Barnes Lipscomb & Stewart PLLC

What Does a Last Will and Testament Do?

“A last will and testament is essential for every adult. It establishes one’s wishes for distributing their property, whether real or personal, after death.”

Your will is the foundation of an estate plan, used to instruct your executor on distributing property, naming a guardian for minor children, creating a legacy and ensuring that your beneficiaries receive what you want. The will can also serve to disinherit a family member, as explained in the recent article “Last will can both include and exclude heirs” from The Record-Courier.

The process of cutting someone out of a will is known as “disinheriting.” Hurt feelings and tension among family members are inevitable when someone is disinherited. However, if the goal is to avoid litigation between family members, an experienced estate planning attorney will be needed. It takes careful planning to avoid creating a will contest. Disinheriting adult children increases the likelihood of them contesting the validity of the will.

Laws concerning inheritance rights vary. In Nevada, for instance, unless there is a prenuptial agreement, you cannot completely disinherit a spouse. Even if your will attempts to disinherit a spouse, in some cases the law will actually override the instructions in the will or trust and award a portion of the estate, known as the elective share, to a surviving spouse. If this is a concern, check with your estate planning attorney.

Adult children can be disinherited. However, minor children are often protected against disinheritance.

Parents can be disinherited if they outlive the decedent, since they are not always legally entitled to a share of their children’s estate.

Extended relatives can also be disinherited. Some estate planning attorneys will conduct a search for missing heirs or beneficiaries while preparing an estate plan to be sure there are no unknown legal heirs who might make themselves known to a decedent’s surviving spouse or other heirs.

Estranged biological children can be disinherited. However, the last will and testament must be properly prepared.

The reasons for disinheritance very from estrangement to the decedent believing their family member is financially secure and doesn’t need the inheritance. It is not necessary for the last will and testament to explain the reason for the disinheritance. However, it is advised to use a disinheritance clause to ensure the heir or beneficiary is removed and will not inherit under the will.

To protect the integrity of the will, it is also advised to include a no-contest clause in the will. This is a provision expressing a directive to eliminate the share allocated to any beneficiary who takes action to contest the testator’s intents as expressed in the will.

The last will and testament is the person’s last communication with loved ones. There is no further opportunity for clarification once they have passed. This is why it’s so important to have a will and for the will to explicitly state the names of the beneficiaries and the names of any disinherited persons.

When you meet with your estate planning attorney to create or update your last will and testament, be prepared to tell them if there are any family members who you want to disinherit, so they can create a last will and testament and an estate plan designed to withstand challenges.

Reference: The Record-Courier (Dec. 17, 2022) “Last will can both include and exclude heirs”

Should Each Child Get Equal Inheritance?

“Equally sharing the wealth among the children isn’t always fair, such as when one sibling is the primary caretaker, or another is already wealthy.”

Every estate planning attorney has conversations with their clients about how adult children should inherit. While most people assume siblings should all inherit equally, in many situations, equal is not always appropriate. There are many situations where an equal inheritance might be unfair, says a recent article, “How Should Your Children Inherit? 4 Scenarios Where ‘Equal’ Is Not Appropriate,” from Kiplinger.

The Caretaker Child Lives With the Parent. When one of the children lives with the parent and has taken on most, if not all, of the responsibilities, it may be fair to treat the child differently than siblings who are not involved with the parent’s care. Taking care of paying bills, coordinating health care appointments, driving the parent to appointments and being involved with end-of-life care is a lot of responsibility. It may be fair to leave this child the family home or leave the home to a trust for the child for their lifetime. The parent may wish to leave the caretaking child a larger portion of the inheritance to recognize the additional help they provided.

A Special Needs Child. If the parent has been the primary caregiver for a special needs child, the estate plan must take this into consideration to ensure the child will be properly cared for after the parents die or are unable to care for the child. Depending on what government benefits the child receives, this usually means the parents need to have a Special Needs Trust or Supplemental Needs Trust created. Most government benefits are means-tested. To remain eligible, recipients may not have more than a certain amount of personal assets. The Special Needs or Supplemental Needs trust could receive more or less than an equal amount of the estate the child would have inherited.

