Oconee Estate Planning Blog

Will a QTIP Trust Work for a Blended Family?

Many people have so-called “blended” families, where one or both spouses have children from a previous marriage.

Estate planning can be hard for a spouse in a blended family who wants to provide for a surviving spouse and for children from an ex-spouse.

Fed Week’s recent article entitled “‘Blended’ Families Raise Special Estate Planning Considerations” suggests that one option may be a qualified terminable interest property or “QTIP” trust.

This kind of irrevocable trust is frequently used by those with children from another marriage.

A QTIP trust allows the grantor or maker of the trust to provide for a surviving spouse and maintain control of how the trust’s assets are distributed, once the surviving spouse dies.

Income (and sometimes the principal) generated from the trust is given to the surviving spouse to ensure that the spouse is cared for during the rest of his or her life. Therefore, with a QTIP:

• At the death of the first spouse, the assets pass to a trust for the survivor. No one else can receive distributions from the trust; then
• At the death of the second spouse, any assets left in the QTIP trust are passed to beneficiaries named by the first spouse to die. This is usually the children of the first spouse to die.

With a QTIP, estate tax is not imposed when the first spouse’s dies. Rather, estate tax is determined after the second spouse has died.

Moreover, the property within the QTIP providing funds to a surviving spouse qualifies for marital deductions. As such, the value of the trust isn’t taxable after the first spouse’s death.

While this arrangement may appear to address the needs of both sides, in many remarriages the surviving spouse is much younger than the one who died.

In many cases, the surviving spouse may be close to the age of the children of the spouse who died. As a consequence, those children may have to wait a number of years for their inheritance.

To avoid this, a better approach would be to provide for biological children as well as for a surviving spouse at the first death. Assets can be divided at that time.

If an asset division is impractical, the proceeds of a life insurance policy may help to provide some inheritance for all parties.

Reference: Fed Week (May 7, 2021) “‘Blended’ Families Raise Special Estate Planning Considerations”

Suggested Key Terms: Estate Planning Lawyer, Qualified Terminable Interest Property (QTIP) Trust, Life Insurance, Blended Family

How Do I Address Digital Assets in Estate Planning?

Many states consider the digital accounts you have and access online to be no different from the tangible personal property you own, like cars, real estate and jewelry.

Los Altos (CA) Online’s recent article entitled “Creating an estate plan for your digital assets” says that you can control what happens to these digital assets after you die. However, you need to take specific actions to ensure that your wishes are followed. Let’s look at how to do it:

1. Create an inventory. With everything you have online these days, you should categorize your digital assets. They might include online data storage accounts; emails, texts and contacts; social media accounts; and shopping accounts. You should identify all your financial accounts – bank, brokerage and retirement and bank credit card. However, those should be addressed through your estate planning documents in the traditional manner.
2. Determine who you want to receive your digital assets after you are gone. Think through who gets what, just like your tangible property.
3. Designate a fiduciary. This is a trusted agent named in your will or trust with the authority to access your digital assets. It can be the same individual for all of them but need not be. You should also include in an addendum your wishes for the disposition of each asset. Work with an experienced estate attorney to make certain that your estate documents accurately reflect your intentions.
4. Determine the fiduciary’s ability to access your digital assets. Social media terms of service agreements (TOSAs) usually state that all posted content becomes the property of the custodian (the service provider), and nearly all TOSAs prohibit third-party access to digital assets after the user dies. However, if your will or trust explicitly grants a fiduciary access, the TOSA will no longer prevail. The custodian will be required to allow access to the digital assets by the fiduciary. The custodian has the right, however, to require evidence of the fiduciary’s authority, and could make the process difficult.

Another option is to leave the fiduciary a list of login IDs and passwords for the sites and/or the data – assuming, of course, that you strongly trust the person you’ve appointed as fiduciary. You can make a list on paper or use password-generator application which requires a master password. You should also be certain to include instructions for any two-factor authentication you may have set up.

Don’t list any user IDs and passwords in your will because they would become visible as a public record after death.

Reference: Los Altos (CA) Online (May 5, 2021) “Creating an estate plan for your digital assets”

Suggested Key Terms: Estate Planning Attorney, Inheritance, Digital Assets, Probate Attorney

What Does the Executor Do?

