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.
Finding Out What Family Really Means… Adult Adoption May Just Be the Answer
We thought it was time to write a feel-good story about estate planning which admittedly can be a mixed bag activity. On the one hand, creating a plan gives you comfort knowing that your loved ones will be taken care of when you’re gone. On the flip side, however, it requires that you contemplate your demise, which can make even the most matter of fact of us squirm.
An upcoming adoption hearing brought to mind some of the most heartwarming cases we’ve handled. These are not stories of orphans or babies being given a new home and a family by loving adults. Rather, these are adult adoptions. According to Chuck Johnson, president and CEO of the National Council for Adoption, adult adoption seems to be on the rise in the United States. Admittedly, these most unique adoptions are those that legally unite adults who may have never shared a home or appear as babies together with their parents in the family photo album. These are later in life relationships that enable adoptees to unite with new parents and formalize a chosen familial relationship.
Why Would An Adult Want to Be Adopted?
Why would any adult want to be adopted? According to Johnson, the most common situations are stepparent and foster parent adoptions of adult children who have lost or are estranged from their biological parents. These new parents typically have played such meaningful roles in their adult children’s lives. Now the “kids” want to make the relationship legal so that together they can participate in milestone events like being walked down the aisle to the altar, sharing firsthand in the achievement of receiving an advanced degree, or being part of the family gathering welcoming a precious new grandchild into the world.
Therapists who specialize in adoption say that emotion seems to be at the heart of these new parent-child relationships. Adoption can provide stability, a feeling of permanence and belonging, and the gratitude of at last or again being able to experience unconditional parental love.
Many states allow adult adoptions, that is adoptions of people over the age of 18. Although state-to-state the requirements vary, generally the laws surrounding adult adoptions are much less restrictive than those governing the adoption of minor children. In New Jersey, for example, the law covering adult adoption says that the court shall allow a person or couple of full age to adopt an adult person if the court is satisfied that the adopting parent or parents are of “good moral character and of reputable standing in the community.” Also in New Jersey, the adopting parent or parents must be at least ten years older than the person being adopted. The law also states that the adoption must be to the “advantage and benefit” of the person being adopted.
Advantage and Benefit
It’s that last reference about advantage and benefit that may speak to the reason why adult adoptions in New Jersey may be even more prevalent than they are in other states: New Jersey is one of only a handful of states that have an inheritance tax, which imposes a tax on assets that pass to anyone other than a spouse or a child. Believe it or not, a story related to the New Jersey inheritance tax is one of our firm’s most touching adoption cases.
At the center of the story are an elderly couple who were both deaf. Our Partner Gretchan Ohlig handled the couple’s estate planning because she can communicate in American Sign Language and could effectively communicate with them. The husband and wife ultimately sought to adopt their neighbor, a woman with whom they had developed an incredibly close relationship over 25 years…so close that the woman was like a daughter to them and her daughter like a granddaughter.
They celebrated all holidays together and, when it came to their estate planning, they asked if she would be their Power of Attorney and Executor. She agreed and subsequently the couple decided to leave the neighbor all of their assets when they passed. We drafted the estate planning documents accordingly.
Adult Adoption. Why Not?
The husband and wife had no children or grandchildren and were in their late 80’s and 90’s respectively when they transitioned to an assisted living-skilled nursing home in the area. A couple of months before the husband passed away, we were talking about their estate plan. They were worried that when they were both gone, and everything went to the neighbor, she would have to pay 15%-16% to the State of New Jersey because she wasn’t related to them.
If we consider her to be our daughter, can we adopt her? they asked.
Yes, and why not! was Gretchan’s answer. If the biological parents are gone, which they were, and in the case of a married adult the spouse consents, which the spouse did, then the adoption can continue.
A Humane Reaction to a Tough Law
When we went to court, we were very upfront with the judge that the primary purpose was to avoid inheritance tax obligations. Still, we emphasized that this was especially important because the couple and the woman shared a parent-child relationship. The judge not only ruled in our favor but said she was “happy” to do it.
