#TuesdayTips: Charitable Remainder Trusts

It’s that time of year again… the hustle and bustle of the holidays are upon us!  If you are like me, you may still be searching for that perfect gift for everyone on your list.  Perhaps this year, as you make your list and check it twice, you may want to consider a charitable remainder trust.

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It’s that time of year again… the hustle and bustle of the holidays are upon us!  If you are like me, you may still be searching for that perfect gift for everyone on your list.  Perhaps this year, as you make your list and check it twice, you may want to consider a charitable remainder trust.

A charitable remainder trust is an irrevocable trust that allows the donor, or anyone else you name, to receive each year either a fixed dollar amount from the trust or a percentage (at least 5%) of the value of the trust.  The right to receive this distribution is either for the individual’s lifetime or for a period of years not to exceed 20 years.  At the end of the term, the amount remaining in the trust is distributed to a qualified charity.  Generally, a qualified charity is one that has been deemed tax-exempt by the Internal Revenue Service.

Moreover, the charity will serve as trustee of the trust and will be responsible for investing and managing the asset(s) to produce income for you.  Because the charity is also the remainder beneficiary, it has an incentive to increase the value of the trust, which in turn, benefits not only the charity, but you as the income beneficiary of the trust.

In addition to the income benefit, there are three primary tax benefits.  First, after you have transferred the asset(s) to the trust, you may take an income tax deduction, spread over five years.  You are not, however, allowed to deduct dollar for dollar the amount that you gave.  Rather, you are only allowed to deduct the amount of the “gift,” which is the amount donated less the amount of income you are expected to receive.  Second, whatever the charity receives at the end of the trust term, is not subject to estate tax.  Similarly, the donation will not be subject to gift tax based on the amount the “gift,” unless the income beneficiary of the trust is someone other than the donor or their spouse, in which case, there may be a gift tax imposed on the amount of income that is paid to the income beneficiary.  Lastly, because the charity is tax-exempt, there is no capital gains tax on the sale of the asset(s) in the trust.  So, you can turn non-income-producing property that has increased significantly in value from the time at which you acquired it, into cash without having to pay capital gains tax on the profit.  This enables you to invest the full proceeds of the sale into an income-producing asset.

Further, you can elect to have either fixed annuity payments or a percentage of the current value of the trust.  If you choose the fixed annuity, you will receive a fixed dollar amount each year.  This is beneficial if the trust has a lower than expected income return because you will still receive your fixed payment.  Sounds great, but be careful.  The higher your annuity is, the lower your income tax deduction.  Also, if the trust does not generate enough income to cover your annuity payment, then the trust’s principal will be used.  The more principal that is used, the less likely it is that the charity would receive anything at the end of the trust term and consequently, the less likely it is that the charity would accept your donation in the first place.

Conversely, if you elect a percentage of the value of the trust, your payments will reflect any gains or losses in value of the investments each year.  And, it is important to note, that once a decision is made, you cannot change it later.  If you are considering a charitable remainder trust, call ERA Law Group, LLC at (410) 919-1790 before making a final decision.  Happy gift giving!

#TuesdayTips: The “Simple” Will

All too often will-seeking clients call the firm asking if we do “simple” wills, say they need a will, but don’t want one of those “long wills”, or claim to not have anything, so they just need a “basic” will.  On this week’s #TuesdayTips article, ERA Law Group, LLC discusses how having a properly drafted will can mitigate many of these foreseen and unforeseen problems.

All too often will-seeking clients call the firm asking if we do “simple” wills, say they need a will, but don’t want one of those “long wills”, or claim to not have anything, so they just need a “basic” will.   Most law firms will respond to the client, “Yes! We can do that!”  But there are pitfalls that can arise, some foreseen and some unforeseen, when a person only has a “simple” will, and the client does not even know these potential pitfalls exist.  On this week’s #TuesdayTips article, ERA Law Group, LLC discusses how having a properly drafted will can mitigate many of these foreseen and unforeseen problems.

Two common scenarios arise when people have a “simple” will that case issues: (1) Age issues, and (2) Disability issues.  The first scenario, age, has two parts: (a) what happens if someone who is under eighteen (18) years old is set to inherit money or property from the decedent; and (2) what if someone who is over eighteen (18) years old is set to inherit money or property, but is irresponsible to handle a substantial inheritance?

