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How Do I Include My Digital Assets in My Estate Plan?

“Smart estate planning, therefore, includes addressing how to handle digital assets.”

It seems that every day we conduct more of our daily activities online. We increasingly all have a digital presence on our PCs and the Internet. To complete your estate planning, you need to consider how to deal with your digital assets.

Without a clear plan in place, it can be a major headache for your family when you pass away, says The Street in the recent article, “Estate Planning in a Digital World.”

Estate planning for digital assets uses the same basic process as planning for physical assets, but it has some unique challenges:

• The information in which a digital asset resides may be owned by another entity;
• Digital assets can change; and
• Legal issues like intellectual property and privacy laws can complicate things.

Some online services haven’t created clear policies for how digital assets are to be managed when a user has died. In some situations, it may be sufficient to make sure the person you've named as executor or given power of attorney has access to your passwords. However, there are some companies that may say that another person accessing an account is a violation of their terms of use. They may freeze or close the account. Therefore, you can see why careful planning and research is critical, when adding digital assets to your estate plan.

Some states have proposed standard governance guidelines for estate planning and digital assets, such as the revised Uniform Fiduciary Access to Digital Assets Act. This standard guideline gives clear rules regarding how an executor can manage digital assets after the owner’s death.

Do an Inventory of Your Digital Assets. Begin with a list of all of your digital assets.

Designate a Person to Handle Your Digital Assets. This person will address your online accounts and files after you pass.

Maintain a List of Your Passwords. A big help to your heirs and advisors, is to have ready access to your accounts at your death. Keep this list updated, and store it in a secure location. You should also give a copy to your estate planning attorney.

Leave Detailed Instructions. The better the instructions you leave, the easier it’ll be for your family to know what to do and to be certain that your final wishes are fulfilled.

Including information on how to access and manage your digital assets in your estate-planning documents is a critical step to ensuring that your heirs can more easily manage your affairs, when you are gone.

Contact us to talk to an experienced Thousand Oaks estate planning attorney to be sure your digital plan is set up correctly in your estate plan.

Reference: The Street (June 3, 2019) “Estate Planning in a Digital World”

Should I Leave an Inheritance to My Kids?

“Deciding whether to leave an inheritance for your children impacts the amount you save, the retirement plans you choose and how you take qualified retirement plan distributions. However, beyond your desire to leave some wealth to your children (or not), there are some essential personal financial issues to consider.”

Some retirees make a big mistake and give their retirement savings away without considering their own income needs. Before you make gifts to others, take a look at how much to spend on yourself. Determine how much you need to save and how much you can withdraw each year, when you retire.

Investopedia’s article, “Challenges in Leaving Inheritance to Children,” says to consider the effect of inflation and taxes and maintain a diversified portfolio of growth and income investments to help your portfolio keep pace with inflation.

The biggest unknowns with retirement income and children's inheritance are unexpected illness and high healthcare costs. Government programs are frequently not helpful in paying for nursing homes and other forms of long-term medical care. Medicare covers nursing home stays for a very limited period. Medicaid mandates that you spend nearly all of your own money, before it will pay for long-term care. You can’t just move assets to family members to qualify for Medicaid, because the program restricts benefits, if asset transfers were made within five years prior to applying for Medicaid. The rules are tricky, when it comes to eligibility.

You can protect your assets from the costs of catastrophic illness with a long-term care insurance policy. However, these policies can be very expensive and have coverage limitations. Consider them carefully.

What happens if you outlive your retirement funds? With longer life expectancies, it's crucial to try to manage retirement-plan withdrawals, so you do not deplete all of your assets during your lifetime.

You could purchase an immediate annuity with some retirement money to ensure a guaranteed amount, for at least as long as you live. Some pension and retirement plans may allow you to stretch payments over single or joint life expectancies, rather than receive the proceeds as a lump sum.

If you expect to inherit assets from your parents, you may be in a better position financially than someone who doesn’t expect to receive an inheritance. Note that certain inherited assets, like stocks and mutual funds, are eligible for a favorable tax treatment called a step-up in basis. If you are leaving assets to others, this could mean significant savings for heirs.

You may also want to set up a trust to control distributions from the estate to the surviving spouse and children. If you or your spouse have children from previous relationships but don't have a prenuptial agreement, trusts can ensure that specific assets are passed to designated children.

You may share your wealth with others by gifting assets, creating a trust, deferring income or purchasing life insurance or tax-deferred variable annuities.

