Have you made and communicated your funeral arrangements?

One aspect of estate planning that isn’t always covered is the ability to make your funeral arrangements in advance. Of course, for many people it can be difficult to think about their mortality. Indeed, it’s not surprising to learn that many put off planning their own funerals. Unfortunately, this lack of planning may result in emotional turmoil for surviving family members when someone dies unexpectedly.

Also, a death in the family may cause unintended financial consequences. Why not take matters out of your heirs’ hands? By planning ahead, as much as it may be disconcerting, you can remove this future burden from your loved ones.

What are your wishes?

First, make your funeral wishes known to other family members. This typically includes instructions about where you’re to be buried or cremated, if you prefer a formal or religious ceremony, and even the clothing you’ll be buried in.

Your instructions may also cover a memorial service in lieu of, or supplementing, a funeral. If you don’t have a next of kin or would prefer someone else to be in charge of funeral arrangements, you can appoint another representative.

Be aware that the methods for expressing these wishes vary from state to state. With the help of your attorney, you can include a provision in your will, language in a health care proxy or power of attorney, or a separate form specifically designed for communicating your funeral arrangements.

Whichever method you use, it should, at a minimum, state 1) whether you prefer burial or cremation, 2) where you wish to be buried or have your ashes interred or scattered (and any other special instructions), and 3) the person you’d like to be responsible for making these arrangements. Some people also request a specific funeral home.

Should you consider a prepaid funeral?

There’s a division of opinion in the financial community as to whether you should prepay funeral expenses. If you prepay and opt for a “guaranteed plan,” you lock in the prices for the arrangements, no matter how high fees may escalate before death. With a “nonguaranteed plan,” prices aren’t locked in, but the prepayment accumulates interest that may be put toward any rising costs.

When weighing whether to use a prepaid plan, the Federal Trade Commission recommends that you ask the following questions:

• What happens to the money you’ve prepaid?

• What happens to the interest income on prepayments placed in a trust account?

• Are you protected if the funeral provider goes out of business?

Before signing off on a prepaid plan, learn whether there’s a cancellation clause to the plan in the event you change your mind.

What is a POD bank account?

One alternative that avoids the pitfalls of prepaid plans is to let your family know your desired arrangements and set aside funds in a payable-on-death (POD) bank account. Simply name the person who will handle your funeral arrangements as beneficiary. When you die, he or she will gain immediate access to the funds in that account without the need for probate.

© 2023

Higher interest rates spark interest in charitable remainder trusts

If you wish to leave a charitable legacy while generating income during your lifetime, a charitable remainder trust (CRT) may be a viable solution. In addition to an income stream, CRTs offer an up-front charitable income tax deduction, as well as a vehicle for disposing of appreciated assets without immediate taxation on the gain. Plus, unlike certain other strategies, CRTs become more attractive if interest rates are high. Thus, in the current environment, that makes them particularly effective.

How these trusts work

A CRT is an irrevocable trust to which you contribute stock or other assets. The trust pays you (or your spouse or other beneficiaries) income for life or for a term of up to 20 years, then distributes the remaining assets to one or more charities. When you fund the trust, you’re entitled to a charitable income tax deduction (subject to applicable limits) equal to the present value of the charitable beneficiaries’ remainder interest.

There are two types of CRTs, each with its own pros and cons:

• A charitable remainder annuity trust (CRAT) pays out a fixed percentage (ranging from 5% to 50%) of the trust’s initial value and doesn’t allow additional contributions once it’s funded.

• A charitable remainder unitrust (CRUT) pays out a fixed percentage (ranging from 5% to 50%) of the trust’s value, recalculated annually, and allows additional contributions.

CRATs offer the advantage of uniform payouts, regardless of fluctuations in the trust’s value. CRUTs, on the other hand, allow payouts to keep pace with inflation because they increase as the trust’s value increases. And, as noted, CRUTs allow you to make additional contributions. One potential disadvantage of a CRUT is that payouts shrink if the trust’s value declines.

CRTs and a high-interest-rate environment

To ensure that a CRT is a legitimate charitable giving vehicle, IRS guidelines require that the present value of the charitable beneficiaries’ remainder interest be at least 10% of the trust assets’ value when contributed. Calculating the remainder interest’s present value is complicated, but it generally involves estimating the present value of annual payouts from the trust and subtracting that amount from the value of the contributed assets.

The computation is affected by several factors, including the length of the trust term (or the beneficiaries’ ages if payouts are made for life), the size of annual payouts and an IRS-prescribed Section 7520 rate. If you need to increase the value of the remainder interest to meet the 10% threshold, you may be able to do so by shortening the trust term or reducing the payout percentage.

In addition, the higher the Sec. 7520 rate is at the time of the contribution, the lower the present value of the payouts and, therefore, the larger the remainder interest. In recent years, however, rock-bottom interest rates made it difficult, if not impossible, for many CRTs to qualify. As interest rates have risen, it has become easier to meet the 10% threshold and increase annual payouts or the trust term without disqualifying the trust.

Now may be the time for a CRT

If you’ve been exploring options for satisfying your charitable goals while generating an income stream for yourself and your family, now may be an ideal time for a CRT. Contact your FMD advisor if you have questions.

