Barnes Lipscomb & Stewart PLLC

Is It Common for Siblings to Fight Over Inheritance?

“When there's bad blood over an inheritance, you can challenge the trustee—but try talking first.”

Unfortunately, siblings refusing to speak with other siblings about their late parent’s estate matters is a fairly common occurrence. A recent article from Morningstar, “My brother won’t tell me anything about our mother’s $1.6 million estate. Can I remove him as trustee?” provides a good example of how things can go wrong.

According to a letter to the publication from one brother, a mother was the second to die and the brother who knows about her will has not yet filed the will with the court. To make matters more complicated, he explains that the father had created a trust before he died in 2000, which was never funded. Medicaid paid for $150,000 in nursing home costs, and at the time of her death, the mother owned a 1.6-million-dollar property.

While the best resolution is almost always simply to have a direct conversation, this doesn’t seem likely to occur in this situation. The controlling brother may be doing precisely what is necessary. However, since the brother won’t tell the other brother what is happening, the only way forward may be to go to court.

If a trust was created, it’s entirely possible it was a Medicaid Asset Protection Trust (MAPT). This trust is created to remove assets from being countable for Medicaid purposes. If the trust wasn’t funded, the $1.6 million property may never have been retitled and placed in the trust. This is the second most common estate planning mistake seen by estate planning attorneys; the first is not having an estate plan.

If the trust was never funded, the family home is considered an asset by Medicaid and could be “clawed back” by Medicaid to cover the medical expenses. If the $150,000 were the father’s nursing home costs, the father’s estate would have owned this amount, which should have taken place after the father’s estate was settled. There is a statute of limitations, however, and depending on the rules of the father’s state, this may be a moot point.

Since the house was the primary residence of a well-spouse, it may not have been countable for Medicaid. If the father had no other assets, there may be no debt to Medicaid. It's entirely possible all this was dealt with. However, the brother wasn’t told the details.

This leaves the question of what the brother is doing with the mother’s estate. If no will has been filed, it might be because the estate plan was designed to avoid probate. Assets held in trusts and passed through beneficiary designations don’t go through probate. If the house was placed in a trust, it would not go through probate either.

However, since the sibling is an heir, he has the right to an accounting report or a report from the brother as the trustee and executor. The report should contain information on how assets were owned, and distributions were made.

This is a lesson for parents who know their children don’t get along. If they don’t get along while you are living, don’t expect this to change after your death. If one is given power of attorney, serves as a trustee and executor, and the others are left out of any decision-making, your estate may shrink because of litigation, and the family may fracture. Talk with your estate planning attorney about naming a neutral person for all or some of these roles to avoid adding the stress of an estate battle to your family’s grief.

Reference: Morningstar (Aug. 3, 2024) “My brother won’t tell me anything about our mother’s $1.6 million estate. Can I remove him as trustee?”

Relocating in Retirement? What You Need to Know before You Go

“More than 338,000 Americans moved for retirement in 2023, according to a January study from HireAHelper, a moving-services marketplace.”

Moving in retirement is a big deal. Whether moving to be closer to family or trying to cut your living costs, moving in your sixties or seventies should only happen after much consideration and careful planning. A recent article, “Moving in Retirement? 5 Things to Ponder Before You Pack” from Nerd Wallet, explains the details.

Lower property taxes or income taxes are an attraction for many. However, look at all the costs to get a total picture, including the cost of living, estate taxes and housing costs, which have rocketed in many Sunshine states. You may find the difference is not as much as you thought. Suppose you’re selling a business before you leave. In that case, your current state may be more interested in recouping taxes than you think, so speak with an estate planning attorney to make the sale as tax efficient as possible.

One unexpected opportunity from moving outside of a Medicare Advantage’s service area is the chance to change your Medicare coverage. Relocating provides an acceptable reason to change a Medicare Advantage plan or sign up for original Medicare. It is also a time when you can sign up for Medigap coverage. You can normally only sign up for Medigap during open enrollment, a six-month period after you turn 65, and when you have Medicare Part B. This coverage is difficult to buy later in life if you have health issues.

