Garland Law Offices, P.A.

What Does an Executor Do?

“My aunt recently asked me to be the executor of her will when she dies. I’m flattered that she asked, but I’m not sure what exactly the job entails.”

Being asked to serve as the executor of a loved one’s estate is flattering, but it is also a big responsibility and a lot of work. As the executor, you are responsible for taking care of all of the financial and legal matters of the estate, explains the article “An executor’s guide to settling a loved one’s estate” from Review Times. The job will require a lot of time and, depending upon the complexity of the estate and the family situation, could be challenging.

Some of the tasks include:

• Filing court papers to start the probate process to determine whether the will is valid.
• Making a complete inventory of everything in the estate.
• Obtaining an estate tax ID number, opening an estate bank account, and using the estate funds to pay bills, including funeral costs and medical bills.
• If the estate includes a home, maintaining the home and paying the mortgage, taxes, etc.
• Terminating credit cards, notifying banks and government agencies—including Social Security—and the post office.
• Preparing and filing income tax returns for the last year of the person’s life, unless they filed them already, and for the estate.
• Distributing assets as directed by the will.

Your first task is to locate the will and any important documents and financial information. You’ll need the will, deeds, titles, brokerage statements, insurance policies, and the like.

If the estate is complicated, you will want to work with an estate planning attorney, who can guide you through the process. The estate pays for the attorney, and you work closely with them. Every state has its own laws and timetables for the executor’s responsibilities, which the attorney will be familiar with.

If possible, find out if there are any family conflicts before the loved one passes. If there are potential problems, it may be better for the loved one to tell who will be inheriting what before they die. If there is no plan for asset distribution, the person who is asking you to be the executor needs to meet with an estate planning attorney as soon as possible and have a plan created, with all of the documents necessary for your state.

The executor is entitled to be paid a fee, which is paid by the estate. In most states, that fee is set at a percentage of the estate’s value, depending on the size and complexity of the estate. If you are both an executor and a beneficiary, you may want to forgo the fee, because fees are taxable, but in most states, inheritances are not.

Reference: Review Times (Sep. 6, 2020) “An executor’s guide to settling a loved one’s estate”

Inherited IRAs Require Careful Handling

“One wrong decision can lead to expensive consequences, and good luck trying to persuade the IRS to give you a do-over.”

For those who inherit IRAs, the intersection of taxes, estate law and financial planning can be a tricky place. There are many choices, maybe too many, and making the wrong choice can be costly, according to the recent article “6 inherited IRA rules all beneficiaries must know” from Bankrate.

There are two categories of beneficiaries. Surviving spouses, minor children, chronically ill or disabled individuals, or someone who is not less than 10 years younger than the original owner are subject to one set of rules. Everyone else has another set of rules.

You’ll need to know if the original owner had taken any RMDs—required minimum distributions—before they passed.

Did you want to minimize taxes, or is it more important for you to maximize cash distribution?

These are just a few of the issues to be addressed. Already complicated, inherited IRAs got even more complicated because of the SECURE Act, which changed some longstanding practices. Some experts tell beneficiaries not to do anything, until they meet with an estate planning attorney. The worst thing someone could do is make a wrong step and lose half of the IRA to taxes.

Here are the six rules for inherited IRAs:

1–Spouses have the most flexibility. The surviving spouse may treat the IRA as her own, naming herself as the owner. She can also roll it over into another account, such as another IRA or a qualified employer plan (including 403(b) plans). She could also treat herself as the beneficiary of the plan. However, each choice leads to further choices and decisions. She might let the IRA grow in the account until she reaches age 72, the new age for RMDs. Or she can roll the IRA into an IRA of her own, which lets her then name her own beneficiary.

2—When do you want to take the money? If you fall into the category of surviving spouses, minor children, chronically ill or disabled individuals, or someone who is not less than ten years younger than the original owner, then you can take the distributions over your own life expectancy. That’s the “stretch” option. Otherwise, you need to take distributions from the account over ten years, according to the SECURE Act. Depending on the size of the IRA, that could be a nasty tax bill. You can take as little or as much as you want, but by year ten after the owner’s death, the account must be empty.