Talk to a Thousand Oaks estate planning attorney at Family Security Law Group, APC to determine the best options for your circumstances.

Reference: Investopedia (November 26, 2018) “Challenges in Leaving Inheritance to Children”

What Do I Need to Know About ABLE Accounts?

“What is an ABLE account and who is eligible?”

Millions of Americans with disabilities and their families depend on public benefits to help provide income, health care, food and housing assistance. Eligibility for assistance through Supplemental Security Income, SNAP and Medicaid is based upon a resource test, so disabled individuals seeking benefits are typically limited to no more than $2,000 in savings or assets. This can present a difficult problem.

The Achieving a Better Life Experience Act (ABLE) was created as a way to create a tax-advantaged savings tool for individuals with disabilities and their families.

nj.com’s article, “ABLE accounts–A tax advantaged tool for special needs planning,” advises that when used correctly, this overlooked savings account may allow families to build a small nest egg, without affecting eligibility for public program benefits.

An ABLE 529 account is designed to be a savings or investment account to supplement public benefits. It can be a powerful strategy for individuals, who previously were unable to build supplemental funds outside of a trust for their needs. An ABLE account is funded with after-tax contributions that can grow tax-free, when used for a qualified disability expense. The account owner is also the beneficiary and contributions can be made from any person including the account beneficiary, friends, and family.

The ABLE account is available to individuals with significant disabilities, whose age of onset of disability was before they turned 26. A person could be over the age of 26 but must have had an age of onset before their 26th birthday.

Contributions are restricted to $15,000 per year. Because the ABLE account is connected to the 529 plan for education, the total contribution limit is based upon the individual state’s limit for 529 plans. Individuals can have up to $100,000 in an ABLE account, without impacting SSI eligibility. The first $100,000 also does not count toward the $2,000 resource restriction.

A frequently asked question is whether to use an ABLE account or a Special Needs Trust for planning purposes. ABLE are subject to certain limitations that make it impossible, or at least ill advised, to use them instead of a Special Needs Trust. Remember that ABLE accounts can only receive $15,000 in deposits each year, but, in most cases, Special Needs Trusts can receive much larger contributions in a year, once they are funded. This is an important difference for parents who want to leave more substantial assets to their child when they die but don’t want to jeopardize the child’s eligibility for critical services. In that situation, a Special Needs Trust may be more desirable.

When the beneficiary of the ABLE account passes away, any leftover funds in the account are typically reimbursed to the state to defray the costs of providing services during the beneficiary’s life. However, that’s different than a properly drafted Special Needs Trust.

In 2019, ABLE account owners who work, but don’t have an employer-sponsored retirement account, can now save up to $12,140 in additional savings from their earnings.

Ask your Thousand Oaks estate planning attorney at Family Security Law Group, APC about possibly coordinating an ABLE account with a Special Needs Trust.

Reference: nj.com (April 20, 2019) “ABLE accounts – A tax advantaged tool for special needs planning”

What Are Some Advantages of Making Lifetime Gifts?

“You probably give to others each year, such as for birthdays and Christmas gifts. Gifting can be done for other reasons, including during life or as bequests at death. The reasons for doing so could be to accomplish nontax or tax goals.”

There are several non-tax advantages of making lifetime gifts. One is that you’re able to see the recipient or “donee” enjoy your gift. It might give you satisfaction to help your children achieve financial independence or have fewer financial concerns.

WMUR’s recent article, “Money Matters: Lifetime non-charitable giving,” explains that lifetime giving means you dictate who gets your property. Remember, if you die without a will, the intestacy laws of the state will dictate who gets what. With a will, you can decide how you want your property distributed after your death. However, it’s true that even with a will, you won’t really know how the property is distributed, because a beneficiary could disclaim an inheritance. With lifetime giving, you have more control over how your assets are distributed.

At your death, your property may go through probate. Lifetime giving will help reduce probate and administration costs, since lifetime gifts are typically not included in your probate estate at death.  Unlike probate, lifetime gifts are private.

Let’s discuss some of the tax advantages. First, a properly structured gifting program can save income and estate taxes. A gift isn’t taxable income to the donee, but any income earned by the gift property or capital gain subsequent to the gift usually is taxable. The donor may have to pay state and/or federal transfer taxes on the gift. There may be state gift tax, state generation-skipping transfer tax, federal gift and estate taxes, as well as federal generation-skipping transfer (GST) tax.

