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”

The Difference between Revocable and Irrevocable Trust

A living trust can be revocable or irrevocable, says Yahoo Finance’s recent article entitled “Revocable vs. Irrevocable Trusts: Which Is Better?” And not everyone needs a trust. For some, a will may be enough. However, if you have substantial assets you plan to pass on to family members or to charity, a trust can make this much easier.

There are many different types of trusts you can establish, and a revocable trust is a trust that can be changed or terminated at any time during the lifetime of the grantor (i.e., the person making the trust). This means you could:

• Add or remove beneficiaries at any time
• Transfer new assets into the trust or remove ones that are in it
• Change the terms of the trust concerning how assets should be managed or distributed to beneficiaries; and
• Terminate or end the trust completely.

When you die, a revocable trust automatically becomes irrevocable and no further changes can be made to its terms. An irrevocable trust is permanent. If you create an irrevocable trust during your lifetime, any assets you transfer to the trust must stay in the trust. You can’t add or remove beneficiaries or change the terms of the trust.

The big advantage of choosing a revocable trust is flexibility. A revocable trust allows you to make changes, and an irrevocable trust doesn’t. Revocable trusts can also allow your heirs to avoid probate when you die. However, a revocable trust doesn’t offer the same type of protection against creditors as an irrevocable trust. If you’re sued, creditors could still try to attach trust assets to satisfy a judgment. The assets in a revocable trust are part of your taxable estate and subject to federal estate taxes when you die.

In addition to protecting assets from creditors, irrevocable trusts can also help in managing estate tax obligations. The assets are owned by the trust (not you), so estate taxes are avoided. Holding assets in an irrevocable trust can also be useful if you’re trying to qualify for Medicaid to help pay for long-term care and want to avoid having to spend down assets.

But again, you can’t change this type of trust and you can’t act as your own trustee. Once the trust is set up and the assets are transferred, you no longer have control over them.

Speak with an experienced estate planning or probate attorney to see if a revocable or an irrevocable trust is best or whether you even need a trust at all.

Reference: Yahoo Finance (Sep. 10, 2022) “Revocable vs. Irrevocable Trusts: Which Is Better?”

Does Potential IRS Change Have an Impact on Estate Plan?

The new federal regulation would require many people who inherit money through traditional IRAs, as well as 401(k)s, 403(b)s, and eligible 457(b)s to withdraw funds from the accounts every year over a 10-year period, according to The Wall Street Journal.

Money Talks News’ recent article entitled “How an IRS Change Could Hurt Your Heirs” says that the change would apply to most beneficiaries other than spouses, and would apply to those who inherited money after 2019.

Children 21 and older, grandchildren and most others who get money from an affected account would need to follow the new regulations or rules.

The proposed change would require beneficiaries to take minimum taxable withdrawals every year for 10 years from their inheritance in situations where the original account owner died on or after April 1 of the year of his or her 72nd birthday.

These withdrawals, technically known as required minimum distributions (RMDs), must deplete the account within the 10-year period.

Heirs would pay a penalty of 50% on any RMD amounts they didn’t withdraw according to the schedule defined by the new IRS rules.

The proposed change has the potential to leave your heirs less wealthy. The reason is because the money you bequeath to heirs would have less time to grow in tax-advantaged accounts before they would be forced to withdraw it.

Over time, this can make a big difference in how much money they accumulate from the initial amount you leave them.

The proposed rules are designed to clarify changes resulting from the federal Secure Act of 2019.

If the IRS moves forward with the changes, the new rules will add to the growing number of reasons why it makes sense for some people to consider putting money into a Roth IRA instead of a traditional IRA.

With a Roth IRA, the account owner pays taxes upfront As a result, heirs won’t owe any taxes on the money they inherit. Therefore, the new rules wouldn’t apply to Roth IRAs.

Reference: Money Talks News (May 13, 2022) “How an IRS Change Could Hurt Your Heirs”

Is Putting a Home in Trust a Good Estate Planning Move?

A typical estate at death will include a personal residence. It’s common for a large estate to also include a vacation home, or family retreat. Leaving real property in trust is common.

Estate plans that include a revocable trust will fund the trust by a pour-over, says Kiplinger’s recent article entitled “Should You Own Your Home in Your Trust?”

A settlor (the person establishing a trust) often will title their home to the revocable trust, which becomes irrevocable at death.

Another option is a Qualified Personal Residence Trust, which is irrevocable, to gift a valuable home to a trust for the settlor’s children. With a QPRT, the house is passed over a term of years while the original owner continues to live there, so the gift passes with little or no gift or estate tax.