© 2023

Naming a guardian is critical for parents of young children

If you’re the parent of young children, you’ve probably put a lot of thought into raising your kids, ranging from their schools to their activities to their religious upbringing. But have you considered what would happen to them if you — and your spouse if you’re married — should suddenly die? Will the children be forced to live with relatives they don’t know or become entangled in a custody battle? Fortunately, you can avoid a worst-case scenario with some advance estate planning.

With a will, there’s a way

The biggest step you can take to ensure your intentions are met is to specifically name a guardian in your will. If you have a will in place but haven’t provided for a guardian for your minor children, have your lawyer amend it as soon as possible. This can be done easily enough by adding a clause or, if warranted, through drafting a new will.

Be sure to list all the names and birthdates of your children. In addition, you might include a provision for any future children in the event you pass away before your will is amended again. Your attorney will draft the required language.

What happens if you don’t name a guardian for minor children in your will? The choice will be left to the courts to decide based on the facts. In some cases, the court could choose a family member over a friend you would have chosen. This could lead to subsequent legal disputes with the kids caught in limbo.

Factors that can influence your choice

There’s no definitive “right” or “wrong” choice for a guardian. Every situation is different. But there are several factors that may sway your decision:

Location. It’s often preferable to name a guardian who lives close to your current location as opposed to someone residing thousands of miles away. The transition will be easier for the kids if they aren’t uprooted.

Age. A guardian’s age is often overlooked but can be a crucial factor. Your parents may have provided you with a great upbringing, but they may now be too old to raise young children. Plus, your parents may experience health issues that could adversely affect the family dynamic.

Environment. Do the guardian’s views on child raising align with your own? If not, your intentions may be defeated. Consider such aspects as education, religion, politics and other lifestyle choices.

Living circumstances. No one can fully project into the future, but at least you can take current circumstances into account. For instance, if you’re inclined to select a sibling as guardian, does he or she already have kids? Is he or she single, married or in a relationship? You don’t want your child to be thrust into chaos when a safer choice may be available.

Choose the best person for the job after discussing it with the individual and designate an alternate if that person can’t fulfill the duties. Frequently, parents will name a married couple who are relatives or close friends. If you take this approach, ensure that both spouses have legal authority to act on the child’s behalf.

Coming to a final decision

Be sure to take time to review your choice of guardian in coordination with other aspects of your estate plan. This decision shouldn’t be made in a vacuum.

© 2023

Owning assets jointly with a child may not be the right estate planning strategy

There’s a common misconception that owning assets jointly with a child or other heir is an effective estate planning shortcut. While this strategy has a certain appeal, it can invite a variety of unwelcome consequences that may quickly outweigh any potential benefits.

Owning an asset — such as real estate, a bank or brokerage account, or a car — with your child as “joint tenants with right of survivorship” offers some advantages. For example, when you die, the asset automatically passes to your child without the need for more sophisticated estate planning tools and without going through probate.

But it can also create a variety of costly headaches, including:

Avoidable transfer tax exposure. If you add your child to the title of property you already own, it may be considered a taxable gift of half the property’s value. And when you die, half of the property’s value will be included in your taxable estate.

Increased income tax. As a joint owner, your child loses the benefit of the stepped-up basis enjoyed by assets transferred at death, exposing him or her to higher capital gains tax.

Exposure to creditors. The moment your child becomes a joint owner, the property is exposed to claims of the child’s creditors.

Loss of control. Adding your child as an owner of certain assets, such as bank or brokerage accounts, enables him or her to dispose of them without your consent or knowledge. And joint ownership of real property prevents you from selling it or borrowing against it without your co-owner’s written authorization.

Unintended consequences. If your child predeceases you, the assets will revert back in your name alone, requiring you to come up with another plan for their disposition.

Unnecessary risk. When you die, your child receives the property immediately, regardless of whether he or she has the financial maturity and ability to manage it.

These problems may be mitigated or avoided with one or more properly designed trusts.

© 2023

Two estate planning documents working in tandem: A living trust and a pour-over will

At the very least, your estate plan should include a legally valid will governing the disposition of assets upon your death. But comprehensive estate planning often goes much further. For instance, you may provide for transfers of assets to a living trust (also known as a revocable trust) to supplement your will. For many, the best part of using a living trust is that the trust assets don’t have to pass through probate.

You can take an additional step by creating a pour-over will. In a nutshell, a pour-over will specifies how assets you didn’t transfer to a living trust during your life will be transferred at death.

Complementary documents

As its name implies, any property that isn’t specifically mentioned in your will is “poured over” into your living trust after your death. The trustee then distributes the assets to the beneficiaries under the trust’s terms.

The main purpose of a pour-over will is to maximize the benefits of a living trust. But attorneys also tout the merits of using a single legal document — a living trust — as the sole guiding force for an estate plan.

To this end, a pour-over will serves as a conduit for any assets that aren’t already in the name of the trust or otherwise distributed. The assets will be distributed to the trust.

This setup offers the following benefits:

Convenience. It’s easier to have one document controlling the assets than it is to “mix and match.” With a pour-over will, it’s clear that everything goes to the trust, and then the trust document is used to determine who gets what.

Completeness. Generally, everyone maintains some assets outside of a living trust. A pour-over will addresses any items that have fallen through the cracks or that have been purposely omitted.

Privacy. In addition to the convenience of avoiding probate for the assets that are titled in the name of the trust, this type of setup helps to keep a measure of privacy that isn’t available when assets are passed directly through a regular will.

