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Helping clients plan for their family's future, by creating an efficient, thoughtful and comprehensive estate plan that preserves their legacy and gives them peace of mind.

Life Settlement Planning

This post addresses Life Settlement Planning.  Even in this volatile environment, many seniors may have an option for more retirement income available in the sale of their life insurance policy. A “life settlement” could provide them with an average of four or more times the cash surrender value of their policy.

The Street’s recent article entitled “Is Your Life Insurance Policy Worth More Than Its Cash Surrender Value?” explains that anytime a senior isn’t going to keep a life insurance policy, they should look into a life settlement to bring them the most money when they terminate the policy.

When a policy is lapsed, the policy owner gets nothing. When a policy is surrendered back to the insurance company, the policyowner receives little, if any, cash surrender value. So, in instances where a policy is being lapsed or surrendered, a life settlement makes financial sense.

According to 2019 life insurance industry data, over 90% of life insurance policies (by face amount) that terminated in 2018 were lapsed or surrendered. In 80% of those cases, the policyowners received nothing in return for years of premium payments to the insurance company, because they lapsed their policies.

Over the next decade, more than $2 trillion in life insurance policy death benefits that could qualify for a life settlement is anticipated to be lapsed or surrendered—about $850 billon is projected to be policies between $100,000 and $1 million.

To qualify for a life settlement, an individual must usually be at least 70 years old and own a whole life, universal life, or convertible term insurance life insurance policy, with a death benefit of $100,000 or more.

Traditionally, life settlements have been available only where the insured has developed a significant health impairment since the policy was started, but now even those insureds without a change in health can qualify for a life settlement, depending on their age and the type and size of the policy.

Some life settlement companies take several months to make an offer to purchase a policy, asking for full medical records and independent underwriting. However, recently, these companies have shortened the time in evaluating a policy and making an offer.

Reference: The Street (Dec. 22, 2020) “Is Your Life Insurance Policy Worth More Than Its Cash Surrender Value?”

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Social Security Death Benefits

When to take Social Security benefits is a decision that has major consequences for not only the worker but their spouse. There are a few mistakes the people make that end up costing their loved ones, advises the recent article “If You Love Your Spouse, Don’t Make This Social Security Mistake” from NASDAQ. The most common mistake concerns deciding when to start taking Social Security benefits.

By starting to claim benefits at age 62, you’ll get a reduced amount compared to what you would receive at your full retirement age. If you can wait until age 70 to claim Social Security, you and your spouse will benefit from the delayed retirement credits.

Most retirees base their Social Security benefit decision on how long they expect to live and their financial needs. People who expect to live a long time will get more money if they can wait until age 70, when their monthly benefits will be larger. People who don’t expect to live very long past retirement, usually take their benefits early.

However, when you decide to take your Social Security benefits has an impact on your surviving spouse. When both members have worked and earned their benefits, it’s not as big of an issue. However, for a spouse who does not have a work history of their own or whose earnings are significantly lower, this can have a big financial impact.

The issue is survivor benefits. You are entitled to receive a survivor benefit when your spouse dies, and that benefit is based on their work history. If the surviving spouse claims benefits earlier than full retirement age, there will be a reduction.

However, if the deceased spouse claimed Social Security benefits early, the surviving spouse will receive a reduced survivor benefit.

Here’s an example. Let’s say a married person, age 62, would get a retirement benefit of $1,500, if they retired at age 66 and 8 months. The person has a terminal illness and will not live more than a few more months. The spouse is also 62. Some people in this situation would start taking their Social Security benefits immediately. The reduced monthly payment would be $1,075. It’s less than the $1,500, but it’s better than nothing.

The issue is that the surviving spouse would only be eligible to receive $1,075 per month. That payment would only be if the surviving spouse waited until full retirement age. If a claim were made before full retirement age, the monthly benefit would be $884.

If the terminally ill person chose not to claim Social Security at all, the surviving spouse would be entitled to a survivor benefit of $1,500, again if they waited until full retirement age.

That $350 difference may not feel big on paper, but when there is only one income, it adds up. Waiting to take Social Security benefits could make all the difference in the quality of life your spouse enjoys for the rest of their life.

Let us help you.

