Barnes Lipscomb & Stewart PLLC

What Happens When You Die with Debt?

Certain kinds of debt die with you, but others will have a big impact on your heirs. If you know the difference, you’ll know what steps to take.

Many Americans have unpaid debts when they die. A study reported by Credit.com says that as many as 73% have debts on death. “Dying with debt: Advice from experts,” an article in the Richmond Free Press, reports that those who die with debts have an average balance of $12,875 without a home loan, and if you include mortgage debt, the number jumps to $61,000.

Among the consumers who had debt when they died, about 68% had credit card balances. Here’s the rest of the list:

• Mortgage debt 37%
• Auto loans 26%
• Personal loans 12%
• Student loans 6%

In most states, debt isn’t passed on to your spouse and children when you die. Debt typically belongs to the deceased person or that person’s estate. But if your spouse or someone else co-signed or was a co-applicant on a credit card or a loan, they’ll be on the hook for any debt when you die. They may also not inherit anything because your estate becomes liable for your debt. Creditors can try to take any funds you leave behind to pay off your balances. If you have enough to pay the debts, the creditors get paid and beneficiaries receive whatever’s left. The creditors will get paid at the expense of the heirs.

If there’s real estate in the mix, it can be sticky. If a home’s your only asset, and it’s where your spouse or children also live, creditors can ask for a sale to cover your outstanding liabilities. Happily, in Texas a surviving spouse and dependent children will have a homestead right in the house and no creditor can force a sale or put a lien on your homestead. 

One way to avoid this type of hardship is to purchase life insurance to help with your debts. In addition, you should draft a will. You may also consider setting up a trust to provide ongoing management and assurance that children or others will end up with your assets.

While you’re working with your estate planning attorney on the will and the trust, ask for two powers of attorney, if you become disabled or mentally incapacitated before you die. One POA is to allow a trusted party to make decisions on your healthcare needs, and the other to allow a trusted individual to handle your financial affairs.

An important part of your estate plan should include a living will. This gives your doctors directions about what you want to happen at the end of your life, if you are unable to speak for yourself due to either illness or injuries sustained in an accident. Don’t leave out a written HIPAA form; this is to allow other people, most likely family members, to be able to access your medical records, if you are incapacitated.

Reference: Richmond Free Press (March 24, 2017) “Dying with debt: Advice from experts”

How Boomers Can Lighten Their Tax Load While Helping with Preschool Costs

Private preschools can be almost as expensive as state colleges. The cost of private colleges, by the time today’s preschoolers get to campus, can only be guessed at.

Here’s an opportunity for boomers to help their grandchildren attend the preschool of their parent’s dreams, while achieving some tax benefits, as reported in CNBC’s recent article, “Grandma to the rescue: The $20,000 way to cover preschool.” If the preschool qualifies, directly paying the costs could score you some major grandparent points and help with your estate tax burden.

One year of pre-kindergarten at a private elite school can cost thousands of dollars. Generous grandparents can pay these expenses and save on gift taxes. However, this takes some careful planning.

Grandparents can give money to their grandchildren in several ways, without being subject to gift taxes. First, you can make a gift up to the annual gift tax exclusion of $14,000 per recipient (or you and your spouse together can give away up to $28,000). You can also give money away under your lifetime gift tax exemption of $5.49 million, but whatever portion of this amount that you use in “taxable gifts” during your life, will decrease the amount you can pass to your heirs without an estate tax. If you are married, you and your spouse each are entitled to your own lifetime gift tax exemption of $5.49 million. Third, you can pay directly for the grandchild's tuition or medical expenses, even it is over the annual gift tax exclusion.  However, the payments have to go directly to the service provider.

When it comes to preschool, you need to prove to the IRS that your grandchild's pre-kindergarten is educational. To qualify as a nontaxable gift, tuition payments to a preschool must be made to an "educational organization" as defined by the IRS. That means a regularly enrolled student body (no day-care) and the school must also have a regular faculty. A big issue with preschool is that it’s frequently considered custodial care, not educational.

