Taking Vacation Homes Into Consideration When Estate Planning

February 27, 2023Filed Under: Estate Planning

The time spent in a family vacation home is very enjoyable for many families. This kind of property is meant to be shared with family and friends, and often there is a desire to keep ownership within the family for generations to come. Yet, even seemingly harmonious families can experience discord and exasperation when parents are no longer alive mediate conflicts. Creating a plan around your family vacation home can avoid later disputes and a potentially forced sale of a beloved property.

The Value of a Family Vacation Home

Statistics show that over eighty percent of vacation homes, cottages, and cabins are without mortgage debts and may sometimes represent a substantial asset within an owner’s estate. Some estate beneficiaries may prefer to access the cash value of their inheritance because they are putting children through college or have other financial needs to meet. Additionally, stepchildren or spouses who have weak emotional ties to the property’s memories may see no value in the property at all outside of its cash value.

Protect Your Vacation Home from Family Conflict

To avoid turmoil and preserve the property within the family system for continued generations, begin with a family conversation to gauge beneficiaries’ interest level. It may be devastating to learn that without you spearheading the family gatherings at the property, many of your children may not have the interest or the ability to use or maintain the home. If one or more inheritors choose to maintain the property and others do not, crafting your will or trust to balance assets of equal value to offset property ownership will help to prevent future conflict.

The key is to manage the expectations of all listed beneficiaries to avoid misunderstandings and miscommunication. Everyone wants to feel they are receiving some level of benefit based on their circumstances and expectations. Once you understand their interest levels in the property, begin the conversation about property taxes, unexpected repairs, maintenance, and mortgage responsibility, if applicable. Typically, your children will prefer to keep their financial discussions private so speak to them individually. Group settings rarely lead to positive outcomes regarding finances.

Create a Living Trust for Your Vacation Home

If you choose to support the vacation property with additional assets, it is best to create a living trust. It is likely the most beneficial to have the property itself pass in the trust as well. By doing so, the vacation property maintains protection against creditors and a more effortless manner to facilitate the costs of the home. Understand the change of income tax benefit as holding the property within a self-paying taxable trust may enable this deduction to continue. Before transferring your family vacation home to your heirs or placing it in a trust, ask these key questions:

Do all heirs have an interest in owning the property?
How often will each heirs’ families use said property, and are there vacation date conflicts?
Do all heirs have the resources to assume the financial commitment of ownership?
Do all heirs have a good and working relationship one to the other?
Do all heirs feel that conflict resolution, particularly around the amount of use of the property and ability to cover costs, is possible?

Prepping for shared ownership may entail placing the property into a limited liability company (LLC) or family limited partnership (FLP). These entity structures serve as a convenient method to pay bills and maintain assets for future expenses. Additionally, these structures can protect the family’s other assets from liability exposure. An LLC, FLP, or living trust also eliminates the need for ancillary probate if your vacation home is in another state from where your primary residence is.

Using the Gifting Strategy for Your Vacation Home

You can pass your vacation home to your heirs as a lifetime gift, as part of your estate plan after your death, or as a future interest gift. A future interest gift (usually a Qualified Personal Residence Trust) works well when gifting real property like a vacation home. This approach provides unlimited use of the property for some time, lowers the amount a transfer would use regarding gift tax exemption, and eases concerns about your family member’s ability to cover the cost of the initial ownership.

A family vacation home creates wonderful times spent together, and the desire to keep it for generations is essential to some but not all family members. Assess your own goals for your inheritors and whether they have the desire and ability to handle the property, and then meet with an elder law attorney to execute your estate plan, including your vacation home. The effort you put into your plan now can preserve your vacation home within your family system and in the memories of future generations.

We hope you found this article helpful. If you’d like to discuss your particular situation, please don’t hesitate to reach out. Please contact our Cincinnati office by calling us at 513-771-2444 and schedule a consultation. We look forward to the opportunity to work with you.

