What’s an “Atom Bomb” or “Contingent Remainder” Beneficiary?

When you’re planning your estate, among other things, you decide who should inherit your assets. You choose your beneficiaries, typically your children (or Living Trust depending upon the children’s ages), grandchildren, or other close relatives. But what if all the beneficiaries you’ve chosen and all their descendants have died? Then it would fall to the “contingent remainder” beneficiary.

Often the “contingent remainder” beneficiary has a slang nickname, like the “atom bomb” beneficiary or “exploding turkey” beneficiary. The contingent remainder beneficiary often is given this nickname because it’s a very unusual circumstance. The odds of all your descendants dying before you typically are very low. Of course, that’s not to say it is impossible.

But, still, you should give serious thought to whom you should choose for that role. Sometimes people choose their heirs at law because they think they should or must do so. However, if all your descendants have predeceased you, depending upon state law, that could mean your heirs would be some distant relatives with whom you have little or no relationship in real life.

Sometimes people choose a charity as the contingent remainder beneficiary. Sometimes they choose their alma mater, their church, or the charity to whom they’ve given consistently during their lifetime.

There’s not a wrong choice for the contingent remainder role. But you aren’t required to choose a particular one either. You have no obligation to choose your heirs at law, just because you may share a common ancestor. Give some thought to the decision and name whomever you feel in your heart would be the best recipient for your assets in the event your primary beneficiaries have predeceased you. You’ll be glad you did.

After you’ve chosen your beneficiaries, including your first line beneficiaries like your children (or Living Trust) and the contingent remainder “atom bomb” beneficiary, you’ll sleep better knowing that you’ve covered all your bases. You’ll know that your assets are going where you want them to go, even in the most unlikely of scenarios.

Staying Current is Especially Important in the Pandemic

President Trump and First Lady Melania Trump announced they tested positive for COVID-19. Around the same time, numerous others at the White House also tested positive. In the United States alone, the pandemic has infected over 7.5 million people and has killed nearly 215,000 of them. Worldwide, the pandemic has infected over 36.5 million people and has killed over a million of them. In today’s pandemic, it’s more important than ever to make sure your estate planning documents are current. It’s especially important to ensure your documents relating to your health are up-to-date. Those documents are the Health Care Power of Attorney, the Advance Directive, and the HIPAA Power. It’s important to have several layers of decision-makers.

In the Health Care Power of Attorney you appoint an “Agent” to make health decisions for you when you’re not able to make those decisions for yourself. You can also appoint a successor Agent to make decisions if the first Agent is not available or isn’t able. You can appoint additional successors, too. It’s especially important to name additional successors in today’s pandemic. The fact that President and Melania Trump both tested positive for COVID-19 around the same time demonstrates the importance of naming several successors. It’s all too common nowadays for your initial agent to succumb to the same illness. If you name several successors, especially in a different household, you increase the odds that one of the agents will be unaffected and able to act for you.

An Advance Directive expresses your wishes regarding end-of-life decisions. Without such a clear expression of your wishes, you must be kept alive even if you have no reasonable chance of recovery, even if doing so would prolong your suffering. Sometimes an Advance Directive is called a “Living Will” and often it is combined into the same document as the Health Care Power of Attorney.

The Health Insurance Portability and Accountability Act of 1996 mandates health providers keep your protected health information confidential. While this is primarily a good thing, sometimes you want some people to have access to your protected health information. For example, you want your Health Care Agent to have access to your information so they can make informed decisions regarding your health. Also, you want fiduciaries such as the Agent under a Financial Power of Attorney and the successor Trustee of your Trust to be able to have access so they can know if they need to step in to manage your financial affairs, which is their duty. A HIPAA Power grants access to your protected health information to those whom you designate. In fact, without such a power, your loved ones might not even know you’re in the ICU with COVID-19.

It’s important to have these three documents, but it’s also important to keep them up-to-date and to name successors in them. All too often in the current pandemic, the illness impacts more than one person in the family or locality. If there’s no successor appointed (or that successor is also incapacitated) there can be delays in getting consents for different treatments or implementing end-of-life decisions. So, perhaps you name your spouse first, then your adult child, then your brother or sister, etc. Keep in mind the importance of naming successors who aren’t in your same household and maybe not even in the same locality.

Today’s pandemic is hard on all of us. Precautions like washing your hands, social distancing, and wearing a mask can make all of us safer. Keeping your estate planning documents up-to-date helps ensure that, if the precautions don’t work, your loved ones and fiduciaries can help you through the illness and make it easier for you and your loved ones.

