Texas Estate Planning

Latest on the Queen of Soul’s Estate

The IRS said that Aretha Franklin’s estate owed more than $7.8 million in unpaid income taxes, interest and penalties from 2010 to 2017.
The Detroit Free Press’ recent article entitled “Aretha Franklin estate reaches deal with IRS to pay off claimed $7.8 million tax debt” reports a big breakthrough. It seems that Franklin’s four sons and the IRS have reached a settlement that would expedite the payment of the remaining tax burden and allow her sons access to some of the money from their late mother’s fortune.
Aretha’s heirs have not yet inherited anything from the estate because of the IRS situation.
In a petition filed February 19 in Oakland County Probate Court, the estate said the proposed arrangement includes an immediate $800,000 payment to the IRS. This is despite the fact that the estate continues to question the total tax bill owed.
Since her death, Franklin’s estate has been steadily paying on the tax debt, as well as the constantly growing interest, as it appeals the IRS’s claimed total. As of December 2020, the balance was $4.75 million.
The new petition says the final IRS bill will be determined “by agreement or litigation.”
The agreement between the estate and the IRS details the way in which Aretha’s posthumous revenue will be distributed, until the tax debt is resolved. Backdated to January 1 of this year, it includes new income from song royalties, licensing agreements and other money streams. This agreement states that 45% of quarterly revenue will go toward the existing IRS balance. 40% would also be earmarked for an escrow account to deal with the taxes due on the newly generated income. The other 15% of revenue would be used for managing the estate.
The agreement also provides an immediate $50,000 payment to each of Franklin’s four sons and approves quarterly cash payouts to them. This proposed deal, authorized by 10 attorneys representing the sons, was submitted to the court by attorney Reginald Turner. The Detroit lawyer and incoming American Bar Association president was appointed last year as temporary personal representative of the Franklin estate. The agreement has to be approved by Judge Jennifer Callaghan to be executable.
Franklin died in August 2018, after a long battle with cancer.
Reference: Detroit Free Press (March 1, 2021) “Aretha Franklin estate reaches deal with IRS to pay off claimed $7.8 million tax debt”

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”

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?”

How Do I Ask My Parents About Their Estate Plan?

Next Avenue’s recent article entitled “Mom, Do You Have a Will?” says that many older adults and their children don't want to talk about death. Of course, you could simply ask your parents about their wishes. How do you make sure the transition after they have died is uncomplicated?

If you die with very few assets, and you only have one child, you may not need a will. However, if you want to leave something to a charity or a dear friend, you’ll need one. If you have more assets or more children, you should hire an experienced estate planning attorney to help.

If your parent is a part of a blended family it is even more important. That is because you want to avoid either a full or partial disinheritance of a surviving spouse or their children. It’s also important to prepare a will and appoint guardians, if there are minor children or adult children with special needs.

Wills are especially important if heirs might fight over the estate, or if you want certain assets to go to specific people.

In addition, single people should have a plan for their assets, especially if they’re in a committed relationship but not married. That’s because state inheritance laws don’t provide for a domestic partner to inherit.

A will is an important first step to make certain that a relationship is recognized before a loved one passes away, so the remaining partner can access their right to property or benefits.

If you die without a will, a situation known as intestate succession, your assets may be distributed according to state probate law. That schedule may differ from what you would want.

When asked if they have a will in place, some older adults will say they’re prepared. However, in truth they aren’t prepared at all. They may have a will that’s old and no longer relevant to their current situation or may have not signed or filed their will and other important estate planning papers.

Clarifying the status of older adults' wills is critical to a smoother transition of assets and should be addressed when they’re of sound mind and clearly able to make their own decisions about their estates.

Reference: Next Avenue (Sep. 14, 2022) “Mom, Do You Have a Will?”

What Is a Living Will?

During a medical crisis, family members frequently are called upon to make decisions quickly on whether to withhold or provide life-sustaining treatments. You may already have a durable power of attorney for health care—a legal document that allows your designated agent or proxy to make medical decisions for you, if you become incapacitated. However, the instructions in a living will can be used only when the person named in the living will has no prospect of recovery or cure.

Forbes recent article entitled “How Does A Living Will Work?” says that adding a living will to your estate plan can mean the difference between your family having questions later or knowing they made the right decision for you, when you were unable to make end-of-life medical decisions for yourself.

A living will is a legal document that states your wishes on receiving or declining medical care or life-sustaining treatments in the event you become terminally ill or injured and unable to communicate those decisions for yourself. The person named in the living will is known as the principal or declarant. The individual named to carry out the wishes of the principal on the living will may be called the attorney-in-fact or health care proxy.

The living will gives limited authority to the attorney-in-fact on behalf of the principal who’s no longer able to communicate their preferences to withhold or withdraw artificial means of life support or life-sustaining treatments. The document  should include your wishes for receiving or going without treatment when your condition isn’t expected to improve and treatment would extend your life for only a limited time.

The living will is designed to apply only in very limited situations when the principal is so terminally ill that the principal will likely die within a short period of time. Life-sustaining treatments discussed in a living will may include:

• Artificial nutrition (via feeding tube)
• Artificial hydration (via feeding tube or IV)
• Heart-lung machines
• Dialysis
• Ventilators
• Cardio-pulmonary resuscitation (CPR); or
• Other extraordinary measures.

Living wills can also detail issues like pain management and palliative care and can even include provisions like “I would prefer to die at home.”

Reference: Forbes (Aug. 18, 2022) “How Does A Living Will Work?”

What Is a Community Property Trust?

The are many variables in the particulars of property ownership styles across the states; however, some general rules apply in each case. Note that any state that’s not a community property state is a common-law state.

