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Articles Posted in Estate Planning

It’s nearly always imperative to take a multi-faceted approach to estate planning as it involves the health and finances of multiple people. Ensuring that family and loved ones are taken care of in the way that benefits them most requires proper planning. One estate planning tool that is especially helpful is a life insurance policy.

Life insurance, much like a last will and testament, is recognized by most people as something used upon death. However, the benefits of a life insurance policy, the options available for it, and possible unexpected consequences are not always well known.

People often think of life insurance as income replacement for an individual’s dependents, and this is especially important for those who are a significant provider for their households. It is also important to keep in mind homemaking spouses, particularly those who are primary caregivers of minor or disabled children, as the expense of hiring caregivers, cleaning services, and food preparation might be a lot higher than the income of a spouse working outside the home.

Estate planning can be extremely confusing for a lot of people. In last week’s blog post, I addressed 5 common estate planning myths that often cost individuals and their loved ones time and money and add extra stress to their lives. Here are 5 more common estate planning myths:

  1. If I have a will, I don’t have to worry about probate. Although a will gives the court guidance on your wishes, having a will doesn’t make it so that you can avoid probate. Probate can be a long and expensive process in which one or more courts decide who will inherit your assets, so wanting to avoid it if possible is certainly understandable. It is important to note, also, that if you have real estate in multiple states, each of your properties may have to go through probate in its respective state.
  2. To avoid probate, you have to draft a trust. If you plan to draft a trust, this is definitely one area for which you may want to hire an attorney. Although avoiding probate is one of the most common reasons for people to want to draft a trust, there may be other methods that are easier and/or less expensive that will still meet your needs.

If you find estate planning confusing, you’re not alone. Estate planning is one of the areas of financial planning with the most widespread confusion, and this can lead to costly mistakes and unnecessary loss of time and money as well as excess stress for people’s loved ones.

Here are some common estate planning myths (I will address 5 now and then 5 more next week):

  1. I’m too young for estate planning. We never know for when we will need our estate plan – and when we do, it is already too late. Although our specific needs change depending on which stage of life we are in, estate planning is important for those young and old alike.

With the current 2020 federal estate tax exemption amount being $11.58 million, a lot less people are needing to plan around this tax while mapping out their estate plan, and more planning can be focused on saving income taxes for family and heirs. Saving income and transfer taxes has always been part of the goal of estate planning, and this was more challenging to do when both the estate and gift tax exemption level was lower.

Below are some strategies to keep in mind:

Plan gifts that use the annual gift tax exclusion. When you make transfers using the gift tax annual exclusion during life, the transferred assets as well as post-transfer appreciation generated by those assets are removed from your estate.

These days, our lives are surrounded by a lot of uncertainty and more people are thinking about their own mortality. Many people are choosing to review and update their estate plans during this challenging time. One thing that can easily trip up an estate plan is not paying attention to how assets are owned. Titling assets in a way that does not work with your estate plan can result in additional cost to your estate or to assets being passed on in a way that does not fit with your wishes.

Here are a few examples of ways this can go awry:

  • Your estate attorney recommends a revocable living trust so that your assets do not need to go through probate and to provide for the management of these assets in case of your incapacity. After you set up the trust, your attorney informs you that you need to retitle your assets in the name of the trust. You intend to do this, but you are extremely busy with other matters in your life and don’t get around to doing it. If you die before you retitle the assets, they will most likely have to go through probate, costing your estate money and your loved ones time as well as exposing your assets to public scrutiny. If you become incapacitated before retitling the assets, this would likely lead to undue delay in the management of those assets. Taking the time to retitle the assets before your death or incapacity would have provided the promised benefits with your trust.

As the digital world becomes a bigger part of our lives, many people have accumulated a lot of “digital assets,” which are non-physical assets that exist online in electronic format. Most estate planning clients preserve these assets either for their sentimental value or financial value. Those held for their sentimental value include things such as digital photos, music, movies, eBooks, information and documents stored on cloud accounts, subscriptions, smart-phone applications along with the data stored on these applications, and social media accounts. Digital assets preserved for their financial value include cryptocurrencies, bank or investment accounts, credit card rewards, income-generating websites or blogs, digital videos or written works that produce income, email accounts, and digital copyrights or trademarks.

With the rise of digital assets also comes the increased threat of cybercrimes. Cybercriminals are able to steal information by hacking into online user accounts and then sell information from these accounts on the black market. They also target online investment accounts that produce substantial financial gain. A 2019 survey conducted by Morgan Stanley revealed that cybersecurity risk is a major concern for high net worth individuals. These individuals often seek attorneys who can help manage and protect their digital assets and help them navigate the legal framework controlling these assets.

