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Estate Planning FAQ

Here are some frequently asked questions (FAQ) about estate planning updated for 2024:

What is Estate Planning? I don’t have a lot of assets. Why should I speak with an expert?

Estate planning involves making reasoned decisions about how the property or monies you own are distributed upon your death. In North Carolina, if you do not have a Will or Trust document, current state law will determine who receives your assets and in what portions. The simplest of estates can become a costly and inconvenient nightmare for survivors when there are no provisions made for an orderly distribution of assets upon death or responsible individuals named to oversee that process. These problems arise at a time when loved ones are least capable of dealing with complicated and messy legal matters while grieving the loss of a family member.  Lack of planning also puts into play the requirement at times for all beneficiaries to work together and come to unanimous decisions which can sometimes lead to conflict and the inability to move estate administration decisions forward in an efficient manner.  Estate planning should also include decisions pertaining to end-of-life decision-making, appointing a health care power of attorney to make medical decisions if you are incapacitated, and a durable power of attorney to make financial or legal decisions upon your incapacity.  It is especially important to discuss your healthcare and end-of-life wishes while you are still healthy so loved ones who may be called upon to make healthcare decisions can act accordingly.  Finally, some consideration should be given in any estate plan as to how one will pay for long-term nursing or medical care if a chronic illness, or physical or mental incapacity strikes.

What is “Probate?”

Probate is simply the administrative process by which the court oversees the distribution and administration of a deceased person’s assets, ensuring the payment of debts and property transfer of ownership. The assets subject to probate are typically those owned in the sole name of the deceased which do not pass to anyone by a beneficiary designation (example: life insurance or retirement accounts) or by co-ownership (example: joint accounts with rights of survivorship or spouses who own real estate together). Just because someone has a Last Will does not avoid probate, in fact simply having a Last Will which designates where assets go upon a person’s death will actually ensure that those solely owned assets are subject to the rules, timelines, costs, and court oversight of probate. This can be a lengthy process even in a simple estate due to staffing shortages and workload burdens also felt by local court officials like employers everywhere.

Should I give away part of my estate before my death to reduce the taxes on my beneficiaries or avoid depletion of those assets should I require nursing home care?

Donating all or part of your estate to charity can provide both income and estate tax benefits depending on the size of one’s estate and taxable income, though most do not have a large enough estate to subject it to federal estate tax based on current tax law. When you begin mandatory draws from certain retirement accounts at age 73 (increased from 72 in 2022), you can choose to make charitable contributions from those mandatory amounts or outright gifts within certain limits from those accounts that will reduce your taxes if you have charitable intent anyway and elect to leave after-tax dollars to your family.

Another option is to gift a portion of your assets to your beneficiaries before you die. An individual can give annual gifts of up to $18,000 ($36,000 per married couple in 2024) without having to file a federal gift tax return to report the gift. Keep in mind that assets given away during life do transfer the donor’s cost basis to the done, thus locking in potentially a low tax basis should that recipient later sell the gifted asset and experience a significant taxable gain (this is not an issue with cash gifts, only with appreciated assets).  There is discussion about possible changes to stepped-up cost basis and federal estate tax thresholds occurring amongst lawmakers, so for higher-wealth individuals, those potential changes should also be factored into discussions about making lifetime gifts.

It is important to note that giving away assets well in advance of needing long-term nursing care can serve as a means of “protecting” those assets from later depletion. Keep in mind that once given away, the assets are no longer under your control and there is a “look back” period following such gifts during which the donor and their spouse will be ineligible to apply for Medicaid to pay for long-term nursing care for a period of months depending on the value of the gift transferred.

What are trusts? Do I need one?

Many people who do estate planning choose a basic Last Will and Testament as their main document directing where their assets go upon death. However, a trust is often a better tool to keep the ownership, management, and knowledge of one’s property or assets under the control of someone chosen as a “trustee” to oversee those assets for the benefit of another person or persons. A trust is also typically a private document that does not have to be filed or “probated” publicly upon the death of the person creating the trust. By not having to file a trust, certain fees and costs, along with court-imposed timelines are also avoided which are normally imposed by the court as part of the process of overseeing the administration of an estate that passes under a Last Will or in the complete absence of a Will.

