Barnes Lipscomb & Stewart PLLC

Why Should We Consider Titling Property as Tenants in Common?

How property is owned matters, especially when it comes to estate planning. In some states, owning property as tenants in common is the default ownership method.

There are a number of different ways to own property. If you own property in Oklahoma, for instance, just titling it “joint ownership,” the form of ownership will be as a tenant in common. Other ways to own property include as an individual, and as joint tenants with right of survivorship (JTWROS).

The Pauls Valley Democrat says in its article “How to title your property as tenants in common” that ownership as a tenant in common provides an undivided interest in the whole property (i.e., an undivided one-half, one-third, etc.). This interest in property stands on its own and can be bought and sold. This form of title is the best option for two or more people who want to keep their title separate during life and after death.

In practice, this ownership is a bit theoretical because an undivided interest provides a partial ownership of the entire property—but not a total ownership of any part of the property. Therefore, an undivided one-half owner has the right to use the entire property, including the right to benefit from one-half of the rent, lease, or crop share.

When several individuals own an undivided interest, the control, usage, and management can become complex and troublesome, especially when one of the co-tenants spends their own money to improve the property, which benefits the other co-tenants.

Tenancy in common offers a benefit because the interest is transferable and can be sold or otherwise transferred, without affecting the other owners. However, the value of a partial ownership is decreased in value, because of the potential limitations on sharing with the other owners.

The following is an issue that can occur, if a husband and wife own their property as tenants in common. If one spouse dies, his or her undivided interest remains as a part of the estate. As a result, his or her estate has to be probated for a clear transfer of title to the surviving spouse or to other heirs. It’s an expense for the survivor that could have been avoided, if another form of ownership were implemented.

Another thought with co-tenancy is a debt of one of the co-owners. The death of one of the co-tenants does not terminate the ability of his or her creditors to file a claim against the property as a part of a probate. Each owner has the right to sue to split the property in a suit for partition, and the other owners may at any time face such action.

This presents a host of legal and financial problems. It’s usually impossible for real property to be divided in equal portions. What usually occurs is that the court sells the property and the parties divide the proceeds of the sale. This is rarely what anyone wants, especially if the property was a beloved family home.

Talk with an estate planning attorney about how to title the ownership of the property, how to align that ownership with the overall goals of the estate and spare your family the cost and heartbreak of having to resort to a court-ordered sale.

Reference: Pauls Valley Democrat (October 2, 2019) “How to title your property as tenants in common”

What Will This Year’s Cost of Living Increase Be for Veterans?

Veterans benefits include disability compensation, compensation for dependents, clothing allowances and dependency and indemnity compensation checks. Every year, there is a cost-of-living allowance.

The annual Veterans’ Compensation Cost-of-Living Adjustment act was signed into law by the President recently. However, it won’t be as big as the last one received. A number of veterans benefits will have the same annual increase as Social Security recipients.

The Military Times’ recent article asks the following: “Veterans benefits will see a cost-of-living bump this year, but how much?” According to the article, the veterans benefits covered include disability compensation, compensation for dependents, clothing allowances, and dependency and indemnity compensation checks.

The measure is typically merely a formality—it passed Congress again this year with no opposition. However, the bill is required annual work for lawmakers, because federal statute doesn’t link annual COLA increases for the two separate payouts.

Legislative efforts in recent years to make the increases automatic for veterans haven’t been successful.

Navy veteran Elaine Lauria, D-Va., sponsored the measure. She termed it an important way for lawmakers to honor their commitment to individuals who served honorably in the armed forces.

“Providing quality benefits to our veterans and their dependents can change lives,” she said.

The official cost-of-living boost for Social Security beneficiaries won’t be announced, until next month. However, multiple analysts have said they expect it to be below the 2.8% adjustment awarded last year.

The annual COLA calculation is based on a series of economic indicators. This includes the private sector wage growth.

In the last ten years, Social Security recipients (and those getting veterans benefits) have had no annual increase three times. It has only gone above 2% twice in that time.

The link between the veterans’ cost-of-living increases and the COLA for Social Security usually comes later in the fall.

This year, because of the federal calendar and timing for check distributions, veterans won’t see these increases until December.

Reference: Military Times (September 30, 2019) “Veterans benefits will see a cost-of-living bump this year, but how much?”

How Important is a Special Needs Trust?

A Special Needs Trust is used to provide for an individual who is disabled and is receiving government support from Medicaid or Social Security Disability. The SNT protects their ability to receive services.

