Written by Danielle Nodar, Associate Attorney
Estate planning can be a daunting process for many people. Whether it is the stress of making decisions that will impact loved ones when we are gone or avoiding thinking about death or incapacity, many people are hesitant to create an estate plan. The confusion and anxiety surrounding this process have lead to some pervasive myths relatied to estate planning, which we have addressed below.
1. My estate is not big enough to require any estate planning.
There is a widespread myth that only the very wealthy need estate plans and that the average person does not have an “estate” to begin with. This is not true! When someone passes away, all of their assets become part of their estate; there is no minimum threshold of assets that make up an estate. Thus, at death, we all have an estate, it just varies in size and complexity based on the amount and types of assets you have. Oftentimes, people with fewer assets have the most issues during probate and could have really used the help of an attorney.
2. Estate Planning only deals with distributing property at my death.
Another myth is that your estate plan only deals with who will inherit your property when you pass away. This is also incorrect! A will also allows you to name people who may serve important roles when you pass away. In a will you will name an Executor to manage your assets and distribute them to the beneficiaries in your will at the time of your death. Without a will, you will not have any control over naming the person to manage you affairs at your death. Additionally, in North Carolina, the only way to name a guardian for your children in the event that both parents pass away while the children are still minors is to name the guardian in a Last Will and Testament. You can also name a trustee who is the money manager for inheriting children until they reach a certain age.
Additionally, estate planning involves planning for incapacity through durable powers of attorney and health care directives. With a durable power of attorney, you can name an agent to make business, legal, and financial decisions on your behalf if you become incapacitated. You can also name an agent to make healthcare decisions for you in the event that you are incapacitated and include specific instructions for them about your healthcare wishes. There is also the advance directive or “living will,” which includes your wishes relating to the withdrawal or withholding of life support if you are incapacitated and suffering from a medical condition where you will not likely recover.
3. If I have a will, I can avoid probate.
Having a will drafted will not always prevent your estate from having to go through probate to pass assets to your loved ones. If you pass away with a will, depending on the circumstances, your executor may have to file your will at the courthouse along with the initial probate application and then must comply with all the requirements of the probate process. This includes providing the court with an inventory of all of your assets at the time of your death, providing notice to any of your potential creditors existing at the time of death, handling creditor claims and paying creditors with estate assets, and making distributions of any remaining assets to your beneficiaries. While there are ways to avoid probate (for example, owning property joint with rights of survivorship, the surviving spouse allowance, and utilizing revocable trusts), sometimes merely having a will is not enough.
4. I do not need a will because my spouse will inherit everything.
In North Carolina, this is oftentimes false. The surviving spouse will remain owner of all joint property or accounts with right of survivorship. Also, every surviving spouse (regardless of the existence of a will) is entitled to a year’s allowance of $60,000 worth of the decedent’s personal property. If there are any other assets, a surviving spouse does not automatically inherit everything according to the North Carolina Intestacy Statute. For example, if you do not have a will and are survived by a spouse and only one child (or grandchildren, if that one child is deceased), the surviving spouse takes ½ of your real property, the first $60,000 of your personal property, and ½ the remaining balance of your personal property while the child inherits the remainder. If you do not have children but are survived by a spouse and parent(s), your spouse will inherit ½ of your real property, the first $100,000 of your personal property, and ½ the remaining balance of your personal property. Your parent(s) will inherit ½ of your real estate and any personal property remaining after the spouse’s share
Thus, without a will, you may be inadvertently leaving your assets to people who do not need them and leave your spouse in need. For example, if your children are minors, you may want your spouse to inherit your full estate to take care of your children.
Overall, all of these options are more complicated and involve more court oversight. It is much easier to create an estate plan with an attorney that ensures that your spouse inherits everything or is adequately taken care of when you pass away. If you or anyone you know have any questions regarding estate planning, please give Jesson & Rains a call.
- By Jesson & Rains Associate Attorney, Danielle Nodar
The beginning of a new year lends itself to reflecting on the year that has passed and setting goals for the future. Come January, we are bombarded with information about New Year’s resolutions and implementing plans to help us transform our resolutions from lofty dreams to our reality. From health goals relating to diet and fitness, financial goals such as saving for retirement or paying off longstanding debt, even decluttering our homes--there is no shortage of information about what we can do to improve our present and plan for our future.