Kiplinger’s recent article entitled “How Community Property Trusts Can Benefit Married Couples” explains that community property states offer a distinct tax advantage for couples’ assets when a spouse dies. However, if you live in a common-law state, know that some states have passed statutes empowering married couples living in any common-law state to establish a community property trust with a qualified trustee. With this, they get a step-up in cost basis at each death, something not previously available in common-law states.

Under community property law, each member of a married couple owns one-half of all the property, with all the rights of ownership. Typically, all property acquired during a marriage is community property, except property acquired by gift or an inheritance.

Under federal income tax law, all community property (including both the decedent’s one-half interest in the community property and the surviving spouse’s one-half interest in the community property) receives a new basis at the death of the first spouse equal to its fair market value; in other words, the cost basis is stepped-up, and the assets may be sold without recognizing a capital gain.

Property only in the name of the second spouse to pass can receive a second step-up in basis, but there’s no second step-up for those assets that were placed into irrevocable trusts prior to the second death.

Under common law, married couples generally own assets either jointly or individually. When the first spouse dies, assets in the decedent spouse’s name, or in the name of a revocable trust, are stepped-up. Assets held jointly at death only receive a step-up in basis on half the property. And the assets in the surviving spouse’s sole name are not stepped-up. However, when the surviving spouse dies, assets held in his or her sole name can get a step-up in basis. Again, this doesn’t apply to assets placed into irrevocable trusts before death.

Right now, five common-law states have passed community property trust statutes that empower a married couple to convert common-law property into community property. They are Alaska, Florida, Kentucky, South Dakota, and Tennessee.

The purpose of community property trusts is to let married couples living in the resident state and others living in common-law states to also get a stepped-up basis up to all assets they own at the first death, just like in community property states. Residents who live in a common-law state that doesn’t offer this trust can still execute a community property trust in one of the community property trust states but must appoint a trustee in that state.

Reference: Kiplinger (Sep. 18, 2022) “How Community Property Trusts Can Benefit Married Couples”

What Do I Need to Do When a Loved One Dies?

The death of a loved one is hard to endure. It can become all-consuming. When someone you love passes, there are new matters that need to be addressed.

Kiplinger’s recent article entitled “A Checklist for What to Do (and NOT Do) After Someone Dies” says that it’s vital to handle these matters today and not put them off until some date in the future, which usually never comes until it becomes a crisis.

When a spouse dies and leaves their assets to the surviving spouse, the mistake many people make is that the surviving spouse often leaves the assets they inherited in their joint names or in their deceased spouse’s name.

As the years pass, the surviving spouse’s health may also begin to decline. The spouse frequently only survives a few years after the first decedent spouse.

When that happens, and the original spouse’s assets were not retitled, it can become an even more difficult process for the heirs.

This is how a typical scenario can play out: the father dies and leaves everything to the mother.

Mom calls everyone she can think of but misses several important matters. She then passes and the heirs now, while in a state of mourning, have to try to settle her affairs.

The issue is that they will now have a much more complicated task ahead of them than Mom did when she settled Dad’s affairs.

They’ll have several more steps to go through – because the mother never retitled some of the father’s original assets.

Mom unknowingly made a difficult job even harder on her heirs by not getting everything transferred over when her husband passed.

Speak with an experienced estate planning attorney to make sure you have your assets titled correctly when a spouse dies.

Reference: Kiplinger (Aug. 24, 2022) “A Checklist for What to Do (and NOT Do) After Someone Dies”

What Did George Harrison Leave to His Sister in His Estate Plan?

Ex-Beatle George Harrison promised to take care of his sister, Louise, for the rest of her life. She thinks he’d be horrified to know that she no longer gets a pension. Even so, she says she’s not upset about it. She did share the one regret she had, though.

MSN’s recent article entitled “George Harrison’s Sister Said He Would Have Been ‘Horrified’ to Learn She Was Cut Off by His Estate” says that in the 1990s, Harrison and Louise had a fight over a bed-and-breakfast. She converted her Illinois home into a bed-and-breakfast called “A Hard Day’s Night.” Louise didn’t own the establishment but used her name and connection to George to promote it. He didn’t appreciate this, and the siblings lost contact.

Before his death, though, the two siblings reconnected. Louise drove to New York to visit him in the hospital, where he was getting treatment for cancer.

“We were able to look into each other’s eyes again with love,” she told the Liverpool Echo in 2001. “It was a very, very positive and loving meeting. I felt very much at peace as I drove home after seeing him. I hated seeing him in that shape when he had been such a vital, wonderful man. But he still had his humor. It was distressing, but also I knew that he was on his way, back to where he belonged.”

In 1980, Harrison set up a pension for Louise and paid her $2,000 every month. He told her that he wanted to take care of her.

“My second husband was an alcoholic. Both of my husbands were alcoholics,” Louise told the Daily Mail in 2016. “I had been beaten up a few times. George said to me, ‘Don’t go get married again. You don’t seem to choose the right people very well. Let me fix you something to live on.’ It was supposed to be a lifelong pension. It was a small amount. That was fine. That was okay.”

A year after Harrison’s death, however, his estate unexpectedly cut her off. Louise says she never knew why. While she thought her brother would have been upset, she said that she tried not to be.

“George would’ve been horrified knowing I was cut off,” she said. “It was such a small amount. And I think he left something like $300 million. Let’s put it this way, some people were more into money than I was. Money is not the most important. I learned that from George.”

“I live modestly, I don’t hold anyone responsible for me and I’m happy to live like that,” she said.

Reference: MSN (Sep. 23, 2022) “George Harrison’s Sister Said He Would Have Been ‘Horrified’ to Learn She Was Cut Off by His Estate”