Tempe Arizona Estate Planning

New Tax Law Means Your Estate Plan Needs a Review

 Whenever there is a big change in the tax law, it’s a good idea to review your estate plan to ensure that you are not missing any opportunities. The Tax Cuts and Jobs Act of 2018 is no exception.

A recent article from Newsmax, “Trump Tax Law Necessitates Immediate Review of All Estate Plans,” explains that the new tax law has doubled the allowable credit for the federal estate tax, which is now $11.2 million for an individual and $22.4 million for a married couple. Most Americans will still not need to pay federal estate tax, but estate tax plans still need to be reviewed. Here’s why.

What happens when the first spouse to die has a relatively small estate that doesn’t use all the estate-tax credit, but then the second spouse dies and their estate is more than their applicable estate-tax credit?

Note that a more recent change, called “portability”, allows the unused estate tax credit from the first spouse to die to be used in the second spouse’s estate. This is important: it’s an election and not automatic. Portability will let nearly all the estates of U.S. persons avoid estate taxes. However, for some, estate tax planning is still the major factor in creating an effective estate-planning strategy.

Estate plans drafted and implemented before 2018 should be reviewed. Standard estate plans for married couples before the 2018 increase in tax exemptions and before portability involved the use of a credit-shelter trust and a marital trust to zero-out most estates on the first spouse to die. This is commonly called the A-B trust system.

A credit shelter trust holds assets equal to the estate tax credit. The remainder of the estate funds the marital trust and avoids taxability in the first estate.  However, it’s taxable in the estate of the second spouse to die—if that estate exceeds its estate-tax exemption. With the increased tax exemption and portability, many tax experts now think that using the marital trust may not be best for many estates.

For example, the wholesale changes in 2018 Tax Cut and Jobs Act dictate considerations for tax planning. There’s the impact of the new lower tax rate (21%) on corporations, and the 20% deduction on the active business income of pass-thru entities, like LLCs, which hold investments.

Another important complication is the inherited tax basis on the property funding the credit shelter or marital trust, and its projected tax impact on sale.

Review your estate plan to find out how the new tax law will impact your estate plan and your loved ones.

Reference: Newsmax (April 30, 2018) “Trump Tax Law Necessitates Immediate Review of All Estate Plans”

What is the Purpose of a Conservatorship?

What is the Purpose of a Conservatorship

Conservatorships are granted by a court to a guardian or a caregiver, when a person can no longer care for themselves or an estate is in chaos. It is usually the end result of a bad situation.

Establishing a conservatorship is a complex and time-consuming process, best done by an experienced attorney. This usually occurs when no advance planning has been done, including setting up a trust, creating powers of attorney, or healthcare directives.

The San Diego Union-Tribune’s recent article asks, “What is conservatorship and how do I get it? According to the article, the San Diego Superior Court website conservatorship page has an overview of the types of conservatorships available. It also contains downloadable forms, links, FAQs, and an outline of steps required to set up a conservatorship. Something similar to this service may be found on the Arizona Courts website.

Seeking conservatorship is pretty much the point of last resort. A conservatorship of an estate can be avoided, if a person prepares in advance by creating a trust or arranges for appropriate powers of attorney with family members. These can be used without court intervention.

 However, setting up a conservatorship may be unavoidable, if a parent or other loved one—even a person who’s signed an advanced care directive and appointed an agent for power of attorney—becomes uncooperative, refuses to accept help, won’t go to a doctor, doesn’t eat properly, fails to maintain appropriate personal hygiene, or has become the victim of a scam artist.

Getting a conservatorship can be difficult, especially if the individual requiring assistance refuses and challenges the action in court. In that instance, they may hire an attorney of their own, or receive a court-appointed lawyer, to fight this.

When a conservatorship of a person or estate is granted, it is not the end of work for a conservator. In both situations, the court will follow up with investigator visits to make sure the conservatee or the estate are being cared for or managed properly. In the case of a conservatorship of an estate, there must be an accounting of all assets.