3—Know about year of death required distributions. If the owner of the IRA did not take his RMD in the year of his death, beneficiaries are required to do so. If a parent dies in early January, for example, it’s not likely he took his RMD. The IRS doesn’t care if you didn’t know—you’ll be liable for a penalty of 50% of the amount that wasn’t taken out. If someone dies close to the end of the year, it’s possible that heirs might not know about the accounts until after the deadline has passed. If the deceased was not yet 70½, there is no-year-of-death distribution.

4—Get all the breaks you can—tax breaks. For estates subject to the estate tax, IRA beneficiaries will get an income-tax deduction for estate taxes paid on the account. The taxable income earned but not received by the deceased is called “income in respect of a decedent.” When someone takes a distribution from an IRA, it’s treated as taxable income. However, the decedent’s estate is paying a federal estate tax, so beneficiaries get an income-tax deduction for estate taxes paid on the IRA. For a $1 million income in an inherited IRA, there could be a $350,000 deduction offset against that.

5—Beneficiary forms matter. An entire estate plan can be undone by a missing beneficiary form, or one that is not filled out correctly or is ambiguous. If there is no designated beneficiary form and the account goes to the estate, the beneficiary will need to take the distribution from the IRA in five years. Forms that aren’t updated, are missing, or don’t clearly identify the individuals create all kinds of expensive headaches.

6—Improperly drafted trusts are trouble. If they are done wrong, a trust can limit beneficiary options in a big way. If the provisions in the trust are not properly drafted, some custodians won’t be able to see through the trust to determine the qualified beneficiaries. Any ability to maximize the time to take money out of an IRA could be lost. An experienced estate planning attorney who knows the rules about IRAs and trusts is a must.

Reference: Bankrate (July 17, 2020) “6 inherited IRA rules all beneficiaries must know”

Coronavirus Makes Estate and Tax Planning an Urgent Task

“What may have seemed like something to take care of ‘one day,’ has turned into a basic necessity that makes it essential and necessary for you to encourage your clients to act now.”

The Covid-19 pandemic has brought estate planning front and center to many people who would otherwise dismiss it as something they would get to at some point in the future, says the article “Estate and Life Insurance Considerations During the Covid-19 Pandemic” from Bloomberg Tax. Many don’t have a frame of reference to address the medical, legal, financial, and insurance questions that now need to be addressed promptly. They’ve never experienced anything like today’s world. The time to get your affairs in order is now.

What will happen if we get sick? Will we recover? Who will take care of us and make legal decisions for us? What if a family member is in an assisted living facility and is incapacitated? All of these “what if” questions are now pressing concerns. Now is the time to review all legal, insurance and financial plans, and take into consideration two new laws: the SECURE Act and the CARES Act.

An experienced estate planning attorney who focuses in estate planning will save you an immense amount of money. Bargain hunters be careful: a small mistake or oversight in an estate plan can lead to expensive consequences. A competent legal professional is the best investment.

Here’s an example of what can go wrong: A person names two minor children—under age 18—as beneficiaries on their IRA account, life insurance policy or bank account. The person dies. Minors are not permitted to hold title to assets. Minors in New York are considered wards of the court in need of protection and court supervision. Therefore, in this state, the result of the beneficiary designation means that a special Surrogate’s Court proceeding will need to occur to have a pecuniary guardian appointed for the minors, even if the applicant is their custodial guardian.

Another “what if?” is the support for a disabled or special needs beneficiary who may be receiving government support. If the parents are gone, who will care for their disabled child? What if there are not enough assets in the estate to provide supplemental financial support, in addition to the government benefits? Life insurance can be used to fund a special needs trust to ensure that their child will not be dependent upon family or friends to care for their needs. However, if there is no special needs trust in place, an inheritance may put the child’s government support in jeopardy.

Here are the core estate planning documents to be prepared:

• Last Will and Testament
• Revocable Living Trust
• Durable General Power of Attorney
• Health Care Declaration

The SECURE Act changed the rules regarding inherited IRAs. With the exception of a surviving spouse and a few other exempt individuals, the required minimum distributions must be taken within a ten- year time period. This causes an additional income tax liability for future generations. There are strategies to reduce the impact, but they require advance planning with the help of an estate planning attorney.