A big reason for lifetime giving is to remove appreciating assets from your estate (i.e., one that’s expected to increase in value over time). If you give the asset away, any future appreciation in value is removed from your estate. The taxes today may be significantly less than what they would be in the future, after the asset’s value has increased. Note that lifetime giving results in the carryover of your basis in the property to the donee. If the asset is left to the donee at your death, it will usually receive a step-up in value to a new basis (usually the fair market value at the date of your death). Therefore, if the donee plans to sell the asset, she may have a smaller gain by inheriting it at your death, rather than as a gift during your life.

You can also give by paying tuition to an education institution or medical expenses to a medical care provider directly on behalf of the donee. These transfers are exempt from any federal gift and estate tax.

Remember that the federal annual gift tax exclusion lets you to give $15,000 (for the 2019 year) per donee to an unlimited number of donees, without any federal gift and estate tax or federal GST tax (it applies only to gifts of present interest).

Prior to making a gift, discuss your strategy with a Thousand Oaks estate planning attorney at Family Security Law Group, APC to be sure that it matches your estate plan goals.

Reference: WMUR (April 18, 2019) “Money Matters: Lifetime non-charitable giving”

What Happens to the “Stretch IRA” with the New Law?

“New legislation that aims to give workers greater opportunities to save for retirement, may put the kibosh on a strategy for passing large individual retirement accounts to heirs.”

Congress’ House Ways and Means Committee has passed a bill known as the Secure Act. This bill would require employers with a 401(k) plan to allow long-term part-time workers to participate. It would also create a $500 tax credit for small companies that start retirement plans with automatic enrollment.

CNBC reports, in its recent article “Congress may gut the 'stretch IRA' that wealthy people love,” that the bill includes a provision that would force non-spouse beneficiaries to draw down inherited retirement accounts within 10 years of the original owner's death.

This provision could discourage the use of a "stretch IRA." This strategy allows younger heirs to take required minimum distributions (RMDs) from the inherited account, based on their own much longer life expectancy. They receive the advantage of "stretching" the IRA's tax-deferred growth over many years, while taking smaller RMDs.

If you inherit an IRA from someone who is not your spouse, you're now generally required to begin taking RMDs based on your life expectancy by December 31, after the year the original account owner died. However, the House version of the bill would force a distribution of the account's value within 10 years. The Senate version would distribute the account in five years, if the beneficiary isn’t a spouse and if the account value exceeds $400,000 as of the date of death.

Both versions of the legislation have an exception, if the beneficiary is the surviving spouse, a disabled or chronically ill person, an individual who is no more than 10 years younger than the account owner, or the minor child of the account owner.

The stretch IRA is most attractive to young heirs of larger accounts. They have years of tax-deferred growth ahead of them, and they must only take a small distribution each year. However, an accelerated distribution over a much shorter period of time, would mean a big tax liability.

There are a few alternative strategies that IRA owners might look into to minimize taxes, while passing on the account to a non-spouse heir, if the bill passes. A charitable remainder trust lets investors leave assets to a charitable organization and to a beneficiary. The beneficiary would get income from the assets for a specified time, and then the charity would get whatever’s left. You’d have to name the trust as the beneficiary of the IRA, which can cause tax issues, if done incorrectly. Be sure to work with an estate planning attorney, if you're considering this.

With life insurance, you could get more money tax-free without any RMD or complexity, and just bypass the whole system. The death benefit of a life insurance policy is typically excluded from the recipient's gross income, and your premium dollar also goes further.

Reference: CNBC (April 11, 2019) “Congress may gut the 'stretch IRA' that wealthy people love”

What are Common Mistakes that People Make with Beneficiary Designations?

“You may be surprised at how easy it is to make an expensive mistake with your beneficiary designations.”

Many people don’t understand that their will doesn’t control who inherits all of their assets when they pass away. Some of a person’s assets pass by beneficiary designation. That’s accomplished by completing a form with the company that holds the asset and naming who will inherit the asset, upon your death.

Kiplinger’s recent article, “Beneficiary Designations: 5 Critical Mistakes to Avoid,” explains that assets including life insurance, annuities and retirement accounts (think 401(k)s,
IRAs, 403bs and similar accounts) all pass by beneficiary designation. Many financial companies also let you name beneficiaries on non-retirement accounts, known as TOD (transfer on death) or POD (pay on death) accounts.

