Paul O. Dillon, Attorney at Law

How to Help Heirs Prepare for an Inheritance

If your family doesn’t talk about estate planning, including incapacity, death, or money, your heirs aren’t likely to know what to do if and when you become incapacitated, when you die or how to manage your assets when they become their inheritance. This is all too often the case, but it doesn’t have to be; according to a recent article from Madison Daily Leader, “Are your heirs ready to receive an inheritance?”

When an inheritance arrives, it’s accompanied by emotional, financial and legal issues. Having everyone prepared and informed can make the difference between a squandered inheritance, an inheritance consumed by taxes, or an inheritance wisely managed and benefiting one or more generations.

There are key issues to discuss, including matters to cover with an estate planning attorney.

Communicate with your family about your estate plan, which is more than a will. Incapacity planning includes a Power of Attorney and Healthcare Power of Attorney, two documents allowing you to name someone else to act on your behalf if you cannot express your wishes. A living will tells loved ones your wishes regarding end-of-life care. With it, your family will know if you want to be kept alive by artificial means. Without it, they’ll have to guess.

Sharing the contents of your will allows loved ones to know what to expect. They may not all be happy with your decisions. However, it won’t be a surprise and will be less likely to spark disputes after you have passed.

Do your heirs know how to manage money or other assets? If you’re leaving your heirs wealth in the form of stocks, real estate, IRAs, 401(k)s, cash, or cryptocurrency, they’ll need to be prepared to accept the assets. If your estate includes a vacation home, is there a plan for sharing it among heirs? These issues will be more manageable, if heirs understand what they are inheriting and what they’ll need to do.

An estate plan should address taxes for the people creating the plan and their heirs. While your family may not have to worry about federal estate taxes, some states still have inheritance and estate taxes. Withdrawals from certain types of inherited accounts may incur state and federal income taxes, which could take a bite out of their inheritance. If inherited assets are sold for more than they were worth at the time of inheritance, there may be capital gains taxes.

Every estate has some expenses to be considered, including funeral costs. If the decedent has a mortgage and the home is left to heirs, they may need to sell it quickly before expenses mount. The estate plan should include an inventory of all liabilities and assets, so the executor can address any outstanding debts.

There’s a lot to unpack when managing an estate. Start by having an estate plan created with an experienced estate planning attorney or update an existing plan to be sure that it still achieves your wishes. Talk with heirs so they understand your intentions. Leaving a legacy of caring takes many forms, and this is one of them.

Reference: Madison Daily Leader (Nov. 23, 2024) “Are your heirs ready to receive an inheritance?”

Is Your Estate Plan Ready for 2025?

Talk about a possible third version of the SECURE Act, elimination of Social Security taxes and a host of other potential changes combined with rules and regulations already set to take effect in 2025 adds a lot of complexity to estate planning for the coming year, says a recent article from Think Advisor, “7 Big Unknowns That Could Shake Up Retirement Planning.”

Possible changes to the SECURE Act. The Setting Every Community Up for Retirement Enhancement was initially passed in 2019, followed by SECURE Act 2.0 in 2022. Both made many changes to retirement and estate plan rules. One former Labor Department official has said a third version is beginning to form.  However, details are sketchy. Republicans in Congress are expected to be eyeing tax cuts. However, reducing government revenue may be problematic.

Historically high estate tax exemptions. The high estate tax exemption created by the 2017 Tax Cuts and Jobs Act may be extended. However, the exact path forward for federal budget negotiations and tax reform is riddled with many unknowns. Can a “core TJCA extension” occur, while avoiding a filibuster in the Senate? Stay tuned.

Social Security taxes. Some states tax Social Security benefits. Campaign promises to eliminate taxes on Social Security may be a bit harder to implement than the extension of federal estate tax exemptions. It would have to be done through stand-alone legislation requiring Democratic support. It is possible, yes, but not certain.

Possible elimination of the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO). The House passed the Social Security Fairness Act on November 12 by a wide margin. The Senate may act in the coming lame-duck session to do away with these two policies, which reduce Social Security benefits for government workers. As of this writing, the Senate version of the bill is still in committee, so the legislation will probably need to be reintroduced in 2025.

