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.

10 Things Everyone Should Do Before the End of the Year: Part Two

10 Things End of Year Pt 2

Read Part One Here.

6. Give gifts to your family. You can give up to $14,000 per person to as many people as you’d like without incurring any federal gift tax liability. If you’re married, you and your spouse can give up to $28,000 per recipient. You can even gift your spouse any amount of money tax free, provided that your spouse is a U.S. citizen.

7. Open or fund an existing 529 College Savings Plan(s). 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. Note: These college savings funds qualify toward the $14,000 annual gift tax exclusion. One advantage of gifting to a 529 plan is that five years’ worth of gifts can be made in one year. With the annual gift exclusion of $14,000 for 2017, you can gift up to $70,000 at one time, and even double that amount if the gift comes from a couple.

8. Review beneficiaries on financial accounts and life insurance policies. The end of the year is always a great time to confirm that your named beneficiaries of your accounts are accurate. If any named beneficiary is your estate, then you need to meet with an estate planning attorney to verify the accuracy of your existing estate plan. Of course, if you have not created an estate plan yet, then you will want to take that important step as soon as possible in order to move into the new year with peace-of-mind.

9. If you are 70 ½ years or older, take your minimum required distributions. When you turn 70 ½ years of age, you are required to withdraw a minimum amount of money each year from your tax-deferred retirement accounts (i.e. traditional IRA, 401k). If you do not take this step, you may be subject to a penalty of up to 50 percent of the minimum required distribution. You can wait until April 15th of 2019 year to take your required distribution, but you should consult with your CPA to determine if waiting will push you into a higher tax bracket for next year.

10. Set your 2019 financial budget. Financial experts recommend that no more than 50 percent of your net pay should go to essential expenses, 15 percent of your gross pay to retirement, and 5 percent of your net pay to short-term savings. If you have not kept good financial records this year, make a New Year’s resolution to be better at record keeping in 2019.

10 Things Everyone Should Do Before the End of the Year: Part One

10 Things End of Year Pt 1

Read Part Two Here.

  1. Take time for tax planning. After you have identified your taxable income and expenses, you may want to consult your CPA and ask these questions: (1) Would it be better to defer income or expenses into 2019, and (2) would you be better to accelerate income or expenses into 2018? Normally, it is better to defer income and accelerate expenses, but each situation is different. Take note of the following:
    1. Businesses have a greater ability to defer income and accelerate expenses than most individuals.
    2. Do you owe estimated payments for income that has exceeded your withholding? The last quarter estimated payment is due on Thursday, January 31, 2019.
    3. As of July 1, 2017, the Illinois Income Tax rate increased from 3.75 percent to 4.95 percent. If you are an employer (even if you are self-employed) you will want to make the proper adjustments now to protect yourself from major penalties.
  2. Manage your investment portfolio. Make sure your financial advisor is strategically managing capital losses in your investment portfolio to potentially reduce taxable gains by year-end. This is an important aspect of implementing a tax-smart investment strategy. Now is a good time to analyze your investment portfolio to make sure the diversification is appropriate for you going into 2019.
  3. Use any remaining funds in your flexible spending accounts. There are several types of flexible spending accounts (or FSA’s), namely a Health FSA and Dependent Care FSA. These accounts allow you to use your own money, pre-tax, for health care and child care.
    1. Did you know that you cannot transfer money between different FSA’s? Check with your employer to confirm how much, if any, of your unused funds can carry over into 2019. If your FSA funds do not carry over, spend them by December 31st.
  4. Make a contribution to your retirement account. Review and adjust your 401(k), 403(b), TSA, or other retirement account contributions. For 2018, individual participants in defined contribution plans like 401(k)s can defer up to $18,500. The catch-up contribution provision allows those over the age of 50 to contribute an additional $6,500 for the year.
    1. Important deadlines to know – All employee contributions to a 401k must be made by December 31st. If you have an IRA, you have until April 15th to make a contribution for the 2018 year.
  5. Give charitable gifts. You can reduce your taxable income by your charitable gifts when you itemize on your tax returns. Be sure to make your charitable gifts by December 31st. You can also make donations of clothing and household goods.  Remember to ask for a receipt for non-cash donations.

Estate Planning Tools Beyond the Basics, Part Five: QTIP Trust


I hope you have learned new information through our “Beyond the Basics Series” for estate planning. Our final topic is the QTIP Trust.  QTIP is an acronym for “Qualified Terminable Interest Property.”  There are two main purposes for this type of marital trust:

  1. To allow you to provide for your spouse and your children, especially if you have a blended family, and
  2. To maximize estate tax savings in the event of one spouse’s death.

