Barnes Lipscomb & Stewart PLLC

Start Your Estate Planning Today

There’s really no reason not to have an estate plan, and no reason not to keep it up to date. However, if you are responsible for a family and a home, it becomes even more important to do.

If you have children under age 18, and you don’t have a will, you’re not looking after them very well. According to a Caring.com study conducted in 2017, only 36% of Americans with children under age 18 have a will. Only 42% of all Americans have a will. This leaves children unprotected, and families exposed to all kinds of estate disasters.

USA Today’s recent article, “Estate planning: 6 steps to ensure your family is financially ready for when you die,” explains that if you die without a will, state laws will decide what happens to your property or who should be legally responsible for minor children. That might be OK in some circumstances, but in others, a grandchild with special needs might not receive the resources you want him to have, or an estranged family member might get your house.

For some reason, people believe that if they don't do anything, things will “work out.” They often do not. Here is what you should consider:

Create a will. This document states who should get your money and possessions, as well as who would become a guardian to your minor children, if both parents die.

A living will. This legal document states what medical procedures you want or don’t want, if you’re incapacitated and can’t speak for yourself, such as whether to continue life-sustaining treatment. Powers of attorney let you appoint someone you trust to make legal, financial and health care decisions for you, if you are unable.

Trust. This is a legal entity that holds any property you want to leave to your beneficiaries. With a trust, your family won’t have to go through probate. Trusts also let you set up instructions for how and when property is distributed. You’ll need to name a trustee who will manage the trust. Make sure you let people know, when you’ve designated them as a trustee. Name a secondary trustee, in case the primary trustee cannot or will not serve.

Beneficiaries. If you have investment accounts and retirement plans like a 401(k), make certain that the individual you’ve listed as the beneficiary is the person you want to receive those funds.  Remember to appoint a contingency or secondary beneficiary, just in case.

Get to know an experienced, local estate planning attorney. Trying to use an inexpensive online will service, doesn’t work for every situation. A local attorney is familiar with the law in your state, which governs estate planning, and will get to know you and your family. They’ll be able to give you the help you need, without any surprises. An invalid will created on the cheap, ends up costing far more than a well-designed estate plan.

An estate plan protects you from incapacity when you are living and protects your family when you have passed. Make an appointment today, if you don’t have an estate plan yet. It’s never too early.

Reference: USA Today (April 1, 2019) “Estate planning: 6 steps to ensure your family is financially ready for when you die”

An Era Passes with the Death of Lee Radziwill

Lee Radziwill, sister to Jacqueline Bouvier Kennedy Onassis, was a member of the international jet set known for her fashion, style and social life. However, her estate also reflected her life and pedigree.

Lee and her sister Jaqueline led lives that regular people could only watch and envy. When she died, as reported in Forbes, “How Lee Radziwill's Estate Plan Reflected the Refined Elegance Of Her Life,” her will was probated, so we are able to learn some things about how her estate plan worked.

Her estate plan uses a standard structure of a Will and a Revocable Trust. This trust is commonly used as a way to create privacy and ease of administration. Although her assets passed into trust, she also had a will. The will was necessary to handle certain elements of estate administration that could not be put in the revocable trust document. The will that was probated was put in place in September of last year, just a few months prior to her death.

If Radziwill knew that her health was not good, it might have caused her to review her decisions and make some final changes, based on her current life circumstances.

Her estate planning reflects family history, as wealthy families often use trusts as a way of dynasty planning, to manage assets in a family line.

The goals of these types of trusts are control and tax savings. One way to pass property to your children and make sure it stays in the family, is to use a trust. Trusts can last for generations. This multi-generational approach is very obvious in Radziwill’s will. She references three different trusts among three generations. Estate planning allows for the assets to move between generations. In this case, Radziwill exercises a special power of appointment over the principal of the trust to pass it to a trust for her daughter Tina that is created under Radziwill’s Revocable Trust, adding to the principal in that trust.

When someone makes a lifetime gift to someone in trust, they may also give that person the power to dispose of the property in trust at death and sometimes during life, which is known as a power of appointment. If it’s an unlimited power, it is a general power. If the power is limited in any way, it’s a special power of appointment. Radziwill’s power of appointment was limited, so she was probably only able to appoint these assets to her heirs or charity. By restricting those who can inherit from the trust, she’s able to maintain her family’s intent.

