Category Archives: Estate Planning

Avoid “bad blood” among family members: Protect your will from legal challenges

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You’ve probably seen it in the movies or on TV: A close-knit family gathers to find out what’s contained in the will of a wealthy patriarch or matriarch. When the terms are revealed, a niece, for example, benefits at the expense her uncle, causing a ruckus. This “bad blood” continues to boil between estranged family members, who won’t even speak to one another.

Unfortunately, a comparable scenario can play out in real life if you don’t make proper provisions. With some planning, you can avoid family disputes or at least minimize the chances of your will being contested by your loved ones.

Start at the beginning

Before you (and your spouse, if married) set the table for your will, which is the centerpiece of any comprehensive estate plan, discuss estate matters with close family members who’ll likely be affected. This may include children, siblings, adult grandchildren and possibly others. Present an outline regarding the disposition of your assets and other important aspects.

This doesn’t mean you should be specific about everything in the will, but it’s a good idea to provide a basic overview of your estate. Consider the input of other family members; don’t just pay lip service to their feedback. In fact, they may raise issues that you hadn’t taken into account.

This meeting — which may require several sessions — may head off potential problems and better prepare your heirs. It certainly avoids the kind of “shockers” often depicted on screen.

Means of protection

Although there are no absolute guarantees, consider the following methods for bulletproofing your will from a legal challenge:

Draft a no-contest clause. Also called an “in terrorem clause,” this language provides that, if any person in your will challenges it, he or she is excluded from your estate. It’s often used to thwart contests to a will.

This puts the onus squarely on the beneficiary. If he or she asserts that the estate isn’t divided equitably, the beneficiary risks receiving nothing. Be aware that, in some states, this clause may not be enforceable or may be subject to certain exceptions.

Choose witnesses wisely. You may want to use witnesses who know you well, such as close friends or business associates. They can convincingly state that you were of sound mind when you made out the will. You also may want to choose witnesses who are in good health, preferably younger than you and easily traceable.

Obtain a physician’s note. A note from a physician about your health status is recommended. For instance, it can state that you have the requisite mental capacity to make estate planning decisions and thus will be useful in avoiding legal challenges.

Last but not least

After your will is drafted, don’t make the mistake of putting it in a safe where you may forget about it. Review it periodically with your attorney. By fine-tuning the will, you improve the likelihood that it’ll deter a legal challenge and, if necessary, prevail in court. Contact us with any questions regarding your will.

© 2020 Covenant CPA

Zeros and ones: Estate planning for your digital assets and accounts

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Nearly everyone owns at least some digital assets, such as online bank and brokerage accounts, bill-paying services, cloud-based document storage, digital music collections, social media accounts, and domain names. But what happens to these assets when you die or if you become incapacitated?

The answer depends on several factors, including the terms of your service agreements with the custodians of digital assets, applicable laws and the terms of your estate plan. To reduce uncertainty, address your digital assets in your estate plan.

Pass on passwords

The simplest way to provide your family, executor or trustee with access to your digital assets is to leave a list of accounts and login credentials in a safe deposit box or other secure location. The disadvantage of this approach is that you’ll need to revise the list every time you change your password or add a new account. For this reason, consider storing this information using password management software and providing the master password to your representatives.

Or, you can use an online service designed for digital estate planning. These services store up-to-date information about your digital assets and establish procedures for releasing it to your designated beneficiary after your death or if you become incapacitated.

Know the law

Although sharing login credentials with your representatives is important, it’s no substitute for covering digital assets in your estate plan. For one thing, a third party who accesses your account without formal authorization may violate federal or state privacy laws.

In addition, many states have laws, such as the Uniform Fiduciary Access to Digital Assets Act (UFADAA), that establish default rules regarding access to digital assets by executors, trustees and other fiduciaries. If those rules are inconsistent with your wishes, you’ll want to modify them in your plan.

The UFADAA allows people to provide for the disposition of digital assets using online settings offered by the account provider. For example, Facebook enables users to specify whether their accounts will be deleted or memorialized if they die and to designate a “legacy contact” to maintain their memorial pages.

The act also allows people to establish rules in their wills, trusts or powers of attorney. If users don’t have specific instructions regarding digital assets, the act allows the account provider’s service agreement to override default rules.

