Spring is Financial Cleaning Season

It’s time to clean out, tidy up and purge our homes of things we don’t use, don’t need and haven’t worn in five years. This is also the season where we gather up all of our financial documents and do our taxes, says The Press Enterprise in the article “Add this to Kondo-spring cleaning list: Organize your finances.” While cleaning out paperwork may not feel as rewarding as piling up clothing to donate to a local charity, the time and energy saved will be appreciated in years to come.

Start by making a monthly payment schedule with company name, due date and amount due. Include estimated taxes, property taxes, insurance premiums and any other bills that you receive on a routine basis. Use this to help budget and plan for the coming year.

Set up electronic bill paying through your bank for recurring bills. You can make your mortgage payments, insurance and all predictable expenses occur automatically. Keep all paper bills that arrive by mail, like property tax and insurance premium notices, until they are paid.

Schedule a set time to pay your bills. That may be weekly, biweekly, or monthly, but make an appointment for yourself and stick to it. During this time, review your monthly payment schedule, review statements for accuracy, pay and then either file or toss.

Set up systems for your important documents. Don’t just stuff them in a file cabinet. Use a manual filing system, a three-ring binder, electronic scanning and storage or a combination of a few different methods. If you go all digital, make sure you have an encrypted and automatic back-up system.

If you don’t already have one, open a safe deposit box or purchase a highly-rated fireproof safe to store documents like birth certificates, marriage licenses, deeds, car registrations, estate planning documents and passports. Tell family members where these documents are located and provide instructions so they can be accessed in an emergency. In addition to yourself and your spouse, give a family member the ability to access your safe deposit box.

Consolidate your accounts. If you have more than one checking, savings, retirement or brokerage account, try to simplify your life by combining like accounts. Fewer accounts mean fewer statements, less paperwork and less hassle, when filing taxes.

The same goes for credit cards. If you can’t close cards because of outstanding balances, create a spreadsheet of outstanding balances, the interest rates you are paying and payment dates for each. Get serious about paying them off, attacking the ones with the highest interest rates first. Check your credit score before canceling any credit cards as the longevity of credit is a factor in your score.

If you haven’t reviewed your estate plan or your beneficiary designations, review all your accounts and estate planning documents. This is a good time to make an appointment with your estate planning attorney, especially if you haven’t reviewed your estate plan in three or four years.

Reference: The Press-Enterprise (March 30, 2019) “Add this to Kondo-spring cleaning list: Organize your finances”

What’s a Revival Trust?

Have you ever thought of having your body scientifically frozen when you die, on the chance you’ll be revived one day with cryonics? If it happens, you’ll need to have ready access to funds when you’re thawed.

There’s an estate planning answer for self-preservation called a revival trust, also known as a future income trust that can help.

Next Avenue’s recent article, “To Freeze Yourself at Death, There’s an Estate Planning Trust for That,” explains that a revival trust sets aside your assets, usually under supervision of an attorney, so if science progresses to the point that you can live a second time, you’ll have money for you to re-live on.

There are about 400 people that have been cryonically preserved, since the technology begin in the late 1960s. A total of 1,500 individuals have made arrangements to do so upon their death. There are two cryonics centers that do most of the freezing in America: the Cryonics Institute in Clinton Township, Michigan and the Alcor Life Extension Foundation in Scottsdale, Arizona.

There is a bit of uncertainty about how a future IRS would view a revival trust. So far, the IRS hasn’t said if it would treat a revived person as his or her former self for tax purposes, or as a new taxpayer. In that scientific future, the issue could arise of “double taxation”: taxes imposed twice on the same income—first at preservation, then at revival.

One of the reasons futurists think about revival after a medical advancement is because at death, the body ceases to function as a whole, but some cells are still alive. They hope for a future world free of disease, death, and aging.

However, there’s one problem, which is that the preservation of a body requires toxic chemicals like sodium pentobarbital, Narcan, metocurine, SoluMedrol, potassium chloride and chlorpromazine. That creates a problem in how to dispose of the hazardous waste left over in the cryonics process.

Since a scientific breakthrough making revitalization possible may be decades or hundreds of years away (if ever), you should add a termination date on a revival trust and hold the document at a financial institution that has been around for some time.

Reference: Next Avenue (March 8, 2019) “To Freeze Yourself at Death, There’s an Estate Planning Trust for That”

How Do I Get My Mom’s Affairs in Order?