Some trusts arising from a decedent estate will hold the home belonging to the settlor without any instructions for its disposal or retention. Outside of very large trusts, a requirement to actually purchase homes for beneficiaries in the trust is far less common.

It is more common in a large trust to have terms that let the trustee buy a home for a beneficiary outside the trust or keep the settlor’s home in the trust for a beneficiary’s use, including purchasing a replacement home when requested.

The trustee will hopefully propose a plan that will satisfy the beneficiary without undue risk to the trust estate or exceeding the trustee’s powers. The most relevant considerations for homeownership in a trust are:

• The competing needs of other trust beneficiaries
• The purchase price and costs of maintaining the home
• The size of the trust as compared to those costs
• Other sources of income and resources available to the beneficiary; and
• The interests of the remaindermen (beneficiaries who will take from the trust when the current beneficiaries’ interests terminate).

The terms of the trust may require the trustee to ignore some of these considerations.

Each situation requires a number of decisions that could expose the trustee to a charge that it has acted imprudently.

Those who want to create a trust should work with an experienced estate planning attorney to avoid any issues.

Reference: Kiplinger (Feb. 8, 2022) “Should You Own Your Home in Your Trust?”

Can I Split My Inheritance with My Sibling?

Let’s say that you are the beneficiary of your brother’s IRA.

All of his assets were supposed to be split between you and your sister according to a living trust. However, the IRA administrator says the IRA only has one beneficiary… you. How can you spilt this equally?

Can you sell half and give your other sibling her money?

What is the effect on taxes and the cost basis?

nj.com’s recent article entitled “Can I give my brother half of my inheritance?” says that it’s important to review beneficiary designations to make sure they reflect your wishes.

In this case, you would essentially be making a gift to your sister from the IRA account that you inherited.

To do this, you would have to liquidate some of the account and pay the taxes on the liquidated amount, if it is a traditional IRA.

You would also have to file a federal gift tax return for the amount gifted above the $16,000 annual exclusion amount. However, no gift tax should be due if you have less than $12.06 million in your estate and/or lifetime gifts made above the annual exclusion amounts.

The unified tax credit provides a set dollar amount that a person can gift during their lifetime before any estate or gift taxes apply. This tax credit unifies both the gift and estate taxes into one tax system that decreases the tax bill of the individual or estate, dollar to dollar.

As of 2021, the federal estate tax is 40% of the inheritance amount. However, the unified tax credit has a set amount that a person can gift during his or her lifetime before any estate or gift taxes are due. The 2021 federal tax law applies the estate tax to any amount above $11.7 million. This year’s amount is $12.06 million.

While you would receive a step-up in basis, the cost basis of your brother’s gifted share would be the value at the time the gift is made.

Another thought is that if there are other assets in the estate, perhaps your sister could have a greater share of those, so you could keep the IRA intact to avoid paying taxes at this time.

Reference: nj.com (Feb. 23, 2022) “Can I give my brother half of my inheritance?”

Does My State Have an Inheritance Tax?

Real Simple’s recent article entitled “Here's Which States Collect Zero Estate or Inheritance Taxes” explains that inheritance taxes are levies paid by the living beneficiary who gets the inheritance. And both federal and state governments can apply estate taxes, which are levied against the assets that are bequeathed.

Just five states apply an inheritance tax: New Jersey, Nebraska, Iowa, Kentucky and Pennsylvania. There are 12 states that have an estate tax: Washington, Oregon, Minnesota, Illinois, New York, Maine, Vermont, Rhode Island, Massachusetts, Connecticut, Hawaii and the District of Columbia. Maryland collects both. As a result, there are 32 states that don’t collect death-related taxes: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Delaware, Florida, Georgia, Hawaii, Idaho, Indiana, Kansas, Louisiana, Michigan, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, Wisconsin and Wyoming.

To better estimate and project the possible outcomes, you should consider an intergenerational planning meeting. There are some families that like the transparency of establishing a trust. This can minimize fighting and avoid probate. Trusts are also taxed differently than individuals. There’s more certainty about who will bear the costs.

There are families that gift assets, while an elderly or chronically ill person is still alive. These gifts can be subject to taxation, but there are exceptions for tuition and medical expenses. Gifts to children may also be excluded.

There’s no one-size-fits-all approach to transferring valuable or sentimental assets. You can list the most important people and causes in your life. If that list has people in other states, it will be even more important to prepare everyone for their role and responsibilities with the help of an experienced estate planning attorney.