Will the Full Retirement Age (FRA) be lifted for Social Security? Depending on who you ask, the insolvency date for Social Security is 2033 or 2034. Increasing the FRA from 67 to 68 or 69 could increase funding. According to the Congressional Budget Office, this change is expected to reduce annual yearly benefits by about 13% for people who fall into this older FRA category. Experts think this may not happen in the next Congress but expect to see a change to the FRA in 2025 or 2026.

Changes to ERISA. Two rulings from federal courts in Texas temporarily halted a new fiduciary rule under the Employee Retirement Income Security Act. The rule seeks to minimize conflicts of interest when financial advisors work with clients on tax-qualified retirement accounts. It was set to take effect on September 23. However, it is now in limbo. Until a Labor Secretary is appointed, it will be hard to determine when the ruling will be reinstated.

Roth accounts. Whether more tax revenue will be needed because of estate tax extensions is followed by transforming more retirement accounts from tax-deferred to Roth-style, where taxes are paid when the assets go into the account. Forcing taxpayers to save for retirement on an after-tax basis could help with collecting tax revenue.

Regardless of these and more changes, an estate plan is still the best means of protecting your family and yourself, managing tax liabilities and preparing for the future.

Reference: Think Advisor (Nov. 26, 2024) “7 Big Unknowns That Could Shake Up Retirement Planning”

Can You Transfer Co-op to a Trust as Part of Estate Plan?

Real estate is often one of the more significant parts of an estate. Whether the property is a single-family home, a condo, or a co-op (cooperative), it needs to be addressed in the estate plan. A recent article from Habitat, “Trust Transfers in Co-ops: Balancing Estate Planning and Building Interests,” explains how co-op boards view these transfers, providing useful insight for those considering putting real estate property into a trust.

The board will watch how maintenance payments are handled once the transfer occurs. In a co-op, you don’t own the apartment or townhouse. You instead own shares in the building. When individual shareholders fail to stay current on maintenance payments, the board has a straightforward path to dealing with the issue of non-payment. It can pursue the shareholder’s personal assets or foreclose on the shares.

When a trust owns the co-op, the board has less control over who lives in the unit, so recovery is unclear. The question of the voting rights for a trust versus an individual also has to be clarified. If three siblings now own the co-op through a trust, who has the right to vote in a shareholder meeting? Someone must be designated to participate in the board’s annual meeting and vote on the trust’s shares to maintain quorum requirements.

Determining who pays the co-ops’ legal fees to review the trust request is another issue the board will address. When the owner is an individual, the transfer cost falls on the shareholder making the request, not the building. This occurs with current shareholders who seek to transfer their shares into a trust and new purchasers who want to buy into a unit owned by a trust.

When faced with a request to transfer a unit into a trust, the board also considers whether or not it will permit heirs to automatically be allowed to live in the co-op. Most co-ops have rigorous review processes to protect the financial well-being of the building. Beneficiaries should not expect to move in without going through the same approval process as any new purchaser, whether they plan to live in the unit themselves or if they are going to sell the unit to someone else.

Condominiums are owned differently, so the transfer process will be different than for a co-op. Most condos don’t give their boards as much control as in a co-op. Some condos try to impose similar restrictions when a property is transferred to a trust. However, they don’t typically have the right to do this. A local estate planning attorney should be consulted to review the condo bylaws before moving the property into a trust.

Understand the condo may not have the legal right to prevent a property from being transferred into a trust. However, they might make life uncomfortable for beneficiaries trying to move into a unit or trying to sell the unit. An experienced estate planning attorney should be involved with the transaction before the trust is created and executed.

Another issue to be considered concerns an existing mortgage. Transferring co-op shares into a trust includes surrendering the current stock certificate and lease. To do so, the lender has to approve this process. A new stock certificate is then issued to the trustee on behalf of the trust. There may be tax implications, as units owned by a trust might not qualify for any co-op/condo tax abatement, which could impact the overall estate plan.

This trend appears to be growing, and while some boards may initially refuse the request, many now understand that trust transfers can facilitate the shareholder’s estate plan, while maintaining the building’s best interests.

