Kansas and Missouri Estate Planning

What are Some Downsides to an Inheritance?

Leaving an inheritance could be a burden to your heirs.

You have started your estate planning.

You want to leave a financial legacy for your children.

Dividing your estate equally in your estate plan seems simple enough.

According to a recent Kiplinger article titled “Are You Forcing Unintended Consequences on Your Heirs?,” leaving an inheritance may be a burden to your heirs.

No, really.

IRA burdens.

Traditional IRAs bring with them Required Minimum Distributions and taxes on distributions.

These do not disappear when inherited.

Chances are your children will not have the same tax liabilities.

After tax, some children may end up with a smaller inheritance due to their higher marginal rate.

Real estate issues.

If you have a vacation home, you may hope your children will want to keep it.

Two viable options to consider are to: 1) pass the property through a Qualified Personal Residence Trust, or 2) leave it directly to your children.

Be sure you discuss this with your children in advance.

They will need to be on board with taxes and upkeep.

Liquidating assets.

Collections, alternative investments, and real estate are often sold at auction after death.

Unfortunately, this can result in them being sold for lower prices.

The result?

Your family would be left with less.

Make plans early so as to maximize their return on your investment for your loved ones.

Life insurance mistakes.

You may have once held a life insurance policy in an Irrevocable Life Insurance Trust (ILIT).

With a higher federal estate tax threshold (i.e., $11.4 million per persons for 2019), maintaining the ILIT may be unnecessary.

There is no need to overcomplicate things for your loved ones.

However, make no moves without consulting with your estate planning attorney and your impacted loved ones who are ILIT beneficiaries.

Inefficient trusts.

A trust can be helpful when bypassing probate.

Be sure your trust meets the needs of your family.

Careless planning can create an unnecessary burden.

Discuss your plans with your heirs and an experienced estate planning attorney to create a plan (or update your current plan) to meet the needs of all parties involved.

Reference: Kiplinger (June 13, 2019) “Are You Forcing Unintended Consequences on Your Heirs?”

What Taxes Should I Expect to Pay on My Inheritance?

Taxes on inheritances vary.

Someone who knows you and loves you had money.

He or she died.

Now you have received an inheritance.

What should you do now?

According to a recent Orange Town News article titled “Will I Pay Taxes on My Inheritance,” your actions are dependent on the type of inheritance you received.

Let us take a look.

Bank Savings Accounts or CDs.

If the account is not a retirement account, the federal government will not impose an income tax.

The federal government does not have an inheritance tax either.

Unfortunately, certain states will impose an "inheritance" tax.

These include Iowa, Maryland, New Jersey, Kentucky, Nebraska, and Pennsylvania.

Talk with an experienced estate planning attorney about the best actions to take.

Primary Residence or Other Real Estate.

Inheriting a home or real estate does not trigger taxes.

When you sell the property and home, you will may be taxed on capital gains.

Valuation is established on the day of death.

Let us say the value is $250,000 at the date of death and you wait to sell it.

When you do sell, the value has risen to $275,000.

The $25,000 gain must then be taxed.

The day you take ownership determines the cost-basis.

Life Insurance Proceeds.

These proceeds are not taxable as income.

There is an exception.

If interest is earned, you could owe taxes.

This occurs when the receipt of the proceeds is delayed.

The Form 1099-INT muse be filed by the beneficiary.

The interest will be taxable by both the state and the federal government.

If the proceeds are transferred to an individual before the insured dies, the proceeds are fully taxable.

There is another possible exemption: the value of the death benefit is included as part of your gross estate for determining federal estate taxes.

Consequently, if the amount of life insurance death benefit put you above the federal estate tax exemption ($11.4 million per taxpayer for 2019), then your estate may be subject to taxation.

Retirement Accounts: 401(k) and IRA.

Whether a traditional IRA is inherited or not, distributions are taxable.

Roth IRA distributions are not taxable, unless taken within five years of the IRA being established.

Laws for retirement plan distributions may change based on pending legislation.

And not for the better.

This means you should discuss options with your experienced estate planning attorney.

Some 401(k)s are taxed or will be taxable.

How much is the tax?

This depends on the particular rules of the 401(k) plan.

The distribution for some plans must be a lump sum.

If a spouse inherits, he or she may rollover into an IRA.

If not a spouse, the lump-sum will likely have to be taken and the resulting taxes paid.

Stocks.

Usually, capital gains are paid on gains made during the period of ownership post-inheritance. (See the hypothetical regarding real estate above.)

When inherited, cost basis is determined from the fair market value on the date of death.

Artwork and Jewelry.

If assets like jewelry, artwork, rare stamps, books antiques, and coin collections are inherited, they will trigger a tax on the next gain at sale.

