Beware the Oft Spoken Line to Seniors: “Transfer Ownership of Your House to Your Kids!”
Should parents transfer their home into their adult children’s names, deeding the house to their kids? This is one of the most common questions that comes up when discussing estate planning with families.
In fact, oftentimes families assume that this preferred and correct handling based on the “advice” you or your adult kids have received from well-meaning friends and family—even the internet. The intention of a transfer is always the same. You and your family want to preserve your family home from a required spend down of your assets should you need extensive medical care in a nursing home or acute care facility.
The fact is, no two families are alike. Don’t sign a deed transferring your house to your kids without taking these important first steps: Have conversations about appropriately protecting your assets with your family and then post haste make an appointment with your estate attorney. Recognizing the potential risks of arbitrarily transferring ownership of your home to your kids will give you a clearer picture of why a willy-nilly transfer is a really bad idea.
Timing is Everything
It may be too late to consider a transfer if a diagnosis of an illness or condition has just been made. Medicaid looks back five years for major financial transactions. If the goal is to reduce your assets so you can qualify for Medicaid, remember that Medicaid will review financial transactions over the last five years. The transfer of a home within this 5-year window constitutes a red flag and may disqualify you from Medicaid nursing home coverage unless there are sufficient other assets to cover the costs during the 5-year period.
Emotional Decision-Making Won’t Do
Having your adult children help you with your financial needs late in life can be challenging. Your emotions do not always help you make the best decisions. A desire to keep the long-time family home in the family or, perhaps less charitably a sense of entitlement on the part of some or all of your children who believe that it should be the family legacy, do not typically lead to sound actions. There are many laws and rules to navigate, and time may not be on your side. Plus, the decision cannot be one-sided. If you are capable of sound decision-making, your wishes combined with the guidance of your estate attorney, financial advisor, or CPA must agree on the best course of action for you and your family. Allowing your kids to be privy to these conversations and have a voice is also a good strategy for family harmony.
Uncle Sam Comes Calling
Transferring your principal residence to a family member may disqualify you from part or all of the capital gains tax exclusion on the sale of the residence and cause unnecessary income tax liability when the residence is sold in the future. Consider the hefty tax bill for either a parent or their children from a capital gains tax on any gain (e.g., profit) on the house sale if you lose the exclusion and your family decides to sell the house during your lifetime.
Is a Life Estate Deed the Answer?
Individuals often think they achieve the best of all worlds if they establish a transfer of real property through a life estate deed. A life estate deed permits a property owner to have full use and occupancy of their property until their death, at which time your home will be transferred to your children. Because life happens, there are any number of potential pitfalls:
- Your home becomes exposed to the financial problems, liens, and creditors of all the joint owners; what if, for example, one of your children or their family members claimed bankruptcy
- A child or their family member could have a serious accident and if their insurance does not cover the cost of care, liens could be placed on the house
- Your child could become divorced, putting your home at risk as part of the marital settlement
- You may decide you don’t want to live in the house anymore and would like to sell it, but you are at the mercy of your children’s agreement with this decision
- You may want to make repairs to the house to accommodate your aging in place needs, and your children ignore your request for repairs not wanting the financial responsibility associated with those repairs; your children have the right to do this
- Your child could predecease you and the house becomes part of your deceased child’s estate subject to probate of that estate
Appropriate Transfer of Home. Get Guidance First.
Indeed, there are situations in which a transfer will work. For example, Medicaid sometimes recognizes a caregiver child exception that allows you to transfer ownership of your house, provided the adult child has lived in your home for at least two years and provided a level of care that prevented you from required nursing home care. That said, the transfer of the home through a life estate deed would cancel the caregiver exception.
A Trust is another—if not the best way—to transfer home ownership from you to your children. When the house is transferred to the Trust, you establish directions for the administration of the Trust and appoint a Trustee who is required to protect your interests.
Still in either of these situations, the counsel of your estate attorney in collaboration with your financial advisor, and CPA are the professionals best equipped to assist you with these specific situations.
At Phelan, Frantz, Ohlig, & Wegbreit, LLC, we are available to answer your questions, inform you of your options, and guide you in both your decision-making and the transfer implementation if all parties determine that a transfer is in your best interests.
Call us at 908- 232-2244 and enjoy the peace of mind of knowing that you are backed by support and knowledge in making informed decisions.
Deaf, Proud, & Determined: Individuals in the Deaf Community Have Specific Estate Planning Needs
American Sign Language (ASL) is the primary language of the Deaf community and many other individuals who are hard of hearing. It is also used by some hearing people.
Among those is Phelan, Frantz, Ohlig & Wegbreit’s Gretchan Ohlig. Gretchan, a Partner at the firm, is the granddaughter of Deaf adults and her beloved grandparents were a huge presence in the years she was growing up.
“My mom’s parents were born deaf, and they had 3 hearing daughters,” says Gretchan. “ASL was my mom’s first language, and I grew up becoming a native user.”
Deaf, not Disabled
The Deaf Community is small and proud and does not perceive itself as “disabled.” Using the word disabled suggests the idea of “less than” and implies that the Deaf culture is lacking something. Removing that label eliminates any stigma that may be attached to it.
“In Deaf culture, Deafness is embraced. It is not considered an impairment,” says Gretchan. That sentiment echoes her philosophy. For people in the Deaf community, being Deaf is part of who they are. “They believe that there is nothing to be fixed,” Gretchan says.
Despite this pride and because of it, it is often necessary for hearing professionals who are fluent in ASL to serve members of the Deaf community by helping them fulfill their wishes in certain areas of life. Estate Planning is one of those areas.
“That is why it is such a privilege for me to help members of the Deaf community who turn to our firm for estate planning services,” Gretchan says.
Unique Legacy Requirements
She explains that within the Deaf community there is often fluidity in family connections. “Family lines are often blurred, and non-blood relatives are sometimes considered family.”
It is often important that an individual’s property stays within the community. That is why precise communication between Deaf individuals and their estate attorneys is imperative so that an estate plan that completely fulfills their needs is put in place.
“There can be no gray areas left to the attorney’s interpretation,” says Gretchan.