The executor of an estate is the person who manages all the decedent’s financial affairs. If the person wants to have more than one person manage their affairs, like naming two children instead of one, then the term “co-executors” is used, as explained in a recent article “Executor of Estate: What Do They Do?” from Forbes

The most important characteristic that the executor should have, is integrity and good judgment. They are legally required to act in the estate’s best interest, which is called acting as a fiduciary. This is important, especially if an heir serves as an executor.

They also need to be wise enough to know when they need help from a skilled professional.

The executor follows the directions that are included in the person’s will, including distributing assets to beneficiaries. They also manage the many tasks associated with wrapping up the decedent’s life, including paying creditors, issuing notices of death, filing tax returns and overseeing the sale of homes and automobiles.

In some states, the executor is called a “personal representative.” The word “executrix” is an old, out-of-date term used when a woman serves as the executor, not commonly used today.

When a proper estate plan is in place, the executor of the estate is named in the decedent’s last will and testament. In cases where the decedent (sometimes referred to as the testator) did not have a will, or the will has been deemed invalid, the probate court judge names someone to serve as executor. This is not always someone who the executor would have named, but when there is no will, the court makes this decision.

If you have been named the executor of an estate and don’t wish to serve, you may decline. If the decedent anticipated that and named an alternative or contingent executor, then the secondary person will serve, or the probate court judge will name someone to serve in this role. The judge can also override the decedent’s choice of an executor, if the person they named has a criminal history, is not of legal age, has a mental disability or a substance abuse problem. The court is not allowed to change the executor simply because the heirs don’t want a person to serve.

The executor has a long list of tasks to accomplish, from obtaining death certificates and securing the home to filing the will with the probate court in the decedent’s county of residence and petitioning the court for probate. Many executors bring in an estate attorney to assist with the legal portion of administering the estate, as an estate and trusts attorney will be familiar with the processes and the deadlines.

The executor must notify the Social Security administration and Medicare, if the person was enrolled in either of these federal programs. The Department of Motor Vehicles, Veterans Affairs and insurance companies must also be notified. The executor is also responsible for filing the person’s final income tax returns and if necessary, filing the state and federal estate tax returns. This is just a partial listing of the many different tasks that must be accomplished. The estate planning attorney may have a checklist to help the executor on track.

Reference: Forbes (May 3, 2021) “Executor of Estate: What Do They Do?”

Suggested Key Terms: Executor, Estate Planning Attorney, Will, Decedent, Deceased, Social Security, Medicare, Fiduciary, Veterans Affairs, Probate Judge, Personal Representative, Executrix, Co-Executors

Should I Create a Trust?

Most people know that a will instructs your executor regarding where to transfer your assets when you die. You may also want to consider a trust.

Nbcnew25.com’s recent article entitled “Elder law and estate planning: What you need to know” explains that a trust can give you peace of mind that your wishes will be carried out when you pass away. Your property won’t need to go through the probate process, if it’s in a trust. Your family can focus on the grieving process without having any problems with wrapping up your estate.

In addition, financial and health care powers of attorney should also be part of your estate plan. Ask an experienced estate planning or elder law attorney to help you draft these documents to save your loved ones the worry, if you must be moved into a nursing home and are unable to make decisions for yourself.

Having the correct documents in place before you or a loved one goes into a nursing home is extremely important. With a financial power of attorney, an elder law attorney could design a Medicaid plan for someone entering a nursing home to help protect their assets.

If the correct documents aren’t in place when a loved one enters a nursing home, it could create issues—one of which is the inability to protect their assets. In that case, you may also be required to appear in front of a judge to get permission for an elder law attorney to assist in protecting assets. That request could even be denied by the judge.

For a married couple, 100% of cash assets, plus the home, can be protected, and Medicaid would cover most of the nursing home cost. This is big because the cost of nursing homes can exceed be tens of thousands of dollars every month.

For married couples, in many instances, the income of the spouse who is entering the nursing home may be able to be transferred to the spouse who still lives at home. That’s important because the spouse at home may depend on the other spouse’s income to help make ends meet.

For singles, at least 60% to 70% of cash assets, plus the home, can be protected, so that Medicaid would cover most of the nursing home cost.

