Although the Tax Cuts and Jobs Act of 2017 (TCJA) effectively eliminated potential Federal estate and gift tax liabilities for most Americans, there is still a vital need for every individual to perform some estate planning. Contrary to what some individuals may believe, not every task associated with estate planning is financially oriented.
There are several things that every individual must perform in order to have a complete and proper estate plan. Among the most important tasks an individual must perform:
- Be sure that an individual’s wishes are followed after death;
- to plan for one’s incapacity and inability to conduct one’s affairs;
- to plan for state inheritance or estate taxes; and
- to plan in advance how to pay for any estate settlement costs.
Every Federal Employee Needs An Estate Plan
Why? Every federal employee has an estate. Included in their estate are their personal residences, vacation homes, life insurance policies, the Thrift Savings Plan, IRAs and personal items. The question an employee should ask himself or herself:
- What would happen at this very minute to the employee’s family and loved ones if the employee were to die?
- How would the employee’s assets be disposed of?
If the employee does not have any formal estate plan, then the employee’s legal state of residence has already determined which individuals will inherit the deceased employee’s or deceased annuitant’s assets. The size of the estate and whether any estate and/or inheritance taxes are due has no effect on who will receive these assets.
The other consideration for estate planning is that of non-monetary concerns, in particular “planning for incapacity”. How many employees have considered the consequences of being incapacitated due to an accident or prolonged illness? Who will handle their bills and financial affairs while they are in capacitated?
In the first of two columns presenting what every employee needs with respect to an estate plan, this column discusses the monetary aspects of an estate plan. The second column will present non-monetary aspects of estate planning, including planning for incapacity.
Based on any estate planning the employee has already done, the employee needs to think about how the employee’s assets would be disposed of at the employee’s death. This includes the TSP, IRA funds, non-retirement brokerage accounts, checking and savings accounts, real estate and personal items.
If an employee has not made any arrangements such as completing and submitting beneficiary forms and owning a will or a trust, then the employee’s legal state of residence will determine which individuals will inherit the employee’s assets
As a starting point to establish or bolster an estate plan, every employee should take a few minutes to answer the following questions regarding their assets:
- Who should inherit what and for what purpose?
- What and/or how much should they inherit?
- When or at what age should they inherit?
- In the meantime, who should control the assets?
As employees review their existing estate plan or prepare a new estate plan, it is important to understand some of the essential terms and concepts along with definitions and explanations.
Of the many possible ways an individual can own assets; it is useful to recognize three ownership categories for estate planning purposes, namely:
- Assets an individual owns solely, with no designated beneficiary or one’s beneficiary is his or her estate;
- Assets that an individual owns jointly; and
- Assets for which an individual has named a beneficiary
Solely Owned Assets
Assets that one owns himself or herself may pose the biggest question for surviving family members when trying to determine who is going to inherit form one’s estate. If written instructions have not been provided in the form of a legally effective will, then surviving family members of the deceased will have to rely on the laws of the deceased’s legal state of residence and state in which one’s real property is located to determine how the solely owned assets will be distributed. It will also have to be decided which assets will be used to pay the taxes and other expenses of settling the estate.
Jointly Owned Assets
To increase the ease and the need of transferring certain financial assets such as checking and savings accounts and non-retirement brokerage accounts, it may be helpful to have these assets titled or designated as jointly owned with rights of survivorship (JOWROS). When a married couple, either a same-sex or an opposite sex couple, own an asset as joint owners with rights of survivorship, it is called tenancy by the entirety (JTWROS).
When one of the owners of a JOWROS or JTWROS held-asset dies, the surviving owner in most states needs to present a death certificate to the financial institution holding the asset in order to put the asset solely in his or her name.
Jointly owned assets may also be held as tenants in common. In these situations, a deceased owner’s portion of the jointly owned asset will eventually pass to beneficiaries or heirs, according to one’s will or according to the laws of the deceased’s legal state of residence. This means that disposition of the deceased’s portion of any asset titled as tenants in common can be subject to potential complications at one’s death if one does have a will and designates beneficiaries through the will.
Assets with a Named Beneficiary
Naming a beneficiary other than one’s estate is another way to conveniently and efficiently transfer assets to one’s beneficiaries. Just as with assets owned as JOWROS and JTWROS, transfers of assets named through a beneficiary form avoid probate. Probate is a legal process after one’s death for the distribution of one’s assets.
Examples of assets that Federal employees own in which beneficiary designations can be made: (1) TSP – beneficiaries named through Form TSP 3; (2) IRAs; (3) Federal Employee Government Life Insurance (FEGLI), beneficiaries named through Form SF 2823, or individual life insurance policies purchased from private insurance companies; (4) checking and savings accounts through “Payable on Death” (POD) designations; (5) United States Savings Bonds (E, EE, or I series) through POD designations; and (6) certain non-retirement brokerage investment accounts through “Transfer on Death” (TOD) designation.
Will or a Revocable Living Trust?
Perhaps one of the most convenient estate planning tools is a will – a legal document in which an individual names beneficiaries, guardians for minor children and identifies the executor of the estate. Also included in the will are strategies to save taxes and to control distribution of assets. Assets that are to be distributed according to one’s will are subject to probate.
Also known as a living trust, a revocable living trust allows the trust creator or “grantor” of the trust to maintain full control of the creator’s assets during his or her lifetime. Upon the grantor’s death, the assets will be disposed of privately and without court filings (in most states) according to the trust instructions. Usually the trust grantor serves as the trustee.