Reference: Habitat (December 2024) “Trust Transfers in Co-ops: Balancing Estate Planning and Building Interests”

Do You Have a Large IRA You Don’t Need for Retirement?

John and Sally’s problem is a nice one to have. However, it is still a problem. They are rightfully concerned about the taxes generated by Required Minimum Distributions and any taxes heirs may face.

Their two adult children would currently be required to empty the IRA within ten years of their parent’s death. Depending on their ages, these taxable withdrawals could hit during their peak earnings years. The $1 million IRA could potentially lose 40% of its tax value. If John and Sally’s estate exceeds the federal or state tax exemption levels, their heirs could pay a combined estate and income tax burden of 60%-70%.

A recent article from Forbes, “Don’t Need That IRA For Retirement? Here’s What You Can Do With It Instead,” provides several options to consider.

IRA Disclaimer to Pass Assets to Grandchildren. Adult children could disclaim part or all of the IRA, passing all or a portion to grandchildren instead of the children. The grandchildren would still have to be content with the ten-year rule for withdrawals. They are in a far lower tax bracket than their parents. The original IRA owners would need to set up a special IRA trust to restrict how funds could be used. They might specify the funds to be used for education, a down payment on a first home, or medical care. An experienced estate planning attorney can help set up a trust to reduce the tax impact on the family and enhance the grandchildren’s lives.

Create a Testamentary Charitable Remainder Trust. The IRA could be left to the trust to create a lifelong income stream for the children. The benefits are twofold: steady income while protecting the principal and spreading tax liability over many years. Upon the death of the heirs, the balance in the trust is donated either to a charity of the parent’s choice or a Donor Advised Fund. If the couple wishes to replace the amount of money given to charity, they can buy a life insurance policy for their children to benefit the grandchildren.

Buy a Guaranteed Life Insurance Policy. Purchasing a life insurance policy with the RMDs would add an asset outside the probate estate. The income tax-free proceeds could be used to pay taxes on the remaining IRA or become an inheritance. The IRA could also be bequeathed to a charity, and life insurance proceeds would replace the IRA inheritance.

Qualified Charitable Distributions During Life. For philanthropically minded families, a QCD allows IRA owners to contribute funds directly to qualified nonprofits once they turn 70 ½. The QCD does not count as income, so John and Sally can keep taking the standard tax deduction.

Early Distributions Before Reaching Age 73. John and Sally could take their distributions before they reach the required minimum distribution age, spreading withdrawals over extended periods of time. The tax burden would be evened out over time.

These options should be reviewed with an experienced estate planning attorney to be sure they don’t undo other estate planning strategies created to pass wealth across generations and support their future.

Reference: Forbes (Nov. 25, 2024) “Don’t Need That IRA For Retirement? Here’s What You Can Do With It Instead”

How to Avoid Estate Planning Mistakes in 2025

Even if you could remove all of the emotions about estate planning, like considering your eventual demise and the possibility of incapacity, it can still feel a bit overwhelming. Having an experienced estate planning attorney on your team makes the process far easier, with the knowledge you’re in good hands. A recent article from GO Banking Rates, “4 Expert Insights on Avoiding Estate Planning Pitfalls for 2025,” explains how estate planning helps to avoid family fights, lost assets and legacies.

Estate Planning encompasses your entire life. Wills express how you want assets to be distributed, and trusts minimize taxes by taking assets out of the probate estate. However, an estate plan is more than these two pieces. Estate plans include incapacity plans, caring for children and transferring wealth in a number of ways.

If someone becomes incapacitated and hasn’t created a Durable Power of Attorney, no one can manage non-healthcare matters, from paying utility bills to maintaining their home. A family member must go to court to obtain guardianship to do anything.

Every estate plan should include a Healthcare Power of Attorney and HIPAA release authorization so a designated person can be involved with their loved one’s healthcare, talk with their doctors and be involved in any medical decision-making.

Keeping beneficiary designations up to date. Beneficiaries aren’t just the people you name in a will. Designated beneficiaries are those listed on retirement accounts, investment accounts, life insurance policies and other documents to receive assets when you die. Make sure these names are up to date, especially if you haven’t reviewed them in years. Any account with a beneficiary designation does not go through probate, and your will has no control over these assets.