Reference: NASDAQ (Nov. 14, 2020) “If You Love Your Spouse, Don’t Make This Social Security Mistake”

 

Digital Assets and Estate Planning

Today’s estate plan needs to expressly declare an “agent” or a “fiduciary” to gain access and control of “digital assets” in case of incapacity or death. If your estate plan has not been updated in the last four or five years, it’s likely that your digital assets are unprotected, advises the article “Properly addressing digital assets on your estate plan” from Southern Nevada Business Weekly.

Digital assets have value not only to owners, but to family members, beneficiaries and heirs. Some assets have sentimental value, like videos and photos, while others, like business records, URLs and gaming accounts, have financial value. Failing to address these issues in an estate plan could result in your executor and heirs being denied access and control of these assets during incapacity or death.

Here are some examples of digital assets:

  • Email accounts–contain communications and history, including information about other digital assets.
  • Social media accounts/apps: Facebook, Twitter, Pinterest, YouTube, TikTok, etc.
  • Photo Sharing Accounts: Instagram, Shutterfly, Snapfish, Flickr, etc.
  • Gaming and Gambling Accounts/Apps: DraftKings, Esports Entertainment
  • E-Commerce Accounts/Apps: Amazon, PayPal, Etsy, PayPal, Venmo, etc.
  • Financial Accounts/Apps: Banks, Scottrade, E*Trade
  • Retail Accounts: Any store, online shopping that has a username and a password
  • Security Information: Two factor authentication, mobile phone PIN/PW, facial recognition, etc.

Here’s a little-known fact: without the proper legal authority to access these assets, the “agent” or “fiduciary” could be committing a crime. The Consumer Fraud and Abuse Act provides that it is a federal crime to access a computer and obtain information without authorization or when exceeding authorized access.

Most states have adopted the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA 2017). The Act contains specific language to be used in wills, trusts or power of attorney to name a “designated recipient” or “fiduciary” to access, control, transfer, or close digital assets upon incapacity or after death. RUFADDA also provides specific procedures for companies to disclose digital assets to a designated recipient or fiduciary.

If your estate planning assets do not address the issue of digital assets or do not use the specific language of RUFADDA, or generally if your estate planning documents were created before 2017, it’s time for a review that includes digital assets.

Even if all you have is a personal email account, you have digital assets to protect. It’s not a big problem to address them in your estate plan but can become a bigger program if they are neglected.

Let us help you make sure your digital assets are covered in your estate plan.

Reference: Southern Nevada Business Weekly (Sep. 17, 2020)“Properly addressing digital assets on your estate plan”

 

Social Security in 2021

Issues for Social Security in 2021 include the annual cost-of-living adjustment (COLA) for benefits to be 1.3%, which is a small but significant increase for millions of beneficiaries. They’ll see a raise in their monthly payments beginning in January 2021. However, the benefits increase isn’t the only change coming next year, according to AARP’s October article entitled “Biggest Social Security Changes for 2021.” Some of the biggest changes affecting Social Security recipients in 2021, including the average monthly benefits in 2021 (+ difference from 2020):

  • Retired worker: $1,543 (+$20)
  • Retired couple: $2,596 (+$33)
  • Widow or widower: $1,453 (+$19)
  • Widow with two children: $3,001 (+$39)
  • Disabled worker: $1,277 (+$16)
  • Disabled worker w/ spouse, children: $2,224 (+$29)
  • SSI for individual: $794 (+$11)
  • SSI for couple: $1,191 (+$16)

The 1.3% COLA that starts in January was calculated based on the year-over-year rate of inflation. It’s the difference between the Consumer Price Index for Urban Wage Earners (CPI-W), a government measurement of prices typically paid for a basket of goods and services, in the third quarter of 2019 and the third quarter of 2020. The modest increase signals the relatively low rate of inflation over the past year. When there’s no change in the index, or if prices have fallen year over year, there’s no COLA.

For the average retired worker, the monthly Social Security in 2021 benefit will go up by $20 to $1,543 in January from $1,523 this year. For the average retired couple who both collect benefits, the payment will rise by $33 to $2,596, up from $2,563, and for the average disabled worker, monthly benefits will increase by $16 to $1,277 from $1,261. The maximum Social Security check for a person retiring at full retirement age will rise to $3,148 a month in 2021 from $3,011 — an increase of $137.

