Texas Estate Planning

Will Moving to a New State Impact My Estate Planning?

Since the coronavirus pandemic hit the U.S., baby boomers have been speeding up their retirement plans. Many Americans have also been moving to new states. For retirees, the non-financial considerations often revolve around weather, proximity to grandchildren and access to quality healthcare and other services.

Forbes’ recent article entitled “Thinking of Retiring and Moving? Consider the Financial Implications First” provides some considerations for retirees who may set off on a move.

1. Income tax rates. Before moving to a new state, you should know how much income you’re likely to be generating in retirement. It’s equally essential to understand what type of income you’re going to generate. Your income as well as the type of income you receive could significantly influence your economic health as a retiree, after you make your move. Before moving to a new state, look into the tax code of your prospective new state. Many states have flat income tax rates, such as Massachusetts at 5%. The states that have no income tax include Alaska, Florida, Nevada, Texas, Washington, South Dakota and Wyoming. Other states that don’t have flat income tax rates may be attractive or unattractive, based on your level of income. Another important consideration is the tax treatment of Social Security income, pension income and retirement plan income. Some states treat this income just like any other source of income, while others offer preferential treatment to the income that retirees typically enjoy.
2. Housing costs. The cost of housing varies dramatically from state to state and from city to city, so understand how your housing costs are likely to change. You should also consider the cost of buying a home, maintenance costs, insurance and property taxes. Property taxes may vary by state and also by county. Insurance costs can also vary.
3. Sales taxes. Some states (New Hampshire, Oregon, Montana, Delaware and Alaska) have no sales taxes. However, most states have a sales tax of some kind, which generally adds to the cost of living. California has the highest sales tax, currently at 7.5%, then comes Tennessee, Rhode Island, New Jersey, Mississippi and Indiana, each with a sales tax of 7%. Many other places also have a county sales tax and a city sales tax. You should also research those taxes.
4. The state’s financial health. Examine the health of the state pension systems where you are thinking about moving. The states with the highest level of unfunded pension debts include Connecticut, Illinois, Alaska, New Jersey and Hawaii. They each have unfunded state pensions at a level of more than 20% of their state GDP. If you’re thinking about moving to one of those states, you’re more apt to see tax increases in the future because of the huge financial obligations of these states.
5. The overall cost of living. Examine your budget to see the extent to which your annual living expenses might increase or decrease in your new location because food, healthcare and transportation costs can vary by location. If your costs are going to go up, that should be all right, provided you have the financial resources to fund a larger expense budget. Be sure that you’ve accounted for the differences before you move.
6. Estate planning considerations. If this is going to be your last move, it’s likely that the laws of your new state will apply to your estate after you die. Many states don’t have an estate or gift tax, which means your estate and gifts will only be subject to federal tax laws. However, a number of states, such as Maryland and Iowa, have a state estate tax.

You should talk to an experienced estate planning attorney about the estate and gift tax implications of your move.

Reference: Forbes (Nov. 30, 2021) “Thinking of Retiring and Moving? Consider the Financial Implications First”

Do I Need a 529 Education Savings Plan?

Statecollege.com’s recent article entitled “Did You Know 529s Are Powerful Estate Planning Tools?” explains that specialized savings accounts, informally referred to as 529s, could be at the top of your list. These accounts have a number of advantages for beneficiaries. There are also benefits for the donors in the high maximum contribution limits and tax advantages.
Special tax rules governing these accounts let you decrease your taxable estate. That might minimize future federal gift and estate taxes. In 2021, the lifetime exclusion is now $11.7 million per person, so most of us don’t have to concern ourselves with our estates exceeding that limit. However, remember that the threshold will revert back to just over $5 million per person in 2026.
Under the rules that govern 529s, you can make a lump-sum contribution to a 529 plan up to five times the annual limit of $15,000. As a result, you can give $75,000 per recipient ($150,000 for married couples), provided you document your five-year gift on your federal gift tax return and don’t make any more gifts to the same recipient during that five-year period. You can, however, go ahead and give another lump sum after those five years are through. The $150,000 gift per beneficiary won’t have a gift tax, as long as you and your spouse follow the rules.
Many people think that gifting a big chunk of money in a 529 means they’ll irrevocably give up control of those assets. However, 529 plans let you have considerable control—especially if you title the account in your name. At any time, you can get your money back, but it will be part of your taxable estate again subject to your nominal federal tax rate. There’s also a 10% penalty on the earnings portion of the withdrawal, if you don’t use the money for your designated beneficiary’s qualified education expenses.
If your chosen beneficiary doesn’t need some or all of the money you’ve put in a 529, you can earmark the money for other types of education, like graduate school. You can also change the beneficiary to another member of the family as many times as you like. This is nice if your original beneficiary chooses not to go to college at all.
In addition, you can take the money and pay the taxes on any gains. Normally, you’d also expect to pay a penalty on the earnings but not for scholarships. The penalty is waived on amounts equal to the scholarship, provided they’re withdrawn the same year the scholarship is received, effectively turning your tax-free 529 into a tax-deferred investment. You can always use the money to pay for other qualified education expenses, like room and board, books and supplies.
Reference: statecollege.com (Aug. 29, 2021) “Did You Know 529s Are Powerful Estate Planning Tools?”