If your grandchild's preschool won’t qualify as an "educational organization," but you still want to help them, consider these alternatives:

1. Pay for preschool, but stay under the limit;
2. Fund a 529 college-savings plan with a five-year front load, that’s up to $70,000 per beneficiary (the same as $14,000 annually for five years); or
3. Provide a low-interest intra-family loan, but talk to an estate planning attorney and draft a formal agreement with your adult child for this option.

All of these options, especially intra-family loans, do need the guidance of an estate planning attorney. After all, if you’re going to be generous, you’ll want to make sure to reap some of the rewards.  You should also be sure to draft a formal agreement with your adult child, so there are no misunderstandings in the future.

Reference: CNBC (March 23, 2017) “Grandma to the rescue: The $20,000 way to cover preschool”

Can the Estate Tax Campaign Pledge Translate into Legislation?

Candidates are able to make lots of plans and promises when they are campaigning, but actually getting big bills passed is not a sure thing.

Regardless of your political preference, it’s likely that you’d welcome the repeal of the estate tax, as promised by President Trump when he was on the campaign trail. But remember that few Americans are wealthy enough to pay taxes on the federal level, and most of us must prepare for state estate taxes, regardless of whether or not the so-called “death tax” is repealed.

A recent Forbes article asks “Do You Still Need An Estate Plan If There Is No Estate Tax?” The article notes that it’s worth recalling that the estate tax laws in place for 2017 were set four years ago. This includes an exemption for individuals up to $5.49 million and $10.98 million for a couple for 2017.  There’s also no tax collected when one spouse dies and leaves everything to their spouse. Therefore, the repeal of the estate tax would really only affect those with a net worth of over $11 million. The rest of us are finding ways to preserve and protect our assets for beneficiaries, rather than fretting over the tax repeal possibilities.

Estate tax repeal or no estate tax repeal, you’re still going to need an estate plan, with financial and medical powers of attorney. A repeal won’t address who’ll receive your assets, retirement benefits or the proceeds from a life insurance policy when you pass away. If you also have minor children, you’ll need to designate a guardian who’ll care for them if you die, especially if any have special needs.

You also want to time when your heirs can access the assets you pass to them, so that a large sum of money doesn’t land in the lap of a 19-year-old. Some folks choose to offer partial access to an estate when beneficiaries are in their 30’s and the rest when they are older. To create a trust managed by a trustee to help your heirs, speak with an estate planning attorney who will create a sound estate plan.

If the 40% federal estate tax is repealed, Uncle Sam will need to make up that revenue gap in his budget. One proposal under discussion is a new capital gains tax for inherited assets. This could mean the Microsoft stock you bought in 1981 and passed to your heirs would be treated differently. The rules now say the cost basis for that stock would be set at the time of your death. Under the Trump proposal, the cost basis would be the original purchase price of the stock. As a result, your heirs would be looking at a huge tax burden which could be just as much as the current 40% tax.

It’s going to pay to rely on an experienced estate planning lawyer to keep you up-to-date with wherever the legislation goes. It is also important to note that 18 states and D.C. will still have their own estate tax laws. These thresholds may be even lower than those set by the federal government.

Regardless of what happens to the federal estate tax, you’re going to want to sit down with an experienced estate attorney who can review your own situation, from finances to family dynamics and create all of the documents needed, from wills to power of attorney to trusts, if appropriate, to minimize your heirs’ tax burdens and control how specific assets are distributed.

Reference: Forbes (March 23, 2017) “Do You Still Need An Estate Plan If There Is No Estate Tax?”

How a Pet Trust Can Care for Your Beloved Furry Kids

No longer the exclusive territory of the super-wealthy, today even regular people use pet trusts to create a legal and financial safety net for their companion animals, while providing peace of mind.