In this scenario, siblings are generally understanding. The siblings often know they will be the ones caring for the family member with special needs when the parents can no longer provide care and welcome the help of an elder law estate planning attorney to plan for their sibling’s future.

An Adult Child With Problems. It’s usually not a good idea to leave an equal portion of an inheritance to an adult child who suffers from mental illness, substance abuse, is going through a divorce or has a life-long history of making bad choices. Putting the money into a trust with a non-family member serving as a trustee and strict directions for when and how much money may be distributed may be a better option. In some cases, disinheriting a child is the unpleasant but only realistic alternative.

Wealth Disparities Among the Siblings. When one child has been financially successful and another struggles, it’s fair to bequeath different amounts. However, wealth can change over a lifetime, so review the estate plan and the wealth distribution on a regular basis.

How To Decide What Will Work For Your Family? Every family is different, and every family has different dynamics. Have open and honest discussions with your estate planning attorney, so they can help you plan for your family’s situation. If possible, the same frank discussion should take place with adult children, so no one is taken by surprise at a time when they will be grieving a loss.

Reference: Kiplinger (Dec. 18, 2022) “How Should Your Children Inherit? 4 Scenarios Where ‘Equal’ Is Not Appropriate”

What Is a Digital Asset for Estate Planning?

“At any given time, the average American maintains between 30 and 50 online accounts. These may be with banks, financial institutions, utility companies, email providers, social media outlets, commercial shopping or travel sites and accounts unique to technology, such as an account to purchase apps for a smartphone.”

Most of us don’t even realize just how much of our life is lived online, from streaming services and banking to apps to monitor our front door. All of these online accounts are digital assets and need to be included in estate plans says a recent article, “Estate planning and online accounts,” from American Legion.

Start by making a complete list of all of your online accounts, together with information about each account. Your list should include username, password, account number and a description of what each account includes. If you change passwords frequently, as recommended by cybersecurity experts, you’ll need to update your inventory every time.

Digital assets fall into four major types: personal, business, financial and social media. Personal accounts including emails, photos, videos, music and apps used on smart phones or tablets. This information is typically backed up on a computer hard drive or cloud-based storage account.

Financial assets include savings and checking accounts, retirement accounts, investment accounts, utility accounts and shopping and frequent flyer accounts. If you do banking or investing online, or if you own cryptocurrency, you’ll want to include these accounts.

Business related accounts include intellectual property, websites or blogs, written work, photos, videos, musical compositions and software. If your side gig includes selling items on eBay or Esty or similar websites, this information also needs to be included in your digital asset inventory.

Social media accounts include well-known platforms like Facebook, LinkedIn, Twitter, Snapchat, WhatsApp and any other platform where you are actively engaged. Gaming sites, e-sports and gambling sites should also be included.

Storage and protection is the second part of a digital estate plan. This involves saving the list and backing up important files and account information. The inventory itself needs to be secured, as it could easily be used to access your identity and steal your entire online life. The inventory can be as simple as a list on a pad of paper, stored in a secure location. If it is stored in a digital manner, make sure it is encrypted. There are programs to store and encrypt passwords. However, they are only as good as the software used to create them.

Saving the information on a desktop, laptop or tablet is risky, since these devices are hacked and contents are compromised fairly often. An external thumb drive might work. However, what if it was lost?

Select a digital executor and discuss your digital assets with them. Many states have now passed laws governing digital assets. Speak with an experienced estate planning attorney to learn if yours is among them. On some platforms, the executor needs to have been named in advance as a legacy contact before they are legally permitted to access the digital asset. In many cases, having the user’s name and password doesn’t give the executor a legal right to access the accounts according to the Terms of Service Agreement (TOSA) between the user and the platform.

Your estate plan should include a letter of instruction to the digital executor to tell them specifically what you wish to happen to your online accounts and digital assets. It should include recommendations for the distribution of various accounts, assets, files and information to heirs. It may be needed to prove your wishes or directives for digital assets, if there should be a challenge to the executor.

