Texas Estate Planning

What will Estate Tax Exclusion Be Next Year?

Starting in 2023, individuals can transfer up to $12.92 million to heirs, during life or at death, without triggering a federal estate-tax bill, up from $12.06 million in 2022, reports CNBC’s recent article entitled “IRS bumps up estate-tax exclusion to $12.92 million for 2023. Here’s what that means for wealthy Americans.”

As married couples may share exclusions by electing portability, their combined limits are double, allowing transfers of up to nearly $26 million for 2023, compared to just over $24 million this year.

Next year, there’s also a higher annual limit on tax-free gifts. In 2023, filers can give away $17,000 per recipient, without reducing their $12.92 million lifetime exclusion.

That’s an increase from this year’s $16,000.  

These increases are part of the IRS’s annual inflation adjustments, impacting federal income tax brackets, standard deductions and dozens of other provisions.

With the stock market down in 2022, many are sitting on lower-value portfolios and the higher exclusion next year may provide opportunities for “more aggressive” estate-planning techniques, such as shielding wealth via trusts, he said.

The estate-tax exclusion has roughly doubled since Republicans’ signature tax overhaul in 2017. Without further action from Congress, the provision will sunset after 2025, leaving a limited time to leverage the higher limits.

Regardless of what legislation happens, 2023 is shaping up to be a very big year for estate planning.

Reference: CNBC (Oct. 19, 2022) “IRS bumps up estate-tax exclusion to $12.92 million for 2023. Here’s what that means for wealthy Americans”

What’s the Most Common Type of Debt for Retirees?

The goal of beginning your retirement in the black is admirable, the reality can be quite different.

Money Talks News’ recent article entitled “Sadly, This Is by Far the Most Common Debt Among Retirees” reports that a recent survey of 1,998 American retirees between the ages of 62 and 75 found that many retirees have debt.

Some likely ran out of time to pay off their debts before retiring, and others may have entered the red or simply deepened their debt level after leaving work.

Whatever the reason, these are the most common types of debt that retirees report — along with other debts that are part of retirement for many people.

1. Credit card debt. A total of 40% of retirees said they had this type of debt in 2022, compared to 43% in 2020.

Credit card debt is almost always expensive, but it’s much scarier when you do not have a regular paycheck to help you pay bills.

2. Mortgage. Retirees who said they had this type of debt in 2022 was 30% and is not available for 2020.

A home loan is one of the few types of borrowing that can be classified as “good debt.” Some experts say paying off a mortgage before retirement is advisable, but others argue against such a strategy.

3. Car loans. Retirees who said they had this type of debt in 2022 was 23%, compared to 30% in 2020.

Unless you have a lot of money in savings, an auto loan is hard to avoid — whether you are retired or not. Therefore, it makes sense that nearly a quarter of retirees are still paying off this type of loan.

4. Less common types of debt. Retirees said they’re also carrying these types of debts in 2022:

• Medical debt: 11%
• Home equity loan: 7%
• Student loan: 4%
• Business loan: 1%

Reference: Money Talks News (Oct. 20, 2022) “Sadly, This Is by Far the Most Common Debt Among Retirees”

New Report Released on Private Sector Medical Care Versus the VA

Advocates said the lack of clear data on the issue is concerning in light of the significant expansion in the program in recent years and the emphasis placed on the community care program by lawmakers and federal officials, says Military Times’ recent article entitled “Private sector medical care may not be faster or cheaper than VA.”

“The complexity of the Veterans Health Administration patient population makes care coordination critical for improving patient outcomes and decreasing costs,” researchers with the RAND Corporation wrote in the new report, released Tuesday. “Poorly coordinated care between VHA and community care providers could result in confusion for patients, duplicative tests, increased costs, and lower-quality care.”

The VA will close down the Office of Community Care soon and replace it with a new agency. The program has expanded significantly in recent years, with critics of the VA health care system saying the private sector physicians are needed to cut down on veterans’ wait and travel times for health care.

VA officials have reported that 44% of all health services are handled through community care offerings. The budget for those programs more than doubled from fiscal 2014 to fiscal 2021, when spending was more than $18.5 billion. That equated to nearly 20% of all VHA spending. The fiscal 2023 budget calls for that total to rise to about 23%.