If your household includes pets, whether they have fur, feathers or fins, you can use a pet trust to protect pets when you have passed away or when you are no longer able to take care of your pets or yourself. A pet trust provides specific instructions to caretakers and also provides funding.

AZ Central’s article, “Who will care for your beloved pet after you're gone? A trust can help with that,” says that it's hard to guess the number of people who have trusts to benefit pets. It’s still a relatively new concept. However, more people are learning that you can and should include pets in estate planning. Many pet lovers find that a trust is appealing and worth the cost.

A trust lets assets be transferred to others without going through probate. They also can provide ongoing financial support for beneficiaries who might burn though a lump sum. A revocable living trust can be changed, dissolved or redrafted, while you're still living and competent.

These are packaged frequently with documents like a pour-over will (for assets not titled into the trust) and financial and health-care powers of attorney, which appoints another person to act on your behalf in case of incapacity.

A pet trust designates a trusted person or organization to provide ongoing care for your animals and gives them the money to do so. Many people make informal arrangements. They ask friends or relatives to take in their animals, but without a trust or other legal document, there's no guarantee that your instructions will be followed.

As part of the process, an owner can detail how much medical care should be given to a pet, especially an older one (when euthanasia might be the preferred route). Trusts can help you prepare for those and other contingencies, so you’d have some control over what happens to your pet.

Designating the right trustee is critical. That is the person or organization entrusted with carrying out your wishes.

If you decide not to create a pet trust and just hope that writing down some instructions and coming to an agreement with a friend or relative will protect your pet, remember that this will not be legally binding. There would be nothing stopping your friend or family member from leaving your pet at a shelter and taking the money for their own use. With a trust, you gain peace of mind.

Reference: AZ Central (March 25, 2017) “Who will care for your beloved pet after you're gone? A trust can help with that”

Steps to Take to Protect Estate Tax Exemptions

 Although there is now a generous federal estate tax exemption, there are still state estate taxes. You’ll want to make informed decisions about how to pass your wealth to your surviving spouse. Trusts may be a good option, but there are different paths you can take to arrive at the same destination: minimizing or eliminating any estate tax.

There are ways to have estate tax exempt wealth be transferred on death to a surviving spouse without the use of a trust, but as noted in a recent article in Barron’s, “How to Protect Your Estate-Tax Exemption, the bottom line is that what we consider federally exempt wealth remains subject to the estate tax laws of individuals states. Many wealthy people rely on credit shelter trusts to protect assets that would otherwise be exempt from federal estate taxes, minus gifts made during your lifetime. A relatively recent development, known as “portability” gives you some ability to transfer wealth on death, but these are sophisticated tools that will require the help of an experienced estate attorney.

An option between portability and credit-shelter trusts—or a combination—is still a critical component of estate planning, despite the federal estate-tax exclusion dramatically increasing over the years. Twenty years ago, it was an easier decision: in 1997, the estate-tax exemption was only $600,000 and the top estate-tax rate was 55%. Credit-shelter trusts were popular to avoid some onerous taxes.  The exemption then began to creep up to the current $11 million for a couple. In 2012, Congress enacted portability to remove the need for credit-shelter trusts for married couples.

Some experts say that a credit-shelter trust is better than portability, even for couples below the $11 million level.  However, portability doesn’t exempt state estate taxes. There are 18 states and DC that have either estate or inheritance taxes of various amounts and rates. There’s also no generation-skipping with portability. The surviving spouse can’t take the $5.49 million estate-tax exemption she got via portability, and place it in a tax-free trust for her grandchildren. She also can’t protect appreciating assets from capital gains. Portability won’t protect the assets of a new spouse if the surviving spouse remarries or from stepchildren.

Credit-shelter trusts also have some cautions. If you place a primary residence in a trust, there will be mortgage problems because banks don’t want to lend money to a trust. A house in a trust doesn’t get a further stepped-up value after the surviving spouse dies. Therefore, if the children want to sell the house, they may have a sizeable capital gains tax on the difference in value between the two deaths.