That help includes explaining complicated legal ideas to them in their language so they will feel confident in the plan we develop with and for them.
Understanding the perspective of Deaf adults is often difficult for hearing individuals because so much of their communication with one another depends upon their ability to hear. Still, some advocates speak about Deaf gain as a communication advantage afforded to those who must use means other than verbal language. The belief behind Deaf gain is that Deaf people have more meaningful and intentional connection because they cannot hear.
It is a wonderful way of looking at the world—one which Gretchan understands and respects because of the deep relationships she had with her grandparents.
With Gratitude to Pay It Forward
“They did so much for me when I was growing up,” she says. “Today I have an opportunity to give back and pay it forward through my work.”
That sense of service to our clients is what inspires our work at Phelan, Frantz, Ohlig & Wegbreit, LLC, and we are proud to be able to effectively assist individuals within the Deaf community who come to us for estate planning services.
Call us at 908-232- 2244 and experience the peace of mind of knowing we can help you create an estate plan customized to your specific wishes and unique needs.
When There’s More Than 1 Sibling, What Happens to the Inherited Family Home?
My estate shall be divided equally among my 3 children. That’s probably the most common final directive in a last Will and Testament. But what happens when most, if not all, of an estate’s assets are real property. Think: the family home. The most common property siblings jointly inherit is a house. How do you divide that very tangible asset among 3 people?
In a best-case scenario, the siblings would agree unanimously on a fair and equitable settlement: Sell the home and split the proceeds equally. Distribute other assets so one heir retains the property or negotiates buyouts for those wanting cash.
Flaws of Nature
But human nature isn’t always so rational…or even kind…especially when there’s a decent amount of money at stake. What happens when siblings are counting on an inheritance, or their financial needs are different? What if one sibling has devoted her life to caring for their parents? What happens if there’s already acrimony among the siblings in the first place?
Unfortunately, as is often the case, specific instructions regarding the disposal of the property are not provided in the decedent’s estate planning documents. Consider these situations which pour fuel on the fire: One sibling has lived in the home taking care of the parent and wants to stay but can’t qualify for a mortgage to buy the others out. Or the caregiver may have a financial windfall from the deceased outside of the will—perhaps in jointly held property, bank certificates, or as the life insurance beneficiary. This may seem fair, and probably is, but that added benefit bestowed upon the caregiver adult child causes dissension among siblings, who then resent having to give the caregiving sibling an equal portion of the estate. And sometimes a sibling with greater wealth will have an unfair advantage to acquire the home.
Those Essential Family Conversations
There’s no better example of the need for important family conversations when parents are still healthy and fully in command of their cognitive capabilities—no better example for the requirement for estate plans with Wills or trusts in which everything is stipulated in black and white.
Even more important is this admonition: “Parents should never divide an indivisible asset in hopes that it will bring their heirs together,” says Lee Hausner, a Los Angeles-based psychologist and author of Children of Paradise: Successful Parenting for Prosperous Families, an instructional book about handling family assets. She’s seen contentious situations—even fights between siblings that turn physical.
Ideally, in these situations, the siblings must amiably turn to a Plan B. Here are the most common options for splitting an inherited home with siblings when the estate planning documents do not provide for this contingency:
- Selling the family home: This is the easiest solution…selling and dividing the proceeds equally or according to the percentage interest each sibling has been designated by the Will or trust
- Renting the family home: Siblings may not be ready to sell the cherished long-time family home even though no one wants it or is geographically well-located to live in it. Renting the home to generate income which they can split among them is a viable option.
- Buyout: If one sibling wishes to keep the home and the other siblings do not, the sibling who wants the home can offer to buy out their other siblings’ interests in the property. In this case, the sibling who wants to buy the home may not be able to afford buying out their siblings’ shares. They could, however, arrange to do so through a private agreement to make payments with or without interest over time on the property. They could also take out a mortgage on the property.
Sometimes There’s No Sibling Resolution
Still, sometimes none or some of the siblings are not ready to compromise. The real nail in the coffin is when one of the siblings thinks they’re getting the short end of the stick—or their own spouse who is not a bloodline family member starts sharing poisonous ideas—and this sibling begins to make waves.
If all else fails and an agreement cannot be reached, the siblings may have to involve the court in order to force the sale of the property and terminate their co-ownership. In this case, heirs who want to sell the home file suit to force its sale against the wishes of those who want to keep it. An impasse like this is called a partition action and can be devastating to a family.
Some Prudent Counsel
There’s no denying the fact that estate planning in which parents and adult children speak openly about their plans, finances, and other important issues that could become factors is essential. Rules of thumb surrounding these talks include:
- Refrain from dividing an indivisible asset to bring siblings together. It’s been shown time and again that it won’t work. Instead, find a way to make up the difference with money or other assets.
- Encourage siblings to reconcile their differences and urge them to forgive before it’s too late and becomes an untenable situation.
- Communication, transparency, and fairness are paramount. Be as equitable as you possibly can. If not, you are asking for trouble not only for your sons and daughters but also for your grandchildren.
At Phelan, Frantz, Ohlig & Wegbreit, we can help you facilitate these important conversations and provide you with the thoughtful guidance on sensitive issues. This will help your heirs avoid acrimonious situations when you are gone.
Call us at 908.232.2344 to get your estate planning underway or to review it. Planning today will ensure a brighter future for your loved ones tomorrow.
How Much Can You Control Your Kids’ Lives from the Grave?
You want the best for your children, and you want them to inherit your assets when you die. But what happens when you don’t like your son- or-daughter-in-law? How can you prevent your kids’ inheritance money from being commingled with the couple’s marital assets? Can you still exert control from the grave? Should you?
In short, you can, by establishing a trust that prevents assets from passing directly to your child, which prevents the commingling of assets. And in the event one of your kids gets divorced, this trust may preserve these assets from being considered available for alimony obligations. Such a trust is designed to keep money in the family, protecting the inheritance of your children and their descendants. Specifically, assets in the trust can only be used for your children’s or grandchildren’s health, education, maintenance, or support.