There is, however, one disadvantage to consider. As with any will, your executor must handle specific bequests included in the will, as well as the assets being transferred to the trust through the pour-over provision, before the trustee takes over. (Exceptions for pour-over wills may apply in certain states.) While this may take months to complete, property transferred directly to a living trust can be distributed within weeks of the testator’s death.

The role of trustee

After the executor transfers the assets to the trust, it’s up to the trustee to do the heavy lifting. The executor and trustee may be the same person and, in fact, they often are.

The responsibilities of a trustee are similar to those of an executor with one critical difference: they extend only to the trust assets. The trustee then adheres to the terms of the trust.

Account for all your assets

The benefits of using a living trust are many. Pairing it with a pour-over will may help wrangle any loose assets that you purposely (or inadvertently) didn’t transfer to the living trust. Contact the FMD team for more information.

© 2023

Consider providing your beneficiaries with the power to remove 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 the trustee isn’t doing a good job, consider giving the trust beneficiaries the right to remove and replace the trustee.

What’s the role of a trustee?

A 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.

What’s considered “cause?”

If you don’t provide the trust’s beneficiaries the option to remove the trustee, their only recourse would be to petition a court to remove the trustee for 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 may be a good idea. Alternatively, you may want to authorize your beneficiaries to remove a trustee under specific circumstances outlined in the trust document.

Other options

If you’re concerned about giving your beneficiaries too much power, you may want to 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 make certain other decisions regarding management of the trust. Contact the FMD team for more information on the role a trustee plays.

© 2023

Keeping a trust a secret may not achieve the outcome you’d expect

When planning their estates, many affluent people agonize over the impact their wealth might have on their children. Bill Gates reportedly said, “I won’t leave a lot of money to my heirs because I don’t think it would be good for them.”

Even parents of more modest means worry about how the prospect of an inheritance might affect their kids and grandkids. Might it be a disincentive to staying in school, working or otherwise becoming productive members of society?

To address these concerns, some people establish “quiet trusts,” also known as “silent trusts.” In other words, they leave a significant sum in trust for their children; they just don’t tell them about it. It’s an interesting approach, but is it effective?

A questionable strategy

Many states permit quiet trusts, but arguably the risks associated with them outweigh the potential benefits. For one thing, it’s difficult — if not impossible — to keep your wealth a secret. If you live an affluent lifestyle, it’s likely that your children expect to share the wealth someday, and using a quiet trust won’t change that. Even if your children are unaware of the details of your estate plan, their expectations of a future inheritance may encourage the same irresponsible behavior the quiet trust was intended to avoid.

A quiet trust may also increase the risk of litigation. The trustee has a fiduciary duty to act in the beneficiaries’ best interests. If you create such a trust and your children become aware of it years or decades later, they may seek an accounting from the trustee and, with the help of counsel, may challenge any past decisions of the trustee that they disagree with.

A better alternative

The idea behind a quiet trust is generally to avoid disincentives for responsible behavior. But it’s not clear that such a trust will actually accomplish that goal. A better approach may be to design a trust that provides incentives to behave responsibly — sometimes referred to as an “incentive trust.” For example, the trust might condition distributions on behaviors you wish to encourage, such as obtaining a college degree, maintaining gainful employment, pursuing worthy volunteer activities, or avoiding alcohol or substance abuse.

A drawback to setting specific goals is that they may penalize a beneficiary who chooses an alternative, albeit responsible, lifestyle — for example, becoming a stay-at-home parent. To build flexibility into the trust, you may want to establish general principles for distributing trust funds to beneficiaries who behave responsibly, but give the trustee broad discretion to apply these principles on a case-by-case basis.

Keep quiet or provide incentive?

Perhaps the most important benefit of an incentive trust is that it provides an opportunity for you or the trustee to help shape the beneficiaries’ future behavior. With a quiet trust, you keep your beneficiaries’ inheritance a secret in hope that, without the negative influence of future wealth, they’ll behave responsibly. With an incentive trust, on the other hand, you can provide positive reinforcement by communicating the terms of the trust, letting beneficiaries know what they must do to receive their rewards, and providing them with the help they need to succeed.

The FMD team can answer any questions you have on the ins and outs of either of these trust types.

© 2023

An art collection is a special asset to account for in an estate plan

Some assets pose more of a challenge than others when it comes to valuing and accounting for them in an estate plan. Take, for instance, an art collection. If you possess paintings, sculptures, or other pieces of art, they may represent a significant portion of your estate. Here are a few options available to address an art collection in your estate plan.

Sell, bequest, or donate

Generally, there are three options for handling your pieces of art in your estate plan: Sell them, bequest them to your loved ones, or donate them to a museum or charity. Let’s take a closer look at each option:

If you opt to sell, keep in mind that long-term capital gains on artwork and other “collectibles” are taxed at a top rate of 28%, compared with 20% for other types of assets. Rather than selling pieces of art during your lifetime, it may be preferable to include them in your estate to take advantage of the stepped-up basis. That higher basis will allow your heirs to reduce or even eliminate the 28% tax. For example, you might leave the collection to a trust and instruct the trustee to sell it and invest or distribute the proceeds for the benefit of your loved ones.

If you prefer to keep the artwork in your family, you may opt to leave it to your heirs. You could make specific bequests of individual artworks to various family members, but there are no guarantees that the recipients will keep the pieces and treat them properly. A better approach may be to leave the collection to a trust, LLC, or other entity — with detailed instructions on its care and handling — and appoint a qualified trustee or manager to oversee maintenance and display of the collection and make selling and purchasing decisions.

