Run the numbers before donating appreciated assets to charity

Are you charitably inclined? If so, you probably know that donations of long-term appreciated assets, such as stocks, have an advantage over cash donations. But in some cases, selling appreciated assets and donating the proceeds may be a better strategy.

That’s because adjusted gross income (AGI) limitations on charitable deductions are higher for cash donations. Plus, if the assets don’t qualify for long-term capital gain treatment, the deduction rules are different.

Tax treatments by type of gift

All things being equal, donating long-term appreciated assets directly to charity is preferable. Not only do you enjoy a charitable deduction equal to the assets’ fair market value on the date of the gift (assuming you itemize deductions on your return), you also avoid capital gains tax on their appreciation in value. If you were to sell the assets and donate the proceeds to charity, the resulting capital gains tax could reduce the tax benefits of your gift.

But all things aren’t equal. Donations of appreciated assets to public charities are generally limited to 30% of AGI, while cash donations are deductible up to 60% of AGI. In either case, excess deductions may be carried forward for up to five years.

Work the math

If you’re contemplating a donation of appreciated assets that’s greater than 30% of your AGI, crunch the numbers first. Then determine whether selling the assets, paying the capital gains tax and donating cash up to 60% of AGI will produce greater tax benefits in the year of the gift and over the following five tax years. The answer will depend on several factors, including the size of your gift, your AGI in the year of the gift, your projected AGI in the following five years and your ability to itemize deductions in each of those years.

Before making charitable donations, discuss your options with us. We can help you make charitable gifts at the lowest tax cost.

© 2023

Addressing IP in an estate plan can be tricky

Over your lifetime, you may have accumulated a wide variety of tangible assets, including automobiles, works of art and property, that you’ve accounted for in your estate plan. But intangible assets can easily be overlooked.

Consider intellectual property (IP), such as patents and copyrights. These assets can have great value, so, if you have them, it’s important to properly address them in your estate plan.

Common forms of IP

IP generally falls into one of these categories: patents, copyrights, trademarks or trade secrets. Here we’ll focus on patents and copyrights, which are protected by federal law to promote scientific and creative endeavors by providing inventors and artists with exclusive rights to exploit the economic benefits of their work for a predetermined time.

Patents protect inventions, and the two most common are utility and design patents. A utility patent may be granted to someone who “invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof.” A design patent is available for a “new, original and ornamental design for an article of manufacture.” To obtain patent protection, inventions must be novel, “nonobvious” and useful.

Utility patents protect an invention for 20 years from the patent application filing date. Design patents filed on or after May 13, 2015, last 15 years from the patent issue date. There’s a difference between the filing date and issue date. For utility patents, it takes at least a year and a half from date of filing to date of issue.

Copyrights protect the original expression of ideas that are fixed in a “tangible medium of expression.” These tangible mediums of expression typically take the form of written works, music, paintings and photographs.

Unlike patents, which must be approved by the U.S. Patent and Trademark Office, copyright protection kicks in as soon as a work is fixed in a tangible medium. For works created in 1978 and later, an author-owned copyright generally lasts for the author’s lifetime plus 70 years.

Estate planning for IP

For estate planning purposes, a key question is: What’s it worth? Valuing IP is a complex process. It’s best to obtain an appraisal from a professional with experience valuing IP. After you know the IP’s value, decide whether to transfer it to family members or charity through lifetime gifts or bequests after your death.

It’s important to plan the transaction carefully to ensure that your objectives are achieved. There’s a common misconception that, when you transfer ownership of the tangible medium on which IP is recorded, you also transfer the IP rights. But IP rights are separate from the work itself and are retained by the creator — even if the work is sold or given away.

Contact us to learn more on addressing IP in your estate plan.

© 2022

Should you consider a psychiatric advance directive?

Many people include health care powers of attorney or advance directives in their estate plans so they have some influence over critical medical decisions in the event they’re incapacitated and unable to make decisions themselves. A psychiatric advance directive (PAD) is less well known, but worth considering, especially if your family has a history of mental illness.

Health care directives

To cover all the health care bases, have two documents: an advance health care directive (sometimes referred to as a “living will”) and a health care power of attorney (HCPA). Some states allow you to combine the two in a single document.

An advance directive expresses your preferences for the use of life-sustaining medical procedures and specifies the situations in which these procedures should be used or withheld.

A document prepared in advance can’t account for every scenario or contingency. However, it’s wise to pair an advance directive with an HCPA. This allows you to authorize your spouse or other trusted representative to make medical decisions or consent to medical treatment on your behalf if you’re unable to do so.

Why a PAD?

Many states allow generic HCPAs and advance directives to address mental as well as physical health issues. But some states limit or prohibit mental health treatment decisions by general health care representatives. Around half of the states have PAD statutes, which authorize special advance directives to outline one’s wishes with respect to mental health care and appoint a representative to make decisions regarding that care.

PADs may address a variety of mental health care issues, including:

• Preferred hospitals or other providers,

• Treatment therapies and medications that may be administered,

• Treatment therapies and medications that may not be administered, such as electroconvulsive therapy or experimental drugs,

• A statement of general values, principles or preferences to follow in making mental health care decisions, and

• Appointment of a representative authorized to make decisions and carry out your wishes with respect to mental health care in the event you’re incapacitated.

Although requirements vary from state to state, to be effective, a PAD must be signed by you and your chosen representative, and in some states by two witnesses. Be sure to discuss the terms of the PAD with your family, close friends, physician and any mental health care providers. And to be sure that the PAD is available when needed, give copies to all of the above persons, keep the original in a safe place and let your family know where to find it.

If you’re concerned about the possibility of mental illness and wish to have some say over your treatment in the event you’re incapacitated, contact us to learn more about a PAD.