However, one area of planning that many people seem to put off is creating an estate plan. Estate planning involves meeting with an attorney to discuss things like your assets and debts and how they could impact your estate plan; how you want your property distributed at your passing; who will administer the probate of your estate; who will handle your financial affairs and medical decisions if your become incapacitated and are no longer able to make those decisions on your own; and other important decisions that could make a lasting impact on your loved ones.
Even if you have an estate plan in place, you should meet with your estate planning attorney every three to five years to review any life changes or changes in the law. Some reasons to update an estate plan are:
If you have had any major life changes or just want to ensure that your estate plan is in order, make it a goal for 2019 to plan for your future and the future of your loved ones with estate planning. We can help you to ensure that your property is distributed how and to whom you want it to be distributed and to ensure that you are leaving your family unburdened.
Retirement accounts can be one of the largest assets that someone passes on to a loved one. However, these assets are treated differently if they are tax-deferred. If you leave a standard 401K to a beneficiary, they will pay income tax when they withdraw the money.
A surviving spouse will be required to take Required Minimum Distributions (RMDs) once they turn 70.5 years old. For non-spouse heirs, the beneficiary will have to take RMDs every year if the original account owner passes away after reaching age 70.5. But if the original account owner was under the age of 70.5 when they died, the RMDs will be based on the beneficiary's age instead. This is called a “stretch out” because the RMDs are stretched out over the beneficiary’s life, based on the beneficiary’s life expectancy as dictated by the IRS.
Not all plan administrators will allow a beneficiary to stretch out the payments. It may be worthwhile for the beneficiary to rollover the inherited 401K to their own IRA because, if you do not stretch out RMDs, the RMDs might be taxed at a higher income tax bracket!
Additionally, because 401Ks are distributed according to life expectancies, sometimes they are not the best asset to pass along to multiple beneficiaries through a trust. The IRS will force RMDs based on the life expectancy of the oldest beneficiary.
Finally, deferred tax assets should not be left in a supplemental needs trust for the benefit of a disabled beneficiary. If the trustee accumulates the RMDs instead of distributing them to the beneficiary (which oftentimes is necessary to keep the beneficiary qualified for government benefits), the IRS will tax the RMDs at the trust income tax rate, which can be as high as 37%!
As you can see, estate planning is so much more than simply drafting a will. Please contact Jesson & Rains if you would like to consult with a professional.
ILIT stands for Irrevocable Life Insurance Trust. It is a method of decreasing the size of a person’s taxable estate. For tax year 2018, an estate over $11.2 million is taxable (in North Carolina, which only has to deal with federal tax). Most people do not realize that life insurance proceeds are included in the calculation of a decedent’s taxable estate by the IRS. An exception to this rule are proceeds from a life insurance policy that the decedent/insured had no rights or powers over (called incidents of ownership). Therefore, ILITs are used to own the life insurance policy instead of the decedent so that the policy proceeds are not includable in the taxable estate.
Unlike revocable living trusts, where the grantor/insured is also the trustee during his or her lifetime, for an ILIT to work, the grantor/insured cannot be the trustee (because that would be an incident of ownership). “Incidents of ownership” also include the power to change the beneficiary, change the proceeds, cancel the policy, assign the policy, change the terms of the policy, or use it as collateral. Therefore, one of the major downsides of utilizing an ILIT is that once the policy is owned by the ILIT, the insured no longer has any control over it.
The premiums are paid by the ILIT using contributions made by the Grantor. This is another benefit of an ILIT – the Grantor can contribute an amount equal to the $15,000 yearly gift tax exclusion to the trust per beneficiary (which is not countable towards the $11.2 exclusion amount). The beneficiaries must have a right to withdraw the gift within a reasonable amount of time (called a Crummey power).
It is better to have the ILIT purchase the life insurance instead of transferring the policy to the ILIT because there is a three-year lookback period (meaning, if the owner dies during that three-year period, the policy proceeds are includable in the owner’s estate).
If you or someone you know would like more information about ILITs, please give Jesson & Rains a call.
In North Carolina, generally, the answer to this question depends on (1) what type of business you own; (2) whether you have bylaws or an operating agreement; (3) whether you have a will; and (4) if you have an insolvent estate.