Evaluate Your Motives
You may actually be surprised at the number of people who sit in our conference room and want to block their in-laws from touching the family inheritance. The first thing we do is encourage them to evaluate their motives. Is your distrust of a son-or-daughter-in-law based on your knowledge that your son or daughter’s spouse is a spendthrift, gambles, has difficulty holding a job, or treats your child and their children abusively, or similar scenarios? In this case, a trust like this can work to safeguard your assets for your children.
But if your motives are based solely on your dislike, or a fear that your kids’ marriages will end in divorce like 50 percent of all marriages in the U.S. do, you may want to think twice. The logistics governing the administration of the trust can get thorny. For starters, best practice encourages appointing an independent Trustee to administer this trust. The result is that your children’s withdrawal rights may also be limited.
In the Name of Love
If there’s income your kids are entitled to get every year or a draw on principal, the trust requires that they must ask the Trustee’s permission for the money to be distributed. Bottom line, while you’ve created a buffer that prevents your in-law from getting to the money, you’re also making it difficult for your son or daughter to access their inheritance. Even though you’re doing this in the name of love, your kids have to penetrate this barrier you created by going to the Trustee to get monies.
And aside from the inconvenience, what does that mean for your kids? How are they going to feel about that? How will they ultimately feel about you? You may not like your son or daughter in law, but your son or daughter may adore them. And despite what you think, they might have a very good marriage. Your feelings could actually throw a monkey wrench or certainly elements of mistrust into a good marriage. Additionally, even if your kids have to ask permission to get the money, distributions made by the Trustee may well be commingled anyway. So, you can never fully control the way your inheritance money is used. You can only make it harder.
Discuss Inheritance Decisions With Your Attorney
At the end of the day, you may not be the best one to decide whether or not inheritance money should be commingled with your kids’ marital moneys. Every situation is different. When you work with one of our attorneys at Phelan, Frantz, Ohlig, and Wegbreit, LLC, you can rest assured we will make sure you evaluate all the ramifications of your decision-making before you finalize your estate plan. We will also make sure you review your plan every 5 years or so, to make sure that it’s consistent with your perspective and the inevitable changes in your family situation.
Calls us at 908-232-2244 to ensure that the decisions you make today will work well for your loved ones tomorrow.
What to Do With Your Cherished Home When You Die: It’s Not as Easy as You Think
The reality is that leaving your house to your kids when you die is not always what your heirs want you to do with it. Trust us. All you have to do is ask your kids.
If you’re like most clients, you come to our firm to talk estate planning, and your focus is typically your Will or Trust, your retirement plan beneficiaries, and the tax strategies that will allow your kids to get the most out of their inheritance. All too often a discussion about what will happen to your house—even your vacation house at the Jersey shore—gets left by the wayside. There’s a good chance your emotions run deep and that you have an intense attachment to your family home. Your assumption, therefore, is that your kids have the same connection to the house that you do.
Please think again. The two operative words here are emotions and assumption. Your home surely holds wonderful, rich memories. It is likely also your single largest holding and in today’s housing market, that may very well constitute a good amount of money and a substantial investment. Word to the wise. Emotion doesn’t work with decisions that are innately investments.
As for your assumptions…you’re first assumption is that everyone gets along. But if your kids argue now about who ate the frosted flakes, how are they going to get along when the stakes are higher? Suddenly they’ll be faced with decisions about upkeep and maintenance or renting the shore house. Decisions like that can fracture families.
As importantly, your assumptions don’t take into account the natural progression of family events. You’ve cut the apron strings and enabled your kids to chart their own course and flourish. A house may be an encumbrance that undercuts your children’s vision of their future. Keeping the family home, then, may end up being a curse rather than a blessing.
Examine your feelings
There’s no question that the emotional attachment you have to your house is understandable. You’ve created memories there. Your vision is to make it part of your legacy. You want your kids to have the opportunity to live there…to have their kids go to their school. Or, if it’s your shore house, you want them to enjoy memorable summer days together and then pass the house on to your grands, so that it will stay in the family forever.
As warming as that idea is, it has the potential of becoming an at all costs proposition: It doesn’t really account for life changes that your children or grandchildren may have one day. What if work takes them all over the country even around the globe? Plus, as they create their own families, the circle widens. It can even and likely will include in-laws. Before you know it, you have 15 people who can’t get along managing a house together. There are added risks such as divorce or, even worse, death. In in lieu of family harmony you may end up with in-fighting and discord.
It’s important to understand that emotion and assumption can take you down a rocky road when you’re making decisions today that will impact your children long-term. Even though it may be difficult, try to step out of the emotion and think more pragmatically. Discuss the idea of leaving a house to your kids with your estate planning attorney. She can illustrate some worst-case scenarios that, guaranteed, are far different than the vision of the ongoing family unity you see in your mind’s eye. You may not want to hear what your attorney has to say, but the dose of reality can help you give up emotion for more pragmatic thinking.
Have those important family conversations
Estate planning isn’t, after all, one sided. This is especially true when leaving a house to your kids and all the responsibility that comes with it. Just as you discuss financial matters such as who in the family will be your Power of Attorney or Healthcare Proxy, have a frank discussion about whether they can envision themselves living or vacationing in that house. Make them understand that you want and need them to be forthright. Steel yourself against potential disappointment and be willing to let go of the motivation to have them inherit the house. Without some outside-the-box thinking on your part, it could end up as an inheritance at any and all costs. Their honesty now about the vision they have for their lives going forward may initially sting, but it’s a good preventive for problems in the future.
Create happiness. Prevent messes
Sometimes we are unable to convince clients that leaving a house to their kids may not be prudent. In these instances, creating a Will or Trust that provides a degree of flexibility for a potential sale or buyout is a viable second option. On the one hand, the parent’s hopes and intentions are honored. On the other, their kids, grandkids, even nieces or nephews who may be beneficiaries can take comfort in knowing they have an out—have the ability to make decisions that will work for them—if sharing the family home or even managing it alone does not come together smoothly.