Different states vary in their legal treatment of digital assets, but there are certain statutes that protect digital accounts from cybercrime. The Computer Fraud and Abuse Act (CFAA), for example, criminalizes the intentional access of a computer system without authorization. The Stored Communications Act (SCA) also prohibits the intentional access of an electronic communication without authorization. Violation of these acts is punishable by imprisonment and a fine. Additionally, all but a few US states have adopted the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA), which allows fiduciaries such as agents under powers of attorney, executors, guardians, and trustees to access a client’s digital assets upon the client’s incapacity or death. Without RUFADAA, it is more difficult for fiduciaries, particularly executors, who have a duty to protect a client’s assets, to collect digital assets upon a client’s death or incapacity. Digital assets that live “on the cloud” unclaimed and unmonitored by owners can easily become a target of cybercrime.

Q:How long are wills good for? Can you renew them or do you have to make a new one? How about powers of attorney?

A: Wills don’t expire or become invalid over time, so once you have created one, you won’t need to renew or replace it after a certain number of years. However, you will want to make sure to update it following certain life changes.

The same is also true for a power of attorney – it does not expire, especially in the case of a durable power of attorney. You can, however, choose to give a POA a time limit that is specified in the body of the document, such as a limited POA created for a specific transaction or period of time.

One important part of estate planning is helping your children and grandchildren with the ever-escalating costs of their education. If they are already in school, you can do this by writing a check for their tuition directly to their educational institution. For younger children or grandchildren who are not yet enrolled, you may wish to delay giving them these funds until it is time for them to pay for college tuition costs. In this case, you have a few options, including making a gift into a custody account or into a trust that qualifies as a current gift under the Uniform Gifts to Minor’s Act. You can also choose to fund a Qualified Tuition Plan under IRC Section 529.

The two types of 529 programs are prepaid plans and savings plans. Unlike a Uniform Gift to Minors Act plan, the earnings on the assets in a 529 plan aren’t taxed until the funds are distributed, and distributions are tax-free up to the amount of the student’s qualified higher education expenses (defined below).

Prepaid Programs: Certain colleges make it possible for you to buy tuition credits or certificates at current tuition rates, even though the beneficiary (child) is not yet starting classes, locking in today’s rate for tomorrow’s education. Through this program, if a child is accepted into college and will start next year, you can purchase tuition credit for all four years at the current year’s rate. This can save a lot of money if tuition costs are rising quickly but isn’t a good option if tuition costs are declining.

Remote witnessing and notarization is becoming increasingly more common for executing estate planning documents. To do this, a witness or notary can use two-way audio-video communication technology to witness or notarize an act instead of doing so in person. As of June 2020, at least 44 US states now allow remote witnessing and/or notarization in some form, be it permanently by statute or temporarily by governor’s order.

Just as execution requirements for wills, trusts, powers of attorney, and advance healthcare directives (or healthcare powers of attorney) vary widely between states, so do the requirements for remote execution of those documents during the COVID-19 pandemic. Many states allow for remote witnessing, while others have temporarily suspended witness requirements for all documents aside from wills. There are also certain states requiring notaries to be specially registered as an “online notary” or require specific software to be used to record the videoconference. Below are the estate planning document execution requirements in Illinois:

Illinois Governor J. B. Pritzker issued Executive Order 2020-14 on March 26, 2020. It was then amended and re-issued by Executive Order 2020-33 on April 30, 2020, and again re-issued by Executive Order 2020-39 on May 29, 2020. These orders allow for remote witnessing and notarization procedures.

Many people are under the impression that families that accrue an above-average amount of wealth or assets will pass down these fortunes generation after generation. However, a Wealth-X report shows that 68% of the those whose net worth exceeds $30 million are self-made, 24% of those individuals have a combination of inherited and self-created fortunes, and just 8.5% solely inherited their wealth.

This comes as less of a surprise when one considers how difficult it is to transfer wealth from one generation to the next. Another study that spanned decades and followed 2,500 families found that 70% of family fortunes run out by just the second generation and 90% run out by the third generation.

Wealth can be difficult to retain and easy to mishandle, especially without preparation. Parents might spend time and money to properly organize their estate and later pass it on to their children, but those efforts may be in vain if their children are not prepared for that wealth. Future generations need to be equipped with the values, the knowledge, and the life skills needed to sustain inherited wealth so that they don’t find themselves overwhelmed and underprepared when they inherit the wealth you have accrued.

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