For loved ones with disabilities or a debilitating and chronic illness, programs like Supplemental Security Income (SSI), Social Security Disability Insurance (SSDI) and Medicaid allow them to get the services and care they need. However, these programs have income limits to ensure that those who need these funds the most receive them.

A special needs trust is a specific type of trust fund that’s created to help a beneficiary with special needs but not jeopardize their eligibility for these programs, explains KAKE’s recent article, “How a Special Needs Trust Works.”

If a family member were to leave money to an individual who is receiving help from these programs, it could put their income above the income limit, and they would lose the government funding.

A special needs trust works around this. That’s because the owner of the funds is technically the trust, not the beneficiary. You also name a trustee to be in charge of disbursing the funds in the trust. Therefore, while the beneficiary benefits from the trust, she doesn’t have control of its assets.

If you are creating a special needs trust for a beneficiary, you must do this before the beneficiary turns 65. And funds from the trust typically can’t be used to pay for food or shelter.

If a person could benefit from a special needs trust, but they themselves own the funds, you can create a first-party special needs trust in which you serve as both the beneficiary and the grantor. These can be complicated to draw up, and states have varying rules determining their validity. A first-party special needs trust has the money that belongs to its beneficiary.

With a third-party special needs trust, the trust holds funds that a beneficiary doesn’t directly own. These are generally used by grantors to allow the beneficiary to start getting money from the trust, even before their death. The funds never technically belong to the beneficiary, so they can’t be used for Medicaid payments. The trust can be used to save money for the beneficiary and future beneficiaries.

The third type of these trusts is the pooled special needs trust. Nonprofit organizations manage assets for a fee, and these organizations pool the funds of multiple trusts together and invest them. When it comes to payments, beneficiaries get an amount equal to their percentage of the pooled trust’s balance.

Through the use of a special needs trust, you can help your loved one to have funds to deal with the expenses that come with a disability or illness, without risking their ability to receive government benefits. The trust can also be very specific about how the money is to be used.

A special needs trust lets you help your beneficiary deal with the expenses that come with illness or disability, without hampering their ability to get other assistance. An attorney whose practice focuses on special needs trusts will explain that these trusts are irrevocable, which means that creditors cannot attach the funds.

Reference: KAKE (September 30, 2019) “How a Special Needs Trust Works”

Why Should I Continue to Have Life Insurance After My Divorce?

If you have children and you purchased a life insurance policy to protect them, then you still need a life insurance policy. But you may want to make a few changes.

Life insurance needs to be addressed during the process of a divorce. If there are children, the beneficiary may continue to be the ex-spouse, if they are going to be the person raising the children if the key breadwinner dies. But there are alternatives.

Investopedia’s article, “How Life Insurance Works in a Divorce,” explains that addressing life insurance is a critical issue in the divorce process, especially for divorcing couples with children. Maintaining life insurance protects the financial interests of both parties and their dependent children. This involves making the necessary beneficiary changes, accounting for the cash value in whole or universal life policies, protecting child support and alimony income, and—most importantly—making certain that any children involved are financially protected.

Most married couples with life insurance list their spouse as the primary beneficiary. Life insurance protects a family from financial devastation, if you die and your income is lost. For a married person, naming your spouse as your beneficiary makes certain that he or she can continue to pay the mortgage, put food on the table and possibly bring up the children without your income. Life insurance is especially critical, if you provide the majority of the income.

In a divorce, especially an acrimonious one, odds are good that you’ll no longer want your ex-spouse profiting from your death. If there are no children are involved, most life insurance policies let you change the beneficiary at any time.

Some life insurance policies, such as many whole life and universal life policies, accumulate cash value over time. Each month when you make your premium payment, some of the money is deposited into a fund that grows with interest. This is the policy's cash value, and it’s your money. Any time while the policy is active, you can forgo the death benefit and take the cash value. This is called “cashing out” your life insurance policy.

Since the cash value from a life insurance policy is part of your net worth, you should list the policy, including its cash value, as a marital asset to be divided. Frequently, when marital assets are divided evenly, half the cash value from the policy goes to each spouse.

Protecting child support or alimony income is really important for the spouse who takes primary custody of the children after the divorce. These child support funds are for feeding and clothing the children and saving for college. If the noncustodial parent isn’t around anymore, this income goes away and it could put the custodial parent in a bind. If you have custody of the children, the best way to protect yourself from this situation, is to keep a life insurance policy on your ex-spouse with a benefit amount high enough to replace your child support or alimony income at least until the last child is 18. Being the custodial parent, if your ex is irresponsible or untrustworthy, you may just purchase the policy and pay the premium yourself, since coverage stops if payments lapse.

