Aaron Charles Gregg

How Can I Avoid Inheritance Tax for my Step-Grandchild?

“Taxes in New Jersey are no pretty thing, and after you die, the state will once again try to get its cut of the inheritance tax.”

nj.com’s recent article, “How can I avoid the inheritance tax for step-grandchildren?” explains that the New Jersey Inheritance Tax is a tax imposed on inheritances, depending on the relationship between the deceased and the inheritor, or beneficiary. The relationship between the deceased and the inheritor can be placed into four different categories, and depending upon the category, a tax may be imposed.

Most inheritors fall into Class A. This category includes a spouse, child, parent, grandparent, stepchild, and grandchild. The next most common category is Class C—siblings and daughters-in-law or sons-in-law, and the surviving spouse of a deceased child are included here. Class E beneficiaries include charities, religious institutions and other exempt organizations. Finally, there’s Class D. These beneficiaries includes anyone who’s not a member of another class. In case you’re wondering, there’s no longer a Class B.

Class A beneficiaries will not see any inheritance tax. For Class C, the first $25,000 is exempt and the rate on amounts in excess of that begins at 11% and goes up to 16%. Class D rates range from 15 to 16%. There’s no inheritance tax for Class E.

Step-grandchildren are considered Class D beneficiaries, despite the fact that grandchildren and stepchildren are Class A beneficiaries. You can avoid the tax, by leaving life insurance death benefits to a step-grandchild, because these benefits aren’t subject to New Jersey’s inheritance tax. If the step-grandchild is the step-child of your child or the child of your step-child, leave the bequest to your child or your step-child and make an unenforceable request that she use the bequest for that step-grandchild.

Another option is to make a gift to the step-grandchild, while you’re living. If the gift is made more than three years before your death, then it won’t be subject to the inheritance tax. However, if it’s within that three-year period, there’s a presumption that the gift was made in contemplation of death, so it will be subject to inheritance tax.

You could avoid this, by making a lifetime gift to your child or stepchild, even within the three-year period preceding death, and request that they use it for the benefit of the step-grandchild. The only issue here is that it's not an enforceable obligation. Otherwise, the gift will be deemed to have been made to the step-grandchild and subject to the three-year gift in contemplation of death rule.

If you have real estate outside of New Jersey, you may want to leave some of that property to the step-grandchild, because out-of-state real estate isn’t subject to New Jersey’s inheritance tax.

Reference: nj.com (October 31, 2019) “How can I avoid the inheritance tax for step-grandchildren?”

Should I Name a Minor as an IRA Beneficiary?

“IRAs provide better opportunities for long-term growth than other assets you could leave to a minor.”

People often leave assets to minors, but is making a minor an IRA beneficiary a really bright idea?

There are many ways to give assets to those for whom you want to leave a legacy. You can leave tangible assets. However, the age of the person to whom you leave the gift will frequently decide the form of, and the conditions under which, they receive the property. Let’s look at some of the advantages and potential negatives of leaving an IRA to a minor.
Investopedia’s recent article, “Designating a Minor as an IRA Beneficiary,” explains that there are several reasons why someone might want to give an IRA to a beneficiary who is not yet an adult. One of the most obvious is that IRAs can provide much greater flexibility and potential for long-term growth than, for example, savings bonds. IRAs also don’t have to be used for higher education or any other specific purpose in order to avoid taxation. Young beneficiaries also get the benefit of a lower required minimum distribution (RMD) over their lifetimes, as the beneficiary’s life expectancy is used when calculating their RMDs.

For example, if you died and left $100,000 of IRA money to a one-year-old granddaughter this year, her current life expectancy would be 81.6 years. Assuming that the funds in the account grow at 8% to 10% per year, she could withdraw several million dollars from the account during her lifetime. If the money were in a Roth IRA, she’d probably also save at least a million dollars in taxes.

If you leave an IRA to a minor, there must be an appointment of a guardian to manage the account, until the child reaches adulthood. Minors can’t own legal property of any kind in their name. Instead, you can appoint a guardian to manage the property on their behalf, until they reach the age of majority (18 or 21, depending on the state). If you do not do this, the court will appoint one for you—and that could be a person who may have very different thoughts about how the account should be managed and invested.

