Taxable on death accounts have become a popular estate planning technique in recent years. The account automatically passes to designated beneficiaries upon the death of the primary owner. These type of accounts pass to beneficiaries outside of the probate process.
A person’s Last Will & Testament does not govern the disposition of these type of accounts. These accounts would not be available to the estate to pay creditors and administration expenses. It is important that a person periodically examine his or her estate plan to make sure that these accounts are consistent with her overall planning goals. Proper reviews may avoid unintended consequences relating to estate liquidity and to arguments between family members pertaining to wealth distributions.
Trustees of grantor trusts need to be aware of additional expenses associated with meeting information reporting requirements.
Grantor trusts are disregarded for tax purposes and are commonly used in many estate plans, but they can be confusing. Many trustees believe that since the trust is disregarded for tax purposes it does not have any information reporting requirements. However, the trustee is required to report the items of income, expense, and credit to the IRS and to the grantor of the trust.
Losing a spouse can be hard enough, but losing a spouse and not knowing how to manage the family’s finances can lead to despair. As you gather your tax records this year, take a few extra steps to help your spouse avoid added stress after you’re gone.
In many households one spouse takes care of the finances, such as paying bills, filing important papers, and tracking investments. It’s essential that the other spouse at least knows the location of these papers and how to access the assets. To provide structure to your records, start with a balance sheet listing of all bank accounts, insurance policies, and investment holdings, including applicable online passwords. Also list your physical assets and the location of ownership titles.
Having a complete record of assets is important, but so is knowing how to manage those assets. Make a list of things you consider important that your spouse might not know about. This might include such things as how to manage retirement distributions and estate issues. You might also list the names of people who should be notified of your passing. Simple things, like routine chores to perform at the vacation home or recreational vehicle, might provide comforting guidance.
Educating your spouse on financial matters can also be a satisfying social opportunity. Join with other like-minded couples to establish an investment club where everyone participates in the decision making. Such venues often lead to important conversations about managing money – discussions not always easy when it’s just you and your spouse.
Candid conversations about family finances are sometimes better facilitated in front of a trusted financial advisor. Including your advisor will not only provide another set of eyes, but can help provide structure and documentation that the other spouse can rely upon in an emergency. Our office stands ready to assist you with this important financial matter.
When setting up a trust, your first instinct might be to name your spouse as the trustee. Just be aware that without proper planning, naming your spouse as the trustee may cause tax and administration difficulties down the road.
If your spouse has broad and/or over-reaching powers over the trust corpus, the fair market value of the trust at his/her death may be pulled into her gross estate for estate tax purposes, resulting in higher death taxes. This result may be contrary to the goals and objectives of your overall estate plan.
Also, if your spouse has strained relationships with the principal beneficiaries of the trust, it may hinder his/her objectivity to comply with the terms of the trust. He/she may have some wiggle-room based upon broad language in the trust instrument to avoid making distributions to beneficiaries which may be contrary to your intentions.
Seeking the advice of a competent estate planning professional will help minimize the above mentioned difficulties.
There are many factors to plan and consider when preparing for marriage, especially if you have been married before.
In a second marriage situation, it is important to discuss with your estate planning team exactly how estate taxes will be paid. If this is not properly addressed, there are situations where the estate taxes will be paid exclusively from the inheritance of the children of the first marriage. In this scenario, assets passing to the second to die’s heirs would not bear its appropriate share of the estate tax burden. With the proper planning, this unintended consequence can be avoided simply by including the necessary language in your will.
When creating a trust to hold a business interest it is important to determine where the money will come from to pay the income taxes associated with the profits of the business allocated to the trust. Sometimes the trust instrument is drafted in such a way that the trust legally owns the business interest but the original grantor of the trust is the “deemed owner” for income taxes purposes only. This is common estate planning technique. The value of the business interest is removed from the grantor’s estate for estate tax purposes and the trust assets are not used to pay the income taxes on the profits. In this situation, the original owner is responsible to pay the income taxes but the trust legally owns the business interest.
Since the trust legally owns the business interest, the trust would be entitled to any distributions from the business not the grantor. The grantor would not be entitled to any funds from the business to pay the income taxes. Proper planning is needed to determine how the income taxes will be paid.
For those planning on leaving some of their assets to charities through their last will and testament, it is important that the assets are titled/owned in a way that the charities will receive the designated assets.
For example, if all of your assets are held jointly with the right of survivorship, although your will leaves monies to charities, the charities will not receive a penny.
The joint owner with the right of survivorship will receive the assets.
This is because the will only applies to assets that do not pass automatically by operation of law.
Joint survivorship accounts and retirement assets which name a specific successor/beneficiary are examples of assets that pass automatically by operation of law and are not governed by your will.