2018 Changes Impacting Estate Planning

Most of us have heard plenty about the changes made to the tax code for 2018 by now. While you may understand that changes in certain deductions and credits may impact income tax, you may have concerns about how the changes may impact your estate planning. Similarly, you may be aware that estate tax exemption amount had increased in 2018 but are not sure to what level and what it means for your personal situation.

For the most part your current estate plan may be sufficient to meet your needs in light of the changes to the law. However, it may be more complex then necessary. It is important to review your estate plan to ensure it allows for flexibility in the event of a subsequent change to the estate tax exemption limits. You want an estate plan to be simple while taking full advantage of the changes and remaining flexible for the future.

First, what are the changes to the law?

Tax Cuts and Jobs Act of 2017

On January 1, 2018, the Tax Cuts and Jobs Act of 2017 (TCJA) became effective. The Act makes significant updates to individual and corporate tax rates, eliminates or modifies many tax deductions and results in changes for estate and business planning. Until such time that regulations are in place, the Internal Revenue Service and tax advisors are still sorting many of the details. Nonetheless there are some key updates that may impact estate planning. For most people the changes will not have a lot of impact on estate planning, but still provides a good opportunity to review their estate plan.

Doubling of the Estate Tax Exemption

One of the most significant estate planning changes for 2018 is the doubling of estate tax exemption amount. While for most people this change will not have a lot of impact on their estate planning, the doubling of the estate tax exemption is quite significant.

Beginning in 2018, the basic estate tax exemption amount increases to $10 million per individual with adjustments for inflation. The IRS has not yet released the inflation adjustment but it is expected that the 2018 exemption amount will be $11.2 million per individual and $22.4 million for a married couple.

Again, this change may not impact most people. However, the change will greatly simplify estate planning for married couples with a combined estate of more than 10 million dollars. Without further congressional action in the meantime, on January 1, 2026, the estate tax exemption amount will revert to the 2017 exemption levels of $5.49 million per individual and $10.98 per married couple. With this in mind, it is important for families with assets exceeding $10 million to plan with flexibility. Often this includes the use of revocable living trusts with certain disclaimer or optional bypass trust provisions.

Increased Gifting Opportunities

The lifetime gift tax exclusion amount also doubled for 2018. The lifetime gift tax exclusion amount is total amount that you can gift during your lifetime without paying gift tax. The new lifetime gift exemption amount mirrors the estate tax exemption amount with an expected adjusted exemption amount of $11.2 million per individual and $22.4 million for a married couple.

With this in mind, it is a good opportunity for those families considering sizable gifting plans to utilize the additional tax-free gift amount while it is available. Since the lifetime gifting exemption is also subject to change it may be advantageous to make additional gifts while exemption amount is higher. By making gifts during your lifetime you can transfer wealth and thereby reducing the overall value of your estate and decreasing your taxable estate.

However, it is important to balance the advantages of lifetime giving with tax basis and estate planning considerations. For example, gifts made during your lifetime will be transferred at your tax basis, or your cost. While distributions of assets through your estate receive a “step-up” in basis equal to the fair market value of that asset upon death. With this in mind, if you are considering lifetime giving you may want to save highly appreciated assets to pass through your estate.

Changes for Pass Through Entities That May Impact Planning

For individuals or families that have rental or investment properties as a part of their overall estate there are advantages to owning these assets through separate pass through entity such as an LLC. Ownership of investment properties through an LLC will provide additional liability protection as well as potential tax advantages.

TCJA changed the tax rate for pass through entities and provides a deduction of up to 20% on qualified business for business income that passes through to an entity to an individual. The modifications to the law and calculation can be quite complicated and are subject to certain limits and restrictions. For example, those with joint income over $315,000 are above the threshold amount and therefore subject to limitations. However, for most pass through entities this change results in a reduction of overall tax.

Another significant change in the law for pass through entities is a change to the partnership audit rules. The update to the law provides for tax assessment and collection at the entity level rather than individual level. This means that if you have assets in an existing LLC, S. Corp. or other pass through entity, or if you are considering setting up a new pass through entity, you need to consider the new requirements.