No matter what type of business, your interest in the business is an asset. Unless there’s a contract stating otherwise, it is an inheritable asset, meaning if you have a will, you can name who the interest passes down to, or if you do not have a will, the interest will pass to your heirs (spouse, children, etc.). If you want to pass your business interest to your son, who will run the family business, instead of it passing naturally to your spouse, you need to have a will drafted.
When the individual and the business entity are interwoven, like a sole proprietorship or a partnership, it is important to note that business debts are oftentimes personal and can cause your estate to be insolvent (leaving nothing for your family). This is an important reason to form a business entity separate from the individual. If your business is not healthy, it may cease to operate at your death and wipe out your estate.
If you have a contract with other members of the business, you can state what happens to your interest when you pass. This is one of the reasons why we urge people who are going into business with non-relatives to enter into operating agreements – do you really want to be working with your business owner’s spouse after the pass away? More importantly, what happens if the spouse has no interest in running the business? What if she wants to sell or have you buy her out? What if you cannot afford to do so? In addition to recommending our clients enter into operating agreements, we recommend that they incorporate buy/sell language into these agreements. Financial professionals can find inexpensive ways to fund these agreements so that a partner can afford to buy another out.
If you own stock in a corporation, that stock will be passed to your beneficiary or heirs just like any other property. While this is not a big deal if you own stock in AT&T, for example, it is a big deal if you own 90% of the shares of a small, family owned business. Again, maybe your business partner does not want to own the corporation with your spouse.
If it is your wishes to continue your business when you pass, and your family is onboard, it may be a good idea to put your business interest in the name of a revocable trust. This way, your business interest stays out of your estate when you pass away and the trustee can manage your business interests better than the executor can. Many attorneys will recommend to executors to liquidate business assets because there is too much potential for liability on the executor’s part if he/she attempts to continue to operate the business.
We recommend that all individuals get an estate plan in place. However, as you can see, there is more planning to be considered when that individual is a business owner. Feel free to contact Jesson & Rains if you have questions about your business or estate plan.
If you are like Ed and I, your pets are members of your family (see above, our two fur-babies, Jeffrey the English Pointer and Tramp the Border Terrier). However, in North Carolina and just about every other state, pets are property. You can leave your pet to a friend or family member in your will, just like you could leave a car or piece of artwork to them, but your friend or family member has no obligation to keep the pet. Even if they did keep it, you are not really gifting something to them – you are saddling them with an obligation. If your pet is not a senior, your loved one will have to purchase food, medicine, supplies, and vet bills throughout the course of the pet’s life, which could be many years. Also, your will only comes into play when you pass away. If you are the sole owner of your pet, leaving your pet and money to care for the pet to a caretaker in your will does nothing to assist with caring for your pet if you become incapacitated or disabled during your lifetime.
One way to increase the likelihood that your pet will be cared-for through the remainder of its life, and relieve the financial burden of its caretaker, is to establish a trust for your pet. This can be done two different ways: through a traditional trust or a statutory pet trust.
In order for a traditional trust to be valid, there must be a human beneficiary -- a pet, as property, cannot be a beneficiary. Therefore, you can name the pet’s caretaker as the beneficiary and leave the beneficiary the pet and money to care for the pet. A second person can be named Trustee. The terms of the trust will control how the Trustee doles out money to the beneficiary to care for the pet and when the trustee passes trust property to the beneficiary (for example, if you are still alive but become incapacitated). When the pet passes away, the trust money can be distributed to someone else.
North Carolina also has a statute permitting a pet trust whereby a human beneficiary does not have to be named. Instead, a named Trustee uses income and principal of the trust to care for the pet. You can name a second person in the trust to enforce the terms of the trust in the event that the Trustee does not do his/her job (in the traditional trust example above, the caretaker beneficiary would be the additional human who would have the ability to enforce the trust through the court system).
Factors to consider when setting aside money for the caretaker are past vet expenses, medical conditions, food costs, and the life expectancy of your pet. You should also discuss your decision with the caretaker so they agree to step into this role and they know your requirements of them.
We hope that everyone had a fantastic holiday weekend and best wishes for a wonderful new year!
Subscribe to our newsletter.