Special Estate Planning Considerations for a Blended Family

Blended families create special estate planning issues.
It is important to address the special estate planning issues involved in a blended family situation.

There are a number of special estate planning considerations that affect those in a blended family. Remarriages are on the rise. According to the article “Estate planning documents for second marriages” from the Cleveland Jewish News, half of previously married seniors have married again.  And the issues are compounded if each spouse has one or more children from a previoius marriage.

We’ve all heard the horror stories of what happens when there is inadequate or no estate planning done to address these issues. Take, for example, a couple each of whom had children at the time of their marriage. Twenty years after the marriage, the husband dies. He had wanted to provide for his second wife, so his will stated that all his assets went to his wife. He may have assumed that anything left would go back to his children after her death, but nothing was put in place to make that happen.

What actually occurred was that his wife lived a long time after he passed, and she simply combined their assets. When she died, her will left all of the assets to her children, and her husband’s children received nothing. The husband’s children didn’t believe that he meant to do that, but because of the lack of planning, that’s exactly what happened.

What were the alternatives? He could have set up a marital trust to hold the assets for his second wife on his death, but upon the wife’s passing, would have gone back to his children. He could have named his wife as trustee to control the trust assets, or, if he wanted extra insurance that the assets remaining at his wife’s death would pass to his children, he could name an independent person or a trust company as trustee to oversee the trust.

Another horror story involves the couple in a second marriage who do not have wills or any other estate plan. Absent a will stating otherwise, Texas law provides that, if the surviving spouse is not the parent of all of the deceased spouse’s children,  a deceased spouse’s share of community property goes to the deceased spouse’s children. As a result, many surviving spouses are shocked go find out that they own their home and other property acquired during the marriage with their step children.

Anyone involved in a second marriage, especially if they have children from a previous marriage, needs to review their estate planning to make sure that their wishes will be carried out and not left to chance or the dictates of Texas law. Not only should they review their wills, but also insurance policies and retirement accounts to make sure that their beneficiary designations say what they want. For more information on what to consider if you are in a blended family situation see https://www.galliganmanning.com/life-stages/blended-families/

There’s no “set it and forget” plan for estate documents, so before you walk down the aisle a second time, or shortly after you do so, speak with an estate planning attorney to clarify your goals and put them into the appropriate estate planning documents.

Reference: Cleveland Jewish News (May 7, 2019) “Estate planning documents for second marriages”

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Higher Estate Tax Exemption Means You Could Save Income Taxes by Updating Your Estate Plan

Updating your estate plan can save taxes.
Updating your estate plan could save taxes.

The estate tax exemption doubled as a result of the Federal Tax Cut and Jobs Act, raising it to historic highs. The estate tax exemption had been scheduled to increase to $5.6 million per person in 2018, but it was modified by the recent legislation to reach the current level of $11.2 million per person, or $22.4 million per couple. The inflation-adjusted exemption for 2019 is $11.4 million per person, or $22.8 million per couple.

In the article “Updating estate plan could save heirs in taxes,” the Atlanta Business Chronicle asks why this matters to an individual or couple whose net worth is nowhere near these levels.

When the most that could be transferred to a non-spouse beneficiary was under a million dollars, everyone worried about the estate tax and used trusts to minimize its effect. Since the estate tax was so much higher than the capital gains tax, it was never considered a big deal if a beneficiary paid the capital gains tax on selling trust assets, because it was less costly than paying the estate tax.

In the past, a married couple’s estate plan would often call for the deceased spouse’s assets to be placed in a trust for the surviving spouse (often called a “bypass trust”). The goal was for the trust to provide for the surviving spouse until the surviving spouse’s death, at which point the trust assets bypassed the estate of the surviving spouse and went directly to the beneficiaries, usually the spouses’ children. If the beneficiaries sold trust assets after the surviving spouse’s death, they would pay the income tax based on the value of the assets at the first spouse’s death, as oppposed to the value of the assets at the surviving spouse’s death. The higher the assets appreciated between the time of the first spouse’s death and the second spouse’s death, the higher the income tax.