Puerto Ricans are Unique, as Is Estate Planning for Them

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

Let’s look at an example:

Maria was born in Puerto Rico and it’s only due to this that she has a U.S. passport. Maria lives in Puerto Rico and does well for herself. Maria buys a vacation home in Miami worth $1 million. Maria has assets in Puerto Rico and elsewhere outside the United States worth $4 million, as well. If Maria dies under these circumstances, Maria 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 what had 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 property worldwide. However, she would have an exclusion of $11.58 million. So, she’d owe no estate tax.

Puerto Ricans are special. They 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. Puerto Ricans should be mindful of this difference and the 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.

Planning Is Important

As Autumn arrives, it is not too early to consider end-of-year planning. Fundamental to end-of-year planning is deciding whether to shift income or expenses from this year to the next, to the extent possible.

All other things being equal, typically you would want to defer income (and the taxation on it) until the following year. However, if your income is lower in the current year, you may want to keep extra income in the current year to be taxed in a lower tax bracket and hence a lower marginal tax rate.

Similarly, typically you would want to take expenses in the current year rather than deferring them until the following year. However, with expenses you would need to consider their deductibility in each year. For example, in 2020 a single taxpayer has a standard deduction amount of $12,400 (and a married couple filing jointly has twice that at $24,800). In order for itemized deductions to give you a better result than the standard deduction, they would need to exceed that standard deduction amount of $12,400.

Let us assume that Betty Taxpayer will have the same income in both years. She has no other deductions in the current year. She is considering making a charitable contribution of some stock. Let us say next year Betty will have other itemized deductions in excess of the standard deduction amount. The existence of those other itemized deductions the following year would mean that her charitable deductions would not have to exceed the standard deduction amount of $12,400 to be deductible. She may want to defer gifting the stock until next year. (Note, in 2020 only, Betty may give up to $300 in cash to a public charity as an “above-the-line” deduction that need not be itemized.)

In addition to considering expenses and deductions, Betty should take into consideration whether her employer participated in the optional deferral of payroll taxes. Beginning September 1, 2020, employers can defer withholding the employee’s 6.2% payroll tax for those employees earning less than approximately $100,000 annually. Some employers, such as the military and the federal government are doing so. Many other employers are not doing so due to the complications involved. If Betty’s employer is deferring her payroll tax withholding, she will have larger paychecks than normal in the last four months of 2020. However, Betty’s paychecks in early 2021 will be smaller than normal to pay back the deferred withholding.

Betty should take all this into consideration, and more as she considers her end-of-year tax planning. Of course, if Betty will have more payroll tax withheld next year, she may find it more difficult to put money aside to make IRA contributions. Remember, you have until April 15th to make your IRA contributions for the prior tax year.

End-of-year tax planning is just part of the planning process. Estate planning includes tax planning but also much more. Estate planning also considers ensuring your assets go to whom you would like them to go and how you would like them to go.

Staying Current is Especially Important in the Pandemic

In the United States alone, the pandemic has infected nearly 7 million people and has killed nearly 200,000 of them. In today’s pandemic, it is more important than ever to make sure your estate planning documents are current. It is especially important to ensure your documents relating to your health are up to date. Those documents are the Health Care Power of Attorney, the Advance Directive, and the HIPAA Power.

In the Health Care Power of Attorney you appoint an “Agent” to make health decisions for you when you are not able to make those decisions for yourself. You can also appoint a successor Agent to make decisions if the first Agent is not available or is not able. You can appoint additional successors, too.

An Advance Directive expresses your wishes regarding end-of-life decisions. Without such a clear expression of your wishes, you must be kept alive even if you have no reasonable chance of recovery, even if doing so would prolong your suffering. Sometimes an Advance Directive is called a “Living Will” and often it is combined into the same document as the Health Care Power of Attorney.

The Health Insurance Portability and Accountability Act of 1996 mandates healthcare providers keep your protected health information confidential. While this is primarily a good thing, sometimes you want some people to have access to your protected health information. For example, you want your Health Care Agent to have access to your information so they can make informed decisions regarding your health. Also, you want fiduciaries such as the Agent under a Financial Power of Attorney and the successor Trustee of your Trust to be able to have access so they can know if they need to step in to manage your financial affairs, which is their duty. A HIPAA Power grants access to your protected health information to those whom you designate. In fact, without such a power, your loved ones might not even know you are in the ICU with COVID-19.