The first trust and agreement were made approximately forty years ago, and the family has gone through many births and deaths. Throughout this period, the family assets were protected, so they could be passed on to the next generation, through the careful use of estate planning strategies.

Reference: Forbes (March 31, 2019) “How Lee Radziwill's Estate Plan Reflected the Refined Elegance Of Her Life”

Do You Know If an Online Will is Going to Work?

One of the many problems presented by online wills, is that you won’t know if they will be deemed valid by the court until you are gone, leaving your loved ones to grapple with the results.

Without the knowledge and experience of an estate planning attorney, you don’t know what kind of legal and financial burden you might be creating when you try to save a few dollars with an online will.

Next Avenue’s article, “The Problems With Do-It-Yourself Online Wills,” reported that one DIY estate planning service had typos on its site, and its estate-planning “packages” had the same document labeled with three different names. Even worse, some of these packages were missing a key estate planning document about which very few users would know to ask.

Many DIY estate planning sites have attorneys on staff, but access to specific help for your personal documents is rarely available. If personal advice is offered, it may cost much more to get it.

It is true that many of us would prefer to fill in the blanks in silence, than to have to talk to anyone about our doubts or concerns. However, sometimes it helps—a great deal—to get professional advice.

If you prepare your taxes yourself and they end up incorrect, you and the IRS may end up working things out. However, if you decide to do your estate planning by yourself, you will never know the results of your DIY handiwork. Your loved ones will. and it may not be pleasant.

You need to have customized estate planning documents to avoid court involvement, to decrease administrative issues and to know that the job is done. The four basic estate planning documents are a will, a trust, power of attorney for financial matters and an advance health care directive. If you use any of these on a DIY site, you’ll be offered a fill-in-the-blank approach. However, each state has its own probate code, and the software package you use may have different names for these documents.

Some DIY websites have all of these documents for you, but only if you purchase their higher-end packages. Some offer limited attorney consultation, but it can be just a set of drop-down of questions with pre-written responses, rather than an actual conversation with an attorney.

Having a DIY will might be better than nothing. However, if the will is found to be invalid in court, the family will be left with the same result, as if nothing had been done. Unless you’re an estate planning attorney, you can’t possibly know what is required to create a valid will. Spare your family from the challenges, and work with a qualified estate planning attorney to have a will and estate plan prepared properly.

Reference: Next Avenue (March 29, 2019) “The Problems With Do-It-Yourself Online Wills”

How Life Insurance Works as Part of An Estate Plan

When a breadwinner dies prematurely, the family loses financial stability. A well-thought out risk management plan can protect the family and cover major expenses, like mortgage payments or college costs.

The biggest reason to have an estate plan is to protect the family, especially when there are minor children. That is why a well-constructed estate plan includes life insurance. Its chief purpose is to replace the income of the family’s primary breadwinner and protect the family’s lifestyle.

Forbes’ recent article, “How To Choose A Life Insurance Beneficiary” reminds us that there’s the task of determining who in your family needs this coverage, how much will they need and for how long. Important factors include whether you have a spouse or partner who depends on you financially, younger children who need care, or parents who will need financial help. Selecting a beneficiary isn’t always a clear-cut decision, and there are several other components to the equation that should guide your decisions.

Age matters. It makes sense that a parent would want to designate a non-adult child as a beneficiary because of their lack of income. However, it is important to consider the process that comes with that decision. Naming a minor as a beneficiary will provide much-needed coverage, but they won’t have access to the funds until they’re adults. If they need to access the assets in the policy prior to reaching adult age, the funds will have to be placed in the hands of a guardian.

Type of Policy. As time goes on, your family may need your financial income less, and that’s where understanding the difference in whole and term life policies plays an important part. If financial coverage is needed most when your children are of a certain age, buying a term life policy lets you to control that. A term policy will only be paid out to your beneficiary, if you die during a fixed span of years (e.g., 10, 20, 30-year policy). In contrast, whole life insurance lasts your whole life. Your children will likely be grown, but the policy proceeds could be used for your grandchildren.

