Downs Law Firm, P.C.
Downs Law Firm, P.C.
Before gifting a holiday property, an individual or couple (who can gift up to $22.8 million against their lifetime estate-tax exclusion through 2025), should find out whether their children want it.
The government will be more than happy to distribute your assets. Years ago a friend of mine told me of his final moments with his father. He was in the hospital signing documents with the lawyer and his father. Dad was on his death bed, dying several hours later. The family business went to him, as he had worked in the business for over two decades. It was what he was promised all along but did not make the final time with his Dad as he would have wanted. If that hadn’t happened, state law would have controlled, leaving promises unkept. Dying intestate will result in your state of residence deciding where your assets will go. However, it doesn’t have to be like that, because creating an estate plan will leave the decision in your hands, according to KREM.com in “Head off a small-business skirmish: Draw up your will or estate plan today.” Here’s a tale from another law office that makes it all very clear. A business owner died unexpectedly. He had never completed his divorce from his first wife after 20 years. He had been in a relationship with another woman for 10 years and they had two children together. Since he never divorced his wife, she inherited his business. No one likes to consider that they will die, or in this case, that it is really time to deal with their marital status. He probably thought he had plenty of time to plan. However, the result was not pretty. Here’s how you can avoid your own unintended consequence: Preplan. A business owner needs to do a complete estate plan, so your property, family and business will be protected, if you should become incapacitated or die. You’ll need the following: Disability insurance. This is a relatively affordable product that replaces up to 60% of your income, if injury or illness prevents you from working. Life insurance. Consider the cost of providing food, shelter, education and care for your family. How would that be replaced, if you died tomorrow? Another thing life insurance can do is keep a business alive after the owner dies. Proceeds can be earmarked in your estate plan to be used to meet business costs and spare your loved ones from selling the business for a low amount, because they need to raise funds fast. Create a succession plan. How will your business go forward without you? Have your documents prepared. Hire an estate planning attorney who can protect your business and your family. Here’s what you’ll need: A will and/or a trust. You need a will, especially if you have small children. This is because you’ll want to name guardians for them. A will does go through probate. However, this is only true if your assets are not placed in trusts. Your estate planning attorney will create a plan that fits your needs. Health care directives. This gives a family member or friend the ability to make health care decisions, if you are unable.
The IRA may be liquidated quickly. An inherited IRA can provide a lot of security. However, it can also become a problem, if it is not handled correctly, according to CNBC in “Leaving an IRA to a loved one? How to avoid a tax bomb.” You can structure the distribution, so your children or grandchildren receive the best benefits. Naming a trust as an IRA beneficiary is a good way to protect large IRAs, since it provides some means of control. By naming a trust, you can protect heirs who are minors, vulnerable to creditors, not able to handle large sums of money or disabled. Trusts only need $12,750 of taxable income in 2019 to be subject to the top tax rate of 37%. If you don’t structure the trust right, you could accelerate the liquidation of the IRA at warp speed. Most people think of their spouse, when it comes to naming a beneficiary for an IRA. If your spouse doesn’t needs the funds, you should consider providing for the next generation, who will live in a world of “You’re on your own” retirement planning. IRA Trusts can also provide asset protection for beneficiaries who inherit them. Except for spousal rollovers, inherited IRAs are within the grasp of a beneficiary’s creditor, unless protected within a trust. What are the pitfalls? Not all IRA custodians allow you to list a trust on the beneficiary form. The tax code has very specific conditions, when trusts are the beneficiaries of retirement accounts. Be very careful with what you do with charities as beneficiaries. IRAs can be great tools for charitable giving, but must be handled with great care to avoid tax problems. If you fail to follow the rules, your heirs could face huge tax bills. For a trust to be viable as a designated beneficiary, it must meet a four-step test: It must be valid under your state’s laws. It must be an irrevocable trust, or one that will become irrevocable upon your death. Beneficiaries must be identifiable from the trust document. The IRA custodian or trust administrator must have received a copy of the trust by October 31 of the year after the death of the IRA’s owner. The beneficiaries must be people, not charities and not your estate. If your beneficiaries are not people, then your IRA may not have a designated beneficiary. In that case, your heirs can’t stretch the IRA by taking required minimum distribution,s based on the longer life expectancy of a child or a grandchild. Worse—if your trust fails to meet the test, it is subject to the same rules as if there was no designated beneficiary at all. That means it’ll be depleted faster than you may have wished. If you die before you start taking RMDs (70½) then the IRA must be distributed within five years after death. If you die after you start taking RMDs, then distributions pay out over what would have been your life expectancy. An estate planning attorney can advise