Cheryl Chapman Henderson, LLC

Planning for Incapacity is Wise Move

“At any age you can become incapacitated or have a temporary illness.”

Many of us are not very proactive in estate planning or aware of the issues of elder law, even though we know that eventually we will all face incapacity and/or death. The Arizona Jewish Post’s article, “Estate planning and elder law benefit all ages,” reminds us that life can change in mere seconds.

Estate planning and elder law attorneys say that everyone needs these three documents—a will, a health care power of attorney, and a financial power of attorney.

A will. If you die with no will, state law has a pecking order as to who will inherit your assets, starting with your spouse and children. A valid will must be signed by the person who wrote it, witnessed by two non-relatives who saw them sign and notarized as to the identity of the signer and witnesses.

Your will should name a personal representative, otherwise known as an executor. This should be done far ahead of time to be certain that they are willing and able to undertake the task. Let this person know the location of a copy of your will.

A living will details your end-of-life choices. Without authorized directions, your family may not be able to make the decisions you’d want. A living will can also include funeral wishes.

A medical power of attorney gives the individual you select, the authority to make health care decisions for you, if you’re incapacitated.

A financial power of attorney lets your appointed agent make financial decisions, pay your bills and take charge of your bank accounts, if you’re unable to do so.

A revocable living trust is a document that lets you assemble all of your assets in one place. The assets must be retitled to the trust, not to you as an individual. A trust can help with out-of-state real property or leaving money to a child with special needs who is receiving means-tested government benefits. When you die, the assets in the trust aren’t subject to probate, and are distributed as you instructed in the trust.

Speak with an experienced estate planning attorney for personalized advice that considers your assets, divorces, stepchildren and many other factors.

Reference: Arizona Jewish Post (December 2, 2016) “Estate planning and elder law benefit all ages”

Gifting Can Be a Smart Estate Planning Tool

“When you mention gifting, what usually comes to mind is a birthday or Christmas. What I’d like to talk about today is giving it away. The IT being an asset you want to give to another generation.”

      As CBS Boston explains in “Our Families: Giving It Away,” your federal estate tax exemption, or the amount you can give away tax free when you pass, is $5.45 million for 2016. If you have more assets than that, your estate will owe federal estate taxes.

Married couples also have an unlimited gifting privilege between spouses in life or death.

The annual gifting exclusion a person can give away is $14,000 year to as many recipients as we want—provided that you have the money. Married couples can gift $28,000, or $14,000 each.

If you give away your money, your estate won’t be reduced by an estate tax on it when you die.  Therefore, you can whittle down your estate by maximizing your gift exclusion giving to reduce the estate that is potentially subject to estate taxes.

Not only can gifting be an estate planning tool for you to save on future estate taxes, but you can enjoy watching your dollars work for your children or grandchildren while you’re still alive.

 However, you shouldn’t give away assets that you might need in the future.

Another thought is, if you have grandchildren in college or grad school, you can pay their tuition and medical insurance. However, you need to pay it directly to the school, and you could still write them a check for $14,000 … and with your spouse, you could write it for $28,000.

Reference: CBS Boston (November 24, 2016) “Our Families: Giving It Away”

Steps to Take When a Loved One Dies

“After you lose a loved one, estate planning attorneys say there are several steps you should take.”

WXYZ Detroit’s recent article, “Tips you need to know to take a loved one's estate through probate,” explains that within 42 days of the death, you need to contact the Probate Court in your county to determine whether you should do a formal or an informal administration of the estate. Here are some other tips about the steps to take after the passing of a loved one:

1. Don’t publish an obituary. People will use it as a way to open estates, make money, steal identities and even burgle the deceased's vacant home.
2. See if there are any assets titled solely in the name of the deceased.

• Assets jointly owned pass to the surviving joint party outside of probate;
• Real estate not specifically stating joint tenancy on the deed or husband and wife requires probate; and
• Assets titled in just the name of the deceased require probate.

3. Determine if there are assets in the sole name of the deceased or not held as a joint tenant for real estate.

• Assets with a beneficiary designation, like an IRA, insurance policy, or a payable on death (POD) bank account pass to the named party. If a party isn’t named, they are part of the probate estate.
• Assets not designated with a named beneficiary or held jointly will be part of a probate estate.