Don’t forget to notify your insurance companies and Social Security if you move.

Could you rent first? If you’re moving to a place where you’ve summered for twenty years, renting for the first year is best. The winters may not be as bucolic as the summer. If you have to sell a house quickly after a short period, it could be a costly mistake. You’ll also own capital gains taxes on any profit made on a home sale if you move after living in a new location for less than two years.

What level of healthcare services do you need now or might need in the future? Healthcare becomes more critical as we age, especially if we are living with a chronic condition. If services are not the same quality or are a day’s drive away, your move could lead to bad health outcomes and added stress.

Estate law is state-specific.  If so, your estate planning documents—last will and testament, power of attorney, health care power of attorney, living will, trusts and other documents—may not be considered valid by the courts in your new state. Consult with an estate planning attorney about what needs to be changed to be sure that your estate plan will give you the same results in your intended new state.

Will you enjoy your daily life in your new location? Retirees active in social activities, from sports to community theater to volunteer work, report enjoying their retirement. Will you be living with people who share your interests and values? Will you feel comfortable if your political views differ from those around you?

One last point: transportation doesn’t usually feel like an issue until it is. If your children live on the West Coast and you’re considering moving to a small New England town, will the added cost make frequent visits prohibitive? If your retirement agenda includes a lot of international travel, you may want to consider how living far from an airport will impact your travel plans.

Reference: Nerd Wallet (Aug. 5, 2024) “Moving in Retirement? 5 Things to Ponder Before You Pack”

Retirement Savings Account Changes and Financial Decision Making

“New rules promote Roth treatment of workers’ investments and ease some RMD burdens, among other things.”

Keeping track of all the changes concerning retirement savings accounts and estate planning laws is not an easy task. However, there are some things you’ll want to know as 2024 moves forward. According to a recent article from The Wall Street Journal, “Changes in Retirement Savings Rules to Know Before Year’s End,” not knowing could impact retirement finances. Some of these changes include:

The End of RMDs from Roth 401(k) Plans. You use after-tax dollars to add to a Roth 401(k) plan. This is how contributions have always worked for Roth IRAs. Required Minimum Distributions (RMDs) had to be taken from Roth 401(k) plans. However, in 2024, this is no longer the case. If you meet other qualifications, you can take as much or as little as you like from your Roth 401(k), just as you do with a Roth IRA.

401(k) Catch-Up Contributions for High Wage Earners Must Go into Roth Accounts. Starting in 2026, if you are participating in a 401(k) plan, are age 50 and older, and if your annual income exceeds $145,000, you’ll have to make your catch-up contributions on a Roth basis. The income benchmark is indexed to inflation; your spouse’s income does not impact this change. This provision also does not affect Roth IRAs.

More Potential Tax-Deferred Growth for Certain Spousal Beneficiaries. Starting this year, an older spouse beneficiary of an IRA owned by a younger spouse who dies is treated as if they were the same age as the decedent spouse. RMDs based on the beneficiary's age don’t have to be taken until the deceased spouse is 73. While the benefits will depend on the younger spouse's age, this gives the surviving spouse more years for the account to grow tax-free.

A related change: the beneficiary may use the IRS uniform lifetime table to determine the amount of the RMD, which is a change from the single-life expectancy table. This can result in smaller RMDs, allowing for more tax-deferred growth. The RMD will rise to 75 years old in 2033.

Penalties for Missed RMDs are Reduced. The penalty for missed RMDs was reduced from 50% to 25% in 2023. If it’s corrected in a timely manner, two years from the end of the year for which the RMD should have been taken – it can be cut even lower, possibly as low as 10%.

These and other changes to retirement accounts may indicate a need for adjustments to your estate plan. With high estate and gift tax exemptions from the Tax Cuts and Jobs Act of 2017 possibly ending, now is a good time to speak with your estate planning attorney and learn if your estate plan is ready for the changes ahead.

Reference: The Wall Street Journal (July 31, 2024) “Changes in Retirement Savings Rules to Know Before Year’s End”

What Estate Planning Documents do I Need?