© 2022

In your own words: A letter of instruction complements a will

A smart estate plan should leave no doubt as to your intentions. Writing a letter of instruction can go a long way toward clearly communicating all of your thoughts and wishes. Even though the letter, unlike a valid will, isn’t legally binding, it can be valuable to your surviving family members.

The devil is in the details

Although the content can vary from person to person, one of the main purposes of a letter of instruction is to provide details on final wishes that haven’t been conveyed in the will. Think of the letter as a way to fill in some of the “gaps” or resolve matters that may be left open to interpretation.

For example, your letter can detail vital financial information that was omitted or glossed over in your will. Typically, this can include an inventory of real estate holdings, investment accounts, bank accounts, retirement plan accounts and IRAs, life insurance policies, and other financial assets.

Along with the account numbers, list the locations of the documents, such as a safe deposit box or file cabinet. And don’t forget to provide the contact information for your estate planning team. Typically, this will include your attorney, CPA, investment advisor and life insurance agent. These professionals can assist your family during the aftermath.

Many people also use a letter to lay out their wishes for personal possessions. Keep in mind that without spelling out your intentions, bitter disputes may erupt over items that have more sentimental value than monetary worth, including furniture, photographs, jewelry and artwork.

Content is up to you

There are no hard-and-fast rules for writing a letter of instruction. The basic elements are outlined above, but the choices are ultimately up to you. Remember that the letter isn’t legally binding, so there is no obligation to include any particular item. Conversely, you can say pretty much whatever else you want to say.

Rewrite if necessary

Completing your letter of instruction shouldn’t be the end of the story. You may have to revisit it for rewrites or edits you didn’t accommodate before. For example, you may have neglected to specify certain accomplishments you want to be mentioned in an obituary.

In addition, it’s likely that some of your personal information will change over time, such as bank account numbers and passwords. Update the letter when warranted. Think of it as an ongoing process.

Finally, make sure that the letter is secured in a safe place. Any printed version should accompany your will or be located somewhere else that’s accessible to trusted family members. At the same time, you must be able to update the letter whenever you need to.

Clarity counts

If you haven’t done so already, draft a letter of instruction and, most important, make sure that your family knows where to locate it. We can help fill in the blanks if you need help.

© 2022

What’s the difference between a springing and a nonspringing power of attorney?

Estate planning typically focuses on what happens to your children and your assets when you die. But it’s equally important (some might say even more important) to have a plan for making critical financial and medical decisions if you’re unable to make those decisions yourself.

A crucial component of this plan is the power of attorney (POA). A POA appoints a trusted representative to make medical or financial decisions on your behalf in the event an accident or illness renders you unconscious or mentally incapacitated. Without it, your loved ones would have to petition a court for guardianship or conservatorship, a costly process that can delay urgent decisions.

A question that people often struggle with is whether a POA should be springing, that is, effective when certain conditions are met or nonspringing, that is, effective immediately.

A POA defined

A POA is a document under which you, as “principal,” authorize a representative to be your “agent” or “attorney-in-fact,” to act on your behalf. Typically, separate POAs are executed for health care and property.

A POA for health care authorizes your agent — often, a spouse, an adult child or other family member — to make medical decisions on your behalf or consent to or discontinue medical treatment if you’re unable to do so. Depending on the state you live in, the document may also be known as a medical power of attorney or health care proxy.

A POA for property appoints an agent to manage your investments, pay your bills, file tax returns, continue making any annual charitable and family gifts, and otherwise handle your finances, subject to limitations you establish.

To spring or not to spring

Typically, springing powers take effect when the principal becomes mentally incapacitated, comatose, or otherwise unable to act for himself or herself.

Nonspringing POAs offer a few advantages over springing POAs:

• Because they’re effective immediately, nonspringing POAs allow your agent to act on your behalf for your convenience, not just when you’re incapacitated.

• They avoid the need for a determination that you’ve become incapacitated, which can result in delays, disputes or even litigation. This allows your agent to act quickly in an emergency, making critical medical decisions or handling urgent financial matters without having to wait, for example, for one or more treating physicians to examine you and certify that you’re incapacitated.

A potential disadvantage to a nonspringing POA — and the main reason some people opt for a springing POA — is the concern that your agent may be tempted to abuse his or her authority or commit fraud. But consider this: If you don’t trust your agent enough to give him or her a POA that takes effect immediately, how does delaying its effect until you’re deemed incapacitated solve the problem?

Given the advantages of a nonspringing POA, and the potential delays associated with a springing POA, it’s usually preferable to use a nonspringing POA and to make sure the person you name as agent is someone you trust unconditionally. If you’re still uncomfortable handing over a POA that takes effect immediately, consider signing a nonspringing POA but have your attorney or other trusted advisor hold it and deliver it to your agent when needed.

Contact us if you have additional questions regarding a springing or nonspringing POA.

© 2022

Don’t overlook foreign assets when planning your estate

You’d be surprised how often people fail to disclose foreign assets to their estate planning advisors. They assume that these assets aren’t relevant to their “U.S.” estate plans, so they’re not worth mentioning. But if you own real estate or other assets outside the United States, it’s critical to address these assets in your estate plan.

Watch out for double taxation

If you’re a U.S. citizen, you’re subject to federal gift and estate tax on all of your worldwide assets, regardless of where you live or where the assets are located. So, if you own assets in other countries, there’s a risk of double taxation if the assets are subject to estate, inheritance or other death taxes in those countries.

You may be entitled to a foreign death tax credit against your U.S. gift or estate tax liability — particularly in countries that have tax treaties with the United States. But in some cases, those credits aren’t available.

Keep in mind that you’re considered a U.S. citizen if 1) you were born here, even if your parents have never been U.S. citizens and regardless of where you currently reside (unless you’ve renounced your citizenship), or 2) you were born outside the United States but at least one of your parents was a U.S. citizen at the time.

