North Carolina Estate Planning Blog : North Carolina Estate Planning Lawyer & Attorney : Trust Counsel, PA : Trust Administration : Serving Chapel Hill, Durham, Raleigh, Pittsboro, Orange County, Chatham County

Call me old-fashioned, but I think estate planning should involve a personalized and continuing relationship, not a transaction.  While some may prefer to use low-cost websites or software because they are more concerned about price than value, think about what they won't be getting.

Can LegalZoom or its ilk:

• Look you in the eye?
• Shake your hand?
• Listen to your concerns and goals?
• Meet your family?
• Answer legal questions?
• Help you if you or a loved one becomes disabled
• Help you after the death of a family member?
• Notify you of changes in the law?
• Say that it is answerable to a State Bar?
• Say it has malpractice insurance?
• Say that it attends many days of continuing legal education each year?
• Refer you to other professionals to assist you with other matters?

The answer is obvious.  Think about it, and then decide what's best for you and your family.

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AICPA, U.S. PIRG Coalition Urges Congress to Ban Tax Strategy Patents Before Adjourning

Inappropriate Patents Attempt Monopoly on U.S. Tax Code

WASHINGTON (Sept. 29, 2010) – Tax strategy patents threaten American taxpayers and Congress should ban them before it adjourns for the year, a coalition of 18 national consumer and taxpayer organizations said in a letter to lawmakers.

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Watch out for telephone calls where the caller requests personal information:

“There are no situations in which it is reasonable to give out Social Security, Medicare/Medicaid, credit card, checking account or other personal information over the phone or in writing unless you have initiated a conversation with a qualified person or business,” according to Angel Dennison, director of the Chatham County Council on Aging.

If you are interested in what someone is offering to sell, ask for the physical address of their office and a call back number. Then, tell the person you will call him/her back to continue the sales process. At least you will have recourse in case the offer is a fraud or your personal information is abused.

But, the best advice is to make personal contact at the place of business or decline to continue the phone conversation.

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Boy, that was fast! I stand corrected by LegalZoom's Senior Counsel, Kenneth Friedman.  The Attorney General of Washington State did not file suit against LegalZoom, but did institute an investigation of their business practices.  The investigation resulted in LegalZoom agreeing, in a document filed in Thurston County Superior Court,  that it would not engage in certain practices.  LegalZoom does not admit having engaged in any such practices.

Click "Continue Reading" to view Friedman's email, which includes his response to what I said about the North Carolina State Bar position on LegalZoom.

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The Attorney General of Washington instituted an investigation of LegalZoom for the unauthorized practice of law and the release of personal and financial information of customers to third parties, resulting in LegalZoom entering into this Assurance of Discontinuance.  Check out this article on the topic.

The North Carolina State Bar has also determined that LegalZoom is engaging in the unauthorized practice of law, and has ordered it to cease and desist.

I hardly need to say it, but caveat emptor, LegalZoom customers!

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I have had a few clients who have been sold “Medicaid Friendly” Annuities. In at least one case, the annuity salesman sold the client a “Medicaid Friendly” annuity in the local senior center. I don’t know who the salesman was, or the details of his sales pitch, but what he sold the client made an extreme mess of her Medicaid eligibility.

Annuities can be an invaluable tool in Medicaid planning. When used correctly, an annuity can convert a person’s spend-down amount (excess resources) to a stream of income for the spouse at home, or, in the case of a single or widowed person, can preserve some of the spend-down amount for expenses not covered by Medicaid.

Medicaid regulations became much more strict in recent years, and the criteria that an annuity must meet to be excluded as a resource for Medicaid eligibility are very specific. They must be:

·        Irrevocable

·        Non-assignable

·        Non-saleable

·       Provide equal payments

·       Name the NC Medicaid Program as beneficiary for benefits paid on behalf of the annuitant

Most of the “Medicaid Friendly” annuities being sold out there do not meet these requirements and will count against a person applying for Medicaid benefits. Often the seniors are advised by the annuity salesman that all they need to do is annuitize the annuity if and when they enter a nursing home in order to become eligible for Medicaid. This is often not true because these annuities do not meet ALL the other Medicaid requirements for them to be considered a non-countable resource.

Most annuities are simply a tax-deferred investment tool. Medicaid Compliant Annuities, on the other hand, are a very specific product offered by only a limited number of insurance agents and companies. Medicaid Compliant annuities are best used when a person knows that nursing home care is imminent and the annuity is then tailored to immediately convert the person’s spend-down amount to an income stream. So, be wary of “Medicaid Friendly” annuities being marketed to the senior community at large.

