How Does the IRS Know if I Give My Grandchildren Money?

A recent nj.com recent post asks, “Will the IRS know if I gift money to my grandchildren?” The article explains that federal and state tax agencies do not have any direct way of knowing how much is being gifted. They rely on taxpayers self-reporting gifts. It’s the honor system.

However, the tax authorities may discover these transfers when you or the recipient are audited, by matching transactions reported for certain assets, or because banks are required to report cash transfers in excess of $10,000. Because it’s pretty simple to avoid paying gift tax, it doesn’t seem worth the risk of getting caught trying to skirt the rules. Understanding the gift tax and working within the system is the best way to avoid issues.

The IRS stipulates that a gift is “the transfer of property by one individual to another while receiving nothing, or less than full value, in return.” A gift is never taxable to the recipient, so only the person making the gift has to consider the gift tax.

The amount you can give will not be subject to gift tax if the gift amounts are less than the annual and lifetime exemptions. The annual gift exemption is currently $15,000 per recipient, which means that you can give up to $15,000 each year to an unlimited number of people with no reporting requirement at all.

You’re supposed to complete a U.S. Gift Tax Return (IRS Form 709) if you exceed the exemption, but don’t panic. Although you are required to file a gift tax return, it is highly unlikely any gift tax will be due. That’s because gifts in excess of the annual exemption must first offset your lifetime exemption before any gift tax is due.

Keep in mind, however, that the IRS can impose penalties if they discover that you failed to file a gift tax return, even if no gift tax was due. Also note that the gift tax is integrated with the estate tax, which applies to amounts transferred upon your death in excess of your remaining lifetime exemption.

If you’re planning on making a gift to help pay a grandchild’s college costs or medical expenses, make the payment directly to the educational or healthcare institution. By making the payment directly to the institution, that payment will not be considered a gift and will not go towards the $15,000 exemption and also will not decrease your lifetime exemption.

Ask your estate planning lawyer about any state gift, estate and inheritance tax implications for any significant transfers you want to make.

Reference: nj.com (October 1, 2019) “Will the IRS know if I gift money to my grandchildren?”

Am I Too Young to Think About Estate Planning?

It’s wise for younger generations to consider estate planning early, advises The Cleveland Jewish News in the recent article “Younger generations should focus on estate planning, too.” Don’t be fooled into thinking that an estate plan is only for older people or the ultra-wealthy. In fact, there are many younger adults who may need it, especially if they have been financially successful and also have experienced changes with marriage and families.

This is especially important for young people who are in committed relationships. A young married couple should talk together about their vision and goals for their financial, health, and legal affairs, in case something happens to one of them or within their families.

Estate plans provide some certainty in an otherwise uncertain life. There are many reasons to start early. One reason is that you never know what’s going to happen. You want to make certain that all of your assets are in place.

When creating an estate plan, there are a few things that younger people should consider, such as making sure all their accounts have named a beneficiary. This includes life insurance, retirement, and checking and savings accounts. These beneficiaries need to be reviewed on an ongoing basis and updated for life and family changes.

Many younger adults will be fine with just a will, a financial power of attorney, and a health care power of attorney. However, marriage is a time when people begin to have more complexity in their professional lives. This can include starting a business or becoming leaders at companies and that may require more complex and protective plans.

While younger generations are known to be independent and to try to meet all their needs online, estate plans should be treated differently. There are numerous online tools or ‘do-it-yourself’ strategies, but professional legal assistance can make it an easier and a more thorough process. Remember, when you meet with an attorney, you are not just getting the papers; you are also receiving their guidance and expertise, crafted to address the needs of your specific situation.

Start as early as you can and set the foundation for more complex planning that will come in the future. This preparation will mean less stress for those left behind after you pass away.

Reference: Cleveland Jewish News (September 19, 2019) “Younger generations should focus on estate planning, too”

Why Are the Daughters of the Late Broncos Owner Contesting His Trust?

Beth Wallace and Amie Klemmer, the two oldest daughters of the late owner of the Denver Broncos, Pat Bowlen, filed a lawsuit in a Denver area court challenging the validity of their father’s trust. Specifically, they are arguing that their father didn’t have the mental capacity to properly execute documents and was under undue influence when he signed his estate planning documents in 2009, according to Colorado Public Radio’s recent article “Pat Bowlen’s Kids Are Still Fighting Over Inheritance As 2 Daughters File Lawsuit.”