Donating your artwork can be an effective way to avoid capital gains tax and estate tax and to ensure that your collection becomes part of your legacy. It also entitles you or your estate to claim a charitable tax deduction. To achieve these goals, however, the process must be handled carefully. For example, to maximize the charitable deduction, the artwork must be donated to a public charity rather than a private foundation. And the recipient’s use of the artwork must be related to its tax-exempt purpose. Also, if you wish to place any conditions on the donation, you’ll need to negotiate the terms with the recipient before you deliver the items.

If you plan to leave your collection to loved ones or donate it to charity, it’s critical to discuss your plans with the intended recipients. If your family isn’t interested in receiving or managing your artwork or if your charitable beneficiary has no use for it, it’s best to learn of this during your lifetime so you have an opportunity to make alternative arrangements.

Seek a professional appraisal

It’s vitally important to have your artwork appraised periodically by a professional. The frequency depends in part on the type of art you collect, but generally, it’s advisable to obtain an appraisal at least every three years, if not annually.

Regular appraisals give you an idea of how the collection is growing in value and help you anticipate tax consequences down the road. Also, most art donations, gifts, or bequests require a “qualified appraisal” by a “qualified appraiser” for tax purposes.

In addition, catalog and photograph your collection and gather all appraisals, bills of sale, insurance policies, and other provenance documents. These items will be necessary for the recipient or recipients of your artwork to carry out your wishes.

Enjoy your collection

A primary goal of estate planning is to remove appreciating assets from your estate as early as possible to minimize gift and estate taxes. But for many, works of art are more than just assets. Indeed, collectors want to enjoy displaying these works in their homes and may be reluctant to part with them. Your FMD advisor can help you properly address your art collection in your estate plan.

© 2023

Are you considering moving to a new state to minimize estate tax?

With the gift and estate tax exemption amount of $12.92 million for 2023, only a small percentage of families are subject to federal estate tax. While that’s certainly a relief, state estate tax also must be considered in estate planning.

Although many states tie their exemption amounts to the federal exemption, several states have exemptions that are significantly lower — in some cases $1 million or less. You may be considering retiring to a state with no (or a lower) state estate tax. However, doing so may not net the result you’re after.

Severing ties with your former state

Moving to a tax-friendly state doesn’t necessarily mean you’ve escaped taxation by the state you left. Unless you’ve sufficiently cut ties with your former state, there’s a risk that the state will claim you’re still a resident and subject to its estate tax.

Even if you’ve successfully established residency in a new state, you may be subject to estate tax on real estate or tangible personal property located in the old state (depending on that state’s tax laws). And don’t assume that your estate won’t be taxed on this property merely because its value is less than the exemption amount. In some states, estate tax is triggered when the value of your worldwide assets exceeds the exemption amount.

Taking steps to establish residency

If you’re relocating to a state with low or no estate tax, consult your estate planning advisor about the steps you can take to terminate residency in your old state and establish residency in the new one. Examples include acquiring a home in the new state, obtaining a driver’s license and registering to vote there, receiving important documents at your new address, opening bank accounts in the new state and closing the old ones, and moving cherished personal possessions to the new state.

If you own real estate in the old state, consider transferring it to a limited liability company or other entity. In some states, interests in these entities may be treated as nontaxable intangible property.

The bottom line

Before putting up the “For Sale” sign and moving to lower-tax pastures, consult with us. FMD can help you address your current and future state estate tax in your estate plan.

© 2023

What are the pros and cons of custodial accounts for minors?

Setting up an investment account for your minor child can be a tax-efficient way of saving for college or other expenses. And one of the simplest ways to invest on your child’s behalf is to open a custodial account under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA).

These accounts — which are available through banks, brokerage firms, mutual fund companies and other financial institutions — are owned by the child but managed by the parent or another adult until the child reaches the age of majority (usually age 18 or 21).

Custodial accounts can be a convenient way to transfer assets to a minor without the expense and time involved in setting up a trust, but bear in mind that they have downsides, too. Let’s take a closer look at the pros and cons.

Pros

Convenience and efficiency. Establishing a custodial account is like opening a bank account. So it’s quicker, easier and cheaper to set up and maintain than more complex vehicles, such as trusts.

Flexibility. Unlike some savings vehicles, such as Coverdell Education Savings Accounts (ESAs), anyone can contribute to a custodial account, regardless of their income level. In addition, there are no contribution limits. Also, there are no restrictions on how the money is spent. In contrast, funds invested in ESAs and 529 plans must be spent on qualified education expenses, subject to stiff penalties on unqualified expenditures. (However, beginning in 2024, limited amounts held in a 529 plan may be rolled over to a Roth IRA for certain beneficiaries.)

Variety of investment options. Custodial accounts typically offer a broad range of investment options, including most stocks, bonds, mutual funds and insurance-related investments. UTMA accounts may offer even more options, such as real estate or collectibles. ESAs and 529 plans often have more limited investment options.

Estate and income tax benefits. Gifts to a custodial account reduce the size of your taxable estate. Keep in mind, however, that gifts in excess of the $17,000 annual exclusion ($34,000 for married couples) may trigger gift taxes or may tap some of your lifetime gift and estate tax exemption. Contributions to custodial accounts can also save income taxes: A child’s unearned income up to $2,500 per year is usually taxed at low rates (income above that threshold is taxed at the parents’ marginal rate).