The payroll tax that funds Social Security in 2021 is set at 12.4% on eligible wages. Employees pay 6.2%, and employers pay the other half. Self-employed workers pay the whole 12.4%. The money paid in by today’s workers goes to cover current benefits, with any excess going into the Social Security trust fund.

A recent change in law states that the new Medicare premium will be less than previously projected, which preserves part of the COLA for most beneficiaries. Initially, higher emergency Medicare spending due to COVID-19 was expected to lead to very high Medicare premiums in 2021. Most beneficiaries would have seen their COLA wiped out by Part B premium increases, if the law hadn’t been changed.

Those who get Supplemental Security Income (SSI) that helps some individuals with little or no income meet basic living needs, will also see a 1.3% rise in their monthly benefits. For the average individual, that means $11 more a month, to $794 from $783. The average couple gets $16 more a month, to $1,191 from $1,175. SSI is funded by general tax revenue, not Social Security payroll taxes.  These are just a few of the changes for Social Security in 2021.

Let us help you with your estate planning.

Reference: AARP (Oct. 28, 2020) “Biggest Social Security Changes for 2021”

Suggested Key Terms: Disability, Social Security, Supplemental Security Income, Social Security Disability Insurance

Estate Planning in a Pandemic

What is unique about estate planning in a pandemic?  The fear of the unknown and a sense of loss of control is sending many people to estate planning attorney’s offices to have wills, advance directives and other documents prepared, reports the article “Legal lessons from a pandemic: What you can plan for” from The Press-Enterprise.

However, people are not just planning because they are worried about becoming incapacitated or dying because of COVID. High net-worth people are also planning because they are concerned about the changes the election may bring, changes to what are now historically advantageous estate tax laws and planning to take advantage of tax laws, as they stand pre-December 31, 2020.

Regardless of your income or assets, it is always good to take control of your future and protect yourself and your family, by having an up-to-date estate plan in place. Anyone who is over age 18 needs the following:

  • Health Care Directive
  • Power of Attorney
  • HIPPA Release Form
  • Last Will and Testament

Any assets without beneficiary designations should be considered for a trust, depending upon your overall estate. Trusts can be used to take assets out of a taxable estate, establish control over how the assets are distributed and to avoid probate. You don’t have to be wealthy to benefit from the use of trusts.

Preparing estate planning documents in a last-minute rush, is always a terrible idea.  Especially estate planning in a pandemic.

If you have more free time during the pandemic, consider using some of your free time to have your estate plan implemented or updated. This should be a top priority. The state of the world right now has all of us thinking more about our mortality, our values and the legacy we want to leave behind. Most estate planning attorneys encourage clients to think about the next three to five years. What would be important to you, if something were to happen in that time frame?

Estate planning is about more than distributing assets upon death. It addresses incapacity—what would happen if you became too ill or injured to care for yourself? Who would make medical decisions for you, such as what kind of medical care would you want, who will your doctors be and where will you live in the short-term and long-term? Incapacity planning is a big part of an estate plan.

When naming people to care for you in the event of incapacity, provide your estate planning attorney with three names, in case your first or second choices are not able to act on your behalf. Most people name their spouse, but what if you were both in an accident and could not help each other?

In recent months, Advance Health Care Directives have received a lot of attention, but they are not just about ventilator use and intubation. An Advance Health Care Directive is used to state your preferences concerning life-sustaining treatment, pain relief and organ donation. The agent named in your health care directive is also the person who will carry out post-death wishes, so provide as many details as you can about your wishes for cremation, burial, religious services, etc.

Trusts are a way to preserve a family legacy. A living trust gives you the ability to decide who you want involved, in case of your death or incapacity. You decide on your beneficiaries, and if you want your assets going directly to those beneficiaries or if they should be held in trust until certain goals are met, like finishing college or reaching a certain age or life milestone.

You can see that estate planning in a pandemic is not much different than during normal times.  The need is always there.

Your estate planning attorney will help you clarify family legacy goals, whether they include a beneficiary with special needs, a supplement for children who go into public service careers, etc.  Let us help you with your planning.