Dan Reilly, a lawyer for the Patrick Bowlen Trust, said in a statement that it is “sad and unfortunate that Beth Bowlen Wallace and Amie Bowlen Klemmer have elected to contest their father’s plan and attack his personal health,” adding the lawsuit was the “latest effort in their public campaign to circumvent Pat Bowlen’s wishes.”

Bowlen died in June at age 75 after a long battle with Alzheimer’s. He put the trust in place hoping that one of his seven children would succeed him in running the Broncos, a team he purchased in 1984. In addition to the two daughters, he had with his first wife, Sally Parker, Pat Bowlen had five children (Patrick, Johnny, Brittany, Annabel, and Christianna) with his widow, Annabel.

Wallace said in 2018 that she wanted to succeed her father, but the trustees said she was “not capable or qualified.” Likewise, Brittany Bowlen said last fall that she wanted to become the next controlling owner of the Broncos team. She will become part of the team in November in a management position to begin that process.

Reilly said that Wallace and Klemmer never raised the issue of mental capacity until after 2014 “when Ms. Wallace was privately told by the trustees that she was not capable or qualified to serve as controlling owner.”

Last month, Arapahoe County Court Judge John E. Scipione dismissed a lawsuit filed by Bowlen’s brother, Bill. That suit that sought to oust team president and CEO Joe Ellis, team counsel Rich Slivka, and Denver lawyer Mary Kelley as trustees. Bill argued that they weren’t acting in good faith or in Pat’s best interests.

The judge ruled in a separate case over the trust that the court and not the NFL would decide the question of Pat’s mental capacity at the time he updated his estate planning documents 10 years ago.

The trust also has a no-contest clause. In electing to challenge the validity of the trust in court, Wallace and Klemmer are putting themselves at risk of being disinherited, if they’re found in violation of the no-contest clause, and the 2009 trust is upheld in court. Their rights as beneficiaries would bypass them and go to their children.

Reference: Colorado Public Radio (September 14, 2019) “Pat Bowlen’s Kids Are Still Fighting Over Inheritance As 2 Daughters File Lawsuit”

Why Would I Need to Revise My Will?

OK, great!! You’ve created your will! Now you can it stow away and check off a very important item on your to-do list, right? Well, not entirely.

Thrive Global’s recent article, “7 Reasons Why You Need to Review your Will Right Now,” says it’s extremely important that you regularly update your will (and other documents, such as a revocable living trust) to avoid any potential confusion and extra stress for your family at a very emotional time. As circumstances change, you need to have your will reflect changes in your life. As time passes and your situation changes, your will may become invalid, obsolete or even create added confusion when the time comes for your will to be administered.

New people in your life. We all know life changes. If you have more children after you’ve created your will, review your estate plan to make certain that the wording is still correct. You may also marry or re-marry, or you may have grandchildren that you now want to include. Make a formal update to your estate plan to include the new people who play an important part in your life and to remove those with whom you lose touch.

A beneficiary or other person dies. If a person you had designated as a beneficiary or executor of your will has died and there is no backup, you must make a change or it could result in confusion when the time comes for your estate to be distributed. You should update your will if an individual named in your estate plan passes away before you.

Divorce. If your will was created prior to a divorce, you will probably want to remove your ex from your estate plan. If you have minor children with your ex, you may also want to change your distribution and nominate a guardian of the estate to take care of any money you want to pass to your children. Talk to an estate planning attorney about the changes you need to make.

Your spouse dies. Even though wills should be written in such a way as to always have a backup plan in place, that’s not what always happens. For example, if your husband or wife dies before you, their portion of your estate might go to another family member or another named individual. If this happens, you may want to redistribute your assets to other people.

A child becomes an adult. When a child turns 18 and comes of age, she is no longer a dependent.  Your documents might have included provisions for dependents that now no longer apply to your children, but you would like to still help them out if you were to die. Therefore, you may need to update your will in any areas that provided additional funds for any dependents.