It is important to have these three documents, but it is also important to keep them up to date and to name successors in them. All too often in the current pandemic, the illness impacts more than one person in the family or locality. If there is no successor appointed (or that successor is also incapacitated) there can be delays in getting consents for different treatments or implementing end-of-life decisions.

Today’s pandemic is hard on all of us. Precautions like washing your hands, social distancing, and wearing a mask can make all of us safer. Keeping your estate planning documents up-to-date helps ensure that, if the precautions do not work, your loved ones and fiduciaries can help you through the illness and make it easier for you and your loved ones.

Generational Wealth is Key to Leveling the Playing Field

Even a little bit of a headstart can be extremely helpful in life. Those who start with little economic wealth, including many minorities and recent immigrants, face obstacles in obtaining a good education and building a business or a solid career. Those who have a headstart in life have an easier path to success and happiness. It doesn’t mean they will have everything handed to them on a silver platter. It just means they won’t start at the bottom of society’s ladder. The biggest factor in the wealth gap between minorities and non-minorities is inheritances, according to a report by the  Brookings Institution. This generational wealth is key to leveling the playing field so your children, grandchildren, and descendants can have a better life. The American dream is to work hard and provide your descendants with a chance for a better life than you had.

How do you provide a headstart in life for your loved ones? First, you can provide them with funds to give them a leg up. These funds could allow:

  • A home to provide a solid footing
  • A good education to allow a more rapid ascent up the career ladder
  • Funds for starting a business
  • Economic security

Second, you can leave those assets to them in a manner that protects those assets.

  • You can protect those assets from the beneficiary’s mismanagement prior to when they have gained maturity
  • You can protect the assets from the beneficiary’s creditors
  • You can protect the assets from the beneficiary’s misuse of the assets

You can achieve all of this by using a trust. Let’s look at an example. Jayden and Alyssa have worked hard all their lives. Through their hard work (and a little good fortune) they have been able to build a tidy nest egg. They have two children, Jasmine and Isaiah (Ike). They want all the best for their children, as we all do, and they want them to be able to have an easier start than they did.

Jasmine is level-headed and is a straight-A student. They have greater concerns about Ike, who isn’t as studious as Jasmine. After speaking with their estate planning attorney, Jayden and Alyssa decide upon a plan tailored to their family’s unique needs. Upon the death of the survivor of them, their assets will be split into shares for their two children. Both trusts will have Alyssa’s trusted sister, Janet, as the trustee. Janet will be the trustee of Jasmine’s half until Jasmine is of a suitable age, which they think will be 35. At that age, Jasmine will be the trustee of her own share. Prior to that time, Janet will distribute for Jasmine’s education, support, and other needs. Thus, the assets will provide Jasmine a headstart in life while the assets are protected from misuse and unwise investments in her early adulthood. Then Jasmine can pay it forward to her children when she has them.

Ike is not as studious as Jasmine. In fact, Jayden and Alyssa have some concerns about Ike. Ike has been irresponsible. Ike had an accident while driving under the influence. Luckily, Ike wasn’t hurt, but the passengers in his car and the occupants of the other vehicle involved were injured and received judgments against him. Because of this, they’re giving Janet greater latitude as trustee for Ike’s share. Ike’s share provides distributions to him only in Janet’s discretion. This provides protection from Ike’s creditors. Janet can still make distributions for Ike’s benefit as she sees fit so he can still get a good start in life by getting an education, etc. This ensures the assets will be there for Ike’s benefit and won’t be wasted by Ike or seized by his creditors.

Jayden and Alyssa have worked hard and saved all their lives. They want their children to have an easier start than they did. So, they consulted with an estate planning attorney. After they are gone, they’re leaving their assets for their children in trusts with protection tailored to Jasmine and Ike’s needs. They built their family. They built their nest egg. Now they’ve consulted an estate planning attorney and built a unique plan tailored for their family which will pass on their nest egg to provide a headstart and protections for their family.

Chadwick Boseman Demonstrates the Importance of Planning

The star of multiple films, including the blockbuster superhero film “Black Panther,” died on August 28 of colon cancer. “Black Panther” by Marvel was nominated for 6 Academy Awards, including Best Picture. The film grossed over $1.3 billion worldwide. Chadwick Boseman became a role model for millions by playing Marvel Studio’s first Black superhero. Boseman also starred in films portraying real-life heroes, like Jackie Robinson (“42”), James Brown (“Get On Up”), and Thurgood Marshall (“Marshall”).

