loved ones, or donate it to a museum or charity.

If you opt to sell, keep in mind that capital gains on artwork and other “collectibles” are currently taxed at a top rate of 28%, compared to a top rate of 20% for most other types of assets. Rather than selling the collection during your lifetime, it may be preferable to include it in your estate to potentially take advantage of the stepped-up basis, which allows your heirs to reduce or even eliminate the 28% tax.

If you prefer to keep your collection in the family, you may opt to leave it to your heirs. You could make specific bequests of individual artworks to various family members, but there are no guarantees that the recipients will keep the pieces and treat them properly. A better approach may be to leave the collection to a trust or other entity — with detailed instructions on its care and handling — and appoint a qualified trustee or manager to oversee maintenance and display of the collection and make sale and purchasing decisions.

Donating your collection can be an effective way to avoid capital gains and estate taxes and to ensure that your collection becomes part of your legacy. It also entitles you or your estate to claim a charitable tax deduction.

Before bequeathing your collection to loved ones or donating it to charity, discuss your plans with the intended recipients. If your family isn’t interested in receiving or managing your collection or if your charitable beneficiary has no use for it, it’s best to learn of this during your lifetime so you have an opportunity to make alternative arrangements. Contact us with questions.

© 2020 Covenant CPA

Don’t forget about making a portability election

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Portability allows a surviving spouse to apply a deceased spouse’s unused federal gift and estate tax exemption amount toward his or her own transfers during life or at death. For 2020, the exemption amount is $11.58 million, and the IRS just announced that that amount will increase to $11.7 million for 2021.

To secure these benefits, however, the deceased spouse’s executor must have made a portability election on a timely filed estate tax return. The return is due nine months after death, with a six-month extension option. Unfortunately, estates that aren’t otherwise required to file a return (because they don’t meet the filing threshold) often miss the deadline.

Qualifying for an automatic extension

In 2017, the IRS made it easier for estates to obtain an extension of time to file a portability election. For all deaths after 2010, the IRS grants an automatic extension, provided:

  • The deceased was a U.S. citizen or resident,
  • The executor wasn’t otherwise required to file an estate tax return and didn’t file one by the deadline,
  • The executor files a complete and properly prepared estate tax return on Form 706 within two years of the date of death, and
  • The following language appears at the top of the return: “FILED PURSUANT TO REV. PROC. 2017-34 TO ELECT PORTABILITY UNDER §2010(c)(5)(A).”

Other considerations

Bear in mind that portability isn’t always the best option. All relevant factors should be considered, including nontax reasons that might affect the distribution of assets under a will or living trust. For instance, a person may want to divide assets in other ways if matters are complicated by a divorce, a second marriage or unusual circumstances.

Also, absent further legislation, the federal gift and estate tax exemption is slated to revert to pre-2018 levels after 2025. Portability continues, though, for those whose estates will no longer be fully sheltered, so additional planning should be considered.

Don’t miss the deadline

If your spouse predeceases you and you’d benefit from portability, be sure that your spouse’s estate files a portability election by the applicable deadline. Contact us with any questions you have regarding portability.

© 2020 Covenant CPA

4 ways to address elderly parents in your estate plan

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Typically, an estate plan includes accommodations for your spouse, children, grandchildren and even future generations. But you may overlook some older family members, such as your parents or in-laws. They may also need your financial assistance and help with their estate planning.

How can you best handle the financial affairs of parents in the later stages of life? Incorporate their needs into your own estate plan while tweaking, when necessary, the arrangements they’ve already made. Here are five critical steps:

Identify key contacts. Just like you’ve done for yourself, compile the names and addresses of professionals important to your parents’ finances and medical conditions.

List and value their assets. If you’re going to be able to manage the financial affairs of your parents, having knowledge of their assets is vital. It would be wise to keep a list of their investment holdings; IRA and retirement plan accounts; and life insurance policies, including current balances and account numbers.

Open the lines of communication. Before going any further, have a frank and honest discussion with your elderly relatives, as well as other family members who may be involved, such as your siblings. Make sure you understand your parents’ wishes and explain the objectives you hope to accomplish.

Execute documents. Assuming you can agree on how to move forward, develop a plan incorporating several legal documents. If your parents have already created one or more of these documents, they may need to be revised or coordinated with new ones. Some elements commonly included in an estate plan are:

  • Wills. Your parents’ wills control the disposition of their assets, such as cars and jewelry, and tie up other loose ends. (Of course, jointly owned property with rights of survivorship automatically passes to the survivor.) Notably, a will also establishes the executor of your parents’ estates. If you’re the one lending financial assistance, you may be the optimal choice. 
  • Living trusts. A living trust can supplement a will by providing for the disposition of selected assets. Unlike a will, a living trust doesn’t have to go through probate, so this might save time and money, while avoiding public disclosure.  
  • Powers of attorney. This document authorizes someone to legally act on behalf of another person. With a durable power of attorney, the most common version, the authorization continues after the person is disabled. This enables you to better handle your parents’ affairs.
  • Living wills or advance medical directives. These documents provide guidance for end-of-life decisions. Make sure that your parents’ physicians have copies so they can act according to their wishes.
  • Beneficiary designations. Undoubtedly, your parents have filled out beneficiary designations for retirement plans, IRAs and life insurance policies. These designations supersede references in a will, so it’s important to keep them up-to-date.

Estate planning for elderly parents, which is complex in its own right, is often intertwined with your own finances. Contact us for help developing a comprehensive plan that addresses all of your family’s needs.

© 2020 Covenant CPA