You experience a change in your financial situation. This is a great opportunity to update your will to protect your new financial situation. If you now have more than the minimum amount needed for probate, you may also want to create a trust to avoid probate. In California, if a person has more than $150,000 in their estate when they die (including the value of any houses), they will have to go through probate. Create a trust and change your will to a pour-over will to save your loved ones the trouble of going to court.

You change your mind. It’s your will, and you can change your mind whenever you like.

Reference: Thrive Global (June 17, 2019) “7 Reasons Why You Need to Review your Will Right Now”

Can I Keep a Loved One’s Inheritance From Their Spouse?

A recent nj.com article asks, “How do I protect my niece’s inheritance from her husband?” The article asks about a scenario where someone plans to leave most of her estate to her niece but wants to keep the niece’s estranged husband from getting his hands on the money. Although the default laws may vary state by state, no matter where she resides, she must be proactive and intentional about her gifting to make sure the funds go where she intends them to go.

First, there are tax consequences to consider and keep in mind. In states like New Jersey, the money may be subject to the New Jersey inheritance tax, which is assessed if the decedent is a New Jersey resident, regardless of where the beneficiary resides. The tax is levied based on the relationship of the deceased to the beneficiary. In this case, the niece’s inheritance would be subject to an inheritance tax of 15 to 16%.

Next, the aunt needs to decide the manner in which she wants to leave the assets. One option is for the aunt to leave the assets to the niece outright.

The laws in many states, like Missouri, South Carolina, and New Jersey, say that unless the parties otherwise agree, upon divorce there will be equitable distribution of their marital property. Marital property generally doesn’t include the property received by gift or inheritance, as long as that person didn’t commingle it (in other words, mix it up and combine it) with the marital property.

Because there will be no administrative costs, the most economical way to transfer the property to the niece is for the aunt to leave it to the niece in her will, with instructions for her to keep it separate and apart from her marital property. However, this may not be the best way to leave property to the niece, because once it is given to the niece, it is out of the aunt’s control and it may be mixed up with the marital property, in which case the niece’s husband may be able to have access to it.

If, however, the aunt leaves the inheritance in trust, she can make certain the property isn’t commingled with marital assets by drafting a trust that will keep it separate from the rest of the niece’s property. Further, if the trust is properly prepared by an experienced estate planning attorney, the income from the trust will likely not be used to decrease any spousal support to which the niece may otherwise be entitled from her spouse, in the event that they divorce down the road. The trust can also protect against other events, by instructing to whom funds should be paid upon the premature death of the niece. For instance, the trust can state specifically that the funds should then be held in trust for the niece’s children. That would further prevent her estranged husband from ever being able to make a claim against the funds.

If you are concerned about leaving property to someone you love, but that person is married to someone that you don’t, a trust can help you make sure that the inheritance goes to the actual person you want to receive it. Talk to an estate planning attorney who can provide you with some options.

Reference: nj.com (August 21, 2019) “How do I protect my niece’s inheritance from her husband?”

What Do I Need to Know About My Own Funeral Arrangements?

You’ve heard about death and taxes. While having a plan for your funeral may not be a big priority, creating a plan for your family when you pass is something everyone should do. WHNT’s recent article, “How to plan for life after death,” says the first step is having that conversation with someone you trust. It may be a close friend, a family member, or an attorney.

The National Institute on Aging has created a comprehensive list of considerations for those who are facing end of life decisions. It’s also a great resource for caretakers. This can help you think about some important considerations like what you want in terms of a funeral service, burial or cremation if you want life insurance to pay your last expenses, and how your estate should be handled. Advanced planning for things like this will may make the process easier for those you leave behind, especially if you work with an experienced estate planning attorney.

There are also some fundamental decisions that can ease the financial burden on your loved ones. The average North American traditional funeral costs between $7,000 and $10,000. This price range includes the services at the funeral home, burial in a cemetery and the installation of a headstone at the cemetery. The National Funeral Directors Association reports that the median cost to move the remains of a loved one to a funeral home in the U.S. is $325. Embalming can run about $725, and the average cost of a vault in the United States is $1,395, as of 2017.

According to the 2018 NFDA Cremation & Burial Report, the 2018 cremation rate is estimated to be 53.5%, and the burial rate is projected to be 40.5%. Forbes says that roughly 42% of people opt to be cremated because of the costs involved with a standard funeral in the United States.