Where Do You Score on Estate Planning Checklist?

Make sure that you review your estate plan at least once every few years to be certain that all the information is accurate and updated. It’s even more necessary if you experienced a significant change, such as marriage, divorce, children, a move, or a new child or grandchild. If laws have changed, or if your wishes have changed and you need to make substantial changes to the documents, you should visit an experienced estate planning attorney.
Kiplinger’s recent article “2021 Estate Planning Checkup: Is Your Estate Plan Up to Date?” gives us a few things to keep in mind when updating your estate plan:
Moving to Another State. Note that if you’ve recently moved to a new state, the estate laws vary in different states. Therefore, it’s wise to review your estate plan to make sure it complies with local laws and regulations.
Changes in Probate or Tax Laws. Review your estate plan with an experienced estate planning attorney to see if it’s been impacted by changes to any state or federal laws.
Powers of Attorney. A power of attorney is a document in which you authorize an agent to act on your behalf to make business, personal, legal, or financial decisions, if you become incapacitated. It must be accurate and up to date. You should also review and update your health care power of attorney. Make your wishes clear about do-not-resuscitate (DNR) provisions and tell your health care providers about your decisions. It is also important to affirm any clearly expressed wishes as to your end-of-life treatment options.
A Will. Review the details of your will, including your executor, the allocation of your estate and the potential estate tax burden. If you have minor children, you should also designate guardians for them.
Trusts. If you have a revocable living trust, look at the trustee and successor appointments. You should also check your estate and inheritance tax burden with an estate planning attorney. If you have an irrevocable trust, confirm that the trustee properly carries out the trustee duties like administration, management and annual tax returns.
Gifting Opportunities. The laws concerning gifts can change over time, so you should review any gifts and update them accordingly. You may also want to change specific gifts or recipients.
Regularly updating your estate plan can help you to avoid simple estate planning mistakes. You can also ensure that your estate plan is entirely up to date and in compliance with any state and federal laws.
Reference: Kiplinger (July 28, 2021) “2021 Estate Planning Checkup: Is Your Estate Plan Up to Date?”

Why Is Estate Planning So Important?

If you are new to the concept of estate planning, you can get swamped with issues fairly easily. You should still soldier on. Start with the basics, says Forbes’ recent article entitled “The Importance Of Estate Planning.” 

An estate plan is a collection of legal documents that details the way in which you want your assets distributed after you die, along with how you want people you select to handle health and financial decisions, if you’re unable to do so for yourself while you’re alive. 

A comprehensive estate plan written by an experienced estate planning attorney can help you feel more confident about the future because you’ll know your loved ones will be cared for and that the legacy you leave behind is the one you planned. Well thought-out planning now can help decrease any taxes and probate fees and make certain that your loved ones will have less to worry about and less stress when you are gone. However, if you don’t make plans for your estate, it can result in unintended complications for your family.  

Let’s look at some of the essential estate planning documents: 

• Will: This is the standard document in your estate plans. Your will designates an executor (or personal representative) to administer the distribution of your assets as you want. In your will, you can also appoint guardians of minor children who will care for them. 
• Durable Power of Attorney: This document names a trusted family member, friend, or advisor to serve as your agent to act on your behalf in your financial and legal matters.  
• Healthcare Proxy: It will name a trusted individual to make medical decisions for you when you are unable, and permits access to your medical records (some institutions may require more documentation for full access to medical records).  
• Living Will: This is where you can state your end-of-life care wishes. Living wills can cover pain relief and whether you would want a ventilator, feeding tube or resuscitation.  