Things will get messy if beneficiaries on your accounts are no longer in your life. Assets could go to an ex-spouse, an estranged family member, etc.

Choosing your executor with care. Many people get stuck when there is no obvious person to manage this task. An experienced estate planning attorney can help you work through this issue, since a poor choice could put your entire estate plan at risk. Whoever you choose to serve as executor—the person who manages your estate—will need to deal with financial institutions, family members, government agencies and every facet of your life. Many automatically name their eldest child or best friend, which might lead to disaster if they are not available, good with details, fiscally knowledgeable, or able to manage your family’s personalities. Ensure that they are up for the task and also have a backup executor named.

Introduce your family to your estate planning attorney, financial advisor, CPA and other professionals in advance. The people who help you manage the business side of your life will be able to help you better if family members know who they are, how to contact them and have already met them. They don’t have to be friends. However, making introductions in advance can make their work together easier.

Reference: GO Banking Rates (Nov. 17, 2024) “4 Expert Insights on Avoiding Estate Planning Pitfalls for 2025”

How Professionals Use Estate Planning

Estate planning encompasses many aspects of an individual’s life, including asset management, wealth transfer and tax planning. With the help of an experienced estate planning attorney, a secure financial future and protection for loved ones can be accomplished. A recent article from mondaq, “Estate Planning for Professionals” provides useful details.

Estate planning includes protecting personal assets from creditors. The tools most often used include trusts, retirement accounts and insurance. Which type of trust is needed depends upon each person’s circumstances and should be tailored to meet your needs. Available trusts include gift trusts, revocable trusts, marital trusts, trusts to benefit children and special needs trusts, to name a few. Trusts also transfer business assets out of direct ownership while minimizing estate taxes.

Retirement accounts, including IRAs, are considered savings vehicles but serve other purposes. Certain retirement accounts include ERISA spendthrift protections, which also allow unlimited accumulation free from creditor claims while protecting someone from taking too much out of their account. ERISA, a federal law, does not protect IRAs, so any protection for the IRA is state-specific. In some states, assets in IRA and Roth IRAs are protected from creditors in case of bankruptcy.

Business owners are often advised to use LLCs and corporations to protect assets from creditors. However, the entity used depends upon the nature of the business and the owner’s circumstances. Keeping business and personal assets separate is a foundation of estate planning, which should also incorporate retirement and succession planning.

Succession planning should be done as soon as a business reaches a certain level of stability and success. If family members are part of the business, assigning key roles, clarifying responsibilities and planning for how ownership will transfer when the founding owners decide to retire or if they die while still operating the business needs to be in place. How the business will be transferred, which can occur in many different ways, must be clarified.

Divorce is an unpleasant fact of life for many families. Protecting assets must be weighed along with maintaining relationships, particularly where children are involved. A pre-nuptial agreement for the professional or business owner should be part of planning for marriage. Drafting the document when the relationship is good can clarify issues and hopefully preclude some acrimony if the marriage doesn’t go well.

An estate plan requires time to prepare, as documents including a last will and testament, power of attorney, healthcare power of attorney, advanced directives and trusts all require careful drafting. Any estate plan must be reviewed every few years to ensure its efficacy.

Reference: mondaq (Oct. 18, 2024) “Estate Planning for Professionals”

What are the Rules About Inherited IRAs?

It’s fun to imagine a tax-free, no-strings-attached inheritance. However, for most people, an inheritance comes with taxes and distribution rules, some of which are complicated. An Inherited IRA is one of those, says this article from Morningstar, “Inherited IRAs: What do Know About Taxes, RMDs, and More.”

With an Inherited IRA, your relationship with the original account owner impacts what you can and can’t do with your windfall. Provisions in the SECURE Act made Inherited IRAs a little less attractive, especially compared to Inherited Roth IRAs. For some, the rules are too much to navigate, and they take the entire amount of an IRA in cash and pay taxes out of their inheritance, giving up a third or even a half of an inheritance. It’s better to seek the guidance of an estate planning attorney and preserve as much of it as possible.