A QTIP Trust Protects Your Ability to Make Gifts for a Future Beneficiary

Each spouse (called the “Grantor”) creates his/her own Trust Agreement, which provides for the use and enjoyment of the trust assets during the lifetime of the Grantor and the Grantor’s surviving spouse.  Upon the Grantor’s death, the Grantor’s surviving spouse is entitled to all income that trust’s assets produces, the amount of principal from the trust’s assets that is necessary for the health or maintenance in reasonable comfort for the Grantor’s surviving spouse,  as well as the use of any real estate owned by the Trust. Here, the Trust, not the Grantor’s surviving spouse is the owner of the trust assets, and therefore, the surviving spouse cannot re-gift the trust assets contrary to the intentions of the Grantor.  This limit is in place so that upon the death of the Grantor’s surviving spouse, the trust assets are distributed to the future beneficiaries named by the Grantor.

In blended families, a QTIP Trust can serve as a way to relieve financial and emotional tension between the Grantor, the Grantor’s surviving spouse, and the Grantor’s children who are not the children of the Grantor’s surviving spouse.  Here, not only are you, as the Grantor, and your spouse gaining peace of mind, but so are your children and, possibly, grandchildren. This gives you, as the Grantor, ultimate control of your assets.  Without this type of protection, your assets would transfer to your spouse, and, if your spouse has children from a previous marriage, they would inherit the assets after your spouse’s death, and your children would receive nothing.

The future beneficiary of the QTIP Trust can be anyone named by the Grantor and is not limited to the Grantor’s surviving children.

A QTIP Trust will save your family money.

Let’s be clear: a QTIP trust does not eliminate your estate tax; it simply postpones it until the death of the second spouse. So, upon your death, a QTIP trust will eliminate the need for your spouse to pay taxes on the assets and property you leave to them. This is a result of the federal estate tax unlimited marital deduction, truly the key to a QTIP trust. Upon the second spouse’s death, then, estate tax is due on all of the assets, including those held in the QTIP trust.  If the trust assets have significantly increased in value, more estate tax could be due than if the assets had simply been included in the estate of the spouse who was first to die.

Important Note: You and your spouse can reap the benefits of a QTIP trust only if your spouse is a U.S. citizen.

A QTIP Trust will provide flexibility.

If at the time of your death, your family’s financial situation changes, or estate tax laws change, there is no requirement that the QTIP tax benefits be fully implemented.  Your fiduciary will make the “QTIP election” (either in whole or in part) on the estate tax return filed for your spouse’s estate. Your fiduciary will be encouraged to seek expert tax advice before making such elections on your tax returns.

A QTIP Trust may not be right for every family, but if anything in this article rings a bell for you, please contact your estate planning professionals to learn more. Don’t miss out on an opportunity to execute the most appropriate estate plan for your own family’s needs.

Estate Planning Tools Beyond the Basics, Part Four: Funding Your Trust with Retirement Assets

Retirement Assets

You learned a while ago that it is wise to begin funding your trust with a life insurance policy in order to cover outstanding costs—specifically, taxes—when your beneficiaries are left with your estate after your death. Another way to fund your trust is through retirement assets, such as IRA’s and 401(k)’s. If you set up your living rust to be the beneficiary of your retirement accounts, your trusts beneficiaries will then benefit from asset protection ease of tax treatment, and avoid probate issues.

A few details to note:

  1. Asset protection. Designating your trust as the beneficiary of your retirement accounts does not necessarily protect your assets while you are still alive. However, upon your death, your IRA payouts can be stretched out and distributed to your trust’s beneficiaries in a favorable matter to them. In addition, a retirement account that benefits a trust will be protected from creditors, divorce decree requirements, and any long-term care expenses that are passed on to your beneficiaries.
  2. Primary and contingent beneficiaries. It is worth noting that your living trust should be named as the primary, or at least contingent beneficiary of your retirement accounts. If you have your spouse or another person named as the primary beneficiary of these accounts, you’ll want your trust named at least as the contingent beneficiary, should your primary beneficiary predecease you. For the most control over where your retirement funds end up, a primary trust beneficiary is the safest route.
  3. Inherited retirement accounts. It is wise to rename your retirement accounts as “inherited” for the benefit of your living trust. If you simply assign your retirement account as is to be payable to your trust, you will face your income taxes to be due and paid immediately. Renaming your IRA or 401(k) as “inherited” will protect your tax benefits and your heirs by indicating that it is still a tax-deferred beneficiary.

It is easy to slip up in turning over your retirement assets to your trust; before you take action for yourself, always consult with an attorney or financial advisor to avoid making a small, yet costly mistake. IRA’s and 401(k)’s are a no-brainer for many working individuals who are serious about planning for their future; turning over those funds to your living trust takes that planning a step further towards protecting you, your loved ones, and your estate.