Moving a loved one into a nursing home can be stressful enough, without having to worry about the cost. Help yourself and your family, by preparing the proper documents ahead of time to eliminate some of the stress.

Working with an elder law attorney who specializes in Medicaid planning is a wise move. Don’t wait until it is too late.

Have things in order, so you or a loved one can avoid any unnecessary stress and keep the assets that you’ve acquired during your lifetime.

Reference: nbcnew25.com (April 30, 2021) “Elder law and estate planning: What you need to know”

Suggested Key Terms: Elder Law Attorney, Estate Planning, Wills, Power of Attorney, Trust, Medicaid

Do You Know about the Grandparents Scam?

The Miami-Dade State Attorney’s Office explains that the Grandparents Scam involves someone posing as a grandchild or relative of the victim and claiming to be out of town and in need of help, usually involving an arrest.

Local10.com’s recent article entitled “Man, 22, arrested in connection with ‘Grandparents Scam’” notes that, in some cases, the scammer says he or she is a relative’s lawyer or bail bondsman.

County prosecutors explain that the fake relative claims to require cash for bail, hospital bills, or other bogus expenses. The caller provides the victim with directions on how to deposit money into their bank account.

The victims are asked to not tell anyone and are sometimes called again, so the fake relative can ask for additional funds due to “negative developments” in their case, prosecutors said.

“When a 22-year-old like Alvaro Esteban Jaramillo Fajardo revels in helping to allegedly steal the savings of caring grandparents and the elderly, there is something truly wrong. Sadly, some people seem to believe that it’s always easier and more sophisticated to take someone else’s money rather than work for it oneself,” State Attorney Katherine Fernandez Rundle said in a statement.

“The grandparent scammers and those ensuring that the scam works all deserve to hear the sound of a jail door closing behind them.”

Jaramillo Fajardo is facing charges in connection with eight victims, ranging in age from 71 to 88.

In all, these Grandparents Scam victims suffered financial losses of more than $480,000.

According to a news release from the state attorney’s office, Jaramillo Fajardo acted as the facilitator of the cash withdrawals from his associates’ bank accounts, “which effectively laundered the stolen money.”

Prosecutors explained that Fajardo paid the account holders about $2,000 for each incident in which they were involved.

Authorities say the Defendant frequently sought out his associates on social media and also offered a finder’s fee, if they obtained new, usable bank accounts to receive the illicit funds.

Fajardo also boasted that none of the account holders had previously gotten into any trouble, prosecutors said.

Reference: local10.com (April 15, 2021) “Man, 22, arrested in connection with ‘Grandparents Scam’”

Suggested Key Terms: Elder Abuse, Financial Abuse

Seven Items Medicare Doesn’t Cover

AARP’s recent article entitled “7 Things Medicare Doesn’t Cover” talks about some needs that aren’t part of the program — and how you might pay for them.

1. Opticians and eye exams. Original Medicare will cover opthalmologic expenses like cataract surgery, but it doesn’t cover routine eye exams, glasses, or contacts. In addition, it’s usually not covered by Medigap plans (supplemental insurance available from private insurers to augment Medicare coverage). Some Medicare Advantage plans cover routine vision care and glasses. As such, it may be wise to purchase a vision insurance policy for a few hundred dollars a year for the expense of glasses or contact lenses.
2. Hearing aids. Medicare covers ear-related medical conditions, but original Medicare and Medigap plans won’t pay for routine hearing tests or hearing aids. You may need to purchase insurance or a membership in a discount plan that helps cover the cost of such hearing devices.
3. Dental care. Original Medicare and Medigap policies don’t cover dental care like routine checkups, dentures, or root canals. Some Medicare Advantage plans offer dental coverage, but if yours doesn’t, or if you opt for original Medicare, you may want to get an individual dental insurance plan or a dental discount plan.
4. Care When Overseas . Original Medicare and most Medicare Advantage plans offer next to no coverage for medical costs incurred outside the U.S. However, there are a few Medigap policies that cover certain overseas medical costs. However, if you travel a lot, you might want this option. In addition, some travel insurance policies provide basic health care coverage. You should also look at medical evacuation (medevac) insurance for your time abroad. This is an inexpensive policy that will transport you to a nearby medical facility or back home to the U.S. in an emergency.
5. Podiatry. Routine medical care for feet, such as callus removal, isn’t covered. Medicare Part B does cover foot exams or treatment, if it’s linked to nerve damage because of diabetes, or care for foot injuries or ailments. Therefore, you may want to set up a separate savings program for this expense.
6. Cosmetic surgery. Elective cosmetic surgery isn’t included in Medicare. This includes procedures, such as face-lifts or tummy tucks. However, Medicare will cover plastic surgery in the event of an accidental injury. So, if you face these costs, you also may want to set up a separate savings program for them.
7. Nursing home care. Medicare pays for limited stays in rehab facilities. This may be a situation where you have a hip replacement and need inpatient physical therapy for a few weeks. However, if you become so frail or sick that you must move to an assisted living facility or nursing home, Medicare doesn’t cover your custodial costs.