Cons

Other vehicles offer greater tax benefits. Although custodial accounts can reduce taxes, ESAs and 529 plans allow earnings to grow on a tax-deferred basis, and withdrawals are tax-free provided they’re spent on qualified education expenses. In addition, 529 plans allow you to accelerate five years of annual exclusion gifts and make a single tax-free contribution of up to $85,000 for 2023 ($170,000 for married couples making joint gifts).

Impact on financial aid. As the child’s property, a custodial account can have a negative impact on financial aid eligibility. ESAs and 529 plans are usually treated as the parents’ assets, which have less impact on financial aid eligibility.

Loss of control. After the child reaches the age of majority, he or she gains full control over the assets and can use them as he or she sees fit. If you wish to retain control longer, you’re better off with an ESA, a 529 plan or a trust.

Inability to change beneficiaries. Once you’ve established a custodial account for a child, you can’t change beneficiaries down the road. With an ESA or parent-owned 529 plan, however, you can name a new beneficiary if your needs change and certain requirements are met.

Weigh your options

A custodial account can be an effective savings tool, but it’s important to understand the pros and cons. We can help you determine which tool or combination of tools is right for you given your financial circumstances and investment goals.

© 2023

Life insurance can be a powerful estate planning tool for nontaxable estates

For years, life insurance has played a critical role in estate planning, providing a source of liquidity to pay estate taxes and other expenses. It’s been particularly valuable for business owners, whose families might not have the liquid assets they need to pay estate taxes without selling the business.

Because the federal gift and estate tax exemption has climbed to $12.92 million (for 2023), estate tax liability generally is no longer a concern for the vast majority of families. But even for nontaxable estates, life insurance continues to offer significant estate planning benefits.

Replacing income and wealth

If you die unexpectedly, life insurance can protect your family by replacing your lost income. It can also be used to replace wealth in a variety of contexts. For example, suppose you own highly appreciated real estate or other assets and wish to dispose of them without generating current capital gains tax liability. One option is to contribute the assets to a charitable remainder trust (CRT).

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 are particularly useful when you contribute highly appreciated assets 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.

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.

Treating your children equally

If much of your wealth is tied up in a family business, treating your children fairly can be a challenge. It makes sense to leave the business to those children who work in it, but what if your remaining assets are insufficient to provide an equal inheritance to children who don’t? For many families, the answer is to purchase a life insurance policy to make up the difference.

Protecting your assets

Depending on applicable state law, a life insurance policy’s cash surrender value and death benefit may be shielded from creditors’ claims. For additional protection, consider setting up an irrevocable life insurance trust to hold your policy.

Finding the right policy

These are just a few examples of the many benefits provided by life insurance. FMD can help determine which type of life insurance policy is right for your situation.

© 2023

Did your spouse’s estate make a portability election? If not, there may still be time.

Portability helps minimize federal gift and estate tax by allowing a surviving spouse to use a deceased spouse’s unused gift and estate tax exemption amount. Currently, the exemption is $12.92 million, but it’s scheduled to return to an inflation-adjusted $5 million on January 1, 2026.

Unfortunately, portability isn’t automatically available; it requires the deceased spouse’s executor to make a portability election on a timely filed estate tax return (Form 706). And many executors fail to make the election because the estate isn’t liable for estate tax and, therefore, isn’t required to file a return.

The numbers don’t lie

When there’s a surviving spouse, estates that aren’t required to file an estate tax return should consider filing one for the sole purpose of electing portability. The benefits can be significant, as the following example illustrates:

Bob and Carol are married. Bob dies in 2023, with an estate valued at $3.92 million, so his unused exemption is $9 million. His estate doesn’t owe estate tax, so it doesn’t file an estate tax return.

Carol dies in 2026, with an estate valued at $15 million. For this example, let’s say the exemption amount in 2026 is $6 million. Because the exemption has dropped to $6 million, her federal estate tax liability is $3.6 million [40% x ($15 million – $6 million)].

Had Bob’s estate elected portability, Carol could have added his $9 million unused exemption to her own for a total exemption of $15 million, reducing the estate tax liability on her estate to zero. Note that, by electing portability, Bob’s estate would have locked in the unused exemption amount in the year of his death, which wouldn’t be affected by the reduction in the exemption amount in 2026.

Take action before time expires

If your spouse died within the last several years and you anticipate that your estate will owe estate tax, consider having your spouse’s estate file an estate tax return to elect portability. Ordinarily, an estate tax return is due within nine months after death (15 months with an extension), but a return solely for purposes of making a portability election can usually be filed up to five years after death. Contact your trusted FMD advisor with any questions regarding portability.

© 2023

To avoid confusion after your death, have only an original, signed will

The need for a will as a key component of your estate plan may seem obvious, but you’d be surprised by the number of people — even affluent individuals — who don’t have one. In the case of the legendary “Queen of Soul” Aretha Franklin, she had more than one, which after her death led to confusion, pain and, ultimately, a court trial among her surviving family members.

Indeed, a Michigan court recently ruled that a separate, handwritten will dated 2014, found in between couch cushions superseded a different document, dated 2010, that was found around the same time.

In any case, when it comes to your last will and testament, you should only have an original, signed document. This should be the case even if a revocable trust — sometimes called a “living trust” — is part of your estate plan.