A life insurance policy becomes more important, if an ex-spouse is no longer involved with the children and if the custodial parent is the only source of income for the family. There should be a guardian named in your estate plan and another person named to handle finances on your children’s behalf. Estate planning and life insurance are both important to protect children, when there is a divorce.

Reference: Investopedia (June 25, 2019) “How Life Insurance Works in a Divorce”

Are There Federal or State Taxes on Inheritances?

In principal, the federal government does not have an inheritance tax. However, there are other taxes to be aware of and to plan for.

Inheritances of property or cash are not taxed as income, and in 2019, the estate tax does not come into play, unless the estate is valued at more than $11.4 million. However, there are taxes to be aware of during retirement and while doing estate planning.

Investopedia’s recent article asks “Are Estate Distributions Taxable?” The article explains that the only exception is for income taxes due on withdrawals from retirement accounts that are ordinarily subject to taxes, like traditional IRA accounts.

However, some states do tax inheritances, and to date, those states include Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. None of those states applies the tax to the spouse or children of the deceased. When imposed, the taxes range from about 5% to about 15% of the inheritance.

If an estate executor doesn’t pay income tax before he or she distributes the inheritance, the IRS may impose limited beneficiary taxes on those who inherit.

Right now, the federal estate tax applies only to inheritances above $11.4 million per individual. Estates, just like individuals, are required to file income tax forms. They may also owe taxes in the form of interest payments on accounts.

The estate can pay the taxes due or distribute the taxable income to the heirs. In certain cases, this actually saves the beneficiary money because the entire estate may be in a higher tax bracket than the individual who’s getting just a portion of the inheritance.

An exemption to the estate tax for inheritances up to $5 million was instituted about nine years ago in 2010 and 2011 (but there were special rules for decedents dying in 2010). This exemption has been reaffirmed, and the limits have been raised in subsequent laws passed by Congress. The current rules exempts from estate taxes the first $11.4 million inherited by an individual, and twice that amount if the inheritance is distributed to a couple.

Under the current tax exemption law, only about 2,000 Americans are liable to pay an inheritance tax. However, it is safe to say that these individuals benefit from the services of skilled estate planning attorneys, accountants and financial advisors, who use acceptable and legal strategies to avoid or minimize their tax liability and maximize the assets that are passed to the next generation.

Reference: Investopedia (August 4, 2019) “Are Estate Distributions Taxable?”

When Beneficiary Designations Undermine Estate Plans

If an estate plan is a puzzle, beneficiary designations are the corner pieces. Get them right, and the puzzle works. Forget them, and the puzzle won’t ever be right.

No matter what your will says, you probably signed a number of documents during your lifetime that supersede your will. How can that be? Beneficiary designations, where you name someone who will receive assets from investment, bank or retirement accounts, life insurance policies, pensions and other accounts, override any provisions in your will.

Some people don’t want to bother their estate planning attorney with what seems like a straightforward issue, that they should be able to handle themselves. A well-intentioned financial advisor could also make an error and complete the change of beneficiary form incorrectly.

People trying to avoid probate may name a “payable on death” beneficiary of an account. However, they don’t know that doing this may undermine their existing estate plan. It’s best to consult with your attorney to make certain that your named beneficiaries are consistent with your estate planning documents.

Wealth Advisor’s “7 Ways That Beneficiary Designations Can Mess Up Your Estate Plan” lists seven issues you need to think about, when making your beneficiary designations.

Cash. If your will leaves cash to various people or charities, you need to make certain that sufficient money comes into your estate, so your executor can pay these gifts.

Estate tax liability. If assets do pass outside your estate to a named beneficiary, make certain there will be sufficient money in your estate and trust to pay your estate tax lability. If all your assets pass by beneficiary designation, your executor may not have enough money to pay the estate taxes that may be due at your death.

Protect your tax savings. If you have created trusts for estate tax purposes, make sure that sufficient assets flow into your trusts to maximize the estate tax savings. Designating individuals as beneficiaries instead of your trusts may defeat the purpose of your estate tax planning. If there aren’t enough assets in your trust, the estate tax provisions may not work. As a result, your heirs may eventually end up paying more in taxes.

Accurate records. Be sure the information you have on the change of beneficiary form is accurate. This is particularly important if the beneficiary is a trust—the trust name, trustee information and tax identification number all need to be right.