Practically speaking one of the most significant changes is the requirement to appoint a tax representative for the entity. The tax representative will be the point of contact for the entity in the event of an audit or other tax issue. This involves updating the operating agreement or partnership agreement to include the appointment of a tax representative. For smaller entities, with less than 100 partners or members, you may elect to opt out of these requirements. However, it is important to consult with your CPA to assist you in this process.

If you own a rental or investment property in your name individually, now is a good time to consider transferring your property to an LLC or other pass through entity. However, discuss this with your CPA, attorney and tax advisors first to ensure it is effective for your personal situation.

Overall Considerations

The focus of this entry is primarily on changes that may have an impact on estate planning. However, TCJA made significant modifications to many other tax provisions including reductions in tax rates and changes to many deductions and tax credits. It is important to discuss these updates with your CPA and tax advisors to determine how the changes might impact your personal tax situation.

Even if you think that the 2018 updates to the law may not apply to you, the key to any effective estate plan is flexibility, and regular review of your plan with your advisors. Discuss your estate and gift planning strategies with your attorney, CPA, financial planner, and other tax advisors as soon as possible to ensure you are making the most of your estate plan and gifting strategies.

If you have question regarding estate or business planning contact Kelly O’Brien, Measure, Sampsel, Sullivan & O’Brien, P.C. at (406) 752-6373/ www.measurelaw.com

 

 

Effective Trust Planning

The Importance of a Fully Funded Trust

What is a Trust?

A trust is written agreement wherein a separate entity, the trust, holds title of property and assets and manages those assets on behalf of an individual. A trust is created by a grantor (also known as the “trustor” or “settlor”) and the assets of the trust are managed by a trustee for the benefit of the beneficiary. During the lifetime of the grantor of a revocable trust, the grantor retains complete control over the trust and can amend the trust,  transfer or sell assets of the trust, or terminate the trust at any point.

How do you “Fund” a Trust?

For a revocable living trust to effectively avoid probate it must be fully funded. “Funding” a trust simply means transferring title of assets to the trust. This means making changes in ownership to change title of your assets from your name as an individual to you as the trustee of your trust.

Typically titling an asset in the name of the trust requires the name of the trustee, name of the trust and date of execution of the trust. For example: Kelly R. O’Brien, Trustee of the O’Brien Revocable Living Trust Dated June 1, 2017 and any amendments thereto.

To actually transfer title to your trust you will need to execute new documents of title. This includes executing new deeds for your real property. This also requires working with your financial advisor, accountant and attorney to update accounting information or obtain new deeds for real property.   If you already have a trust in place review your assets and accounts to make sure that the trust is actually funded.

Bank & Investment Accounts

For any significant bank or money market accounts, including certificates of deposit, you need to update the title on the account to include the name of the trust and trustee. This will likely require signing new signature cards or ownership documents directly with the bank.

For small accounts or checking accounts you may simply make beneficiary changes rather than re-titling your accounts.  By updating the beneficiaries of your checking account you will ensure that any remaining funds are distributed either directly to your family members or through your trust upon your death. By naming a beneficiary rather than re-titling your checking account you avoid having to list the name of your trust on all of your checks.

For stocks and bonds held in investment account you will also need to change title of the account to the name of your trust. The process is similar to re-titling bank accounts, but you may have to fill out new account applications so make sure you work with your investment advisor to transfer title of your investments to your trust.

Real Property

Transferring real property to a revocable living trust requires a conveyance of ownership. In Montana this requires the preparation, execution and recording of a deed for each property in the county where that property is located. This also must be filed along with the Montana Department of Revenue Realty Transfer form. If the property has associated water rights you will also need to transfer ownership of the water rights to the trust.

Prior to recording any deed it is important to review and understand the current status of property ownership and any related financing or tax issues. Additionally if your real property is encumbered by a mortgage or deed of trust you may need to provide additional notices or obtain consent from your lender. Accordingly, it is important to consult with your attorney and tax advisors before conveying title to real property to a trust.

Business Interests

Most business ownership interests, such as ownership in a partnership, limited liability company or corporation, can be assigned to your trust through a written assignment of interest. Typically the assignment must be approved and signed by the other owners of the business. However, it is important to first determine if there are any restrictions on the transfer of ownership. You may need to contact corporate counsel for the business and/or work with your individual attorney to properly transfer business ownership interests to your trust.