Living trust vs. a will

True, revocable trusts are designed to avoid probate and distribute your wealth quickly and efficiently according to your wishes. But even if you have a well-crafted revocable trust, a will serves several important purposes, including:

Appointing an executor or personal representative you trust to oversee your estate, rather than leaving the decision to a court,

Naming a guardian of your choosing, rather than a court-appointed guardian, for your minor children, and

Ensuring that assets not held in the trust are distributed among your heirs according to your wishes rather than a formula prescribed by state law.

The last point is important because for a revocable trust to be effective, assets must be titled in the name of the trust. It’s not unusual for people to acquire new assets and put off transferring them to their trusts or they simply forget to do so. To ensure that these assets are distributed according to your wishes rather than a formula mandated by state law, consider having a “pour-over” will. It can facilitate the transfer of assets titled in your name to your revocable trust.

Although assets that pass through a pour-over will must go through probate, that result is preferable to not having a will. Without a will, the assets would be distributed according to your state’s intestate succession laws rather than the provisions of your estate plan.

Reason for an original will

Many people mistakenly believe that a photocopy of a signed will is sufficient. In fact, most states require that a deceased’s original will be filed with the county clerk and, if probate is necessary, presented to the probate court. If your family or executor can’t find your original will, there’s a presumption in most states that you destroyed it with the intent to revoke it. That means the court will generally administer your estate as if you died without a will.

It’s possible to overcome this presumption — for example, if all interested parties agree that a signed copy reflects your wishes, they may be able to convince a court to admit it. But to avoid costly, time-consuming legal headaches, it’s best to ensure that your family members can locate your original will when they need it.

Please don’t hesitate to contact FMD if you have questions about your will or overall estate plan.

© 2023

Avoiding probate: How to do it (and why)

Few estate planning subjects are as misunderstood as probate. But circumventing the probate process is usually a good idea, and several tools are available to help you do just that.

Why should you avoid it?

Probate is a legal procedure in which a court establishes the validity of your will, determines the value of your estate, resolves creditors’ claims, provides for the payment of taxes and other debts, and transfers assets to your heirs.

Depending on applicable state law, probate can be expensive and time consuming. Not only can probate reduce the amount of your estate due to executor and attorney fees, it can also force your family to wait through weeks or months of court hearings. In addition, probate is a public process, so you can forget about keeping your financial affairs private.

Is probate ever desirable? Sometimes. Under certain circumstances, for example, you might feel more comfortable having a court resolve issues involving your heirs and creditors. Another possible advantage is that probate places strict time limits on creditor claims and settles claims quickly.

How do you avoid it?

There are several tools you can use to avoid (or minimize) probate. (You’ll still need a will — and probate — to deal with guardianship of minor children, disposition of personal property and certain other matters.)

The right strategy depends on the size and complexity of your estate. The simplest ways to avoid probate involve designating beneficiaries or titling assets in a manner that allows them to be transferred directly to your beneficiaries outside your will. So, for example, you should be sure that you have appropriate, valid beneficiary designations for assets such as life insurance policies, annuities and IRAs, and other retirement plans.

For assets such as bank and brokerage accounts, look into the availability of “pay on death” (POD) or “transfer on death” (TOD) designations, which allow these assets to avoid probate and pass directly to your designated beneficiaries. Keep in mind, though, that while the POD or TOD designation is permitted in most states, not all financial institutions and firms make this option available.

What if your estate is more complicated?

For larger, more complicated estates, a revocable trust (sometimes called a living trust) is generally the most effective tool for avoiding probate. A revocable trust involves some setup costs, but it allows you to manage the disposition of all your wealth in one document while retaining control and reserving the right to modify your plan. It also provides a variety of tax-planning opportunities.

To avoid probate, it’s critical to transfer title to all your assets, now and in the future, to the trust. Also, placing life insurance policies in an irrevocable life insurance trust can provide significant tax benefits.

The big picture

Avoiding probate is just part of estate planning. We can help you develop a strategy that minimizes probate while reducing taxes and achieving your other estate planning goals.

© 2023

Yes, you still need an estate plan even if you’re single, without children

There’s a common misconception that only married couples with children need estate plans. In fact, estate planning may be even more important for single people without children. Why? Because for married couples, the law makes certain assumptions about who should make financial or medical decisions on their behalf should they become incapacitated and who should inherit their property if they die.

Who’ll inherit your assets?

It’s critical for single people to execute a will that specifies how, and to whom, their assets should be distributed when they die. Although certain types of assets can pass to your intended recipient(s) through beneficiary designations, absent a will, many types of assets will pass through the laws of intestate succession.

Those laws vary from state to state, but generally, they provide for assets to go to the deceased’s spouse or children. For example, the law might provide that if someone dies intestate, half of the estate goes to his or her spouse and half goes to the children. If you’re single with no children, however, these laws set out rules for distributing your assets to your closest relatives, such as your parents or siblings. Or, if you have no living relatives, your assets may go to the state.

By preparing a will, you can ensure that your assets are distributed according to your wishes, whether to family, friends or charitable organizations.

Who’ll make financial decisions on your behalf?

It’s a good idea to sign a durable power of attorney. This document appoints someone you trust to manage your investments, pay your bills, file your tax returns, and otherwise make financial decisions should you become incapacitated.

Although the law varies from state to state, typically, without a power of attorney, a court would have to appoint someone to make these decisions on your behalf. Not only will you have no say in who the court appoints, but the process can be costly and time-consuming.

Who’ll make medical decisions on your behalf?