Reference: Bloomberg Tax (June 18, 2020) “Estate and Life Insurance Considerations During the Covid-19 Pandemic”

How Does a Constructive Trust Work?

“Certain types of trusts, however, may only be used in very specific situations and a constructive trust is one of them.”

Trusts are useful in estate planning to avoid probate or minimize estate taxes. A commonly used trust is a revocable trust, often used to pass on assets to beneficiaries and keep them outside of the taxable estate. A constructive trust is a trust used to correct situations where property belonging to one person is held unfairly by someone else, explains the article “What is a Constructive Trust?” from Yahoo! Finance.

A constructive trust isn’t a traditional trust. A revocable living trust requires certain steps, like drawing up a trust document, naming a trustee, selecting beneficiaries, and transferring property or assets into the trust, referred to as “funding the trust.” This is used to manage assets for your own lifetime and potentially for generations to come.

A constructive trust is established by the court, when two parties are involved in a civil dispute over property. It might be created when someone is unfairly given ownership over property, which could happen because of deliberate misconduct or a mistake in a property transfer.

Here’s an example. Let’s say a person sets up a living trust and a trustee commits a breach of fiduciary duty that allows them to take control of trust assets. The estate planning attorney for the person who had the trust created would go to court to have a constructive trust created. This is known as an “equitable remedy.”

The first requirement for a constructive trust is that there is a court action between a property owner and another person, who is wrongly benefiting from the property. Another example: an elderly person’s caretaker coerces her into signing over the title for a piece of real estate. The mother’s legal guardian would bring a lawsuit against the caregiver on behalf of the mother. If the court agrees that the caretaker abused their position to gain ownership of the property, a constructive trust would be created. The property would be placed in the trust, out of the ownership of the caregiver, while the ownership is being transferred to the mother.

The constructive trust is meant to be a short-term arrangement to provide temporary relief. The person who is benefitting wrongfully from the property is directed by the court to transfer it to the trust. If the property itself cannot be returned, they are required to pay money to the trust of the equivalent value.

Here are examples of situations when a constructive trust could be used to transfer property:

• Undue influence,
• Duress or coercion,
• Mistake,
• Breach of fiduciary duty,
• Embezzlement, or
• Commission of a crime, including theft or homicide.

The constructive trust is also used if there is a dispute over how property should be distributed after a person dies. Let’s say the oldest sibling of a family convinces his parents not to write a will, assuring them that he will make sure that assets are distributed fairly to the younger siblings. He then keeps everything or sells assets and does not distribute proceeds. If the other siblings take him to court, the court may establish a constructive trust to provide relief and ensure that the estate is distributed according to the state’s inheritance laws.

Reference: Yahoo! Finance (June 5, 2020) “What is a Constructive Trust?”

Divorce Reveals How Trusts are Used by the Ultra-Wealthy

“In a lawsuit, Marie Bosarge claims that her estranged husband, Texas billionaire Ed Bosarge, created trusts ‘to hide income and property and to hold what would otherwise have been personal income and assets.’”

South Dakota has become a domestic mini-Switzerland for wealthy people who want to shield their assets. Texas billionaire Ed and Marie Borsage’s divorce is shining an unwanted spotlight on both his finances and the use of trusts in the state, according to CNBC’s recent article “Billionaire Divorce uncovers secretive world of trusts in South Dakota.”

Married for three decades, the Borsage’s accumulated 12 homes and an unusual collection of high- priced items, like an Egyptian mummy and Marilyn Monroe’s personal effects. It was quite a lifestyle. However, when Ted filed for divorce, Marie discovered that everything had been put into a special trust that shielded assets from any claims. After paying her legal fees, she may end up with nothing from the 30-year marriage.

Ed’s attorneys are making the claim that all of the assets are controlled by the trust, so they are not marital assets. The total value of the couple’s marital property, which would be subject to division in a divorce, is about $12 million. Marie’s legal bills are already in the millions.

The unpleasant nature of the divorce offers a rare look into the highly secretive world of asset trusts in South Dakota. The protective trust laws of the state make it a haven for wealthy families from the U.S. and around the world. Experts say that about $250 to $900 billion is now being held by South Dakota trusts, from Chinese billionaires, Europeans seeking to avoid taxes and Americans looking to shield wealth from spouses.