Flexible documents include language that delineates how to get somebody out of the property if the situation doesn’t work and how to unwind the inheritance by selling the property. The language of these documents:
- Allows for someone to be bought out outright
- Sets forth wording that eliminates the need for decisions to be unanimous
- Identifies sale triggers (e.g., one individual can’t pay their proportionate share of expenses)
A dollar versus fair market value
So, is the buyout for a dollar or is it to real market value? That’s a question that can and does come up. The answer to that question is unequivocally always fair market value. Anything different or less, and it’s a gift that could subsequently interfere with their estate planning and how they distribute their assets to their loved ones. It comes down to the fact is that if they have an ownership interest in the house anything drastically short of fair market value is gifting. That’s a massive issue, especially right now with the proposals in Congress that could significantly bring about estate tax reform.
One last salve
There are plenty of situations in which the moment the Will is read, one of the kids says they clearly have no interest in the property. In this situation, as long as all the beneficiaries agree, the law will allow for there to be a distribution in lieu of the house. This means that the sibling who doesn’t want the property gets other assets from the estate and the other two siblings get the house. In other words, a clause can be written into the document that gives flexibility to the final distribution. And again, that distribution must be made in alignment with fair market value of the property at the time of distribution.
Rational decisions are key at any juncture
The image of your children having a “What was my dad thinking?!” reaction to your Will is far from pleasant. Being well-thought out from the get-go is one way to avoid it.
Discuss these matters with your family and your estate attorney as you develop your estate plan. Make certain reason trumps pure emotion. Work with your estate attorney to include flexible language. These actions are among the ways to steer clear of the mess of family discord.
At Phelan, Frantz, Ohlig, & Wegbreit, LLC, we know how much your loved ones matter to you. They matter to us, too.
Call us at 908-232-2244 and cover all the bases to ensure your legacy will bond your family, not divide it.
If Capital Gains & Proposed Tax Law Change Could Boost Your Tax Bill a Charitable Trust Could Help
While it’s great to see significant growth in your stock portfolio and the appreciation of your investments is gratifying, the capital gains can cause you problems at tax time. Couple that with proposed estate tax changes coming out of the Biden administration and your heirs could be handed a hefty bill when they inherit your estate.
Proposed Tax Law Changes Amounts You Can Pass Tax Free to Heirs
At Phelan, Frantz, Ohlig & Wegbreit, LLC, we can provide you with tools to reduce your estate’s tax burden and gifting strategies that can help minimize your tax bill. The Biden administration, however, has proposed estate tax reform which includes removal of the stepped-up basis. These proposed reforms could potentially increase the tax burden to your estate. That’s why in the current political climate it’s more important than ever to put your head together with your financial advisor, your accountant, and your estate attorney to do some strategic estate planning. Creating an estate plan is your opportunity to provide for your loved ones. The thoughtful time you spend will not only benefit your heirs but also benefit you during your lifetime especially when it comes to estate taxes.
Reduce Your Taxable Estate With an Income Stream to Someone You Love
The good news is that a charitable remainder trust (CRT) may be an option to circumvent changes that may be ahead to significantly reduce the amount of money an individual can gift tax-free during their lifetime and at death. In fact, the primary benefit of a CRT, allows you to reduce your taxable estate while providing an income stream to someone you love.
A CRT is a trust that is funded by an individual during their life. In addition to donating funds to a charitable organization, the CRT makes distribution to a noncharitable beneficiary, which can include the donor or another beneficiary, such as a spouse or child, for a prescribed number of years. A CRT can also offer an opportunity to move assets with a low basis (and corresponding high capital gain).
This is a particularly palatable option if you are charitably inclined and understand that your estate plan serves as a testament to who you are, the values you hold, and the legacy you want. Plus, it addresses the federal estate tax exclusion change currently on the table by limiting or eliminating the amount that will be subject to estate tax upon your death. As attractive, it also can eliminate capital gains on appreciated property, reducing income tax liability during the years of your life when you likely need it most.
Income Stream a Real Plus
Here’s how it works. The CRT makes a distribution to a noncharitable beneficiary for a fixed number of years or for the rest of their life. This means that you can give yourself or another individual an income stream of either a fixed dollar amount per year or a fixed percentage based on the value of the assets transferred to the trust. At the conclusion of the designated term, the assets that remain in the trust will be paid to the charity you have selected. In the year you create the trust and initiate the asset transfer and for the predetermined period thereafter, you will receive a charitable deduction on your income tax return. The deduction will be based on the value of the transfer, the number of years of the trust, the payout rate, and the number of beneficiaries.
Although there has been no proposal put forth to eliminate the tax benefits of utilizing a properly structured CRT, Biden’s proposed plan would impose a 28 percent limit on charitable deductions for taxpayers making over $400,0000 per year in income. This compares to the current environment in which a high-income earner can make a $100,000 charitable gift and write off $37,000 (the highest marginal tax rate). But under Biden’s plan, the same charitable gift would be limited to a $28,000 income tax write-off, with 28 percent being the proposed limit for deductions for charitable giving for those in a higher income tax bracket. Despite this reduction in the write-off limit, however, there is still substantial savings on your income tax. Your accountant and attorney will work together to maximize the amount of charitable deduction you will be able to take on your income tax return.
Heart Centered and Money Wise
At the end of the day, by making this transfer, you have simultaneously maximized the philanthropic benefit of a charitable gift while avoiding the payment of capital gains tax on your highly appreciated assets. You have also subsequently reduced the value of your estate for your heirs which is an important consideration in light of the potential tax changes on the horizon. As importantly, you have not given up the benefit you received from the underlying asset, as you have converted it into an income stream for a period of time.
There is a long road between proposed revisions to the tax law and their enactment. But even in the current environment, capital gains on low basis assets may still be an issue that can cause you significant taxation. At Phelan, Frantz, Ohlig & Wegbreit, LLC, we have always been available to guide you on approaches that can enable you to make investment decisions that will minimize taxation for you during your lifetime as well as for your loved ones when they inherit your estate. In light of the current political environment, there is no better time to work with your accountant, your financial advisor, and your estate attorney to review your estate plan as well as gifting strategies.
Call us at (908) 232-2244 to understand the benefits of charitable giving. Learn how it can be incorporated into a well-designed estate plan that will benefit not only your heirs upon your death but also put your assets to work for you during your lifetime.