If it is at all possible, speak with an experienced estate planning attorney and put a plan in motion before the situation becomes urgent. It may be possible to avoid problems in the future, including the need to establish a conservatorship. Giving adult children or close relatives powers of attorney, naming an agent, creating an advance health care directive and funding a trust may help avoid lengthy and expensive legal actions.  Contact the Soto Law Firm today to discuss these issues with an attorney in a free consultation.

Reference: San Diego Union-Tribune (April 25, 2018) “What is conservatorship and how do I get it?

How Do Trusts Work, and Do I Need One?

How Do Trusts Work, and Do I Need One

Trusts are appropriate in many instances to protect assets, before and after death. Be forewarned: there is one universal blunder that can undo your best planning.

As your estate planning attorney will tell you, there are many different types of trusts that can be used to achieve several goals. The right trust can protect your assets, provide exacting limits on how assets are distributed, and help minimize tax liability.  However, there is one detail you’ll want to get right.

Kiplinger’s recent article asks, “What Type of Trust Solution is Best for You?”  The article notes that people often make one common mistake when setting up their own trusts—they chose the wrong person (often a family member) to administer it when the time comes. Since the “grantor” of the trust wants to be sure her wishes are faithfully carried out, she will need to designate a trustee who can competently and effectively handle the role.

Trusts will affect people about whom the grantor cares, so it’s natural that those creating trusts often feel obligated to name a person close to the family as trustee. It can be efficient for the trustee to know the grantor and the beneficiaries.  However, it may create issues with the administrative, fiduciary, and legal requirements that the trustee is tasked with executing.

In some situations, you may want to hire a trust company or bank to serve as corporate trustee. They have the expertise and capacity to conduct the administrative and reporting tasks, and the personnel to support long-term asset protection and distribution strategies.  However, a corporate trustee may not be familiar with the grantor or the beneficiaries and may not be able to provide the level of care or accessibility the family may need.

Trusts can be dynamic tools for integrating tax planning into an estate plan to efficiently transfer wealth to heirs. Trust assets can continue to grow tax-deferred or tax-free (depending on the account), for many additional years. A trust can be written to support whatever objectives the grantor has and can provide as much flexibility or latitude as he wants, provided that the trust structure and distribution schedule comply with IRS requirements.

Take this decision very seriously. Devote the time needed with your trust attorney to identify the best individual or entity to take on the responsibility of your trust. Your attorney should understand the goals you have set for your trust and your legacy. Contact the Soto Law Firm today to schedule a free consultation to learn more about what a trust can do for your situation.  Once this is settled, you’ll be able to breathe a sigh of relief.

Reference: Kiplinger (April 30, 2018) “What Type of Trust Solution is Best for You?”

If You Might Need Life Insurance During Retirement, Don’t Delay

If You Might Need Life Insurance During Retirement, Don’t Delay

Even if you don’t earn a king’s ransom, good planning and diligent saving can prevent you from having to rely on Social Security benefits.  However, there are other tools to consider, including life insurance.

Like so many pieces of the retirement puzzle, addressing financial concerns in your 30s and 40s can help prepare you for the future and boost your confidence in your ability to manage money. It’s far easier, for example, to buy life insurance in your thirties than in your fifties.

USA Today’s recent article, “Financial planning: How to determine if you need life insurance in retirement,” notes that many older Americans wonder if they’ll need life insurance in retirement. They are concerned whether their surviving spouse and loved ones will need the capital generated by the life insurance policy—the death benefit—to replace their income and to preserve assets.

The answer depends on the facts and circumstances. Some experts believe that if you planned well enough prior to retirement, you won’t need life insurance. You’ll have no debt, plenty of assets to replace the income lost due to your death, and sufficient money to leave to heirs. That all sounds good in theory, but reality may be different.