The new RAND analysis said data still doesn’t exist to prove claims that community care is a better choice for most veterans.

“Little is known about how the costs of care provided directly by VHA compare with the costs of community care,” the authors wrote. “Although comparisons between the cost of VHA-delivered and community care are limited, there are some indications that community care may be more expensive than VHA-delivered care.”

Similarly, the researchers said that studies so far indicate that access to private sector medical appointments “may be no better than access to care at VHA facilities,” especially as VA has improved appointment wait times in recent years.

“However, there may be certain populations of veterans for whom community care has significantly improved access,” the report states.

“Rural veterans, who make up nearly half of VHA patients, are more likely to live in areas with provider shortages and hospital closures, and they generally have to drive greater distances to see providers community care may improve access for [those] veterans,” the report notes.

The report also says that private sector physicians without specific training on veterans’ issues may be more likely to miss complications arising from military sexual trauma, battlefield injuries, or toxic exposure in the service.

“As Secretary of Veterans Affairs Denis McDonough recently stated, the future of VHA depends on its ability to attract veterans to its facilities and keep those veterans returning for their needed medical care,” the report states.

“Coordinating with community care providers and ensuring that eligible veterans can access the high-quality care they need in a timely fashion, whether at VHA facilities or in the community, will be integral to achieving those goals,” the report adds.

Reference: Military Times (Sep. 6,  2022) “Private sector medical care may not be faster or cheaper than VA”

The Latest on Actress Anne Heche's Estate

Twenty-year-old Homer Laffoon asked for a bond of $800,000 as part of his 'ex-parte application' with the Superior Court of California in Los Angeles County to extend his control as special administrator of his mother Actress Anne Heche's estate.

The Omaha World-Herald’s recent article entitled “Anne Heche's son bids to 'expand authority' over late mum's estate” reports that documents show the 20-year-old asserts the expansion is "necessary" as the "tangible personal property of the estate" located in Anne's apartment needs to be moved as soon as possible in order to "avoid additional fees, costs and possible loss".

Homer also claims checks made payable to his mom need to be negotiated, endorsed and deposited into a bank account in the name of the estate as soon as possible, so they are not voided.

He said permission to allow him more control would let him "collect all claims, rents and other income belonging to the estate; commence and maintain or defend suits and other legal proceedings" as well as "request and receive copies of the estate's financial records".

This would also let him "manage, perform and enforce the rights and interests" related to Anne's book, 'Call Me Anne', due for release in January 2023.

The request comes two weeks after a judge ruled Homer can for now oversee his mother’s estate.

Prior to a hearing next week about the late actress' estate, Homer claimed she had $400,000 to her name at the time of her death and said she lived in an apartment. She didn’t own any property.

Anne's ex James Tupper, and their 13-year-old son, Atlas, also attended the October 11 hearing at a Los Angeles court. James said that he believes his son and Homer's relationship will be strained if a neutral party is not present to help mediate the estate matters.

James was told he could file an objection to his ruling that Homer is fit to oversee the estate, with the next hearing scheduled in a month.

Anne died after suffering a "severe anoxic brain injury" as a result of a fireball car crash in August. She did not leave a will. She had Homer with ex-husband Coleman Laffoon to whom she was married from 2001 to 2009, and had 13-year-old Atlas with actor James Tupper, who she was with from 2007 to 2018.

Reference: Omaha World-Herald (Oct. 23, 2022) “Anne Heche's son bids to 'expand authority' over late mum's estate”

There are Ways to Transfer Home to Your Children

Kiplinger’s recent article entitled “2 Clever Ways to Gift Your Home to Your Kids” explains that the most common way to transfer a property is for the children to inherit it when the parent passes away. An outright gift of the home to their child may mean higher property taxes in states that treat the gift as a sale. It's also possible to finance the child's purchase of the home or sell the property at a discount, known as a bargain sale.

These last two options might appear to be good solutions because many adult children struggle to buy a home at today's soaring prices. However, crunch the numbers first.