Even if you’re not a U.S. citizen, you may be subject to U.S. gift and estate tax on your worldwide assets if you’re domiciled in the United States. Domicile is a somewhat subjective concept — essentially it means you reside in a place with an intent to stay indefinitely and to always return when you’re away. Once the United States becomes your domicile, its gift and estate taxes apply to your assets outside the United States, even if you leave the country, unless you take steps to change your domicile.

One will may not be enough

To ensure that your foreign assets are distributed according to your wishes, your will must be drafted and executed in a manner that will be accepted in the United States as well as in the country or countries where the assets are located. Often, it’s possible to prepare a single will that meets the requirements of each jurisdiction, but it may be preferable to have separate wills for foreign assets. One advantage of doing so is that separate wills, written in the foreign country’s language (if not English) can help streamline the probate process.

If you prepare two or more wills, work with local counsel in each foreign jurisdiction to ensure that they meet each country’s requirements. And it’s critical for your U.S. and foreign advisors to coordinate their efforts to ensure that one will doesn’t nullify the others.

Trust issues

Your U.S. estate plan may use one or more trusts for a variety of purposes, including tax planning, asset management and asset protection. And your U.S. will may provide for all assets to be transferred to a trust.

Be aware, however, that many countries don’t recognize trusts. So, if your estate plan transfers foreign assets to a trust, there could be unwelcome consequences, including higher foreign taxes or even obstacles to transferring the assets as intended.

If you own foreign assets, talk to us about steps you can take to ensure that those assets are distributed in accordance with your wishes and in the most tax-efficient manner possible.

© 2022

Understand Your Spouse’s Inheritance Rights If You’re Getting Remarried

If you’re taking a second trip down the aisle, you may have different expectations than you did when you got married the first time — especially when it comes to estate planning. For example, if you have children from a previous marriage, your priority may be to provide for them. Or perhaps you feel that your new spouse should have limited rights to your assets compared to those of your spouse from your first marriage.

Unfortunately, the law doesn’t see it that way. In nearly every state, a person’s spouse has certain property rights that apply regardless of the terms of the estate plan. And these rights are the same, whether it’s your first marriage or your second. Here’s an introduction to spousal property rights and strategies you may be able to use to limit them.

Defining a spouse’s “elective share”

Spousal property rights are creatures of state law, so it’s critical to familiarize yourself with the laws in your state to achieve your planning objectives. Most, but not all, states provide a surviving spouse with an “elective share” of the deceased spouse’s estate, regardless of the terms of his or her will or certain other documents.

Generally, a surviving spouse’s elective share ranges from 30% to 50%, though some states start lower and provide for progressively larger shares as the duration of the marriage increases. Perhaps the most significant variable, with respect to planning, is the definition of assets subject to the surviving spouse’s elective share rights.

In some states, the elective share applies only to the “probate estate” — generally, assets held in the deceased spouse’s name alone that don’t have a beneficiary designation. In other states, it applies to the “augmented estate,” which is the probate estate plus certain nonprobate assets. These assets may include revocable trusts, life insurance policies, and retirement or financial accounts that pass according to a beneficiary designation or transfer-on-death designation.

By developing an understanding of how elective share laws apply in your state, you can identify potential strategies for bypassing them.

Using planning strategies

Elective shares are designed to protect surviving spouses from being disinherited. But there may be good reasons for limiting the amount of property that goes to your spouse when you die. For one thing, your spouse may possess substantial wealth in his or her own name. And you may want most of your estate to go to your children from a previous marriage.

Strategies for minimizing the impact of your spouse’s elective share on your estate plan include making lifetime gifts. By transferring property to your children or other loved ones during your lifetime (either outright or through an irrevocable trust), you remove those assets from your probate estate and place them beyond the reach of your surviving spouse’s elective share. If your state uses an augmented estate to determine a spouse’s elective share, lifetime gifts will be protected so long as they’re made before the lookback period or, if permitted, your spouse waives the lookback period.

Seeking professional help

Elective share laws are complex and can vary dramatically from state to state. If you’re remarrying, we can help you evaluate their impact on your estate plan and explore strategies for protecting your assets.

© 2022

Instill family values with a FAST

You create an estate plan to meet technical objectives, such as minimizing gift and estate taxes and protecting your assets from creditors’ claims. But it’s also important to consider “softer,” yet equally critical, goals.

These softer goals may include educating your children or other loved ones on how to manage wealth responsibly. Or, you may want to promote shared family values and encourage charitable giving. Using a family advancement sustainability trust (FAST) is one option to achieve these goals.

Fill the leadership gap

It’s not unusual for the death of the older generation to create a leadership gap within a family. A FAST can help fill this gap by establishing a leadership structure and providing resources to fund educational and personal development activities for younger family members.

For example, a FAST might finance family retreats and educational opportunities. It also might outline specific best practices and establish a governance structure for managing the trust responsibly and effectively.

Form a common governance structure

Typically, FASTs are created in states that 1) allow perpetual, or “dynasty,” trusts that benefit many generations to come, and 2) have directed trust statutes, which make it possible to appoint an advisor or committee to direct the trustee with regard to certain matters. A directed trust statute makes it possible for both family members and trusted advisors with specialized skills to participate in governance and management of the trust.

A common governance structure for a FAST includes four decision-making entities:

1. An administrative trustee, often a corporate trustee, that deals with administrative matters but doesn’t handle investment or distribution decisions,

2. An investment committee — consisting of family members and an independent, professional investment advisor — to manage investment of the trust assets,

3. A distribution committee — consisting of family members and an outside advisor — to help ensure that trust funds are spent in a manner that benefits the family and promotes the trust’s objectives, and

4. A trust protector committee — typically composed of one or more trusted advisors — which stands in the shoes of the grantor after his or her death and makes decisions on matters such as appointment or removal of trustees or committee members and amendment of the trust document for tax planning or other purposes.