At this point, you’re just trying to see if a probate estate is necessary … you don’t have to locate all of the assets to open an estate. Other assets can be added later.

4. Calculate the value of the assets that require a probate estate to determine if you require a small estate process or a full probate procedure.
5. Find the will to see if specific parties are named to inherit and administer the estate.
6. Get the contact information of all parties named in the will and family members who will inherit by law.
7. Obtain an original death certificate and order several copies.
8. If there’s no will, come to an agreement as to who should open and handle the estate as Personal Representative and sign the proper court forms.
9. Contact an established estate planning attorney to handle the estate or advise you, depending on the amount of work you want to handle and your budget. An attorney can complete and file the appropriate forms.
10. File the forms in court and pay the fees to open the estate. You’ll receive a letter authorizing you to speak and act on behalf of the estate as the Personal Representative (you can charge the estate a fee for your time).
11. After the estate is open, publish a notice to creditors and allow four months for claims.
12. Notify known creditors using the court form and include a copy of the death certificate, if requested.
13. Notify credit bureaus of the death to prevent identity theft.
14. Keep searching for assets and determine their value. Within three months of opening the estate, you have to file an inventory with the court and determine fees to be paid to the court based on the value. Assets can be added to the inventory until you close the estate.
15. If the deceased had a home, contact the utilities and arrange for maintenance, then sell it with permission of the court.
16. After all the claims have been filed and the Personal Representative determines that they’re valid, the claimants can be paid, the assets distributed to the heirs and the paperwork filed to close the estate.

Reference: WXYZ Detroit (November 18, 2016) “Tips you need to know to take a loved one's estate through probate”

Great Info on GRATs

“Even without a taxable estate, a GRAT could make sense”

A GRAT is a trust that is typically created by a grantor who transfers assets, like stock or closely-held business interests, to the GRAT for a specific period of time—usually between five and ten years. A GRAT, however, can also be set up for a two-year term, says AccountingWeb’s recent article, “The Beauty of Grantor Retained Annuity Trusts.”

The language of the GRAT will be written, in many instances, to provide that a parent retains the right to receive back, in the form of annual fixed payments (an annuity), 100% of the initial fair market value of the assets transferred to the GRAT.

The grantor will also receive a rate of return on those assets based upon the IRS-prescribed interest rate, which is called the “7520 rate,” after the Internal Revenue Code Section 7520. Section 7520  specifies the way in which this rate is to be calculated. For example, the IRS’s 7520 rate for November 2016 is 1.6%.

An excellent feature of a GRAT is that any asset remaining in the GRAT at the end of the trust’s term, will pass to the named beneficiaries without any additional gift tax. The named beneficiaries, in many cases, will be the grantor’s children. This type of GRAT is often called a “zeroed-out GRAT” because it doesn’t end up with the grantor making a taxable gift due to the retention of an annuity equal to 100% of the assets contributed to the GRAT.

To illustrate this further, the stock of a family business is placed into a GRAT for a term of ten years, and the value of that stock is $500,000. (Note: if you put the stock of an S corporation into a GRAT, you are required to refile the S-election under the QSub rules.) The term of the GRAT is 10 years, and the 7520 rate is 1.6%. Based on these assumptions, you would pay the grantor $50,000 a year, plus 1.6% in interest.

What the GRAT does is freeze the asset—so in ten years, after the GRAT has zeroed out, the appreciated value would remain in the GRAT and pass to the beneficiaries, gift-tax free.

Ding Ding…. Warning: there’s just one little issue with the GRAT.  However, it is an important one. If the grantor dies during the term of the GRAT, the assets remain in the grantor’s taxable estate and the amount does not avoid gift tax.

 Therefore, the GRAT isn’t absolutely perfect, but it can be used as an effective way to remove assets from an estate in most instances. Speak with an experienced estate planning attorney to learn if a GRAT should be considered for your estate plan.

Reference: AccountingWeb (November 18, 2016) “The Beauty of Grantor Retained Annuity Trusts”

A Sound Succession Plan is an Integral Component of a Complete Estate Plan

“In addition to traditional estate planning tools such as a will, a power of attorney and a trust, business owners also need to take additional steps by instituting a buy-sell agreement, obtaining insurance and having a succession plan.”