Trusts are also handy if the person(s) you wish to benefit upon death are not necessarily capable of managing money or would be disqualified from receiving certain benefits, like Medicaid or SSI, if they were to receive money or property outright. Under the Special Needs Trust Fairness Act passed in late 2016, disabled individuals may now establish a Special Needs Trust on their own behalf without court action or approval. This legislation is a great step toward allowing many individuals with disabilities to control their own financial situations. The account owner may add up to $18,000 per year (in 2024) to their ABLE account (with additional rules surrounding income earned by the account beneficiary). If you have a loved one with special needs, you may also wish to learn more about ABLE accounts.

Trusts can also help avoid federal estate taxation of larger estates if used properly in estate plans and assist beneficiaries in maintaining eligibility for certain public benefits like Medicaid or SSI in more moderate estates. All of these benefits are dependent upon the type of trust put in place and how it is administered in accordance with the goals for which it was drafted.  Often trusts are not properly funded during one’s lifetime, so the probate-avoidance benefits outlined above are lost or there are misunderstandings or assumptions made about the actual benefits a certain type of trust will provide or the purpose for establishing it in the first place.

It is important to review any trust you currently have to ensure it is structured properly based on changes in the SECURE Act if IRAs were designated to be paid into a trust for a beneficiary. Read more about the SECURE Act. The SECURE Act has tightened the regulations such that if the beneficiary does not meet an “eligible beneficiary” designation, he or she will be required to draw out and pay taxes on the entire account balance within 10 years of the death of the owner. The language in the Act may cause a conflict with the terms of your specific trust or the purposes for which it was originally established.

How can I limit or avoid inheritance tax paid by my family?

With proper advanced planning, inheritance tax can often be avoided. The tax laws significantly changed in 2018, so fewer people will now pay estate tax on money and assets they inherit. As of January 2024, the federal estate tax exemptions have been raised to $13.61 million per individual and $27.22 million per married couple. This should eradicate most folks’ potential for federal estate tax liability. While North Carolina no longer has an estate tax, several other states still do. Therefore, structuring an individual or married couple’s estates to take advantage of the exemption amounts, state or federal, which allow estates to pass tax-free can be fairly easily accomplished if planning is undertaken in advance of serious illness or advanced age.  Previous federal estate tax thresholds that were raised significantly are scheduled to “sunset” or revert back to significantly lower amounts at the end of 2025, so keep an eye out for changes in this area and the potential for a reduction in the amount of assets which subjects an estate to federal estate tax.

Use of trusts upon death or even to gift assets with potential for significant appreciation, and lifetime gifting to family members or charity are all methods by which state or federal inheritance tax is avoided. Often, traditional ownership of assets, such as jointly between spouses or naming spouses as primary beneficiaries can run contrary to recommended tax-planning and disability-planning techniques. Therefore, an estate planning attorney should be consulted on the best ways to structure not only Wills or Trusts but also the method by which title to certain assets is owned.

When would a Guardianship be needed?

When a person becomes ill to the point they are no longer mentally or physically competent to handle their own business or personal affairs, they must rely on another competent adult to make those decisions for them. If the incapacitated person has not appointed someone as their durable power of attorney, then the only recourse is to seek the appointment of a Guardian through the Clerk of Court in the county of the disabled person’s residence. This is essentially a lawsuit filed to have the person legally declared incompetent and a guardian appointed by the Clerk of Court to handle the person’s financial and/or medical decision making. This can be costly, time-consuming, and can strip the person of more rights than necessarily required, though laws have begun to allow for a more tailored approach through “limited guardianships” to address the specified needs of an impaired individual.  A guardianship also limits the options for estate and asset protection planning strategies as all transfers or expenditures of an incompetent’s assets must be court-approved.  Having a durable power of attorney in place that names a trusted adult is a much better option. It is recommended that a durable power of attorney and healthcare power of attorney be executed prior to incapacity to avoid the need for a court-ordered Guardianship. The Power of Attorney statute in North Carolina was completely rewritten in 2018. While the newer law does not invalidate older POA documents, consideration should be given to updating older POA documents to comply with the new law.

What is the difference between a medical power of attorney, a durable power of attorney and a living will?

A medical power of attorney authorizes someone to have access to your medical records and make medical decisions for you only at a time when you are not capable of communicating those decisions to your doctors. A durable power of attorney authorizes someone to make financial, property, tax, or other legal decisions for you, either at a time when you are incapable of doing so due to mental or physical infirmity or at the time specified in the power of attorney document itself. A living will serve as instructions to your doctor and your medical power of attorney/agent as to when you would want life-prolonging measures to cease if you are terminally ill, in a persistent vegetative state (i.e., coma), or suffer from severe Alzheimer’s, dementia or similar cognitive loss. These documents are also referred to as advanced directives.