What can you do to make sure your mother’s financial affairs are in proper order?

The Monterey Herald’s recent article, “Financial planning: Making sure Mom is taken care of,” says to first make sure that she has her basic estate planning documents in place. She should have a will and an Advance Health Care Directive. Talk to an experienced estate planning attorney to make sure these documents fully reflect your mother’s desires. An Advance Health Care Directive lets her name a person to make health care decisions on her behalf, if she becomes incapacitated. This decision-making authority is called a Power of Attorney for Health Care, and the person receiving the authority is known as the agent.

Based on the way in which the form is written, the agent can have broad authority, including the ability to consent to or refuse medical treatment, surgical procedures and artificial nutrition or hydration. The form also allows a person to leave instructions for health care, such as whether or not to be resuscitated, have life prolonged artificially, or to receive treatment to alleviate pain, even if it hastens death. To limit these instructions in any specific way, talk to an attorney.

Another option is to create a living trust, if the value of her estate is significant. In some states, (including California) estates worth more than a certain amount are subject to probate—a costly, lengthy and public process. Smaller value estates usually can avoid probate. When calculating the value of an estate, you can exclude several types of assets, including joint tenancy property, property that passes outright to a surviving spouse, assets that pass outside of probate to named beneficiaries (such as pensions, IRAs, and life insurance), multiple party accounts or pay on death (POD) accounts and assets owned in trust, including a revocable trust.  You should also conduct a full inventory of your parent’s accounts, including where they’re held and how they’re titled. Your parents should update the named beneficiaries on IRAs, retirement plans and life insurance policies.

Some adult children will have their parent name them as a joint owner on their checking account. This allows you greater flexibility to settle outstanding obligations, when she passes away. But, it is important not to put a large account in joint tenancy for tax reasons. Also, a joint owner automatically becomes the owner, on the other joint tenant’s death. Remember that a financial power of attorney won’t work here, because it will lapse upon your mother’s death. However, note that any asset held by joint owners are subject to the creditors of each joint owner. Do not add your daughter as a joint owner, if she has current or potential marital, financial, or legal problems!

You also shouldn’t put your name as a joint owner of a brokerage account—especially one with low-cost basis investments. One of the benefits of transferring wealth, is the step-up in cost basis assets receive at time of death. Being named as the joint owner of an account will give you control over the assets in the account—but you won’t get the step up in basis, when your mother passes.

Reference: Monterey Herald (March 20, 2019) “Financial planning: Making sure Mom is taken care of”

What You Need to Know, If the Next Generation Is Inheriting the Family Farm

Understanding the tax liabilities for inheriting, buying or being gifted the family farm, is critical to avoid a costly financial misstep, says Capital Press in the article “The family farm is coming to you: What’s next?” You’ll need to work closely with your estate planning attorney and CPA to make sure you understand the basis in the real estate, especially if the property is sold and taxes will need to be paid. How you inherit the property, makes a big difference in the tax bill.

If you receive the property as a gift from parents while they are alive, then you retain their income tax basis in the property. If they inherited it also, they likely have a low tax basis. Farms with a basis of $50,000 that are now worth $2 million are not unusual. If the farm is sold, there will be a capital gains tax on the difference between the basis and the present value, which could be more than $600,000.

If you inherit the farm from a parent and then sell it for $2 million, its value at the time of their death, you would not have to pay a capital gains tax. That saves $600,000.

The estate tax may not be so bad, depending upon your state’s estate tax, which is probably lower than the highest capital gains rate. If you live in California, there are no estate taxes in this state. Your estate planning attorney will be able to help you plan for and manage these taxes.

If you bought the farm from a parent’s trust or estate for $2 million, then you have a $2 million basis in the property and will probably not owe any property gains tax, if you eventually sell it for $2 million.

If you own the farm without other family members, you should start planning your next steps. To whom do you want to pass the farm? If you want to keep the farm in the family, work with an attorney who is familiar with farm families, so that you can keep working the land and reduce any disputes.

Farmers often separate business operations from the land, with the operations held by one business and the land held by another entity. This allows the estate planning attorney to plan for succession in how operations and land are transferred to the next generation. It also provides asset protection, while you are alive.

Make sure that your farm succession plan and your estate plan are aligned. A common issue is finding that buy-sell documents don’t align with the will or trust. Some farmers use a revocable living trust as a will, so they can incorporate estate tax planning and transition the farm privately upon death.