The Estate Planning Process for Surviving Spouses

February 20, 2023Filed Under: Estate Planning

In the wake of the loss of a spouse or long-term partner, it can be difficult to think of anything other than your grieving. However, it is crucial to understand there are important and timely decisions you need to make regarding your finances and personal estate plan. In truth, estate planning is perpetual as it accounts for changes in marriages, deaths, divorces, and births of children and grandchildren. Assuming your spouse left an up-to-date estate plan requiring no further action after their passing can have disastrous consequences.

Your first line of defense to avert problems is scheduling a meeting with your estate planning attorney to review the decedent and your estate in its entirety. It is not uncommon to discover assets you are unaware of, which allows for planning opportunities to transfer tax-free wealth. With the loss of a spouse’s income, uncovering these sorts of assets may also secure a widow or widower’s finances. You may also discover incomplete beneficiary designations, incorrect titling of assets, or an overlooked grandchild if they are newly born into the family.

Your estate planning attorney can also advise you of the decision-making deadlines inherent to your situation. There are some powerful wealth transfer tools available to a surviving spouse. For instance, a spouse may opt to disclaim interest in some of the decedent’s assets in favor of transferring them to other beneficiaries, but this must occur within nine months of the decedent’s date of death.

Inheritance tax laws are in political play. Is there an elimination of the tax-free basis step-up but still a $1 million per person exclusion, and how long will you have to make this adjustment? As a surviving spouse, you have an option to file a federal tax return for that year as a single individual or as a married couple, permitting you to receive the benefit of higher deductions as long as you do not remarry that year.

Regarding the decedent’s estate tax return, a surviving spouse may need to make a portability election maximizing the amount transferred estate-tax-free to the next generation. If the decedent had no revocable trust sheltering assets from the probate process, there are timelines to meet with the probate court. Many more scenarios exist but what is universally true is that a surviving spouse must prioritize assessing the estate plan and finances amidst their grieving.

After a spouse’s passing, much of the attention of legal services focuses on administering the decedent’s estate, yet so often, allotting time to develop plans to meet the legal needs of the surviving spouse is often overlooked. Both the decedents and surviving spouses will require review. There are circumstances when wills and trust configurations permit a surviving spouse a “second look” to see if the decedent’s estate plan is still a proper fit for the spouse. Existing estate plan documents in the surviving spouse’s name require review as documents most often require a change of beneficiary or representative since the death of their spouse.

Aside from wills and trusts, some of the most basic estate planning needs for implementation or review moving forward with the surviving spouse’s documents include:

Durable Powers of Attorney

This individual acts on your behalf for financial matters and is typically between spouses during your lifetime. The surviving spouse must identify another trusted person, replacing the decedent, as their power of attorney and decide if this power is only available in the event of incapacitation or at any time.

Medical Power of Attorney (Health Care Proxies)

Again, if the decedent was your representative, you will have to select an agent in the event of incapacitation or an inability to communicate your health care decisions. There is a possibility of an alternate designation in the health care proxy. If so, review the choice to ensure it is still appropriate or remove them and name a new health care agent. These documents are often on file with your primary care physician, so provide an updated copy to those who may have the old document and be certain they are aware of the change.

HIPAA Release Forms

Even if you have a medical power of attorney, you may still want other family members to discuss your health situation with medical personnel. Strict laws govern the release of your medical information. If you want additional individuals to access your medical records, you must sign a HIPAA release form. This strategy of an additional individual having access to your medical information is useful, particularly when you are still making your own decisions but prefer someone to discuss your medical situation with the doctors. Be sure your primary care provider has a legal copy of this form.

It is not uncommon for an estate planning attorney to understand the financial and legal situation more fully than a surviving spouse. Whatever your level of comprehension of the situation, it is paramount to review and make appropriate changes to best protect yourself as a widow or widower. It is a challenge to review all of this during such an emotional time, but do not delay in creating your best scenario moving forward.

How the Probate Process Works

February 13, 2023Filed Under: Estate Planning

Despite its negative reputation, probate can sometimes be avoided or minimized with thoughtful estate planning. In reality, most heirs will have to navigate the probate process to some degree after losing a loved one. Understanding what probate is in conjunction with careful estate planning can minimize probate’s impact on an estate’s value and inheritors’ well-being.