Designating multiple beneficiaries. You may have several individuals who are dependent on your income or who’d have trouble financially, in the case of your absence. If you’re having a hard time choosing between a spouse, parent, or child,  it is possible to select multiple beneficiaries. Elections can also vary in coverage. This lets you choose the right portion of your policy designated for each beneficiary you name.

Contingent Beneficiaries. If you leave your policy to just one person, have a backup or a contingent beneficiary. The primary beneficiary is an initial person to whom you leave your life insurance policy, and a contingent is the second in line to inherit the policy, if the primary beneficiary dies.

Beneficiary designations can change. Beneficiary designations aren’t set in stone. You can change beneficiaries, in the event of major life changes.

The critical part of selecting a beneficiary designation is first figuring out who will most need the proceeds from the life insurance policy and then, determining who will be responsible to ensure that the proceeds are used for the correct purposes.

Reference: Forbes (March 27, 2019) “How To Choose A Life Insurance Beneficiary”

State Estate Taxes to Consider When Planning a Retirement Relocation

Chances are you wouldn’t choose to live in a state, where estate taxes take a big bite out of your estate. However, if you haven’t checked this out, do so before relocating.

Where you live and die could make a big difference in how much of your estate makes it to the next generation. It’s not information you’ll find in brochures for a continuing care community, so you’ll need to some homework.

While federal estate taxes apply no matter where you live within the United States, there are 18 states that have some form of state estate taxes or inheritance tax. To be clear, state taxes are taken from an estate before it’s distributed to the heirs.  Inheritance tax applies to the heirs, even if they live in a different state than the deceased.

Fox News’s recent article, “Estate and inheritance tax guide: The best and worst states to die in,” explains that inheritance taxes only apply in Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. Note that each of these states totally exempts spouses from paying the inheritance tax. New Jersey also exempts domestic partners. Children and siblings are also frequently exempted.

Nebraska and Pennsylvania are the only states where children and grandchildren are not exempted. Nebraska law stipulates that immediate relatives are subject to a 1% tax on inheritance amounts above $40,000. In Pennsylvania, tax rates begin at 4.5% of inheritances for children and lineal heirs. Nebraska has the highest top inheritance tax rate of the states at 18%; other states range from 10 to 16%.

Each state has exemptions that are based on the amount of the inheritance and the heir's relationship to the deceased. These vary from state to state. If you receive an inheritance from someone who lived in one of the inheritance-tax states, ask an estate planning attorney about that state's tax laws. States categorize heirs into types for the purposes of assigning exemptions and tax rates—from two categories in Maryland to seven in Iowa.

You could say that any of the other 32 states are by definition the "best" states to die in, because they don’t have these types of taxes. There’s one of those mentioned above that is arguably the worst. That’s because it imposes both inheritance and estate taxes. Maryland levies a 16% tax on estates above $4 million for decedents, who passed away in calendar year 2018.

Here’s the list of the other states with estate taxes and their 2019 income exemption limits:

• Connecticut: 7.2% - 12.0% tax on estates over $2.6 million.
• Hawaii: 10.0% - 15.7% tax on estates over $5.49 million.
• Illinois: 0.8% - 16.0% tax on estates over $4 million.
• Maine: 8.0% - 12.0% tax on estates over $5.6 million.
• Massachusetts: 0.8% - 16.0% tax on estates over $1 million.
• Minnesota: 12.0% - 16.0% tax on estates over $2.4 million.
• Oregon: 10.0% - 16.0% tax on estates over $1 million.
• Rhode Island: 0.8% - 16.0% tax on estates over $1.538 million.
• Vermont: 16.0% tax on estates over $2.75 million.
• Washington: 10.0% - 20.0% tax on estates over $2.193 million.
• District of Columbia: 12% - 16.0% tax on estates over $5.6 million.

The size of the exemptions is fairly high, but when you consider the value of your home and your investment accounts, you might come close to hitting those numbers in certain states. State tax laws do change, so as you begin working on your estate plan, ask your estate planning attorney about the state tax levels. If you are planning on relocating in retirement, taxes and estate laws may be different, so address both a new estate plan and a tax plan, as soon as you get settled into your new home.