If you live in a state with an estate tax, you may want to ask your estate planning attorney about putting the amount of the state tax exemption in the credit-shelter trust and elect portability for the balance of the estate up to the $5.49 million.

There are still many unknowns about possible changes to the estate tax exclusion, including the possibility of a change to the capital gains rate. Rather than wait to see what happens and potentially lose the ability to benefit from tax laws as they currently stand, speak with an estate planning attorney. She or he will be able to work with you to determine how to structure your assets to minimize tax liability and to protect your family.

Reference: Barron’s (March 25, 2017) “How to Protect Your Estate-Tax Exemption”

You Don’t Live in a Mansion? You Still Need an Estate Plan

Thinking about how you’d like your assets to be distributed after your passing is a start, but putting those thoughts into an estate plan ensures that your thoughts will translate into reality.

Even if you aren’t wealthy or even near retirement age, you still need an estate plan. If you own anything, including a home, any financial accounts or even a car, you have an estate.

As Vanguard’s recent article, “5 estate planning facts you need to know now” explains, your estate includes both tangible and intangible personal possessions and real property.

An estate plan is a set of legal documents used, if you become incapacitated or die. The documents detail your wishes when you're unable to communicate on your own behalf.

A typical estate plan contains the following:

• A will: it says who’ll get your assets and in what manner;
• A general power of attorney: designates a person to look after your financial needs, if you become incapacitated;
• A healthcare power of attorney: designates a person to make healthcare decisions for you, if you become incapacitated or are otherwise unable to do this for yourself; and
• An advance directive for healthcare (or living will): this states your wishes, if you can't make decisions for yourself.

Before you sit down with an estate planning attorney to create your estate plan, look at the whole picture, including both assets and liabilities. Make a personal financial inventory that includes details about your holdings as well as your debts.

Remember that if you die without an estate plan, your assets will be distributed according to your state's intestate laws, and if you have minor children, the court will determine who will care for them.

Once you have your estate plan, it’s important to keep it up-to-date. Review your estate plan—especially your beneficiary designations—every three or four years. You’ll need to make changes after a major life event, like a marriage, divorce, death,  adoption or a birth.

A word to the wise: software programs and websites may claim to let you create a will on your own. The problem is, you won’t know if these conform to the laws of your state, or if they will even be appropriate to your situation, until you have passed away. Many estate planning attorneys devote a great deal of time for cleaning up the messes left behind by do-it-yourselfers. Protect your family by working with an experienced estate planning attorney.

Reference: Vanguard (February 14, 2017) “5 estate planning facts you need to know now”

Was this Billionaire Penniless? Mysterious Death Leaves No Clues

As part of a settlement of a lawsuit that charged Oklahoma Billionaire Aubrey McClendon with theft of trade secrets when he left the company, Chesapeake Energy Corp. has withdrawn its claim for more than $455 million against his estate.

An Oklahoma City probate judge recently approved a settlement between Chesapeake Energy and the estate of the late Aubrey McClendon, according to KOCO News 5’s report, “Settlement erases some of Aubrey McClendon estate debts.” The settlement stipulates that Chesapeake would stop trying to collect undisclosed compensation and benefits previously paid to McClendon and agreed to pay $3.5 million in costs and legal fees. In return, the estate waived any claims to unpaid compensation and rights to benefits, including the use of a corporate jet and stock.

There are still several other claims that remain against the estate.

The agreement settled Chesapeake's lawsuit against McClendon. He left the company he founded over differences with a new board of directors. The lawsuit claimed that McClendon used stolen trade secrets to benefit a new company he formed, American Energy Partners LP.

Numerous claims against the estate remain. The largest is a $464.3 million claim by Williams Trust for loans secured by McClendon. Court documents show an undisclosed amount of the trust's claim was rejected by the executor of McClendon's estate in August.