Take inventory

To ensure that your wishes are carried out, take inventory of your digital assets now. Then, talk to us about including these important assets in your estate plan.

© 2020 Covenant CPA

Family matters: Estate planning considerations if you have adopted children or unadopted stepchildren

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If you have adopted children or unadopted stepchildren, estate planning is critical to ensure that your property is distributed the way you desire.

Adopted children

Adopted children are placed on an equal footing with biological children in most situations for estate planning purposes. Thus, adopted and biological children are treated the same way under a state’s intestate succession laws, which control who inherits property in the absence of a will.

In addition, adopted children generally are treated identically to biological children for purposes of wills or trusts that provide for gifts or distributions to a class of persons, such as “children,” “grandchildren” or “lineal descendants” — even if the child was adopted after the will or trust was executed.

Unadopted stepchildren

Stepchildren generally don’t have any inheritance rights with respect to their parents’ new spouses unless the spouse legally adopts them. If you have stepchildren and want them to share in your estate, you should amend your estate plan to provide for them expressly.

Of course, you can also consider adoption, but you shouldn’t adopt stepchildren only for estate planning reasons. Adoption gives you all of the legal rights and responsibilities of a parent during your life, so that must be carefully considered.

Adoption will also affect the adopted children’s ability to inherit from (or through) their other biological parent’s relatives. In most states, when a child is adopted by a stepparent, the adoption decree severs the parent-child relationship with the other biological parent and his or her family.

That means the child can’t inherit from that biological parent’s branch of the family — and vice versa — through intestate succession. For example, if Jane is adopted by her stepfather, Steve, the adoption would terminate Jane’s intestate succession rights with respect to her biological father, Ed, and consequently, Ed’s family.

Most states provide an exception for certain “family realignments.” From the previous example, let’s suppose that Ed is deceased. In that case, Steve’s adoption of Jane wouldn’t sever the connection to Ed’s family. If, for example, Ed’s sister Emily dies intestate, Jane will be included in the class of heirs. In a state that doesn’t recognize a family realignment exception, however, Jane won’t be considered Emily’s heir.

If you wish to exclude stepchildren from your estate, in most cases it’s sufficient to do nothing. But some states permit stepchildren to inherit through intestate succession under certain circumstances.

Put it in writing

To ensure your desired treatment of adopted children or stepchildren, the best strategy is for you and your spouse or partner to spell out your wishes in wills, trusts and other estate planning documents. As with most estate planning issues, relying on the laws of intestate succession can lead to unwelcome surprises. Contact us with your questions.

© 2020 Covenant CPA

A win-win proposition: A CRT can benefit you and your favorite charity

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Are you a multitasker? If so, you may appreciate an estate planning technique that can convert assets into a stream of lifetime income, provide a current tax deduction and leave the remainder to your favorite charity — all in one fell swoop. It’s the aptly named charitable remainder trust (CRT).

A CRT in action

You can set up one of two CRT types: a charitable remainder annuity trust (CRAT) or a charitable remainder unitrust (CRUT) and fund it with assets you own. The trust then pays out income to the designated beneficiary or beneficiaries — for example, the trust creator or a spouse — for life or a term of 20 years or less. Alternatively, if certain requirements are met, you can choose to have income paid to your children, other family members or an entity.

If it suits your needs, you may postpone taking income distributions until a later date. In the meantime, the assets in the CRT (ideally) continue to appreciate in value.

Typically, a CRT is funded with income-producing assets, such as real estate, securities and even stock in your own company. (Note: S corporation stock can’t be used for this purpose.) These assets may be supplemented by cash deposits or the transfer can be all cash.

When you transfer assets to the CRT, you qualify for a current tax deduction based on several factors, including the value of the assets at the time of transfer, the ages of the income beneficiaries and the Section 7520 rate. Generally, the greater the payout, the lower the deduction.

A matter of control

An important decision relating to a CRT is naming the trustee to manage its affairs. The trustee should be someone with the requisite financial acumen and knowledge of your personal situation. Thus, it could be an advisor, an institutional entity, a family member, a close friend or even you.

Because of the significant dollars at stake, many trust creators opt for a professional, perhaps someone who specializes in managing trust assets. If you’re leaning toward this option, interview several candidates and consider factors such as experience, investment performance and level of services provided.