Reference: Fox News (March 28, 2019) “Estate and inheritance tax guide: The best and worst states to die in”

Your Family Needs You to Have a Will

There are many nuances in wills that only experienced estate planning attorneys know about. That’s just one reason, why it’s best to have a will prepared by a professional.

With the creation of a will and estate planning documents, combined with frank conversations with family members about your intentions, your family will be better prepared for your passing.

Detailing your wishes helps to eliminate unnecessary work and potential stress and anxiety, when a loved one dies. Wills let heirs act with the decedent’s wishes in mind, and a will can make certain that assets and possessions wind up in the right hands.

The Oakdale Leader’s recent article, “Things People Should Know About Creating Wills” says that when you meet with an experienced estate planning attorney, he or she will discuss the following topics:

Assets: Create a list of known assets and determine which assets are covered by a will and which pass through joint tenancy, beneficiary designation, or a living trust. For instance, life insurance policies or retirement plan proceeds will be distributed directly to the named beneficiaries. A will also can cover other assets, such as photographs, personal items, autos and jewelry.

Guardianship: Parents’ wills should include a clause that states who they want to become guardians of their minor children.

Pets: Some people use their will to state the guardianship for their pets and to leave money or property to help care for them. However, it is important to remember that pets don’t have the legal capacity to own property, so don’t give money directly to pets in your will. In some states, you can establish a pet trust.

Funeral directions: Probate won’t occur until after the funeral, so funeral wishes in a will often go unnoticed. You can let your executor know your wishes in a separate document.

Executor: An executor is a trusted person who will carry out the terms of your will. He or she should be willing to serve and be capable of executing the will.

If you die without a will, the estate is settled based on the laws of your state. Your property does not automatically go to your spouse or children. With no will, estate distribution can be more easily challenged, and the transfer of property is handled by an administrator, who is appointed by the court. This administrator doesn’t know you or your family and is required by law to make decisions that may be completely contrary to what you would have wanted.

The solution is simple: make an appointment with an estate planning attorney and start the process of creating an estate plan. You should have a will, power of attorney, health care power of attorney and, depending upon your situation, there may be other documents needed.

Reference: Oakdale (CA) Leader (March 27, 2019) “Things People Should Know About Creating Wills”

Start a Roth IRA for a Retirement Bounty When You Need It

It’s easy to dismiss retirement savings when you are young. Retirement seems so far away, and there’s so much you want to do right now. But wiser and older people know how important it is to start retirement savings while you are young.

No one ever says “I should have worked more” on their death bed. Similarly, no retiree ever says, “I should have saved less.”

CNBC’s article, “The one thing no one tells you about investing in a Roth IRA,” says that you almost never hear, is regret from retirees that they didn't start saving sooner. It’s wise to start investing as early as possible, so your investments will have more time to grow.

Millennials seem to really like Roth IRAs, which show an across-the-board increase in all age groups.

In looking at investor data, Fidelity concluded that more than 50% of IRA contributions go into Roth IRAs, especially from people age 23 to 38. Millennials opened 41% of new Roth IRA accounts in 2018, and 74% of their contribution dollars are going into Roth’s. These accounts are especially valuable, when they’re the sole source of retirement savings.

For younger people, 30 or 40 years seems like a super long time to not be able to use that money. However, because Roth contributions are made with after-tax dollars, that's not a big concern.

The benefit is that you can use the contributions you've made without taxes or a penalty. You have to forfeit the immediate tax break, but you’ll receive something better in return: the contributions and years of earnings that will be tax-free in retirement.

Fidelity believes that this year millennials are estimated to be a larger population than boomers. Older millennials are in their 30s, stable in their careers and saving.

Since the IRS has upped IRA contribution limits, you can contribute $6,000 annually. If you are over age 50 and making catch-up contributions, you can add in an additional $1,000, for a total of $7,000 per year.

The income cutoff for contributing to a Roth IRA is $137,000 for single filers, up from $135,000 for single filers in 2018.

In simpler terms, a traditional IRA will give you a tax credit now, and the Roth IRA will give you tax-free withdrawals, when you draw down your retirement funds. If you are in a low-income tax bracket now, it might make sense to take advantage of the Roth. As your career and income grow and you want to minimize income taxes, the traditional IRA will work better.

