Estate planning is a critical part of the retirement planning process. As we kick off the new year, this is a perfect time to ensure that your plan is up to date.
Things change over time. That includes our lives, our family, and even the laws that apply to estates. This means the wills, trusts, and other estate documents that protect our families and secure our legacies may need to change, too.
With that in mind, we’re thrilled to have Keith McManus, attorney at McManus Estate Planning, back on the podcast. In our conversation, we discussed the downside of not reviewing and updating your estate plan, different ways to protect your biggest asset such as the family home, and the pros and cons of life estates and much more.
In this podcast discussion, you’ll learn:
- Reasons why a “set it and forget it” strategy can put your estate at risk.
- How to take advantage of incredible opportunities before the Tax Cuts and Jobs Act sunsets in 2025.
- Why you may want to prepare estate plans to protect young adult children, even if they haven’t accumulated much wealth yet.
- What it means to create a life estate–and the potential risks and benefits of this approach to retirement.
- Why there’s no such thing as a cure-all trust–and how this makes estate planning more important than ever.
- Why you never want to rely on a will as the backbone of your estate plan.
- “Some people use tax formulas that are completely outdated–and that’s not something an average person is going to pick up.” – Keith McManus
- “People mistakenly think that every trust protects against nursing homes. But if you own that trust and are the beneficiary, if it’s revocable, there’s no protection at all.” – Keith McManus
- McManus Estate Planning, LLC
- Follow Keith McManus on LinkedIn
Keith Ellis, Jr.: Welcome back, everybody, to another podcast by SHP Financial. I’m the host Keith Ellis, one of the owners here, and I’m lucky enough to be joined here by Attorney Keith McManus from McManus Estate Planning, CapeCodEstatePlanning.com, PlymouthEstatePlanning.com. If you want to find Keith, find out a little bit more about him and his firm. Thanks, Keith, for joining us.
Keith McManus: My pleasure. I’m so happy to be here.
Keith Ellis, Jr.: As you know, part of our process here at SHP Financial is we’re helping folks transition from their working years to their retirement years, or if they’re in their retirement years, start to put together a plan to get them to and through their lives. And one part of our planning process is estate planning, which is why we wanted to invite you on the show, because it is a new year, and we want to know and people out there probably want to know what should they be looking at for 2023.
Keith McManus: So, so many of our clients in the past few years have been doing estate reviews. And I think that’s a great way to start off any new year is to look at what you have for an estate plan and to try and evaluate that, see if it’s still relevant, see if it’s still cutting edge, if it’s still up to date. I know part of SHP’s process is to make sure you’re getting the absolute best advice, and that means current advice.
So, as the years play out, it’s very important to take wills, trusts, other support documents, same thing for people that own businesses, having a review of their LLC documents, their corporate documents. So, reviewing their business and their personal estate, very important. And it’s something that’s very easy to postpone and overlook. Sometimes, we’ll have clients, I’ve been a law practice now since 1996. And sometimes you’ll have clients from five, ten years ago that haven’t really looked at their documents. So, I’d say probably the first recommendation I’d have is if it’s been more than maybe three years, to sit down and review their trusts, wills, and estate plan even if you think that the family and circumstances haven’t changed that much.
Keith Ellis, Jr.: It’s amazing. One, the first thing we usually tell folks to do at the beginning of the year is revisit their budget, revisit there. You’re right. It’s about revisiting what you have in place or the plan that you have in place to make sure from your side, the legal side, that everything is up to date from our side, the number side that the numbers are still going to carry through. But it is amazing how many times you’re sitting and talking to someone and their life has changed and life goes on, life happens. But like, they haven’t changed the beneficiary or they haven’t updated the information. So, I think that’s really, really good advice.
Keith McManus: A good way to prepare for that. So, some people say, well, how exactly do I go about that? There’s the obvious part, which has obviously gathered the actual documents together and gathered the actual estate plan together, make sure you have those original documents or that the attorney has the originals. Most of the time with our clients, the clients have the originals, but that’s only half the puzzle.
The other half of the puzzle is the financials. So, whenever someone is doing an estate review through us, we not only look over the estate documents and the business documents, but we have to compare that to the actual financial statements to do exactly what you just said to make sure that assets are held appropriately. It makes a big difference if you own a particular account in your business account versus your trust versus your personal name with your spouse. And many people don’t keep that square. So, we really want to make sure to look at financials and to look at legal documents together when you’re having an estate review, not just one or the other.