Reference: AARP (Oct. 1, 2020) “7 Things Medicare Doesn’t Cover”

Suggested Key Terms: Elder Law Attorney, Medicare, Paying for a Nursing Home, Long-Term Care Planning, Elder Care

What Is the Tax-Law Exception for 529 College Plans in 2021?

Grandparents might use this tactic to dramatically reduce their estate, without using any of their lifetime exemption if they meet some conditions, explains Financial Advisor’s recent article entitled “Tax Break Adds Perk To 529 College Plans.” That’s five years’ worth of the standard $15,000 annual exclusion that normally applies to 2021 gifts. Your spouse can also make the same gift.

You could give a five-year gift of $150,000 per couple and report it on a gift tax return. This uses none of your exemption. You should fund the educations of grandchildren or children, while they are young. If they end up being academic stars or athletes, scholarships can be adjusted against the 529 plan. If they choose not to go to college, you can select a new beneficiary. It is a smart way to frontload the 529 and take advantage of the tax-free growth.

Income earned in any qualified distributions from a 529 are typically not taxed, except under some states’ special rules. Non-qualified distributions are taxed and subject to a 10% penalty. Note that a 529 withdrawal to pay for health insurance or other medical expenses is a non-qualified distribution.

Many people get befuddled by filing a gift tax return. They think a tax is due. However, in fact, it is just a letter to the IRS informing them that you are using some of your lifetime exemption now.

The Tax Cuts and Jobs Act of 2017 also permitted 529 money to be used for tuition for grades K-12. Therefore, frontloading the contribution makes for potentially faster accumulation of assets in the plan, which could be helpful due to the shorter timeframe between funding and use.

There are some conditions to note in the current political climate. If a donor funds a plan with $75,000 for the benefit of an individual, that donor could not give that person any additional gifts over the five years without using their lifetime exemption (now $11.7 million per person). If that exemption amount were to be reduced, it is possible that a person will have used up their lifetime exemption and would not be able to give additional gifts above the annual exclusion without paying gift tax.

This tax break comes with another catch: if the donor dies within the five years, the balance reverts back to the deceased donor’s estate.

You should know that the downside is limited investment options. Plans are generally conservative, so you do not lose your principal. There also may be high fees and costs. The plans often impede students who apply for financial aid, though not as much as some other investment holdings.

Reference: Financial Advisor (May 3, 2021) “Tax Break Adds Perk To 529 College Plans”

Suggested Key Terms: Estate Planning Lawyer, Probate Attorney, Estate Tax, Gift Tax, Unified Federal Estate & Gift Tax Exemption, 529 Education Savings Plan, Legislation, Tax Planning, Financial Planning

What Does Tax Proposal Mean for Estate Planning?

The president’s tax plan proposes to nearly double the top tax rate on capital gains and eliminate a tax benefit on appreciated assets, known as the “step-up in basis.”

CNBC’s recent article entitled “Wealthy may face up to 61% tax rate on inherited wealth under Biden plan” reports that the combined tax rate would be the highest in nearly a century.

Some more well-off families could face combined tax rates of as much as 61% on inherited wealth under President Biden’s tax plan.

It is not known if President Biden’s plan can get through Congress, even with changes. Many moderate Democrats are likely to resist his proposal to raise the capital gains rate to 39.6%, as well as the plan to eliminate the step-up. Moreover, just a small number of the wealthiest taxpayers would ever see a rate of 61%. Most of us others would try to avoid this hike with tax and estate planning.