It was once estimated that McClendon had a net worth of over $1 billion. However, creditors’ claims may wipe out that fortune. He may have debts that total over a billion dollars, so his net worth may be close to zero.

Many of the details of the claims are not public. They are either filed under seal or redacted from court filings.

McClendon owned 20% of the NBA's Oklahoma City Thunder, an asset creditors believe to be his most valuable, worth about $200 million. Forbes estimated in February that the team is worth $1.025 billion. Creditors said in a May 2016 hearing that McClendon's ownership stake could be sold to a family member at less than market value.  However, the estate’s attorney remarked that the team interest was not for sale.

McClendon used his stake in the NBA franchise to secure a loan from a bank that filed a claim for $87 million.

McClendon was a generous supporter of charitable organizations. Many of their claims have been rejected. One, the Boy Scouts, said it wouldn’t pursue its claim, while another, the Reagan Foundation, remains a party to the probate case. Duke University also filed a claim last year for the nearly $10 million that he’d pledged to various projects at his alma mater, but the claim was withdrawn.

One day after being indicted by a grand jury for allegedly conspiring to rig bids to buy oil and natural gas leases, McClendon was killed when his car slammed into a concrete bridge embankment. He was travelling at nearly 89 miles per hour. There was no suicide note, or anything to indicate that the collision was deliberate.  However, the police said that he drove straight into the wall with no correction.

Reference: KOCO News 5 (March 11, 2017) “Settlement erases some of Aubrey McClendon estate debts”

Is Someone You Love Without a Support System?

Elder orphans, a term used to describe seniors who don’t have children or a family support system, are growing in number. To protect themselves, they need to plan more than other seniors.

With a health care system already straining at the seams from aging baby boomers, a new concern is rising: the care of elder orphans, single adults with no family to care for them as they age.

The chief of geriatric and palliative medicine at North Shore LIJ Health System found that about 25% of Americans age 65 or older are in danger of becoming “elder orphans.” That number may be increasing, as U.S. Census data says that one-third of Americans 45 to 63 are single—an increase of 50% since 1980.

The Enid (OK) News’ article, “Many seniors age without support system,” identified some questions to help physicians and other health care professionals screen patients and help identify those who are at the greatest risk of becoming an “elder orphan.” Identifying individuals most at risk allows health care providers to more effectively meet their needs and help to avoid health crises before they happen.

Planning for the future is critical for those aging alone and without a family support network. They need to consider their current living arrangements and compare it to future expectations. It is important to examine the services and amenities available in the community,  such as mobile meals, public transportation and home healthcare.

You should also get your legal documents in order, like determining who’ll be your healthcare proxy, if you are unable to make decisions about your own health. If you don’t have someone in your personal life who can take on that responsibility, look at elder care options so that you can identify someone to speak on your behalf if you’re unable to speak for yourself.

You should talk to an attorney who specializes in Elder Law to help you.

Single men and women without families have to be more pro-active about advocating for their needs, and that includes planning for the challenges of aging well in advance. It is not fun to consider the decisions that will need to be made about geriatric care or end-of-life issues on your own, but planning in advance will, at the very least, provide some peace of mind.

By taking action now, elder orphans can put a plan into place that will allow them to age with dignity and retain independence for as long as possible.

Reference: The Enid (OK) News (March 19, 2017) “Many seniors age without support system”

What You Need to Know About the Durable Power of Attorney

The Durable Power of Attorney is an important document to have.  However, you and your agent need to be aware of some potential pitfalls with its use.

The essential function of a Durable Power of Attorney (DPOA) is to legally designate a representative to handle your financial affairs, if, for whatever reason, you become incapacitated. Having a DPOA drafted and executed properly, is one of the central documents in estate planning.