If you decide to take on the task yourself, consider using a third-party professional to handle most of the paperwork and provide other support.

During the CRT’s term, it’s the trustee — not the charity — who calls the shots. The trustee is obligated to adhere to the terms of the trust and follow your instructions. Thus, you still maintain some measure of control. In fact, you may retain the right to change the trustee if you become dissatisfied or designate a different charity to receive the remainder assets.

Is a CRT right for you?

The short answer is that it depends on your specific circumstances. Be aware that a CRT is irrevocable. In other words, once it’s executed, there’s no going back and you generally can’t make other changes. So, you must be fully committed to this approach. Contact us with any questions.

© 2020 Covenant CPA

Avoid pitfalls when splitting gifts with your spouse

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The annual gift tax exclusion allows you to transfer up to $15,000 per beneficiary gift-tax-free for 2020, without tapping your lifetime gift and estate tax exemption. And you can double the exclusion to $30,000 per beneficiary if you elect to split the gifts with your spouse.

It’s important to understand the rules surrounding gift-splitting to avoid unintended — and potentially costly — consequences.

Understanding the pitfalls

Common mistakes made when splitting gifts include:

Failing to make the election. To elect to split gifts, the donor must file a gift tax return and the nondonor must consent by checking a box on the return and signing it or, if a gift exceeds $30,000, filing his or her own gift tax return. Once you make the election, you must split all gifts to third parties for the year.

Splitting gifts with a noncitizen. To be eligible for gift-splitting, one spouse must be a U.S. citizen.

Divorcing and remarrying. To split gifts, you must be married at the time of the gift. You’re ineligible for gift-splitting if you divorce and either spouse remarries during the calendar year in which the gift was made.

Gifting a future interest. Gift-splitting can be used only for present interests. So, a gift in trust qualifies only if the beneficiary receives a present interest — for example, by providing the beneficiary with so-called Crummeywithdrawal rights.

Benefiting your spouse. Gift-splitting is ineffective if you make the gift to your spouse, rather than a third party; if you give your spouse a general power of appointment over the gifted property; or if your spouse is a potential beneficiary of the gift. For example, if you make a gift to a trust of which your spouse is a beneficiary, gift-splitting is prohibited unless the chances your spouse will benefit are extremely remote.

Be aware that, if you die within three years of splitting a gift, some of the tax benefits may be lost.

Extended gift tax return deadline is approaching

Remember that when you elect to split gifts with your spouse, you, the donor, must file a gift tax return and your spouse, the nondonor, must consent by checking a box on the return and signing it. Bear in mind that because of the COVID-19 pandemic, the IRS extended the gift tax filing deadline to July 15, 2020, so now is the time to act. Contact us with any questions regarding making gifts.

© 2020 Covenant CPA

Concealing a trust could run afoul of state law

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You may have good intentions in keeping a trust a secret from its beneficiaries. Perhaps you have concerns that, if your children or other beneficiaries know about the trust, they might set aside educational or career pursuits. Be aware, however, that the law in many states forbids this practice by requiring a trust’s trustee to disclose a certain amount of information about the trust to the beneficiaries.

More states enforce the Uniform Trust Code

The Uniform Trust Code (UTC), which now 34 states (and the District of Columbia) have adopted, requires a trustee to provide trust details to any qualified beneficiary who makes a request. The UTC also requires the trustee to notify all qualified beneficiaries of their rights to information about the trust.

Qualified beneficiaries include primary beneficiaries, such as your children or others designated to receive distributions from the trust, as well as contingent beneficiaries, such as your grandchildren or others who would receive trust funds in the event a primary beneficiary’s interest terminates.

Consider a power of appointment

One way to avoid UTC disclosure requirements is by not naming your children as beneficiaries and, instead, granting your spouse or someone else a power of appointment over the trust. The power holder can direct trust funds to your children as needed, but because they’re not beneficiaries, the trustee isn’t required to inform them about the trust’s terms — or even its existence. The disadvantage of this approach is that the power holder is under no legal obligation to provide for your children.

Turn to us for help

Before taking action, it’s important to check the law in your state. Some states allow you to waive the trustee’s duty to disclose, while others allow you to name a third party to receive disclosures and look out for beneficiaries’ interests. In states where disclosure is unavoidable, you may want to explore alternative strategies. If you have questions regarding trusts in your estate plan, please contact us.