Explore funding options

Establish a FAST during your lifetime. Doing so helps ensure that the trust achieves your objectives and allows you to educate your advisors and family members on the trust’s purpose and guiding principles.

FASTs generally require little funding when created, with the bulk of the funding provided upon the death of the trust holder. Although funding can come from the estate, a better approach is to fund a FAST with life insurance or a properly structured irrevocable life insurance trust. Using life insurance allows you to achieve the FAST’s objectives without depleting the assets otherwise available for the benefit of your family.

Is a FAST right for you?

If your children or other family members are in line to inherit a large estate, a FAST may be right for you. Properly designed and implemented, this trust type can help prepare your heirs to receive wealth and educate them about important family values and financial responsibility. We can help you determine if a FAST should be part of your estate plan.

© 2022

Annual Gift Tax Exclusion Amount Increases for 2023

Did you know that one of the most effective estate-tax-saving techniques is also one of the simplest and most convenient? By making maximum use of the annual gift tax exclusion, you can pass substantial amounts of assets to loved ones during your lifetime without any gift tax. For 2022, the amount is $16,000 per recipient. In 2023, the amount will increase by $1,000, to $17,000 per recipient.

Maximizing your gifts

Despite a common misconception, federal gift tax applies to the giver of a gift, not to the recipient. But gifts can generally be structured so that they’re — at least to a limited degree — sheltered from gift tax. More specifically, they’re covered by the annual gift tax exclusion and, if necessary, the unified gift and estate tax exemption for amounts above the exclusion. (Using the unified exemption during your lifetime, however, erodes the available estate tax shelter.)

For 2022, you can give each family member up to $16,000 a year without owing any gift tax. For instance, if you have three adult children and seven grandchildren, you may give each one up to $16,000 by year end, for a total of $160,000. Then you can turn around and give each one $17,000 beginning in January 2023, for $170,000. In this example, you could reduce your estate by a grand total of $330,000 in a matter of months.

Furthermore, the annual gift exclusion is available to each taxpayer. If you’re married and your spouse consents to a joint gift, also called a “split gift,” the exclusion amount is effectively doubled to $32,000 per recipient in 2022 ($34,000 in 2023).

Bear in mind that split gifts and large gifts trigger IRS reporting responsibilities. A gift tax return is required if you exceed the annual exclusion amount, or you give joint gifts with your spouse. Unfortunately, you can’t file a “joint” gift tax return. In other words, each spouse must file an individual gift tax return for the year in which they both make gifts.

Coordinating with the lifetime exemption

The lifetime gift tax exemption is part and parcel of the unified gift and estate tax exemption. It can shelter from tax gifts above the annual gift tax exclusion. Under current law, the exemption effectively shelters $10 million from tax, indexed for inflation. In 2022, the amount is $12.06 million, and in 2023 the amount will increase to $12.92 million. However, as mentioned above, if you tap your lifetime gift tax exemption, it erodes the exemption amount available for your estate.

Exceptions to the rules

Be aware that certain gifts are exempt from gift tax, thereby preserving both the full annual gift tax exclusion amount and the exemption amount. These include gifts:

• From one spouse to the other,

• To a qualified charitable organization,

• Made directly to a healthcare provider for medical expenses, and

• Made directly to an educational institution for a student’s tuition.

For example, you might pay the tuition for a grandchild’s upcoming school year directly to the college. That gift won’t count against the annual gift tax exclusion.

Planning your gifting strategy

The annual gift tax exclusion remains a powerful tool in your estate-planning toolbox. Contact us for help developing a gifting strategy that works best for your specific situation.

© 2022

Estate Planning Vocab 101: Executor and Trustee

Among the many decisions you’ll have to make as your estate plan is being drafted is who you will appoint as the executor of your estate and the trustee of your trusts. These are important appointments, and, in fact, both roles can be filled by the same person. Let’s take a closer look at the duties of an executor and a trustee.

Duties of an executor

The executor (called a “personal representative” in some states) is the person named in a will to carry out the wishes of the deceased. Typically, the executor shepherds the will through the probate process, takes steps to protect the estate’s assets, distributes property to beneficiaries according to the will and pays the estate’s debts and taxes.

Most assets must pass through probate before they can be distributed to beneficiaries. (Note, however, that assets transferred to a living trust are exempted from probate.) When the will is offered for probate, the executor will also obtain “letters testamentary” from the court, authorizing him or her to act on the estate’s behalf.

It’s the executor’s responsibility to locate, manage and disburse the estate’s assets. In addition, he or she must determine the value of property. Depending on the finances, assets may have to be liquidated to pay debts of the estate.

Also, the executor can use estate funds to pay for funeral and burial expenses if no other arrangements have been made. The executor will obtain copies of the death certificate, which will be needed for several purposes, including closing financial accounts, canceling certain benefit payments and filing the final tax return.

So, whom should you choose as the executor of your estate? Your first inclination may be to name a family member or a trusted friend. But this can cause complications.

For starters, the person may be too grief-stricken to function effectively. And, if the executor stands to gain from the will, there may be conflicts of interest that can trigger contests of your will or other disputes by disgruntled family members. Furthermore, the executor may lack the financial acumen needed for this position. Frequently, a professional advisor whom you know and trust is a good alternative.

Duties of a trustee 

The trustee is the person who has legal responsibility for administering a trust on behalf of the trust’s beneficiaries. Depending on the trust terms, this authority may be broad or limited.

Generally, trustees must meet fiduciary duties to the beneficiaries of the trust. They must manage the trust prudently and treat all beneficiaries fairly and impartially. This can be more difficult than it sounds because beneficiaries may have competing interests. The trustee must balance out their needs when making investment decisions.