Reference: CNBC (March 31, 2019) “The one thing no one tells you about investing in a Roth IRA”

Divorce and Your Estate Plan: Don’t Make Mistakes Here

With or without children, divorce is a complicated transaction, with many moving parts. Things happen during a divorce, which can sometimes take years to complete. One part that is often overlooked is the estate plan, which should be updated as early in the process, as possible.

What would happen if your soon-to-be ex-spouse became very sick or died during divorce proceedings? If his or her estate plan wasn’t updated, you could be the one making health care decisions or inheriting everything. That’s why the recent article, “5 Estate Planning Moves If You Are Getting Divorced” from the Journal Enterprise, says not to forget about getting your estate plan updated.

Medical Power of Attorney. This is also called a healthcare proxy. This person is named to make decisions on your medical care, if you’re ill or injured and can’t state your medical care decisions. Unless you make the change, your ex-spouse will have this right.

Financial Power of Attorney. Like a healthcare proxy, this is someone you select to take charge, if you become incapacitated. This person has authority over your financial decisions, and it means they have the authority to pay your bills, access your bank and investment accounts, collect and cash your paychecks and make financial decisions for you. You want to be certain that your assets are protected, and your financial obligations are met, while you’re unable to act on your own behalf. Most people name a spouse, but if you get divorced and don’t switch this designation, your spouse will still be your financial power of attorney and will retain access to your finances.

Create a List of Things to Change After Your Divorce. A divorce can freeze some assets and accounts, which remains in effect until it’s finalized. Therefore, you won’t be able to change the beneficiary on life insurance policies, pensions and other types of accounts. Ask your estate planning attorney to find out exactly what accounts will be affected. Once you know which ones are frozen, you should make a list to ensure you won’t neglect to change them, when the divorce is finalized.

Modify Your Will. In some states, you may not be permitted to create a new will, but your attorney should still be able to help you make the necessary changes. You’ll want to review your heirs. If you do have minor children and you have sole custody, you may want to designate another person as their guardian. If you named your spouse as executor of your will, you may want to consider changing that.

Modify Your Trust. You may have a revocable living trust, in addition to a will. One of the advantages of a revocable trust is that it doesn’t go through probate, so your heirs get a bigger inheritance more quickly. If you have a revocable trust, talk to your attorney about changing it after your divorce.

Divorce is an overwhelming process, and one that feels like it will take forever. You might feel like estate planning is the last thing you want to deal with, but it may be wisest to make it one of the early tasks in the process.

Reference: Journal Enterprise (March 20, 2019) “5 Estate Planning Moves If You Are Getting Divorced”

Should I Consider Cashing In a Life Insurance Policy?

Older workers who find themselves unable to find a new job or retirees confronting a health crisis and its associated costs, often turn to their life insurance policy as a source of ready cash. Is it a good idea?

There’s no easy answer to the question of cashing in a whole or permanent life insurance policy. If there’s no other source of cash, even temporarily, it may be the only answer. On the other hand, according to the discussion presented in “Cashing in Your Life Insurance Policy” from Investopedia, if you are relatively young and the insurance policy was purchased to protect your family’s financial future, there may be some long-term risks.

Cash-value life insurance, like whole life and universal life, builds reserves through excess premiums plus earnings. These deposits are held in a cash-accumulation account within the policy. You can access cash accumulations within the policy through withdrawals, policy loans, or partial or full surrender of the policy. Another alternative is selling your policy for cash, known as a life settlement. Note that although cash from the policy might be useful during stressful financial times, you could face unwanted consequences depending on the method you use to access the funds.

You can usually withdraw limited cash from a life insurance policy, based on the type of policy you own and the insurance company. The big advantage is that the withdrawals aren’t taxable up to your policy basis, as long as your policy isn’t classified as a modified endowment contract (MEC). However, these can have unexpected or unrealized consequences. Withdrawals that decrease your cash value, could cause a reduction in your death benefits. This is a potential source of funds you or your family might need for income replacement, business purposes or wealth preservation. Cash-value withdrawals also aren’t always tax-free. If you take a withdrawal during the first 15 years of the policy, and the withdrawal causes a reduction in the policy's death benefit, some or all of the withdrawn cash could be subject to tax. Withdrawals are treated as taxable, to the extent that they exceed your basis in the policy.