You also need to regularly review and update your estate plan. There may be changes in probate and tax laws, as well as life changes, such as marriage, divorce, or the birth, adoption, or death of a family member that require a revision of your plan. 

Reference: Forbes (March 2, 2020) “The Importance Of Estate Planning” 

What Exactly Is the Estate Tax?

In the U.S., we treat the estate tax and gift tax as a single tax system with unified limits and tax rates—but it is not very well understood by many people. The Motley Fool’s recent article entitled “What Is the Estate Tax in the United States?” gives us an overview of the U.S. estate and gift tax, including what assets are included, tax rates and exemptions in 2020. 

The U.S. estate tax only impacts the wealthiest households. Let’s look at why that’s the case. Americans can exempt a certain amount of assets from their taxable estate—the lifetime exemption. This amount is modified every year to keep pace with inflation and according to policy modifications. This year, the lifetime exemption is $11.58 million per person. Therefore, if you're married, you and your spouse can collectively exclude twice this amount from taxation ($23.16 million). To say it another way, if you’re single and die in 2020 with assets worth a total of $13 million, just $1.42 million of your estate would be taxable. 

However, most Americans don't have more than $11.58 million worth of assets when they pass away. This is why the estate tax only impacts the wealthiest households in the country. It is estimated that less than 0.1% of all estates are taxable. Therefore, 99.9% of us don't owe any federal estate taxes whatsoever at death. You should also be aware that the lifetime exemption includes taxable gifts as well. If you give $1 million to your children, for example, that counts toward your lifetime exemption. As a result, the amount of assets that could be excluded from estate taxes would be then decreased by this amount at your death. 

You don't have to pay any estate or gift tax until after your death, or until you've used up your entire lifetime exemption. However, if you give any major gifts throughout the year, you might have to file a gift tax return with the IRS to monitor your giving. There's also an annual gift exclusion that lets you give up to $15,000 in gifts each year without touching your lifetime exemption. There are two key points to remember: 

• The exclusion amount is per recipient. Therefore, you can give $15,000 to as many people as you want every year, and they don't even need to be a relative; and 
• The exclusion is per donor. This means that you and your spouse (if applicable) can give $15,000 apiece to as many people as you want. If you give $30,000 to your child to help her buy their first home and you're married, you can consider half of the gift from each spouse. 

The annual gift exclusion is an effective way for you to reduce or even eliminate estate tax liability. The estate tax rate is effectively 40% on all taxable estate assets. 

Finally, the following kinds of assets aren’t considered part of your taxable estate: 

• Anything left to a surviving spouse, called “the unlimited marital deduction”; 
• Any amount of money or property you leave to a charity; 
• Gifts you've given that are less than the annual exclusion for the year in which they were given; and  

• Some types of trust assets. 

Reference: The Motley Fool (Jan. 25, 2020) “What Is the Estate Tax in the United States?” 

What Happens If I Don’t Have an Estate Plan?

It’s so much better to have a will than not to. With a will, you can direct your assets to those whom you wish to receive a legacy, rather than the default rules of the State. This is according to a recent article in the Houston Chronicle’s entitled “Elder Law: Will you plan now or pay later?” 

You should also designate an independent executor. You may want to have an estate planning attorney create a special trust to provide for family members who are disabled, along with trusts for minors and even adult children. 

Here are three major items about which you may not have considered that may require changes to your estate plan or motivate you to get one. Years ago, the amount a person could leave to beneficiaries (the tax-free exemption equivalent) was much lower. You were also required to either use it or lose it. 

For example, back in 1987 when the exemption equivalent was $600,000 per taxpayer, a couple had to create a by-pass trust to protect the first $600,000 upon the first to die to take advantage of the exemption. The exemption is $11.58 million in 2020, and the “portability” law has changed the “use it or lose it” requirement. There may still be good reasons to use a forced by-pass trust in your will, but in some cases, it may be time to get rid of it. 

Next, think about implementing planning to have some control over your assets after you die.  

You could have a heart attack, a stroke, or an unfortunate accident. These types of events can happen quickly with no warning. You were healthy and then suddenly a sickness or injury leaves you severely disabled. You should plan in the event this happen to you.  

Why would a person not take the opportunity to prepare documents such as powers of attorney for property, powers of attorney for health care, living wills and medical privacy documents? 