If inheritance tax sounds intimidating, start small with updating the beneficiary forms on your bank accounts and employer-led retirement accounts. Organize documents, such as insurance information and house titles and deeds. Make them secure but accessible to those who might need them, if you're unavailable.

Even if you're socially distancing, many estate planning attorneys offer consultations via video conferencing. There's no reason to delay another year to clarify your inheritance and estate plans.

Reference: Real Simple (Nov. 24, 2021) “Here's Which States Collect Zero Estate or Inheritance Taxes”

What Does the Role of Estate Executor Entail?

Being named as the executor of a will is an honor and an obligation. However, depending on the size of the estate and your relationship to the deceased, performing the duties of an executor can feel like a second job, says Kiplinger’s recent article entitled “What to Do When You’re the Executor.”
This can be a real challenge for adult children who are responsible for executing the estate of the last surviving parent. These executors are often required to distribute assets among several beneficiaries, sell the family home and look over all the family belongings. If the family is a bit dysfunctional, if it’s a big estate, or if their parents’ estate planning was poor (or nonexistent), it’s even more time-consuming. Let’s look at some basic steps most executors should follow:
Get a dozen copies of the death certificate and file the will. Copies of the death certificate are usually available from the funeral home. You must then file the will and death certificate with the county probate court. If probate is required, you must get a letter from the court, known as a letter of testamentary. This gives you legal authority over the estate.
Assemble your pro team. In most instances, you’ll need an experienced estate planning attorney to help you navigate the probate court. The attorney who helped the decedent draw up his or her will is a good choice, as he or she is most likely familiar with the estate.
Create an inventory of assets. If the deceased didn’t keep good records of bank and brokerage accounts, insurance policies, tax returns, and other documents, you may need to track down some of these accounts.
Protect personal property. If the estate includes a home, the executor is responsible for maintaining the property and paying the mortgage, taxes and insurance until it’s sold.
Set up a separate bank account. An executor will need to pay bills and make deposits on behalf of the estate, so set up a bank account in the name of the decedent’s estate. This will also provide you a record of transactions that will prove useful if anyone challenges your administration of the estate.
Pay the decedent’s debts. This is a crucial action. If the decedent’s unpaid bills and other debts aren’t paid before the estate is distributed to heirs, creditors could sue. The executor is also responsible for filing a state and federal tax return to pay any taxes owed (or claim a refund).
Communicate with the beneficiaries on a regular basis. Don’t leave the heirs in the dark.
Distribute the assets. Finally, you can distribute the assets after all debts are paid, which may first require court approval.
If this sounds like more than you can handle, you can decline to act as an executor. Sometimes that’s the right choice.
Reference: Kiplinger (Oct. 29, 2021) “What to Do When You’re the Executor”

Are Gen Z’s Ready for Estate Planning?

Once their 401K plan and IRAs are set up, many Gen Z’ers turn their attention to their parents’ financial planning. They want to make sure their parents have also maximized their tax savings, so they can get the most out of their inheritance. Forbes’ recent article entitled “What Gen Z Needs To Know About Estate Taxes” tells us what this savvy generation needs to know about the estate tax.
The estate tax, also known called “the death tax,” is a completely different tax than income tax. Income tax is a yearly tax on your income earned during that year.
The estate tax is a one-time tax on a person’s assets after they die. It’s due nine months after a person dies, if certain monetary thresholds are met. There are two types of estate tax—state and federal.
When a spouse dies and leaves everything to the surviving spouse, there’s usually no estate tax due because there’s no estate tax due if you leave all your assets to your spouse.
However, estate tax returns would need to be filed.
The government doesn’t want the surviving spouse to be a ward of the state. The surviving spouse will have access to the funds to live on and then they’ll be taxed after both spouses die. Therefore, estate taxes will need to be paid after both spouses die and before the assets are distributed to the children.
Another way to save on estate taxes would be to start a gifting program. Any person can gift up to $15,000 a year to a person with no tax consequences. A husband with two children could gift $15,000 to each of his children, and his spouse could do the same. As a result, this would transfer $60,000 on a yearly basis to the next generation with no tax consequences.
There’s also the federal estate tax. In 2021, that tax is imposed on estates with assets at or over $11,700,000. However, in 2026 the exemption amount drops to $5 million (adjust yearly for inflation). The federal estate tax rate is a whopping 40%.
In states like Washington and Hawaii, estate tax rates can be as high as 20%. There are a number of states, like Massachusetts, where estate taxes can hit 16% (New York, Minnesota, Oregon, Illinois, Rhode Island, Maryland, Vermont, and D.C.). Connecticut and Maine’s estate tax is 12%. Every state with estate taxes has a different exemption level, so talk to an experienced estate planning attorney about how to proceed.
Reference: Forbes (Aug. 10, 2021) “What Gen Z Needs To Know About Estate Taxes”

Should I Try Do-It-Yourself Estate Planning?