According to analysis by the Tax Foundation, families who own a business or a large amount of stock and want to transfer the assets to heirs could see a dramatic tax change.

For instance, you are an entrepreneur who started a business decades ago, that is now worth $100 million. Under the current tax law, the business would pass to the family without a capital gains tax—the value of the business would be “stepped-up,” or adjusted to its current value and the heirs would only pay a capital gain, if they later sold at a higher valuation. However, under President Biden’s plan, the family would immediately owe a capital gains tax of $42.96 million upon death (capital gains rate of 39.6%, plus the net investment income tax of 3.8%, minus the $1 million exemption).

If the estate tax remains unchanged, the family would also have an estate tax of 40% on the $57.04 million of remaining value of the assets. Including exemptions, the estate tax would amount to $18.13 million.

The combined estate tax and capital gains tax liability would total $61.10 million, reflecting a combined effective tax rate of just over 61% on the original $100 million asset. The rate rises, when including potential state capital gains and estate taxes.

However, experts say that if the step-up is eliminated, Congress would likely eliminate or overhaul the estate tax.

Reference: CNBC (May 3, 2021) “Wealthy may face up to 61% tax rate on inherited wealth under Biden plan”

Suggested Key Terms: Estate Planning Lawyer, Inheritance, Asset Protection, Probate Attorney, Estate Tax, Unified Federal Estate & Gift Tax Exemption

Link Possible between Diabetes, Dementia and Age

New research says those people who had type 2 diabetes for more than 10 years had more than twice the risk for developing dementia, as compared with those who were diabetes-free at age 70, according to Archana Singh-Manoux, PhD, of the Université de Paris in France.

MedPage Today’s recent article entitled “Diabetes, Dementia, and Age: What’s the Link?” reports that at age 70, every additional five years younger that a person was diagnosed with diabetes was linked to a 24% increased risk of incident dementia, even after adjustment for sociodemographic, health-related and clinical factors including cardiovascular disease, hypertension, body mass index and use of antidepressant or cardiovascular medications, among others.

This is equal to a dementia rate of 8.9 per 1,000 person-years among patients age 70 without diabetes versus a rate of 10 to 18.3 for those with diabetes, depending on age at onset:

• Diabetes onset 5 years earlier: 10.0 per 1,000 person-years
• Diabetes onset 6-10 years earlier: 13.0 per 1,000 person-years
• Diabetes onset 10+ years earlier: 18.3 per 1,000 person-years

The strongest connection with incident dementia appeared to be younger age at onset of type 2 diabetes. Patients at age 55 who were diagnosed with diabetes within the past five years saw a twofold increased risk for incident dementia; those age 60 who were diagnosed with diabetes six to 10 years prior saw a similar twofold increased risk. However, late-onset diabetes wasn’t found to be tied to incident dementia. Prediabetes (fasting blood glucose of 110-125 mg/dL) also was not linked to risk of subsequent dementia. Singh-Manoux said this finding suggested that “a certain threshold of high glucose” might be needed to ultimately see hyperglycemia-induced brain injury.

However, cardiovascular comorbidities played into this link. Patients with diabetes who also had a stroke had a dramatically higher risk for dementia. Those with three heart conditions — stroke, coronary heart disease and heart failure – were at five times increased risk for subsequent dementia. Thus, these findings emphasize the importance of age at diabetes onset and cardiovascular comorbidities, when determining risk for dementia, the study authors said.

A few possible explanations could explain the connection between diabetes and dementia. “One hypothesis is that brain metabolic dysfunction is the primary driver of Alzheimer disease, highlighting the role of decreased transport of insulin through the blood-brain barrier, impairments in insulin signaling and consequently decreased cerebral glucose utilization,” they wrote. This idea was supported by findings from the 2019 SNIFF trial, which found some benefit with 40 IU of daily intranasal insulin for Alzheimer’s disease patients. The group also suggested that episodes of hypoglycemia, more often experienced by those with a longer diabetes duration, may increase the risk for dementia.

Reference: MedPage Today (April 27, 2021) “Diabetes, Dementia, and Age: What’s the Link?”

Suggested Key Terms: Elder Law Attorney, Elder Care, Caregiving, Dementia, Diabetes