The law prohibits IRA custodians from dealing directly with minors in any capacity. A will doesn’t solve the problem because wills only deal with probate assets, and IRAs are exempt from probate. The minor’s parents or another relative can petition the court for guardianship, if you fail to make an appointment. However, this can be expensive, time-consuming and really unnecessary.

There are a couple of different ways that your beneficiary can receive the IRA. One option is to put the distributions inside a custodial account, like an UGMA or UTMA account. However, there could be adverse tax consequences for the minor’s parents (or whoever claims the minor as a dependent on a tax return) if the minor’s income is above a certain threshold. That’s because the parent or guardian must pay tax on the excess at their top marginal tax rate. This also gives the minor sole custody of the property at the age of majority, but she may not be prepared at that time to handle a large sum of money.

Another possibility is to put the money into a 529 plan. This will let the assets grow tax free, until they’re used to pay for qualified higher education expenses.

A more comprehensive solution may be to use a revocable living trust as the beneficiary for the IRA. The minor is named the beneficiary for the trust, and the guardian would be appointed as the trustee. A big benefit of a trust is that you can provide specific instructions as to how you want the guardian to handle the IRA distributions for the minor.

There are several available options, so talk with an experienced estate planning attorney about what makes the most sense for you and your family.

Reference: Investopedia (September 7, 2019) “Designating a Minor as an IRA Beneficiary”

What’s the Best Way to Take My Required Minimum Distribution?

“If you miss the deadline for taking an RMD, you’ll be hit with a tax penalty. If you’re retired or have inherited a retirement account, you must take your required minimum distributions by December 31.”

CNBC’s recent article, “These tips can help retirees make required minimum distributions easy and tax penalty free,” gives the steps to follow, so we don’t leave money on the table.
RMDs or required minimum distributions, are the minimum amount people age 70½ and older must withdraw from their retirement funds. If you’ve inherited a retirement account, you may also have to make a withdrawal. The amount you need to withdraw varies from year to year and is based on specific calculations, including what your account values were as of December 31 the prior year and your age.

The time to get started on your RMD for this year is right now, because the paperwork may take some time. You have until April 1, if you just turned 70½ this year. Let’s look at a few tips:

Get your paperwork organized. In order to know how much you have to withdraw, you have to have an accurate picture of what you own. Create a list of accounts and take an inventory first, so you know where all your retirement accounts are located.

Know what you can take from what account. If you have multiple IRAs, you can take your total RMD from any one of those accounts because of the aggregation rule. However, with multiple IRAs, you still must calculate the amount you take out based on the value of all of them. It’s that same with multiple 403(b) retirement accounts. The rule doesn’t apply to 401(k) plans. If you have multiple 401(k) accounts, you must take money from each one, and you can’t take an RMD from an IRA to satisfy a 401(k), or vice versa.

Understand the rules, if you’re still working. If you’re 70½ and still employed, you could get a break from taking your RMD in certain circumstances. Generally, 401(k) plans have a still-working rule, which stipulates that you don’t have to take the RMD until you retire. However, you can only delay the RMDs, if the plan is attached to the company where you’re currently employed. Other accounts from a previous employer are excluded, so you must still take distributions from those.

Keep an eye on any inherited accounts. If you’ve inherited a retirement account, you may have to take an RMD by the end of this year. That generally doesn’t apply if you inherited the money from your spouse, because spouses can do a rollover and keep postponing the distributions. However, if you’re a non-spouse beneficiary, you probably must take a distribution by the end of 2019. If you inherited the account in 2018, you’ll need to take your first RMD in 2019. RMDs from a Roth IRA will likely be tax-free. However, if you’ve inherited one of these accounts and you didn’t take that money out, you’ll have to pay a 50% penalty on the funds you should’ve withdrawn.

Consider giving to charity. A good way to avoid paying taxes on your RMD, is to give the money to charity. A qualified charitable distribution lets you to make donations to a charity directly from your IRA, instead of taking the RMD yourself. Therefore, if your RMD is $5,000, and you typically give $5,000 to charity each year, you can donate that money directly and not pay tax on it.

Reference: CNBC (November 29, 2019) “These tips can help retirees make required minimum distributions easy and tax penalty free”

How Do I Reduce My Blended Family Fighting Concerning My Estate Plan?