Retirement Accounts & Pension Plans

Retirement accounts are a unique type of investment requiring special planning. Typically it is not advisable to transfer ownership of a qualified retirement or pension plan to a revocable living trust as they correlate to your age, life expectancy and require minimum distributions. Instead, it is generally recommended that you include a spouse, partner or children as the primary and contingent beneficiaries of these types of plans.

However, appointing beneficiaries for retirement plans may involve complex tax planning and requires individual and specific advice. Therefore it is essential that you discuss your retirement plan beneficiary designations with your attorney, tax advisor, financial advisor and plan administrator.

Other Assets

The above descriptions include some of the more common assets that may be transferred to a trust. However, if you have a trust in place it is important that all of your assets are either titled in the name of your trust or that you have appointed the specific beneficiary for the asset. Again, work with your advisors to ensure that this is done properly.

Providing Documentation of a Trust

Typically you do not need to provide a bank, financial institution, or title company with a full copy of your trust, but instead provide what is called a “Certificate of Trust.” A Certificate of Trust prevents the disclosure of the private plans for distribution of an estate to third parties. A Certificate of Trust provides documentation and proof that a trust exists, lists the trustees of the trust and provides documentation of authority and power to transact business on behalf of the trust.

Additionally, you typically do not need to obtain a separate tax identification number for your revocable living trust. As long as you are the acting trustee of your trust (or for a joint trust if both spouses are living) you will use your own social security number for accounts held by the trust.

Effective Trusts Require Complete Funding

Revocable living trusts can be highly effective estate planning tools. Trusts provide a greater ability to control the distribution of your estate and can provide estate tax planning benefits. Moreover the use of a revocable living trust can enable your family to avoid a probate proceeding for your estate. However trusts are only effective so long as you properly transfer title of your assets to your trust. By reviewing ownership of your assets and following the processes outlined above you can ensure your trust is properly funded.  Work with your legal, financial and tax advisors to make certain that you have followed the necessary steps to fully fund your trust.

If you have additional questions regarding revocable living trusts or proper funding of trusts contact Kelly O’Brien, Measure, Sampsel, Sullivan & O’Brien, P.C. at (406) 752-6373/ www.measurelaw.com

 

 

 

Life Estates in Montana

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Effective Use of Life Estates in Estate Planning For Blended Families

The idea of the “typical” American family has changed significantly over the last several decades from the traditional nuclear family to blended families of countless variations. Modern families much more variety then the traditional husband and wife with two children. Now-a-days, a blended family, or a family where one or more spouse has children from a prior marriage is commonplace. A married couple with children from a prior marriage may face unique challenges when it comes to estate planning, especially if the couple is living together in a home they acquired prior to their marriage. All too often couples simply decide to leave everything to each other without considering how it may impact their children or create conflict in the future.

While we all would like to believe that our family members will all get along after we are gone, we all know that life can change. Your spouse may remarry, get sick or simply just not get along with your children. A life estate can be an easy way to address some of these issues without requiring the creation of a complex estate plan.

What is A Life Estate?

First, it is important to understand the basic definition of a life estate and how it is created. A life estate is an interest in land whereby an owner of real estate grants another individual (known as the “life tenant”) title of the property for the lifetime of the life tenant. The individual that possesses the life estate has an interest in the property for their lifetime only. Upon the life estate owner’s death, the remaining interest in land is passed to another individual(s) or entity (“remainder interest” holders or “remaindermen”). The person possessing the life estate interest may live on the property, use it, and otherwise benefit from it for their lifetime in a reasonable manner as they see fit.

The typical rights of a life tenant during his or her lifetime include:

  • Residing on the property;
  • Renting the property to a third party and collecting the rent payments;
  • Making profits from the land including profits from farming the land or timber harvesting (unless previously granted to a third party); and
  • Receiving a portion of sale proceeds if the real estate is sold (up to the value of the life estate).

The typical responsibilities and obligations of a life tenant during his or her lifetime include:

  • Maintaining the property and avoiding waste to the property;
  • Paying real estate taxes and insurance;
  • Paying any other fees, dues or utilities;
  • Paying any mortgage and interest costs.

Creation and Documentation of a Life Estate

A life estate can be created by a deed, an agreement, or though a will or trust. It is important that the document conveying the life estate is specific in any limitations that the grantor may intend. Otherwise, without specific language limiting or expanding the rights and responsibilities of the life tenant then the default rights and responsibilities of a life tenant listed above apply.