Naming a beneficiary can be a good way to make certain your family will get assets directly. However, these beneficiary designations can also cause a host of problems. Make sure that your beneficiary designations are properly completed and given to the financial company, because mistakes can be costly. The article looks at five critical mistakes to avoid when dealing with your beneficiary designations:

1. Failing to name a beneficiary. Many people never name a beneficiary for retirement accounts or life insurance. If you don’t name a beneficiary for life insurance or retirement accounts, the financial company has it owns rules about where the assets will go after you die. For life insurance, the proceeds will usually be paid to your estate. For retirement benefits, if you’re married, your spouse will most likely get the assets. If you’re single, the retirement account will likely be paid to your estate, which has negative tax ramifications. When an estate is the beneficiary of a retirement account, the assets must be paid out of the retirement account within five years of death. This means an acceleration of the deferred income tax—which must be paid earlier, than would have otherwise been necessary.
2. Failing to consider special circumstances. Not every person should receive an asset directly. These are people like minors, those with specials needs, or people who can’t manage assets or who have creditor issues. Minor children aren’t legally competent, so they can’t claim the assets. A court-appointed guardian will claim and manage the money, until the minor turns 18. Those with special needs who get assets directly, will lose government benefits because once they receive the inheritance directly, they’ll own too many assets to qualify. People with financial issues or creditor problems can lose the asset through mismanagement or debts. Ask your attorney about creating a trust to be named as the beneficiary.
3. Designating the wrong beneficiary. Sometimes a person will complete beneficiary designation forms incorrectly. For example, there can be multiple people in a family with similar names, and the beneficiary designation form may not be specific. People also change their names in marriage or divorce. Assets owners can also assume a person’s legal name that can later be incorrect. These mistakes can result in delays in payouts, and in a worst-case scenario of two people with similar names, can mean litigation.
4. Failing to update your beneficiaries. Since there are life changes, make sure your beneficiary designations are updated on a regular basis.
5. Failing to review beneficiary designations with your attorney. Beneficiary designations are part of your overall financial and estate plan. Speak with your estate planning attorney to determine the best approach for your specific situation.

Beneficiary designations are designed to make certain that you have the final say over who will get your assets when you die. Take the time to carefully and correctly choose your beneficiaries and periodically review those choices and make the necessary updates to stay in control of your money.

Reference: Kiplinger (April 5, 2019) “Beneficiary Designations: 5 Critical Mistakes to Avoid”

Are You Making a Long-Term Plan?

“Middle-income earners are more focused on planning their funerals than arranging for long-term care, a new study found.”

More than 10,000 people turn 65 in the U.S. every day. Almost 70% of people retiring today will need some type of long-term care during their lifetimes, according to the Department of Health and Human Services (DHHS). The cost of long-term care can be substantial—but even the most financially secure people are totally discounting the looming threat of long-term care in their retirement planning.

The Motley Fool’s recent article, “Baby Boomers Are More Prepared for Death Than Life,” says most baby boomers are either unprepared or haven't planned for a long-term care expense, according to a Bankers Life survey of 1,500 middle-income Americans aged 54 to 72. The results show that baby boomers were more likely to plan for their own death, than to have a long-term care plan. About 81% made some kind of funeral arrangements for when they pass away, but just 32% have a plan for how they’ll get care in retirement. The lack of long-term care planning is a significant issue, when you compound this with the harm that such a huge unexpected expense has on a person’s retirement savings, especially in cases where a nest egg is small to begin with.

DHHS believes that the average total cost of care for a retiree is $138,000. However, 79% of the respondents said they have set no money aside for their retirement care needs. For those who do have long-term care savings, the median amount saved is a mere $40,000. Nonetheless, 67% of those surveyed said they know someone who required care in retirement and 36% said they can't rely as much on friends or family for around-the-clock care. Given all these negative numbers, why aren't more boomers better prepared? The article gives us three surprising reasons that contribute to this lack of awareness and lack in savings for long-term care:

1. Overconfidence. Boomers may overestimate their ability to manage future long-term care costs. Three-fourths of those surveyed by Bankers Life said they were confident in their ability to handle future healthcare costs. A misplaced confidence could be why boomers used more effort and money to plan for their deaths. About half of the respondents had fewer than $5,000 saved in an emergency fund, and 33% had fewer than $1,000 set aside for emergencies. With the high cost of long-term care, and the collective weakness in emergency funds, boomers' confidence in being able to manage long-term care costs appears unrealistic. These people may be relying on Social Security benefits and Medicare too much.
2. Lack of basic Medicare understanding. Medicare covers only some long-term care expenses like skilled nursing care after a hospital stay, but there are limits. It also doesn’t pay for custodial or home healthcare. Most of those surveyed believe that Medicare will pay for a future healthcare event, and 56% mistakenly identified Medicare as a source to pay for future long-term care.
3. Not knowing where to get advice. The greatest obstacle to planning for care in retirement, is a lack of trust. About a third of boomers surveyed said they need and want advice, but don't know whom to trust. Most seek the help of a family member (36%), and just only 7% ask a health professional. A lack of trust or willingness to seek professional help may lead boomers to either put off a decision or perhaps not fully understanding their planning options.