“Even a close family can have quarrels and confrontations, but these conflicts tend to be more prominent within a blended family.”

The IRS recently announced that in 2020, the first $11.58 million of a taxable estate is free from federal estate taxes. Therefore, a vast majority of estates won’t have to pay federal estate taxes. However, a TD Wealth survey at the 53rd Annual Heckerling Institute on Estate Planning found that family conflict was identified as the leading threat to estate planning.

Investment News’ recent article, “Reducing potential family conflicts,” explains that a blended family can result from multiple marriages, children from a current or former marriage, or children involved in multiple marriages. There are more "blended families" in the U.S. than ever before. More fighting over estate planning occurs in blended families.

The key element in any conflict resolution is open and honest communication. It’s especially the case, when it involves a blended family. In many instances, it’s best to explain a proposed estate plan to the family in advance.

If anyone objects, listen to their point of view and try to be empathetic to their position. You may wind up with a compromise, or, if no changes are made, at least the family member had an opportunity to air their grievances.

One potential solution to minimize conflicts within a blended family may be a prenuptial agreement. The agreement is signed prior to the marriage and outlines the financial rights of each spouse, in the event of a divorce or death. Prenups are particularly useful in second marriages, especially when there is a disparity in age and wealth between the parties.

However, not every married couple in a blended family has a prenuptial agreement. Even if they do, blended families can still have family conflicts in estate planning.

It is important to remember communication, reducing the chances of a will contest with a “no-contest” clause, asking your attorney about a revocable living trust and compromise

.
Estate planning can be particularly difficult for blended families. Talk with an experienced estate planning attorney about the techniques that can help reduce potential family conflicts.

Reference: Investment News (December 9, 2019) “Reducing potential family conflicts”

What is the Keystone State Doing to Change Its Laws on a Deceased’s Digital Assets?

“State Sen. Tom Killion says most states have rules for who gets someone’s social media photos and email accounts after that person dies, but Pennsylvania is lagging behind.”

ABC27.com’s recent article “Legislators setting rules on who gets digital photos, emails after death” reports that Pennsylvania State Senator Tom Killion is looking to help change the law on who owns the social media of a deceased person. He has sponsored legislation to make changes.

“Currently, if you pass away, you can leave your house, your car, your valuables, your savings to your children or whoever you want to decide to leave it to via will or trust, but you can’t do that in Pennsylvania with your digital assets,” he said.

“Think about all of those apps that you have on your phone all of those assets contain your personal information,” said Sen. Kristin Phillips-Hill, who supports the legislation.
Killion’s legislation proposes the transfer of all digital assets to beneficiaries, in the same way physical assets are—by will, trust, or power of attorney.

“We all have lots of stuff in the cloud right now—family photos, maybe I’ve started writing a book that I haven’t finished yet, you can go on and on and on,” Killion said. “This is basically our laws catching up to what’s going on in our world.”

The state senator commented that the National Conference of State Legislatures reports 46 states have similar legislation. He says without these laws, family members are frequently in battle against large media companies to fight for ownership of that data.

Killion also remarked that the state bar association was working to get this put into law for some time.

The bill was unanimously passed by the state Senate and referred to the House Judiciary Committee in October.

“It’s something that’s really meaningful particularly for younger generations who are much more dependent on those applications,” Phillips-Hill said. Killion would like to see the legislation get passed this session.

Reference: ABC27.com (November 28, 2019) “Legislators setting rules on who gets digital photos, emails after death”

What Do I Need to Know About Owning Property with Someone Other than My Spouse?

“It's very common for spouses to title property they own together as ‘joint with right of survivorship.’ When one passes, the other owns the property outright. It’s simple, easy and automatic. However, it can get messy when the other joint owner isn’t your spouse.”

Have you ever considered owning property jointly with a family member, friend, or a business associate? Inside Indiana Business’ recent article, “Risky: Property Owned with a Non-Spouse,” says that you should think about the negatives, such as loss of control, unknown creditor issues and tax consequences.