On an equally personal level, this long-ago adoption was the first adult adoption for Gretchan. Since then, Gretchan has overseen other adult adoptions that share a similar story.
“It was so obvious that my clients cared so much about this person and were so happy and relieved that that they could solidify this relationship,” says Gretchan.
At Phelan, Frantz, Ohlig & Wegbreit, we always listen intently to your unique situation and then work diligently to develop an estate plan that fulfills your wishes and your needs.
Call us at 908-232-2244 and we will work with you to take care of your heirs in ways that will make your heart sing.
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.
Pride Month: A Great Time for Same-Sex Couples to Seal Their Wishes With Estate Planning
Proper estate planning is daunting but necessary for anyone who wants to ensure that their wishes for end-of-life care and the disposition of their assets are carried out. It could be even more critical for LGBTQIA+ families. While laws and attitudes continue to evolve, limitations still exist in some areas. Estate planning is one of them. With June being LGBTQIA+ Pride Month, it’s a perfect time for you to turn your attention to estate planning and prevent the creation of important estate planning documents from slipping through the cracks.
Unless you are married or have an estate plan, your assets and any decision-making regarding end-of- life care will likely revert to your family of origin. Love them or not, that is almost certainly not what you want to happen. If you have no estate plan, every state provides default rules about who might be responsible for your care if you are incapacitated or to determine who would receive your assets when you die.
Marriage Key to Health Care Decision-Making
Many things have changed since the 2015 Obergefell v. Hodges Supreme Court decision that legalized same-sex marriage. Even so, many same-sex couples choose not to marry or to legally formalize their relationships. It also is unlikely these couples have taken the time to create a Will, a Durable Financial Power of Attorney, and an Advanced Health Care Directive or Health Care Proxy. This can have negative consequences, both in decision-making for end-of-life care and asset transfer and inheritance tax issues. These omissions can cause a lot of problems for a surviving partner.
An Advanced Health Care Directive is an important component to every individual’s estate planning. It enables you to appoint an individual of your choosing to make important health care decisions if you are ill or incapacitated and cannot advocate for yourself. If a married couple does not have a Health Care Proxy, your physician will likely defer to your spouse to make decisions about your care. That is not always the case with unmarried same-sex couples. While this is not solely a same-sex issue, it tends to come up more with same-sex partners.
Marriage Influences Survivor Asset Transfer
There’s also a secondary monetary issue. You can title a house deed for joint tenancy with rights of survivorship, and you can name anyone to be your beneficiary on a life insurance policy and in both cases facilitate a seamless transition. But that is not the case with other holdings. Laws vary from state-to-state, and New Jersey, for example, has an inheritance tax. While the inheritance tax does not apply to assets that go to a spouse, it does apply to anyone who’s not your spouse. You could be with someone for 50 years and never be legally married or set up a civil union. This means that everything that your partner would inherit from you will be taxed as much as 16 percent. That can end up being a lot of money.
If you’re not married or have legally formalized your relationship as a civil union, there’s no getting around the inheritance tax. Imagine what happens when your surviving partner takes monies out of your 401(k). Getting taxed on your 401(k) withdrawals is standard. But if you and your partner are not married, an extra 15 percent or 16 percent in tax will be tacked onto the withdrawal. Even having a Will won’t circumvent the issue.
The good news is that same-sex couples who marry can enjoy the unlimited marital deduction for federal estate and gift taxes – a privilege many heterosexual married couples have enjoyed for decades. Gay and lesbian spouses who consummate their relationship through marriage can now generally leave an unlimited amount of assets to their surviving spouse without triggering a federal estate tax, providing both are U.S. citizens. A same-sex spouse can also now rollover assets from a deceased spouse’s retirement accounts to their account without a mandatory minimum distribution or lump-sum distribution. By revisiting their financial and estate plan, married same-sex couples can take take advantage of the marital deduction, rollover assets, and free up considerable liquidity.