The decision about naming a trustee is similar to the dilemma of choosing an executor. The responsibilities require great attention to detail, financial acumen and dedication. Because of the heavy reliance on investment expertise, choosing a professional over a family member or friend is often recommended. At the very least, make it clear to the trustee that he or she may — and should — rely on professionals as appropriate.

Designating alternates

An executor can renounce the right to this position by filing a written declaration with the probate court. Along the same lines, a designated trustee may decline to accept the position or subsequently resign if permission is allowed by the trust or permitted by a court. This further accentuates the need to name backups for these important positions.

Without a named successor in the executor role, the probate court will appoint one for the estate. For a trustee, the trust will often outline procedures to follow. As a last resort, a court will appoint someone else to do the job.

If you have additional questions regarding the roles of a trustee or an executor, please contact us.

© 2022

Should You File a Joint Tax Return for the Year of Your Spouse’s Death?

The death of a spouse is a devastating, traumatic experience. And when it happens, dealing with taxes and other financial and legal obligations are probably the last things on your mind. Unfortunately, many of these obligations can’t wait and may have to be addressed in the months to follow. One important issue for the surviving spouse to consider is whether to file a joint or separate income tax return for the year of death.

Final tax return

When someone dies, his or her personal representative is responsible for filing an income tax return for the year of death (as well as any unfiled returns for previous years). For purposes of the final return, the tax year generally begins on January 1 and ends on the date of death. The return is due by April 15 of the following calendar year.

Income that’s included on the final return is determined according to the deceased’s usual tax accounting method. So, for example, if he or she used the cash method, the income tax return would only report income actually or constructively received before death and only deduct expenses paid before death. Income and expenses after death are reported on an estate tax return.

The surviving spouse, together with the personal representative, may file a joint return. And the surviving spouse alone can elect to file a joint return if a personal representative hasn’t yet been appointed by the filing due date. (However, a court-appointed personal representative may later revoke that election.)

Pros and cons of a joint return

In the year of death, the surviving spouse is generally deemed to be married for the entire calendar year, so he or she can file a joint return with the estate’s cooperation. If a joint return is filed, it’ll include the deceased’s income and deductions from the beginning of the tax year to the date of death, and the surviving spouse’s income and deductions for the entire tax year.

Possible advantages of filing a joint tax return include:

• Depending on your income and certain other factors, you may enjoy a lower tax rate.

• Certain tax credits are larger on a joint return or are unavailable to married taxpayers filing separately.

• IRA contribution limits, as well as the amount allowed as a deduction, may be higher for joint filers.

There may also be disadvantages to filing jointly. For example, higher adjusted gross income (AGI) may reduce the tax benefits of expenses, such as medical bills, that are deductible only to the extent that they exceed a certain percentage of AGI.

Crunch the numbers

To determine the best approach, let us assess your tax liability based on both joint and separate returns. While married filing separately might be the only filing option available to you, other possibilities — depending on the facts — include qualifying widow(er) and head-of-household status.

© 2022

Drafting Your Estate Plan Isn’t a Do-It-Yourself Project

There’s no shortage of online do-it-yourself (DIY) tools that promise to help you create an “estate plan.” But while these tools can generate wills, trusts and other documents relatively cheaply, they can be risky except in the simplest cases. If your estate is modest in size, your assets are in your name alone, and you plan to leave them to your spouse or other closest surviving family member, then using an online service may be a cost-effective option. Anything more complex can expose you to a variety of costly pitfalls.

Your plan’s details count

Part of the problem is that online services can help you create individual documents — the good ones can even help you comply with applicable laws, such as ensuring the right number of witnesses to your will — but they can’t help you create an estate plan. Putting together a plan means determining your objectives and coordinating a collection of carefully drafted documents designed to achieve those objectives. And in most cases, that requires professional guidance.

For example, let’s suppose Ken’s estate consists of a home valued at $500,000 and a mutual fund with a $500,000 balance. He uses a DIY tool to create a will that leaves the home to his daughter and the mutual fund to his son. It seems like a fair arrangement. But suppose that by the time Ken dies, he’s sold the home and invested the proceeds in his mutual fund. Unless he amended his will, he will disinherit his daughter. An experienced estate planning advisor would have anticipated such contingencies and ensured that Ken’s plan treated both children fairly, regardless of the specific assets in his estate.

Professional experience vs. technical expertise

DIY tools also fall short when a decision demands a professional’s experience rather than mere technical expertise. An online service makes it easy to name a guardian for your minor children, for example, but it can’t help you evaluate the many characteristics and factors that go into selecting the best candidate.

FMD will gladly any of your estate planning questions and help draft your documents.

© 2022

Life Insurance Still Plays an Important Role in Estate Planning

Because the federal gift and estate tax exemption amount currently is $12.06 million, fewer people need life insurance to provide their families with the liquidity to pay estate taxes. But life insurance can still play an important part in your estate plan, particularly in conjunction with charitable remainder trusts (CRTs) and other charitable giving strategies.

Home for highly appreciated assets

CRTs are irrevocable trusts that work like this: You contribute property to a CRT during your life or upon your death and the trust makes annual distributions to you or your beneficiary (typically, your spouse) for a specified period of time. When that period ends, the remainder goes to a charity of your choice.

These instruments may be useful when you contribute highly appreciated assets, such as stock or real estate, and want to reduce capital gains tax exposure. Because the CRT is tax-exempt, it can sell the assets and reinvest the proceeds without currently triggering the entire capital gain. Another benefit is that, if you opt to receive annual distributions from your trust, that income stream generally will be taxed at a lower rate than other income using a formula that combines ordinary taxable income, tax-exempt income, capital gains and other rates.