Run the numbers. Examine your cash flow statement before and after the death of either spouse. If there’s more than enough income to cover the surviving spouse’s living expenses throughout retirement, then you might not need life insurance. However, if there’s not enough income, even after you calculate the amount the couple has saved and whether that can reliably provide for the surviving spouse — then you might need life insurance.

Life insurance can be used for other goals, in addition to income replacement and paying off debt. It can be used for estate taxes, taxes due on inherited IRA distributions, taxes due on death-bed Roth conversions of qualified accounts, or for charitable planning.  If you have minor children or intend to leave assets to minor beneficiaries, life insurance that names a trust as the beneficiary can allow you to leave assets to minor beneficiaries and avoid the problems associate with probate and conservatorships.

A retiree with a large farm or business worth more than $22 million might want their heirs to use life insurance proceeds to pay estate taxes and to avoid selling the bequeathed asset.  They can also use required minimum distributions (RMDs) from IRAs to purchase life insurance that will provide a tax-free legacy to heirs, while designating a non-profit organization as the eventual beneficiary of the retirement account. This strategy may allow a retiree to double the impact of their retirement account, while eliminating income taxes on the retirement savings.

In addition, with the possible need to fund long-term care expenses in retirement, retirees might consider buying a permanent life insurance policy with a rider for long-term care. In other cases, insurance policies with a large death benefit can be a substitute for long-term care coverage for the beneficiary, the surviving spouse.

Speak with your estate planning attorney to work through the numbers and make sure that any insurance policy you purchase, works as part of your estate plan.  Contact the Soto Law Firm today to discuss the best ways to coordinate your life insurance with your estate plan.

Reference: USA Today (May 2, 2018) “Financial planning: How to determine if you need life insurance in retirement”

Taking Control of a Trust: What You Need to Know

Taking Control of a Trust: What You Need to Know

For those who are inexperienced with handling large amounts of money, taking control of a trust can be daunting. Start by learning the basics about trusts, so you can feel more comfortable in this new role.

Fear of the unknown is one reason why people, who have never been responsible for a trust, might feel uneasy. As reported in WTOP’s article, “7 questions to ask when taking control of a trust,” having access and control of more wealth seems like it should be an easy change to get used to.  However, the increased wealth comes with increased risk and responsibility. To get more accustomed to this new position, start with the fundamental questions:

What are the trust’s rules? There are different types of trusts, each with its own set of legal rules. Many are extremely complex.  Therefore, you should work with a trust attorney to be certain you’re doing things right.  You should also look at the trust agreement or the will provisions that established the trust. This will give you the instructions for managing, investing, and distributing trust assets. It will also detail your powers and how you can use the funds.

What’s the history of this trust? If more information is needed on the history or intentions behind the trust, talk to the advisers who are involved with the trust. This can give you a sound history on how the trust has operated in the past.

How are the trust funds invested? Investors should know what assets they own and why. This also applies to trust assets. Once you establish an appropriate asset allocation for the trust, you may want to have an investment policy statement to ensure that the ongoing management of your assets coincides with your intended allocation, risk tolerance, and objectives.

What about taxes? If a trust earns income, it will likely be subject to income taxes. Taxation of trusts can become extremely complicated, so work with a tax attorney or accountant in order to plan appropriately for your situation.

What protection is there from creditors or a divorce? There are some trust structures that increase your odds of shielding assets from a potential lawsuit.  Asset protection strategies implemented in an estate plan can afford beneficiaries with the ability protect their assets from predators and other litigious individuals and entities.

Who would be the beneficiary of this trust if I die? When a trust is first established, the original grantor may designate the next beneficiary if you pass away.  However, if a successor beneficiary isn’t stated in the trust, you need to consider how this asset affects your existing estate plan and change your documents to direct the asset at your death.

Inheriting a trust can be a life-changing event for you and your family. Don’t feel you have to go it alone—your estate planning attorney will be able to help. You and your family should enjoy the new opportunities and the security that the trust provides.  Contact the Soto Law Firm today to schedule a free consultation to discuss the proper administration of your trust.