Some Other Issues for Same-Sex Couples
Same-sex couples also have unique concerns when it comes to children, especially when only one partner is the biological parent – a common occurrence in same-sex marriages. Typically, when parents die, their assets are passed on to their children. If this is an estate planning goal for same-sex couples, it’s important to reach out to a family law attorney to discuss adoption.
One last item that occasionally arises in families. There’s sometimes a stigma attached to same-sex marriages that can also create problems even when Wills and other estate planning documents have been prepared. At the time of death, people start haggling over who’s in charge or who has rights – the same kind of thing that often happens with second marriages. Because such scenarios may find more fertile ground with same-sex or second marriages, it’s wise to have those important conversations about your end-of-life issues before and while you are preparing and/or reviewing your estate plan. Firmly stating your wishes during the planning stage, not when the family is in crisis mode, is the optimal time to raise your family’s awareness and encourage their understanding.
Get Your Ducks in a Row With Essential Estate Documents
Having a comprehensive plan in place can help you circumvent the complexities of estate planning. Review this list to become familiar with the estate planning documents you need:
- Will – Research has suggested that individuals within the LGBTQIA+ community are less likely than non-LGBTQIA+ couples to have a Will. The importance of having a Will to protect assets cannot be emphasized enough. Work with your estate planning attorney to draft this important document. You may even wish to explore additional options that can prevent your Will from being challenged.
- Advanced Directive for Health Care – Advanced Directive is the general term that refers to the various documents that could include a Living Will, Instruction Directive, Health Care Proxy or Health Care Power of Attorney. Whether you are in a domestic partnership and unmarried or married, the Advanced Directive for Health Care is essential to allow your physician and other medical professionals to communicate with your partner about your medical condition, designate your partner or spouse as being able to make medical decisions on your behalf, and alert medical professionals and your family as to the treatments you want to receive or refuse.
- Durable (Financial) Power of Attorney – This document allows someone (typically your spouse or your partner) to make financial decisions on your behalf should you be unable to do so.
- Trust – You may wish to speak with your estate attorney about creating a trust which may provide your assets with even greater protection than a Will.
At Phelan, Frantz, Ohlig & Wegbreit, LLC, we are always prepared to provide you with the estate planning guidance that is most appropriate for your specific situation. We are confident in our knowledge and ability to successfully navigate through any of the complexities involved.
Call us at (908) 232-2244 and be proactive in creating an estate plan that has your family’s best interests at heart.
AVERAGE AMERICANS TO THE UBER WEALTHY COULD PAY MORE ESTATE TAX TO UNCLE SAM
Proposed Estate Tax Reform Seeks to Cut the Stepped-Up Basis, Raise Tax Rate
A provision in President Joe Biden’s relief plan could cause average Americans along with the uber wealthy to pay more to the federal government when they die, which means your kids or other heirs may get less than they would under the current estate tax laws.
President Biden’s COVID-19 relief package, the American Families Plan, includes a proposal to change the way capital gains are taxed when people pass away. According to economic policy experts, the revision to a tax rule called the stepped-up basis has the potential of being a big revenue raiser for the plan. This, coupled with Biden’s proposed reduction in the federal estate tax exemption to $3.5 million likely will result in tax hikes for not only for the uber wealthy and the well-off but also for everyone who has something of value to pass along to heirs.
The proposed changes are not yet law, and there will surely be lots of Congressional haggling over the measures. But they’re out there and looming. Right now, it’s important for you to keep abreast of what’s going on in Washington and keep in touch with your accountant, financial planner, and estate attorney to make sure you get a handle on how estate tax reform will specifically impact your estate situation.
Inheritance With and Without the Stepped-Up Basis
The stepped-up basis is defined in IRS Tax Code 1014 which says the basis of an inherited asset rises to “the fair market value of the property at the date of the decedent’s death.” Inherited assets like your house or equities in your stock portfolio typically have gained in value since you purchased them. These capital gains are taxable, but the stepped-up basis wipes out the capital gains tax when heirs inherit an asset, which significantly reduces the tax liability when and if the inheritor eventually sells the asset.
