Should I Include an Annuity in Estate Planning?
Retirement

Should I Include an Annuity in Estate Planning?

Annuity  – Kiplinger’s recent article entitled “Annuities: 10 Things You Must Know” explains that, as traditional sources of guaranteed retirement income (like pensions) are no more, many retirees are wondering where to look. An annuity may be an option. However, not all annuities are alike, and some may not be appropriate for everyone’s situation.

Immediate Annuities vs. Deferred Annuities. There are two types of annuities: immediate annuities and deferred annuities. Immediate annuities are best for retirees who want to receive payouts immediately. If you invest money in an immediate annuity, an insurance company guarantees that you will receive a fixed payment every month for as long as you live (or as long as you or a beneficiary are alive). However, usually your money is locked up after you give it to the insurance company. Some insurance companies, however, permit a one-time withdrawal for emergencies. In light of this, you may not want to tie up all of your savings in an annuity.

Deferred annuities are better for people who are still saving for a future retirement because that money they invest grows tax-deferred, until it is withdrawn later. A deferred annuity, also known as a longevity annuity, needs a smaller cash outlay. You get guaranteed payments when you reach a certain age, and you’ll receive the highest payout with an annuity that stops paying when you die.

Annuity Payouts: Single Life vs. Joint Life. If you buy an immediate annuity, you’ll get the highest annual payout if you buy a single-life version. The payouts cease when you die, even if your spouse is still alive. However, if your spouse needs that income, you may want to take a lower payout that will also continue for his or her lifetime.

Fees for Cashing Out Your Annuity. Although deferred annuities let you cash out at any time, you may not see all your money returned. A surrender charge is usually imposed that’s about 7% to 10% of the account balance in the first year. It gradually decreases every year, until it disappears after seven to 10 years. If you withdraw money before age 59½, you generally have to pay an early-withdrawal penalty of 10%.

Deferred Annuities: Fixed vs. Variable. Most deferred annuities allow you to invest your money in mutual-fund-like subaccounts. These products are known as deferred variable annuities. They let you add (for a fee), guarantees that you won’t lose money, even if the underlying investments decline in value. If the market drops, you can still withdraw about 5% of the guaranteed balance each year. You can also withdraw the actual account value at any time (after the surrender period expires) if your investments increase in value.

Reference: Kiplinger (May 21, 2021) “Annuities: 10 Things You Must Know”

 

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Step-Up in Basis – Short-Cuts to Estate Planning can Lead to Costly Consequences

Step-Up in Basis – It seems like a simple way for the children to manage mom’s finances: add the grown children as owners to a bank account, brokerage account or make them joint owners of the home. However, these short-cut methods create all kinds of problems for the parent’s estate and the children themselves, says the article entitled “Estate planning: When you take the lazy way out, someone will pay the price” from Florida Today.

By adding an adult child as owner to the account, the child is being given 50% ownership. The same is true if the child is added to the title for the home as joint owner. If there is more than $30,000 in the account or if the asset is valued at more than $30,000, then the mother needs to file a gift tax return—even if no gift tax is due. If the gift tax return is not filed in a timely manner, there might be a gift tax due in the future.

There is also a carryover basis in the account or property when the adult child is added as an owner. If it’s a bank account, the primary issue is the gift tax return. However, if the asset is a brokerage account or the parent’s primary residence, then the child steps into the parent’s shoes for 50% of the amount they bought the property for originally.

Here is an example: let’s say a parent is in her 80s and you are seeing that she is starting to slow down. You decide to take an easy route and have her add you to her bank account, brokerage account and the deed (or title) to the family home. If she becomes incapacitated or dies, you’ll own everything and you can make all the necessary decisions, including selling the house and using the funds for funeral expenses. It sounds easy and inexpensive, doesn’t it? It may be easy, but it’s not inexpensive.

Sadly, your mom dies. You need some cash to pay her final medical bills, cover the house expenses and maybe a few of your own bills. You sell some stock. After all, you own the account. It’s then time to file a tax return for the year when you sold the stock. When reporting the stock sale, your basis in the stock is 50% step-up in value based on the value of the stock the day that your mom died, plus 50% of what she originally paid for the stock. There is no Step-Up in Basis .

If your mom bought the stock for $100 twenty years ago, and the stock is now worth $10,500, when you were added to the account, you now step into her shoes for 50% of the stock—$50. You sold the stock after she died, so your basis in that stock is now $5,050—that’s $5,000 value of stock when she died plus $50: 50% of the original purchase. Your taxable gain is $5,450.

