Paul O. Dillon, Attorney at Law

Don’t Procrastinate on Estate Planning Moves

Planning for wealth transfers, whether you are the person doing the giving or the recipient, is essential to avoid expensive surprises, says a recent article from Go Banking Rates, “Wealth Transfers: 9 Unexpected Obstacles to Plan For Before It’s Too Late.”

Wealth transfers fall into two categories. Beneficiary wealth is wealth passed from your estate to beneficiaries. The second is legacy wealth, which is when entities, like trusts, are created to pass wealth on in perpetuity. The first step in planning for wealth transfer is deciding what you want to happen to the wealth you’re passing on.

The next step is figuring out the tax implications of the wealth transfer. A traditional IRA or 401(k) account is tax-advantaged, while non-qualified assets include stocks, bonds, investment accounts and Certificates of Deposit (CDs). Unless they fall into certain categories, an heir receiving an inherited traditional IRA must empty the account within ten years with Required Minimum Distributions and pay income taxes on those distributions. For this and many other reasons, estate planning includes tax planning.

Estate planning includes articulating your wishes for how wealth is to be passed. Without having a will prepared by an estate planning attorney, you risk your entire estate being tied up in court probate proceedings for months or even years. Fights among family members are more likely to occur when your wishes aren’t made clear through enforceable legal documents.

You’ll also want to discuss your estate plan with your family. A sudden inheritance, if not expected, could create tax issues, sow discord between family members and lead to expensive litigation if some feel they were treated unfairly.

People think they don’t need an estate plan because they are too young, still healthy, or don’t have enough assets to warrant taking the time to create an estate plan. This is simply not true. Anyone over the age of 18 will benefit from having an estate plan. An estate plan includes preparing for incapacity and creating documents, like a Power of Attorney and Healthcare Proxy, so someone else can take care of you if you are injured or too sick to communicate your wishes. As you accumulate more assets and age, these documents need to be reviewed and updated to reflect changes in status.

A commonly overlooked and often expensive mistake in estate planning is to neglect to check and update beneficiary designations. This lesson is learned when people get divorced or remarry. When the spouse passes, the new spouse is stunned to discover the recipient of these accounts goes to the prior spouse.

Don’t forget to leave specific instructions in writing for tangible assets. This may include real estate property, cars and houses. Some people want to give their children the family home but have them sell it immediately to take the cash. If your wishes aren’t expressed, don’t expect them to be followed.

Speak with an estate planning attorney before it’s too late to put your wishes into an estate plan. Talk with your family about your estate plan. Making sure everyone knows what you want and putting it down on paper will protect your wishes and your loved ones.

Reference: Go Banking Rates (Jan. 24, 2025) “Wealth Transfers: 9 Unexpected Obstacles To Plan For Before It’s Too Late.”

Money Tips for the Coming Year

A fresh start for 2025 should include your financial life and your health and wellness resolutions. A recent article from USA Today, “Start 2025 off right with these 9 money moves,” offers good suggestions to make this new year a good one.

Get out of debt. If you have high-interest debt and high-earning investments, you’re only treading water and not getting ahead. Take care of the high-interest debt first if you want to see your net worth grow.

Try living below your means. Too many of us spend more than we bring in and then try to catch up (See “Get out of debt” above). The more significant the difference between what you earn and spend, the better your savings accounts will grow. If you’re saving for retirement and your kid’s education, changing spending from what you want to what you need will help.

Build an emergency fund. Unless you are lucky enough to have untapped wealth, you need an emergency fund in cash ready to pay for at least three months of non-negotiable expenses. This means taxes, housing, food, transportation, medical expenses, etc. Few people are ready to deal with the economic impact of losing a job, having to replace a car, or needing major surgery. Having an emergency fund protects you from needing to use retirement funds or take on debt to deal with a short-term financial crisis.

Revaluate your portfolio. Investing in great companies for the long haul is how most people set their investment portfolios. However, it makes sense to look at a rebalance every now and then. People who are in their high-earning years may be okay with a 60/40 split between stocks and bonds. However, as you get closer to retirement, you may want to change this. After a few years, when stocks grow faster than bonds, your 60/40 split from a few years ago might have become an 80/20 split.

