In the real world, many people do not even know that they have been appointed as the executor of an estate until after a person dies and they read the decedent’s Last Will and Testament.

Being appointed as the executor for an estate is both an honor and a burden, but that burden can be made infinitely harder when the executor does not have the right information or guidance to know how to handle the estate. Here are some quick tips to help you out if you or a family member has been named the executor of an estate and you do not know where to begin:

Find a Competent Probate Attorney –

An experienced probate attorney is a great resource to help you carry out and discharge your duties and responsibilities as the executor of an estate. In many cases, you can work with the attorney who originally drafted the decedent’s Last Will and Testament, but there will be times when this is not possible, either because the attorney passed away, retired, or you have a conflict of interest. If this is the case, you should find an attorney who has experience dealing with your local probate court and can help you navigate the estate administration process.

Locate the Decedent’s Last Will and Testament –

The Last Will and Testament must be filed with the probate court to start the probate proceedings. Many times, the lawyer who originally drafted the document may have the original Last Will and Testament in their vault for safekeeping purposes. If not, the original Will may have been in a secure location, such as the decedent’s safety deposit box or in a fireproof storage box in the decedent’s residence. If the original Last Will and Testament of the decedent cannot be located, there are usually steps which probate courts allow to admit a copy of the decedent’s Will to probate through preparation of a petition to the court in order to allow the commencement of an estate administration.

Establish the Estate Bank Account –

Once the Last Will and Testament has been filed and accepted by the probate court, the executor appointed under the Will receives legal documents, including the Certification of Probate, that allows the executor to access bank and brokerage accounts, as well as establish a new estate bank account. The best practice is to close all of the decedent’s accounts held in the individual name of the decedent and transfer them all into the estate account, which gives the executor the ability to track the estate’s finances and pay any bills or debts.

We hope this edition of Estate Planning Matters finds you and your family all well and safe.

In this newsletter, we want to share with you potential changes to the gift and estate tax laws that may occur after the upcoming election.

We trust you will find this information useful in your practice and invite you to share Estate Planning Matters with your clients and colleagues who may be interested in practical trust and estate planning strategies to protect and preserve their assets.

Democratic presidential nominee Joe Biden has provided some information about his plans to modify the tax treatment of decedent estates. He has signaled that he supports raising estate taxes and changing the taxation of capital gains on assets owned by a decedent upon their passing.

Gift and Estate Tax Exemption

The first change proposed would be to increase the estate tax. Currently, the gift and estate tax exemption amount is at an all-time high: $11.58 million per person and $23.16 million for a married couple in 2020. These amounts are indexed annually for inflation.

The Trump tax cuts doubled the exemption from prior levels, but only until they sunset to take place on January 1, 2026. If Vice President Biden wins the presidency, the sunset of the Trump gift and estate tax exemption amount could be retroactive to the beginning of 2021, which is why some individuals are seeking to use their exemptions by year end.

In other words, Vice President Biden’s proposal would reduce the exemption to its pre-Trump tax cut level of $5.49 million per person and $10.98 million for a married couple, adjusted annually for inflation. Any amounts above this lower exemption amount would be subject to a flat 40% estate and gift tax rate.

There is also speculation that the gift and estate tax exemption amount might be reduced to the $2.5 million per individual and $7 million for a married couple, which levels were proposed by the Obama administration. These modifications to estate tax exemption transfer tax amounts are also very likely to be passed by Congress if the Democrats also win control of both the Senate and the House.

Step-Up in Basis

The second proposed tax law change would repeal the present “step-up in basis” rule. Under current law, the income tax basis of appreciated assets owned by a decedent at the time of death generally are increased (stepped-up) to their fair market value on the date of death.

The current basis step-up laws enable a client’s beneficiaries to sell inherited assets without the imposition of any capital gains income taxes on all appreciation that occurred during the decedent’s life.

Therefore, repeal of the step-up in basis rules could prove very costly to heirs when they decide to sell inherited assets which have appreciated in value, and which assets would be exposed to federal capital gains taxes.

As a result, some individuals may wish to consider triggering capital gains prior to the end of the year — especially because of the possible loss of the stepped-up income tax basis and because Vice President Biden has proposed to increase the top capital gains tax rate to 39.6% (the same as his proposed top ordinary income tax rate).

Use it or Lose it

Although none of us have a crystal ball to know exactly which changes in tax law will be passed by Congress and signed into law by a future President, nor can we control or be certain what estate tax transfer laws will be in effect upon our passing, strategic gifting prior to a change in the law could have a significant positive effect on the overall tax liability faced by your family.

Gifting assets now, either outright or in trust, while the exemption levels are still at their historic highs, essentially allows you to “lock in” these high exemption amounts.