 Many entrepreneurs have their noses to the grindstone and a laser focus on growing their companies. While they’re working hard at it, they can fail to consider what will happen if they are injured in an accident, suffer an illness, or die suddenly. These business owners who don’t take the time to create an effective estate plan risk undermining a lifetime of hard work, jeopardizing the jobs of their staff, and endangering the future of their loved ones.

A recent business.com post, “5 Estate Planning Tips for Entrepreneurs,” lists these important estate planning essentials:

A Will. This is the most basic estate planning document. It lets a person or a small business owner say how his or her assets will be distributed and to whom. A will also allows the person creating the will to name a personal representative or executor to be responsible for managing and disbursing the personal and business assets according to the testator's wishes. If the business is a sole proprietorship, the executor or a trusted family member should be given access to digital assets like online banking, email, and the company website. This should be a separate document from the will because a will is a public document filed in probate court.

Power of Attorney. This designates a person to handle the business affairs, if the owner becomes incapacitated. If you don’t have this, the court will appoint a guardian to manage the affairs—and his or her decisions may not jive with the business owner's wishes. It could also cause conflict with the other parties.

Trusts. A will, again, is a public document and is required to be probated in court. That can cause issues for a small business wanting to protect sensitive information. As a result, a business owner may want to consider a revocable living trust. This trust takes title to property but lets the creator of the trust or the trustees continue managing the assets during his or her lifetime. Because it’s "revocable," it can be modified. A trust can avoid probate, transfer assets to beneficiaries privately and quickly, and allow a business to continue operating.

Buy-Sell Agreement. A buy-sell agreement is critical for partnerships or companies with just a few owners. This document establishes a way of distributing an owner's interest if he or she dies or becomes disabled. It is also helpful if an owner declares bankruptcy or is going through a divorce. The buy-sell agreement will also detail how to value the business.

Succession Plan. An entrepreneur’s comprehensive estate plan should include a formal, written succession plan, which provides for the seamless transition of the business. A comprehensive succession plan will state how ownership will be transferred, establish rules for hiring, compensating and promoting family members, and detail how disputes will be resolved.

An estate plan is a must for an entrepreneur. If you fail to have a plan that enables the business to continue operating, then your partners and family members will have an extremely difficult time trying to manage the business assets … and the disputes that will no doubt arise. Hire an estate planning attorney to establish a course for the future.

Reference: business.com (November 15, 2016) “5 Estate Planning Tips for Entrepreneurs”

Blended Family Estate Planning

“We all need to do some type of estate planning, but it’s especially important if you are part of a blended family.”

The best time to start estate planning is now—before the plan needs to be implemented, says The Fairfield Bay News in “Estate Planning Tips for Blended Families.” Estate planning can be very complex with a blended family, so ask for help from a qualified estate planning lawyer.

Here are a few general ideas to help you think about your blended family:

Update Beneficiary Designations. Get all of your beneficiaries set and updated, like those on your retirement accounts and insurance policies. This will ensure that they reflect your blended family. It is important to remember that these designations take priority over the instructions in your will—it’s a totally separate deal.

Living Trust. While you’re at it, consider a professional trustee for a living trust. Trusts can help you to avoid probate and allow you the freedom to decide how and when you want your assets distributed. After you pass away, a properly created trust can provide a surviving spouse with income for life.  After he or she dies, it will then give the children from an earlier marriage the remainder of the trust assets. To be fair to all, you may want to hire a professional third-party trustee who isn’t a beneficiary of the trust and isn’t entitled any of the trust assets. This person or company wouldn’t have a vested interest in how proceeds of the trust are distributed.

Prenuptial Agreement. When settling an estate, a prenuptial agreement can help eliminate disputes among members in a blended family. With a pre-nup, you can detail a separation of property for your will, your living trust, and any other relevant estate-planning arrangements in the event that you and your new spouse agree to keep your assets separate so you can each pass an inheritance to your own children.

Finally, be sure to share your estate-planning intentions with the members of your blended family. This can help prevent bad feelings and unpleasant surprises.

Reference: Fairfield Bay (AR) News (November 9, 2016) “Estate Planning Tips for Blended Families”

Can I Retire and Still Pay for My Kids’ College?