Reference: WTOP (April 18, 2018) “7 questions to ask when taking control of a trust”

How to Infuriate Your Second Wife: Neglect Updating Your Beneficiaries

How to Infuriate Your Second Wife: Neglect Updating Your Beneficiaries

Beneficiary designations are usually signed when opening a new account, changing financial advisors, or taking out a life insurance policy. They are then swiftly forgotten, until it’s too late to make any changes.

What would happen if you did not update your beneficiary designations every few years? How about your second spouse having no recourse, when a life insurance policy payment is made—to your ex? Remember that beneficiary designations have precedence over last wills and testaments in court.

CNBC’s recent article, “Out-of-date beneficiary designations are a common and costly mistake,” says that naming beneficiaries can come with unexpected costs, like deeding money to an irresponsible minor. Many people still have ex-spouses or deceased relatives named as a beneficiary on a retirement account or on a life insurance policy purchased long ago.

That is why it is critical to review these after marriages, divorces, births, adoptions, deaths, and other major life events.

Beneficiaries for some retirement accounts can be easily reviewed and changed online. For others, the account holder just has to ask for the right form from the administrator.

If you don’t have any named beneficiaries—either because you never named them or your beneficiaries pre-deceased you—your assets may pass to your estate or be forced to go through probate. This can create expenses and headaches.

If your IRA winds up going to your estate, instead of to a named beneficiary, the estate can be forced to withdraw funds and pay the tax on those withdrawals in a short time.

In addition to traditional, Roth, SIMPLE, and SEP IRAs, beneficiaries should be checked on 401(k) plans, 403(b), and deferred-compensation employer plans, life insurance policies, 529 education savings accounts, and any bank or other investment account that’s designated as "Transfer on Death."

Naming a minor child or other person incapable of managing funds, is another possible mistake.

It sounds basic, and yes, a little boring, but it’s very necessary: review all of your assets that have beneficiary designations and do the work to make sure they are all up to date. 

Reference: CNBC (April 17, 2018) “Out-of-date beneficiary designations are a common and costly mistake”

Why Does My Estate Plan Need to be Reviewed?

Why Does My Estate Plan Need to be Reviewed

Tax laws change, so do lives. You could be missing out on planning opportunities, or forget to make an important change that cannot be fixed after you pass.

Creating an estate plan entails a detailed review of every aspect of your life, from personal finances to personal relationships. Sometimes that brings issues to light that are difficult to deal with, but need to be addressed.

The Smyrna-Clayton Sun-Times reports in its article, “Change plan as plans change,” that most financial plans begin as a snapshot of your financial life, with a thorough review of your assets, liabilities, and cash flow.

Your estate planning attorney will then use this to show what your financial life may look like, under a wide range of future scenarios.  However, when it comes to forecasting numbers and assumptions, it’s not uncommon for things to turn out differently than planned. You need to recalibrate your planning based on your situation, as well as where the markets and your circumstances are heading.

For example, most people set their 401(k) allocations and name beneficiaries when enrolling in the plan and never look at it again. This also happens with life, property and casualty insurance policies. The renewal notices arrive in the mail when your policy is renewed, but do you actually read them? You should review every property and casualty renewal to be sure your coverage selections are adequate. Don’t assume that the renewal has the same exact coverage as last year, or that it was the right amount of coverage. Review your beneficiary designations every time you pay your life insurance bill.

In the same fashion, estate plans are rarely reviewed yearly. However, there are parts of your estate plan that may be worthless, if they’re too old. There may also be new opportunities that you are missing.

Every few years, your health care power of attorney or durable power of attorney needs to be reviewed. They may not need to be updated, but they should be reviewed. An appointment with your estate planning attorney should be treated like a visit for a physical examination—there might not be anything wrong, but you still need a check-up to be sure.   Contact the Soto Law Firm today to set up a free consultation to review your existing estate planning documents.