For example, if the house you bought for $200,000 years ago has grown to a fair market value of $700,000, the $500,000 in capital gains would not be taxed when your son or daughter inherits it. Plus, if years later, they sell it for $950,000, their personal capital gains would be valued against the $700,000 fair market value of the house at the time they inherited it. The same would be true for stock. There would be no tax when your heirs inherit it and upon sale, the gains would be based on the difference between the market value at the time of your death and the time they sell it.
With the proposed Biden changes, the step-up basis would be eliminated, and your heirs would be taxed on the carryover basis of $200,000 either at the time of your death or at a future date when they sell the asset—and the taxation may be at a new, higher 39.6 percent rate (which is another part of President Biden’s proposal). The use of the carryover basis would be applicable on all assets transferred in the estate.
Then There’s the Gift Tax
Currently, the unified federal estate and gift tax exemption is at an historically high $11.7 million and integrates both the gift and estate taxes into one tax system. You can give as much as $15,000 to as many people as you want during the year without being subject to a gift tax. If any gift exceeds $15,000, you are required to submit a form to the IRS but not required to pay a tax until, if and when, you exceed the $11.7 million exemption. On December 31, 2025, that exemption, which was increased under the 2017 Tax Cuts and Jobs Act (TCJA), will sunset to the pre-TCJA level of $ 5.3 million per person. President Biden, however, has proposed that the estate and gift tax exemptions be decoupled and return to 2009 levels: $3.5 million for the estate tax exemption and $1 million for the gift tax exemption with an increased maximum estate tax rate of 45 percent up from the current flat 40 percent rate.
What You Should and Can Do Now
If you’re planning your estate now, reviewing your current plan, or expect to be the beneficiary of an inheritance, we recommend you consider these strategies to better arm yourself for potential changes Congress may make to the estate tax code.
- Gather Up all Your Records – If you’re not certain where you’ve put all these records, now is the time to find them, store them in a safe place, and send copies to your accountant and your estate attorney. One reason the current stepped up basis rule exists is that it can be difficult to keep track of an asset’s cost basis. In the case of real estate, for example, records of the kitchen renovation or the addition you built several years ago would favorably impact the carryover basis, making it higher. Similarly, if you reinvested dividends and interest in your stock portfolio, that too, would increase the carryover basis.
- Consider Making Charitable Donations or Establish Trusts – You can still donate an appreciated asset to a qualified charitable organization and receive a deduction on the full market value. Trusts will allow you to pass assets to heirs with as little tax as possible.
- Purchase an Insurance Policy – If you’re leaving an asset or assets that you anticipate will cause your heirs to face a big tax bill, consider including a life insurance policy as part of your estate. This will help your heirs pay the tax.
- Gift Prudently – You must seriously think about how you make large lifetime gifts. Even now, we advise clients who want to reduce their estate or get assets out of their names to gift liquid assets. Gifting liquid assets with no capital gains implications makes more sense than an asset like your house or your stock.
- Stay in Touch – Start talking or continue your dialogue with your tax advisors (e.g., your accountant, financial advisor, and your estate attorney). With potential estate tax reform on the horizon, staying connected with these professionals is more important than ever. Change can be daunting but being informed will enable you to be ahead of the curve and, therefore, more flexible and at the ready to make specific adjustments quickly.
At Phelan, Frantz, Ohlig & Wegbreit, LLC, we are knowledgeable of estate tax laws and issues and stay continually abreast of the ongoing changes in estate tax law—and are always available to provide you with the guidance you need for your unique situation.
Call us at (908) 232-2244 to ensure that you’ll be fully prepared for whatever estate tax reform Congress may send your way.