“Believe it or not, you can handle your child's higher education costs and your 401(k) deferrals—you'll just have to start saving years in advance.”

          A recent CNBC article, “Saving for college and for retirement isn’t impossible,” says that parents can fund college tuition and retirement if they begin saving as early as possible. And grandparents can help with well-timed tax-free gifts.

The cost of education is going to be highest for parents with younger children. For a couple today with a newborn, it’ll cost $455,585 to send him or her to a four-year private institution. But the cost of a public institution will be $202,768.

Let’s take a look at a hypothetical married couple. They’re 28 years old with a newborn, and they want to have a second child in a couple of years. The couple has been working since age 22 and earns a total income of $60,000. Their salaries are growing, and they’ve also been adding to their 401(k)s since they've started working and earning an average annual rate of return of 6.5%.

In addition, the couple’s been saving for college since the birth of their first child and they’re earning an annual return of 6%. They can accumulate $6.5 million by age 65 if they start saving 15% of their salaries in their 401(k)s at age 22. That deferral rate includes the couple’s 12% contribution and a 3% company match. When the first child is born, the couple (at age 28) can reduce their retirement plan savings rate to 12.2% and start to invest the difference or about 2.8% of salary into a 529 college savings plan.

After the second child arrives when they’re 30, they will continue saving to their 401(k), but at 9.4%. The difference (5.6% of salary) continues to go toward the college savings plan.

When the first child begins her freshman year of college and the couple turns 46, they can up their retirement plan savings to 12.2% and continue to fund the college plan. After the youngest kid starts college, the parents can go back to their original 15% deferral rate into their retirement plans. They’ll need to keep that level of savings until they retire at age 65. Plus, it’s an even better picture if grandparents help.

A person can make a lump sum contribution of up to $70,000 or $140,000 for married couples filing jointly to a 529 if the gift is spread over five years. Let’s say that grandpa and grandma make a $140,000 gift to the college savings account after the birth of the first child, the couple can continue deferring 15% of their salaries into their retirement plans. So when they hit retirement at age 65, they'll have $7.8 million in their 401(k) accounts.

It’s also important for the grandparents to know that gifting to the grandkids’ 529 lets them take advantage of the estate planning benefit.

But even with a solid savings strategy, fully funding four years at a private college for two kids is a pinch. In the past, guidelines suggest parents to use up to a third of their earnings to pay for college.

Reference: CNBC (November 7, 2016) “Saving for college and for retirement isn’t impossible”

Take Action Now to Keep Money Safe as You Get Older

“Taking steps when you're younger can be essential to keeping your money safe in your later years.”

You’ve all heard the sad stories about the elderly being fleeced of their life savings, being conned, or losing their homes because they never got the bill for their real estate taxes. This isn’t that uncommon, and research shows that even people who never suffer from dementia will lose some of their financial prowess as they get older. Unfortunately, they don’t necessarily lose confidence in their ability to manage their own finances. That can spell trouble.

US News explains in “8 Ways to Safeguard Your Financial Life as You Age,” that folks of just about any age should take action when they’re young to protect themselves from financial errors later in life. We’ll look at a few of these.

Automate transactions. Automate what you can, like utility and mortgage payments, as well as required distributions from retirement accounts. Go with direct deposit for your bank account. Create a list of what you have automated and tell your heirs where it is. Continue to review your statements.

Set up bank alerts. Your bank may provide you with the ability to get an email or text alert in the event that your balance drops below a certain level. You can do the same thing for large credit card purchases, and bill due dates.

Keep your estate planning documents up-to-date and organize your important papers. First make sure you let someone know where they’re located. Create a list of your assets, collect your important documents and passwords and put them in a secure place, like a home safe or fireproof security box. Also inform one of your children or trusted friend of their location in the event you become incapacitated.

Simplify your accounts. Consolidate your financial accounts and close accounts that have only small balances, which gives you less to manage. Get down to just one credit card, so you have just a single bill to pay.

Don’t make any hasty decisions. Sales people can be pushy, so don’t make any big financial moves, like moving investments or buying a new car, without first discussing it with a trusted friend or relative.