The trustee can also enter an agreement with a bank or other fiduciary to keep records, to pay bills, to distribute money, or to make investment decisions, all subject to the trustee’s approval. All earnings, gains and losses on the trust assets are reported on the grantor’s personal income tax returns. Since the trust is revocable, the grantor can amend its provisions or cancel the trust altogether.
Financial (Durable) Power of Attorney
With a written document called a financial durable power of attorney, an individual called the “principal” grants another person – the “agent” – to manage the principal’s financial affairs even in the event of the principal’s incapacity. The agent can be a member of the principal’s family, a trusted friend, or an attorney. Since the agent may have financial authority that is quite broad in scope, the principal must be certain that the agent is a completely trustworthy person. The idea behind “durable” is that the agent can do things on behalf of the principal without the principal’s formal approval, as opposed to a “general” power of attorney in which the agent needs formal approval from the principal to perform certain actions on behalf of the principle. These actions would include, for example, signing the principal’s tax return or representing the principal at a real estate settlement.
A living trust ideally should be combined with a special type of will called a “pour-over” will. The “pour-over” will instructs that assets not already in the trust at the time of the grantor’s death be “poured-over” into the trust by the executor of the estate and disposed of by the trustee as directed in the trust agreement.
In summary, the following are the benefits of a will and/or a revocable living trust:
▪ An individual, and not the individual’s legal state of residence, will control the disposition of the solely owned assets in the individual’s estate or included in the trust.
▪ By creating a revocable living trust, the grantor will: (1) Ensure privacy for the family, friends and charities about the trust creator’s final wishes; (2) minimize required oversight by the courts in the estate settlement process; (3) minimize potential hassles involved in distributing assets to beneficiaries; and (4) avoid the expense and inconvenience of possible probate proceedings in a second state in which the grantor owns real estate. To accomplish this, the grantor may need to transfer title of this real estate to the revocable living trust.
What Needs to be Considered When Creating a Will or a Revocable Living Trust
The following are some considerations when deciding to have a will or a living trust:
▪ Simplicity and cost. Assuming an individual has named beneficiaries for financial assets in which beneficiaries can be named – pension plans, bank accounts, IRAs, brokerage accounts and life insurance – and has named joint owners with right of survivorship with other accounts, and then a single will is only necessary for other financial assets including personal items and real estate. This will result in reduced costs.
▪ Complexity. With some individuals, the services of an experienced estate attorney is the most expeditious way to ensure that one’s assets will ultimately be transferred to heirs, according to one’s wishes. For example, if one owns rental properties located in multiple states or one has multiple brokerage accounts.
Other advantages of a trust include: (1) The grantor and not the truster’s legal state of residence, controls the disposition of solely owned assets included in the trust; (2) minimization of required oversight by the courts in the estate settlement process, (3) minimization of potential hassles involved in distributing assets to beneficiaries; and (4) avoidance of expenses and inconvenience of possible probate proceedings.
Unfortunately assets added to a trust after the grantor’s death via a “pour-over” will not avoid probate. But the “pour-over” will/trust combination still affords increased privacy since the most detailed information about the disposition of trust creator’s estates resides in the trust agreement. Trust agreements in most state do not have to be filed with a court.
A will or a revocable living trust, a “pour-over” will, a durable power of attorney and other estate-related documents should be prepared by a qualified estate attorney in the employee’s legal state of residence.
All necessary estate-related documents – for example, a will, a living trust, or a financial power of attorney – should be prepared by a qualified estate attorney. Other questions and issues that may need to be considered and discussed when meeting with an estate attorney:
- Who would raise young children? If neither parent were living, who would control and manage the minor children’s financial assets? Who would be responsible for filing their income tax returns, if any are required?
- Living Will. In the event an individual goes into a coma or has a terminal condition, what types of medical treatment will the individual want and do not want? A living will states in writing the types of treatments the person does and does not want.
- “Health Care Proxy”. A “health care proxy” (also called a durable power of attorney for health care) is authorized in most states. A health care proxy is broader and more flexible than a Living Will since it provides for many types of health care decisions other than those regarding life-sustaining treatment. One form of health care proxy – the “Medical Directive” – allows someone to make his or her wishes as to the medical treatment (or non-treatment) he or she would prefer given several representative situations. Some states put a limit as to how long health care proxies will be effective, thereby requiring them to be renewed once that time has passed.
An estate plan will also include a “Letter of Instruction”. A “Letter of Instruction” is an informal document in which an individual gives specific instructions that cannot be altered. It is usually left with the person’s executor or immediate relative. Typical items that may be included with a “Letter of Instruction” are:
- Where key documents (including a will) are located.
- Funeral and burial directions.
- Personal matters that are not chosen to be included in a will or trust but maybe useful to an executor.
This information is not intended to be a substitute for specific individual legal or tax advice as individual situations will vary. Because individual legal or tax situations vary, it is suggested that individuals discuss any legal or tax issues with a qualified legal or tax advisor.
There are other estate planning tools that can result in reduced estate-related expenses, especially inheritance and estate taxes. These tools are commonly called testamentary trusts; that is, trusts that come into existence upon the death of the trust grantor. Among the common types of testamentary trusts are bypass trusts, marital power of appointment trusts, qualified terminable interest property (QTIP) trusts, and trusts for children and grandchildren. Since establishing these trust depends on an individual’s circumstances, interested employees should discuss their appropriateness, advantages and disadvantages, with a qualified estate attorney.