Here’s where life insurance comes in. Because CRT assets eventually go to charity — usually after both you and your spouse have died — you won’t have as much to leave to your children or other heirs. A life insurance policy can replace that “lost” wealth in a tax advantaged way.

Charities as beneficiaries

CRTs are ideal for philanthropically minded individuals. But there are other ways to use life insurance to fund charitable gifts and enjoy tax benefits. You might, for example, transfer your policy to a nonprofit organization and take a charitable income tax deduction (subject to certain limitations) for it. If you continue to pay premiums on the policy after the charity becomes its owner and beneficiary, you can take additional charitable deductions.

Another scenario is to just name a charity as your policy’s beneficiary. Because you retain ownership, you can’t take charitable income tax deductions during your life. But when you die, your estate will be entitled to an estate tax charitable deduction.

Wealth replacement tool

Life insurance can be used to replace wealth in many circumstances — not only when you’re donating to charity. For instance, if you’ve decided to forgo long term care (LTC) insurance and pay any LTC-related expenses (such as home nursing services or care in a nursing facility) out of pocket, you may not have as much to leave your heirs. Life insurance can help ensure that you provide your family with an inheritance.

Multiple benefits 

Federal estate tax liability may no longer be a concern if your estate is valued at less than $12.06 million. But, depending on your goals, life insurance can help you make charitable gifts, leave money to your heirs and realize tax advantages. We can explain the types of policies that might be appropriate for estate planning purposes.

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Trust in a Trust to Keep Assets Secure

Whether the economic climate is stable or volatile, one thing never changes: the need to protect your assets from risk. Hazards may occur as a result of factors entirely outside of your control, such as the stock market or the economy. It’s even possible that dangers lie closer to home, including the behavior of your heirs and creditors. In any case, it’s wise to consider taking steps to mitigate potential peril. One such step is to set up a trust.

Make sure it’s irrevocable

A trust can be a great way to protect your assets — but it must become the owner of the assets and be irrevocable. That is, you as the grantor can’t modify or terminate the trust after it has been set up. This is the opposite of a revocable trust, which allows the grantor to modify the trust.

Once you transfer assets into an irrevocable trust, you’ve effectively removed all of your rights of ownership to the assets and the trust. The benefit is that, because the property is no longer yours, it’s unavailable to satisfy claims against you.

Placing assets in a trust won’t allow you to sidestep responsibility for any debts or claims that are already outstanding at the time you fund the trust. There may also be a substantial “look-back” period that could negate the protection that would otherwise be provided.

Consider a spendthrift trust

If you’re concerned about what will happen to your assets after they pass to the next generation, you may want to consider a “spendthrift” trust. Despite the name, a spendthrift trust does more than just protect your heirs from themselves. It can protect your family’s assets against dishonest business partners or unscrupulous creditors.

The trust also protects loved ones in the event of relationship changes. For example, if your son divorces, his spouse generally won’t be able to claim a share of the trust property in the divorce settlement.

Several trust types can be designated as a spendthrift trust — you just need to add a spendthrift clause to the trust document. This type of clause restricts a beneficiary’s ability to assign or transfer his or her interests in the trust, and it restricts the rights of creditors to reach the trust assets. But a spendthrift trust won’t avoid claims from your own creditors unless you relinquish any interest in the trust assets.

Bear in mind that the protection offered by a spendthrift trust isn’t absolute. Depending on applicable law, it’s possible for government agencies to reach the trust assets to, for example, satisfy a delinquent tax debt.

You can gain greater protection against creditors’ claims if you give your trustee more discretion over trust distributions. If the trust requires the trustee to make distributions for a beneficiary’s support, for example, a court may rule that a creditor can reach the trust assets to satisfy support-related debts. For increased protection, give the trustee full discretion over whether and when to make distributions. You’ll need to balance the potentially competing objectives of having the access you want and preventing others from having access against your wishes.

Secure your assets

Obviously, you can choose from many types of trusts, depending on your particular circumstances. Talk to us to help you determine which type of trust is best for you going forward.

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If You’re Moving Out of State, Review Your Estate Plan

Are you planning to move to a different state? It may be due to a change in jobs, a desire for a better climate, an opportunity to downsize or to be closer to your kids. In any event, you’ll have to cope with some hassles, including securing motor vehicle registrations, finding new physicians and updating financial records.

In addition to these tasks, here’s some practical advice: Don’t forget to amend your will and other estate planning documents. It doesn’t have to be the first thing you do, but it shouldn’t be the last, either.

Different state, different laws

Remember that the laws governing wills, as well as most other estate planning documents, vary from state to state. Although your will is still generally valid, you may need to take extra steps to ensure complete enforcement. For example, depending on your situation, you might consider appointing a different executor.

Furthermore, state laws for estate planning are constantly changing. This could adversely affect the implementation of your will, trusts, powers of attorney and medical directives. You may no longer be able to achieve the intended results or you might have to forfeit certain tax benefits. In a worst-case scenario, your documents could be rendered obsolete. Also, consider the state tax impact on pensions and other retirement plan accounts.

Review and revise before you relocate

The optimal approach is to review your estate plan before relocating to determine if any changes will be needed. We can help you revise your estate planning documents as necessary.

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Deducting a Trust’s Charitable Donations

If you’re charitably inclined, it may be desirable to donate assets held in a trust. Why? Perhaps you’re not ready to let go of assets you hold individually. Or maybe the tax benefits of donating trust property would be more attractive than making an individual donation.

Before moving forward, it’s important to understand the differences, for tax purposes, between individual and trust donations and the circumstances under which donations by a trust are deductible.

Tax treatment of individual donations

Generally, you’re permitted to deduct charitable donations for income tax purposes only if you itemize. Itemized charitable deductions for cash gifts to public charities generally are limited to 50% of adjusted gross income (AGI), while cash gifts to private foundations are limited to 30% of AGI. Note that through 2025, the Tax Cuts and Jobs Act increased the limit for certain cash gifts to public charities to 60% of AGI.

