Making End of Life Decisions Part of your Estate Plan

End of life decisions are an important part of your estate plan.

If your end of life decisions are important to you, there are a handful of documents that are typically created during the process of developing an estate plan that can be used to achieve this goal, says the article “Choosing a natural end” from The Dallas Morning News.

The four documents are the Medical Power of Attorney, the Directive to Physicians, the Out-of-Hospital Do-Not-Resuscitate, and the In-Hospital Do-Not-Resuscitate. Note that every state has slightly different estate planning laws. Therefore, you will want to speak with an experienced estate planning attorney in your state. If you spend a lot of time in another state, you may need to have a duplicate set of documents created. Your estate planning attorney will be able to help.  In Texas, attorneys often prepare the Medical Power of Attorney and Directive to Physicians, and Do-Not-Resuscitate Orders are prepared by medical systems.  See Mary’s excellent blog for further background https://www.galliganmanning.com/living-wills-and-medical-powers-of-attorney-why-they-are-important/.

For the Medical Power of Attorney, you are appointing an agent to make health care decisions if you cannot. This may include turning off any life-support systems, refusing life-sustaining treatment and other end of life decisions. Talk with the person you want to take on this role and make sure they understand your wishes and are willing and able to carry them out.  You have the right to change your agent at any time.

The Directive to Physicians, which is basically the Living Will of Texas, is a way for you to let physicians know what you want for comfort care and any life-sustaining treatment in the event you receive a diagnosis of a terminal or irreversible health condition. You aren’t required to have this, but it is a good way to convey your wishes. The directive does not always have to be the one created by the facility where you are being treated, and it may be customized to your wishes, as long as they are within the bounds of law. Many people will execute a basic directive with their estate planning documents, and then have a more detailed directive created when they have a health crisis.  It and the Medical Power of Attorney serve to nominate and provide guidance to your healthcare decision-maker on end of life decisions.

The Do-Not-Resuscitate (DNR) forms come in two different forms in most states. Unlike the Directive to Physicians, the DNR must be signed by your attending physician. The Out-of-Hospital DNR is a legally binding order that documents your wishes to health care professionals acting outside of a hospital setting not to initiate or continue CPR, advanced airway management, artificial ventilation, defibrillation or transcutaneous cardiac pacing. You need to sign this form, but if you are not competent to do so, a proxy or health care agent can sign it.

The In-Hospital DNR instructs a health care professional not to attempt CPR, if your breathing or heart stops. It is issued in a health care facility or hospital and does not require your signature. However, the physician does have to inform you or make a good faith effort to inform a proxy or agent of the order.

If you have specific wishes for your end of life decisions, especially if you want a natural end, speak with your estate planning attorney about how to legally prepare to protect your wishes.

Reference: The Dallas Morning News (Jan. 12, 2020) “Choosing a natural end”

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Inherited Property? What You Need to Know

There are many options for what to do with inherited property, but they depend on debts, costs of property, beneficiaries and your needs.

Many clients wonder what to do with inherited property, particularly real property like a house.  There are choices, and they depend on several factors. Are there other siblings who also have inherited portions of the ownership of the house? Is there another owner who needs to be bought out? Can the heir afford to take on the responsibilities and expenses of a home? Is someone else already living there?  These are all questions presented in the article “What to do when inheriting a house” from The Mercury.

There’s a tax issue to consider, for starters. Property that was titled in the name of the decedent at the time of death or is part of their estate taxable estate and then inherited, receives what is called a “step-up” in basis. This means that there is no federal tax due on the appreciation in value from the time the person purchased the home to the time that the person died.  They may also be state taxes as well.

Let’s say the person bought the home for $100,000 and at the time of her death the property is worth $300,000. The federal government will not tax the $200,000 difference between the original value and the DOD (Day of Death) value of the home. If the heir obtains an appraisal shortly after the death of the home owner and then moves in or if you already live there and the house is transferred into your name, the “clock” starts running again for another tax break, which is an additional $250,000 exclusion from capital gains on resale after you have lived there for two years.  If the property is sold shortly after the person’s death to a third party in an arms-length deal, the sales price would be the DOD value of the inherited property.

Now, this all assumes that any other beneficiaries have been satisfied as to the ownership of the house. A good elder law estate attorney will be able to help with the details, including the transfer of title.

Another issue: is there a mortgage on the house? If so, the new owner may need to satisfy the lender and refinance. If the heir has enough money to meet monthly payments, a strong credit rating to be able to get a mortgage and enough income to maintain the home, then it should be a relatively simple transaction.

Have the home inspected before moving in. Is the inherited property in good shape? If repairs need to be done, are they budget-friendly, or will they make the inheritance too expensive to be financially viable?  Who will pay for it?  The estate, the heirs, or a new owner?

Property maintenance is another consideration. If the estate can carry costs associated with the property until the property is sold and if the estate can pay for repairs, upgrades and maintenance so the house can be sold for a good price, then that is a reasonable approach to take. If there are other beneficiaries, they should all part of a discussion about how much money is worth investing in the house and what the return on investment will be.