However, as reported in The (Wichita Falls TX) Times Record News article, “Tips to make a Durable Power of Attorney work,” sometimes the person to whom you give authority—known as an “agent”—will visit your financial institutions and attempt to get something done on your behalf to no avail. The bank might say “no”, even when they see your perfectly legal DPOA.

Sometimes banks don’t want to recognize a valid POA.

In the eyes of the bank, the DPOA could have been rescinded or even forged. Financial institutions want to do everything they can to protect themselves from lawsuits and damages. Using their own DPOA form is one of those protections. They may want you to use their own forms.

If it is possible, introduce your agent to your local bank or financial institution. This will allow them to meet and get to know each other.

In the event the agent is unable to get the bank’s approval, they should ask why. It may be as simple as changing wording in the document. You can also ask your estate planning lawyer to speak with the bank’s legal department. This may cut through some of the red tape that can be created by front-line staff misinterpreting the bank’s requirements or rationales.

If all else fails, particularly if you’re the agent and the principal isn’t competent, you may need to file a lawsuit to have the DPOA honored. In some rare occasions, a guardianship is requested.

The DPOA is there to protect your interests. We don’t always know in advance when we are going to become incapacitated. Having this in place allows your representative or agent to handle tasks like filing taxes, paying bills and handling the day-to-day financial tasks of life.

An experienced estate planning attorney will be able to help you create a DPOA, along with other necessary documents, so that you and your family are prepared for the unexpected, well in advance.

Reference: The (Wichita Falls TX) Times Record News (March 11, 2017) “Tips to make a Durable Power of Attorney work”

Why Start College Savings a Generation in Advance?

Mighty oaks grow from little acorns, and a 529 you start for your someday-grandchild will also grow mighty with the benefit of decades.

It sounds a little extreme, but when you think about the power of compounding returns, starting a college fund for a grandchild while your own children are still young makes a lot of sense. According to Kiplinger in “529 College Savings Plans for the Unborn,” starting a 529 account for a grandchild before your own kids have kids or are even married, gives you years of growth and some tax advantages.

Think of it this way: thirty years ago, the annual out-of-state cost of a state university was about $5,000. Today, one year at an out-of-state university could easily cost $40,000 or more. Therefore, it makes sense to consider funding a 529 college savings plan for your grandchildren now.

The real advantage of a 529 savings plan is that the money they don’t use for college will continue to grow tax-deferred and can be used for their own children just by changing the beneficiary. The grandparent still has ownership of the account, meaning they won't spend the money on something other than college.

If you need access to those funds, the earnings (not the contributions) are subject to federal and state income taxes and a 10% federal penalty. Money in 529 college savings plans grows free of state and federal taxes, and if/when it’s withdrawn and used for qualified higher-education expenses, it will also be tax-free.

There are no maximum annual contribution limits.  However, there can be gift tax consequences if you give more than $14,000 per year or $28,000 for couples. The account can be front-loaded, up to $70,000 ($140,000 for couples) in a single year without gift taxes, if you don’t make any other gifts to the beneficiary that year or for the next four years. Money can be contributed until it reaches the limit, which varies by state.

If your daughter or granddaughter has graduated from college and is single, instead of waiting until you pass away to give her money as an inheritance, you might start a 529 college savings program (or keep hers if you still have it) with you as the owner and your daughter or granddaughter as the beneficiary and successor owner.

If you pass away before all this happens, designating your child or grandchild as the successor owner allows him or her to take over the account with their own child as the beneficiary. The beneficiary can be changed to another family member if the initial beneficiary chooses not to attend college.

This strategy offers great tax efficiency. Deposited funds are never taxed, as long as they are used for qualified expenses. You have complete control over the money during your lifetime and the plan beneficiary can use the money for any college they chose. The beneficiary can also be changed to another family member. Depending on your state, you may even get a tax deduction for your contribution to the account. This is a legacy your children and grandchildren will be thankful for!

Reference: Kiplinger (March 2017) “529 College Savings Plans for the Unborn”