Loss of Control. When you choose to co-own an asset with another person, you can enter into a legal ownership agreement known as “joint tenants with rights of survivorship” or “JTWROS.” When one of the owners dies, the surviving owner automatically becomes sole owner of the property. However, you give up some control of ownership, when you own property in this way. For example, you can’t direct your portion to go to a spouse or a child after your death in your will or other estate planning documents. OK, you can, but your co-owner’s ownership title takes precedence over your estate documents. As a result, she will become the sole owner. You can also lose some control over the property, if the non-spouse co-owner transfers her interest in the property to another individual without your consent. It’s also tough to remove a co-owner from the property title without his or her full cooperation.
Creditors. Another issue with jointly held property is that it’s subject to creditors’ claims against both owners. If your brother, as a co-owner of your cabin, has financial troubles and files for bankruptcy, his ownership in the cabin could possibly be claimed by a creditor. He could also be forced to sell it to pay off his debts. So, unless you can buy out his ownership in the cabin, you may now own the property with a stranger.
Potentially Higher Taxes. Adding a non-spouse as co-owner of an asset, allows for a simple property transfer at your passing. However, it could also mean both a gift tax to you and an increased capital gain tax for your heir. By adding a non-spouse to the property title, you’re making a gift to the new joint owner. Therefore, based on the current value of the property being gifted, you could be liable for gift tax. In addition, the heir of the property may have to pay increased capital gain taxes. Property transferred at death receives a step-up in basis. This means the heir’s cost basis is equal to the fair market value of the property at your death, instead of your cost basis (the amount you paid for the property). Receiving a step-up in basis reduces the heir’s capital gain on the appreciation of the property when it’s sold. However, if you add a co-owner, only your interest in the asset has the benefit of stepped-up basis at your death, not the entire property. When the property is sold, this may mean a higher capital gain tax.
JTWROS vs. Tenants in Common. When deciding to co-own an asset with another person, you can also enter into an ownership agreement known as “tenants in common.” Here’s a key difference: holding property JTWROS with another person means that when one owner dies, the other owner receives the property outright and automatically. When owning property as tenants in common with another person, when one owner dies, the owner’s heirs receive his share in the property. A co-owner can again transfer his interest in the property without approval as the other co-owner. This loss of control may place you in a difficult position.
When considering property ownership with another party, look at the pros and cons of both JTWROS and tenants in common. The cons usually outweigh the pros. However, if owning property with a non-spouse is what you want, discuss this with a qualified estate planning attorney.

Reference: Inside Indiana Business (December 1, 2019) “Risky: Property Owned with a Non-Spouse”

How Can I Protect My Real Estate Investments?

“If you’ve decided to join the real estate industry, asset protection is paramount. Just like in most industries, investing in real estate has its shortcomings. Adopting different asset protection strategies for your real estate will secure your property.”

How can a person protect a real estate asset to ensure its value? That’s what Wealth Advisor’s recent article, “8 Reliable Ways to Protect a Real Estate Asset,” asks. The article suggests that you look at this guide for several ways to keep your investments valuable.

1. Insurance. This is one of the most popular asset protection strategies in real estate. The protection you select for your property depends on the real estate type. You can protect your home with a homeowner’s policy and your commercial property with a business policy. Insurance will protect you against many catastrophic events.

2. Limited Liability. An LLC for rental property can protect your personal assets from potential lawsuits. With limited liability, your home is shielded from litigation concerning your business. One strategy is to buy a house with an LLC and rent it to yourself to minimize financial risks. This will limit the odds of personal real estate asset seizure. However, consult with an attorney to avoid charges on fraudulent practices. You should also place your commercial real estate properties in different LLCs, so if one asset faces a risk, the remainder of your property will be protected.

3. Anonymous Land Trust. You can create an anonymous land trust to avoid legal implications on your real estate property. With a trustee, you don’t need to have your name on records, so putting your house in a trust will protect your investment. This may discourage anyone from attempting to pursue a lawsuit against you.

4. The Titling of Assets. This can also be a great protection strategy. If your spouse is an equal tenant, it provides you with an indivisible interest, so if your spouse is involved in litigation, creditors can’t claim your house because you have an interest. Ask your estate planning attorney about how this works in your state.

5. Protection Through Debt. Debt is an affordable way to protect your real estate property because the available equity is insignificant. The low income may also discourage creditors from going after your property.

6. Eliminating Assets. You can get rid of your real estate asset, if creditors are on your tail. A lawsuit against you can’t affect the property that’s not under your name. Ask your attorney about transferring ownership of the property to irrevocable trusts.