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The Tax Hike Prevention Act of 2010 was introduced in the Senate on September 13 as Senate Bill 3773 "to permanently extend the 2001 and 2003 tax relief provisions and to provide permanent AMT relief and estate tax relief, and for other purposes."

Highlights of the proposed Estate Tax Relief Provisions include:

1. To be effective beginning January 1, 2010 with respect to decedents dying on or after that date; and beginning on January 1, 2011 with respect to gifts made and generation-skipping transfers on and after that date. 

2. Reunification of the Gift Tax and Estate Tax Unified Credit Equivalent Amount to $5 million and the amount is indexed for inflation.

3. Top Marginal Rate of Gift, Estate and Generation-Skipping Transfer Tax of 35%.

 4. "Portability" of decedent's unused Unified Credit by election of the executor of the decedent's estate to pass the unused portion to the surviving spouse.

 5. Special election available for decedents dying in 2010 to apply existing 2010 law rather than the Tax Hike Prevention Act of 2010.

Thanks to attorney David Cahoone of Sarasota, Florida for this update. 

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One of the most challenging things for many executors is trying to locate and organize the decedent's financial information, such as insurance policies, and bank and investment statements.  Faced with that problem after their father died in a car accident, Jarred and Adam Mait created knowtification.com.

Once person's name, date of birth, date of death, social security number, and address are entered, the service automatically generates a letter that is sent to 200 (or 400, if you choose the premium plan) top financial institutions requesting information regarding any accounts held by the decedent.  Credit bureaus are also notified.

I have no personal experience with the site, but it is a great idea, and should save executors time and money.

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The North Carolina Court of Appeals, in Kinlaw v. Johnson, confirmed statutory law protecting IRAs from creditors, and extended the protection to the account owner's legal use of IRA funds from collection on a creditor's judgment.  The court stated:

"We therefore hold, liberally construing the statute in favor of Defendant, Elmwood, 295 N.C. at 185, 244 S.E.2d at 678; Laughinghouse, 44 B.R. at 791, that N.C. Gen.Stat. § 1C-1601(a)(9) exempts Defendant's IRAs and Defendant's legal use of funds contained within those IRAs, from Plaintiff's judgment. As the issue is not before us, we do not make any holding regarding any question concerning contributions Defendant may have made, or may in the future make, to his IRAs." (Emphasis added)

Michael Kinlaw, Plaintiff, v. John J. Harris, Jr., M.D., Defendant, NC App No. COA08-1584, December 08, 2009

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This update is from Tax Analysts by way of Robert Keebler, CPA:

Obama administration officials are considering a proposal to allow taxpayers to elect to apply 2009 rules to their 2010 estate tax bills, a Treasury Department official said in an interview that aired September 12.

Treasury Assistant Secretary for Tax Policy Michael Mundaca said in a C-SPAN interview that the Obama administration would like to make permanent the 2009 iteration of the now-expired estate tax. The estate tax was allowed to lapse for 2010, and Congress has not agreed on a fix. Allowing taxpayers to retroactively apply the 2009 rates to their 2010 taxes is one possibility being considered, Mundaca said.

The option could prove appealing to taxpayers who have inherited estates worth less than the $3.5 million estate tax exemption for 2009 but more than $1.3 million. The current law repeals the estate tax entirely but allows a basis step-up for only $1.3 million of the estate's assets, not for the entirety of the estate as under the 2009 law. Thus, heirs of decedents dying in 2010 may exempt only $1.3 million of capital gains when they dispose of the property and must calculate capital gains tax using the decedent's basis in the property.

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Most people know that the proceeds of a life insurance policy are generally free of income taxes.  What many don't realize, however, is that the same proceeds are included in one's estate for estate tax purposes.

The federal estate tax will be back next year with a rate of 55% for amounts over $1 million.  This will mean that many folks who do not think of themselves as wealthy will have a significant estate tax problem in the event of their death.

However, this is an easy problem to fix.  By creating an Irrevocable Life Insurance Trust (ILIT) and transferring the ownership of the policy to the trust, estate tax at the death of the insured (and the beneficiaries) can be avoided.  For a transferred policy, the insured must survive by three years for the proceeds to escape taxation, but a newly issued policy in the name of the trust is immediately exempt.

I see a lot of clients who are reluctant to set up an ILIT because of the cost (usually $1,000 to $2,500 or so).  Not chicken feed, but not much compared to the hundred of thousands of dollars the ILIT will save.  People don't think twice about spending $500 a year to insure a $20,000 car, but can't justify a one-time expense of a couple of thousand dollars to save a couple of hundred thousand for the benefit of their family.  Not logical.