Digital estate planning is a new and changing area of the law. Making provisions for your digital estate will make it possible for your executor to protect your digital assets, as much as a traditional estate plan protects traditional, tangible property.

Reference: American Legion (Dec. 13, 2022) “Estate planning and online accounts”

What Is Included in an Estate Inventory?

“One of the essential steps in the probate process is filing an inventory of all the assets that are part of the estate.”

The executor’s job includes gathering all of the assets, determining the value and ownership of real estate, securities, bank accounts and any other assets and filing a formal inventory with the probate court. Every state has its own rules, forms and deadline for the process, says a recent article from yahoo! Finance titled “What Do I Need to Do to Prepare an Estate Inventory for Probate,” which recommends contacting a local estate planning attorney to get it right.

The inventory is used to determine the overall value of the estate. It’s also used to determine whether the estate is solvent, when compared to any claims of creditors for taxes, mortgages, or other debts. The inventory will also be used to calculate any estate or inheritance taxes owed by the estate to the state or federal government.

What is an estate asset? Anything anyone owned at the time of their death is the short answer. This includes:

• Real estate: houses, condos, apartments, investment properties
• Financial accounts: checking, savings, money market accounts
• Investments: brokerage accounts, certificates of deposits, stocks, bonds
• Retirement accounts: 401(k)s, HSAs, traditional IRAs, Roth IRAs, pensions
• Wages: Unpaid wages, unpaid commissions, un-exercised stock options
• Insurance policies: life insurance or annuities
• Vehicles: cars, trucks, motorcycles, boats
• Business interests: any business holdings or partnerships
• Debts/judgments: any personal loans to people or money received through court judgments

Preparing an inventory for probate may take some time. If the decedent hasn’t created an inventory and shared it with the executor, which would be the ideal situation, the executor may spend a great deal of time searching through desk drawers and filing cabinets and going through the mail for paper financial statements, if they exist.

If the estate includes real property owned in several states, this process becomes even more complex, as each state will require a separate probate process.

The court will not accept a simple list of items. For example, an inventory entry for real property will need to include the address, legal description of the property, copy of the deed and a fair market appraisal of the property by a professional appraiser.

Once all the assets are identified, the executor may need to use a state-specific inventory form for probate inventories. When completed, the executor files it with the probate court. An experienced estate planning attorney will be familiar with the process and be able to speed the process along without the learning curve needed by an inexperienced layperson.

Deadlines for filing the inventory also vary by state. Some probate judges may allow extensions, while other may not.

The executor has a fiduciary responsibility to the beneficiaries of the estate to file the inventory without delay. The executor is also responsible for paying off any debts or taxes and overseeing the distribution of any remaining assets to beneficiaries. It’s a large task, and one that will benefit from the help of an experienced estate planning attorney.

Reference: yahoo! finance (Dec. 3, 2022) “What Do I Need to Do to Prepare an Estate Inventory for Probate”

What Happens When Gift and Estate Tax Exemptions Change?

“The federal lifetime gift and estate tax exclusion will increase for 2023, with possible increases for 2024 and 2025. However, these high thresholds are only temporary, unless there is a change in tax law.”

The federal lifetime gift and estate tax exclusion will increase for inflation in 2023 to $12.93 million.  There may be similar increases for inflation in 2024 and 2025, according to a recent article from Think Advisor titled “The Estate and Gift Tax Exclusion Shrinks in 2026. What’s an Advisor to Do?”

This is the good news for wealthy Americans. However, there’s bad news in the near future. Under the Tax Cuts and Jobs Act, these historically high levels will end on December 31, 2025. Estate and gift exclusions will drop to the pre-2017 level of $five million, adjusted for inflation. Estimates for 2026 vary, but most expect the amount may reach $6.8 million per person.

For Americans who saw the value of their homes and portfolios increase in the last ten years, this level becomes uncomfortably close when considering the overall value of their estate. Here’s some help on how to minimize estate taxes in coming years.

What is the Estate and Gift Tax Exclusion in 2023?

