Is Your Estate Plan Ready For 2022?

At Ison Law, we like to think of estate planning as life affirming. Your plan affirms the decisions you made in your lifetime to have an estate to plan. When you create your estate plan, you are creating a bit of reality and framework within which your beneficiaries can extend your life chooses and absorb them into their own lives. For some of you, that means a multigenerational approach to planning and creating a real economic reality that could last in perpetuity. It does not matter what number you start with, grab a calculator and run that number out over two or three generations. Your estate could become an enormous resource available as a safety net for generations of your descendants. For others, you may want to grant your beneficiaries the immediate use of your estate relying on your beneficiaries to make wise choices. Whatever your desires for the future, your estate plan is the instrument to play your tune.

Things change. People, ideas, laws, and even sometimes values change with time and experience. Make certain that your estate plan reflects these changes. Whether you are a first-time visitor to Ison Law or have been with us for decades, we are always happy to meet with you, rekindle our friendship, and make certain your estate plan affirms your life. Rather than just words on page after page of print you sign at the end, at Ison Law we aim for you to experience joy knowing that your plan is thorough, complete, understandable, and most of all uniquely your own.

The Impact of Transfer on Death designations.

If you have not had the opportunity to read our article related to the statutes and cases related to Transfer on Death designations, please go here when you get ten minutes. To summarize, if you use Transfer on Death as a means to transfer vehicles or real estate, please make sure that your current insurance carrier includes the beneficiaries as additional insured parties on your property and casualty insurance. Otherwise, claims made against the owners of property (think auto accident or slip and fall) and losses to the property (think fire damage or tree falling on home) will not be covered by insurance from the moment of the owner’s death until the TOD beneficiary gets their own property and casualty insurance.

Annual Exclusions and Lifetime Transfer Tax Exemption for 2022

The gift tax annual exclusion increased to $16,000.00 per done for 2022. That means you can gift $16,000 per year to as many persons as you want during 2022 and pay no gift tax. Gifts made to a done above that amount must be reported on a Gift Tax Return due when your Income Tax Return is filed. The amount of a gift over $16,000 in 2022 will reduce your lifetime exemption amount by that amount.

Despite the talk in Washington during most of 2021 about increasing the gift and estate tax and decreasing the gift and estate tax exemption, Congress passed no changes to the law for 2022. Of course, as of this writing there is still time for Congress to act on those provisions retroactive to Jan 1, as each day passes that probability decreases. That seems especially true since the conversation out of Washington seems to have focused on different issues of late. As of this writing, the exemption for gifts made during lifetime and gifts made at death is $12,060,000.00 per person. The exemption is a lifetime exemption so it includes taxable gifts made during lifetime and those made at death. That means a married couple can transfer double that amount during lifetime or at death without incurring taxes. Remember, the exemption will decrease by half on January 1, 2026 unless the law changes in the meantime. The tax for amounts transferred over the exemption amount is 40%.

Remember, your gross taxable estate includes all assets you own and all assets to which ownership is attributed to you at the time of your death. Your gross taxable estate includes the value of life insurance paid as a result of your death, your retirement accounts, accounts, stocks, bonds, personal property, real estate, cryptocurrency, and all other property. If your estate is near the exemption amount or may become near when the exemption is halved in 2026, we should discuss options that may be available to you to assure the 40% estate tax has the least impact on your estate.

Using Your Spouse’s Unused Exemption Remains an Option

Whether your estate plan includes provisions to use your deceased spouse’s unused exemption after the spouse’s death or is silent on that issue, the portability option remain law as of this writing. Portability allows a surviving spouse to save the unused portion of the deceased spouse’s exemption and use it at the time of the surviving spouse’s death. To use portability, the surviving spouse must make sure IRS Form 706 is filed within nine months after the date of the deceased spouse’s death and the form must complete the sections to preserve the exemption. Even though no estate tax may be due, Form 706 must be timely filed with the proper election made on the form. If this impacts you, we can work with your accountant to help your accountant file the Form 706.