When the two married in 1989, they had no wealth. Ed began a commodities trading business and Marie was one of the first employees. They became wealthy. However, in 2012, according the lawsuit, Ed began an affair and filed for divorce in 2017. That was when Marie learned that he had been transferring their business and personal assets into a complicated series of trusts, first in Bermuda and then in South Dakota. Marie was originally a beneficiary of the trust, but then before the divorce, Ed started transferring assets and she was removed as a beneficiary.

According to South Dakota law, he was not required to notify her of the changes. Trusts in South Dakota are also perpetual. Therefore, a wealthy family can put assets into a trust that are held in perpetuity, rather than a limited period of time. The state also gives trusts sweeping privacy and asset-protection against creditors, business partners, lawsuits—and ex-spouses. South Dakota has no inheritance, capital gains or income taxes. It’s an extremely attractive state for people who want to keep their business private and protected.

The state also has strict information protections, so there are nondisclosure orders on all of the attorneys and all of the filings in the divorce case.

Reference: CNBC (May 6, 2020) “Billionaire Divorce uncovers secretive world of trusts in South Dakota.”

Relocating for Retirement, Family … or Taxes?

“Does your ability to pass on your wealth to your heirs depend on where you live ... and die? Indeed, it does.”

When the current health crisis finally passes, many people will have spent time considering what they want to do with their remaining years. That may include relocating. For some people, taxes are a real reason to move to a new state, but some states are more tax-friendly than others, says the article “Best States to Die In…For Taxes” from Tucson.com.

No matter where you live, you have to pay federal estate taxes. However, there are eighteen states in the U.S. that require citizens to pay either estate taxes or inheritance taxes or both. The estate taxes are subtracted from an estate before its assets are distributed to heirs. Inheritance taxes are paid by heirs of the deceased, and it doesn’t matter if the heirs live in another state.

Here are the six states with inheritance taxes: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The good news is that spouses are exempted from having to pay any inheritance taxes, and in New Jersey, it also applies to domestic partners. In some states, children and grandchildren are exempted, but not in Nebraska or Pennsylvania.

For people who live in Nebraska, immediate relatives must pay a 1% tax on inheritance amounts that are more than $40,000. In Pennsylvania, tax rates start at 4.5% for children and lineal heirs. Nebraska has the highest top inheritance tax rate of all the estates, at 18%. The others range from 10% to 16%.

Each state has certain exemptions, based on the amount of the inheritance and the heir’s relationship to the deceased. If you receive an inheritance from someone who lives in one of the inheritance tax states, speak with an estate planning attorney, so that you know what tax is due. State law categorizes heirs into types for the purposes of assigning exemptions and tax rates, and these vary by state.

The worst state to die in from an inheritance tax and estate tax perspective is Maryland, which imposes a 16% tax on inheritances above $5 million for persons who died in calendar year 2019. Until recently, New Jersey had a scaled estate tax that ranged from 0.8% to 16.0% on estates over $675,000, but the state no longer imposes any estate tax on the estate of decedents, who die on or after January 1, 2018.

Many inheritances pass through to spouses and children. The exemptions are generally fairly generous, so many people may not run into this issue with estate or inheritance taxes. However, if your estate includes a home within an expensive real estate market, your family may be in for some surprise taxes.

Meet with an estate planning attorney to learn what your state’s estate and inheritance tax rates are, and plan for the future. If you are in a high tax state, relocating may not be a bad idea. Your heirs will appreciate your planning.

Reference: Tucson.com (March 27, 2020) “Best States to Die In…For Taxes”

Grandson of Walt Disney’s Longstanding Inheritance Battle

“Bradford Lund tries to prove he is mentally capable of managing his affairs but is trapped in a probate system susceptible to predators.”

Even visionary Walt Disney could not have imagined the struggle his grandson Bradford Lund has endured trying to claim his share of the Disney family fortune, reports the Daily Bulletin in a recent article titled “Walt Disney’s grandson locked in legal battle for personal freedom, millions in inheritance.”

It’s been fifteen years since the start of Lund’s estate battle with estranged family members, probate and courts to prove that he is mentally able to manage an inheritance of hundreds of millions of dollars. He’s had to repeatedly prove that he does not have Down syndrome and can manage this kind of money.