Keith Ellis, Jr.: Yeah, yeah. I think one of the things that’s often overlooked is the business, you know what I mean? You just set up your business and off it goes. But I also think if you think of the last 10-plus years, say someone set up an estate plan four, five, seven years ago, their net worth, even with last year’s bad market, is probably escalated quite a bit because of the savings that we’ve had or the run-up we’ve had in the market over the previous 12 to 14 years, plus the value of real estate. So, what are some things that as your net worth continues to grow that people should be doing? Is a will sufficient? Or what type of other planning should they be looking at?
Keith McManus: So, there’s so many to focus upon. But I’d say when it comes to that particular circumstance, business owners and folks that have had their net worth grow over the past few years due to real estate appreciation or just to inflation, they might not feel wealthier, but they have more dollars around because of inflation. I think one of the most important things to do is to make sure that the trusts and the business structure they have, if they own a business, are appropriately set up in taking advantage of current law.
Like, for example, just a quick example, the Tax Cuts and Jobs Act is going to sunset in 2025. Now, from ‘23 to ‘25, that’s a snap of the fingers, a couple of years to take advantage of some kind of a golden age of estate planning. So, people that aren’t keeping up to date with this sort of thing might not know that once that sunsets, now these very permissive federal estate tax rules are just going to go away. So, we want to take advantage of estate tax laws while we can, and a review is critical for that.
Keith Ellis, Jr.: Yeah, the federal estate tax law, I mean, a lot of times we’re talking about the Massachusetts estate.
Keith McManus: Yes, yes.
Keith Ellis, Jr.: And for most folks out there, the federal estate tax law probably doesn’t play a major role in where they are, but with the changes and when the Tax Cuts and Jobs Act goes away, now it is a little bit more attainable.
Keith McManus: Very much.
Keith Ellis, Jr.: And the federal government wants a lot more of your money than the state of Massachusetts, right?
Keith McManus: They sure do. So, there’s a 40% tax on federal estate taxes. Massachusetts is still a very greedy estate tax regime. Now, 2023, we want to keep a very close eye as things develop to make sure that the Massachusetts exemption amounts are appropriately sited in your trust. So, as you know, ever since 2003, we’ve had this $1 million trip wire or trigger point for Massachusetts estate taxes. And now, that’s very, very likely to change to $2 million with a few nuances. So, we want to kind of keep our finger on the pulse. Many people need to just update their trust just to reflect that. That’s a great development once that comes to pass.
Another one people want to take advantage of is now, in 2023, you can give or gift $17,000 per person. It’s kind of funny when people just talk casually, sometimes they think it’s $10,000 or $15,000. It’s actually $17,000 for 2023, and that’s per donee. So, people that have maybe lazy money or they’re looking to gift assets and they want to make a gift of some money to children or grandchildren…
Keith Ellis, Jr.: Reduce their estate.
Keith McManus: Yeah, shrink that estate. You can do $17,000 per donee. So, that means a married couple can give away $17,000 each to each recipient. So, you can really diminish an estate that way. Now, we want to be careful with making gifts, of course, when you’re making a gift, bear in mind that the recipient of that gift also gets your capital gain’s cost basis. So, you have a carryover cost basis, meaning that sometimes the best gifts are gifts that don’t have any appreciated value, like money market accounts, cash gifts, things that really haven’t appreciated in value. Certainly, don’t want to go gifting away highly appreciated investments in real estate, if you can help it.
Keith Ellis, Jr.: Yeah, because there’s certain provisions depending on where that money lies, that when something happens, there might be a chance to step up that basis, right? So, it is a really tough process or something that people really need to pay attention to. If you are gifting, where are you gifting your assets from? Why? What’s the goal of the gift? Because a lot of times, we are trying to drive down the value of estates because like you said, in the state of Massachusetts, there are certain trigger points that if you’re on that cusp, you want to get your estate below. And I think that’s going to be true from a federal level too.
Keith McManus: Very much. So, I’d say estate reviews are very major pressure point to have people come on in and it builds tremendous value in an estate and among family members when that gives them a great feeling that they’ve got cutting-edge documents having that business, if there is a business reviewed, taking advantage of taxes. Those are all very high-level, very important tasks.