It’s good to know that becoming the subject of a court supervised guardianship proceeding is a matter of public record for everyone to see. There is also the unnecessary expense and frustration of a guardianship that could’ve been avoided, if you’d taken the time to prepare the appropriate documents with an estate planning or elder law attorney. 

Why would you want to procrastinate making a will and then die suddenly without ever taking the time to make your will? Without a valid will, your family will have to pay more for a costly probate proceeding. 

Reference: Houston Chronicle (Jan. 16, 2020) “Elder Law: Will you plan now or pay later?” 

A 2020 Checklist for an Estate Plan

The beginning of a new year is a perfect time for those who haven’t started the process of getting an estate plan started. For those who already have a plan in place, now is a great time to review these documents to make changes that will reflect the changes in one’s life or family dynamics, as well as changes to state and federal law.

Houston Business Journal’s recent article entitled “An estate planning checklist should be a top New Year’s resolution” says that by partnering with a trusted estate planning attorney, you can check off these four boxes on your list to be certain your current estate plan is optimized for the future.

1. Compute your financial situation. No matter what your net worth is, nearly everyone has an estate that’s worth protecting. An estate plan formalizes an individual’s wishes and decreases the chances of family fighting and stress.
2. Get your affairs in order. A will is the heart of the estate plan, and the document that designates beneficiaries beyond the property and accounts that already name them, like life insurance. A will details who gets what and can help simplify the probate process, when the will is administered after your death. Medical questions, provisions for incapacity and end-of-life decisions can also be memorialized in a living will and a medical power of attorney. A financial power of attorney also gives a trusted person the legal authority to act on your behalf, if you become incapacitated.
3. Know the 2020 estate and gift tax exemptions. The exemption for 2020 is $11.58 million, an increase from $11.4 million in 2019. The exemption eliminates federal estate taxes on amounts under that limit gifted to family members during a person’s lifetime or left to them upon a person’s passing.
4. Understand when the exemption may decrease. The exemption amount will go up each year until 2025. There was a bit of uncertainty about what would happen to someone who uses the $11.58 million exemption in 2020 and then dies in 2026—when the exemption reverts to the $5 million range. However, the IRS has issued final regulations that will protect individuals who take advantage of the exemption limits through 2025. Gifts will be sheltered by the increased exemption limits, when the gifts are actually made.

It’s a great idea to have a resolution every January to check in with your estate planning attorney to be certain that your plan is set for the year ahead.

Reference: Houston Business Journal (Jan. 1, 2020) “An estate planning checklist should be a top New Year’s resolution”

The beginning of a new year is a perfect time for those who haven’t started the process of getting an estate plan started. For those who already have a plan in place, now is a great time to review these documents to make changes that will reflect the changes in one’s life or family dynamics, as well as changes to state and federal law.

Houston Business Journal’s recent article entitled “An estate planning checklist should be a top New Year’s resolution” says that by partnering with a trusted estate planning attorney, you can check off these four boxes on your list to be certain your current estate plan is optimized for the future.

1. Compute your financial situation. No matter what your net worth is, nearly everyone has an estate that’s worth protecting. An estate plan formalizes an individual’s wishes and decreases the chances of family fighting and stress.
2. Get your affairs in order. A will is the heart of the estate plan, and the document that designates beneficiaries beyond the property and accounts that already name them, like life insurance. A will details who gets what and can help simplify the probate process, when the will is administered after your death. Medical questions, provisions for incapacity and end-of-life decisions can also be memorialized in a living will and a medical power of attorney. A financial power of attorney also gives a trusted person the legal authority to act on your behalf, if you become incapacitated.
3. Know the 2020 estate and gift tax exemptions. The exemption for 2020 is $11.58 million, an increase from $11.4 million in 2019. The exemption eliminates federal estate taxes on amounts under that limit gifted to family members during a person’s lifetime or left to them upon a person’s passing.
4. Understand when the exemption may decrease. The exemption amount will go up each year until 2025. There was a bit of uncertainty about what would happen to someone who uses the $11.58 million exemption in 2020 and then dies in 2026—when the exemption reverts to the $5 million range. However, the IRS has issued final regulations that will protect individuals who take advantage of the exemption limits through 2025. Gifts will be sheltered by the increased exemption limits, when the gifts are actually made.

It’s a great idea to have a resolution every January to check in with your estate planning attorney to be certain that your plan is set for the year ahead.