Prudent and well accepted estate planning techniques may also allow you and your clients to leverage this significant lifetime exemption amount by also using valuation discounts and other wealth transfer planning strategies which may be especially effective in our current low interest rate environment, coupled with any decrease in asset values.

In some cases, it might make sense to plan for a gifting transaction now but wait to execute this strategy until we know the results of the November presidential election. One way to establish a more flexible result would be to sell assets now for a promissory note, rather than gifting the assets, with the intent to forgive the note after the election if a reduction in the gift and estate exemption seems very likely to occur.

While there are a number of possible estate planning techniques which you and your clients may implement in 2020, a popular technique among our married clients is the Spousal Lifetime Access Trust (SLAT). A SLAT is an irrevocable trust that allows an individual to give assets to his or her spouse and/or their descendants. The beneficiary-spouse may receive distributions of income and principal from those assets, typically at the discretion of the trustee.

In essence, by establishing a SLAT, clients can remove the assets from the grantor-spouse’s estate while still affording access through the beneficiary-spouse, as long as the parties are married and the beneficiary-spouse is living. The potential access may well indeed provide married couples more certainty and peace of mind when making large gifts, while enjoying the benefits of utilizing relatively high transfer tax exemption amounts currently in effect.

Currently, it is uncertain how the results of the Presidential election will impact estate tax transfer tax reform in our country.

Puerto Rico is a territory of the United States. Those born in Puerto Rico carry U.S. passports. But, from an estate planning perspective, they hold a unique place.

If a Puerto Rican is living in the United States, they are estate taxed just like other U.S. citizens. In other words, their taxable estate includes their worldwide assets, no matter where their assets are located. They also have the same estate tax exclusion as other U.S. citizens and residents, $11.58 million in 2020.

However, if they are living in Puerto Rico and if they only have U.S. citizenship due to their birth in Puerto Rico, then they are taxed as non-resident aliens. In other words, they are taxed only on their U.S.-situs assets, like real estate in the U.S.

Unfortunately, these individuals would have a dramatically lower exclusion of only $60,000. This is the same exclusion as those people who are non-resident aliens. By comparison, someone born in the United States, even if they live outside the United States, are taxed on their worldwide assets and enjoy an exclusion of $11.58 million.

Let’s take a look at the following example:

Maria was born in Puerto Rico and that is the only reason why she has a U.S. passport. Maria lives in Puerto Rico and decided to purchase a vacation home in Miami worth $1 million. Maria has assets in Puerto Rico and outside the United States worth $4 million.

If Maria passed away owning these assets, her estate will owe a federal estate tax on $940,000, the value of her vacation home in Miami, less her $60,000 exclusion.

Maria decides to move to Miami and live in the property which had previously been her vacation home. If Maria dies after the move, she would owe federal estate tax on $5 million, the value of all of her worldwide property. However, she would have an exclusion of $11.58 million and therefore would not owe any federal estate tax.

Puerto Ricans are taxed in a special manner for federal estate tax purposes. These individuals are estate taxed in a unique way, depending upon whether they are living in the United States or living in Puerto Rico. 

While living in the United States, they are treated just like any other American citizen. But, while they are living in Puerto Rico, they are treated differently. Therefore, Puerto Ricans should be mindful of these transfer tax differences and the federal estate tax burden they might owe by owning U.S.-situs assets (such as real estate in the U.S.) while they are living in Puerto Rico. 

While a legal Will bequeaths valuables to your beneficiaries, an Ethical Will bequeaths your values, such as how to lead a moral and upright life.

For many of our clients who engage us to design and implement their estate plans, questions of the heart and soul often arise, especially as we get older. Some of these questions include:

– Have I fulfilled my purpose?

– What will I be remembered for?

– What kind of legacy will I pass along to my family?

While not legally binding, Ethical Wills are excellent vehicles for clarifying and communicating the meaning of our lives to our families. Individuals who want to be remembered authentically, and for their gifts of heart, mind and spirit, can take satisfaction in knowing what they hold most valued is “on the record,” not to be lost or forgotten. Imagine the richness that might be added to our lives if we had a legacy of values, which we received from our grandparents or our great-grandparents, of whom many of us know little if anything at all.

An early example of an Ethical Will occurs in Shakespeare’s Hamlet, where Polonius advised his son, Laertes:

“Give every man thy ear, but few thy voice,
Take each man’s censure, but reserve thy judgement…
Neither a borrower not a lender (be),
For (loan) oft loses both itself and friend…
This above all: to thine own self be true,
and it must follow, as the night the day,
Thou canst not then be false of any man.”