A couple of other things, towards the New Year 2023, everyone’s a year older, of course, no one wants to think about that, but it’s true. Now, we also want to think about young people in the family. So, some listeners might have children or grandchildren that are just 18 years of age or in their teens or early 20s. These are people who necessarily haven’t accumulated much wealth, but we want to protect them anyway, remember, and if these people are off to college or they’re just starting jobs, it’s important for them to get some of the basics, even if they just get basic health proxies and powers of attorney and HIPAA authorizations, real basic documents so that those well-meaning parents and grandparents can help them out just in case there’s an accident or an illness. Many people don’t realize that once a minor becomes 18 years of age, those parents don’t have the same ability to look at medical documents, sign things for them, or make medical decisions. So, having those basic documents are going to avoid conservatorships and guardian ad litem hearings.
Keith Ellis, Jr.: Yeah, I think it’s important to have those in general for everybody.
Keith McManus: Absolutely.
Keith Ellis, Jr.: It’s one of those things that you want people to be able to act on your behalf if you become incapacitated, whether it’s financially or, God forbid, having to make a decision about someone’s health. Sadly gone through it in my own family, but we had the proper documentation in place and things went in that direction, so.
Keith McManus: It is also another minor point. We’ve been talking about some very high-level points. I wanted to give one that’s sort of an add-on or something to think about that people can just do on their own. It’s kind of fun, but it’s important. It gets you into the mindset of estate and legacy planning.
Keith Ellis, Jr.: That fun mindset that everyone…
Keith McManus: Right, right. Well, so did you know that there’s a legacy setting on a lot of smartphones and smart devices that a lot of people now are accumulating a lot of digital content and digital value? They’re accessing passwords and things digitally more and more instead of writing them down. And you can also add a legacy contact. So, if the owner of that phone dies, that someone else can now access that digital content.
Keith Ellis, Jr.: Wow. I don’t even know that.
Keith McManus: You sure can, yeah. And maybe you want to get a younger person to help out, but on the iPhone, you can do that just by going into your password and security section and adding a legacy contact so this person can easily now get into the phone and get the content, get passwords and other protected information, whereas otherwise that might not have been possible.
Keith Ellis, Jr.: Wow. That’s good information for sure, because that’s hard to do. There are so many times you want to get into somebody’s phone because maybe you found it and you want to get a hold of them or something like that, so.
Keith McManus: Just to get even photos and passwords and background information. So, just little things like that, that’s on the small level, kind of gives you a taste for some planning. But then on the higher level, we really want to focus on taxes and documents. That’s going to make major impact.
Keith Ellis, Jr.: So, let’s transition here for a second and talk about these estate reviews that we’ve kind of said. One of the things you should do for 2023 is revisit your documents. Where are they? How dated are they? What’s changed in your life? When you’re sitting with folks, do you see anyone ever fundamentally change the structure of their trust from maybe revocable to irrevocable, and why that would happen?
Keith McManus: Many, many times. And so, sometimes you’re combining multiple strategies. So, sometimes people that have had life changes or changes to their net worth are changing the tax elections in the trust. So, this is something that, unless you’re an estate planning attorney and you know how to read trusts, any two trusts may kind of look similar, but they might have completely different tax formulas in it.
Some people are using tax formulas that are completely outdated, that were used 10, 15 years ago and that aren’t going to work very well now. That’s not something an average person or a casual read is going to pick up. Your average person is going to look at it and say, there’s some tax language in here, but I don’t know exactly what kind of formula this is.
So, on a very technical level, I do look at the tax formulas that that drafting attorney used. I also see people that are suddenly concerned about maybe nursing home protection and nursing home planning. They’ll want to create irrevocable trusts, Medicaid trusts, life estates, and other kinds of structures that can protect real estate and assets against potential skilled nursing admission. And they want to balance that kind of a trust against other kinds of trusts where they continue to own and control assets outright.
Keith Ellis, Jr.: So, both, basically.
Keith McManus: You can do both, absolutely. I think too many people get in the mindset of feeling like…
Keith Ellis, Jr.: One or the other.