The best use of a long-term care insurance policy may be folding it into a more comprehensive plan. Talk to an elder law attorney about what makes sense for your situation.

Reference: The Motley Fool (March 27, 2019) “Baby Boomers Are More Prepared for Death Than Life”

What Do We Do with Mom’s House, When She Dies?

“The executor is responsible for finding a buyer and doing all that is necessary to get the best price possible.”

It’s not uncommon for the surviving parent to leave the family home to her children. At the parent’s death, questions often arise concerning how long the children have before they must sell it or change the deed. What if one sibling wants to live in the home for a while, before it is sold?

nj.com’s article on this subject asks, “Mom died and left us her home. What do we have to do next?” According to the article, the executor is tasked with gathering the assets, paying the debts and taxes (if any) and then distributing the assets, in accordance with the parent’s will.

If the home was in the parent’s name alone, it makes the property a probate asset that’s passed according to the will. In addition, if the will provides that under the residuary clause everything that’s left is to be distributed equally among the children, it will give the executor discretion to liquidate and then make the distributions.

There also may be a specific provision in the will covering the home.

There’s no specific timeline as to when the property has to be transferred. However, the executor is required to act prudently and in a reasonably timely manner.

In this situation, the home will most likely be sold. It is also the executor’s responsibility to pay the bills associated with the home, until a buyer is found.

If one child wants to live there, and it’s agreeable to everyone, make sure that she doesn’t refuse to leave, when it comes time to sell.

Note that landlord-tenant laws protect a tenant and may create an issue. The executor may want to talk with an attorney to determine what steps are necessary to protect against the tenant refusing to leave.

Further, the executor may want to talk with an experienced estate attorney to learn the legal requirements in selling the home in order to comply with probate laws and real estate laws. The family home is generally a valuable asset which mandates exercising his/her fiduciary duties.

Reference: nj.com (April 1, 2019) “Mom died and left us her home. What do we have to do next?”

How Do I Do Estate Planning for My Coin Collection?

“People who bother about estate planning, often have a tendency to collect interesting and often valuable items, from art and antiques, watches to jewelry, to firearms and baseball cards to numismatic or bullion coins.”

Forbes’ recent article, “Astute Estate Planning For Art, Antiques And Valuable Collectibles,” says that personal property items, like a coin collection or artwork, can pose an added degree of estate planning complexity, for several reasons.

Tracking. Personal property items are easily “lost” or misplaced. Use inventory software or keep copious records. You should also retain receipts, appraisals and other imprimaturs and bona fides of provenance.

Assignment and Transfer. Since personal property can “walk off,” it’s smart to make certain that all applicable parties, such as heirs, are informed of inventory lists or other tracking methods, with clear instructions on who gets what. You can even add in your will an addendum “Exhibits A-Z,” to make sure that nothing gets lost. Photographs, serial numbers, and other identifying data can be added for more fungible items, like firearms.

Security and Insurance. Use precautions like safes, safety deposit boxes and alarm systems because transportable valuables present greater risks of theft and of fire/disaster. There can be different insurance rules based on the item. You may need separate deductibles, endorsements, riders and proofs of location and ownership to have proper insurance coverage.

Documentation. Particularly for art and important antiques, it is vital to have documentation that supports authenticity and records provenance. This can include certificates of authenticity, bills of sale, condition reports, artists’ notes and photographs, along with appraisals and insurance reports. A gap in documentation can result in challenges in establishing provenance and authenticity.

Valuation. Most personal property is in a very illiquid market, and the price is very much whatever the market will bear. Specialized knowledge may be needed to arrive at a fair price.

Estate Tax Issues. Retain accurate inventories to make certain that all value is properly accounted for, if an estate tax return is due. It’s not uncommon for these items to be “forgotten” at tax time since, unlike securities, bank accounts and real estate, the IRS can’t easily track estate ownership of the assets, whether or not they’re taken by members of the family.

Reference: Forbes (April 8, 2019) “Astute Estate Planning For Art, Antiques And Valuable Collectibles”