What is Probate?

The probate process is a series of court-supervised proceedings in which the decedent’s assets become retitled and distributed to the named heirs. It also includes validating the decedent’s will, ensuring payments of the estate’s debts and taxes, and enacting any minor children’s guardianships. In addition, heirs, other interested parties, and creditors have the right to contest the will in probate court.

The probate process is generally efficient in smaller estates but can become lengthy and complex in larger ones. States have varying probate codes, and many have informal and formal probate processes. The informal process occurs when there is no expectation of a contest to the estate. Typically the administration of the estate includes the personal representative or executor, beneficiaries, creditors, and a judge.

Probate becomes necessary to manage and transfer those properties and assets of an estate that are not via contract law, trust law, or state titling. Any property or assets in the decedent’s will or those owned by an individual without a will (intestate) may necessitate probate. Property and assets not awarded in the will or otherwise transferred become part of the probate process in addition to the property and assets awarded to heirs with a need for retitling. State intestacy laws determine the dispersal of probate property in an estate without a will or beneficiary designations.

Which Property and Assets Aren’t Subject to Probate Court?

Some property and assets are disbursed outside of probate, including:

Property held in joint tenancy with rights of survivorship
Property held as tenancy by the entirety
All trust property
Retirement funds with named beneficiaries
Life insurance policies with named beneficiaries
Annuities with named beneficiaries
Transfer-on-death (TOD for securities) accounts
Pay-on-death (POD for cash) accounts

What Happens in Probate?

The first step in probate is producing and validating the will. It is also useful to contact family members and other heirs at the onset of the probate process. Involving known heirs provides information about who accepts the state of the will or whether it will be contested. Without objection, an estate planning attorney can prepare the probate documents, have distributees sign and notarize consent forms, and file the probate documents with the court. Probate proceedings may occur in the physical court setting or virtually. Routine probate hearings often occur on video platforms such as Zoom, streamlining the process and creating convenience for the court, attorneys, and clients. Virtual probate hearings are also more cost-effective for clients.

The probate petitioner, usually the estate’s personal representative, will file the necessary documents with the court for the first probate hearing. These documents include a certified copy of the death certificate, the decedent’s last will, a list with the names and addresses of the decedent’s heirs, and a known list of creditors.

How Long is the Probate Process?

An informal probate process can conclude in as little as six to eight months. An estate with complex assets, contests to the will, or both may experience a complicated probate process that is extensive, expensive, and may take multiple years to conclude. These lengthy probates are frustrating for deserving and rightful beneficiaries who must wait for the probate court’s conclusive legal findings regarding the estate, property, and asset distribution.

Is Probate Expensive?

Aside from the length of time, the probate process can also become very expensive. According to a US News article, the average probate process costs for legal fees and administration is five to ten percent of the estate. Some estates with complex or lengthy probates may lose twenty or more percent. Many states have attorney fee schedules that reflect the estate’s size and location. In addition to an estate’s lawyer fees, there may also be executor compensation, court filing, and other paperwork fees. The possibility of a probate bond can also increase the cost of probate.

The most common reason for increasing probate costs is litigation among beneficiaries or non-heirs trying to receive ownership of the estate’s property. Additionally, if the decedent was a party in litigation at the time of death and the estate is the successor in interest, the ongoing litigation can get very expensive. Costs may also rise relating to preparing and filing federal and possibly state estate tax returns and any accompanying audits.

What are Common Reasons to Avoid Probate?

Besides trying to avoid high costs and time-consuming probate administration, many people prefer to avoid making the terms of their will a public record. While a substantial portion of the estate can remain private through designated beneficiaries and rights of survivorship accounts, to avoid having the bulk of an estate’s assets become public knowledge, most people with larger estates seek privacy by creating appropriate estate trusts. An estate planning attorney can identify which trust type will most benefit your goals as you plan for your legacy.

Contact our office if you want to learn how you can avoid probate or get through the process as seamlessly as possible. Thoughtful planning, asset coordination, and regular review of your estate plan can minimize the potential that your heirs will experience an extensive probate process. At a time when your loved ones are mourning your loss, you can protect them through careful estate planning.