Keith McManus: Yeah, I have to either keep all my assets and have no nursing home-type protection or have to give everything away and lose all protection. Make myself a pauper. You absolutely don’t have to go to those two extremes. There’s plenty of middle ground that we can explore to have some level of skilled nursing protection in there for families.
Keith Ellis, Jr.: Yeah, one of the things that a lot of our clients talk about is the idea of a life estate and seeing if you could expand on that and kind of that philosophy and why, when it makes sense…
Keith McManus: Yeah. So, life estates are a strategy that are usually combined with something else. It’s usually combined with an irrevocable trust. And when you add those two structures together, you’ve got a pretty robust and a very powerful way of starting this so-called five-year lookback period. And it’s usually on an asset like real estate.
So, usually, the entry point for people when they’re considering long-term care planning, skilled nursing planning, many people will say, let’s at least start by protecting the real estate, even if other assets aren’t necessarily protected straight away. It’s kind of like your step number one in that whole process. There are many more steps.
The life estate is where the life tenant, often that’s the elder that you’re concerned about protecting, still has occupancy of the home. They start a five-year lookback period. They still are able to move out and rent the house, keep all the rent if they want to do. But it’s kind of a shared arrangement with their loved ones where the benefits outweigh the negatives for many of these clients that want to protect that house. After five years, that house is essentially taken off the table for nursing home planning purposes.
Keith Ellis, Jr.: And many times, that’s their biggest ask.
Keith McManus: Yeah, not only that, but real estate tends to be an appreciating asset. Some people that have mortgages are paying the mortgages off or they don’t have a mortgage anymore. And the value of that real estate is going up. And as people age and they’re spending other assets, they still have a house, they still need a place to live.
So, the older person is something that’s very common to see the house being a major asset. So, that’s a great starting point, being able to draw a line, a red line around that house and kind of taking it off the table. So, there are pros and cons to the strategy that people should explore, but we’ve been doing a lot of life estate and irrevocable trust strategies to protect folks that fit a certain category. It’s not for everybody. And we want to make sure to also connect that with an irrevocable trust.
So, sometimes you see people taking a life estate and having the remainder interest just go to their children or something. And that’s kind of a little bit riskier than we might want. So, that’s why I think a full meeting is necessary to review that, the pluses and minuses of that strategy.
Keith Ellis, Jr.: Yeah, I think it makes a lot of sense, especially like you said, as real estate appreciates or you have a mortgage or you’re spending it down and you want to protect that real estate. And as you get older, maybe when you’re younger, you’re not thinking, hey, something’s going to happen to me, but as you get older, maybe you start thinking that way.
Keith McManus: Absolutely.
Keith Ellis, Jr.: You want to take some of those chips off the table for…
Keith McManus: And a very common misconception people have, many people mistakenly think that every trust protects against the nursing home. They’ll say, “Oh, don’t worry, I set up a trust.” Well, if you own that trust and you control it, you’re the trustee, you’re the beneficiary, if it’s revocable, there’s no protection at all when it comes to nursing homes on that property.
Keith Ellis, Jr.: Yeah, many times, when I’m sitting with folks and I’m looking at their estate documents and they’re like, I’m all set, I’m protected. I say, wait, wait, wait, actually, you’re not. Here’s why. They’re kind of shaking their head or scratching their head, then it’s time for them to review their estates, which is important. It’s important to know what you have, right?
Keith McManus: Know what that trust does and doesn’t do. There’s no cure-all trust out there.
Keith Ellis, Jr.: Right.
Keith McManus: Trusts are more like a computer program these days. They do a very specific task.
Keith Ellis, Jr.: This is why these estate planning reviews are extremely important because maybe you set up, like we said earlier, your trust five years ago, seven years ago, and your net worth has grown, your goals have shifted. Now’s the time, 2023, start of the year. Get in, check out, have your estate plan reviewed. Make sure it’s up to date. Make sure it has the proper tax codes in it and the proper, like you said, tax calculation in it.
Keith McManus: Yeah, and make sure those financials connect properly, that the dots connect because I can’t tell you how many times we see people who have trusts and they think they’re functioning well, and then we start inquiring what’s in this trust? What’s in that trust? They either don’t know or there’s nothing that trusts at all. And we say, what the heck happened here? What kind of advisor…
Keith Ellis, Jr.: Who dropped the ball?