© 2020 Covenant CPA

Business succession and estate planning: It can be complicated

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Transferring a family business to the next generation requires a delicate balancing act. Estate and succession planning strategies aren’t always compatible, and family members often have conflicting interests. By starting early and planning carefully, however, it’s possible to resolve these conflicts and transfer the business in a tax-efficient manner.

Ownership vs. management succession

One reason transferring a family business is such a challenge is the distinction between ownership and management succession. From an estate planning perspective, transferring assets to the younger generation as early as possible allows you to remove future appreciation from your estate, minimizing estate taxes. However, you may not be ready to hand over the reins of your business or you may feel that your children aren’t yet ready to take over.

There are several ways owners can transfer ownership without immediately giving up control, including:

  • Using a family limited partnership (FLP),
  • Transferring nonvoting stock, or
  • Establishing an employee stock ownership plan.

Another reason to separate ownership and management succession is to deal with family members who aren’t involved in the business. It’s not unusual for a family business owner to have substantially all of his or her wealth tied up in the business.

Providing heirs outside the business with nonvoting stock or other equity interests that don’t confer control can be an effective way to share the wealth with them while allowing those who work in the business to take over management.

Conflicting financial needs

Another challenge presented by family businesses is that the older and younger generations may have conflicting financial needs. Fortunately, strategies are available to generate cash flow for the owner while minimizing the burden on the next generation. They include:

An installment sale. This provides liquidity for the owner while improving the chances that the younger generation’s purchase can be funded by cash flows from the business. Plus, so long as the price and terms are comparable to arm’s-length transactions between unrelated parties, the sale shouldn’t trigger gift or estate taxes.

A grantor retained annuity trust (GRAT). By transferring business interests to a GRAT, the owner obtains a variety of gift and estate tax benefits (provided he or she survives the trust term) while enjoying a fixed income stream for a period of years. At the end of the term, the business is transferred to the owner’s children or other beneficiaries. GRATs are typically designed to be gift-tax-free.

An installment sale to an intentionally defective grantor trust (IDGT). Essentially a properly structured IDGT allows an owner to sell the business on a tax-advantaged basis while enjoying an income stream and retaining control during the trust term. Once the installment payments are complete, the business passes to the owner’s beneficiaries free of gift taxes.

Each family business is different, so it’s important to identify appropriate strategies in light of your objectives and resources. We’d be pleased to help.

© 2020 Covenant CPA

Should you “park” your vehicle in a living trust?

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Using a revocable trust — sometimes referred to as a “living trust” — is a common estate planning strategy to manage one’s assets during life and to avoid probate at death. For the trust to be effective, you must “fund” it, meaning transferring ownership of your assets to the trust.

Perhaps you have collectible automobiles or other vehicle types. Should you consider transferring them to your revocable trust? If you still owe money on an auto loan, the lender may not allow you to transfer the title to the trust. But even if you own the vehicle outright (whether you paid cash for it or a loan has been paid off), there are risks in making such a transfer.

Steer clear of pitfalls

As the vehicle’s owner, the trust will be responsible in the event the vehicle is involved in an accident, exposing other trust assets to liability claims that aren’t covered by insurance. So you need to name the trust as an insured party on your liability insurance policy.

On the other hand, because you’re personally liable either way, owning a vehicle through your revocable trust may not be a big concern during your life. After your death, when the trust becomes irrevocable, an accident involving a trust-owned vehicle can place the other trust assets at risk.

Keeping a vehicle out of the trust eliminates this risk. The downside, of course, is that the vehicle may be subject to probate. However, some states offer streamlined procedures for transferring certain vehicles to heirs.

Turn to us for directions

Are you considering transferring automobiles or other vehicles to your revocable trust so they can avoid probate? Before taking action, it’s important to understand the pitfalls of such a move. Contact us with for additional details.

© 2020 Covenant CPA

Estate planning when time is short

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The novel coronavirus (COVID-19) pandemic has caused some people to contemplate their own mortality or that of a family member. For those whose life expectancies are short — because of COVID-19 or for other reasons — estate planning can be difficult. But while money matters may be the last thing you want to think about when time is limited, a little planning can offer you and your family financial peace of mind.