He is now fighting for his freedom. A Superior Court judge from Los Angeles County has appointed a temporary guardian ad litem to make legal decisions on his behalf.

Judge David Cowan said he was not going to give $200 million to someone who may suffer, on some level, from Down syndrome. Even after he was given evidence that Lund does not have Down syndrome, the judge refused to retract his statement.

Lund is fighting against a probate system with high profile attorneys–the former White House counsel Lanny Davis is one of three on his legal team. They have filed a federal civil rights lawsuit accusing Judge Cowan of appointing the guardian ad litem without due process. Suing a judge is almost never done, but the complaint alleges that a judgment was rendered that left them no choice but to take action.

One of Lund’s main opponents is his twin sister, Michelle Lund. The twins attended special-needs schools as children, reportedly for learning impairments. When Lund was 19, his mother created a trust fund now valued at $400 million for him, his sister and another sister, Victoria. She appointed four trustees. The grandchildren were to receive part of their shares at ages 35, 40 and 45, with the remainder kept in trust and then given to them gradually over time.

Lund’s mother died, as did his sister Victoria. Some of the trustees resigned, with others who did not know the family taking their places.

When Brad turned 35, the trustees voted against paying him part of his inheritance, saying they did not believe he was financially or mentally competent. Four years later, sister Michelle suffered a brain aneurysm, but she received her share as scheduled. In 2009, Michelle and her two half-sisters sought an order in an Arizona court that would place Brad under a guardianship for his legal decisions. They claimed that he had chronic deficits and mental disorders. The case went on for seven years and ended with a judge declaring Brad able to make his own decisions.

While the Arizona case was still underway, Lund filed a court petition in Los Angeles County to remove his trustees for various violations. That is when Judge Cowan entered the picture. The judge was presented with a settlement agreement between Lund and his trustees, in which he would pay them $14.5 million, in exchange for their removal and replacement.

The monetary exchange was approved, but Cowan would not agree to letting Lund replace the trustees. That’s when the temporary guardian ad litem was appointed.

While the size of the assets involved is larger than life, estate battles among siblings and half siblings are not unusual. When the family includes an individual whose capacity may be challenged, extra steps are needed in estate planning to protect their interests.

Reference: Daily Bulletin (March 22, 2020) “Walt Disney’s grandson locked in legal battle for personal freedom, millions in inheritance”

Inheriting a House? What You Need to Know

“Depending on whether you are the only beneficiary, or you are buying out other beneficiaries, you could move in, rent or sell.”

There are choices when someone inherits a house. However, they depend on several factors. Are there other siblings who also have inherited portions of the ownership of the house? Is there another owner who needs to be bought out? Can the heir afford to take on the responsibilities and expenses of a home? These are all questions presented in the article “What to do when inheriting a house” from The Mercury.

There’s a tax issue to consider, for starters. Property that was titled in the name of the decedent at the time of death and then inherited, receives what is called a “step-up” in basis. This means that there is no federal tax due on the appreciation in value from the time the person purchased the home to the time that the person died.

Let’s say the person bought the home for $100,000 and it’s now worth $300,000. The federal government will not tax the $200,000 difference between the original value and the DOD (Day of Death) value of the home. If the heir obtains an appraisal shortly after the death of the home owner and then moves in or if you already live there and the house is transferred into your name, the “clock” starts running again for another tax break, which is an additional $250,000 exclusion from capital gains on resale after you have lived there for two years.

This all assumes that any other beneficiaries have been satisfied as to the ownership of the house. A good elder law estate attorney will be able to help with the details, including the transfer of title.

Another issue: is there a mortgage on the house? If so, the new owner may need to satisfy the lender and refinance. If the heir has enough money to meet monthly payments, a strong credit rating to be able to get a mortgage and enough income to maintain the home, then it should be a relatively simple transaction.

Have the home inspected before moving in. Is the house in good shape? If repairs need to be done, are they budget-friendly, or will they make the inheritance too expensive to be financially viable?