In ancient times, most people had little opportunity to control the distribution of their property (assuming they owned any); however, they were free to speak their minds as it related to the disposition of “moral” assets. In fact, Ethical Wills were particularly advantageous for women, since society’s rules usually precluded women from writing a legal will or dispensing property as they wished.

Historians have found examples of Ethical Wills authored by women during the medieval period, usually in the form of letters or books written to their children.

People usually associate the term “will” with “after death.” Legal wills are read after death. At one time Ethical Wills were passed on and read after death as well; however, that’s less often the case today.

A Living Will, on the other hand, is a document that contains specific instructions about medically related issues, meant to be followed while the person is still alive but unable to communicate his or her wishes directly to medical care providers when required.

What all three types of Wills have in common is the fact that they provide instructions to others as to the intentions of the author.

When considering what you might include in your Ethical Will, it may be wise to consider your past, present and future. Hopefully, some important values and beliefs we now have were passed on to us from our parents and grandparents. Our own life experiences shape our character and help form a foundation of our values and principles. By examining our believes and values, we might ponder what we
may desire to include in an Ethical Will for our surviving family members.

Common Themes in Ethical Wills

Common themes from our past:

– Meaningful personal or family stories

– Lessons learned from personal or family experiences

– Regrets

Common themes from the present:

– Personal values and beliefs

– Values and beliefs of the author’s faith

– Expressions of love and gratitude

– Apologies

Common themes for the future:

– Blessings, dreams, and hopes for present and future generations

– Advice and guidance

Creating an Ethical Will is a way to:

– Learn about yourself

– Reflect on your life

– Affirm yourself and your values

An Ethical Will is a forum in which to:

– Fill in knowledge gaps for your beneficiaries by providing historic or ancestral
information that links generations

– Convey feelings, thoughts, and “truths”, that are often hard to say face-to-face

– Express regrets and apologies

– Open the door to forgiving and being forgiven

– Come to terms with your mortality

Writing an Ethical Will may be:

– A spiritual experience that provides a sense of completion to your life

– A way for you to convey a sense of undertaking that helps your loved ones “let go” upon your passing

When planning your estate, you’re probably going to feel a little overwhelmed at some point (and that’s why your estate planner is there to help you!) Sure, in general terms, you might have considered what is and isn’t in your estate, but when you get down to it, you might realize you have way more stuff than you thought you did. This in turn leads to the question of what you should protect first. What assets are so important that they should be the first things you start with in your estate plan?

Ideally, you want to protect everything, because everything is important in its own way. But you have to start somewhere. Here is a suggested list of what you should start with, in no particular order. Note that some of these aren’t necessarily assets in the traditional sense (i.e. tangible items), but they do deserve a mention.

Your Home

First and most obvious, you need to think about your home, if you own one. Think about what you want to have done with your house after you pass on. Do you want it sold? Do you want it to be granted to your relatives? Owning a house is a big responsibility, and it can be expensive. If you want to have your home liquidated, that could be the best option if you’re unsure whether your relatives could financially support home ownership.

Your Business

This can apply to a business you own or just your assets that you have from work (equipment, stocks, etc.). If you have equipment or a business that you want to keep in the family, you should protect that in your estate plan. You can also include other plans for what you might want done with it, such as sale, transfer of ownership, or something else.

Family Items

Everyone has family heirlooms and items that they don’t want to see leave the family. These items are important to your heritage and help future generations understand your origins. Include these valuables in your estate plan and make sure you grant them to someone you know will keep them safe and pass them along, ensuring that the heirlooms are kept in the family.

Intangible Assets

You may have stocks and investments that you count among your assets. When you pass away, think about what you want done with them and whether you think it will be more profitable to sell or transfer them. Make sure you grant these intangibles to someone that you know will be able to manage them, particularly if you’re giving away cryptocurrency, which is volatile and, although very popular, hard to handle.

Yourself

When creating an estate plan, you want to make sure that your own needs are met in the form of a healthcare directive and power of attorney. These documents ensure that your financial and medical needs will be taken care of according to your specifications should something happen to you to prevent you from making those decisions yourself.

Your Kids

If you have minor children, even teenagers, you will want to have some type of plan laid out for guardianship in case something happens to you. Make sure that you select guardians who not only have your overall values, but who will also keep your kids’ day to day life stable and secure. This a big decision, so don’t be afraid to take a lot of time to think about who you would want to raise your kids.

This quick list of things to think about when estate planning will help you get some idea of what, out of your giant pile of stuff, is important and should stand out. Talk to your estate planner if you’re feeling overwhelmed and need help, as they can assist you in picking out what you absolutely shouldn’t forget to cover, whether you desire to create your Will, Revocable Living Trust, Financial and Healthcare Powers of Attorney, or HIPAA Waiver Authorization.