Keith McManus: Yeah, yeah, yeah.
Keith Ellis, Jr.: So, if you want to reach out to Keith and his team, it’s CapeCodEstatePlanning.com or PlymouthEstatePlanning.com. Maybe one or two more questions. A lot of times, we see folks come in that have a will, and I’m kind of transitioning here because– and they think they’re all set and that will is going to be the cure-all. Kind of what are some thoughts on wills in general or the pros and cons, I guess?
Keith McManus: So, in Massachusetts especially, but in pretty much all 50 states, will trigger probate proceedings when they’re used. And many people are very shocked to hear that. Assets that actually pass through a will are passing through a probate court system. So, a will is only a useful device for a very, very modest estate. Maybe people just getting started in life, just getting started over in life. Maybe they don’t own real estate, they don’t have investments. Very modest estate, wills can be a useful part of every estate plan if they have pour-over provisions that push into a trust.
We never want to rely on a will as the backbone of any legitimate estate plan, in my opinion. I think trusts are a much better and more useful tool. They’re going to solve probate issues, address taxation. They can protect disabled family members. They can deal with certain trusts, can deal with nursing home issues. Wills generally don’t accomplish that nearly as efficiently, and wills do have a valid place. If you have minor children, you can name guardianship in the wills. And that’s an appropriate use of it. If you have minor children, you want to have those guardianship provisions in the will updated.
But a will is a very secondary document in most of our plans. Most of the clients that we’re seeing have ownership of a home, even if there’s a mortgage on it. And that’s generally the starting point for investigating trusts as the working tools of the trade trusts or assets that are actually in the trust that have been properly funded, they’re going to avoid probate. If the trust is drafted well, you can address that estate taxation and capital gains taxation. You can manage wealth over time for beneficiary. I mean, the list goes on and on. Trusts are just hands down the way to go for the vast majority of estate plans.
Sadly, there’s a lot of misinformation about trusts, and a lot of it, people just don’t specialize enough in them. So, clients never need to be an expert in this stuff. What they should do is just sit down with an estate planning attorney, whether it’s us or the next guys. We represent people all throughout Massachusetts and happy to have that initial consult or even just a phone call with someone.
Keith Ellis, Jr.: So, as we wrap up here, any final thoughts? Any other quick tidbits for 2023?
Keith McManus: So, it’s an exciting time. I think that there are estate planning opportunities. And I get so excited when I talk about estate planning. You see the look on people’s faces when they’ve updated their plans, the look of relief on their faces after they’ve signed…
Keith Ellis, Jr.: Checking that box or crossing that off the list.
Keith McManus: Oh, yeah.
Keith Ellis, Jr.: I agree with you, yeah.
Keith McManus: Yeah, and it’s a good feeling. And there’s also kind of a bittersweet feeling. Eventually, people do become unwell, they pass away. I’m in my 26th year of law practice now, so I’ve had a lot of clients come and go through the years due to being unwell or they passing away and you’re able to help that surviving family so much. It’s really just such an important set of documents to make sure that are up to date. And when someone’s unwell or they’ve already passed away, it’s usually too late to do anything, unfortunately.
Keith Ellis, Jr.: Well, thank you for joining us today. To reach out again to Keith and his team, CapeCodEstatePlanning.com or PlymouthEstatePlanning.com. Keith, thanks again, like I said, for joining us.
Keith McManus: Thanks for having me. I appreciate it.
Keith Ellis, Jr.: Take care.
Keith McManus: You too.
Investment Advisory Services are offered through SHP Wealth Management LLC., an SEC registered investment advisor. Insurance sales are offered through SHP Financial, LLC. These are separate entities, Matthew Chapman Peck, CFP®, CIMA®, Derek Louis Gregoire, and Keith Winslow Ellis Jr. are independent licensed insurance agents, and Owners/Partners of an insurance agency, SHP Financial, LLC.. In addition, other supervised persons of SHP Wealth Management, LLC. are independent licensed insurance agents of SHP Financial, LLC. No statements made shall constitute tax, legal or accounting advice. You should consult your own legal or tax professional before investing. Both SHP Wealth Management, LLC. and SHP Financial, LLC. will offer clients advice and/or products from each entity. No client is under any obligation to purchase any insurance product.