Think about sharing information. You may want a trusted friend or relative to help monitor your finances. You can have copies of your statements sent to them and authorize your financial advisor to discuss your finances and concerns with such a person. You can also give your passwords to those you trust. That way, they can monitor your financial affairs. Just be careful when it comes to sharing your information.

Reference: US News (October 26, 2016) “8 Ways to Safeguard Your Financial Life as You Age”

Some in Congress Opposing New IRS Rule Making More Farmers Eligible for “Death Tax”

“Several congressmen, including one from Illinois, are fighting a new IRS rule they say would make more farmers eligible for the ‘death tax.’”

Illinois News Network recently published this news in an article entitled “Congressmen plan to defund new IRS rule making more farms eligible for ‘death tax.’” U.S. Representative Randy Hultgren, R-Plano, explained that the new IRS rule calculates interest in the value of family farms that would be left to the next generation of farmers. This, in turn, results in 40% more in federal estate tax. Hultgren’s legislation would defund the enforcement of the new IRS rule. “The IRS would not be able to use any appropriated funds to enforce this rule,” Hultgren said.

Hultgren said the new tax regulation will, in effect, assist the big corporate farms that have the resources to purchase the land that small farmers would need to sell just to pay the tax. Those with the cash can come in and buy at fire sale prices: the large corporate-owned farms, he said.

The state of Illinois has an inheritance tax of 16% that begins at $4 million in total assets.

The federal government has enacted measures to help farmers who would be hit with a large estate tax. However, this is really just a loan to pay off the tax over time with interest. In the past, a small number of family farms have been subject to the federal estate tax due to exemptions and loopholes. The Tax Policy Center reports that only 120 farms paid the estate tax in 2013. The new tax regulation, Hultgren said, might see that number skyrocket. He thought the cost of estate planning could be reinvested into the farm.

The Illinois Society of Professional Farm Managers and Rural Appraisers says that an acre of high-quality farmland in the Land of Lincoln is worth on average $11,737 per acre. About 460 acres of farmland at that price would trigger the federal estate tax, not counting valuation of machinery, structures, or livestock on the farms.

Reference: Illinois News Network (October 19, 2016) “Congressmen plan to defund new IRS rule making more farms eligible for ‘death tax’”

Elder Law Attorneys Help Seniors and Their Families

“How do I pay for long-term care when I don’t have much money?”

The (Fort Worth TX) Star-Telegram recently published an article, “Elder care attorneys can help with long-term care, Medicaid.” The article explained that this segment of the legal profession focuses on the needs of older and disabled adults. Elder law attorneys focus on issues of guardianship, estate planning, probate, veteran’s benefits and Medicaid.

One thing that most seniors don’t plan for is long-term care. Many people are trying to pay for long-term nursing care. A focus of elder law is how an elderly person can pay for it. With this in mind, the majority of long-term care is paid for by Medicaid, so understanding how that program integrates with estate planning is important. For example, you wouldn’t want a bequest in someone’s estate planning to adversely impact your Medicaid planning. A family member may be ineligible for Medicaid if they inherit something.

Completing the Medicaid application can also be a challenge. Elder law attorneys see many of their clients’ applications initially denied. An experienced attorney may be successful on appeal. It might be a mistake at Health and Human Services (HHS). The best way to do this is to ask for the assistance of an elder law attorney. People who apply on their own may be denied and won’t question it—or even realize that they can question it.

Some people worry that their parent will go broke before they need costly end-of-life care and they’re afraid that Medicaid patients received substandard care. However, they should receive the exact same care as a private pay or short-term disability in the nursing home. Even so, you should look at several facilities, speak with residents and staff, and observe the conditions before making a choice.

There is also a lot of bad information floating around about Medicaid eligibility. Some folks believe they won’t qualify. However, some assets, like a house and vehicles, are exempt when qualifying for Medicaid. This allows the community spouse — the one remaining at home — to continue to support themselves.

Also, there are a few elder law attorneys who receive an extra certification called a Certified Elder Law Attorney, or CELA. It’s a national certification program that requires five years of practice in elder law and a written exam.

Reference: The (Fort Worth TX) Star-Telegram (October 14, 2016) “Elder care attorneys can help with long-term care, Medicaid”