You should prepare a living will, a health care directive (also known as a medical power of attorney), or both to ensure that your wishes regarding medical care — particularly resuscitation and other extreme lifesaving measures — are carried out in the event you’re incapacitated. These documents can also appoint someone you trust to make medical decisions that aren’t expressly addressed.

Absent such instructions, the laws in some states allow a spouse, children, or other “surrogates” to make these decisions. In the absence of a suitable surrogate, or in states without such laws, medical decisions are generally left to the judgment of health care professionals or court-appointed guardians.

Contact your FMD advisor if you fall into the category of being single without children. We can help draft an estate plan that’s best suited for you.

© 2023

How can an estate plan be kept vital after death?

When a loved one passes away, you might think that the options for his or her estate plan have also been laid to rest. But that isn’t necessarily the case. Indeed, there may be postmortem tactics the deceased’s executor (or personal representative), spouse or beneficiaries can employ to help keep his or her estate plan on track.

Make a QTIP trust election

A qualified terminable interest property (QTIP) trust can be a great way to use the marital deduction to minimize estate tax at the first spouse’s death and limit the surviving spouse’s access to the trust principal. For the transfer of property to the trust to qualify for the deduction, a QTIP trust election must be made on an estate tax return.

QTIP trust assets ultimately are subject to tax as part of the surviving spouse’s estate. In some cases, including more assets in the estate of the first spouse to die can minimize the overall estate tax. In such a situation, the deceased spouse’s executor may decide not to make the QTIP trust election or to make a partial QTIP trust election.

Use a qualified disclaimer

A qualified disclaimer is an irrevocable refusal to accept an interest in property from a will or living trust. Under the right circumstances, a qualified disclaimer can be used to redirect property to other beneficiaries in a tax-efficient manner.

To qualify, a disclaimer must be in writing and delivered to the appropriate representative. The disclaimant has no power to determine who’ll receive the property. Rather, it must pass to the transferor’s spouse or to someone other than the disclaimant, according to the terms of the underlying document making the transfer — such as a will, a living or testamentary trust, or a beneficiary form.

Take advantage of exemption portability

Portability helps minimize federal gift and estate taxes by allowing a surviving spouse to use a deceased spouse’s unused gift and estate tax exemption amount. For 2023, the exemption is $12.92 million.

Bear in mind that portability isn’t automatically available. It requires the deceased spouse’s executor to make a portability election on a timely filed estate tax return. Unfortunately, many estates fail to make the election because they’re not liable for estate tax and, therefore, aren’t required to file a return. These estates should consider filing an estate tax return for the sole purpose of electing portability. The benefits can be significant.

Keep on track

Following the death of a loved one, there may be steps that can be taken to keep his or her estate plan on the right track toward accomplishing his or her goals. To help ensure your loved one’s plan isn’t derailed, discuss your options with FMD.

© 2023

The time to make health care decisions is when you’re healthy

When it comes to estate planning, your ultimate goal likely is to provide for your family after your death. To achieve this goal, consider placing assets in an irrevocable trust to protect against creditors and drafting a will to clearly state who gets what.

But estate planning isn’t just about what happens to your assets after you die. It’s also about protecting yourself and your loved ones during your life. In this regard, it’s important to have a plan in place for making critical medical decisions in the event you’re unable to make them yourself. And, as with other aspects of your estate plan, the time to act is now, while you’re healthy. If an illness or injury renders you unconscious or otherwise incapacitated, it’ll be too late.

2 documents, 2 purposes

To ensure that your health care wishes are carried out and that your family is spared the burden of guessing — or arguing over — what you would decide, put those wishes in writing. Generally, that means executing two documents: a living will and a health care power of attorney (HCPA).

Unfortunately, these documents are known by many different names, which can lead to confusion. Living wills are sometimes called “advance directives,” “health care directives” or “directives to physicians.” And HCPAs may also be known as “durable medical powers of attorney,” “durable powers of attorney for health care” or “health care proxies.” In some states, “advance directive” refers to a single document that contains both a living will and an HCPA.

For the sake of convenience, we’ll use the terms “living will” and “HCPA.” Regardless of terminology, these documents serve two important purposes: 1) to guide healthcare providers in the event you become terminally ill or permanently unconscious, and 2) to appoint someone you trust to make medical decisions on your behalf.

Living will

A living will expresses your preferences for the use of life-sustaining medical procedures, such as artificial feeding and breathing, surgery, invasive diagnostic tests, and pain medication. It also specifies the situations in which these procedures should be used or withheld.

Living wills often contain a do not resuscitate order, which instructs medical personnel to not perform CPR in the event of cardiac arrest.

HCPA

An HCPA authorizes a surrogate — your spouse, child, or another trusted representative — to make medical decisions or consent to medical treatment on your behalf when you’re unable to do so. It’s broader than a living will, which generally is limited to end-of-life situations, although there may be some overlap.

An HCPA might authorize your surrogate to make medical decisions that don’t conflict with your living will, including consenting to medical treatment, placing you in a nursing home or other facility, or even implementing or discontinuing life-prolonging measures.

Put your plan into action

No matter how carefully you plan, living wills and HCPAs are effective only if your documents are readily accessible and healthcare providers honor them. Store your documents in a safe place that’s always accessible and be sure your loved ones know where they are. Also, keep in mind that healthcare providers may be reluctant to honor documents that are several years old, so it’s a good idea to sign new ones periodically. Contact FMD with questions.