How do you avoid this? If the ownership of the brokerage account remained solely with your mother, but you were a Payable on Death (POD) or Transfer on Death (TOD) beneficiary, you would not have access to the account if your mom became incapacitated and had appointed you as her “attorney in fact” on her general durable power of attorney. What would be the result? You would get a step-up in basis on the asset after she died. The inherited stock would have a basis of $10,000 and the taxable gain would be $500, not $5,450.

A better alternative—talk with an estate planning attorney to create a will, a revocable trust, a general durable power of attorney and the other legal documents used to transfer assets and minimize taxes. The estate planning attorney will be able to create a way for you to get access or transfer the property without negative tax consequences.

Reference: Florida Today (May 20, 2021) , “Estate planning: When you take the lazy way out, someone will pay the price”

 

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When Should an Estate Plan Be Reviewed?

If your parents don’t remember when they last reviewed their estate plan, then chances are it’s time for a review. Over the years, wishes, relationships and circumstances change, advises the recent article, “5 Reasons To Have Your Parents’ Estate Plan Reviewed,” from Forbes. An out-of-date estate plan may not achieve your parent’s wishes, or be declared invalid by the court. Having an estate planning attorney review the estate plan may save you money in the long run, not to mention the stress and worry created by an estate disaster. If you need reasons, here are five to consider.

Financial institutions are wary of dated documents. Banks and other financial institutions look twice at documents that are not recent. Trying to use a Power of Attorney that was created twenty years ago is bound to create problems. One person tried to use a document, but the bank insisted on getting an affidavit from the attorney who prepared it to be certain it was valid. While the son was trying to solve this, his mother died, and the account had to be probated. A “fresh” power of attorney would have solved the problem.

State laws change. Things that seem small become burdensome in a hurry. For example, if someone wants to leave a variety of personal effects to many different people, each and every one of the people listed would need to be located and notified. Many states now allow a separate writing to dispose of personal items, making the process far easier. However, if the will is out of date, you may be stuck with a house-sized task.

Legal document language changes. The SECURE Act changed many aspects of estate planning, particularly with regard to retirement accounts. If your parents have retirement accounts that are payable to a trust, the trust language must be changed to comply with the law. Not having these updates in the estate plan could result in an increase in income taxes or costly fees to fix the situation.

Estate tax laws change. In recent years, there have been many changes to federal tax laws. If your parents have not updated their estate plan within the last five years, they have missed many changes and many opportunities. It is likely that your parents’ assets have also changed over the years, and the documents need to reflect how the estate taxes will be paid. Are their assets titled so that there are enough funds in the estate or trust to cover the cost of any liability? Here’s another one—if all of the assets pass directly to beneficiaries via beneficiary designations, who is going to pay for the tax bills –and with what funds?

Older estate plans may contain wishes from decades ago. For one family, an old will led to a situation where a son did not inherit his father’s entire estate. His late sister’s children, who had been estranged from him for decades, received their mother’s share. If the father and son had reviewed the will earlier, a new will could have been created and signed that would have given the son what the father intended.

These types of problems are seen daily in your estate planning attorney’s office. Take the time to get a proper review of your parent’s estate plan, to prevent stress and unnecessary costs in the future.

Reference: Forbes (May 25, 2021) “5 Reasons To Have Your Parents’ Estate Plan Reviewed”

 

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Some Surgeries are Especially Risky for Seniors

A team of researchers created a list of 277 risky procedures for older adults. Considerable’s recent article entitled “These 10 surgeries are considered “uniquely high risk” for older adults” explains that the study, published in JAMA Surgery, generated the list by using admissions data of patients 65 years of age and older. They found 10 surgeries to be especially problematic for older patients:

  1. Adrenal gland removal (adrenalectomy). This is the removal of one or both of the adrenal glands. These glands produce hormones that are necessary for daily bodily functions, but tumors can form on the glands and cause increased hormone production. If this happens, the gland(s) needs to be removed. The Cleveland Clinic says the usual recovery time after this surgery is 2-6 weeks, and the risks can include blood clots, infections and high blood pressure.
  2. Plaque buildup removal from carotid arteries (carotid endarterectomy). This procedure removes plaque buildup from inside a carotid artery in the neck. This surgery is typically preventative of a stroke and removes blockages that might trigger one. The risks include clotting, stroke or death. However, taking anti-clotting medicines before and after a carotid endarterectomy can decrease these risks.
  3. Arm blood-vessel replacement (peripheral vascular bypass surgery). Blood vessel replacement in the arm improves blood flow when an artery becomes narrowed or blocked. A blood vessel from another part of the body or a synthetic blood vessel is used to replace the damaged blood vessel. Risks of this procedure can include irregular heartbeat, infection and death.
  4. Abdominal vein resection or replacement. When a blood vessel causes tissue injury in the abdomen, part of the tissue might need to be removed or replaced. Risks include pulmonary embolism, infection and excess bleeding.
  5. Varicose vein removal. These veins form in the legs, when the valves in the veins aren’t functioning properly. If a senior is experiencing pain, blood clots, or bleeding, varicose vein removal may be suggested. The risks include nerve injury, heavy bleeding and infection.
  6. High gastric bypass. This weight loss surgery alters the way in which the stomach and small intestine handle food. There are a number of criteria that must be met to receive this procedure. It can pose major risks and complications, such as malnutrition, perforation of the stomach or intestines and dumping syndrome (aka when food gets “dumped” directly from the stomach pouch into the small intestine without being digested).
  7. Proctopexy (rectal prolapse surgery). Seniors with stool leakage, inability to control their bowel movements (fecal incontinence), or obstructed bowel movements may require a proctopexy. This procedure helps put the rectum back in place. Risks can include damage to nearby nerves and organs, narrowing (stricture) of the anal opening and development of new or worsened constipation.
  8. Bile duct excision. When a tumor is blocking the flow of bile to a bile duct, it may be removed. Nausea, jaundice, or a temperature of 101° F (38.3° C) or higher are potential risks of this surgery.
  9. A urinary reconstruction technique. Sometimes an individual’s urinary bladder is removed due to cancer, a non-working bladder, or another medical reason. This procedure creates a new way for urine to exit the body when a bladder isn’t present. One risk of the procedure is urine backing up into the kidneys, causing infections, stone formation, or organ damage over time.
  10. Ureter repair. If a senior’s ureter is injured (scar tissue forms after an accident or surgery), more surgery might be required to repair it. Chest pain, blood clots and trouble urinating can be complications that follow this procedure.

Reference: Considerable (May 1, 2021) “These 10 surgeries are considered “uniquely high risk” for older adults”

 

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New Rules for Burial at Arlington National Cemetery

In testimony before the House Appropriations Committee, Karen Durham-Aguilera, Executive Director of Army National Military Cemeteries and Arlington National Cemetery, said she expects revisions to those rules in coming months, but would not say whether that would tighten or loosen the proposed eligibility restrictions.

Military Times’ recent article entitled “As space dwindles, final rules on burial eligibility for Arlington Cemetery expected this fall,” reports that new eligibility rules for Arlington Cemetery would exclude most non-combat veterans.

“We continue to explore all viable options to ensure Arlington National Cemetery continues to honor our nation’s heroes for generations to come,” she said. “It’s really an impossible problem for us. The eligible population is more than 22 million … currently today, we have less than 85,000 spaces.”

The proposed changes are aimed at extending the use of the cemetery for several more decades.

In 2019, Army officials suggested restricting all below-ground burial sites to combat heroes, battle casualties and a small pool of notable dignitaries. Other veterans would be eligible for placement of cremated remains in above-ground structures at the cemetery. However, many veteran groups were against this, saying it could upset numerous families’ end-of-life plans and risks the perception that certain military experiences are more valuable than others.

About 400,000 individuals are buried at Arlington now, and roughly 7,000 individuals are interred at the cemetery annually.  those numbers were reduced last year due to COVID restrictions.

The expansion plans are expected to add about 80,000 new burial spaces to the cemetery.

“Without changes to eligibility, Arlington National Cemetery will run out of space for new burials in the early 2040s or the mid-2060s with the construction of the Southern Expansion project, even for those service members who are killed in action or are recipients of the Medal of Honor.”

With the eligibility changes, officials estimate the site can remain an active cemetery for more than 150 years.

These proposed rule changes for Arlington wouldn’t change the veterans cemetery sites run by the Department of Veterans Affairs across the country.

Reference: Military Times (May 5, 2021) “As space dwindles, final rules on burial eligibility for Arlington Cemetery expected this fall”

 

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Did Bill Gates and Wife Sign Pre-Nup?

The tabloid secured a copy of Bill Gates divorce filings. The papers show that the couple signed a separation contract they told the court to enforce, rather than a prenuptial agreement.

Entrepreneur’s recent article entitled “Bill and Melinda Gates Never Signed a Prenup. Here’s How They’ll Divide Their Assets Instead” says that a prenuptial agreement is created before the parties get married and states what each party will retain, should a divorce occur.

By contrast, a separation contract is a “postnuptial agreement” that’s signed when the two parties are thinking about divorce but are legally married. A separation contract can direct the division of property and address spousal support, but it can’t include any terms on child support and custody.