Property maintenance is another consideration. If the estate can carry costs associated with the property until the property is sold and if the estate can pay for repairs, upgrades and maintenance so the house can be sold for a good price, then that is a reasonable approach to take. If there are other beneficiaries, they should all part of a discussion about how much money is worth investing in the house and what the return on investment will be.

Finally, if the language of the will says “equally to my three children” or language similar to that and one sibling wants to buy out the other two, then an agreement on the value of the house and a plan for working out timing of the sale will need to be created. An estate planning elder law attorney will be able to help create a family settlement agreement that will include an informal accounting, whereby all of the heirs receive their fair share of the inheritance and all sign off that they have agreed to the transaction.

Reference: The Mercury (Jan. 15, 2020) “What to do when inheriting a house”

What Do I Need in My Estate Plan in Addition to a Will?

“This time of year, families gather to celebrate the season, offering an opportunity to air your plans for the inevitable.”

American Legion’s recent article, “Planning beyond the will” says that it’s important that your estate planning papers are synced with your wishes and the current law, but you should also look at some items outside of the fundamental documents:

Beneficiary designations. This includes life insurance policies, IRAs, current and former employer retirement plans and annuities. A beneficiary designation supersedes any instructions in a will or trust. As a result, it’s important that your designations reflect your current wishes and are synched with the rest of your estate plan.

Property title. Be sure that you know how your property is titled. If the family home is titled as joint tenants with rights of survivorship, then it will pass seamlessly to the surviving owner. There are also potential income-tax implications. Ask your estate planning attorney about this and the best way to address title concerns.

Personal property plans. This could be as simple as giving your trustee or executor the authority to make decisions, designating instructions with respect to specific property in your will or trust, or incorporating a personal property memo into your plan. The guidance you give can alleviate major problems, when you’re no longer around to settle disputes.

A continuity book. In the military, it’s common that just as you’re getting used to your responsibilities, it’s time to PCS (Permanent Change of Station) or switch jobs. Many leaders require a continuity book that helps bridge that knowledge gap, so your successor has an idea of what to do. You can adopt this practice in your personal affairs. This can include an inventory of your assets, liabilities and insurance policies. This “continuity book” should also include your social media account passwords, key contacts, funeral wishes and the location of your key estate planning documents. This is an important resource for trustees and executors, as they assume their duties.

Enjoy the holidays, and this year, work on making sure that your family spends many more happy holidays together.

Reference: American Legion (October 18, 2019) “Planning beyond the will”

How Do I Set Up a Living Trust?

“Setting up a living trust is largely the same, regardless of where you live in the U.S.”

For those who want to spare heirs the hassle and cost of the probate process, you may consider transferring your assets to a living trust.

Yahoo! Finance’s recent article, “How to Create a Living Trust in Tennessee” explains that creating a living trust is mostly the same, regardless of where you live in the U.S.

Let’s look at the basic steps you’ll need to take, with the help of a qualified estate planning attorney:

1. List the assets that should go into the trust. There are some assets, such as 401(k) plans and IRAs, which must be in an individual’s name. Other items like bank accounts, securities and life insurance policies can but don’t need to, provided you set up payable-on-death accounts or designate your beneficiaries. Usually real estate and business interests are shielded with living trusts.
2. Select the right type of living trust. If you use a revocable trust, you can remove assets or cancel the trust. With an irrevocable trust, you don’t have this luxury. If you’re not married, you can create a single trust. If you’re married, a Tennessee Community Property Trust will hold what you own jointly without having to split property or say who owns what. However, this type of trust isn’t a good option, if you’re in a later marriage with separate assets and children from previous relationships.
3. Name a trustee. The trustee will manage the trust. With revocable trusts, you can also be the trustee, or in the case of a joint trust, you and your spouse can be co-trustees. If you name yourself, name a successor trustee for when you pass away.
4. Create a trust agreement. It’s best to hire an estate planning attorney to create the trust, because it must be done correctly and legally. If the trust is found to be invalid, there may be penalties, taxes and added costs.
5. Sign and notarize the trust document.
6. Transfer property into the trust. The law states that the trust won’t be effective, unless and until property is retitled in the name of the trust.

Trusts and their rules can be complicated. Use an experienced estate planning attorney to do it right.

Reference: Yahoo! Finance (September 27, 2019) “How to Create a Living Trust in Tennessee”