When some people consider these costs, they may think differently about what they would like their family members to plan to commemorate their lives. Writing down what you would like your family members to do for your memorial service can save them significant strain and stress as they cope with losing you, and it can also save them significant costs.

Reference: WHNT (June 30, 2019) “How to plan for life after death”

Don’t Forget to Update Your Estate Plan

There are some people who sign their will once in their life and never change it. They may have executed their estate plan late in life, or after they were diagnosed with a serious disease. However, even if your family life and finances are pretty basic, there are still changes in the law that you may need to incorporate into your estate plan.  Some of the people that you named in your will could also have died or moved away.

Forbes’ recent article, “Why You Should Change Your Will Now,” warns us that if you’ve taken the “one and done” approach to your estate plan, think again. In addition to the reasons already mentioned, your assets may have changed dramatically since you signed your will and other estate plan documents. The plan you put in place years ago may not have considered new federal and state estate taxes. Now that you’ve accumulated significant wealth that will be passed on to your children, you might need to review your plans for that wealth for your children.

You may want to include grandchildren to help pay for their college education. It is also not uncommon for parents to want to protect their children from themselves. This can be because of addiction issues or a lack of financial literacy. If that’s an issue, some parents elect to hold monies in trust for adult children, as a way to ensure that the funds will be there throughout the child’s lifetime.

A person’s estate plan should grow with them over time. An estate plan for a twenty-something may be very basic, but a newly-married couple will want to include provisions for their spouse. Parents need to think about providing for and protecting their children. Adult children have another set of concerns and you need to prepare for the possibility of divorcing spouses, poor life choices, addiction issues, and just poor money management. There are many stages in life when you may need to readjust the provisions for your children in your estate planning documents.

If you haven’t looked at your estate plan in a while, do it now.

Reference: Forbes (August 27, 2019) “Why You Should Change Your Will Now”

What Do I Need to Do Financially, When We Have a Baby?

In addition to all the logistics involved with a new baby, new parents should also take care of financial and legal matters in the months leading up to the big day.

U.S. News & World Report’s recent article, “Financial Steps to Take When You’re Pregnant” reminds us that pregnancy is a terrific time to review your financial life. It’s a great time to assess your budget, emergency savings, estate planning documents, and insurance needs to see if anything needs to be refreshed.

Here are a few things to do to prepare for a new baby:

Employee Benefits. Take a look at your employee benefits or have a conversation with HR to determine how much time you can take off and whether you’ll be paid your salary while on parental leave. This is important because many families are faced with higher living costs by the presence of a new baby, which is often combined with taking parental leave that may cut their take-home pay. New parents may have to use the Family and Medical Leave Act (FMLA), which offers eligible employees 12 weeks of unpaid leave, or tap into short-term disability insurance, which typically only replaces a portion of your salary. The amount you receive in short-term disability will also be impacted by whether you pay premiums with pre-tax or post-tax dollars. If you pay with pretax, your benefit will be subject to taxes, which will decrease the overall amount received.

While reviewing these policies, look at your health insurance and see what kind of prenatal visits and pediatric care are covered. You should also look at the terms of your health insurance policy since you could be liable for health insurance premiums during periods where you are taking leave from work. Also, remember that you’ll need to add your baby to your medical insurance within 30 days of the birth.

Budget. Create a new budget that takes into account changes in your income from taking leave and new expenses from having a new baby. You may have to survive several weeks without your normal level of income, so be sure that you have enough saved up to get through that period. After that, create another budget that considers more long-term expenses associated with the new one, such as the cost of childcare, diapers, and formula, all of which can add up.

Life Insurance. Determine if your current life insurance will meet your needs. If you need more, look at term life insurance. It’s usually affordable and expires after a set term, typically anywhere from 10 to 30 years. This policy payout would help a surviving parent or guardian care for your child.

Estate Planning. Consider who would care for your child if both parents were to die before they turn 18. Talk to family or close friends about who you’d like as the guardian of the child. Talk to an estate planning attorney to update (or create) a will and guardianship choices. In addition, ask about formulating a plan for how inheritance, insurance, and other assets will be handled and disbursed if you die while the child is a minor. A revocable living trust can be one way to direct a future inheritance. You can designate your child as the beneficiary and a relative or close friend as the trustee. The trustee will help decide how the money is spent. This trust is usually included in the will and activates after the death of the person who created it.