For example, if a spouse owned $10,000 worth of stock which passed to a bypass trust at his or her death, and the stock increased to $100,000 at the death of the surviving spouse, the heirs would pay capital gains taxes on the amount of the appreciation ($90,000) upon the sale of the stock. If, however, instead of being in a bypass trust, the stock were included the surviving spouse’s estate, when the beneficiaries sold the stock, they would not have to pay capital gains taxes on the $90,000 of appreciation that occurred between the first spouse’s death and the surviving spouse’s death. That could be a substantial tax savings.

For those who included bypass trusts in their estate plans just to save on estate taxes, updating their estate plan to eliminate the bypass trust could bring greater simplicity as well as tax savings for the heirs.

It should be noted that the law creating the present $11.4 million estate tax exemption ends at the end of 2025, when the estate tax exemption will return to $5 million (adjusted for inflation). Because the tax laws are constantly changing, it is always a good idea to revisit your estate plan at least every three years. Learn more about what married couples should consider when updating their estate plan at https://www.galliganmanning.com/life-stages/planning-for-married-couples/

Reference: Atlanta Business Chronicle (May 31, 2019) “Updating estate plan could save heirs in taxes”

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Estate Planning Avoids Problems With Selling the Family Home

Estate planning can help avoid problems when selling the family home.
Estate planning can help avoid problems when selling the family home.

Family members who are overtaken with grief are often unable to move forward with selling the family home after a parent has passed away. If the family home was not being well maintained while the parent was ill or aging, it might fall into further disrepair. When siblings have emotional attachments to the family home, things can get even more complicated. The difficulty of selling a parent’s home after their passing, depends to a large degree on what kind of estate planning the parent has done.

Much also depends on the family’s ability to ask for help and work with the right professionals in handling the sale of the home and managing the estate. The earlier the process begins, the better.

Parents can take steps while they are still living to ward off unnecessary complications. It may be a difficult conversation but having it will make the process easier and allow the family time to focus on their emotions, rather than the sale of property. This is why is is important to address what happens to the family home in an estate plan.

Here are a few pointers:

Make sure your parents have a will or a living trust. Many Americans do not. A survey from Caring.com found that only 42% of American adults had a will or a trust, and other estate planning documents.

After a parent passes away, there may be costs associated with maintaining the property and fixing any overdue repairs. Make sure to save all receipts and estimates.

Also, the Executor or successor Trustee under the parent’s estate planning documents should secure the property immediately. That may mean having the locks changed as soon as possible. Once an heir (or someone who believes they are or should be an heir) moves in, getting them out adds another layer of complication.

Be realistic about the value of the property. Have a real estate agent run a competitive market analysis on the property and consider an appraisal from a licensed appraisal. Avoid any accusations of impropriety—don’t hire a friend or family member. This needs to be all business.

To keep disagreements to a minimum, the Executor or successor Trustee should frequently update the heirs on how the sale of the house is progressing.

The biggest roadblock to selling the family house is often the emotional attachment of the children. It’s hard to clean out a family home, with all of the mementos, large and small. The longer the process takes, the harder it is.

This is not the time for any major renovations. There may be some cosmetic repairs that will make the house more marketable, but substantial improvements won’t impact the sale price. Remove all family belongings and show the house either empty or with professional staging to show its possibilities. Clean carpets, paint, if needed and have the landscaping cleaned up.

Keep tax consequences in mind. Depending on where the property is, where the heirs live and how much money is being inherited, there can be estate, inheritance and income taxes.  It is usually better to sell an inherited property as quickly as possible. When a property is inherited at death, the property value is “stepped up” to fair market value at the time of the owner’s death. That means that you can sell a property that was purchased many years ago, but not pay taxes on the value gained over those years.

Talk with an experienced estate planning attorney about what will happen when the home needs to be sold. It may be better for parents to create a revocable trust in advance, which will direct the sale, allow a child to continue living in the home for a certain period of time, or instruct the one child who loves the home so much to buy it from the trust. Trusts are typically easier to administer after parents pass away and can be very helpful in preventing family fights.

Dealing with issues in advance through estate planning will help minimize conflicts after a parent passes away. Learn more avoiding estate planning mistakes.

Reference: The Washington Post (May 16, 2019) “With proper planning, selling a parent’s house can be a relatively painless process”

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