Maximize retirement accounts. If you can make use of tax-advantaged retirement funds, your future self will thank you. Use IRAs and 401(k)s to build long term wealth. If your company has a matching program, make sure to maximize your contributions using what is essentially free money. Your retirement withdrawals will be tax-free, if you can use a Roth account and pay taxes when you make contributions.

Check beneficiary designations. Make a list of all the financial accounts with beneficiary designations and check to see if the people you named to receive the assets on your death are still the right people. This is especially true if you’ve gone through a divorce, moved, or married.

Get your estate planning documents in order. If you don’t have a will, durable power of attorney, healthcare power of attorney, living will, or advanced directive, make an appointment with an estate planning attorney now to get these documents in order. If you have these documents but they are more than four years old, you’ll want to update them to be sure they still reflect your wishes. If you have young children, be sure your will includes naming a guardian.

Celebrate the New Year by organizing your estate planning and financial life. Next year at this time, you’ll be glad you did.

Reference: USA Today (Jan. 5, 2025) “Start 2025 off right with these 9 money moves”

Is Having a Will Important?

A last will and testament is a legal document outlining your wishes for the distribution of your property, the care of any dependent minor children and the declaration of who you want to be your executor. As explained in a recent article, “Do I Need a Will?” from mondaq, your will is a powerful tool giving you control over your estate and protecting your final wishes.

All wills become a matter of public record after they are filed with the court in the probate process. This is when the court determines if the will is valid, i.e., meets the requirements of the law in your state and if the executor, the person who you named to be in charge of distributing your assets and managing your estate after you die, is acceptable to the court.

There are many advantages to having a will, not the least of which is the peace of mind of knowing your wishes have been expressed, documented and will be carried out. Without a will, your estate is going to be divided according to your state’s laws. You or your family members may not like how the state does this. However, there won’t be much they can do about it.

Parents of young children or children with special needs must have a will to name a guardian for their offspring. Without a will, the court will decide who will raise your children and where they will live.

Having a comprehensive estate plan helps prevent family conflicts. Your clear instructions should leave no doubt about your intentions. Families in the middle of grieving the loss of a loved one are often susceptible to fighting when they otherwise would be able to work out issues without drama.

Having a will also allows you to create a legacy by giving assets to a charity you care about. Your estate planning attorney can help you with a number of gifting strategies to make donations over time, minimize tax liabilities and provide heirs with income streams.

The first step in creating a will is identifying an experienced estate planning attorney you feel comfortable with. The next step is to create an inventory of your assets, including everything from bank accounts, investment accounts, retirement funds, personal items and real estate property.

Some assets don’t pass through a will. Accounts like 401(k)s and IRAs usually have beneficiary designations and pass directly to the person or people named by you when you opened the account. Make sure that these designations are still correct so the right people receive these assets.

Depending on your income and asset level, estate planning has many tax implications. You’ll want to take advantage of any tax-saving opportunities.

Once you’ve reviewed these materials, your estate planning attorney will create the documents. The will needs to be put in writing, signed and witnessed. You may need one or two witnesses, depending on where you live. Remember that your will needs to be updated to keep pace with changes in your life and the law.

Having a will created by an experienced estate planning attorney will help you avoid common mistakes, understand complex concepts and create a plan for the future for you and your family.

Reference: mondaq (Dec. 19, 2024) “Do I Need a Will?”

How to Create an Estate Plan with a Blended Family?

Blended families are not as unusual as they used to be. However, the financial and legal challenges of combining two families haven’t changed. If your future includes a combined family with stepchildren and stepparenting, the recent article from Kiplinger, “How to Navigate Finances as a Blended Family,” has useful information to consider.

Prenuptial Agreement. A prenup is used to clarify expectations regarding assets and debts. How assets are to be divided between children from past marriages or any future grandchildren can be addressed in a prenup and your will. If you come to the marriage already owning a home or a business, a prenup should be used to clarify your future spouse’s ownership interest. If your spouse-to-be has debts, a prenup covers how premarital debt will be handled.