“Incapacity can happen to anyone at any time, but your risk generally increases as you grow older. Consider what would happen if, for example, you were unable to make decisions or conduct your own affairs.”

People think estate planning is only about a will, but it’s much more. Estate planning protects and preserves assets after you’ve passed. Still, it also protects property and your wishes while you are living, explains a recent article, “Do You Have These Key Estate Planning Documents?” from Cape Gazette. There are four documents every adult should have, no matter their age or stage in life. They include Power of Attorney, Advance Medical Directives, Last Will and Testament, and a Letter of Instruction. An estate planning attorney can help create all these documents for you.

What would happen if you were severely injured or became suddenly ill and needed someone to be able to run your household, pay your bills, and access your financial assets? A Power of Attorney authorizes another person to make financial and legal decisions on your behalf. The person doesn’t have to be a family member but needs to be someone you trust completely.

There are two types of POAs: an immediate POA, which is effective as soon as it is executed, and the other is a springing POA, which is not effective until a court decides you are incapacitated. Your estate planning attorney will help you decide which is best for your circumstances.

Additionally, you’ll want to have an Advance Medical Directive. This document expresses your wishes for medical treatment and allows you to appoint another person to make critical decisions if you are incapacitated. Without one, decisions will be made by someone appointed for you, which may or may not align with your personal values.

There are a few different types of medical directives. The Living Will concerns the specific medical treatment you would want in the event of a terminal illness or injury. A Healthcare Proxy allows another person to make medical decisions on your behalf. The DNR—Do Not Resuscitate is a legal order signed by you and your treating physician to tell healthcare professionals and first responders not to perform CPR or other treatments to bring you back to life in a medical crisis.

A Last Will and Testament lays out how you want your property distributed and serves several other purposes. Parents of minor children use their wills to name guardians who would raise their children in the event of both parents’ deaths. The will is also used to name an executor who will manage all the tasks accompanying death: paying estate and income taxes, selling a residence, paying creditors, distributing assets, and more.

A Letter of Instruction or Letter of Intent is not a legal document but a wise adjunct to your other estate planning documents. It can provide funeral and memorial instructions, explain why your estate plan was structured as it was, or simply express your feelings. The letter will not override instructions in your will but can be used to underscore your wishes.

Reference: Cape Gazette (April 12, 2024) “Do You Have These Key Estate Planning Documents?”

How Can I Minimize Taxes During Retirement?

“Take time to consider the tax impact of your financial decisions and speak to a professional to make sure you don’t pay more than anticipated during your non-working years.”

During your working years, your actions to minimize taxes aren’t the same as those you’ll need after retirement. How you manage your tax liability may have an even bigger impact during your non-working years, says a recent article, “5 Ways to Minimize Taxes on Retirement Income,” from U.S. News & World Report. Re-evaluating finances and tax liabilities at retirement age can help minimize taxes for the coming decades.

Roth Conversion. Once you’ve turned 59 ½ years old and the account has been opened for at least five years, you may take withdrawals tax-free at any time with no taxes or penalties. The conversion takes planning to avoid pitfalls. First, you must be prepared to pay the taxes on the converted accounts. You’ll also need to be careful not to place yourself in a higher tax bracket. Converting to a Roth should be done when income is lower.

Delay Social Security Benefits. When you start taking benefits will impact whether the amount you receive could be subject to taxes. If you file taxes single and your income is more than $25,000, you’ll pay taxes on as much as 85% of your Social Security benefit! Married couples with income exceeding $32,000 will suffer the same tax fate. If possible, delay taking Social Security until after you reach Full Retirement Age (FRA) which is 66 or 67 for most people. If you can delay taking benefits until age 70, you’ll have reached the maximum benefits, but circumstances don’t always allow this.

Coordinate Estate Planning with Required Minimum Distributions (RMD). After age 73, you’ll probably need to start taking RMDs from traditional IRAs and 401(k)s. If you forget, there will be penalties. If you take the RMDs, you must pay taxes on the income. Talk with your estate planning attorney to explore how you might keep your withdrawals within lower tax brackets to reduce your tax liability.