That's why I call the failure to create an ILIT estate planning's costliest mistake.  An ILIT is quickly and easily implemented by an experienced estate planning attorney, will not limit or complicate the ownership of your assets, and is a veritable bargain in comparison the benefit it will provide.

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Given the new basis reporting requirement for the estate of decedents dying in 2010, these new FAQ from the IRS are welcome and contain very important details, including (emphasis added):

Are there any filing requirements for a decedent who died in 2010?
Yes. Current legislation requires the executor of an estate to file the following tax returns: 

1. The final income tax return (Form 1040) for the decedent;
2. Fiduciary income tax returns (Form 1041) for the estate during administration; and
3. A return allocating the allowable basis adjustment to property acquired from a decedent, if the fair market value of the property exceeds $1.3 million or if the decedent acquired property by gift, except in certain cases.
4. No later than 30 days after the filing of the return allocating the allowable basis adjustment, a written statement to each recipient of property that contains the information on the return.

For more information, you should consult your tax adviser.

What is the due date for the tax return allocating the allowable basis adjustment?
The form allocating the allowable basis adjustment must be submitted by the executor with the decedent’s final income tax return.  For decedents dying in 2010, the due date is Friday, April 15, 2011.

What if the assets acquired from the decedent have a fair market value of less than $1.3 million? Does the executor need to file a return allocating the basis adjustment?
Maybe. The return allocating the basis adjustment is required only if the property acquired from the decedent is in excess of $1.3 million or if the decedent acquired property by gift, except in the case of certain gifts from decedent’s spouse, during the 3-year period ending on the date of the decedent’s death and the donor was otherwise required to file a return to report the gift.

For more information, you should consult your tax adviser.

What is the form number for the return used to allocate the allowable basis adjustment and where can I obtain it?
A form to allocate the allowable basis adjustment due by the executor is currently under construction, and a number has not yet been assigned.

When the return form is completed, it will be posted at the IRS Web site.

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I came across this article by lawyer and journalist Deborah L .Jacobs, The Case Against Do-It-Yourself Wills, on Forbes.com today.

While I think the article sends an important message, I take issue with some of what Jacobs, and even nationally known attorney Jonathan Blattmachr have to say:

JACOBS' ARTICLE: Much as I dislike DIY wills because of all the problems they can cause, I think estate-planning lawyers are partly to blame for their proliferation. They've gotten into the habit of charging some pretty hefty fees for very routine services. It cost my husband and me $4,500 for a package of basic estate-planning documents--his-and-her wills, powers of attorney, living wills and life insurance trusts--prepared in 1997 after our son was born. By today's standards, we got ripped off. During the past 13 years, the same technology that has spurred the DIY movement has made it much easier for trust and estate lawyers to do their jobs. There's some spectacular software out there that they can now use to prepare clients' wills in minutes. But many lawyers are still charging as if it took them hours.

MY RESPONSE:  $4,500 for two life insurance trusts (ILITs), wills, powers of attorney, and living wills is far from a "rip-off."  Life insurance trusts are complex, irrevocable trusts designed to remove life insurance from one's taxable estate, and require substantial legal and tax expertise to draft correctly.  A botched ILIT could cost hundreds of thousands of dollars in unnecessary taxes. 

JACOBS' ARTICLE: "Lawyers have to lower their fees, or self-help products, which prepare a will for less than $100, will continue to lure clients who view wills as a commodity, says Jonathan G. Blattmachr, a retired partner of Milbank, Tweed, Hadley & McCloy, who founded the Melbourne, Fla., company, InterActive Legal, to provide estate-planning software to lawyers. Clients want "a competently prepared document done as quickly and as cost-efficiently as possible."

What's a reasonable price? After an initial learning curve, a lawyer can use the InterActive Legal software to do a simple will in three minutes or less and should spend another half hour re-reading it, Blattmachr says. That, plus counseling the client, should bring the total elapsed time on the matter (again, assuming no complexities) to about two hours. With fees for trust and estate lawyers running between $300 and $1,000 per hour, it should therefore be possible, paying on an hourly basis, to get an expertly drafted will and legal advice for $600 at the low end, he says.

MY RESPONSE: While it is certainly true that software makes an estate planning attorney's job easier, time is not all that is involved in setting fees.   Fees also compensate for expertise, training, risk, expense of technology, value to the client, etc.  Other professionals charge this way as well.  Take laser surgery for eyes for example.  Such surgery takes only a few minutes, but costs a couple of thousand dollars. 