For example, if a grantor wants the life tenant to be able to reside on the property for his or her lifetime, but not rent the property to a third party, then the grantor must include specific language limiting the nature of the right to “live” or “reside” on the property. This language would create “limited life estate” or “right to reside,” which has very different rights and responsibilities.

Similarly, if the grantor wanted the remaindermen to pay the taxes and maintenance costs, rather than the life tenant, the granter must be specific in the conveyance document or agreement to transfer these obligations to the remaindermen.

A life estate can also be granted or sold to another person, or it may be reserved by the individual owning property for his or her lifetime. By retaining life estate interest in one’s own property an individual can enjoy the property for the remainder of his or her life, but transfer the property to another individual or entity upon death.

Use of a Life Estate in Estate Planning

A life estate can be a highly effective estate planning tool if properly documented and discussed with all involved. For a blended family a life estate can help to ensure that property would pass to children while allowing a spouse to reside on the property for his or her lifetime. Similarly, an owner of real estate can retain a life estate allowing the owner to continue to reside on the property for his or her lifetime while passing property to children, charities or other individuals upon death. The use of a life estate can also help to avoid a separate probate proceeding upon the death of the life tenant.

If you are considering granting a life estate to a spouse or child, or retaining a life estate for yourself talk with your family about your intent for the life estate to make sure your intentions are clear. Also make sure to discuss your plans with your financial, legal and tax advisors to ensure that your intentions are properly documented and carried out.

Seek Legal Advice

Before you proceed to grant or retain a life estate interest either through your estate plan or by a separate agreement discuss it with your attorney. It is important for you to consider your assets, family situation, and personal preferences carefully to ensure that it fits in with your overall estate plan. Moreover to ensure that your intent for your property is properly documented in a manner to meet your goals, discuss the following issues with your attorney:

  • What happens if the life tenant vacates the property? Can he or she rent the property to a third party and collect payments or does it pass to the remaindermen?
  • Who pays for regular maintenance costs?
  • What maintenance is required of the life tenant?
  • Who is responsible for major improvements? Who makes decisions regarding major improvements?
  • What insurance is required by the life tenant and the remaindermen?
  • Are the remaindermen permitted to inspect the property or otherwise enter the property during the lifetime of the life tenant? If so, when and how is entry permitted?
  • Who is responsible for taxes, insurance and other fees and costs?

Again, without specific language setting out the rights and responsibilities of each party the life tenant would have the responsibility for most of the expenses during his or her lifetime and benefit from the property during his or her lifetime. A life estate can be a valuable planning tool without the need for a complex estate plan. However, it is important that you involve your family and advisors in the process.

If you have questions or need legal assistance regarding life estates, estate planning or other real estate matters, contact Kelly O’Brien at Measure, Sampsel, Sullivan & O’Brien, P.C. at (406) 752-6373/ www.measurelaw.com

 

Beneficiary Deeds in Montana

What are Beneficiary Deeds and How Do You Effectively Use Them?

What is a Beneficiary Deed?

A Beneficiary Deed is a type of ownership interest where an individual holds title to real property but conveys his or her interest in the property to another individual to become effective upon the owner’s death. The individual to receive title to the original owner’s property upon death is known as a “grantee beneficiary.” A grantee beneficiary might be a child or other family member but it could also be a friend or charity. The grantee beneficiary’s interest in the real property is not effective until the death of the original owner. This means that an owner can revoke a Beneficiary Deed or change the beneficiaries at any time.

A Beneficiary Deed is a separate type of deed which requires all the formalities of a deed to be effective. This means that the deed must contain a full, accurate legal description of the property, contain the addresses for both the grantor and the grantee beneficiary, and it be signed, notarized, and recorded with the Clerk and Recorder in the county in which the real property is located. It also requires the filing of a Montana Realty Transfer Certificate with the Montana Department of Revenue.

Essentially a Beneficiary Deed is a way to transfer interest in real estate to heirs and beneficiaries upon death without the need for a probate.  While a Beneficiary Deed is not suitable in all situations, it can be an effective tool in transferring interest in real property upon death if executed for the appropriate reasons.