USING A REVOCABLE TRUST TO PASS ON REAL ESTATE TO YOUR CHILDREN
Act Now to Prevent the Future Hassles of Out-of-State Probate
The concern is a common one: “I want to make it simple for my kids,” say aging parents of adult children. “I don’t want them to experience stress when the time comes to settle my estate.”
Estate attorneys have solutions to honor these wishes. These solutions are, in fact, quite simple to execute, provided they’re completed as part of your estate planning. Failing to attend to these matters during your lifetime may mean you are bequeathing not only an inheritance to your children, but also a probate nightmare, particularly if you own property in more than one state.
Jumping Through the Hoops of Probate in Several States
Many of our clients have a primary residence in New Jersey and own vacation homes or rental properties in other states such as Pennsylvania, Florida, or New York. If the goal is to pass these properties on to future generations in the simplest way possible, the focus should be on ways to avoid probate in more than one state.
States are possessive of real property located within their borders. Accordingly, the appointment of an executor in New Jersey is of little consequence outside of New Jersey. When it comes to the transfer of real property inside their state, individual states reserve the right to make their own determination as to who should be appointed pursuant to their state’s unique rules. And while New Jersey has a relatively straightforward probate process, other states do not. Going through probate in states like Florida and New York, for example, takes considerable time and money. Thus, effective estate planning that for individuals who own multiple properties often requires the implementation of a plan that helps families avoid having to institute probate actions in multiple states.
Transferring Property Into a Revocable Trust: Smart Estate Planning and Flexibility
There are various estate planning tools that can provide you with peace of mind knowing that your assets will be transferred seamlessly to your heirs. One such tool, a revocable trust, also known as a living trust, has multiple features that can benefit you during your lifetime and your heirs when it comes time to settle your estate. A revocable trust provides a prearranged mechanism that will ensure the continued management and preservation of your assets, should you become disabled. It can also set forth all of the dispositive provisions of your estate plan and detail how you want your assets to be disbursed. In addition, a trust protects your privacy and the privacy of your beneficiaries because unlike a Last Will and Testament, which is a publicly available document once probated, a trust is available only to the impacted beneficiaries.
Finally, transferring your various properties into a revocable trust will help your family avoid the nightmare of multiple probate actions and the corresponding costs of different lawyers in different states. Because you are the trustee of your living trust, you still have full authority with respect to how the property is used and managed during your lifetime and all income tax consequences are reported on your personal income tax return.
The creators or “grantors” of the trust, which can be either a single individual or a couple, can establish the terms that will dictate what happens to assets held in trust upon their death. To this end, successor trustees also are named by the trust, which ensures that the grantors’ designated agents have automatic authority to sell, transfer, and manage the property upon the grantors’ death without the need to seek court appointment. In short, when properties are owned or held by the trust, there is no need to probate a Will, whether the property is held in New Jersey or another state.
Further, revocable trusts offer a degree of flexibility. For instance, if you become incapacitated or ill during your lifetime, the successor trustee can step up to assist and run things, offering a seamless transition. In addition, other assets, such as bank or brokerage accounts, can be retitled into the trust. Many financial institutions prefer to manage assets held in this manner as it allows them to respond quicker in emergent situations and serve clients more nimbly than they would be able to if they had to wait for the production of a power of attorney or a court appointed guardian to provide instructions.
Additional Considerations for Rental Properties: Limited Liability Companies
We frequently counsel clients who have rental properties to place such property into a limited liability company (LLC). Property ownership, especially ownership of rental property, comes with the risk of liability from injuries that take place while on the property, leaving you and your assets vulnerable to claims and/or exposing you and your assets to the risk of lawsuits. If your property is held in an LLC, and it is the only asset in the LLC, your liability is limited to that property, and your other assets are shielded from judgment if the formality of the LLC is honored and assets are kept separate.
Holding properties in trust and an LLC are not mutually exclusive planning techniques. Instead, the property can be placed in an LLC for liability reasons and the revocable trust established for estate planning purposes can serve as the sole member of the LLC. In other words, the trustees hold the LLC and the LLC holds the property. Although the structure is akin to the Russian stacking dolls, it makes sense for a multitude of reasons.
In either case, the trust assets, in this case the property, can easily pass on to your heirs. The trust itself may also continue with the trust assets managed and payments continued to the trust’s beneficiaries. What’s more, if your heirs decide to sell the property, they can do so easily and earn and retain money for that sale.
Life Happens: Realtime Action to Prevent Future Hassles
It’s important to remember that taking action now will prevent issues from complicating your children’s lives in the future. At Phelan, Frantz, Ohlig & Wegbreit, we are here to help you pass your property on to your beneficiaries easily and cost-effectively.
Call us at (908) 232-2244 to develop an estate plan that will give you the peace of mind you need today, knowing your heirs will be well-protected tomorrow.
To Transfer or Not: Should You Deed Your House to Your Adult Children?
Thorough Research, Careful Evaluation and Attorney Consult Can Help You Decide
“Should aging parents transfer their home to their adult children?” You’ve probably heard others, perhaps even your friends, ask this question. This is a topic that also frequently makes the news.
The answer: There is no one “right” answer. No easy answer.
The best guidance is to diligently do your homework and consult your estate attorney. Research the pros and cons of a house transfer from a parent to an adult child. Then, determine how the implications of the transfer will apply to your particular family situation. It’s only then that you’ll be positioned to make a decision that works for you and your family.
Preserving assets: a top priority
The most important consideration is to preserve assets. A house is typically your largest asset, especially if your mortgage is fully or significantly paid off. It is, therefore, undesirable to put a drain on any of your assets while you are alive but in need of the long-term care that can bankrupt you financially or force you to sell your house. In these situations, people often wish to seek relief by turning to Medicaid, the joint federal and state program that helps people with limited income and few assets cover health care costs.
Puzzling over Medicaid and some misconceptions
People often think they are ineligible for Medicaid coverage of nursing home costs and doctor’s bills simply because they own property or have some money in the bank. They believe that getting their home out of their own name will enable them to receive the benefit more easily and often use it as a go-to strategy. The reality is, however, that the transfer of assets can have wide-ranging impacts which, in the end, can impact your ability to be considered eligible for Medicaid. What’s required is understanding the rules and making a legal and financial plan, typically with legal and financial professions, to ensure they are met.