There are three different kinds of IRA beneficiaries:

Eligible Designated Beneficiary. This is the spouse of the IRA owner, a minor child or children of the IRA owner, a person who is disabled or chronically ill, or a person who is not more than ten years younger than the IRA owner.

Designated Beneficiary. This is not your spouse and doesn’t fit any of the above categories.

Non designated Beneficiary. This is a “nonperson entity,” i.e., a charitable organization or estate.

Which category you’re in determines what your inheritance options are. The best candidate for an inherited IRA is a spouse. They have the option to put the assets into a properly titled Beneficiary IRA, roll it into their employee plan, or transfer funds to their own IRA.

Changes to IRA distribution rules from the SECURE Act impacted designated beneficiaries the most, the most common person to inherit an IRA. The new rule mandates that all funds must be taken out of the account by the end of the tenth year the account was inherited.

You’ll want to speak with your estate planning attorney to learn how your IRA inheritance may impact your current estate plan, since it may change how assets are distributed to your own beneficiaries. You may also want to consider converting some of your own IRA funds into a Roth IRA. Taxes are paid when funds go into the Roth IRA. However, beneficiaries don’t pay taxes on withdrawals.

Inheriting an IRA can lead to changes in your life as well as your estate plan. Take the time to consider your short-term and long-term goals, then consult with an estate planning attorney to make sure you make the best choice for your situation.

Reference: Morningstar (Sept. 13, 2024) “Inherited IRAs: What do Know About Taxes, RMDs, and More”

Estate Planning Lessons From Warren Buffett

As one of the creators of The Giving Pledge, encouraging wealthy people to give away most of their wealth to charitable causes, Warren Buffett’s estate plan isn’t like other billionaires’ estate plans. There are many takeaways for people of all different wealth levels, according to a recent article, “What Clients Can Learn from Warren Buffett’s Estate Plan” from Wealth Management.

Buffett says he’s changed his will several times after seeing how his children matured over the years. Building flexibility into an estate plan is important. It’s hard to tell which child will end up with a better financial situation, or which is more financially responsible. In addition, any time there is a significant life event, like divorce, moving to a new state, a new child in the family or marriage, estate planning documents should be reviewed, especially state-specific ones.

Buffett is celebrated for leading a relatively ordinary lifestyle, living in the same house, and driving the same car for many years. In a newsletter, he declared to Berkshire Hathaway shareholders his estate would be an open book, a simple last will and testament to be filed at the Douglas County Courthouse. The courthouse will no doubt be flooded by requests for the document, as it will become part of the public record once it’s filed.

Many families choose to use trusts to keep their bequests private, lighten their tax burden and facilitate wealth distribution.

A change to his estate plan will end his donations to the Bill & Melinda Gates Foundation. Buffett has given more than $40 billion to the foundation in the last fifteen years. His donations will cease when he dies. Buffet has put his three children in charge of a charitable trust. They will decide what causes to fund and how much to allocate.

For people of more modest means, charitable giving may include Donor Advised Funds or planned giving. You can also donate time and effort to nonprofits in your community.

Buffett praises his children’s ability to make good decisions, trusting them to carry out the family’s philanthropic goals while leaving room for them to deal with future changes in the tax laws and regulations governing nonprofits. His plan for the three of them to make unanimous decisions may lead to some wrinkles in the plan. However, he believes their shared values will overcome any disagreements.

Many estate planning attorneys recommend that parents objectively examine how their children interact before making them co-executors or joint owners of property. This may work well in some families.  However, for others, it may create obstacles. In some cases, it’s useful to hold a family meeting with the estate planning attorney to identify future issues.

Reference: Wealth Management (September 4, 2024) “What Clients Can Learn from Warren Buffett’s Estate Plan”

What Is a ‘Second Retirement,’ and How to Plan for It?

Many spouses design their retirement finances and estate plans with their spouses. However, planning for the second phase of retirement and estate plans also needs to be done. When the first spouse dies, the surviving spouse would be well served by a plan for the “second retirement,” as explored in a recent article from Nasdaq, “I’m a Financial Expert: 7 Ways Ever Woman Can Prepare for a ‘Second Retirement.’”