Beneficiary Deeds are most effective for estates that are relatively simple where real estate may be the only asset without an existing beneficiary designation and where the family members or other beneficiaries generally get along with one another. If your estate consists of your home and financial accounts, a Beneficiary Deed can be a simple and effective way to transfer your estate upon your death.

When a Beneficiary Deed May Not Be As Effective

If you have a complex estate, especially one with any type of trust in place or with potential estate tax planning issues or property in multiple states, then a Beneficiary Deed may not be the best option.

  • If your estate is complex. Complex estates, especially estates that are likely to exceed the federal estate tax exemption amount, require additional planning and consideration. For 2016 the federal estate tax exemption amount is $5,450,000.00 per individual.  While a Beneficiary Deed may be a simple way to transfer real estate upon death, it could have other estate tax implications or unintended consequences. If your estate is above or near the current federal exemption limit it may be beneficial for you to consider other estate planning options for avoiding probate such as a revocable living trust. If your estate falls into the more complex category discuss your overall estate plan with your attorney to determine how a Beneficiary Deed would impact your plan.
  • If you own property in multiple states. Every state has a different system for addressing real property and not all states recognize Beneficiary Deeds. Accordingly, if you own property in multiple states, the use of Beneficiary Deeds may not be as effective in accomplishing your estate planning goals. Instead, you may consider other options such as a revocable living trust to pass your real estate to your beneficiaries without the need for a separate, or “ancillary,” probate proceeding in each state where you own property. With a properly funded trust, the trust holds title to your property so no probate is required regardless of the location of your real property.
  • If family members or other beneficiaries do not always get along. Similarly, if you want to leave your estate to multiple individuals that may not always get along, a Beneficiary Deed may create more problems. If your heirs are likely to disagree, it does not make sense for them to hold title to real property together. Instead you may decide to create a separate trust or direct your personal representative or trustee to liquate your real property and split the proceeds between your heirs to avoid potential conflict.

Naming Multiple Beneficiaries

An owner of real property can list more than one grantee beneficiary on a Beneficiary Deed. However, they are most effective when only one or a few beneficiaries are listed (and those beneficiaries get along). If you decide to list more than one beneficiary on a Beneficiary Deed, it is important to make sure you specify how the beneficiaries will hold title together upon your death. Specifically, state whether they will own the property as tenants in common or as joint tenants with rights of survivorship. If you plan to list more than one beneficiary, make sure you discuss your options with a real estate or estate planning attorney to ensure that you understand the implications of different title designations.

How is Title to Property Updated Upon Death?

If you list an individual as a beneficiary of a financial asset, that individual becomes the legal owner immediately upon your death without the need for probate. The same concept is involved with a Beneficiary Deed. The beneficiary you name on the deed becomes the owner upon death, instead of having to wait to transfer property through a probate proceeding. To update the title, the beneficiary owner must record an affidavit certifying that the original owner has died and naming the grantee beneficiary or beneficiaries entitled to receive the property. This affidavit must be signed by the grantee beneficiaries in the presence of a notary public and recorded with the office of the Clerk and Recorder in the county where the real property is located. If these steps are followed, the beneficiaries will take title without the need for a probate proceeding.

Seek Legal Advice

Beneficiary Deeds can be simple and effective estate planning tools. However, before you proceed to execute a Beneficiary Deed discuss it with your real estate or estate planning attorney. It is important that a Beneficiary Deed is properly executed and meets all the formal requirements for a deed. It is also important for you to consider your assets, family situation, and personal preferences carefully before recording a Beneficiary Deed and to ensure that it fits in with your overall estate plan.

If you have questions or need legal assistance regarding Beneficiary Deeds, estate planning or other real estate matters, contact Kelly O’Brien at Measure, Sampsel, Sullivan & O’Brien, P.C. at (406) 752-6373/ www.measurelaw.com

 

When to Engage a Real Estate Attorney to Buy or Sell a Home


Buying or selling your home can be a daunting task. Often the purchase of a new home is the most substantial purchase in your lifetime. In addition to the emotional issues associated with buying or selling your home, there are a host of legal issues involved. A new home purchase can be exciting, but there are a lot of potential pitfalls in the process, which is why it is important to obtain adequate legal advice.

Working With a Real Estate Broker

In most circumstances a buyer or seller of real property will engage a real estate broker or agent to assist with the sale or purchase. A broker can provide helpful insight into the local real estate market, up-to-date listing information, marketing advice and assist in negotiating a fair price for your home.