Medicaid eligibility requires that an individual’s combined assets be less than $2,000 in order to receive help with payment for care. In certain situations, your home is not considered a countable asset for Medicaid eligibility purposes, especially if you, your spouse, or a dependent relative continues to reside in the property.
Medicaid’s five-year lookback period is perhaps the largest factor that must be considered. Any gifts or uncompensated transfers that have been made in the five years immediately prior to the Medicaid application will result in a penalty period and delay eligibility for months, even permanently. Therefore, an ill-timed transfer could penalize an individual rather than enhance eligibility.
Still, there are circumstances in which it is legal to transfer a house, but these circumstances often come with a double-edged sword. You may freely transfer your home without incurring a transfer penalty to:
- Your spouse
- Your under 21-year-old-child who is blind or disabled
- Your caretaker child who has lived in the house for two years prior to your entering an acute or long-term care facility can also be the legal recipient of a transfer, as long as that child provided care to you during that two-year period.
That being said, Medicaid can put a lien on your house for the amount of money spent on your care. Similarly, if the house is sold while you are still alive, you will likely have to satisfy the lien by paying back the state. There is also an option called estate recovery which under certain conditions allows the government to recover the cost of your care from your estate.The appropriateness of a decision to transfer one’s home for Medicaid purposes is one with which many seniors and families struggle. More often than not, it’s a choice dependent on an individual’s unique circumstances and the real-time monetary values involved in a situation.
For example, a typical scenario which could favor moving the home out of a couples’ name may involve a 70-year-old couple, say, a healthy wife and a husband suffering with Alzheimer’s. The cost of the husband’s long-term care may be exorbitant and the wife will need money to live on herself. And there is always the desire to leave a financial legacy of their hard-earned money for their kids and grandchildren.
Avoiding a hefty tax bill with a Will or Trust
Taxation is another reason you may give thought to transferring your home to your adult children. In lieu of simply handing over the deed to your son or daughter, there are other ways to transfer your home out of your name. The fact is that gifting your home can involve a hefty bill that taxes your son or daughter on the capital gains derived from your home’s increased market value.
Say you bought your home 50 years ago for $25,000, and now it’s worth half a million dollars. That $475,000 increase comes with a huge tax hit for your kids on the capital gains earned between the purchase price and the current market price. That tax could be avoided if they inherit the property after you die. In the latter scenario, your kids will receive what’s called a step-up basis equal to the value of the house at the time they inherited it rather than the value of the house at the time you purchased it.
People are also skittish about probate and sometimes rush to judgement and transfer their home willy-nilly to their kids. In reality, in most states—New Jersey among them—probate is nothing to fear. In fact, most states even have simplified probate procedures for smaller estates. If you are really worried about probate, you can also establish a living or revocable trust to avoid probate—not estate taxation—but this may not really be necessary depending on the cost and complexity of probate in your estate.
Probate is quite expensive and time-consuming in only a few states, such as California and Florida. In those states, as well as in the situation in which you own homes in more than one state, you may want to work with your estate attorney to develop strategies for wealth transfer. In general, however, many individuals perceive probate as something much more daunting than it actually is.
Trusting your kids: a must
One of the most important considerations for you when reflecting on how to treat your home centers on the conversations you have with your children about your intentions regarding your assets. If your objective is to keep the house in the family, it’s essential that you trust that your adult children are aligned with that value especially while you are alive.
This goal is often compromised when adult children live out of state and feel increasingly detached from the home in which they were raised. They could also be facing their own, sometimes extreme, financial difficulties which could subject your home to liens and/or require your adult child to sell your house to satisfy his or her creditors.
Then, too, if your child divorces, your house could be considered an asset to be divided or dealt with as part of the property agreement with his or her former spouse. Finally, there are health situations in which a transfer could work to your adult child’s disadvantage. Your grandchild, for example, could become disabled and require Medicaid or other government benefits. The fact that your adult child owns your house could prevent your grandchild from qualifying for those benefits.
At Phelan, Frantz, Ohlig and Wegbreit, LLC, we are here to help you navigate these challenging conversations and decisions so that you can better evaluate your options and determine the best way to preserve your assets, among them your home. We will help you gain clarity around your unique family situation and will work tirelessly to guide you to effective strategies that will best serve your wishes and the future needs of your family.
Call us at 908.232.2244 to schedule an appointment and ensure that the legacy you leave to your loved ones fulfills your every intention and keeps the best interests of you and your family top of mind.
8 STEPS TO CREATING YOUR ESTATE PLAN IN THE NEW YEAR
Procrastination is often the biggest enemy of estate planning!
We’ve all heard stories like this: A couple is about to head out on a prolonged business/pleasure trip involving considerable air travel. Panic sets in five days before their departure when it dawns on them that they don’t have Wills. Though immediate outreach to their attorney may enable them to get documents drafted and executed before they leave, this scenario is hardly ideal. Harried or rushed actions can result in improper or faulty planning, which in turn may lead to family misunderstandings and disputes, assets going into the wrong hands, court cases, and the corresponding expense in legal fees and/or taxes.
As the saying goes, there’s no time like the present, even when planning for events likely to occur in the distant future. The New Year is the perfect time to get started or review a plan you already have to make sure it is on track.
Wherever you are in your estate planning process, our eight-point New Year’s checklist will help you get off on the right foot.
1. Make an appointment with an experienced estate planning attorney
There’s no better way to get the wheels turning than to sit down with an attorney experienced in estate planning. In this initial visit, your attorney will familiarize you with all the issues you must consider.
Estate planning is serious business and far more than a last-minute scramble to execute a Will. Its goal is to ensure the seamless transfer of assets to your heirs. It also safeguards your assets and the care you receive during times of critical illness if and when you cannot advocate for yourself. Estate planning takes considerable thought, important family conversations and the painstaking development of a plan geared to your unique family situation.
2. Take inventory
Assimilating information on your assets, tangible and intangible, is critical. This means listing what they are and how they are held. Some of these assets will pass to your survivors under your Will, others will pass to beneficiaries outside of your Will.