Every year the annual estate and gift tax exclusion is adjusted for inflation. Gifts at or below this amount are not counted towards your lifetime exemption. For example, in 2022, the annual exclusion was $16,000 and in 2023, it is $17,000.

If you haven’t made any gifts to remove assets from your estate before 2026, your lifetime gift and estate tax exemption will revert to 2026 levels. If you made gifts prior to 2026, several different scenarios may apply.

If the amount of your gift was less than the exemption amount in place in 2026 or beyond, your remaining exclusion will be the amount of the exemption minus the amount of your lifetime gifts. Let’s say the exclusion is $6.8 million and you’ve given $3 million in lifetime gifts. The remaining exclusion would be $3.8 million. Any gifts over this amount would be subject to estate taxes.

If the amount of your gifts before 2026 exceeded the limit in place, the exemptions from the old limits will apply to those gifts. However, there won’t be any additional exemptions. Here’s an example: if you made $9 million in gifts before 2026, this would be your exemption amount upon your death. There would be no additional exemption for 2026 or beyond, unless the inflation-adjusted exemption exceeded $9 million in the future.

To be blunt, the higher exemption amounts in place are “use it or lose it.” Any difference between the higher exemption amounts and the post-2025 reduced amounts will be lost if not used. Any gifts made in excess of the higher exemptions in place before 2026 will still fall under the higher exemption upon death.

There are steps to be taken to reduce your taxable estate and make the most of the current limits. Which steps to take depends on the size of the estate, the nature of heirs, marital status, health status and other factors.

One strategy is to spend down assets. Take the big vacations, travel to out of town sporting events, enjoy the wealth you worked so hard to accumulate. This lifestyle can add up over time and fit in with an overall plan of minimizing your taxable estate.

Gifting to charity is another excellent way to reduce the size of a taxable estate while building a legacy. Current-year gifts of cash appreciated securities and other assets can provide a tax deduction to also reduce current year income taxes. Speak with your estate planning attorney about using a Donor Advised Fund, Charitable Lead Trust, or Charitable Remainder Trust.

If you are married, assets left to a surviving spouse have no estate tax consequences, except for a non-citizen spouse, who may not benefit from the unlimited marital deduction rules. One option is for the surviving spouse to elect to take the decedent spouse’s unused lifetime exclusion.

Reference: Think Advisor (Dec. 7, 2022) “The Estate and Gift Tax Exclusion Shrinks in 2026. What’s an Advisor to Do?”

What Exactly Does an Executor Do?

“The main responsibility of an executor of a will is to carry out the final wishes of the person who bestowed that position of trust.”

The executor is usually a spouse, close family member or trusted friend. If no such person is available, a qualified compensated person can be appointed under state law, according to a recent article from The Street entitled “Top Duties of an Estate Executor and How to Carry Them Out.”

The executor needs to be trustworthy and organized, since there are many details involved. Depending on the complexity and size of the estate, the executor’s duties could include additional tasks. However, the following are the five main categories:

• Filing the will with the court
• Gathering documents
• Paying debts and taxes and collecting from any debtors
• Closing out Social Security accounts, insurance policies and retirement accounts; and
• Maintaining any real estate property, until it is sold or ownership is transferred to an heir.

Once the will is filed with the court and the will is deemed to be valid, the court will issue Letters Testamentary, and the executor will be empowered to go forward with their tasks as directed by the will.

Gathering documents.

The executor needs to gather documents, including:

• Death certificates
• Deeds and titles of ownership
• Trust documents; and
• Insurance policies.

Combine assets and close accounts.

The executor needs to contact the decedent’s banks, credit card companies, lenders, leasing companies and any accounts holding assets.

The executor also applies to the IRS for an estate tax ID number, also known as an EIN, and opens an estate bank account. This is where any assets are deposited, including proceeds from the sale of any assets.

The Social Security Administration needs to be notified of the death. Depending on the date of death, the last Social Security deposit may be recouped from the decedent’s bank account. If there is an eligible survivor, the executor may help the spouse or dependent apply for benefits.

Collect money owed and pay debts.

The executor may help beneficiaries file for life insurance proceeds.

