What are the Biggest Mistakes Women make with their Social Security Benefit?
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What are the Biggest Mistakes Women make with their Social Security Benefit?

Retirement planning is an important part of long-term financial wellness, and for women, who typically make less money and live longer than men, it can mean lower Social Security benefit payments and other problems.

Money Talk News’s article from January entitled “3 Costly Social Security Mistakes That Women Make” looks at some of the costliest Social Security mistakes that women can make.

  1. Taking your Social Security benefits too early. Deciding to take Social Security benefits too soon can be especially costly for single women and women in same-sex relationships or marriages. Women usually have a tougher time than men saving for retirement because they have lower lifetime earnings and a longer lifespan than men, on average. For single women, these challenges are compounded by the absence of a significant other bringing in additional Social Security income — or any other type of retirement income. It may be prudent for single women and women in same-sex relationships to delay claiming Social Security benefits as long as possible, so the amount of their monthly benefit is higher when they do start getting it.
  2. Forgetting about your ex-spouse. If you were married and then divorced, and your marriage lasted at least 10 years, you might be eligible for benefits through your ex-spouse. You should check to see if you’d get a better monthly payment by claiming through an ex’s earnings record, instead of your own. If you’re currently unmarried and at least 62, and your ex-spouse is at least 62, you can claim spousal benefits. Your own retirement benefits at full retirement age must be less than half of your ex’s benefits. (When you claim ex-spousal benefits, it will trigger a claim for your own benefits, unless you were born before 1954.) Even if your ex hasn’t applied for benefits yet, you can file a claim on his or her account, provided you and the ex are both at least 62. However, remarriage will mean the loss of ex-spousal benefits. However, if your later marriage also ends, you again become eligible for the ex-spousal benefits.
  3. Allowing your spouse to make a unilateral claiming decision. A 2018 study from the Center for Retirement Research found that a husband can increase his wife’s survivor benefits by 7.3% each year by waiting to claim his benefits. However, the study says that many husbands don’t think about the effect that their age at claiming benefits can have on their survivor and her benefits. Rather, many husbands will look at more immediate issues and decide to claim Social Security earlier. Despite being educated about the possible effect on their wives in the future, many husbands said they wouldn’t change their claiming age.

Talk to your spouse about how to best manage when each of you should file a claim for benefits and coordinate your retirement and your Social Security claims.

Reference: Money Talk News (Jan. 6, 2020) “3 Costly Social Security Mistakes That Women Make”

 

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Survivor Benefits – When a Husband Dies, Does the Wife Get His Social Security?

Survivor Benefits – When to take Social Security benefits is a decision that has major consequences for not only the worker but their spouse. There are a few mistakes the people make that end up costing their loved ones, advises the recent article “If You Love Your Spouse, Don’t Make This Social Security Mistake” from NASDAQ. The most common mistake concerns deciding when to start taking Social Security benefits.

By starting to claim survivor benefits at age 62, you’ll get a reduced amount compared to what you would receive at your full retirement age. If you can wait until age 70 to claim Social Security, you and your spouse will benefit from the delayed retirement credits.

Most retirees base their benefit decision on how long they expect to live and their financial needs. People who expect to live a long time will get more money if they can wait until age 70, when their monthly benefits will be larger. People who don’t expect to live very long past retirement, usually take their benefits early.

However, when you decide to take your benefits has an impact on your surviving spouse. When both members have worked and earned their benefits, it’s not as big of an issue. However, for a spouse who does not have a work history of their own or whose earnings are significantly lower, this can have a big financial impact.

The issue is survivor benefits. You are entitled to receive a survivor benefits when your spouse dies, and that benefit is based on their work history. If the surviving spouse claims benefits earlier than full retirement age, there will be a reduction.

However, if the deceased spouse claimed retirement benefits early, the surviving spouse will receive a reduced survivor benefit.

Here’s an example. Let’s say a married person, age 62, would get a retirement benefit of $1,500, if they retired at age 66 and 8 months. The person has a terminal illness and will not live more than a few more months. The spouse is also 62. Some people in this situation would start taking their Social Security benefits immediately. The reduced monthly payment would be $1,075. It’s less than the $1,500, but it’s better than nothing.

