Administering a trust or an estate is an important responsibility. In addition to keeping track of all relevant assets, income and expenses, executors must attend to the interests of the beneficiaries while often undergoing the grieving process themselves. Here's how to balance the emotional aspects and the financial reality.
1. FAILURE TO CONSIDER CARRYING COSTS
Carrying costs can quickly accumulate and eat away at the value of an estate, so when it comes to the estate settlement process, time is money. The executor is responsible for controlling carrying costs, such as the costs of maintaining a residence, for the decedent's estate. The executor should ensure that ongoing costs such as property taxes, insurance and lawn care or snow removal are met.
Other costs may include making necessary repairs and reviewing insurance coverage for a vacant home. It is recommended that the executor organize the home's sale or transfer as soon as is practicable.
2. FAILURE TO CONSIDER OPPORTUNITY COSTS
Just as the value of a decedent's residence is subject to carrying costs, there are opportunity costs to leaving assets in an estate as well. Inflation will inevitably diminish the value of assets held in an estate. Also, some assets may be subject to unexpected losses and could be put to better use in other investments or to pay down debt and thereby reduce interest payments and fees. Over time, these opportunity costs can reduce a person's legacy by 10 per cent per year or more. A prudent executor will work quickly to gather and distribute all assets from the estate as soon as is legally permissible, giving the beneficiaries the opportunity to grow their inheritance.
3. EXCESSIVE SENTIMENTALITY & SLOW DECISION MAKING
As the executor of a loved one's estate, you will need to process your own grief while also making practical decisions. It may be helpful to think of your role as an executor as a professional responsibility, separate from your obligation to the decedent as a family member or friend. This will give you the distance to make business-like decisions for the estate, and not sink into sentimentality. The decedent trusted you to be organized, diligent and professional in carrying out their final wishes prudently and expeditiously. If the decedent was a loved one, it might be beneficial – even healing – for you and other beneficiaries to spend some time examining their possessions and revisiting memories. Beware, though, of getting lost in minutiae as it can quickly increase your costs while not significantly increasing your inheritance.
4. NOT HIRING HELP TO CARRY OUT KEY FUNCTIONS
Many individuals adopt a "do it yourself" approach to administering an estate instead of hiring professionals, such as accountants, appraisers, lawyers and contractors. Many people don't realize that by "DIY-ing" it, the savings to anyone beneficiary is low, but the liability for the executor can be extremely high. Owners may seek to impose liability if you or another non-professional unknowingly violate building codes, miss deadlines, or fail to acquire necessary licenses or permits. In addition, a good accountant and attorney are well worth their fees for what they may save you in taxes and time.
5. IGNORING THE CALENDAR
Be sure to keep track of tax filing dates, real estate cycles, and seasonal costs. For most clients, filing estate and trust income tax returns on a calendar year (vs. fiscal year) basis make the most sense. Imagine a client who passed away late in the year: most likely, it will be impossible to close out his or her estate in a few months, and therefore tax returns may be required for two years at least. As a result, you will want to keep an eye on the calendar so that you can reduce the number of years required for filing returns.
Real estate cycles are also important to keep in mind regarding the sale of the decedent's home, which is often their greatest asset. Realtors say that March, April and May are the best months to list a home, while November and December are the worst. In addition to putting a home on the market when it has the best chance of selling for a high price, it is important to think about allowing yourself enough time between the sale and the applicable filing deadlines to file all necessary paperwork and tax returns. Allow appropriate time to clear out a residence, make needed repairs, and hire professional cleaners to present the property in a good light, but do not embark on a program of capital improvements.
As you can see, being an executor or trustee can be a trying task, but our team of attorneys and paralegals are here to help make the process as painless as possible.
August 10, 2021
Michael Jackson, often referred to as “the King of Pop”, left us in June 2009. As expected, the Executors of his Estate filed an estate tax return reporting the value of various assets. The IRS audited the Estate’s return, and later issued a notice of deficiency that adjusted the reported values in May of 2013. Although the Estate and the IRS settled most of the valuation disputes, there was a disagreement as to the value of three assets: (1) Jackson’s right to publicity (“Image and Likeness”); (2) The New Horizon Trust II, which held his 50% ownership interest in Sony/ATV (which owned a large catalog of copyrights, among which were some 175 songs by The Beatles); and, (3) the New Horizon Trust III, which held copyrights to compositions written or co-written by Michael Jackson, as well as other songwriters.