Consider Low-Tax States. If retirement relocation is in your future, consider state tax laws in your decision-making. Some states don’t tax Social Security benefits, while others provide exemptions for pensions. You’ll want to investigate income, sales and property taxes. Your analysis should include an overview of all the factors. For instance, a state may not tax Social Security, but it might have higher property taxes.

Create a Trust. Creating a trust removes assets from your taxable estate. Depending upon the trust your estate planning attorney recommends, you may need an irrevocable trust, which gives the trust the assets and control of the assets to the trustee. Income generated by the assets in the trust may be taxed at a different rate than your income.  

Estate planning and tax planning intersect in many ways, so speak with an experienced estate planning attorney to see what strategies are available and which are best suited to your situation.

Reference: U.S. News & World Report (March 14, 2024) “5 Ways to Minimize Taxes on Retirement Income”

Do You Need Conservatorship or Power of Attorney?

“Several high-profile celebrities have recently sought a conservatorship for a family member including Jay Leno, his wife Mavis, and Cher for her son, Elijah Blue Allman, claiming they cannot adequately manage their affairs or make proper medical decisions.”

There’s a long list of celebrities involved with conservatorship matters, although the thirteen-year conservatorship of Brittany Spears may have gotten the biggest headlines. A recent Paso Robles Daily News article, “Conservatorship or power of attorney? The answer it: it depends,” explains the difference.

A conservatorship occurs when a court appoints a person, the conservator, to oversee decision-making for another person. A conservatee is a person who has been deemed unable to make decisions for themselves or to care for themselves. Different states have different names for this process; in some states, it’s known as guardianship, and the appointed person is the guardian, with the person under their care known as their ward.

There are several different forms of conservatorship. They include:

• Of the estate, where the conservator has full authority over the person’s finances. The person may retain their physical autonomy but cannot access finances. Trusts are not included in this arrangement.
• Of the person, if the person has been found unable to make decisions about their life and physical health, including medical care but not medication for psychiatric care.
• Some states have specific conservatorships/guardianships designed to provide care by a conservator/guardian for people with mental health disorders.

A Power of Attorney gives one person many of the same abilities as a conservator, minus the involvement and required reporting to the court. The person who executes the POA must be legally able to do so; they cannot be incapacitated. The POA is useful for someone who is undergoing surgery, for instance, and knows they will be incapacitated in the future for a certain amount of time but wishes to have someone else take care of their affairs.

Similarly, an Advanced Health Care Directive (AHCD) gives another person the authority to make medical decisions on behalf of another person. Like a POA, the AHCD doesn’t require going to court to be executed.

Planning ahead and creating a Power of Attorney, Advanced Health Care Directive (sometimes referred to as a Power of Health Care Attorney), and other estate planning documents is how a responsible person ensures that their family is ready if something unexpected occurs. An estate planning attorney in your state can create these documents as part of your estate plan.

Reference: Paso Robles Daily News (March 12, 2024) “Conservatorship or power of attorney? The answer it: it depends”

Does Your Estate Plan and IRA Align with the SECURE Act?

“Most dramatically, the Secure Act established a 10-year rule for withdrawing from inherited IRAs that eliminated the popular, but at times controversial, ability to “stretch” inherited IRAs for these beneficiaries.”

It’s known as the SECURE Act—“Setting Every Community Up for Retirement Enhancement” Act of 2019. Some consider it more unsettling than secure, since this law changed withdrawal and tax rules for inherited IRAs for non-spouse beneficiaries. However, as reported by Think Advisor’s article, “9 Things to Know About IRA Beneficiaries Under the Secure Act,” the law led to other significant changes in estate planning.

The biggest headline is the end of the lifetime stretch for IRAs. Beneficiaries who are not spouses and don’t fall into specific categories and inherit a traditional IRA in 2020 or later must empty the account within ten years.

There’s a little bit of a wrinkle in the ten-year distribution rule. The experts initially said that heirs could take out as much or as little as they wished within ten years, including waiting until the very end of the ten years; the proposed regulations used the phrase “during,” meaning throughout the ten years. The IRS did not issue regulations until 2022, so the IRS waived Required Minimum Distributions (RMDs) for 2021, 2022, and 2023. This includes accounts inherited in 2022.