According to the divorce filings, the couple has agreed to divide real estate property, personal property, debts and liabilities, as “set forth in our separation contract.”

Spousal support “is not needed,” they wrote.

“This marriage is irretrievably broken,” Melinda wrote in her request for a divorce. “We ask the court to dissolve our marriage and find that our marital community ended on the date stated in our separation contract.”

The couple announced their divorce in a statement:

“After a great deal of thought and a lot of work on our relationship, we have made the decision to end our marriage,” the two said in a joint statement. “Over the last 27 years, we have raised three incredible children and built a foundation that works all over the world to enable all people to lead healthy, productive lives. We continue to share a belief in that mission and will continue our work together at the foundation, but we no longer believe we can grow together as a couple in this next phase of our lives. We ask for space and privacy for our family as we begin to navigate this new life.”

The couple first met at a work event in New York in 1987 and married seven years later on New Year’s Day in Hawaii.

They have three children together: Jennifer, Rory and Phoebe.

A court is expected to look at the Gates’ divorce filings this fall.

Reference: Entrepreneur (May 4, 2021) “Bill and Melinda Gates Never Signed a Prenup. Here’s How They’ll Divide Their Assets Instead.”

 

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Can a Daughter Help Parents by Paying the Mortgage ?

A daughter who has free cash from selling her own home and wants to protect her parents from the worry of dying with mortgage debt, asks if buying the family home outright, before the parents die, is the best solution. It’s a common situation, reports The Washington Post in the article “Daughter seeks to help parents with mortgage, credit card debt by buying their house.” Is there a right answer?

Lenders generally don’t demand the repayment of a residential mortgage loan immediately after the death of the owner. They will, however, call the loan if the borrower’s heirs fail to make mortgage payments. As long as the mortgage payments are made in a timely manner, the loan remains in good standing. If the daughter and her siblings are making these payments, this won’t be a problem.

Depending on how the home is owned, when one of the parents dies, the surviving parent will become the sole owner of the home, if they hold title as joint tenants with right of survivorship. The surviving parent also does not have to worry about the lender, as long as they continue to make the mortgage payments. When the surviving parent dies, then the three daughters inherit the home.

In 1982, the federal government passed the Garn-St. Germain Depository Institutions Act to protect spouses and children, when the owner of a home adds them to the property’s title. This law also prevents a lender from calling the loan due, when the owner puts the title into a living trust.

As long as the mortgage can continue to be paid, there’s no need to pay it off in full or to purchase the home so parents are debt-free. When they die, the daughter can pay off the remaining loan, if she can and wishes to do so.

The daughter also notes that her parents have credit card debt. If they die and cannot pay the debt, it will die with them. However, if they own a home when they die and there is equity in the property, the creditor will expect the estate to liquidate the asset and pay off the debt.

If one of the siblings wants to stay in the home, she could take over the property, making the monthly mortgage payments and find a way to pay off the credit card debt separately. Or, if the daughter who is asking about buying the home wants to, she can pay off the credit card debts.

From a tax perspective, buying the property from the parents while they are living doesn’t afford any advantages. Extra cash could be used to pay off the mortgage and the credit card debt, but again, there are no advantages to doing so, except for giving the parent’s some peace of mind. The cost of doing so, however, will be the daughter losing the ability to use the money for anything else.

One estate planning attorney recommends that the daughters inherit the home. When they die, tax law allows them to pass down a large amount of wealth—$11.7 million for an individual and $23.4 million for a married couple. The home would also get a stepped-up basis. The siblings would inherit the home with its value at the time of death of the surviving parent resetting the basis.

If the parents bought the home for $25,000 years ago and it’s now worth $250,000, the siblings would inherit the home at the increased value. The parents’ estate would not pay tax on the home, and if the sisters sold the house for $250,000 around the time of their death, there would be no capital gains tax due.

As the law currently stands, it’s a win-win for the siblings. When the parents die, they can decide how to divide the estate, if there are no clear instructions in a last will from the parents. They can use any extra cash, if there is any, to pay the mortgage and credit card debt, and split what’s leftover. If one sibling wants to own the home, the other two could get cash instead of the home.

The sibling who wants to keep the home should refinance the loan and use those proceeds to buy out the other two sisters. The siblings should sit down with their parents and discuss what the parents have in mind for the property. An estate planning attorney will help the family determine what is best from a tax advantage. Planning is essential when it comes to death, taxes and real estate.