Tangible Assets include Real Property, land and whatever is built on it, typically your house, and Personal Property, which includes your physical possessions: jewelry, art and antiques and other collectibles; television sets, computers and other electronics. These will be just some of the items on the list.
Intangible assets include the things you own on paper: bank accounts, stocks, bonds, insurance policies, and retirement accounts (IRA’s). Items like bank accounts and stocks and bonds in a brokerage account likely will pass through your Will or to a joint account holder. Items like your insurance policy, IRA or 401(k) already have named beneficiaries and will pass to your survivors outside of your Will regardless of what your Will dictates. Reviewing these distinctions is a KEY piece of crafting an appropriate estate plan.
3. Get organized
Getting organized is another vital step. It requires that you create a spreadsheet that itemizes all of the above items, again both tangible and intangible. Make copies of deeds and mortgage documents related to real estate, make copies and place originals and copies in a safe place. Ideally, your estate attorney will retain the original and a trusted designee named in a legal document will securely retain the other.
All documents should be recorded on a spreadsheet which accurately identifies the institution or institutions in which an asset is held and account numbers and passwords to the accounts, and contact information for the representative in the institution who handles your account. It is imperative that your estate attorney and the designated fiduciaries have copies of these spreadsheets or knows where to find them.
If you have a safety deposit box that holds important documents or information, make certain your attorney and survivors know the box number and in which bank the box is located. It is advisable to provide your attorney and your designees an extra key.
Note: Once you and your attorney have actually developed a plan, you will have created a Will, Durable Power of Attorney, Living Will and Advanced (Healthcare) Directive, essential documents which may be held in your safety deposit box and/or with your attorney as well as with other fiduciaries and designees.
4. Designate Fiduciaries (Financial), Healthcare Proxy and Create the Necessary Documents
Fiduciary roles refer to any person or institution that has the power to act on your behalf in situations in which you are no longer capable of acting or advocating for yourself and following your death. Plus, any adult can serve as your Healthcare Proxy. Fiduciaries can assume many roles in your estate, and, depending on a particular fiduciary designation, can act either before or after your death…or in both situations.
The law stipulates that your fiduciaries be legally competent individuals over 18 years of age and capable of managing their own affairs. But that’s where the requirements stop and where your careful thought and good judgement come in. Because these positions require the utmost honesty, loyalty and trustworthiness, the individuals you choose must be able to set aside their own personal inclinations and motivations to act in a manner consistent with your financial and health goals. Plus, if you have children who are minors, it is wise to appoint a guardian who will parent in a manner consistent with your parenting style and love your children as you would.
Each role requires a different skill set. To choose the most appropriate fiduciary, align the strengths and characteristics of the person you want to designate with the functions required for that position. It is also advisable to have an alternate or backup in case logistically there is a problem with the primary person being available when it’s time to serve.
Keep in mind also that you must reach out to the individuals whom you want to serve in these roles and ask/confirm that they are willing to assume the associated responsibilities. While being selected may be considered an honor, these positions take time, require work and, in many cases, require a stalwart mindset.
5. Draft your Will
A Will is one of the main, if not the primary, components of every estate plan, even if you don’t have substantial assets. Wills ensure property is distributed according to your wishes and drafted according to state laws. In it, you state who you want to inherit your property, name the person (the Executor) who is in charge of distributing your assets as instructed in the Will, and address the contingency of the simultaneous death of you and your spouse, name a guardian to care for your young children.
Simply having a Will isn’t enough, though. The proper wording of the document is critically important, which is why it is highly recommended that you work with an estate attorney when executing this document. Sometimes, when individuals try to do this themselves with one of the Do It Yourself apps, they overlook important considerations or fail to comply with laws in their state. This can cause probate problems that may require your heirs to spend time and money attempting to rectify misstatements, omissions and other mistakes
6. Consider a Trust
A trust is legal entity that allows a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries. Trusts can be arranged in many ways and can specify exactly how and when your assets pass to your heirs.
Trusts typically avoid probate, so your beneficiaries may gain access to these assets more quickly than they might to assets that are transferred through a Will. And, because assets that you’ve held in a trust may be able to pass outside of probate, this saves your heirs time, court fees, and potentially reduces estate taxes as well. An irrevocable trust, for example, may not be considered part of your taxable estate, so fewer taxes may be due upon your death.
You can specify the terms of a Trust down to the letter, controlling when and to whom distributions may be made. What’s more, if you set up a revocable trust, the Trust assets remain accessible to you during your lifetime; you designate to whom the remaining assets will pass, even when there are complex situations such as children from more than one marriage.
A properly constructed Trust can also help protect your estate from your heirs’ creditors, future ex-spouses, or from beneficiaries who may not be adept at managing money. Again, working with an experienced estate attorney will ensure you set up a Trust with the best governance for your unique situation.
7. Make a Living Will
A Living Will, also called an Advanced Directive, is a written statement that details the type of care you want or don’t want if you become incapacitated. A Living Will bears no relation to your conventional Will or Living Trust used to bequest property upon your death. It’s strictly a document that spells out your health care preferences and addresses a number of possible end- of-life care decisions and whether you want or do not want them. While you may indicate you do not want heroic measures, you must define heroic and answer questions regarding whether you want:
- Mechanical Ventilation – A respirator can take over your breathing if you are unable to breathe on your own.
- CPR – Cardiopulmonary resuscitation can restart the heart.
- Nutrition and Hydration – Tube feeding can supply the body with nutrients and fluids.
- Palliative Care – Narcotics and other interventions can keep you comfortable; this issue also addresses your wish to avoid invasive tests or treatments.
- Antibiotics or Antiviral Medications – These can be used to treat many infections. If you were near the end of life, would you want infections to be treated aggressively or have them run their course.
Creating your Living Will requires you to think about your values as well as your wishes: Questions like how important it is to you to be independent and self-sufficient? What circumstances might make you feel like your life is not worth living? Would you want treatment to extend your life in any or all situations, or only if a cure seems possible?
Also, beyond treatments during illness, you can specify your wishes to donate your organs and tissues or donating your body to scientific study.