Should I pre-plan/pre-pay my funeral arrangements?

In a word, “yes!” This too is better dealt with at a time when family is not in the throes of grief or trauma. Further, the cost of a funeral/burial is always increasing, so pre-payment of those expenses serves as some cost savings. Postponement of such payment also risks that you may have insufficient assets at death to satisfy those expenses, leaving your family to wonder how they are going to pay for your funeral. If properly planned, pre-need funeral/burial contracts are typically viewed as “exempt” assets for purposes of Medicaid eligibility should you need to apply for those benefits for long-term nursing care in the future. Also, talking over one’s final wishes with family is a healthy way to communicate one’s legacy and desire for how one wishes to be remembered.

How can I avoid family fights over the distribution of my assets?

Estate disputes are not uncommon, but there is an option in North Carolina called Living Probate. This legal process allows you to identify potential challenges to your will while you are still alive, in essence, having your will declared valid before your death. Anyone wishing to challenge the will would do so during this process, allowing you to weigh in on your reasons for the decision. Trusts are also sometimes better tools to mitigate a potential for a challenge to an estate plan as those do not lend themselves to challenge in the way a Last Will might. Clear communication about one’s wishes well in advance of illness and incapacity will also head off potential disputes or frustrated expectations.  There are relatively new “living probate” procedures provided by statute in some states that allow someone to “test the waters” while living to determine if any beneficiary or potential beneficiary may challenge one’s estate plan.  Careful consideration should be given to disclosing through a court proceeding what would otherwise remain confidential until the individual’s death depending on the likelihood of a challenge and the amount of property or assets at play.

How often should I review my estate plan?

Laws affecting estates, trusts, taxes, and public benefits for disabled individuals do change over time, as do personal situations and the health or suitability of those whom you have named to act on your behalf under your estate planning documents. It’s a good idea to review your estate plan with your attorney every 2-3 years or sooner if you have a significant life change, such as a death, serious illness, placement into a long-term nursing facility, move to another state, or change in your financial situation. The 2019 SECURE Act and 2022 SECURE 2.0 Act made some major changes to the rules, so if you still have not reviewed your estate plans, we recommend you do so to ensure the plans still accomplish their goals. You may wish to make an appointment with your estate planning attorney.

It is helpful to periodically make a list of one’s assets, where those are held, contact persons who serve as your advisors relative to those assets or accounts, and the identity and location of all persons named as beneficiaries of your estate or of life insurance or other accounts, whether under a Will, Trust or Beneficiary designation. Talk to your medical power of attorney about your wishes concerning your health care and what types of treatment you would – or would not – wish to have administered. Don’t forget to include instructions (including logins and passwords) for your digital assets (Facebook and social media accounts, online bill pay, automated checking account deductions, etc.) so they may be properly closed out after your death.  It can be helpful to use a password management service to securely store passwords and to allow your executor to access digital information easily.  In addition, Google has an inactive account manager option that would automatically allow, after a designated waiting period, a designated person to take control of your account.

More on the SECURE Act

The SECURE Act has several dozen provisions that may impact individuals, from removing the age cap to contribute to an IRA, limiting the period of time for drawing out proceeds from an inherited IRA for all but a few eligible beneficiaries, to enabling small business owners the opportunity to more easily offer a retirement savings plan for their employees. Learn more about the SECURE Act.

The SECURE 2.0 Act of 2022 made some additional important changes, such as increasing the age for mandatory distributions from retirement accounts, removing the requirement to take Roth IRA required distributions from employer plans, reducing the penalty for failing to take required minimum distributions from 50% to 25%, and allowing higher catch up contributions.  Additionally, the SECURE 2.0 Act has allowed some funds held in a 529 to be rolled over into a retirement account if the funds are not fully utilized on educational expenses.  Learn more about the SECURE 2.0 Act.

Estate planning is not limited to individuals with highly valued assets. Everyone should periodically review their situation – specifically from a personal, financial, and medical perspective – and ensure they and their families are prepared for the future and the unexpected circumstances that can – and will – occur. The Estate Planning and Elder Law team at Brinkley Walser Stoner can speak with you about your specific situation and make appropriate recommendations.

If you would like to learn more or schedule an appointment with one of our estate planning attorneys, please contact us online or call us now at (336) 249-2101.