If you sell your home to your child for less than what it's worth, the IRS considers the difference between the fair market value and the sale price a gift. Therefor., if you sell a $1 million house to your child for $600,000, that $400,000 discount is deemed a gift. You won't owe federal gift tax on the $400,000 unless your total lifetime gifts exceed the federal estate and gift tax exemption of $12.06 million in 2022, However, you must still file a federal gift tax return on IRS Form 709.

Using the same example, let’s look at the federal income tax consequences. If the parents are married, bought the home years ago and have a $200,000 tax basis in it, when they sell the house at a bargain price to the child, the tax basis gets split proportionately. Here, 40% of the basis ($80,000) is allocated to the gift and 60% ($120,000) to the sale. To determine the gain or loss from the sale, the sale-allocated tax basis is subtracted from the sale proceeds.

In our illustration, the parent's $480,000 gain ($600,000 minus $120,000) is non-taxable because of the home sale exclusion. Homeowners who owned and used their principal residence for at least two of the five years before the sale can exclude up to $250,000 of the gain ($500,000 if married) from their income.

The child isn't taxed on the gift portion. However, unlike inherited property, gifted property doesn't get a stepped-up tax basis. In a bargain sale, the child gets a lower tax basis in the home, in this case $680,000 ($600,000 plus $80,000). If the child were to buy the home at its full $1 million value, the child's tax basis would be $1 million.

Another option is to combine your bargain sale with a loan to your child, by issuing an installment note for the sale portion. This helps a child who can't otherwise get third-party financing and allows the parents to charge lower interest rates than a lender, while generating some monthly income.

Be sure that the note is written, signed by the parents and child, includes the amounts and dates of monthly payments along with a maturity date and charges an interest rate that equals or exceeds the IRS's set interest rate for the month in which the loan is made. Go through the legal steps of securing the note with the home, so your child can deduct interest payments made to you on Schedule A of Form 1040. You'll have to pay tax on the interest income you receive from your child.

You can also make annual gifts by taking advantage of your annual $16,000 per person gift tax exclusion. If you do this, keep the gifts to your child separate from the note payments you get. With the annual per-person limit, you won't have to file a gift tax return for these gifts.

Reference: Kiplinger (Dec. 23, 2021) “2 Clever Ways to Gift Your Home to Your Kids”

How Big Is the COLA for Vets This Year?

The big increase reflects the rising cost of inflation throughout the last year. In a statement, acting Social Security Administration Commissioner Kilolo Kijakazi said the move will give beneficiaries “more peace of mind and breathing room.”

Military Times recent article entitled “Veterans, retirees get 8.7% Social Security cost-of-living boost” says the move will directly impact roughly 65 million Americans getting Social Security benefits. VA officials said the average beneficiary will see an increase of about $140 in their monthly payouts. For a vet getting about $1,500 in monthly payouts, that level of increase would mean about $130 extra each month. And while the increase is for 2023, some veterans and retirees will see their first increase in their December 2022 checks.

The announcement also affects veterans and military retirees, whose benefits increases are tied to the Social Security figure. Last month, Congress approved legislation linking veterans payouts to the Social Security mark—a non-controversial but annual requirement for lawmakers. President Biden signed the measure into law this week.

The 2022 COLA was 5.9%. The 8.7% figure is the highest announced since 1981, when the COLA adjustment was more than 11%.

Whether that will be enough to address higher grocery and fuel costs is unclear. Advocacy groups in recent months have pushed for more assistance for vets and retirees dependent on the payouts, as inflation costs have risen.

Federal officials announced that the Consumer Price Index (CPI), a formula that measures the average change in the price of consumer goods, was at 8.2% in September. That’s higher than many outside analysts had anticipated. It could be a sign of continued higher costs for consumers for months to come.

About five million veterans and two million military retirees get benefits checks each month. The COLA increase legislation would apply to payouts for disability compensation, clothing allowance, dependency, and indemnity benefits, as well as other VA assistance programs.

In a statement, Representative Elaine Luria, D-Va. and the sponsor of House legislation linking veterans benefits to the Social Security boost, called the announcement “critical financial help to our veterans and their families during these challenging times.”