Furthermore, a simple will is only appropriate for persons with simple situations, not those in second marriages, with estates over $1 million, with disabled family members, etc.  Also, durable powers of attorney, health care powers of attorney, living wills and HIPAA authorizations should be a part of every estate plan - in some cases they are more important than the will.  Finally, a good estate planning attorney provides advice beyond the documents themselves - on how to title assets and name beneficiaries of life insurance and retirement accounts, etc.

All of that being said, I charge much less than $600 for a simple will alone, and just slightly more than that for a complete simple plan for a single person.  However, the fees rise substantially as the complexity of the plan and the expertise required to properly implement it increase.

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Now that Labor Day has come and gone, with no more summer vacations and the kids back in school, it's time to get serious and give thought to creating or updating your estate plan. Here are some things that should be examined/implemented as part of every estate plan:

1.      Creditor/Predator/Mismanagement Protection for spouse, children, etc.

2.      Estate tax planning - flexibility for changes in the law and value of assets

3.      Income tax planning – basis issues and retirement plans

4.      Coordination of asset ownership and beneficiary designation with estate plan

5.      Probate avoidance – Living Trusts, POD, TOD accounts

6.      Incapacity planning – Durable Powers of Attorney, Living Trusts, Health Care Powers of Attorney, HIPAA Authorizations

7.      End of life care – Advance Directives (Living Wills), DNR, MOST form

8.      Long-term care planning – insurance, Medicaid issues

9.      Insurance – life, long-term care, disability, umbrella liability

10. Asset Protection – use of LLCs for rental property, avoid joint accounts, etc.

While many strategies are put into place with the hope that they will never be needed, an immediate benefit is the peace of mind that comes with knowing that you have done all you can maintain your dignity, and protect your family, preserve your assets, and save taxes.

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Recently I met with a couple who had an estate of over $2 million, and wanted to safeguard their daughter's inheritance.

I advised them that it would be prudent to establish living trusts with credit-shelter trusts to avoid the cost and delay of probate and eliminate or reduce estate taxes at the death of the second spouse to die.  I also recommended a lifetime trust for the daughter to protect her funds from divorce, lawsuits and her own poor judgment.  I further suggested pour-over wills, durable powers of attorney, health care powers of attorney, living wills and HIPAA Authorizations.

This plan, which includes state of the art documents, advice regarding funding the trusts, allocation of assets and beneficiary designation choices, was $4,500.  While I am certainly not the least expensive attorney in town (nor would I want to be), I feel the fee was reasonable given the complexity of the plan, the benefit of my years of training and experience, and the potential tax savings of over $500,000.

However, these particular clients failed to see the value in what I could provide for them.  It's partially my fault, I suppose, for not doing a better job of educating them.

They called my assistant and said that they decided to use another attorney who would do the "same thing" for $2,000 less.  I looked up the name of the attorney, whom I had never heard of, and found that he has only been licensed to practice law for five months, and works for a firm that has no estate planning attorneys and its website does not even state that it does any estate planning.

So, this couple saved a couple of grand now, but at what future cost? 

• Not properly funding the trusts to avoid probate - $5,000 - $10,000
• Not providing proper language to allow stretching of retirement plans - tens of thousands of dollars
• Failure to arrange assets to fund the credit-shelter trust - several hundred thousand dollars. 
• Failure to properly protect the daughter's funds so that she will have adequate support for the rest of her life - priceless.

If your family and your property are important to you, then in choosing an estate planning attorney and type of estate plan, then it's imperative to look beyond the price and see the value.

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This year, of course, there is no federal estate tax.  However, many Wills and Trusts drafted in the past contain formula clauses based on the existence of the federal estate and/or generation-skipping transfer tax.  These convoluted clauses were generally designed to maximize tax savings.

In 2010 there is no federal estate tax.  So what happens if a persons with such a Will or Trust dies this year?  How is the formula to be interpreted?  Well, recent changes to North Carolina law (N.C.G.S. Sections 31-46.1 and 36C-1-113) help provide certainty in the interpretation of the formula clauses.  NC law now provides that the clauses are to be given effect as if the federal estate and generation-skipping transfer taxes law as of December 31, 2009 were in effect.

Executors or trustees, or an affected beneficiary, if they believe the testator would not have intended such a result, may bring a proceeding for a court determination.

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The Social Security Administration may do away with a rarely used option to pay back earlier social security payments received in order to get increased payments in the future.  So, if you or someone you know thinks this technique might make sense, the time to act is now.

Check out this article from the Washington Post for more information.

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