The executor needs to examine and adjudicate any outstanding debts owed to the decedent and handle any creditor claims. The debts are not the financial responsibility of the executor and should be paid only from funds in the estate account.

With good planning, the executor can ensure an orderly and uncontested flow of assets from the deceased’s estate to heirs. This includes consultation with the testator while they are still living and can discuss their wishes and plan for a smooth transition. This is certainly not the most comfortable discussion. However, it can make the process easier for all concerned, if done with kindness and care in advance.

Reference: The Street (Dec. 5, 2022) “Top Duties of an Estate Executor and How to Carry Them Out”

What’s Is the Best Way to Give to Charity?

“It may be better to give than to receive. However, it may be even better to give and see your generosity rewarded.”

Charitable giving plays a valuable role in estate and tax planning. A well-planned donation can also provide a healthy income tax deduction, along with a reduction of estate taxes. Your generous donation could help to maintain financial security, exert control over assets during life and after death and provide for heirs, as explained in a recent article titled “Charitable giving good for heart, 1040” from the Valdosta Daily Times.

To accomplish any of these objectives, you’ll want to work with an experienced estate planning attorney who can help tailor an estate plan to your individual circumstances. Here are some strategies to consider.

Gifts of appreciated property might allow you to avoid capital gains tax owed when the asset is sold and, if planned properly, might allow you to receive an income tax deduction, usually worth the fair market value of the asset.

Removing any assets from your estate reduces the potential estate tax liability.

If you want to make a donation to a charity but you’d like to maintain some control over it, a Charitable Remainder Trust (CRT) might be a good fit. A CRT works best when funded by an appreciated asset, such as real estate or stock in a family owned business.

Once the property is transferred to the CRT, the CRT can sell the appreciated assets it holds without paying capital gains taxes. It then continues to provide income generated by the CRT to the beneficiaries for a period of time, as instructed by the CRT. At the end of this period, the remainder of the CRT is donated to the charity. You avoid capital gains on the assets you donated, an income stream and you also receive a tax deduction.

Another strategy is to use a Charitable Lead Trust or CLT. With a CLT, you give the charity the use of the asset and the right to any income generated for a predetermined time. When the time period ends, the asset reverts to you or is given to whoever you designate in the CLT. Appropriate assets for a CLT could be income-producing stocks and bonds, a valued collection or a painting transferred to a museum for a certain period of time.

You likely receive a current income tax deduction for the value to the charity. However, you receive no other direct benefit during the term. If a CLT is created upon your death, estate tax liability could be reduced.

Early tax planning can help make the most of any charitable giving opportunities and let you take full advantage of any additional benefits. Talk with an experienced estate planning attorney to receive guidance appropriate to your unique situation.

Reference: Valdosta Daily Times (Dec. 4, 2022) “Charitable giving good for heart, 1040”

What Is a ‘Residuary’ Estate?

“In simple terms, a residuary estate is any part of your estate that hasn’t been distributed to your heirs through a last will and testament.”

This is also known as estate residue or residual estate. It simply means the assets left over after a will has been read, assets have been distributed to heirs and any final expenses have been paid. An estate planning attorney can help avoid leaving residual assets behind, with a comprehensive estate plan, reports a recent article titled “How to Write a Residuary Estate Clause in a Will” from yahoo!

A will is a legal document used to name guardians for minor children and providing directions for how you want assets to be distributed when you pass. Any assets not included in your will or distributed through a trust automatically become part of the residuary estate on your death.

This can happen deliberately or unintentionally. For example, your will can state your wishes to have certain assets left to certain people. However, your will could also include a residual estate clause explaining what should happen to any assets not already named in the will. In this case, you’re intentionally creating a residual estate, and planning for it at the time of the will’s creation.

Some residual estates are created without advance planning. Here’s how that happens:

• If you forget to include assets in your will.
• If you acquired new assets after drafting a will and do not add a codicil making provision for the distribution of the assets.
• Someone named in the will dies before you or is unable to receive the inheritance you left for them.

This can also happen if you set up a Payable On Death (POD) account but neglect to add a beneficiary to the account. Any funds in the account would be lumped into the residual estate.