Reference: Military Times (Oct. 13, 2022) “Veterans, retirees get 8.7% Social Security cost-of-living boost”

Should I Know About Advance Directives?

Advance directives address the type of healthcare and medical treatment you’d want if you become incapacitated. MarketWatch’s recent article entitled “What happens if you’re incapacitated? How to get your advance directives in order” says if you don’t make these decisions now—and complete the necessary forms to state your wishes—someone else will make the decisions for you down the road.

Advance directives typically consist of a living will and a power of attorney for healthcare. Each state has its own statutory advance directive form. Because these state forms are legal documents, the wording can be pretty formal. People will sometimes forget they’ve filled out the forms. They also forget where they put them.

After completing the proper forms, you must get them to your medical providers, so they know whether to resuscitate you during a medical emergency or administer artificial feeding or hydration.

Make sure you have a discussion with your physician, family and close friends about your values, goals and fears concerning advance care planning.

You should tell them what forms of medical intervention you’d find acceptable and unacceptable—and what level of life-sustaining treatment you’d like if you’re deemed permanently unconscious. That may include considering these types of situations:

• If I am unconscious, in a coma, or in a vegetative state and there is little or no chance of recovery
• If I have permanent, severe brain damage that makes me unable to recognize my family or friends (for example, severe dementia)
• If I need to use a breathing machine and be in bed for the rest of my life
• If I have a condition that will make me die very soon, even with life-sustaining treatments
• If I have pain or other severe symptoms that cause suffering and can't be relieved
• If I have a permanent condition where other people must help me with my daily needs (for example, eating, bathing, toileting).

When sharing your end-of-life wishes with your physician, he or she may enter your comments into your electronic health record. That way any other healthcare provider with access to those records (such as a hospital system) can retrieve them.

Reference: MarketWatch (Oct. 14, 2022) “What happens if you’re incapacitated? How to get your advance directives in order.”

Major Blunders in Estate Planning

Kiplinger’s recent article entitled “5 Common Estate Planning Mistakes to Avoid” warns that if you overlook an important step or make a misstep in your estate planning, everything could be undone. You could instead burden your family with a challenging and headache-inducing estate.

There are many ways to get things wrong. Let’s look at a few:

1. Not preparing for incapacity. The main reason to create a will is because we know that some day we’ll pass away. A will lets your family know how to distribute your property and other assets. A well-thought-out estate plan should identify the people authorized to make important decisions on your behalf regarding finances, health care and other critical matters. This is accomplished with powers of attorney. Once you are unconscious or afflicted with dementia, it will be too late. Make a list of decision-makers now, inform them of your wishes and create the necessary powers of attorney.
2. Failing to include funeral and burial wishes. If you can purchase a burial plot and make funeral plans, put this in your estate planning documents. If you don’t, it may mean a lot of work for your family after your death. Name someone to be in charge of the funeral and burial arrangements and make sure that person understands your wishes. If you don’t detail your wishes prior to your death, it may become an issue for your loved ones.
3. Ignoring the tax implications of transferring property. As generous as it may seem to give property to your family during your lifetime, it is usually much smarter – and far more generous – to delay the transfer until you’re deceased. If you convey the deed to property to your next of kin before you die, they may see a hefty tax bill whenever they sell the same property. That’s because the basis for that property will be tagged to the date on which you made your purchase, not the date you made your gift. As a result, it could leave your heirs scrambling to pay an enormous sum that would have been averted, had they been granted the deed after your death.
4. Failing to designate backups for decision-makers. The best of plans can go south without a secondary beneficiary. This will address any unforeseen events. Name backups for your executor and other decision-makers. If they can’t fulfill their obligations, a court will name substitutes unless you’ve already planned for these contingencies.
5. Not tracking beneficiary designations. In addition to stating the beneficiaries and their respective shares in your will, you must also communicate a directive to your bank that sets forth the interests in your account after your death. If you fail to do this, the bank’s rules will override anything you’re written in your will as to that account. That means your percentages will be different from those expressed in your will.

Take steps now to make certain there are no hidden issues that will haunt your family after you’ve passed.

