What Does My Estate Plan Need to Accomplish? Estate Planning for the Blended Family

Estate Planning for Blended Families

No two families are the same.  Because of this critical fact, the way to decide what you must accomplish depends on what your family make up looks like. I’d like to take a closer look at a blended families.  You may be surprised to know that blended families are actually a higher percentage of all families than a traditional married couple with children.

I’d like to introduce you to Tom and Sue Jones, a married couple living in Illinois.  Tom is 56, and Sue is 61.  Tom has two daughters, ages 20 and 16, from his first marriage that ended when his wife lost her fight against a terminal illness.  From her previous marriage that ended in divorce, Sue has three adult children of her own, ages 33, 31, and 21, and two grandchildren ages 2 and 4 months. Together, Tom and Sue’s net worth exceeds $4,000,000.00, and they would like to use their assets in a way that treats each other’s children as their own.

As I work with Tom and Sue to create an estate plan, which cares for their blended family as one family unit, here are the 10 things that Tom and Sue need to consider in order to accomplish their goals:

#1 – Don’t Procrastinate!  They must have a written plan in place.  If Tom or Sue were to become disabled or die, prior to this plan becoming effective, the law would treat Tom’s heirs differently from Sue’s heirs, even though Tom and Sue are married.  My advice to Tom and Sue is to start the decision making process with a decision to create a plan that is effective by the end of this calendar year.

#2 – Give gifts today if they meet your estate planning goals!  Tom and Sue believe that education is a gift that keeps on giving, and they want to include gifts for education in their estate for their children and grandchildren.  Both of Tom’s daughters are still in school, as is Sue’s youngest son.  Tom and Sue know that in Illinois, a 529 College Savings Plan, such as the Bright Directions College Savings Program, is a “Qualified Tuition Program” and withdrawals used to pay for Qualified Higher Education Costs are free from federal and Illinois state income tax. These expenses include tuition, fees, books, supplies, and equipment required for enrollment at a qualified institution of higher education. Room and board is considered a qualified education-related expense if the student is enrolled on at least a half-time basis.  Tom and Sue desire to use their money to the greatest extent possible for their family so considering plans that allow them to save tax on expenses they would otherwise incur is a great approach to allowing their dollars to stretch over time.  I work directly with Tom and Sue’s CPA, who will advise them on any holding periods that apply for these types of funds prior to a withdrawal being made.

#3 – Decide who will care for any minor children!  Tom’s youngest daughter Katie is now 16.  Tom will need to decide who should care for Katie if he were not able to do so.  As I sit with Tom to discuss this, I explain that he can partition the roles between guardian (the person who cares for his daughter) and the custodian of the estate (the person who manages the finances for his daughter).  This allows Tom to choice the best for Katie, while considering two different people to take on those roles.

#4 – Use your Tax Exemptions.  Because Tom and Sue’s assets exceed $4 million, the estate of the second to die will incur a state estate tax liability.  To properly minimize this tax, Tom and Sue will be advised to make certain marital transfers in ways that will allow them keep control and even keep the income their assets are generating.  The rule of thumb for this is to always plan for the future and keep in mind that if you are investing your assets they will continue to grow over time and what you have tomorrow will be more than what you have today.

#5 –  Secure/update health care documents. At the minimum, everyone over the age of 18 needs 1) a Durable Power of Attorney for Heath Care, which gives another person legal authority to make health care decisions (including life and death decisions) for you if you are unable to make them for yourself; and 2) HIPPA Authorizations, which give written consent for doctors to discuss your medical situation with others, including family members.  I advise Tom and Sue to make these decisions so that they are able to have the proper persons making decisions for them when needed in the future.  As we discuss this, I learn that Sue’s oldest son is a medical doctor, and he and Tom have a very close relationship.

#6 – Select the Vehicle for Transferring Your Assets.  Tom and Sue select a Revocable Living Trust over a Will because (a) of the private nature of the trust and (b) the reduced expenses of administering the estate.  This means that Tom and Sue will have a little bit more work upfront updating their beneficiary designations on their assets, but I provide them with a checklist of how their assets should be titled and how to make the necessary changes. In the end, Tom and Sue are eager to do the work instead of having someone else do it later.

#7 – Review and update beneficiary designations!  Although Tom and Sue have been married for over five years, they have not reviewed all of their beneficiary designations on all of their investments.  Sue’s employer was very diligent in helping her make the changes after her divorce, but her current beneficiaries are her three children and not Tom or his children. Similarly Tom’s beneficiary designation still shows his former wife.    Because Tom and Sue’s plans for distributing their assets include a plan to care for one another as well as all of their children collectively, the designation needs to be changed to mirror their intentions.

#8 – Review and update insurance!  Tom and Sue have permitted me to work directly with their team of professionals to determine their current insurance levels and beneficiary designations. In addition to the proper titling of assets, I ask their financial advisor two important questions: (1) Do they have the amount of life insurance coverage to meet their current needs?  (2) Do they have long-term care insurance in place to preserve their family assets and use in the event that either of them should need long-term care due to illness or injury?  Tom and Sue’s financial advisor will work directly with them on these issues and report back to me with any updates or changes that will effect the drafting of the estate plan.
#9 – Get Basic Documents for Unmarried Adult Children.  Although Sue will tell everyone she meets that it came as a shock when she learned that she could not see her oldest child’s college grades without his permission, she goes on to say that she does not want this type of thing keeping her from caring for him if he becomes ill.  I explain to Tom and Sue that unmarried adults (18 and over) need to have a Durable Power of Attorney for Health Care and HIPPA Authorization so you can act on their behalf in a medical emergency.  We also discuss the benefits of a Simple Will and Durable Power of Attorney.
#10 – Talk to your children about your estate plan.  Although Tom and Sue’s children all get along well now, they should expect that this will always be the case.  I encourage Tom and Sue to sit with their children to talk about their estate plan and how they have created an estate plan to be a family plan, each of them having a part of the plan.  I have explained that they don’t need to show them bank and financial statements, but simply talk in general terms about what they are planning and why.  I explain to Tom and Sue that this is important because the more the kids understand their intentions, the more likely they are to readily accept it—and that will help to avoid discord after they are gone.   I remind them as well that this is a good chance to talk to their children about their values and the opportunities that money can provide. Tom and Sue took this opportunity one step farther and have decided that the holidays are an excellent time for families to do charitable work together, and have signed up to work a local charity event over Thanksgiving weekend.