The Tax Court was then left with the task of determining the fair market value of these assets at Jackson’s date of death. The fair market value for estate tax purposes is defined as the price at which the property would exchange hands between a willing buyer and a willing seller. Given the unique nature of Jackson’s assets, however, the challenged assets lacked a readily ascertainable fair market value. Ultimately, the Court concluded that the value of these three assets totaled $111,467,473. This was a dramatic decrease from the $481,866,964 valuation of the IRS’s expert at trial.
As we can see from the outcome of this opinion, valuation of assets is key to estate tax planning. In some cases, it is best to gift high-growth, hard to value assets earlier, and let them grow outside of your estate, rather than holding onto them. This strategy may allow you to moonwalk past the tax headache and enjoy the benefits of today’s unprecedentedly high gift tax exemptions.
Carefully implemented, this gift tax strategy can allow you to benefit from the current gift tax exemption, without losing control of assets, and may allow you to reduce your estate tax burden significantly.
Contact us to see if this simple but effective strategy could be right for you.
Click here for the the in-depth source article.
June 9, 2021
Most people do not realize the incredible complexity and time invested in a typical probate proceeding. Often, clients come to us thinking that the process of honoring the decedent’s will is about getting assets to appropriate beneficiaries as quickly as possible, when in reality probate is about ensuring that taxes, creditors and other interested parties are paid prior to the beneficiaries receiving any money. A statutory waiting period for 5-9 months (depending on the state) usually applies to all payments to beneficiaries, once the probate petition has been drafted and filed and approved, which can take several months.
Estimated Savings With a Trust = $17,850
The data on the left assumes things run smoothly. Factors leading to additional costs include:
• Multiple Accounts
• Large Number of Beneficiaries
• Disputes over Bequests and Litigation
• Environmental Problems
• Missing Beneficiaries/Genealogical Research
• Extensive Creditor Claims
• Delinquent Income Tax Compliance
• Real Estate Title Issues
• Judicial Accounting, if required
• Charitable Bequests and Attorney General Intervention
While this money is tied up in an estate, you cannot use it to:
• Pay down mortgage loans
• Pay down car loans
• Pay down student loans
• Pay down credit cards
The opportunity cost on a $1M estate might be close to $5,000 per month while it is open. Larger estates would likely be proportionally greater. A typical probate proceeding lasts 1-2 years and sometimes longer, whereas a well-drafted trust can largely be distributed in a matter of months. What do you want your legacy to be? Headaches and bureaucracy or speed and efficiency? Let us help you design an estate plan that steers clear of probate potholes. Please also refer to our Will vs. Trust Worksheet at: www.docrlaw.com/how-trusts-save-you-time-and-money
DID YOU KNOW? Right now, only 1 out of 11 calls are getting through to the IRS. As a result, administering estates can be even more costly and time-consuming. A trust can help you avoid taxes and the necessity of paying someone to keep you on hold for hours. For more information, follow: www.politico.com/news/2021/02/16/irs-tax-season-469182
May 26, 2021
This is a guide for what to do now when you are 1) happily married and 2) hear about someone losing their spouse, and 3) it causes you to worry about what you would do if the unimaginable happened.
First and foremost, I hope it never happens to you. Your spouses’ death is going to throw your life into chaos no matter what. Whether you have been expecting it or it comes as a complete shock, you will likely be an emotional wreck. Even if you were hoping for his or her death as a release from suffering, you would have a lot to deal with from yourself and others like children, family, and friends. So, take some stuff off your future plate by thinking a little about it right now.
Note: this is also good to do if both you and your spouse happen to perish together and leave behind children, pets, or a company full of employees. If you have lived the kind of life where someone cares about your passing, you will need to give it some thought and put a few easy-to-execute plans in place.
Long before my husband died, I thought about his death, but I never imagined it would happen, nor were my imaginings of what it would be like anywhere close to accurate. I always assumed he would also pass before me, but I figured I would have him well into his 70s, if not 80s at least. So it came as a huge shock that he was one of the first 16,000 Americans to die of COVID-19. I never saw that one coming. How does anyone see that coming? I barely knew it existed before I lost my husband, best friend, soul mate to it.
In the aftermath, I was prepared, and that helped tremendously. Even though it was a huge shock, I had been through an untimely death before with his father. I had done the majority of paperwork and coordination for him so that he had to do nothing but grieve his father’s tragic passing. Because of that, I knew that I had to claim his body by going through a local funeral home. I had learned how important it was to get the death certificates right and to get several copies.
Because I had been in charge of the family finances, I knew all of the bank accounts as well as any investment and retirement accounts he had himself, and we had jointly. Because I had thought about his death long before he died, and because his mother had been a bank branch manager and seen many helpless little old ladies have no idea about the family finances, we had set up the accounts to pass through to me without needing any probate. Because we had been in the military where a will was required, not suggested, we had one in place.