Withdrawals that reduce your cash surrender value could mean higher premiums to maintain the same death benefit, or the policy could lapse.

If your policy is determined to be an MEC, withdrawals are taxed, according to the rules applicable to annuities–cash disbursements are considered to be made from interest first and are subject to income tax and possibly a 10% early-withdrawal penalty, if you're under age 59½ at the time of the withdrawal. Policy loans are treated as distributions, so the amount of the loan up to the earnings in the policy will be taxable and could also be subject to the pre-59½ early-withdrawal penalty.

Surrendering the policy can provide the cash you need, but you're relinquishing the right to the death-benefit protection. You can sell your life insurance policy to a life settlement company in exchange for cash. The new owner will keep the policy in force (by paying the premiums) and get a return on the investment, by receiving the death benefit when you die.

To qualify for a life settlement, the insured must be at least 65 years old, have a life expectancy of 10 to 15 years or less, and usually have a policy death benefit of at least $100,000. However, the taxation of life settlements is complicated. The gain in excess of your basis in the policy is taxed to you as ordinary income. In addition to the tax liability, life settlements usually include up to a 30% in commissions and fees, which reduces the net amount you receive.

There may be other alternatives to liquidating a life insurance policy for cash. Before you make the decision, think about why the policy was purchased, and what is at risk, if the policy is gone. Other options may include a home equity loan or borrowing against a 401(k) loan. All of these options have their own pros and cons, but should be thought through before going forward. You may have to ask yourself what is the “least bad decision” you can make.

Reference: Investopedia (January 9, 2019) “Cashing in Your Life Insurance Policy”

Some Medicare Premiums Reflecting IRMAA Surcharge

Some Medicare Premiums Reflecting IRMAA Surcharge

The increase may only be temporary for some, but others are seeing big changes in their Medicare bills. Plan ahead for this additional cost.

Have you started seeing a separate invoice from Medicare, in addition to the deductions taken from your monthly Social Security benefit? If so, Kiplinger’s recent article, “How Changes in Income Affect Medicare Premiums,” says this is happening because you are now subject to the Medicare high-income surcharge, or the “Income-Related Monthly Adjustment Amount (IRMAA).”

The bill should indicate “IRMAA.” This means that a senior must pay this surcharge, because his modified adjusted gross income, plus tax-exempt interest income, was higher than $85,000 if single or $170,000, if married filing jointly on his last tax return on file (usually 2017 for 2019 premiums).

This surcharge ups the monthly Medicare Part B premiums from the standard $135.50 in 2019 to a range of $189.50 to $460.50 per month, depending on income. Medicare Part B (medical insurance) is part of Original Medicare. Part B covers medical services and supplies that are medically necessary to treat a health condition. This can include outpatient care, preventive services, ambulance services and durable medical equipment.

In addition, if a senior has Medicare Part D prescription-drug coverage, he may also have to pay an extra $12.40 to $77.40 per month, in addition to his Part D premiums. If a senior and his spouse file jointly and are both receiving Medicare benefits, they’ll both be subject to the high-income surcharge.

If a senior’s income has dropped since 2017 because of certain life-changing events, like marriage, divorce, death of a spouse or retirement, he can ask to have his Medicare premiums based on more recent income, which could reduce or eliminate the surcharge. The senior must file Form SSA-44 with the Social Security Administration, along with evidence of the eligible life-changing event (such as a statement from your employer with the date of your retirement) and an estimate of your reduced income for the year.

If a senior’s income was unusually high in 2017 for other reasons (e.g., because he sold investments for a profit or rolled money over from a traditional IRA to a Roth), he won’t be able to get his premiums reduced this year. However, the senior may go back down next year when his premiums will be based on his 2018 income.

This is an unexpected cost that can pinch a retirement budget, if there’s no room for surprises. If you don’t have a cushion for extra expenses, consider dialing down some spending to create some financial breathing room for yourself. This may not be your only surprise cost in years to come.

Reference: Kiplinger (February 19, 2019) “How Changes in Income Affect Medicare Premiums”