Reference: The Washington Post (May 10, 2021) “Daughter seeks to help parents with mortgage, credit card debt by buying their house”

 

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Do You Have to Do Probate when Someone Dies?

Probate is a Latin term meaning “to prove.” Legally, a deceased person may not own property, so the moment a person dies, the property they owned while living is in a legal state of limbo. The rightful owners must prove their ownership in court, explains the article “Wills and Probate” from Southlake Style. Probate refers to the legal process that recognizes a person’s death, proves whether or not a valid last will exists and who is entitled to assets the decedent owned while they were living.

The probate court oversees the payment of the decedent’s debts, as well as the distribution of their assets. The court’s role is to facilitate this process and protect the interests of all creditors and beneficiaries of the estate. The process is known as “probate administration.”

Having a last will does not automatically transfer property. The last will must be properly probated first. If there is a last will, the estate is described as “testate.” The last will must contain certain language and have been properly executed by the testator (the decedent) and the witnesses. Every state has its own estate laws. Therefore, to be valid, the last will must follow the rules of the person’s state. A last will that is valid in one state may be invalid in another.

The court must give its approval that the last will is valid and confirm the executor is suited to perform their duties. Texas is one of a few states that allow for independent administration, where the court appoints an administrator who submits an inventory of assets and liabilities. The administration goes on with no need for probate judge’s approval, as long as the last will contains the specific language to qualify.

If there was no last will, the estate is considered to be “intestate” and the laws of the state determine who inherits what assets. The laws rely on the relationship between the decedent and the genetic or bloodline family members. An estranged relative could end up with everything. The estate distribution is more likely to be challenged if there is no last will, causing additional family grief, stress and expenses.

The last will should name an executor or administrator to carry out the terms of the last will. The executor can be a family member or a trusted friend, as long as they are known to be honest and able to manage financial and legal transactions. Administering an estate takes time, depending upon the complexity of the estate and how the person managed the business side of their lives. The executor pays bills, may need to sell a home and also deals with any creditors.

The smart estate plan includes assets that are not transferrable by the last will. These are known as “non-probate” assets and go directly to the heirs, if the beneficiary designation is properly done. They can include life insurance proceeds, pensions, 401(k)s, bank accounts and any asset with a beneficiary designation. If all of the assets in an estate are non-probate assets, assets of the estate are easily and usually quickly distributed. Many people accomplish this through the use of a Living Trust.

Every person’s life is different, and so is their estate plan. Family dynamics, the amount of assets owned and how they are owned will impact how the estate is distributed. Start by meeting with an experienced estate planning attorney to prepare for the future.

Reference: Southlake Style (May 17, 2021) “Wills and Probate”

 

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Do Stepchildren Inherit?

Stepchildren – When an individual passes away without a will, the state laws of intestacy instruct how the person’s probate estate will be distributed.

Only assets that would have passed through a person’s will are impacted by intestate succession laws. This typically includes only assets owned alone in his or her name.

For instance, in Nebraska, under intestate succession, who inherits depends on whether the deceased had living children, parents, or other close relatives, when he or she died.

In Nebraska, if the decedent was married and died without a will, what the decedent’s spouse will receive depends on whether the decedent had any living parents or descendants, such as children, grandchildren, or great-grandchildren. If the decedent did not, then his or her spouse inherits all of the intestate property.

Under New Jersey’s intestacy statute, when a decedent is survived by a spouse and children who are not children of the surviving spouse such as stepchildren , the surviving spouse is entitled to the first 25% of the intestate estate, but not less than $50,000 nor more than $200,000– plus one-half of the remainder of the intestate estate.

However, nj.com’s recent article entitled “Who gets this house after spouse dies with no will?” explains that the laws of intestacy don’t control the distribution of assets that were jointly owned with a right of survivorship (like a house) or that have a beneficiary designation (like life insurance).

If the house was jointly owned as husband and wife in joint tenancy with the right of survivorship, the surviving spouse solely owns the entire house by operation of law, upon the death of the first spouse. The stepchildren do not have any right to the proceeds of the sale of the house.

However, if the decedent spouse owned the house only in his or her own name or the house was titled by the spouses as “tenants in common,” then the laws of intestacy would apply.

Tenancy in common is an arrangement where two or more people have ownership interests in a property.

The big difference between joint tenants and tenants in common is that joint tenants have the right of survivorship (which gives them ownership of the property when one owner dies), tenants in common do not.

With a tenancy in common, the tenants can own different percentages of the property.

Tenants in common can also gift their share of the property to anyone upon their death.

Reference: nj.com (May 5, 2021) “Who gets this house after spouse dies with no will?”

 

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