The issue is that the surviving spouse would only be eligible to receive $1,075 per month. That payment would only be if the surviving spouse waited until full retirement age. If a claim were made before full retirement age, the monthly benefit would be $884.

If the terminally ill person chose not to claim Social Security at all, the surviving spouse would be entitled to a survivor benefit of $1,500, again if they waited until full retirement age.

That $350 difference may not feel big on paper, but when there is only one income, it adds up. Waiting to take benefits could make all the difference in the quality of life your spouse enjoys for the rest of their life.

Reference: NASDAQ (Nov. 14, 2020) “If You Love Your Spouse, Don’t Make This Social Security Mistake”

 

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When Does It Make Sense to Take Social Security at 62 ?

You’re entitled to your full monthly Social Security benefit based on your earnings history when you hit your full retirement age (“FRA”) or  you can take Social Security at 62.

Your FRA is either 66, 67, or somewhere in between, depending on when you were born. However, you can enroll in Social Security early and take Social Security at 62.

However, for each month you claim benefits ahead of FRA, it reduces the amount for the rest of your life.

Motley Fool’s recent article entitled “3 Reasons to Claim Social Security Benefits Early” says it may pay to enroll early, if one of these situations applies to you.

  1. You need cash ASAP. It’s not uncommon for seniors to lose their jobs and have a hard time securing employment again. Others are forced to stop working due to health issues (either theirs or that of a family member).

If you require money immediately, then you might not have the option of weighing whether claiming Social Security early is a good idea. You’ll just have to go ahead to get by.

It’s better to claim your benefits early at a lower rate, than adding costly debt to survive.

  1. Your health is a concern. Social Security is supposed to pay you the same total lifetime benefit. As a result, filing early will give you less money each month, but more years of benefits. This, in effect, simply means stretching that total payout for a longer time period. If you delay, it will have the opposite effect. You get a bigger monthly benefit but over fewer years.

This formula is designed so you break even, if you live an average lifespan. However, if your health isn’t good, and you don’t expect to live all that long, then filing for benefits early could be the right move. This could ensure that Social Security ultimately pays you the largest amount of money.

  1. You want to have fun in retirement, while you’re younger. Filing for benefits before your FRA may let you really enjoy travel and other experiences, while your health permits. However, if you don’t have a lot of retirement savings, you may need to wait on filing for benefits to avoid financial difficulties later on. However, with a good-size nest egg, it pays to claim your money when it will do you the most good.

Take the time to consider your options for claiming your benefits. This will help you to avoid regretting your choice. Consult with a financial advisor with expertise and experience in retirement planning.

Reference: Motley Fool  (Oct. 6, 2020) “3 Reasons to Claim Social Security Benefits Early”

Suggested Key Terms: Elder Law Attorney, Social Security, Elder Care, Financial Planning

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Do I Have to Pay Taxes during Retirement ?

Paying taxes when you aren’t working but are instead receiving income from a lifetime of working and Social Security is a harsh reality of retirement for many people. Figuring out how much of your income will be consumed by taxes is a tricky task, according to the article “What You Need to Know About Taxes and Your Retirement” from Next Avenue. Ignore it, and your finances will suffer.

Most households will pay about six percent of their retirement income in federal income tax, but that number varies greatly, depending upon the size of their retirement income. The lowest income groups may pay next to nothing, but as income rises, so do the taxes. Married couples with an average combined Social Security benefit of about $33,000, 401(k)/IRA balances of $180,790, and personal financial wealth of $87,000 could find themselves paying 10.5% to 20.9%.

Income taxes and health costs are most people’s biggest expenses in retirement. Income taxes are due on pensions and withdrawals from tax-deferred accounts, including traditional IRAs, 401(k)s, 403(b)s, and similar retirement accounts. The same goes for tax-deferred annuities. Required minimum distributions must be taken starting at age 72.

Roth IRA and 401(k) distributions are tax free, since taxes are paid when the funds go into the accounts, not when they are withdrawn.

If you have investments in addition to your tax-deferred funds, like stocks or bond funds, you also pay taxes on the dividends and interest paid to you. If you sell them, you’ll likely need to pay any capital gains taxes.