A Word of Caution: A Will-Based Estate Plan Must Be Administered Through Probate Court

We have worked with several clients over the past year who believed that using a Last Will and Testament to plan their estates avoids probate. Maybe there is a website, article, or video that led them to this conclusion. I don’t know the origin of that myth. But it is a myth. A Last Will and Testament may particularly describe exactly what you want to happen to your property and who is to be in charge. However, a Last Will and Testament has no effect at anytime during your lifetime or after your death until it has been admitted into a probate court case by the Probate Court and the Probate Court has issued Letters of Authority to your personal representative to authorize the actions described in the Last Will and Testament. Until the Letters of Authority have been issued, the personal representative named in your will has no power or authority to take any action. What that means if a Last Will and Testament will assure that your probate property will be administered through the Probate Court process at the time of your death.

Funding Your Trust-Based Estate Plan

We continue to meet with clients whose trust-based plan was created by other attorneys who have not been instructed in properly funding their trust. Remember, trusts are simply agreements between the Grantor of the Trust and the Trustee of the Trust to accomplish certain things for the Beneficiaries of the Trust. The most common type of trust used in estate planning is a revocable living trust. A revocable living trust holds and administers your assets during your lifetime, during any period of incapacity, and after your death according to your wishes described in your trust.

Your revocable living trust cannot accomplish any of its purposes until assets are transferred into the trust. At Ison Law, we advocate that and assist you in transferring your assets into the name of the trustee of your trust (usually you are your own trustee during your lifetime) when the trust is established. As you attain more assets those too should be included among the trust assets. That process is called Funding the Trust. Certain assets must not be transferred to the Trust – assets that would trigger an income tax by making the transfer. Assets like IRA, 401k, 403b, and other qualified plans for instance should not be transferred into the ownership by your trust.

By completing the Funding process and maintaining the Funding, at the time of your death you will own no probate assets. The reverse is likewise true. If you do not properly Fund your trust, then your survivors will need to complete the probate process just to transfer assets into the Trust. That extra step can be expensive and time-consuming yet it is entirely unnecessary if your Trust is properly Funded and you maintain that Funding.

Those of you who work with our office know that we emphasize the importance of Funding and provide Funding letters and documents as part of the estate planning process. We enjoy working with you to make certain you understand the Funding process and your future assets are properly Funded.

IRA Beneficiaries – Confusion from the Most Recent Law Changes

Over the years, changes in the law have caused changes in the preferred beneficiary designations for your IRA, 401k, 403b, and other qualified plans (“Qualified Plan”). To provide the proper context for this discussion, you should think about your Qualified Plan as a Piggy Bank full of Taxable Income. When the money is distributed out of the Piggy Bank to a beneficiary, the beneficiary must include the money as ordinary income on the beneficiary’s income tax return. Meanwhile the money in the Piggy Bank continues to grow income tax deferred.

To understand where we are now, we need to consider some history. While this is not intended to be a comprehensive, ivory tower explanation of all of the changes to law over time, it is intended to give you an understanding of why we make the suggestions for beneficiaries of your Qualified Plan. This explanation discusses Qualified Plans in terms of primary beneficiary – the first person to benefit from the Qualified Plan at the owner’s death AND contingent beneficiary – the person to benefit from the Qualified Plan if the primary beneficiary does not survive the Qualified Plan owner’s death. The explanation also assumes a family unit of Qualified Plan owner, the owner’s wife and more than one child and total gross assets less than the exemption amount so no estate taxes enter into the discussion.

Years ago, most of us in the estate planning business understood IRAs and other qualified plans were covered under ERISA, which meant that creditors could not reach the assets that were properly contributed to a qualified plan. In those days, the law imposed annual required minimum distributions (“RMD”) at certain times during the owner’s lifetime and to the beneficiary after the owner’s death. The RMDs generally allowed distribution of the Qualified Plan assets over the beneficiary’s lifetime. This lifetime RMD distribution were referred to as Stretch Provisions because it allowed the beneficiary to stretch out the distributions and allow the amount not distributed to continue to grow income tax deferred. In those days, the surviving spouse was the primary beneficiary and adult children who had no issues with wisely investing money were the contingent beneficiaries. Each beneficiary would receive an inherited IRA with the RMD measured over their individual lives. It was a simple but effective way to Stretch the Qualified Plan assets as long as possible.