In Maryland, a person under eighteen cannot inherit money or property and hold legal title to that property in their own name.  Someone else over eighteen must hold title to that property, for the minor’s benefit, until the minor attains eighteen years old.  Often times, though, the Testator or Testatrix (man/woman who creates the will) might not think that a person at eighteen is mature enough to handle inheriting money or property; therefore, in a properly drafted under-stated age trust (a.k.a. a minor’s trust) set up in a will, he/she can set the minimum age to inherit to an age he/she feels is more appropriate.  Often, a Testator or Testatrix will choose somewhere between age 23 and 25 because the person inheriting has completed college, grad school, a trade school and/or has been working for a reasonable amount of time and a can hopefully manage an inheritance of money, property or both.  Therefore, it is advantageous for your will to contain an under-stated age subtrust that directs how a minor’s or individual’s inheritance who is under a stated age will be held and managed.  Last, this subtrust can avoid the requirement of court intervention if a minor is set to receive an inheritance and no provisions are made outlining how to handle a minor receiving an inheritance.

The next scenario is: what happens if a person who is incompetent or disabled is set to receive an inheritance?  It is possible that when a person dies, he or she has designated an individual who is incompetent or disabled to receive all or a portion of their estate.  If that happens, it can have dire consequences for the beneficiary.  For example, what happens if the child of a decedent has a severe cognitive disability (i.e., severe autism or severe Downs Syndrome) and is receiving SSI and Medicaid because he is unable to work. If the parent does not do proper planning, that disabled child may inherit a substantial sum of money causing that child to lose his SSI and Medicaid benefits.

Or this other scenario: a husband is in a nursing home on Medicaid because of severe dementia, but the wife still living in the community suffers a massive heart attack and dies.  Now the husband in the nursing home may be designated in the wife’s will to receive all of her estate.  Now the husband in the nursing facility might lose his Medicaid benefits because he now inherited a house that needs to be sold.  Remember, the husband has severe dementia, cannot sell the house himself, and does not have a power of attorney.  Now a guardianship issue has presented itself in addition to him losing his Medicaid benefits because he now has excess assets.

All of the problems caused in scenario two can be avoided if the decedent’s will has a properly drafted Incompetent or Disabled Beneficiary Trust.

At ERA Law Group, LLC, we advise our clients of these potential pitfalls, even when the client wants to do “basic” planning.  Unfortunately, if not properly counseled, “basic” planning can cause very complex issues later after someone dies.  At that point, it may be too late to cure the issues.  That is why ERA’s “basic” or “simple” will includes both of these subtrusts…we don’t want our clients to be left stranded if these difficult and “unforeseen” scenarios come up later.  Call us today at (410) 919-1790!

#TuesdayTips: 529 Plans as Part of Your Overall Estate Plan

It’s that time of year again when the kids head out to the bus stop in the morning to start a new year of learning, eager for what lies ahead. These children aspire to do great things, but with the rising costs of undergraduate education, families need to start saving earlier and the sooner the better. A 529 plan may be the answer.

It’s that time of year again when the kids head out to the bus stop in the morning to start a new year of learning, eager for what lies ahead.  These children aspire to do great things, but with the rising costs of undergraduate education, families need to start saving earlier and the sooner the better.  A 529 plan may be the answer and could benefit your estate plan as well.

A 529 plan is a tax-advantaged savings plan operated by a state or qualified educational institution that is designed to make it easier to save for college.  There are two basic types of plans: prepaid tuition plans and college savings plans.

Prepaid plans let you lock in future tuition costs at today’s prices; whereas, college savings plans are designed to increase over time to cover tuition costs at the time the beneficiary begins college.  Generally, the prepaid plans guarantee a minimum rate of return, but you will be limited to that rate.  Conversely, the college savings plans generally do not have a guaranteed minimum rate of return so you will receive whatever return the stock market generates.  Based on recent trends, this could be significant.

The main advantage of a 529 plan is that the earnings generally are not subject to federal or state income tax provided the funds are used for the qualified education expenses (i.e. tuition, fees, books, room and board) of the designated beneficiary.  Although contributions to a 529 plan are not deductible on your federal return, some states, including Maryland, will allow you to deduct a portion of your contribution on your state return.  In Maryland, you can deduct up to $2,500 each year per beneficiary with the ability to deduct excess contributions in the subsequent 10 years.  This benefit is available only to those contributors who are the actual account holders and Maryland taxpayers.