Learning that a portion of your Social Security benefits are subject to federal income tax is a shocker to many retirees, but about 40% of recipients do pay taxes on their benefits. The higher your income, the more taxes you’ll need to pay.

There may also be state taxes on your Social Security benefits, depending on where you live.

However, here’s the biggest shocker–if you work part time, you may forfeit benefits, temporarily, if you claim before your Full Retirement Age, while you are working. Claiming before FRA means that your benefits are subject to earnings limits—the most you can make from work before triggering a benefit reduction.

Social Security withholds $1 in benefits for every $2 earned above the annual earnings limitation cap. If you reach your FRA after 2020, that’s $18,240. If you reach your FRA in 2020, the annual exemption amount is $48,600.

Pension, investment income and any government benefits, like unemployment compensation, don’t count towards earned income.

Benefits that are withheld will be returned to you once you hit FRA when Social Security bumps up your monthly benefit to make up for the withholding, but this takes place over time.

Reference: Next Avenue (Sep. 17, 2020) “What You Need to Know About Taxes and Your Retirement”

 

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What Is a Fiduciary and a Fiduciary Duty ?

First, a fiduciary duty is the requirement that certain professionals, like attorneys or financial advisors, work in the best financial interest of their clients. By law, members of some professions with clients are bound by fiduciary duty.

Forbes’ recent article entitled “What Is Fiduciary Duty?” explains that in a fiduciary relationship, the person who must prioritize their clients’ interests over their own is called the fiduciary. The person getting the services or assistance is called the beneficiary or principal.

You will frequently see a fiduciary relationship with certain types of professionals, like attorneys and financial advisors. A fiduciary duty is a serious obligation, and if a fiduciary doesn’t fulfill his or her duties, it’s known as a breach of fiduciary duty. Fiduciaries must act in a beneficiary’s best interest. They have two main duties: duty of care and duty of loyalty. Fiduciaries may have different or additional requirements, depending on their industry.

With the duty of care, fiduciaries must make informed business decisions after reviewing available information with a critical eye. Lawyers must act carefully in performing work for clients. Care is determined by the prevailing standards of professional competence in the relevant field of law and geographic region. To abide by the duty of loyalty, fiduciaries must not have any undisclosed economic or personal conflict of interest. They can’t use their positions to further their own private interests. For example, fiduciary financial advisors might adhere to the duty of loyalty by disclosing recommendations from which they’ll receive a commission.

Other common professions or positions that require fiduciary duties include directors of corporations and real estate agents, as well as those discussed below:

Trustee of a Trust. When you want your assets to transfer to someone after you die, you can put them into a trust. The trustee who’s in charge of the trust has a duty to manage the trust and its assets in the best interests of the beneficiary who will one day inherit them.

Estate Executor. The person who manages your estate and handles your affairs is your estate executor. He or she has a fiduciary responsibility to your heirs and next of kin to distribute the estate according to your wishes.

Lawyer. Your attorney must disclose any conflicts of interest and must work with your best interests in mind.

Financial Advisors. Financial advisors who are fiduciaries must act in the best interest of their clients and offer the lowest cost financial solutions to fit their clients’ needs. However, it important to note that not all financial advisors are fiduciaries.

Reference: Forbes (July 28, 2020) “What Is Fiduciary Duty?”

 

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How to Make Beneficiary Designations Better

Beneficiary designations supersede all other estate planning documents, so getting them right makes an important difference in achieving your estate plan goals. Mistakes with beneficiary designations can undo even the best plan, says a recent article “5 Retirement Plan Beneficiary Mistakes to Avoid” from The Street. Periodically reviewing beneficiary forms, including confirming the names in writing with plan providers for workplace plans and IRA custodians, is important.

Post-death changes, if they can be made (which is rare), are expensive and generally involve litigation or private letter rulings from the IRS. Avoiding these five commonly made mistakes is a better way to go.

1—Neglecting to name a beneficiary. If no beneficiary is named for a retirement plan, the estate typically becomes the beneficiary. In the case of IRAs, language in the custodial agreement will determine who gets the assets. The distribution of the retirement plan is accelerated, which means that the assets may need to be completely withdrawn in as little as five years, if death occurs before the decedent’s required beginning date for taking required minimum distributions (RMDs).