In 2021, data from the U.S. Census Bureau shows that 30% of all older women were widows. There were also more than three times as many widows as widowers.

How do you plan? It depends on your age and financial situation. For instance, becoming a widow in your 60s is very different from becoming widowed in your 80s. If your network of friends and family was through your spouse, this may also change dramatically after their death.

The most important question is what the household income will be upon losing the first spouse. This must be considered if the decedent had a pension, annuity, or other income source that stopped upon their death. A surviving spouse can’t claim a deceased spouse’s Social Security benefits in addition to their own. You can only receive one of two benefits—either your retirement or survivor benefit.

Some pensions end upon the account owner's death, while some allow for survivor benefits. These are usually a percentage of the original amount, or they may offer a lump sum payment.

Living costs will change when the first spouse dies. The surviving spouse may be able to move to a smaller home or sell a second car. However, certain costs will go away. Meanwhile, other costs may occur, like one-time taxes on inherited IRAs and taxes on the sale of property and vehicles. Losing the spouse might mean some services, like home maintenance, will need to be paid for.

The death of a spouse will incur certain legal and administrative costs. If there was no will, probate is expensive and will be necessary. An estate planning attorney may be needed to help settle an estate if there was no will, while costs will be less if a will and trusts were created before the spouse died.

Major changes in circumstances like the death of a spouse can throw even the highest functioning people into a difficult emotional state. Planning for the “second retirement” will ideally help the surviving spouse to make the transition into their new life easier, or at least as easy as possible.

Speak frankly with an estate planning attorney about revising your estate planning documents and preparing for the second retirement. There will be more than enough to deal with at the time; it will be better if planning can be done in advance.

Reference: Nasdaq (August 17, 2024) “I’m a Financial Expert: 7 Ways Ever Woman Can Prepare for a ‘Second Retirement’”

Can an Irrevocable Trust Be Changed?

Most irrevocable trusts are created to serve for generations. However, life and tax laws change. The terms of the trust sometimes simply don’t work for the family any more. An article from Kiplinger, “Can You Change an Irrevocable Trust? Yes, But Be Careful,” explains how changes to irrevocable trusts can be made, with a few caveats.

Changes to an irrevocable trust shouldn’t be done without the guidance of an experienced estate planning attorney. Be very clear about why you want to make any changes. Make sure that you understand what your choices are for making changes. You may learn that you can’t do exactly what you have in mind. If this is the case, find out what changes you can make. Understand the tax consequences, which could be considerable.

Why would you want to make changes to an irrevocable trust? In most cases, a trust created twenty years ago no longer serves its purpose. Other reasons include fixing errors in drafting the trust, changes in family circumstances, needing to fund a Special Needs Trust, the death or incapacity of a trustee or successor trustee and permitting investment flexibility.

There are also tax-based reasons to change an irrevocable trust. You’ll want to make changes if you want to move the trust to a state with lower income taxes, include or exclude assets from a beneficiary’s estate, convert a grantor trust to a non-grantor trust, change provisions for IRA distributions, or qualify a trust to own stock in an S corporation.

How do you actually make the changes to the trust? Start by reviewing the trust with your estate planning attorney. The trust may already contain language permitting changes to be made. The trust terms may also block your usage of certain trust strategies.

Review the state’s governing laws. Laws about trusts may have changed since the trust was originally created. Some states, including New York, Delaware and California, have “decanting” statutes, meaning one can “pour” assets from one trust into another. Your estate planning attorney will be up to date on these laws.

Consider a trust modification. Depending upon the state’s laws, you might be able to make changes without court involvement simply by obtaining and documenting beneficiaries' consent. In some states, you’ll need to obtain approval from the court.

Be mindful of tax implications. If the trust assets will be included in a beneficiary’s estate, this could be a good thing—or a bad thing. Assets subject to estate tax receive a step-up in income tax basis. Therefore, having these assets in the beneficiary’s estate might be costly.

Changes to the terms of the trust may make sense as your life progresses and laws change. Just be certain to make changes with the guidance of an experienced estate planning attorney.

Reference: Kiplinger (Aug. 26, 2024) “Can You Change an Irrevocable Trust? Yes, But Be Careful”