Just like no two families are the same, no two families (even similar) will have the exact same goals.  So, take your time to set your own goals for your family. I’d be happy to schedule some time to meet with you to answer any questions that you may have as you think through those goals.

Food for Thought: Year-End Charitable Gifts

Charitable Gifting

Charitable giving is a great way to close out the year, and there are so many creative and impactful ways to do so. Whether you send a check to an organization that you value or you collect and distribute gifts to those less fortunate, charitable giving is what makes the holidays meaningful and connects us to others in ways we would not be able to otherwise.

I would like to take this time to remind you of some tax rules for gift-giving to charities. The basic rule is that a charitable gift is considered made on the “date of delivery.”  This will determine (A) the tax year in which the gift is deductible; and (B) the value of the gift for assets that have appreciating and depreciating value.

The method for establishing the date of delivery depends on the type of gift contributed and how it is given to a charity. Here are a few of the most common types of gifts given to a charity:

  1. Gifts by check: Under the “mailbox rule,” the date of mailing to the charity is deemed the date of delivery if there are no restrictions on the time or manner of payment and the check is honored when presented. Thus, a donor will get a deduction on a 2017 income tax return for a check mailed via US postal services on December 31, even though it is not received by the charity until January 2018. When it is important to establish the delivery date, the donor should not rely on the postage meter; rather, the donor should mail the gift through the post office via certified or registered mail with a return receipt requested.
  2. Credit card gifts: Charitable contributions made using a credit card are deductible when the bank pays the charity. The gift is deemed made as of the date the bank mails, transfers, or delivers the funds to the charity. That date is shown on the bank’s monthly statement, but it might not be the date (or, more significantly, the year) that the donor directed the transfer. However, contributions made by text message are deductible in the year the text message is sent. A telephone bill showing the name of the charity, the date of the contribution, and the amount of the contribution will be proof of the date of the gift.
  3. Gifts of tangible personal property: The date the property is received by the charity is the delivery date. The title must also be transferred, if applicable.
  4. Real estate: The date the charity receives a properly executed deed is the delivery date.
  5. Pledges: For income tax purposes, pledges are deductible in the year they are fulfilled, not in the year they are made.

Don’t forget: You can also make gifts of up to $14,000.00 to an unlimited number of people before December 31, 2017, free from any federal gift tax consequences.

Happy Year-End Giving!

The Estate Plan: An Impactful Gift for Your Family

Estate Plan Gift

Are you already thinking about Christmas gifts for your family? You may be considering gifts like sweaters and electronics, gift cards and cookies. Consider, though, what impact it might have to give your family the gift of peace-of-mind.

An estate plan is a gift that will continue to give peace-of-mind, even after your death. There are typically four reasons why individuals want to use an estate plan document, such as a trust, to establish how they want to make gifts after their death:

  1. It allows you to choose who will receive what, and how much.
  2. It reduces income and estate taxes, where possible.
  3. It allows you to direct ownership of your assets to specific people, rather than letting the courts send your assets to outside parties, such as creditors.
  4. It allows you to make charitable gifts upon your death if that is a goal of yours.

So, what exactly is a trust? A trust is a written relationship where a person or entity is designated to act as the “trustee” to receive and hold legal title to property and, upon your death, administer the property for the “beneficiary” in accordance with the instructions of you, the “grantor.” Each trust relationship involves these three parties: the trustee, the beneficiary, and the grantor.

So, as you may begin to gather, a trust is very important in granting that piece-of-mind to your family. There are two types of trusts to consider: a Testamentary Trust and a Living Trust.

  • A testamentary trust (sometimes referred to as a will trust or trust under will) is a trust which arises upon the death of the testator, and which is specified in his or her will. A will may contain more than one testamentary trust, and may address all or any portion of the estate. In addition to the three parties in a basic trust relationship, the probate court becomes a necessary component of the relationship because it oversees the trustee’s management of the trust.
  • A living trust (sometimes referred to as a grantor trust or inter vivos trust), is a trust created during the lifetime of the grantor and is revocable and amendable, until the death of the grantor. The primary difference between a testamentary trust and a living trust is that the assets held in a living trust do not have to go through the probate process. Probate estates usually remain undistributed for at least six months after the probate process has started to allow creditors an opportunity to make claims against the estate with some flexibility for families that can show the probate court they are in need.

For trusts that arise or continue after the death of the grantor, it is important to understand that you as the grantor will not have any influence over the trustee’s exercise of discretion. The trustee owes certain duties and responsibilities to the beneficiaries (i.e. safeguarding the trust assets, investing assets in a prudent manner that will result in reasonable growth with minimal risk, etc.). Likewise, the beneficiaries have certain rights inherent in the trust relationship (true and complete copy of the trust, right to be reasonably informed, right to be treated fairly, etc.).

So, with an official estate plan through a trust, you will give a gift that keeps on giving. You will ensure that your desires for your family and your assets are carried out in a timely manner, and in a way that you would personally carry it out during your lifetime.