8. Draft a Power of Attorney
A Power of Attorney (POA) is a very important estate planning tool which allows a person you appoint—your Attorney-in-Fact or Agent—to act in your stead in financial and legal matters.
A POA grants broad authority to your agent to sign documents, pay bills, and conduct financial transactions on your behalf. In other words, your agent will be authorized to handle “the business” of your life.
The Bottom Line
As is evident from the above considerations, there is more to estate planning than deciding how to divvy up your assets and provide for your loved ones and other beneficiaries when you die. Estate planning also ensures that the right individuals have access to your assets upon your temporary or permanent incapacity so that your affairs can be handled appropriately and the care you receive will ensure the dignity and quality of life you deserve and desire.
While estate planning may seem like a bleak and uncomfortable task for the start of a new year, it is a necessary one to address. You can adjust your mindset to think of your estate planning in a positive light. Just consider: Thorough preparation now will give your family peace and comfort and a stress-free probate process at some future time when your family will be dealing with emotions of loss and sadness.
When you think of estate planning in this way, you will likely come to realize that planning today is a gift you are giving your loved ones for some time in the future. And giving a meaningful gift to your loved ones…there’s no better way to start a new year!
At Phelan, Frantz, Ohlig & Wegbreit, LLC, we take our responsibility to provide families with conscientious estate planning very seriously…in the new year and beyond. Please enjoy the year ahead and contact us if we can be of assistance to you in developing and/or reviewing the appropriate estate plan for your family.
WHEN IT COMES TO YOUR ESTATE PLAN, DIY JUST WON’T DO
The do-it-yourself mentality has become an integral part of many areas that inform our lives. Thanks to the Internet and even YouTube, consumers now have all the tools and how-to’s they need to create anything from simple arts and craft gifts, to more upscale inspirations like DIY fashion, printed merchandise or any number of home remodeling projects. This DIY mentality has even expanded to the potentially intricate, increasingly personal and definitely legal task of estate planning and the execution of your Will. Most often undertaken to save money, even the “simplest” DIY Wills may contain pitfalls that end up costing families large amounts of grief or money.
Seen it all
Mixing online programs like LegalZoom, Rocket Lawyer and Quicken WillMaker Plus to lay down the groundwork that will protect and provide for loved ones after you’re gone in the hopes of saving time and money in the here and now can be a recipe for disaster. Most trust and estate lawyers likely will tell you that choosing these options for estate planning documents may be a real disservice to your heirs.
Estate lawyers should know. They’ve seen it all when it’s come to unraveling the intended bequests of DIY Wills that were erroneously drafted. When a person has passed there’s literally no resource available to clarify his or her intent. Some people will tell you a DIY Will is better than no Will at all. But a bad DIY Will inappropriately and incompletely done does NOT trump no Will status. If you shortchange the process on the front end, there can be significant legal costs incurred after death either due to errors in the execution of the Will or lack of clarity about dispositive wishes.
False sense of security
In fact, DIY estate planning may give benefactors a false sense of security even if you have only modest assets and plan to draft the “simplest of wills”—a term with which legal professionals take issue. There is no such thing as a “simple will.” First, every individual’s circumstances are unique with particular family complexities that impact to whom and how assets should pass. Second, there are so many assets that pass outside an estate such as insurance policies, 401(k)’s and IRA’s to name a few that there must be careful coordination between probate (the Will) and non-probate or beneficiary assets. It’s imperative that you have a full understanding of what will happen with your assets when you die—which is why a conversation with a lawyer is critical.
With DIY sites, there’s limited, if any, professional guidance. Some sites do provide some attorney assistance, but you don’t get to choose the person with whom you’re working or have any sense of their background with trusts and estate law. For a sensitive subject like the financial protection of your loved ones, the client experience matters and so does interaction with a professional who knows you and understands your family situation.
You don’t know what you don’t know
The lack of appropriate guidance can lead to ignorance, which is a real deficit to DIY planning. Choosing a DIY option for your estate planning is like looking for cures to your ailments on WebMD—most individuals have no real idea what they need when it comes to protecting themselves and their loved ones. For example, every state has unique rules, particularly when it comes to estate/inheritance or “death” taxes. None of this is contemplated in a DIY will. Some sites may not offer the right tools for state-to-state differentiation. Others may offer graded packages and you may inadvertently or for cost reasons choose the wrong one.
Then, too, DIY sites do not lend themselves to the intricacies and/or depth of complex family and financial situations such as blended families, stepchildren and the like.
Plus, a host of other issues can unknowingly arise when upon death, your Will is passed on to the surrogate or probate court. The surrogate court oversees matters of probate, the administration of estates and the process of distributing the decedent’s assets to the proper beneficiaries. To name some of the most common problems that can arise with DIY Wills at this time:
- A lack of proper witnessing or notarization when signing your Will to make it legal
- The chance that you will make innocent errors and therefore provide contradictory instruction involving your bequests
- Poor, if any, coordination between probate and non-probate or beneficiary designated assets
Where’s the Will?
Another wrinkle that occurs with DIY Wills is when the individuals who take on the responsibility of executing their own Wills forget or simply don’t let anyone know where their Will is located. If the original Will can’t be located, it’s as good as dying without a Will.
It’s also important to remember that your Will is a living, breathing document. This means it must be reviewed regularly and revised with changing life situations like marriage, childbirth, inheritance, etc. Choosing the DIY route to estate planning just may make an individual less aware or inclined to make regular reviews and subsequent revisions.
Covering All the Bases
But when you work with an estate attorney, you have an accountability partner who can help you stay on top of these very important matters—from the sometimes uneasy but serious and important planning process, to choosing the right fiduciaries, to reviewing your Will at least at five-year intervals, down to keeping the original document in safekeeping. Then, when the inevitable time comes for your loved ones to inherit and carry on your legacy, everything will be in order.
When it comes to providing for the precious people in your life, you will surely want nothing less than that.
At Phelan, Frantz & Ohlig, LLC, we take our responsibility to provide families with conscientious estate planning very seriously. Please contact us if we can be of assistance to you in developing the appropriate estate plan for your family.