Boseman showed us that even those who appear to be young, vibrant, and heroic need planning. Boseman died at age 43. While little is known of Boseman’s estate planning, we do know that he had a wife, Taylor Simone Ledward, whom he met in 2015 and to whom he got engaged to in October 2019. Boseman was the youngest of three sons of his mother, a nurse, and his father, a textile factory worker.

Even those of us who are young need at least a basic estate plan. A basic estate plan includes:

  • A Power of Attorney for Property which appoints someone as your Agent to manage your property, particularly when you’re not able to do so yourself.
  • A Healthcare Power of Attorney which appoints an Agent for you to make healthcare decisions for you when you’re unable to make those decisions for yourself. This may be combined with a Living Will which expresses your wishes regarding end-of-life decisions.
  • A Living Trust often is used to hold your property during lifetime. A Trust avoids the probate process and the cost, delays, and publicity which it might bring.
  • A Pourover Will is used to transfer any property in the estate at death to the Trust for disposition according to its terms. The Will is also the document in which you nominate guardians for any minor children.
  • A HIPAA (Health Insurance Portability and Accountability Act) Power, which grants access to your protected health information. Without this authority, loved ones and fiduciaries, such as your Agent or Successor Trustee, might not be able to know your health information, including whether you’re even in a hospital or other facility or if you’re no longer able to manage your affairs and your Agent or Successor Trustee needs to step in.

Chadwick Boseman performed his most famous roles after his diagnosis with colon cancer four years before his death. President Barack Obama tweeted: “To be young, gifted, and Black; to use that power to give [Black kids] heroes to look up to; to do it all while in pain – what a use of his years.”

What a use of his years, indeed. Chadwick Boseman demonstrated that one can inspire millions through your words and your deeds.

Will Your Estate Plan Still Work If You Move?

Before the pandemic, Americans were as mobile as ever. In the prior decade, millions of Americans moved each year.

Often, people wonder, “What happens to my estate plan if I move?” Well, it depends. If you move within the same state, your documents are valid and the planning will still be intact, as well. If you move from one state to another, your primary dispositive plan may still be valid, but some aspects might not work as well in your new state.

Let us look at an example. John and Mary went to an attorney in State A. A couple of years later, they moved to State B. There are so many things to do when you move, they did not update their estate plan when they moved to the new state.  This caused issues because the laws in State B were somewhat different. John had a stroke and when Mary went to use the Healthcare Power of Attorney, the hospital gave resistance because they had never before seen a document like the one John and Mary had which was similar to that typically used in State A. The form used in State A did not have many of the choices the hospital staff in State B typically saw.  Eventually, Mary was able to use the Power of Attorney, but the hospital’s resistance caused by not having a document familiar to them added stress when Mary was already near the breaking point. Later, after John died, Mary went to an attorney to settle things. The attorney opined that, while their estate plan made sense for State A, it did not do the tax planning which would have been wise to do in State B. You see, State B had a separate estate tax, while State A did not.  This is not an issue with the trusts that I prepare.  In each trust, there are three (3) sections that I call the “legislation savings” clauses.  These means that to whatever state you move, your trust provisions will comport with and automatically amend to conform with that state’s laws.  Every state has its own ‘form’ powers of attorney.  I have people moving out of Illinois all of the time.  The only thing we have to address is re-preparing their powers of attorney to be that of their new state of residence.

Going further, after John’s death, the bills from his final illness and funeral came in. Mary sold some stock to pay for the bills. When it came time to prepare her taxes for the year, her accountant asked her if the stocks had been community property before John died. When Mary told him they had not been, he said “That’s a shame.” She would owe tax on her gains. If the stocks had been community property at John’s death, even Mary’s part of the community property would have gotten a “step-up” in basis to fair market value. In other words, all the gain up until John’s death would have been wiped out.

If John and Mary had visited an estate planning attorney regarding their estate plan upon their move to the new state, they could have made plans more appropriate for the new state. This could have saved income tax on the stock sale after John’s death. Mary would not have encountered difficulty using the Power of Attorney. Mary could have saved money at her later death.

Whenever you have a significant life change, including a move to a different state, it’s best to check with an estate planning attorney to see if your estate plan should be updated or if you should make any other changes to take advantage of the laws of your new state of residence. That is the case whenever you move to a different state—even if it is only across a river or state line.