US News & World Report’s recent article entitled “6 Common Myths About Estate Planning explains that the coronavirus pandemic has made many people face decisions about estate planning. Many will use a do-it-yourself solution. Internet DIY websites make it easy to download forms. However, there are mistakes people make when they try do-it-yourself estate planning.

Here are some issues with do-it-yourself that estate planning attorneys regularly see:

You need to know what to ask. If you’re trying to complete a specific form, you may be able to do it on your own. However, the challenge is sometimes not knowing what to ask. If you want a more comprehensive end-of-life plan and aren't sure about what you need in addition to a will, work with an experienced estate planning attorney. If you want to cover everything, and are not sure what everything is, that's why you see them.

More complex issues require professional help. Take a more holistic look at your estate plan and look at estate planning, tax planning and financial planning together, since they’re all interrelated. If you only look at one of these areas at a time, you may create complications in another. This could unintentionally increase your expenses or taxes. Your situation might also include special issues or circumstances. A do-it-yourself website might not be able to tell you how to account for your specific situation in the best possible way. It will just give you a blanket list, and it will all be cookie cutter. You won't have the individual attention to your goals and priorities you get by sitting down and talking to an experienced estate planning attorney.

Estate laws vary from state to state. Every state may have different rules for estate planning, such as for powers of attorney or a health care proxy. There are also 17 states and the District of Columbia that tax your estate, inheritance, or both. These tax laws can impact your estate planning. Eleven states and DC only have an estate tax (CT, HI, IL, ME, MA, MN, NY, OR, RI, VT and WA). Iowa, Kentucky, Nebraska, New Jersey and Pennsylvania have only an inheritance tax. Maryland has both an inheritance tax and an estate tax.

Setting up health care directives and making end-of-life decisions can be very involved. It's too important to try to do it yourself. If you make a mistake, it could impact the ability of your family to take care of financial expenses or manage health care issues. Don’t do it yourself.

Reference: US News & World Report (July 5, 2021) “6 Common Myths About Estate Planning”

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What Exactly Is a Trust?

MSN Money’s recent article entitled “What is a trust?” explains that many people create trusts to minimize issues and costs for their families or to create a legacy of charitable giving. Trusts can be used in conjunction with a last will to instruct where your assets should go after you die. However, trusts offer several great estate planning benefits that you don’t get in a last will, like letting your heirs to see a relatively speedy conclusion to settling your estate.
Working with an experienced estate planning attorney, you can create a trust to minimize taxes, protect assets and spare your family from going through the lengthy probate process to divide up your assets after you pass away. A trust can also let you control to whom your assets will be disbursed, as well as how the money will be paid out. That’s a major point if the beneficiary is a child or a family member who doesn’t have the ability to handle money wisely. You can name a trustee to execute your wishes stated in the trust document. When you draft a trust, you can:
Say where your assets go and when your beneficiaries have access to them
Save your beneficiaries from paying estate taxes and court fees
Shield your assets from your beneficiaries’ creditors or from loss through divorce settlements
Instruct where your remaining assets should go if a beneficiary dies, which can be helpful in a family that includes second marriages and stepchildren; and
Avoid a long probate court process.
One of the most common trusts is called a living or revocable trust, which lets you put assets in a trust while you’re alive. The control of the trust is transferred after you die to beneficiaries that you named. You might want to ask an experienced estate planning attorney about creating a living trust for several reasons, such as:
If you’d like someone else to take on the management responsibilities for some or all of your property
If you have a business and want to be certain that it operates smoothly with no interruption of income flow, if you die or become disabled
If you want to shield assets from the incompetency or incapacity of yourself or your beneficiaries; or
If you want to decrease the chances that your will may be contested.
A living trust can be a smart move for those with even relatively modest estates. The downside is that while a revocable trust will usually keep your assets out of probate if you were to die, there still will be estate taxes if you hit the threshold.
By contrast, an irrevocable trust can’t be changed once it’s been created. You also relinquish control of the assets you put into the trust. However, an irrevocable trust has a key advantage in that it can protect beneficiaries from probate and estate taxes.
In addition, there are many types of specialty trusts you can create. Each is structured to accomplish different goals. Ask an experienced estate planning attorney about these.
Reference: MSN Money (July 9, 2021) “What is a trust?”