7. Homestead Exemptions. In some states, the homestead laws provide full or partial protection of home equity. If the exemption is high, think about increasing your mortgage payment to promote fund protection.

8. Avoid Risky Situations. As a real estate investor, do your due diligence. Be certain that your review contracts carefully and work with an attorney.
Consider these property protection strategies to ensure that your real estate assets remain secure.

Reference: Wealth Advisor (November 19, 2019) “8 Reliable Ways to Protect a Real Estate Asset”

How Well Did Actor Luke Perry Succeed with Estate Planning?

“Luke Perry’s passing on March 4, 2019 was a sad moment for many, since his iconic role on Beverly Hills 90210 is forever etched in pop culture. However, in the eight months since his passing, it has become clear that unlike most celebrity estates, Luke Perry was financially savvy.”

Actor Luke Perry’s estate planning was well-planned, including the use of a revocable trust to pass assets to his heirs in an efficient and private manner.

Forbes’ recent article, “How Luke Perry’s Estate Maximized This Unique California Tax Shelter,” says that media outlets have reported that Perry’s $2 million home in the Los Angeles area had been transferred from his revocable trust to his two children in equal shares. This can be a normal part of the estate administration process, if you are working with an experienced estate planning attorney. However, it also shows some additional sound planning on his family’s part. It looks like the actor’s children took advantage of a unique tax loophole in California, the parent-child property tax exemption. Therefore, they’d have inherited their father’s property tax base, which is an important financial benefit in California, because the home has increased in value significantly since Perry bought it.

The parent-child exclusion gives California property owners some unique benefits, so with proper planning, property can be passed on to the next generation. Note that these rules are complex and must be followed carefully, to avoid accidently triggering reassessment.
In 1978, California voters approved Proposition 13, which rolled back property tax values for existing homeowners to their 1976 value. For new purchases, the property tax rate was set at 1% of purchase price and increases to the property tax base were limited to 2% per year.

In 1986, California passed Proposition 58—a constitutional amendment that excluded from reassessment transfers of real property between parents and children. Therefore, when a child inherits their parent’s home, they can also inherit the parent’s property tax base.

While both propositions independently create property tax relief, when combined, it can have extraordinary benefits. Assume that you bought a home for $100,000 in 1979. The property tax base would have been established at 1% of the purchase price ($1,000). This property tax base 40 years later in 2019 would be $2,208. Now, let’s say the $100,000 home has increased its fair market value to $1,000,000. If the owner dies and the property is transferred to their child, their child would inherit the parent’s property tax base of $2,208, and that rate would continue to grow at the 2% rate.

However, this loophole is complicated, because the exclusion allows the transfer up to $1 million of assessed value (and each spouse of a married couple has $1 million to allocate). The assessed value is merely the property tax base, not the fair market value. As a result, provided the assessed value stays within the $1 million of assessed value, parents can transfer property that has increased by millions of dollars. As you can imagine, these rules can have a major effect on beneficiaries. The ability to inherit a parent’s property tax on a home that has increased in value, might result in keeping the family home, instead of having to sell it.

Luke Perry’s estate is a rare example of a celebrity with excellent estate planning. To do the same, work with a qualified estate planning attorney.

Reference: Forbes (November 14, 2019) “How Luke Perry’s Estate Maximized This Unique California Tax Shelter”

What Should I Keep in Mind, When I Remarry?