ESTATE PLANNING DURING COVID-19: ADAPTING TO THE TIMES
More People Get Onboard With Estate Planning During COVID-19
The corona virus (COVID-19) has changed lives in ways we’ve never experienced or even imagined before. In short order, we’ve been required to stay home, practice social distancing and take diligent safety and health precautions as recommended by the Centers for Disease Control and Prevention to flatten the curve and prevent the spread of this highly contagious disease.
Heightened awareness regarding the importance of estate planning during this time is one silver lining that may result from the dark cloud of this devastating pandemic. In response to the critical need for conversations about existing estate plans or the creation of a concrete plan, trust and estate attorneys have been forced to recreate the way in which they consult with clients. Attorneys have been finding creative and safe ways to confront the logistical obstacles posed by the legal formality that accompanies the execution of estate planning documents.
An abundance of calls and inquiries
We have been struck by an increase in calls from individuals inquiring about estate planning. Understandably, these calls are taking on a much different tone. In the past, when people came to the office to discuss their estate plan, it was clear the conversations were theoretical—a talk about something hopefully very far off. Now, whether a caller is young, old or middle-aged, the tone is heavier. Rather than checking another item off their to-do lists, the indiscriminate nature of COVID-19 has forced us all to focus more on our own mortality. Offering a safe and open space for clients to have these conversations and provide some peace of mind is important to the lawyers at Phelan, Frantz, Ohlig & Wegbreit.
Business, but not as usual: Technology is key
In most instances, the key estate planning documents are the Will, which controls the proper disposition of assets at death, and the Durable Power of Attorney and Advance Directive/Health Care Proxy, both of which enable others to make financial and medical decisions for us if we are not able to do so. Technology has become a powerful force in how attorneys and clients get the planning process under way and, sometimes, in facilitating the execution of final documents.
For the planning piece, most lawyers are using video conferencing technology to facilitate conversations between clients and counsel so that the appropriate documents may be crafted. More ingenuity is required when it comes to signing the documents. This is so because under New Jersey law, Wills are only valid if executed in the presence of two witnesses. Further, they are only “self-proving” if a notary (third-party) notarizes the signatures of the person making the Will and the witnesses. POAs and Health Care Proxies similarly must be witnessed (only one) and notarized.
New places to execute documents
Under normal circumstances, witnesses preferably are not “interested parties” – beneficiaries or fiduciaries – of the estate for which a document is being executed. Conditions caused by the pandemic, however, may limit the options available to those signing documents.
Face-to-face signings may still occur – most typically in law office parking lots with gloves and masks intact, each participant using separate pens and exercising proper distancing but within sight and sound range of the person (the testator) signing their Will and for whom it is being prepared. Once signed, documents can be witnessed, notarized and collated by staff who have remained at a safe distance. Porches or window-separated settings provide alternate and acceptable locations.
Earlier this month, Governor Phil Murphy signed into law a bill that permits remote notarization effective immediately. This provision eases the need for face-to-face meetings for document execution and allows estate planning attorneys a greater degree of flexibility to accommodate the health and safety concerns of their clients.
It’s fair to say that both clients and attorneys are finding that these alternate ways of doing things are cumbersome, if only because they are so different and, right now, feel unnatural. But it’s the best clients and attorneys can do to avoid delays at this time.
Not easy but necessary
Important as it is, estate planning is always a delicate subject. These days the discomfort associated with the topic is ten-fold. The anxiety being experienced by everyone is legitimate and as professionals, spouses, parents, and sons and daughters, we have these same worries.
Regardless of whether legal interactions by Zoom or in parking lots becomes the new norm, we will continue, as always, to make our clients’ needs a priority. We remain focused on our clients’ safety during this difficult time and are committed to being a partner who will listen and assist.
At Phelan, Frantz, Ohlig & Weqbreit, LLC, we will carefully listen to your unique family circumstances and, as always be responsive, and intuitive in handling the difficult questions that you have regarding your estate planning during COVID-19 or anytime. Please call us at 908.232.2244 to learn how we can assist you in crafting your Will and important accompanying documents that best fit your wishes and needs.