Shared Expenses. Hoping financial matters will work out themselves is not a plan for a blended family. Will you set up joint checking accounts? Who will be responsible for biological or adopted children’s expenses from prior marriages? What expenses will be split? Single parents of college-age children need to know that if they marry, both spouses' incomes are used on applications for financial aid.

Estate Planning Updates. Everything related to estate planning, from your will, trusts, insurance policies and health care directives, must be updated when you marry again.

Your will must be updated to reflect your wishes for assets to go to children from a prior marriage and your spouse. It’s easy for children to be disinherited in a blended family, requiring special attention. If there is no will, the state’s laws will be applied. This may not be what you wanted.

Beneficiary designations need to be updated. The person named as a beneficiary on accounts like IRAs, SEPs, pensions and life insurance policies receives assets directly, regardless of what the will may state.

You may want to establish a Revocable Trust to take assets from your “probate estate” and provide for children. Your new spouse may be the trustee, or you may choose an adult sibling to administer the trust. You may want to update the trustee or beneficiaries if you have trusts.

Medical directives must be updated so your new spouse can be involved in your healthcare. Privacy laws are strict, and a new spouse might be shut out from making healthcare decisions without new documents. These include a Health Care Proxy, also known as a Medical Power of Attorney, HIPAA Release Forms and Living Will. Your estate planning attorney will know what documents are used in your state.

Estate planning is not as romantic as planning a wedding. It is still a sure signal to your intended and your family to prepare for a future based on responsibility and caring.

Reference: Kiplinger (Oct. 18, 2024) “How to Navigate Finances as a Blended Family”

How to Prepare for the Financial Impact of a Spouse’s Death

Social Security benefits are just one of many changes happening when a spouse dies. A recent article in Barron’s, “A Spouse’s Death Brings a Financial Jolt. How to Prepare,” explains what can be done before and after the death of a spouse to protect the surviving spouse.

The surviving spouse receives the higher of the two Social Security benefits. The survivor also receives a one-time death payment of $255.

The surviving spouse may be able to use the higher married couple filing jointly tax bracket. However, check with your estate planning attorney to be sure. Unless the surviving spouse is qualified as a widow or widower, they will file as a single taxpayer the following year. The standard deductions are lower, and thresholds for tax brackets are reduced.

Be prepared for healthcare premiums to rise. Medicare premiums are tied to income, and while couples pay the standard premium of $174.70 up to income of $206,000, single people pay it only up to $103,000. If the decedent was working and health care came through their employer, the surviving spouse may need to access COBRA or buy health insurance on the open market, an expensive proposition.

Not all deaths are foreseeable. However, one spouse will almost always die before the other, so planning is necessary. Couples should review their estate plans, named beneficiaries, and trusts every three to five years.

Some strategies should be done while both spouses are still living. Converting some or all of traditional IRA accounts to Roth accounts is one to consider. Pre-tax IRA or 401(k) accounts are moved to after-tax Roth accounts when both spouses are living and take advantage of higher standard deductions and generous tax brackets, compared to when filing as a single.

The sale of a primary residence becomes costly when one spouse has died. When a couple sells their home, they receive a joint $500,000 capital gains tax exemption. When a single person does, the exemption is halved, making the home sale far less profitable.

Estate planning attorneys may advise clients to be cautious about significant decisions while grieving their loss. However, steps must be taken before death or in the calendar year after death to protect the surviving spouse.

Here’s an example. For a couple where the wife was diagnosed with pancreatic cancer, stocks with large capital gains were moved out of a joint account into an account in the wife’s name only. Upon her death, the husband inherited the stocks, receiving the equities at their current value.

In another scenario, accumulated capital losses were used to offset gains in a trust brokerage account following the death of the husband. Capital losses typically expire upon the death of the investor, but spouses can use those losses during the same calendar year. The revocable trust was revised, and the highly appreciated assets were sold, taking advantage of the losses.

When there is a diagnosis of a serious disease, or someone is not recovering from an illness, the time to review the entire estate and plan accordingly becomes more pressing. Talk with an experienced estate planning attorney to keep your estate up to date and discuss possible strategies to be considered if and when a spouse becomes seriously ill.