There’s a separate set of rules for nonqualified trusts and charitable entities—not people—to be aware of. If a traditional IRA owner or plan participant dies before the original owner would have been required to take their RMDs, the account must be emptied within five years. If the original owner dies on or after their RMD date, the rules require RMDs to be taken over the decedent’s single life expectancy. An estate planning attorney can guide you in avoiding paying unexpected taxes or penalties in these cases.

For a surviving spouse, there are numerous choices. They can take withdrawals as per the solo beneficiary framework, elect to take a spousal rollover, use the life expectancy numbers, or take a lump-sum distribution. Every situation is different and needs to be evaluated to determine which is best for the spouse.

A spouse who inherits a traditional IRA can do a spousal rollover, transferring funds into a new or existing IRA. You can only do this if the spouse is the only beneficiary. This method lets the IRA continue to grow, which is an attractive option if the surviving spouse is younger than the deceased spouse. If the spouse is under 59 ½, they’ll be subject to the regular IRA distribution rules.

There's a separate rule for spouses who are more than ten years younger. They’ll have to use the IRS joint and last survivor table. There’s no 10% early distribution penalty if they withdraw funds. One fine point: the account name must include the deceased owner's name to be sure it’s an “inherited” or “beneficiary” IRA.

If a minor inherits the IRA, they are considered a minor until they turn 21. They must also be the minor child of the original owner—not a nephew, niece, or family friend. The ten-year rule kicks in once they become a legal adult at age 21.

Disabled and chronically ill IRA beneficiaries are subject to separate rules. However, there are nuances to be aware of. They must have a condition and are unable to live a “normal” life (working, two activities of daily life, etc.). Their condition or disability must be one expected to result in death or long continued and indefinite duration.

Speak with an estate planning attorney before putting IRA assets into a trust. In most cases, trusts are not permitted to own IRAs if the original IRA owner is living. Certain trusts don’t qualify as eligible or non-eligible designated beneficiaries.

Reference: Think Advisor (March 11, 2024) “9 Things to Know About IRA Beneficiaries Under the Secure Act”

Common Questions Concerning SECURE Act 2.0

“The speakers touched on the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, including the provision that a designated beneficiary must distribute the entire inherited IRA by Dec. 31 of the 10th year after the employee’s or IRA owner’s death (the 10-year rule), thus doing away with the stretch IRA for most beneficiaries.”

A webinar from Trusts & Estates presented a discussion on SECURE Act 2.0 and the many planning opportunities it made possible, as well as proposed IRA regulations, which was reviewed in Wealth Management’s article, “SECURE Act 2.0: Q&A,” covered a number of commonly asked questions about SECURE Act 2.0.

Charitable Remainder Trusts (CRT)

In the case of a trust for a disabled or chronically ill beneficiary, a charity permitted to receive qualified charitable distributions (a registered charity other than a donor-advised fund), which is a remainder beneficiary, will be treated as a designated beneficiary. This allows an IRA owner to create a trust for a disabled or chronically ill beneficiary and name a charity as a remainder beneficiary while qualifying for the life expectancy stretch.

For a disabled beneficiary of an IRA, are CRTs and Special Needs Trusts Eligible for Stretch Distributions?

Because a CRT is tax-exempt, it can take the IRA benefits all at once and then make annual or more frequent payments to one or more individuals, usually for their lifetime. Payments are treated as first-in, first-out. They are considered ordinary income until the payments cumulatively equal the amount of the IRA benefits considered. After that, the nature of the payments depends upon the nature of the trust’s investment income. This effectively replicates the stretch that had previously been available. A disabled or chronically ill beneficiary or (if there’s no beneficiary who isn’t disabled) a trust for the beneficiary or a disabled or chronically ill person may stretch distributions over the life expectancy of the disabled or chronically ill person.

Can a Minor Child be Named as a Beneficiary of the CRT to Get the Stretch Benefit?

