Top Five Estate Planning Questions

Because of all the estate planning that we do, we get a lot of estate planning questions on a daily basis. In today’s column we are going to discuss the top five estate planning questions that we regularly get in our office. Here they are in no particular order:

I can give away $10,000 per person per year with no tax or other detrimental effects, right?

It is true that pursuant to the Federal gift tax laws, you can gift up to $14,000 (up from $10,000) per person, per year in 2017 without having to report it or pay Federal gift tax on it. With gift splitting, a husband and wife can gift up to $28,000 per year per person.

What is also true is that you can give more, much more, to your loved ones without paying any Federal gift taxes. In 2017, your gifts in excess of the annual $14,000 exclusion amount are not subject to Federal gift tax unless the total of those lifetime gifts exceed $5.49 million in 2017. For a married couple, with gift splitting, this amount is $10.98 million.

Although these gifts are not taxable for Federal gift tax purposes, in other circumstances, these gifts are fully reportable and countable. For example, you need to report gifts of any amount that you or your spouse have made within the last five years of an application for Medicaid to pay for nursing home care. There is no minimum gift which is excludable. Every single one of those gifts, no matter how small, must be counted and reported as divestments. These divestments will create a penalty period during which Medicaid will not cover your nursing home care.

If I have everything jointly owned or with a beneficiary designation, I do not need a will, right?

Many people use joint ownership and beneficiary designations as their own do-it-yourself estate plan. We regularly see situations in which joint ownership and beneficiary designations backfire on the family and do not work as intended because the joint owner or beneficiary got mad, got greedy, got sick, got sued, got divorced, was a minor or died in the wrong order

There was  the mom who had to take out a $200,000 mortgage on her home that was fully paid for because her daughter was a joint owner on her home deed, and the IRS slapped a tax lien on the home after her daughter didn’t pay Federal taxes. Or the dad who had to pay his son half the proceeds of the sale of the house because son was a joint owner on the home, and son refused to sign on the sale unless he received his half. Then there was this dad who only used beneficiary designations for estate planning and one of his beneficiaries died before he did, so that beneficiary’s accounts ended up going through probate. Or the son who had most of his inheritance through a beneficiary designation garnished by the ex-wife to pay back-alimony and child support. Or the minor beneficiary who needed a court appointed conservator for the inheritance until age 18, after which he bought a brand new sports car. And there was this dad who remarried and made everything joint with his new wife, he died first, she got everything and left all dad’s assets to her children when she died. Or how about the mom who lost her life savings because she named her son as joint owner on her accounts and he was sued and garnished by a creditor.

How long do I have to keep records?

There are various statutes of limitations governing numerous activities that give guidance on recordkeeping timeframes. Federal taxes generally have a three year statute of limitations and Michigan taxes generally have four years. Michigan contract actions have a six year statute of limitations. This statute of limitations is extended to ten years in certain circumstances relating to covenants in deeds and mortgages.

When you sell any capital asset, you have to document your tax basis of the asset to the IRS. You subtract your tax basis of the asset from the sale proceeds to determine your taxable gain or loss. For individuals, a capital asset is generally anything you own for personal or investment purposes. Capital assets can include stocks, bonds, mutual funds, vehicles, real estate and collectibles.

If you are married and you or your spouse go into a nursing home and you want to qualify for Medicaid to pay for nursing home care, you have to document all the assets either one of you owned on a “snapshot date”. This snapshot date is the first date after 1989 that began 30 consecutive days of continuous care in a hospital or long-term care facility. This then determines how much of these assets that the non-nursing home spouse can keep when the nursing home spouse qualifies for Medicaid.

So how long should you keep your financial records? To be safe, I recommend that you keep general financial and tax records for at least ten years. If you have sold or transferred any real estate, you should hold onto those records for fifteen years. For any capital assets that you currently own, keep all records related to the purchase or other acquisition or improvement of the asset, no matter how old until ten years after the asset is disposed of, or fifteen years after real estate is disposed of. If you are married and you or your spouse has a snapshot date, keep records of all assets owned as of that snapshot date until the first spouse’s death.

How much assets do I need in order to have a trust?

There is no minimum dollar amount of assets necessary for you to own before a trust is used. You do not need $1 million in assets, or a taxable estate ($5.49 million in 2017) before a trust makes sense for you. What determines whether you have a trust or not, are the instructions you want for you and your loved ones and the goals and objectives you want to accomplish. Who do you want to benefit? What protections do you want for you and your beneficiaries?

There are lots of protections that you can put in your trust for the benefit of you during your lifetime or for the protection of your loved ones after you are gone. Many people have trusts for the protections of privacy and avoiding probate. Some choose a trust for charitable planning, or to protect their beneficiaries from divorces, creditors or remarriage. Others have trusts because they have beneficiaries who are on governmental assistance, have an addiction, have poor money management skills, are minors or are not motivated to find a job. Still others have trusts to protect the family homestead or cottage, provide financial resources for beneficiaries’ higher education or for pets.

What is trust funding and why is it important?

Trust funding is completely and correctly designating your trust and individuals as owners, beneficiaries and insured parties of your assets. Basically, it’s putting your stuff in your trust. You have to retitle your bank and investment accounts, real estate and sometimes vehicles in the name of your trust. You also need to name your trust and individuals in the proper order as beneficiaries of your IRAs, retirement plans, annuities and life insurance. And you have to make sure that your homeowners and other casualty and liability insurance policies name your trust as insureds.

The proper funding of your trust is critical in making your estate plan work and having the results you plan. Failure to properly fund your trusts may cause unintended results. These may include probate during your lifetime or after death; distributions not in accordance with your goals and objectives; additional taxes; and additional administrative, legal and other expenses.

In my thirty one years of preparing trust-based estate plans, for new clients with existing trusts prepared by other estate planners, I still have not found a single trust that was fully-funded, nor a client who has been able to completely and correctly fund their trust on their own. You should choose an estate planner who will make sure your trust is fully-funded. It may cost more initially, however there will be substantial savings after your death. It’s like the old Fram oil filter commercial, “Pay me now, or pay me a lot more later.”

By Matthew M. Wallace, CPA, JD

Published edited June 4, 2017 in The Times Herald newspaper Port Huron, Michigan as: Top 5 estate planning questions

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