We all like to get away. Many people purchase out-of-state vacation properties to do just that. They often consider the tax consequences of the purchase, but do not give much thought to the effect it will have on their estate planning.
If a person passes away with real estate in his or her name, then their Executor may have to get authority to act on behalf of the estate in that particular state. Some states accept the doctrine of “muniments of title,” which means they accept the home state’s probate and do not require a new probate for the Executor. Other states require the Executor to open a second probate matter entirely. In either case, the Executor has to deal with multiple attorneys in multiple states to transfer the property.
A common way to fix this problem is to create a trust and record a deed placing the out-of-state property into the trust. The property owner still has full control of the property during his or her lifetime as trustee of his or her trust. However, when he or she passes away, the property flows outside probate because it is in the name of the trust. The successor trustee can then deal with the property without having to open multiple probates.
If a person owns property in multiple states without a trust then the Executor’s job becomes exponentially more expensive and time consuming as he or she has to get court permission to act in multiple states. Putting out-of-state property into a trust saves that person much time and headache.
In Georgia, a surviving spouse gains rights because a spouse is an heir-at-law, or a closest living relative, of someone who passes away. However, a surviving spouse does not automatically get everything. That is really an urban myth, even though there is a grain of truth in it. That grain of truth only arises if all the facts align just right.
In many cases, people want a surviving spouse to get everything, and that is why the default rules are built that way. For example, if a person dies without any Will and without children, then a new spouse can claim the estate because the surviving spouse is the only closest living relative and the deceased spouse has written nothing different.
If a new spouse is not mentioned in an existing Will which does not specifically state a future marriage is contemplated, and if that person has no children, then the probate code gives a surviving spouse the right to claim the decedent’s estate after debts and expenses are paid.
People can override the default rules by signing a valid Last Will and Testament. A Will spells out who takes charge of the estate and who receives property from the estate. The Will can be signed either before or after the marriage, and it should specify that a person is either already married or about to get married. By mentioning the marriage, a Will’s directions then control the estate and the default rules fall away.
Other ways to exercise more control over how assets flow are by designating beneficiaries of retirement accounts or insurance policies and by adding joint owners to various assets. Beneficiary designations transfer assets outside a Will, and take priority over the probate laws. Software programs and on-line services that help you draft a Will for a low cost often leave out language that describes these rules, and they don’t tell you about options that might exist outside the Will. They are not as effective as a professionally drafted document, so getting married is yet another reason to sit down with a good advisor and make changes to your Will.
Benjamin Franklin and Daniel DeFoe taught us to rely on two certainties: death and taxes. However, dying does not necessarily lead to taxes. In fact, the federal estate tax exemption in 2019 is $11.4 million per person, which means that assets flowing through more than 99% of the estates this year will not be subject to estate taxes. A handful of states impose their own estate and inheritance taxes, but Georgia is not among them.
As a general rule, assets received as an inheritance do not typically show up on a person’s income tax return. Usually, it is only the dividends and interest earned on inherited property that count as income.
The biggest exception to this rule applies to traditional IRAs and 401(k)s. Because the income flowing into these retirement plans is not taxed at the time it is earned, distributions from those plans are treated as taxable income to the beneficiaries. Just as income tax is due if a retiree pulls money out of a traditional IRA, income tax is also paid by a beneficiary in the year that a beneficiary withdraws funds from that IRA.
The income tax burden on traditional IRAs (as opposed to Roth IRAs), means that the slowest distribution schedule is also the most tax efficient. Individual beneficiaries can use their remaining life expectancies to calculate the minimum IRA distributions and defer most of the income tax liability into future years. Leaving an estate as beneficiary or having no beneficiary at all is sometimes the worst plan because the entire IRA is subject to the “five-year rule” and must be distributed within 5-6 years. The estate then pays the income tax on each of those distributions in the year that they are made. Trusts can also be named as beneficiaries, but the rules there get complicated fast. Some Trusts are subject to the five-year rule, and other Trusts qualify to let the life expectancy of the oldest beneficiary stretch out the IRA distributions. It is a good strategy to review your beneficiary designations with a competent adviser and think about how your legacy could be more tax efficient for your beneficiaries.
To bury or cremate? That is the question that family members ask as they step into the funeral home after a loved one has passed away. In the ideal scenario, you have answered that question for them during your lifetime.
Pre-arranging burial or cremation with funeral homes and buying plots at memorial gardens ahead of time is a great idea, but it is not effective if a conversation with family does not take place ahead of time. Your family will have no way of knowing that the preparations were made unless you tell them.
Final disposition of bodily remains is not something that people like to talk about or even think about. Some people feel strongly about cremation, others want a full body burial, while some like the green burial plan. One question that frequently comes up during an initial estate planning meeting is whether or not those wishes should be expressed in a will.
There is no legal problem expressing burial or cremation wishes in a will. The only concern is that the Testator expresses those wishes to the people who will be taking care of the arrangements. It comes down to whether your family is going to take care of your funeral arrangements first or track down your will. Wishful thinking (and what typically happens) is that the funeral arrangements will come first, and then the will second. It would be heartbreaking for the family to find out that what they chose to do is not what you expressed in your will.