These are not easy conversations to have. However, taking care of these issues before the death of a spouse can make life easier for the surviving spouse.

Reference: Barron’s (Oct. 5, 2024) “A Spouse’s Death Brings a Financial Jolt. How to Prepare.”

Retirement Savings Account Changes and Financial Decision Making

Keeping track of all the changes concerning retirement savings accounts and estate planning laws is not an easy task. However, there are some things you’ll want to know as 2024 moves forward. According to a recent article from The Wall Street Journal, “Changes in Retirement Savings Rules to Know Before Year’s End,” not knowing could impact retirement finances. Some of these changes include:

The End of RMDs from Roth 401(k) Plans. You use after-tax dollars to add to a Roth 401(k) plan. This is how contributions have always worked for Roth IRAs. Required Minimum Distributions (RMDs) had to be taken from Roth 401(k) plans. However, in 2024, this is no longer the case. If you meet other qualifications, you can take as much or as little as you like from your Roth 401(k), just as you do with a Roth IRA.

401(k) Catch-Up Contributions for High Wage Earners Must Go into Roth Accounts. Starting in 2026, if you are participating in a 401(k) plan, are age 50 and older, and if your annual income exceeds $145,000, you’ll have to make your catch-up contributions on a Roth basis. The income benchmark is indexed to inflation; your spouse’s income does not impact this change. This provision also does not affect Roth IRAs.

More Potential Tax-Deferred Growth for Certain Spousal Beneficiaries. Starting this year, an older spouse beneficiary of an IRA owned by a younger spouse who dies is treated as if they were the same age as the decedent spouse. RMDs based on the beneficiary's age don’t have to be taken until the deceased spouse is 73. While the benefits will depend on the younger spouse's age, this gives the surviving spouse more years for the account to grow tax-free.

A related change: the beneficiary may use the IRS uniform lifetime table to determine the amount of the RMD, which is a change from the single-life expectancy table. This can result in smaller RMDs, allowing for more tax-deferred growth. The RMD will rise to 75 years old in 2033.

Penalties for Missed RMDs are Reduced. The penalty for missed RMDs was reduced from 50% to 25% in 2023. If it’s corrected in a timely manner, two years from the end of the year for which the RMD should have been taken – it can be cut even lower, possibly as low as 10%.

These and other changes to retirement accounts may indicate a need for adjustments to your estate plan. With high estate and gift tax exemptions from the Tax Cuts and Jobs Act of 2017 possibly ending, now is a good time to speak with your estate planning attorney and learn if your estate plan is ready for the changes ahead.

Reference: The Wall Street Journal (July 31, 2024) “Changes in Retirement Savings Rules to Know Before Year’s End”

Money Tips for Taxes at Different Stages of Retirement

There are different stages of retirement, just as there are different stages of any portion of life. Each stage has its own challenges and needs, nearly all of which can be addressed by planning in advance. A recent Forbes article, “Tax-Saving Strategies For Three Stages Of Retirement,” describes the different stages and their requirements.

Pre-retirement is age 50-64. This is when you’re entering your final years of work and getting financial retirement and estate plans in order. The most critical tasks:

Make the most of retirement plan opportunities, including maxing out contributions to any employer-sponsored plans, especially those with matching features.

After age 50, wage earners qualify for catch-up contributions to IRAs and 401(k) plans. In 2024, a 50-year-old can contribute an additional $7,5000 to a 401(k) and $1,000 more to an IRA.

This is the time to review your Social Security benefits. While you can take benefits any time after age 62, by waiting until your Full Retirement Age (FRA) or later, your monthly benefit will grow. This is a personal decision, as some people need to take Social Security earlier, while others can draw income from retirement accounts until they reach age 70.

Active retirement is considered ages 65-74. The focus here is wrapping up your working life and ensuring that you have enough money to support your lifestyle. The factors to focus on:

Required Minimum Distributions (RMDs) are the least amount of money you can take from your retirement accounts. The SECURE Act 2.0 extended the time you have to leave money in these accounts. However, you’ll need to take your RMDs strategically so you don’t get pushed into a higher tax bracket.