With no beneficiary named, retirement plans become probate accounts and transferring assets to heirs becomes subject to delays and probate fees. Assets might also be distributed to people you didn’t want to be recipients.

2—Naming the estate as the beneficiary. The same issues occur here, as when no beneficiary is named. The asset’s distributions will be accelerated, and the plan will become a probate account. As a general rule, estates should never be named as a beneficiary.

3—Not naming a spouse as a primary beneficiary. The ability to stretch out the distribution of retirement plans ended when the SECURE Act was passed. It still allows for lifetime distributions, but this only applies to certain people, categorized as “Eligible Designated Beneficiaries” or “EDBs.” This includes surviving spouses, minor children, disabled or special needs individuals, chronically ill people and individuals who are not more than ten years younger than the retirement plan’s owner. If your heirs do not fall into this category, they are subject to a ten-year rule. They have only ten years to withdraw all assets from the account(s).

If your goal is to maximize the distribution period and you are married, the best beneficiary is your spouse. This is also required by law for company plans subject to ERISA, a federal law that governs employee benefits. If you want to select another beneficiary for a workplace plan, your spouse will need to sign a written spousal consent agreement. IRAs are not subject to ERISA and there is no requirement to name your spouse as a beneficiary.

4—Not naming contingent beneficiaries. Without contingency, or “backup beneficiaries,” you risk having assets being payable to your estate, if the primary beneficiaries predecease you. Those assets will become part of your probate estate and your wishes about who receives the asset may not be fulfilled.

5—Failure to revise beneficiaries when life changes occur. Beneficiary designations should be checked whenever there is a review of the estate plan and as life changes take place. This is especially true in the case of a divorce or separation.

Any account that permits a beneficiary to be named should have paperwork completed, reviewed periodically and revised. This includes life insurance and annuity beneficiary forms, trust documents and pre-or post-nuptial agreements.

Reference: The Street (Aug. 11, 2020) “5 Retirement Plan Beneficiary Mistakes to Avoid”

 

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Financial Planning – How Do I Survive My 50s?

Financial Planning – More than 50% of the workers who entered their 50s with stable, full-time jobs were laid off or forced out at least once by age 65, according to an analysis of employment data from 1990 to 2016 by the nonprofit newsroom ProPublica and the Urban Institute. Only one in 10 of those who lost a job ever found another that paid as much, and most never recovered financially.

Considerable’s recent article entitled “5 strategies for navigating your most dangerous decade” says that these realities make it critical that you have a plan for surviving what could be your most dangerous decade.

Stay current in your field. You may want to just ease into retirement and switch to auto pilot in your last few years of your career. However, older workers who aren’t proactively updating and increasing their skill sets are more likely to be laid off. They may be the first to go. Seek out training opportunities at work and volunteer for new assignments. You can also ask to be both “a mentor and mentee,” where a younger co-worker helps you stay up-to-date with the latest technologies used by your office, and you can share you knowledge of the company and industry with them.

Save early, save often. “Catch up” provisions were added to help workers supercharge their savings in the years right before retirement. As a result, in 2020, workers who are age 50 and older can contribute up to $26,000 to workplace retirement plans, like a 401(k)s, compared with the limit of $19,500 for younger workers. This may motivate you to start saving as soon as possible and to increase your savings rate, whenever you can. It’s also a good idea to bolster your emergency fund. The average length of unemployment for people 45 to 54 is about five months. In this pandemic and down economy, the time may be even longer.

No more borrowing. Many people see their ability to save blocked, because of debt. Limiting how much you owe as you get older, can provide you with more financial flexibility. If you’re refinancing a mortgage, get a loan term that lets you be debt free by retirement or earlier. Use care in borrowing money for education, either for yourself or a child, because those obligations typically can’t be discharged in bankruptcy and could be hard to pay back, if you lose your job.

Cut the cord. More than a few parents provide their adult children with some financial support—typically for household expenses not an emergency. These continuous gifts may wreak havoc with your financial health, as well as theirs. Create some clear financial boundaries you help you wean them off the distribution of the “Bank of Mom and Dad” welfare checks.