If you truly want to make it easy on your family, then have those hard conversations about burial wishes sooner rather than later.
Marianna is an associate at the Law Offices of J. Christopher Miller, PC. 678-746-2900 NorthFultonWills.com
Managing an estate is a lot like running a vacuum cleaner . . . it works better if only one person does the job. Families choosing Executors to take charge of an estate often ask whether all of the children can serve together as Co-Executors. The legal answer is not the practical answer. Yes, it might be legal to give more than one child the power to act simultaneously for the estate, but that shared gift can lead to bitter fights and resentment. It is also much more complicated to have two Co-Executors serving together because of the logistics involved.
When two Co-Executors are named to serve together, then both of them have to visit the probate court to sign an Executor’s Oath. Then, both of them have to meet at a chosen bank to open an account in the name of the estate and coordinate the application for a tax ID number from the IRS. Some bank branches will even decline to open an estate account with two Co-Executors, for fear of the liability they might have in letting two people spend the estate’s funds independently.
This is only half of the story. When two Co-Executors have to clean out a home, even the smallest differences of opinion can turn into vicious arguments. Without a pecking order described in the Will, no effective tie-breaker is available to calm things down. Experience teaches us that no matter the age or maturity, children coping with the loss of a parent have high emotions. A good way to prevent arguments is to choose an individual Executor and write that person a letter with clear instructions about who you might want to receive certain items.
Another topic where Co-Executors frequently find themselves at odds with one another is in deciding whether to sell the house that a deceased parent lived in, especially if that house sits on land owned by the family for generations. With Co-Executors, the decision to sell might be easy, but disagreements arise about the right listing price or which real estate agent to use. For these reasons, and a few others, one Executor can push an estate faster and more efficiently than two.
Before an Executor can take control of a decedent’s assets and begin following a Will’s instructions to distribute dollars among beneficiaries, the Executor has to file the Will at the Probate Court and prove to the Court that the Will was properly signed by the decedent in front of two witnesses. After the Probate Court is convinced that the Will was properly signed and that all of the closest living relatives have received notice and an opportunity to, then the Court issues a document called “Letters Testamentary” to the Executor. Many original Wills are accompanied by a notarized “self-proving affidavit,” which is what the Court relies on to determine that a Will meets the requirements of a formal signature with two witnesses.
If, however, the Will is not accompanied by a self-proving affidavit or was signed outside Georgia, then to “prove” the Will, the Executor needs to find one of the witnesses and ask that witness to sign a document called “Interrogatories.” The word “Interrogatories” is just a fancy way of saying “answer these questions, please.” Instead of relying on the self-proving affidavit, the Court will instead rely on the witness’ statements in the Interrogatories to determine that the Will was properly signed.
Some Wills do not have blanks for the witnesses’ addresses, so tracking the witnesses down can be tricky or completely impossible. If an Executor makes a good faith effort to find witness and fails, or if the Executor discovers that both of the witnesses are deceased, then the Probate Code gives Executors an alternative method of proving a Will’s validity. That alternative method starts with showing the Court all of the steps taken to find witnesses and the results of that fruitless search. The alternative method then lets the Executor submit two sworn statements signed by people who can say they knew the decedent and can vouch for the authenticity of the decedent’s signature. Examples of people who could vouch for a signature include an accountant or a coworker of the decedent who would have seen or have records of the decedent’s signature and can compare it to the signature on the Will.
All of that effort can be avoided in Georgia if the Will has a self-proving affidavit in the correct format. It can save your Executor lots of time and money.
In late December, the Tax Cuts and Jobs Act changed the incentives built into the federal income tax system. It also bumped the federal estate tax exemption to more than $11 million per person. That exemption is the door through which someone can pass assets before his or her estate pays estate taxes. Under the new rules, only individuals who die with more than $11 million in net worth will pay estate taxes. For married couples with assets between $11 million and $22 million, “portability” provides a relatively easy way to “double up” the exemption, and eliminate the estate tax exposure on that second $11 million.
The danger of this good news is that people might think that their Wills are fine because there is no expected estate tax. However, the estate tax exemption was not always so high and many documents written in the 1990s and 2000s traded away income tax benefits to save estate taxes. Those documents still sacrifice income tax savings, but they do not save estate taxes anymore. Words like “credit shelter trust” or “Bypass Trust” or “A/B Trusts” are flags that your estate plans might create income tax exposure down the road.
For example, if I buy a share of stock for $10 and die owning that stock when it is worth $25, then my estate and heirs will only pay capital gains tax if they sell it for more than $25 per share. In a credit shelter plan, however, that stock is held to the side so that it does not qualify for this basis adjustment. The Trustee then selling my stock at $25 per share after my death would still pay capital gains tax on the $15 difference between my purchase price and the sale price. To keep up with the changes in the tax rules, and to make sure that your documents do what you want them to do, now is a good time to review your Wills with someone who is informed about the changes and can help decide what is right for you.
Chris Miller has practiced in the North Fulton area for 18 years, guiding clients in estate planning and estate administration.