After age 70 ½, you can make Qualified Charitable Distributions (QCDs) directly from your IRA to any qualified charitable organization. You may donate as much as $100,000 per year if it is a direct donation from the IRA to the organization. For people who will make donations with or without tax benefits, this allows you to make your donations, reduce taxable income and leave a legacy while still living.

Late retirement is anything after age 74, where you may want to focus your attention on passing wealth to heirs. You should have an estate plan in place by now. However, it probably needs to be reviewed. Have any of your beneficiaries passed away? Is the person you named as your executor still willing to perform the tasks? Review your estate plan with your estate planning attorney to ensure that it complies with your state's laws and wishes.

If you’re concerned about estate taxes, this is the time to use the annual gift tax exclusion to transfer wealth to heirs with no tax liability. In 2024, you may gift $18,000 to as many people as you want as a single, while married couples may gift $36,000 to as many people as they wish.

Reference: Forbes (July 12, 2024) “Tax-Saving Strategies For Three Stages Of Retirement”

What’s the Best Way to Simplify an Estate?

Yes, you need to create your estate plan and decide how you want your money and real estate property to be distributed upon your death. However, there’s more. A recent article from Morningstar, “Your family will love you even more if you simplify your estate,” says you should also simplify your assets to simplify your estate.

How you have your financial life arranged now may seem simple enough to you as you navigate it regularly. You know where your accounts are, how much is in each account and who the beneficiaries are of any account, having the option of naming a beneficiary. If you don’t know who the beneficiaries are, take care of this right away.

However, for your executor and your heirs, those same accounts are a series of unknowns. If a single financial advisor doesn’t handle your investments, can you bring them under one person’s management? If you have accounts in more than one bank, can you consolidate them into one bank?

A record number of boomers will turn 65 in 2024. The “great wealth transfer” of a generation owning $72.6 trillion and passing this along to younger generations has led many to prepare accounts and heirs for what will come in the next twenty years. This includes creating a comprehensive estate plan with a will and trusts. Most experienced estate planning attorneys advise their clients to create a revocable living trust to avoid probate, which can be costly, stressful and time-consuming.

Probate is considered one of the most complex parts of inheritance. Distribution will be far simpler if you can remove most of your assets from being part of your probate estate. Trusts can also protect assets in a way wills cannot. It’s far more challenging to contest a trust than it is a will. If your family is prone to infighting, you want to place assets into trusts!

Talk with your estate planning attorney about a “pour-over will.” This is a will directing any assets not already in your trust to be “poured over” into the trust upon your death. You’ll also want to have a financial power of attorney, healthcare power of attorney, living will and HIPAA release. These documents allow the people you designate to take care of your financial, legal and health if you should become incapacitated.

Once your estate plan is in place, start consolidating accounts. If you have multiple IRAs or 401(k)s from various employers, combine them. You've set your heirs up for trouble if you have individual stock certificates in your bank’s safe deposit box. First, the safe deposit box will be sealed upon your death, unless someone else owns the box. Second, stock certificates must be settled through a stock-transfer company, which requires proof of the owner’s passing and proof of their being legitimate heirs. New accounts need to be opened up for the stocks to be transferred to, and only then can they be retrieved the money from the sale of the stocks.

It can also be difficult for heirs if they have annuities, government-issued bonds, or bank CDs. They all must be found, and distribution rules must be uncovered and processed.

After having your estate plan created and consolidating accounts, create an inventory of all accounts, including digital assets (usernames and passwords will be needed), and place them in a file with keys to your safe deposit box, life insurance policies and estate planning documents in one place. Make copies of your credit cards, front and back as well.

Having this information in one place will make managing your estate far easier. Your loved ones can focus on their memories and not be overwhelmed by the details.

Reference: Morningstar (June 18, 2024) “Your family will love you even more if you simplify your estate”

Money Mistakes to Avoid when You’re Over 50

After you’ve worked for a few decades and accumulated assets and investments, there are certain mistakes you’ll want to avoid, says a recent article, “7 Money Mistakes People 50 and Older Make” from yahoo! finance. One of the most common is failing to plan for the cost of long-term care. You’ll want to purchase LTC insurance when you’re relatively young and healthy.