Move quickly. You may find another job soon, if you lose your current one. If so, move ahead like you won’t by cutting non-essential spending, asking lenders about possible forbearance or hardship programs and staying in touch with your network.

Reference: Considerable (August 1, 2020) “5 strategies for navigating your most dangerous decade”

 

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Should I Create an LLC for Estate Planning ?

If you want to transfer assets to your children, grandchildren or other family members but are worried about gift taxes or the weight of estate taxes your beneficiaries will owe upon your death, a LLC for Estate Planning can help you control and protect assets during your lifetime, keep assets in the family and lessen taxes owed by you or your family members.

Investopedia’s article entitled “Using an LLC for Estate Planning” explains that a LLC is a legal entity in which its owners (called members) are protected from personal liability in case of debt, lawsuit, or other claims. This shields a member’s personal assets, like a home, automobile, personal bank account or investments.

Creating a family LLC with your children lets you effectively reduce the estate taxes your children would be required to pay on their inheritance. A LLC also lets you distribute that inheritance to your children during your lifetime, without as much in gift taxes. You can also have the ability to maintain control over your assets.

In a family LLC, the parents maintain management of the LLC, and the children or grandchildren hold shares in the LLC’s assets. However, they don’t have management or voting rights. This lets the parents purchase, sell, trade, or distribute the LLC’s assets, while the other members are restricted in their ability to sell their LLC shares, withdraw from the company, or transfer their membership in the company. Therefore, the parents keep control over the assets and can protect them from financial decisions made by younger members. Gifts of shares to younger members do come with gift taxes. However, there are significant tax benefits that let you give more, and lower the value of your estate.

As far as tax benefits, if you’re the manager of the LLC, and your children are non-managing members, the value of units transferred to them can be discounted quite steeply—frequently up to 40% of their market value—based on the fact that without management rights, LLC units become less marketable.

Your children can now get an advance on their inheritance, but at a lower tax burden than they otherwise would’ve had to pay on their personal income taxes. The overall value of your estate is reduced, which means that there is an eventual lower estate tax when you die. The ability to discount the value of units transferred to your children, also permits you to give them gifts of discounted LLC units. That lets you to gift beyond the current $15,000 gift limit, without having to pay a gift tax.

You can give significant gifts without gift taxes, and at the same time reduce the value of your estate and lower the eventual estate tax your heirs will face.

Speak to an experienced estate planning attorney about a family LLC, since estate planning is already complex. LLC planning can be even more complex and subject you to heightened IRS scrutiny. The regulations governing LLCs vary from state to state and evolve over time. In short, a family LLC is certainly not for everyone and it appropriately should be vetted thoroughly before creating one.

Reference: Investopedia (Oct. 25, 2019) “Using an LLC for Estate Planning”

 

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Full Retirement Age Working and Collecting Social Security Benefits

Full Retirement Age – For decades, Americans have taken comfort from knowing that no matter what else happened with their retirement savings, they would be able to get Social Security benefits when they stopped working. Even better, the benefit grows with inflation and continues for as long as the person or their spouse lives, explains the article “How working changes your Social Security benefits” from The Sun.

Workers and spouses who qualify for Social Security have the option of starting to receive benefits at any time from age 62 to 70. Benefits received before reaching Full Retirement Age (FRA) will be smaller than those received after a worker reaches their FRA. These amounts are worked out in a series of complex calculations by actuaries to ensure that everyone receives their fair share. If you retire later, after FRA, the monthly benefit will be higher. If you wait until age 70, the monthly benefit will have reached its maximum level.

Less well understood is the effect of continuing to work, while collecting Social Security benefits. You can decide to stay in the workforce and apply for benefits. However, if you claim benefits before your Full Retirement Age and your income exceeds certain levels, there’s a reduction in the full monthly benefit that you would otherwise receive.

This is known as the Retirement Earnings Test, or RET. It does not apply to earnings from investments and pensions, but it does apply to earned income.

Someone who will be younger than their FRA during the entire calendar year will lose $1 in benefits for every $2 they earn above $18,240 in 2020. There was a $600 increase from the 2019 earnings test.