Shortly before he died, he told me whom he wanted me to call about his valuable collections should anything happen to him. He also told me how much I should try to sell his motorcycle for if he should die. That was another opportunity for me to tell him that he was worth more to me alive than dead. I had no idea that I would actually need to know that information.
What we never talked about was anything regarding a memorial or funeral planning. Because we had gone through his father’s passing, I assumed he would want a cremation just like his dad and to scatter his ashes together with his dad’s. I don’t worry too much about what he wanted because I feel like those things are more for the living left behind than for the person who has passed. But if you or your spouse don’t feel the same, then you should definitely talk about that while he is above ground.
While you are at it, make sure that you are also listed on all the utilities so that you don’t have to work too hard to act on your own behalf to keep your lights on and your cell phone going. If everything is in his or her name, that is one extra step you have to go through.
One of the most important things I could say is to get term life insurance. It doesn’t cost that much because most people do not die before it expires. Usually, you get it while you have children at home and building your nest egg. Because he had term life insurance, it allowed me to do nothing aside from grieving his loss. I could stay in the house where we lived, and I didn’t have to pack everything up or go through his stuff. Life and all the comforts of our home stayed intact. That allowed me and our daughters just to exist until we could breathe again, eat again, sleep again. I can’t imagine how much more heartache there would have been for us had we had to vacate our home in a hurry.
The biggest reason I am sharing this is I wish to minimize the number of people whose lives are thrown into such a crisis from the loss of their mate. Parents, do this for your children. Think through these things so they don’t suffer more than they already will at your passing. Designate who their guardian will be if both you and your spouse pass. Get that life insurance so those you leave behind will be okay and able to grieve your loss.
Please don’t spend a lot of time imagining what it would be like to lose your spouse. Please go on enjoying your lives together and not being able to imagine spending it with anyone else. But do take a bit to make sure that you have some things in place in case the worst thing ever happens to you.
May 18, 2021
Never before has the term, “Happy New Year” rung with such a profound sense of hope and relief. Throughout 2020, we navigated the countless challenges and transitions that COVID-19 forced upon us. Even alongside a tumultuous and anxious landscape, we’ve gained precious insights into our daily lives and habits. We’ve come to terms with the fragility of our sense of control, and—perhaps most importantly—where our true priorities lie.
The Power of Places and Faces
For so many of us, our inherent need for human connection was revealed. We all utilize the subtleties of a smile and the warmth of a welcome handshake to build trust and reliance. Even brick and mortar buildings can provide the kind of legitimacy and stability one needs to make and complete difficult decisions. Without such interpersonal interactions, isolation can have a severe impact on our mental health. Most of our documents need multiple witnesses and notarizing. This is just one of the
reasons why we decided to keep our offices open safely. Our aim to provide guidance and expertise on some of the most significant decisions our clients could make in life are our number one priorities.
A Boom for Zoom
When the practice of social distancing removed us from our offices and other public spaces, technology tried quickly to fill the gap. In a matter of days, people of all backgrounds and abilities acclimated to online platforms and ordered deliveries. In many ways, this shift was rewarding as we have seen an increase in independence for seniors and an increased interest in lectures and online learning. Industries have utterly transformed in response to the pandemic, in some cases irrevocably and in others, fantastically and quite successfully. From retail operations moving to curbside shopping and pickup, to hospitals and healthcare providers transitioning to telehealth in order to continue access to preventative care and other services, there is much to learn and reap from these inventive methods. Even so, a backdrop of struggle and collapse accompanied 2020, as childcare bottlenecks forced some parents out of the workforce. The painful limits of remote learning, and the overwhelm hospitals and healthcare workers faced were part of our daily lives. We have yet to see just how far-reaching the effects of COVID-19 will be on our society and our economy.
Preparation is the Antidote to the Unknown
Unfortunately, we can’t talk about a new year without talking about the budget deficit. We anticipate an aggressive regulatory environment for addressing the growing imbalance between tax receipts and expenditures. What has been ongoing for quite some time now has rapidly accelerated in the last year. Ultimately, someone will have to pay the piper. Whether that comes in the form of higher taxes in the short term, a reduction in entitlement spending, or a kicking of the can even further down the road via refinancing, the debt needs to be repaid. Tax increases are highly likely to happen, and this is where we can help you. Though we do not yet know what future policies will look like, the more we explore creative tax savings scenarios and prepare for longevity and higher costs, the closer we will be to the optimal strategy when new policies are enacted. So, do not be scared, but do prepare. Let us help you manage the unknown and make smart decisions as we forge ahead into a brave new world, together.
January 18, 2021