The rate is higher than most capital gains assets.

Instead of 15 or 20 percent, the capital gains rate is 28 percent.

Valuation like other assets is determined on date of death or the alternate valuation date.

Before accepting your inheritance, you should discuss the inheritance and the tax liability with your attorney.

This will help you have a better understanding of your situation and how your choices will impact your finances.

Reference: Orange Town News (May 29, 2019) “Will I Pay Taxes on My Inheritance”

Should I Tell My Children Anything About Their Future Inheritance?

Honesty is a good policy.

You have created an estate plan.

With the help of an experienced estate planning attorney, everything is in place and in alignment with your wishes.

You are done.

According to a recent Kiplinger article titled “To Prepare Your Heirs for Future Wealth, Don't Hide the Truth,” this is not necessarily true.

You should probably talk to your children about your plan.

People make many excuses for avoiding this crucial step.

Like what?

First, the topic is unpleasant.

People do not enjoy discussing death of a family member.

You cannot avoid death.

Why avoid talking about it?

It is a reality.

A second reason is fear of poor decisions.

Many parents believe if children know they will receive an inheritance, then they will no longer be motivated to work or go to school.

Discussing your wealth and your estate plan with your children can be a valuable time to pass along your wisdom and explain why you made the choices you made.

By doing so, you can help your children make informed decisions for their own future.

This can help with their own tax and estate planning, too.

Communication is key to any relationship.

Transparency in estate planning can help strengthen your family bonds, while setting your loved ones up for a successful transfer of wealth and wisdom.

Reference: Kiplinger (May 22, 2019) “To Prepare Your Heirs for Future Wealth, Don't Hide the Truth”

What Should I Know about Leaving an "Unequal" Inheritance?

Equal and fair are not necessarily synonymous.

You are reviewing your finances and assets.

You know you will likely be leaving some sum behind.

You have more than one child.

How should you divide the inheritance pie of assets?

According to a recent Ladders.com article titled “More parents are leaving unequal inheritances to their adult kids,” equal may not be the best choice.

A recent Merrill Lynch study found about two-thirds of Americans believe unequal divisions are a good choice depending on circumstances.

It is not merely theory.

The IZA Institute for Labor Economics found those who actually left unequal amounts through wills more than doubled from 1995 to 2010.

Will this not cause conflict among siblings?

Perhaps.

Managing expectations will help.

If you explain your estate planning and the underlying reasons for your decisions, your children will be less inclined to blame your or each other.

What are common reasons for unequal division of an estate?

One is the number of grandchildren.

If a person has more children, many parents see this child as having a greater need for funds.

Another reason is the amount of care provided.

If a child serves as the primary caregiver for an aging parent, this individual may deserve a greater inheritance for the sacrifices of time, energy, and finances.

Sometimes stepchildren are left less than adopted or biological children within blended families.

Sometimes they are not included at all.

However, if you are not careful, stepchildren may inherit everything and your children zippo.

If this possibility caught your attention, consult with an experienced estate planning attorney without delay.

In addition to a difference in sum, you may consider a difference in disbursement.

You may have responsible and capable children who can receive an outright inheritance.

You may also have minor children, children with disabilities, or children with addictions, or children with an undesirable spouse who require more complex and protective planning through a trust.

Do not leave your estate plan as a surprise.

Get the family together and explain your wishes so everyone is on the same page.

Surprises are fun when it comes to birthday parties, but less so when it comes to inheritances.

Reference: Ladders.com (March 25, 2019) “More parents are leaving unequal inheritances to their adult kids”

When is an "Inheritance Trust" a Good Idea?

Trusts provide greater control.

Years of life bring years of experience.

Wisdom tends to grow with age.

As you have accumulated wisdom, you have also grown your wealth.

You want to help your children through leaving an inheritance.

You want the inheritance to be beneficial rather than a stumbling block.

After all, they have not had your years of accumulated financial wisdom.

According to a recent Times Herald-Record article titled “Leaving inheritances to trusts puts you in control,” trusts can be helpful tools.

Many consider trusts to be a tool just for the super wealthy.

This is not so.

With a trust, you have greater control over your assets.

When you leave an inheritance trust to your children, you can stipulate that the inheritance passes to your grandchildren rather than the spouse of your child should you child predecease you or die with assets in trust.

You deny control to the grandchildren until a certain age and have someone else manage the funds for their health, education, maintenance, and support (known by the acronym "HEMS" in the estate planning world).

Are your children at risk of creditors, divorces, or lawsuits?

If yes, a trust can provide protections for the assets you leave behind.

Another benefit a trust affords is protection from the fear that your life of hard work and delayed gratification will be squandered by heirs.