Even if you utilize a real estate broker, you may want to consider engaging a real estate attorney. When you engage a real estate broker you typically sign a brokerage or listing contract with the broker. When a buyer makes an offer that is reasonable to a seller, the parties enter into a formal buy-sell agreement.

Once the parties agree to the price and terms of the buy-sell agreement, the buyer will obtain a preliminary title commitment. If the title commitment is acceptable then the parties will proceed to address any contingencies. Once the contingencies are released the parties can proceed to close the sale. At every step of this process there are potential problems and areas for dispute.

A real estate attorney can review any listing agreement and the buy-sell agreement to ensure that all of the potential legal issues are addressed. An attorney can also help you to understand the commissions and closing costs you will be required to pay. Oftentimes, realtors use standard forms that may not address a unique issue relating to the specific property. Moreover, a real estate attorney can review the title commitment to ensure that you are aware of and adequately address any title exceptions that may cause a problem in the future.

However, whether or not you decide not to engage a real estate agent, an attorney can assist with all aspects of the sale or purchase of real estate from the initial offer through closing. More specifically a real estate attorney can provide assistance in the following areas:

Document Drafting & Review

A real estate attorney can draft or review every written document involved in the sale or purchase of real property. Attorneys can prepare offers, buy-sell agreements, financing documents, deeds, and other documents for conveyance. Even if an attorney does not draft these documents, a real estate attorney can provide review and essential insight into the terms of the documents to ensure that the contract and associated sale documents are correct, do not omit essential terms, and that you understand the terms contained in the agreement.

Examine Status of Title & Resolve Title Issues

Most real estate sales require the buyer to obtain a preliminary title commitment for the property. A title commitment will show any encumbrances on the property, such as easements, or legal restrictions, such as restrictive covenants, that may impact the property. Advice of an attorney within this process can be especially valuable. An attorney can explain what certain title exceptions might mean and how they might impact your property.

For example, one of the most common types of encumbrances on real property is an easement. By definition, an easement is a “nonpossessory” interest in the land of another individual that gives the easement holder the limited right to use the land of another. Many people living outside of the city limits may have some type of road or utility easement either on their property, or used to access their property.  If you are considering purchasing or selling property it is important that you adequately review any easements and related agreements to ensure that you understand and agree to the terms. If the title commitment raises any potential issues with adjoining property, an attorney can help to resolve the potential issue before you purchase the property.

Explain Zoning Restrictions & Subdivision Regulations

If you plan to purchase a home to use for a particular purpose, such as a home business or farm, a real estate attorney can explain the zoning restrictions on a particular property. A real estate attorney may also advise you as to whether you are able to subdivide the property and the process required to subdivide.

Examine Water Rights & Environmental Issues

A water right is a type of property right, which means it can be bought, sold or transferred. Water rights are normally transferred with real property, but sometimes the previous owner reserves the water rights from the conveyance. A reservation of water rights must be specifically written into the deed. If a seller does not reserve the water rights then a water right transfer certificate must be filed to ensure the water right documentation is updated with the state. An attorney can review the language of conveyance in the deed and associated documentation to ensure the water rights are properly transferred with the land, and assist in determining the nature and extent of water rights associated with a particular property.

Similarly, a real estate attorney can assist in determining whether there are any environmental issues that may impact the property. If there is existing environmental issues, such as previous spill or other environmental contamination, an attorney can explain how this might impact ownership or future development. An attorney can also provide advice in how to address an environmental issue within the sale process.

Resolving Disputes & Litigation

Even if you thoroughly address all potential legal issues in advance, real estate transactions do not always work out as planned. If a sale falls through an attorney can assist in attempting to resolve a dispute and negotiate the best outcome for you. Ultimately, if attempts to resolve the situation are not successful, an attorney can assist with the litigation associated with the transaction and related agreements.

Seek Legal Advice at the Beginning of the Process

If you are interested in buying or selling real estate consider engaging a real estate attorney at the beginning ofthe process to help reduce potential problems with the transaction. Even if you work with a real estate agent, a real estate attorney can assist in navigating the entire process to ensure you understand and agree to all the terms of the agreement, and if not, can negotiate better terms or resolve potential issues prior to the property sale.