Reference: Capital Press (March 24, 2019) “The family farm is coming to you: What’s next?”

How to Be Smart about an Inheritance

While there’s no one way that is right for everyone, there are some basic considerations about receiving a large inheritance that apply to almost anyone. According to the article “What should you do with an inheritance?” from The Rogersville Review, the size of the inheritance could make it possible for you to move up your retirement date. Just be mindful that it is very easy to spend large amounts of money very quickly, especially if this is a new experience, so it is important to be smart about an inheritance.

Here are some ways to consider using an inheritance:

Get rid of your debt load. Car loans, credit cards, and most school loans are at higher rates than you can get from any investments. Therefore, it makes sense to use at least some of your inheritance to get rid of this expensive debt. Some people believe that it’s best to not have a mortgage, since now there are limits to deductions. You may not want to pay off a mortgage, since you’ll have less flexibility if you need cash. It is very important to check your student loan forgiveness options before paying off any student loan debt.

Contribute more to retirement accounts. If the inheritance gives you a little breathing room in your regular budget, it’s a good idea to increase your contributions to an employer-sponsored 401(k) or another plan, as well as to your personal IRA. Remember that this money grows tax-free and it is possible you’ll need it.

Start college funding. If your financial plan includes helping children or even grandchildren attend college, you could use an inheritance to open a 529 account. This gives you tax benefits and considerable flexibility in distributing the money. Every state has a 529 account program and it’s easy to open an account.

Create or reinforce an emergency fund. A recent survey found that most Americans don’t have emergency funds. Therefore, a bill for more than $400 would be difficult for them to pay. Use your inheritance to create an emergency fund, which should have six to 12 months’ worth of living expenses. Put the money into a liquid, low-risk account, so that you can access it easily if necessary. This way you don’t tap into long-term funds.

Review your estate plan. Anytime you have a large life event, like the death of a parent or an inheritance, it’s time to review your estate plan. Depending upon the size of the estate, there may be some tax liabilities you’ll need to deal with. You may also want to set some of the assets aside in trust for children or grandchildren. Your estate planning attorney will be able to provide you with experienced counsel on the use of the inheritance for you and future generations.

Reference: The Rogersville Review (March 21, 2019) “What should you do with an inheritance?”

Must I File Taxes When My Dad Dies?

Generally, when someone passes away, the final individual federal and state tax return must be prepared and filed in the same way as when they were alive, says nj.com, in the recent article, “What tax returns need to be filed after someone dies?”

All of the income starting at the beginning of the year up to the individual’s date of death, must be reported on the tax return. All of the tax deductions and tax credits that the person was entitled to may be claimed. This final return is typically filed by the surviving spouse or by the executor of the individual’s estate.

The final return can be either electronically filed or filed on paper. The tax preparer should also be sure to write “deceased” after the taxpayer’s name and include the date of death, so that the IRS knows that this will be the last individual return filed.

However, at the death of a taxpayer, a new taxpaying entity—the taxpayer’s estate—is created to make certain that no taxable income escapes review by the IRS. Income that’s earned during the tax year, up to the date of the person’s death, is reported on the final individual tax return, and any earnings after that date are taxable to the decedent’s estate. Earned income of the estate is any income for which the decedent was entitled to during the year that occurred after the date of death. This could include any dividends or interest from stock or bond investments held in the decedent’s name that was collected between the date of death and the end of the calendar year.

In addition, beneficiaries of assets paid directly to them outside of probate, like IRAs already in distribution mode or life insurance policies, may be subject to what is called “income in respect of a decedent,” or IRD. Two things must apply for this to occur: (i) the asset earns interest before the balance is transferred or paid to the beneficiaries; and (ii) the interest isn’t reported on the deceased taxpayer’s final tax return. If both of these occur, then beneficiaries are responsible for reporting IRD on their own tax returns.

The deceased father’s estate may then also need to file returns, so talk to an estate planning attorney to be certain that everything is correct.

Reference: nj.com (March 21, 2018) “What tax returns need to be filed after someone dies?”

What’s My Plan If I’m an “Elder Orphan?”

Roughly 66% of those over 65 need some form of long-term care help, and the majority will depend on a spouse, partner, or their children for assistance. WFMZ TV’s recent article, “The single senior life: Elder orphans,” asks “what if they have none of the above?”