Noncash donations to public charities generally are limited to 30% of AGI and 20% for donations to private foundations. If you donate appreciated long-term capital gain property to a public charity, you’re generally entitled to deduct its full fair market value. But with the exception of publicly traded stock, deductions for similar donations to private foundations are limited to your cost basis in the property.

Deductions for ordinary income property (including short-term capital gain property) are limited to your cost basis, regardless of the recipient.

Tax treatment of trust donations

The discussion that follows focuses on nongrantor trusts. Because grantor trusts are essentially ignored for income tax purposes, charitable donations by such trusts are treated as if they were made directly by the grantor, subject to the rules applicable to individual donations. Also, this article doesn’t discuss trusts that are specifically designed for charitable purposes, such as charitable remainder trusts or charitable lead trusts.

Making charitable donations from a nongrantor trust may have several advantages over individual donations, including the ability to claim a charitable deduction even if you don’t itemize deductions on your individual income tax return. And a trust can deduct up to 100% of its gross taxable income, free of the AGI-based percentage limitations previously discussed.

In addition, trust deductions can be more valuable than individual deductions because the highest tax rates for trust income kick in at much lower income levels. If you’re contemplating a charitable donation from a trust, there are a few caveats to keep in mind:

• The trust instrument must authorize charitable donations.

• The donation must be made from (that is, traceable to) the trust’s gross taxable income. This includes donations of property acquired with such income, but not property that was contributed to the trust.

• Unlike certain individual charitable donations, deductions for noncash donations by a trust generally are limited to the asset’s cost basis.

Special rules apply to trusts that own interests in partnerships or S corporations, as well as to certain older trusts (generally, those created on or before Oct. 9, 1969).

Make the most of charitable deductions

If income limits or restrictions on itemized deductions have hampered your ability to deduct charitable donations, consider making donations from a trust. We can help you determine if this is a tax-wise option for your situation.

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What Does “Probate” Mean?

The term “probate” is one you’ve probably heard and might associate with negative connotations. But you may not fully understand what it is. For some people, the term conjures images of lengthy delays waiting for wealth to be transferred as well as bitter disputes among family members. Others, because the probate process is open to the public, worry about their “dirty laundry” being aired out. The good news is that there are strategies you can employ to keep much or all of your estate out of probate.

Probate primer

Probate is predicated on state law, so the exact process varies from state to state. This has led to misconceptions about the length of probate. On average, the process takes six to nine months, but it can run longer for complex situations in certain states. Also, some states exempt small estates or provide a simplified process for surviving spouses.

In basic terms, probate is the process of settling an estate and passing legal title of ownership of assets to heirs. If the deceased person has a valid will, probate begins when the executor named in the will presents the document to the county courthouse. If there’s no will — in legal parlance, the deceased has died “intestate”— the court will appoint someone to administer the estate. Thereafter, this person becomes the estate’s legal representative.

The process

With that in mind, here’s how the process generally works. First, a petition is filed with the probate court, providing notice to the beneficiaries named in the deceased’s will. Typically, such notice is published in a local newspaper for the general public’s benefit. If someone wants to object to the petition, they can do so in court.

The executor takes an inventory of the deceased’s property, including securities, real estate and business interests. In some states, an appraisal of value may be required. Then the executor must provide notice to all known creditors. Generally, a creditor must stake a claim within a limited time specified under state law. The executor also determines which creditor claims are legitimate and then meets those obligations. He or she also pays any taxes and other debts that are owed by the estate.

Ownership of assets is then transferred to beneficiaries named in the will, following the waiting period allowed for creditors to file claims. If the deceased died intestate, state law governs the disposition of those assets. However, before any transfers take place, the executor must petition the court to distribute the assets as provided by will or state intestacy law.

Ways to avoid probate

Certain assets, such as an account held jointly or an IRA or bank account for which you’ve designated a beneficiary, are exempt from probate. But you also may be able to avoid the process with additional planning. The easiest way to do this is through the initial form of ownership or the use of a living trust.

In the case of joint ownership with rights of survivorship, you acquire the property with another party, such as your spouse. The property then automatically passes to the surviving joint tenant upon the death of the deceased joint tenant. This form of ownership typically is used when a married couple buys a home or other real estate.

A revocable living trust may be used to avoid probate and protect privacy. The assets are typically transferred to the trust during your lifetime and managed by a trustee that you designate.

Protect your privacy

The reason many people dread the word probate is the fact that it’s a public process. But by using the right strategies, you can protect your privacy while saving your family time, money and hardship. We can help you implement the right techniques.

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2 Estate Planning Options for Families with Disabled Loved Ones

If you have a family member who’s disabled, financial and estate planning can be tricky. You don’t want to jeopardize his or her eligibility for means-tested government benefits such as Medicaid or Supplemental Security Income (SSI). A special needs trust (SNT) is one option to consider. Another is to open a Section 529A account, also referred to as an ABLE account, because it was created by the Achieving a Better Life Experience (ABLE) Act.

ABLE account details

The ABLE Act allows family members and others to make nondeductible cash contributions to a qualified beneficiary’s ABLE account, with total annual contributions limited to the federal gift tax annual exclusion amount ($16,000 for 2022). To qualify, a beneficiary must have become blind or disabled before age 26.

The account grows tax-free, and earnings may be withdrawn tax-free provided they’re used to pay “qualified disability expenses.” These include health care, education, housing, transportation, employment training, assistive technology, personal support services, financial management and legal expenses.

An ABLE account generally won’t affect the beneficiary’s eligibility for Medicaid and SSI — which limits a recipient’s “countable assets” to just $2,000 — with a couple of exceptions. First, distributions from an ABLE account used to pay housing expenses are countable assets. Second, if an ABLE account’s balance grows beyond $100,000, the beneficiary’s eligibility for SSI is suspended until the balance is brought below that threshold.