One key concern that I’ve told countless clients over the years is decide early what to do with the inherited property, and stick with the plan.  Maintaining the property is time consuming, potentially costly, carries a risk in the form of liability and may prevent the estate from making liquid distributions if it isn’t sold.  Some of the worst estate administrations I’ve dealt with involved not deciding what to do with inherited property, and that lead to unnecessary cost and years of administration. So, the executor or trustee should decide earlier what to do with the property.

Finally, if the language of the will says “equally to my three children” or language similar to that and one sibling wants to buy out the other two, then an agreement on the value of the house and a plan for working out timing of the sale will need to be created. An estate planning or elder law attorney will be able to help create a family settlement agreement that will include an informal accounting, whereby all of the heirs receive their fair share of the inheritance and all sign off that they have agreed to the transaction.

Reference: The Mercury (Jan. 15, 2020) “What to do when inheriting a house”

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How the SECURE Act Impacts Your Estate Plan

The SECURE Act made major changes to beneficiary distributions you should consider in your estate plan.

The SECURE Act has made big changes to how certain retirement plans, such as IRAs, 401(k)s, and 403(b)s, distribute after death. Anyone who owns such a retirement plan, regardless of its size, needs to examine their retirement savings plan and their estate plan to see how these changes will have an impact. The article “SECURE Act New IRA Rules: Change Your Estate Plan” from Forbes explains what the changes are and the steps that need be taken.  Our firm has mentioned the SECURE Act in past blogs, such as here:  https://www.galliganmanning.com/proposed-ira-rules-and-their-effect-on-stretch-iras/ on Kevin’s Korner and will address the impact of these changes in the future, but today I wanted to focus on some key issues as mentioned in the article.

First, the SECURE Act means changes to some existing estate plans, especially ones including provisions creating conduit trusts that had been created to hold retirement plan death benefits and preserve the stretch benefit, while the retirement plan owner was still alive.  Existing conduit trusts may need to be modified before the owner’s death to address how the SECURE Act might undermine the intent of the trust or to evaluate possible plans.

This first change will apply to many, many clients.  A typical client who may be affected by the SECURE Act is a parent creating a trust for their children’s inheritance.  These types of trusts typically serve to provide creditor or divorce protection for their beneficiaries while maximizing the tax benefits of stretching the retirement.  Now that the stretch benefit may not apply to a beneficiary, it may make sense to alter the trust to maximize asset protection instead of the tax savings that are no longer available.  If you have this situation, you definitely want to review your plan.

Another potential strategy for clients who are including charities in their estate plan be making a charity the beneficiary of the retirement account, and possibly using life insurance or other planning strategies to create a replacement for the value of the charitable donation to heirs.

One more creative alternative is to pay the retirement account balance to a Charitable Remainder Trust (CRT) on death that will stretch out the distributions to the beneficiary of the CRT over that beneficiary’s lifetime under the CRT rules. Paired with a life insurance trust, this might replace the assets that will ultimately pass to the charity under the CRT rules.  This is a more complex strategy, but may be effective for charitably minded clients.

The biggest change in the SECURE Act being examined by estate planning and tax planning attorneys is the loss of the stretch treatment for beneficiaries inheriting retirement plans after 2019. Most beneficiaries who inherit a retirement account after 2019 will be required to completely withdraw all plan assets within ten years of the date of death.

One result of the change of this law will be to generate tax revenues. In the past, the ability to stretch retirement payments out over many years, even decades, allowed families to pass wealth across generations with minimal taxes, while the retirement account continued to grow tax free.

Another interesting change: No withdrawals need be made during that ten-year period, if that is the beneficiary’s wish. However, at the ten-year mark, ALL assets must be withdrawn, and taxes paid.

Under the prior law, the period in which the retirement assets needed to be distributed was based on whether the plan owner died before or after the RMD and the age of the beneficiary.

The deferral of withdrawals and income tax benefits encouraged many retirement account owners to bequeath a large retirement balance completely to their heirs. Others, with larger retirement accounts, used a conduit trust to flow the RMDs to the beneficiary and protect the balance of the plan.

There are exceptions to the 10-year SECURE Act payout rule. Certain “eligible designated beneficiaries” are not required to follow the ten-year rule. They include the surviving spouse, chronically ill heirs, disabled heirs and some individuals not less than 10 years younger than the account owner. Minor children are also considered eligible beneficiaries, but when they become legal adults, the ten year distribution rule applies to them. Therefore, by age 28 (ten years after attaining legal majority), they must take all assets from the retirement plan and pay the taxes as applicable.

The new law and its ramifications are under intense scrutiny by members of the estate planning and elder law bar because of these and other changes. If you believe these changes affect you, contact our office at 713-522-9220 to review your estate plan to ensure that your goals will be achieved in light of these changes.

Reference: Forbes (Dec. 25, 2019) “SECURE Act New IRA Rules: Change Your Estate Plan”

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