While you’re still healthy, you should make plans, in the event you find yourself in need of the help that is traditionally provided by a family member. There are solutions, but they require planning.

The first step is to hire an elder law attorney to create the documents to protect you, if you become incapacitated. Designate a friend, a physician, or licensed private fiduciary to make medical decisions and detail your wishes for your healthcare.

Anyone 18 years or older should have at least a durable power of attorney and an advance healthcare directive.

The next task is to consider where you want to live, like a neighborhood that is near public transportation, so you are not housebound. Begin looking at senior communities or assisted living facilities, and home-help services.

A somewhat unique strategy is to “adopt” a family, where a single elderly person agrees to leave his assets to a family who will help as they age and until they pass. Be careful about the family you select, to avoid any elder financial abuse. You should consider to leave these gifts, but do not inform the family until after you pass.

Another way to stay connected is via social media, like Facebook. Carol Marak, the editor of SingleCare, started a group for elder orphans. The group already has more than 35,000 members.

It’s critical that you develop a social network. Think about becoming a member of a class, volunteering somewhere, or taking up a hobby—something that will give you regular exposure to a new group of people on an on-going basis.

Some people who do have families lack close connections with their own flesh and blood, and if that is the case, while you may not be an elder orphan, you still need to create a plan to protect yourself as you age.

Reference: WFMZ TV (March 7, 2019) “The single senior life: Elder orphans”

What is the Best Way to Leave an Inheritance to a Grandchild?

Leaving an inheritance (money or real estate) to a grandchild under the age of 18 requires careful handling, usually under the guidance of an estate planning attorney. The same is true for money awarded by a court, when a child has received property for other reasons, like a settlement for a personal injury matter.

According to the article “Gifts from Grandma, and other problems with children owning property” from the Cherokee-Tribune & Ledger News, if a child under age 18 receives money as an inheritance through a trust, or if the trust states that the asset will be “held in trust” until the child reaches age 18, then the trustee named in the will or trust is responsible for managing the money.

Until the child reaches age 18, the trustee is to use the money only for the child’s benefit. The terms of the trust will detail what the trustee can or cannot do with the money. In any situation, the trustee may not benefit from the money in any way.

The child does not have free access to the money. Children may not legally hold assets in their own names. However, what happens if there is no will, and no trust?

A child could be entitled to receive property under the laws of intestacy, which defines what happens to a person’s assets, if there is no will. Another way a child might receive assets, would be from the proceeds of a life insurance policy, or another asset where the child has been named a beneficiary and the asset is not part of the probate estate. However, children may not legally own assets. What happens next?

The answer depends upon the value of the asset. State laws vary but generally speaking, if the assets are below a certain threshold, the child’s parents may receive and hold the funds in a custodial account. The custodian has a duty to manage the child’s money, but there isn’t any court oversight.

In Georgia, the threshold is $15,000. Check with a local estate planning attorney to determine your state’s limitations.

If the asset is valued at more than $15,000, or whatever the threshold is for the state, the probate court will exercise its oversight. If no trust has been set up, then an adult will need to become a guardian of the estate, a person responsible for managing a child’s property. This person needs to apply to the court to be named guardian, and while it is frequently the child’s parent, this is not always the case.

The guardian is required to report to the probate court on the child’s assets and how they are being used. If monies are used improperly, then the guardian will be liable for repayment. The same situation occurs, if the child receives money through a court settlement.

Making parents go through a guardianship appointment and report to the probate court is a bit of a burden for most people. A properly created estate plan can avoid this issue and prepare a trust, if necessary, and name a trustee to be in charge of the asset.

Another point to consider: turning 18 and receiving a large amount of money is rarely a good thing for any young adult, no matter how mature they are. An estate planning attorney can discuss how the inheritance can be structured, so the assets are used for college expenses or other important expenses for a young person. The goal is to not distribute the funds all at once to a young person, who may not be prepared to manage a large inheritance.

Reference: Cherokee-Tribune & Ledger News (March 1, 2019) “Gifts from Grandma, and other problems with children owning property”

Where There’s A Will, There’s a Better Future for Family

The plain truth is, everyone needs a will. The value of someone’s personal property has very little to do with the need for a will or estate plan. Without one, the process of settling an estate and having heirs receive their inheritance could be delayed for many months, or even years, says the article “Where there’s a will, there is a plan in place” from The Advertiser. For wills to be legally acceptable, there are certain things that need to be included:

Identification of the person making the will, also known as the testator. The will must contain the person’s name, address, state their intention to create a distribution process for assets and the statement that this will is intended to be their last will and testament and all other wills are revoked. The will must also be dated to be sure to know hold old it is, with regard to other wills.