Reference: The Press-Enterprise (Oct. 18, 2020) “Legal lessons from a pandemic: What you can plan for”

 

Federal Estate Tax Issues

Federal estate tax issues are back.  In 2018, the Tax Cuts and Jobs Act (TCJA) doubled the lifetime gift, estate and generation-skipping tax exemption to $11.18 million from $5.6 million. With adjustments for inflation, that exemption in 2020 is $11.58 million, the highest it’s ever been, reports the article “Federal Estate Tax Exemption Is Set to Expire—Are You Prepared?” from Kiplinger. However, this won’t last forever.

There’s a limited time to this historically high exemption. The window for planning may be closing soon. The high amount is set to sunset at the end of 2025, but the impact of a global pandemic and the result of the presidential election will likely accelerate the rollback.

As of this writing, many states, including Florida, have already eliminated their state estate taxes, although 17 states and the District of Columbia still have them. The estate planning environment has changed greatly over the last decade. However, for families with large assets, and for those whose assets may reach Biden’s proposed and far lower estate tax exemption, the time to plan is now.

Gifting Assets Now to Reduce Estate Taxes. The IRS has stated that there will be no claw back on lifetime gifts, so any gifts made under the current exemption will not be subject to estate taxes in the future, even if the exemption is reduced.

Keep in mind that when gifting assets, to make a gift complete for tax purposes, you must relinquish ownership, control and use of the assets. If that is a concern, married couples can use the Spousal Lifetime Access Trust or SLAT option: an irrevocable trust created by one spouse for the benefit of the other. Just be mindful when funding irrevocable trusts of gifting any low cost-basis assets. If the trust holds assets that appreciate while in the trust for extended periods of time, beneficiaries could be hit with tax burdens.

Take Advantage of Lower Valuations and Low Interest Rates. The value of many securities and businesses have been impacted by the pandemic, which could make this a good time to consider gifting or transferring assets out of your estate. Lower valuations allow a greater portion of assets to be transferred out of the estate, thereby reducing the size of the estate.

With interest rates at historical lows, intra-family loans may be an effective wealth-transfer strategy, letting family members make loans to each other without triggering gift taxes. Intra-family loans use the IRS’ Applicable Federal Rate–now at a record low of between 0.14%-1.12%, depending upon the length of the loan. These loans work best when borrowed funds are invested and the rate of return earned on the invested loan proceeds exceeds the loan interest rate.

Avoid Last-Minute Rush by Starting Now. This type of estate planning takes time. The more time you have to plan with your estate planning attorney, the less likely you are to run into challenges and hurdles that can waste valuable time. When estate tax laws change, estate planning attorneys get busy. Creating a thoughtful plan now may also help prevent mistakes, including triggering the reciprocal trust doctrine or the step transaction doctrine. Planning for asset protection and distribution allows families to control how assets are distributed for many generations and to create a lasting legacy.  Let us help you.

Reference: Kiplinger (Oct. 14, 2020) “Federal Estate Tax Exemption Is Set to Expire—Are You Prepared?”

 

Add a Pet Trust to Your Planning

The Minneapolis Star Tribune’s article entitled “Who will take care of Fido when you’re gone? Minnesotans put trust in trusts reports that Minnesotans are setting up pet trusts to care for their pets in the event they survive them.

This is a fairly new law in Minnesota. Since it was enacted in 2016, Minnesotans have been setting aside money to guarantee the care of their animals after they die or become incapacitated. With a pet trust, there’s a guarantee that the money earmarked to care for the animal will be there for the animal as intended. A trust can designate a separate caretaker, trustee and a trust enforcer to care for the animal, manage the money. and make certain the care is being provided as instructed in the trust.  Florida has a similar statute authorizing the use of pet trusts.

Such a trust can contain instructions on the type of food, medical care, exercise and housing the pet will get, as well as the pet’s end of life and burial or cremation directions.

When the pet trust law was being debated in the Minnesota Legislature, there was the idea that these trusts are frivolous, an option only for wealthy eccentrics like New York real estate and hotel tycoon Leona Helmsley. She died in 2007 leaving $12 million for the care of her dog, Trouble. The courts later reduced that amount to $2 million.

A pet trust can be used to care for an animal before the owner dies but is disabled or incapacitated. When the pet dies, depending on how the trust was created, the money left in the trust would be distributed to heirs or could go to another designated person or charity.