For every two dollars you earn above $18,240, Social Security will deduct one dollar from your benefits. However, the money that is withheld will be added back into your benefits when you reach Full Retirement Age .

Let’s say you earn $20,240 in 2020 and you’re 62 years old. You’ll temporarily give up $1,000 in benefits for going $2,000 over the earnings limit test. However, you will get it back.

What if you are reaching FRA in 2020? The earnings test limit is $48,600 in 2021, a jump of $1,680 from the 2019 limit of $46,920. In this situation, once your earnings reach $48,600 in 2020, $1 in benefits will be withheld from every $3 you earn.

The typical response to learning how the RET works, is that it’s a harsh penalty and why work at all?

Some people stop working altogether or work less to avoid the penalty. That is a mistake. By continuing to work, once a person does reach Full Retirement Age , Social Security increases the monthly benefit amount for the rest of the person’s life. Any benefits lost in earlier years are recouped. Think of it as a rescheduling of payments, from pre-FRA to post-FRA. It’s not a penalty, but another means of saving for the time when you are not working.

Reference: The Sun (June 21, 2020) “How working changes your Social Security benefits”

 

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Don’t Shrink Your Estate with Last Minute Tax Planning

In the best-case scenario, you’d start talking with your estate planning attorney early on about your overall goals and the various tools available for tax planning and transfer wealth to the next generation. Whether your estate is modest or significant, the article “A Recipe for Risk—Last-Minute Tax Planning for Estates” from The Legal Intelligencer explains how a last-minute plan failed on a grand scale. A recent memorandum opinion from the U.S. Tax Court provides a cautionary tale.

Howard Moore owned a large amount of property and ran a successful farm. He was admitted to the hospital late in 2004, was discharged to hospice and told he only had six months to live. He created an estate plan that included a family limited partnership (FLP), a living trust, a charitable lead annuity trust, a trust for the adult children, a management trust that acted as the general partner of the family limited partnership and an “Irrevocable Trust No. 1” that was created to act as a conduit for the transfer of funds from the FLP to a charitable foundation.

The primary focus of the plan was to transfer the farm to a living trust and then to transfer 80% of the farm property to the FLP. The management trust was to serve as a partner to the FLP, with the living trust owning almost all the limited partnership interests and with each of the decedent’s children owning a 1% partnership interest. The FLP was to offer protection against liabilities from the use of pesticides, potential bad marriages, creditors and the fact that the family was a bit dysfunctional and would need to work together to manage the FLP. The FLP had many transfer restrictions and the limited partners were not given any rights to participate in business management or operational decisions regarding the FLP.

The trust known as “Irrevocable Trust No. 1” was nominally funded at the time of the decedent’s death and received funding from the FLP. Those funds, in turn, were transferred to the charitable trust to gain a charitable deduction by the estate. Just before he died, Moore used FLP funds to make large transfers to his children that were designated as loans. He also made outright gifts to the children and to one grandchild.

The estate filed an estate tax return and a gift tax return after Moore’s death. The IRS issued a notice of deficiency for nearly $6.4 million and the case went to tax court. The U. S. Tax Court agreed with the IRS’ findings. The defense of the estate plan, the tax court maintained, was form over substance and the only reason for the estate plan and the numerous transactions was to save estate taxes.

There were a lot of hurdles in this case, in addition to the short time period for the estate plan to have been created. At the time of the decedent’s hospitalization, the sale of the farm to a neighbor was being negotiated. A contract to sell the farm was executed with days of transferring it to the living trust. There were numerous transfers and distributions made between trusts and the FLP, and the court concluded that all decisions about the FLP after its formation were made unilaterally by the decedent. An FLP is supposed to function as a true partnership. Many other issues and errors occurred in the rush to have this estate structured in such a short period of time.

Had Moore engaged in tax planning five or ten years earlier, there would have been time to create a plan in which both the substance and execution of the plan were sound and the family would have been able to save millions of dollars in taxes. By waiting until his death was imminent, the plan attempted to establish transfer requirements without the opportunity to execute them properly.

Reference: The Legal Intelligencer (May 18, 2020) “A Recipe for Risk—Last-Minute Tax Planning for Estates”

 

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