Outstanding debt payment. The will needs to explain how any outstanding bills will be paid, including funeral costs, medical costs, taxes owed, and any other expenses that a person may have at the time of their death. This may vary by state, so speak with a local estate planning attorney to find out what your state’s laws are.

Name any heirs and what they are being given. You may give your property to whomever you want, or to a charity. The bequest needs to be carefully written, so it is very specific and there are no misunderstandings. Since it may be hard to know what will be left after final expenses are paid, it may be wise to give percentages of assets, rather than specific figures. An estate planning attorney will know how to best handle this aspect of a will.

Chose an executor and name them in the will. The executor is responsible for carrying out the wishes of the testator and is in charge of paying debts, taxes, distributing assets and any tasks assigned in the will. Choosing the right person for this task is very important. They need to be able to handle the responsibility and be able to execute your wishes, without being bullied by family members or friends. Always name a secondary executor, in case the first predeceases you, or if the person is unable or unwilling to serve.

Name a guardian for minor children. This is why parents of young children must have a will. If there is no will, the court will determine who should raise the children, following the laws of kinship of your state. You may not agree with the court’s decision. Select a person (or couple) you believe will raise the children, as close as possible to how you would raise the children.

Plan for your funeral. This is a kindness to your loved ones. If you don’t plan in advance, your loved ones may spend more than you would wish on an elaborate funeral. The opposite may also happen. A simple paragraph may do the job, or you could visit the local funeral home and prepay, selecting everything so that it will be done according to your own wishes.

In addition to a will, you’ll want a power of attorney and health care power of attorney in place to protect you, in case of incapacity. This way, someone will be able to take care of your finances and someone else will be able to make health care decisions, if you can’t.

An estate planning attorney can work with you to make sure that all these documents are properly prepared according to your state’s laws.  They have worked with many others, know what kind of issues crop up and how to prepare for them. This is especially important with blended families or families where there are complicated histories. Think of the estate plan as a gift to your heirs, a chance to express your wishes and a way to create a legacy for your loved ones.

Reference: The Advertiser (March 10, 2019) “Where there’s a will, there is a plan in place”

What is an Advance Directive and Do I Need One?

These are difficult questions to think about. However, they are very important, as every estate planning attorney knows. Should you ever become unable to speak for yourself, reports the Enid News & Eagle in the article “Veteran Connection: What you should know about advance directives,” there is a way to make a plan, so your wishes are known to another person or persons and by legally conveying them in advance, making sure you have a say, even when you don’t have a voice.

The advance directive helps family members and your doctors understand your wishes about medical care. The wishes you express through these two documents described below, require reflection on values, beliefs, views on medical treatments, quality of life during intense medical care and may even touch on spiritual beliefs.

The goal is to prepare so your wishes are followed, when you are no longer able to express them. This can include situations like end-of-life care, the use of a respirator to breathe for you, or who you want to be in the room with you, when you are near death.

It should be noted that an advance directive also includes a mental health component, that extends to making decisions on your behalf when there are mental health issues, not just physical issues.

There are two types of documents: a durable power of attorney for health care and a living will.

The durable power of attorney for health care lets you name a person you trust to make health care decisions when you cannot make them for yourself. This person is called your health care agent and will have the legal right to make these decisions. If you don’t have this in place, your doctor will decide who should speak for you. They may rely on order of relationships: a legal guardian, spouse, adult child, parent, sibling, grandparent, grandchild or a close friend.

A living will is a document that communicates what kind of health care you want, if you become ill and cannot make decisions for yourself. This helps your named person and your doctor make decisions about your care that align with your own wishes.

Another very important part of this issue: the conversation with the people who you want to be on hand when these decisions have to be made. Are they willing to serve in this capacity? Can they make the hard decisions, especially if it’s what you wanted and not what they would want? Do you want a spouse to make these decisions on your behalf? Many people do that, but you may have a trusted family member or friend you would prefer, if you feel that your spouse will be too overwhelmed to follow your wishes.

Reference: Enid News & Eagle (March 13, 2019) “Veteran Connection: What you should know about advance directives”