ABLE account vs. SNT

Here’s a quick overview of the relative advantages and disadvantages of ABLE accounts and SNTs:

Availability. Anyone can establish an SNT, but ABLE accounts are available only if your home state offers them, or contracts with another state to make them available. Also, as previously noted, ABLE account beneficiaries must have become blind or disabled before age 26. There’s no age limit for SNTs.

Qualified expenses. ABLE accounts may be used to pay only specified types of expenses. SNTs may be used for any expenses the government doesn’t pay for, including “quality-of-life” expenses, such as travel, recreation, hobbies and entertainment.

Tax treatment. An ABLE account’s earnings and qualified distributions are tax-free. An SNT’s earnings are taxable.

Contribution limits. Annual contributions to ABLE accounts currently are limited to $16,000, and total contributions are effectively limited to $100,000 to avoid suspension of SSI benefits. There are no limits on contributions to SNTs, although contributions that exceed $16,000 per year may be subject to gift tax.

Investments. Contributions to ABLE accounts are limited to cash, and the beneficiary (or his or her representative) may direct the investment of the account funds twice a year. With an SNT, you can contribute a variety of assets, including cash, stock or real estate. And the trustee — preferably an experienced professional fiduciary — has complete flexibility to direct the trust’s investments.

Medicaid reimbursement. If an ABLE account beneficiary dies before the account assets have been depleted, the balance must be used to reimburse the government for any Medicaid benefits the beneficiary received after the account was established. There’s also a reimbursement requirement for SNTs. With either an ABLE account or an SNT, any remaining assets are distributed according to the terms of the account or the SNT.

Examine the differences

When considering which option is best for your family, remember the key differences: An ABLE account may offer greater tax advantages, while an SNT may offer greater flexibility. We can help your family decide how to proceed to best provide for your loved one.

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Does Your Trust Provide for the Removal of a Trustee?

To ensure that a trust operates as intended, it’s critical to appoint a trustee that you can count on to carry out your wishes. But to avoid protracted court battles in the event that the trustee isn’t doing a good job, consider giving your beneficiaries the right to remove and replace a trustee. Without this option, your beneficiaries’ only recourse would be to petition a court to remove the trustee for cause.

Defining “cause”

The definition of “cause” varies from state to state, but common grounds for removal include:

• Fraud, mismanagement or other misconduct,

• A conflict of interest with one or more beneficiaries,

• Legal incapacity,

• Poor health, or

• Bankruptcy or insolvency if it would affect the trustee’s ability to manage the trust.

Not only is it time-consuming and expensive to go to court, but most courts are hesitant to remove a trustee that was chosen by the trust’s creator. That’s why including a provision in the trust document that allows your beneficiaries to remove a trustee without cause if they’re dissatisfied with his or her performance can be a good idea. Alternatively, you could authorize your beneficiaries to remove a trustee under specific circumstances outlined in the trust document.

Adding successor trustees

If you’re concerned about giving your beneficiaries too much power, you can include a list of successor trustees in the trust document. That way, if the beneficiaries end up removing a trustee, the next person on the list takes over automatically, rather than the beneficiaries choosing a successor.

Alternatively, or, in addition, you could appoint a “trust protector” with the power to remove and replace trustees and to make certain other decisions regarding management of the trust. Contact us for additional information on the role of a trustee.

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Avoid These 4 Estate Planning Pitfalls

No one likes to contemplate his or her own mortality. But ignoring the need for an estate plan or procrastinating in the creation of one is asking for trouble. If you haven’t started the process, don’t delay any longer. For your estate plan to achieve your goals, avoid these four pitfalls:

Pitfall #1: Failing to update beneficiary forms. Your will spells out who gets what, where, when and how, but it’s often superseded by other documents such as beneficiary forms for retirement plans, annuities, life insurance policies and other accounts. Therefore, like your will, you must also keep these forms up to date. For example, despite your intentions, retirement plan assets could go to a sibling or parent — or even worse, an ex-spouse — instead of your children or grandchildren. Review beneficiary forms periodically and make any necessary adjustments.

Pitfall #2: Not properly funding trusts. Frequently, an estate plan will include one or more trusts, including a revocable living trust. The main benefit of a living trust is that assets transferred to the trust don’t have to be probated and exposed to public inspection. It’s generally recommended that such a trust be used only as a complement to a will, not as a replacement.

However, the trust must be funded with assets, meaning that legal ownership of the assets must be transferred to the trust. For example, if real estate is being transferred, the deed must be changed to reflect this. If you’re transferring securities or bank accounts, you should follow the directions provided by the financial institutions. Otherwise, the assets must be probated.

Pitfall #3: Mistitling assets. Both inside and outside of trusts, the manner in which you own assets can make a big difference. For instance, if you own property as joint tenants with rights of survivorship, the assets will go directly to the other named person, such as your spouse, on your death.

Not only is titling assets critical, you should review these designations periodically, just as you should your beneficiary designations. Major changes in your personal circumstances or the prevailing laws could dictate a change in the ownership method.

Pitfall #4: Not coordinating different plan aspects. Typically, there are several moving parts to an estate plan, including a will, a power of attorney, trusts, retirement plan accounts and life insurance policies. Don’t look at each one in a vacuum. Even though they have different objectives, consider them components that should be coordinated within your overall plan. For instance, you may want to arrange to take distributions from investments — including securities, qualified retirement plans, and traditional and Roth IRAs — in a way that preserves more wealth.

To help ensure that your estate plan succeeds at reaching your goals and avoids these pitfalls, turn to us. We can provide you with the peace of mind that you’ve covered all the estate planning bases.

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