In states where these trusts are not available, a person could write in their will that a relative will inherit a pet, and the pet owner could also leave the person money to pay for the animal’s care. However, because pets are legally considered personal property, they cannot own property or inherit assets themselves. As a result, there’s nothing that would prevent the relative designated to care for the animal to take it to the pound after you die and spend the cash on themselves.

A pet trust can provide a plan for animal lovers who want to own pets late in life but may be concerned the pet might outlive them. Talk to an experienced estate planning attorney about pet trusts in your state.

We can help you provide for your pet with a pet trust.

Reference: StarTribune (Sep. 23, 2020) “Who will take care of Fido when you’re gone? Minnesotans put trust in trusts”

 

Estate Planning Before 2020 Ends

What a year!  And it may be necessary to attend to your estate planning before 2020 ends. When it comes to estate planning, there’s no such thing as a “one-size-fits-all” solution. That is especially true before a presidential election. However, there are several factors that should be considered and discussed with your estate planning attorney, as recommended in this recent article from The National Law Review “Top Ten Estate Planning Recommendations before the End of 2020.”

The estate, gift and generational-skipping transfer tax exemption is now $11.58 million per person. It’s scheduled to increase every year by an inflationary indexed amount through 2025 and in 2026 will revert to $5 million. If Biden wins the election, don’t be surprised if changes are made earlier. The IRS has already said that if the exemption is used this year, there will be no claw back. This is a “use it or lose it” scenario. If you are planning on using it, now is the time to do so.

It is possible that Discounts, GRATS, Grantor Trusts and other estate planning techniques may go away, depending upon who wins the election and control of Congress. Consider taking advantage of commonly used estate planning before 2020 ends.

Married couples who are not ready to gift significant amounts to their children or to put assets into trusts for their children should consider the SLAT–Spousal Lifetime Access Trust. They can create and gift the exemption amount to a SLAT and still maintain access to the assets.

Single individuals who similarly are not ready to make large gifts and give up access to assets may also create and gift an exemption amount to a trust in a jurisdiction based on “domestic asset protection trust” legislation. They can be a beneficiary of such a trust.

Interest rates are at an all-time low, and that is when tools like intra family loans, GRATs and GLATs are at their best.

Moving to Florida, Nevada, Texas and other low- or no-income tax states has become very popular, especially for people who can work remotely. Be aware that high tax states like New York and California are not going to let your tax revenue leave easily. Check with your estate planning attorney to make sure you’re following the rules in giving up your domicile in a high-income tax state.

We can help you with your estate planning before 2020 ends.

Reference: The National Law Review (Oct. 6, 2020) “Top Ten Estate Planning Recommendations before the End of 2020”

 

Prince’s Estate Planning Disaster

Another unnecessary probate lesson comes from Prince’s estate planning disaster. Filing probate documents was just the beginning of process that still hasn’t ended the bad news from the Prince estate. He did not have a spouse or children, but Prince had half-brothers and half-sisters, says a recent article from Forbes titled “Prince’s Estate Sues IRS Over Claimed $135 Million Tax Value.” There were a number of claims against the estate, and claims by the estate as well, including a wrongful death action that was eventually dismissed.

However, just like anyone else who dies without a will, probate takes a long time and is expensive. Things also get complicated quickly, especially with an estate of this size.

One of Prince’s half-sisters, Tyka Nelson, sold a portion of her share of the estate to Primary Wave, a music publisher. So did another sibling. And then the tax troubles began. Cash poor or not, estates must pay a federal estate tax of 40%. A federal estate tax return needs to be filed, and while audits are rare, almost every estate of this magnitude is audited by the IRS. The estate reported a taxable value of $82 million, but the IRS isn’t satisfied.

Estate tax fights with the IRS can go on for a long time. Michael Jackson’s estate battle with the IRS is still going on—and he died in 2009.

Papers filed by Prince’s estate in the U.S. Tax Court show that the estate reported a taxable value of $82 million, but the IRS claims that the value is really $163 million and wants an additional $38.7 million. In every case, Prince’s estate has obtained appraisals to support its reported values, but the IRS has its own appraisers who disagree.