No. The actuarial value of the CRT has to be at least 10% of the value of the trust, and the payments to the beneficiaries must be at least 5% of the trust each year. Both of these requirements cannot be satisfied if the individual beneficiary is a minor. An estate planning attorney will need to run the numbers on any beneficiary under age 30 or so who might start payments. The solution is to do a term-of-years CRT for the maximum 20-year period. This will likely be less than the young beneficiary’s life expectancy, but it’s double the ten-year stretch maximum.

What about a non-spouse who inherits an IRA from an owner who had been taking Required Minimum Distributions (RMDs), and the IRA owner died before the rule changes under the SECURE Act of 2019?

The ten-year rule does not apply to this specific instance. However, if the primary beneficiary was taking life expectancy distributions and dies after 2019, their beneficiary (the successor beneficiary) will be subject to the ten-year rule. Under this ten-year rule, the successor beneficiary must continue taking life expectancy distribution (using the life expectancy that the primary beneficiary was using) and must fully distribute the account no later than ten years after the primary beneficiary’s death.

The changes created by SECURE Act 2.0 have a wide range of impacts on IRAs, certain types of charitable gifts, and estate plans. Your estate planning attorney will be able to address your unique situation, making the SECURE Act 2.0 regulations work for your own family’s distribution of assets.

Reference: Wealth Management (Feb. 13, 2024) “SECURE Act 2.0: Q&A”

How to Make 2024 the Best for Retirement Finances

“Keeping those New Year's resolutions to save and invest more or spend less is tough. However, there are some steps you can take now to stay on track.”

We all know what happens with New Year’s Resolutions—they’re mostly gone by February. A recent article from The Street, “9 Ways to Prioritize Your Financial Well-Being This Year,” explains how a proactive mindset can help you integrate positive management into your everyday life in 2024.

First, get organized! A cluttered environment can lead to a cluttered state of mind, increasing stress and reducing productivity. When was the last time you organized your finances? Preparing for taxes is a good time to take a day to go through old records, identify and gather what’s missing, update information, end unused subscriptions, set a budget, create your income tax folder and create a mindful bill-paying system.

Determine your financial goals for 2024 and beyond. If you’ve recently experienced a significant life event, like a divorce or marriage, or welcomed a new child or grandchild, now is the time to incorporate new goals, eliminate old goals and focus on the steps you need to achieve your new goals.

Have a values-based conversation with your spouse or partner. What is essential to both of you and how might you accomplish these goals? If you are single, make an appointment with your financial advisor to discuss your goals and what you can do to make them a reality.

Do you know what your net worth is? This is often used as a benchmark to understand your progress towards your goals. You should include investments, savings, equity in your home and other assets. Then assess your liabilities: mortgage, credit card debt, auto loans, personal loans, etc. Doing this every year will help you understand if you’re making good progress or may serve as a wake-up call.

Do you have an estate plan, or is your estate plan more than three to five years old? This is the greatest gift you can give your family. It includes how to settle your estate once you’re gone and how and who to manage your affairs while you’re living if you become incapacitated. An experienced estate planning attorney can create a plan aligned with your state’s law, so you don’t risk creating an invalid will, which will cause many challenges for loved ones.

Prepare digital assets. If you don’t have a list of all online accounts, including usernames, passwords, PINS and two-factor authentication information, start by taking inventory and documenting your information. Make sure your executor has access to this information.

Prepare a financial “go” bag. The news is filled with natural disasters. You won’t get a printed invitation if you need to evacuate in an emergency. Have copies of important documents, including IDs, insurance cards, healthcare directives, birth certificates and marriage certificates, ready to take with you at a moment’s notice. Include information about your prescriptions and other medical information.

It's always good to form good habits and tracking them keeps your activities and goals top of mind. Use a spreadsheet, calendar, or journal to hold yourself accountable and give yourself a feeling of satisfaction every day.

Finally, a values-based decision-making approach can help you reach your goals. An example is whether you want to make an extra mortgage payment or invest the money in your child’s 529 account. By identifying core values before setting goals, you can use your values to help prioritize what matters to you, aligning goals with values and actions.

Reference: The Street (Jan. 22, 2024) “9 Ways to Prioritize Your Financial Well-Being This Year”