What happens if you draft a will and don’t have a residuary estate clause? Any unclaimed or overlooked assets will be distributed, according to your state’s inheritance guidelines. However, this is only done after any estate taxes, outstanding debts or final expenses have been paid. Assets would be distributed as if you did not have a will. Heirs at law would receive assets according to kinship, including spouse, children, parents, siblings and other relatives.

How does a trust work in relation to a residual estate? Trusts are legal entities allowing you to transfer assets to a trustee. The trustee is responsible for managing assets on behalf of the trust for beneficiaries according to your wishes. You may want to establish a trust if you have a substantial estate, want to plan for a family member with special needs or if you wish to create a charitable giving legacy.

Speak with an experienced estate planning attorney to determine whether your will should have a residual clause and what assets should be included. The estate planning attorney will also be able to determine whether you need additional estate planning strategies, including a revocable living trust.

Reference: yahoo! (Dec. 4, 2022) “How to Write a Residuary Estate Clause in a Will”

When Is a Family Limited Partnership Needed?

“You don’t have to be ultra-wealthy for a family limited partnership to make sense.”

Being able to transfer wealth from one generation to the next is a good thing, especially now, when a big change is coming to the federal estate tax exemption amount, says a recent article titled “The Pros and Cons of Family Limited Partnerships” from The Wall Street Journal.

In 2022, estates valued at up to $12.06 million are exempt from federal taxes. However, on January 1, 2026, the exemption sinks to around $6 million, with adjustments for inflation. As a result, wealthy Americans are now re-evaluating their estate plans and many are turning to the Family Limited Partnership, or FLP, as a tax saving strategy.

An FLP can be tailored to suit every family’s needs. You don’t have to be ultra-wealthy for an FLP to make sense. An upper-middle class family owning a small business or real estate properties they’re not ready to sell could make good use of an FLP, as well as a real estate mogul owning properties in multiple states.

There are some caveats. The cost of setting up an FLP ranges from $8,000 to $15,000. However, it can go higher depending on the state of residence and the complexity of the partnership. There are annual operating costs, tax filings and appraisal fees. The IRS isn’t always fond of FLPs, because there is an institutional belief that FLPs are subject to abuse.

The FLP needs to be drafted with an experienced estate planning attorney, working in consultation with a CPA and financial advisor. This is definitely not a Do-It-Yourself project.

What makes these partnerships different from traditional limited partnerships is that all partners are family members. There are two kinds of partners: general and limited. The parents or grandparents are usually the general partners. They contribute the bulk of the assets, typically a small business, stock portfolio or real estate. Children are limited partners, with interests in the partnership.

The general partners control all of the investment and management decisions and bear the partnership liability, even though their ownership of assets can be as little as 1% or 2%. They make the day-to-day business decisions, including funds allocation and income distribution. The ability of the general partner to maintain control of the transferred assets is one of the FLP’s biggest advantage. The FLP reduces the taxable estate, while maintaining control of the assets.

Once the entity is created, assets can be transferred to the FLP immediately or over time, depending on the family’s plan. The overall goal is to get as much of the property out of the general partners’ taxable estate as possible. Assets in the FLP are divided and gifted to limited partners, although this is often a gift to a trust for the limited partners, who are the general partners’ descendants. Placing the assets in a trust adds another layer of protection, since the gift remains outside of the limited partner’s taxable estate as well.

To avoid a challenge by the IRS, the partnership must be conducted as a business entity. Meetings need to be scheduled regularly, with formal meeting minutes recorded properly. General partners are to be compensated for their services, and limited partners must pay taxes on their share of income from the partnership. The involvement of professionals in the FLP is needed to be sure the FLP remains compliant with IRS rules.

An alternative is to create a Family Limited Liability Company instead of a Family Limited Partnership. These can be created to operate much like an FLP, while also protecting partners from liability.

Partnerships are not for everyone. Your estate planning attorney will advise regarding whether an FLP or an FLLC makes more sense for your family.

Reference: The Wall Street Journal (Dec. 3, 2022) “The Pros and Cons of Family Limited Partnerships”