“When you remarry, you're not only combining residences with your new spouse, you're also merging your finances. If you have children, it may involve some financial-related stress. For instance, you might need to factor in child support payments or consider whether your new marriage will impact your children's inheritance.”
Before you remarry, discuss any past financial issues with your fiancé, and plan for success, by considering some important ideas.
U.S. News & World Report’s recent article, “6 Financial Considerations for Remarriage,” lists six financial considerations and crucial steps to take before you remarry:
1. Revise Your Budget. Whether this is your first, second, or third marriage, couples need to create a budget for daily spending, monthly expenses and big-ticket purchases. You should also talk about your household expenses and costs related to children from a prior marriage. If you have to pay alimony, let your new spouse know. It’s also a good time to talk about credit card debt, past investments you've made and retirement accounts. You may want to draft a prenuptial agreement.
2. Inform your Fiancé of Any Financial Obligations, Including Child Support. Before getting married, review the laws to see how child support may be impacted by marriage to a new person. While it's unlikely that you would lose your child support if you remarry, the family court may reduce the amount. If a person paying the child support is remarrying, they should talk to their partner prior to the marriage to make certain they understand the amount of the payments.
3. Check Insurance and Benefits. A frequent mistake when remarrying, is not updating the beneficiaries of life insurance policies. You also may have to look at other updates to your coverage, like who will be on your health plan, and you may need to modify your homeowner’s insurance with a spouse and children in residence. Understand that if you get government benefits, like Medicaid or Social Security, you could forfeit your Medicaid eligibility when you remarry if your spouse's income is too high to be eligible. You might also discover that your Social Security benefits from an ex-spouse will stop, after you remarry.
A second marriage may also increase a parent's income for federal financial aid purposes for college. If a parent is the custodial parent for the FAFSA (Free Application for Federal Student Aid), their income now may include their new spouse's income. It is important to discuss saving for college and tuition costs, as well as if either partner has children from a prior marriage, whether each spouse will save money for tuition costs.
5. Estate Planning Is Critical. Check your estate planning before remarrying. That includes a will, medical powers of attorney, do not resuscitate orders, durable powers of attorney, designations of guardianship or consent to adoption and various trusts, including trusts for special needs children. If you have children from a prior relationship, hire a qualified estate planning attorney.
6. Create an Inheritance Plan. If you have children from a prior relationship, you need to put the right estate planning documents in place to protect them from being disinherited. In some states, a last will and testament may be enough, but in others it may make sense to also have a revocable living trust.
The biggest mistake that couples commit when entering their second marriage, is thinking that their own children will inherit any of their estate, if they die first. Perhaps the adult children will inherit some of the estate, but you should speak to an estate attorney to create a customized strategic plan. In many instances, the living spouse will change the plan and leave everything to their children and nothing to yours.
Reference: U.S. News & World Report (November 18, 2019) “6 Financial Considerations for Remarriage”

Why is Ashton Kutcher So Stingy with his Kids’ Inheritance?

“In a recent episode of the Dax Shepard podcast "Armchair Expert," Kutcher said he wasn't creating trust funds for his two children with his wife, Mila Kunis.”
Ashton Kutcher said, "My kids are living a really privileged life, and they don't even know it.”
The actor has an estimated net worth of $200 million.
Business Insider’s recent article, “Ashton Kutcher says he's not setting up a trust fund for his kids, and his parenting approach echoes what billionaires like Warren Buffett and Bill Gates have said,” reports that Kutcher's parenting approach is similar to other well-known wealthy individuals. Elton John, Sting and Simon Cowell have all revealed they don't plan to leave their children a lot of money. Instead, they plan to emphasize educating them on the value of hard work.
Likewise, many billionaires aren't leaving their children much money. For example, Bill Gates has announced that he would leave $10 million to each of his three children. That’s just a fraction of his $108 billion net worth.
In a 2013 Reddit "Ask Me Anything" forum, Gates said: "I definitely think leaving kids massive amounts of money is not a favor to them. Warren Buffett was part of an article in Fortune talking about this in 1986 before I met him, and it made me think about it and decide he was right."
Mr. Buffett said he has pledged 100% of his estimated $87.3 billion fortune to various charities. Instead of giving each of his three children millions or billions, he’s promised to give about $2.1 billion of Berkshire Hathaway stock to each of his children's charities.
Buffett's decision might arise from his views on dynastic wealth, or the pattern of families passing money down from one generation to the next. Buffet has been vocal about his efforts to decrease the vast wealth sitting in the hands of a few influential people.
"Dynastic wealth, the enemy of a meritocracy, is on the rise," Buffett said in 2007. "Equality of opportunity has been on the decline."
Older generations might consider restricting their children's access to family wealth because of highly visible heirs and so-called trust-fund babies, who show off their wealth on social media. Parents may want to include provisions to ensure that any trust can be modified in the future.
Reference: Business Insider (November 10, 2019) “Ashton Kutcher says he's not setting up a trust fund for his kids, and his parenting approach echoes what billionaires like Warren Buffett and Bill Gates have said”