Even if Prince had a will, there still could have been problems. Heath Ledger had a will, but it was five years old when he died and there was no provision made for his daughter. James Gandolfini had a will, but his estate gave the IRS $30 million of his $70 million. These estate planning disaster stories make estate planning attorneys cringe. Seymour Hoffman, Heath Ledger, and James Gandolfini’s estates all ended up with wills in probate, which is public, expensive, time-consuming and unnecessary. A will does have to go through the court process, but the use of a revocable trust could have disposed of their assets outside of probate. A simple pour-over will would have given everything to the revocable trust, simply, and privately in terms of the ultimate inheritance disposition.

Estate planning attorneys advise clients to update wills and trusts every time there is a birth, marriage, divorce, etc. It is good advice for both celebrities and regular people.

You can give an unlimited amount to your spouse during life or on death. Prince’s estate may face a 40% estate tax, but if he had been married and left his estate to his spouse, there would not have been any federal estate tax until the death of the spouse.

A lesson for the rest of us: have an estate plan, including a will and trust, make sure that it includes tax planning and avoid your own estate planning disaster.

Let us help you.

Reference: Forbes (Oct. 7, 2020) “Prince’s Estate Sues IRS Over Claimed $135 Million Tax Value”

 

Pablo Picasso’s Estate Planning Disaster

Pablo Picasso’s probate was a perfect example of an estate planning disaster.  Picasso left behind 1,885 paintings, 1,228 sculptures, 7,089 drawings, as well as tens of thousands of prints, thousands of ceramic works and 150 sketchbooks when he passed away in 1973. He owned five homes and a large portfolio of stocks and bonds. “The Master” fathered four children with three women. He was also thought to have had $4.5 million in cash and $1.3 million in gold in his possession when he died. Once again, Picasso did not leave a will. Distributing his assets took six years of contentious negotiations between his children and other heirs, such as his wives, mistresses, legitimate children and his illegitimate ones.

Celebrity Net Worth’s recent article entitled “When Pablo Picasso Died He Left Behind Billions Of Dollars Worth Of Art … Yet He Left No Will” explains that Picasso was creating art up until his death. Unlike most artists who die broke, he had been famous in his lifetime. However, when he died without a will, people came out of the woodwork to claim a piece of his valuable estate. Only one of Picasso’s four children was born to a woman who was his wife. One of his mistresses had been living with him for decades. She had a direct and well-documented influence on his work. However, Picasso had no children with her. Talk about an estate planning disaster.

A court-appointed auditor who evaluated Picasso’s assets after his death said that he was worth between $100-$250 million (about $530 million to $1.3 billion today, after adjusting for inflation). In addition to his art, his heirs were fighting over the rights to license his image rights. The six-year court battle cost $30 million in legal fees to settle. But it didn’t settle for long, as the heirs began fighting over the rights to Picasso’s name and image. In 1989, his son Claude sold the name and the image of Picasso’s signature to French carmaker Peugeot-Citroen for $20 million. They wanted to release a sedan called the “Citroen Xsara Picasso.” However, one of Picasso’s grandchildren tried to halt the sale because she disagreed with the commission paid to the agent who brokered the deal—but oddly enough, the consulting company was owned by her cousin, another Picasso.

Claude created the Picasso Administration in Paris in the mid-90s. This entity manages the heirs’ jointly owned property, controls the rights to exhibitions and reproductions of the master’s works, and authorizes merchandising licenses for his work, name and image. The administration also investigates forgeries, illegal use of the Picasso name and stolen works of art. In the 47 years since his death, Picasso has been the most reproduced, most exhibited, most stolen and most faked artist of all time.

Pablo Picasso’s heirs are all very well off as a result of his art despite his estate planning disaster. His youngest daughter, Paloma Picasso, is the richest, with $600 million. She’s had a successful career as a jewelry designer.  She also enjoys her share of her father’s estate.

Let us help you prevent an estate planning disaster.

Reference: Celebrity Net Worth (Sep, 13, 2020) “When Pablo Picasso Died He Left Behind Billions Of Dollars Worth Of Art … Yet He Left No Will”

Suggested Key Terms: Estate Planning Lawyer, Wills, Intestacy, Probate Court, Inheritance, Asset Protection, Will Changes, Will Contest, Power of Attorney