Another mistake is to match increases in earnings with increases in spending. Known as “lifestyle creep,” this is a natural tendency to want to enjoy a bigger house, fancier car and more extravagant vacations as income grows. However, the downside is that you’re spending more and saving less, which will return to haunt you during retirement.

Tied to lifestyle creep is underestimating how much money you’ll need to have to enjoy a real retirement—when you’re not working part-time at a second career because you didn’t save enough when you could have. Maximize your contributions to 401(k)s and IRAs instead of spending more on a more expensive car. Your future you will thank you.

Savings for retirement need to grow over the decades. Keeping money in a savings account or relying on low-risk investments can protect your money. However, it will come at a cost. A moderate portfolio with some investment risk is better over the long term than no risk.

Neglecting to do estate planning, particularly failing to update estate plans made years ago, creates many problems for families. Any major change in your life, including marriage, divorce, death of a spouse, birth of a child or grandchild, or relocation, should be accompanied by a review of your estate plan. This ensures that your wishes are reflected, avoids possible legal battles among family members and establishes a legacy of caring. An estate planning attorney can help you navigate this.

Ignoring the cost of inflation can shrink your purchasing power, so any retirement projections should include the impact of inflation.

Longevity is the big mystery in all retirement planning. We cannot know how long we’ll live, so we tend to underestimate our lifespan. Plan for a longer retirement by creating a plan for sustainable withdrawals from retirement accounts.

Reference: yahoo! finance (June 13, 2024) “7 Money Mistakes People 50 and Older Make”

Top Estate Planning Mistakes to Avoid

Suppose you’ve reached retirement age and have savings, including a 401(k), IRA, investment accounts, home and life insurance policies. Congratulations! While you’ll use these assets during retirement, some of them may end up in your estate. This, according to a recent article from Rocky Mount Telegram, “Avoid these estate planning mistakes,” is why you need an estate plan.

An estate planning attorney will be able to create such a plan. They’ll also know how to avoid common mistakes made by people with less experience. Once you get your information in order, the process isn’t as daunting as you think. Here’s what you need to know to have a successful plan:

Don’t wait until the “right time.” Putting off creating a plan and taking care of the details, like funding a trust or getting documents executed, leaves many people with no plan. Illness and accidents occur without warning. Estate plans address incapacity and distribute assets. If there is no will, your state’s laws of intestacy will determine how to distribute your estate. Contact an estate planning attorney and schedule a meeting sooner, not later.

Neglecting to update an estate plan and related documents. Estate planning isn’t a “set it and forget it” process. Most people’s lives include change—marriage, divorce, moving, etc. Your estate plan needs to change too—to be updated in the event of a large event, like the birth of a second child or grandchild, moving, a change in health or financial status and to take advantage of always-changing tax laws.

Forgetting to update beneficiaries. The number of people leaving generous surprises to people no longer in their lives because they forgot to update their beneficiaries would surprise you. However, it would not surprise an estate planning attorney. People start retirement funds at their first job and forget they assigned someone to receive the assets twenty or thirty years later. Your will only addresses assets in your estate—accounts with beneficiary designations are outside the purview of your will.

Neglecting to fund a trust after it’s been created. This is another common mistake to avoid. The entire estate plan might not achieve your goals if the trust is created and not funded. Assets being moved into the trust need to be retitled, and it takes some attention to detail to ensure that this is all done.

Naming a bad executor. The executor is responsible for carrying out your wishes as expressed in your will, overseeing the distribution of assets, filing estate and final personal taxes and many other tasks. They need to be extremely well organized and financially responsible. Your legacy will be impacted if you choose someone based on family relationships instead of competence.

Most people start this process by consulting with an estate planning attorney. It will take some time and effort on your part. However, imagine your family having to dig through all your records and documents and guess what you wanted to happen. Is that not a pretty picture? A better choice is to start and finish your estate plan with an experienced attorney.

Reference: Rocky Mount Telegram (May 10, 2024) “Avoid these estate planning mistakes”