Reference: Smyrna-Clayton (DE) Sun-Times (April 17, 2018) “Change plan as plans change”

Health Care Directives and End of Life Planning Exemplified by Two First Ladies

Health Care Directives and End of Life Planning Exemplified by Two First Ladies

Barbara Bush’s final days are an example of what some call “a good death.” She left this world with dignity and on her terms. Her health care directive likely ensured that her wishes would be followed, and is an example of a life well-lived.

When First Lady Barbara Bush passed recently, Americans of all political parties felt the loss. The “Silver Fox” was the matriarch of a family at the forefront of politics for more than four decades. As reported by Forbes in its article, “Barbara Bush And Betty Ford - How Two First Ladies Mastered Unique Aspects Of End Of Life Planning,” this wife, mother, grandmother and great-grandmother should be an example to us all of how to prepare for and handle our final days.

Mrs. Bush’s death is a drastic contrast to how most Americans approach the dying process. The average American doesn’t have a well-planned approach to how they wish to handle death. In 2017, the University of Pennsylvania's Palliative and Advanced Illness Research Center found that only 29% of all Americans even have a health care directive. This is an important document to help your family as well as medical and legal professionals understand your wishes about medical treatment, palliative care, and funeral plans.

Likewise, Betty Ford used her estate documents to express her last wishes in a unique way. Betty wanted her eulogy to be a political statement on how the increased partisanship in Washington was creating a negative impact on the country. She asked journalist Cokie Roberts to eulogize her, and the eulogy was to be specific. Betty wanted Roberts to speak about Washington in the 1960s and 70s and how the DC crowd had to get along and work together. That was because they were frequently at dinner parties at each other’s home on the weekends. This was the statement she wanted to be certain was communicated.

Another powerful use of the health care directive is to provide our wishes for treatment, in the event we lack capacity, or our condition is terminal.

Barbara Bush’s health care directive stated that treatment for her chronic obstructive pulmonary disease (COPD) and congestive heart failure would stop, and she’d return home to focus on being comfortable in her last days. She was surrounded by family and on her final day, her husband of 72 years sat at her bedside and held her hand. She even had a final bourbon!

Regardless of their political preference, everyone should have a health care directive. Think through how you feel about everything from palliative treatment to funeral plans. Create a health care directive with the help of an estate planning attorney. It will make a difficult time less stressful for your family, and they will appreciate knowing your final wishes.  Contact the Soto Law Firm today to set up a free consultation to discuss these important issues.

Reference: Forbes (April 18, 2018) “Barbara Bush And Betty Ford - How Two First Ladies Mastered Unique Aspects Of End Of Life Planning”

New Law Would Require Background Check for Pennsylvania Guardians

New Law Would Require Background Check for Pennsylvania Guardians

A bill has been introduced by a Berks County lawmaker with the intent to require background checks on individuals who want to be court appointed guardians to the incapacitated.

Preventing convicted felons from serving as guardians to vulnerable people, including seniors and the disabled, who have been declared incapacitated by the court sounds like common sense. It is hard to believe that rule is not already in place, isn’t it?

The Reading Eagle reports in a recent article, “Bill would require background checks for guardianship,” that Pennsylvania State Representative Mark Gillen is seeking co-sponsors for the bill, after he read about a Reading Eagle investigation that found courts in Philadelphia and Montgomery counties appointed Gloria Byars, a convicted felon, to manage the estates of more than 75 incapacitated adults.

Advocates praised the bill, saying it goes a long way to creating state standards. After more than ten years of state working groups, advisory committees and task force reports recommending standards for guardians that include licensing and background checks that have yet to be put in place, these advocates praised the lawmaker for responding to the issue that the newspaper article raised. However, they also had concerns that the bill's language didn’t specifically address whether agencies that delegate court-appointed responsibilities to staff, must conduct background checks on those employees. The proposed law might not prevent a case like Byars', who worked for a guardianship agency, from happening again.