Reference: Houston Business Journal (Jan. 1, 2020) “An estate planning checklist should be a top New Year’s resolution”

Do It Yourself Wills Go Wrong–Fast

What happens when a well-meaning person decides to create a will, after reading information from various sources on the internet? There’s no end of problems, as described in the Glen Rose Reporter’s article “Do-it-yourself estate plan goes awry.”

The woman started her plan by deeding her home to her three children, retaining a life estate for herself.

By doing so, she has eliminated the possibility of either selling the house or taking out a reverse mortgage on the home, if she ever needs to tap its equity.

Since she is neither an estate planning attorney nor an accountant, she missed the tax issue completely.

By deeding the house, the transfer has caused a taxable transaction. Therefore, she needs to file a gift tax return because of it. At the same time, her life estate diminishes the value of the gift, and her estate is not large enough to require her to actually pay any tax.

She was puzzled to learn this, since there wasn’t any tax when her husband died and left his share of the house to her. That’s because the transfer of community property between spouses is not a taxable event.

However, that wasn’t the only tax issue to consider. When the house passed to her from her husband, she got a stepped-up basis, meaning that since the house had appreciated in value since she bought it, she only had to pay taxes on the difference in the increased value at the time of her husband’s death and what she sold the property for.

By transferring the house to the children, they don’t get a stepped-up basis. This doesn’t apply to a gift made during one’s lifetime. When the children get ready to sell the home, the basis will be the value that was established at the time of her husband’s death, even if the property increased in value by the time of the mother’s death. The children will have to pay tax on the difference between that value, which is likely to be quite lower, and the sale price of the house.

There are many overlapping issues that go into creating an estate plan. The average person who doesn’t handle estate planning on a regular basis (and even an attorney who does not handle estate planning on a regular basis), doesn’t know how one fact can impact another.

Sitting down with an estate planning attorney, who understands the tax issues surrounding estate planning, gifting, real estate, and inheritances, will protect the value of the assets being passed to the next generation and protect the family. It’s money well spent.

Reference: Glen Rose Reporter (September 17, 2019) “Do-it-yourself estate plan goes awry”

What Is the Impact on Clawback of New Tax Law?

The tax cuts passed late last year include provisions that double estate tax and gift tax exemption limits. That is good news on multiple fronts for many people. It means that some of them will no longer have their estates subject to the estate tax and others can gift more than previously to help decrease the size of their estates.

However, the new exemption limits are scheduled to sunset in 2026 and revert back to $5.5 million for individuals. That creates a potential problem for people with gifting programs who want to take advantage of the higher exemptions.

For example, if someone makes total lifetime gifts of $8 million before 2026, it is not clear what the IRS will do as Wealth Management recently discussed in "Clawback Under the New Tax Law: Part 2."

Congress left it up to the IRS to determine through regulations whether the excessive gift amounts should be clawed back or allowed. It appears that Congress intended for the IRS to allow such gifts through a reading of the legislative history of the tax cuts.  However, it is not known whether the IRS agrees with that assessment.

Whatever the IRS decides to do, there will likely be court challenges to their actions. A definitive answer to what will happen is unlikely to come anytime soon. That means those who utilize the new law to give lifetime gifts in excess of $5.5 million, are taking on some risk in doing so.

Reference: Wealth Management (Jan. 26, 2018) "Clawback Under the New Tax Law: Part 2."

Estate Tax Clawback

The recently passed tax reform bill required Congress to make several compromises because of budget limitations in the amount the bill could add to the deficit and avoid a possible filibuster by Democratic senators.

Those limitations prevented a complete elimination of the estate tax, as had long been proposed by Republicans in government.

The estate tax exemption has now been doubled.  However, this could not be made permanent and the exemption is scheduled to revert back to its previous level in 2026.

This creates a potential issue for some estates, as Wealth Management discusses in "Clawback Under New Tax Law."

The issue is what to do if someone in 2018 uses the doubled exemption to make gifts and thus uses up their lifetime exemption under the current law, but then passes away after the exemption limits have reverted to previous levels.  The exemption limit to use for the estate is unknown. It is possible that gift amounts over the exemption limit in place at the time the person passes away, could be clawed back into the estate for estate tax purposes.

Instead of deciding how to handle this issue, Congress has authorized the IRS to decide what to do.

It is possible the agency will decide that there should be clawbacks. Therefore, for now people need to be wary and talk to advisors before gifting too much.

Reference: Wealth Management (Dec. 28, 2017) "Clawback Under New Tax Law."