A trust with a graduated plan can be beneficial.

This allows specific amounts to be paid out at certain ages or when certain milestones are reached.

The thought is that more money is given as maturity and responsibility increase.

Another trust option is a spendthrift trust.

What does this do?

This trust allows you to put restrictions on the use of the money for the life of your heirs.

Funds cannot be used to underwrite a lavish and irresponsible lifestyle.

A trust can also provide protections for a loved on who has special needs.

A Special Needs Trust can help you provide for such a loved one without affecting his or her eligibility for government benefits.

Not all trusts serve the same purpose.

Discuss trusts with an experienced estate planning attorney to create a plan to meet your specific needs.

Reference: Times Herald-Record (February 16, 2019) “Leaving inheritances to trusts puts you in control”

What Happens to My Estate Distribution for a Predeceased Heir?

Burying your child can be a sad reality.

You are the parent.

You brought new life into the world.

You rear your children.

You love them, nurture them, and teach them.

What if you have to bury them?

According to a recent article in The Carroll County Times titled “Legal Matters: If predeceased by an heir in a valid will, what happens with that inheritance?,” this is an unpleasant reality for many.

The death of a child is devastating.

It is not how things are “supposed” to happen.

As my maternal grandfather told me, "the old must die, but the young may die."

The pain will never fully leave.

You may be grieving the rest of your life.

Unfortunately, even after the death of a child, your life will go on.

As it does, you will need to face your new normal.

This includes mundane and even unpleasant tasks like updating your estate plan.

The death of one of your heirs requires such action to be taken.

What happens if you neglect this?

The state will decided, based on its own laws of intestate succession, the fate of the share designated for your deceased child.

In addition, life insurance companies and retirement plan administrators typically have provided for this by contract in lieu of beneficiary designations made by you.

The inheritance may be transferred to the descendants, the surviving siblings, or the estate of a predeceased child.

Not updating your will, trust, or beneficiary designations not change reality.

Honor the legacy of your child by taking care of yourself and those you love.

Reference: The Carroll County Times (December 21, 2018) “Legal Matters: If predeceased by an heir in a valid will, what happens with that inheritance?”

Can I Refuse to Accept My Inheritance?

You can choose to refuse an inheritance.

A loved ones has died.

You have been designated as an heir.

Perhaps congratulations are in order.

Perhaps they are not.

According to a recent Investopedia article titled “How Inheritance and Estate Tax Waivers Work,” there may be times when it is wise to not accept an inheritance.

Really?

Yes.

For example, there may be adverse estate tax consequences to you or the estate of the decedent.

What do you need to know regarding estate or inheritance disclaimers?

Disclaimer Form Language

Language must be specific and binding.

What should it include?

The decedent and the heir must be named.

In addition to a general disclaimer, you should list any assets specifically left.

You will also need it to indicate that your disclaimer is made voluntarily.

The Legal Process

States have their own laws regarding estates.

The disclaimer needs to be specific to the laws of the state where you live and filed with the appropriate jurisdiction.

You will also need to provide the estate executor with a copy of the disclaimer.

Remember, you cannot receive compensation for signing away your rights to your inheritance.

Timing and Taxes

Once the decedent passes, you have a limited amount of time to submit a waiver.

How long?

Typically, the time frame is nine months.

What if you miss the deadline?

You must accept the inheritance.

This means you will also need to pay any taxes by nine months after the date the decedent passed.

Do not waste time.

This could be a costly mistake.

Legal Consequences of Disclaiming Rights

As an heir can you redirect your disclaimed inheritance?

No.

Asset distribution will occur as if you predeceased.

These could be governed by the terms of the will, or the trust, or intestate estate of the decedent.

By all means, do not attempt these actions alone.

Work with an experienced estate planning attorney to ensure any disclaimer you may consider will meet the requirements of your state.

Reference: Investopedia (October 1, 2018) “How Inheritance and Estate Tax Waivers Work”

Do Most Parents Leave an Inheritance to Their Children?

No one should be presumptuous when it comes to a future inheritance.

People have different priorities.

Some value family.

Some value charity.

Some value business.

Some value personal comfort.

According to a recent Think Advisor article titled “Who Leaves an Inheritance, Who Doesn't,” what people prioritize tends to affect their estate planning.

Estate planning will play a significant role in the coming decades as Baby Boomers begin to expire (i.e., die, pass away, etc.).

Baby Boomers together have an estimated $30 trillion in wealth.

This means about 10 percent of U.S. wealth could change hands every five years between 2031 and 2045.

Inheritances will become a hot topic.

Kansas State University (go Wildcats!) researchers decided to investigate the influences on leaving an inheritance.