Then the United States Supreme Court herd a case and ruled that the creditor protections of ERISA extended only to a surviving spouse. Qualified Plan assets left to beneficiaries other than a surviving spouse were subject to the claims of the beneficiary’s creditors. If a Qualified Plan owner wanted to gain asset protection for the non-spouse beneficiaries, the beneficiary needed to be a trust with strong language to protect trust assets from the beneficiary’s creditors. The trustee of the trust could still elect to Stretch the RMDs over the lifetime of the beneficiary but the measuring life for the RMDs was the oldest beneficiary. After that Supreme Court decision, to assure creditor protection for non-spouse beneficiaries, the Qualified Plan beneficiaries were: Primary Beneficiary – Surviving Spouse and Contingent Beneficiaries – The Qualified Plan owner’s revocable living trust. If the owner had no trust, then the children were still named as contingent beneficiaries with hopes no creditor issues would arise.

Then Congress acted. Most recently, the Qualified Plan law changed dramatically. With only a few exceptions, the law no longer allows stretch and RMDs. The Qualified Plan owner and the owner’s spouse can still use RMDs to stretch distributions over their lifetime. In almost all other circumstances, a Qualified Plan beneficiary has no RMD but must receive 100% of the distribution from the Qualified Plan within 10 years. By revoking the RMDs and stretch provisions, each beneficiary must decide when during the 10-year period the beneficiary should receive the beneficiary’s share of the Qualified Plan. If a trust is named as the Qualified Plan beneficiary and the trust has more than one beneficiary, the trust accounting becomes complex. What if one beneficiary wants all of the beneficiary’s share of the Qualified Plan in year one but the other wants none in year one, the trustee must seek a distribution from the Qualified Plan to satisfy the first beneficiary and make the distribution to only one of the beneficiaries. The trust must account for that distribution from the Qualified Plan as ordinary income to the trust and reconcile that with a distribution of income only to one of the trust beneficiaries. That accounting becomes very complex very quickly. For that reason, after the most recent changes to the law, the Primary Beneficiary – Surviving Spouse and Contingent Beneficiaries – the children.

The foregoing describes the history of the generally accepted beneficiary designations under the assumptions described. This complex area has gained more complexity after the last law change. Please feel free to meet with us to discuss your specific circumstances.

Digital Assets: Does your plan cover your Cryptocurrency?

We are seeing more clients with cryptocurrency as part of their assets. You should not ignore these assets as part of your estate plan. Nor should you ignore cryptocurrency when filing your income tax returns.

For those of you who work with us, you know we have included authorizations for transacting digital asset business for many years. If you have not updated your plan recently, please check to assure it includes digital assets authorizations. If you want your cryptocurrency treated differently than you other assets at the time of your death, you must describe that in your plan.

The IRS wants to know; they may already know, about your cryptocurrency. Your 2021 Form 1040 will ask you if you received, sold, exchanged, or otherwise disposed of any financial interest in any virtual currency during 2021. You must check either “yes” or “no”. Please assure you answer this question and do not leave it blank. You should discuss your digital assets and virtual currency with your tax preparer to assure you answer the question accurately.

You should know, the IRS has announced its position that cryptocurrency is considered property just like any other property that you own. The gain and loss on transactions involving your cryptocurrency are considered capital gains and losses. You recognize the gain or loss whenever you exchange your cryptocurrency for dollars, goods, services, real estate, a different cryptocurrency, or other transaction. Failure to report gains and losses could subject you to interest, penalties, or worse. Discuss all of your cryptocurrency transactions with your tax advisor to make sure you are reporting your transactions accurately.

Looking to find experienced Estate Planning Lawyers in Ohio skilled in Asset Protection and Estate Planning? Ison Law is a law firm in Powell, Ohio, with over 35 years of experience in estate planning and asset protection. If you have questions about estate planning, contact Ison Law, and we will be glad to answer all the estate planning questions you have!