Planning for Incapacity

Every year, many people in the United States are unable to manage their own affairs due to incapacity. They might be young or old. They may have had a gradual decline or a sudden onset. They might have had a stroke, heart attack, or some disabling disease such as Parkinson’s, Alzheimer’s, or COVID-19.

If you are incapacitated without having prepared, it can be an ordeal for you and those who care for you. Your loved ones might need to go to court to have you declared incompetent and have a guardian appointed to manage your affairs.

Let’s look at an example. John was moving to be closer to his family. He was trying to sell his house. He was in an auto accident and was suddenly incapacitated and unable to manage his own affairs. His neighbor knew he wanted to sell his house and the neighbor’s sister was moving and made John an offer to buy his house. The offer was for more money than John had ever imagined the house was worth. Since John didn’t have the capacity to sell his house, his loved ones had to go to court and have him declared incompetent and have someone appointed as his guardian. Of course, this process was difficult in many ways. John’s family disagreed regarding who should be John’s guardian. Embarrassing information concerning John’s condition and behavior came to light. The family’s dirty laundry all came out in court. After all of this, the great offer on the house was lost due to the court delays. The neighbor’s sister couldn’t wait any longer. An economic downturn hit in the interim and another good offer wasn’t forthcoming.

John could have prepared in advance by naming an “agent” under a Power of Attorney. John could have had one agent to make health decisions for him and the same or a different agent to make financial decisions for him, such as regarding the sale of the house.

Often a home is funded into a revocable trust to avoid any delays, expense, and publicity of the probate process upon death. If John had funded the home into his revocable trust, his successor trustee could have had the authority to sell the home.

In fact, some title companies are reluctant to accept a Power of Attorney for real estate transactions, especially if the Power of Attorney was signed more than two years earlier. Properties in a revocable trust don’t face this same reluctance.

While planning for what happens to your assets after your death is important, planning for the management of your assets and your well-being during periods of your incapacity is even more important. Why not do the right thing, for yourself and those who love you and whom you love, by planning today. Now, more than ever, it’s important to plan for your own incapacity.

Use the Exclusion or Lose It

In 2020, each person can give away $11.58 million during life. Whatever portion they haven’t used during life, they can use it at death. However, that generous exclusion will be cut in half at the end of 2025. Beginning in 2026, the exclusion will be only $5 million adjusted for inflation from the 2011 base year. If you use the exclusion before it falls back, you won’t be penalized by a “clawback” upon your death in 2026 or later.

For example, let’s say Mary has $11.58 million and gives it all away in 2020. Let’s assume she lives off her social security and dies with nothing in 2026. She would not owe any estate tax, even though she had given away $11.58 million and the exclusion at her death in 2026 is half that amount.

In other words, if Mary uses her exclusion before 2026, she won’t have to worry about having to pay estate tax because of the gifting she did of an amount within the exclusion during her lifetime, even though that exclusion later decreases.

Does that mean Mary should wait until 2025 and then decide what to do? Unfortunately, not. Some voices in Congress have called for an earlier repeal of the law which included the doubling of the exclusion to its current level. Some voices have even called for the exclusion to be lowered even further, to $3.5 million per person, or less.

A shift in power in Washington after the 2020 elections could bring those voices to power and see their vision realized. Does that mean Mary could wait until legislation is passed by Congress and signed by the President to act? Again, unfortunately not. Legislation could be passed late in 2021 and could be retroactive to January 1, 2021. In other words, to be safe, you would need to act before the end of 2020.

For a married couple, perhaps the best way is for one of them to give their full exclusion into a trust for the benefit of their spouse and descendants. This is called a Spouse And Family Exclusion (“SAFE”) Trust (also sometimes called a Spousal Lifetime Access Trust (“SLAT”)). Let’s look at an example. John and Liz are married and have $15 million. John could give $11.58 million to a SAFE trust for the benefit of Liz and their children and grandchildren. Liz could be the trustee of the trust and decide how the assets are invested and distributed, within the ascertainable standard set in the trust (typically “health, education, maintenance, and support”). The assets in the SAFE trust are outside both John and Liz’s estates.

By doing this, John and Liz would have taken advantage of John’s $11.58 million exclusion and would not have an estate tax due even if the exclusion falls back to $3.5 million. Even better, Liz still has control of the money and can use it for her own benefit and that of their children and grandchildren.

Having planned now, John and Liz can rest easy and not worry about what legislative changes might be coming after the election in November.