Reference: Kiplinger (Oct. 17, 2022) “5 Common Estate Planning Mistakes to Avoid”

Is a Baby Born After Dad’s Death Entitled to Social Security Benefits?

The Free Press’ recent article entitled “Courts Ponder Benefits In Florida Social Security In Vitro Fertilization Case” reports that a panel of the 11th U.S. Circuit Court of Appeals last week took up the issue and effectively sent the case to the Florida Supreme Court for an interpretation of state law. That court will examine the case and issue an opinion that will go back to the federal appeals court.

The panel said in its decision that a key issue about Florida law in the case is a “question of first impression for this court” — meaning a first-of-its-kind question. The appeals court pointed to different interpretations of the law by Kathleen Steele and the U.S. Social Security Administration.

“Given these two reasonable interpretations of the Florida statute at issue, and the lack of Florida case law on the issue, we believe it is the better option to certify this dispositive issue to the Florida Supreme Court,” said the decision, written by Judge Barbara Lagoa, a former Florida Supreme Court justice.

The judge also wrote that the case “requires us to apply old statutes to new problems.”

Mrs. Steele applied for Social Security Child’s Insurance Benefits shortly after P.S.S.’s birth. She included the child’s birth certificate, which listed Phillip Steele as the father. The Social Security Administration denied the claim in 2014, saying the child did “not meet the dependency requirement for benefits.” Lower courts upheld the agency’s denial of the claim, prompting Steele to appeal in 2020.

The case involves legal interpretations related to wills and intestacy. Intestacy deals with situations where wills don’t exist or where parts of estates are “not effectively disposed of by will,” according to state law.

Phillip Steele had a will, but the court said it must “determine whether Florida law authorizes P.S.S. to inherit a child’s share of Mr. Steele’s intestate personal property, as is required in order to recover CIB (Child’s Insurance Benefits).”

The lower courts concluded that, under Florida law, a child conceived after the father’s death, could inherit property only through a will and not intestacy. As a result, they said, P.S.S. was not eligible for the benefits.

Phillip’s will listed his children living at the time of his death, but it also said the terms “children” and “lineal descendants” was to include those later born or adopted. Kathleen contends P.S.S. was “provided for” in the will and that a state law “effectively vests such a child with intestate rights in the event he or she is provided for by the decedent’s will.” As such, she argued P.S.S. is considered a “child” within the meaning of the Social Security Act and is entitled to the benefits.

Reference: The Free Press (Oct. 18, 2022) “Courts Ponder Benefits In Florida Social Security In Vitro Fertilization Case”

The Benefits of a Good Estate Plan

If you don’t have a comprehensive estate plan, state law will control. That’s unlikely to coincide with what you would choose to do. MSN’s recent article entitled “What is estate planning?” discusses the benefits of estate planning.

Minimizes taxes. Clever structuring of flexible retirement accounts, such as a Roth IRA, can help funnel more tax-free money to your heirs, while other tax-planning strategies like strategic charitable giving can help you mitigate estate taxes.

Prevents family disputes. The possibility of a fight about who gets what of value or even a sentimental treasure can arise without proper planning.

Clarifies your directives. Although you may have always intended for your niece to get a certain heirloom, unless it’s written out in your estate plan, it may not get into her hands. If you clearly spell out your wishes with the help of an experienced estate planning attorney, you can help your loved ones remember you fondly or at least get what you intended.

Avoids the time and expense of probate court. Done correctly, a trust can help your family avoid the hassles of probate court. Because of the ease of using a trust, more people are doing an end-run around probate and setting up their assets this way. You don’t need as much wealth as you might think to make it worthwhile.

Keeps your family assets together. Trusts can be a good way to make sure your money stays in the family. With the help of an estate planning attorney, a trust can keep a beneficiary from blowing your lifetime of hard work in a few years.

Protects your heirs. If you have minor children, a will can instruct who will take care of them. A living will can help heirs avoid some difficult health decisions during a parent’s end of life.

Sound estate planning can help avoid several potentially troubling problems.

Reference: MSN (Oct. 13, 2022) “What is estate planning?”