What did they find?

Those who expected to receive and those who did receive an inheritance were more likely to want to leave an inheritance to their children.

Those who believed leaving an inheritance was important were more likely to do so.

Often businessmen prioritized leaving an inheritance.

In fact, they are about 10 percent more likely than non-business owners to do so.

What does this mean for you?

Regardless whether you choose to leave an inheritance, estate planning will be important.

Working with an experienced estate planning attorney will enable you to plan in such a way as to meet your own goals.

Reference: Think Advisor (October 19, 2018) “Who Leaves an Inheritance, Who Doesn't”

How do I Make Sure an Estate is Properly Administered?

Executors should be acting in the best interest of the beneficiaries and the estate.

The last surviving parent has passed away.

She left a last will and testament.

In this will your mother divided her assets equally between you and your siblings.

She also named one of your siblings as the executor.

Apparently, that sibling has decided to abuse his power to get a larger chunk of inheritance.

Yikes!

Is there anything you can do?

According to a recent nj.com article titled “Your rights when family fights over a will,” there is.

If the executor tries to keep a testamentary trust or other actions secret from the beneficiaries, he or she is breaching his or her fiduciary duties.

Executors are accountable to the beneficiaries.

The beneficiaries should be informed of all actions taken by the executor.

When the executor probates a will, all beneficiaries named in the will and all heirs of law must be notified by the executor in writing within an allotted time frame.

Copies of the will must be provided to the beneficiaries upon request.

These beneficiaries then have a specific amount of time to contest the will.

If a testamentary trust was created, then the beneficiaries can see and review it as part of the will provisions.

The executor is responsible for settling and distributing the estate efficiently and quickly.

Any executors or trustees have a fiduciary responsibility to care for the estate assets, to be impartial in their dealings with beneficiaries, and to act in the best interests of the estate according to the wishes of the decedent.

The executor is thus accountable to the beneficiaries who can request an accounting of the actions of the executor as well as any supporting documentation.

The trustee is similarly required to keep beneficiaries informed to protect their interests.

What if a fiduciary breaches his or her fiduciary duties?

You can ask the court to remove the individual as the executor or trustee.

What happens if the court finds the executor or trustee to be in fault?

The executor or trustee is responsible for any misconduct and the legal fees associated with the action brought against him or her.

Does this sound like your situation?

Work with an experienced estate litigation attorney regarding your specific circumstances.

Reference: nj.com (September 28, 2018) “Your rights when family fights over a will”

Is it Better to Receive a Gift or an Inheritance?

Gifting while alive of through your estate can make a difference in taxes.

You are thinking about your estate plan.

How can you optimize your asset transfers?

Should you give them to your children while you are alive?

Should you pass everything through your will or trust?

Is one approach better than the other?

According to a recent nj.com article titled “This estate planning mistake could mean huge tax bill,” this depends on certain factors.

In New Jersey, for example, the estate tax was repealed in 2018.

There is still a federal tax, but your assets must be exceed $11.18 million if you are single or $22.36 million if you are a couple.

The inheritance tax remains in the Garden State.

This tax only affects those who inherit and are not “Class A” beneficiaries.

Who are “Class A” beneficiaries?

These include children, spouse, grandchildren, and parents.

Why could giving an asset to your child while you are yet living have negative tax consequences?

In such case your child would have the same basis (a carryover basis) you had in the asset.

Were she to sell the asset, then there could be a capital gains tax to pay.

What is the capital gains tax?

This is the difference between the sale proceeds and the tax basis of the owner.

Passing the asset to your child at death would allow her to avoid the capital gains tax by affording a stepped up basis to value on your date of death.

Transferring assets is a big decision.

Tax consequences can be significant.

Work with an experienced estate planning attorney to create a plan to benefit you and your loved ones.

So, how do you find an "experienced" estate planning attorney?

First, ask around. Friends, family and other professional advisors are trustworthy sources.

Second, conduct an "organic" search on "Google" for "estate planning" near you (e.g., "Estate Planning Anytown MoKan").

Third, either way, verify! Check out the education, experience, ratings and client reviews of any attorney before you contact him or her.

How?

Two helpful online resources are just a mouse click away to assist with your due diligence:  Avvo.com and Lawyers.com.

Check any Avvo ratings, client ratings/testimonials and attorney endorsements on Avvo.com and any "peer ratings" by judges/other attorneys and any client ratings/testimonials on Lawyers.com.

In fact, I use both of these services to thoroughly vett attorneys before referring members of our "client" family for legal help in other areas of law or for matters in jurisdictions outside Kansas or Missouri.

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: nj.com (April 10, 2018) “This estate planning mistake could mean huge tax bill”