© 2023

How to address your frequent flyer miles in your estate plan

If you’re a frequent traveler, you may have accumulated hundreds of thousands or even millions of frequent flyer miles. The value of these miles may be significant, so it’s important to determine whether you can include them in your estate plan and share them with your loved ones.

Learn your options

Your ability to transfer miles at death (or any other time) is governed by your contract with the airline, which requires you to accept a long list of terms and conditions when you join its frequent flyer program. Most programs make it clear that miles aren’t your property and that you’re not entitled to transfer them during your lifetime or at death. But many programs provide that the airline may transfer miles to authorized persons at their discretion.

For example, American Airlines’ rules state that miles are nontransferable, but that, in the event of death, the airline “in its sole discretion, may credit accrued mileage to persons specifically identified in court approved divorce decrees and wills upon receipt of documentation satisfactory to American Airlines and upon payment of any applicable fees.” Anecdotal evidence indicates that American routinely grants these requests and often waives the fees.

Read the fine print

There are no guarantees, but you can maximize the chances that an airline will honor your wishes by including a provision in your will, leaving your frequent flyer miles to one or more beneficiaries. It may be beneficial to put on your reading glasses and read the fine print of your frequent flyer mile programs. Your attorney can answer questions on how to address your miles (or other odd assets, such as a firearms collection) in your estate plan.

© 2023

You’ve been asked to serve as executor, now what?

If you’ve been asked to serve as executor of the estate of a friend or family member, be sure you understand the responsibilities and potential risks before you agree. Keep in mind that you’re not required to accept the appointment, but once you do it’s more difficult to extricate yourself should you change your mind.

Here are some questions to consider before accepting the offer:

What’s your relationship to the individual? If he or she is a close family member, consider not accepting the appointment if you think your grief after his or her death will make it difficult to function effectively in the executor role.

Are you willing and able to take on the duties of an executor? Generally, an executor is responsible for arranging probate, identifying and taking custody of the deceased’s assets, making investment decisions, filing tax returns, handling creditors’ claims, paying the estate’s expenses, and distributing assets according to the will. Although you can seek help from professionals — such as attorneys, accountants, and investment managers — it’s still a lot of work, sometimes for little or no compensation. Ask if there’s an executor’s fee and whether the estate has set aside funds to pay for professional advisors.

What’s your location? If you live far away from the place where the assets and beneficiaries are located, the job will be more difficult, time-consuming, and expensive.

Do you have a good relationship with the beneficiaries? If not, accepting the appointment may put you in a difficult position, especially if you’re also a beneficiary and the other beneficiaries view that as a conflict of interest.

Will the estate pay your expenses? Even if you receive no fee or commission for serving as executor, be sure the estate will pay, or reimburse you, for any out-of-pocket costs.

Finally, some individuals appoint co-executors. For example, they may select one person who knows the family and understands its dynamics and an independent executor with the requisite expertise. So, be sure you know if you’ll be serving as executor solo or with a partner. Having a co-executor may come as a relief or it may add more complications. Contact your FMD advisor for additional information.

© 2023

Prepare for an uncertain federal gift and estate tax exemption amount with a SLAT

For 2023, the federal gift and estate tax exemption amount stands at $12.92 million ($25.84 million for married couples). But without action from Congress, on January 1, 2026, it’s scheduled to drop to only $5 million ($10 million for married couples). Based on current estimates, those figures are expected to be adjusted for inflation to a little over $6 million and $12 million, respectively.

If you expect your estate’s worth to exceed those estimated 2026 exemption amounts, consider implementing planning techniques today that may help reduce or avoid gift and estate tax liability down the road. One such technique is a spousal lifetime access trust (SLAT). Under the right circumstances, a SLAT allows you to remove significant wealth from your estate tax-free while providing a safety net in the event your needs change in the future.

SLAT basics

A SLAT is an irrevocable trust that permits the trustee to make distributions to your spouse, during his or her lifetime, if a need arises. Typically, SLATs are designed to benefit your children or other heirs, while paying income to your spouse during his or her lifetime.

You can make completed gifts to the trust, removing those assets from your estate. But you continue to have indirect access to the trust by virtue of your spouse’s status as a beneficiary. Usually, this is accomplished by appointing an independent trustee with full discretion to make distributions to your spouse.

Beware of potential pitfalls

SLATs must be planned and drafted carefully to avoid unwanted consequences. For example, to avoid inclusion of trust assets in your spouse’s estate, your gifts to the trust must be made with your separate property. This may require additional planning, especially if you live in a community property state. And after the trust is funded, it’s critical to ensure that the trust assets aren’t commingled with community property or marital assets.

It’s important to keep in mind that a SLAT’s benefits depend on indirect access to the trust through your spouse, so your marriage must be strong for this strategy to work. There’s also a risk that you’ll lose the safety net provided by a SLAT if your spouse predeceases you. One way to hedge your bets is to set up two SLATs: one created by you with your spouse as a beneficiary and one created by your spouse naming you as a beneficiary.

If you and your spouse each establish a SLAT, you’ll need to plan carefully to avoid the reciprocal trust doctrine. Under that doctrine, if the IRS concludes that the two trusts are interrelated and place you and your spouse in about the same economic position as if you had each created a trust for your own benefit, it may undo the arrangement. To avoid this outcome, the trusts’ terms should be varied so that they’re not substantially identical.

Contact FMD for more information.

© 2023