Spouses as beneficiaries. Many people name their spouse as the primary beneficiary of their life insurance policy, followed by their trust as the secondary beneficiary. However, this may defeat your estate planning, especially if you have children from a first marriage, or if you don’t want your spouse to control the assets. If your trust provides for your surviving spouse on your death, he or she will be taken care of from the trust.

No last minute changes. Some people change their beneficiary designations at the last minute, because they’re nervous about assets flowing into a trust. This could lead to increased estate tax payments and litigation from heirs who were left out.

Qualified accounts. Don’t name a trust as the beneficiary of qualified accounts, like an IRA, without consulting with your attorney. Trusts that receive such qualified money need to contain special provisions for income tax purposes.

Make reviewing and updating your beneficiary designations, part of reviewing and updating your estate plan. Your heirs will appreciate your attention to detail.

Reference: Wealth Advisor (October 8, 2019) “7 Ways That Beneficiary Designations Can Mess Up Your Estate Plan”

What Does a Living Trust Accomplish?

A living trust is a useful way to help heirs avoid the probate process.

It’s smart to think about what you would like to happen to your property, after you have passed. No doubt you’d like to have certain people receive certain assets. One way to do this is through 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.

These documents seem simple but they require following state-specific rules. An estate planning attorney will be able to help you make sure that your trust accomplishes your goals.

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

This article discusses estate planning in Tennessee.  In Texas, probate is not lengthy nor expensive and often costs less than the cost of creating a living trust.  There are many good reasons to use a living trust, but sometimes they simply are not appropriate, depending on your particular situation and assets.  The decision should never be automatic, it should be done in consultation with your estate planning attorney, to see if in fact a living trust is appropriate for you and your assets.    Pat Barnes

 

Welcoming a New Member of the Family Means You Need an Estate Plan

Your baby is dependent upon you for everything. That includes naming who should be named as a guardian to raise her, if something unexpected should happen to you. Welcome to parenthood!

The birth of a baby is a wonderful time in a family’s life. One task that isn’t usually at the forefront of new parents’ minds is estate planning, but it should be a priority. Young and healthy people with dependent children need to ensure that their offspring are protected, and that is what an estate plan does.

Motley Fool’s recent article, “If You're a New Parent, Take These 4 Estate Planning Steps” says there are a few key estate planning steps that every parent should take to make certain they've protected their child, no matter what the future holds.

1. Purchase Life Insurance. If a parent dies, life insurance will make sure there are funds available for the other spouse to keep providing for the children. If both parents die, life insurance can be used to raise the child or to fund the cost of college. For most parents, term life insurance is used because the premiums are affordable, and the coverage will be in effect long enough for your child to grow to an adult.
2. Draft a Will and Name a Guardian for your Children. For parents, the most important reason to make a will, is to name a guardian for your children. If you designate a guardian, you will select the person you think shares your values and who will do a good job raising your children. This way, it’s not left to a judge to make that selection. Do this as soon as your children are born.
3. Update Beneficiaries. Your will should say what happens to most of your assets, but you probably have some accounts with a designated beneficiary, like a 401(k), and IRA, or life insurance. When you have children, you'll need to update the beneficiaries on these accounts for your children to inherit these assets as secondary beneficiaries, so they will inherit them in the event of your and your spouse’s death.
4. Look at a Trust. If you die prior to your children turning 18, they can't directly take control of any inheritance you leave for them. This means that a judge may need to appoint someone to manage assets that you leave to your child. Your child could also wind up inheriting a lot of money and property free and clear at age 18. To have more control, like who will manage assets, how your money and property should be used for your children and when your children should directly receive a transfer of wealth, ask your estate planning attorney about creating a trust. With a trust, you can designate an individual who will manage money on behalf of your children and provide instructions for how the trustee can use the money to help care for your children, as they age. You can also create conditions on your children receiving a direct transfer of assets, such as requiring your children to reach age 21 or requiring them to use the money to cover college costs. Trusts are for anyone who wants more control over how their property will help their children, after they've passed away.

Take the time now to speak with an experienced estate planning attorney about your new family and your estate plan. You’ll feel better knowing that you have taken yet another step to protect yourself and your children.

Reference: Motley Fool (September 28, 2019) “If You're a New Parent, Take These 4 Estate Planning Steps”

This article is from Motley Fool.  I would just add that naming minor children as beneficiaries of life insurance or retirement plans is not recommended.  The insurance company and the IRA custodian will not pay the proceeds to anyone other than a court appointed guardian under a court supervised guardianship, which is an expensive and difficult situation, and the child would get all the proceeds at age 18, which is also a bad outcome in many instances.  Coordinating beneficiary designations is an important part of any estate plan.  You should work with your estate planning attorney to make certain the proceeds will be distributed to a trust for the child or in some way that will not be an outright distribution to a minor.  Pat Barnes

Adding an Elderly Parent to a Checking Account: What Could Go Wrong?