An Overview of Estate Planning and How Life Insurance Plays a Role

February 6, 2023Filed Under: Estate Planning, Long Term Care

When it comes to distributing your assets in your estate plan, life insurance may not seem relevant at first glance. However, life insurance can be an integral, indispensably important part of a well-thought-out estate plan. There are numerous other benefits to owning a life insurance policy aside from providing a large sum of money to beneficiaries.

Life insurance provides immediate cash upon death that can pay debts, final income taxes of the insured, and funeral expenses.
Life insurance cash can also pay estate taxes and avoid the forced sale of assets.
Mostly, the proceeds from life insurance will pass to the named beneficiary free of income tax.
Life insurance proceeds can transfer to a trust as part of a will the insured created for the benefit of minor children, special needs, or elderly relatives.
The proceeds of a life insurance policy can be payable to someone other than the insured’s estate and avoid passing through probate when owned by an irrevocable insurance trust. For example, the funds can pay marital settlement obligations for spousal or child support.
If the insured owns a closely-held business, a life insurance policy can fund a buyout of their interest.
Proper beneficiary designation forms of a life insurance policy prevent proceeds from going through probate.

Do not underestimate the importance of having cash funds immediately available in an uncomplicated way. Often the passing of a loved one or family member comes with a string of expenses that often exceed cost expectations. Much of what Americans have resides in investments like 401ks, IRAs, housing, and other illiquid assets with very little cash on hand. Life insurance proceeds protect families from having to force the sale of these assets at unfavorable tax rates. Some inheritable assets come with immediate payment requirements. Homes not fully paid off, cars, and the like can leave families with short-term liabilities requiring cash.

Understanding Estate Planning Strategies with a Life Insurance Policy

One of the more popular estate planning strategies that fit many situations is an irrevocable life insurance trust (ILIT). Though a beneficiary or third party cannot rescind the trust, modified, or amended post-creation, it still offers heirs several financial and legal advantages. These advantages include asset protection, favorable tax treatment, and assurance beneficiaries use the proceeds in a manner concurrent with the benefactor’s wishes. Typically, life insurance policies are the chief assets held in an ILIT.

Before purchasing a life insurance policy, particularly if you want to create an ILIT, speak with your estate planning attorney regarding potential income and estate tax consequences. If you have an estate large enough, it can be subject to federal and state estate taxes depending on the applicable laws in place at the time of your passing. Your ILIT should be in place before binding a life insurance policy to it. Remember that states have different laws regarding an ILIT; to avoid problems, your ILIT must follow your state’s rules.

Using a Gifting Strategy for your Life Insurance Plan

It is possible to gift an existing life insurance policy to your ILIT. Unfortunately, if you were to die within three years of making the gift, the policy amount can be included in your estate for tax purposes due to a rule known as a “lookback period.” In effect, this isn’t making the policy proceeds taxable, but it adds the policy proceeds amount to the total value of the estate, in turn making it part of your estate subject to taxes. As federal estate tax exemption amounts frequently change, it is prudent to fund your ILIT by purchasing a new policy. Doing so will avoid the possibility of a lookback period.

When using an ILIT, whether or not you are married, use the second-to-die, survivorship policy, or are single and have an individual policy must be considered. Choosing between variations of permanent life insurance for your ILIT, such as whole standard life, universal life, and variable life insurance, can be confusing, and your estate planning attorney can guide you to your best option.

If you own a business and one adult child will take over the business. Still, other adult children are not interested or involved in the enterprise. The life insurance proceeds can provide the cash to buy out those inheritors’ business interests while leaving the business intact. Blended family systems can also benefit from life insurance payouts to ensure that all children receive an inheritance, not just the children of the last surviving spouse.

Life insurance should be a part of your family estate plan. It can increase the wealth your heirs inherit and provide a ready source of cash for immediate financial obligations after your death. Which form of life insurance best suits your needs will depend on your age and situation. Speak with your estate planning attorney about how a life insurance policy can be an effective way to transfer wealth to your beneficiaries.

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