Also, for federal gift tax purposes, any contribution to a 529 plan generally is considered a completed gift so it will reduce the value of your estate and will not be subject to estate tax when you die.  However, there are contribution limits and if your yearly contribution exceeds $14,000 (in 2017) to any beneficiary, then you may have to file a gift tax return.  But, you will not owe any gift taxes until you have given away more than $5.49 million (in 2017).

Another benefit to the 529 plan is its flexibility.  Generally, the beneficiary may use the funds at any participating school even if they are a part-time student.  Also, if a designated beneficiary does not use the funds in the account, you have the option to change the beneficiary designation, or roll it over tax-free to another plan.

The biggest disadvantage is that if the funds are not used for qualified education expenses then the earnings are subject to federal and possibly state income tax.  Additionally, a 10 percent federal penalty will be imposed on the withdrawal.  Further, for Medicaid purposes, a 529 plan likely is a countable asset that must be spent-down before you will be eligible for benefits and could have other negative consequences.

Call ERA Law Group, LLC today at (410) 919-1790 and ask how we can help you save for your children’s future!

#TuesdayTips: Effective Estate Planning

A proper estate plan should provide for the following: (1) the ability to control your property while you are alive and able, (2) planning for you and your loved ones should you become disabled, and (3) after you die, making sure your assets go to the people you love without unnecessary cost or delay. 

A proper estate plan should provide for the following: (1) the ability to control your property while you are alive and able, (2) planning for you and your loved ones should you become disabled, and (3) after you die, making sure your assets go to the people you love without unnecessary cost or delay.  Moreover, for an estate plan to be effective there needs to be proper asset ownership and control of the process.

Every person over the age of eighteen, at the very least, needs a financial power of attorney, a health care power of attorney, and a will.  The powers of attorney are for when you are alive but for whatever reason, are unable to manage your assets or make medical decisions for yourself.  Additionally, the health care power of attorney should include your wishes and instructions for life sustaining treatment should you be terminally ill, in a persistent vegetative state, or at the end-stage of a condition.  These powers of attorney terminate upon your death.  At that time, the will takes effect and your assets would be distributed in accordance with the terms of the will.

In addition to the powers of attorney and will, every estate plan should include long-term care planning.  With the advance of medicine, people are living longer; yet, most of us have not made ample provision for our future long-term care needs.  Creating an estate plan now ensures that you are in control of your future.

With that in mind, here are some questions you should consider:

  1. Do your current documents name individuals that you trust and who would be appropriate (e.g. a family member or other trustworthy person who lives nearby and who has the time and ability)? Have you named alternates?
  2. Does your financial power of attorney allow your agent to engage in asset preservation or long-term care planning?
  3. Who are the current beneficiaries under your will? Are they still alive?  Do you have alternates?
  4. Have you made provision for an underage beneficiary? Does your will provide for a disabled beneficiary?
  5. How are your assets titled and do they have beneficiary designations? If so, you need to review this information to make sure it coincides with your will.

The attorneys at ERA Law Group, LLC today are here to help.  Call today!

#FamilyFriday – Prenuptial Agreements: Why You Should Get One!

There are two ways to dissolve a marriage: divorce and death. Prenuptial agreements help in making the dissolution as easy as possible.

There is a misconceived notion that asking for a prenuptial agreement or discussing it in some way implies distrust or concern over your relationship.  This isn’t true!  There are a significant number of benefits to obtaining a prenuptial agreement that the attorneys at ERA Law Group, LLC want to bring to your attention for this week’s #FamilyFriday article!

Marriage is both a romantic and business relationship.  With very few exceptions nearly everything is or becomes marital.  As such, nearly everything can become subject of costly litigation in the event of divorce or death.  A well drafted and all-inclusive premarital agreement will limit many of these issues.  For example, the agreement will identify what is and is not marital property, each parties’ rights in the event of death or divorce, predetermine rights and obligations for spousal support, inheritance, and more.  In addition, the agreement will have a complete financial disclosure including each spouses’ assets, liabilities, and income.

There are two ways to dissolve a marriage: divorce and death.  Prenuptial agreements help in making the dissolution as easy as possible.  Prospective spouses should consider whether they want to be on the hook for their partner’s debt in the event of divorce or marriage?  Whether they want their spouse from a second marriage to inherit more than their children from their first marriage?  Whether they want their private business to be impacted in the event of divorce or death?

Why wait?  Protect you, your spouse, and your family no matter what life throws at you.  Call ERA Law Group, LLC today at (443) 906-3566!