Many adult children add themselves to their parent’s checking account to help manage an aging parent’s finances. In this case, a child added his 79-year old father to his account to make a single transfer easier.

Doing paperwork at the bank may not enjoyable, but, adding an elderly parent to a checking account for a single large cash transfer – and then leaving him on the account as a co-owner, because the paperwork is onerous – presents a number of issues. A scam targeting the father is just one concern addressed in the article from nj.com, “Is having a joint bank account with my father going to cause any problems?”

The father is still a named joint holder of the account, so he can withdraw some or all of the funds in the checking account at any time. As a result, the transfer is neither a completed gift nor a payment from the father to the adult son, until the son withdraws funds.

If the elderly father predeceases the adult son, the checking account would be included in his taxable estate. There may be taxes due on the estate, depending on the size of the estate and the state in which he lives, since some states have their own estate taxes at much lower levels than the federal thresholds. In New Jersey, there is a procedure where a tax waiver would need to be obtained to release the funds to the son in this case.

If the adult son dies before his father, the checking account funds would automatically pass to the father by operation of law, and not pursuant to the terms of the son’s will, nor to his children or spouse.

In light of the fact that the father can withdraw the funds during his lifetime as a joint holder of the account, those funds in the checking account are subject to him being a victim to scams.

To safeguard these funds, the adult son should take the time to properly title the checking account. If the transfer of funds was a gift to the son in excess of $15,000, the father would also need to file a Form 709, U.S. Gift and Generation-Skipping Transfer Tax Return, even if no tax is due because the federal gift and estate tax exemption is at $11.4 million per person.

If the transfer was made by the father to qualify for Medicaid, it is important to understand that the Medicaid five-year look-back period and penalty could be an issue. The look back is from the time of the application. Any gifts or transfers made within this period, are subject to a penalty, that is equal to a period for which Medicaid benefits are denied. Since the transfer isn’t complete until the son removes his father’s name from the account, for purposes of Medicaid qualification, it would be best to remove the father’s name ASAP.

If the father has any debts or financial problems, the joint account could be subject to creditors.

This seemingly simple solution to one transaction actually creates a number of problems. It would have been better to speak with an estate planning attorney, who would have addressed how the transfer could have been made with tax planning and Medicaid in mind.

Reference: nj.com (September 25, 2019) “Is having a joint bank account with my father going to cause any problems?”

When is a Sale to a Family Member a Gift?

If a parent sells a home to a child for far less than the bank-appraised value of the property, are there tax consequences? What should both parties to the sale expect from the IRS?

In this case, a generous couple agree to sell their home to their son. While the bank appraised the value of the property at $700,000, the couple is selling it to their son for the amount of the mortgage, which is $340,000.

According to the article “I’m selling my home to my son at a discount. Is it considered a gift?” from nj.com, the IRS will consider this transaction to be a gift.

The amount of the gift would be the excess of the value subtracted from the amount paid. In this example, if the bank-appraised value of the property is $700,000, and the parent is selling it for $340,000, the $360,000 will be treated as the amount of the gift.

The gift must be reported to the IRS on IRS Form 709 by April of the following year. However, there’s probably no gift tax due.

The gift tax is a tax on the transfer of property by one person to another while receiving nothing, or less than full value, in return. The tax applies whether the donor intends the transfer to be a gift or not.

In this case, because the value is a gift is under the available federal annual gift exclusion, when applied, that relieves the son of taxes on the gift. The federal basic exclusion amount will be applicable.

An individual can gift $15,000, adjusted for cost of living over time, to a person each year without reporting the gift. However, if the gift to a single person is more than $15,000, then IRS Form 709 must be filed to report the gift.

When reporting the gift, the value of the gift is applied against the available federal basic exclusion amount of the donor (the person making the gift). Only if the gift value is more than the available federal basic exclusion amount, is there a tax that’s due.

The current federal basic exclusion amount is $11.4 million per person.

If the property was in a state that did not have a gift tax, there would be no need for a filing. It would be wise to speak with an estate planning attorney to discuss the pros and cons of gifting the house in this manner described above, or as part of an inheritance.

Reference: nj.com (September 17, 2019) “I’m selling my home to my son at a discount. Is it considered a gift?”