Beneficiary Designations. Update any beneficiary designations on your retirement and insurance accounts to include your child, but make sure and ask about meeting requirements for how minors can own property.

529 College Savings Account. You should also look into funding a 529 college savings account but don’t feel pressure to contribute a lot. Making certain that your budget, estate, and insurance needs are tailored to meet your new family dynamic are more pressing concerns.

Reference: U.S. News & World Report (August 29, 2019) “Financial Steps to Take When You’re Pregnant”

How Do I Have the Financial Talk with My Parents?

GOBankingRates recently released a survey that found that 73% of Americans haven’t had conversations with aging parents about their finances. Moreover, 22% of the survey’s respondents said they never plan to have this talk with their parents, because they believe their finances are none of their business.

That’s a really big mistake.

Forbes’ recent article, “What You Don’t Know About Your Parents’ Finances Could Ruin Yours” says that if you don’t take the time to chat to your parents about their finances, your own finances could be affected. This is because there’s a good chance you’ll have to get involved with your parents’ financial lives, as they age. This can impact your own financial well-being, if you aren’t ready for that task.

As Americans are living longer, there’s an increased risk of health issues, which can lead to significant financial consequences. About 80% of older adults have at least one chronic condition like heart disease, diabetes, dementia or Alzheimer’s disease. Alzheimer’s disease is becoming increasingly prevalent as people live longer. The number of Americans living with Alzheimer’s disease is expected to more than double to 14 million by 2050, according to the Alzheimer’s Association.

However, just 5% of adults ages 55 to 60 have long-term care insurance, and only 11% of adults 65 and older have it. Long-term care insurance helps cover the cost of care in an assisted-living facility, nursing home or even at home. Medicare doesn’t pay for this sort of care–which easily runs well over $8,000 a month.

If you and your parents don’t talk about how to pay for any care they might need, you could become your parents’ long-term care plan. That could mean you pay these expenses or stop working to help care for a parent.

Those who haven’t had detailed discussions with their parents about their finances can anticipate facing a larger burden than those who have been able to help their parents start managing their money better, by having discussions with them.

If you have siblings, it is important for all the children to be on the same page regarding the parents’ finances and long term care plans. This will help everyone involved be better prepared.

Another important reason to talk to your parents about their finances sooner rather than later, is to see if they have a will, power of attorney and living will or advance health care directive. If they don’t, consult with an experienced estate planning attorney. The sooner you address these issues, the better.

Reference: Forbes (July 17, 2019) “What You Don’t Know About Your Parents’ Finances Could Ruin Yours”

Where Should I Keep My Estate Plan?

Many people ask their attorney to hold the original documents of their estate plan. This prevents the plan from being misplaced at home and keeps it away from prying family members.

Forbes’ recent article, “Keeping Your Estate Planning Documents Safe,” explains that because of the expense of storage and the move to paperless offices, some estate planning attorneys are now having their clients hold the original documents.

This saves money for the attorney, but it leaves the client with the problem of where to put the originals.

If you need a safe and secure place for them, here are some options.

No safe deposit boxes. Avoid placing the original documents in a safe deposit box, because the authority to get into the box is inside the box! If you pass away or are incapacitated—and nobody has access to the safe deposit box—they’ll need a court order to get access. For them to get the court order, they need the documents inside the box. It’s like the chicken and the egg.

Get a fireproof safe. A fireproof safe is a great place to keep these important documents.

Make copies. Get a set of hard copies in another location that is easily accessible. You can now use the safe deposit box to hold a set of copies of your documents. Your attorney should also have a set of hard copies.

E-records. Your estate planning attorney should also have an electronic copy of your estate plan and should send you an electronic version of the documents to keep with your e-records.

Treat your copies like the originals, and don’t lose it, in case the originals are misplaced or destroyed. If the original documents somehow vanish, your family may still be able to use a set of copies. For instance, a photocopy of a will can be probated, once the executor has attested that she has made a diligent search to find the original which hasn’t turned up.

Remember that this isn’t a “one and done” task. You should review your documents every few years to make certain the people you’ve named in them are still alive and your intentions haven’t changed.

Reference: Forbes (August 16, 2019) “Keeping Your Estate Planning Documents Safe”