Critics say the felony ban would bar relatives with a criminal conviction from being appointed, even if the offense is long in the past. There’s nothing in state statute that currently prohibits a court-appointed guardian from having a criminal record. The new legislation would change that and would disqualify convicted felons from being appointed guardians. It would also require federal and state criminal history checks.  In addition, it bans undocumented immigrants from serving.

Lawrence A. Frolik, a University of Pittsburgh School of Law professor and national expert on elder legal issues, called the bill heavy handed.

"The use of felony disqualification disproportionately impacts minority communities," Frolik said.

Advocates said that doing a criminal background check would be limited, and someone like Byars, who was convicted for financial theft and fraud, could still slip through the cracks, because she worked as an employee for a guardianship agency.

Gillen said he hopes that the amendment process will iron out this loophole. He noted that his strategy is to start out with a lean piece of legislation, and then seek input from stakeholders.

Here at the Soto Law Firm, we help clients avoid these types of incapacity issues.  In a General Durable Power of Attorney, commonly known as a Financial Power of Attorney, clients name those individuals they wish to perform financial transactions on their behalf, which would avoid the need to have a guardian or conservator appointed if they became incapacitated.  Through Trust planning, a client can choose successor trustees who would step in an control assets titled in the name of the trust, which process also avoids the need for a the appointment of a guardian or conservator.  Contact the Soto Law Firm today to set up a free initial consultation to discuss your options for avoiding these types of incapacity issues in Arizona.

Reference: Reading Eagle (April 14, 2018) “Bill would require background checks for guardianship”

Strategies for 529 and ABLE Plans Need Review Under New Tax Law

 

Strategies for 529 and ABLE Plans Need Review Under New Tax Law

If your family has 529 or ABLE accounts, these changes may impact how they work within your larger financial plans. It is time for a review!

With the passage of the 2017 Tax Act, up to $10,000 from Section 529 plan funds may now be used for elementary or secondary school expenses. That’s a big change for parents with children in private schools.

As noted in Think Advisor’s recent article, “Investing in 529, ABLE Plans? Better Check Tax Law Changes,” the new law will permit Section 529 plan funds to be rolled over into an ABLE account (tax-advantaged savings accounts for individuals with disabilities and their families) for the designated beneficiary or the designated beneficiary’s family member, in an amount up to the annual 529 plan contribution limit. (These rollovers would offset other contributions made to the ABLE account for the year.) Any amounts rolled over in excess of the limitation are included in the distributee’s gross income when they’re distributed. These rules are effective for rollovers that happen after December 31, 2017 and before January 1, 2026.

The new rules for elementary and secondary school expenses could mean that some people may want to open a second Section 529 plan for K-12 school expenses.  However, the $10,000 amount applies on a per-student basis and not a per-Section 529 account basis. Therefore, if the student is a beneficiary of several accounts, he or she can only receive a maximum of $10,000 from all the accounts. Anything over the $10,000 will be taxable.

ABLE accounts also underwent some significant changes with the 2017 Tax Act. The new law expanded ABLE account contribution rules, so that the account beneficiary can now contribute his or her earned income, even if the contribution (when added to other contributions) results in the contribution levels going over the annual contribution limit (which is tied to the annual gift tax exclusion amount: $15,000 for 2018).

Bear in mind that while the account beneficiary’s contribution is limited to either her income or the federal single-person poverty limit—whichever is lowest—this additional contribution is not available to account beneficiaries who contribute to 401(k), 403(b) or 457(b) plans. ABLE account beneficiaries who contribute to their account are eligible for the saver’s credit. This applies for tax years beginning after December 31, 2017 and before January 1, 2026.

Together, these changes may present entirely new opportunities for planning at all levels of education, particularly for those who are supporting a disabled child.

Reference: Think Advisor (April 17, 2018) “Investing in 529, ABLE Plans? Better Check Tax Law Changes”