Action steps to take

Here are some (but by no means all) of the steps you should take if you have a short life expectancy. These steps are also helpful if a loved one has been told that time is limited.

Gather documents. Review all estate planning documents, including your:

  • Will,
  • Revocable or “living” trust,
  • Other trusts,
  • General power of attorney, and
  • Advance medical directive, such as a “living will” or health care power of attorney.

Make sure these documents are up-to-date and continue to meet your estate planning objectives. Modify them as appropriate.

Take inventory. Catalog all your assets and liabilities, estimate their value, and determine how assets are titled to ensure that they’ll pass to their intended recipients. For example, do you own assets jointly with your ex-spouse? If so, title will pass to your ex-spouse on your death. There may be steps you can take to separate your interest in the property and dispose of it as you see fit.

If you have a safe deposit box, make sure someone is authorized to open it. If you have a personal safe, be sure that someone you trust knows its location and combination.

Review beneficiary designations. Take another look at beneficiary designations in your IRAs, pension plans, 401(k) plans and other retirement accounts, insurance policies, annuities, deferred compensation plans and other assets. Make sure a beneficiary is named and that the designation continues to meet your wishes. For example, a divorced individual may find that an ex-spouse is still named as beneficiary of a life insurance policy.

Review digital assets. Ensure that your family or representatives will have access to digital assets, such as email accounts, online bank and brokerage accounts, online photo galleries, digital music and book collections, social media accounts, websites, domain names, and cloud-based documents. You can do this by creating a list of usernames and passwords or by making arrangements with the custodians of these assets to provide access to your authorized representatives.

Gaining peace of mind

Although facing your own mortality can be difficult, great peace of mind can come from ensuring that your estate plan fulfills your wishes and minimizes the tax burden on your family. Contact us with any questions regarding your estate plan.

© 2020 Covenant CPA

Looking for a trust that can also act as a financial backup plan? Consider a SLAT

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Some of the most effective estate planning strategies involve setting up irrevocable trusts. For a trust to be deemed irrevocable, you, the grantor, lose all incidents of ownership of the trust’s assets. In other words, you’re effectively removing those assets from your taxable estate.

But what if you’re uncomfortable placing your assets beyond your control? What happens if your financial fortunes take a turn for the worse after you’ve irrevocably transferred a sizable portion of your wealth? This may be an especially pertinent question in light of the current economic downturn resulting from the novel coronavirus (COVID-19) pandemic.

If you’re married, and feel as though your marriage is strong, a spousal lifetime access trust (SLAT) allows you to obtain the benefits of an irrevocable trust while creating a financial backup plan.

A SLAT in action

A SLAT is simply an irrevocable trust that authorizes the trustee to make distributions to your spouse if needs arise. Like other irrevocable trusts, a SLAT can be designed to benefit your children, grandchildren or future generations. You can use your lifetime gift tax and generation-skipping transfer tax exemptions (currently, $11.58 million each) to shield contributions to the trust, as well as future appreciation, from transfer taxes. And the trust assets also receive some protection against claims by your beneficiaries’ creditors, including any former spouses.

The key benefit of a SLAT is that by naming your spouse as a lifetime beneficiary you retain indirect access to the trust assets. You can set up the trust to make distributions based on an “ascertainable standard” — such as your spouse’s health, education, maintenance or support — or you can give the trustee full discretion to distribute income or principal to your spouse.

To keep the trust assets out of your taxable estate, you must not act as trustee. You can appoint your spouse as trustee, but only if distributions are limited to an ascertainable standard. If you desire greater flexibility over distributions to your spouse, appoint an independent trustee. Also, the trust document must prohibit distributions in satisfaction of your legal support obligations.

Another critical requirement is to fund the trust with your separate property. If you use marital or community property, there’s a risk that the trust assets will end up in your spouse’s estate.

Understand the pitfalls

There’s a significant risk inherent in the SLAT strategy: If your spouse predeceases you, or if you and your spouse divorce, you’ll lose your indirect access to the trust assets. One way to mitigate this risk is to use dual SLATs. In other words, you and your spouse each establish an irrevocable trust using your separate property and naming each other as lifetime beneficiaries.

If you’re considering using a SLAT, or would like to learn about other estate planning strategies, contact us to learn more about the benefits and risks.

© 2020 Covenant CPA