How Do I Get My Mom’s Affairs in Order?

What can you do to make sure your mother’s financial affairs are in proper order?

The Monterey Herald’s recent article, “Financial planning: Making sure Mom is taken care of,” says to first make sure that she has her basic estate planning documents in place. She should have a will and an Advance Health Care Directive. Talk to an experienced estate planning attorney to make sure these documents fully reflect your mother’s desires. An Advance Health Care Directive lets her name a person to make health care decisions on her behalf, if she becomes incapacitated. This decision-making authority is called a Power of Attorney for Health Care, and the person receiving the authority is known as the agent.

Based on the way in which the form is written, the agent can have broad authority, including the ability to consent to or refuse medical treatment, surgical procedures and artificial nutrition or hydration. The form also allows a person to leave instructions for health care, such as whether or not to be resuscitated, have life prolonged artificially, or to receive treatment to alleviate pain, even if it hastens death. To limit these instructions in any specific way, talk to an attorney.

Another option is to create a living trust, if the value of her estate is significant. In some states, estates worth more than a certain amount are subject to probate—a costly, lengthy and public process. Smaller value estates usually can avoid probate. When calculating the value of an estate, you can exclude several types of assets, including joint tenancy property, property that passes outright to a surviving spouse, assets that pass outside of probate to named beneficiaries (such as pensions, IRAs, and life insurance), multiple party accounts or pay on death (POD) accounts and assets owned in trust, including a revocable trust.  You should also conduct a full inventory of your parent’s accounts, including where they’re held and how they’re titled. Update the named beneficiaries on IRAs, retirement plans and life insurance policies.

Some adult children will have their parent name them as a joint owner on their checking account. This allows you greater flexibility to settle outstanding obligations, when she passes away. Remember that a financial power of attorney won’t work here, because it will lapse upon your mother’s death. However, note that any asset held by joint owners are subject to the creditors of each joint owner. Do not add your daughter as a joint owner, if she has marital, financial, or legal problems!

You also shouldn’t put your name as a joint owner of a brokerage account—especially one with low-cost basis investments. One of the benefits of transferring wealth, is the step-up in cost basis assets receive at time of death. Being named as the joint owner of an account will give you control over the assets in the account—but you won’t get the step up in basis, when your mother passes.

Reference: Monterey Herald (March 20, 2019) “Financial planning: Making sure Mom is taken care of”

What You Need to Know, If the Next Generation Is Inheriting the Family Farm

Understanding the tax liabilities for inheriting, buying or being gifted the family farm, is critical to avoid a costly financial misstep, says Capital Press in the article “The family farm is coming to you: What’s next?” You’ll need to work closely with your estate planning attorney and CPA to make sure you understand the basis in the real estate, especially if the property is sold and taxes will need to be paid. How you inherit the property, makes a big difference in the tax bill.

If you receive the property as a gift from parents while they are alive, then you retain their income tax basis in the property. If they inherited it also, they likely have a low tax basis. Farms with a basis of $50,000 that are now worth $2 million are not unusual. If the farm is sold, there will be a capital gains tax on the difference between the basis and the present value, which could be more than $600,000.

If you inherit the farm from a parent and then sell it for $2 million, its value at the time of their death, you would not have to pay a capital gains tax. That saves $600,000.

The estate tax may not be so bad, depending upon your state’s estate tax, which is probably lower than the highest capital gains rate. If you live in Oregon, you may be eligible for the Oregon National Resource Credit, which was created to reduce Oregon estate taxes on family farms. Your estate planning attorney will be able to help you plan for and manage these taxes.

If you bought the farm from a parent’s trust or estate for $2 million, then you have a $2 million basis in the property and will probably not owe any property gains tax, if you eventually sell it for $2 million.

Just be sure that you comply with all reporting requirements. If you are in Oregon and took the Oregon National Resource Credit, then for five out of eight years after the death, the recipient of the inherited property is required to file an annual certification to keep the credit that was used to lower the estate tax. Failure to comply, means that a portion of the estate tax will have to be repaid.

If you own the farm without other family members, you should start planning your next steps. To whom do you want to pass the farm? If you want to keep the farm in the family, work with an attorney who is familiar with farm families, so that you can keep working the land and reduce any disputes.

Farmers often separate business operations from the land, with the operations held by one business and the land held by another entity. This allows the estate planning attorney to plan for succession in how operations and land are transferred to the next generation. It also provides asset protection, while you are alive.

Make sure that your farm succession plan and your estate plan are aligned. A common issue is finding that buy-sell documents don’t align with the will or trust. Some farmers use a revocable living trust as a will, so they can incorporate estate tax planning and transition the farm privately upon death.

For more on Legacy Planning for your Family Farm, click here.

Reference: Capital Press (March 24, 2019) “The family farm is coming to you: What’s next?”

How to Be Smart about an Inheritance

While there’s no one way that is right for everyone, there are some basic considerations about receiving a large inheritance that apply to almost anyone. According to the article “What should you do with an inheritance?” from The Rogersville Review, the size of the inheritance could make it possible for you to move up your retirement date. Just be mindful that it is very easy to spend large amounts of money very quickly, especially if this is a new experience.

Here are some ways to consider using an inheritance:

Get rid of your debt load. Car loans, credit cards and most school loans are at higher rates than you can get from any investments. Therefore, it makes sense to use at least some of your inheritance to get rid of this expensive debt. Some people believe that it’s best to not have a mortgage, since now there are limits to deductions. You may not want to pay off a mortgage, since you’ll have less flexibility if you need cash.

Contribute more to retirement accounts. If the inheritance gives you a little breathing room in your regular budget, it’s a good idea to increase your contributions to an employer-sponsored 401(k) or another plan, as well as to your personal IRA. Remember that this money grows tax-free and it is possible you’ll need it.

Start college funding. If your financial plan includes helping children or even grandchildren attend college, you could use an inheritance to open a 529 account. This gives you tax benefits and considerable flexibility in distributing the money. Every state has a 529 account program and it’s easy to open an account.

Create or reinforce an emergency fund. A recent survey found that most Americans don’t have emergency funds. Therefore, a bill for more than $400 would be difficult for them to pay. Use your inheritance to create an emergency fund, which should have six to 12 months’ worth of living expenses. Put the money into a liquid, low-risk account, so that you can access it easily if necessary. This way you don’t tap into long-term funds.

Review your estate plan. Anytime you have a large life event, like the death of a parent or an inheritance, it’s time to review your estate plan. Depending upon the size of the estate, there may be some tax liabilities you’ll need to deal with. You may also want to set some of the assets aside in trust for children or grandchildren. Your estate planning attorney will be able to provide you with experienced counsel on the use of the inheritance for you and future generations.

Reference: The Rogersville Review (March 21, 2019) “What should you do with an inheritance?”